5 Top Stocks to Buy in July

Now that we’re officially halfway through 2024, it’s time to reflect on where the stock market has been. Although no one knows what the market will do in the short term, we can try to filter out the noise and be aware of what’s driving broader themes. A good place to start is by looking at sector performance.

There are 11 sectors in the S&P 500. And only two of them — tech and communications — are outperforming the index. Right off the bat, it tells you that growth-heavy sectors are doing well, and value and income stocks are lagging. Dig deeper, and you’ll find that mega-cap growth, more so than smaller growth stocks, are driving the bulk of the gains in the major indexes.

Investors looking for buying opportunities outside of mega caps have come to the right place. Here’s why these Motley Fool contributors are particularly excited about Okta (OKTA -0.99%), Celsius Holdings (CELH -1.04%), Ares Capital (ARCC 0.82%), NextEra Energy (NEE 0.81%), and Home Depot (HD -0.36%).

Please identify yourself

Demitri Kalogeropoulos (Okta): It’s a great time to get excited about Okta stock again. The software-as-a-service specialist, which sells cybersecurity and digital identity management services, is trading at about where it was at the beginning of the year. Yet its prospects are brightening.

Sales in the most recent quarter were up a healthy 19% to $617 million. Almost all of the revenue figures are subscription-based, too, which gives shareholders confidence that sales won’t swing wildly during any upcoming industry slowdown.

Okta is not profitable just yet, but that won’t be true for long. Operating losses narrowed to 8% of sales last quarter from over 30% a year ago. Meanwhile, cash flow is solidly in positive territory, at nearly 40% of sales.

According to its late May outlook, management is projecting a growth slowdown in the coming months, with second-quarter revenue gains decelerating to about 14%. Sales should rise by about 13% for the full fiscal year, too. But investors should look past that short-term volatility toward Okta’s likely impressive earnings growth over the next several fiscal years.

Buying the stock in July and patiently waiting for these benefits to accrue will put you in a great financial position when you reflect on your decision to buy this small but growing tech company.

Get energized with Celsius

Anders Bylund (Celsius Holdings): Known for its fitness-focused energy drinks, Celsius is brewing up impressive growth. Unlike archrivals Monster Beverage (NASDAQ: MNST) or Red Bull, Celsius focuses on providing a fitness-centric boost, with no artificial preservatives or flavors. It has proved to be a recipe for success, especially with the distribution expertise of Celsius partner PepsiCo.

The Pepsi deal is paying off big time, expanding Celsius’ reach globally and boosting brand visibility. International growth is only getting started, leaving a ton of overseas opportunities to explore. The health-focused branding message should resonate just as strongly in valuable markets such as Canada, Australia, and Western Europe.

The stock isn’t exactly cheap, trading at 61 times earnings and 9.4 times sales. But those valuation ratios are still a bargain compared to Celsius’ loftier figures over the last couple of years. A 28.6% price drop in June took the edge off a skyrocketing stock chart, giving Celsius investors a chance to load up on shares at a lower price premium.

The heart of Celsius’ idea is that its health-conscious growth story has many chapters left. The Pepsi partnership has proved effective, and the company is expanding its brand around the world. The stock isn’t cheap, but it has earned every drop of that premium price tag. Those lofty ratios should calm down as it executes its profitable growth plans over the next few years.

There is room for a third global giant in the booming energy drink industry. Many have tried and failed to fill that role. With soaring sales and robust profit margins already under its belt, Celsius looks primed to get the job done. That’s why its stock is a hot buy in July.

An attractive valuation, dividend, and business

Keith Speights (Ares Capital): I have a condition I call investors’ acrophobia. The higher the stock market goes, the more afraid I become. With the S&P 500 continuing to rise, my nervousness is increasing. But Ares Capital is the kind of stock I don’t have qualms about in a pricey market.

Ares is a leading business development company (BDC). And its stock is dirt cheap, with shares trading at only 8.7 times forward earnings.

That attractive valuation isn’t because the company’s business is floundering. Its earnings continue to grow. CEO Kipp deVeer said in the first-quarter earnings press release, “With our competitive advantages, we believe we are well positioned to build upon our nearly 20-year track record of generating attractive investment returns for our shareholders.”

Those competitive advantages include a stronger financial position and more investment professionals than its rivals have. Ares Capital has a longer history in the industry than most direct lenders. Unsurprisingly, the company has delivered significantly higher returns on equity (ROE) and total returns than other BDCs.

Income investors should love the forward dividend yield of over 9.3%. Even if you’re not an income investor, this hefty yield gives Ares a head start on delivering exceptional returns.

Are there risks associated with investing in a BDC that provides financing to middle-market businesses? Sure. However, Ares Capital has proved to be remarkably resilient, generating strong ROE during the financial crisis of 2008 and 2009 and the pandemic period of 2020 and 2021.

Whether or not you have investors’ acrophobia, Ares Capital looks like a great stock to buy in July.

Any drop in this stock’s price is an opportunity to buy

Neha Chamaria (NextEra Energy): I recommended NextEra Energy in May, and while the stock surged during the month, it has come under a bit of pressure over the past couple of weeks or so. I believe the fall was unwarranted, and with NextEra Energy reminding investors yet again about its growth potential and plans, I am picking it as my top stock to buy now.

Investors were spooked when management announced plans to sell equity units worth $2 billion in mid-June. What they might have overlooked, though, is the reason the company is raising money via a share sale: to fund growth.

At its latest Europe investor presentation, NextEra Energy quoted an industry report projecting fourfold power demand growth in the U.S. over the next couple of decades versus the previous 20 years. As the owner and operator of the largest utility in the U.S., Florida Power & Light, NextEra is primed to benefit from any surge in power demand.

To top that, the company is also the world’s largest producer of wind and solar energy and a leader in battery storage. It announced plans to invest $65 billion to $70 billion over the next four years with a potential to develop 36.5 to 46.5 gigawatts (GW) of new renewable and storage capacity through 2027.

That brings us back to why the fall of NextEra Energy stock after the company announced an equity sale was an overreaction. With its utility and renewables businesses, it could spend around $100 billion between 2024 and 2027. But equity issues are expected to be only about 5% of the company’s total projected spending. It expects to fund the bulk of its growth through cash generated from operations and will rely more on debt than equity to fund the remaining portion.

With NextEra Energy further reiterating its adjusted earnings-per-share growth projection of 6% to 8% through 2027 and increases in dividends of around 10% through 2026, I believe any drop in the stock’s price is an opportunity to buy and hold for the long term.

Home Depot knows how to navigate a cyclical slowdown

Daniel Foelber (Home Depot): In the long term, stock market winners are companies that can grow earnings over time through innovation, staying flexible, and savvy acquisitions. But in the short term, the market is often driven by narratives.

Right now, the market is marching higher to the beat of the mega-cap growth drum. But behind the scenes, many industry-leading consumer-facing companies like Home Depot have seen their stock prices get left behind. The home-improvement retailer’s stock is down year to date and up less than 10% over the last three years compared to a 24.3% gain in the S&P 500.

At least part of the sell-off is justified. Home Depot and its peer Lowe’s Companies are facing a difficult housing market. Management commentary hasn’t shied away from its impact on results.

High volume in home sales is great for Home Depot and Lowe’s because homebuying coincides with home improvement. But if homebuying is low or so expensive that consumers have little left over for home improvement, then they might be less inclined to pair pricey projects with a home purchase.

The economic indicators point to relatively expensive housing, record-high credit card debt, and some of the highest mortgage interest rates in the last decade — all bad news for Home Depot.

Despite these challenges, the company has continued investing through the cycle with new store openings and expansions. On June 18, it completed its $18.3 billion acquisition of SRS Distribution — which boosts its building products and roofing materials offerings. Management has been targeting professional contractors as a key growth area that can help diversify the business to be less dependent on consumer sales.

On the surface, this strategy looks fairly aggressive, considering all the near-term challenges. But the company has historically been an excellent capital allocator and has the balance sheet needed to take market share during a slowdown rather than be passive.

Home Depot is also a reliable dividend stock. In February, it announced a 7.7% increase to its dividend, bringing it to $2.25 per share per quarter, or $9 per year. The dividend is up 379% over the last decade and 65% over the last five years. With a yield of 2.6%, it’s an excellent dividend stock to buy for patient investors who believe in the company’s ability to navigate cyclical ebbs and flows.