The market has been stuck in neutral since late July 2019, when: 1) the Federal Reserve failed to appease markets with “just” a quarter point rate cut and less-dovish-than-expected commentary, and 2) U.S. President Donald Trump re-upped the trade war ante with the promise of more tariffs.
But, this era of sideways trading could end soon. When it does, it could end in a big upward move for stocks. The bull market rationale is as follows:
- The trade war is de-escalating. It should continue to de-escalate for the foreseeable future as neither side has incentive to up the ante anytime soon.
- Central banks everywhere have enacted accommodating monetary policy over the past several months. This injection of fiscal stimulus everywhere should re-stimulate global economic activity.
- De-escalating trade tensions and re-stimulated economic activity should spark a rebound in global business confidence, investment and capex levels.
- Global labor markets remain healthy. Rates are low. Inflation is contained. Consumer confidence remains strong. Corporate earnings are stable. Stock valuations are normal.
Long story short, it looks like markets are heading for a sharp move higher over the next few quarters. What should you buy to prepare for this market rally? High volatility stocks.
According to a joint economic study from the Hong Kong Polytechnic University, Deakin University, and Zayed University, stock synchronicity is positively correlated with investor sentiment. That is, when times are good, all stocks tend to go up — a rising tide that lifts all boats. Further, recent research from the University of Chicago and Harvard indicates that when perceived risk is low (or when times are good), the spread between high volatility and low volatility stock valuations tends to widen (or high volatility stocks tend to outperform low volatility stocks).
The investment implication? Buy high volatility stocks when times are good.
High Volatility Stocks to Buy: Shopify (SHOP)
% Off 2019 Highs: 24%
High-flying growth stock Shopify (NYSE:SHOP) has been hit hard amid recent market choppiness, dropping into bear market territory over the course of roughly a month. But, as markets turn higher over next few weeks and investors adopt risk-on attitudes, SHOP stock should rebound in a big way.
The core bull thesis on SHOP stock remains unharmed by recent stock price weakness. Shopify is the digital equivalent of a store front. Before, regardless of size or product offering, every merchant/retailer needed a store front in a mall. Today, regardless of size or product offering, every merchant/retailer needs a store front on the internet. Shopify provides tools which help merchants/retailers of all shapes and sizes build those storefronts – and further helps them do everything to drive traffic to and sales through those digital storefronts.
Over the next several years, digital storefronts will become the standard throughout the retail world. As they do, Shopify will continue to grow revenues by leaps and bounds. Importantly, they will do so at strong gross margins (north of 50%), implying a huge opportunity for profits to be quite large in the long run. Net net, then, SHOP stock should continue to power higher in the long run, and near-term weakness in the stock is nothing more than noise that will pass once market sentiment improves.
The Trade Desk (TTD)
% Off 2019 Highs: 34%
Programmatic advertising leader The Trade Desk (NASDAQ:TTD) has been a Wall Street darling for several years. That ended recently. TTD stock is down more than 30% over the past two months amid valuation concerns. But, the stock has fallen so far, so quickly, that such valuation concerns no longer hold water. The implication? A big rebound is around the corner for TTD stock.
Long story short, The Trade Desk is pioneering what is called programmatic advertising, which is essentially just the usage of data, machines and algorithms to more optimally execute ad transaction processes and allocate ad spend. Programmatic advertising is the future of the ad world. In the long run, pretty much all ads will be transacted programmatically. Today, only a fraction of global ad spend is transacted programmatically and a tinier fraction goes through The Trade Desk’s platform. Thus, in the long run, TTD has plenty of room to grow revenues and profits.
At a near $300 price tag, one could reasonably argue that TTD stock was fully priced for all that growth. But, with the stock now below $190, the valuation actually seems discounted relative to the big growth potential. Indeed, the consensus price target on TTD stock is $270 — this is the farthest below its sell-side price target TTD stock has traded, ever. Thus, once broader market sentiment turns a corner, TTD stock should rush higher from currently depressed levels.
% Off 2019 Highs: 41%
Streaming device maker Roku (NASDAQ:ROKU) has exploded higher this year following multiple double-beat-and-raise quarters which, when strung together, added tremendous credibility to the long term bull thesis. But, after popping to record highs following its most recent beat-and-raise report, ROKU stock has since given up all those gains on valuation concerns. Such valuation concerns have run their course, and ROKU stock is now ready to take a sustainable leg higher once the broader markets gain upward momentum.
In the big picture, Roku is rapidly turning into the cable box of the streaming world. That is, while consumption is shifting in bulk from linear to internet TV channels, the dynamics of the internet TV landscape will look a lot like the dynamics of the linear TV landscape. There will be multiple streaming services (channels), with a ton of subscribers to multiple services (cable TV buyers), and a central ecosystem which connects all those services to all those subs (a cable box). Roku is the central ecosystem – and while Roku is one of many central ecosystems, it is by far and away the largest.
Throughout 2019, everyone has been buying into this bull thesis of Roku turning into the cable box of the streaming world. This overwhelming bullishness pushed ROKU stock into way overvalued territory at prices north of $150. But, the stock has since come crashing back to down to Earth, and at $100, the valuation is much more tangible. Plus, this is where the stock was before last quarter’s earnings report, so there seems to be fundamental, technical, and optical support here.
The next move? Higher, once the market exits this choppy phase and moves higher, because the fundamentals supporting ROKU stock remain conducive to significant long term profit growth.
% Off 2019 Highs: 35%
Connected learning platform Chegg (NASDAQ:CHGG) has been a secular winner for several years. But, CHGG stock has hit a rough patch recently amid optical risks and valuation concerns. Shares have dropped 35% in just over two months. This weakness won’t last. The optical risks are overstated, and the stock actually now appears undervalued, not overvalued. As such, a big rebound is likely coming soon.
There is concern out there that the recent college admissions bribery scandal will have a negative impact on Chegg’s growth trajectory. I see the opposite happening. As a result of this bribery scandal, college admissions offices will tighten up their admissions processes, making it harder than ever to get into a good school. That means students will have to try harder than ever to improve their college applications, and parents will pour more money than ever into legitimate channels to help their children do that. Chegg provides the most streamlined, legitimate college application assistance platform, and as such, should actually benefit from the recent college admissions scandal.
There has also been concern out there regarding the valuation on CHGG stock. Sure, at $45, the stock look overvalued. But, below $30, CHGG stock looks like a bargain. EPS estimates in two fiscal years stand at roughly $1.25. Based on an application software sector average 35-times forward multiple, that equates to a one year forward price target for CHGG stock of well over $40. Thus, below $30, Chegg stock actually seems undervalued.
% Off 2019 Highs: 31%
Social media platform Pinterest (NYSE:PINS) has been one of the more successful IPOs this year in a 2019 IPO market that has birthed some big winners, and some big losers. But, PINS stock has lost its touch recently amid broader valuation concerns, and shares presently trade more than 30% off their August highs. Such valuation concerns have largely run their course, while the fundamentals remain rock solid — implying that a recovery rally in PINS stock should be just around the corner.
Pinterest is a good company. The platform has hundreds of millions of users. All of those users use Pinterest for something different than what they use other social platforms for. Thus, there is very limited risk of user churn. Further, this differentiated use-case, which can broadly be characterized as looking for visual inspiration to do something, lends itself almost perfectly to digital ads. Consequently, this company should have no problem populating its platform with high conversion ads over the next several years. This should lead to robust revenue and profit growth.
At current levels, PINS stock is undervalued relative to that growth. That’s why the consensus sell-side price target on PINS stock is $33 – more than 20% above the current price tag. As such, once macro investor sentiment improves, PINS stock should be in store for a big rebound from today’s depressed levels.
% Off 2019 Highs: 31%
Cloud security company Okta (NASDAQ:OKTA) was a big winner in 2019 – until recently. A broad shift out of momentum stocks has hurt OKTA stock, which has fallen more than 30% over the past two months. But, a shift back into momentum stocks thanks to a rebound in investor sentiment, should propel a meaningful rebound in OKTA stock over the next few months, too.
In a nutshell, Okta is revolutionizing the cloud security game. Before, cloud security platforms were all about protecting the ecosystem, or creating a castle of security surrounding all workflows, processes, and data. Okta is instead focused on protecting the individual. That is, they are creating a body of armor for each individual in the ecosystem, individually securing their own workflows, processes, and data. The thinking is that, if everyone has a body of armor, you don’t need a castle. That’s a win, since castles can be constraining.
Okta is the leader in this field, broadly dubbed identity access management. As this field gains mainstream traction over the next several years, Okta’s reach, presence, and relevance will grow, too. That will power robust revenue growth at strong gross margins – which should flow into big profit growth. At current valuation levels, OKTA stock is priced at a discount to that big profit growth potential. Thus, when momentum stocks come back in favor, OKTA stock will come back in favor doubly so.
% Off 2019 Highs: 17%
Big data analytics company Splunk (NASDAQ:SPLK) has seen its shares fall nearly 20% over the past two months as investors have grown concerned about slowing growth and an extended valuation. But, SPLK stock has shown signs of life recently amid sizable fundamental improvements, and these improvements should provide the stock with enough firepower to reclaim its highs in the near future.
Splunk is at the heart of the data economy. Enterprises everywhere are starting to realize the value of data in making business decisions. As such, they are doing everything they can to collect data. But, analyzing that data can be a tall order. That’s where Splunk steps in. They turn the treasure trove of data companies have, into actionable insights. In so doing, Splunk is turning into an indispensable part of the data economy.
Because of this, Splunk has guaranteed itself big growth over the next several years. But, investors have grown weary of the valuation, hence the sell-off. This sell-off is overdone. Splunk has introduced new pricing schemes over the past month. These new pricing schemes should keep revenue growth big for the foreseeable future. Sustained big revenue growth will provide continued support for SPLK stock’s valuation. As that valuation finds continued support, Splunk stock should rebound from this sell-off.
As of this writing, Luke Lango was long SHOP, TTD, CHGG, PINS, OKTA and SPLK.