Yesterday was a wilder day than expected on Wall Street. The Federal Reserve completed their two-day meeting, then Fed Chair Jerome Powell delivered the verdict.
The note itself was exactly as I thought it would be, bearing no surprises; the Fed didn’t stray from what they said previously, nor did they commit to any official start to the taper process. The indices closed off their highs, but it was still a strong day for stocks. Within this mini correction, there’s opportunity to find stocks to buy from support zones.
Yesterday’s question and answer session was where the real fireworks happened for the Fed. Chair Powell offered more specifics, enough to guesstimate a taper schedule: my bet is that they will announce the taper during their next meeting. I also can estimate that they will be relatively aggressive in dialing back purchases, probably to the tune of $15 billion per month. I derived these numbers from what the comment regarding ending the taper by middle of 2022. The current purchase rate is $120 billion, so you can do the math.
Here are 3 stocks to buy for swing trades into the 2022 taper cycle:
The effect of these developments on stocks is minimal. Wall Street prices things months in advance and the idea of an upcoming taper has been on the table for a long while already. Now we have tangible guesstimates to guide us. Overall, stocks will be fine. Apple (NASDAQ:AAPL) is not going to suffer a crash in sales because the Fed is going to buy $15bn worth of bonds per month. This is still a friendly Fed. And if the economy falters like 2018 I am confident they bring back the medication.
Stocks to Buy: ContextLogic (WISH)
Catching falling knives is always tricky, but doing so in a bullish market is twice as treacherous. If a stock can’t find footing in a good market, investors should be worried. Such is the case with WISH stock, which recently set a new all time low.
ContextLogic started public life strong, but quickly fell apart in February. Since then, WISH has lost more than 80% of its value. But the losses are at stark odds with its financial metrics.
According to its income statement, the company is growing aggressively, more than doubling their revenues since 2017. The company is not yet profitable, but that’s normal for an aggressive company; growth doesn’t happen while pinching pennies. Amazon (NASDAQ:AMZN) taught us this lesson, though the bears were very slow to learn.
For this simple reason, WISH stock makes a great speculative long-term bet for a recovery. The bulls tried to make a stand in June, with WISH stock experiencing a 90% rally in two days. This lasted for about a month and then the disaster resumed. July brought out sellers in droves and prices couldn’t even hold the floor from June. The support that was near $8 per share now becomes resistnce.
This descending lower-high trend is nearing zero. The company has to make a decision in the next few months. There isn’t much room below, so either delist or recover.
This is a U.S. based company, so there should be enough transparency to trust it. But someone might know something that would explain this rapid descent.
A bit earlier I used the term “speculative” on purpose. Therefore bullish bets on WISH should be small and finite. This is not a stock in which I would average down. Investors should establish the risk amount and stick with it until it becomes unbearable.
So far, this falling knife has earned the machete label.
Rocket Mortgage (RKT)
Our second pick today has had an equally hard time on Wall Street. It too started out of the gate running fast with a 90% rally. However it quickly gave up the gains to spend months consolidating below $24 per share. Earlier this year RKT stock went bonkers alongside the Reddit stock mania. In March Rocket Mortgage rallied 110% in a week, but that’s as good as it was going to get.
Rocket stock is now 60% below that highwater mark. However unlike WISH stock, this one has held a constant floor since May. The bulls have been able to stay above $16 per share, and this is their third effort at defending it. My assumption is that it will hold one more time before mounting a recovery rally.
The financial statements for this company are fantastic on paper. That raises all kinds of questions for me, mainly, “am I missing something?” On the flip side, this is where the opportunity lies. My thesis is that Wall Street needs more time to fully grasp the health of this company.
Total revenues are now four times bigger than they were in 2017. Moreover, it has a positive net income of $400 million per year. I will feel much better about its financial health when it swings to positive cash flow from its own operations. Meanwhile, it also has a low price-to-sales.
Rocket Mortgage is not a new company but it’s new to being public. Investors may just need more time to buy it in the proverbial and literal sense.
If my thesis of a $16 floor is correct, then this is the opportunity to get in on the bottom floor. You could use option strategies to be bullish and leave room for error.
Our third ticker today is an old tech dog that’s been around long enough to have survived the dot com bubble. In fact QCOM stock has just corrected harshly, but it’s still 35% above its 2000 high. More short-term perspective shows that current price is in recession territory. Wall Street describes that as being down 20% overall.
The reaction to the earnings report was a jubilee that only lasted a couple of days. The sellers stepped in and QCOM dropped 14% from the July high. It has now fallen into a support zone that has served as the base for the last four rallies.
My thesis today is that the support zone will hold one more time and Qualcomm will have a potential rally coming in the next two months. But this is not an all-in situation because this bottom may turn out to be a process rather than a sharp point in time.
The fundamentals are as solid as they come. Even as a mature company, management has grown sales more than 40% in four years. Net income ballooned three times over. The company nets more than $9 billion per year and that is bankable.
Statistically this is a cheap company with a 16.5 price-to-earnings ratio. Its price-to-sales is half of that of Apple.
Any which way you look at it, Qualcomm stock has value. Buying it now as an investment is not likely to be a major financial debacle. However, the stock markets are at their all-time highs and we’re going into a tapering session. Investors should leave room for error in all of their investment strategies. Moderation will be key.
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.