There was a party going on in the stock market Wednesday. It’s like you can almost feel the sigh of relief from investors on Wall Street. The rally brought fast profits for those who dared find stocks to buy during the crisis.
I use the term crisis loosely because it was only a crisis of courage. There’s nothing wrong with the economy, in fact quite the opposite. The only reason the Federal Reserve is ending its QE is because things are too good.
The recent correction we saw was an opportunity to find stocks to buy. Even though we already bounced significantly off the Jan. 24 low, we can still find some. The idea remains the same, and that is to look for strong fundamentals and smart levels. Therefore, my parameters will always include a strong business model. Then the challenge will be to find the proper levels on the chart.
My ultimate goal is to avoid the easy mistakes. I must consult the charts before doing anything with stocks. Those who don’t do that are purposely leaving the door open for blind sides. Case in point they bull traps in Upstart (NASDAQ:UPST) or Lucid (NASDAQ:LCID), which are both good companies.
UPST fans who came in too late have a disaster on their hands. The stock fell 80% from its October peak. So those who did homework on fundamentals but not charts are holding a big bag of losses. There’s nothing wrong with the business, and nothing changed since their entry. The only difference is that they didn’t pay attention to the level they bought.
Today we are doing the exact opposite, because we are looking for stocks that have fallen beyond reason. For example, the 20% snap-back rally in Twilio (NYSE:TWLO) last night was not a coincidence. The business is stronger than ever, and the stock’s been falling for months.
At some point stocks hit the bottom of the barrel and they can only go up. Or at least falling would become a chore rather than an easy thing to do. Netflix (NASDAQ:NFLX) is going through this right now. And Disney’s (NYSE:DIS) earnings are giving it an extra boost this morning. These are examples of what was on the list of stocks to buy.
Today hopefully we can find three new ones. The candidates are:
Stocks to Buy: Skyworks Solutions (SWKS)
Skyworks management leveled their profit-and-loss statement last year. They are not afraid to make acquisitions to grow, and that’s a sign of confidence. It takes courage to do that out of a pandemic year, yet they did it. The revenues and net income for 2021 were 50% and 70% larger than 2019. This happened while valuation remained humble. SWKS has a 16.8 price-to-earnings on its actual 12 months results.
There is no sign of bloat in these metrics, yet the opportunities are plentiful ahead. The company is serving all the right verticals. They are in the business of connecting people and things in private and government sectors. The automotive sector alone could be opportunity enough for massive growth.
Our cars are fast becoming high tech living spaces. We will soon need them to do more than just transport us from A to B. SWKS stock will benefit from that and all other trend roll outs imaginable. Other buzzwords they serve include the 5G conversion and the internet of things. The important thing is that management has done extremely well absorbing their latest acquisition. The latest quarter margins were almost 50%, and $1.7 billion in cash from operations.
The opportunity I will be watching this month is the one in the charts. SWKS stock has the opportunity to rally more than 10%. There will be resistance near $149 per share. But if the bulls can clear it, they can put the stint into high gear. The upside potential from that is another $10 higher. Above $163 will be a region that will present much tougher resistance. With support below, the bulls have the setting for this run if the indices allow.
iShares 20+ Year Treasury Bond ETF (TLT)
The TLT has fallen on hard times for mechanical reasons. Once the Fed announced the end of the quantitative easing program (QE), it forced the TLT down. If they are raising rates, then the yields will follow. As bond yields rise, the bond prices fall. The TLT stock represents that for the 20-year U.S. bond. Today’s hot inflation numbers are causing the TLT to drop.
However, these fears in the TLT are temporary. As long as the European Central Bank is still in its QE there is a bottom in the TLT. The experts called this phenomenon TINA. It is an acronym spelling there is no alternative to buying the TLT. Those who seek fixed income have no choice but to buy the U.S. bonds. Instead of buying a negative yield Euro bond they would choose one that pays 1.9%. That is the reward from the U.S. 10-year Treasury note.
TINA should keep the bid under the TLT, which is also bullish stocks. I bet that the yields have a limit, so they can’t rally too far. Therefore, the TLT should find a bottom soon and rally back a bit. The upside opportunity could carry it to $144, and perhaps eventually to $147. This is a technical setup so I would stop out of it below $136.50.
Stocks to Buy: Nike (NKE)
Nike’s fundamentals are beyond reproach. They don’t need me to make that argument for them. The financial metrics speak volumes, not to mention their marketing success. I say this because they have had their fair share of challenges. Some of it was by-design controversies, but they are always surgical with their approach.
Management lives up to the adage of not letting a crisis go to waste. As a results, NKE products are hotter than ever and their global reach is wider than ever. This is a formula for success that will not die from a few rate hikes. NKE stock has the backing of $46 billion in revenues and about $6.2 in net income. Critics could complain about the valuation a bit but I would ignore them.
While the price-to-earnings is not humble at 36, it is not a huge detriment either. The price-to-sales is 5, so stock owners are realistic with their expectations. Today’s thesis is purely technical. I expect that NKE stock has a runway to reach $158 per share. There is a strong base below and levels to recover above. As long as the bulls continue rallying the indices, this can happen by March.
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.
