Finding Buy Opportunities In This Year’s Market Decline

The stock market coughed up 17% of its value from January 3 to May 24. That provides investors with an opportunity for a portfolio upgrade. You can sell some stocks with losses, possibly reaping a tax deduction. And you can replace them with good stocks selling for 15% to 30% below their highs.

Here are five stocks that have been hit hard this year, and are now buys in my judgment. Could they go down further? Of course they could. Catching the exact bottom is a matter of luck. Nonetheless, I feel that I you buy these now, you will be glad you did.

Based in Santa Clara, California, Applied Materials
AMAT
is the world’s largest supplier of semiconductor manufacturing equipment. The stock peaked in January at about $167. It sells for less than $120 now.

Does anyone doubt that semiconductor chips will stay in high demand? Computers, smart phones, appliances and cars are all using more chips, and more advanced chips, as time goes on. While the stock has been smacked, the company is doing fine. Sales rose 28% last year and profits were up 56%.

So what ails this stock? As interest rates rise, a dollar of earnings in the future – say, in 2029 – becomes worth less. So growth stocks have been punished, especially technology.

As of May 27, Applied Materials shares sold for 16 times earnings. That seems to me quite a reasonable valuation for a company that has grown its revenue at a 14% annual pace for the past decade, and earnings considerably faster.

The largest U.S. homebuilder, D.R. Horton (DHI) has fallen 29% this year through May 27. The entire homebuilding group has been whacked – and for logical reasons, but I believe the selling has been overdone.

What investors fear is that mortgage rates will rise, choking off home buying. It’s a rational fear, but it has pounded Horton’s price down to five times earnings, which is extremely cheap.

Home prices have risen a lot in the past two years, pricing out some potential buyers. But I think demographics are on the side of the homebuilders. Millennials are coming of age. Like many of their parents, they may want single-family homes for their children. Horton’s return on invested capital has been above 10% (my preferred zone) for five years in a row.

Selling about 35% below its high is Brunswick
BC
, which makes boats, outboard motors, fitness equipment and billiards gear. I think investors harbor two fears about Brunswick. One is that a recession will come soon, crippling sales of all recreational gear, especially boats.

I believe there will be no recession in 2022. The leading economic indicators (designed to be predictive) are still pointing up, and the coincident (real time) indicators are healthy.

The other fear stems from the fact that Brunswick benefited from the pandemic. Boating is outdoor recreation, relatively safe from Covid-19. When the pandemic ebbs, people think Brunswick’s profits may tail off. The pandemic probably did help Brunswick, which earned 20% on invested capital last year. But the return was above 10% in 10 of the past 12 years.

Target
TGT
shares fell almost 25% in a single day on May 18. It reported a bad first quarter, as its costs for goods, shipping and labor rose. Like many retailers, it doesn’t dare to raise prices commensurately, fearing that shoppers will flee. One of my mantras as an investor is to look for stocks depressed on bad news that is real but temporary. I think Target’s troubles fit that description, even though the problems may last for a while.

Target has exceeded my target for return on invested capital (10% or better) in 10 of the past 15 years. I don’t expect a recession, but if one should hit, Target is among the better places to be, since consumers trade down to Wal-Mart and Target from pricier stores.

Down 31% this year through May 27, MKS Instruments (MKSI) makes instruments and process control systems used in manufacturing semiconductors, flat panel displays, medical devices and other things.

MKS, which is based in Andover, Massachusetts, has been profitable in 14 of the past 15 years, and has beaten my return-on-capital guideline 10 times.

Since the company’s sales and earnings have been strong lately, I regard the stock is just another casualty of the technology sell-off. At 12 times earnings, I think it’s a bargain.

Disclosure: I own D.H. Horton shares personally and for most of my clients. I own Applied Materials for one or more clients.