Every once in a while, I like to consider stocks to buy on the dip. These are companies whose shares have fallen by 10% or more in the past week.
According to Finviz.com, 42 companies with a market capitalization of $2 billion or more have seen their share prices fall by 10% or more over the past week.
Sectors such as basic materials, consumer cyclical, financial, healthcare and technology all had a rough time last week, but ultimately they should recover.
I’ve found at least three stocks from these sectors whose share prices fell more than 10% over the past week, but whose profitability isn’t a question mark. Here are three stocks to buy on the dip.
Airbnb (ABNB)
The good news if you’re a long-time Airbnb (NASDAQ:ABNB) shareholder is that the business is performing at a very high level. The bad news is that investors aren’t buying what it’s selling. ABNB stock is down more than 16% over the past week and 24% over the past 5 years.
The company is likely to see a surge in business once summer vacations get underway. Plus, I’ve been really impressed with the changes that Airbnb is making to the platform to improve the customer experience.
CEO Brian Chesky spent six months living and working in Airbnbs across the country to see what it was like to be a customer with his company. What he found was that some of his Airbnb hosts were making life miserable for him and, by implication, all of their guests.
“The worst 10% of guest and host experiences were making it worse for everyone,” Chesky told Fortune. “And the whole point of our platform is to take those things off the table.”
So the company came up with 50 improvements to the platform, the most important being a transparent total price that includes everything but applicable local taxes. Since all fees are now all part of the rental price, potential guests can better compare properties.
It’s doing all of this while generating handsome profits. In the trailing 12 months ended March 31, it generated $3.8 billion in free cash flow, which is 44% of its $8.7 billion in revenue over the same period.
I see no reason why it can’t get back to $200 in the next 12-18 months.
PayPal (PYPL)
PayPal (NASDAQ:PYPL) has had a slightly better week than Airbnb. It’s only down a little more than 10% for the past 5 days. Of course, it’s not having a great year, down nearly 17%.
What the heck is going on at PayPal?
They say perception is everything. Earlier in May, PayPal reported Q1 2023 results that beat analyst estimates on both the top and bottom line. It even raised its guidance for 2023 for revenue and earnings. However, its stock dropped because its outlook on its operating margins was disappointing.
The weird thing is, it still expects higher operating margins for the year.
While some analysts lowered their target prices on the stock, Wall Street remains optimistic about the fintech’s future. Of the analysts covering its stock, the majority rate it overweight or an outright Buy.
PayPal’s trailing 12-month free cash flow is $5.1 billion. Based on a market cap of $69.5 billion, it has a free cash flow yield of 7.3%. I consider anything above 8% to be in value territory.
It’s safe to say PayPal is a growth at a reasonable price stock at the moment. Take advantage of the dip.
Sonos (SONO)
Sonos (NASDAQ:SONO) absolutely got crushed over the past week losing 28% of its value. It’s now down nearly 8% on the year.
Like PayPal, the manufacturer of multi-room audio products reported good quarterly results, but investors only were focused on its soft outlook. Down went its share price.
Unlike PayPal, Sonos operates in a more fickle business. Consumer electronics buyers aren’t spending on non-essential items right now. Naturally, that’s going to hurt revenue and earnings.
How bad are the guidance cuts? It now expects $1.66 billion in 2023 revenue at the midpoint of its outlook, $84 million less than its previous guidance. In addition, it lowered its gross margin for the full year to 44.3% at the bottom end. That’s 0.7%, or $52 million, lower than previously expected.
Reuters reported Raymond James (NYSE:RJF) analyst Adam Tindle said about the situation, “While the revised guidance takes numbers lower, we have no reason to ‘call the bottom’ at this point.”
Clearly comments from analysts such as the one above don’t help. Sonos’ share price had made great strides from last fall before its May 11 earnings report. It’s now trading where it did last November. Before that, you have to go back to October 2020.
If it’s not at the bottom, it is very close. The 24% single-day decline in its share price was an overreaction by investors. I’m not saying it won’t fall further, but if you like its business, than this is definitely one of the stocks to buy on the dip.
On the date of publication, Will Ashworth 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.
