Successful investors are not afraid to take risk, even when it’s not the prevailing choice. Ever since machines took over the bulk of trading, investment strategies became collective opinions. The big profits come from when there is consensus in a thesis. Investors milk it to death through social and traditional media, and it becomes absolute truth — until it’s not. And then, they spit it out quicker than they gobbled it up. However, this is a good thing because among the wreckage, we finds great stocks to buy.
That said, the three we’re focusing on have all corrected at some point in 2020. But they are all still up 25%, 134% and 15% year-to-date, so they are beating the S&P 500.
Clearly they are not disaster stories, but therein lies part of my point. These are not broken companies, but rather it’s a case of wrong expectations. Investors are often guilty of over-loving something to the point it becomes a risk. The catalyst that carried them up is suffering from some doubt, so traders are quick to sell them.
Meanwhile, the fundamentals that carried these companies to records are still intact. The idea is to let Wall Street have its hissy fits and pounce on the opportunities. Overall, it is important to remember that all three are momentum stocks, so they do move fast. This means that we need to be cautious when handling them.
Even though they are stocks to buy on weakness, it’s probably prudent to do so in tranches. Taking one big full bite leave us no room to manage the meal. The three names are:
Now, let’s dive in and take a closer look at each one.
Stocks to Buy: Alibaba (BABA)
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The correction seems shocking, but it is part of normal price action. In fact, I suggested waiting for it on Oct. 28th. I said to buy the dip between $290 and $260. And here we are.
Not too long ago, Alibaba stock could do little wrong. In 2017, it broke out of $125 per share and never looked back. Since then, management earned Wall Street’s trust as if it was a U.S. mega-tech company no different than Amazon (NASDAQ:AMZN) or Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG). However, now BABA stock cannot buy a break even if it paid cash for it.
For the last few months, the world has been waiting for the IPO of ANT Financial. It was supposed to be the largest of all-time, and Alibaba owns a third of it. Last week the IPO was suspended, and BABA stock fell 8% on the headline. Then it fell again on its earnings, but they were not bad. It’s what’s going on behind the scenes that rang the alarm. It turns out that through this mess, ex-CEO and Founder Jack Ma criticized the Chinese financial system. This added fuel or maybe even started the fire storm, and the rhetoric continues as the stock fell more. In total, Alibaba has fallen almost 15% since the start of November.
However, most importantly — and what would spur me to buy BABA stock here — is that it’s at a pivot level. I wrote about this opportunity in early August, and it worked out very well. And again another winning stint a few weeks later to $320. It should work again now, and usually these pivots are support so it’s worth a shot. This would qualify as a swing trade back to $290 for traders. But this could also be an entry point into a long term buy for a great stock.
Eventually, this too shall pass and BABA stock will go back to trade on its own merit. And to think investors were worried about the U.S. regulators acting on Chinese stocks. This one was a complete shock.
Datadog (DDOG)
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The pandemic was terrible for humans, but worked miracles for cloud stocks. Among them were Zoom (NASDAQ:ZM), Shopify (NYSE:SHOP) and Datadog. But for the last few weeks, investors sold them down for the slightest of news. For example, Fastly (NYSE:FSLY) revised its guidance 5% and they sold it down 30%. That said, DDOG stock fell hard on the earnings headline and it did nothing wrong. They beat all metrics, raised guidance and that wasn’t enough.
The problem is that investors get stuck on a catalyst too long to a point where they hate it. Once that happens, the champions fall and they become woeful. DDOG stock is a fallen angel, and is part of the great stocks to buy when others hate it. The fundamentals don’t lend any support. It sports a trailing price-earnings (P/E) ratio of 1,400 (not a typo), but that’s not the problem. The price-sales (P/S) is 55, and there’s the potential weak spot. This represents too much froth that could still potentially fall out of the stock price.
Overall, my current thesis is purely technical. In August, DDOG stock had a fierce battle at $70 and the bulls prevailed. This now becomes solid support. Then again, two more ruckus battles in August and September this time at $75.
Currently, the stock is at $88 as it bounced hard off the $80 low. Clearly, the bulls are still in control of the levels. Now, they simply need time to rebuild the momentum and salvage the trend. So far, there is no harm done except to say they are consolidation since late June. This whole exercise may become the base for a rally back to new highs by February.
Stocks to Buy: Slack (WORK)
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For full disclosure, I use Slack to host my chat room and I love it. The problem for them is that I don’t pay for anything. It’s completely free with minor restrictions. The pandemic shutdown forced the world to go digital. That said, Slack is part of the cohort companies that benefited well. In fact, WORK stock rallied more than 100% from the March lows.
Those were the good days, but now investors face darker ones. The problem is unlike say Zoom, Slack gave a huge chunk of the Covid-19 rally back. It is now 33% below the high, and struggling to hold support. As long as it is still above it, fans to try and catch this knife. The important part is to use discipline with tight stops. Unless the intent is to own the shares long term, avoid turning this trade into an investment.
The problem for young stocks like this is their lack for fundamentals. I am referring to the tangible kind that investors typical seek. They still lose money, so there is no P/E — but at least this one has a reasonable (P/S). Perhaps the fall from grace made it so that Slack stock has little froth left in it. Nevertheless, the impression is that it’s risky to bet on a stock that doesn’t have a strong income statement or balance sheet. Investors often need the security of those so they can gain confidence in their thesis.
Collectively, my current bet would be that if markets in general hold up, WORK stock should hold. It is within a stones throw from the March lows, so there is no need to go there again. We are far better off than when the world was closed for business. It makes no sense to revisit a level from when it was the worst of times.
If $24 per share fails, then there should be more support near $22. Conviction is medium at best simply because of macro-conditions. The indices just set new all time highs so if they decide to correct they will take Slack with them
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.
