The price action on Wall Street has been nutty. Often this brings about some crazy good opportunities. The indices stumbled a bit of late, and the bulk of the pain was in the Nasdaq. Great mega-cap stocks just simply fell off a cliff, and without warning. Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA) to name two fell 25% and 40% respectively from their highs. They both bounced hard this week and that’s the point of today’s opportunity.
You can’t keep great stocks down for no reason. The markets will have to crash for quality companies will rise again. Passive investing will come back to the drinking fountain every time. Up until a few months ago, these big-cap tech stocks were the wild growth ones. Now it’s the bunch making the rounds on Reddit. The Russell 2000 has a bunch of them like GameStop (NYSE:GME), AMC Entertainment (NYSE:AMC), and Novavax (NASDAQ:NVAX). Just yesterday GME spiked 40%, then crashed 50% and then rallied back 60%. All this in mere hours, so they definitely now own that moniker.
These large dips in mega-cap stocks were gifts for anyone looking for upside opportunities. They say they don’t ring bells, but one look at the NVDA or Apple (NASDAQ:AAPL) charts and you just pounced. By Monday, my list of tickers that alerted me for entry points was more than 50. Today I will share three of them with an important caveat.
Even as volatility remains 27% above its average, the indices are still near records. That alone is not reason to short, but it definitely suggests caution. Regardless of how great the upside opportunity is in mega-cap stocks, it has to work within the market. They cannot rally on their own. Because of that, I lower my conviction a notch or two. The companies are:
Mega-Cap Stocks to Buy: Netflix (NFLX)
Netflix stock continues to be out-of-favor of late. After the jubilation of its earnings report, it has failed to recapture momentum. This week it fell as much as 17% from the January high. Now it sits inside important support zones that should hold up. I wrote about this about a month ago suggesting that the dip to these levels are buying opportunities. This is my follow-up to confirm that buying Netflix stock at these levels makes sense.
The underlying assumption is that the markets in general are on solid footing. The bears will need to work extremely hard to break through these levels. Any subsequent dips from here into $480 will find buyers lurking. Technically losing the support would generate a new bearish leg lower. If that happens, investor should be ready to expect another $50 of pain. This would bring Netflix back to last June’s breakout zone.
The fundamental metrics are not going to help support the stock-price action. Netflix is not cheap. However I contend that its price-to-sales (P/S) of 9 is very reasonable. This is in line with Facebook (NASDAQ:FB) and just above Apple. Having a low P/S means that the stock holders have realistic expectations. They are not likely to be afraid of bearish stents.
My thesis is that it should meander higher and test $550 per share in the next two months. The streaming trend is still in its exponential phase. Case in point, Disney (NYSE:DIS) reported this week reaching more than 100 million subscribers. While this sounds like a threat to Netflix, it is not. It validates NFLX’s outlook. The migration from cord to no cord is still in its infancy. The global market is massive, so the upside is big enough to sustain all providers.
Take-Two Interactive (TTWO)
Take-Two stock has been under fire having lost more than 20% since the highs a month ago. The business is undergoing important changes so it’s going through a rough patch. The last earnings report was not stellar but the assets they own and operate are. I bet its fans and users are calm enough to sit through the transition.
Within the mediocre results there was an important statistic in the sales mix. Subtle improvements like recurring consumer spending increased 57%. The more exciting part is that it accounted more than 60% of the total revenue. This is a big step in the right direction, in my estimation.
Patient investors should see upside from TTWO stock. The weekly chart suggests that it merely reverted to the mean. This is normal price action after a large rally. Post-pandemic, the company rallied more than 100%. Giving back half of it is acceptable and does not break the company. The stock will find footing soon, even though it’s not going to be a hard floor. Meanwhile, investors should be ready to see another 5% drop if they lose Mondays lows.
Selling puts below $140 is a viable alternative to buying shares outright. Otherwise, investors should use stop losses to avoid riding it down much further. It is important to note that if the rally comes, it will face resistance levels. The first is at $175 per share and another just $10 above that.
Fundamentally, value is not likely to provide much help. It has a 40 price-earnings ratio, which is not cheap. The saving grace is that the P/S is under 6 and that is solid. Surprise upside may come from too far left sources. The first is once the mania over GME stock dies, more gaming funds will come back to gaming stocks. The other is the ubiquity of 5G will open more opportunities for gamers on many platforms. Streaming should be faster in many more aspects of life because of it. This fits well within the logic that the problem is temporary as the company adjusts and adapts.
My third pick today is the longest shot of them all. With a $29 billion market cap, it’s a tiny mega-cap but it plays among them. Chip stocks are now massive and this one could be, too. Therein lies the idea of owning it for the long term. Marvell is not a young company but in reality I consider it to be one. Just like Roku (NASDAQ:ROKU) has been around for eons, only recently the world came into their arenas. Finally the current trends fit their business models perfectly.
MRVL stock has been under fire lately, down 30% from its highs at one point. Since then it has rebounded a bit but will face resistance as it approaches $46 per share. My thesis today is that owning it for the long term makes sense. The whole world is going digital, and totally connected. These guys have the stuff that we will need to make that happen. I’m not sure if this is the bottom, but it’s close. With a P/S ratio of 10 I’m confident it’s not bloated.
The recent drop accelerated after the earnings report and that’s on management. They delivered boring results and very muted forecasts. To make matters worse, they did it during a time when investors were already hating on tech stock. When popular stocks like Tesla are down 7% a day, they’re not likely to step up to buy MRVL.
Technically, it needs to hold the recent lows or it will open the door for more selling. This is where investors need to decide if they want to stop out or not. My guess is that the bottom will hold, and if it doesn’t, there is more support at $36 per share. This could turn out to be a swing-trade opportunity back to $50. Otherwise, it’s a long-term investment to set new highs in the next two years. Here again it will benefit it too will benefit from the launch of a 5G cycle.
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.