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A company’s stock price can fall for multiple reasons, and knowing the reason for the dip can help you determine whether the stock is a buy at the dip. Some common reasons for a stock price dip are earnings misses, a panic sell due to overall market bearishness, the tax season sell-off, and periodic profit booking. These reasons do not affect the company’s business or earnings growth potential. As long as the reason for long-term earnings growth is intact, that stock is a buy.
Importance of buying at the dip
Once you know which stock is a buy and for what reason, the next step is to look at its valuation. Sometimes, the bull market overvalues a stock as investors price in unreasonable growth expectations, as was the case with Shopify (TSX:SHOP) during the pandemic. Investors had priced in 10 years of growth between April 2020 and November 2021.
While the company continued reporting strong revenue…
