2 Tech Stocks To Watch During This Market Correction

NASDAQ: NFLX | Netflix Inc. News, Ratings, and Charts

NFLX – Two clear stand-out names are outperforming the market with double-digit annual earnings per share growth; these names are Microsoft (MSFT) and Netflix (NFLX).

 

It’s been a volatile past week and a half in the markets with the S&P-500 (SPY) plunging more than 15% from its February highs on an intra-week basis. While the market recovered some of its lost ground this week, it does not seem like we’re completely out of the woods yet. Despite the sea of red, however, there have been a few out-performers, and many companies are unlikely to see a significant impact on their FY-2020 annual earnings per share growth. These are the companies worth keeping a close eye on as they will likely be the first to emerge from the rubble and have the highest probability of heading to new highs in the back half of 2020.

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

When it comes to which names are showing these characteristics, two clear stand-out names are outperforming the market with double-digit annual earnings per share growth; these names are Microsoft (MSFT) and Netflix (NFLX). Both companies are forecasted to grow annual EPS by 20% or more in FY-2020, with NFLX being the clear leader in the earnings growth department, based on estimates of over 55% growth in FY-2020. While solid fundamentals are certainly a reason to keep an eye on both MSFT and NFLX, the technical picture for both stocks is also impressive, with neither stock breaking its January lows on a monthly closing basis in the most recent correction. Let’s take a closer look at both stocks below:

A screenshot of a computer Description automatically generated

(Source: YCharts.com, Author’s Chart)

Beginning with Microsoft’s fundamentals, we can see that the company has a very impressive earnings trend, with annual EPS trending higher for the past four years in a row. During the period from FY-2016 to FY-2019, annual EPS has grown over 70%, from $2.79 in FY-2016 to $4.75 in FY-2019. However, the exciting news is that this earnings growth rate continues at a rapid pace despite starting from much higher levels, with a 20% growth in annual earnings per share expected for FY-2020. This figure is based on current estimates of $5.70 in EPS for MSFT, and estimates for FY-2021 are predicting yet another double-digit increase. Based on these robust forward estimates and a relatively reasonable valuation at 29x forward earnings, I believe the stock is one worth watching closely. If the stock could drop below $151.00 per share and closer to 26x forward earnings, I would strongly consider adding to my position.

From a technical standpoint, there’s a lot to like about Microsoft as well, as the stock has held up quite well during this recent market correction. While the S&P-500 broke below both its January and December lows in a flash during the correction, MSFT only briefly traded below its January lows, and never came close to approaching its December lows at $146.00. This suggests that MSFT is giving up ground grudgingly and that funds are eager to pick up the stock on any 20% corrections. As the chart below shows, Microsoft looks like it is trying to build a new base between $150 and $180 while the market corrects, and this is completely normal price action from a market leader. The key for the bulls going forward will be defending the $150.00 level on a monthly closing basis if we do see further weakness.

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

Moving over to Netflix, we can also see a robust earnings trend, with triple-digit growth in both FY-2018 and FY-2019, and another year of strong double-digit growth expected in FY-2020. FY-2019 EPS came in at ­­$2.68, up over 110% year-over-year, and current estimates are calling for roughly 55% growth in annual EPS for FY-2020. This figure is based on FY-2020 forecasts of $4.13, and this is extremely impressive, considering that the company is forecasted to grow earnings 55% after lapping two consecutive years of triple-digit growth. If we look out further to FY-2021, analysts are just as bullish, with annual EPS estimates sitting at $5.99. Based on FY-2021 EPS estimates of $5.99, Netflix is trading at over 60x forward earnings for FY-2021, quite a high valuation compared to Microsoft. However, it’s important to note that NFLX has double the earnings growth rate of MSFT, and therefore deserves a premium. If we could see a pullback to $355 on NFLX, I believe this might present a buying opportunity. This would place the company at below 60x FY-2021 EPS estimates, and at a more reasonable valuation with a slightly larger margin of safety.

A screenshot of a computer Description automatically generated

(Source: YCharts.com, Author’s Chart)

If we move over to the technical picture, we can see that Netflix is one of the few companies building a multi-year base currently, and this has likely shaken out many of the weak hands in the stock. A breakout through the $400.00 level would be a very bullish development and one that investors should be watching closely. However, I am looking to buy a pullback, not a breakout, and I’ll be watching the stock for potential bottoming signs if we can head below $360.00.

A picture containing clock, object Description automatically generated

(Source: TC2000.com)

To summarize, Netflix and Microsoft are two tech giants worth watching closely in this correction, as the cream tends to rise to the top when it comes to market leaders. Both names have held up relatively well the past couple of weeks, and both are expected to grow annual earnings per share by 30% or more over the next two years, making their valuations more reasonable if we see further weakness. For now, I continue to hold MSFT but may add more below $155, and I am watching for a long setup in NFLX, but I would like to see the stock trade below $360.

(Disclosure: I am long Microsoft (MSFT))


NFLX shares were trading at $387.25 per share on Thursday morning, up $3.46 (+0.90%). Year-to-date, NFLX has gained 19.68%, versus a -4.77% 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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