The stock market sold off sharply in the early days of August, but has since reversed course, with the S&P 500 making back about half of its recent declines and now trading for just 6% below its all-time high. This wasn't the first stock market sell-off, and it certainly won't be the last. And if the stock market heads lower, there are a few stocks I would love to buy more of if they also drop in price.
To be sure, I'm not saying that investors need to wait until these stocks drop before buying. Quite the opposite. I already own all three of the stocks on this sell-off shopping list and think they all trade at attractive prices now from a long-term perspective. But if a sell-off causes them to get cheaper, it would make me that much more eager to hit the buy button.
A homebuilder for a slow or active market
The incredibly slow real estate market has created a strong environment for homebuilders, and Dream Finders Homes(NYSE: DFH) is my favorite way to invest in the industry.
For one thing, the company has done a fantastic job of growing and continues to produce excellent results. Even with home prices at all-time highs and mortgage rates elevated, Dream Finders grew its revenue by 12% in the second quarter and ended with a backlog of over 4,200 homes. Thanks to a focus on efficiency, the company grew its bottom-line earnings at an even faster 19% rate.
While the current environment is more favorable for new homes than existing ones, Dream Finders still has a massive opportunity to grow as interest rates (hopefully) start to fall. The U.S. has an estimated shortage of about 4.5 million homes to meet the needs of its population, and entry-level homes (which are Dream Finders' bread and butter) are likely to be a big part of the solution. With the stock trading for less than 9 times forward earnings, Dream Finders already looks like a bargain, but a sell-off could make it even more appealing.
One of my favorite AI stocks
Digital Realty Trust(NYSE: DLR) was left for dead by many investors in 2022 after notable short-seller Jim Chanos referred to it as the next "big short" idea, but to say the company has turned a corner would be a big understatement. Not only has Digital Realty's management done a fantastic job of reducing debt without sacrificing much profit, but the company has been a major beneficiary of the boom in artificial intelligence (AI) investment.
Digital Realty is a real estate investment trust (REIT) that owns and operates data center properties. Think of these as the physical homes of the internet. Every time you access a cloud-based app, use social media, or ask ChatGPT a question, all of that data has to physically live somewhere, and that's where data centers come in.
Digital Realty pays a 3.3% dividend yield and has a great track record of long-term outperformance, handily beating the total return of the S&P 500 over its 20-year history as a public company. With data center demand expected to grow by about 150% over the next five years, and with tons of liquidity, Digital Realty is in a great position to capitalize on the next wave of the AI revolution.
One of the best-performing real estate stocks
Ryman Hospitality Properties(NYSE: RHP) is one of just a few major REITs that have performed well in the current rate-hike cycle.
Ryman owns six large-scale hotels, including all five Gaylord hotels, as well as a collection of entertainment assets including the iconic Grand Ole Opry and Ryman Auditorium in Nashville. In the most recent quarter, Ryman's revenue reached an all-time high, as did the company's operating income and average daily room rates.
Even though it has performed well, Ryman still looks like a bargain. This 4.4%-yielding stock trades for just 12 times forward funds from operations -- the real estate equivalent of earnings -- estimates. If it were to fall in a market sell-off, it would be even more attractive.
A sell-off is a great time to look for opportunities
Stock market sell-offs can seem scary, but they can be a long-term investor's best friend. A sell-off can put your favorite stocks on sale, so it can be a smart idea to get a shopping list ready, as the next sell-off is a question of "when," not "if."
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Matt Frankel has positions in Digital Realty Trust, Dream Finders Homes, and Ryman Hospitality Properties. The Motley Fool has positions in and recommends Digital Realty Trust and Dream Finders Homes. The Motley Fool recommends Ryman Hospitality Properties. The Motley Fool has a disclosure policy.
