Earnings season is a great time to scour Wall Street for stocks to buy on the dip. Add to it that the stock market just had a full-blown correction in a matter of days, and this candidate list grows exponentially. Almost all stocks have recently suffered sizable losses so there are are likely hundreds of opportunities to pounce on this week.
With that in mind, we will address two dips from earnings reports and one from the normal price action that just occurred. The three companies have different fundamental pictures with varied conviction levels. But, regardless of how solid they are, they all have to trade within this arguably still expensive stock market prism.
The effects of the novel coronavirus quarantine on the economy remain too significant. We still have way too many unemployed Americans, and we have not returned to growth. Yet, the recovery on Wall Street has been not only of the “V” kind, but one that has exceeded expectations by a long mile.
So, regardless of how good the micro-economic condition of each of these stocks, we have to make room for potential extrinsic risks from a frothy equity market. Therefore, conviction should remain humble enough to keep sizing small and employ appropriate stop loss levels.
Thus, the three stocks we’re looking at are:
Now, let’s dive in!
Stocks to Buy on the Dip: Apple (AAPL)
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We start with Apple stock because it is arguably the best company on the planet. It is a cash machine thanks to its iPhone engine, and recently, the company shifted more of its income to be from services rather than hardware sales. In fact, during their last earnings report, that segment was about 22% of the total revenue till. Nevertheless, this is still an iPhone company because it remains the fulcrum of most of these subscriptions.
The price action that unfolded in AAPL stock around its earnings was simply astonishing. After a brief hesitation around $100, it launched into a 50% rally. At the Friday lows, it had fallen 20% from that high — which Wall Street considers a full recession. Luckily, it didn’t last long and Wednesday’s bounce gives it some room to breathe. The bears may not be done with it yet, but this mini dip is indeed an opportunity. The Friday bottom was great, but maybe we will get that chance again soon.
The politicians are not looking like they will give the people another round of generous relief. Also, the vaccine headlines are not having the same buoyant effect on stocks as they did a few weeks ago. Therefore, equities are vulnerable for the next few days. It could be a dead cat bounce, and if so, then Apple would make a great buy closer to $100. It bottomed at $110, and has established several layers of support therein between.
Thus, until further tizzies, the bulls can assume that these will hold. And overall, Apple is indeed one of the stocks to buy on the dip.
Slack (WORK)
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Slack is a platform that I love and I use everyday. So far, it’s been free to do so and if they force me to pay for it then I would switch. There are other free alternatives, or I can even build my own tailor fit solution. The stock fell as much as 20% on Wednesday after it’s earnings report. It closed $7 off the lows, but a 13% drop is still very painful to the bulls.
It’s not that the report results were bad, it’s more a case of misaligned expectations. The concern was perhaps over slowing revenue growth, and that’s concerning but it’s too early to call it a trend. The rally in the NASDAQ Composite — and especially in work-from-home stocks like this — was insane. Therefore, it’s no surprise to see the flip side of that when reality sprinkles a little dose of reality. The bad part of superb rallies is that they create froth that could disappear quickly and without notice.
However, the opportunity for WORK stock is its support. On the night of the report, the buyers stepped in with conviction at $23.30 per share. Below that, there are two support lines at $22 and $20 per share. And below that still lies the extreme low from the initial quarantine shock.
Thus, it is likely to stand for a long time as an anomaly. And those who wished they owned Slack on the way up, this is their second chance to start now. Current investors who didn’t yet give up, it is perhaps too late to get out after this dip.
The options markets offer an alternative way of buying the stock cheaper. For example an investor can sell the December $20 put and collect $1.20 per contract. This trade doesn’t even need a reality to profit. In fact it allows for another 25% dip from here before it starts losing money.
Stocks to Buy on the Dip: Lululemon (LULU)
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The reaction to LULU stock on Wednesday after they reported earnings was negative. The stock fell 7.4% in the regular session, but found footing and closed $20 off its day lows. This could be an omen that the buyers are willing to step in and take advantage of the sale.
However, relative to its recent price history, there could be more trouble ahead. I mostly fear the risk of falling in sympathy with the reset of the market if the correction persists. Additionally, it doesn’t help that the stock leaders of late have been frothy stocks like Zoom Video (NASDAQ:ZM). Investors in those are quick to change their minds and without warning.
Collectively, LULU stock has decent metrics, but it is definitely not cheap. It has a hefty price-earnings ratio (P/E), so it too can stand lose some weight there. This is a stock that benefits from the new normal of telecommuting. So if people are not dressing up for an office, they are likely wearing more yoga-wear. In reality it’s no longer a one trick pony. Lululemon has an expanding line of men’s wear and it is growing globally. Moreover, they recently entered the workout-at-home sector with their purchase of The Mirror. Peloton (NASDAQ:PTON) proved that this segment has tremendous potential, and LULU is an early entrant into it.
The risk to their income now is that we are still in a high jobless situation. And since the free government money has dried up, this could impact their sales into next quarter. Although I believe that LULU stock will find support into $300, it is not likely to see huge buying bursts. I prefer catching this falling knife by selling the October’s $270 put for almost $4 per contract. This way the investors can create income without needing a rally to profit. In fact, the stock can fall another 18% before they’d suffer losses.
Overall, of these three stocks to buy, I prefer Slack and Apple over Lululemon. This is simply because if the markets in general are not done selling off then it’s likely to have the farthest to fall still.
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.
