It’s never fun to watch an extremely red day on Wall Street, but it has its upside. Besides, I was expecting it, so that makes it easier to trade through. Nevertheless, I am optimistic by nature. On bad days, I search for quality stocks to buy for the long term.
I specified my extended-term limit because I am not striving to find the perfect bottom. This is truer now than ever because there are dislocations in this market. There are dozens of great companies whose stocks have fallen into supports. Conversely, the S&P 500 weekly chart simply has one red candle. On that chart there are no signs of a correction, merely the start of a tough week. There still is an open gap to SPDR S&P 500 ETF Trust (NYSEARCA:SPY) $400.
One red candle does not make for a correction, nor does it inspire going into stocks in force. For example, Apple (NASDAQ:AAPL) looks like it’s falling into a solid support level from the March lows. Normally this would inspire me to take some bullish positions but I haven’t yet. I fear that the S&P still has a lot of room to fall, especially that this is a weak season. The “sell in May” gang might have more action left in them. I don’t want to pick a fight with a meme if I can avoid it.
If I’m right and the indices continue lower, they would drag Apple down through no fault of its own. We often forget that our stocks have to trade within the collective market. Regardless of how good the one story is, I have to consider external influences.
Today my goal is to find three companies whose stocks have a good chance at finding footing. I am confident that these levels may not be the absolute bottoms but close enough. The three stocks to buy on this weakness are:
Stocks to Buy: Zillow Group (ZG)
It feels like eons ago that the world went through the financial crisis of 2008. At the heart of the problem was a real-estate bubble that burst in a big way. Zillow had only been about four years old back then. Somehow they managed to pull through the toughest test on the industry in modern times. This is testament to the competency of the management team.
In the last two years, they made more bold moves even into buying homes, not just reporting on them. They had doubters and the stock went through troubling times but they managed to pull through it. Last year, the pandemic crash took the stock down 70%. It quickly recovered that and increased the greens to +1,040%.
This all came to a crashing halt on February 16. They had just reported earnings and the investors liked what they heard. But the whole market corrected hard, especially the Nasdaq. For no specific reason, ZG stock fell 45% and is now trying to stabilize. Unfortunately, the indices are having another bout of selling this week, so the Zillow bulls have headwinds.
Their fundamentals suggest that any stock troubles are opportunities to buy. They tripled their revenues since 2017 into a $3 billion run rate. They now are sporting a positive net income for the trailing 12 months. While it’s not a cheap stock, it has a relatively modest price-to-sales cheaper than Facebook (NASDAQ:FB). Investors have made mistakes judging this company and I’ve pounced on those opportunities for years.
Marvell Technology (MRVL)
Next on the list of stocks to buy, Marvell shares had a terrible April and are starting May on an equally bad note. Wednesday, the stock fell another 6% after a similar drop the prior three days. In total, MRVL stock is now 25% off its highs and seemingly with no relief. Today, I will borrow the mantra from the most famous investor of all time. Warren Buffett believes that it’s best to buy when the rest are fearful.
Those who did this in March had fast and vast profits for their bravery. Now we can draw from their example and do the same with this. It’s basically a rinse-and-repeat scenario but it also has merits for other reasons. The MRVL $40 line has been in contention since last September. Back then it was a major failing point. Then finally, after two months of struggle, the bulls broke out from it.
Here comes the important bit. They successfully tested it for footing during the Nasdaq crash of March 5. Now we are going back into it, hence the attempt to catch it. My assumption from the charts is that the support will hold again. For that purpose it’s good to place a stop-loss level below to suit personal taste.
Fundamentally, I would be comfortable if MRVL fails to hold and I have to own it for a while. Management has the business in a position of power. They are riding the right trends so they have runway room for more successes. Management recently delivered reasons to expect stronger sales forecasts. They are promising a lot and that is infectious optimism. The price targets are still relatively reasonable. It will be hard to disappoint the owners of the stock without new black swans.
Stocks to Buy: The Trade Desk (TTD)
The TTD stock fell 50% from its highs just four months ago. The traditional “value” metrics won’t help it find footing because it is an expensive stock. It has a three-digit price-to-earnings ratio and its price-to-sales is almost 30. From that perspective, there could be some more downside in it.
In fact, on my charts, I expected it to target much lower values than this. But there are reasons to expect support at or below $450 per share. Unfortunately for the TTD stock bulls, this is a fast mover so it is tough to handle. On the way down, it always looks like it’s going into an abyss.
My solution for these monsters is to use options where I can build risk buffers. Instead of buying TTD shares, I sell the July $365 put, for example. I collect money to open the trade and I don’t need a rally to win. In fact, the stock can fall 35% and I can still break even. Compare that to buying the shares outright and risking $506 with no room for error.
TTD stock is expensive but it’s worth it so far. Growth companies like this need to spend money to deliver the results. So far, there is no reason to doubt this management team. They grew revenues three-fold since 2017 while also growing net income. Yes, they are spending a lot but not burning cash. In fact, their cash flow from operations is now seven times bigger than two years ago. They deserve the benefit of the doubt.
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.