The 2022 bear market reversed this fall, leading to a nice rally. It S&P 500: the index has rebounded from this year’s lows, which saw it fall more than 20%, with double-digit gains since late September. But that shouldn’t give investors any hope that markets will move consistently higher from here.
When the next reversal happens, you need to be ready. Those are the times to promote investments that can pay off over time. It also makes sense to be prepared to buy a diversified mix of companies. Here are three ideas that will ensure diversity and businesses with a bright future.
Tesla (TSLA: -4.72%) stocks have not participated in the recent market recovery. The stock has fallen more than 40% in less than three months. That decline had less to do with business performance than with several other factors.
First, Tesla stock has long been richly valued using traditional metrics like the price-to-earnings (P/E) ratio. So the revaluation shouldn’t be too sudden. It also comes as investors worry that CEO Elon Musk has strayed from the launch of Twitter and alienated potential Tesla customers with some of his public comments. But the stock drop has pushed Tesla stock to an interesting valuation level.
While its P/E remains high, the company has two plants that are still ramping up production, and management has forecast about 50% annual growth over several years. If it also achieves that level of earnings growth, that would mean a price-to-earnings growth (PEG) ratio of around 1.0. That level can be a good time to buy growth stocks.
Unlike many growth stocks, Tesla also generates a lot of cash. It reported free cash flow of $3.3 billion in the third quarter alone and more than $6 billion in the first nine months of 2022. The big risk for Tesla, however, is that its growth rate is not sustained. Increased competition and slowing global economies could hit demand for Tesla cars. Buying Tesla after the market will help reduce that risk.
Lock in some earnings as well
Another opportunity worth seizing when the markets are down is dividend-paying stocks. As long as the underlying business is strong, investors can secure higher dividend yields and still have market-beating returns on some stocks. Two that fit that bill and offer further diversity are consumer products companies McCormick (MKC: -1.24%) and a utility and renewable energy company NextEra Energy: (NO: -1.95%).
Spices and condiments maker McCormick has been able to increase its dividend for 37 consecutive times thanks to its consistent growth. The company succeeds in a variety of economic environments. McCormick’s consumer segment leverages the cost of cooking at home. It usually increases when times are tough and people may be worried about their finances. But the company’s flavor solutions segment also serves the needs of commercial food services, including restaurants and entertainment venues.
While consumer segment sales fell 3.3% in the nine months ended August 31, 2022, commercial flavor solutions net revenue increased 9%. But it was McCormick’s consumer sales that fueled its growth in fiscal 2020, as pandemic trends boosted those sales by 10% while trade sales fell slightly. That balance helps sustain overall business growth, allowing the company to reliably grow its dividend.
NextEra Energy also offers balance, but in a different way. The company’s utility holdings generate stable and reliable earnings that help provide income for shareholders, while its renewable energy assets allow for more growth opportunities. It has historically proven to be able to achieve both.
Since 2006, NextEra has grown earnings at an annualized rate of 8.4% while increasing its dividend payout by about 10% each year. And it expects to continue growing its 10% annual dividend through at least 2024, even as it also invests heavily in clean energy projects. These include wind, renewable natural gas, solar and green hydrogen generation.
Shares of both McCormick and NextEra have outperformed the S&P 500 over the past two months. But if those stocks fall during any market pullback, both would make great long-term investments and nicely balance out growth stocks like Tesla as well.
Howard Smith holds positions at McCormick, NextEra Energy and Tesla. The Motley Fool has positions in and recommends NextEra Energy and Tesla. The Motley Fool recommends McCormick. The Motley Fool has a disclosure policy.