While stocks may be down for now, buying the dip could be a profitable opportunity. To maximize that profitability, the key is to look for stocks with the following characteristics: 1) stocks that have fallen more than the overall market; and 2) rising earnings forecasts for the underlying companies. Such stocks represent a bargain relative to the market, and five that currently fit that bill include Apple Inc. (AAPL), Delta Air Lines Inc. (DAL), American Electric Power Inc. (AEP), D.R. Horton Inc. (DHI) and Verizon Communications Inc. (VZ), according to Barron’s.
After reaching a high of 2,872.87 on January 26 of this year, the S&P 500 plunged nearly 12%, reaching a bottom at a low of 2,532.69 last Friday. Since then, the index has risen to 2,662.94, as of the close of trading on Tuesday. That’s a total decline of 7% since the high near the end of January. As of last Friday, the index was trading at a multiple of estimated forward earnings of 16.35, according to the Wall Street Journal.
By comparison, Apple is down nearly 8% from a peak reached around the middle of January, and is currently trading at a forward price-to-earnings ratio (P/E ratio) of 12.46; Delta is down 13% and trading at a multiple of 7.29; American Electric is down almost 15% from a high reached at the end of November, and is trading at a multiple of 15.96; D.R. Horton is down 15% from an early January peak and trades at a multiple of 10.41; and Verizon is down more than 8% since the end of January and trades at a multiple of 10.72.
That these stocks have fallen more than the overall market and are trading at a forward earnings discount relative to the market suggests investors could pick them up for a real bargain. (To read more, see: Why the Sell-Off Is a Correction, Not a Bear Market.)
Rising Earnings Forecasts
While the markets have taken a beating, Wall Street’s 2018 consensus estimates for corporate earnings have risen by 6% since the end of December. Further, although Goldman Sachs' U.S. equity strategist David Kostin believes the stock market is still relatively expensive even considering the recent correction, he predicts an overall 14% climb in corporate earnings growth, according to Barron’s.
Since the start of the year, the forward earnings per share (EPS) estimate for D.R. Horton has risen 21%; for Delta, that rise has been 19%; 18% for Verizon; 8% for Apple; and 3% for American Electric, according to data from FactSet as reported by Barron’s. (To read more, see: Fidelity’s Timmer: Markets Are Now Balanced.)
These companies are all exhibiting strong fundamentals and will benefit from lower corporate tax rates as the underlying economy continues to show signs of expansion.