When investors buy stocks on weakness, they purchase securities on dips in the hope that the equities will rebound in the future. Investors try to execute this strategy with names whose pullbacks are overdone or, better yet, completely unjustified.
As I’ve pointed out in past columns, buying stocks on weakness is a way of starting to execute the “buy low, sell high” strategy that is often the key to successful investing. After all, stocks that have dropped meaningfully on price are much more likely to be towards the low end of their valuation ranges than names which have recently surged.
To see how a successful buy-on-weakness strategy could work, consider that Nvidia (NASDAQ:NVDA) stock had tumbled to $762 on April 19. At that time, many on the Street were worried that the stock’s valuation was excessive and that the artificial intelligence (AI) boom would prove to be fleeting. Investors who thought such fears were overdone and purchased the shares on weakness would be looking at a 32% gain as of the market close on May 31.
For investors who want to exploit similar opportunities, here are three top-notch stocks to buy on weakness.
Celsius Holdings (CELH)
The shares of up-and-coming energy drink maker Celsius Holdings (NASDAQ: CELH) slumped over 15% from May 24 to May 31. The decline was ostensibly due to a small downturn in the company’s market share and a slowdown in its rapid growth recently reported by Nielsen. Specifically, Celsius’ market share dropped to 10.5% from 10.8% while its sales growth fell to a still-blistering pace of 39%.
But even Morgan Stanley, which was cautious about the outlook of CELH stock in the near-term, admitted the firm has multiple, positive catalysts including improved placement of its offerings at retailers and increased demand for its beverages by retailers. Moreover, the company is expanding to new overseas markets.
The investment firm warned the beverage maker is facing tougher comparisons which could cause its growth data to slide. But investment bank Wedbush called the decline “an overreaction.”
Given the company’s incredibly strong growth and powerful, positive catalysts, I agree with the latter sentiment.
Intel (INTC)
Giant chipmaker Intel (NASDAQ:INTC) has fallen sharply in recent months as its shares sank 33% between Mar. 7 and May 31. The Street was displeased with the company’s Q1 results in general and its Q2 guidance in particular.
But the company’s top line increased 8.5% in the first quarter versus the same period a year earlier as sales of its client computing unit soared 31% year-over-year. Moreover, Intel generated earnings per share of 14 cents last quarter, well above analysts’ mean outlook of 10 cents. As a result, I believe that Intel’s Q2 data could easily beat its guidance.
Meanwhile, Intel’s share of the PC market increased by about three percentage points to 63% last quarter, and the company’s top and bottom lines are likely to be boosted over the longer term by the initial demand for AI PCs.
Finally, according to some sources, the company’s Gaudi 3 AI chip is actually faster than Nvidia’s current offerings. Gaudi is certainly cheaper and less supply-constrained than Nvidia’s chips.
Given these points, I view Intel as one of the best stocks to buy on weakness.
Luckin Coffee (LKNCY)
In recent quarters, China-based Luckin Coffee (OTC:LKNCY) has been the victim of tough competition from domestic rival Cotti Coffee. Launched by Luckin’s deposed former chairman and its former CEO, Cotti has relied on a franchise model to open 6,200 stores and engage in a price war with Luckin. Largely as a result of Cotti’s high number of stores and its price war, Luckin generated an operating loss of 65.1 yuan (or $9 million) last quarter. Last year it had operating income of 678 million yuan.
But the competition from Cotti is likely to fade sharply in the medium term. That’s because the low prices it is charging appear to be unsustainable for its franchisees. Indeed, reportedly only about 20% to 30% of them are currently profitable and at least 40% are losing money. As a result, it’s not surprising that 826 of Cotti’s shops reportedly closed between November 2023 and February 2024.
Given these points, I expect Cotti to either have to close many shops or raise its prices going forward. In either scenario, Luckin will be able to raise its prices, boosting its top and bottom lines.
On the date of publication, Larry Ramer held long positions in INTC and CELH. His wife held a long position in LKNCY. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.