We are in the middle of a very eventful week. Yesterday, the Federal Reserve delivered its monthly policy decision. But more importantly we have most of the massive tech companies reporting earnings as well. And today we scour that trash bin to find three stocks to buy after their earnings dips.
We already heard from Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL) to name two. One thing is consistent, they are all delivering mostly incredible numbers. Some reactions, though, were not commensurate with the quality of the results.
First things first, I’d like to plainly state that these lackluster reactions from traders is incorrect. All three of the following companies have one thing in common. They have healthy business models with excellent financial statistics.
The disappointments from traders were because they had the wrong expectations going into the events. Experts like to project what they guesstimate likely to happen. When it doesn’t, they punish the stock even when companies delivers growth.
This is ridiculous, but thank goodness it happens. It leaves the door open for smart money to pick up what they are throwing away.
It is not a surprise that companies are reporting strong results in 2021. We have have a flood of cash into the economy thanks to extreme efforts from the government. In my estimate, they overshot trying to reflate the economy.
Virus fears are still rampant judging by Fed Chairman Jerome Powell’s comments yesterday. But at some point, we will have to get back to normal monetary policy. For now, it remains QE forever.
Meanwhile, this is the market we have and there are stocks to buy on earnings dips. The three that we chose today are:
Stocks to Buy: Las Vegas Sands (LVS)
Las Vegas Sands stock has had a rough go of late. It peaked in March and has since lost 35% of its value. Wall Street tends to overshoot in both directions. In 2007, LVS stock rose to $148 per share, but by 2009 it had fallen below $5. Clearly somewhere in the middle lies the truth. It is now 70% below the top and 2,700% above the bottom.
These statistics are ridiculous and highlight the following point. We should trade the price action we have, not sentiment. Looking at the chart, we clearly see that LVS stock is near support dating to last May. Below that lies the pandemic panic crash. Back then, the whole world was under lockdown and we don’t have that situation now. Regardless of how disappointing the results may have seemed, LVS does not deserve to be at pandemic lows.
Starting long positions in the stock now for the long-term makes common sense. Going all in does not because we still have extrinsic risk to fret. Moreover and until now, it had 12 consecutive positive quarter reactions to earnings. It was about to get a negative one sooner or later, so it won’t be the end of the world. The stock was already on a downhill slide and this merely capitulated the selling.
I won’t nitpick its financials because they are still trying to rebuild after the reopening. Revenues fell from $13 billion in 2019 to the $4 billion currently. The fact that the stock has held up this well is impressive. This should be only a starter position as much risk lies ahead.
Our second pick today did not suffer the same consequences as LVS. In fact, the shutdown helped Logitech gain momentum. Everyone on the planet rushed to the internet, so they needed technology equipment quickly. Work-from-home meant that there was an explosion of home offices. The demand on computer peripherals skyrocketed.
The proof is in the pudding and the profit-and-loss statement shows it. Revenues and net income just about doubled in over a year. Those are incredible statistics albeit with a huge tailwind.
The sharp rise did not cause a bloat scenario. Valuation for the stock dropped 30%. This is an utopian scenario where performance and also the stock got cheaper. Consequently I am confident assuming that the negative stock price action was because of bad expectations.
There is no evidence of weaknesses in the earnings report. Traders just were hoping for more. Their greed is my opportunity to get into a good company on the cheap.
There is technical incentive for prospective buyers. LOGI stock is falling into a support zone. As it approaches $100 per share, there should be buyers lurking. Even if it fails, there is another zone like it and stronger 6% lower.
Stocks to Buy: The Boston Beer Company (SAM)
Among the three stocks to buy we are highlighting today, this one offers a great opportunity. SAM stock fell 25% on strong results. Investors threw a fit because they just simply wanted more. The company delivered great results growing sales 33% year-over-year. They fell short on earnings, but that’s not a problem for growth stocks.
Unlike Logitech, SAM did not get a tailwind because of the pandemic. The strong sales growth trend had been ongoing at least four years. The stock price simply rallied too fast with the markets, and this drop simply is correcting that. Investors have already given back more than half of the rally from March of 2020. They will find footing nearby.
This won’t be a hard line in the sand unless the markets continue to be strong in general. There is the potential for more weakness ahead, maybe as much as another 12% risk below. Therefore, this will be a starting point for new investors. Those who know options can get long there and build a buffer for peace of mind. Instead of buying shares outright, selling puts can leave 30% margin of error.
Regardless of what experts think, there are always opportunities in finding stocks to buy after earnings dips. I see it often where investors react to the wrong metric. The first point of evaluating a company’s performance is defining what it is. If they are delivering revenue growth I can forgive margin misses. Just ask great companies like Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Zoom (NASDAQ:ZM). They seemed expensive for a long time until suddenly they became cheap.
I have concerns over the state of the entire stock market. I believe the Federal Reserve will be tapering sooner than they have been telling us. This could create a void in the tailwinds, which can turn into a headwind. Caution is important at this stage. Therefore patience is necessary. Under more normal circumstance, my conviction in these three stocks to buy would be high. However, I purposely will ding my confidence level down a notch.
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.