The price action on Wall Street has been difficult to watch of late. The bulls have stuttered at important lines and suffered potentially serious consequences. As a result, there are dozens of massive stocks teetering at or just below bearish triggers. This doesn’t bode well for the next few weeks unless they reverse course and close strong Friday. While we wait out this malaise, we can still sift through the rubble to find stocks to buy.
We can even point out one to sell.
I am not as worried about the economy as most experts. The Federal Reserve rate hikes are not likely to break the momentum for businesses. The Fed would not make the mistake of purposely ruining what they spent trillions fixing. I bet officials will err on the side of caution.
Meanwhile, I am concerned about the state of the small-cap sector. That basket of 2000 stocks is nearing an official recession level. But the problem is that they could lose a year-long support zone. If that happens, the bears would then have the opportunity to drop it another 15%. If the small-caps capitulate, then the main indices will follow lower too.
This is not my forecast because there is still a chance that cooler heads will prevail. Therefore, I can still find stocks to buy at these levels. Today I will even offer a stock to sell, which has rallied as far as it should. Regardless, investors would do well to stay cautious since we are in limbo. When the Fed changes policies, Wall Street tends to panic. They want to immediately account for the worst-case scenario. I find it surprising that Jamie Dimon CEO of JPMorgan says they could raise rates “6 or 7 times” this year.
The Fed spent years struggling to build the inflation up to fuel job growth. To now decide they need to panic fighting it would be too strange. Logic suggests that the negative scenarios we are building now are worse that the reality that will follow. Nevertheless, it is best to be prudent for a few weeks, so we can gather more intelligence on the subject.
Netflix launches the tech earnings reporting season tonight, and that should be interesting to watch. It will likely cause sympathetic moves in the FANG gang, Disney (NYSE:DIS) and Roku (NYSE:ROKU). If you include Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL), this giga-cap posse can help stave off a correction.
The two stocks to buy and one to sell today are:
- Penn National Gaming (NASDAQ:PENN)
- Peloton (NASDAQ:PTON)
- Energy Select Sector SPDR Fund (NYSEARCA:XLE)
Stocks to Buy: Penn National Gaming (PENN)
Penn National Gaming survived the pandemic with flying colors. The company’s business relies heavily on crowds, yet they managed to recover this fast. Total revenues now are back to 2019 levels. Gross profit and net income have already grown past that watermark. Clearly management pivoted correctly and managed its business well. This is a test of a lifetime and gives me confidence in their prospect.
The PENN stock action has not reflected the same exuberance yet. In fact, it has been making lower-lows and highs for 10 months. Albeit the slide started from the March extreme high, still I expected better. Going forward, the descent should stabilize as it approaches the pandemic base.
PENN fell into the lockdown lows from $39 per share. Then after the 2020 crash bottom, it spent three months consolidating just below it. Then the rally went into ballistic mode and culminated at $142 per share. There was no way to justify that jubilant rally.
Investors clearly made a mistake in gauging the potential that year. The reversion to normalcy has taken out much of the froth from that rally. It is now almost back to base and is likely to find buyers. I wrote about the company’s ability to recover from the pandemic in 2020. That trade worked out well, and I think there is a similar brewing now. However, this time it is to slow down this massive pendulum swing. It would be best if the investors moderate a bit when dealing with PENN. There is no guarantee of a bottom line but the area makes sense.
Stocks to Buy: Peloton (PTON)
Peloton’s business on paper looks solid. The pandemic was a great catalyst for its sales in 2020. When gyms were not available, people needed alternative ways for staying healthy. PTON stock benefited and for good reason. Revenues doubled in 2020, and then doubled again last year.
However now PTON stock is suffering from life returning to normalcy. Gyms are open again and the mad rush to buy their products has abated. Moreover, they had tragic accidents involving their products creating more uncertainty.
Wall Street does not like question marks, and Peloton has a few currently hanging overhead.
I am willing to cautiously giving manage the benefit of the doubt for now. Especially that the stock is back to pre-pandemic levels. I also like that management is making changes to adjust to post-pan conditions. Even though that last year’s sales soared, so did expenses. Growing pains plague most businesses when demand explodes.
I am willing to give them the benefit of the doubt this year. Even though they still lose money, their price-to-sales is only 2. Maybe investors now are more realistic with their expectations.
Stocks to Sell: Energy Select Sector SPDR Fund (XLE)
This energy prices rally is mind boggling. Experts tell us that the world is going green, which doesn’t gem with this price bloat. Moreover, all car manufacturers have eliminated fossil fuels from their future. I just don’t agree with this exploding oil price theme.
At this point, investors who have enjoyed profits from the rally in energy should book profits. Oil stocks like Chevron (NYSE:CVX) and Exxon (NYSE:XOM) have enjoyed the ride. Their P&L is not pointing in the same direction as the stock price. This discrepancy will revert and the rally should fizzle soon. I mention this because these two giants account for 44% of the XLE stock.
I respect the need for fixed income from CVX and XOM, but we are at the point of diminishing returns. Besides, the XLE stock is back at levels from before the lockdowns started. The stock is likely to face resistance at these levels. I don’t condone shorting it outright for fear of super-spike shenanigans during the Reddit age. But the least we can do is fade it and lock profits. Moreover, the options markets offer simple ways of betting on the short side. By buying put options, investors can safely bet on a downside stent in XLE stock.
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.