3 Stocks to Buy on the Dip—and 1 to Avoid

Market Downturn: Contrarian Investment Plays with Jeff Clark

Key Concepts:

• Contrarian Investing: A strategy of investing in assets that are currently out of favor with the majority of investors, based on the belief that these assets are undervalued and poised for a rebound.
• Reversion to the Mean: The principle that asset prices tend to return to their historical average over time.
• 50-Day Moving Average: A technical analysis indicator that calculates the average closing price of a stock over the past 50 days, used to identify trends and potential support/resistance levels.
• Oversold: A condition where an asset's price has declined significantly and may be due for a rebound.
• ETF (Exchange Traded Fund): A type of investment fund that holds a basket of assets, such as stocks, and trades on an exchange like a stock.
• BITO: The ticker symbol for ProShares Bitcoin Strategy ETF, a Bitcoin futures ETF.
• GDX: The ticker symbol for the VanEck Gold Miners ETF.

I. Market Shift and Contrarian Opportunities

The market is currently experiencing a shift in momentum, moving away from the growth-focused strategies that dominated 2023 towards a more value-oriented approach. While the S&P 500 is down only slightly (around 2%), significant sectors have experienced declines of 20-30%. This is attributed to a change in market philosophy, where previously successful momentum stocks are now facing headwinds, and previously unloved stocks are beginning to recover. Jeff Clark notes a “reversion to the mean,” with overbought stocks declining and oversold stocks rebounding. This creates opportunities for contrarian investors. He highlights the outperformance of consumer discretionary stocks (like Pepsi), homebuilders, and gold stocks as examples of this shift.

II. Identifying Buy-the-Dip Opportunities

Clark emphasizes a contrarian approach to identifying buy-the-dip opportunities. The key is to focus on stocks that are considerably oversold, significantly below their historical averages. He specifically uses the 50-day moving average as a benchmark. A stock trading 20% below its 50-day moving average, when its historical average is 5-8% below, presents a potential buying opportunity. This indicates a stretched “rubber band” with limited further downside and a strong potential for a snapback. He previously recommended consumer discretionary and energy stocks when they were beaten down, and now cautions against them as they are overextended.

III. Specific Contrarian Plays

Clark presents three specific investment areas, along with one to avoid:

• Software Sector (IGV): Despite recent declines (Oracle down over 50%, ServiceNow beaten down after a strong quarter, Microsoft down 35%), the software sector is considered significantly oversold. Valuations are reasonable relative to historical norms, and a modest rebound to the 50-day moving average could yield a 25-30% return. He suggests the IGV ETF as a safer way to play this sector, but also identifies individual stocks like ServiceNow, Oracle (with a potential dip), and Microsoft as potential buys.
• Bitcoin (BITO): Bitcoin, currently trading around $68,000 (down from a high of $125,000 in October), is experiencing “exhaustive selling” driven by margin calls and liquidations. Clark believes this selling pressure is nearing its end and that Bitcoin could see a significant rebound in the next 6-8 weeks. He recommends BITO, the Bitcoin ETF, as a convenient way to gain exposure. He suggests a small initial investment with potential additions if the price dips further towards the $55,000-$60,000 range.
• Grocery Sector (ACI - Albertson's): Albertson's, and the grocery sector in general, is seen as a defensive play. As a necessity, grocery sales are less susceptible to economic downturns. Albertson’s trades at a low valuation (8x earnings) and has already begun to show signs of recovery. Clark anticipates a potential 20-30% upside in the next few weeks.

IV. Area to Avoid: Gold Mining Sector

Clark strongly advises against investing in the gold mining sector (GDX, Numont Mining, Barrick, Agniko Eagle) at this time. Despite recent gains, he believes the sector is overextended and due for a pullback. He notes that the recent surge in gold prices was largely driven by enthusiasm and has already discounted potential geopolitical risks. He suggests waiting for a more bearish sentiment and a pullback towards support levels before considering an investment. He specifically notes that his wife’s casual mention of silver prompted him to sell his position, as widespread public interest often signals a peak.

V. Technical Analysis and Risk Management

Clark’s approach relies heavily on technical analysis, particularly the 50-day moving average, to identify oversold conditions and potential rebound opportunities. He emphasizes the importance of identifying stocks that are historically far below their moving averages. He also advocates for a contrarian mindset, seeking opportunities where widespread pessimism creates undervaluation. Risk management is addressed through the suggestion of starting with small positions and adding to them on further dips.

VI. Notable Quotes

• “If everybody loved the stock, it wouldn't be selling off so hard.” – Jeff Clark, emphasizing the contrarian principle.
• “Now is better than any other time in the last 15 months to be a buyer of Bitcoin.” – Jeff Clark, highlighting the current undervaluation of Bitcoin.
• “If you wanted to buy Bitcoin and you were waiting for a pullback to do that, now is that opportunity to do it.” – Jeff Clark, reinforcing the buy-the-dip strategy for Bitcoin.

VII. Synthesis and Conclusion

The current market downturn presents opportunities for contrarian investors willing to identify and invest in oversold assets. Clark’s recommendations focus on the software sector, Bitcoin, and the grocery sector, all of which are exhibiting signs of potential rebound. However, he cautions against the gold mining sector, which he believes is overextended. His strategy emphasizes technical analysis, a contrarian mindset, and a focus on value, offering a framework for navigating the current market volatility and potentially capitalizing on undervalued opportunities. The core takeaway is to look for assets that are significantly below their historical averages and poised for a “snapback” as market sentiment shifts.