The 2020 pandemic was a human tragedy, but it was also an economic catastrophe on a global level. The reflation process out of it in the U.S. is going swimmingly well. This came at a great cost from the government. Consumer spending is incredibly strong. The result is a macroeconomic scenario that is almost a perfect Goldilocks situation. This makes for a good stage for finding stocks to buy on dips.
This could be coming to an end sooner rather than later. The Federal Reserve last week all but told us they are prepping their taper process. They didn’t commit to a date but they are working on one. In spite of this, the indices are still trying to make highs. Stocks like Nvidia (NASDAQ:NVDA) and Microsoft (NASDAQ:MSFT) did and took the Nasdaq to a positive week.
In general, equities are struggling, and this could last a few more weeks. Eventually, there will be stocks to buy on the dip into the second half of 2021. The goal today is to find companies with exceptional fundamentals and healthy profit and loss statements. Value is an important asset when catching falling knives.
When in doubt, I err on the side of safety. Eliminating as many questions as possible is key. Speculation is not a quality I look when trying to find stocks to buy on dips. Especially if there’s the possibility that the bull run is ending. I am not a perma-bear, but at these levels I am cautious. My main concern is the void that will happen after these government tailwinds end.
The reflation programs from all facets are bigger than this world has ever seen. Coming off them is likely to be a painful process. I’m not an expert economist but I think they overdid it. The massive rally out of the pandemic is proof of my suspicion. We rallied way too fast and too far. They gave the patient too much adrenaline and now they have to rest.
I don’t say this with great conviction, so I can’t short the markets outright. However, I would be very cautious entering new longs blindly. Chasing runaway rallies can work but only in fast trading hands. Investors need to be more choosy, and even then they need to stay small. Buying all in at record levels is something I avoid. I’d rather miss out on a few upside bucks than to buy a top that could last for years.
Today’s three retail stocks to buy on the dip are:
Stocks to Buy: Walmart (WMT)
Walmart is the poster child for all old-school businesses. They are the Goliath of all times. Then came along Amazon (NASDAQ:AMZN) to disrupt everything. They changed the game for all retail businesses. Now everyone is scrambling to establish their e-tail operations.
Along the way, many died or came close to the brink from this onslaught. A few of them adapted quickly and are thriving. WMT and Target (NYSE:TGT) are perfect examples of this. It’s not a surprise to see WMT stock still excel. They took the threat from Amazon seriously early. They saw the opportunity and are following its playbook. WMT now is a dominant force on Main Street and in cyberspace. It’s still one of my go-to stores in both realms. If I want the lowest price, I can’t beat Walmart and it’s available now for pick up too.
Fundamentally, the financials are beyond reproach. They are not growing their total revenues like a tech stock, but their cash from operations is up significantly. They seem to be doing more with less and the metrics are still humble. Walmart’s price-to-earnings ratios is still about the same from 2017, and its price to sales is 0.7. This means that investors in WMT stock don’t have much froth in it. In fact, they don’t even give it credit for one year’s worth of sales in its stock price.
This stock will track “the market.” I’m worried about the overall equity scenario, so I am leery about WMT as well. Investors should wait to buy the dip but not yet. The first level I would consider is near $125 per share. If that fails then there’s an additional $10 at risk from there. I am not looking for the perfect entry, but I want to avoid the obvious mistake. It is better to buy some at the first level and add more at the second.
If the stock bounces in the short term it will face resistance going into $143 per share. I usually revert to using options to sell puts for better entry prices. However, WMT premiums are not volatile enough, so that strategy is out. In short, I like the company strategy but I’d rather wait out a few weeks. We could get a much better entry opportunity in WMT stock in the next six months.
Costco has always been an exceptional retail operation. They did things differently from the start, so they didn’t have a lot of adjusting to do. They established their business with low margins and almost like a consignment store. This fit well with the new Amazon model. My least favorite part of Costco is the online shopping experience.
This didn’t stop management from growing its business. In the past four years they have expanded revenues and cash from operations by more than 35%. These are impressive metrics and the Costco stock price action is proof of it. It’s too good at this point and I would sit patiently waiting for the next dip.
For the last eight weeks, COST has hovered near all-time highs matching the levels from last fall. It’s either that the bulls are consolidating to finally break out, or repeat the fade. Either way, therein lies the next opportunity. Buying Costco stock near or under $350 a share would be the goal. There’s no specific reason to expect a correction all by itself. Any weakness will come from the market price action in general.
From a trading perspective, the breakout will happen above $390 per share. Those fast enough can collect a nice reward from it. But from an investment perspective, I prefer waiting for the dip. The lower entry points would make for stronger hands. I don’t want to wait for a perfect opportunity but I also want to avoid the potential mistakes. Near all-time highs is almost never an obvious point of entry. The price-to-earnings ratio is almost 40, which is expensive relative to itself. Patience, I believe, is the right strategy at least for the next two months.
Stocks to Buy: Home Depot (HD)
Our third candidate today had an incredible rally out of the March 5 low. HD stock rose 40% in two months. Since then, it has given back 14%. This is almost exactly the 50% Fibonacci retracement level. This is where those who missed the rally on the way up start looking to buy it.
The price action in Home Depot resembles more that of Walmart than Costco. But all three can stand to lose a little more for better positioning. In this case, $285 per share served at the clear breakout line on March 19. It will be ideal if we can get an entry point there. Anything lower would be a gift for a long-term investor. We can’t pick absolute bottoms but it’s nice to strive toward one. HD is this close and I see no harm in waiting out a few ticks.
This is especially true that after the Fed conference call last week. There might be leaner times ahead on Wall Street when the stimuli abate. Fundamentally, the company’s profit-and-loss statement is healthy. There are no flagrant evaluation concerns, in fact it’s cheaper now than four years ago. Those who are long already had it right. Home Depot now generates $19 billion of cashflow from its operations. That is a powerful tool to feed the beast going forward.
I do worry about the state of the economy, especially from the consumer-spending angle. We are on a massive spree but this will drastically diminish into the end of the year. There will be an adjustment that needs to happen and hopefully this team is up for it. So far, they’ve been near flawless with their execution.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.