5 Fundamentally Solid Stocks with a Dynamic Hedge Strategy to Enhance Returns and Protect Against Downside Risk

The stock market just endured its third consecutive weekly sell-off, with the S&P 500 down 7% from its peak and the Nasdaq 100 entering correction territory. Mounting trade tensions and deteriorating economic data are raising recession concerns, fueling market uncertainty. While valuations have become more attractive following the sell-off, volatility is expected to persist. Hedging remains a key strategy to protect against further downside while allowing investors to capitalize on promising stocks at discounted prices. In this article, we highlight five fundamentally strong stocks and a dynamic hedge strategy to optimize portfolio performance.

1. Nvidia (NVDA)

Broadcom's impressive quarterly results serve as yet another example that the AI boom is far from over. Nvidia remains below the $3 trillion market cap, having declined 17% from its peak, with a price-to-earnings (P/E) ratio of approximately 31 (Market Cap / (latest earnings * 4)). In comparison, Apple trades at a P/E of around 25, while Broadcom stands at 41, making Nvidia relatively undervalued compared to Broadcom.

While many tech giants are partnering with Broadcom on ASIC chips, Nvidia's chips remain their primary choice and serve as a crucial negotiation tool when securing Nvidia's GPUs. For instance, OpenAI and Oracle's Stargate project's first data center will be equipped with tens of thousands of Nvidia's GB200 GPUs, even though OpenAI is also collaborating with Broadcom on ASIC chips. ASIC chips offer more customization for specific customer needs, but large language models (LLMs) demand extensive computational power and inference capabilities—an area where Nvidia remains the biggest beneficiary.

Although China's DeepSeek has suggested that building LLMs does not necessarily require massive chip investments, scaling a more powerful model capable of supporting billions of users inevitably demands substantial computing resources. Additionally, Nvidia is likely working on inference-accelerated chips to address the next phase of AI development, paving the way for AGI. Notably, Nvidia's GTC AI conference begins next Monday, where investors will be watching closely for the next major AI product announcement—just as GB200 was unveiled at the same event previously.

Regarding trade tariffs, Nvidia, as a chip designer rather than a manufacturer, faces minimal direct risk. TSMC, its primary chip manufacturer, recently announced plans to invest hundreds of billions in U.S. facilities to circumvent potential tariffs under Trump. These developments position Nvidia for continued growth, with over 60% sales growth and 70%+ margins. At a 31 P/E ratio, Nvidia presents an attractive buying opportunity, and if it dips further, investors may find it even more compelling.

2. Netflix (NFLX)

Netflix shares fell 9% last week following a bearish analyst note predicting a slowdown in subscriber growth post-password-sharing crackdown and broad market sell-off. However, the company remains well-positioned with a strong global content portfolio, record Q4 paid memberships, and continued subscriber growth.

Netflix has several potential catalysts, including a stock split, international price hikes, and increased ad-monetization. The last stock split occurred in 2015, and with shares near $900, a split could enhance retail investor participation. Moreover, while Netflix recently raised U.S. subscription prices, international markets present further pricing power opportunities. Its successful ad-supported tier continues gaining momentum, strengthening its financial outlook.

With minimal exposure to trade tariffs and solid fundamentals, Netflix remains a strong contender for long-term growth.

3. Walmart (WMT)

As a grocery-focused retail giant, Walmart offers defensive qualities amid economic uncertainty. Its recent pullback is largely due to profit-taking, as the stock remains up 1.5% year-to-date after surging 76% over the past few years.

Walmart recently announced a 13% dividend hike, raising its quarterly payout to $0.94 per share, implying a 4% annual yield—an attractive proposition for value investors. Given its strong market position and ability to navigate tariff risks, Walmart is a solid long-term hold, even if economic conditions worsen.

4. Robinhood (HOOD)

Robinhood's stock has been volatile due to its exposure to stock and crypto markets. Recent market turmoil and disappointment over Trump's crypto initiatives triggered a broad sell-off. However, Robinhood's diverse trading offerings—including equities, ETFs, options, futures, and crypto—along with its user-friendly platform, make it a formidable competitor in the brokerage space.

The company's transaction-based revenue surged 236% last quarter to $672 million, indicating a strong recovery potential when market sentiment improves. While Trump's current crypto stance has been underwhelming, his pro-crypto stance could eventually benefit Robinhood in the next bull market.

5. Apple (AAPL)

Apple has remained relatively resilient, declining just 1.15% versus the S&P 500's 3% drop. The company's $500 billion U.S. investment plan and prior exemptions from Trump-era tariffs reduce trade risks.

Apple's AI initiatives, growing services segment, and potential benefits from China's economic recovery position it well for future growth. Notably, Apple plans to launch AI services in China by April, which could spur iPhone sales. Additionally, China's phone subsidies to stimulate the domestic economy could further boost Apple's performance.

Hedge Strategy: Enhancing Returns and Protecting Downside

Market uncertainty remains elevated, with rising concerns that Trump's tariffs could ultimately push the economy into recession. As a result, hedging remains crucial, even for investors who remain bullish on select stocks.

A practical hedging strategy involves purchasing short-term SPY or QQQ put options to offset potential downside risks while maintaining long positions. This approach also allows for tactical trading, capitalizing on short-term price movements through an intraday sell-high, buy-low strategy while holding overnight positions when appropriate. For example:

1. Buying a 3DTE QQQ put at market open on Monday could generate gains by the close.

2. Holding overnight and selling into strength on Tuesday can lock in profits.

3. Repeating this cycle—buying puts when indices rise intraday and selling them the next day when stocks rebound—can be an effective way to navigate market volatility. This strategy should be maintained until there are clear signs that the bear market has finally ended.

This strategy proved highly effective last week, as investors initially anticipated a rebound following sell-offs, only for renewed fears to drive markets lower the next day. By allocating a fraction of the portfolio to put options, investors can leverage their high return potential while maintaining an overall bullish stance. If the market rebounds, long positions generate gains; if the downturn persists, hedging minimizes losses and allows for stock purchases at lower prices. When market turmoil subsides, the portfolio is well-positioned for recovery as long positions regain strength.