Is the market set to continue heading higher? Or after a tremendous run, are the bulls finally running out of steam? Inflation, high interest rates, mounting geopolitical concerns and a fast-approaching presidential election all add to the uncertainty.
Investors could be forgiven for having concerns about putting money to work in the market at this uncertain time. However, as the adage goes, time in the market is more important than timing the market. Over time, it pays to invest in high-quality companies despite the economic twists and turns. What good options do investors have today?
The S&P 500 Index has risen nearly 25% over the past 12 months. At the other end of the spectrum, however, these seven high-quality S&P 500 stocks to buy on the dip are all down 10% or more over the same time period.
EPAM Systems (EPAM)
EPAM Systems (NYSE:EPAM) is a leading IT outsourcing company focused on digital transformation solutions.
The company’s business model is to hire quality IT professionals in lower cost-of-living countries such as Ukraine and Poland and use that labor force to fulfill contracts for leading Fortune 500 companies. It earns a high profit margin on this thanks to labor arbitrage.
EPAM’s business model has historically enjoyed great success. In fact, the stock has appreciated more than 1,000% since its 2012 IPO. However, its gains have ground to a halt in recent years.
When Russia invaded Ukraine, EPAM had to let go of much of its Russian staff while relocating other team members out of Eastern European countries. In the meantime, EPAM had to hire more folks in places like India and Latin America which temporarily disrupted operations.
More recently, EPAM stock has sold off again on fears that AI will reduce demand for IT consulting. This seems to be a mistaken notion, however. In fact, consulting juggernaut Accenture (NYSE:ACN) just announced upbeat earnings driven by a surge in revenues tied to designing and implementing generative AI solutions for clients.
This sort of AI work is right in EPAM’s wheelhouse, and so it should enjoy a similar burst of activity in coming quarters. With EPAM stock down by more than two-thirds from its 2021 peak, shares are in the bargain bin and set for a major turnaround.
Nike (NKE)
Nike (NYSE:NKE) stock is on a losing streak. Shares are down 10% year-to-date, and have risen less than 15% over the past five years despite the roaring bull market.
The weakness is understandable, as Nike relies heavily on Asian markets like China for a large chunk of its overall revenues and growth prospects. With the prolonged Chinese economic slump, Nike has seen a sharp decline in its operating results there.
From a bigger picture, consumer spending appears to be slowing down. After a few boom years, levels of consumer debt are rising again, the unemployment rate is ticking up, and inflation has taken a toll on consumer confidence.
However, Nike continues to report positive growth in both revenues and earnings per share. Even during this downturn, Nike is holding its ground thanks to efficient operations and cost-cutting. And analysts see more robust growth returning as the apparel industry works its way through the current cycle.
In the bigger picture, Nike’s celebrity endorsements, global brand and powerful distribution channels give it the sticking power to make it through this downturn and come out stronger.
PayPal (PYPL)
PayPal (NASDAQ:PYPL) was a big winner in the 2020 tech boom that has subsequently fizzled out. The pandemic gave a huge boost to tech companies that facilitated online payments and e-commerce solutions.
However, the payments industry is a saturated one, and as the 2021 e-commerce boom waned, the sector lost momentum. Many payments stocks, PayPal included have crashed and burned since then.
But investors shouldn’t give up on the whole sector. PayPal, for example, has continued to grow steadily despite the tougher macroeconomic environment.
The company is set to increase revenues roughly 7.5% this year to $32 billion, and shares trade for less than 15 times forward earnings. These are not usually the sorts of metrics associated with a stock that is trading down 80% from its all-time highs. Once the gloom lifts, PYPL stock will be set for a huge bounce.
Estee Lauder (EL)
Estee Lauder (NYSE:EL) has lost its shine. The company is one of the world’s leading cosmetic companies and traditionally posted double-digit annualized earnings growth over the years.
The past two years have been a totally different story. Consumer spending has slowed in the cosmetics space, particularly in the pivotal China and Southeast Asia market where a large portion of the world’s population lives. Excess inventory levels have mounted across the industry and profit margins have slumped.
Estee Lauder shares traditionally trade at a high P/E ratio. But given the current tailspin, shares have plunged nearly 75% from their prior highs.
EL stock plummeted as much as 75% from peak to trough. But change is coming. Estee Lauder’s earnings results have started to show signs of improvement this year. Morningstar‘s Dan Su believes that the cosmetics industry downturn is temporary and that EL stock is 45% undervalued today. He sees shares holding a fair value of $210 per share compared to today’s $115 price.
Hormel Foods (HRL)
Hormel Foods (NYSE:HRL) is a packaged foods company focused on protein products. Known for its canned pork product Spam, the Hormel of nowadays is more focused on health-conscious products such as natural and organic meats, guacamole, Mexican salsas, and nuts and nut butter.
Hormel has dramatically underperformed the stock market in recent years. Investors have shied away from slower-moving consumer staples companies as attention has shifted to technology and growth stocks. Additionally, Hormel’s profit margins have compressed since the pandemic amid supply chain disruptions, higher commodity prices and an increase in labor costs.
All this has led to HRL stock suffering its worst drawdown in decades. For patient long-term investors, this marks a tremendous opportunity.
Hormel has increased its dividend for 57 consecutive years. And because the company is controlled by a charitable foundation, its mission is to keep increasing the dividend steadily each year to enable further charitable work.
The company delivered another soft earnings report recently. However, management has guided to better results starting in the back half of 2024. Given Hormel’s more budget-friendly assortment of foods, it could be set to enjoy rising demand and profit growth as the economy slows down. This makes it a top S&P 500 stock to own heading into the next recession.
Kenvue (KVUE)
Kenvue (NYSE:KVUE) is a new consumer wellness company. It came about thanks to Johnson & Johnson (NYSE:JNJ) spinning of its consumer healthcare products so it could focus more on medical devices and pharmaceutical products.
Kenvue went public in May 2023 around $26 per share and is now trading below the $20 mark. This is intriguing situation, given that Kenvue sells well-known products like Tylenol, Motrin, Benadryl and Nicorette.
These are hardly the most glamorous healthcare products in the world, but they are tried and true brands that can produce steady cash flows for many years to come. When the economy slows down and investors turn to defensive stocks again, names like Kenvue will stand out.
KVUE stock now sells for just 16 times forward earnings while offering a 4.2% dividend yield.
Verisign (VRSN)
VeriSign (NASDAQ:VRSN) offers investors a unique asset. It’s a de facto toll road, but for the internet.
Specifically, VeriSign is one of the internet’s leading domain registries, meaning that it provides key infrastructure for the world’s internet services.
VeriSign has the exclusive license to operate all of the .com and .net website domains worldwide. The company charges approximately $9.75 per year for each registry, and its contract allows it to raise prices about 8.5% per year on average.
VeriSign has operated these domain addresses since the 1990s and has proven that it is dependable in managing these properties. Its contract is set to run in perpetuity, which should ensure that the company’s cash flows persist for decades to come.
VRSN stock has recently underperformed as internet growth has slowed down since the 2020-2 boom period. In addition, the Chinese internet market is facing serious headwinds right now with that country’s economic slump.
VeriSign uses its profits to aggressively repurchases its own stock. Now that the share price has slumped, VeriSign can retire its shares more quickly, giving investors even more bang for their buck until market sentiment recovers.
On the date of publication, Ian Bezek held a long position in VRSN, JNJ, KVUE, HRL, EL and EPAM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
