With one eye on the events in Afghanistan, market watchers have the other locked in the Federal Reserve’s virtual conference this week (traditionally held in Jackson Hole, Wyo.), when central bankers are meeting to discuss the economic impact of the COVID epidemic, what government policy makers might do to keep the economy rolling in chaotic times -- and what that means for stocks.
Federal Reserve Chairman Jerome Powell is set to give a speech Friday that should clarify some steps the Fed may take, especially concerning the timing of any stimulus tapering activity and the risks involved with COVID variants going forward for the rest of 2021.
Over on Real Money, contributor Tom Graff, a head of fixed income and a portfolio manager at Brown Advisory, writes that “the real volatility will come as the market prices in the timing of rate hikes. Markets have become convinced that 2023 hikes will be a mistake, and that the U.S. economy is so fragile that even three to four rate hikes will torpedo growth. Get more of his market and economic insights and trading strategies.
Investors have already taken note of comments made last week by Rob Kaplan, Dallas Federal Reserve president. Kaplan indicated potential second thoughts about tapering the Dallas Fed’s $120 billion per month Treasury bond and mortgage-backed security purchases. That, analysts say, could mean the Fed sees a slowing U.S. economy that needs continued government stimulus.
“Based on the recent FOMC minutes, we believe the Fed will not announce a Taper at Jackson Hole and will most likely announce a Taper in November or December,” said Tom di Galoma, managing director at Seaport Global Holdings: “The tapering will be very gradual taking place in 2022 over 10-12 months and possibly longer. In our view, there is a 30% probability that the Delta variant and/or a geo-political crisis could actually delay taper all altogether.”
Five Buy-the-Dip Picks
What stocks offer upside as buy-the-dip opportunities in a languishing market environment? Kick some tires with this week’s picks.
Yes, at $711 per share, Tesla (TSLA) - Get Tesla Inc Report is a pricey pick. But the stock is down slightly from highs earlier this month and some high-end institutional investors are snapping up shares.
“In a market filled with liquidity, the "buy the dip mentality" continues to persist,” writes Brennan Ertl in TheStreet’s Tesla Daily. “This appears to be true with Tesla stock and institutions.”
Share demand in Tesla is up and the third quarter has been on pace to be the first quarter since Q4 2020 to have an overall net inflow of Tesla stock into institutions — those with at least $100 million under management. Currently, there is a net inflow of ~$700 million of Tesla stock into institutions. 13F filings were due Aug. 15 to show any quarter-over-quarter changes in Q2, however, institutions can continue to update positions throughout the third quarter.
“Of those 'buying the dip.' the Canada Pension Plan Investment Board increased its position 617% quarter-over-quarter for a total of 330,196 shares,” Ertl wrote. “While this accounts for a small position in the assets under management for CPPIB, others have made Tesla a larger portion of their portfolio. Australia-based Hyperion Asset Management has also increased its Tesla stock position by over 20%. As a result of the additional shares, Tesla stock is now over 15% of Hyperions portfolio demonstrating more conviction than Cathie Wood's Ark Innovation ETF (ARKK) - Get ARK Innovation ETF Report”
Bitcoin continued to chug higher last week, as bulls were buying the dips. By Friday, Bitcoin had leveled off by about $1,000, as investors took a bitcoin breather.
Why a “buy at the dip” candidate? TheStreet’s Bret Kenwell notes that bitcoin was aided by the fact that Coinbase recently bought $500 million of crypto, while PayPal PYPL unveiled an expansion of cryptocurrency services. That has helped Bitcoin crest the $50,000 level, after trading as low as $30,000.
This from Kenwell: "Bitcoin bottomed in late July and immediately turned higher, ripping off 10 straight daily gains. Not long after that move, I looked at how Bitcoin could get to $50,000. Now that it's there, we have to reassess.
"After bouncing around on both sides of the 200-day moving average, Bitcoin resolved higher, then pushed through the $47,100 level, which was the breakdown spot in May. I’m watching one more upside level from here, at $51,100. That’s where the 61.8% retracement comes into play.
"It would be a big run, but if Bitcoin can maintain momentum, we could see a push into the $58,000 to $60,000 zone. This area has been strong resistance, with only one real push occurring above it, which sent Bitcoin up toward $65,000.
On the downside, Kenwell said that bulls should love a dip down toward $45,500 to $47,500.
That’s a fairly wide range, but there should be plenty of support in that zone. It includes the 10-day, 21-day and 200-day moving averages, as well as uptrend support (purple line). Below all these measures and the $42,000 area is on the table, followed by the 50-day moving average.
Kenwell says he's not sure how long the rally in Bitcoin will last, but for now it’s riding a nice trend higher. "Let’s not bet against it until support begins to fail. Until then, dips are a buying opportunity."
Looking for good will from customers and from investors, Wells Fargo (WFC) - Get Wells Fargo & Company Report recently reversed its decision to end personal credit lines for existing customers after a litany of complaints from the public and some negative press over the issue. While the banking giant won’t roll out any new personal lines of credit, it will service existing ones, which should nip the bad publicity over the personal credit line issue in the bud.
The stock is getting some attention after news of its entry into the Bitcoin fund market. Additionally, Mario Gabelli, the chief of New York-based GAMCO Investors, includes WFC among his best bank stocks to buy.
Honeywell HON is another solid “buy the dip” candidate. Real Money contributor Stephen “Sarge” Guilfoyle says Honeywell is among the large companies that should benefit from a strengthening supply chain environment and from more clarity on COVID vaccine mandate issues. Honeywell also reported robust second-quarter earnings and boosted its full-year guidance in the process. That wasn’t enough to elevate HON’s share price right away, but the future's looking brighter for the company.
Guilfoyle notes Honeywell’s stock has dipped recently, but still presents a good buying opportunity for investors. The industrial company’s stock took a beating last year amid pandemic restrictions, but recovered, even though the stock has faced some volatility lately. With an expected EPG rate of 14.1%, the industrial giant is worth a closer look.
“The worm has turned in the right direction for this firm, and for the various parts of the firm as well,” Guilfoyle wrote. “While we cannot say that the stock has run into earnings, the stock has consistently gained all year (2021) long after running in late 2020.”
Ingevity (NGVT) - Get Ingevity Corporation Report, which launched in 1964, is a big favorite of Real Money contributor Paul Price, who says that NGVT “is really in its element right now.” According to Price, Ingevity spent most of its corporate life as part of Westvaco, then its successor companies MeadWestvaco and WestRock Company. NGVT assumed its current format as a tax-free spin-off from WestRock (WRK) - Get WestRock Company Report in 2016. Price adds that after becoming independent, NGVT has a huge upside for investors. Independence has agreed with NGVT. If this year's second half plays out as expected every major business metric will have established new all-time highs. Per share cash flow, earnings and book value have surged since the end of 2016.
Get more trading strategies and investing insights from Price, Guilfoyle and the other contributors on Real Money.
Total shares outstanding have been reduced from over 42 million to around 39 million. There is no defined benefit pension plan to deal with, nor any preferred shares. Best of all for those wishing to own it, NGVT's stock has risen by just a fraction of what could have been expected after all the cumulative value created since 2016.
Price says to toss out last year's price-to-earnings ratio as an outlier due to the COVID-crisis and a normalized multiple has run a well-deserved 21.8 times. Assume a more conservative 20-times P/E and just $5.75 in EPS next year as Value Line did and NGVT could easily be $115 by Dec. 31, 2022. That modest goal would deliver an almost 53% gain from last week's closing quote of $77.57, Price notes.