Last week was one of the strangest ones I’ve seen in a long while. The mood on Wall Street soured tangibly without any significant evidence of deterioration in price. The indices were still within a half percent of an all-time high, yet the headlines read of corrections. The commentary sounded like we had already dropped 5% to 10%. If it is correct to not fight the tape, then we should look for stocks to buy, not panicking out.
The trend has been bullish for months. Until that changes, dips are tactical buying opportunities.
Human nature causes investors to be over exuberant when things are well, and overly cautious when something’s off. This usually keeps us alive in the wild, but causes mistakes in investing. Today’s picks are quality stocks that have lost a big chunk of their market cap. While this is painful for current share owners, they present opportunities for those looking for good stocks to buy.
The trick is to find quality profit-and-loss statements that have shaken out enough weak hands. The new investors buying them after a correction will have better conviction in these cautionary times. This doesn’t mean that we should pile into them blindly. Somewhere in the middle lies a good balance of moderation.
Moderation Is Key
I consider each one of today’s ideas an opportunity for a starter position. The goal is to get a foot in the door and manage the risk over the next few months. No one is good enough to pick perfect bottoms every time. Those that claim they can do are either lying or incredibly lucky. It is good to try and seek potential bottoms while staying open to the possibility of lower prices.
To do that with confidence, it’s important for the modern investor to use the proper tools. It is easy these days for average traders to properly gauge a stock chart. The goal is not to be master chartists, but to simply avoid the obvious mistakes. Chasing runaway stocks is wrong after a certain period of time, but today we’re doing the opposite. We are jumping into falling knives where upside potential outweighs downside risk long term.
The three stocks to buy we picked for us today are:
Stocks to Buy: DocuSign (DOCU)
DOCU stock just had a technical correction as Wall Street defines it. It fell 12% in just five days. But this is after it rallied 75% in about three months prior. Without this perspective it is easy to make the mistake and go all in.
Catching this falling knife in mid air is dangerous business. It clearly moves fast and will cost the brave investors digits. The correction from last August extended down 40%. The one from February of this year was 35%. Bravery got early investors extra pain, not rewards.
This time it’s no different because there is no evidence of immediate support. Add to this that the overall sentiment is somber and there is no rush buying DOCU with both hands. I consider this opportunity just getting one’s toe wet a bit. Closer to $250 per share would be a much stronger entry spot. By then it would have shed 20%, which is what Wall Street deems a recession.
Absolute “value” is not yet an argument supporting a full entry. It still carries a 31 price-to-sales ratio, which is not cheap. However they are growing fast, so that is a metric will normalize over time. They more than tripled their revenues in four years. I would need that rate to sustain itself, else I reserve the right to change my mind.
Marathon Digital Holdings (MARA)
As with DOCU, MARA stock has already fallen a lot. But that alone is not a reason to risk heroics without good reason. It has fallen 20% since Sept. 3, but that is after a 117% rally. The bounce from July was ferocious. It most likely rode the Bitcoin coat tails to $53,000.
As they say, you live by the sword and you die by it. MARA moves with the crypto price action, which eventually is a great thing. In fact, that’s at the heart of the long-term thesis on this stock. If you believe in the crypto trend for a decade then this is a stock worth accumulating.
With that assumption, the strategy is to buy MARA stock on dips over time. This is similar to how it traditionally worked for assets like gold and Bitcoin. MARA is too fast to nail every entry, so I expect this is tranche of one or two or more. The concept with this stock is simple and should remain that way.
There is support for it going into $34 per share and more about $4 lower. If the buyers fail here they will try again soon thereafter. That’s the upper end of a support cluster dating back to December. Anything beyond those dates is too low to mean much on the charts now.
Stocks to Buy: Biogen (BIIB)
BIIB stock did not have a good summer. But that is more to do with human error than a broken company. It spiked 70% in two days in early June. It then spent the rest of the summer falling back to earth. Since then it gave back about 35% but should be approaching the pivot point. Much of the drop came last Thursday on negative commentary from CEO Michael Vounastos. He raised concerns over the Alzheimer’s drug launch progress.
The summer crash now brings the stock into a potentially pivot zone. There should be buyers lurking below it, so it makes for a good starter position. The nature of this segment involves headline risk short term. BIIB has been around long enough to earn some benefit of the doubt. Short-term bad news is not strong enough to kill the stock. It is a mere setback and a potential opportunity.
Since it carries binary outcomes, taking a full position into it is reckless. Fundamentally, this is a strong company generating billions in cash flow from its operations. This gives it freedom to pursue promising ventures. They are still delivering $2 billion in net income, so there are no fire sales here.
Earlier we noted a technically pivotal zone. It extends beyond recent history, because around $285 per share has been in contention since 2014. These tend to offer support on the way down. I don’t count it being a sharp line of defense, but more of a cushion with a bit of leeway. If it fails, the BIIB buyers have emphatically bought the dips just $20 lower.
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.