Wall Street is seeing some incredible things happening these days. We have a confluence of situations that new to us. The pandemic unleashed a chain events that are bringing about new eras everywhere. Consequently, there are very few experts if any that totally grasp the entire picture. As a result, the reactions to earnings are creating bigger opportunities to find stocks to buy on extreme moves.
Today we will share three quality companies whose stocks have suffered a bit. It is important to note that we’re not trying to catch questionable tickers. In all three cases, the bullish long-term thesis is solid. These are stocks to buy because the charts have damage, but definitely not the businesses.
In my efforts to find good stocks to buy I typically insist on them having growth. I’m typically less preoccupied with how the earnings reports perform relative to estimates. And most of the opportunities on sharp earnings drops come from those headlines. Wall Street concentrates too much on how well the report was relative to opinions. In reality, it’s more productive to discern how the stats stack up to last year’s. After all the point of every business is to do better than they did before.
This makes me somewhat of a contrarian to find these stocks to buy. I don’t mean to argue with the price action, so I will be honest about the technical levels. I will also share any potential further pitfalls. Regardless, investors should know that these are special times, so conviction should not be absolute. This means that when catching falling knives, one must not take full positions at once.
The stock market in general is breaking records, so corrections could be around the corner. I don’t expect one but I can’t promise you it won’t happen. If that’s the case, all stocks will fall including the three today. Moderation is key to the success of investors in 2021. The bulls are in charge of the price action overall, and they will buy the dips. Hopefully these three stocks to buy are among them:
Stocks to Buy: Beyond Meat (BYND)
Beyond Meat reported last night and the stock fell 20% on the headline. The scorecard wasn’t great, but it wasn’t as horrendous as the price action. Yes, they missed on profitability by a long shot against forecast. But they also did a lot worse than last year on that front as well. However, sales grew 13% so they are making some progress.
Investors were expecting more, and the tepid statistics didn’t stop them from throwing a fit. A 20% drop in one day is a lot to expect to stop on a dime. This is my way of saying that there could be more pain ahead. However, the charts show that the zone below has been support twice before.
One of those was the pandemic, so it went a little bit deeper. I doubt that investors are going to take it there. And therein lies the thesis, that support will hold a third time for a recovery rally. This doesn’t mean that it’s going to shoot to the moon right away.
In fact, I predict that there will be tremendous selling pressure starting at $86 per share. Moreover cutting through three digits again is going to be very difficult. Management needs to rekindle talking points in order to realign expectations.
The pandemic was a tremendous disruption to their business, and they did a good job navigating it. They just have to re-frame what’s going to happen going forward. Investors need to know how long it’s going to take to normalize out of it. I wouldn’t throw away BYND, and I don’t blame those who have it on their stocks to buy list.
Penn National Gaming (PENN)
Our second pick for stocks to buy is Penn National Gaming. The company also faced a curve ball from the pandemic. Except this one benefited from the lockdowns that happened last year. It quickly recovered from the March, and immediately rallied 310%.
This week, management reported earnings and investors hated what they saw. The scorecard wasn’t that great just like Beyond Meat, and it lacked luster. They missed on profitability and a slightly beat sales metrics versus last year. Clearly Wall Street wanted better, so the stock has corrected more than 20% in a very short period of time. This brought it onto our list of stocks to buy today.
The chart suggests that the selling could continue to perhaps below $50 per share. That is not my forecast for it, because there is a viable thesis that it will find support there. This was the base from which the summer of 2020 rally happened. It survived one test for footing already a year ago. As Penn stock falls, it should attract willing buyers there.
However, if the stock market hiccups, this stock can finish the job and fall another 12%. Therefore, conviction in the floor below is medium. I would not deploy a full-size position so to leave room for error. This would make it a good candidate for using options instead of buying shares. The out-of-pocket expense is much smaller if not a credit in some cases.
This is a healthy business that has a logical upside scenario ahead of it for years to come. If the stock markets are higher in the future I’m confident that this one will be too. Investors need to exercise moderation and patience in the meantime.
Stocks to Buy: DraftKings (DKNG)
DKNG is our third stock to buy and it is a close relative to PENN. Our love for sports is here to stay, so the pandemic disruption effects will fade in time. Last year’s lockdowns eliminated the market for this sports betting business. Now the rebuilding starts, and you’d think that investors would give it a pass on earnings.
Instead, here it is part of a list of stocks to buy on bad earnings reactions. Even the critics of the results still have nothing but upside potential for DKNG stock. According to Yahoo Finance, the experts’ average price target is $67, which is a 60% upside potential from here.
I don’t usually give too much weight for what the analyst opinions. For that I usually refer to the charts, because after all price is truth. The zone below $40 per share has been in contention for more than a year. The bulls are not likely going to cede it without a strong fight.
There should be buyers lurking soon especially if they are long term investors. The business model is great and it only needs time to prove it to Wall Street. Of course, there could be more pain ahead but most likely only if markets correct. Again moderation and patience are two key ingredients for long-term success.
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.