Buy the dip?
Lots of high-quality names have dropped double digits:
Adobe -28%
Amazon - 24%
Estee Lauder -20%
Nike -20%
Microsoft -15%
Alphabet -13%
Microsoft
This company needs no introduction and has growth opportunities in cloud computing, gaming, and their office products are generating impressive cash flows.
The stock has fallen 15% from its highs in late 2021. Like many other growth companies, the stock price has fallen because of an uptick in interest rates. The price-to-earnings ratio is still not very cheap at 33, but one can argue that you get a much better company than the average company in the index. It, therefore, deserves to trade at a premium to the market average.
Just look at those profitability numbers!
The stock price is in the range where I like to make an entrance. The relative strength index is in the gutters, and the price is almost touching the 200-day exponential average. Companies that grow their revenues and free cash flow tend to show increasing stock prices over time, but dips and larger price drops happen up to several times per year.
Adobe
Adobe was one of my most successful trades last year, and the stock price trades just over ten bucks from where I made an entrance the previous year. The stock was far from attractively priced when I sold at $663, but it’s now entering a price point where I could be tempted to get in again.
The company shows impressive numbers with solid margins, the moat is wide, and capital allocation is exemplary. The business is generating solid free cash flow, and the company is reinvesting in the business to improve the product offerings.
Estee Lauder
If you’re betting that people, in general, are going to become more prosperous in the future, a bet on the beauty sector is a sure bet. When people get more discretionary income, they will treat themselves with higher-quality products. Estee Lauder has a high degree of skincare, makeup, and other products that consumers use every day.
Estee Lauder shows high gross margins and excellent returns on capital. The price reflects a high-quality business, and that’s why their price-to-earnings ratio is 36.5. If rates continue to climb, there could be greater multiple compression, but solid prospects for future earnings should take away some of that uncertainty. According to analysts, the company is expected to deliver 14.8% annual growth in eps over the next five years.
Alphabet
Alphabet’s charts look very similar to Microsoft. They’ve been knocking the ball out of the park since 2020 but have seen weakness this year from a broad sell of in growth and tech. It’s also nearing my preferred range of buying on “weakness.” Alphabet’s ad business is more cyclical than Microsoft’s core business, which may be the reason for the lower multiples, anyhow 25 times earnings are not that high for arguably one of the greatest brands in the world. Google is synonymous with search, and the Google Services businesses generated 40% EBIT margins in the last quarter.
Amazon
The sheer growth of Amazon’s most profitable businesses, ads, and AWS are stunning. The Amazon story keeps reinventing itself several times since its incorporation in the 90s. Are AWS and Ads going to dominate the story in five years, or will Amazon Prime’s value materialize?
What to do
I think that periods like these are tough to maneuver because it’s easy to get carried away and want to buy every good opportunity you see. You can deposit more cash to the account, or you could make adjustments to free up liquidity. My mind is telling me to sell companies that will most likely provide a smaller return but at less risk to buy stocks that could give a higher return. Periods like these make you remember why it’s beneficial to write down how you will approach different kinds of scenarios.
Disclosure
Always do your own research before investing! I hope that you enjoyed this post but It should not be considered an encouragement to buy the companies that I include in my portfolio or be taken as financial advice. Buying quality companies could result in financial loss if you’re buying at a high price or if the overall market falls. If you want to receive investment advice you should contact a professional.