3 Stocks to Buy on Very Big Dips

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Quiksilver (ZQK) stock dropped nearly 30% September 5 on poor Q3 earnings. As a result of this very big dip, ZQK enters an exclusive club. Only nine out of 2,781 US stocks (market caps greater than $300 million) have lost 20% or more of their value in the past month.

stocks to buySome of these definitely aren’t good stocks to buy and should be avoided at all costs. Stocks often fall for very obvious financial reasons, and they’re best left alone. But savvy investors know how to separate fair drops from unfair selloffs, buying up oversold companies to rake in the profits.

If you have a stomach for volatility, a few of the nine aforementioned stocks are worth considering. You’ll want to be patient when buying any of these stocks; you’ll also want to put some cash aside so you’re ready in case they fall back 10% or more.

Long-term, all three of these picks are stocks to buy on very big dips. Hang on to your hat though, because the ride is going to be very bumpy.

Stocks to Buy on Big Dips — Conn’s (CONN)

stocks to buyFirst of our stocks to buy is Conn’s (CONN), a Texas-based retailer that sells electronics, appliances and furniture from 89 locations in 10 states. Its stock was on a tear for a three-year period going from a low of $3.39 in November 2010 to a high of $77.63 at the end of 2013. That’s an astonishing annualized return of 184%.

Right there, Conn’s shareholders should have been worried. Those returns are reserved for growth companies like Tesla (TSLA) — not electronics retailers who sell a good chunk of their goods on expensive credit.

Conn’s shouldn’t be in the business of extending credit. It’s a retailer, not a bank. Sure, the credit business generates nice profits on loans, but the extra revenue ultimately masks weaknesses in its retail business that often appear too late for investors to make a move for the exits.

In fiscal 2014, Conn’s credit segment saw operating profits virtually cut in half by increases in bad debt provisions. In Q2 2015, increases in bad provisions led to an operating loss compared to a $7.5 million operating profit the year before. With credit receivables soaring faster than sales, it’s only natural that the air has been let out of CONN stock.

You might be asking, “So what’s to like?”

I’ve picked CONN as one of the stocks to buy for two reasons:

  1. Conn’s will eventually come to its senses and sell the credit segment after 45 years; and
  2. It’s currently in the midst of a downturn in its business cycle.

If the first reason were to come to fruition, I believe it would force the company to focus its business in the long-term, leading to huge stock appreciation. In terms of the second reason, history has shown that it most always recovers from these downturns and rough patches.

Although I believe that selling its credit segment would be the best thing for CONN stock, investors can profit from the current negativity no matter management’s ultimate decision.

Stocks to Buy on Big Dips — Noodles & Co. (NDLS)

stocks to buyNoodles & Co. (NDLS) doubled in price to $36 in its first day as a public company which pushed its valuation at the time to more than 30 times EBITDA, much higher than Chipotle Mexican Grill (CMG), the fast-casual champion. Since then, however, the two stocks have gone in separate directions with CMG trading at almost 29 times EBITDA, compared to less than 13 for NDLS.

In fact, for a short time, NDLS stock was trading below its June 2013 IPO price of $18. In mid-August, NDLS reported disappointing Q2 earnings, including guidance that suggested same-store sales growth in 2014 would be flat. Those aren’t growth numbers to be sure.

NDLS’ fall from grace isn’t unusual. Many IPOs can be bought for less than the initial price within 12-24 months of going public. NDLS is a classic example: Combine a frothy IPO market with a trendy concept and you’ve got the possibility for a speculative frenzy. Once the institutions sell out (likely above $40), there’s nowhere to go but down.

The business itself is in good shape, though. UBS analyst Keith Siegner upgraded NDLS September 10 to “Buy” from “Hold” with a $26 price target. Siegner had a lot of good things to say about the company in a note to clients. The analyst calls it “one of the best growth stories in the restaurant sector.” Furthermore, as Forbes staffer Maggie McGrath points out, it has one of the best cash-on-cash returns per store of any of its fast casual competition.

Unless NDLS continues to wet the bed, its current share price below $20 makes it easily one of the best stocks to buy after its recent dips.

Stocks to Buy on Big Dips — Quiksilver (ZQK)

stocks to buyOkay, let’s get one thing straight. Quiksilver hasn’t been itself for several years, so a drop below $2 isn’t exactly jaw-dropping news; nor are poor Q3 earnings results. Zacks says that ZQK has missed the consensus quarterly estimate in nine of the past 11 quarters. Ever since founder Bob McKnight made the fateful mistake of buying Rossignol for $320 million in 2005, ZQK has been a shell of a company.

CEO Andy Mooney was brought in to run the company in January 2013. Having worked at Disney (DIS) for 11 years and at Nike (NKE) for 20 years before that, ZQK put its future firmly in the hands of an industry veteran. Since Mooney came on board, ZQK stock has gotten as high as $9 before crashing back to earth after its two most recent quarterly reports were anything but healthy.

However, don’t let first impressions fool you.

ZQK has three strong brands in Quiksilver, DC Shoes and Roxy. Mooney is pushing the company to capitalize on its strong brand names by increasing annual marketing spend by 50% year-over-year. Its own retail stores — 658 at the end of July — are doing well, with positive same-store sales growth. In addition, its e-commerce business saw revenues grow 10% year-over-year to $35 million or 9% of overall revenue.

In order for the business to truly succeed, its wholesale business needs to return to form. Mooney is in the midst of a complete restructuring of its wholesale business in both North America and Europe that aims to deliver a better group of core products for the end consumer. In other words, Quiksilver needs to present itself better on the wholesale front so that the end consumer gets a similar buying experience whether in its own stores or somewhere like Macy’s (M).

I think it can get there from here.

However, ZQK lost $305 million in the first three quarters of 2014; the red ink must be stopped sooner rather than later if it hopes to have enough cash to carry out its turnaround plan. There’s also plenty of risk given it has $812 million in debt that costs ZQK approximately $75 million in interest expense annually. That debt’s not going away without free cash flow generation.

The clock is ticking, but at less than $2 per share ZQK makes the list of my three stocks to buy.

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As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/stocks-to-buy-ndls/.

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