A happier title for today’s note is: Three stocks to buy going into the holidays. However I mean to scare readers by sounding more bearish than I really am about these companies. In the long run, these are stocks to buy with confidence but from better vantage. For now they are stocks to avoid.
The price action on Wall Street last week was incredibly exciting. We had a rec session on Thursday and it felt like the end of the world. Hours later stocks were breaking records. Costco (NASDAQ:COST) and Amazon (NASDAQ:AMZN) to name two extended their runs into open air.
One thing is for sure is that the bulls are in complete control of the equity markets. Therefore writing about caution makes me a contrarian today. However, I look at it that I am preparing a shopping list for stocks to buy after the summer correction. I should explain that I am not bearish any of my three picks today. In fact, my concern comes from an angle of fandomship. Else I wouldn’t even consider them a buy at all – now or after a dip. I am simply a bit weary of the levels that their stocks have reached.
The fundamentals in question are solid and they have longstanding track records. I am a fan of all of them. Over the years I have written more positive notes about them. The perspective I am using today is for someone looking to deploy new investment money for the long term.
The simplest way to describe my opinion for all three is that this is not an obvious point of entry. I would not short them either, so my caution is not a reason to short. I bet that investors will have much better entry points this year.
Enough with the suspense, and on to the three stocks to avoid for summer:
Stocks to Avoid into Summer: Eli Lilly (LLY)
Eli Lilly has had a lustrous past, and has over the years touched all of humanity. Their efforts helped solve serious global problems. The list is long and it includes cancer, polio, depression, diabetes, infections and more. They even helped us grow better crops. There is hardly a family that hasn’t benefited from one of their products. This is testament that they are a successful company for a very long time.
They have been in business since 1876, so that’s 145 years of history. I am not here to poke holes in that bullish thesis. They have earned the benefit of the doubt after decades of successes. Therefore it is only natural that LLY stock is doing this well. In 2018, it broke out from $90 in a big way, and hasn’t looked back. Clearly this is a winning equity.
The stock has done too well of late. It is up 100% from the pandemic lows and without a rest. The bulls are completely in charge, so they are not letting it dip enough. Small draw-downs are healthy because they let off steam. If a stock rallies too far without a break, it becomes frothy.
Its price-to-earnings ratio is still in line, but its price-to-sales (P/S) is double that of 2017. Also it is now 60% more than its last four year average. P/S is where hopium lives. Buyers of the stock now are giving it credit for 8.5 times its full year sales. That’s double that of Amazon (NASDAQ:AMZN) to name just one.
LLY’s revenue growth isn’t that exciting but they know how to grow the bottom line. Net income now is double that of 2018. Clearly I can’t complain about performance, but I will about their stock chart.
The rise above $170 per share was too violent. It left too many weak points in the chart structure. Therefore my caution today is more technical than fundamental. The goal is to determine if this is a good time to invest in LLY stock long term. I am confident that waiting out a few weeks is the more logical course of action. Jumping in especially with a full position right now is reckless.
Nike management is a genius at marketing. I should know because I’ve been a client for decades. I remember buying my first pair of Nike Wimbledon when I was a teenager. It was a highlight of my summer back then.
The same spirit still lingers even though they often find themselves in hot water with the public opinion. Somehow they manage to turn controversies around into an assets. Case in point was the debate over Colin Kaepernick and his protesting on the football field.
Experts predicted negative impacts to their sales line item. That wasn’t the case but don’t take my word for it. The scoreboard shows that they’ve grown revenues 25% and doubled their net income in the last four years. This is even all the more impressive considering that we had to live through a pandemic class here.
The whole world was in lockdown for almost an entire year. Yet here I am boasting about their retail growth. So far I sound more bullish than bearish right? Here comes the bad part. The stock chart for Nike looks parabolic. Looking back 10 years, these are unique circumstances. Therefore this, by definition, is an extreme situation.
Extremes are wrong and they always correct. Trying to time the letdown is the tricky part, so the easiest thing to do is to avoid it now. This is where I remind us that I don’t condone shorting it. The proper course of action is to delay opening new investment positions in it.
Those investing for the long term often say that a few bucks lower are not going to matter much. I get it, but the same reasoning works the other way. Missing out on a few upside bucks shouldn’t matter either. If I’m not long NKE stock, I missed it for now. That’s just fine because there are hundreds of other stocks I can chase from better vantage points.
Stocks to Avoid into Summer: Apple (AAPL)
Closing today’s cautious article with Apple is almost sacrilegious. Arguably this is the most important company on the planet. It has a market cap of almost $2.4 trillion. Who am I to pick a fight with it? That’s the thing, I am not.
I’m merely cautious going into an earnings season. Apple stock has a habit of rallying into the event and then selling off. Netflix (NASDAQ:NFLX) will kick things off for tech soon. This late into its run, I worry about being late chasing AAPL stock. There still could be more upside but the easy part is too far already. Fast hands could trade that opportunity. But today’s perspective is for investors going into it for the long term.
I have never lost money buying AAPL on dips with conviction. I bet those who chase it after a 40% rally like this cannot say the same. Investors deal with the FOMO in different ways. I would rather miss out on a dozen opportunities then lose on one.
I always strive to do extensive fundamental and technical homework before I engage. Therefore my conviction is high, so I make it count. Apple stock close to $150 does not scream bargain to me. Fast traders can buy high and sell higher, but investors usually buy and hold. At these levels I bet they’d risk holding red for a while.
There’s no need for me to regurgitate how good the fundamentals are for Apple. They sell out of every widget they make and at a premium. Their clientele never complain about price. Apple users are not likely to ever switch out of their ecosystem.
This is an incredible accomplishment by a very competent marketing team. I wouldn’t dare bet against it. If you short it actively, you’re making a mistake. The best course of action with AAPL stock just like the previous two is to avoid it for now.
There Will be Better Entries
Some of the readers are probably thinking that I’m taking it too far. After all, these are solid companies running on rails. They’re not going to dip all by themselves. To that I say that, great stocks more often than not fall through no fault of their own. Calling them stocks to avoid is only temporary.
If the stock market corrects all three of these stocks will fall with it. They might resist for a day or two, but eventually falling indices sink everything with them. We have gone 16 months without one serious dip. Odds are we’re going to face tougher times as we lose big tailwinds.
The Federal Reserve is no longer adding QE, quite the opposite. Their next move is bearish because they told us so. The White House has one last infrastructure bill headline. That too will be the last for a while. In the absence of those helping hands, stocks might stumble a bit going into your end.
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.