Markets eked out a positive score last week, in spite of tremendous fear levels. The CBOE Volatility Index (VIX) remains well above its average, thereby indicating nervous conditions on Wall Street. The large earnings reactions in the mega-cap stocks are tangible proof of the extreme fear levels. This makes it challenging to find stocks to buy with confidence.
Therefore, it is important to have a method doing it. What has worked well so far is to only consider stocks that have strong fundamentals. It is also imperative to find ones that have fallen into technical support levels. Brave bulls that are finding stocks to buy need all the help they can get these days. Even if they don’t believe in technical analysis, it doesn’t hurt to have it as an ally in their thesis.
There is grave risk in chasing stocks that are still too high above support levels. This creates unnecessary losses if investors are too hasty to catch the proverbial knife.
Case in point is Upstart (NASDAQ:UPST) stock. Those who tried to catch the UPST falling knife too soon lost a ton of money. The rally was so large that it made the correction extend seemingly for ever. Hopeful investors in that stock needed incredible patience to be successful.
Today the three stocks to buy we picked have strong fundamentals. Two of them have suffered too much already, making them long-term buys with confidence. The third is somewhat more iffy on that front, but nevertheless belongs on the list. Regardless of how sure we are of the upside potential in these stocks to buy, we must remain humble.
While Wall Street investors remain this fickle, I must only take partial risk at first. Leaving room to manage positions and add at lower prices is crucial. If nothing else it makes the potential mistakes smaller.
Investors must be willing to miss out on upside in the name of safety. There’s never a rush to enter trades in this environment. The three stocks to buy this week are:
Stocks to Buy: United Airlines (UAL)
I am never a big fan of airline stocks, yet today I am arguing for some upside opportunity in one. The UAL stock weekly chart is conducive for a swing trade opportunity. While I don’t have a tangible trigger on the chart, the trade idea is from patterns. Therefore, I would consider this a purely technical trade, at least from my point of view. This is the iffiest of the three stocks today.
The fundamental metrics for United Airlines are messy. But this is not a knock against it because it’s also true for the whole industry. In fact, the situation is so dire that it’s not even worth discussing for this purpose. The UAL team is doing its best to navigate unique circumstances. The sector is still reeling from the unbelievably tough test from 2020.
The pandemic lockdowns are old news now. But they were especially harsh on airlines and their complications still linger. The only ones worse are the cruise lines. Therefore, if I discuss the fundamental and financial metrics they would be “con” arguments today. Instead, I will trust the charts and stop out on a dime. This again is a get long and hope for the best that the patterns play out.
To be successful in such trade setups, we must be diligent with the levels that make us quit. I call these tactical trades and they must come with stop loss levels. In this case, UAL has support below extends to $39 per share. Since this is a wide range on a $42 stock, it is best to use a stop loss line. Whatever the risk for the trade, I would call it dead if I lose 20% of my investment. Therefore, the opportunity is catching a 15% run in the stock, or lose a little on my investment. For this I would use options, because a 15% point run would equate to a giant win in options premiums.
SoFi (SOFI)
Sofi stock has been falling precipitously for a year. It topped in February of last year and has completely collapsed since then. The bulls had two massive 70% rallies and there could be another brewing. Today I am not suggesting this is the reason to buy it. The argument for owning SOFI shares stands on its long-term legs.
It has already lost 60% of its value versus its peak. This price action does not match its financial results. While this does not guarantee a floor below, I bet the bears have done the easy work already. Meaning it will need extremely bad news to go much lower than this.
The long-term outlook for the business looks promising. It is part of the financial technology sector (fintech) and it’s never been more exciting. The pandemic has accelerated the need to get transactions online. We’ve always chased the digitization trend of our finances, but now it is in panic mode.
Moreover, there is help from the onset of crypto and blockchain. These two put even more emphasis on fintech. The technologies coming out of them will benefit all of us in the long run. The business model for SoFi has merit because it also touches heavily on the consumer. In the U.S. the consumer spending is at record levels. In fact, the Federal Reserve is tightening conditions because of it.
The economy has rarely been hotter, which is puzzling that they are selling SOFI stock incessantly. At these levels or lower I would confidently hold this stock for a long term investment. Moreover, it can double as a short-term swing trade opportunity even going into earnings.
I accept that the reaction on those headlines is binary. And that we don’t know how they’re going to act the day after it reports. But at these levels, the downside risks seem smaller than the upside opportunity.
Stocks to Buy: Netflix (NFLX)
The reaction to Netflix earnings was astonishing. They sold the stock as if it had delivered an incredibly bad report. It didn’t, but it simply failed to wow the investors. I would argue that this was a problem with the expectations not with the actual scorecard. Short term they tend to do that.
Another example would be the incredibly bullish reaction to a horrific Robinhood (NASDAQ:HOOD) earnings report. This is proof that the short-term action is about feelings, not facts.
In the long term, Netflix stock is still doing what it needs to do in order to grow. Management has earned all the credits it needs in my book for me to trust it to succeed. The negative reaction on earnings took NFLX stock below its 2018 levels. That is an extreme by any stretch of the imagination.
NFLX is worth the risk, and confidently belongs on the list of stocks to buy on dips.
This can also double as a investment opportunity for the long term. In the meantime, investors should expect the volatility in it to linger. Meaning it could just as likely have a sharp recovery rally, albeit a tough one. I don’t anticipate that the bulls are able to rally back too fast. The fall was incredibly harsh and they might need time to rebuild their confidence.
There are resistance levels at $430 and $460 per share. If the indices find footing, I bet that the recovery rally can be consistent and substantial. These resistance levels would merely be temporary setbacks. Valuation will not be a problem since it only has a price-to-sales of 6. Moreover, its price-to-earnings ratio is reasonable at 36. These are levels comparable to Apple (NASDAQ:AAPL).
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.
