Wall Street has just had a full-blown correction, and it was hardest on the Nasdaq. This is normal, because that index led the rebound out the quarantine panic. While the other indices are barely back to their February levels, the Nasdaq hit that level a while back and then added more upside to the rally. In this case and after this dip, it’s only natural to look for winning stocks to buy on the dip.
In addition to the natural price action, there are the added effects of an earnings season. The expectations in some stocks have risen to unrealistic levels. It’s only natural to find a few that could’t meet the investor expectations. While the companies are beating the metric targets, they sometimes fail to fill the unrealistic hopium of investors. It’s easy to get spoiled expecting everything to only rally.
Dips are normal, and in fact are necessary for the health of a bull market. Wall Street is defying the odds by sustaining these equity levels. The macroeconomic conditions are still terrible still. Yet stocks are still setting records, or close to it.
Today we consider three more stocks that have been winning in spite of the challenges. They’ve take a rest here but they will resume higher. The trick is to have the courage to buy them on the dips. They are:
Stocks to Buy on the Dip: Okta (OKTA)
Okta deals purely with cyberspace, so it’s not a surprise to see it do well for investors this year. The global rush to do more things online keeps demand for its services strong. Year to date, OKTA stock is up around 70% even after this 16% correction. The concern for the bulls here is that the ascent has tapered off and the stock price is bouncing along the neckline at $190. If, for whatever reason, it falls below that level, the bears will get a second wind.
Overall, the investment thesis remains the same. Okta should do well for investors in the long run, and dips are normal. The trading opportunity for this is to put it in your basket of stocks to buy on those dips, and there are many levels to watch. Right here at $190 is the first attempt, but with a tight stop below the neckline we noted. The safer bet is to wait for another leg lower and buy it closer to $167 per share. In May, that was the base for a 40% rally to all-time highs.
This stock rallied 160% from the March lows, so it earned the right to rest. This sideways range between $230 and $190 could merely be the consolidation it needs for another leg higher. Meanwhile, the bulls are not done resting to take on the upper edges of the range, and they are still testing the lower ends of it.
There is the risk that OKTA stock will bounce here and hit resistance near $210 then fail and test the same neckline. That could prove to be one to many tries, and it could fail. Although that’s not what I expect, if it does happen, the good news is that there are many places to catch this falling knife thereafter.
Stocks to Buy on this Dip: Advanced Micro Devices (AMD)
The quarantine panic put the migration to the internet into hyper-speed mode. The behavior has lingered, and it looks like most companies will change how they do things going forward. Finally the telecommuting concept has taken foothold, and even schools will probably offer the online alternative to all of its students.
This is all to say that demand for tech has never been higher and the ramp will continue for years. AMD is one of three companies that provide the brains for the computers that drive it. They will shape what our world will become and that is a big responsibility for only three companies. The competition is fierce as evident this morning with the headlines that Nvidia (NASDAQ:NVDA) is buying chip maker ARM for $40 billion. Under the leadership of Lisa Su, AMD is making smart moves and up to the task. In fact it was the best stock in the entire S&P 500 for the last two years in a row, so this is definitely among the stocks to buy on the dip.
This is not a cheap stock, with a 147 trailing price-earnings ratio. That’s especially obvious if you compare it to Intel (NASDAQ:INTC). It has to spend a lot to deliver the growth. But the good news here is that its price-to-sales is 12. This is around 50% cheaper than Nvidia.
Technically AMD stock just fell over 15%, so it’s a better deal now than just a few days ago. But this isn’t necessarily an absolute bottom. Even though it has a good base here, it could lose another 10% before hitting a better pivot point.
The fact is that when a stock rallies as fast as this one did, there isn’t one hard line to count on for a bounce. The bulls were too enthusiastic on the way up and so they are unpredictable on the way down. The earnings rally base should hold once this sentiment crisis among investors abates.
Stocks to Buy on this Dip: Costco (COST)
Brick-and-mortar retail stocks have been against the ropes for over a decade thanks to the onslaught of e-tail that Amazon (NASDAQ:AMZN) brought to their front door. Costco is one of the few that actually still thrived in the face of the threat. The astonishing fact is that they did this without completely relying on their online efforts. Amazon’s weapon was to operate on thin margins, and that was also a main ingredient in Costco’s secret sauce.
COST stock consolidated well during the virus shock correction. It even set new all-time highs in the summer. The quarantine panic caused a run on its goods, most famously the panic purchases of toilet paper and disinfecting materials. Even the food aisles were empty and shoppers were stock piling as if preparing for a nuclear war. This usually pulls sales forward and causes a dip later, but the momentum has sustained itself so far. Costco is still turning strong comparable sales even after the initial panic has worn off.
Those who wished they owned it on the way up should start thinking about buying some. This is not a clear bottom — there is better support near $325 per share. This served as the base for the whole July rally. On its own, it should find footing there, but should the malaise on Wall Street continue, this stock has support all the way into the $300 line. The 12-months volume profile suggests that there should be strong support near $315 per share. This was resistance for almost a year, so it should be support on the way down. The short story is that COST is a great stock and investors have plenty of levels at which to love it.
Should the sentiment among investors continue to deteriorate then these great stocks will have trouble finding the bottom. They will trickle down into their secondary zones that we’ve discussed here today. Until the market starts ringing bells at tops and bottoms, the right thing to do is avoid chasing too late and nibble on the way down near support zones.
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.