One tried-and-true path to great returns as an investor is to buy shares of strong companies that have fallen out of favor on Wall Street. These businesses are often enduring challenges that threaten the next year or two of earnings, but not the wider growth picture. In that way, you expose yourself to short-term paper losses in exchange for impressive gains over many years. In effect, you're being paid to be patient.
Of course, many stocks are cheap for reasons that do impair the company's long-term growth prospects. The challenge is to avoid these situations while singling out the truly temporary corporate stumbles. Let's look at a few attractive candidates that fit the bill.
1. Coca-Cola
Coca-Cola (KO 0.29%) stock missed most of the pandemic-era rally in 2021 and then was left out of the post-pandemic market surge over the past year. As a result, shares of the beverage titan have risen by just 24% in the past five years compared to the 73% increase in the S&P 500 over that time.
Yet, Coke remains a formidable business with sales volumes rising along with prices in 2023. Earnings are stellar and profit margin is well above that of rival PepsiCo. The company generates enough cash to pay one of the most stable, longest-running dividends on the market.
And its growth prospects are solid as rising demand for waters, energy drinks, and other new niches offset declines in the more traditional soda portfolio.
2. Electronic Arts
Electronic Arts (EA 0.83%) is playing a game that's stacked in its favor. The video game publisher owns a huge collection of intellectual property that spans popular niches like sports and casual games. Steady growth in its audience size (and monetization rates) has helped annual revenue rise to $8 billion from less than $4 billion a decade ago.
Games are becoming more profitable as the selling model shifts to more of a software-as-a-service approach. EA is a leader in this arena, with subscription services accounting for 70% of annual sales. Wall Street is worried about slowing growth following the pandemic spike, but savvy investors can look past that volatility toward EA's much brighter potential in 2025 and beyond.
3. McDonald's
Fears about a recent growth slowdown should have investors salivating at the discounted price of McDonald's (MCD -1.08%) stock. The fast-food chain noted that customer traffic dropped into negative territory at the start of 2024, which is never great news for a restaurant business. Fewer guests means fewer opportunities to sell new menu items or those core sandwiches (like the Big Mac) that have been staples for decades.
McDonald's has been through many similar challenges in its years sitting at the top of the fast-food industry. It will emerge from this slump, too, with help from promotions and a deeper push into the drive-thru and home delivery segments.
In the meantime, investors can collect its tasty dividend payment and marvel at McDonald's industry-leading profit margin. The chain is aiming to push operating profit toward 50% of sales over the next few years, in fact.
4. Apple
Apple (AAPL 5.98%) shares haven't budged in the past year even as the wider market rallied over 20%. There's no shortage of concerns about this member of the "Magnificent Seven," including sluggish growth in China, flat demand for its hardware products, and relatively weak profitability when compared to rivals like Microsoft.
It would be a mistake to bet against the iPhone maker over the long term. It has the biggest installed base in the industry, with 2.2 billion users interacting with its brand through the tech titan's hardware. That's a huge audience it can market to for its next several product launches, whether they're iterative updates or revolutionary entries into new categories.
Apple looks cheap at its current valuation sitting below 7 times annual sales. Toss in ample cash generation ($40 billion just this past quarter), and you've got a recipe for crisp investor returns from here.
