The Federal Reserve serves two official functions. The first is to achieve maximum employment, and the second is to do it without causing inflation. They are now walking a fine line on the latter. We clearly have successfully reflated the economy. Their QE efforts have been phenomenal. This is without a doubt the most aggressive Fed the U.S. has ever had. Judging by how strong the stock markets are, they may have gone a dash too far. It is near impossible finding bargain equity investments. Therefore, today we will look for stocks to buy after a correction.
I’m generally optimistic about stocks – especially the good ones. At this point, I am waiting for some to fall out of favor and the list is small. The dilemma is that on paper the stock prices are not all extravagantly expensive. Most of the ones on my list have legitimate reasons for rallying. But in reality, the charts look parabolic. You will find that near 90 degree walls are never good basis for new positions.
Today’s write up will come across as bearish but it’s not. I do like these companies but I would prefer lower entries. Case in point that I wrote about the upside potential in Facebook (NASDAQ:FB) mid May. That idea delivered 10% in profits so my conscience is clear. Everyone is chasing runaway rallies. I prefer to identify quality stocks to buy after corrections. I have no doubt that we will have this opportunity in the coming months.
Meanwhile, there are less precarious investments to make. We don’t all have to pile into the same tickers. The concept is easy but the execution is hard. We all feel the FOMO, and the smart money resists it. Yes, of course I want to be on board of Facebook at its all-time highs. But not at the cost of buying it late and risk watching it fall apart. I remember calling it a buy after every “shocking” headline. Warren Buffett is old but his idea to buy quality equities into what others fear is golden.
It’s now easy for investors to pick winners when the indices are breaking records incessantly. The tide is lifting almost all boats. The S&P 500 on Friday at a record for the sixth straight time in a row. Throw a dart and you’ve got a winner. Eventually the music will stop and people will panic to find a seat.
When the correction comes, finding winners will not be this easy. Doing the research now under no stress yields better results later. The idea is to find proper business opportunities that have too much love now. Then when the masses change their mind and panic out of it, we step in to pick it up.
Stocks to Buy: Amazon (AMZN)
I will start my list of stocks to buy after a correction with the king of stocks in my book. AMZN is the best company that I’ve ever seen. This sounds dramatic but I am confident in my choice. It is a startup that never ceased being one. Their growth rate has been phenomenal and for a decade.
They keep reinventing themselves, and dominate every vertical they enter. Therefore, every dip is a buying opportunity. Why am I bearish about it now? I am not! I already called to buy the dip in May. That trade delivered 10% in fast profits. The idea is to trade the range now until the bigger opportunities become more obvious. This won’t be until Wall Street has a tizzy and shakes out the weak hands.
Two years ago, the experts called it dangerous because of excessive spending. That was the time to buy it because when they spend, they deliver new revenue streams. I am always confident catching AMZN stock when it’s a falling knife. Now it’s the opposite of that. It’s a boomerang mid flight and investing in it for the long term could be dangerous.
Technically there is a bullish trading opportunity lying just above. This would be different than deploying slow money for years. If AMZN sets a new high it could launch into beast mode like Nvidia (NASDAQ:NVDA) just did. Fast investors should wait for the breach to happen and chase it for a trade.
In the middle of 2019 AMZN stock set an incredible base. The 120% rally out of the pandemic was ferocious. Somewhere in the middle lies the truth. I would consider proper entries any dips into or near the base.
The chip sector is on fire and for good reasons. The pandemic launched the efforts to digitize into hyper-speed. Everyone on the planet now is in a rush to get online. This requires technology and MU is in the thick of it. The chip shortage that is currently making news is proof that demand is strong.
This is a trend not a fad since we are not likely to go back to analog. Micron will have a good runway ahead of it so there is time to get long the stock. I do appreciate that it has already shed 17% from the highs, but there could be more. The price action of late suggests that the sellers could already be in charge. This means that they will “sell the pops” into a downward trend. If I am correct then there will a big battle at $76 per share. The bulls absolutely must win that else MU stock risks falling another 18% from there.
Micron management just reported earnings and they did well. The reaction was negative because of overzealous expectations. That is almost the case where people chase stocks too far. In the end it’s a matter of math. MU stock is now three times more expensive than pre-pandemic levels. It also carries a hefty price-to-sales double its usually and equal to AMZN. It’s a good company, but not that good. The better opportunities in MU stock are still likely much lower. Patient investors who buy the dips will be happier for it.
Stocks to Buy: Visa (V)
Along the same theme of global trends we can find the opportunity in Visa stock. Financial technology stocks (fintech) are a hotter topic after the pandemic. While we were under lockdown we still needed to move money around. Companies like this were pivotal to keep the world function quasi-normally. I took advantage of Paypal’s (NASDAQ:PYPL) instant money transfers to send money to family abroad. In a pinch, it was an essential tool for survival.
This highlights the importance of the role that Visa and its competitors will play in our future. The fintech trend is in its infancy stage and there is room for all of them to thrive. Old dogs like V and MasterCard (NYSE:MA) are learning new tricks from PYPL and Square (NYSE:SQ), so the race is on. Stock prices are a bit higher than they should be, especially for Visa.
The idea is to confirm now that it’s a stock worthy of owning. Therefore, it is on the list of stocks to buy after a correction. If not long V stock yet, investors should admit they missed this run. They say in the long run it won’t matter much, and that it is futile to time entries. If that’s the case then waiting out a few more ticks won’t make a difference, either. If timing is truly not that important then logic suggests waiting out the next few weeks. More time means more opportunity for price discovery.
It is important to note that I don’t seek perfect entry points. I am merely trying to avoid getting long at a very bad time. Avoiding mistakes is my duty as an investor – especially the obvious ones. Stocks have never been higher and inflation is rampant. The Fed policy is the main fuel for the rally and it is approaching abatement. Caution is most likely the best course of action. Meanwhile it is smart picking potentially great stocks to buy after a correction.
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.