For investors looking for the best stocks to buy on a dip, “the dip” can mean a lot of different things. It can be the case of a market dominator that is trading near its low following a brutal bear market. Or it can be a stock that has bounced recently following an extended downtrend, thus signaling that shares may have bottomed. It could even be a stock that has defied the broader market to deliver a stellar performance in 2022. In the latter case, even a modest pullback may offer a chance to purchase shares at a slight discount before the next leg up.
Today’s list of the best stocks to buy on a dip has examples of all of these. Whether trading at a steep discount or taking a momentary breather, these stocks all have the potential to deliver outsized short- and long-term profits for investors who are ready to move some cash off the sidelines and buy the dip now.
| AMZN | Amazon | $96.79 |
| CPRX | Catalyst Pharmaceuticals | $38.58 |
| PRLB | Proto Labs | $13.98 |
| TAN | Invesco Solar ETF | $71.72 |
| SPWR | SunPower | $18.25 |
| PLUG | Plug Power | $15.69 |
| INMD | InMode | $34.27 |
Best Stocks to Buy on a Dip: Amazon (AMZN)
To say investors were disappointed with tech giant Amazon’s (NASDAQ:AMZN) third-quarter results is an understatement. Shares are down 16% since the Oct. 27 announcement, falling to a two-and-a-half-year low. Among their qualms with the results were lower-than-expected Q3 revenue, slowing cloud growth and an underwhelming forecast for the holiday quarter.
“The continuing impacts of broad-scale inflation, heightened fuel prices and rising energy costs have impacted our sales growth as consumers assess their purchasing power and organizations of all sizes evaluate their technology and advertising spend,” said Amazon CFO Brian Olsavsky on the company’s Q3 earnings call.
In other words, even the online retail and cloud services giant is feeling the sting of inflation. On the bright side, energy prices have come down meaningfully from their peak and there are signs that inflation is easing. While this helped boost stocks in October, Amazon has not been a beneficiary of the broader market rally.
Yet, if the market continues higher in the short term based on continued economic optimism, AMZN stock should eventually move higher with it, especially if the company ends up beating its conservative Q4 guidance. And, of course, in the long term, investors will likely look back on today’s price levels as a screaming deal in the stock.
Catalyst Pharmaceuticals (CPRX)
Catalyst Pharmaceuticals (NASDAQ:CPRX), which develops drugs for rare diseases, is a buy-the-dip candidate that has bucked the broader market downtrend, with shares more than doubling so far in 2022. However, they currently sit 19% below their all-time high, made on Sept. 13.
Catalyst’s outperformance this year is largely due to the company’s strong financial results, which indicate rapid uptake of its drug Firdapse. The Food and Drug Administration approved Firdapse in 2018 for the treatment of Lambert-Eaton Myasthenic Syndrome, which affects around 3,000 people in the U.S., including 1,400 adults who are undiagnosed or misdiagnosed. Firdapse remains the only approved treatment in this rare disease market, and patients tend to stay on the medication once they start taking it.
In the second quarter, the company reported record net product revenue of $53 million, up 58% from a year ago. Strong Firdapse sales also helped the company beat analysts’ earnings estimates by a wide margin, reporting 28 cents per share versus an 11-cent estimate.
For the full year, analysts are expecting earnings to jump more than 45% to $205 million and EPS to surge 89% to 70 cents. In 2023, they are calling for revenue growth of 18% to $242 million and earnings growth of 21% to 85 cents per share. CPRX stock is trading at 16.4 times next year’s earnings estimate, a very low valuation for a successful drugmaker.
Expect shares to continue higher as the company captures more of the Lambert-Eaton Myasthenic Syndrome patient market and expands its rare disease portfolio.
Best Stocks to Buy on a Dip: Proto Labs (PRLB)
Proto Labs (NYSE:PRLB) uses 3D printing to produce custom prototypes and on-demand production parts for a range of industries including medical devices, electronics, appliances, automotive and consumer products. The stock is down 25% year to date. However, it is up 12.5% since hitting a 52-week low on Oct. 13, perhaps signaling shares have put in a bottom.
The company reported better-than-expected Q2 earnings of 46 cents per share, 7 cents ahead of expectations. Revenue rose 3.2% year over year to $126.9 million, slightly below the consensus estimate. Impressively, given the high-inflation environment, gross margin came in at 45.9%, above the 45.7% reported for Q1.
Analysts expect revenue to increase 3% this year and 5.5% next year, while earnings per share are forecast to grow 7.7% and 11.4%, respectively. PRLB’s forward price-earnings ratio is a reasonable 21.3.
Over the longer term, Proto Labs, whose customers are primarily manufacturers, should benefit from a “reversion to the mean” when it comes to the ratio of goods and services demanded by consumers.
Invesco Solar ETF (TAN)
The Invesco Solar ETF (NYSEARCA:TAN), a proxy for the solar energy industry, has taken investors on a wild ride in 2022. Shares peaked above $90 in mid-August, following the passage of the Inflation Reduction Act, which includes billions in clean energy incentives. However, they now sit more than 20% below that high after reversing lower in September.
It appears that the retreat is based on two main fears, both of which are tremendously overdone. One is the concern that the Uyghur Forced Labor Prevention Act will hurt the American solar industry next year. The other is the worry that higher interest rates will hurt rooftop solar demand in the U.S.
As I’ve stated in the past, given the tremendously pro-solar sentiment of the Biden administration, I do not expect it to enforce the Uyghur Forced Labor Prevention Act in a way that will significantly damage the solar sector. Further, many companies whose stocks are owned by TAN such as GCL-Poly Energy Holdings and Daqo New Energy (NYSE:DQ) generate much more of their revenue from outside of America than within it. Finally, the rooftop sector does not represent a majority of the U.S. solar industry. Meanwhile, as I’ll discuss in detail in the next section, higher interest rates should not prevent millions of Americans from adding solar panels.
It’s possible that investors may be coming to their senses, as TAN is on the upswing once again, rallying 14% in just over a week.
Best Stocks to Buy on a Dip: SunPower (SPWR)
SunPower (NASDAQ:SPWR), which specializes in providing solar panels to consumers globally, has followed a similar trajectory as TAN. Shares reversed lower in September and now sit 36% below their recent high. But they’ve also rallied more than 20% in just over a week.
The company should get a big boost from the EU’s upcoming mandate of solar panels on all new homes and buildings starting in 2030. In the U.S., the Inflation Reduction Act, which will implement 30% tax credits for all residential solar installations for the next decade, will give rooftop solar, in general, and SPWR, in particular, a big lift.
As I mentioned earlier, I believe concerns about higher interest rates hurting solar panel demand are overdone. The balance sheets of American households remain quite strong, according to Fitch Ratings. The firm called U.S. consumer finances “robust,” noting, “Household debt service and leverage continue to be relatively low compared with historical standards.”
Meanwhile, in the U.S. and even more so in Europe, electricity prices have risen sharply, greatly increasing consumers’ financial incentives to install rooftop solar panels. SPWR and its competitors should benefit meaningfully from this trend.
Plug Power (PLUG)
Plug Power (NASDAQ:PLUG), which develops hydrogen fuel cell systems, is down 39% from its recent high above $30, made in mid-September. Shares have not yet shown signs of putting in a bottom, making this one of the riskier of today’s best stocks to buy on a dip. However, the industry has huge growth potential and the company’s upcoming earnings announcement could provide an upside catalyst for the stock.
Between 2021 and 2031, the global green hydrogen market is expected to grow at a compound annual rate of 46.5% to $31.6 billion. And recent industry deals show the sector is indeed heating up.
For instance, in August, Plug said it struck a deal to provide 10,950 tons of liquified hydrogen per year to Amazon. The online retail giant, which already uses Plug Power’s fuel cells to power its electric forklifts, plans to use the liquified hydrogen to fuel transportation and building operations beginning in 2025.
Morgan Stanley believes Plug Power “will be a leader in the green hydrogen ecosystem.” The firm rates shares “overweight” with a $48 price target. That implies upside potential of more than 200% from current levels.
Best Stocks to Buy on a Dip: InMode (INMD)
InMode (NASDAQ:INMD), a maker of radiofrequency-based medical products used in cosmetic procedures, delivered beat-and-raise Q3 results — a rarity these days — on Oct. 27. Shares, which are down 51% year to date, initially popped following the announcement but have since fallen 8% from their post-earnings peak.
The company reported third-quarter EPS of 66 cents versus analysts’ average outlook of 58 cents. Revenue jumped 29% year over year to $121 million, $5 million above what analysts had been expecting. Management increased its full-year sales guidance to $445 million to $450 million from its previous outlook of $415 million to $425 million.
“Demand has remained strong despite the anticipated seasonality and the return of summer travel, and this positive momentum continues into Q4,” said InMode CEO Moshe Mizrahy. “We’re very happy with the successful market endorsement of our strategy as we expand from aesthetics into wellness and improved quality of life categories.”
On Oct. 12, before InMode reported its Q2 results, investment bank Jefferies initiated coverage of the name with a “buy” rating and a $40 price target, which is 17% above the current share price. The analyst said “continued market growth, higher outside the U.S. penetration, share gains and pipeline contributions” should help InMode exceed analyst expectations.
With a forward price-earnings ratio of just 13.5, put INMD on your list of the best stocks to buy on a dip.
On the date of publication, Larry Ramer owned shares of PLUG and INMD. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.