Traders are often quoted as slaves to volatility, as their entire business model is dependent on stocks moving actively to meet the conditions of a trade and spread. However, long-term value investors are just as dependent on volatility as their distant day-trader counterparts. Here’s why.
Volatility, as measured by the volatility index (VIX), can bring fear and uncertainty to the stock market, and with those feelings usually come lower prices. So, before they allocate capital, those hunting for a potential value play or attractive price on their favorite stocks will typically look for rising and present volatility in order to meet their investment criteria.
To seize discounted opportunities before they disappear, retail investors can look for stocks that have recently dropped in price during periods of high volatility. Stocks on this list include NexGen Energy Ltd. (NYSE: NXE) as the energy sector gets ready to ramp up, consumer discretionary Wayfair Inc. (NYSE: W) riding on the real estate sector bottom, and healthcare stock Hims & Hers Health Inc. (NYSE: HIMS) showing an unjustified discount today.
1. NexGen: Energy Cycle Presents Chance to Buy the Stock
Oil prices have declined lately despite OPEC's recent efforts to tighten production for a little while longer. The problem right now is not supply and production but weakening demand.
The United States economy is cooling down further, with unemployment reaching 4.3% and inflation collapsing to the 2% target from the Federal Reserve (the Fed). The slow business cycle won't last forever, though, as interest rate cuts are expected as soon as September 2024, which could spark a new bull market in oil. Warren Buffett saw this coming a little too early as he bought up to 29% of Occidental Petroleum Co. (NYSE: OXY)in June 2024.
Now, why is an oil rally potentially good for a uranium miner like NexGen? If the demand for oil increases, so will the price of oil.
When this happens, alternative energy sources like nuclear will become more attractive, and that's where Uranium comes into play.
Knowing this, analysts now forecast up to 107.2% upside for NexGen stock through their $11 price target today. As the stock trades at only 60% of its 52-week high, the risk seems minimal compared to the reward.
2. Wayfair: Real Estate Boom Drives Double-Digit Upside
Interest rate cuts drive down mortgage rates and make new homes more accessible. With such bullish expectations, lenders like Rocket Companies Inc. (NYSE: RKT) are already rallying by more than 30% in the past quarter.
Wayfair stock is next in the value chain. As mortgages are sold and closed, the next step for new homeowners is to furnish the property, and that’s where this stock comes into play. Now trading at only 56% of its 52-week high, this stock means investors have a large gap to close higher.
Analysts at Citigroup see a price target of up to $70 a share for Wayfair stock, a belief that could be backed by double-sector tailwinds. Lower rates will benefit real estate and consumer activity as financing and credit become more accessible and flexible.
Even bears know that the odds are against them with Wayfair stock. The company reports that the stock’s short interest declined by 9.3% over the past month alone, showing signs of bearish capitulation and opening the way for bulls to buy the stock and take their place.
3. Hims & Hers: Unjustified Dip Creates a Prime Arbitrage Opportunity
After Hims & Hers competitor Eli Lilly & Co. (NYSE: LLY) announced a more affordable and easier-to-scale GLP-1 weight loss product, shares of Hims & Hers fell to a dismal 53% of their 52-week high price. With this statistic, investors can start to build a potentially bullish case.
Looking inside the company’s latest quarterly presentation, only one out of ten product offerings deals with weight loss, meaning most of the company’s revenues (and earnings) are secure despite the growing competition. This is why Wall Street analysts reiterated their EPS growth forecast for up to 72.7% in the next 12 months, backed by a price target set by those at Deutsche Bank for $23 a share. To prove these analysts right, the stock would need to rally by as much as 70% from where it trades today, a tilted scale away from risk and toward reward.
More than that, quantitative hedge fund Renaissance Technologies boosted its position in the stock by 113.1% as of August 2024. Expecting to see the dip erased, this fund now has up to $121.9 million running in favor of Hims & Hers stock.
