The last month has been a rather chaotic one on Wall Street. China’s surprise decision to allow the yuan to devalue, followed by slowing growth numbers and a series of precipitous selloffs in its stock market, didn’t sit well with U.S. investors.
Following China’s lead, the U.S. stock market entered correction mode (defined as a decline of 10% or more from highs) for the first time in four years. In just two trading days, the Dow Jones Industrial Average lost more than 1,000 points.
Savvy investors should view large moves like these as prime opportunities to hunt for stocks to buy. A quick checkup on the U.S. economy reveals no obvious problems — in fact, 3.7% second-quarter GDP growth and the lowest unemployment rate (5.1%) since April 2008 paint a fairly robust picture.
Given that China’s problems seem to be just that — China’s problems — opportunistic investors should consider today’s deflated stock prices a gift. There are quite a few oversold stocks to buy at these levels, but three in particular caught my eye: Ambarella (AMBA), NXP Semiconductors (NXPI) and Google (GOOG, GOOGL).
3 Oversold Stocks to Buy on the Dip: Ambarella (AMBA)
Market Capitalization: $2.2 billion
% off 2015 highs: -45%
Ambarella’s (AMBA) claim to fame is being GoPro‘s (GPRO) favorite supplier. The semiconductor company makes the low-power, high-definition video compressor chips that go into the famed wearable action cameras.
Being a supplier for red-hot GoPro worked out in Ambarella’s favor, to say the least. After going public at $6 per share in fall of 2012, AMBA took off like a rocket, soaring year after year until reaching an all-time high of nearly $130 per share in July. With the exception of the last few months, Ambarella has consistently been one of the best stocks to buy for almost three years now.
But all good things must come to an end, and the remarkable run was halted as Wall Street began second-guessing the ease with which the stock was soaring. The general souring of the market hit AMBA stock particularly hard, as high-growth names took the brunt of the selling.
Then, on Sept. 1, a battered and bruised Ambarella reported its second-quarter earnings. Despite beating on both the top and bottom lines, Mr. Market sent the stock tumbling after the company projected a “soft” third quarter. Revenue of $91.5 million vs. expectations of $92.3 million wasn’t worthy of that day’s 15% slump from my perspective.
The concerns — mostly GoPro-centric — that have since sent shares into the low $70s are totally overblown. After all, AMBA isn’t directly tethered to GoPro … it’s a big player in IP security cameras, drones and the automotive industry as well.
Although it seems to be taking Wall Street a little longer than expected to realize this overreaction, a forward price-to-earnings ratio of 20 for a company still growing revenues by about 80% a year is a steal. I’ll stick to my guns on this one: The low $70s is an amazing entry point for AMBA.
3 Oversold Stocks to Buy on the Dip: NXP Semiconductors (NXPI)
Market Capitalization: $21 billion
% off 2015 highs: -21%
NXP Semiconductors (NXPI) is another chip maker, but its main client is even better known than GPRO. I’m speaking of the largest company in the world, Apple (AAPL), which uses NXPI’s near field communications chips in the iPhone to facilitate the functionality of Apple Pay.
The company is also a major player behind the emerging chip-and-pin technology, which is increasingly becoming standard in credit cards and makes credit card fraud much more difficult.
Before the market-wide selloff in August, NXPI was trading around $100 per share, and its 52-week high is $114. Shares got as low as $79 in the depths of the recent pullback, but even at $90 per share, the stock is a killer value. It currently trades at a forward P/E of just 14, a remarkable discount considering EPS is expected to grow 22.7% in 2015 and 11.5% next year.
3 Oversold Stocks to Buy on the Dip: Google (GOOG, GOOGL)
Market Capitalization: $426 billion
% off 2015 highs: -8.3%
Another stock to buy on the dip is Google (GOOG, GOOGL), which probably has the lowest risk/reward of these three names.
Just before markets went bonkers in mid-August, Google made headlines by announcing plans to restructure and hold Google Inc. under an umbrella holding company, Alphabet.
The stock shot up on the news, since investors will now be able to see more clearly the health of Google’s core search business without wondering how much the results were being distorted by investments in self-driving cars, fiber optic networks, Google Glass and other “moonshot” endeavors.
On the heels of that announcement, GOOG jumped from $633 to $660.
Still not fully recovered from the pullback that followed, Google is one of the highest-quality stocks to buy on the dip, at around $620 per share. A forward P/E of 18 doesn’t make much sense for one of the most innovative companies in the world. Especially not when the P/E of the entire S&P 500 index is 16.6.
Google deserves a higher multiple for all its potential, and eventually the market will acknowledge that again. It’s best you buy in before Wall Street has that “aha” moment!
As of this writing, John Divine was long AMBA stock, Oct 2015 $85 NXPI call options, Jan 2017 $90 NXPI call options, Jan 2017 NXPI $95 call options and Jan 2017 $105 NXPI call options. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
