3 Stocks to Buy At A Discount!Mar 26, 2021
Looking for stocks that are trading at a discount relative to their true value? Look no further. The below 3 stocks are stocks that we believe are completely oversold and are worth more than what their current price reflects.
- While we fully agree that the recent tech sell-off over the last month or so has been painful to endure, what has happened is that it has created a good buying opportunity as stock prices have come down from the recent highs. With stocks at relatively lower prices, we're able to enter new stock positions and feel more comfortable about stock appreciation relative to risk.
In order to pick our stocks, we've created a market screener that show's stocks that are down 20%+ from their recent highs and then looked across their peaks and troughs.
- What are peaks and troughs?
- Peaks and troughs are patterns that are developed by the price action experienced by all securities. As we know, prices never move in straight lines, whether in an uptrend or a downtrend. Peaks represent the relative highs and then troughs represent the relative lows.
- Using the picture below, this is a good example of how we can measure the wide disparity of stock pricing to understand how much it has lost and the upside potential. By seeing this stock down from ~$400 to ~$200, we can see the stock is down 50%, but in order to hit the peak again, the stock would actually need to appreciate by 100%!
Our takeaway: If we believe the peak is possible to hit again, that means that the stock has to double whereas it only lost 50% on the downside!
- Using an easier to grasp understanding, think of it like this: You own a stock that is $100. If it goes down to $50, you just lost $50 (50% loss). But in order for it to go back up to $100, the stock needs to double (100%) increase. So while re-realizing your initial investment is significantly harder, for investors like us either entering a new position or cost averaging down, this is a massive buying opportunity!
With that context, let's introduce the stocks that we believe have significant upside potential!
1) Snowflake (SNOW): For those of you who have been following us for awhile, you know that we've been short Snowflake for some time as we believed the stock was significantly overvalued (it once had the highest price to revenue ratio of any technology company on the Nasdaq!) And while we did believe the stock was overvalued (which the market has come to agree with), we always did believe the company had great potential (just not at the current price at the time). Fast forward to today and the stock price is now down 50% and less than it's price at IPO. At this level now we feel comfortable changing our view! While the stock may very well continue to sell off, we're comfortable taking this risk as we believe the company, over time, will be able to live up to the lofty expectations and re-realize a higher stock price.
- And with this, this is a major point to realize. Do not judge your stocks against the absolute highs and the absolute lows. No one can ever sell at the peak and no one can ever buy at the bottom. If we as investors, are able to realize even 60% of the upside, it's still a massive win. And that's what we're betting on here. Fast forward a year from now and we believe we'll be having gains on SNOW. It may not be 100% of the upside, but we will participate and that is fine with us. No one is able to consistently time the market to that extent. That truly is a sucker's game.
2) Spotify (SPOT): Down roughly 30% from its recent high's, SPOT is another stock we feel is a good buying opportunity given the recent downswing. We've long been investors in SPOT and the recent stock deprecation hasn't change our view that SPOT will be a winner in the long term. Starting as a music streaming platform and moving into other avenues of audio (podcasts, video, etc.), SPOT is looking to own all of audio. With a massive increase in spend in audio advertising over the last few years and SPOT entering into massive contracts with large podcasters (Kim Kardashian, Joe Rogan, etc.) we think SPOT is just starting their push into the kings of audio and a future of large revenue opportunities. We're using this time to buy more of the stock and dollar cost average ourselves downward!
3) Lemonade (LMND): For those of you not familiar with LMND, LMND offers renters' insurance, homeowners' insurance, and pet insurance policies. Different then traditional insurance companies, LMND is a tech first platform that makes signing up easy and simple to use. Innovating on a traditional old and sleepy industry, LMND is poised to take significant market share of a massive industry and fast. For example:
- In 2019 the property and casualty insurance premiums written in the United States amounted to 637.7 billion U.S. dollars!
This is clearly a massive industry in the US alone and will be an area they can capitalize on domestically and internationally. While we've written about LMND in the past, we believe this is especially a good time to buy them as the price has fallen over 50% from their recent high's. Similar to SNOW, if LMND is able to recapture its recent high's, they'll be able to appreciate over 100%. This is an extremely exciting opportunity for us as buyers of the name.
- Caution: However, unlike SPOT, LMND is an extremely long term play, as LMND is looking to displace a massive industry where the buyers are used to one way of things vs. how they're doing it. It'll take time to educate consumers and have them feel comfortable - especially in non-urban areas.
While down times like this can be painful, we as investors need to be opportunistic and look at the glass half full. If you truly believe in the stocks you owned at $100 (for example), then you should like them even more than when they are at $50 (i.e. on sale). Price should not be reflective of how you feel about the company. If anything, high prices are good times to sell, not to be exuberant.
We hope this has been helpful for you all. If you have any questions, please let us know.
Another company to watch out for is Peloton (PTON). We did not include them in the above because they're taking on serious competition in the form of Apple. Apple is looking to truly own all of health and fitness - and when they put their resources to something, you need to be cautious. So while PTON has a lot of upside opportunity, it comes with significantly more risk than the stocks above! Proceed with caution.
- While we do not have any reason for saying this, we wouldn't be surprised to see Apple buy them. If that happened, their stock price would soar overnight!