Friday, March 29

Got $1,000? This Dow Jones Stock Is a Screaming Buy | The Motley Fool


The Dow Jones Industrial Average is one of the most watched stock indexes in the world. It tracks 30 of the most commonly known blue-chip stocks in the United States, from tech giant Apple to heavy machinery maker Caterpillar. Year to date, the index has pulled back about 12% in view of the grim macroeconomic backdrop.

Record-high inflation, aggressive interest rate hikes by the Federal Reserve, and geopolitical concerns have led to investor hysteria of late. And to make matters worse, some investors and economists believe the U.S. could be heading for a brutal recession in the near future. That’s a lot to process, but for long-term investors, economic downturns bring incredible buying opportunities.

On that note, let’s check out one Dow Jones stock that investors should think about pouncing on today. 

Seated person smiles while using a laptop.

Image source: Getty Images.

A victim to the broader sell-off 

Shares of home-improvement retailer Home Depot (HD -4.50%) have contracted 27% since the start of 2022. In my opinion, its recent stock price movement doesn’t necessarily reflect its operational performance.

In its second quarter (ended July 31), the company outdid Wall Street estimates on both the revenue and earnings fronts. Total revenue grew 6.5% year over year to $43.8 billion while diluted earnings per share rose 11.5% to $5.05. Meanwhile, same-store sales increased 5.8%, and both gross and operating profit margins remained consistent year over year at around 33% and 16%, respectively.

Management also reaffirmed its guidance for the full fiscal year. In 2022, the company expects to experience total revenue and same-store growth of 3% and earnings-per-share growth in the mid-single digits.   

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It was comforting during the recent earnings call to hear management cite continued strong demand for home-improvement products. As a cyclical business that ebbs and flows with the economy, Home Depot generally expects sales to slow when the macro environment becomes uncertain in that home-improvement goods are non-essential items for consumers.

In Home Depot’s case, sales volumes have remained healthy, so we can assume that the consumer continues to be strong — which is a great sign for the broader economy. Moving forward, it’ll be interesting to watch if demand for home-improvement products shifts, but for the time being, the company appears to be in fine shape.

Should investors buy Home Depot stock?

I know what you’re probably thinking: Home Depot is in a cyclical industry, so why is it a good investment amid the unstable economy? While I understand that concern, it’s important to keep a long-term mindset when investing. Home Depot has returned 423% over a 10-year span, and it has battled its way through five recessions since going public in 1981.

Past markets don’t predict future ones, but the company appears strongly positioned to weather any economic storm. Plus, its latest quarterly performance indicates that all is well for now from a consumer spending standpoint.

Not only is the home-improvement business a profit-generating machine, but it’s also awfully good at generating cash, yielding $10.8 billion in free cash flow over the past 12 months. Consistent profitability and cash-flow generation are important in any economic environment, but even more so in a down market.

Then there’s the $1.90-per-share quarterly dividend, which translates to a 2.54% dividend yield — granting investors a nice source of passive income. With the stock trading at about 18 times earnings, below its five-year average of 23.3, investors are presented with a good margin of safety today. Expect some turbulence in the near term — but keeping the big picture in mind, Home Depot should enjoy continued growth and generate impressive gains for investors.

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Luke Meindl has positions in Apple. The Motley Fool has positions in and recommends Apple and Home Depot. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.



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