In the stock market (just like in sports), momentum is a real thing. And it’s tough to stop.
Red-hot stocks can appear quickly and go on big runs in a hurry. A lot of the time, it’s a positive earnings report that gets things started. Those good numbers cause a rapid shift in sentiment. Everyone starts buying. Then FOMO (fear of missing out) kicks in, and everyone starts buying more. The net result is a stock which soars remarkably higher in a relatively short amount of time.
Sometimes, those big runs lead to a bubble. The bubble pops. The run ends. And the stock drops.
Other times, those big runs are part of a secular growth narrative. The stock pauses after a red-hot run. It consolidates for a bit. But then it continues to head higher as the growth story picks up steam.
A big part of investing is looking at red-hot stocks, and realizing whether it’s a bubble stock or a secular growth stock. Bubble stocks make for great shorts. Secular growth stocks make for great longs.
Right now, with the market blitzing back to all time highs, there are a lot of red-hot stocks. But not all of them are secular growth stocks. Below is a list of three red-hot stocks which have secular growth components. Because of those secular growth components, they should stay on their uptrend into the foreseeable future.
3 Red Hot Stocks to Buy Today: Netflix (NFLX)
Video streaming giant Netflix, Inc. (NASDAQ:NFLX) is a part of the FANG group. But that acronym feels antiquated now. Netflix stock has jumped into a class of its own.
Meanwhile, Netflix stock is up more than 130% over the past year. Year-to-date, Netflix stock is up 70%, versus a 35% gain for AMZN and sub-10% gains for FB and GOOG.
NFLX massive over performance is because Netflix is morphing into a decade-long growth narrative with huge global growth prospects.
Before, everyone was talking about whether or not Netflix’s huge bet on original content was going to pay off. There were concerns about domestic market saturation and competition from Amazon Video, Hulu, and others. Profitability was a big question mark, especially on the international front.
Now, all that is in the rear-view mirror.
All those big investments in original content? They’re paying off. Everyone is talking about how Netflix’s robust original content portfolio is making the company the new (and global) Hollywood. All those concerns about domestic market saturation and competition? Those have faded. Everyone is talking about how Netflix can get to maybe 100 million domestic users as cord cutting and over-the-top media consumption accelerates.
Those international growth and profitability concerns? Also gone. Netflix’s international user growth is accelerating to unprecedented levels as investments into foreign original content are paying off. Moreover, the international business is actually profitable now, and profit margins across the whole company are soaring higher by several hundred basis points per year.
As Netflix continues to grow its international reach and improve its profitability, the fundamentals will only get stronger, and Netflix stock will only head higher.
3 Red Hot Stocks to Buy Today: GrubHub (GRUB)
As hot as Netflix has been over the past year, digital food delivery platform GrubHub Inc (NYSE:GRUB) has been hotter.
NFLX stock is up more than 130% over the past year. GRUB stock is up more than 220%.
Just like Netflix, GrubHub’s massive gain in stock price has been accompanied by a strengthening of the underlying growth narrative. Formerly, GrubHub was a just digital food delivery platform staring at massive competition. Now, not only has GrubHub brushed those competition concerns aside, but the company has also morphed into a pure play on secular trends in the on-demand and at-home economy.
There’s no hiding it. Everyone is staying at home these days. Instead of going to the movies, we stay at home and watch over-the-top streaming services. Instead of going to malls to shop, we stay at home and shop online. And instead of going out to eat, we stay at home and order food in.
When you think about those secular transitions from going out to staying in, you begin to realize there are clear leaders in each field.
Staying at home and watching videos? Netflix.
Staying at home and shopping online? Amazon.
Staying at home and ordering food in? GrubHub.
In this sense, GrubHub has thrust itself into the same growth narrative as Amazon and Netflix as a pure-play on the emergence of the on-demand, at-home economy. Just as Netflix and Amazon have grown their businesses internationally, GrubHub will likely also experience tremendous success once the company decides to pour fuel on the international expansion fire.
Because of all this, it’s pretty easy to see why GrubHub stock has soared to all time highs. And why the stock will keep making new highs into the foreseeable future. This is a secular growth stock supported by strengthening fundamentals.
3 Red Hot Stocks to Buy Today: Micron (MU)
Bulls have been pounding on the table about chipmaker Micron Technology, Inc. (NASDAQ:MU) for the past several months. It was a big growth stock (this year, revenues are expected to grow by 40% while earnings are expected to more than double) trading at a really low multiple (right around 5-times forward earnings).
But cyclical issues inherent to the semiconductor industry kept MU stock range bound for quite a while. Supply and demand command profitability for semiconductor companies. Eras of tight supply and big demand bring about massive profits. But those eras are subsequently followed by eras of robust supply and choppy demand, as competitors build out capacity to gain market share and demand wanes.
Thus, in the semiconductor space, big profits can disappear quickly.
Many view this year as peak cycle for Micron. Supply in the DRAM and NAND markets is expected to zoom higher in 2019 and after as competitors build out capacity. That will eat into profit margins, and erode Micron’s earnings. That is why MU stock was stuck in the lower $40’s for months.
But MU stock has now broken above $50 for the first time since 2000, and has done so in a hurry. Over the past month, MU stock is up more than 35%.
This move higher comes as investors are starting to realize (rightly so) that even if supply increases in 2019, demand should remain strong enough to help maintain healthy levels of profitability. That is because MU is benefiting from secular growth in huge markets like the Internet-of-Things, automation, artificial intelligence, and data centers.
Most of those growth catalysts are still in their early innings, meaning demand for MU chips will remain very strong into the foreseeable future. Yes, supply increases will hurt profitability, but robust demand should keep profitability near record-high levels.
All in all, Micron stock should keep heading higher into the foreseeable future. It’s a dirt cheap stock supported by secular demand growth from huge end-markets like data centers.
As of this writing, Luke Lango was long FB, AMZN, NFLX, GOOG, and MU.