5 Observations to Consider Before Deciding What Stocks to Buy
Did you know that while financial markets have plunged amid the novel coronavirus pandemic, everyone has been looking for stocks to buy?
Search interest related to “stocks to buy” has surged to all-time highs in March and April. Millennial investors trading stocks on Robinhood increased their buying activity by 60% in March. And corporate insider buying activity surged to record highs in March, too.
In other words, everyone and their best friend bought the stock market dip in March.
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And they’ve made out well. The S&P 500 is up more than 30% from its mid-March lows.
What now? Is time to take profits? Or look for more stocks to buy?
To answer those questions, let’s consider the five following observations:
Stocks are priced for a near-perfect recovery right now. A near-perfect recovery won’t happen. The economic re-opening in May will be choppy. That chop will cause broader market turbulence.
On all fronts, the coronavirus pandemic is trending in the right direction. Cases are going down. New science points to a lower death rate than originally thought. An effective treatment is close to being approved. Vaccine trials are underway.
About 20% of Americans have lost their jobs during Covid-19. But another 80% still have their jobs, aren’t spending money and have tons of free capital to deploy once the storm passes.
The economic data isn’t pretty, but corporate America data has come in much better than feared. Things should only get better from here.
Strong long-term, big-picture fundamentals imply that the stock market will finish the year on a high note. Thus, any near-term dip in stocks in May or June is a great time to look for stocks to buy.
Here’s a deeper look into each.
Expect a May Selloff
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I’ve been bullish on this stock market recovery for the past six weeks. But I also acknowledge that stocks don’t take the elevator up. They take the staircase up, meaning that it’s a choppy ride higher. Right now, we are due for some chop.
As of this writing, the Nasdaq is a stones throw away from being up year to date, while many high-quality growth stocks are right back to their pre-Covid-19 highs. That’s right. Despite everything that’s happened in 2020, many stocks are acting like it’s all over.
It’s not all over. I’m optimistic that we will get through this crisis, and sooner, rather than later. But right now, stocks are broadly priced for a smooth economic re-opening in May.
That won’t happen. The re-opening of the economy in May will be choppy. Consumers will remain hesitant to go out. Restaurants and stores will be operating at fractional capacity. Any rise in cases — which will likely happen — will cause delays and setbacks in the re-opening process.
All in all, the re-opening of the U.S. economy in May will be anything but smooth. Stocks are “smoothly” priced today. That discrepancy could cause weakness in markets over the next few weeks.
Covid-19 Trends Are Positive
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When it comes to the science and data surrounding the coronavirus pandemic, everything is trending in the right direction.
The number of new daily cases reported each day is declining in every major country. So is the number of new daily deaths reported in every major country. In other words, social distancing measures are working, and the spread of the virus is materially slowing.
Simultaneously, new science from a handful of antibody tests across the U.S. and Europe show that many, many more people have Covid-19 than previously thought. Those studies estimate that somewhere between 3% and 20% of the population in different areas have had Covid-19. If this new science holds up, then it would imply that Covid-19 is only fractionally more deadly than the seasonal flu.
And that was before we had an effective treatment. Today, it increasingly appears that Gilead’s (NASDAQ:GILD) remdesivir is an effective treatment for the novel coronavirus. If so, then mass distribution of remdesivir will help lower Covid-19’s true death rate to levels equal to or potentially even below that of the flu.
Given all these favorable developments on the coronavirus pandemic front, I fully expect the U.S. to survive this crisis with much less damage than initially anticipated, and overcome it much quicker than initially expected. Needless to say, that’s a good thing for U.S. stocks.
Tons of Consumer Firepower
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There is a strong argument circulating that, even if we do “beat back” the virus quicker than expected, we still have a huge unemployment problem to deal with. This loss of employment (and consumer spending firepower) will weigh on the economic and stock market recovery for several months.
But here’s the counter-argument, which I think holds much more water.
Yes, 20% of Americans have lost their jobs over the past few weeks. But the other 80% haven’t. Those other 80% are receiving their normal salaries, just got $1,200 checks from the government, and aren’t spending money, i.e., their savings and checking accounts are just growing and growing.
So, by the time the economy starts “normalizing,” one of out every five Americans will have very limited (if any) consumption firepower. The other four will have “super-charged” consumption firepower.
Sure, in order to unleash that firepower into actual spending, you need consumer sentiment to flip to not being deathly afraid of the virus. But as the science continues to change to show that Covid-19 isn’t as deadly as originally thought, as spread continues to slow, and as an effective treatment gets rolled out, consumer sentiment will flip.
When it does, we will unlock a ton of pent-up consumer spending firepower — the likes of which will offset the loss of firepower from 20% unemployment.
Corporate Numbers Will Only Get Better
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The economic data today isn’t pretty. But the corporate America data isn’t too bad.
Microsoft (NASDAQ:MSFT) just reported strong earnings, propelled by sustained robust cloud services demand. Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD) also reported strong earnings recently on the back of strong cloud demand.
Facebook’s (NASDAQ:FB) earnings were better-than-expected, and the company said that ad spending trends — while down — are starting to stabilize. Pinterest (NYSE:PINS), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Snap (NYSE:SNAP) all said something similar.
Tesla (NASDAQ:TSLA) reported record deliveries and strong profits this quarter. eBay (NASDAQ:EBAY) topped estimates in its quarter. Starbucks (NASDAQ:SBUX) said that comparable sales declines in the U.S. are stabilizing, and improving in China. McDonald’s (NYSE:MCD) sounded a similar tone, saying that comparable sales trends globally have started to improve over recent weeks.
All in all, business trends are starting to get better — and they will only keep getting better.
It increasingly appears the worst of Covid-19 happened in March and April. In May, June and July, we will re-open the economy, equipped with more knowledge about the virus, an effective treatment, and ample PPE to accommodate an uptick in hospitalizations.
As business trends continue to improve in the coming months, stocks should maintain a broader uptrend.
Stocks Will Trend Higher
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When you look at the numbers, it becomes clear that stocks have healthy upside potential over the next six to twelve months.
As go profits, so go stocks. Corporate profits in 2020 will get slammed, since March and April business activity ground to a halt. But it looks like business activity will start picking back up in May, and stage a meaningful recovery in the summer. By the second-half of 2020, it’s very likely that corporate sales and profits get back to growing again on a year-over-year basis. Thereafter, throughout 2021, corporate profit growth should be quite robust, as an approved vaccine allows us to put Covid-19 in the rear-view mirror and tons of stimulus powers strong consumer and enterprise spending.
Big picture: corporate profits will drop in 2020, but not by as much as feared, and then rebound in 2021 by quite a bit.
My modeling suggests that a reasonable estimate for 2021 S&P 500 earnings per share is $170 or higher. Based on an 18-times forward earnings multiple — an appropriate multiple for the market today consider that interest rates are at zero — that implies a 2020 price target for the S&P 500 of 3,060… or higher.
Consider These Stocks to Buy
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Zooming out, I believe that most data today points to a May/June retreat in the stock market, followed by a big second-half surge to levels above 3,000 on the S&P 500.
So, if you’re looking for stocks to buy, I’d do some profit-taking here to get some dry-powder, and deploy that dry-powder on the next big market dip.
If/when that market dip does come, what are the best stocks to buy? I’d take a good hard look at these 10 best growth stocks to buy for the next 10 years:
Shopify (NYSE:SHOP)
The Trade Desk (NASDAQ:TTD)
Amazon (NASDAQ:AMZN)
Roku (NASDAQ:ROKU)
Square (NYSE:SQ)
Okta (NASDAQ:OKTA)
Beyond Meat (NASDAQ:BYND)
Chegg (NASDAQ:CHGG)
Facebook
Pinterest
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long SHOP, FB, TTD, ROKU, PINS, OKTA, BYND, and CHGG.
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