The S&P 500 gained 24.2% and 23.3% in 2023 and 2024, respectively. Naturally, this has made many stock investors happy and wealthier.
That makes finding stocks trading at an attractive valuation a challenge, however. It's always risky when looking at laggards since the market has proven fairly efficient.
Nonetheless, you can uncover stocks that have underperformed and look cheap based on their valuations. In the case of these two stocks, investors seem to be placing too much emphasis on the companies' short-term prospects. That creates a buying opportunity for long-term investors.
You don't need a lot of money to get started, either. Although $500 may only buy you a share, you can regularly add to the amount over time.
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1. Ulta Beauty
Ulta Beauty's (ULTA -3.24%) shareholders have a hard time putting on a happy face lately. The stock has lost over 9% in the last year through Jan. 3. The S&P 500 has gained 26.3% during this period.
The company's sales have been sluggish. Fiscal third-quarter, same-store sales (comps) increased a tepid 0.6%. However, that's likely due to consumers being stretched by higher prices for essentials like food and rent rather than specific company factors.
Ulta Beauty offers products like cosmetics, fragrances, skincare, and hair across various brands and price points in its stores. This should help the company weather the storm and help offset tough conditions with lower-priced products. Notably, higher traffic contributed to most of the comp increase. That indicates people continued visiting and buying items at Ulta stores
Fortunately, at some point, inflationary pressures will abate. When it does, lower-income consumers will return, and Ulta Beauty, with its broad offerings, will benefit.
The shares trade at a price-to-earnings (P/E) ratio of 17 compared to a median of 27 over the last 10 years. Ulta's stock also appears cheap relative to the S&P 500's P/E multiple of 30.
2. Home Depot
Home Depot's (HD 0.37%) 14.7% increase over the last year seems impressive. But that gain underperformed the S&P 500 by 11.6 percentage points.
The company's sales have been negatively impacted by a weary consumer, high interest rates, and sluggish home sales. These have dampened major remodeling projects.
Home Depot's fiscal third-quarter comps dropped 1.3%. The period ended on Oct. 27, 2024.
The largest home-improvement retailer by sales, Home Depot is in a prime position to benefit when the cycle turns. And people will undergo major renovations at some point out of necessity or want.
There have already been positive signs on the home sales front. October and November saw an increase in existing home sales after a sustained period of declines. That should help Home Depot since many new homeowners undergo projects after closing on a home.
As for borrowing costs, the Federal Reserve has been lowering short-term interest rates. That includes a rate cut last month. While no one knows with certainty what the future may hold, the central bank has dropped short-term interest rates by one percentage point since September. That makes its borrowing costs cheaper home equity lines of credit and loans tight to these rates, which homeowners often use to finance construction.
Home Depot's P/E multiple has increased from about 22 to 26 over the last year. However, that's lower than the S&P 500's 30 P/E ratio. Hence, you can buy the shares at a discount to its larger-cap brethren.
