The investment gods did not take kindly to Netflix (NASDAQ:NFLX) missing second-quarter analyst expectations for subscriber additions July 16, knocking its stock down 5.2% on the day and another 4.4% over the next four days of trading. This puts NFLX stock at its lowest level in more than a month, in line with other downtrodden stocks.
Down 12%-plus over the past month, there are a lot of investors wondering if Netflix’s over-forecast was a one-time thing or if this is the beginning of the end for Reed Hastings’ baby.
“Investors are devastated by Netflix’s Q2 projection that went down in dramatic flames,” said Eric Schiffer, chief executive officer of private equity firm Patriarch. “Now future projections are suspect and that decimates valuation.”
Reed Hastings stated in the company’s conference call that its fundamentals have never been stronger. In early June, I suggested that NFLX stock could double over the next three years as long as its operating profit per subscriber kept increasing by double-digits on a sequential basis each quarter.
At the end of the first quarter, Netflix had an operating profit per subscriber of $8.65 for a rolling 12-month period; at the end of the second quarter, it was $10.96, an increase of 26.7%. Down more than 10% over the past month, I’d say you should buy Netflix at these discounted prices.
Here are seven other downtrodden stocks I think you should buy on the dip:
Downtrodden Stocks to Buy on the Dip: Tesla (TSLA)
As I write this, Tesla (NASDAQ:TSLA) is off more than 6% over the past five days, putting it down nearly 11% over the past month and off by more than 12% over the past year through July 24.
Although Elon Musk has found himself in hot water recently, with a Trump-like addiction to tweeting his unvarnished opinions, it’s the company’s shortage of cash that has investors worried about its ability to stay afloat.
Tesla is apparently so desperate to reduce its expenses, it’s asking some suppliers to cut spending on projects and others to reduce the price of parts.
“The fact they are seeking cash back is certainly alarming …” Cowen analyst Jeff Osborne wrote in an email. “Cash is becoming a major concern of investors.”
Personally, I’m on record saying that the longs ought to be buying on this correction because Elon Musk is going to make Tesla profitable even if it kills him.
Downtrodden Stocks to Buy on the Dip: L Brands (LB)
I feel for anyone who bought L Brands (NYSE:LB) stock last Christmas; if you’re still holding you’re down 50% in less than seven months, 14% of that drop in the past month alone.
Why in god’s name would I recommend investors buy on the dip when it’s obvious Victoria’s Secret is a broken brand?
“June sales showed VS struggling to drive traffic even when in semi-annual sale mode,” Jefferies analyst Randal Konik wrote in a July 12 note to clients. “The company admitted traffic was soft so the sale was extended and prices reduced further. We believe this all means the brand is broken.”
Business is so bad for Victoria’s Secret, Konik sees LB stock dropping into the low $20s over the next 12 months.
Leslie Wexner is a retailing icon. I don’t believe he’s going to go away without fixing his legacy buy — he paid around $1 million for Victoria’s Secret in 1982 — but certainly, Aerie and others are giving the once-untouchable brand fits.
While Victoria’s Secret might be floundering, it’s still managing to generate $1.3 billion in operating cash flow annually, which is a miracle considering how badly its legacy brand is performing.
I think Konik’s got a chance to be right about LB. That said, in five years, $30 is probably going to look very cheap. I just don’t see Wexner failing to right the ship.
Downtrodden Stocks to Buy on the Dip: Match Group (MTCH)
If you bought Match Group (NASDAQ:MTCH) stock at the end of 2017, you’re smiling, up 24% year to date through July 23. If, on the other hand, you bought three months ago, you’re down 16% including close to 10% in the past month.
What’s happened to trigger the decline?
Match’s earnings are out later this summer and I’m betting they’ll be good. Add to this the fact that Facebook is for old people and it’s likely that Match has nothing to worry about.
“Tinder’s our big growth engine, and Tinder tends to skew very young, so 18 to 25. Facebook does not skew that young in general,” Ginsberg told Recode’s Kurt Wagner. “If you’re a 23-year-old and you’re going to be using two or three apps, definitively, we think you’re going to use one of our apps, most likely Tinder.”
Personally, I think Facebook would be smarter buying Match and providing its users with easy access to Tinder, etc., while revving up the advertising engine. As one expert recently suggested, Facebook isn’t approaching dating with the right mindset and as a result, it will likely fail to catch on with users.
Match wins because it’s sole purpose is dating. This might be the best stock of the bunch to buy on the dip.
Downtrodden Stocks to Buy on the Dip: State Street (STT)
If you’ve been a State Street (NYSE:STT) shareholder for the past five years you can’t be a happy camper — its annualized total return is 5.7%, 301 basis points worse than its asset management peers — and it hasn’t gotten any better so far in 2018, down 10% year-to-date through July 23.
The latest hit to STT stock came on July 20 when it announced it was buying Charles River Development, a privately held data analytics company, for $2.6 billion in cash.
I’m not sure why investors weren’t positive about the news. According to D.A. Davidson analyst Peter Heckmann, the deal makes it a stronger player in the fintech arena.
With its second-quarter earnings beat and 17% increase in revenue year over year, buying within 10% of its 52-week low is a solid game plan especially if you believe in reversion to the mean.
I believe it’s time for STT to shine.
Downtrodden Stocks to Buy on the Dip: The Gap (GPS)
After rebounding nicely in 2017 — it generated an annual total return of 55% last year, its best showing in a calendar year since 2012 when it gained 70% — the company’s stock appears to have hit a bit of wall down more than 10% in the past month.
Recently, Gap CEO Art Peck mused about making a potential acquisition suggesting it might make a bolt-on purchase for its Athleta brand, which along with Old Navy, are the company’s growth engines.
With more than 3,600 stores globally, it has too many Gap and Banana Republic stores and not enough Old Navy and Athleta stores.
Over the next 2-3 years, investors can expect to see more store closings of its legacy brand although the recent hiring of former Eddie Bauer CEO Neil Fiske would indicate that Peck believes the Gap brand can still be relevant.
The company’s latest earnings indicate it’s facing lots of headwinds including slower same-store sales growth at Old Navy.
As Old Navy goes, so goes Gap stock. I expect Old Navy and Athleta to deliver for shareholders in the next 2-3 years; any positives from the legacy brand and Banana Republic would be a bonus.
Downtrodden Stocks to Buy on the Dip: Skechers (SKX)
Skechers (NYSE:SKX) is going through a bit of a rough patch these days down 12% just in the past week alone and 28% year to date through July 23.
If you look at a five-year chart, Skechers has had two big corrections — the first in October 2015 when it lost around 45% of its value and 33% in April of this year, both over a short period of time — suggesting now might be the perfect time to buy on the dip.
The company’s stock tanked in April because it issued disappointing guidance for the second quarter that included lower sales and earnings than analysts were expecting. Skechers is known as a company that messes up operationally from time to time so it’s not surprising that investors took the guidance badly.
Fast forward to its Q2 2018 results announced July 19 that included more disappointing guidance for the third quarter. That sent it down another 20% or more on the news.
Despite the bad news, Skechers is in really good shape from a historical perspective both on the top and bottom line. Add to that a balance sheet that’s rock solid and you’ve got your self the perfect buying opportunity to get in while others are fearful.
In the $20s, especially the low $20s, Skechers is an absolute buy.
Downtrodden Stocks to Buy on the Dip: GreenSky (GSKY)
GreenSky (NASDAQ:GSKY) provides loans to consumers right at the cash register. Going public on May 23, 2018, at $23 a share, the Georgia company saw its stock price jump to a high of $27.01 just days after its initial public offering (IPO), only to fall back to earth. It’s now trading below $20, well below its IPO price.
A big market for the company is home improvement stores where big-ticket purchases are a lot more prevalent. The downside, of course, is that it’s tied to the housing market.
“If there’s a home-improvement slowdown or a housing slowdown, GreenSky could be impacted,” said Phil Haslett, co-founder at EquityZen, an online marketplace for pre-IPO shares.
That’s a fair observation.
However, the fact that it originates the loans and doesn’t carry them on its balance sheet, along with the fact it’s hitting other markets such as healthcare for elective surgery, etc., combined with the fact it actually makes money — $103 million profit on $326 million in revenue — makes it a relatively safe bet.
IPOs historically tend to trade below their IPO price within the first 12-24 months as public companies.
Greensky is one of those rare IPOs lately that actually makes money.
Should you buy on the dip? Absolutely.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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