3 Stocks to Buy for Long Recovery Rallies This Quarter

  • RingCentral (RNG) is seeing consistent 30% growth that is likely to continue.
  • Etsy’s (ETSY) emerging business is sustainable and healthy.
  • Roku (ROKU) concerns by critics are temporary.
A businessman ripping his shirt off to reveal an upward green arrow with the word buy on it underneath
Source: ImageFlow/Shutterstock.com

Equity markets eked out a profit last week, despite still having the same major worries lingering. The situation in the Ukraine has not yet approached a solution. In addition, the U.S. Federal Reserve is still wanting to wage war against inflation. The list of Fed heads asking for 0.5 raise is growing. These are real threats that can potentially break the momentum that the bulls have had for years. But as long as there is momentum, we can continue finding new ideas for stocks to buy near their support levels.

Today I am specifically seeking stocks to buy that have a long rally back potential. So the prerequisite is for them to have sold off for a while. In fact that’s the main common thread that they share. Otherwise, they are diverse in fundamentals. But it’s first extremely important to acknowledge that the potential for a market-wide downturn is still very real. Our thesis on these can only happen if markets don’t significantly correct.

Last week, the S&P 500 was within 3% of its closing all-time highs. Therefore, there’s plenty of downside room to fall through should there be another equity hiccup. Even though the three stocks to buy are near their own supports, the market is far from its supports. Investors doing homework too often tend to forget that stocks do not trade in a vacuum. Whatever the thesis that we may have for our investment ideas, they must work within an ascending market. Otherwise, we will leave ourselves open to being blindsided.

Until we get abatement in headline threats, I consider my three trades tactical opportunities. Although they will work as investment strategies for the long term, the goal is to scalp profits this quarter. I don’t trust the macroeconomic environment long enough to commit anything beyond a few months at a time.

Ticker Company Current Price
RNG RingCentral $125.21
ETSY Etsy $137.62
ROKU Roku $135.32

RingCentral  (RNG)

Stocks to Buy For Rebound Rallies: RingCentral (RNG) Stock Chart Showing Upside Potential
Source: Charts by TradingView

The pandemic forced businesses to shutter their doors for months. Consequently, most companies chased the idea of going mobile. This included human resources, storefronts and order-taking to name a few aspects. Therefore, demand for online infrastructure exploded. RingCentral’s (NYSE:RNG) business falls perfectly in line with that trend. I used their services over a decade ago and it was a miracle solution back then.

This trend, although not as explosive as it was in 2020, is likely to continue for a long while. Therefore, demand will not be a problem for them. Management so far has consistently delivered 30% revenue growth for years. They left us no reason to doubt that they suddenly will stop succeeding. Their P&L shows a loss, but it is important that they generate a strong positive cash from operations.

Despite their record, the stock has been in the hands of sellers for months. Since last March 2021, RNG lost as much as 78% of its value. So a year later and it is still struggling to find footing. There is hope from the price action last week, because it established a slightly higher-low mark. The bulls are not out of the woods, but it’s a good start. Especially that these are levels below that have been significant since 2019. This week and next will be important for how this opportunity develops.

The thesis is that the bulls will maintain a positive slope trend to eventually break out of $130. When that happens, they should overshoot 20% with fairly easy effort. But then the hard work starts as they approach the heaviest volume profiles that lie ahead. Between now and then, investors can profit handsomely in the short term. This can also double as a long-term starter investment for those who have longer investment horizons for this stock.

Etsy (ETSY)

Stocks to Buy For Rebound Rallies: Etsy (ETSY) Stock Chart Showing Upside Potential
Source: Charts by TradingView

My second pick today also benefited from the pandemic lockdowns. When people could not go to work, they went online. Etsy (NASDAQ:ETSY) was there to serve the personal business opportunity, and as a pastime for entertainment. The P&L suggests that management is taking full advantage of the opportunity. Last year’s revenues were 2.8 times larger than 2019. Moreover, they had an income of half a billion dollars.

These are impressive numbers, especially if you consider that they are flowing even more in positive cash then operations. As interest rates rise, that could be a sticking point for other companies that need to borrow to exist. Statistically, valuation shouldn’t be a problem because a price-to-earnings ratio of 36x is acceptable for a growth company.

However, despite all this good financial news, Etsy stock has failed to demonstrate any successful sustainable rallies. From November of last year it lost 64% of its value, and it’s still barely above that now. But just like our first pick today, Etsy is also showing a slight higher-low trend that started in February. On the back of this thin evidence, patient investors can build a small position for the long term.

More pressingly, more active traders could strive for shorter-term profits from the breakouts above $152 and then $164. One would lead to another, which will in turn lead to a potential 20% rally from there. All in all, from here there could be a giant bounty for Etsy stock traders if the overall markets cooperate. An important point to make is the necessity of using stop losses. For example, in this case, if the price falls below $109, I would opt out of it tactically and re-engage lower. This logic also applies to the other two stocks to buy on dips today.

Roku (ROKU)

Stocks to Buy For Rebound Rallies: Roku (ROKU) Stock Chart Showing Upside Potential
Source: Charts by TradingView

My third pick today is Roku (NASDAQ:ROKU), and it was a stock I did not care for two years ago. That was until they turned a profit and they demonstrated they can make the streaming environment pay off. Lately, the stock fell on criticism because of the semiconductor shortages. The business opportunity for Roku’s operating system sales as well as the streaming viewership could taper off. But so far, those concerns have not materialized in the financial results. So they should not kill the bullish thesis for ROKU stock. I would note the concern but proceed with caution.

Just like the other two, after months of trepidation, the stock is showing a bit of light. It looks like the bulls are trying to establish the bottom off of the March 15 low. If that’s the case, and especially if they hold above $118, they can make some good further progress this week. The next hurdle to overcome is at $141 per share. If and when the bulls succeed at that, they can rally another $25 from there. This process would repeat at every hurdle that they tried to hold on the way down.

ROKU belongs on the list of stocks to buy because it’s the mother of momentum stocks. I would not underestimate its ability to run fast in either direction. And after falling for eight months, the bulls could overwhelm the bears with the element of surprise. This is especially true since it fell into its pandemic low levels. Those were extreme and unique circumstances. Nevertheless, the sellers are in charge and not letting rallies sustain.

So far there is no evidence that this rally is different from the last two weeks. There were short-term pushes in January and February and they both failed. There was also one from December, and it too failed. I’m trying to infuse a bit of reality that the bulls need to be cautious. When a stock has been falling this long, it’s up to the buyers to prove stabilization. Until then, humility and caution are too important ingredients that will help investors avoid staying too long, too early.

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.


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