I have a love-hate relationship with stock market corrections. While I hate seeing all the red in my portfolio, I love the opportunities they provide to buy stocks at more attractive prices.
I’ve already started taking advantage of the current stock market correction by adding to several positions at lower prices. As I’ve combed through my portfolio, there are several more companies I’d love to buy if they got even cheaper. Three that are on my watch list if the sell-off continues are NextEra Energy (NYSE: NEE), AvalonBay Apartment Communities (NYSE: AVB), and Waste Management (NYSE: WM).
This premier utility is starting to look attractive
Shares of NextEra Energy have taken a beating this year, tumbling more than 20%. That’s due to the stock market sell-off and the utility’s recent management change, which surprised investors. That decline caught my eye and has me seriously considering adding to my position in this long-term winner.
NextEra Energy’s sell-off now has the stock trading at about 26 times its forward earnings. While that’s still quite a bit more expensive than the average utility – its three largest rivals trade at slightly less than 20 times their forward earnings – it’s a lot cheaper than the 35-plus forward P/E ratio it had at the end of 2021.
I’d love to see NextEra Energy come down even more so that I can scoop up some additional shares at a lower valuation and higher dividend yield than the current 2.1%. While I think it’s trading at a much more attractive price right now – especially after unveiling its updated growth outlook – I want to be patient and see if I can grab shares closer to 20 times its forward P/E and a 2.5% dividend yield.
Waiting to see if we get an even better deal
Real estate investment trusts (REITs) have also cooled off this year as the Federal Reserve gears up to increase interest rates. I’ve already added to a few of my positions during the initial sell-off but would love to keep buying. Apartment REIT AvalonBay Communities sits at the top of my wish list.
Shares of AvalonBay have declined by about 5% from their recent peak, pushing its dividend yield up to 2.6%. However, the stock is still up nearly 50% in the past year. Because of that, the REIT currently trades at almost 30 times its funds from operations (FFO).
AvalonBay has benefited from surging rental rates as apartment demand recovers in major coastal cities. The REIT also unveiled an expansion strategy into faster-growing markets across the Sun Belt region. It entered the Dallas, Texas, and Charlotte, North Carolina, markets during the third quarter while further expanding in South Florida in October. While I love those moves, AvalonBay is still a bit pricy even after its recent decline. If shares start trading closer to 25 times FFO and a dividend yield of more than 3%, I’d add to my position.
Keeping an eye on the yield
Waste Management has followed the market lower, declining by about 10% from its most recent high. That has the waste and recycling company trading at a more attractive valuation of around 27 times its forward earnings. However, that’s still high, even for a premium value-creator like Waste Management.
I’d love to see the stock come in a bit more. That would enable both the company and me to buy shares cheaper. Waste Management unveiled a $1.5 billion share repurchase program in December, which will stretch further as the stock price goes lower.
Likewise, a lower stock price would make the company’s dividend more attractive. While its current yield of 1.6% is above the broader market, it has historically been closer to 2%. Since I’m a big fan of dividends, I’d be happy to pick up more shares of Waste Management if it continued selling off and offered a yield closer to 2%.
If the market starts getting fearful, I plan to get greedy
While the recent sell-off in the stock market has taken a toll on my portfolio, I’m trying not to focus on that negative. Instead, I’m looking at the opportunity it has already brought to buy some great companies at lower prices. I’m also steeling myself for the possibility it could have further to fall. Though, instead of letting that instill fear, I’m thinking about the upside of buying additional shares of some great companies at even more attractive values.
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Matthew DiLallo owns AvalonBay Communities, NextEra Energy, and Waste Management. The Motley Fool owns and recommends NextEra Energy. The Motley Fool recommends AvalonBay Communities and Waste Management. The Motley Fool has a disclosure policy.
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Source: USA Today