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Coming off a year that boasted 25% gains, January was expected to be volatile, and boy, it sure has. Nobody knows if Monday’s sell-off, which saw the TSX slide 3%, the Nasdaq 5% and the S&P tumble into a correction, is the bottom or not, but investors should be picking away at their favourite oversold stocks. The outlook for the rest of 2022, particularly the second half, remains bullish, even if inflation may stubbornly remain high while central banks raise rates. Why? Consumers will continue to spend; Omicron will weaken (BC and the UK, for example, are reporting peaks); and companies that turn profits will remain robust. High-PE tech stocks are a different story altogether. Here are some suggestions to pick away at:
Walt Disney Co. (DIS-N)
The House of the Mouse got thrown under the bus last Friday when Netflix reported a weak forecast. DIS stock slid $10 from $147.62, and fell below $130 in Monday’s rout.
What prompted this 12% fall? Nothing that Disney did, and it’s probably an oversold stock. After all, Disney still operates theme parks, which thrive in warm weather when Covid traditionally recedes. Sure, cruise ships and theatrical movies are having a rough time during Omicron, but they too will thrive in warmer weather.
Even Ontario, which has the toughest lockdown measures in the world, will reopen screens on Jan. 31. Simply put, Disney has too many successful businesses with long track records to ignore. Buy below $140.
Manulife Financial (MFC-T)
It makes sense that high-PE tech stocks are getting sold off these days, but financials? Why are stocks with low PE’s and predictable earnings getting tossed out with the bathwater? In fact, financials should continue to rise.
As a trade or a medium-term hold, Manulife benefits from rising interest rates and pays a generous 5.22% dividend. It trades at only a 7.27x PE. In the past seven years, MFC stock tends to plateau slightly above $27 and fails to rise to $28. With the street expecting four rate hikes in 2022, MFC has another shot at cracking at $28. Since Dec. 1, 2021, Manulife has climbed $2 on the tailwind of rising rate talk.
Based on Monday’s stock levels around $24.50, MFC stock offers buyers a 10% return if it hits $27, plus of course that divvy pays you to wait. Manulife’s next earnings date is Feb. 9 and it could surprise to the upside. A caveat is that the company’s Asian insurance operations could take a hit from Omicron, so MFC is not without risk. Is this a long-term hold? No. Buy on weakness, but later sell on strength.
Netflix Inc. (NFLX-Q)
The streaming giant got hammered after Thursday’s close for issuing disappointing guidance. Shares tanked 20% in after-hours trading, then plunged from $508.25 on Thursday’s close to as low as $351.47 during Monday’s rout. That’s a 31% hit. I’ve always shied away from high-PE tech stocks that carry a lot of debt, but Netflix was always excused because it was investing a ton of money in producing top-notch movies and series which is the lifeblood of any streamer. Also, Covid lockdowns gave Netflix literally a captive audience. But that was nearly two years ago and competition from Disney, Apple, HBO and others are challening Netflix. As of Q3 2021, Netflix remained the king of streaming in the U.S. with a 27% market share, but Amazon Prime wasn’t far behind at 21%, Disney+ at 14%, Hulu 13% and HBO Max 10%. Of course, this is not a zero-sum game. Viewers often subscribe to more than one streamer. However, Netflix just reported that it added 8.3 million subscribers in Q4, falling short of its earlier forecast of 8.5 million. In 2020, it added 37 million subs, but 18 million in 2021. North America is looking saturated.
On the positive side, over 90% of the streamer’s membership grew outside America and Canada, riding on a strong slate of international content. Meanwhile, overall revenues climbed 16% YOY in Q4 to $7.7 billion, while its net income of $1.33 per diluted share beat the street. In terms of metrics, Netflix’s PE keeps shrinking. The last time it traded in triple digits was June 20, 2019 at 144.05x. Two years later, it stood at 54.74x, and now it’s below 33x. So, dump Netflix stock?
At current levels, Netflix is a buy and is an oversold stock. It’s been oversold by investors expecting too much. Membership may stagnate in North America, but Netflix’s growth lies overseas. After all, no other streamer has captivated the entire world with a Korean-language series; by far, The Squid Game is the number-one series in Netflix’s history. However, one thing to watch is the company’s recent price hike from $14 to $15.50 in the U.S. Before Covid, it cost $11. (In Canada, rates jumped from $15 to $16.50.) Netflix will be the most expensive streamer. Will viewers cancel or keep watching? If some cancel, will the added revenue make up for it?
Disclosure: I own shares of Disney and Manulife.
