Coming off its best month since November 2020, it will be tough for the S&P 500 in August to match the 9.1% return it notched in July. The best stocks to buy in August may be some of the best performers from July.
How long will the summer rally last?
“We believe the rally will last until later in the summer, but as stock prices rebound and it becomes increasingly clear that we are headed for a more typical recession (e.g., one with higher unemployment and nominal GDP dropping close to zero or negative), markets will again have another selloff,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, told CNBC.
So what are the best stocks to buy in August?
I’ve got seven S&P 500 stocks from seven sectors. Each stock must have gained at least 10% over the past month and be trading at a reasonable price-sales ratio.
Bath & Body Works
Best Stocks to Buy: Nucor (NUE)
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I’ve admired the North Carolina steel producer for some time. In March, I recommended Nucor (NYSE:NUE) along with nine other S&P 500 stocks to buy. I also recommended NUE in September 2021. I thought it was a stock that was down but not out.
While the past year has been a rollercoaster ride for Nucor shareholders, the result’s been very positive. It’s up 33% compared to -5.9% for the index. In the past month, NUE is up 29%, almost 4x the return of the S&P 500.
One of the reasons for the significant gain in July was the company’s record results in Q2 2022, which Nucor reported on July 21. Its net earnings were $2.56 billion during the quarter, $460 million higher than Q1 2022 and $1.05 billion higher than a year earlier.
It currently has a P/S ratio of 0.88, approximately the same as its five-year average. Nucor remains an excellent long-term buy.
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Disney (NYSE:DIS) barely qualified for this article, with DIS stock gaining 10.4% in July. But it qualified and now Disney’s shares could be ready to take off.
Asset allocation specialist Chantico Global believes that Disney would make an intelligent buy if there were a mild recession and not a more prolonged economic downturn.
“Parks are already starting to normalize in terms of numbers, they’re growing like gangbusters. They’ve upped their pricing with absolutely no response in demand, which is to say that Disney has incredible pricing power,” Chantico Global CEO Gina Sanchez said in late July.
She’s also high on Disney+, which reported 87.6 million subscribers at the end of the second quarter, 28% higher than a year earlier, with 7.9 million added in the quarter.
Despite the nice gain in July, DIS stock is still down more than 30%. Barring a major recession, it ought to be able to recover some more of its losses in the months ahead.
Best Stocks to Buy: Bath & Body Works (BBWI)
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Bath & Body Works (NYSE:BBWI) rebounded nicely in July with a 27.5% gain. Yet it’s still down 46% YTD.
On July 20, the company cut its guidance for the second quarter and fiscal year as inflation took a bite out of sales. At the beginning of fiscal 2022, it expected sales to grow in the low single digits. It now sees a drop in the mid- to high single digits. It also projects earnings per share will be 20 cents lower in 2022.
Between consumers cutting back on their spending and shifting toward more experiential products and services, Bath & Body Works is bracing for lower demand. However, it’s important to remember that it’s facing 2021 comparable sales that were record-breaking due to Covid-19. A return to more normal buying patterns was expected.
Interim CEO Sarah Nash, RetailDive recently reported, said that the company is performing well above its pre-pandemic levels, an indication that Bath & Body Works ought to be able to weather this economic storm.
Trading at 1.3x sales, BBWI stock is still cheap despite July’s significant gain. I wouldn’t be surprised if the momentum continued in August.
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Costco (NASDAQ:COST) gained 11.4% in July. As a result, it’s down just 5% on the year, about one-third of the loss of the S&P 500.
Costco has always been one of my favorite stocks. As far back as 2012, I was recommending COST stock. More recently, I argued that Costco remains one of the best buy-and-hold stocks you can have in your portfolio. It is a must-own stock. Now more than ever.
The key to Costco’s business model is its membership fees. If you’ve looked at one of its financial statements, you’ll see that the membership fees for a given period are very similar to its net income. In Q3 2022, its membership fees were about 73% of its $3.98 billion net income for the first nine months.
The membership fee revenue enables it to pass on supplier savings to its customers. As long as its membership base grows, all is good at Costco HQ. As of May 8, Costco had 64.4 million paid members, up from 60.6 million a year earlier. That’s a 6.3% YOY increase. In the Costco business model, that’s plenty.
Best Stocks to Buy: Chevron (CVX)
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However, there is no question that Chevron’s business is booming. The energy giant reported strong second-quarter results on July 29 that included $68.8 billion in revenue, $9.5 billion higher than analyst estimates. On the bottom line, it earned $5.82 a share in Q2 2022, 72 cents higher than the consensus and much higher than $1.71 a year earlier.
The company’s return on capital employed (ROCE) in the second quarter was 26%. It hasn’t been this high since 2008. As a result of its strong cash flow through the first six months of the year, Chevron was able to pay down more debt, reducing its debt ratio by 380 basis points to 14.6%.
Chevron’s trailing 12-month free cash flow through the end of the second quarter is $29.7 billion. Based on its market cap of $321.8 billion, it has an FCF yield of 9.2%. I consider anything over 8% to be in value territory.
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On July 20, JPMorgan analysts raised their target price for Generac Holdings (NYSE:GNRC) to $461 from $455 while maintaining an overweight rating on GNRC stock. Of the 23 analysts covering GNRC stock, 19 rates it a buy. None rate it a sell or underweight. The median target price is $365, 48% higher than its current share price.
In Q1 2022, its sales were $1.14 billion, 41% higher than a year earlier. Its residential products, which account for 68% of revenue, grew 43% during the quarter to $777 million. For all of 2022, Generac projects sales growth of 36% to 40% over last year.
On the bottom line, its adjusted net income was $135 million, 12% lower than $153 million a year earlier. Higher input costs were the cause of lower gross margins in the quarter. It expects gross margins to improve in the second half, leading to net margins of 13%-14% in 2022.
Despite being up more than 23% in July, Generac’s FCF yield is high at 8.2% [TTM FCF $140 million divided by $17.1 billion market cap].
Best Stocks to Buy: Molina Healthcare (MOH)
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On the company’s Q2 2022 conference call, Molina Healthcare (NYSE:MOH) CEO Joe Zubretsky announced that it was permanently moving to a remote work environment. As part of this permanent move, it is reducing its real estate footprint by approximately two-thirds. The move cut its general and administrative expenses in the years ahead.
Molina Healthcare provides Medicaid and Medicare healthcare plans to lower-income individuals through state insurance marketplaces. At the end of June, it had 5.1 million members, 9% higher than June 2021.
The company continues implementing a turnaround strategy that includes acquiring smaller healthcare plans. In 2017, it had a $512 million loss. In the first six months of 2022, it had an adjusted profit of $554 million, a turnaround of more than $1 billion to the bottom line. This year, it expects earnings of $17.60 a share. In 2023, Molina expects to earn more than $20.
In May, I suggested investors consider Molina as a blue-chip stock to buy for safety. It’s up 4% since then. More importantly, it’s up 15.8% in July after reporting Q2 2022 results that beat revenue and earnings estimates. August ought to see more gains.
On the date of publication, Will Ashworth did not have (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.