It’s been a volatile couple of months for the Nasdaq Composite (COMPQ), and while the indexes remain only a few percent from their highs, several former leaders are down more than 30% from their highs. Despite this sharp correction in high-growth stocks, complacency continues to sit near multi-year highs, with the equity put/call ratio residing below 0.60 for nearly three months.

This weakness in market leaders combined with a dearth of fear continues to be a red flag, suggesting that investors need to be selective if buying the dip. Fortunately, there are two names that have managed to buck the trend and continue to hold up well, despite this correction, and are worth keeping near the top of one’s shopping list. We’ll discuss these two names in more detail below:

(Source: TC2000.com)

Revolve Group (RVLV) and Cloudflare (NET) have little in common from a business standpoint, with one being a software company and the other being an online retailer. However, they do share two key traits: powerful earnings growth and institutional accumulation. While Cloudflare is not yet earnings positive, it is expected to see annual EPS grow from $0.03 in FY2022 to $0.36 in FY2024. Meanwhile, Revolve Group has grown annual EPS from $0.03 in FY2016 to $0.79 last year, and is expected to nearly double annual EPS over the next three years. Let’s take a closer look at Revolve Group:

For those unfamiliar, Revolve Group is a market leader in online-retail for premium and luxury clothing as well as cosmetics, and has an impressive social media presence. The company’s target is millennials and Gen-Z consumers, and so far, the company’s growth has been in incredible. Despite COVID-19 affecting sales across the board in the retail space, Revolve managed to see only a low single-digit drop in net sales year-over-year in FY2020 ($581MM vs. $601MM), but reported massive growth in free cash flow and gross margins. Gross margins in FY2020 came in at 56.0%, up 310 basis points year-over-year, and we should see strong growth figures in FY2021 with the company lapping what was a huge year in FY2019 with insurmountable comps.

(Source: YCharts.com, Author’s Chart)

As shown above, Revolve Group managed to grow annual EPS by more than 50% during the pandemic to $0.79, but is on track for a slower year this year based on estimates. While a year-over-year decline is never a great sign as I prefer 20%+ annual EPS growth, it’s worth noting that even with the year-over-year decline in FY2021, Revolve boasts a compound annual EPS growth rate of 73%, which is one of the highest in the market currently. Besides, FY2022 and FY2023 annual EPS are expected to return to high double-digit growth rates, suggesting that FY2021 is merely an aberration in the long-term trend. At a current share price of $52.00, Revolve looks cheap, given that the highest-growth stocks can easily command earnings multiples of 65 or higher. Based on FY2022 annual EPS of $1.08, the stock looks to have considerable upside from current levels if it can meet or beat these estimates, with a fair value closer to $70.00.

(Source: TC2000.com)

If we look at Revolve’s monthly chart, we can see that the has broken out to new all-time highs while most high growth stocks have corrected, a bullish development for the stock. However, breakouts have been more choppy over the past few months, and the lowest-risk buy setup would be a re-test of these breakout level closer to the $46.00 area. Assuming this occurs, the stock would be trading at a much more attractive valuation, and also shake out some of the weak hands. So, if we see RVLV correct below $46.00, I would view this as a low-risk buy zone to start a position in the stock.

Moving over to Cloudflare, the company is a website security company that provides content delivery network services, DDoS mitigation, and internet security. The company has enjoyed incredible growth rates since going public, and the share price has followed, with the stock up more than 400% since its IPO debut. However, since the fall, the stock has taken a rest, with Cloudflare building out its first base since its primary IPO base when the stock debuted in late 2019. There’s no guarantee that this consolidation will resume to the upside, but with Cloudflare’s strong fundamentals, there’s a good chance that higher prices are ahead.

(Source: TC2000.com)

Cloudflare released its FY2020 earnings in February and reported revenue of $431MM, with revenue soaring by 50% year-over-year. Notably, Q4 revenue also increased by 50% year-over-year, showing no deceleration for the company in its most recent quarter. Cloudflare’s dollar-based net retention came in at an astounding 119% in Q4, up 300 basis points year-over-year, and operating margins also improved considerably, suggesting that profitability is just around the corner. Looking ahead to FY2021, the company is guiding for up to $593MM in revenue, translating to 37% growth year-over-year. While this is a minor deceleration, it’s one of the highest growth rates among software names currently, and the company’s aggressive release of new products could beat these estimates.

(Source: YCharts.com, Author’s Chart)

If we look at the company’s earnings trend below, it’s clear that earnings remain in negative territory, but we are seeing a shift towards profitability in FY2022. Some growth funds will not increase their positions in high-growth names until a stock is profitable, so this could be a catalyst for accumulation in the stock once positive annual EPS is on the table. Assuming the company can meet estimates, annual EPS is expected to increase by more than 1000% between FY2022, from $0.03 to $0.36. In terms of revenue, estimates are $1.10BB in FY2023, translating to a more than 140% increase from current levels. So, while the stock might look expensive at more than 40x sales currently, it’s worth noting that its revenue multiple should improve drastically, to barely 24x FY2023 sales, and this assumes no beat on estimates.

Generally, I prefer to pay less than 40x sales, even for the highest growth names, so this is a name best bought on a dip. Currently, NET has a range of $60.00 to $95.00 where it’s building a new base, and a pullback to the lower end of this base below $64.00 would represent a low-risk entry into the stock. At these levels, NET would trade at closer to 30x sales, and less than 25x FY2022 revenue estimates of $800MM.

While neither RVLV or NET are sitting at low-risk buy zones currently, it’s possible that the market could push them lower to set up low-risk buying opportunities in the future. So, I believe these two names are worth keeping a close eye on going forward if they do get dragged down with general market weakness. For now, these stocks have held up much better than their peers, and I would expect them to continue to outperform their high-growth peers going forward.

Disclosure: I have no positions in any stocks mentioned.

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

NET shares were trading at $70.98 per share on Thursday morning, down $8.04 (-10.17%). Year-to-date, NET has declined -6.59%, versus a 11.41% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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