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September 01, 2020 1:41pm
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3 Highly Profitable Companies Set for Double-Digit Upside

Compass with needle pointing the text double-digit growth. Financial concept. 3D illustration.

Most investors fail to realize that a stock price has nothing to do with the underlying company, as more than 90% of the time, there is a wide gap between value and price. How come businesses like PepsiCo Inc. (NASDAQ: PEP), which have a solid global presence with sales coming in almost auto-pilot mode, are trading at 5% over its 52-week low price? That’s the sort of gap savvy investors dream of catching with great businesses, as it is almost a sure profitable investment.

Investors can also take the example of Home Depot Inc. (NYSE: HD), one of the strongest home renovation brands in the United States. That company has fallen to trade within 23% of its 52-week low on an unjustified fear of weakness within the consumer discretionary sector. Even athleisure favorite Lululemon Athletica Inc. (NASDAQ: LULU) is now beaten to a new 52-week low, following the same fearful behavior that savvy investors can exploit today.

Of course, there is always a good reason why markets send stock crashes down, and often, these reasons are justified. But that’s not going to be the case today. Investors will find out why these stocks can be sensible watchlist additions today, especially when digging into the fundamentals, where the unwavering profitability of these companies stands the test of the market’s emotional swing.

Home Depot Is About to Give Investors a New Reason to Buy Stock

Notice that stocks like Zillow Group Inc. (NASDAQ: Z) have taken off in the past two months as markets leaned on the news that U.S. listings rose for the first time in a few quarters. With listings on the rise and building permits decreasing by 7% on the year and 3.5% on the month, the real estate sector is starting to look like a bottom in the making.

What this means for Home Depot is increased demand, as home improvement and renovation activity takes off for sellers getting their homes ready to hit the market or new home buyers looking to design their new homes just how they want them. More than that, investors now have a timetable that they can follow in anticipation of this event.

CME’s FedWatch tool now prices over a 60% probability of the Federal Reserve (the Fed) cutting interest rates as soon as September 2024. This would also lower mortgage rates, sparking housing demand. So, why pick Home Depot?

For starters, analysts at Evercore felt comfortable slapping a valuation of $420 a share for Home Depot stock, daring it to rally by as much as 24.1% from where it sits today. Second, the company’s financials have a few factors to add to the potentially bullish case.

Home Depot’s gross margins are above 33%, enabling more capital to reach the bottom line for management to generate more capital. How much is management generating? Return on invested capital (ROIC) rates of 32% show investors how Home Depot stock could be one of the best picks to compound their wealth at a discount.

Lululemon Stock Hits 7-Year Low Valuation, Attracting Institutional Investors

That’s right, shares of Lululemon are now trading at a P/E ratio of 23.8x today, a valuation not seen since 2017, making it a new 7-year low valuation that savvy investors can exploit today. But, as always, Wall Street beat Main Street to the curb.

The Vanguard Group decided to boost its stake in Lululemon stock by 1.6% as of May 2024. This boost increased the asset manager’s net investment to $3.9 billion, a vote of confidence that Lululemon is not in trouble.

Analysts at Robert W. Baird reiterated an ‘outperform’ rating on Lululemon stock, with a price target of $470 a share, or 57.8% from where the stock traded. Lululemon’s financials, particularly its profit margins, back Wall Street's confidence.

A 58.3% gross margin is high enough for Lululemon’s management to duplicate the ROIC rates achieved by those at the Home Depot. For Lululemon, ROIC stands under 30%, making it another excellent choice for investors to compound their wealth on a potential dip-buy.

Why Pepsi Stock's Dividend Makes the Dip Worth Watching

Inflation today is a concern slowing down the potential interest rate cuts that – as discussed – could come by September 2024. So, one thing investors can add to their filtering criteria is a high enough dividend yield to cushion this sticky inflation rate today.

PepsiCo stock fits that profile, as its $5.4 a share payout would translate into an annual dividend yield of 3.3%, roughly matching inflation but also beating the latest U.S. GDP growth rate, revised to 1.3% in the past quarter.

Analysts at Jefferies Financial Group slapped a $211 a share valuation for PepsiCo stock, and to prove them right, the stock needs to rally by 29.3% from where it trades today. Encouraging the stability of these dividends and the upgrades from Wall Street comes the company’s financials.

A 54% gross margin allows management to replicate what investors have seen in Lululemon and Home Depot, this time generating 17.3% ROIC rates for PepsiCo. DekaBank Deutsche, PepsiCo’s largest shareholder, used these factors to justify a 6.1% boost in its position, bringing its net investment in PepsiCo stock to $480.5 million.

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