With the FTSE 100 and the S&P 500 near historic highs, it can be hard to know what to invest in right now. I don’t like the idea of buying the indices as a whole at these levels. But I think that within them there are some sectors — and some individual stocks within those sectors — that might be justifiable investments for me. Here are two examples.
Polaris
Polaris (NYSE:PII) manufactures recreational vehicles, such as motorbikes, snowmobiles and quad bikes. It’s one of the best-established powersports brands. There are two major headwinds facing the company at the moment. The first is inflation. High commodity prices means that Polaris has to spend more manufacturing its vehicles and then try to pass this on to its customers. The second is global supply chain issues. Difficulties getting hold of parts — most notably semiconductors — increase the time it takes Polaris to build its vehicles, slowing down revenues.
While the company’s stock is trading as though investors are seeing an enduring problem here, I’m anticipating both of these headwinds turning out to be temporary. An investor buying Polaris shares today could pick them up at a price-to-earnings (P/E) ratio of around 14, but I don’t believe this tells the full story. This is a company that will have ups and downs, yet I think that now might be a good time to invest. I’m looking at adding some shares to my portfolio at the moment.
Adobe
Unlike Polaris, Adobe (NASDAQ:ADBE), is fairly well shielded from inflation. The company makes software for creative publishers. Its line-up includes photo and video editing programmes, e-signature apps, and marketing software. As a software company, it doesn’t have to buy in physical commodities or materials to sell its products. The result is that those products tend to have high margins and its stock tends to have a high price tag.
To my mind, Adobe is clearly a wonderful business. The trouble is, nearly everyone else seems to agree. As such, Adobe’s shares are almost never cheap. They’ve been falling recently, though, so the question is whether or not they’ve fallen enough to make the stock attractive from an investment perspective. I think that they have.
Adobe shares currently trade at a P/E ratio of just over 40. That’s quite high, but with earnings forecast to increase by around 25% annually, I take the view that Adobe has the capacity to justify this price tag. I also believe it’s worth noting that Adobe’s shares have historically traded at an average P/E ratio of around 52. While that by itself isn’t a reason to buy a stock, I think it’s worth paying attention to.
Summary
Right now, I’m looking at two major themes as I search for stocks to buy. The first is companies that are facing inflationary headwinds. I think that inflation will subside over time (though I’m not taking a view on exactly when that will be) and that companies like Polaris will be able to use their strong brands to pass on a good amount of their additional costs. I’m also looking at technology stocks that have been falling as interest rates rise. And I believe that Adobe might have fallen too far, providing an opportunity for investors like me. At today’s prices, I’d be happy buying either for my portfolio.
