It’s been a volatile start to the month of June for the S&P-500 (SPY), with the index making a run at the 3200 level on the back of a rally in laggard stocks, only to give up all of these gains in a 9% drop in just five trading days. However, the first sharp pullback following a plethora of separate breadth thrusts is typically a buying opportunity, and we got one high-probability breadth thrust on June 3rd with 90% of S&P-500 stocks closing above their 50-day moving averages. Generally, a reading above this crucial level after a significant correction suggests that the bulls have regained control of the market’s reins, which points to any further weakness below 3000 providing low-risk buying opportunities. The other piece of good news is that the decline has inflicted minimal technical damage to the bigger picture for the market and has allowed several growth stocks to pull back and reset their overbought conditions. There are two stocks are sporting exceptional growth that look to be primed for more upside, and we’ll take a closer look at them below:

The two stand-out names in the market currently do not have much in common, with one being a household media name, and the other being one of the highest-ranked security solutions for enterprises and government worldwide. However, both of these names offer massive earnings growth rates and are priced attractively relative to peers from a valuation standpoint. These two names are Netflix (NFLX) and Fortinet (FTNT), and both look like attractive buy-the-dip candidates if we see any further weakness. Let’s take a closer look at both companies below:

(Source: YCharts.com, Author’s Chart)

Beginning with Fortinet, the company is situated in one of the highest demand industries in the market currently, as security software demand soars with enterprises, government agencies, and mid-sized businesses forced to send workers home to curb infections at the workplace. This migration home for workers has come with a massive risk to security, and Fortinet’s software security solutions are well equipped to tackle this problem. As we can see from the above chart, the company has seen a solid earnings trend over the past several years, as Fortinet has managed to grow annual EPS from $0.51 in FY-2015 to $2.47 last year, translating to growth of nearly 400% in less than five years. In FY-2019, the company posted annual EPS of $2.47, a 34% growth rate year-over-year, a figure that is typically reserved for the top 250-growth stocks in the market. However, despite a year of significant growth in FY-2019, there’s lots of upside left in this story.

(Source: Author’s Table)

If we look at the FY-2020 and FY-2021 estimates above, they are currently sitting at $2.82 and $3.34, respectively, translating to 14% and 19% growth for the next two years. While this is a slight deceleration from the 34% growth rate last year, these are still exceptional figures, especially considering the tough year-over-year comp that the company is lapping in FY-2019. Assuming the company meets these estimates for $2.82 in FY-2020, this would translate to a 2-year stacked growth rate of nearly 50%, one of the highest growth rates in Fortinet’s industry currently, behind ZScaler (ZS) which is one of the leading growth names. Based on the $3.34 in forecasted annual EPS for FY-2020, the Fortinet is trading at barely 40x FY-2021 earnings despite boasting one of the highest growth rates in the market. If the stock could pull back closer to its 10-month moving average near $125.00 and closer to a multiple of 35 on FY-2021 EPS estimates, I would view this as a low-risk buying opportunity.

(Source: TC2000.com)

Moving over to Netflix, the stock needs no introduction, and the company has clearly benefited massively from the stay-at-home push to curb worldwide COVID-19 infections. Despite being a mega-cap name, the company is one of the highest growth rates in the market, with a projected FY-2020 earnings growth rate of 56%. It’s worth noting that this forecast for over 50% growth this year was lapping a year of 54% growth last year. Therefore, the company is currently offering investors a 2-year stacked earnings growth rate of 110%, while most mega-cap tech names have sub 50% 2-year stacked growth rates. Therefore, for an investor looking for growth in a highly-liquid name that’s also a hedge on a potential second wave of COVID-19 infections, it’s hard to find a more attractive name than NFLX.

(Source: YCharts.com, Author’s Chart)

If we take a look at FY-2021 and FY-2022 annual EPS forecasts, the growth is incredible, with estimates of $8.60 and $11.92 in annual EPS. This would translate to Netflix more than quadrupling its annual EPS in less than five years, based on annual EPS of $2.68 in FY-2018. Given the likely net new customer adds from COVID-19 and the stickiness of the service, Netflix will likely continue to have substantial pricing power going forward, which should allow gross margins to remain above 38% going forward, in line with the trailing-twelve-month growth margins of 38.5%. However, while the fundamentals paint an extremely bullish picture for Netflix, the technical picture is even more attractive. Let’s take a closer look below:

(Source: TC2000.com)

As we can see from the chart above, Netflix has built out a multi-year cup base and is now pausing for two months at the top of this breakout. This is extremely bullish as it shows that there is no real selling pressure following the 7-month advance we saw on high volume, and this means that institutions are likely continuing to accumulate while weak hands are letting go of their positions. Assuming this is a successful breakout, which it looks like based on the tight price action, a move to $550.00 would not be surprising in the next 12 months. This price target offers substantial upside from the current pullback to $425.00, and therefore, I would view any drops below the $425.00 level as buying opportunities.

While most growth names remain quite expensive, even after the recent drop, Fortinet and Netflix offer market-leading growth at exceptional prices even after the recent pullback. Thus far, the technical picture for both stocks is confirming this, with steady accumulation over the past couple of months, and stocks that launched to new highs with ease ahead of the market. Based on this, I believe both names are attractive ideas for investors to buy on pullbacks. I would view any drops below $425.00 on Netflix as a low-risk buying opportunity, and any trade down to $125.00 on Fortinet as a buying opportunity. Given the breadth thrust we’ve seen on the S&P-500, growth names are likely to remain in demand long-term, and this should provide a tailwind for NFLX and FTNT over the medium-term (6-9 months).

(Disclosure: I am long NFLX)

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.

Want More Great Investing Ideas?

Do NOT Buy This Dip! Are you prepared for the bear market’s return?

7 “Safe-Haven” Dividend Stocks for Turbulent Times

9 “BUY THE DIP” Growth Stocks for 2020

NFLX shares were trading at $435.73 per share on Tuesday afternoon, up $10.23 (+2.40%). Year-to-date, NFLX has gained 34.66%, versus a -2.11% 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...

More Resources for the Stocks in this Article