The recent stumble of equity prices has created many opportunities on Wall Street. Smart money should be looking for stocks to buy when there is rampant uncertainty.
This is especially true when fears are not for any particular reason. There are enough headlines about a multitude of topics to let the worry warts revel in fear. None of these have the strength alone to cause a correction. This bull market is not likely to die from the proverbial thousand cuts.
Nevertheless, investor confidence has deteriorated in the last few weeks. Moreover, this is a monthly options expiration week, and that causes even more uncertainty. Of late, the meme has been that those bring about downside pressure on equities. They have become a self-fulfilling prophecy of sorts. However, there is a chance that this week will come out green. Until it does, investors are being cautious.
The facts support a longer bull market still even after three years. The underlying fundamental macroeconomic conditions remain strong. This is thanks in large part to the massive stimulus packages that the government has unleashed in the U.S. economy. In spite of the perception that the Federal Reserve is now a detriment to stocks, they remain our friend.
Federal Reserve Chair Jerome Powell has expressed on many occasions that they will not intentionally harm the economy or the stock market. They expressed their intentions of a taper two weeks ago and the market did not have a tantrum.
In addition, Friday’s jobs report raised the odds of a rate hike sooner rather than later. Yet, the CBOE Volatility Index (VIX) closed red on the day. The indices closed out a green week and held the floor from July footing.
What could add to the confusion this week is that banks kick off the earnings season. JP Morgan (NYSE:JPM) will lead the pack, which does not have a good record of post earnings reactions. Maybe this time is different, but until then I remain leery.
Knowing that the foundation of the stock market is healthy, we can shop for stocks to buy. Today’s three have a good pedigree and technical support working for them. I like finding falling knives that are worthy of my risk. The idea is to buy quality stocks that have fallen hostage to either general headlines or temporary circumstances.
It’s hard to see value when others are panicking. The first step is to run into the fire to see if there’s anything worth saving in the building. There is no guarantee that these strategies will work especially because of extrinsic risks. If the stock market continues to correct, then there could be more pain in these three stocks to buy today. And they are:
Stocks to Buy: Chewy (CHWY)
Chewy has a great business model catering to pet owners. It’s a slam-dunk winning formula because we love them, and we love convenience. Moreover, the pandemic forced more people to try it out for the first time. Some of these habits will linger going forward. This is evident from the profit-and-loss statement. But for whatever reason, investors seem to need more convincing.
Management quadrupled the revenues in four years. That should be proof enough to have the benefit of the doubt, but it’s not. The price-to-sales is only 3, so there is hardly any bloat. Wall Street may be obsessed with its astronomical price-to-earnings ratio. The company’s net income is a tiny positive value, so investors are leery.
This may turn out to be mistake on their part. Because this is a growth business, so the top line is much more important than the bottom line. In the early stages of development, businesses need to over-spend in order to build momentum. Tweaking profits follows later because it’s easier to control spending than to grow sales. Eventually they will figure it out. Until then the window of opportunity is open.
Technically, the stock is falling into a support zone. Losing the $64 per share is worrisome, because it suggests more downside still. The bulls can still find footing to stave it off with a bit of luck. This is realistic enough to warrant the start of a bullish attempt. It is important to make it a partial positions to leave room for error.
Remember that stocks sometimes fall through no fault of their own. So, if the overall sentiment on Wall Street continues to sour, CHWY stock is going to suffer as well. Using options may help because they have strategies that would allow for bullish positions to leave room for error.
Zoom Video (ZM)
Another stock that benefited from the pandemic is ZM. Since everyone was out of work and out of touch, the need for meeting online exploded. Zoom was there to deliver, so it’s services metrics grew exponentially. Management did not squander the opportunity because they have carried the momentum forward into this year.
The habits that we created last year with video conferencing have lingered. Education was probably a big part of it, but there are other business and personal uses too. I had never used Zoom before, and now I use it weekly.
In the end, the best way to judge ZM stock is by its financial metrics. At the height of the pandemic, ZM price-to-sales ratio was 125. It is now five times cheaper, so the loftiness normalized. Owners of the stock are much more realistic with their expectations.
Unfortunately the stock has not found a floor as investors keep shying away from it. ZM stock is now 55% off its all-time highs. The opportunity comes from the fact that it has fallen into a solid base from last summer. Odds are that it will provide footing, so that the bulls can restart rebuilding a better trend.
There are no guarantees, especially in a young stock like this one. Onus is on management to continue executing well on its plans. ZM’s 2020 honeymoon period was very strong and it will take time to find an appropriate pace. The start was too furious and this is just the other side of the pendulum swing. Investors will learn to judge it on merit, not emotions.
Stocks to Buy: Carnival Cruises (CCL)
Our third pick today had the opposite reaction to the pandemic lockdowns. The whole world stopped traveling, which meant that the cruise line industry’s income died. They are in the early stages of a comeback but there are miles left to go.
The stock financial metrics are useless at this point because the business is still in shambles. Management did well to survive the shock of a full year with no income. The job now becomes to normalize the business before they can even think about growth again.
What they have working for them is a dedicated fan base that loves cruising. Moreover, the dawn of the Reddit investors also made it so that now have super stock fans, too. This makes CCL stock exciting to trade. Regardless, the overall investor can also start building longer-term positions for a full recovery.
Extremes are wrong and it seems that this one likes to go from one to the other. The June correction was too harsh because the stock fell 40% in less than two months. Since there is no moderation with CCL stock, it rallied back 40%. The stock stalled at $27 per share and is now retesting the September footing of $23 per share. Therein lies the range for the next few weeks, and the opportunity to follow if possible.
The bulls have established a higher-low trend off the July bottom. If they can continue that they will eventually break out from the September top. This could present the opportunity to reach $32 per share. At that level, I anticipate a massive flight because breaking from it would mean eventually recovering the pandemic accident scene.
I admit that CCL is a long way from $41 but at least there is a visible path ahead. Betting on an industry that has almost no sales is risky. Therefore this deserves the speculative tagline. Taking a full-size position at once is reckless. Leaving room for error makes more sense.
In fact, that mantra applies to all three situations today. I still favor the scenario of a new all-time highs, before a 20% correction. However, when uncertainty is this high, moderation is the best course of action.
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.