Buy these stocks before they bounce!

 

With the exception of a two-week sell off that occurred prior to the presidential election, the market as a whole has been rather flat in recent months. Uncertainty over the election, interest rates, and oil prices has kept the market in check, but we have seen plenty of stocks take a hit as of late.

As is always the case, when we see a stock like CVS Health (CVS) take a 14% drop after posting its quarterly results, the knee-jerk reaction is to buy into the stock at a discount and wait for shares to rise. In CVS’s case, this may be a good strategy, but there are enough reasons against getting into the stock at the current time to suggest investors may want to avoid establishing a new position in the stock, even at the more affordable price.

You never want to try to catch a falling knife, but that is not to suggest that you cannot find good values in stocks that have recently experienced some selling pressure.

The first thing I look for when considering beaten-up stocks is the current valuation. We want to make sure that we are not jumping into a stock that is still overvalued and has further room to fall. A favorable valuation is necessary, but you have to follow that up by looking at the company’s future earnings growth estimates. As long as the company is forecast to grow earnings at a nice pace moving forward, there is always the potential for the stock to move higher.

The final thing I look at when deciding whether or not to jump into a stock that has shown weakness is the average price target that analysts have set on the stock. Analysts are human, and as such they can always make mistakes, but it is worth noting what analysts, on average, think is a fair price for the stock.

If you can find a stock with an attractive valuation, upbeat earnings growth estimates, and favorable price targets, then you have the perfect recipe for a stock to buy into ahead of a rebound.

Apple

Tech titan Apple (AAPL) recently took a hit following its fiscal fourth-quarter report, and while shares enjoyed a little rebound with the overall market in the days leading up to the election, the stock still has a long way to go to get back to its pre-earnings level. At first glance, the quarter looked great. Earnings and revenue were above expectations, and iPhone sales were higher than forecast. The problem is that iPhone sales are declining. During the recent quarter, the company sold just 45 million iPhones, down from 48 million during the same period last year. This marked the third straight quarter that iPhone sales were down, but that streak could end during the current quarter, which is the first full quarter of iPhone 7 sales, and the always-important holiday shopping season. AAPL shares trade with a low 13.2 P/E, making it a great value, and a good time to jump into the stock ahead of the holiday season when the stock could very well break out to a new 52-week high. AAPL stock has a 2.07% dividend yield.

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Chart courtesy of www.stockcharts.com

Starbucks

Coffee retailer Starbucks (SBUX) is an example of a great company whose stock simply cooled off after years of blistering growth. During the first week of November, the company reported fiscal fourth quarters that topped estimates on both the top and bottom lines. Taking the look at the numbers, what we see is a stock that simply ran too hot for too long. With the recent pullback, its P/E has fallen to a more respectable 30.5, and its forward P/E is down to 21.9. While the company’s growth has definitely slowed, analysts still expect to see earnings growth of 13.1% during the current year, and by and additional 14.8% next year. Those numbers are impressive, and combined with the current valuation creates an attractive entry point for investors before the market drives the stock higher. The stock is currently trading at $54.23, while Wall Street sees the stock rising as high as $64.38. The stock has a 1.84% yield, and the company has boosted its payout each of the last five years.

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Chart courtesy of www.stockcharts.com

Nike

After years of steady gains, athletic apparel and accessories leader Nike (NKE) has seen its shares steadily lose ground over the last year. Sales and earnings have been on the rise, but when the company next reports in December, analysts see earnings falling slightly versus the same period last year, but revenue rising 4.0% year over year. Nike has a great track record of posting better than expected earnings, and if we see that trend continue, and the company is able to post slightly better earnings for the current quarter, then there will not be a year-over-year earnings drop, and the stock should trend higher into the New Year. After years of big gains, the stock ran into a valuation problem, but the recent losses have brought the P/E back down to 22.9, which combined with analysts expecting earnings to rise by 9.7% for the full current year, and by 13.5% next year, creates an attractive entry point in the stock before enthusiasm returns and the stock regains its upward momentum. NKE is currently trading at $50.91, but analysts have an average price target of $61.14, suggesting 20.1% upside from the current trading level. The stock has a 1.26% dividend yield at the current time, and the company has boosted its dividend the last seven years.

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Chart courtesy of www.stockcharts.com

Target

Mega retailer Target (TGT) took a big hit back in May on disappointing revenue figures, and in sympathy to a string of negative earnings reports from its competitors. After a strong Q2 report in August, the stock initially moved higher, but once again trended lower and shares are now trading just above the 52-week low. The good news for investors is that the stock looks very oversold at the current time. TGT trades with a low P/E of 12.5, with earnings forecast to rise by 5.5% this year, and 7.3% next year. The stock is currently trading at $67.53, but analysts see shares rising as high as $74.60. If the stock is able to climb to Wall Street’s average price target, it would represent a gain of 10.5%. In addition, the stock is currently offering a 3.6% dividend yield, and boasts a 48-year streak of dividend increases.

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Chart courtesy of www.stockcharts.com

Honeywell

Honeywell (HON) manufactures diversified machinery for sectors such as defense and aerospace, as well as the automotive sector. After a big drop at the start of October, the company has started to rebound, but there is still plenty of room for the stock to run. Last quarter the company reported weaker than expected earnings, but sales were above estimates. Defense contractors are likely to do well moving forward, as politicians on both sides of the aisle have expressed their desire to strengthen the nation’s military to better address the global risks that threaten the country moving forward. HON shares now trade with a P/E of just 15.6, and analysts expect earnings to climb 8.2% during the current year, and an additional 7.7% next year. HON shares are trading at $111.37, but analysts have an average price target of $125.79 on the stock, which suggests that shareholders who buy the stock at today’s price could enjoy 13.0% upside. The stock offers a 2.39% dividend and a five-year streak of dividend increases.

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Chart courtesy of www.stockcharts.com

Symbols: AAPL HON NKE SBUX TGT
Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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