If you’re looking to find stocks to buy on the dip, November provides slim pickings. That’s because the markets did well in October.
The S&P 500 gained 6.9% last month, bringing its year-to-date return to 22.61%. In addition, the index had five new closing highs in October, bringing the YTD total to 59. Since 1950, the index has had an all-time high on only 7% of trading days, compared to 28% through the end of October.
In November, except for the Dow Jones Industrial Average, all the major U.S. indexes were up 20% or more YTD. Over at the Russell 3000, it too had a strong October gaining 6.7% on the month. It’s up 22.6% YTD.
As for sectors, the big winners in October were consumer discretionary (up 10.4%) and energy (up 10.3%). Conversely, the worst performer was communication services (up 2.5%).
With all that in mind, I’ve given myself quite a challenge. I need to find seven stocks with a market capitalization greater than $2 billion that lost at least 10% in October but have long-term appreciation potential.
Here are the seven I’m recommending:
- Futu Holdings (NASDAQ:FUTU)
- Aluminum Corp. of China (NYSE:ACH)
- Snap (NYSE:SNAP)
- Medirom Healthcare Technologies (NASDAQ:MRM)
- Sendas Distribuidora (NYSE:ASAI)
- CareDX (NASDAQ:CDNA)
- Duck Creek Technologies (NASDAQ:DCT)
Stocks to Buy on the Dip: Futu Holdings (FUTU)
Futu Holdings lost 41.2% in October.
The Chinese online brokerage got walloped last month as the regulatory crackdown by the Chinese government continues. As a result, investors fear that the brokerage sector might be the next industry targeted by Beijing.
In October, Futu responded to questions about the company’s ability to operate given the Chinese government’s Personal Information Protection Law (PIPL) that took effect on Nov. 1.
“Regarding the PIPL and other Chinese laws and regulations on data protection, Futu has always been closely monitoring the latest regulatory developments and optimizing its compliance practices,” the company’s Oct. 15 press release stated. “Futu is subject to similar data and privacy protection requirements in other markets in which the Company operates, including the United States and Singapore.”
All the company can do is work with the Chinese government to ensure it meets and exceeds privacy expectations.
In the meantime, there is no question that the company’s Nov. 3 announcement that its board had approved a $300 million share repurchase program was a smart move.
Except for the regulatory overhang — it’s a big one — the company’s performance through the first six months of 2021 has been excellent. In Q2 2021, it added 211,000 net new accounts, resulting in a 129% increase in revenues to $203.1 million. On the bottom line, net income rose 127% to $70.9 million.
I’d be lying if I didn’t say there’s real risk investing in FUTU stock. However, if you’re risk-tolerant, down 52% over the past six months, it’s a very interesting contrarian buy.
Aluminum Corp. of China (ACH)
Aluminum Corp. of China lost 19.7% in October. However, it is up 52% YTD through Nov. 15.
You wouldn’t know that the company, which is also known as Chalco, was having an excellent year given the performance of its ADRs (American Depositary Receipts) during October.
Thanks to rising aluminum prices, Chalco reported a five-fold increase in Q3 2021 net income on Oct. 26 to $349 million, its highest since late 2013. Sequentially, they were 6% higher than Q2 2021. This gain comes despite a reduction in volume in the quarter due to power shortages imposed on smelters in China.
YTD, Shanghai spot alumina prices are up 78%, higher than they’ve been since 2012. The first nine months of the fiscal year produced 12.2 million tonnes of alumina, 13.3% higher than the same period a year earlier.
In the trailing 12 months (TTM) ended Sept. 30, Chalco had a free cash flow (FCF) of 9.84 billion CNY ($1.54 billion) and an FCF margin of 5.3%. That’s high for a commodity-based company. Further, it has an FCF yield of 17.6%, putting it squarely in value territory.
The big question here is how long prices will stay high.
Stocks to Buy on the Dip: Snap (SNAP)
Snap was going along just fine in October until it announced Q3 2021 results on Oct. 21. Then, it plunged on the bad news. As a result, SNAP lost 26.4% in October. It is up 12% YTD.
Investors have had several weeks to digest what Apple’s (NASDAQ:AAPL) iPhone privacy changes have meant for social media platforms like Snap that rely on advertising for revenue.
In addition to Apple throwing a wrench in Snap’s business, the supply chain and labor shortages have put a short-term lid on ad spend. That’s put SNAP stock in serious retreat.
CNBC reported on CEO Evan Spiegel’s comments about Apple’s changes:
“While we anticipated some degree of business disruption, the new Apple-provided measurement solution did not scale as we had expected, making it more difficult for our advertising partners to measure and manage their ad campaigns for iOS.”
Over the past year, SNAP stock has tested $50 on three separate occasions — March 2021, May 2021, and October 2021 — and all three times, it bounced off the mat. I expect this to happen again as the company figures out how to deal with these changes.
In the meantime, the social media platform’s daily active users (DAUs) increased by 4% from Q2 2021 to 306 million. It expects to finish Q4 2021 with 317 million DAUs at the midpoint of its outlook, 5.2 million higher than analyst estimates. It also generated a non-GAAP profit of $268.5 million, up from $11.4 million a year earlier.
SNAP is a stock to buy on the dip.
Medirom Healthcare Technologies (MRM)
Medirom is an operator and franchiser of healthcare salons in Japan. It went public in December 2020 at $15 a share. Its stock lost 23.7% in October. It is down 51% since its IPO.
Is it worth buying the Japanese company’s stock at half off? You bet.
There is no question that Medirom isn’t for risk-averse investors. It doesn’t make money on a GAAP basis — it lost $4.6 million in the first six months of fiscal 2021 on $19.1 million in revenue. And it doesn’t make money on a non-GAAP basis with an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss of $2.6 million.
However, I don’t think there’s any question there’s a need for its services. It’s opened 24 locations over the past year through June 30. It now has 313 healthcare salons that have served more than 373,000 customers in the first six months of 2021.
In September, Medirom acquired three luxury hair salons for $3.3 million. The ZACC brand is well-known in Japan. It plans to open more ZACC salons by franchising the concept. It’s an asset-light way to grow Medirom’s share of the health and wellness market in Japan.
While I do believe investors could be buying into a bargain situation, this is not a stock for anyone who can’t stand volatility. Getting back to double-digit share prices will take several quarters of positive results before investors will wade back into MRM stock.
Stocks to Buy on the Dip: Sendas Distribuidora (ASAI)
In October, the Brazilian operator of cash-and-carry wholesale warehouses lost 22.6% of their value. However, YTD it remains in positive territory, up 18%.
I’m someone who loves learning about new companies in emerging markets. So I’m happy to do a little research on the company.
It got its start in 1974 when the first Assai Atacadista store was opened to provide cash-and-carry wholesale products to small businesses. In 2007, a majority of its stock was acquired by Casino Guichard Perrachon (OTCMKTS:CGUSY), a French food retail conglomerate. Casino Group continues to own 41% of ASAI stock.
Assai is the second-largest retailer in Brazil, with 189 stores in 23 states. Over the past six years, it has gained eight percentage points of market share. It is the 17th largest company in Brazil.
In 2007, when Casino Group got involved, it had 15 stores, which generated approximately 55 million BRL ($10.1 million). Today, its 189 stores generate an average of 214 million BRL ($39.2 million).
In 2014, it had a net income of 120 million Brazilian Real ($22 million). In 2020, it was 1 billion Brazilian Real ($183.8 million), a compound annual growth rate of 42.5%.
Any way you slice it, the retailer’s Q3 2021 results were off-the-charts good. But, down over 22% in October, you’re getting an opportunity to own an excellent company at a fair price.
The organ transplant diagnostics company lost 19.5% of its value in October, most of it on Oct. 29, the day after it announced Q3 2021 results.
It wasn’t so much the results that shook investors — it had revenues of $75.6 million, 42% higher than a year earlier with non-GAAP net income of $4.0 million, down from $5.1 million a year earlier — but the two federal investigations dogging the company.
According to some who are following the proceedings, CareDX and Natera (NASDAQ:NTRA) are in a big spat over patent infringement that’s been going on since 2019.
Who knows the entire truth about this situation. However, we know that the market for organ transplant monitoring is worth $12 billion per year. If CDNA got 10% of this market, the company’s market cap would be worth $10.7 billion, based on a price-to-sales ratio of 8.9x and $1.2 billion in annual sales.
That’s 328% upside based on its current market cap of $2.5 billion.
With the company’s hands in many different pies, including AlloSure Lung and its lung monitoring diagnostic, I think aggressive investors should be all over CDNA stock at current prices.
Stocks to Buy on the Dip: Duck Creek Technologies (DCT)
The SaaS (software-as-a-service) provider for the property and casualty insurance industry lost 28.8% of its value in October. It gained 48.1% of its value on its first day of trading when it went public in August 2020.
Duck Creek’s enterprise SaaS solution enables property and casualty insurance companies to more effectively run their businesses. Its suite of products handles issuing policies, billing insured, rating customers, handling claims and everything else that goes into running a P&C insurance business.
Duck Creek went public in August 2020 at $27 per share. After the October drop, it trades just a few dollars over its IPO price, opening on Nov. 15 at $30.37.
The October swoon results from slowing growth, or at least the perception that growth is slowing. In 2022, it expects $296 million in revenue at the midpoint of its guidance. That’s below the analyst estimate of $303 million. As for profitability, it expects adjusted EBITDA of $17 million at the midpoint of its guidance, a sign that it’s having difficulty squeezing profits out of its business.
It’s essential to keep in mind that the company generated $211.7 million in revenue. In two years, it will have grown its revenues by 40%. Yet it essentially has the same valuation as when it went public, only with $85 million in additional sales, most of it from its Duck Creek OnDemand enterprise SaaS solution.
From where I sit, the company’s October correction was an invitation for aggressive investors to hop on board.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.