They say they don’t ring bells at tops and bottoms. I say why wait for someone to tell us, when we can do our own homework? That’s what today’s write-up is all about. We aim to find great mega-cap stocks that are hitting support zones. The point of successful investing is to find the value when the price action doesn’t show it yet. Yes, traders can profit from hot stocks or ones that are already rallying. But investors need to be more choosy since their goals are longer term and not necessarily actively trade for profit.
In today’s environment it’s challenging to be a traditional investor. It’s hard to see what goes on with GameStop (NYSE:GME) and Rocket Mortgage (NYSE:RKT) and not want a piece of that action. For now, the regulators are unresponsive, but they probably will soon. Therefore, I don’t need to change my fundamental beliefs yet to adapt to the new way of trading. I can always use options to partake in some of that wild action but be fully aware of its gambling aspect.
Today’s three stocks are most definitely not the only ones worthy of consideration. I literally had dozens of alerts this week that I had set over the past two months. The pain of 3% dip in the Nasdaq was especially hard on Wednesday. It’s chalk full of great opportunities for the careful investors. Some may even double as swing trades for shorter time frame scalps. The stocks are:
Mega-Cap Stocks: Verizon (VZ)
Verizon’s bad jag started much earlier and Wednesday it may have culminated. The bears succeeded pushing it down all the way to close the gap from Feb. 17. For all intents and purposes, the technical reasons for the selling are no longer there. From here it’s going to likely trade on fundamentals more than technicals.
The long-term thesis is very viable going into a year of the 5G roll out. We were expecting this last year but the pandemic stole center stage. People will want to own stocks that benefit from the upgrade cycle. This one is in the thick of it. I even looked into getting that Verizon’s 5G for my house instead of my current high-speed cable.
Looking at the financial and operational metric for VZ it won’t awe its fans. Sales are somewhat stagnant but margins are stable. Their assets are growing while shrinking the debt levels. Furthermore, VZ stock pays almost 5% in dividends. These days that’s a fantastic reward since there is hardly any fixed income available to us. The central banks made sure of that with their very aggressive and loose monetary policies.
Stock value plays a role in corrections. Investors know where those lie and they will buy the dips. Case in point how VZ bounced hard on a really bad day for equities. It closed green while Tesla (NASDAQ:TSLA) and Apple (NASDAQ:AAPL) fell 5% and 2.5% respectively. Verizon is cheap because its price-to-earnings ratio is 12 and only 1.8x sales. Owners of the stock now have very little froth in it. They don’t even give it credit for two years worth of sales. There are better days ahead of this stock.
The stock of Wally-world, as my son called it when he was a tot, has seen better days. It’s been on an incredibly bearish trend for more than two months. WMT stock has already shed 16% off its recent highs. The problem is that it’s showing no resilience. There is no visible sign of support. The bears succeeded in slicing through all lines so far. Once the bulls lost $139 per share, the race lower was afoot. So far, they have more than filled its measured target yet they still don’t stop.
Fundamentally, it’s a healthy company so it’s a matter of a broken stock. It has a reasonable price-to-earnings ratio under 30. While that is not dirt cheap, it’s reasonable and not the reason for the pain. Moreover, the price-to-sales is under 1, which means that the owners of the stock don’t expect much from it. That should also mean that they can’t be too disappointed yet here they are selling it hard.
I don’t like to be a follower so naturally when the herd is selling something it peaks my interest. I see potential support below and within 5% of current price. That’s a tangible risk assessment and I would be willing to get long WMT stock now. I am not sure that I will catch the perfect bottom so I would take partial position to start. Better yet, I would use options where I can sell puts lower to further expand my safety net.
I do have a concern that I’ve see a really popular store in Orange County close last month. In other ones I am seeing only one or two cashiers even when 20 people were in line. Management may be working hard to control the labor cost. Maybe they are morphing into more of an Amazon (NASDAQ:AMZN) model than before. This could actually turn out to be a good thing.
ARK Innovation ETF (ARKK)
Last but not least is one of ARK’s exchange-traded funds. ARKK has components that I find intriguing. First, let me assure you that I have issues with their investment mantra, so I am not a perma-fan. But I also can’t argue with results as they have crushed the indices so far. What rallies fast usually falls fast. While the S&P 500 fell 3% of late, ARKK stock is almost down 25%. Clearly catching this falling knife will require strong stomachs.
If the overall thesis is that the bulls are in control, then investors will buy this dip. If so, then ARKK will recover more violently in my favor. It is important, however, to know what’s in it before buying it. Adding to current longs after only a few bad days is not great here. For example, if I am already long Tesla and suffering then I should pass on adding ARKK. TSLA stock is its largest component at almost 10% weighting.
But that’s the idea of choosing this ETF because it alleviates the single-stock risk. Going long it now is like buying a bit of TSLA, Baidu (NASDAQ:BIDU), Spotify (NYSE:SPOT), Roku (NASDAQ:ROKU) and Square (NYSE:SQ). These mega-cap stocks are half of the top 10 components, which amount to almost 50% of the ETF. Even though it’s not a leveraged ETF, ARKK moves fast. Earlier I noted my dislike of their investment mantra. I owe you an explanation on that.
On their site they state that they “solely” invest in “disruptive” companies. I disagree with the first word because putting all my eggs in one basket is not ideal. And the “disruptive” part tells me it’s a bet on future success, not current facts. Betting all your eggs on the new kid on the block is too aggressive for my taste. Only very young people can go that route. Making part of a portfolio is great, but betting the whole farm on it is wrong.
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.