3 Overbought Stocks to Snap Up on Correction

A common investing mistake is to snap up stocks that have already witnessed a big rally. There is a fear of missing out that triggers impulsive buying without valuation consideration.

However, stocks never move up on a sustained basis. Even the best stocks trend higher, which involves intermediate corrections. It’s these corrections of 15% to 20% (sometimes higher), that provide an entry opportunity. This column talks about the overbought stocks for correction before fresh buying takes these fundamentally strong stocks higher.

It’s important to mention that the S&P 500 index has been sideways in the last 12 months. However, there are individual stocks that have gone ballistic. Of course, I would wait for a correction to grab these stocks. Another important lesson is that markets will have value creators even in the most difficult times.

Let’s discuss three stocks to buy on correction to hold for the next few years.

Nvidia Corporation (NVDA)

Nvidia Corporation (NASDAQ:NVDA) stock has skyrocketed by 170% for year-to-date 2023. Of course, there are reasons to be bullish in terms of growth and cash flow upside. However, valuations look stretched at a forward price-earnings ratio of 50.4. I would not be surprised if there is a 20% correction from current levels before fresh buying.

For Q1, Nvidia reported robust revenue growth of 19% on a year-on-year basis to $7.19 billion. The data center, gaming, and automotive segment contributed to revenue growth.

It’s worth noting that the automotive segment contributes to a small portion of the revenue. However, growth was 114% on a year-on-year basis. The automotive design win pipeline has swelled to $14 billion for the next six years. This segment is likely to be a value creator.

From a financial perspective, Nvidia reported an operating cash flow of $2.9 billion for Q1. The annualized OCF potential is already at $12 billion. With strong revenue growth, Nvidia’s free cash flows will continue to swell. Therefore, NVDA stock is worth accumulating on declines.

Apple (AAPL)

Apple (NASDAQ:AAPL) stock has surged by 43% for year-to-date 2023. It’s said that ‘buy on rumors and sell on the news.” This holds true for AAPL stock in the foreseeable future.

The reason for the rally was the anticipation of a new product launch. Apple has unveiled a $3,500 AR/VR headset, which is the biggest product launch for the company in a decade. I am bullish on the company’s wearable segment growth. However, I believe that the stock is likely to correct by 10% to 15% before heading higher.

For the next five years, there are several reasons to be bullish on Apple. First, the company’s financial flexibility is robust, with annual operating cash flows in excess of $100 billion. This provides headroom for aggressive investment in research. The company’s electric car is in the pipeline.

Further, Apple’s biggest segment remains iPhone. However, the company’s services and the wearable segment will be big in the coming decade. It’s worth noting that Apple is shifting focus to high-growth markets like India. Revenue and earnings growth is likely to remain attractive.

Tesla (TSLA)

After a big correction in 2022, Tesla (NASDAQ:TSLA) stock has surged by 100% for year-to-date 2023. The rally from oversold levels has been stellar, but the stock looks expensive at a forward price-earnings ratio of 62.2. It’s among the overbought stocks for correction, and I would expect a 15% downside before a renewed rally.

There are multiple reasons to be bullish on TSLA as a core portfolio stock. First, the company has an attractive pipeline of new models that include the Roadster, Cybertruck, and Semi. This will ensure sustained delivery growth.

Furthermore, Tesla has ambitious growth plans throughout the decade. The company plans to produce 20 million cars annually by 2030. There is a likelihood of multiple new gigafactory, which will boost revenue and earnings growth.

It’s also worth noting that Tesla is already a cash flow machine. Last year, the company reported $14.7 billion in operating cash flows. With strong financial flexibility, the company is positioned to make big investments without leverage.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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