Many investors such as Warren Buffett have made fortunes buying stocks at the bottom. Any number of things can turn yesterday’s stocks to buy into today’s stocks to sell. Changing buying habits, evolving consumer tastes, falling demand, poor management, high debt levels and many other factors can send stocks falling to multi-year lows. But how do you know which stocks to buy once they’re at the bottom?
Succeeding like Buffett has in buying stocks at the bottom requires knowing the difference between a good company facing challenges or a firm in actual financial trouble.
As one can see by analyzing these five companies, making profits with such a strategy involves finding companies at a reasonable valuation that exhibit potential for both growth and stability.
Here are five stocks to buy at the bottom.
[Editor’s note: This story was originally published in August 2018. It has since been updated and republished.]
Macy’s, Inc. (M)
Like many brick-and-mortar retailers, Macy’s (NYSE:M) stock suffered as online competition from Amazon (NASDAQ:AMZN) and other e-retailers cut into sales. It remains unclear if Macy’s is one of the better stocks to buy at the bottom. Macy’s stands in a better position than some, in a worse place than others. Sears (NASDAQ:SHLD) and JCPenney (NYSE:JCP) are struggling to survive while M stock still earns a profit. However, unlike Walmart (NYSE:WMT) of even Nordstrom (NYSE:JWN), it finds itself unable to grow its profits.
As a result, M stock trades at a low multiple. It trades at a forward price-earnings (P/E) ratio of about 8.6. That multiple came down after its most recent earnings report. The equity fell by almost 16% despite beating estimates on both revenue and earnings.
The pessimism likely stems from future earnings. Analysts expect profits to decrease by 11.6% next year. Over the next five years, they expect earnings to fall by an average of 0.77% per year. However, at current trading levels, this keeps the P/E ratio below 10 for years to come.
Also, investors will earn a yield on the dividend of almost 4.3%. This dividend has increased every year since 2011. So investors will be paid to wait while the company finds a way to resume earnings growth. Nobody knows what the future holds. However, with the company’s earnings and assets, investors can position themselves to collect the dividend while waiting for Macy’s to find their way back to a position of profit growth.
Freeport-McMoRan, Inc. (FCX)
Phoenix-based copper miner Freeport-McMoRan (NYSE:FCX) has fallen steadily since reaching a high of over $60 per share. It bounced back slightly from the single-digits. However, since 2016, it has held a price floor at the low-teens per share level. Investors will see if this becomes one of the better stocks to buy at the bottom. After briefly surpassing the $20 per share level, it fell back again. FCX stock currently trades around $14 per share.
Still, shareholders might see a reason to believe starting in 2020. Analysts expect earnings in 2019 to fall back to 2017 levels. However, they predict growth will resume in 2020. Over the next five years, Wall Street predicts an annual growth rate of 17.6% on average.
Moreover, investors can buy this future growth at a low valuation. The stock trades at a P/E of just over seven right now. That will briefly rise to just above ten if the prediction for lower 2019 earnings comes to pass. Assuming a sustained increase in profits in 2020 and beyond, that growth should inspire buyers to bid up the FCX stock price.
Furthermore, after suspending dividends in the previous two years, the company began to pay a 20-cent per share annual dividend this year. That amounts to a yield of about 1.4% for now. However, dividends topped out at $2.25 per share in 2013. The yield will become quite generous if the dividend can return to even half that level. Although profiting from FCX may involve a wait, I think it has reached a lucrative buy price for long-term investors.
Constellation Brands, Inc. (STZ)
Constellation (NYSE:STZ) could be poised for the next chapter in its existence. After struggling with slowing sales growth in the beverage market, investors wonder if marijuana will help it become one of the better stocks to buy at the bottom.
Constellation recently announced an intention to invest an additional $3.88 billion in Canadian marijuana company Canopy Growth (NYSE:CGC). STZ stock still denies it has become a “marijuana stock.” However, Constellation now refers to cannabis as the “natural fourth leg” after beer, wine, and spirits. This also follows up on the $191 million investment STZ made last year in CGC. Both stakes combine to give Constellation a 38% stake in the cannabis company.
Whatever STZ has become, it has bought a company that saw 63% revenue growth last year. This could increase profit growth, which analysts predict will increase by an average of 12.5% per year over the next five years.
STZ stock trades at a forward P/E of about 21.2. While both the profit growth and P/E run close to S&P 500 averages, marijuana changes the dynamic. As more states and countries opt for full cannabis legalization, profits for STZ should increase further as CGC stock becomes profitable starting in 2020. Among stocks to buy at the bottom, Constellation will experience the catalyst it needs to return STZ stock to a growth path.
Kohl’s Corporation (KSS)
Last year, Kohl’s (NYSE:KSS) stock was one of the more profitable stocks to buy at the bottom. However, like other brick-and-mortar retailers, Kohl’s has recovered as fear of an “Amazon takeover” began to subside. KSS stock has nearly doubled over the last year.
Despite this recovery, KSS stock trades at around 13.7 times forward earnings. Moreover, analysts believe net income growth will average 9.8% per year over the next five years. This takes the price-to-earnings-to-growth (PEG) ratio to around 1.4. This stands just above the long-term S&P 500 average PEG of 1.33. Furthermore, KSS stock beat earnings estimates in three out of the last four quarters. It has also seen revised earnings estimates continue to rise. Hence, that P/E could come down further.
Despite the near average PEG ratio, the dividend may make paying this multiple worthwhile. Since beginning to pay a dividend in 2011, Kohl’s has increased its payout every year. The dividend now amounts to $2.44 per share, a dividend yield of almost 3.3%.
KSS stock will report second-quarter earnings soon. Such reports have led to selloffs in both J C Penney and Macy’s stock. Time will tell if such a swoon remains in store for Kohl’s. However, any downward in move in KSS stock would create a likely buying opportunity.
Marathon Oil Corporation (MRO)
Marathon Oil (NYSE:MRO) has probably risen enough to be no longer considered one of the stocks to buy at the bottom. However, MRO stock has seen only a very slow climb from the bottom since it fell from a high of more than $41 per share in 2014. After falling as low as $6.52 per share in 2016, the stock has risen to about $19.50 today. The question now involves whether MRO stock can reach and then surpass its 2014 high?
After three straight years of losses, analysts predict a 79-cent per share profit this year. This gives the company a forward P/E of about 24.7. They also expect the profit growth to continue at least until 2019 when Wall Street expects consensus earnings to come in at $1.17 per share. This gives the company a profit growth rate of about 50%.
Investors should approach MRO stock carefully. While that 2019 profit growth looks appealing, Wall Street predicts profits will plateau beginning in 2020. In its latest earnings report, MRO stock reported second-quarter earnings of 15 cents per share. This came in five cents below expectations. The company beats estimates in most quarters, so this does not set a trend. However, the positive trends will probably have to continue beyond 2019 for MRO stock to rise above its current trading range.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.