Too many investors still asking if there will be a Santa Claus rally this year on Wall Street. This is a puzzle to me because just last week the S&P 500 broke new records. This sentiment bifurcation stems from extreme pockets of weakness. From those, today we will pick three stocks to buy that are going into support.
I caution you that they cannot rally in a vacuum, so they will need the markets to not correct. They are at compelling levels and that makes them have support from history. Fundamentally I also seek successful stocks who are simply out of favor among investors. The idea is to like something worthwhile before they come back in style.
The three stocks to buy today all have thriving businesses. In contrast, their stock prices have fallen precipitously and seemingly out of control. Even though I am primarily a fundamental trader, I rely heavily on the technicals. I never take a trade without first analyzing its chart from several angles. This doesn’t guarantee results, however it eliminates the possibility of making easy mistakes.
Timing is not everything, but it accounts for a heck of a lot. The three stocks to buy today carry extreme momentum. This means that surgical entries are almost a prerequisite for success with them. Otherwise investors could find themselves in a losing situation for months.
A few easy cautionary technical steps could help avoid hassles and headaches. Time does not fix everything, and investing for the long term is not foolproof. In all three cases of these stocks to buy I would prefer to use options rather than the equities. There I can get long a stock and leave plenty of room for error.
Going into year end, markets are signaling the chance of a correction like in 2018. That was the time when the Federal Reserve tried to deploy its tightening cycle. The parameters are slightly different this time around, however one cannot ignore the similarities.
Last week Fed Chair Jerome Powell carried a tone of concern. Whereas before he was confident in his fight against inflation. I don’t believe that one set of reports could have spooked him. Therefore, there could be more bad news to come.
In this case bad news is actually good news because the Fed’s concerned about wage inflation. Their worst-case scenario is an idealistic scenario for the economy. Having full employment and spending power means that this nation’s workers are wealthier. The flip side of this is creating inflation, which spooks old-school economists. We should consider the fact that inflation is not bad until it actually crimps spending.
So far we are dealing with it nicely, so it’s not a critical problem requiring extreme action. They can panic and cause a ruckus, but for now the upside potential still outweighs the downside risk in equities.
This, of course, does not account for black swans. They can occur at any moment in time regardless of macroeconomic conditions. Investors are nervous and they could hit the sell buttons quickly and cause a crash where one is not necessary.
The three stocks to buy are:
Stocks to Buy: Best Buy (BBY)
The pandemic brought about the need for a full cycle of technological upgrades. Suddenly the concept of telecommuting became the norm and our homes were not ready for it. Business boomed as is evident by the BBY P&L. Gross profit is now almost 20% larger than 2019. The improvement in net income is three times more impressive.
However, the problem now is that Wall Street has the habit of overshooting. Investors went hog wild last year over the concept of upside to tech companies. BBY stock soared 190% from the pandemic lows. In reality it needed to spend more time near the pre-pandemic levels before adding to them.
Therefore, this dip here is part of normal price action after a mega rally. The point of it is to fix an abnormally large rally from over-exuberance. Nothing has really changed and it’s just time to readjust investor expectations.
The company has delivered with strong growth. Now the worry is for what’s to come in 2022. Onus is on management to still wow investors. This is not going to be easy because they are rolling over strong comps. Zoom (NASDAQ:ZM) did it, so can Best Buy. From a trading perspective, it is worthy of a bullish trade with tight stops.
Coupa Software (COUP)
The pandemic caused a rush into moving business functions online. This is a dream scenario for Coupa Software’s business. They help automate business functions. Remote work is now part of everyday life so operators need these services. Demand should remain strong for a long while. This is becoming a turning point, not an inconvenient stint. In other words, the migration online is a lasting trend, not a fad.
The Coupa P&L is evidence of this as revenues are now more than double 2018. This is a good new baseline situation for management to execute even better on plans.
This by no means makes it cheap with a 17 price-to-sales ratio. Luckily, it is still in a growth phase so that’s forgivable for now. Investors should focus more on revenue growth and management gets an “A” in that department
The attractive part of our thesis today comes from the charts. COUP stock has lost 60% of its value this year. Clearly investors priced out the exuberance of the pandemic spike. The stock is now back to the highest volume node in three years. This is also the middle of the pre-pandemic range. This by definition makes this area a reasonable starting point.
Stocks to Buy: Marathon Digital (MARA)
Crypto currencies are all the rage and the debates over them are fierce. There are staunch supporters and absolute haters. There is also a large portion of the population that couldn’t care less. All three are wrong because somewhere in the middle will lie the truth.
Everyone, not only investors, should learn about crypto. Because eventually we will all have to deal with them. The concept of money continually evolves and the electronic form is coming. It is only a matter of time before the concept of cash will be a thing of the past. Crypto is the stepping stone in the middle of the pond.
Bitcoin (CCC:BTC-USD) is the chief spokes-coin for crypto. And MARA is in the business of mining for it and growing its pile of e-assets. For now MARA stock price follows BTC-USD very closely. This is the good news because investors have blueprints on how to deal with it.
Trading MARA is just like trading gold miners. Both industries deal with rare assets that are in hot demand. Companies who mine for it are striving for efficiency so they can fatten up their balance sheets over time. Their P&Ls are the report cards in the meantime. Companies like Barrick Gold (NYSE:GOLD) went through tough times after the 2011 gold crash. But that made them stronger and now they are bulletproof.
MARA is going through a similar stage now but at much faster rates. In addition, it does not yet have the investors’ benefit of the doubt. This is the good news because it may be the sleeper winner of the future.
In addition, MARA stock is now at a level that served as a base two times already. Twice since this summer it rallied 50% and 160% each time. There are no guarantees for a three-peat but at least investors won’t be chasing blindly.
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.
