3 Stocks to Buy on Dips This Earnings Season With a Safety Margin

The opportunities during the earnings season continue to present themselves. The immediate headline writers are not usually the true experts, so they are often misleading. The facts they report are true but the point they deliver is often wrong. Today, we evaluate buying three more stocks to buy on dips from wrong headline reactions.

Of late, we’ve had a few negative moves that warrant investigating.

I have had good luck taking advantage from other people’s mistakes. Investors erroneously react to the scorecards. This is the practice of catching the proverbial falling knife. It has been fruitful for me over the years especially when I use options to do it. There I can buy the dip and leave even more room for error.

That’s especially important to one of the three today. It has special circumstances because of recent headlines.

An important ingredient in this practice is choosing the right companies. At heart, I am a fundamental investor who uses a lot of trading tricks for an extra edge. Therefore, I need a good story to use as an excuse for my bravery. I don’t catch falling knives that don’t deserve catching. If the company has great fundamentals then I reach out my hand confidently. If it also has technical reasons for it even all the better.

In this mega-bullish market it has been hard to find negative trends in companies. Investors are not willing to sell many things. The indices are still making highs, the Dow made one yesterday. Meanwhile, someone yesterday asked me if this was a bottom. The more appropriate question is if this is a top. Yes, I am cautious but I don’t want to short markets outright.

Stocks to buy on dips include:

  • Rocket Mortgage (NYSE:RKT)
  • Peloton (NASDAQ:PTON)
  • Etsy (NASDAQ:ETSY)

Source: Charts by TradingView

There is downside risk on every stock just from the sheer altitude of the indices. Above is a S&P 500 weekly chart to show how high we are. This is not the bottom of anything, and we could use a reversion to the mean. This is an important point because every bullish idea must work within the overall market confines.

Stocks to Buy on Dips: Rocket Mortgage (RKT)

Stocks to Buy on Dips: Rocket (RKT) Stock Chart Showing Value Below

Source: Charts by TradingView

Rocket mortgage reported earnings last night and the stock fell off a cliff. The headline read that they missed earnings expectations by a whopping 1% (#sarcasm). Meanwhile, they left the good bits in the dark, bringing RKT down 12%.

If people spend a minute reading the results they see that management crushed it where it matters. Rocket is a growth company so it’s OK to miss on earnings. What’s most critical is to show a strong trend in growth. This is indeed a buy-the-dip opportunity in RKT stock. Smart money can capitalize on someone else’s mistake.

The revenues grew a respectable 91% year-over-year. Moreover, they had record loan origination and 300% sequential growth in user metrics.

If you are confused about these statistics versus the selling, you are not alone. That’s further proof that earnings events are always have binary outcomes. I constantly preach that message, but I know most investors don’t believe it. This is one bit of proof for you that the quality of reports do not drive the price action. If you want another, compare Amazon’s (NASDAQ:AMZN) blockbuster report versus its stock price since.

This is a dip I can buy with confidence especially if I use the option. Instead of buying shares outright, I can sell the RKT $15 December puts instead. This trade can still profit even if the stock falls 20% below its all time lows. It breaks even much lower than that.

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Peloton (PTON)

Stocks to Buy on Dips: Peloton (PTON) Stock Chart Showing Value Below

Source: Charts by TradingView

My second pick for today has special circumstances coming from headlines. Recently Peloton stock fell on a serious warning about its treadmill safety. Sadly, there were injuries, so it’s nothing that the company could ignore. Peloton did the right thing yesterday and recalled its machines. Understandably, the selling intensified and PTON stock collapsed another 15%. This is after it just shed 25% in April. Clearly, it’s out of favor with investors for now.

The question going forward is about sustainability of the news. Chipotle (NYSE:CMG) and Boeing (NYSE:BA) stocks went through something similar. The stocks lost their best drivers: The product. We don’t know if this will be a one-time cost for the recall for PTON. Or if they will struggle to make the machines safe and resume. They were already struggling to meet demand.

There is the risk of changing the game going forward. The fact that we don’t yet know lowers our conviction in this particular falling knife. Therefore, using options in this case is even more important than the other two stocks today.

The trade that would provide another 30% buffer would be to sell the September $55 put. To open the trade I collect $3 today, which means my break-even point would $52. In essence, I would be long immediately yet with plenty of more room for more potential bad news.

It is important to remind everyone that I would never sell a naked put if I don’t want to own the shares. Doing so opens up several scenarios for complications if the selling persists. The alternative would be to sell a bull put spread instead to limit the worst case scenario.

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Stocks to Buy on Dips: Etsy (ETSY)

Stocks to Buy on Dips: Etsy Stock Chart Showing Support Below

Source: Charts by TradingView

Just like in Rocket’s case, ETSY stock is fell 11% for the wrong reasons. Fears stemmed from a note that rolling over last years strong performance is challenging. We don’t need the management to tell us that it would be tough to beat the pandemic comps. It’s common sense and is not a systemic problem or performance deficiency. Selling stock on it is a mistake. Therefore, I can confidently add ETSY to my list of stocks to buy on dips.

Fundamentally, the company has the right offering in the right arena and at the right time. The online marketplace is not a fad and this one is special. It empowers entrepreneurs and creative people to do what they do best. In this gig economy that is potential worth a few gold nuggets.

Moreover, the stock is relatively cheap to other growth cloud companies. It has a price-to-sales under 15, which is close to Facebook (NASDAQ:FB) and 40% cheaper than Tesla (NASDAQ:TSLA). All the other financial metrics are going in the right direction. Most important is the strong cash flow from operations because it frees management to execute on plans. This lessens the need to borrow so bankers won’t hold them back.

Investors can buy shares with confidence for the long term. Alternatively, they can sell the ETSY $110 put and leave another 35% buffer before the risk of losing money. The worse case scenario is owning shares at $110 and breaking even on them even lower.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Nicolas Chahine is the managing director of SellSpreads.com.

View more information: https://investorplace.com/2021/05/3-stocks-to-buy-on-dips-this-earnings-season/

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