Key insights
- The article provides an investor's checklist for buying stocks that have recently dipped, emphasizing the importance of understanding the reason for the decline. It differentiates between macro-driven selloffs, which might present a buying opportunity for fundamentally sound companies, and company-specific issues like earnings misses or margin compression, which suggest a continued slide. The author highlights gross margin and Free Cash Flow (FCF) as key metrics to assess a company's health and advises checking current valuation against historical ranges to determine if a stock is truly cheap.
Watched a bunch of people on here buy Monday thinking the bottom was in and get wrecked by Friday. Wrote down the checklist I actually use before touching anything that's dipped.
Even if a "good" stock being down 30% isn't a reason to buy it. it's 30% cheaper than it was, which only matters if the original price was right.
Before touching anything that dipped this week, one question actually matters: why did it drop. macro selloff with no company news means the business is the same, just cheaper. Earnings miss or two years of margin compression means the price might still be adjusting to reality and you're not buying a dip, you're buying a slide.
Gross margin and FCF are the two hardest numbers to fake short term. if those are holding the thesis is probably intact. If gross margin has been going the wrong way for a couple years the drop might be correct not overdone.
And the last thing I check of course is whether it's actually cheap now or just cheaper than it was. stocksight.org is free and shows historical P/E ranges with historical P/E average, been using it for my research recently.