Plunging oil prices are sending shockwaves through the equities market, creating the first true risk-off day in a while. Though the selling frenzy is threatening the S&P 500’s fledgling uptrend, it is bringing some much-needed profit-taking to leading stocks. I’ve surveyed the landscape and found three of the best stocks to buy.
Their leadership was easy to spot. The first criterion I focused on was momentum during the most recent upswing. I scanned for stocks that had rallies ramping them to higher pivot highs. Additionally, their prices had to sit on the north side of the 20-day moving average. The second criterion aimed at this week’s retracement. The swing had to pull the stock back low enough to create a compelling low-risk, high-reward setup.
A handful of stocks qualified, but these three were my favorite:
The beauty of today’s gallery comes from its diversified nature. It includes an operator of membership warehouses, a health and well-being company, and a semiconductor. Let’s take a closer look at how to buy the dip.
3 Stocks to Buy on This Dip: Costco Wholesale (COST)
Costco has benefited dramatically from the novel coronavirus. So much so that the company recently announced a 7.7% increase to its dividend. The boost in its quarterly payout from 65 cents to 70 cents underscores the retailers increased sales and beaming balance sheet. Shareholders should be cheering the news. It comes at a time when many other companies are suspending dividends or are at least seriously considering slashing them.
Today’s 4% whack marks the third straight down day for COST stock. It’s returning to the rising 20-day moving average, which sits in the middle of its two-month range. The choppy price action has made it challenging to find clean entries, but Costco has been a stock to buy into weakness for months.
I think the current dip offers yet another chance to get in. To increase the odds as well as create a low-cost trade on such an expensive stock, let’s use bull put spreads.
The Trade: Sell the May $280/$270 bull put spread for $1.75
United Health Group (UNH)
The healthcare sector has come within a stone’s throw of its 2020 peak, which is incredible given the damage suffered elsewhere. UnitedHealth Group capitalized on the comeback and actually rose to within 1% of its February high. High volume accompanied the ascent to confirm institutions were supporting the recovery.
Last week’s earnings report only accelerated the buying binge after investors were able to confirm the company’s fundamentals remained robust. UNH stock is working on its third down day, but volume has been minimal during the descent. This looks like a classic “buy the dip” opportunity. Let’s build a trade with the potential to more than double our money if UNH climbs back above $300 by June.
The Trade: Buy the June $280/$300 bull call spread for around $8.50.
Nvidia (NVDA)
The last on this list of stocks to buy on the dip is Nvidia. Semiconductor stocks have played a part in the Nasdaq’s robust recovery. Nvidia is the poster child for the industry and has a stock chart worth bragging about. It’s back above all major moving averages and has a daily uptrend now firmly established. Today it’s working on the third day of its pullback and is testing the 20-day moving average.
Given the strength of the sector and industry, I think Nvidia is one of the best stocks to buy here. Since there’s an earnings announcement slated for May 14, I’m going to suggest a low-cost, limited risk trade. That way, if we don’t capture enough profit to justify exiting before the event, you can hold into it if desired.
The Trade: Buy the June $280/$290 bull call spread for around $4.25.
The risk is capped at the initial $425 and will be forfeited if NVDA sits below $280 at expiration. The max reward is $575 and will be captured if NVDA sits above $290 at expiration.
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