The stock market is acting too inconsistently within its segments. Last week we saw extreme strength in the Dow and the S&P 500. Conversely, the Nasdaq and the small-cap indices struggled overall. This is somewhat new behavior because usually the rotation is between these last two. Nevertheless, earnings reports and trader reactions to them offer investment opportunities. I like the idea of finding stocks to buy that are falling on the headlines, especially without real reason.
We are looking for strong long-term fundamentals.
Today we will offer three good stocks to buy for a long-term recovery. This is the practice of catching the falling knife and it’s risky. But the point is not to find the absolute bottoms, but to start something good.
This is not the all-clear to go all in. If the intention is to own a thousand shares, I would only venture into one-third of that now. The main reason is the extrinsic risk from the overall market structure.
Indices have extreme tailwinds from government support. The Federal Reserve is infusing record amounts of monetary medicine, in addition to ZIRP. Secondly, the White House is infusing astronomical amounts of money through fiscal spending. If I am correct that spending will taper, there will be some disappointments on Wall street.
The extreme exuberance of the new breed of investors is adding risk. They are new enough to be very brave. We will discover true courage levels after extremely harsh conditions. We haven’t had a good shake out in a long time. Exuberance dies after repeated failed attempts at a bounce.
Today’s stocks to buy are not for the faint of heart because they move fast in either direction. Catching these falling knives is risky so buyer beware. They are:
Stocks to Buy: Skillz (SKLZ)
Normally when I evaluate the opportunity in a stock, I like to lean first on its fundamentals. In this case, SKLZ stock doesn’t have much yet and I will have to resort to assumptions. The business exists in a popular segment, so there is tailwind from that. Meanwhile, it has a few headline challenges that it’s working through.
Gaming is very popular and growing. It is also morphing into something bigger involving esports. Long gone are the days where people mocked video gamers, and the participant base is expanding. The profile of gamers now includes new target audiences, so there are big bucks for the taking. SKLZ is right in the thick of it.
The stock collapsed 70% from the February highs. But then it bounced with an impressive 80% rally going into the earnings. Unfortunately, it has already given back almost 30% of it. Clearly the momentum swings are still dizzying, but there are hopes of stabilization. When a stock falls into a prior support level, it usually finds buyers. SKLZ approaching $14 per share should find support. New buyers should see upside in the long run.
The more active traders should book profits on rallies into $22 per share. There will be resistances on the way back up. There are two stop-loss levels to note, and the most important one is at $12.30. If the stock goes below it, there’s the risk of further short term pain. It is not the likely scenario, but it does exist.
The recovery rally will not be easy without some headline assists and the stock market holding its own.
TWLO is one of the kings of momentum stocks. It broke out last October into a 60% rally from $280 per share. The February correction from its earnings report brought it back to the October neckline. Usually when they revisit a prior trigger, stocks find support. In this case, it is very important to set stop losses even for long-term investors.
Twilio stock is testing its support from March 30. If the buyers fail to make a stand at last week’s lows, they could overshoot lower for another $50 drop. If that happens, there will be support below. But there’s no need to ride it and find out where. It may have already triggered mini-bearish necklines above, so it is vulnerable for more downside. It’s hard to buy a stock this active with strong conviction. Therefore, bulls and bears should be humble with their trade sizes.
The novel coronavirus pandemic accelerated the need for cloud services, so its business should continue to thrive. Besides, fundamentals are not the problem. It’s the human element (expectations) that could place trap bulls. I remember trading TWLO three years ago in the low $20s. We are miles away from that. I like to keep that fresh in my head for a sobering perspective.
For a growth stock, it’s not expensive. Its price-to-sales is 25, which is in line say with Tesla (NASDAQ:TSLA). Twilio management grew its revenues almost five times in four years. The company still loses money but it’s not that’s not a concern for an aggressively upward moving team. Twilio has the benefit of the doubt but the investors have been fickle.
Stocks to Buy: Chegg (CHGG)
I am a fan of any business that can double revenues in four years. Chegg did that, so I give management an A+ on execution. Critics could say that the pandemic gave it an unfair push. I would disagree because they were already growing fast going into 2020. They grew 60% between 2017 and 2019. Besides, the learning industry suffered a tremendous blow last year. It disrupted all aspects of it.
The contribution of the pandemic will continue to pay dividends to CHGG stock for a few years. The learning trend just split into online and in person. Until 2019, opting for online classes was a fringe activity. Now it’s one of two almost equally viable options.
The Chegg business model had vision and that’s the real advantage. This is much like how Amazon’s (NASDAQ:AMZN) business exploded from the pandemic. Some critics could call it a lucky break but as the saying goes, you make your own luck. They saw an opportunity years ago and they set the plan in motion. Last year, they caught a break that accelerated the process.
The global shutdown highlighted the importance of what these visionary companies knew already. CHGG saw room to streamline and improve old processes and they went after it. Now they have first-mover advantage as the rest of the education industry scrambles to adapt.
There is a technical warning in the short term. I will use the scenario in Chegg to illustrate it for the other two.
If CHGG stock loses $80 per share, it could invite momentum sellers. The risk would then extend to a 15% drop, and it would be a great place to buy.
Short-term trades now should have a tight stop loss. Else a partial entry would be sufficient caution while they fight for the neckline.
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.