The higher the market goes, the harder it becomes to find bargain stocks to buy. Even then, conviction would be on shaky grounds because of sheer altitude. This is the case now as all indices broke new records yesterday. The U.S. Federal Reserve finally officially announced the taper, and this time there was no tantrum like in 2013.
Moreover, the markets accelerated higher while Fed Chair Jerome Powell was speaking. He sounded confident that they have a good handle on things, so investors should go about their business as usual.
Part of what investors do is finding stocks to buy after they have fallen under false pretense. The trick in doing this is to find instances where consensus is wrong.
The earning season opens many of those doors and we just have to do a little homework. Simply relying on headlines is a sure way of letting them lead us down the wrong path. For some reason, Wall Street focuses too much on “estimates” and often overlooks facts. More on that later because it’s pivotal to the success of this method.
The stocks to buy today also have strong fundamentals. I always strive to find opportunities where I have the least number of variables. Having a strong business is a good baseline on which to build a portfolio. FOMO is an emotional response that is almost inverse successful trading. Whenever consensus is running from something, it peaks my interest.
This is not the same as being a contrarian, because I am picky with which stocks to buy. While I am optimistic about the macroeconomic conditions, I realize how high we have come. Being in record territory is not a guarantee for a correction. It just makes one easier to have, and it would not take much to spark it.
Nevertheless companies are delivering very strong results. The pundits continue to raise alarms about inflation and unemployment. The data suggests that fear mongering is holding investors back. Reports show that we are near full employment. As for inflation, it only becomes a problem when we stop spending. In the U.S. consumer spending is 70% of GDP, and it is as strong as ever. Even the Fed chief sounded very confident yesterday on that front. So I will draw on his confidence and develop some courage for today’s stocks to buy:
Stocks to Buy: Roku (ROKU)
Roku is a momentum stock that moves very fast in both directions. I haven’t always been a fan of it, because it took more than 16 years to become profitable. Over a year ago I changed my mind as it has blossomed into a viable streaming stock to buy.
The current media consumption environment suits it perfectly. This is in large part thanks to Netflix (NASDAQ:NFLX). Management is making the best of it, and the earnings reports show it. Unfortunately for the bulls, the headlines this week focused on the fact that it missed earnings estimates by a hair. Meanwhile, they completely ignored the fact that the company grew sales more than 50% in a year.
This is where I side with facts versus estimates every time. For all I know, whoever set the estimates didn’t know what they were doing. Besides, the company doesn’t profit from estimates, it’s the actual results that hit its bank account.
If we strictly rely on what we read to guide our investing, we would be in trouble.
Our own homework should bring us the stocks to buy, especially when they are under duress. Last night, Roku stock fell 9% on the headline. Technically, this brought it back into the sharp bottom from May of this year. Back then it served for a 80% rally. My thesis today is that support will hold one more time and deliver a substantial rally recovery rally.
This is a trade that could actually turn into an investment. Nevertheless, investors should not go all in on it. It will need to work within the market collective. If the indices hiccup, they will put downside pressure on Roku stock as well.
Otherwise, this is not an expensive stock with a price to sales of 19. Besides, at this growth rate they would normalize that metric quickly. They are now even turning a profit, and they flow +$130 million cash from operations. This means that management can execute on its plans with confidence.
The opportunity in Disney stock is exciting, but it has its short-term risks. Price is hovering just above support from the May lows. If the stock market continues to be stable, DIS stock could use that base for a 5% rally. The bulls will then find resistance there on their way to triggering another equal rally higher.
This swing-trade opportunity would bring it back to the September top. With a bit of luck that in turn would provide another launching point opportunity for another leg. However, this scenario does not come without risks. If Disney falls below $167 per share, it could trigger a bearish pattern with a 10% drop potential. There are more support levels from the January lows. However, the technical risks exist for the next two weeks.
This is not the old Disney stock from 2018. Management has morphed the business into a model that better suits the current trends. They took the lead from Netflix and jumped into the deep end of online streaming delivery. They did great at it, therefore investors should look at it differently than they did a few years ago.
This includes accepting different fundamental evaluations. Statistically speaking, it is expensive relative to its old self. But as long as they are growing revenues and user metrics I will give them a pass on that. Moreover, the pandemic struck them hard because all of their businesses rely on crowds. And for about a year, people everywhere were trying to be hermits. It will take months to repair the damage, but it looks like they are well on their way.
There is an earnings report coming and that throws a wrench into the short-term price action. The reaction to the headline is binary because it has more to do with human emotions than actual facts. We don’t know what they’re going to report. More importantly, we don’t know how people will react to it. We have seen too many excellent reports deliver disappointing stock auctions and vice versa.
Stocks to Buy: FuboTV (FUBO)
The third pick today is the most speculative of the bunch. It is still an infant relative to the other two. As such it has my lowest conviction rating for long-term success. Nevertheless, the opportunity is real and FUBO stock makes for a viable thesis.
It also has something else working for it and it comes from the indices. The Russell 2000 small-cap sector finally made a new high this week. This follows a period of almost a year of sideways consolidation. If the breakout continues to its target then it would drag FUBO with it. The small young companies are trading almost in perfect unison. They are like the soldiers in the Reddit army of traders.
Fundamentally, Fubo can carry its own tune because it is showing growth, albeit a murky mess. The company needs time on Wall Street to establish its street cred. Until then, investors must take it on faith that management is executing well.
Technically the stock is ready to burst upward. It has reached a level of prior failure from the last three efforts. Once the bulls push past it, they can overwhelm the bears and rally another 20% from there. This would bring the fight closer to $45 per share. There are a lot of lines of resistance in between, but all they need is a spark. For that, they could use the help of the indices continuing their rally into open all time high air.
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.