When the VIX falls below 15%, it's time to cut the games and get serious. Opportunities become scarce without volatility, so you must employ extra scrutiny to pick the right stocks to invest in. Luckily, this also means that Wall Street is on vacation, leaving many good deals on the table.
Today, it is important to find stocks with good momentum (upside, hopefully) and ones with a lot left on the tank backed by analysts' bullish views and representative of a sector outlier.
Surprisingly, names like The Walt Disney Company (NYSE: DIS), T-Mobile US Inc. (NASDAQ: TMUS) and Li Auto Inc. (NASDAQ: LI) have fallen out of favor. However, today's trends have proven to carry their respective industries forward.
Decoding markets
When trying to understand where the market's sentiment toward a stock or industry is, you can go right by starting with price action. An excellent first step is to compare a stock's price today and compare it with its 52-week high to gauge bullish versus bearish momentum.
Disney is a beast of its own, with an unbeatable moat that cannot be compared to other businesses so that you can knock this one out quicker than the other two. Regarding price action, Disney stock has crossed above 80% of its 52-week high, an official bull market.
Not only is price action on Disney's side, but analysts still see a price target of $112.20 a share, implying a net 17.5% upside from today's prices.
However, the company still has a long way to go to return to its historical profit margins, so if your gut tells you this target should be higher, then you're right.
Earnings projections reflect a net bump of 24.7%, and the way the market has been bidding the stock, an EPS beat is a sure thing. Considering the stock trades at prices not seen since 2015, the ceiling keeps increasing, especially with the long-awaited return of dividend payouts.
Clear as day
Markets did not try to hide their excitement around T-Mobile and Li Auto, as their price action and valuations are all over like a "tell" at the poker table. In the automotive sector, namely foreign manufacturers, Li Auto carries the price action crown.
While the industry trades at an average of 77.7% of its 52-week high, Li is 85%, way above peers and representing a bull market. The industry's valuation metrics, particularly its P/E ratio, sit at an average of 5.6x.
Li's P/E? Try 43.9x.
Why are markets willingly paying a 682% premium to the industry's average P/E? The answer is in the earnings growth. Analysts expect EPS to shoot up by 90.1% in the next twelve months, while the industry should grow at an average of 7.3%.
Like any other product or service, you will be asked to pay a premium price for superior quality. Stocks work the same way, within reason, so markets will gladly pay a premium price for an analyst price target of $70.4, 75% above today's price!
What's impressive is to notice how similar of a situation T-Mobile sits in. Trading at 97% of its 52-week high, this stock is playing around with making new all-time highs, for good reason.
The national wireless industry is expected to grow EPS by an average of 2.2%; T-Mobile analysts are shooting for a massive 38.7%, leaving all other competitors in the dust.
For this reason, the market is willing to pay a P/E of 21.0x for T-Mobile stock, which is 264% higher than the industry's average 7.9x P/E. It should be no wonder that analysts are expecting a net upside of 21.4%.
While Disney is the easy choice in its standalone industry, Li and T-Mobile are other easy wins in case your portfolio needs a bit of exposure to the automotive or wireless industry. Either way, a mix or a match are all worthy additions to your holiday watchlist.
