The relief pop from the Federal Reserve minutes yesterday didn’t last long. Investors initially rejoiced on the headline, then they changed their minds. The indices closed down hard considering they’ve been so strong for a while. Big drops like this tend to rattle investors, so they sell the good with the bad. That’s where we start looking for stocks to buy on panic selling.
Just hours before the Wednesday debacle, the S&P 500 broke records and the bulls were in complete control. Then late in the day – and in just one hour – things fell apart fast. What happens next depends on sentiment. We are not likely to have new “news” on Fed policy before the Jackson Hole event.
Shorting stocks now anticipating the Fed saying something scary is illogical. Under the leadership of Jerome Powell, this Fed is a babysitter to Wall Street. It is just as likely that they kick the can on tapering as announcing it. If that’s the case, they could launch a new rally to bring even higher highs.
The odds are just the same for bull or bear scenarios, so there is no use guessing. It is best to simply trade the charts we have, while keeping protection in place.
The three stocks to buy on dips are:
Stocks to Buy: Lemonade (LMND)
Lemonade is blazing trails to disrupt the insurance industry. They are blending technology, specifically artificial intelligence, with an age-old practice of selling insurance. In theory, the bullish argument for long-term success is strong. And the proper thing to do for investors is accumulate shares opportunistically.
It has fallen 40% precipitously since the June highs. The good news is that this is not the first time, so investors should keep calm. A similar scenario happened earlier this year. The correction ended in May but not before the stock lost 80% of its value. After every major dip, LMND stock has rallied back with a vengeance.
Through the ups and downs, the argument to own it remains the same. It is not cheap, but profitability can come later. For now the focus is to build up the book of business. The last earnings report could have been better and investors showed their discontent. Buying it here is not sure to be the perfect bottom. Therefore, investors should take one tranche of many. This leaves room to manage the risk, in case the indices correct.
There will be buyers lurking as it approaches $60 per share. After a bounce there will also be sellers on every ledge going back up. A few levels to note where resistance lies are $80, $91 and $100 per share. The average price target from analysts on Yahoo is $82.
Silvergate Capital Corp (SI)
In less than three months, SI stock corrected 25% three times. Clearly it is a momentum stock and not for the faint of heart. So far, it has found footing every time and around $83 per share. This makes it a buy on dips into support, but with caution. Stocks that move this fast also can accelerate even faster. If support breaks, it will zoom to $60 per share quickly.
The thesis today is that this is not likely to happen. Support will hold and SI stock will swing back up to the upper end of the range. Just like it has support below, there are sellers lurking above $117 per share. Traders can enjoy the ping-pong action inside this range. Once either side fails, the action will accelerate in that direction.
Fundamentally, SI is not expensive with a 45 price-to earnings and a 20 price-to-sales. Revenues are still small but growing at a good clip. This means that the financial metrics will improve quickly over time. The growth will make the value proposition stand out more. And to boot it is already profitable and generating positive cash flow from operations.
Having support just under here and more below it makes SI attractive. Starter positions now and more later on dips when they come. This is an old company that is adapting well enough to a digital financial world.
Stocks to Buy: Virgin Galactic (SPCE)
Virgin Galactic stock has always surprised investors. Most recently it rallied 300% after the founder and a small crew took to space. Sadly for those who chased it late, the rally ended badly and the stock fell 55%. Now that it’s back to base – pun intended – SPCE stock makes sense again.
I’ve loved the idea of investing in space exploration companies for a long while. So far, this is the only public one that aims at transporting people eventually. Therefore, by default investors like me who believe in going into space as a business must buy it. Since the stock market is near highs, going all in would be a mistake.
I am a proponent of taking starter positions, so we can leave room for error. Taking risk is OK, but the conviction levels must be lower than normal. We have too many uncertainties, like the Fed no longer being our friend for long.
Since this an emotional stock, savvy investors can use options to capitalize on that. The implied volatility for SPCE stock is high enough to make using them attractive. At 120% it’s five times that of Amazon (NASDAQ:AMZN) to name one. This creates advantages for those willing to sell options to buy shares.
Selling puts in lieu of owning shares is relatively safe. For example, I can sell January 2022 SPCE $20 put and collect money for it. This requires no out of pocket expense and leaves 20% room for error. The worst case scenario is that I would have the opportunity to own SPCE and break even below $17.
It is futile to discuss the fundamentals since they are not yet actively flying people. Being pre-revenue makes it impossible to judge fairly. Those metrics will come later, but for now it’s the concept that is the selling point. I am confident that humans will be traveling into space for a business. SPCE is my only option on Wall Street today.
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.