It’s been a volatile few weeks for the major market averages (SPY), and we’ve seen what may either be the first leg higher off of a significant bottom, or one of the most violent bear market rallies in history. However, while the major indexes like the Nasdaq Composite (QQQ) and S&P-500 (SPY) have recouped roughly 50% of their losses, some stocks have charged to new all-time highs. These names are likely to be the new market leaders, whether the market has bottomed or not, and it’s not surprising that some of these names have significant earnings growth. Let’s take a closer look at a couple of these names below, and what makes them so unique:

(Source: TC2000.com)

While some of the bigger names like Apple (AAPL), and Facebook (FB) remain well off of their all-time highs, Netflix (NFLX) and Amazon (AMZN) have vaulted to new all-time highs in the past week, and are both staging multi-year breakouts. These two stocks are clearly leaders technically for this reason, and they benefit from the fact that they are thriving in this market. Amazon’s hiring binge has told us all we need to know about the demand for their business during this crisis, and Netflix will likely see a surge in new sign-ups as account sharing is not possible when most of the population is watching at the same time. Some analysts are out saying these stocks have run too far and that they’re too expensive, but most of these analysts are using FY-2019 earnings, which are irrelevant given the earnings growth for these two companies and the tailwind that COVID-19 lock-downs have provided them. Let’s take a look at AMZN below:

(Source: TC2000.com)

As we can see from the above chart of AMZN, the stock had taken a backseat to the other FAANG names the past two years and was busy consolidating after a blow-off top at $2,000 in 2018. However, despite a weak overall market that remains below its key moving averages and a dearth of leadership, Amazon broke out earlier this month through the $2,000 level and has surged higher since. This is a sign of leadership for the stock, as it suggests that the stock does not need the market to go higher and is trading in its own world. If we look at the previous 18-month base breakout from 2014 through 2015, the worst thing one could have done was to sell into the initial breakout. Instead, the better move was to hold on tight as range expansions of this size typically lead to outsized gains. While a 300% gain like we saw over four years may not be in the cards this time, I would not rule out a move to $3,000 for AMZN over the next two years, given the size of this breakout. What’s the catalyst for these higher prices? Earnings growth, of course, let’s take a look below:

(Source: YCharts.com, Author’s Chart)

If we look at the chart above, we can see that AMZN saw a relatively sluggish earnings growth in FY-2019, only managing to grow earnings from $20.14 to $23.01. The weakness in the stock is not surprising during 2019, given this fact, as the market is typically forward-looking as earnings were set to decelerate. However, FY-2020 annual earnings per share is likely to accelerate based on estimates, with FY-2020 annual EPS forecasts currently sitting at $29.56. This would translate to nearly 30% growth year-over-year, an incredible growth rate for a trillion-dollar company. However, AMZN’s FY-2021 and FY-2022 earnings projections are even more impressive, with FY-2021 EPS estimates sitting at $40.75, and FY-2022 forecasts sitting at $53.86. This points to two more years in a row of strong double-digit earnings growth, and the stock does not look nearly as expensive if it can generate close to $55.00 in earnings per year. Therefore, while analysts using annual EPS of $23.01 for FY-2019 might think AMZN is insanely priced, those looking at a higher customer count, a trend towards more online shopping are envisioning what the future holds if consumer habits change even moderately. Ultimately, I would not be surprised to see $56.00 in annual EPS for FY-2022, which would mean that Amazon has the potential to increase earnings by nearly 150% in the next three years.

If we move over to Netflix below, we’ve got a very similar setup and a massive breakout to new all-time highs. Similar to Amazon, NFLX had a blow-off top in 2018 and needed a year or two to shake out weak hands and allow its valuation to cool off. However, the stock blasted out of its 2-year box to new highs last week and has since shown strong follow-through to this breakout. This is an extremely bullish development, with the measured move for this breakout targeting the $540.00 level. Therefore, while the stock may pull back a little in the short-term after a violent move higher, those holding on for the bigger picture likely have more upside ahead if they’re patient.

(Source: TC2000.com)

Similar to AMZN, NFLX has massive earnings growth on the way, and the company has been one of the few mega-caps to see near parabolic earnings growth. As the chart below shows, NFLX grew annual EPS by more than 50% in FY-2019, from $2.63 to $4.13, but FY-2020 earnings are expected to grow nearly 50% after lapping a year of massive earnings growth. This is unheard of from a mega-cap company, and I believe these earnings estimates are likely a little conservative. Therefore, for analysts suggesting the stock is expensive at $430.00 based on $4.13 in EPS last year, they are using a dated earnings level for a stock that could be generating as much as $8.00 in EPS by FY-2021.

(Source: YCharts.com, Author’s Chart)

If we look at the table above of Netflix’s annual EPS estimates, we can see that FY-2021 estimates are sitting at $8.41 for NFLX, with FY-2022 annual EPS estimates sitting at $11.70. These growth rates are typically reserved for small-cap or mid-cap companies, not mega-cap juggernauts like NFLX, and this is what makes the stock so desirable. Not only does Netflix have pricing power when consumers are stuck at home watching their shows, but we are likely to see new sign-ups as noted or upgraded plans, as sharing is not possible when everyone is at home. Therefore, Netflix has a clear fundamental backdrop for this breakout, and I do not believe a share price of $500.00 is unreasonable within the next nine months.

Netflix and Amazon are two rare stocks that are benefiting from this COVID-19 crisis, and this is likely to convert occasional users to more avid users, given the stickiness of their products. While pullbacks are possible, I see no reason for investors to cash out here. I have personally taken small profits on Amazon and Netflix as they ran up 30% very quickly, but I continue to hold the core of my position in both names looking for much higher prices. The first names to break out after a major market low are often the leaders going forward, and AMZN and NFLX seem to be the most attractive two FAANG names for 2020 to buy on pullbacks.

(Disclosure: I am long NFLX and AMZN)

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AMZN shares were trading at $2,324.08 per share on Tuesday afternoon, down $69.53 (-2.90%). Year-to-date, AMZN has gained 25.77%, versus a -14.52% 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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