There can be no doubt that stock prices got a bit out of control in January and early February of this year. A pullback was inevitable, and it came, causing pain for many stocks, while a fortunate few continued to defy gravity. In the months since then, stocks have tried three times, unsuccessfully, to climb back to those lofty heights. They will certainly go higher soon enough, which is why this latest pullback is a great buying opportunity
Based on average P/E, S&P 500 stocks are in the same range they have been for the last three years, though closer to the high side than the low. From that, it may seem that stock prices are too high across the board, but that isn’t so. Last Friday’s selloff was, beyond any doubt, the result of the very strong economic numbers that came in that morning. The numbers were high enough to spook both the bond and stock market with the probability of more frequent interest rate hikes in the future. Selloffs, based on economic strength, are almost inevitably short term, as the higher earnings caused by a good economy inevitably push the market higher. Indeed, in the 23 years I have been following the market, I have come to know of no more reliable pattern. I don’t know about you, but that makes me want to buy. Here are a few buys I myself am considering.
Remember to treat these ideas as just that, ideas, and do your own research before making any investment decision.
First Solar (FSLR)
First Solar should be a beneficiary of the Trump administration’s solar panel tariffs, as it certainly was from tariffs put in place by the Obama administration. The company’s profit margin is protected by the elimination of ultracheap Chinese panels from the market, and it has already booked 80% of its supply through 2020. Unfortunately, it seems it will take a while for those benefits to kick in. The company reported a disappointing second quarter, including a loss instead of a profit, zero being an important psychological threshold. Still, estimates are for the company’s earnings to rise precipitously over the next two years, while the company’s superior technology ensures that it will remain a major player in the space for many years to come. You have to look at the whole board to see that First Solar actually has a winning position.
Chart courtesy of www.stockcharts.com
Dropbox (DBX)
Shares of DBX have been pounded recently, though the fall appears to be due entirely to market forces. From $31.67 last Wednesday, the stock has fallen 15% to $26.80 today. The Dropbox service has been growing steadily for more than a decade now, and though it has now gone public, there is no reason to think that its growth has stopped. In fact, the company’s quarterly growth rate is a very comfortable 27.6%, yoy. Now, for the first time, you can buy shares of DBX for less than it first began trading on its IPO day. It’s not quite clear to me why this stock isn’t 20% higher right now.
Chart courtesy of www.stockcharts.com
Baidu (BIDU)
Baidu is an $86 billion Chinese search engine company, the Chinese Google, in a country where citizens are not permitted to use the actual Google. Take a look at how BIDU shares have traded this year, but strap yourself in first to avoid whiplash. The company has strong revenue growth, a comfortable profit margin, and all the security in the world, as the Chinese government is heavily vested in its success. As the Chinese middle class continues to expand, Baidu will make more and more money from advertising, which will allow it to continue to expand into other areas. Based on all this, and its dead-on-average trailing P/E of 24.5, I believe shares of BIDU will be 15% to 30% higher by this time next year.
Chart courtesy of www.stockcharts.com
H&E Equipment (HEES)
H&E Equipment is a maker of industrial equipment, primarily for the construction and oil services industries. The company is known as a cyclical, which is good news given the healthy economy, and, in particular, the recovery of the oil industry, as it was the downturn in the oil industry that knocked the company off-track back in 2014 and 2015. Last Thursday, HEES shares were treading at $39.75, while today, they are trading at $36.75. That’s a pretty big decline for a conservative, industrial company such as this. Also, the rate of growth here is high compared to the valuation, a relationship enumerated in the PEG Ratio. Here, it is 0.95, where anything less than one is generally considered a value.
Chart courtesy of www.stockcharts.com
Ilumina (ILMN)
I’m breaking with the pattern to spotlight a tremendous opportunity. A stock doesn’t have to have fallen in price to suddenly become a good value. As in the case of Ilumina, the company may be firing on all cylinders, and making more money than expected. Ilumina is the direct beneficiary of the much-touted human genome project, finished in 2003. That means there are people in high school today who were not yet born when the project was completed, but I digress. After reporting an incredible second quarter, shares of ILMN were up 11.5% on Tuesday to $325, but that was after falling due to market forces from $315 all the way to $288, a fall of 8.5%. Hence, in spite of the incredible quarter, ILMN shares are up only 3% since last week. The trailing P/E of 84 is, no doubt, high, but the unlimited potential of genetic screening and treatment make the upside for this stock incalculable.
Chart courtesy of www.stockcharts.com
