World-class companies are seldom affordable when markets reach all-time highs.
Notably, outstanding companies can prosper for decades, creating substantial wealth for investors. Often, textbook examples of such enterprises are consumer-facing businesses, given that consumer spending is the primary driver of the U.S. economy.
Three quintessential examples of successful companies include Apple (AAPL 0.40%), The Home Depot (HD 2.22%), and Costco Wholesale (COST -1.70%). The investment returns generated by these companies relative to the S&P 500 over the past several decades are notable.
These companies are well-known with distinguished histories, making them no secret on Wall Street. Stocks that outperform the market typically do not come cheap, especially when the broader market is at historic highs. Nonetheless, they present excellent investment opportunities if the market declines or crashes.
Below is an analysis of where these blue-chip stocks currently trade and what potential buying opportunities may look like.
### Apple
Apple’s dominance in personal electronics is evident by the ubiquitous presence of iPhones. Today, Apple stands as one of the world’s largest companies, boasting nearly $400 billion in annual revenue, including over $100 billion in free cash flow.
While Apple’s most significant growth period may be behind it, the company generates enough cash to drive investment returns through extensive stock-buyback programs and a growing dividend. Analysts project Apple’s long-term earnings growth at approximately 12% annually, which can result in substantial returns over decades.
However, investors should be cautious about overpaying for stocks with lower growth rates. Apple’s current price-to-earnings ratio (P/E) is 34, a figure that might be difficult to justify despite its strong fundamentals. Even the renowned long-term investor Warren Buffett has been reducing Berkshire Hathaway’s Apple holdings at these prices, though he still retains a significant stake.
Investors should consider revisiting Apple’s stock once its P/E ratio cools down to the mid-20s or lower, reflecting a fairer price for its anticipated growth.
### The Home Depot
The home improvement market in the U.S. is vast, with approximately 144 million homes driving constant demand for materials, appliances, tools, and more. Home Depot has led this market, achieving $152 billion in annual sales and benefiting from world-class management, which has yielded a remarkable 31% return on invested capital.
The potential for future growth remains substantial, with the U.S. home improvement market projected to exceed $600 billion by 2027. Analysts estimate that Home Depot’s earnings will grow by nearly 10% annually over the next three to five years. Additionally, the company offers a robust dividend, enhancing the possibility of double-digit annualized returns.
However, the company’s current valuation could impact returns. Shares trade at a P/E of 26, higher than the company’s long-term average. Investors may find a more attractive entry point at a P/E closer to the low 20s, about 20% lower than the current level.
### Costco Wholesale
Costco enjoys a unique cult following, known for its $1.50 hotdog meal and substantial annual revenue exceeding $253 billion, primarily from selling bulk items at slim margins. The company generates most of its profits from membership fees, which it occasionally increases to drive earnings growth. Costco recently raised its membership fees for the first time in years.
The company is so renowned that it does not spend on advertising, opting instead to pay a quarterly dividend and occasional special dividends.
Costco’s popularity has translated into a high stock valuation, with shares trading at 51 times estimated 2024 earnings, significantly above its 10-year average P/E of 35. Despite the company’s slower projected earnings growth of just over 9% annually, the high valuation is difficult to justify fundamentally.
Costco’s stock has a beta of 0.8, indicating lower volatility. A significant market downturn might be necessary to bring the stock’s valuation back to historical averages. Investing at current levels could lead to prolonged periods of flat or negative returns.