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Buy the Dip: Disney, Mastercard, Sally Beauty

Real Money experts look at the prospects for stocks that have seen recent weakness.

Stocks moved slightly lower over the past week, with the Dow Jones Industrial Average off 0.63% over the last five trading sessions.

All eyes are on the U.S. inflation rate, which clocked in at 6.2% in October, on a year-to-year basis. That’s impacting the U.S. dollar, which rose sharply as data showed inflation in the world's biggest economy grew at its fastest pace since 1990.

“Inflation in and of itself isn’t always a bad thing for the equity market,” said Don Townswick, director of equity strategies at institutional asset manager Conning.“Typically tightening happens when the economy is doing really well, so merely the prospect of some higher interest rates isn’t a problem.”

That sentiment may explain why stocks aren’t sliding significantly in the first two weeks of November. Certainly, the Federal Reserve is front and center, reassuring investors that economic events are under control.

“Last week the U.S. central bank said it will begin slowing the pace of its $120 billion in monthly bond purchases later this month,” said TheStreet’s Martin Baccardax. “Fed chair Jerome Powell, however, said the Fed will be "patient" in terms of interest rate hikes, but would not hesitate to act if a response against faster inflation were needed.”

In the meantime, there is no shortage of interesting “buy the dip” stocks flowing through the market right now. According to experts at TheStreet, these companies are at the top of this week’s list.

Disney  (DIS) - Get Walt Disney Company Report $158.54 5-Day Performance (-10.35%.) 

Disney stock is sliding in mid-November and is down 12.48% on a year-to-date basis.

What’s the prognosis for the entertainment giant?

“While the DIS stock slide is not exactly a bullish reaction to earnings, the losses aren’t too bad and bulls are buying the dip,” said TheStreet’s Bret Kenwell. “That’s about as much as investors could ask for in a situation where a company misses on earnings and revenue expectations and as Disney came up short on subscriber estimates.”

It’s no secret why Disney is circling the cauldron right now. “The company missed on the key estimates for its business,” Kenwell noted.

The stock rallied hard off its January low and topped in March just above $200. “Since then, we’ve seen several lower highs, but more recently, the stock had settled into a trading range,” he added. “Specifically, that range was defined by support near $170 and resistance between $187.50 and $190.”

In September, Disney lost its 200-day moving average, which then became resistance along with the $178 to $180 area.

“On the upside, I would really like to see how Disney handles the $169 to $170 area and 10-day moving average,” Kenwell added. “Above both measures puts a full earnings gap-fill move in play to about $174.”

Mastercard  (MA) - Get Mastercard Inc. (MA) Report $361.43 5-Day Performance 3.36%. 

Mastercard is only trading up 1.24% on a year-to-date basis and is trading flat over the past three months. But things could be looking up for the credit card behemoth.

TheStreet Recommends

On a recent Mad Money, Jim Cramer spoke with Michael Miebach, president and CEO of Mastercard, one of the few companies that actually benefits from rising inflation.

When asked about the pandemic's effect on their business, Miebach said that at the onset discretionary spending stopped, but everyday spending simply shifted from in-person to online.

When asked about alternative payments like "buy now, pay later" and cryptocurrency, Miebach said that Mastercard is all about giving consumers choices for how they pay for things.

Mastercard is ready for crypto and it's ready for the digital euro, he added, but they also need countries and regulators to agree on exactly what those payments will mean for consumers and for merchants.

TheStreet’s Bruce Kamich recently checked in on MA. In an October 20 review Kamich wrote that "It looks like MA is ready to resume its uptrend. Traders could go long at $365.90 or higher."

He added that “MA has bounced back in recent days and is in a position to retest the underside of the 200-day moving average line,” Kamich said. “A close above the 200-day line and above $370 (a new recovery high) will improve the chart.”

“Maybe the worst of the price weakness is behind MA,” Kamich noted. “Maybe it will prove itself. Only buy strength above $370.”

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Sally Beauty Holdings  (SBH) - Get Sally Beauty Holdings, Inc. Report $20.17 5-Day Performance 12.74%. 

Sally Beauty is up 24.20% over the past 30 days and just released a solid quarterly earnings report, beating revenues by $13.73 million with a same store sales increase of 2.1%.

TheStreet’s Paul Price calls Sally “a fine growth company that is still offered at a non-growth valuation.”

Price said analysts never seem to give the company much respect. “They've now missed actual results by pretty wide margins on each SBH's the last five quarters,” he said. “The end of September period came in 25.5% above estimate.”

Prior to the earnings beat Yahoo Finance indicated a $24 year-ahead target price. “That is sure to go up in the near future. SBH changed hands at $25.66 as recently as late May,” Price said. “It hit an all-time peak of $35.30 back in 2015 on EPS of just $1.49.”

“With at least $2.45 now expected for fiscal 2022, there is still plenty of room for significant upside,” he said.

What is SBH really worth?

“I like to value companies based on their "normalized" valuations based on their own multi-year trading histories,” Price noted. “From 2011 through 2020 SBH typically fetched about 15-times earnings.”

“As of November 11, following the pop from the Q4 report, SBH was still offered for about 8.2-times forward estimates for the fiscal year already in progress,” he added. “That suggests major upside potential is still in play.”

“A simple reversion-to-the-mean valuation could easily justify north of $36 by this time next fall.”

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