ENGAGING IN WILD speculation and short-term trading is unwise for most investors, especially if you need your portfolio to support retirement. However, buying the dip on oversold stocks is not necessarily speculation, nor is it as risky as you might think.
The key is determining what makes a stock oversold.
At a high level, it's when people follow the herd, rashly unloading shares based on a spate of bad news without factoring a company's competitive advantage or broader market conditions. If a firm hits a rough patch – say on a lackluster product or operational mishap – but continues to command outsize market share, lacks rivals offering a legitimate alternative or enjoys a loyal customer base, its stock likely will turn around.
Three prominent companies show how this works.
Chipotle Mexican Grill
Chipotle (ticker: CMG) grew explosively after its debut on the public markets, thanks to its bold flavors and fresh ingredients. Then, an E. coli outbreak struck in 2015 and spread across 11 states. In response, the chain instituted new health safety training for staff and closed the doors at all its restaurants nationwide for a day to reassure the public.
Over the next few years, Chipotle's stock shed two-thirds of its value. However, after bottoming out, shares have rebounded, up nearly 165% since October 2017, even as there was a brief panic last summer over reports that a location in Columbus, Ohio, was responsible for a series of food poisoning incidents.
What did Chipotle have going for it? For one thing, a very public and consistent commitment to fix its food safety lapses. But perhaps most importantly, the so-called fast-casual dining market is growing rapidly, and Americans have come to agree that Chipotle is a clear leader when it comes to freshness and convenience.
Having been caught in the crossfire of a trade dispute between the U.S. and China, it's easy to see why Nvidia (NVDA) stock has taken a beating since peaking in October of last year, with Christmas Eve being the low point. Shares regained ground earlier this year but once again retreated in recent weeks.
To be sure, more than a few market watchers are currently dismissing Nvidia as a has-been, pointing toward increased competition within the chipmaking industry it once dominated. In our view, however, its challenges, while hardly inconsiderable, have been blown out of proportion.
First and foremost, tariffs will not last in perpetuity. Indeed, the American and Chinese economies are far too interdependent for them to linger – if for no other reason that there's an election 17 months from now and the president will be loath to continue a policy that is interpreted as harming the economy.
Also, the company remains a top producer of graphics processing units, or GPUs, which are essential to everything from mobile phones, to video games, to a wide range of products powered by artificial intelligence.
So, despite any new entrants that may be seeking a share of this lucrative market, there are more than enough opportunities to allow Nvidia to remain an entrenched, big-time player.
Building planes that transport millions of people globally each day is a life or death responsibility. Boeing (BA) has no doubt failed to uphold that obligation in recent months, with faulty automated systems in its 737 MAX airliners believed to have caused two fatal crashes in fewer than six months.
As a result, Boeing has faced an international outcry from regulators, customers and investors, and was forced to ground the fleet for weeks. Given the string of troubling headlines in the wake of both incidents, Boeing's stock has been surprisingly resilient. That masks the fact, however, that shares are down over the last 12 months, a period in which the broader indexes have experienced gains.
Clearly, Boeing has a lot of work to do before it wins back the world's trust. At the same time, the reality is that not only is the company the second largest defense contractor in the world but, along with Airbus, it enjoys a duopoly of the large commercial aircraft market.
Further strengthening Boeing's position is that switching from one plane manufacturer to another is a significant undertaking for airlines, so the company's share of that market will always be somewhat stagnant.