It was a wild ride on Wednesday on Wall Street. Stocks started the day on shaky ground but then broke out in a monster rally. The small-caps at one point were up almost 5% and did not look like they were going to stop. Among the greenery, there were pockets of weakness. Oddly enough it was among the companies with the best fundamentals. Mega-cap stocks fell hard on a very up market day.
For example Apple (NASDAQ:AAPL) fell over 3% when the S&P was up 0.6%. AAPL wasn’t alone because the NASDAQ fell 1.4%. This is all to say that there are opportunities and the action yesterday proves it.
First, we can confidently say that the bulls are still in charge. Proof of this is the 4% rally from a basket of 2,000 stocks in mere hours. Second is that there is weakness in quality stocks that are not getting the attention they deserve. Therein lies today’s opportunity because we will pick from a few mega-cap stocks with brighter days ahead.
Usually I prefer buying upside opportunities with specific triggers. In this case all three situations are more of the swing trade variety. Usually the old adage says to avoid turning trades into investments, but here it would be okay. When the stock is of excellent quality it wouldn’t be such a bad idea.
Wednesday’s upside move didn’t come without its drama. Stocks fell sharply off their highs as news of a violent breach of the Capitol rattled traders. These story lines, however, will not change the prosperity of these mega-cap stocks. The three companies that we picked are not the only ones and definitely not the most boring ones. Two of them are in the same sector so it would be a case of choosing either-or.
Given that there’s so much uncertainty still brewing, it would be smart to take bullish positions in tranches. Doing so would leave room for managing the risk and adding on bad days.
Mega-Cap Stocks to Buy: Netflix (NFLX)
Netflix has long been a momentum stock. It moves fast in either direction and those who don’t trade it with a plan are playing with fire. Like Apple, NFLX stock fell 4% yesterday amidst a day rally on Wall Street. Usually that is reason for concern but not in this case. The company fundamentals did not suddenly change. They are still enjoying the first mover advantage and growing fast. What happened yesterday was simply normal price action.
The bullish bet on Netflix here has a technical flair to it. The stock has now fallen $40 from last week’s highs and right into a support zone. The good news for the bulls is that it spent over five months building a base around $490 per share.
While the support line is wide and could be more of a cushion area than a hard floor, it’s good enough to work. Fans of the stock will buy this dip with confidence knowing there is support below. The trend is also your friend because there is a distinct ascending trading channel from last April. The trader in me believes that the algorithms will buy dips to keep that trend alive.
If I’m long Netflix stock I should find comfort knowing it’s falling into several layers of support. Investors need not panic out of it. I am confident that it will deliver profits come summer. There is a good chance that the price action will lift it back towards $540 per share. Once that happens, there is an opportunity to set new all-time highs. This doesn’t mean it’s going to be a straight shot. There are several levels of resistance in the way. The first one is at $520 where the bulls will face sellers. But every hurdle becomes the next opportunity especially when mega-cap stocks are this popular.
Fundamentally it’s not cheap and it won’t be for long time. Investors give it a pass on that front for as long as management delivers subscriber growth overseas. Yes, it has tremendous competition especially from Disney (NYSE:DIS), Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL). But the opportunity from the migration to streaming content is massive. There will be enough room for all of them to thrive.
Evidence of this is the success of smaller companies like FUBO TV (NYSE:FUBO). The popularity of content aggregators like FUBO and Alphabet’s (NASDAQ:GOOGL,NASDAQ:GOOG) YouTube TV confirms the trend. Therefore the demand for content is exploding and Netflix is a monster at it. They spend over $15 billion a year and no one can compete with that. Not even Disney.
Home Depot (HD)
Home Depot has excellent pedigree among mega-cap stocks. Management rarely creates its own drama and they almost never disappoint. They have delivered growth and a level of maturity that gives me confidence going forward.
HD stock is almost down 9% from its all-time highs while establishing a lower-high price trend. Usually this raises concern among investors, but to me this instance looks like an opportunity more than a problem. Buying dips in this quality stock has worked for me for years.
What is important to note is the price level at $260 per share. Last June it was a challenge and the resistance area. Then in July the HD stock bulls broke out from it with force. Since then they’ve defended it six times (including three days ago). To me, the assumption here it is that the bottom at $260 will hold one more time. This process caused the price range to tighten almost into a point. Usually this builds energy so a move is coming. I speculate that the direction will be “up” because of this solid floor below.
It will have resistance going into $280 per share but they are not insurmountable. The HD stock fans are capable of breaking out and in a big way. Arguably the technical lines on the chart resemble a bullish flag pattern. Those portend breakouts with significant upside potential. In this case, the buyers took it up into a long upward stint from June. Then the price spent five months see-sawing sideways. My presumption is that this consolidation will serve as the base for another rally equal to the first stint.
I expect that HD stock will be above $300 by the end of the year if not sooner. There are no guarantees in life and if the $260 per share floor fails it could fall $20 from there. That would also be another buying opportunity.
Fundamentally Home Depot is cheap selling at just over two times its sales. The owners of the stock have realistic expectations, therefore they are less likely to throw hissy-fits.
The story in LOW stock is very similar to Home Depot. Therefore all the arguments that we just made for HD apply here too. What is different is the price action and it’s slightly better. But for that reason I actually prefer Home Depot because of it being in a worse shape now.
The level to watch for support in LOW stock is near $115 per share. It has immediate and secondary support zones. If the bears get their claws into it and bring it near $140 per share I’d double down. Here too there is an ascending channel from the depth of the pandemic correction.
Fundamentally what they both have going for them are the strategies of central banks. The U.S. Fed is fully committed to a perpetual QE program. They tried and failed to end it in 2018 because Wall Street crashed and Chairman Powell panicked. They have officially stated their commitment to keep rates near zero for years to come. Therefore, interest rates will not rise in the near future.
Yesterday, we saw bond yields spike but I doubt it’s a runaway situation. Therefore I expect mortgage rates to stay low for a long time. This is an environment that favors HD and Lowe’s stocks. Low rates mean that there will be more refinancing opportunities. Usually people do that and take cash-out and they often invest it back in their homes.
The low rate environment also encourages people to move. This expands the affordability spectrum because most of us shop on payments. The first thing that new homeowners do when they move in is do construction to suit their needs. This means they will make several trips to the home improvement store. If they don’t do it then the construction crew they hire will. In that department I believe HD has an edge over LOW with contractors.
Any which way you slice it, the demand for LOW and HD products and services will remain high for years. There are other themes at play stemming from the crisis. People are moving out of cities and into suburban areas. They will need to buy more home improvement stuff. There’s also the matter of stimulus and that’s a big one. There are $2 trillion reasons to expect that many U.S. citizens will be spending a ton of money soon. Americans typically spend any extra money the get. Some of it will hit these stores.
All three companies today are mega-cap stocks that are worthy of owning into the summer. The only reason I would hold some concern is from the overall indices’ altitude. Being this close or at all-time highs raises the odds of pullbacks. If those happen they would likely be normal price action, albeit they will cause these three to fall. That’s why I want to reiterate the importance of taking the positions in smaller bites, not all at once.
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.