The earnings seasons are usually cherry patches for finding bargain stocks to buy. The immediate reactions to those events are binary. This is a simple concept that most investors refuse to accept. I am constantly in this debate when I hear traders try to guess direction based on results prospects.
Let me present you proof positive as to why this is wrong. Nobody knows how a stock will trade at the open after the earnings.
Consider the best company on the planet which arguably is Apple (NASDAQ:AAPL). They haven’t had a bad report in years. If that’s the case, then I would expect for all the earnings reactions to be positive. Looking back to the last five, four of them are drops. This should end the debate once and for all.
The morning-after trade direction is a coin flip. This is why I rarely take positions ahead of the events.
The best trades are when we have the information thereafter. Today, we present three stocks to buy after a wrong reaction on Wall Street. The idea is to catch falling knives that are worthy.
But before we discuss the details, it is important that I express my concern over the entire stock market. We have had the largest stimulus in history and for too long. Finally, the Federal Reserve has committed to tapering it.
This is not a matter of if, but rather when. Experts expect it this year. If that’s the case then equities will be facing headwinds into the second half. Extra caution is necessary when taking bullish positions regardless of quality of the stock. Whatever my usual conviction level is, I should mark it down a notch.
The three stocks to buy on the dip are:
Stocks to Buy: Pinterest (PINS)
Pinterest user growth has been impressive. The pandemic definitely helped it but it was already on the right track. The company just reported earnings and the stock collapse 25% as a result of it.
High profile analysts like JPMorgan downgraded it in spite of stellar metrics. Management increased sales and earnings by 125% and 457% respectively over last year. These are hardly bad results, but investors wanted more. Let this be more proof that expectations are the problem, not facts.
PINS stock hasn’t yet bounced significantly from it, so the opportunity to buy the dip is still there. In the middle of June I wrote about a similar opportunity in June. At the time it was in mid-range with catalysts above and support below. My trading thesis back then was spot on and delivered the spike, and now we have the reversal of it. These whipsaws have not been a complete surprise.
The fundamentals have not changed. The financials of PINS stock are still great. The reasons for the drop stem from overzealous investors. The company is still firing on all cylinders, but don’t take my word for it. Total revenues tripled in three years. Furthermore Pinterest now has $160 million in net income.
Statistically it is not expensive with a price-to-sales (P/S) under 19. The high price-to-earnings ratio (P/E) doesn’t matter at this point as long as it is growing fast. Other investors’ opinions don’t sway mine. On paper, PINS belongs on a list of stocks to buy now. Besides, their collective average price target from Yahoo Finance is $84.
A close relative to Pinterest is Etsy. It also benefited from the pandemic. With people out of work and stuck at home, they got creative and needed an outlet. The Etsy platform was in the right place and at the right time. Just like Pinterest, it was already on the right track, so management deserves a lot of credit as well.
The reaction to last night’s earnings report is disappointing down 14% after hours. This is after a 6% Wednesday rally. Both were wrong, therefore, nothing has changed.
This wild price action does not change the actual fundamentals. The report was not all bad news. Earnings fell 9% to last year but sales grew 23%. When companies are pushing for growth, it’s OK to miss on profit targets. Clearly, this is another case where overzealous traders were expecting too much and out of touch with reality.
Technically, Etsy stock is falling into a heavy volume support zone. For the last eight months, $165 per share has seen the most action of all other levels by far. Usually as a stock price falls into that, it finds support. Earlier we noted our overall caution from the indices. Therefore, there is a low probability scenario that could bring much more pain ahead. Although I don’t see it coming to fruition, I must note it.
If. for whatever reason, Etsy stock falls below $150 per share, all bets are off. And investors could expect debacles to follow. Again, this is not my forecast but rather a cautionary note just in case.
Statistically, the metrics for Etsy are great. It has a 54 P/E and a P/S of just 14. They have quintupled their revenues and net income in four years. This is a competent management team that deserves the benefit of the doubt.
Etsy generates $670 million in cash flow from operations. This allows it freedom to continue executing on its plans. A rate hike is not likely to crimp its style. They have the financial freedom to adjust to search patterns. This is a source of worry for the experts of late.
Stocks to Buy: Uber (UBER)
Our third pick today, unlike the other two did not benefit from the pandemic. In fact, the shutdown brought its business to a screeching halt. The fact that management survived the test speaks to its abilities. UBER stock should be much lower than this. The devastation that happened to its revenue stream last year should have broken it. But it didn’t.
Since the highs in April, UBER has fallen more than 30%. Although I don’t expect a sharp rally back, I do see the possibility of buyers lurking below. Technically, we could expect lower prices still. Therefore, entries here should not be all in. Leaving room for error makes a lot of sense for many reasons. Not the least of which is the open gap near $36 per share.
This situation is where I like to use options to capitalize on the current fear. When a quality stock is falling precipitously, it makes sense to sell puts instead of buying shares. The goal is to own shares and this method builds a buffer between current price and my entry strike.
The fundamental thesis behind UBER stock is still intact, but it needs time to heal from the shutdown. The income statement has suffered tremendously through no fault of their own. The fact that they can still draw $11.5 billion in revenue is impressive. They will soon need to get their spending back in line, so that the balance sheet remains healthy. That was their Achilles heel a while back and they do not need to revert to it.
The traditional statistical metrics are not useful until after a few months of normalcy. Even still, its P/S is only 7. There is not a lot of hope in the stock price now.
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.
View more information: https://investorplace.com/2021/08/3-stocks-to-buy-on-dips-when-markets-make-mistakes/