Wall Street is having a crisis of sentiment much like a child goes through while learning to ride a bicycle. Investors know that the economy is healthy, yet they cannot trust themselves without the help of the Federal Reserve. As a result, the indices have had a correction in anticipation of a change in monetary policy. Today we muster up courage to share three social media stocks to buy on this dip.
The assumption is that this too shall pass and the bulls will remain in charge overall. The rally out of the pandemic was extremely fierce, so it’s normal to stall a bit. Healthy bullish markets need weak stints to gather momentum for more upside. Otherwise they would construct a house of cards that would crumble at the drop of a hat. The fact is that the economy is so healthy that the Fed feels the need to cool it down. Keep in mind that we still have an ongoing QE through March.
Following the Fed event, yesterday stocks flipped bearish after being green all day. The official statement was mild, however Mr. Powell spooked investors during his question-and-answer session. He went off script and unofficially pre-announced the hike for March. He did a similar thing with the announcement of the taper start last year. It is a bit annoying, to tell you the truth, because it causes short-term grief without cause.
Nevertheless, the fact remains that we have a healthy economy, and it no longer needs help. The Fed can let go of the bicycle seat and stock shouldn’t crash. Equities may wobble a bit, but eventually the score cards will speak for themselves. Case in point Tesla (NASDAQ:TSLA) reports an increase in sales 65% over last year and 217% in earnings. The knee-jerk reaction to that was to sell the stock down to $880 after hours.
We now know that the Fed will end the taper, and most likely raise rates in March. This should not change the profit-and-loss statements of companies materially for years. Therefore, investors should expect to find stocks to buy on weakness. The best ones are companies who have strong tangible financials now. Ideally they would also have fallen into prior support zones.
Our three picks today fit the bill to a tee. I cannot guarantee that they won’t fall further if the indices continue to correct. However left alone, taking bullish positions in them sounds reasonable enough. Since we do have extrinsic factors, investors should be patient by taking only partial positions to start. This is not the time to add to current risk but it is OK to start new positions.
The idea is to leave enough room to add later if lower prices become available. Succeeding on Wall Street involves patience and planning. When we are unsure about the macroeconomic conditions, we must leave room for error. No one should have absolute certainty in their thesis regardless of how bulletproof it may seem. These are unique conditions, so there are no experts on the eventual outcomes.
Stocks to Buy: Snapchat (SNAP)Source: Charts by TradingView
In October o2020, SNAP stock spiked violently 50% and out of the blue. Yesterday, it completed the round trip back to square one. When that happens, usually stocks find buyers lurking to buy it again. Investors like to rinse and repeat winning trades. That 2020 rally delivered 195% of upside, so there is ample opportunity to entice them. While I don’t expect another 200% rally, it is reasonable to expect a 40% rebound effort. Taking out $45 per share will be difficult, and may require quite a bit of time passing first.
Fundamentally, Snapchat has been making improvements. They more than doubled their sales since 2019. While they still lose money, the stock is not outrageously expensive with a price to sales of 13. Moreover, they now show a 40% improvement in net income from that year. This is testament that management is progressing in the right direction. SNAP stock should follow the markets higher.
The current shaky situation on Wall Street is causing problems for investors in general. But the smaller-caps are suffering more severely for some reason. As a result, the easy froth has fallen out of this one already. From here, it’s going to take much harder work from the bears to punish it much further. Although this may not be a sharp line bottom, it’s likely near one. Using options, investors can sell puts to own shares much lower, thereby leaving plenty of room for error. This reduces the need to be surgical with the entry in case there’s more short-term volatility.
Twitter (TWTR)Source: Charts by TradingView
Our second pick today is a bit politically controversial. Specifically because they threw themselves in the mix by permanently banning Donald Trump. Arguably this gave life to Digital World Acquisition Corp (NASDAQ:DWAC). DWAC is looking to go head-to-head with Twitter by offering an alternative platform. Although I think there’s plenty of room for all of them to exist, it’s another talking point.
Fundamentally the bulls have reason to like this stock. Nevertheless, TWTR is my least favorite of the three today. It appears to be farthest from adapting to the metaverse trend that is coming. Credit goes to management that is improving their financial statements. And it has a much cheaper price-to-sales than SNAP. However, more often than not, investors get what they pay for. The important thing is that revenues are increasing at a respectable pace.
TWTR stock is also falling into a zone of potential support. While there isn’t one hard line to point out, there should be buyers lurking through $28 per share. Twitter is falling into range of the pandemic start. Back then the whole world had stopped working, so the conditions were literally as bad as they could have been. This is the complete opposite of what we have now, so I expect a snap-back rally off this base. It makes no sense for it to continue falling into conditions that were horrific back then.
Stocks to Buy: Facebook (FB)Source: Charts by TradingView
I will end today’s note with the king of social media platforms. Facebook is always under a microscope and suffers severe scrutiny in the media. That is an inevitable fate that it must endure because of its success. All gigantic companies must go through this process, much like Microsoft (NASDAQ:MSFT) and Walmart (NYSE:WMT) did decades ago. Facebook deals with so many people that it’s inevitable they upset a few of them.
Luckily, this is a global company and the local public opinion doesn’t matter as much. As long as the results continue to be this good, rhetoric is not going to crash the stock. The success of Facebook stock has backup in its financials. Revenues now are 10 times bigger than 2014. Moreover, gross profits are double than the sales were that year. Facebook’s net income for the last 12 months is more than double two years ago. These are impressive growth rates that investors must acknowledge.
Any which way you slice it there’s nothing bad evident in its financial metrics. Meanwhile, Facebook stock is 25% off its all-time highs. Albeit the rally out of the pandemic was 175%, so giving back a bit is normal. In addition, the stock is falling into a pivotal zone near $280 where it’s likely to find buyers. That has been in contention since summer of 2020 and the base for last year’s rally.
If the indices continue to fall, Facebook stock can also suffer. However, falling from here will require much more effort than falling to here. The increase in stock price over the past two years is still impressive. Even after this correction, it is still 140% above its 2018 Christmas correction. Throughout, valuation stayed reasonable because of the growth rate they were able to maintain. The company still has a modest 21 P/E and its stock is only seven times sales. I can confidently state that if the indices are higher in the future, then so will Facebook.
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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