The stock market has been soaring since April, with the Dow Jones Industrial Average (^DJI +0.58%), S&P 500 (^GSPC +0.37%), and Nasdaq Composite (^IXIC +0.19%) all hitting new all-time highs.
Markets are now up for the year, with the Nasdaq leading the way, up 13% after falling 10% in the first quarter.
While corporate earnings have been strong, the economy is brittle, with inflation rising, the labor market weak, interest rates high, and much geopolitical uncertainty. Could the market plunge again anytime soon? It is impossible to know, but corrections happen all the time, especially when valuations are abnormally high, like they are now.
Investors should always be prepared for bear markets, crashes, and corrections when constructing their portfolios. That means building a diversified group of stocks and exchange-traded funds (ETFs) that balance each other out to navigate rough patches.
Image source: Getty Images.
But retreats are also perfect opportunities to build your portfolio. The glass-half-full investor actually sees the long-term benefit of a sell-off because they can buy great stocks at lower prices. Here are three stocks Iʻd load up on if there were a tumble.
1. Nvidia
Nvidia (NVDA 1.86%) is one of the greatest companies in the world and the most valuable. It is at the center of the artificial intelligence (AI) revolution, making the chips that power AI applications and data centers. Within the booming data-center segment, Nvidia holds close to 90% of the market, so its earnings power is huge and the business has a long runway.
Today’s Change
(-1.86%) $-4.09
Current Price
$215.42
Key Data Points
Market Cap
$5.2T
Day’s Range
$214.84 – $221.07
52wk Range
$132.92 – $236.54
Volume
5.8M
Avg Vol
171.3M
Gross Margin
74.15%
Dividend Yield
0.02%
On May 20, Nvidia posted fiscal first-quarter earnings (for the period ended April 26), with revenue rising 85% to $81.6 billion and data-center revenue jumping 95% year over year. Earnings skyrocketed 211%. For Q2, Nvidia is targeting $90 billion in revenue and a ridiculous 74.9% gross margin.
The issue with Nvidia isnʻt about growth. With Nvidia, the buying decision is always about valuation. When things get overheated, you take a pause. When things dip, as they did after Q1, you buy.
Nvidia stock is up about 15% this year, but it’s still relatively cheap, with a forward price-to-earnings (P/E) ratio of 27 and a price-to-earnings growth (PEG) ratio of 0.72. Anything less than 1 is typically considered undervalued relative to its growth prospects. So, it’s a buy right now, and it will be an even better buy if the stock market tanks.
2. Amazon
Amazon (AMZN 0.70%) is another stock that is a must-buy on the dip. We saw that play out this year, as Amazon stock traded near its lowest valuation in years. It had been brought down by lower growth numbers and concerns about the near-term impact on earnings of its plans to make huge AI capital investments. Investors were also selling off because the valuation had become elevated.
Today’s Change
(-0.70%) $-1.89
Current Price
$266.57
Key Data Points
Market Cap
$2.9T
Day’s Range
$266.36 – $269.77
52wk Range
$196.00 – $278.56
Volume
1.2M
Avg Vol
45.2M
Gross Margin
50.60%
But after Amazon’s stock tanked some 20% between mid-January and the end of March, investors returned and bought like crazy. Amazon stock has soared some 34% since the end of March to roughly $265 per share. Amazon stock is now up some 15% for the year, and its valuation has crept back up. It is now trading at 31 times earnings, back where it was last summer.
Although Amazon is a great long-term stock, investors may be a little hesitant to buy at this elevated valuation. But if there were another plunge or correction where the P/E dipped back into the mid-20s, that would mark a huge opportunity to buy the dip, as it did in Q1.
3. Walmart
Walmart (WMT 0.82%) has traditionally been an excellent stock to own during economic downturns and bear markets. That’s because this discount retailer, the largest in the world, tends to see more traffic when the economy is slow, prices are rising, and money is tight, thanks to its low prices and wide range of items, including groceries.
Today’s Change
(-0.82%) $-0.99
Current Price
$120.35
Key Data Points
Market Cap
$959B
Day’s Range
$118.91 – $121.92
52wk Range
$93.43 – $135.16
Volume
1.5M
Avg Vol
19.3M
Gross Margin
23.48%
Dividend Yield
0.80%
The thing is, inflation has been high for a few years now, so Walmart has been very popular with consumers, with steadily rising foot traffic. That has led to strong investor interest, which has translated into a 21% annualized return for the shares during the past five years.
Now, Walmart’s stock is overvalued, priced like a tech stock, trading at 43 times earnings and 41 times forward earnings. That’s just too high, even though it continues to grow. But if the market pulls back, I’d jump on Walmart shares at a lower valuation because it is a stock that would do well during a downturn, if priced right.
