The U.S. equities market continued its downward trend on Friday after sharply declining on Aug. 17 when the Dow Jones Industrial average fell 274 points, the second-worst single-day drop in 2017. The broad market decline has opened up a solid buying opportunity for investors who are ready to pull the trigger and take advantage of the drop. Here are the two companies investors should be ready to accumulate if the decline continues.
Nike
2017 is turning out to be the year that Nike (NKE, Financial) would love to forget. As if increasing competition and slower growth were not hurting the company enough, the sharp market decline in the last few days has been dragging the company down further. Nike declined by 4.37% on Friday, close to the Standard & Poor's 500’s decline of 4.46%.
Nike data by GuruFocus.com
Nike is now trading at 2.6 times sales and 21 times earnings, levels which were last seen in 2014 and 2015. The stock price has been moving lower and lower since 2015 as growth slowed down in the U.S., making the company’s target of achieving $50 billion in annual sales by 2020 a near-impossible target. Nike has announced several plans to get its growth back on track, but things are not going to be easy for the company due to increasing heat from adidas (XTER:ADS, Financial).
Though the short-term outlook does look a bit concerning, Nike as a brand is well accepted worldwide. Not many companies have the reach that it enjoys. International revenues are still growing at a fair clip, which will lift the company over the long term.
Revenue from emerging markets grew 14% in fiscal 2017 while Greater China grew by 17%. North America still accounted for a major portion of the company’s revenue, and the 3% growth it posted in 2017 is what is making the market nervous about Nike’s revenue growth potential. But combined revenues from emerging markets, and Greater China accounted for 26.3% of Nike’s revenue during the fourth quarter of the current fiscal.
Nike is still growing in the U.S. but at a pace slower than expected, and the market has been unforgiving so far. If you are ready for the long term, Nike’s recent decline makes the company an attractive investment.
Home Depot
Home Depot (HD, Financial), the largest home improvement retailer in the U.S., took a beating as the stock declined by 1.46% on Friday. Despite reporting solid growth numbers in the last four quarters and raising its forecast for the current fiscal, the stock has gone up by only 10% in the last 12 months.
The home improvement market has, so far, remained out of reach for the Amazon (AMZN, Financial) e-commerce juggernaut. The duopoly of Home Depot and Lowe’s (LOW, Financial) is firmly in control, and both the companies have already taken huge strides in improving their respective digital sales channels. Home Depot’s online sales grew 23% during the second quarter of 2017.
The double-digit online sales expansion has accelerated this year after growing 19% in 2016 compared to the year before. In 2016, online sales accounted for 5.9% of Home Depot’s net sales, or $5.581 billion. The fast-growing online sales channel makes it extremely hard for new competitors to enter and win the market. And, as if online strength weren’t enough, Home Depot’s operating margin has been expanding along with its revenue. Margins have gone from under 10% in 2009 to 14.2% in 2016. Home Depot has also forecasted for 0.3 basis point margin expansion for the current fiscal.
HD data by GuruFocus.com
The healthy state of the U.S. housing market has helped Home Depot’s revenue increase in a big way, but the company has already proved during the last recession that it had enough strength to survive on its own even during the worst housing collapse the history has ever known. The company has only grown in strength since then, increasing its revenue and also improving its operating margins. The higher operating margin level, when compared to its closest competitor Lowe’s, shows an operationally superior company.
This is one company that you can buy and forget forever. The recent price drop opens up a great opportunity for investors to buy the stock and, if it continues to decline along with the market, just keep accumulating.
Disclosure: I have no positions in the stocks mentioned above and no intention to initiate a position in the next 72 hours.
