Despite tricky conditions, these U.S. mega-cap companies are still performing very well. It’s not so much that the macroeconomic conditions are difficult, but daily headlines are definitely a hindrance. Geopolitical unrest is causing dilemmas in their C-suites. While their businesses are thriving, CEOs cannot commit capital expenditures as freely as they want.
Central banks are guaranteeing the availability of cheap money and companies want to spend it. But the uncertainty from the U.S.-China trade war and upcoming 2020 presidential election is holding them back. In light of this, here are three mega-cap stocks to trade this week: Chipotle (NYSE:CMG), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Netflix (NASDAQ:NFLX).
While most giants are doing well, not all the mega-cap stocks are healthy. CMG and GOOGL are near their all-time highs, but NFLX stock is in trouble. So trading these tickers is not a one-size-fits-all activity. Of the three, only GOOGL is a stock I’d own for the long term. I am not a fan of the valuations on CMG or NFLX stock. I think Wall Street gives them too much credit and eventually will have to either change their models or reprice them much lower. But I never let my bias stand in the way of a good trade.
Mega-Cap Stocks to Trade: Chipotle (CMG)
Value is in the eye of the beholder, and CMG stock looks outrageously expensive at a price-to-earnings ratio of almost 100. This is four times more expensive than GOOGL, but it is cheaper from a price-to-sales perspective. These perspectives and thesis definitions matter before judgement. But the charts reflect actual price action.
Rarely do I see a restaurant stock that commands such valuation. But in this case it is earned because of the impressive comparable-store sales that it delivers. When management executes well and clobbers growth expectations, then Wall Street rewards the stock well. Chipotle definitely got its mojo back from the food illness headlines of a few years back. The onus is now on management to maintain high performance or else they could give cause for the shorts to step back into it.
This week’s setup is specific to the neckline that exists near the $852 level in CMG chart. The bulls have been trying to break through it for a while to no avail. But this last effort comes with the momentum of a $50 run of higher lows. The exciting part is that they have been trying since August so if and once they do break through, the buyers will cause CMG stock to overshoot higher. It will set new highs — and then some — since the actual target should be $920 per share.
It is important to note that even up here, the analysts who cover CMG stock are still shy about their ratings. This makes shorting CMG an even more dangerous activity.
Alphabet (GOOG, GOOGL)
Alphabet stock is trying to make a run for it. The bull case for GOOGL stock is easy to make. Its search business is a massive cash cow with only two serious competitors in Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN). To that, there is enough business for all three to thrive for years. So a couple of weeks ago I wrote about an upside opportunity in GOOGL and indeed, the stock rallied 8%. Now it is trying to add to that rally in a big way. If you are long in the stock, stay in it with proper stops.
What’s more exciting is what lies ahead. We are entering an exciting round of earnings. This week Microsoft (NASDAQ:MSFT) and AMZN, to name two giants, will hand in their report cards –and they are sure to move GOOGL stock in sympathy. Technically, even though they failed near $1,265 per share, the charts suggest that the buyers are in charge. As long as GOOGL stays above the $1,232 zone, the bulls can use it as a platform for a new leg higher. This thesis is a tactical trade, not an investment at these altitudes, meaning I would scalp the profit ahead of earnings if given the chance. And I would also use tight stops below at $1,239, $1,221 or $1,208 depending on time frame preference.
I am confident that in the long term GOOGL stock will be higher. But my concern for the next two weeks is the binary reaction to an earnings headline. Wall Street developed a bad habit to trade the stock on the change in management’s guidance. For that reason, I’d rather be tactical ahead of earnings. Then there will be an opportunity to trade GOOGL with better conviction.
NFLX stock has always been an emotional one to trade. Both fans and haters are passionate about their opinions. The crazy thing is that they are both right. The fans claim that the company’s upside is giant, and it is. The critics complain about its terrible cost structures and financials, and they too are right. The bottom line is that Netflix is growing very fast and it is spending an insane amount of money to do it. Once growth stalls the stock will need a repricing period. And NFLX stock is dangerously close to this inflection point.
To that point, management just reported earnings last week and the initial reaction on Wall Street was a giant spike. I dubbed the reaction a mistake, because the results Netflix delivered did not fit the stock profile. This is a growth company and management had just told Wall Street that they missed on revenues and new signups. These are the two most important things to a growth stock. I would have rather seen them miss on earnings than sales. When I’m investing in a growth company, I don’t worry as much about profitability than I do about growth targets. The initial spike turned out to be a relief pop — and those are almost always shortable.
From here, there are clear tradable lines in NFLX stock for the next two weeks. It has support below but these are also must-hold levels or else $225 comes into view. As long as it holds above $269 per share I can still try to catch the earnings reversal. But I should employ very tight stops below it because that would be the neckline of a massive bearish pattern that could trigger a 20% correction or more. This is not my forecast but it is a realistic scenario that exists below these levels.
If NFLX stock bounces then I expect resistance zones at $282, $301 and $309 per share. There the sellers will try to stop the progress — especially near $310. At this pace, this company needs a miracle to regain its upward momentum like CMG did this year.
These three stocks to trade discussed today will need the help of the overall markets. The indices are hovering near all-time highs in spite of so many potential pitfalls looming. And the CBOE Volatility Index (VIX) is way too low. This is not the same as me saying that investors are reckless because they are not. But caution is still warranted and new all-time highs should not be this easy. We may have another dip brewing before the final push. So I never risk more than I can afford to lose.