2 Tech Stocks To Buy On Pullbacks

NASDAQ: AMZN | Amazon.com, Inc. News, Ratings, and Charts

AMZN – It’s been a strong start to the year for the Nasdaq-100 ETF (QQQ), with the index up 8% in less than 25 trading days.

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It’s been a strong start to the year for the Nasdaq-100 ETF (QQQ), with the index up 8% in less than 25 trading days, more than doubling the performance of the S&P-500 (SPY). While the majority of technology stocks remain extended from their bases and have seen great runs the past few months, there are a couple of names that have been held back, but funds have quietly been accumulating them. I prefer to buy solid companies when they’re unloved but remain in steady uptrends, rather than those names where retail are busy climbing over each other to get into currently. As Warren Buffett is famous for saying, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Let’s take a look at two stocks that exemplify this statement below:

While the market has been busy bidding up Tesla (TSLA), Microsoft (MSFT), and the two payment behemoths: Visa (V) and Mastercard (MA), PayPal (PYPL), and Amazon (AMZN - Get Rating) have been mostly forgotten. Amazon and PayPal have both been lying dormant for over six months without making new highs, but have seen significant buying pressure near the lows of their bases. The attractive thing about both of these names is that annual earnings growth is expected to hit new highs yet again in FY-2021, while the earnings growth rate accelerates materially. Both Amazon and PayPal continue to put up 20%+ annual EPS growth, which is the formula William O’Neil used to uncover the best growth stocks with the strongest performance track record from the 1950s to 1980s. Let’s begin with digging into Amazon’s growth below:

 

A screen shot of a computer Description automatically generated

(Source: YCharts.com, Author’s Chart)

As we can see in the above chart, Amazon delivered 14% growth in annual EPS for FY-2019 but is set to report 25% growth in FY-2020, 38% growth in FY-2021, and over 27% growth in FY-2022. Therefore, the company’s annual EPS growth rate is expected to accelerate materially on a sequential basis over the next two years, launching 900 basis points in FY-2020 based on estimates, and adding another 1300 basis points to its growth rate in FY-2021. This is incredible growth from a mega-cap company, and there are few companies in the mega-cap space that boast this type of growth.

Amazon’s decision to drop its $14.99 monthly membership fee for grocery delivery has been a significant tailwind to their grocery business, with delivery orders doubling year over year in Q4. Since the Whole Foods acquisition a few years ago, many have doubted Amazon’s ability to take a bite out of the grocery industry. However, their recent initiatives seem to finally be gaining some traction at a time when Prime member growth is slowing due to saturation. Therefore, not only is the grocery delivery an added perk to tie customers to their Prime membership, but it’s also added revenue for the company. As we can see in the below chart, the market certainly likes the most recent earnings release, with the stock breaking out of a multi-year cup and handle near the $1,980 level. Going forward, I would expect any 7% plus to the $1,920 level to be buying opportunities.

 

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(Source: TC2000.com)

If we move over to PayPal, we can see the company has had a steady earnings trend since going public, with annual EPS growing 27% like last year. While FY-2020 is likely to be a slower year for the company, with barely double-digit growth, we are expecting to see massive re-acceleration in FY-2021 and FY-2022. Based on current forecasts of $4.21 and $5.11 in FY-2021 and FY-2022, respectively, PayPal is likely to see annual EPS growth of 23% in FY-2021 and 22% in FY-2022. This is a significant bump from the low double-digit growth expected in FY-2020, the reason why the stock has been lagging its peers recently.

 

A screenshot of a computer Description automatically generated

(Source: YCharts.com, Author’s Chart)

Fortunately, for investors looking to begin a position in PayPal, the stock’s valuation has improved considerably, at a very reasonable 8x price to sales vs. peers Visa and Mastercard at closer to 20x price to sales. While Visa and Mastercard certainly deserve a premium given that they’re the leaders in the Payments sector, I would not be surprised to see PayPal play some catch-up going forward. Currently, the stock is busy building out a multi-month base and may have to build a handle to this base. However, if the stock pulls back to the $110.00 – $112.00 area to create a handle to its multi-month cup base, I would consider this a buying opportunity.

A close up of a map Description automatically generated

(Source: YCharts.com)

 

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

While investors are busy chasing hot stocks, and the over-extended names in the Nasdaq-100 ETF, two reliable growth names are setting up large bases with attractive valuations given that they’ve had a rest the past several months. Therefore, I would not be surprised to see funds begin rotating money into PayPal and Amazon from other tech high-flyers that are significantly overbought. This is especially true given the fact that both PayPal and Amazon have positive earnings revisions and earnings growth set to accelerate next year. Based on this, I would view any 7-10% pullbacks in these names as an area to begin to start long positions.

 


AMZN shares were trading at $2,049.56 per share on Thursday afternoon, up $9.69 (+0.48%). Year-to-date, AMZN has gained 10.92%, versus a 3.68% 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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