“Irrational exuberance” is how then-Federal Reserve Chairman Alan Greenspan described the stock market during the dot-com bubble, and that same descriptor applies perfectly today. Price action in the stock market this month has been astonishing.
On the way down, stocks were setting record correction statics. Now on the way up they are doing the same, leaving most experts clueless. American stocks are acting very resilient in front of unprecedented uncertainties, perhaps too resilient.
Yesterday chairman Jerome Powell said as much in his testimony, expressing concern over the fundamental challenges facing the economy unless we reopen the world soon. He also reaffirmed that the Fed is committed to act like it has never before and that nothing is off the table. Aggressive rate cuts had critics saying the Fed was out of bullets. Powell basically said the Fed was willing to increase the credit it has already extended if necessary.
From the rally we saw on Wall Street this past month, it’s hard to believe Main Streets are still shut down. The world is still under quarantine yet the S&P 500 rallied 3% just yesterday, within 12% of its all time highs. The small-caps have gained more than 1% every day for six days in a row and 5% on Wednesday. The DOW hasn’t had a month this good since 1987. At some point reality has to set in and the fundamentals will take control of the narrative again.
Luckily the companies we’ll discuss today have solid footings, and should be fine even if the stock market at large experiences another swoon this year:
When it comes to another market dive, we clearly don’t lack for potential catalysts, case in point being the almost 4 million new weekly jobless claims. The next unemployment report is going to be scary, and the stock market’s current bullish action hasn’t priced that in yet. Nevertheless let’s dive into these three stocks assuming the best on the macroeconomic front.
American Stocks to Buy after Earnings: 3M (MMM)
3M is a great American company that has been stuck in the middle of covid-19 headlines from the get-go. The shortage of masks and ventilators brought out the worst in people and a whole lot of finger pointing. Authorities and the people of the world are in a mad scramble to secure personal protective equipment (PPE), and while that might not be 3M’s fault, it certainly became their problem.
However, that doesn’t take away from the integrity that the company has built for over 118 years. Therefore, this is a stock to buy on any serious dip and we just had a great one.
Those who were lucky to have bought the very bottom of the covid-19 crash near $115 per share are already almost 40% in the green. But that doesn’t mean the opportunity is gone.
The rally so far has been the easy work for MMM stock, because it is now running into resistance around $158. The stock fell from this level back in late February. So it’s only natural for the stock to find sellers when it comes back to that band. This opens the door for an opportunity to buy the smaller dip. If MMM falls towards $150 per share, it would make for a good starting point for the long-term.
Management reported a strong quarter, which is really saying something in light of the current global crisis. In addition to the successful execution on plans, 3M still pays a hefty 3.7% dividend, a definite selling point when compared with almost no yield from U.S. bonds and less than zero abroad. This will attract investors seeking fixed income, and act as defense for the stock in times of trouble.
Caterpillar (CAT)
For several years Caterpillar’s success has depended on global growth, but that was back when we had some. No one is looking for growth these days; companies are lucky just to break even in the current market.
At some point in the future there will be another boom to rekindle the frenzy. Meanwhile trading CAT stock in the near-term has more to do with inherent value than upside potential.
Since the 2018 top, the stock has traded inside a very wide descending channel of lower-highs and lower-lows. It had several attempts at breaking out from that trend, but all failed. The March crash was especially harsh on Caterpillar as it fell back to the 2016 neckline.
The bulls have recovered most of that, but are now struggling with the resistance around $120 per share. This level has been pivotal for more than two years. More often than not, levels with such longevity are difficult to break through, especially on the first few attempts.
The good news is that buyers of the stock stepped in and defended it under extreme stress-testing conditions. This makes for a legitimate bottom that bulls can rely on as they start to build a base for the stock. Valuation also plays an important role in this bullish thesis. CAT stock sells at a modest 12 price-to-earnings rati,o and just over one time sales. And like 3M, this American company also yields a strong 3.6% dividend.
This is all to say that owning the shares at these levels is a viable investment, particularly for the long-term. Management recently reported earnings, with a non-shocking drop in retail sales. This is not a reason to short CAT stock but rather to have tempered short-term upside expectations.
Pepsi (PEP)
I will disclose that I am a fan of Pepsi products, but this in no shape influences my opinion of the stock. This is supposed to be a boring stock, not one that moves +/- 30% in mere weeks. But that’s exactly what happened during the coronavirus crisis.
PEP stock fell 31% from the late February drubbing. Then it quickly bottomed off $101 per share and delivered an even bigger rally from low to high. Clearly the easy trade is done. But what the crash proved is that there is appetite to buy this stock.
I am definitely not suggesting that buying Pepsi up here is easy, even if there is more upside available. It’s not an obvious point of entry. This would make for a much better investment after a dip towards $128 per share. After such a fast rally it is important for this stock to drop at least 5% to shake off a few of the recent weak hands. It’s best to scare some people out and transfer the ownership into those who would have better conviction.
This is not a cheap stock. It has a 26 P/E and that’s 40% more expensive than MMM and double that of CAT’s valuation. For this and other reasons, this is my least favorite entry point of the three today. Buying it here is relying on a lot of thing to go right in the world and for Pepsi specifically. Luckily it too pays a dividend albeit slightly lower than the other two.
The earnings report wasn’t too shocking because they beat expectations benefiting from the global rush to stock up. Management opted out of guiding forward but that is not unusual during this earnings season. So far analysts are not shying away from the stock on the news.
In all three cases today I am more certain of the support below than the upside potential. In such cases, selling put options works well especially that premiums are still elevated from the VIX being this high. This would be a great way to get into a stock long with room for error.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
