When the stock market’s lofty valuations come back down to earth, these three stocks could offer a strong buying opportunity.
Since dipping in March, the U.S. stock market has defied gravity despite worries about bloated valuations and a prolonged recession. Warnings that this bear-market rally could be coming to an end have intensified recently, a move that could prove valuable for value investors.
On the bull side of this market is the Federal Reserve and its bazooka of liquidity. On the bears’ side is pretty much everything else.
Coronavirus-related risks include a rising tide of cases across the U.S. and the near-certainty of a second wave of outbreaks.
Another round of mass layoffs is starting to materialize, even for those who benefitted most from the pandemic. Political bickering is holding up additional stimulus measures like coronavirus checks and an extension of unemployment benefits, shoving much of the American population off an income cliff.
More technical concerns also point to a stock market slump. As Bloomberg’s A. Gary Shilling pointed out, the most recent rally in U.S. Treasury bonds could be a signal of more downside to come.
He noted that 30-year Treasury bond yields began to decline significantly on January 2 as the price leaped upward. Seven weeks later, the S&P 500 began its epic slide.
He sees a similar scenario playing out in today’s market. It’s been roughly seven weeks since yields started to sink.
No one can predict with certainty where the market is heading, but it could pay off to be ready for a correction. Here’s a look at three stocks worth considering should a pullback materialize.
If there’s to be a stock market correction, it will likely start in the tech space, which is one of the pillars of the current rally. While most of the FAANGs offer a strong value proposition, Google-parent Alphabet (NASDAQ:GOOGL) provides the most compelling opportunity.
GOOGL stock has been vastly underestimated so far, and its share price has been falling in recent days after releasing underwhelming quarterly results. According to JP Morgan’s Doug Anmuth, a share of GOOGL stock is worth more than $2,000 based on a sum-of-the-parts value:
Looking at the whole, GOOGL compares well to S&P 500 peers as no other company has the combined top-line scale, growth, and margins of GOOGL. Overall, we remain positive on Alphabet as we believe: 1) it is well-positioned across ads, cloud, and a number of other key initiatives to both drive and benefit from long-term digital trends; 2) it has an attractive combination of top-line scale, growth, & margins; and 3) our SOTP (sum of the parts) suggests there is valuation support and upside potential
Google has a massive cash hoard and very little debt, making it a great stock to hold onto in times of economic uncertainty.
Another stock to keep on your watchlist is DraftKings (NASDAQ:DKNG). The firm is a play on online sports betting—a segment that is likely to experience stellar growth once sports resume in earnest. Several U.S. states are considering relaxing their online gambling regulations, a move that could boost DKNG stock significantly.
Importantly, DKNG is a bet on a return to normalcy—something that may not happen as quickly as the firm’s valuation suggests. If a second wave does cause a stock market crash, DraftKings will be along for the ride.
Chinese e-commerce giant Alibaba (NYSE:BABA) is another stock to keep on your radar, particularly amid rising tension between the U.S. and China.
While Donald Trump’s increasingly threatening rhetoric against China has cast doubt on the future of the trade deal, a full-on trade war is unlikely. Both countries are struggling to prevent economic meltdown—adding a trade war to the mix would be a mistake.
While BABA stock doesn’t come without risk, it’s an excellent way to play the growing e-commerce market in China.
Stifel’s Scott Devitt noted that online shopping in China had been spurred on by coronavirus, and the growth is expected to continue:
Overall, we believe macro concerns remain but view China e-commerce as well positioned to gain share of retail dollars with the potential for more permanent shifts in consumer buying behavior in certain categories in favor of online players.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author holds no investment position in the above-mentioned securities.