Jhere are 30 components in the Dow Jones Industrial Average. It might surprise investors to learn that the two worst performers so far this year are Nike (NYSE: NKE) and Home deposit (NYSE:HD), which have been two of the best performers over the past decade. As of this writing, Nike is down 23.5% year-to-date, while Home Depot is down 25.2%.
To illustrate the magnitude of the decline, consider that Nike and Home Depot lost, on average, about 1.5% of their value per week. It’s like starting the year with $100 and every three or four days someone takes a dollar from you. Ouch.
Although they face some serious headwinds in the near term, there is reason to believe that now could be the perfect time to buy the drop in these two. blue chip stocks.
An iconic brand at the top of its game
Nike is one of the most powerful and recognizable brands in the world. But looking back, it’s clear that its valuation has gotten ahead of itself. Nike’s stock price peaked at $179.10 per share, giving it a market capitalization of $281 billion at the November 5, 2021 high. At that time, its price-to-earnings ratio ( P/E) was 47 and its price-to-sales ratio was 6.2, well above its median 10-year P/E ratio of 28.8 and its median 10-year P/S ratio of 3 ,1.
Even after falling 28% from its all-time high, Nike still has a market capitalization of $200 billion. And it’s not a cheap business either; its P/E and P/S ratios are still above these 10-year median levels and above many of its peers.
However, the leading companies in the segment arguably deserve higher valuation multiples. When thinking about a company like Nike, it’s important to separate the shares of the company. As a stock, Nike is still expensive, but cheaper than it used to be. But as a company, there’s no denying that Nike is at the top of its game. It still sponsors many of the world’s elite athletes, has never had such a strong brand image, is growing at a decent rate and is more profitable than ever.
Nike achieved record revenue and net profit in 2021. But its real standout measure was its operating margin of 15.6% – its highest level since 1993, when Nike was a company. much smaller.
It remains to be seen whether Nike can maintain its high margins and continue to grow sales and earnings in an inflationary environment. But the long-term thesis of owning Nike stock remains stronger than ever.
A colder housing market could negatively impact Home Depot
Like Nike, Home Depot is the benchmark in its sector. The stock has been a long-term outperformer – it’s still up more than 500% over the past decade, even after its recent sell-off. Home Depot’s performance surged during the most intense stages of the COVID-19 pandemic, as a white-hot housing market was associated with an increase in the number of people undertaking do-it-yourself home improvement projects. same.
However, there are reasons to believe that the housing market is about to cool down. And that’s one of the reasons investors are spooked by Home Depot stocks right now.
The Case-Shiller national home price index is essentially the S&P500 for the housing market. Each month, it updates its calculations by tracking the average price of a single-family home based on data from the previous three months. And this index is at an all-time high. Also consider the average sale price of existing homes in the United States, which is $370,700, very close to its peak. And the average selling price for newly built homes is at an all-time high of $511,000. The most concerning element of this graph is not the highest data. It’s that the housing crisis of 2008 looks like a blot on the graph. In other words, the roaring housing market bubble that burst and led to a -38.5% return in the S&P 500 in 2008 – the worst return since 1974 – now looks like a hill leading to the top of prices. real estate prices in 2022.
To make matters worse, the average interest rate on a 30-year mortgage is now 4.7%, which is a three-year high. It’s not that a 30-year mortgage interest rate of 4.7% is so high compared to historical levels. It’s that mortgage rates are no longer favorable levels and housing prices are still extremely high.
The housing market has been strong for years and accelerated when mortgage interest rates crashed at the height of the pandemic. But now that house prices and mortgage interest rates are high, we could start to see supply outpace demand, causing house prices to fall.
However, it is difficult to say that the short-term outlook for housing is good. And that negative outlook certainly dampens investor optimism for Home Depot. It would not be surprising to see the title fall further. And in many ways, it makes sense that the stock is down 25% year-to-date. However, it’s equally difficult to imagine a world where Home Depot’s stock isn’t much higher 10 or 20 years from now than it is today. It’s also worth mentioning that the company has a P/E ratio of 20, so at least investors can buy its shares at a relatively inexpensive valuation.
Go with Proven Winners
In times of heightened volatility, it makes sense to rely on companies with strong fundamentals and a track record of persevering through past sell-offs. Nike and Home Depot certainly fit that description. It’s true, both are consumer discretionary businesses, and therefore exposed to the impacts of broader economic cycles. Volatility is just normal when it comes to buying and holding either stock. In the meantime, at the current stock price, Nike has a dividend yield of 0.9% and Home Depot has a dividend yield of 2.5%, which will provide investors with a stream of passive income until the economic environment – and the share price of these two companies – improves.
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