Key insights
- The article discusses individual stock picking within the S&P 500, highlighting Home Depot and PepsiCo as potential market-beaters. It notes Home Depot's dominance in home improvement but acknowledges recent sluggish sales due to high interest rates and inflation impacting consumer spending. The piece suggests that despite short-term volatility, these stocks offer long-term potential for patient investors.
It's easy to think of the market as a single entity based on how people talk about it. Indeed, you can purchase low-cost vehicles, such as exchange-traded funds (ETFs) that invest passively by tracking indexes such as the S&P 500.
But it's important to remember that the market is a collection of stocks. Of course, you can pick individual stocks within the index, hoping to produce better returns. Fortunately, you don't need a lot of money to get started, and you can add to your investment over time.
Home Depot (HD +0.27%) and PepsiCo (PEP +0.89%) have market-beating potential for patient investors willing to endure some short-term volatility.
Home Depot dominates the home-improvement retail space. In the latest fiscal year, the retailer generated sales of $164.7 billion, nearly double those of its nearest competitor, Lowe's, at $86.3 billion. Home Depot's fiscal year ended on Feb. 1.
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This size conveys certain advantages, such as economies of scale and convenience to do-it-yourself homeowners and professional contractors. It's increasingly targeting professionals, including acquiring SRS Distribution for $18.3 billion in 2024, followed by its $5.5 billion purchase of GMS.
However, Home Depot's sales have been sluggish lately due to cyclical economic factors that have kept homeowners from taking on large projects. These include high interest rates that have raised borrowing costs for existing homeowners and made it more challenging for potential buyers to purchase homes. Additionally, persistently high inflation has squeezed consumers' wallets.
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The company's first-quarter same-store sales (comps) were flat after removing foreign-currency translations. Management projects flat to 2% growth in comps for this year.
But people will buy homes again. And they'll undertake major projects, including out of necessity. It seems likely that homeowners and contractors will once again turn to Home Depot.
Meanwhile, the stock price drop has created a better valuation. Home Depot's shares have fallen around 16% over the last year, through June 2. During this time, the S&P 500 has gained about 26%.
The stock has a price-to-earnings (P/E) ratio of 22, down from last year's 25 multiple. With a 10-year median P/E ratio of 23, it's also slightly cheaper than its historical valuation.
Home Depot's strong market position, combined with an attractive valuation, makes the stock a compelling buying opportunity for savvy long-term investors.
PepsiCo's product offerings include much more than soda. It also offers food like chips, cereal, granola bars, and oatmeal. The company's brands include household names like Pepsi, Gatorade, Doritos, and Quaker.
But even a food and drink company isn't immune to economic forces affecting consumer spending. PepsiCo, like other consumer goods companies, had been raising prices to combat higher costs. But that's caused consumers to cut back.
To increase demand, management decided to selectively reduce prices, and it has had a positive impact. PepsiCo's first-quarter sales, adjusted to exclude foreign-currency translations and the impact of acquisitions and divestitures, grew 2.6% year over year. Importantly, volume increased slightly.
Granted, that doesn't sound great, but it's a signal that management's plan appears to have increased shoppers' buying. Looking back at 2025, the company's adjusted sales grew 2%, with price increases driving the gain. They contributed 4 percentage points, with lower volume subtracting 2 percentage points.
Meanwhile, the stock price's 8.9% gain has badly lagged the S&P 500 by more than 19 percentage points.
PepsiCo's stock has a P/E ratio of 22, up from last year's 19. However, it's much cheaper than its long-term historical P/E multiple of 26.
With PepsiCo's powerful brands and price reductions winning back consumers, the company's long-term future looks good. Add in an attractive valuation, and the stock seems poised to produce nice returns for shareholders willing to hold the shares for a long period.