High interest rates are here to stay. Federal Reserve Chairman Jerome Powell said the fight against inflation had stalled and the central bank was leaving interest rates unchanged. It wasn’t unexpected but it means that costs will remain elevated for an extended period for business. The Fed will try to slow the economy through its higher-for-longer policies. Although businesses can learn to adjust to the new normal, it takes a toll on their performance and causes stock prices to fall. Investors should be ready.
It’s not an indication that the businesses are broken, only that the government is inept at managing the economy. Eventually this period will pass and businesses will pick up again, allowing their stocks to rise. By buying shares while they’re down, investors will juice their portfolio returns on the recovery.
Below are three bargain stocks to buy for just such a scenario.
Starbucks (SBUX)
Coffee shop Starbucks (NASDAQ:SBUX) is the perfect example of this in action. It just reported quarterly results that stunned Wall Street with how bad they were. While the chain had been passing along its increased costs to consumers, coffee drinkers pushed back in the fiscal second quarter and decided to pass on the high-priced brew. Sales fell 2% in the period to $8.6 billion. Adjusted profits plunged 14% year over year to 68 cents per share.
Starbucks CEO Laxman Narasimhan said economic conditions were to blame.
“We continue to feel the impact of a more cautious consumer,” he told analysts, “particularly with our more occasional customer, and a deteriorating economic outlook has weighed on customer traffic and impact felt broadly across the industry.”
This isn’t the fault of Starbucks, and as Narasimhan suggested, it’s hurting everyone. McDonald’s (NYSE:MCD) also felt the effects of government and Fed policies with an earnings miss.
That, however, does make Starbucks a bargain stock to buy. Maybe don’t rush right in, but the stock cratered 16% after earnings and is beginning to look much more attractive than it has for some time. As the coffee shop isn’t sure whether it will cut prices to lure customers back, the malaise could linger for the stock. But this is now a discounted company you might want to buy.
Eli Lilly (LLY)
Obesity and diabetes often go hand in hand, which is why combating one can help minimize the other. Eli Lilly (NYSE:LLY) is making bank with therapies for both, following rival Novo Nordisk (NYSE:NVO) blowing up the market with its celebrity-endorsed treatments Ozempic and Wegovy.
Instead of using semaglutide as its glucagon-like peptide-1 (GLP-1) agonist, Lilly uses terzepatide as the wunderkind in Mounjaro and Zepbound. The treatments were only approved by the Food & Drug Administration last November but are already generating massive results. Worldwide sales of Mounjaro rocketed to $1.8 billion in the first quarter following U.S. approval, versus $565 million last year. Zepbound saw $517 million in sales in its first full quarter after approval.
But Eli Lilly isn’t a one-trick pony (or two tricks in this instance). It has a portfolio of solid therapies. One of the best performers was Verzenio, a treatment for advanced metastatic breast cancer. Sales surged 40% to $1 billion, driven by increased U.S. demand. But that led to large back orders and Lilly is forecasting tight supplies going forward. How much money it makes will be restricted by how much it can produce.
Limited capacity to meet demand could eventually bite Lilly, which might not be so bad for investors considering the hefty premium Eli Lilly stock carries. Shares go for 116 times trailing earnings, 60 times estimates and 20 times sales. That’s not cheap. Any meaningful pullback in the stock, however, should be an invitation to buy.
Ulta Beauty (ULTA)
Two months ago, I wrote that Ulta Beauty (NASDAQ:ULTA) was primed for a price cut via a stock split. Trading at $554 per share, I said that the beauty and personal care retailer would benefit from the increased liquidity and availability of its stock by splitting them to make them more affordable. Well, investors got a price cut — but not from any split.
Ulta Beauty stock was crushed last month after warning it was seeing a slowdown in sales across the first two months of the quarter. Shares are down 30% from the highs hit shortly after my article published. They recently closed just under $400 a share.
That makes them much more attractive even if they still trade at triple-digit prices. Ulta is the largest specialty beauty retailer in the U.S., with nearly 1,375 stores in all 50 states. After the haircut, shares trade at just 15 times trailing earnings, 13 times estimates and less than 2 times sales. Ulta also goes for 18 times the free cash flow (FCF) it produces. Closer to 10 times FCF would indicate that Ulta Beauty stock is a bargain-basement steal. But even at these levels, it makes for an attractive stock.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
