Despite the relentless bull market, investors remain on edge. Sentiment has been flip-flopping for months as investors brace for the loss of the Central Bank aids.
But the whipsaw price action in the market has been more violent than it needs to be. The silver lining is of course, great opportunities to buy stocks on the dip.
Today we’ll look at three potential candidates to do just that. Although the opportunities look solid on their own, it is important that investors remain cautious. At these altitudes we must assume extraordinary risk of corrections. Therefore entering positions in tranches, rather than all at once, makes the most sense.
The Federal Reserve recently announced its tapering process, to begin of the end of the QE cycle. They will remain accommodative until about the middle of next, when they will also likely start a rate hike cycle. They tried this back in 2018 but caused a correction, which forced the Fed to restart the QE in December of that year. Of course, the S&P 500 was 50% lower than Friday’s close back then.
Since then, Wall Street has forgotten how to trade without the backstop of the federal reserve. Moreover, we have become used to waiting for headlines to make moves. The good old days of doing homework and investing in outlooks is long gone.
Even the pros are acting like Reddit traders these days. Personally, I’d bet that this is a transitory investment mentality. As long as we’re aware of these investors, we can trade around them. Today’s opportunities come from respectable stocks that have fallen into support. This increases the odds of more upside potential than downside risk.
Here are 3 stocks to buy on the dip as we head into the holidays:
Modern investors have a slew of tools at their disposal, and my favorite is reading charts. Because machines do most of the trading, they become a version of self-fulfilling prophecies. Ignoring the data and getting caught up in narratives means knowingly putting oneself at a disadvantage.
Stocks to Buy On the Dip: Tilray (TLRY)
Cannabis stocks haven’t quite unfolded the way people expected they would. When they first burst onto the scene in 2018 they were incredibly hot: TLRY stock was a prime example, spiking to $300 per share.
This was a rocket ride a la GameStop (NYSE:GME) of 2021. Sadly for Tilray investors, Tilray has not revisited those highs or even come close since. Today it is falling out of control, seemingly into the abyss.
At some point the buyers will make a stand, hopefully near $9 per share. They did this last week so they need to repeat it with confidence. If they set a new low it would open the door for more sellers.
Bottoming is a process and in this case they need to start immediately. Step one is to stop making lower-lows, which highlights the importance of last week’s base.
Fundamentally, Tilray is doing as well as it can given the legal predicament. The White House is dragging its feet to legalize marijuana on the Federal level. The headline will help the stock, but it would also unshackle the business.
Kudos to the cannabis industry for surviving this long on Wall Street. The present dip makes for a decent opportunity to get back into TLRY on the cheap. Management has so far navigated the difficulties it had well.
If the cannabis trade is to happen, this is one of two companies that will be on top. The other one is Canopy Growth (NYSE:CGC), which would also make a viable bet on the same concept.
GameStop stock is about as controversial as stocks can get. Arguably it may have single-handedly brought about a new era of investing. The Reddit trading mentality caught fire during the pandemic and hasn’t relented much. GME has yet to survive a bearish market, but for now Wall Street needs to respect the action.
Gamestop’s fundamentals aren’t great. Total revenues now are only about 40% of what they were five years ago. Moreover, they are now running a loss, but the fans of the stock are stronger than ever. The traders know what they know and couldn’t care less about what others say.
Consequently, it’s almost useless to mind the deteriorating fundamentals. They are neither a selling point or a bright star attracting buyers. Today’s upside bet comes from the price action. The range in GME stock has tightened and a move is coming. The bulls can bounce the stock off its support, so place your bets because this outcome is binary.
If the indices continue with their breakout from last week they will nudge GME up. I wouldn’t try to read into the stock success in the long term. Therefore, I would suggest a quick profit scalp if and when it comes. I by no means vouch for its long term viability.
GME stock is one of those stocks to buy as a trade for the coming weeks. This would not be a long-term investment prospect; I leave that for those who really care about it, and I don’t. There are hundreds of other stocks to chase with more tangible fundamentals.
Unity Software (U)
Social media has changed the world forever. We just got adapted to this new realm, but don’t get too comfortable. The largest social media company Facebook (NASDAQ:FB) just announced it’s changing the game.
FB has committed to the next frontier for its platform in the metaverse. Unity Software is likely to thrive in such a domain. They are experts at immersive entertainment with multidimensional modeling. If the metaverse is going to happen, it’ll take companies like Unity to make it hapen and U stock will benefit as a result.
Besides, U stock now offers a technical opportunity to boot. It just lost more than 30% of its value in a few weeks. Moreover, it is falling into a strong base from Oct. 1 that served as a start for a massive November rally, so that level will act as support now.
In addition, there is good news on the fundamental front. Financial metrics suggest that management knows what it is doing, maintaining a high revenue growth trend. They are still unprofitable but value is not a concern at this stage.
The stock trades at 40x price-to-sales, not cheap but potentially normalizing in 2022. For now they are focused on the topline where it all starts. The tough part is growing the business, the easier part is cutting back later to manage profit margins.
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.