Great companies can win for decades and create life-changing wealth in the process for investors. Many of the textbook examples of this are consumer-facing businesses. After all, consumer spending is the No. 1 activity driving the U.S. economy.
Three classics that come to mind include Apple (NASDAQ: AAPL) , The Home Depot (NYSE: HD) , and Costco Wholesale (NASDAQ: COST) . Just look at the mind-blowing investment returns all three have generated relative to the S&P 500 over the past several decades:
AAPL Total Return Price data by YCharts.
Since these are such well-known companies with decorated histories, they aren't exactly a secret on Wall Street. Market-beating stocks rarely come cheap, especially when the broader market is at all-time highs like it is today. These companies make excellent targets if the market dips or even crashes.
Read below to find out where these blue chip stocks trade today and what a potential buying opportunity could look like.
1. Apple
It seems that iPhones are everywhere these days, which speaks to how dominant Apple has become in personal electronics. Apple is one of the world's largest companies today and operates at a size that's hard to fathom. The business generates nearly $400 billion in annual revenue, including over $100 billion in free cash flow .
Its best growth days may be behind it, but Apple produces so much cash that it can drive investment returns through massive stock-buyback programs and a growing dividend . Analysts expect Apple to grow earnings by around 12% annually over the long term, which can compound into big things over decades.
Investors must be careful about overpaying for stocks when growth is lower. Apple trades at a price-to-earnings ratio (P/E) of 34, which seems hard to justify despite the company's blue chip qualities. Even famous long-term investor Warren Buffett has been selling chunks of Berkshire Hathaway 's Apple stake at these prices (although, admittedly, he still owns plenty of the stock).
Investors should revisit this longtime winner once the stock cools down and its P/E drops back into the mid-20s or lower. This would be a fairer price for Apple's expected growth.
2. Home Depot
Home improvement is an enormous market in America, where approximately 144 million homes create constant demand for materials, appliances, tools, and more. Home Depot has become the king of this market as it's grown to $152 billion in annual sales. Plus, the company enjoys world-class management, earning a remarkable 31% return on invested capital .
Efficient revenue growth is a potent formula for investment returns. There's still plenty of room for future growth, too. The U.S. home improvement market could exceed $600 billion by 2027.
Analysts believe Home Depot will grow earnings by an average of almost 10% annually over the next three to five years. The company also pays a solid dividend that adds another 2.3%, giving investors a shot at double-digit annualized returns.
Unfortunately, the company's high valuation could eat into that. Shares trade at a P/E of 26 today, notably above the company's long-term norms. Investors should look to buy at a P/E closer to the low 20s, about 20% lower than where the stock is now.
3. Costco Wholesale
Few retail brands have the cult following that Costco does. The company is known for several things, including its famous $1.50 hotdog meal. It also boasts an annual revenue that tops $253 billion -- all while primarily selling bulk items at razor-thin margins.
The company makes most of its profits on the membership fees it charges customers to shop at its stores, which is an easy lever to pull to create earnings growth. Costco recently bumped up its membership fee for the first time in years.
Costco is so well-known that it doesn't spend any money on advertising. Instead, it pays a quarterly dividend and an occasional special dividend .
The enthusiasm of the company's customers has spilled over into the stock market. Costco stock trades at a lofty valuation of 51 times its estimated 2024 earnings, well above its 10-year average P/E of 35.
The big problem is that Costco is no longer growing quickly. Analysts believe the company's earnings will compound at just over 9% annually over the long term. That's nothing to sneeze at, but it's hard to see how such a higher valuation is fundamentally justified.
Costco's stock has a beta of 0.8 , so it's generally not volatile. It could take a severe market downturn to cause the significant drop needed to bring the stock's valuation back near its historical averages. Buying at these levels risks potential years of flat or negative returns.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Costco Wholesale, and Home Depot. The Motley Fool has a disclosure policy .
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