Buy the dip: The cheapest stocks to buy now

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When the market is down and stock prices are down across the board, savvy traders know there’s business to be had. But picking the right stocks to buy can be tricky: How do you decide which stock will bounce back?

Buying the dip is not an easy trading strategy and should be treated with caution. Done right, you can get deep discounts on stocks with solid fundamentals and strong prospects. Think of it as buying quality stocks at a discount.

The truth is that many great companies have been hit by short-term market downturns, but they have performed extremely well over time. Knowing which quality metrics to track to spot cheap stocks to buy can help you pick winners that the market can return at higher prices after a decline.

We’ve identified nine cheap stocks that have fallen in tandem with the S&P 500 and other major indexes over the past few months. Each company has a multi-year history of earnings per share (EPS) and revenue growth, and analysts expect similar gains in the years ahead.

Monolithic Power Systems, Inc. (MPWR)

Tracking annualized 3-year EPS

+28.86

Annual sales for the past 3 years

+27.5%

Expected annualized 5-year EPS estimate

+25%

Monolithic Power Systems manufactures integrated circuits used to manage power in various electronic systems. Manufacturers install Monolithic’s chips to reduce the power consumption of their systems.

Shares have risen a total of 373% over the past five years — but as of this writing, MPWR is trading about 20% below its all-time high of $580 set in November. This latest drop is the stock’s biggest in the past 10 years and could be a great opportunity to buy the dip.

MPWR’s earnings and revenue have grown every year since 2015. Over the past three years, annual earnings per share have grown an average of 33% and annual revenue has grown an average of 31%.

The median EPS growth for S&P 500 stocks over the same period was 12%, which tells us that the $22 billion company is growing earnings more than twice as fast as the rest of the stock market average.

Monolithic’s earnings growth is expected to continue, with analysts forecasting 25% EPS growth over the next five years (but only 18.3% EPS growth in 2023). Companies that expect future earnings growth at these levels will usually justify higher stock prices over time.

MPWR offers a 0.7% dividend yield. The company has steadily increased its dividend every year since 2017 — including through 2022.

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Ubiquiti Inc. (UI)

Tracking annualized 3-year EPS

+16.8%

Annual sales for the past 3 years

+23.1%

Expected annualized 5-year EPS estimate

+23.9%

Ubiquiti operates wireless and networking equipment for Internet Service Providers. Since 2018, the communications equipment company’s annual results and overall sales have grown.

Shares have risen 470% over the past five years, but UI is trading about 30% below its March 2021 peak. The magnitude of the recent decline corresponds to a good historical entry point.

Analysts expect earnings per share to grow 35% next year and a compound annual growth rate of 24% over the next five years. The $15 billion company is on track for more impressive growth than the company has achieved in recent years.

Ubiquity has increased its dividend every year since 2014. The current dividend yield is 0.9%.

Medifast, Inc. (MED)

Track 3-year annualized EPS

+38.2%

Annual turnover in the last 3 years

+45%

Expected annualized 5-year EPS estimate

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+20%

Medifast manufactures and sells products for weight loss and healthy living. The $2 billion company is growing rapidly, and many consumers are looking for ways to manage their weight.

MED stock can be volatile, but it’s also valuable. The stock is up 346% over the past five years, even taking into account the stock’s 50% decline from its May 2021 all-time high.

A similar 50% pullback is a good long-term buy argument, but investors should be prepared to hold MED through some choppy ups and downs. Before hitting new highs, the stock has retraced 60% to 80% from its all-time highs several times over the past two decades.

The company’s total revenue has tripled since 2018, with a three-year compound annual growth rate of more than 38%. Analysts expect growth to slow from current levels while maintaining a respectable 20% compound annual growth rate over the next five years.

Like Deckers, stocks with a P/E near 10 are not often seen among growth stocks: Medifast has a P/E of 13.1 and a forward P/E of 9.9. At this price, it is a cheaper stock option than DECK.

Medifast pays the highest dividend on our list, currently yielding 3.6%. Dividend payments have increased each year since 2015.

Microsoft Corp. (MSFT)

Tracking annualized 3-year EPS

+28.6%

Annual sales for the past 3 years

+15.1%

Expected annualized 5-year EPS estimate

+16.2%

Microsoft doesn’t require an introduction from anyone familiar with the stock market or personal computers. Some of the other stocks on our list are lesser-known, but Microsoft may appeal to investors looking for blue-chip stocks to buy on the dip.

Despite its outsized market cap and dominance in the tech industry, the $2 trillion company has hardly slowed down. Microsoft’s annual EPS has grown an average of 29%, driven by an average revenue growth of 16.3% over the past three years.

Microsoft stock has performed well over the past five years, gaining more than 300%. MSFT’s current 22% pullback from its November high is a potential opportunity to buy a pullback. This was the biggest drop for MSFT since 2010, aside from a drop in early 2020 at the beginning of the Covid-19 pandemic.

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Analysts expect annual earnings per share growth of 16% over the next five years.

Microsoft has steadily increased its dividend every year for more than a decade. The current dividend yield is 0.9%.

Chipotle Mexican Grill, Inc. (CMG)

Tracking annualized 3-year EPS

+48.7%

Annual sales for the past 3 years

+15.8%

Forward-looking 5-year annualized EPS estimates

+27.2%

Chipotle is one of the largest fast food chains in the United States. Insatiable demand for the company’s burritos and bowls has sent the stock soaring an impressive 189% over the past five years. That includes a 30% drop from an all-time high set in September 2021.

Note that the $39 billion company has seen some volatility over the past decade. The stock fell 47% in 2012, 65% between 2015 and early 2018, and 55% in early 2020.

The current 30% sell-off in CMG could be a good entry point for long-term holders, but another 10% to 20% drop is not uncommon. Long-term trends in share prices, earnings and sales remain elevated.

Chipotle’s earnings and revenue growth has been impressive, with a compound annual growth rate of around 49% and 16%, respectively, over the past three years. Analysts expect earnings per share to grow at a CAGR of 27% over the next five years.

Note that CMG does not pay dividends.

Method

Our handpicked list of cheap stocks to buy now was created using strict criteria. The above stocks are traded on U.S. or Canadian exchanges and meet the following requirements:

Sustainable annual EPS growth. All of the above stocks have achieved average annual EPS growth of more than 15% for at least five consecutive years.

Sustainable average annual sales growth. Select stocks have achieved annual sales growth of more than 10% for at least five consecutive years.

Earnings per share continued to grow year-on-year. In each of the past four years, earnings per share must be higher than the previous year.

No negative income for the past four years. While continued earnings growth is key, profitability is even more important, so no stock should have seen negative earnings per share over the past four years.

Sustained growth in forward-looking EPS estimates. Analysts, on average, estimate annual earnings per share growth of more than 15% over the next five years.

EPS estimates should be strong next year. Analysts’ average estimate for EPS growth next year should be 15% or more.

Long-term returns outperform the market. Each stock that met the other criteria also significantly outperformed the S&P 500. The 5-year annualized return should outperform the S&P 500’s performance by at least 10% over the same period.

Prices have fallen recently. The stocks on our list are all down 20% or more from their recent highs. Then use historical price declines to explain how lower pullbacks preceded the recovery.

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The information contained in this website does not constitute, nor should it be construed as, advice, recommendation, offer and/or solicitation to buy or sell stocks, and any decision taken is the sole responsibility of the reader/user. Before deciding to buy any of these stocks, do a lot of research to make sure they fit your financial goals and risk tolerance.

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