This has been a market where the right short-term stocks have been massive winners. The combination of elevated volatility and a rush of retail investors into equities has led to a huge number of parabolic rallies.
Even in March, when investors were panic-selling everything in sight, so-called “novel coronavirus pandemic winners” like PPE (personal protective equipment) manufacturers, vaccine plays and beneficiaries like Zoom (NASDAQ:ZM), Clorox (NYSE:CLX) and Teladoc Health (NYSE:TDOC) all soared. Since then, tech has been hot, while sectors like solar and electric vehicles have posted stunning and quick rallies.
To some extent, the easy money in short-term stocks probably has been made. The U.S. and the world are approaching a return to normalcy, even if progress will remain uneven. Sectors with obvious tailwinds already have gained. Volatility has come down since March, with the CBOE S&P 500 Volatility Index, commonly referred to as “the VIX,” near its lowest levels since early March.
Still, for active investors there are opportunities. Some may be from the short side for the most aggressive traders. But these 10 short-term stocks all seem to have the potential for a quick rally:
- Alibaba (NYSE:BABA)
- Aaron’s (NYSE:AAN)
- Foley Trasimene Acquisition (NYSE:WPF)
- Malibu Boats (NASDAQ:MBUU)
- Home Depot (NYSE:HD)
- Array Technologies (NASDAQ:ARRY)
- Salesforce.com (NYSE:CRM)
- Big Lots (NYSE:BIG)
- Accel Entertainment (NYSE:ACEL)
- Polaris (NYSE:PII)
Great Short-Term Stocks: Alibaba (BABA)
BABA stock has been pummeled by bad news over the past month or so. The initial public offering of Ant Financial, in which Alibaba has a one-third stake, was suspended after the Chinese government stepped in. That same government a few days later issued antitrust guidelines that seemed to target Alibaba and other “big tech” companies in China.
As a result, and despite a strong fiscal second quarter earnings release in early November, Alibaba stock has pulled back 17% from late October highs.
But we’ve been here before. Investors often have become nervous about BABA and other large-cap Chinese stocks, for a number of reasons. Whether it’s the “trade war” or political risk, Alibaba seemingly always has a short-term obstacle to clear. Even before the company went public in 2014, investors were convinced that the Chinese economy was headed for a “hard landing.”
Each time, BABA has powered through. It’s hard to see why this time will be different. The negative headlines will fade. Attention will turn to the new administration in the U.S., and an almost staggeringly cheap valuation for Alibaba, which now trades at just 21x forward earnings. Simply returning to late October levels suggests 20% upside, making BABA stock one of the better short-term stocks to buy.
Famed investor Joel Greenblatt is well-known for targeting spin-offs, in which a company separates one of its businesses as a new, publicly traded company. Spin-offs usually are executed to allow investors direct ownership of the more attractive business, which supposedly “unlocks value” as the standalone entity can better prove its worth.
That logic, however, usually leads shares of the less attractive company to plunge. After all, shareholders now can own the segment they wanted all along. They can, and usually do, dump the part of the business that (again, by this logic) supposedly was depressing the valuation of the combined company before the spin.
As Greenblatt and others have noted, that often creates a somewhat counterintuitive opportunity. The better business often rises too far; the weaker business gets too cheap.
That might be what is happening with Aaron’s at the moment. The rent-to-own retailer actually was the company spun off, with the remaining company renamed PROG Holdings (NYSE:PRG). AAN stock initially traded at $30; it’s below $18 barely a week later.
There are challenges for Aaron’s, which is dealing not just with the novel coronavirus pandemic but a multi-year record of weak same-store sales. But down more than 40%, this seems like a classic spin-off opportunity, and one that should grab investor attention sooner rather than later. That makes AAN stock one of the best short-term stocks, even if the longer-term outlook remains cloudy.
Foley Trasimene Acquisition (WPF)
SPACs, or special purpose acquisition companies, have been the best short-term stocks of 2020, and perhaps ever. SPACs disrupt the traditional IPO process, allowing a private company to merge with an already-public company instead of listing its own shares.
Some of the biggest winners of 2020 — DraftKings (NASDAQ:DKNG) and Luminar (NASDAQ:LAZR), to name just two — used SPACs to go public. Most others at least have seen a nice “pop” from a pre-merger price usually around $10.
Foley Trasimene Acquisition hasn’t yet picked a target. But it’s a good bet it will soon, and that WPF stock will rally on the news. The SPAC is led by William Foley, who has made investors billions in stocks like Black Knight (NYSE:BKI), Cannae Holdings (NYSE:CNNE) and many others. Foley’s second SPAC, Foley Trasimene II (NYSE:BFT), has rallied more than 20% in just a few sessions after agreeing to merge with payments platform Paysafe.
Foley Trasimene thus seems due for a deal of its own. Given Foley’s track record, it seems likely the market will like that deal as well. WPF already has been bid up toward $11 in the wake of the Paysafe deal, but the track record of Foley himself and SPACs as a whole suggests there should be more upside ahead.
Malibu Boats (MBUU)
Many of the short-term stocks investors might consider are those that have seen a sharp dip. MBUU stock is not one of those stocks.
In fact, MBUU has held up reasonably well over the past few months. Like a number of cyclical stocks, it plunged in March and into early April. But as investors realized the pandemic would lead to higher purchases of big-ticket products like boats and recreational vehicles, Malibu better than tripled from the lows.
There’s room for another rally from here. Its valuation is attractive, at 11x forward earnings. Industry leader Brunswick (NYSE:BC) sees higher demand continuing into 2021, at least. And Malibu has outperformed not just Brunswick, but smaller rivals like Mastercraft Boat Holdings (NASDAQ:MCFT) and Marine Products (NYSE:MPX).
In other words, there’s a long-term story here. But there’s a short-term case as well. Malibu is coming off a strong quarter last month, which included its own bullish outlook for demand. The chart looks favorable, with MBUU stock consolidating over the past few months, and now building up steam to challenge resistance. At some point, the stock is likely to break through, and then break out.
Home Depot (HD)
From a long-term perspective, I’ve been skeptical toward, and mostly wrong about, Home Depot stock. From a short-term perspective, however, there seems a strong case for a rally.
After all, HD stock surprisingly has struggled of late. It has gained less than 3% over the past six months, significantly underperforming the broader market. A recent pullback led the stock to touch a five-month low this week.
It’s likely that investors are somewhat nervous about 2021 performance. Huge growth this year — same-store sales rose a stunning 24% in the fiscal third quarter — sets up tough comparisons next year. The pandemic may well have pulled forward demand as well.
But at this point, HD stock seems likely to once again get the benefit of the doubt from the market. And the long-term outlook should be improving. Elsewhere in the market, investors are pricing in an exodus from urban areas to the suburbs, and from apartments to homes. Both trends should provide a multi-year boost to Home Depot results once the difficult comparisons are lapped.
Simply put, Home Depot seems like a pandemic winner, but it hasn’t been treated as such lately. It’s possible that valuation concerns are a factor, but assuming the market holds up, the negative trend seems likely to reverse in the not-too-distant future.
Array Technologies (ARRY)
Solar stocks have sizzled this year. The Invesco Solar ETF (NYSEARCA:TAN) has gained 173% year-to-date. Some of the best short-term stocks of late have come from the sector. Meanwhile, IPOs are hot, with Doordash (NYSE:DASH) the latest new issue to see overwhelming demand.
And yet ARRY stock has flatlined. The manufacturer of trackers for solar installations closed its first day of trading at $36.45. It sits at almost exactly the same level at the moment.
That seems likely to change. ARRY stock seems to have found a bottom in recent sessions after falling from $50 to $35. Its valuation is not terribly onerous, at 41x forward earnings, given the growth potential and valuations elsewhere in the sector.
IPOs usually see quite a bit of volatility as investors try and parse the impact of lock-up expirations, and a low float magnifies the impact of trading. ARRY has seen that volatility so far, but it’s important to remember that volatility can cut both ways. There seems to be too much optimism behind similar stocks for ARRY stock to struggle for too long.
Investors apparently did not like Salesforce’s acquisition of Slack (NYSE:WORK). CRM stock declined more than 8% the day after the deal was confirmed. That followed weak trading heading into the official announcement. CRM stock now sits at $220, down 15% in a month and off 22% from its 52-week high.
In fact, the last time Salesforce stock traded this low was on Aug. 25. After that day’s close, Salesforce delivered one of the best earnings reports you’ll see from a mega-cap company. CRM stock rallied 26% on the news.
Yet investors now can buy the stock essentially at the pre-earnings price. That seems like an opportunity. The Slack deal may have been expensive, but the cash-and-stock deal still had a valuation of roughly $28 billion (and actually less at the current CRM stock price). Salesforce has lost nearly $20 billion in market capitalization just since the deal was announced.
This seems like a massive overreaction, with investors focusing on the deal and ignoring both the blowout quarter and Salesforce’s long history of success. Without exaggeration, this is one of the best companies in history, and CRM one of the best stocks. At some point soon, investors will remember that, even if sentiment toward the Slack deal takes some time to reverse.
Big Lots (BIG)
Discount retailer Big Lots has done basically everything right this year. Earnings have been impressive. A sale-leaseback agreement on its distribution centers raised capital and unlocked value.
To some extent, the market has rewarded the progress: BIG stock has gained 60% so far in 2020. But of late, investors have shrugged. Another strong report last week actually sent the stock down 11%.
There’s a case for a reversal. The chart looks favorable, with support holding yet again around $45. Its valuation remains attractive, with BIG trading at less than 8x forward earnings. Execution has improved, and Big Lots finally seems to be finding its niche in a crowded discount space.
Retailers always are dangerous, and a “second wave” of the pandemic could hit holiday results and investor sentiment. Still, there seem plenty more reasons to buy BIG then to sell it, which suggests the post-earnings selloff is an opportunity, not a warning.
Accel Entertainment (ACEL)
Even with the pandemic’s resurgence, investors have been bidding up “return to normalcy” plays. Cruise operators and airlines, to name just two sectors, have rallied nicely in recent weeks. Progress in the race towards a vaccine has led investors to look forward to better times.
ACEL stock should be a beneficiary. The distributor and installer of VLTs (video lottery terminals) has seen its 2020 results collapse amid shutdowns in Illinois, its home market. As bars reopen, revenue should bounce back. Yet the stock hasn’t received the same credit; it continues to trade sideways, and is down 22% so far this year.
That should change, and perhaps in a hurry. Online gambling stocks have soared in part because of a belief that more states will legalize more types of gambling to raise revenue. At some point, investors should realize that thesis applies to VLTs as well.
In other words, there are two trends that ACEL is missing out on right now. Only one needs to be applied for ACEL to find a rally.
The case for Polaris stock is similar to that of Malibu Boats. Polaris has a boating division, though it’s better known for its motorcycles and ATVs (all-terrain vehicles). Across the board, Polaris’ end markets should be posting growth that extends in 2020 at least.
But Polaris too could benefit from the same urban exodus that is expected to help the housing market and the likes of Home Depot. More room should mean more “toys.” As one of the biggest and best manufacturers in the world, Polaris is an obvious beneficiary.
Yet PII stock hasn’t budged for some six months, even as housing market trends confirm the tailwinds behind the company. Better-than-expected economic data should provide another boost. There’s seemingly too much good news here for PII to end the year in the red; yet the stock at the moment is off more than 7% in 2020. Perhaps it takes until next year, but there’s no reason Polaris stock can’t post a big rally in a hurry.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.