We’ve seen a meteoric rise over the past few months for the Nasdaq Composite (QQQ), with the index now up more than 30% in the past five months alone, and investors have now wholly thrown caution to the wind. I’ve found that the best thing to do during periods of extreme complacency is to build new watchlists of stocks that have been forgotten or left behind, and therefore are less susceptible to significant weakness if the market does correct. Given that we continue to have an accommodative Fed and loose credit conditions, it would suggest that any 10% pullbacks in the market are likely going to provide buying opportunities. Therefore, the best thing to do is be aware of some of the top earnings growers where money might find a new home after the correction, and two names fit this bill accordingly.
While the market has had an incredible run off of its December 2018 lows, Netflix (NFLX - Get Rating) has been left in the dust, despite managing to grow annual earnings per share [EPS] by more than 100% last year. Meanwhile, Nvidia (NVDA) accomplished a similar feat, growing annual EPS by more than 35% last year, with a two-year stacked annual EPS growth rate of over 100%. Although Netflix and Nvidia have seen incredible earnings growth, they’ve mostly been left behind, and are still trading at roughly the same level as they were in September 2018. Therefore, not only have these companies become much more valuable, but they’re certainly not crowded names any longer. Let’s take a closer look below:
As we can see from the below chart of annual EPS for Netflix, the company has one of the most powerful earnings trends in the Nasdaq-100 Index and has managed to grow annual EPS by over 800% since FY-2014. The company reported FY-2019 annual EPS of $2.68 in FY-2019, up 113% year-over-year, and this is although the company was lapping a year of over 200% annual EPS growth ($0.43 to $1.25). If we look ahead to FY-2020, the exceptional growth is expected to continue, with current estimates pegged at $4.13 in annual EPS. This would represent yearly EPS growth of 54% for FY-2020, well above the average for the rest of the FAANG peers. It’s important to note that Netflix has trounced earnings estimates in three of the past four years, and therefore, this figure could end up being on the conservative side.
(Source: YCharts.com, Author’s Chart)
As we can see from the chart below of Netflix, the stock continues to build out a nearly two-year base and is sitting just 10% shy of its all-time highs. It is during these long consolidation periods that any investors often get bored of a stock and move on, and this is one of the best times to watch for a new potential long setup ahead of the breakout. Ideally, what I’d like to see for Netflix is for the stock to begin to build out a multi-week base, and show commitment to holding above the $330.00 level on any pullbacks. If Netflix could make a substantially higher low inside this base, I might consider starting a position as it would suggest the stock is finally changing its character. Therefore, as long as Netflix holds the $330.00 level, pullbacks to this area are likely going to provide low-risk buying opportunities.
If we move over to Nvidia, we can see that the company also has an exceptional earnings trend, with Nvidia posting-annual EPS growth of 35% last year, and 62% growth in FY-2018. This translates to a triple-digit two-year stacked EPS growth rate and is incredible for a mega-cap company like Nvidia. While annual EPS is likely to slide by more than 10% in FY-2020, I do not see this as an issue. This is because FY-2021 estimates are looking for $7.82 in annual EPS, and the market cares much more about where earnings are headed in eighteen months than it does about what the company might earn this year. Given that Nvidia’s FY-2021 EPS is forecasted to grow by 35%, with FY-2022 earnings per share likely to come in above $9.00, I believe that any 20% pullbacks in Nvidia are likely going to provide buying opportunities.
(Source: YCharts.com, Author’s Chart)
Taking a look at the monthly chart below, we can see that Nvidia has broken out of a nearly 2-year cup-shaped base, and it would be logical that the stock might build a handle to this base in the $235.00 – $300.00 region for a couple of months. This would likely frustrate many of the breakout traders in the stock, and allow the stock to remove its overbought condition currently. As long as the stock can hold above the $235.00 level on any pullbacks, I would consider buys near the $240.00 level to be a low-risk buying opportunity. Therefore, for investors looking to buy Nvidia, patience is likely the right move here, as the stock has run straight up into this breakout over the past few months. Typically, I’ve found that these breakouts more often than not build handles before any continuation higher.
Nvidia and Netflix are two names that have been mostly neglected during this bull market, and neither is trading more than 5% above their prior 2018 highs. Based on this, I believe the 2018 froth has come off of them, and their valuations are becoming more reasonable. However, given that we have a market with the highest levels of complacency since January 2018, the wise move here is to wait for a pullback before initiating any new positions. Therefore, I’m watching the $335.00 level on Netflix and the $240.00 level on Nvidia for potential entries. Nvidia and Netflix are likely to grow annual EPS by more than 50% between now and FY-2021, and I see no reason believe this bull market is over just yet, though a 5-10% correction is highly likely. Therefore, for investors that want to be prepared to buy the dip, I see both names as ideal candidates to watch on sharp corrections.
(Disclosure: I am short the S&P-500 (SPY) from 3360)
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.
NFLX shares were trading at $382.37 per share on Thursday afternoon, down $3.82 (-0.99%). Year-to-date, NFLX has gained 18.17%, versus a 4.45% 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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