Since bottoming in October (for the second time), the S&P 500 has gained a healthy 9.8% return, fueled by better-than-expected earnings results and bullish technical trends. To date, almost half (229) of the stocks within the benchmark index have followed its lead by returning 9.8% or better, while a majority (276) have underperformed the index.
The nature of an investor’s psyche is to always look for “deals” in the market — the next stocks that will ring the bell and pump up their portfolio.
Historically, stocks trail the S&P 500 for one of two reasons.
- They’re just bad. Missed earnings, poor fundamentals, miserable technicals, whatever the reason, they just shouldn’t be in your portfolio. Don’t buy these as they’ll usually just cost you money down the road.
- They’ve been overlooked. This is the group we’re always interested in, they’ve got a good story but ran into a little hard luck. Maybe earnings weren’t as impressive as the Street thought they should be, maybe a misstep on earnings guidance? Despite the excuse, these companies remain technically sound and usually have the benefit of pessimistic sentiment to help drive them back into the market’s good graces.
We looked at this group of 276 laggards to find companies that should be targeted as stocks to buy based on their underperformance amid otherwise attractive backdrops.
Stocks to Buy on the Dip: Campbell Soup Company (CPB)
It’s not sexy, but it makes money. Campbell Soup Company (CPB) shares recently broke below their $49 level and are approaching support at $48. A technical bottom becomes likely at this level due to the stock’s bullish 200-day moving average. The analyst community has missed the boat on CPB shares in 2015 as only 26% of the analysts have it ranked a “buy,” despite the shares’ 10% return.
The shares have been effected by interest rate fears since it pays a 2.6% dividend, but this will pass as short-term obstacle. CPB is a buy at $48 with an upside target of $52.
Stocks to Buy on the Dip: Chipotle Mexican Grill, Inc. (CMG)
Recent headlines concerning an E. coli outbreak combined with a lighter-than-expected earnings report to careen Chipotle (CMG) shares from $740 to $600, a decline of nearly 20%. While the stock’s longer-term fundamentals have some questions, the short-term charts favor a rally as they have breached dramatically oversold conditions.
Last week, CMG shares touched $600 for the first time since July, triggering a psychological support level. Our models rank the stock as a short-term bullish candidate with a short-term price target of $675 as the overreaction to recent events has opened the doors to bullish traders.
Stocks to Buy on the Dip: Consolidated Edison, Inc. (ED)
Dividend stocks such as utilities have seen exaggerated selling after Janet Yellen tipped the FOMC’s hand on a potential interest rate hike in December. Of course, what everyone is not talking about is the fact that rates won’t climb by much over the next 12 months, meaning that dividend stocks will remain a profitable option for portfolios.
Consolidated Edison (ED) shares dropped to $62 after a lighter-than-expected earnings report, but the company reaffirmed guidance that matched The Street’s expectations. ED has some serious long-term support at the $61.50 level, which supported the stock last week. A lack of analyst “buy” recommendations is only one sign of the pessimistic sentiment that is helping this stock climb the “wall of worry.”
For now, we’re buyers of ED stock with a target of $68.
Stocks to Buy on the Dip: WEC Energy Group Inc (WEC)
Another utility company benefiting from strong technical support is WEC Energy (WEC). WEC shares are trading at the $49 level despite a better-than-expected earnings report. As with other utilities, fear of higher rates on risk-free instruments have lowered the “value” of dividend stocks.
This situation is likely to be short-lived when the market realizes that interest rates will remain tame over the next twelve months.
WEC has long-term support in place at the $49 level from its long-term trendlines. At minimum, the stock is a trading opportunity with a short-term target of $54. Longer-term, we see WEC shares outpacing the market after the first quarter of 2016 when the yield curve begins to adjust to less interest rate risk.
Stocks to Buy on the Dip: Best Buy Co Inc (BBY)
A perennial performer during the holiday season, Best Buy (BBY) defies the popular view that everyone is shopping online by posting strong holiday shopping results, with a catch. Our research of the stock shows that there is usually a “sweet spot” for performance that stretches from the beginning of November through mid-December.
Currently, our models have BBY shares ranked a “buy” with potential from a short covering rally existing when Best Buy breaks above $36.50. The bullish outlook and short covering rally will combine to result in a short-term target of $40, which represents an 18% return from current prices.
Stocks to Buy on the Dip: Realty Income Corp (O)
REITs have fallen out of investor’s favor quickly as fears that higher rates will suddenly render these investments useless. Realty Income Corp (O) focuses its investments on commercial real estate properties — a market that is likely to maintain growth as interest rates edge higher.
O shares enjoy the strong underpinnings of long-term technical support while having seen short-term selling pressure that has knocked it down to a technical support level at $46. Only 13% of the analysts covering the stock have it ranked a buy, signaling potential for upgrades to drive prices higher.
We expect the overreaction to the FOMC’s interest rate activity to result in higher prices for O and other REITs. With a target of $52, Realty Income has about 13% upside potential over the next three months.
Stocks to Buy on the Dip: C.H. Robinson Worldwide, Inc. (CHRW)
Transportation companies have found a hard economic market as cost pertaining to their operations continue to rise. Ironically, it’s not the usual suspect — fuel — but instead the cost of hiring and maintaining an already stretched fleet of drivers.
Our models currently rank C.H. Robinson (CHRW) shares a “buy” based on their technical strength and lowered investor expectations. For example, the current short interest ratio of 6 suggests that a short covering rally is likely to move share higher. Similarly, sparse analyst “buy” recommendations also suggest that CHRW could be moved higher with upgrades as the analyst community.
Short-term targets have the stock trading at $74 over the next three months.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
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