The equity markets continue to be very resilient. We are facing down the eventual taper cycle from the Federal Reserve. Investors seeking stocks to buy are not flinching yet. Experts expect this to happen later this year, meanwhile there is no fear in this market while we wait.
The CBOE Volatility Index (VIX) made 5-week lows yesterday. Investors are not willing to accept any dips. When they do happen, the buyers step in with force. This is at the heart of the three stocks to buy we are discussing today.
The earnings season provides opportunities to capitalize on mistakes. The knee-jerk reactions to headlines are more about expectations than results. It is rare these days that big-cap companies deliver bad financial reports. The disappointments usually come from having the wrong expectations going into the events. Such is the case and all three of our tickers today.
This week all three reported and they stumbled hard. When the selling happens in big chunks like this it sometimes lingers for days. Therefore, it is important to not go all in assuming a hard bottom. In fact, in all three instances, these are stocks to buy but not with extreme conviction.
The price action that happened this week is just too big to ignore. Candles this red deserve a bit of respect. The bears might want two more days to do their thing.
Besides, the indices are still breaking records so they are vulnerable to small dips surprise dips. Even if we time entries in these tickers just right, they could suffer from sympathy selling. There are those who fear another shutdown. My guess is that the U.S. will not do it with this set of circumstances.
The variants of Covid-19 will not likely scare the authorities enough. The bottom line is that they just can’t afford it, so they will tough it out. It has cost trillions to reflate the economy from last year’s. That is an insanely huge tally that they can’t repeat. As it is, future generations will have a huge hole from which to dig. But for now we will stick to exploring the opportunities from these three stocks to buy on the dip. They are:
Stocks to Buy: Groupon (GRPN)
I will start with the one that needs activities to continue for it to prosper. Groupon needs people to be active to increase their sales. Fundamentally, the company is still on its heels from the pandemic. There is progress but it’s not going fast enough for investors.
They reported earnings last week and after an initial spike GRPN stock simply collapsed. The $44 was too big a pivot zone for it to hold from the overnight earnings action. Conversely, the stock made a beeline for last year’s November support zone. Therein lies the thesis for today.
What makes GRPN be part of the stocks to buy on dip is this history from last year. The buyers stepped in back then and mounted a 200% rally. It didn’t hold too long but they did show their willingness to buy shares. I bet that they do it again as long as the stock markets hold up.
As GRPN falls into $25 per share it will find love on Wall Street. It won’t be a hard line in the sand but it has a zone of lurking buyers through $5 lower. In such cases, I prefer to use options to more safely capture the opportunity. Selling puts into panic works well, especially after a 50% correction. Alternatively, buying leap call options can reduce the out-of-pocket risk now. While the VIX is this low, premiums for calls are cheap.
Weight Watchers (WW)
Weight Watchers stock suffered a crushing blow yesterday. Management reported earnings and they disappointed investors terribly. They missed on a few important points so they broke a few hearts. This is one situation where losing weight is definitely not the goal.
The good news for investors is that the time to panic out of it has passed. WW stock has technical support around $25 per share. This is a relatively wide zone and has shown conviction in the past. Yesterday’s low matches up with the base from earlier this year. Longer term, Weight Watchers stock is making progress with higher lows from the pandemic crash.
As long as this continues, the bulls can still shrug this off. The idea here is to sell puts into someone else’s panic. The worst that could happen is buying shares even lower still. This technique works well when I don’t have a specific catalyst for expecting quick upside. Therefore, my thesis involves expecting an eventual rebound.
Experts tell us that margin calls take three days to unfold. I should expect there could be more pain this week. Fundamentally, this stock made no progress in revenues in four years. This is not a pandemic thing because the 2019 total revenues were smaller than the year before it. Net income is also going the wrong way, so fundamentally the bulls will have to look elsewhere for catalysts.
It is not cheap either because when a stock doesn’t grow I expected it to be lean. In this case it’s not because it sports a price-to-earnings ratio of 36. That’s 28% higher than Apple (NASDAQ:AAPL). Clearly the story is not perfect and catching this falling knife will require a bit of luck and patience.
Our last pick WIX is also falling hard into support. This was a significant zone from May, and a year before that too. There could be more pain ahead for similar reasons that we already noted. But unlike WW, this company is growing fast.
Total revenues more than doubled since 2017. They are not profitable yet but they don’t need to be as long as that trajectory continues. Statistically it is definitely not cheap. However its price-to-sales ratio is less than 14 and that is reasonable. There are no alarming aspects of their financial situation.
The drop in the stock price on the headline came from disappointments and false expectations. I contend that the experts had it wrong. A stock that crushes its year-over-year metrics and beat the forecasts does not deserve to fall 17%. This is a perfect example for stocks to buy when someone else makes a mistake.
The May 2020 rally came too fast. This may have created a vulnerable $20 zone just under $200 per share. The bulls will do well to stay above that so not to trigger another slide lower.
This is a good time to remind us that none of these are an all-in situation. Each of them has reasons to be susceptible to more selling ahead.
Moreover, there are extrinsic risks that we have to consider. The tailwinds that we’ve had since 2018 are coming to an end as early as this year. This would be a process start not a dead stop.
Nevertheless, Wall Street could over-react negatively and sharply on the headlines. Caution is a good idea and patience are definitely a virtue. When in doubt, smaller bets make for potentially smaller mistakes.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.