It’s been a nasty few weeks for buy and hold investors as we’ve seen one of the largest market declines (SPY) from all-time highs in history. While the 2001-2003 bear market and 2007-2009 bear market were much deeper corrections than the current 36%, investors at least got hints ahead of a potential catastrophe on the horizon. Unfortunately, leading up to this cyclical bear market, the only fear that one should have had was the complete lack of fear in the marketplace. When everyone is optimistic, and there is not even a glimmer of uncertainty on the horizon, it’s often time to take shelter before the storm. The good news for investors that raised cash and have sidestepped this mess is that we now have great companies trading at fire-sale prices and the best companies that actually benefit from this crisis that have sold off for no reason. When everyone is panicking, and there isn’t a hint of optimism out there, it’s generally time to go shopping.
Given that the whole market is off over 35%, there are undoubtedly several options to choose from if one is looking for beaten-up stocks. However, I prefer to look for the stocks that are being accumulated regardless of the turbulence in the market, and two clear stand-out names fit this bill; Amazon (AMZN – Get Rating) and Cloudflare (NET). Not only have these two companies resisted the market’s selling pressure, but the latter has charged to new highs. This tells me that AMZN and NET are in high demand by some of the best funds, and they’ll likely be supported in a big way even if this correction continues. Let’s take a closer look at them both below:
Beginning with AMZN, the company was on track for a multi-year breakout in Q1, before getting derailed by the SPY’s 35% plunge. This breakout should not have been surprising at all to investors, even prior to COVID-19 fears, as the company’s earnings trend and forward growth is incredible as we look ahead to FY-2022. Even better, the company is hiring workers during this crisis to keep up with demand. As we can see in the chart below, annual earnings per share is expected to grow from $23.01 in FY-2019 to $29.56 in FY-2020, $40.75 in FY-2021, and $53.86 in FY-2022. This translates to 28% growth in FY-2020, 38% growth in FY-2021, and 32% growth in FY-2022. Not only does this suggest we’re likely to see two years in a row of sharp accelerating in earnings growth, but these growth metrics are typically reserved for mid-cap companies, not a massive mega-cap juggernaut like Amazon. Given that the company is likely to see further adoption of its services among the social distancing movement, I believe the FY-2019 and FY-2020 earnings may actually be on the conservative side. Based on this, I have started a new position in the stock below $1,900.
(Source: YCharts.com, Author’s Chart)
Moving over to Cloudflare, the company is certainly not the traditional growth stock, given that the company has no earnings to speak of currently. However, the technical picture is suggesting that something is up. This is because the stock has broken out of a multi-month base and charged to new highs during a 35% decline for the general market. This is extremely abnormal, and the company is one of only 9 stocks in the past three weeks that have made new all-time highs, among the 8000 US stocks I track. Therefore, whether earnings are on the table or not, the company is one worth keeping a close eye on.
As we can see in the below chart, while the company is expected to post net losses for the next three years, losses are narrowing, with the company likely to approach profitability in FY-2022 or FY-2023. However, it can be very difficult to measure early-stage companies based on earnings alone as the best early-stage growth companies are busy pumping cash-flow into growth initiatives and re-investing in their businesses. Therefore, one key metric to watch is…
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