Wednesday was a painful day on Wall Street and not from the scoreboard. The day started strong and then flipped to close on its very lows and red. The small-caps fell 2% after a 4% drop on Tuesday. This disappointment is carrying through this morning’s action. This bothers investors in the short term, but usually within the pain lie opportunities. Among the rubble there are gems and today we will share three. These are stocks to buy that have fallen into support.
In times of doubt, I want as much certainty as possible. This means that I have to exclude speculative stocks. It is difficult enough to profit using quality ones, so I should avoid adding extra risks. This rule is helpful because it stops me from getting into trouble with too much hopium. To use an example, almost all EV stocks would not qualify today. The whole industry is the underdog now, and except for Tesla (NASDAQ:TSLA) and maybe Nio (NYSE:NIO), the rest are too iffy.
This concept extends to more than one sector. Another good example would be the price action in GameStop (NYSE:GME). It fell 45% since reporting earnings two days ago. That will not qualify because of the underlying thesis. There’s too much in contention for me to have confidence in the quality of what I would be buying.
On the other end of the spectrum lies a stock like Apple (NASDAQ:AAPL). That would most definitely qualify as one of the stocks to buy. It has actual value in its current financials, and tangible levels at where it makes mathematical sense. Except that in this case, I would like it much better closer to $115 to $112 per share.
The three I chose today are:
Stocks to Buy: Disney (DIS)
I will start the day with Disney because this is effectively a brand new stock. Long gone are the days where it traded based on strong fundamentals. The pandemic completely changed the company’s business lines. They have stopped pursuing big theater releases. If crowds could not gather, they certainly couldn’t go to the movie theaters.
Moreover, it was impossible to keep the theme parks open. That business relied on being shoulder-to-shoulder with thousands of strangers. The pandemic fears prohibited that from happening any more.
So how on earth did DIS stock make new highs above $200 per share? The answer is simple: Netflix (NASDAQ:NFLX). Yes, Disney stock now trades like NFLX used to in its earlier days. Buyers of it only care about subscriber counts. Based on that, investor excitement is valid because it has already amassed about 150 million subs. That’s an incredible pace, way faster than NFLX ever did.
Remember that Disney also owns other streaming platforms like Hulu. Investors love to chase vague potential, and it has a bunch of it now. The company is in the process of adapting to this new normal. If we ever go back to what we had before the novel coronavirus, they can flip the switch back to that immediately. It’s almost a no-lose situation for as long as markets do not collapse. DIS cannot rally alone, so it will need cooler heads to prevail on Wall Street this week and next.
Dips in DIS stock are buying opportunities. It has fallen almost 10% from its highs, but more importantly straight into pivot zone. The $180 per share zone has been in contention since December. When falling back into it, it will likely find support. But if the overall equity selling persists, Disney could find itself $10 cheaper and quickly. This would not change the fact that the buyers are still in charge of it since last summer.
Unlike Disney, DoorDash’s business benefited tremendously from the pandemic. People needed delivery services and the company was right there to capitalize on the explosion in demand. These are habits that will linger far past the reopening process. It’s just too convenient to order-in for the opportunity to completely reverse itself from last year.
The DoorDash financial statement exploded higher. Total revenues went from $290 million in 2018 to almost 10 times bigger now. Clearly the company delivered on its growth promises and then some. As with most new growth stocks, it’s not cheap. But at least these owners are realistic. Its price-to-sales is under 15, which is pretty close to most of the other giga-cap tech stocks. There could be more disappointment, but after such a tremendous fall, it’s likely that most of the froth is out.
DASH is making new lows, so it’s hard to find support levels. It is literally in uncharted territory so the buyers will need to rely on faith. Because of this, I would rate this investment idea as speculative. Meaning I set a reasonable amount to risk and I don’t increase it. Finding stocks to buy is one thing, but I don’t want to add to my problems if the selling lingers.
Moreover, the recovery won’t be easy so I will also need patience. Every ledge that the bulls tried to hold on the way down is a problem on the way back. But first, DoorDash stock needs to snap out of it. For that it will need the help of the entire stock market as well. The company has a ton of potential but it has yet to prove itself on Wall Street.
Investors need imagination and courage to stick with it. If I’m already long and hurting, I don’t add, because I would be making my problem bigger. If I’ve thought about owning it in the past, this is as good a time as ever to nibble. To leave even more room I could use the options markets. There I could sell puts to leave an additional 30% buffer from here.
Keeping with the theme of creating new trends, our third pick today is definitely on the forefront of its industry. Every company on the planet is now chasing the cloud. This trend also got a huge boost from the pandemic and it’s now in panic mode. Snowflake provides ways for companies to better utilize their data over the internet.
This is a simplified statement of what they do. Just know that what they provide is very practical. SNOW was an early mover and their potential is very real. So real, in fact, that even Berkshire Hathaway (NYSE:BRK-B) jumped on the bandwagon. That was a huge surprise because of how long it took them to buy Apple stock. Warren Buffett had long shied away from tech and to see them embrace Snowflake is comforting.
Because it is new, it shouldn’t be part of the stocks to buy today. But if it’s good enough for Berkshire then it’s good enough for me. This makes for a viable long-term investment argument in SNOW stock. Meanwhile, investors have to deal with the falling knife aspect of it. In this case you can even say it’s a machete with a very small handle and a huge blade. Similarly to DASH, SNOW is making fresh lows on the verge of going off the charts the wrong way.
If the stock can’t stabilize soon, it becomes hard to gauge how far down it can go. Since there’s no real value in the financial statements yet, the floor could be too far below current price. Meaning the risk is too big to jump in with both feet. The growth in it is phenomenal and it pretty much doubled revenues in two years. But the expectations are extremely high and that could be a problem. Everything is going right with improving profit margins and sales, but investors are temporarily freaked out.
Catching Falling Knives Is Risky Business
Nobody wants to catch a falling knife too early. Therefore, investors will need the whole market to stabilize in order to find stocks to buy like our three today. The small-caps fell 9% in three days, so the buyers are in panic mode. Any new positions now should be small just in case the general malaise persists.
Nothing has changed in the macroeconomic conditions except sentiment. For some reason, the experts in the media are spinning uncertainty. Wall Street got exactly what they wanted from the Fed. They committed to low rates through 2023. We also had some relief from runaway yields, which were a concern last week. Yet investors are only concentrating on fear mongers.
It is better to be patient now and let them have their tizzy. Leaving room for error makes a lot of sense. Even though I am confident in my thinking, I can’t be sure that they don’t want to continuing selling. Conviction must be low by design when dealing with young companies like today’s. Yes, I’m including Disney in that bunch because like I said, it’s reinventing itself.
The schedule this week from the Fed speaking engagements was lunatic. There were 17 speeches on the docket, not counting Treasury Secretary Janet Yellen’s contribution. Chairman Jerome Powell spoke three times. I find it mind-boggling that they would allow a schedule like that to happen. Especially since they just had their FOMC decision event. Investors want simplicity and this is the exact opposite of it. They have caused tremendous confusion without any point to it.
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.