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My Top Beaten-Down Stock to Buy and Hold Forever

The most successful investors don’t enter the market looking to make a quick buck. That’s the fastest way to lose your nest egg. You need a longer time horizon to reap the full value of your investment, with three to five years being the minimum and decades of ownership being optimal. As Warren Buffett has said, “The best time to sell is never.”

While not even the Oracle of Omaha himself follows that rule to the letter, the idea is that you should only buy companies you’re willing to become wedded to. JPMorgan Chase recently found that over the past 20 years through 2021, the stock market went up an average of 9.5% a year, but if you missed the 10 best days in the market, your returns would be cut nearly in half, to 5.3% a year.

Now that the stock market has tumbled, investors should be using this opportunity to find excellent but beaten-down companies to buy and hold for the next two decades. The following stock is one you’ll want to own forever.

Gold pocket watch lying on quarters.

Image source: Getty Images.

Nailing down the opportunity

Few companies have as long a continuous operating history as Stanley Black & Decker (SWK -1.01%), which has been in business for 180 years. More remarkably, it has paid a dividend to investors for more than 140 of those years while increasing the payout for 55 consecutive years, making it a Dividend King.

That history alone makes it worthy of an investor’s attention. Stanley has been through numerous market cycles before. It has weathered depressions and recessions, world wars and pandemics, and has come out the other side in fine condition.

Today, the stock is cheaper than it has been in years. Shares have lost more than half their value over the past 12 months and go for less than 10 times trailing earnings, the company’s lowest valuation in more than a decade.

And that vaunted dividend, which currently yields 3.7% annually, is safe with a payout ratio of just 35%, meaning there is plenty of room for future growth. (The payout ratio is how much of its profit a company pays in dividends.) Over the past three years, Stanley has increased its dividend by an average of 5.6% a year.

A turnaround in progress

Over the last century and a half, Stanley has grown into the tool industry’s titan. It now owns some of the biggest and best brands, including Craftsman, DeWalt, Bostitch, and Porter-Cable, as well as its namesake Stanley and Black & Decker product lines.

Yet the tool company is a turnaround play today. The market has slashed its stock because demand for tools has declined amid concerns about a recession, the impact of inflation, and the effect of supply chain issues.

Also, bringing all those name brand tools under its roof has cost it a lot of money, causing it to take on a lot of debt to finance the purchases. At the end of the third quarter it had $5.4 billion worth of long-term debt and $2.7 billion of short-term borrowings. Moody’s downgraded Stanley’s debt at the end of December citing “ongoing economic uncertainties” that could delay its ability to meaningfully pay down its debt. 

Stanley has had to cut its guidance several times, sometimes dramatically, over the past year. A year ago, it had forecast full-year adjusted earnings of between $12.00 and $12.50 per share, but after the third quarter, it reduced its outlook to just $4.15 to $4.65 per share, a massive 64% reduction at the midpoint.

Management, though, has launched a cost-containment and inventory-reduction program that is rationalizing the company’s 50,000 stock-keeping units (SKUs), or the unique identifiers of its various products. It’s starting to pay off, too: Third-quarter results came in above expectations.

Hammer, nails, and tape measure.

Image source: Getty Images.

Why buy now

Stanley’s problems really began when the Trump administration imposed tariffs on imported steel and aluminum, which ignited a trade war. This resulted in soaring costs for the toolmaker that wounded profits. The outbreak of the pandemic didn’t help, but Stanley rebounded as the housing market took off, only to be brought up short by the supply chain morass.

Management, though, believes its supply chain transformation savings will start building. Stanley expects to hit approximately $500 million in revenue by the end of 2023, which will help accelerate its return to a 30% gross margin by next year and to 35% by 2025.

In the meantime, an investor can buy this high-quality company at a severely discounted price while collecting a rich dividend that promises to continue growing in the future. That sounds like the ticket to a lifelong relationship with this stock.

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