Are you the type of investor who likes to buy the dip? Are you there buying good companies when their stocks hit 52-week lows? I’m sure Warren Buffett’s been guilty of this several times in his long and successful investing career.
I can’t remember how I came across the BTD Capital Fund (NYSE:DIP), but it is supremely relevant. That’s because it uses artificial intelligence (AI) to pick the stocks in its ETF.
“DIP seeks to capitalize on quick-return opportunities in the market — no matter where they are or market conditions. The company’s AI identifies dips, initiates buys, and then instructs when to sell rebounded shares in short order — replacing a significant portion of the ETF’s holdings daily,” stated its April press release announcing the ETF’s move to the NYSE.
The ETF was launched in December 2022 by Kaiju ETF Advisors, a collection of brilliant people working on building a better mousetrap.
Actively managed, it invests in stocks from the S&P 500 and Nasdaq 100 and oversold United States large-cap stocks. I won’t get into the more than 25 factors in the ETF’s algorithm. However, if you’re into AI, I recommend you check out DIP.
So, I’m selecting three holdings from the ETF. It’s important to remember that the fund has significant turnover as it zips in and out of stocks. It decides to buy the dip and sell after the rebound.
The names I provide might be outside the holdings two weeks from now. However, for each of them, I’d hold for the long term.
Discover Financial Services (DFS)
Discover Financial Services (NYSE:DFS) is the ETF’s largest holding with a 4.59% weighting. Based on the algorithm used to identify oversold stocks, I assume that the fund believes Discover’s share price is trading well below its fair value.
Since mid-July, DFS has lost 30% of its value. As a result, it trades at its lowest point since January 2021, almost three years ago.
Why has Discover lost altitude in recent months? Profits could be better.
On Dec. 19, the credit-card lender reported its Q3 2023 results. Earnings per share in the quarter were $2.59, 58 cents lower than analyst expectations. In the company’s conference call, Chief Financial Officer John Greene said it saw increasing credit-card delinquencies and higher loan balances.
Consumers are a little more stressed than in past years, which is why net write-offs rose to 3.52% from 1.71% in Q3 2022.
As a result of its recent correction, it currently has an earnings yield (inverse of P/E) of 15.75%, considerably higher than its five-year average of 11.96%.
While the latest report will cut the yield by some, all of its financial metrics remain lower than they’ve been in some time.
Davita (DVA)
Davita (NYSE:DVA) is the ninth-largest holding of DIP with a weighting of 3.93%. On Oct. 11, its stock dropped 17% on news that Ozempic, Novo Nordisk’s (NYSE:NVO) drug for treating Type 2 diabetes, successfully slowed kidney disease in diabetes patients.
Davita runs 2,703 dialysis centers in the U.S. and 353 in 11 countries worldwide. In Q2 2023, it opened 10 new centers.
The company responded to investor concerns on Oct. 12, stating that less than 10% of patients with chronic kidney disease would be eligible to take Ozempic. Further, it suggested that more studies are required before determining if Ozempic would benefit the other 90%.
Davita shareholders should look to Warren Buffett for guidance. Berkshire Hathaway (NYSE:BRK.B) owns 39.5% of its stock. The company doesn’t own any Novo. Should that change, then it might make sense to worry.
However, these things often get blown way out of proportion by investors. This makes it a great opportunity if you are looking to buy the dip.
Davita and its predecessor companies have been in the dialysis business since 1979. The need for its treatment facilities isn’t going away because Novo’s drug is helping a segment of those affected by diabetes.
Resmed (RMD)
Resmed (NYSE:RMD) is the 11th largest holding with a 3.73% weighting. Its shares are down more than 35% in the past six months. In September 2021, they traded close to $300.
Resmed made its name with sleep apnea machines.
Today, it’s so much more, with machines designed to help people with COPD (chronic obstructive pulmonary disease) and asthma and an entire treasure trove of technology and SaaS (software-as-a-service) management solutions to help patients cope more effectively with their breathing and sleep issues.
On Aug. 3, it announced Q4 2023 and full-year results (June year-end). They included $4.2 billion in annual revenue, a company record, and a non-GAAP operating income of $307 million, 13% higher than in fiscal 2022.
Investors, worried about Philips’ (NYSE:PHG) recall of its CPAP and BiPAP machines, knocked RMD stock to its lowest level in two years.
While margins were slightly lower in 2023, the company is confident in what lies ahead in 2024.
As the CFO said in its Q4 2023 analyst call, Resmed finished the year with just $1.2 billion in net debt, a very low 6% of its market capitalization.
When good companies are on sale, intelligent investors go shopping. Resmed should be at the top of your list if you are looking to buy 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.
