Catching Falling Knives: Is Time to Buy These Beaten-Down Stocks?

Key Points

• IBM, Booz Allen Hamilton, and McDonald's have each fallen at least 15% from recent highs, raising questions about whether buyers should step in now.
• Booz Allen Hamilton faces the steepest challenges, having lost more than 30% of its value amid government contract cancellations and a 10% revenue decline.
• McDonald's appears best positioned for recovery among the three, with 49 consecutive years of dividend growth and an average analyst price target implying nearly 20% upside.

Every new investor goes through a few rites of passage in the market, but few are more painful than the first attempt to catch a falling knife. When a well-known stock has dropped 15%, 20%, or even 30%, it's tempting to see a ‘discount’ and try to scoop up a quality company on the cheap. However, cheap stocks often get cheaper when in freefall, and the ‘discounted’ position you opened simply bleeds capital, hence the term falling knife. Today, we’ll look at three portfolio staples that have been crushed this year, and consider the merits of buying stocks down big.

3 Large Cap Stocks Down 15% From Previous Highs

If you want to take a stab (sorry) at a stock that’s down 20%, you’ll need to ensure fundamental and technical factors are in your favor. And even if you’re correct, there’s that other maxim to consider: the market can stay irrational longer than you can stay solvent. Here are three large-cap stocks in the midst of severe drawdowns; is it time to buy, or is there more downside ahead?

International Business Machines: AI Shockwave Hits Profitable Consulting Division

International Business Machines Corp. NYSE: IBM was seen as an AI-adjacent winner as recently as six months ago when the stock notched a new all-time high of $315. But while AI giveth, AI can also taketh away. Anthropic’s Claude Code has emerged as a potential tool for COBOL modernization, which has long been a profitable wing of IBM’s consulting division. A single post about Claude eating into this business caused IBM's shares to plummet 13%, its worst single-day performance since the Dot-Com Bubble popped. Consulting revenue was a red flag in the Q1 2026 earnings report released on April 22, which showed growth of just 4% year over year (YOY).

Apart from flat Q2 guidance, the rest of the Q1 2026 numbers showed an otherwise healthy company. Revenue grew 9.5% to $15.92 billion, which easily surpassed estimates, and EPS of $1.91 was 16% higher than Q1 2025. The company also generated $2.2 billion in free cash in Q1, its highest first-quarter figure in a decade.

The IBM knife might be slowing down, but it's still falling as sentiment outweighs fundamentals. Sellers quickly rejected the stock’s attempt to recapture the 50-day moving average, and the share price is hovering back near its February lows. The Relative Strength Index (RSI) also remains stuck below 50, where sellers are firmly in control. Until these technical trends reverse, it's hard to see meaningful momentum in IBM shares, even if the fundamentals are strong.

Booz Allen Hamilton: No Floor in Sight for This Falling Knife

It's been a rough 12 months for defense contractor Booz Allen Hamilton Holding Corp. NYSE: BAH, which has lost more than 30% of its value and is facing a wave of headwinds. The fiscal Q3 2026 earnings report released Jan. 23 revealed a 10% YOY revenue decline, with civil sector sales dropping nearly 30% from fiscal Q3 2025. January was a double-whammy for bad news as the U.S. Treasury canceled 31 contracts totaling $21 million, citing inadequate data safety. The dollar amount is relatively small, but losing the trust of your biggest client is a serious headwind for future revenue.

The overall backlog remains strong, and the stock now trades at just 11 times earnings and 0.75 times sales, but this suddenly cheap-looking valuation doesn’t mean it’s time to buy. Losing government contracts is a big signal in the aerospace and defense industry, and the technical support for BAH shares has evaporated. Recent analyst price targets have clustered around $85, suggesting limited upside for a stock that traded above $185 as recently as October 2024.

McDonald’s: Macro Pressures Squeezing Low-Income Diners

McDonald’s Corp. NYSE: MCD reached a new all-time high of $334 the day before the first bombs began falling in Iran, and the resulting geopolitical shock has sent the stock down nearly 20% in just under six weeks. The downside case here is simple: higher gas prices are an outsized burden on low-income consumers, and the lower end of the K has been a reliable source of foot traffic for McDonald's as dining dollars were stretched. But now that low-income diners are tapped even further, the company’s traffic-focused growth initiatives could see margin compression.

The Q1 2026 earnings report released on May 7 was actually positive, with revenue up 9% YOY and global comp sales up 3.8%. But management expects the Iran war to be an FX tailwind for most of 2026, and U.S. store margins are forcing the company to seek operational changes. MCD is a defensive stock to begin with, and it's best equipped to survive a consumer slowdown compared to IBM or BAH. The company has raised dividends for 49 straight years, and the average price target of $335 implies nearly 20% upside from current levels.