Legendary investor Warren Buffett has famously said his “favorite holding period is forever.” Indeed, there are companies have consistently created value for shareholders.
Contemplating stocks where every dip is a buying opportunity, I am reminded of an article from the University of Pennsylvania’s Wharton School of Business discussing “Why Do We Make Bad Stock Decisions?”
The article looks at the work of Wharton Neuroscience Fellow, CalTech behavioral economist and MacArthur Fellow Colin Camerer, a “pioneer in the fledgling field of decision neuroscience, and specifically neurofinance.”
The biggest takeaway from the article:
“Generally, investors tend to hold onto losing stocks for too long and sell winning stocks too soon. Behavioral economists have a term for this: the “disposition effect.” If we acted logically instead of being fallible humans, we would sell our failing stocks to prevent further losses and hold onto rising stocks in order to increase our gains.”
These cognitive biases are important to bear in mind as we consider stocks worth buying on any decline. Instead of booking profits on these stocks, investors should aim to average-up. It’s a better strategy than averaging down on stocks with weak fundamentals or growth outlooks.
Here are 4 stocks you should definitely buy on any dip:
These companies are quality names that are suited for the core portfolio and worth buying on declines. These stocks to buy on a dip can be considered for exposure for the next 5 to 10 years.
4 Stocks to Buy On Any Dip – Every Time: Lockheed Martin Corporation (LMT)
Over the past year, LMT stock has been largely sideways. However, zooming in on the last six months, the stock has moved higher by 20%. In fact, LMT is among the top stocks to buy on a dip.
The first reason to like LMT stock is an annual dividend pay-out of $9.60. I believe that dividend is likely to increase in the coming years. Therefore, this is one of the best dividend stocks for a portfolio.
The second reason to like the stock is a low beta of 0.93. With markets trading near all-time-highs, it makes sense to add low beta positions to your portfolio. Additionally, the defense sector is relatively immune to economic fluctuations.
From a business perspective, Lockheed Martin reported an order backlog of $150 billion for the second quarter of 2020. And after the quarter, the company won a $62 billion contract for F-16 foreign military sales. Therefore, the company is well-positioned for growth in international markets as well.
Based on Q2 2020 numbers, the company is positioned for $9.0 billion in operating cash flows. With the order backlog providing cash flow visibility, shareholder value creation will likely sustain.
Overall, as geopolitical tension remains globally elevated, Lockheed Martin stands to benefit in the coming years. This makes LMT stock attractive any dips. Stock upside, dividends and share repurchase will sustain value creation.
Apple (AAPL)
In the recent past, AAPL stock touched a high of $137. The stock has subsequently declined to $115.50. The September tech correction provides a great opportunity to buy this long-term portfolio stock. Besides stock upside, AAPL stock is likely to reward shareholders via higher dividends in the coming years.
Recently, Apple launched Apple Watch Series 6, Apple Watch SE and two new iPad Models. Beyond the enhanced features, these models are attractively priced, which will help Apple cater to a wider global audience. Furthermore, the newest iPad is targeted towards students and educational institutions. Under the ongoing pandemic, online classes will trigger increased demand for these products.
It’s worth noting that the company’s wearables segment is already delivering healthy growth alongside the services segment. In the next few years, the iPhone won’t be the company’s only growth and cash flow driver. I like a more diversified Apple, both in terms of segments and regional exposure.
But since we’re talking about the iPhone business, it’s expected that the company’s 5G-enabled phone will be released in the coming month. iPhone revenue growth has been relatively muted; however, the promise of 5G ought to support ramped up demand over the coming year.
Overall, Apple’s core strength is innovation and product improvement. A diversified revenue base and presence in growth markets makes AAPL stock attractive.
Additionally, the business is a cash flow machine and provides flexibility for Apple to pursue inorganic growth and shareholder value creation.
Alibaba Group (BABA)
When crafting your long-term portfolio, it’s important to be regionally diversified. BABA stock is among the top stocks to buy on a dip for growth exposure in Asia.
With the novel coronavirus pandemic driving serious business growth for e-commerce, BABA stock has trended 43% higher over the past six months. Any correction would be an opportunity to consider long-term exposure.
In the e-commerce business, Alibaba provides exposure to the high growth market in China and Southeast Asia. This segment remains the key cash flow driver for Alibaba.
However, I am bullish on Alibaba not because of its retail prospects, but when considering the company’s growth plans for the cloud business. The company is already the largest cloud computing provider in Asia. In the coming years, Alibaba has planned a $28 billion investment in the cloud business. This will ensure that strong growth and robust cash flows sustain for the company.
Its also worth noting that Alibaba has healthy free cash flows. The company has pursued inorganic growth in the past and is likely scouting for further acquisitions. It was recently reported that Alibaba is eyeing a $3 billion stake in Grab.
Overall, the company has years of strong earnings growth visibility and I believe that BABA stock will continue to trend higher.
Tesla (TSLA)
Over the years, Tesla has proved every skeptic wrong with its innovation-driven growth. TSLA stock has surged by a massive 817% in the past year. Of course I do expect some correction, but I continue to see value in the long-term.
Its worth noting that the global electric vehicle market is expected to grow at a CAGR of 14.3% through fiscal year 2030. Tesla is likely to be among the major beneficiaries of that growth in the coming decade.
In terms of production capacity, Tesla has facilities in the United States and China. Once its Berlin Gigafactory commences operations, I expect profitability to increase via higher production output and lower logistics costs.
Tesla already believes that the company has ample liquidity through internal cash flows to fund growth plans. I don’t see further equity dilution in the cards, and as cash flows swell the stock is likely to trend higher.
Tesla also has an exciting product pipeline, with Tesla Semi, Cybertruck and Roadster models likely to drive growth in the future. New vehicle driven top-line growth, cost improvements and higher cash flows will ensure that TSLA stock remains a out-performer.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
