Even amid last week’s market pullback, there’s no denying stocks are overbought … in the near term as well as the long term. Indeed, several of investors’ favorite stocks to buy have simply priced themselves right out of reach for most interested buyers.
But that doesn’t mean traders can’t put certain companies on a “stocks to buy” watchlist in the meantime, waiting for a better entry level.
Which stocks are in desperate need of a dip before they’re priced attractively enough for newcomers? There are plenty worth keeping tabs on, but here’s a closer look at eight top names best left avoided until they’ve been through a significant price reduction.
In no particular order, here are eight stocks to buy … once the price becomes right.
Stocks to Buy on a Dip: Eli Lilly (LLY)
At first glance, Eli Lilly (LLY) looks like a winner. It recently inked a drug development deal with AstraZeneca (AZN), it’s buying back $1.6 billion worth of debt — which will lower its costs — and LLY shares are up 13% year-to-date after gaining 35% last year.
The stock’s forward progress doesn’t align with the company’s performance, however. Revenue has dwindled from 2011’s top line of $24.3 billion to $19.6 billion last year, with a commensurate swoon in income. The end result is a stock valued at a trailing earnings multiple of 38.5.
Fans of Eli Lilly will argue that the future looks much better than the past, with several things in the pipeline nearing the proverbial end zone. For instance, Alzheimer’s treatment Solanezumab is in phase 3 testing right now, and the partnership with AstraZeneca is apt to bear fruit.
And truth be told, those LLY fans are right to be optimistic.
Nevertheless, there’s just enough time between now and when a meaningful milestone could be met for the stock to go through a decent wave of profit-taking, as LLY currently trades at a frothy 22 times next year’s estimated earnings.
Stocks to Buy on a Dip: Ambarella (AMBA)
The technology sector has seen more than its fair share of M&A in recent weeks, with Intel (INTC) nabbing Altera (ALTR) and Avago Technologies (AVGO) pairing up with Broadcom (BRCM) serving as just a couple of high-profile examples.
The prospect of more-of-the-same has jump-started something of a mania among other technology stocks, with investors scrambling to find other stocks to buy that are likely acquisition candidates.
Ambarella (AMBA) is one of those names, with shares gaining more than 40% for the year through mid-May, then really turning up the heat to gain more than another 25% since May 11.
Truth be told, Ambarella is a great video-focused semiconductor name that a suitor would be proud to own. Unfortunately, thanks to the speculative run-up, AMBA is largely priced out of reach for suitors as well as for new investors.
The forward-looking P/E needs to be whittled down to sub-30 levels — versus its current reading of 32 — before it’s palatable again.
Stocks to Buy on a Dip: Universal Display (OLED)
It’s admittedly tough to stay in, or not jump on, a stock like Universal Display (OLED) that seems to be going strong while the company seems to be doing what it needs to do to secure a bright future.
But that’s exactly the way would-be investors should be viewing Universal Display right now: It belongs on list of great stocks to buy … but it’s just not buy-worthy at its current value.
Yes, OLED is apt to benefit from the switch Apple (AAPL) is rumored to be planning for its phone displays, which would utilize the organic light-emitting diode technologies Universal Display makes — the kind currently used by Apple-rival Samsung (SSNLF). In the shadow of the 110% gain OLED shares have made since mid-January, however, the full extent of that potential switch may already be priced in (and then some).
Indeed, with unrealized gains on the table that are almost solely inspired by the Apple rumor, it might be wise to take profits now and/or wait for a better risk/reward scenario later.
Apple is notorious for changing its mind, and the big run-up from Universal Display leaves the stock more than vulnerable to a big correction stemming from that news.
Stocks to Buy on a Dip: Netflix (NFLX)
The easiest argument to make against buying a stake in Netflix (NFLX) right now is the valuation argument. NFLX stock is trading at a ridiculous trailing P/E of 163, and a similarly laughable forward P/E of 184.
Thing is, of all the arguments one could levy against NFLX, the valuation argument is also the least relevant one.
Right or wrong, the only thing driving the value of Netflix shares is the strength of its subscriber growth and the perceived strength of its competition.
With that in mind, investors interested in owning NFLX might want to wait for a dip not because of waning subscriber growth, but because a handful of similar services are about to be unveiled. One of them is the new over-the-top, Internet-delivered broadcast cable service from Apple. HBO Go and HBO Now are starting to get some real traction (subscriber growth) now that the network has stepped up its proliferation efforts. And several other second-tier names are now joining the on-demand party.
Whether these alternatives pose a true threat to Netflix is irrelevant. If investors collectively feel like they’re a problem for the company — and it’s likely they will — it’s going to take at least a temporary toll on the value of NFLX.
That is, until investors realize Netflix still is the dominant name in the business.
Stocks to Buy on a Dip: Live Nation Entertainment (LYV)
Of all the companies being named here as stocks to buy on the dip, Live Nation Entertainment (LYV) may be the quintessential, prototypical one, in that it’s truly a great company, but the stock has simply gotten a little overextended.
Live Nation Entertainment is, in simplest terms, a concert promoter. It organizes events for entertainers like Nick Jonas, One Direction and Ariana Grande, just to name a few. Although it’s a reliably seasonal business, the company has done a great job of posting consistent annual growth in the top and bottom lines. Indeed, it has been such consistent growth that this year’s projected profit of 20 cents per share of LYV is completely plausible following last year’s swing to a profit of nine cents per share.
In other words, Live Nation Entertainment has proven it can be viable with enough scale, which is largely the reason the stock’s up 20% since the end of January, reaching new record highs along the way.
The euphoria linked to the company’s new era of net profits, however, is apt to fade away before the stock’s current price of $28.65 will be justified by actual earnings. Even 2016’s projected EPS of 47 cents per share of LYV translates into forward-looking P/E of 61.
That’s just too frothy to not expect some sort of corrective move sometime in the foreseeable future.
Stocks to Buy on a Dip: Equinix (EQIX)
With shares up 17% year-to-date and up 62% since the end of 2013, it would be easy to conclude Equinix (EQIX) was a growth machine putting up fierce numbers.
That would be an erroneous conclusion, however. While sales have grown nicely over the past several years for this data-center operator, operating income has been stunningly stagnant.
But won’t the recent acquisition of Telecity Group (TLEIY) lead to some synergies that start to widen margins again? Anything’s possible, but that may not have been the rationale for the buyout decision.
Giving credit where it’s due, it was Cowen & Co. analyst Colby Synesael that opined:
“This is a defensive deal that (Equinix’s) management otherwise would prefer not to have to do considering the sizable price tag. This deal was less about acquiring Telecity and more about what we expect will be other moves by Equinix competitors.”
In other words, there’s no real meaningful upside in the merger. Equinix was simply playing not to lose. It’s not exactly the kind of reality that earns EQIX a spot at the top of a list of stocks to buy … at least not at its current price. The costly and questionable acquisition is going to be reflected in the stock’s price sooner or later.
Better to let that adjustment play out before stepping into EQIX.
Stocks to Buy on a Dip: GoPro (GPRO)
There’s no denying GoPro (GPRO) still is the wearable-action-camera category leader. But with a 50% gain over the course of the past three months against a backdrop of new product unveilings that leave some investors wondering whether the company is simply throwing spaghetti against the wall to see what sticks, GPRO may be about to run out of gas.
The recently announced products are admittedly cool. Cameras for drones and virtual reality cameras had been largely out of reach for the average consumer, but GoPro will soon be making such reality affordable and easy-to-access for the common man.
On the other hand, cool or not, these technologies are solutions to problems that don’t exist en masse. Investors might soon realize they’ve bid up GPRO because they like the premise of the product rather than the potential performance of the company.
And of course, there’s now that nagging possibility that Apple could unveil a similar camera of its own, and leverage its good name to take market share away from GoPro.
Stocks to Buy on a Dip: T-Mobile US (TMUS)
Kudos to T-Mobile US (TMUS) for (reasonably) successfully fighting the good fight — a price war — with bigger rivals AT&T (T) and Verizon Communications (VZ). And congratulations to those investors who saw their TMUS holdings rocket higher on rumors that the company could be acquired by Dish Network (DISH).
At this point time, though, there are just a few too many things that could work against the company that make it a buy at its current price.
First and foremost, while a final decision has yet to be made, the FCC is reportedly planning to reject a request from T-Mobile to limit the amount of airwaves bigger players like AT&T and Verizon can acquire via the government’s auction process of those airwaves. This decision will help Verizon and AT&T keep their dominant lead on T-Mobile US.
Second, while the potential buyout of TMUS by Dish Networks has been applauded by the market and served as inspiration for a 13% rally over the course of the past couple of weeks, that union is hardly a foregone conclusion. If it doesn’t go through, the stock is apt to suffer.
It’s just not worth the risk at its current price.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.