My career at Cabot began back in June 1999, just before the internet bubble really revved up in October. That was a time of great divergences—the broad market struggled all the way from the mini-bear market bottom of October 1998 right through the top in March 2000, while a few hundred internet, networking, chip and software stocks roared ahead to dizzying heights.
As trend followers, we were able to catch many of the top growth stocks of that move (JDS Uniphase, EMC Corp. (EMC), Yahoo! (YHOO), Amazon (AMZN) … those were fun times!), but just as important, we were able to avoid the “value traps” (afraid to buy the leaders, many investors bought “old” tech stocks because they seemed cheaper.)
For example, in Cabot Growth Investor, we repeatedly recommended selling Microsoft (MSFT)—it was still a blue-chip stock and a highly regarded company, but its sales and earnings trends were lackluster and the stock was lagging badly. We advised moving into some of the new leaders instead.
And it wasn’t just Microsoft. Dell (DELL), Intel (INTC) and other blue-chip tech stocks of companies that focused on PCs couldn’t get going, while networking and internet-focused stocks soared.
Today, of course, we’re not in any sort of bubble (except a bubble of apathetic investor sentiment … but that’s a topic for another time), as the market has been chopping around for the better part of two years. But I see a similar dichotomy in the market—many “old” leaders are struggling while “new” growth concepts are finding support.
New Leading Stocks vs. Old Leading Stocks
The obvious example today is Apple (AAPL), which just broke to new 52-week lows last week. While everyone loves Apple the company (and Warren Buffett’s disciples apparently think it’s a good value), the fact is that earnings at Apple are likely to shrink this year as iPhone and iPad demand slows. Earnings, in fact, fell 18% in the first quarter and are expected to tank 24% in the second quarter!
Netflix (NFLX) is another example—the company is definitely successful, but despite mid-20% sales growth, earnings were down 45% in the first quarter and are expected to be down 13% for the year (and total just 27 cents per share to boot).
Gilead Sciences (GILD) is another well-loved example that has shrinking earnings and pricing worries. The stock was walloped on earnings on April 29 and nicked new lows last week as well. Sure, the company is highly profitable, but earnings are now expected to fade a few percent this year, with downside risk if those pricing issues intensify.
As Chloe Lutts Jensen wrote in Tuesday’s Cabot Wealth Advisory, we’re also seeing a bunch of old-world retailers get pummeled. Macy’s (M) reported a 7% sales decline and a 29% earnings dip last week, causing the stock to implode to new lows. Gap (GPS), another blue-chip retailer, looks even worse—the stock is now 55% off its high and at new lows since earnings sank 24% last quarter.
For a growth investor, avoiding these “old” stodgy stocks was easy—none had the bullish combination of stories, numbers and charts to even make it onto my radar screen.
The moral of the story: A familiar name, a low valuation and a modest dividend are seldom enough to put a floor under a stock if business is deteriorating. It’s best to force yourself to hunt for the best growth stories and companies with rapid (and, ideally, accelerating) sales and earnings growth that are focused on the new, expanding areas of the economy.
Barring a major market downturn, those are stocks that have the potential for big gains … and the stocks that find support on dips as institutional investors build positions.
This Liquid Leading Stock is Ready to Get Going
So what are the “new” top growth stocks? If you’re looking for liquid leaders, like I always do, you’re probably familiar with a couple of winners. Here are three names that have been recently featured in Cabot Top Ten Trader.
Facebook (FB) is the new Apple, as big investors believe it’s still early in the process of monetizing its 1.09 billion daily users, not to mention the 400 million active users of Instagram, its one billion active users of WhatsApp, and the potential for consumer-to-business interaction for Messenger and virtual reality with its Oculus subsidiary. The stock looks ready to continue its major uptrend if the market can get out of its own way.
Amazon (AMZN) is the other top growth stock most investors are following closely, and for good reason. The boom in online retail, the firm’s unmatched ecosystem of products and offerings (Prime, Fire devices, Kindle, etc.) and the fact that spending is under control are leading to booming sales and earnings (analysts see earnings up 327% this year and 83% next).
But another potential top growth stock that few are talking about is one I’ve written about before. Adobe Systems (ADBE) and its various software suites have become de-facto platforms for the digital age—its Creative Cloud suite includes the leading products in its field (Illustrator, InDesign, Photoshop, etc.) that most leading marketers use, as well as educators and hobbyists.
Adobe’s Marketing Cloud suite is gaining in popularity for online marketing campaigns and measurements, and the same goes for its Document Cloud suite, which allows for e-signatures and archiving of legal and business documents. Creative Cloud is driving results, which have been fantastic—sales growth is accelerating, earnings were up 50% in the latest quarter, and analysts see 30%-plus bottom line growth for another couple of years.
The stock had a big wipeout earlier this year, but then gapped back toward its highs in March and has tightened up beautifully since then. Of course, if the market really falls apart, all bets are off. But any decisive push above 98 (ideally on huge volume) looks buyable to me, with a stop in the 90 area.
Long-term, I think the upside for Adobe could be huge as money comes out of the old tech names and into stocks like ADBE.
Cabot Top Ten Trader recommends market leaders before they are ready to break out. Since January 1, we delivered 101 winning trades, and investors grabbed 68% gains in Barrick Gold, 42% gains in Edwards Lifesciences and 55% gains in Universal Display, just to name the few. If you would like to start profiting from fast growing momentum stocks, consider taking a risk-free trial subscription to Cabot Top Ten Trader here.
Sincerely,
Mike Cintolo
[author_ad]
