This article is an excerpt from the InvestorPlace Digest newsletter. To get news like this delivered straight to your inbox, click here.
It’s been a terrible week for speculators in low-quality stocks.
Last Sunday, struggling retailer Bed Bath & Beyond (NASDAQ:BBBY) announced it was entering Ch. 11 bankruptcy. The speed of its wind-down, however, makes it look more like a Ch. 7 liquidation.
And early last week, shares of First Republic Bank (NYSE:FRC) sank 60% after the firm revealed it had lost $100 billion in customer deposits.
Many high-quality stocks have been taken on the same white-knuckled ride. Shares of self-driving firm Mobileye Global (NASDAQ:MBLY) plummeted 25% after cutting growth forecasts by only 5%. And United Parcel Service (NYSE:UPS) sank 10% after missing earnings by a single penny.
This may mark a golden opportunity to buy high-quality stocks on the cheap.
That’s why many of our analysts here at InvestorPlace.com, our free market news and analysis website, have been busy recommending new buys among these fallen angels.
In today’s InvestorPlace Digest, I’m going to show you how those writers have identified five high-quality stocks among these to buy on the dip.
1. Sociedad Quimica y Minera de Chile (SQM)
Shares of the world’s lowest-cost lithium miner dropped as much as 25% this week after Chile’s left-wing president, Gabriel Boric, announced plans to nationalize his country’s lithium reserves.
At first glance, that seems like terrible news. Sociedad Quimica y Minera de Chile’s (NYSE:SQM) mining contract will expire in 2030, and the nationalization could essentially turn a money-spinner into an ordinary-looking mining operation. We could theoretically see SQM’s 80% return on capital invested decline to barely its cost of capital.
But three things stand in the way.
- Politics. Chile’s divided Congress still needs to approve the measure. The president’s coalition only holds 67 of the 155 seats, making nationalization an uphill battle.
- Profits. Changes beyond 2030 have little impact on SQM’s front-loaded profits. A two-stage discounted cash flow (DCF) model shows that only 8% to 12% of the firm’s value sits beyond 2030.
- Diversification. SQM will surely use the opportunity to diversify beyond its Chilean roots. Argentina, Australia and the United States all have viable lithium sources.
It’s why the stock continues to hold a place on InvestorPlace.com writer Muslim Farooque’s list of Top-7 Lithium Stocks to Buy.
2. Enphase Energy (ENPH)
Shares of this high-end solar inverter maker saw a similar crash this week after reporting a temporary slowdown in demand. Revenue forecasts missed by 4.9%, sending the stock down 25%.
Josh Enomoto has been covering the story for InvestorPlace.com. He notes that investor pessimism has “cast an unmistakable shadow over what had been a robust, resilient sector” with Enphase Energy (NASDAQ:ENPH) absorbing the brunt of the damage. He also notes that strong European sales essentially cancel out weakness in the California market.
Enphase was obviously too expensive to start. Shares traded as high as 95X forward earnings, thanks to the company’s high-end inverter technology, battery storage systems, and related software systems. Investors were “paying up for quality” without thinking about price.
Yet, lower share prices now make Enphase a reasonable buy again.
Enphase’s disappointing outlook has more to do with lower subsidies in a single state, not a broader issue with its products. And with shares hovering under 40X forward earnings, long-term investors might finally have an attractive entry point.
3. PNC Financial Services (PNC)
Larry Ramer writes at InvestorPlace.com about America’s sixth-largest bank in his list of 7 Stocks That Could Skyrocket in the Next 12 Months. The Pittsburgh-based bank announced excellent first-quarter results on April 14, and Ramer believes shares could surge as much as 80% by the first quarter of 2024.
It’s obviously been a down year for PNC Financial Services (NYSE:PNC). Shares have fallen nearly 20% for the year and trade 40% below their all-time peak. Many investors are nervously looking around for the next First Republic disaster and punishing any company that looks the part.
Yet, PNC has been unfairly targeted. The company is expected to earn 13% return on equity (ROE) next year, the third highest among major U.S. banks. And its national footprint reduces exposure to any single sector.
That suggests the company should trade at 1.3X book value, a 20% upside to today’s levels. If earnings rise as Ramer expects, the upside will be far higher.
4. Qualcomm (QCOM)
Qualcomm (NASDAQ:QCOM) has seen shares wobble in recent weeks on fears of a semiconductor slowdown. Earlier this month, Samsung warned it could face its worst profits in decades, driven by sagging prices in memory chips.
But we must remember that the low-end memory chip market is distinct from Qualcomm’s higher-end products used in mobile phones, data centers, and internet of things devices.
In a recent update at InvestorPlace.com, Thomas Niel makes the case that shares of this high-quality stock are now vastly underpriced. Shares trade at 12X forward earnings — a 25% discount to long-term averages and an unusually low amount for a company generating almost 40% return on invested capital.
5. Hanesbrands (HBI)
Finally, my own contribution to this week’s list of 5 High-Quality Stocks to Buy on the Dip is Hanesbrands (NYSE:HBI), the ubiquitous maker of underwear, innerwear, and Champion-branded sportswear.
Shares of Hanesbrands were hammered in 2022 after prices of cotton spiked from 80 cents to $2 per pound. The company is roughly 80% vertically integrated, and it’s virtually impossible to pass all raw material costs to end consumers. A 13% decline in first-quarter 2023 revenues added to the panic.
Nevertheless, we know that Q1 figures will mark a low point for Hanes. First-in-first-out accounting means that high-priced cotton is finally working its way out of its inventory. So, even a minor 3% revenue decline in the second quarter should see a 72% sequential increase in operating earnings. Shares of this dominant underwear brand likely have 2X-4X upside from here.
You can read more about Hanesbrands here.
It’s Hard to Buy the Dip
There’s always been an issue about buying the dip:
Most falling stocks keep going down.
My quantitative research has shown that stocks have persistence in month-to-month returns. A drop in one month means a greater chance of a fall in the next. That means cautious investors looking for consistent 12-month gains often wait until a stock has risen for at least six months before jumping in.
Such strategies will always miss the bottom of the market. Waiting half a year to confirm a rising trend means you’ve missed the bottom by… well… six months.
That means investors buying the dip need to focus on the highest-quality stocks to buy where further downside is limited.
And once shares are bought, investors should put them away and not worry about the near term. Because for companies with wide business moats, fast growth, and large profits, stock returns will eventually come.
As of this writing, Tom Yeung held a LONG position in HBI. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.