It’s been a nasty few weeks for buy and hold investors as we’ve seen one of the largest market declines (SPY) from all-time highs in history. While the 2001-2003 bear market and 2007-2009 bear market were much deeper corrections than the current 36%, investors at least got hints ahead of a potential catastrophe on the horizon. Unfortunately, leading up to this cyclical bear market, the only fear that one should have had was the complete lack of fear in the marketplace. When everyone is optimistic, and there is not even a glimmer of uncertainty on the horizon, it’s often time to take shelter before the storm. The good news for investors that raised cash and have sidestepped this mess is that we now have great companies trading at fire-sale prices and the best companies that actually benefit from this crisis that have sold off for no reason. When everyone is panicking, and there isn’t a hint of optimism out there, it’s generally time to go shopping.
Given that the whole market is off over 35%, there are undoubtedly several options to choose from if one is looking for beaten-up stocks. However, I prefer to look for the stocks that are being accumulated regardless of the turbulence in the market, and two clear stand-out names fit this bill; Amazon (AMZN - Get Rating) and Cloudflare (NET). Not only have these two companies resisted the market’s selling pressure, but the latter has charged to new highs. This tells me that AMZN and NET are in high demand by some of the best funds, and they’ll likely be supported in a big way even if this correction continues. Let’s take a closer look at them both below:
Beginning with AMZN, the company was on track for a multi-year breakout in Q1, before getting derailed by the SPY’s 35% plunge. This breakout should not have been surprising at all to investors, even prior to COVID-19 fears, as the company’s earnings trend and forward growth is incredible as we look ahead to FY-2022. Even better, the company is hiring workers during this crisis to keep up with demand. As we can see in the chart below, annual earnings per share is expected to grow from $23.01 in FY-2019 to $29.56 in FY-2020, $40.75 in FY-2021, and $53.86 in FY-2022. This translates to 28% growth in FY-2020, 38% growth in FY-2021, and 32% growth in FY-2022. Not only does this suggest we’re likely to see two years in a row of sharp accelerating in earnings growth, but these growth metrics are typically reserved for mid-cap companies, not a massive mega-cap juggernaut like Amazon. Given that the company is likely to see further adoption of its services among the social distancing movement, I believe the FY-2019 and FY-2020 earnings may actually be on the conservative side. Based on this, I have started a new position in the stock below $1,900.
(Source: YCharts.com, Author’s Chart)
Moving over to Cloudflare, the company is certainly not the traditional growth stock, given that the company has no earnings to speak of currently. However, the technical picture is suggesting that something is up. This is because the stock has broken out of a multi-month base and charged to new highs during a 35% decline for the general market. This is extremely abnormal, and the company is one of only 9 stocks in the past three weeks that have made new all-time highs, among the 8000 US stocks I track. Therefore, whether earnings are on the table or not, the company is one worth keeping a close eye on.
As we can see in the below chart, while the company is expected to post net losses for the next three years, losses are narrowing, with the company likely to approach profitability in FY-2022 or FY-2023. However, it can be very difficult to measure early-stage companies based on earnings alone as the best early-stage growth companies are busy pumping cash-flow into growth initiatives and re-investing in their businesses. Therefore, one key metric to watch is sales growth, and Cloudflare certainly has it.
(Source: YCharts.com, Author’s Chart)
If we look at the table below, we can see that Cloudflare enjoyed a revenue growth rate of 49% in FY-2019, and is expected to maintain a revenue growth rate of near 45% over the next three quarters. This is incredible growth considering that the company is lapping a year with near 50% growth, which means that the company was already up against tough year-over-year comps. While we don’t have acceleration for NET like we do AMZN, the continued strength in the stock suggests that buyers might be banking on a much stronger couple of quarters than analysts are currently forecasting, and this could lead to revenue growth acceleration.
(Source: YCharts.com, Author’s Table)
The one issue, however, is that the company is trading at over 20x sales, and I would not be chasing the stock above $23.00. Having said that, if the stock could pull back to $19.00 or lower over the next few weeks, this would provide a more low-risk entry for the stock, as this would be a re-test of the recent base the stock is building. Therefore, while I don’t own the stock currently, the incredible sales growth and even more impressive technical strength makes the name one worth paying close attention to going forward.
While most investors might be hunting down the names that have fallen the most during this market decline, I think this is the wrong strategy and it carries much more risk. Instead, I prefer to look for the companies that remain above their 250-day moving averages, and those that are showing that they are less affected by this decline. The two names that fit this description are AMZN and NET, and I remain the former for the time being. Ultimately, this crisis, too, shall pass, and the cream will rise to the top. Based on recent price action, NET and AMZN look like potential leaders for the next upcycle, and this is why both are at the top of my watch-lists.
(Disclosure: I am long AMZN)
Want more great investing ideas?
The Fake Rally is Over! – Why the bear is still in charge. Along with the right investment strategy to generate profits while stock prices head lower.
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Reitmeister Total Return portfolio – Discover the portfolio strategy that Steve Reitmeister used to produce a +5.13% gain while the S&P 500 fell by -14.97%.
AMZN shares were trading at $1,897.32 per share on Thursday afternoon, down $10.38 (-0.54%). Year-to-date, AMZN has gained 2.68%, versus a -22.94% rise in the benchmark S&P 500 index during the same period.
About the Author: Taylor Dart
Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
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