Yesterday the stock markets fell 3% on headlines, and that is always a time to find great stocks to buy on dips. The stock markets have been in headline trading mode for months. This week we got several reminders of that — and of how excellent homework can fall hostage to surprise headlines.
First there were China currency threats, then videos of the protests in Hong Kong. Just when the markets recovered from those, yesterday the stocks fell off a cliff on the news that the yield curve had inverted. This merely means that the two-year treasuries yield more than the 10-year. Consensus is that once that happens, a recession is likely to follow within 12 to 18 months.
The reasoning there is that banks borrow on short-term rates to lend on longer-term rates. So if it is more expensive for them to do this, then banks would stop lending. Consequently, businesses could not borrow to grow and consumers would buy fewer houses, etc.
But there is also growing consensus that this time it’s different. The global bond market makeups have never been like this. They have changed dramatically in the last few years, as now we have a giant chunk in negative territory.
My point is that there are no real experts here on the subject, so it’s best to stick to what we know. There are good stocks to buy on this dip just based on their own profit and loss statements, balance sheets and charts. Today I concentrate on three that qualify as a good knives to catch on dips like this one. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Apple (NASDAQ:AAPL) and Johnson & Johnson (NYSE:JNJ).
This is not to say that these are the only three stocks I would pick. There are hundreds of great companies getting punished for no fault of their own. Caution is warranted though. For example, last night Cisco (NASDAQ:CSCO) reported and the stock fell on the headline. Although it too can be a good entry point, CSCO management gave us some reasons to doubt its stock for at least for a few more days.
Google, Apple, and J&J had no incremental bad news this week yet their stocks are falling fast.
Stocks to Buy on the Dips: Alphabet (GOOG, GOOGL)
The proof is in the pudding, and owning GOOGL stock has been very profitable over the years. I remember the days when I discussed entry around $90 per share, and that was before the split.
Alphabet stock here is not bloated from a valuation perspective. It sells at a reasonable 24 trailing price-to-earnings ratio and 5 times sales. In addition, it has $130 billion in cash and short-term investments on the balance sheet and little debt.
GOOGL stock has the support of its business model. This is a company that dominates one of the strongest trends of going online. So it has at least one massive cash cow and many others developing — mainly YouTube and its autonomous car subsidiary Waymo. Both still have tremendous income potential.
Moreover, Alphabet has a fortress of balance sheet which allows it to hunker down in case the difficult times do hit. It can then finance evasive actions that are necessary in order to defend its business or its stock.
It is also important to note that so far, Alphabet has done minimal financial engineering to prop up the GOOGL stock prices. This could be an incremental bid into the GOOGL stock.
Apple is a stock that almost always gets less respect than it deserves. I, too, am guilty of dissing its current management for their lack of innovation. Maybe it’s the wow factor we are missing.
My criticism of the leadership doesn’t mean I don’t like the company fundamentals. In fact, this is a bulletproof stock in the long run. It has an incredible profit and loss statement, and a decent balance sheet. I say only decent even though they have a ton of cash on hand because since Tim Cook took it over, he piled on the debt.
The excuse was that it is cheap to borrow and the returns that they get from their performance justifies the actions. I don’t agree but that’s a difference of opinion. I would have rather see them use the cash to buy new income streams like Amazon (NASDAQ:AMZN) does.
Nevertheless for the long-term, the Apple business model is still an incredible one. It has an unbelievably loyal clientele who almost never complains about price. Moreover it is making the shift into the new way of doing business, which is subscription models. For that, they have a huge base of current users and it would be as easy as turning on a faucet.
This makes AAPL stock less sensitive to the unit sales. It is no longer an iPhone company for now. The important part is that they continue on this journey while they find new ways to monetize clients.
Meanwhile Apple stock recently had a few sharp drops. But Tuesday 5% rally was emphatic to erase them. Yes, they gave half of it back the next day, but AAPL stock, unlike the market, did not trend down all day. It’s almost as if investors decided it had hit a short-term balance level.
If I’m buying Apple stock here, my goal is not to profit in a week. This is a long-term core holding for any portfolio. Since they don’t ring bells at tops and bottoms, I consider this a decent opportunity to buy Apple stock on the massive stock market uncertainties. AAPL sells at a 17 trailing P/E and 3.5 times sales.
Johnson & Johnson (JNJ)
This has been a household name for more than a century. JNJ stock — and the company — are proven winners. They continue to flourish through all prevailing trends. Sure they’ve had their fair share of headline scares, but over the years it’s almost inevitable, especially for consumer companies.
So this is where homework is crucial. JNJ stock sells at a 22 trailing P/E and 4.2 times sales. This is not cheap, but it’s not bloated either. Over the past five years, JNJ stock teetered around $125 per share. So as it falls into this area again, these zones are usually support because bulls and bears will fight over them again.
There is technical risk. If JNJ loses that pivot level then it could retest $115 per share. Although it is not a forecast, it is a bearish scenario that exists below.
I cannot confirm that JNJ stock is as cheap as it’s going to be. But I can confirm that it probably won’t matter. In the long run, I am confident that holding Johnson & Johnson stock is likely to have more upside potential than downside risk from these levels.
The idea of buying stocks on dips is almost never going to be perfect. But here’s an emphatic statement: If the stock markets are higher in the future then so are GOOGL, AAPL and JNJ stock.
Nevertheless, since we still have a slew of geopolitical risk booming, I don’t enter trades in full size today. It is always best to take positions in tranches, which leaves room for adjustments wherever necessary.