Today, I have three of what I call off-the-bottom stocks to consider. But first, let’s talk about the elephant in the room: the maddening investing climate.
It’s been a dreadful couple of months for the market—just about every stock and sector has taken at least a modest hit, with some big winners of the past couple of years coming unglued, like Align Technology (ALGN) and Nvidia (NVDA), both of which have fallen more than 50% from their peaks just since the start of October!
That said, now that we’ve had two or three waves down in the market, the wheat is beginning to separate from the chaff when it comes to potential leading stocks. I prefer stocks that are near new high ground, and those are the focus of Cabot Top Ten Trader and Cabot Growth Investor—subscribers to those advisories know which names I’m watching closely should we receive a buy signal from the market going forward.
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But I’m not religious about only looking at stocks that are near new highs. The reason: I’ve seen many new market rallies that are initially led by what I call “off-the-bottom” stocks—names that went through the wringer for months, bottomed out for a while and then embarked on a solid multi-month rebound. Commodity stocks in early 2016 were a good example, as none were near their highs of 2014 but a bunch did well in early 2016 after the market bottom.
Currently I’m seeing a few intriguing off-the-bottom stocks that are showing relative strength and could have nice runs if the pieces fall in place. To be clear, I wouldn’t be diving into these names head first here, but it’s often valuable to look for the most resilient stocks in sectors that have already taken big hits—if and when the market (and each sector) turns up, these names could stage nice rallies.
Three Off-the-Bottom Stocks
The first one is a bit of a cheat: the Financial Sector SPDR ETF (XLF). It hasn’t been totally crushed, but the fund hit its peak back in January and fell a maximum of 16.5% from its peak by late October. What caught my eye, though, is that the fund held up well above its October lows last week, and that’s in spite of some horrid action from high-profile financial outfits (go look at a chart of Goldman Sachs (GS)!). A push above 27.5 would be intriguing for this sector play.
Homebuilder stocks have been brutalized this year, falling a big 36.5% from their peak in January to their October lows, at which time the sector was at the same level as February 2017. Despite that drubbing, it hasn’t bounced much since as reports of slowing home sales and construction (thanks to sky-high prices and higher mortgage rates) have surfaced.
However, the fundamental underpinnings of a good housing market remain in place (job and wage growth), and PulteGroup (PHM) looks like a leader of any turnaround that develops in the group—the stock got hit with everything else into October, but is now actually working on its sixth up week in a row, a rarity in this environment. And looking at the numbers, it’s easy to see why: In Q3, sales (up 24%) and earnings (up 68%) topped estimates, and while that kind of growth won’t continue, leading indicators like new orders (up 1%) and backlog (up 5%) are still pointed in the right direction.
Throw in low valuation (8 times earnings), a solid dividend (1.4% annual yield) and a nice stock buyback program (share count is down 5.2% during the past year) and it appears the bottom may already be in here. A few weeks of consolidation in the 22 to 26 area and/or a push above the 200-day line (now near 28) are things to watch for.
Last but not least is a stock I made good money on last year and one that I think has another run in it once this downturn finishes up. It’s Alibaba (BABA), the Chinese e-commerce giant that has been roughed up like all Chinese stocks—at its low of 135 in early October, it was down 36% from its peak and no higher than it was back in June 2017.
But despite continued worries regarding the U.S.-China trade war, BABA hasn’t really gone down since that early-October low—there was one day later that month where it dipped below 135, but since then it’s actually been pushing higher, with shares holding above their 50-day line for the first time since its June peak. And while a ton of investment spending has kept earnings growth tame, analysts see that changing, with the bottom line expected to rise 30% in the fiscal year that starts next April.
As with most stocks that have taken big hits, BABA may need some time to bottom out, but the longer it holds up, the greater the chance it’s seen its lows for the market correction.
Those are my three favorite off-the-bottom stocks (or two stocks and one ETF, to be precise) at the moment. Now, if you want to know what other stocks I’ll be recommending once the market gets going again, you can click here to learn how to become a Cabot Growth Investor subscriber.
Let’s hope we don’t have to wait much longer for the turnaround!