Wall Street investors trembled a little last week. It’s hard to say we’ve had a correction since we are still so close to all-time highs. We simply had a couple of red days, and they do happen. The modern traders have unrealistic expectations of nothing but green days. Rallies don’t last forever and corrections will come along the way. The more often they do, the less severe they are. Within this bullish mentality there are now great mega-cap stocks to buy after dips.
The stock market has been rising ferociously for far too long. Traders are buying almost every dip on anything. Fundamentals almost don’t matter to them, the riskier the stock the better. Case in point? Look at what’s going on with the WallStreetBets gang and stocks like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC). I learned to trade within the price action not fight it. Meaning it is true it’s not healthy to fight-the-tape. However it is important to recognize the risk below. Today’s picks work well within their own charts. The entry points make sense but with the big caveat that markets are not sick. If the weakness from last week grows, then all stocks will fall regardless how good their opportunities maybe.
I am optimistic about the future, especially for as long as the Federal Reserve has Wall Street’s back. I don’t think it’s healthy, but it’s happening, so we might as well take advantage of it. The indices could be in trouble already, but the morphine drip is still working for now. There is extraordinary cash coming in from the government to prop us up. That’s a lot of potential to see disappear after just two red days. There will need to be a change in policy on those fronts before a crash can come.
With that in mind, I want to focus on these three mega-cap stocks to buy:
Mega-Cap Stocks to Buy: Peloton (PTON)
Peloton has a successful business trying to create new trends. For it to succeed means disrupting the gym and fitness industry. Its efforts got a huge boost from the novel coronavirus pandemic. All gyms were closed for months thereby making home workout solutions the default choice of consumers.
It is impressive to see the company do well when millions are out of work. I say this because its equipment is definitely not cheap. Despite this, Peloton can’t keep up with demand. It has had a backlog of orders since last year, so the pandemic was fortuitous to PTON stock. These habits are persistent, and the model is viable for years to come.
Fundamentally, management is showing results. Their sales and assets are growing quickly. No one can argue with success like this. Moreover, the stock price — although three digits — is reasonable. Since this is a growth company, I will judge it by its price to sales. From that perspective, it is cheap at 14 times full year sales. That is in line with the rest of the mega-cap stocks like Facebook (NASDAQ:FB), just to name an example. There isn’t a lot of “hopium” in PTON stock. so it’s hard to disappoint an investor who has realistic expectations.
Technically speaking, the stock is down 35% from its recent highs. It has also fallen back into support from December. This level was in contention back then and before the breakout that took it to the highs. I wrote an article suggesting to chase that breakout and it paid. It’s time to reload that same effort … assuming markets in general hold up well this week. Falling back into a breakout neckline usually creates temporary support for the bulls.
In my December article, I also mentioned the CRM breakout opportunity. Sadly for the bulls it never happened. In fact, it was quite the opposite. CRM stock hit the skids and fast. It is now down 18% from then and 24% off the all-time high. Last week management reported earnings and the price action was also horrendous. By Friday it had fallen almost 10% in just two days. Wall Street considers that a full correction. Cumulatively now CRM is in a recession.
The negative price action does not reflect the quality of the effort. Management is doing great because they are still doing their thing. The reactions to the earnings are more about the expectations than results. Since they announced their acquisition of Slack (NYSE:WORK), investors have been punishing it hard. I for one think that CEO Mark Benioff deserves some slack on that (pun intended). I bet that the acquisition fits well with their long-term strategic plans. They deserve some benefit of doubt.
Regardless of opinion, investor profits come from the price action not company potential. For now, the sellers are in charge, but there could be relief. Heading into $210 per share, CRM stock should have a lot of support. This was the place for the mega-breakout last August and where shares bounced from a month ago. Usually such pivot points offer support.
Conversely, there is the risk of losing $212 per share. If it happens, CRM could trigger another bearish leg to target $180. I would be surprised if that scenario is possible without a sharp market correction. This would mean that the stock is well below the pandemic crash levels. The Nasdaq will probably need to fall 20% from here. I don’t see CRM collapsing further on its own. Therefore, I would consider partial positions to catch this falling machete. This would leave room to add 15% lower if the worst case scenario happens.
Costco stock has had similar price action to that of CRM. It is now more than 15% below its recent highs. It too had a very ugly week and that’s even going into earnings. The company has been firing on all cylinders for years. It faced the Amazon (NASDAQ:AMZN) challenge and flourished when most others struggled. It quickly adjusted to the pandemic hurdles and served its customers right.
Despite the difficulties last year, Costco still delivered excellent financial results. I want to remind everyone here that the short-term price action from earnings are a complete coin flip. COST stock has to face that risk this week from speculators. But for the investors it will be an opportunity because it’s becoming a bargain. Any negative reactions will be great buying points.
Costco has cheap fundamentals. Its 34x price-to-earnings ratio is reasonable and its price-to-sales is under 1x. This means that the investors don’t even give its stock credit for one year worth of sales. Therefore, there shouldn’t be a substantial surprise dip from disappointments on that front.
Technically what happened to COST stock last summer matters a lot. There was a stretch of almost a month that resulted in a big breakout in August. Now it has fallen straight back into that. Moreover this was also the point of contention from the pandemic start and then again in April. These are pivotal lines and I don’t expect them to crumble.
Just in case the whole market wants to have another tizzy, I don’t suggest anyone jump in with full-sized positions. If you’re already along the stock, this is not where you want to panic out of it. If you want to own Costco, you can do so by nibbling at it confidently. Losing $350 per share triggered a technical breakdown and it’s almost at its measured target. The bears have had their party already and it’s time for the bulls to step up to the plate. This is true for almost every mega-cap stock that is on sale while markets set records.
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.