The market has gone through a beating this month and few groups have been hit harder than momentum stocks. The stock market blew out after a historic run in January, falling some 10% in just 10 trading days in February. However, U.S. equities were able to bottom and we’ve since seen a low-volatility grind higher. Well, that is until October.
So what do we do now? Most investors aren’t trying to decide if they should buy, but when they should pull the trigger. Unless we’re rotating from a bull market to a bear market, buying in stages is usually the safest way to deploy one’s capital.
Many momentum stocks come with lofty valuations, but their businesses are well insulated. Not only against gyration in the economy, but also against things like trade wars. So what momentum stocks should we have on our radar? Let’s look.
Adobe Systems (ADBE)
Click to Enlarge Shares of Adobe Systems (NASDAQ:ADBE) had come under pressure earlier this month. However, the stock caught up a 10% rip after management reaffirmed guidance for the current year and provided their outlook on 2019.
Suffice to say, investors loved Adobe’s update, which came during its Adobe MAX conference in Los Angeles earlier this month. However, waves of selling in tech stocks have again hit Adobe. Not that ADBE hasn’t enjoyed monstrous gains, rising 40% over the past year, even when including the current decline.
So why is Adobe a momentum stock to buy? Simply put, it’s the best of the best in its respective category. It’s a must-have for online marketing and graphic design. Instead of one-time sales, the company’s move over to a subscription revenue model has significantly boosted revenue, which has grown 52% over the past three years.
Its cloud-based system has helped add fuel to the fire, as it’s put Adobe into the anointed group of cloud stocks. A significant close below the 200-day is a concern, but if investors can buy near this level, Adobe offers a favorable risk-reward. Shares will be 15% off the highs and have a good chance at finding support.
Click to Enlarge Another momentum monster over the past year has been Salesforce (NASDAQ:CRM). Coming into October, CRM was up 60% over the past 12 months. After its latest pullback, shares are still up 42%. But here’s what investors do: At $100 a share, they want a pullback to $85 or $90.
Then, at $125, they want a pullback to $110. At $140, they want a pullback to $125, and so forth and so forth. When they finally get that chance to pounce on a correction though, most chicken out and don’t pull the trigger.
There could be some support just above $135, which may make for a good spot for long-term investors to nibble some stock. Conservative investors may want to wait for a correction down to $132, near the 200-day moving average.
Yes, its valuation is expensive and the bottom line is scant. But revenue growth remains robust and Salesforce — like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) — is sacrificing today’s profits to build out its ecosystem. The goal will be to eventually reduce its costs and allow for significant margin expansion once market share grows considerably from today’s levels.
If CRM’s valuation keeps you on the sidelines, that’s fine. It’s not for everyone. But if you’ve been waiting for a buying opportunity, don’t squander a good risk-reward opportunity when it presents itself.
Click to Enlarge What more can we say about Amazon at this point? Perhaps the biggest momentum name out there simply due to its size, the tech behemoth hit the $1 trillion market cap mark earlier this year. Frighteningly, even with the recent correction where Amazon is down 12% this month, shares are still up 80% over the past 12 months. That alone makes Amazon susceptible to more downside. Some even say it’s going to fall to $900.
I don’t own Amazon but did have a limit order in near its 200-day. Most other stocks have hit or fallen below their 200-day, but Amazon isn’t one of them. Despite also having a lofty valuation, too many investors realize the potential it has. Whether that’s in e-commerce, the cloud, advertising, delivery, grocery and a number of other areas.
Investors support these high-growth initiatives and stand beyond CEO Jeff Bezos’ leadership. Like CRM, if you’ve been waiting for an opportunity in this one, it might be best to set your limit orders for an appropriate amount and close your eyes. That doesn’t mean to invest in something that you’re not comfortable with.
But when dealing with non-traditional companies in non-traditional industries, it doesn’t make much sense to use traditional metrics. For instance, you wouldn’t make the case that that CRM, ADBE or AMZN is expensive based on the metrics we use to measure railroad or utility companies.
It’s apples and oranges.
If we can step into Amazon at, or near, the 200-day moving average, we can always sell it if it continues to decline relentlessly. But at least we have a measurable risk-reward near that mark.
Click to Enlarge Nvidia (NASDAQ:NVDA) had been a momentum monster, racking up gains of almost 500% between 2016 and 2017. However, shares are up “just” 18% so far this year after the stock’s 20% fall this month. That’s right. Despite a good earnings result last quarter and just hitting new all-time highs near $290 less than a month ago, shares have been in full-blown plunge mode.
Concerns over semiconductors and chip stocks entering a bear market have caused a lot of investors to dump Nvidia. It doesn’t help that tech, in general, is under pressure as well. The question now is, should investors buy Nvidia?
It might take a quarter or two for some of Nvidia’s new products to start significantly driving revenue and earnings higher. Not that those metrics need much help, but whether it’s Nvidia’s work in autonomous driving with its DRIVE platform or within graphics with its new ray-tracing Turing GPU, the company continues to lead the way in virtually all of its end markets.
We’re halfway through Nvidia’s fiscal 2018 where analysts expect 33% sales growth and 52% earnings growth. In fiscal 2020, those estimates decelerate to 14% sales growth and 10% earnings growth, but we’ll see if Nvidia’s momentum can increase those expectations.
But even if they don’t, the valuation isn’t all that bad. Bears used to chide bulls thanks to Nvidia’s valuation. But 28 times next year’s earnings hardly seems like a hefty premium for a company that has so much potential when it comes to its current end markets and especially when it comes to its future markets. Be it in artificial intelligence/machine learning, autonomous applications, gaming, graphics and more.
Nvidia will continue making serious waves.
Advanced Micro Devices (AMD)
Click to Enlarge Considered Nvidia’s “little brother,” Advanced Micro Devices (NASDAQ:AMD) has been on a monumental run lately. After spiking from sub-$10 in April to more than $30 this summer though, shares are having trouble holding up.
Is AMD a stock to buy? If I had to pick just one, I personally would prefer Nvidia over AMD. However, I know some long-term investors who opted to take profits between $30 and $34 and have been hawking AMD for re-entry.
For those that have been stalking the name looking to buy, the 50-day did not hold up as support. However, the 100-day down near $21.70 might be a good spot to buy. In addition to having the 100-day moving average near that price, AMD’s 50% Fibonacci retracement level for its current 52-week range is there as well.
If anything, it should provide a bounce for AMD if the markets remain under pressure.
Click to Enlarge There was skepticism over Roku (NASDAQ:ROKU) when the company went public. Many investors were concerned that Roku was simply a hardware company. That its little plug-in devices would see their margins collapse down to nothing by technology giants like Amazon, Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) or by smart TV makers. Intense competition and hardware dependency are certainly a concern for many companies.
Roku isn’t one of them.
The popular saying in entertainment is “content is king.” Well, there’s obvious disruption in the consumption of that content and Roku is riding that massive wave. Only it doesn’t need to be Netflix, Hulu, HBO Go, YouTube TV or anyone else. Instead, Roku is the entertainment hub for millions of delighted customers.
It’s a leading player in the streaming revolution and with its $5.75 billion market cap, it’s still quite small. Is M&A in its future? It’s possible, but many will likely not pull the trigger after having ample opportunity in the past and passing it up. Creating free streaming channels that are popular with its users are helping to drive services and advertising revenue for Roku, diversifying it away from hardware dependency.
As for the charts, shares have been falling through various trendlines and moving averages. I don’t mind nibbling a little Roku near current levels, but I would love a shot at it between $48 and the low-$50s. This was a notable breakout level in the past and will put ROKU near the 200-day as well.
Click to Enlarge All of the names above are tech giants, but what about the financial winner known as Visa (NYSE:V)? This company continues to crush it every year as the transition from cash and check to debit and credit continues to fuel top-line growth.
Visa operates with impressive margins and acts as a “toll booth” to customer transactions. With the economy firing on all cylinders and as we approach the holidays, Visa will be an obvious winner. Further, as long as the rise in gas prices doesn’t crimp consumer spending, that too will fuel Visa’s results, as it benefits when consumers pay at the pump.
The stock almost hit its 200-day moving average this month, which would have been the first time since the fourth quarter of 2016. I wouldn’t rule out a 200-day touch sometime in 2018 and, actually, breaking below the 200-day would be attractive. While I don’t like to see trends break, look at the chart above. It’s actually quite common for Visa to break below the 200-day moving average (at least, when it’s actually there). A decline to $125 would thrust V solidly below the 200-day but into a prior breakout level.