In a year full of surprises, one of the biggest is how the stock markets have acted. So far, they have behaved counter-intuitively to the traditional investment thesis. Stocks are making all-time highs, and at a record pace — even as we still have unbelievably bad economic conditions. In turn, there are plenty of hot stocks out there available for investors.
Overall, it is not good news to have 15 million people file unemployment every week. Nor is it ideal to have a negative GDP. And collectively, the debt will exceed the size of the economy thanks to Covid-19 costs.
Yet, here we are celebrating with more buying of the S&P 500 and the NASDAQ Composite. That said, there are a slew of hot stocks rallying with no rest — and they are led by the frothiest of the bunch.
This resembles the dot-com mania, but from a slightly different angle. This by no means is a bearish statement yet because for now, there is absolutely no fear in this stock market. Investors are drawn to the explosive growth potential that stocks like Zoom (NASDAQ:ZM) are delivering. However, not all of them will be winners in the long term as we’ve learned from past manias.
Moreover, the CBOE Volatility Index (VIX) — which usually indicates the level of fear in the stock market — is not doing that now because it too is twice as high as it should be. So, clearly, there is a dislocation that will get resolved in the next few months.
Meanwhile, as I said before, investors have an opportunity in a handful of stocks making positive moves in 2020. However, these three should be bought on the dip. They are:
So, with all of that in mind, let’s take a look at their charts.
Hot Stocks to Buy on Dips: Tesla (TSLA)
It is only fair to start with the hottest one of them all.
Tesla stock has had an astonishing year in 2020. In fact, TSLA stock is down nearly 20% the past three days, and it is still up 38% the past month. It also now has a bigger market capitalization than all the other major global auto manufacturers combined. And yet, it only sold less than 370,000 vehicles last year — while the others sold 55 million. Clearly, Wall Street does not price TSLA stock as a car company.
There is more to its story, and it’s up to CEO Elon Musk to tell it sooner rather than later. That said, the company has a battery day scheduled for late September, and investors are probably expecting great news.
Meanwhile, the fans of the stock will defend it on every dip. On Wednesday, it fell 15% in the morning and had recovered much of it in hours. This shows there is ample risk appetite for it, so it would make for a great buy-on-the-dip stock — but from the right levels.
For the midterm, the price action from Wednesday indicates that around $405 per share is a valid starting point. The more exaggerated pivot point, though, is about about $50 lower. This is because that level had marked a major failure in July, and then served as the base for the end of August rally.
Additionally, I believe that if TSLA stock falls into $340 per share, it will find support all the way down. Investors can pick their entry points based on their time frames and risk appetites. Those who know options can sell me $280 put and collect about $15 for that. This trade doesn’t start losing money until Tesla falls to $265 per share.
Best Buy (BBY)
Best Buy is the last surviving brick-and-mortar technology store on main street. Therefore, it is seeing bullish action on Wall Street. By looking at the weekly chart alone, BBY stock appears over-extended and needing a correction. But then, the fundamental metrics tell a different story — because even after this massive 130% rally, it still has a price-earnings ratio (P/E) of 18. What’s even more amazing is that its stock price is only 0.7 times its full-year sales. Thus, investors have baked in no froth even at these altitudes.
By looking at the metrics alone, it’s slam dunk buy. Unfortunately, though, it has to trade inside a stock market that is also extended too far above its skis. So, if we get a general correction in the next couple of months, the “E” part of the P/E ratios has a way of disappearing. Meaning, what looks cheap now can get a lot cheaper through no fault of its own.
Management has proved itself worthy as it has staved off the online retail assault that Amazon (NASDAQ:AMZN) brought. The question now is no longer one of survival, but rather thriving, and that’s why I believe the bulls will buy-the-dip if and when the selloffs happen.
That said, the first level of support in BBY stock is near $105 per share, then at $5 increments thereafter. The biggest pivot level that would be an absolute must-buy is closer to $94 per share. If we’re lucky and it corrects all the way down there, it would make for a great long term buying opportunity or to double down on existing positions. Here too there are short put options trade opportunities to create income out of thin air.
Chipotle is the restaurant that baffles investors and defies all odds. They turned positive comps even during the quarantine crisis. That is just astonishing to anyone who knows how hard it is to operate a restaurant, let alone a national chain. Management is beyond reproach, and they had done all the work with technology and take out operations ahead of time. That played a huge part in their success during the crisis and tougher times. In other words, they made their own luck just like Amazon.
Investors price CMG stock like a tech company and that’s why it can carry these high multiples. However, the interesting part is that there isn’t a lot of hopium built into the stock price because its price-to-sales is only about 7. The high ticket price of the stock is deceiving because it’s not indicative of how expensive it is.
This is a growth company, so I judge it like I would judge Amazon based on how fast it grows, not on how profitable it is. This is how we can justify it having a 150 P/E, and investors should give it a pass on that.
Buying it up here is counter-intuitive just because of the size of the rally it has already experienced since March. Chasing a stock after rallying 200% is never a good idea. It is best to add CMG stock to the shopping list to pounce on it on dips. Ideally, I’d want to consider it near $1,150 per share. This is not the same as saying that it is a short up here because it is not. But if I am not long already, I should admit that I missed it and wait for the dip to get back on board.
It is important to note that CMG stock blew through its novel-coronavirus top in May, and that was around $940 per share. So, if for any reason — and to no fault of its own — it falls back to that level, I would add to my longs in size. The options opportunity for CMG stock is to sell the October puts at these levels, and collect about $5 in premium. This is a great way for those who want to own the shares now and leave room for error.
These Hot Stocks Are Not Like Most Others
Not all hot stocks are created equal, and these three hot are ones to buy on the dips. They have great fundamentals, proven managements and they have just thrived through the worst global test ever. More importantly, they have the sales now to support their businesses — whereas most of the other hot stocks like Zoom, for example, have a lot of hope of future sales in their stock prices.
Overall, when markets correct, they sell the hope first and then the meat later. Therefore, these three stocks stand a better chance of holding better during the next selling phase.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.