These stocks are about to blast off

 

The market is falling into one of those weird patterns where stocks head in one direction in the morning (up, in this case), usually based on earnings reports, then head in the opposite direction in the afternoon (down in this case), usually because of troubling longer-term economic indicators, such as interest rates or the value of the dollar. Don’t give me that look—there’s no telling how deep in the muck we would already be if it weren’t for the corporate tax cuts now beginning to hit the bottom line, but the market is beginning to wonder, as indeed it should, how earnings growth of 10% to 15% across the board can be sustained when US workers (still the source of most of US corporate earnings) are only seeing total annual pay increases of between 1% and 1.5%.

If you don’t believe that matters, I’m sorry. I’ve done what I could to change that. Now, I’ll simply have to content myself with the knowledge that as you don’t believe what I’ve told you, you’ll probably keep buying even as the tax cut / share buyback bubble grows wobbly, thereby giving me and those who do believe me ample time to exit before the final pop. Given that that is my plan, I’m ethically bound to tell you so and remind you of the same right up to and throughout the event itself, which is why I do so now. That said, you’re always welcome to switch sides, and in any event, we’ve likely got at least two or three quarters of advancing earnings before the end. I, for one, intend to make my last plays in this bull market count. Here are a few I’ll be playing.

Remember to treat these ideas as just that, ideas, and do your own research before making any investment decision.

TD Ameritrade (AMTD)

There are many e-trading platforms available today, but I use TD Ameritrade due to its wide range of capabilities and its convenience. I like AMTD stock because of the company’s solid earnings growth and due to recent analyst forecasts that suggest it is going to earn far more than ever before in the final two quarters of the year. If we look at those forecasts compared to the company’s current price, we see that AMTD has a forward P/E of 15.3, which is mighty low for a stock with such a long, healthy track record and the implicit downside protection that entails. Things look even better if we peer even deeper and look at a more obscure ratio, the PEG ratio, which measures current price vs earnings growth over time. In this case, AMTD has a PEG Ratio of just 0.63, where anything less than 1 is considered a value. Since this stock appears to be trading 10% to 15% below where it should be, just given the numbers we can see now, I’ve had to ask myself why that might be, and the only reasonable explanation is that investors are worried that the company’s fortunes will fail when this long bull market finally ends. I think that fear is overblown, not because the bull market will never end, but because traders have become far more shrewd and active over the past decade, so even though they may have done so in the past, I don’t believe they will cease to actively manage their portfolios due to a market downturn, even if it turns out to be a serious one.

Chart courtesy of www.stockcharts.com 

Amazon (AMZN)

Amazon is taking over everything. The trend didn’t start, nor will it end, in this decade, but we just saw the company’s relatively new profitability take a great leap forward, far beyond what analysts were expecting. Amazon.com’s first quarter 2018 profits were up 40% from the year-ago quarter, yet the market seemed more focused on the increase in the cost of Amazon Prime. That’s odd, because as financial news, that’s a big nothing: everyone knows Amazon will lose a few Prime subscribers as a result of the decision, but that it will come out even-to-slightly-better as a result of the greater revenue. What the market should have been paying attention to was the continuing growth of revenue from Amazon Web Services, which is seemingly unaffected by Microsoft’s successful foray into the same industry. Last week, AMZN looked like a $2,200 stock. (I am long AMZN and AMZN Jan 2019 $2,200 calls.)

Chart courtesy of www.stockcharts.com

CVS (CVS)

CVS has remained in my portfolio despite a sad few years, largely because the company has demonstrated that it has a solid foundation and that it executes well when it endeavors to change. The company’s timing in buying Aetna was not great, but it will certainly mean higher revenue in the future. I even held on to CVS shares when Amazon.com was threatening to enter the prescription drug industry, a threat which has now subsided. That news in itself has sparked buying, but more importantly, it will allow CVS to stop looking in its rear-view mirror and press ahead with its planned streamlining of the entire diagnostic / prescription / insurance / fulfillment process. Once the revenue from this venture begins to manifest, CVS could rocket past its previous high of $110 before you can say “America’s drug store.”

Chart courtesy of www.stockcharts.com

Shopify (SHOP)

Perhaps we who analyze stock should avoid superlative phrasing such as “explosive growth,” but when a company posts year-over-year quarterly revenue gains of 70% or more for four quarters in a row, what other phrase would suffice? Now consider that despite four quarters of 70% revenue growth, you can pick up SHOP stock for only about 50% more than you could one year ago. The company appears to be building its business by helping serious small business owners to offer goods and services online and not, as critics charged, by helping people set up “get rich quick” schemes / scams. This stock is high on my “to buy” list, and buy is what I’ll do as soon as I can free up some cash.

Chart courtesy of www.stockcharts.com

Comcast (CMCSA)

The greatest mystery on the market today, IMHO, is why Comcast has lost a quarter of its value, falling from a market cap of just under $200 billion on Jan 26, to a market cap of $146 billion today. The company has strong upward momentum in both revenue and earnings. The share price has fallen so low as to create almost unthinkable valuations: f P/E 11.6, PEG 0.83, Price/Book 2.14. The company also maintains a profit margin of 20.1%. I’m not sure Comcast needs SkyB as badly as it thinks it does, but with the price this low, the stock will likely be a winner whether or not the company wins its current bidding war. I own CMCSA long and recently added some call options to spice things up.

Chart courtesy of www.stockcharts.com

 

 

Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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