Daily Archives: December 3, 2018

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Buy These 3 Growth Stocks to Beat a “Non-Diversified” Index

Stocks have been on a rollercoaster ride since early October when Fed Chairman Powell told the market that neutral interest rate levels were a “long way away” from the current rate. And while Mr. Powell reversed course last week, the damage had already been done to a market weary of tariffs and shaken by ever starker housing numbers.

Outsized Impact of a Few Stocks

More and more the so-called FAANG stocks, Facebook (NYSE: FB), Amazon (Nasdaq: AMZN), Apple (Nasdaq: AAPL), Netflix (Nasdaq: NFLX) and Google (Nasdaq: GOOGL, GOOG) have an outsized impact on the overall market. At one point last week these behemoths had lost over $1 trillion in market value from their recent highs.

The FAANG stocks now make up a massive percentage of the Nasdaq Composite Index. Even after the recent sell off, they are still over 35% of the index. And if we add in Microsoft (Nasdaq: MSFT) we get to well over 45% of the Nasdaq Index being represented by just 6 stocks.

And it is not just the Nasdaq that is overly impacted by these few stocks. As of July of this year, these six stocks represented an unbelievable 98% of the returns of the S&P 500. At that time the S&P was up 4.4%.

Investing in a market index is meant to give your portfolio diversification over a range of stocks. The Nasdaq is known to be technology focused and is often called a tech index, while the S&P is a broad index meant to represent a wide range of companies. But the shear size of the FAANG stocks and Microsoft have made these indexes much less diverse.

The overrepresentation of these six stocks is a major issue for investors who hope to diversify their investments by way of the indexes. There is a false sense of diversification, and as we saw in October, the impact of scandals at Facebook, projected slowing iPhone sales, and increased competition in streaming video, had major impacts on the overall markets due to just a few stocks.

If you want true diversification in your growth portfolio it is necessary to find individual stocks with good growth prospects. The following are three stocks that I believe should outperform the non-diversified indexes moving forward.

Vericel Corporation (Nasdaq: VCEL)

Vericel is capitalizing on two strong trends. An aging population and the trend for improved health through exercise. Both trends have the side effect of deteriorating or damaging the cartilage in our knees.  MACI, the company’s cartilage replacement technology, removes a small amount of tissue from the patient, and then grows new cartilage which is then implanted in the patient.

The process has two major advantages over previous solutions. Since the tissue is the patient’s to begin with there is less chance of rejection of the new cells. And, because of this, there is less need to provide immunosuppressive therapy necessary when a foreign solution is placed in the body. In clinical tests MACI has also shown improved recovery time over the incumbent solution.

In addition to the cartilage replacement market, Vericel provides a product that helps severe burn victims who need to regenerate damaged skin. As with the cartilage solution, Epicel takes a small part of the patient’s skin that it then uses to grow additional skin.

Both products have proven superior to the current solutions on the market, and sales of both products have begun to takeoff, making now a great time to pick up the stock.

While the company is not yet profitable, in its most recent earnings release on November 6th, it grew revenue 58% year-over-year. MACI revenue grew 66% and Epicel 36%. The company also raised estimates with the earnings release, and is expected to grow earnings 82% next year.

In addition to the great earnings report, which lifted the stock, CEO Nick Colangelo has said the company plans to expand the MACI product beyond knee cartilage to ankles, shoulders and hips. The expansion will grow the company’s addressable market at a time when the product is already in high growth mode. This is another catalyst that argues for entering the stock sooner rather than later.

pdvWireless (Nasdaq: PDVW)

pdvWireless is a provider of secure private networks to utilities, municipal transportation, railroads, airlines and other enterprise and industrial critical communications. The networks provide narrowband communication capabilities for critical communications often in areas where normal communications networks are not available.

I’m bringing PDVW to your attention now because the private communication networks provided to these specialized users are poised to undergo a major shift from narrowband to broadband. There are two catalysts driving this change.

First, there is an increasing need for broadband as the number of connected devices to these networks is expected to increase substantially. Rob Schwartz, president and COO of PDVW says, “Utilities often operate in places where there isn’t ideal coverage, or for specific use cases, and with the exponential growth in connected devices, this creates the need for broadband private LTE.”

Second, the frequency used for these networks, 900 MHz, is expected to undergo a major FCC regulatory overhaul very shortly. This will put in place the regulatory structure necessary to expand the narrowband services to broadband. If successful, the new regulatory scheme should lead to a boom in the transformation of these networks, which in turn should drive the stock of pdvWireless higher.

In its latest earnings release CEO Morgan O’Brien stated that he believes the new regulatory structure is imminent based on the fact that the FCC has frozen applications in the spectrum, a common practice when new regulations are about to be announced. And, there have been positive comments from both the FCC Commissioner and the head of the President’s Economic Council, that seem to imply the new regulations will favor the pdvWireless position on expanding spectrum use.

With earnings projected to grow close to 26% next year, a positive regulatory ruling, combined with pent up demand, should propel pdvWireless higher.

Ceragon Networks (Nasdaq: CRNT)

Ceragon is a leading provider of wireless backhaul for the communications sector. Ceragon’s customers include major carriers AT&T (NYSE: T), Sprint (NYSE: S) and T-Mobile (Nasdaq: TMUS) in the U.S., Deutsche Telekom (OTCMKTS: DTEGY) in Germany, Reliance Jio and Bharti Airtel in India, and Telcel in Mexico.

Ceragon provides extra capacity, or backhaul, to these providers by way of both fiber optics and wireless solutions. The backhaul market is expected to grow at 13% annually over the next four years.

Ceragon is being driven by two catalysts. One, the continued build out of infrastructure in emerging markets, and two, the coming build out of the 5G network.

Ceragon makes almost one-third of its revenue from India. The Indian market is growing at 16% year-over-year and has one of the highest smartphone growth rates in the world. Ceragon will continue to benefit from this growth providing wireless backhaul to Indian telcos.

Ceragon should also benefit from the global rollout of 5G. 5G requires a denser network and more point-to-point communication than the current 4G network. This densification will require the support of backhaul services like those provided by Ceragon as the networks come online.

Ceragon’s backhaul technology platform is believed to be one of the fastest among its competitors, which should give it an additional advantage as the 5G networks are built out.

In its latest quarter Ceragon grew sales 72% quarter-over-quarter, and the company is expected to grow earnings 34% this year. The combination of growing emerging markets along with the coming 5G build out makes Ceragon a growth story to invest in now.

Vericel, pdvWireless, and Ceragon all offer an alternative way to diversify your growth portfolio in what has become a non-diversified index world.

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Market Preview

Market Preview: Progress on U.S./China Trade War Lifts Markets, Earnings from Dollar General and Autozone

Markets rallied strongly Monday after President Trump and Chinese President Xi Jinping agreed to a 90 day moratorium on trade tariffs in which the U.S. will hold off on raising tariffs by 25% at the beginning of 2019. Larry Kudlow, the President’s National Economic Council Director, said “If China opens its markets as they promised to do, and they’re going to do it fast according to their promises, we will increase our exports substantially…” Kudlow is well known on Wall Street, and many analysts put faith in his comments over often exaggerated political commentary regarding trade. Markets rallied from the outset Monday morning, gave back some of those gains, and then rallied again near the close. Investors are hoping Director Kudlow is correct and for a quick resolution to the trade issues. If a resolution is not arrived at either before, or soon after, the new year markets will see the 90 day window as simply kicking the can down the road.

Dollar General (DG), Autozone (AZO) and Marvell Technology (MRVL) all report earnings on Tuesday. As Todd Vasos, CEO of Dollar General stated last quarter, “our two-year same-store sales stack for the second quarter of 2018 was the highest in 10 quarters.” The company has been hitting on all cylinders this year, and raised earnings estimates as a result. The stock has been little impacted by the market pullback, and analysts expect another strong quarter from the discount retailer. Autozone earnings are expected to increase 23% year-over-year when the company reports before the bell Tuesday. After selling off earlier this year the stock has regained the $800 level, recently hitting all-time highs. Analysts are looking for another strong quarter, and an update on the company’s aggressive buyback program.

Tuesday, investors will get to take a peak at motor vehicle sales and Redbook retail numbers. The auto sales number is expected to decrease slightly to 17.2 million from the 17.5 reported in October. But both month’s numbers increased dramatically from a summer slump. Wednesday was to see Fed Chairman Powell deliver testimony to Congress’s Joint Economic Committee. But, the passing of President George H.W. Bush, and the declaration of a national day of mourning, means that testimony will be postponed. Stock markets in the U.S. have also announced that they will be closed on Wednesday to honor the nation’s 41st President.  

Wednesday the earnings focus on retailers continues as lululemon (LULU), Five Below (FIVE) and American Eagle Outfitters (AEO) report earnings. Last quarter lululemon handily beat estimates by 44% sending the stock higher yet again after an earnings beat. The stock has performed exceptionally well this year, rising from $80 to around $140. Investors will be looking for the athletic apparel company to provide color on the final few months of the year as we’re in the midst of the holiday season. American Eagle has stair-stepped lower since August of this year. The company has invested heavily in its online operations, and has achieved relatively strong sales numbers from that channel the past few quarters. Analysts will be looking for an update on the progress of the online initiative and what hurdles the company is encountering as it broadens its platform.

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3 Financial Stocks to Buy While They’re Cheap

Source: Shutterstock

This morning stocks are rallying on the back of good news from the G20 meetings. China and the U.S. struck a deal to halt the tariff rhetoric so that they can negotiate a long-term trade deal between the two countries.

The fear that the U.S. and China would bog down global growth with tariffs has driven a lot of market volatility this year. There is a lot on the line for all economies and this morning’s news is a relief to the markets.

Year-to-date — while not a financial disaster — equities have been under pressure and in see saw from one headline to the other. This is especially disappointing to financial stocks. This year was supposed to be when bank stocks flourished. The U.S. Fed is in a rate hike cycle and the idea was that banks would profit from the higher rates. This hasn’t worked out that way so far. In fact, coming into today the Financial Select Sector SPDR (NYSEARCA:XLF) is down 3% in 2019, lagging behind the S&P 500 and the Nasdaq which are up 4% and 11% respectively.

As a result, bank stocks are now even cheaper, so there is value in most of them, and they should be part of a healthy portfolio.  At some point this general macroeconomic malaise will pass and the sentiment selling will abate. There is a lot to like in these financial stocks and they are worth accumulating.

The Value Investment: Bank of America (BAC)

This Sell-Off Could Be Your Best Chance to Buy Bank of America Stock

Source: Shutterstock

First on my list of financial stocks is Bank of America (NYSE:BAC). BAC sells at a trailing P/E of 13.6 — a ratio which is cheap in both absolute and relative terms. At these levels, BAC stock sells at almost price-to-book, meaning that investors give it no credit beyond the assets on its books.

Buying BAC here is likely very safe. Bank of America has a strong management team. They were able to navigate out of the worst financial disaster and save a few other banks along the way. In short, if the stock markets move higher in the next few years, then BAC stock will too. In addition, it mainly operates in the U.S. so it has little exposure to China headlines.

The Momo Run: Square (SQ)

square stock SQ stock

Source: Via Square

Momentum stocks rarely give investors clear entry points. That is the case with Square(NYSE:SQ). Unlike Bank of America stock, SQ stock is far from cheap. But this is a fintech stock so I don’t give the same amount weight to value as I would for a standard financial center. Case in point, even though SQ has fallen 20% in the last three months, it’s still up 80% in 12 months.

This is a stock that should to be part of a complete portfolio. SQ has solid fundamentals as it begins to compete with the likes of Visa (NYSE:V) and Mastercard (NYSE:MA). Recently SQ stock was dragged lower by the bitcoin crash. Part of the rise of Square was tied to its foray into the blockchain arena. So like Nvidia (NASDAQ:NVDA), SQ suffers on the way down with bitcoin too.

Both BAC and SQ are financial stocks technically poised for spikes. They are now re-approaching pivot zones and if the bulls can prevail in retaking them they can shot 7% higher on momentum alone. Since SQ is a fast mover, its breakout will be faster and longer than that of BAC, but they should both do well.

The Gamble: Goldman Sachs (GS)

Source: Shutterstock

Last on my list of financial stocks to buy today is Goldman Sachs (NYSE:GS) . GS stock has grossly under-performed in absolute terms  and relative to the sector. GS is down 24% in 12 months.

Recently Goldman Sachs has been in the news over issues with their potential involvement in the Malaysian bond fraud event. I don’t now how this scenario is going to play out but it’s worth a small bet for a positive resolution. Usually Wall Street is too quick to overreact and it’s too early to call GS stock dead for good. As a result of its massive fall, GS now sells at an 8x forward P/E.

Nevertheless, Goldman Sachs stock still carries a high ticket price at $190 per share. So one can use options to speculate on a rebound into the first quarter of 2019 instead of risking the face value of the stock. Options offer lower entry costs for a chance to profit on a rebound. In addition to the fundamental news, GS stock is also at a technical disadvantage. Losing the $220 level triggered a bearish pattern that may still be unfolding. There is further risk below if $185 zone also fails.

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