While stocks were likely oversold to end 2018, the action in January has been far more bullish than many expected. It’s easy to say that there’s too much buying going on, just as many thought there was too much selling over the last three months of last year.
But, stocks have a way of moving in waves, especially when volatility is higher than normal. We had a selling wave in December and now a buying wave in January. Are we going to have another selling wave in February or is the rally going to continue? Or, are we going to move sideways for a while?
Predicting market direction is never an easy task. That’s true no matter how much experience you have, how advanced your research tools are, and how many resources you have access to. There are simply too many variables to know for certain.
However, market volatility can be more predictable. That doesn’t mean it’s easy to trade volatility or volatility products. However, volatility models do tend to perform better when it comes to forecasting than directional models.
That means if I come across a big volatility trade (using ETFs or otherwise), I certainly pay attention to it. Large volatility trades can give you a clue as to what the smart money is expecting, at least in terms of future market volatility.
Let’s take a look at a very interesting volatility trade that I recently came across in iPath Series B S&P 500 VIX Short-Term Futures ETN (NYSE: VXXB).
First off, VXXB is taking over for VXX, which expires at the end of January. VXX is actually a note that had a 10-year life, which is about to end. VXXB will replace VXX and will be the exact same thing. In fact, when VXX goes away, VXXB will drop the B and become the new VXX.
VXXB is the easiest way to trade volatility since it trades like a stock. It tracks the first two futures that make up the VIX calculation, so is representative of short-term volatility.
A sophisticated trader just made a ratio call spread trade in VXXB which I think is quite illuminating. A ratio spread means the legs of the spreads aren’t all an equal amount, as you’ll see. More specifically, with VXXB at $37.25, the trader bought the March 15th 38 call 5,000 times while selling the 43 call 10,000 times.
Because twice as many 43 calls were sold versus the 38 calls, the trade generates a credit of $0.80. That means if VXXB is below $38 at March expiration, the trader earns $400,000. What’s more, the trade can make additional money from $38 to $43, with max gain at $43. In the best case scenario, the trader can make $2.5 million in appreciation plus $400,000 in credits for a total of $2.9 million.
The risk from the trade comes from the 10,000 calls sold at 43. Only 5,000 of those are protected by the purchase at 38. The other 5,000 are exposed to however high VXXB could realistically go. The trade loses $500,000 per $1 in VXXB above $43.
This ratio call spread is interesting because it can be considered both bullish and bearish on market volatility. The credit aspect of the trade is moderately bearish or neutral on VXXB. But, the long call spread feature is clearly bullish (but not too bullish). But, the trader definitely doesn’t want to see a spike in volatility due to the unlimited loss potential on the upside.
Given the risk of the trade, the strategist making this trade clearly doesn’t believe volatility is going to spike and remained elevated prior to March expiration. Still, this isn’t the sort of trade a casual trader should make.
Instead, stick to a straight 38-43 call spread in VXXB if you’re bullish on VXXB or want to hedge a long stock portfolio. For those bearish on market volatility, you can use a put spread to take the opposite side for relatively cheap.
In late 2018, financial markets tumbled on concerns regarding rate hikes, trade tensions and slowing global economic growth. The biggest victims in that market sell-off were growth stocks, which essentially required low rates and continued healthy global growth to sustain their valuations. Those things were being called into question in late 2018. As such, many of the market’s high-flying glamour stocks fell 20% or more.
Sentiment has changed sharply in 2019. Stocks had a huge, decade-large rebound rally the day after Christmas. Stocks have remained on an uptrend ever since because the Federal Reserve has sounded a much more dovish tone regarding rate hikes, U.S. and China trade talks are progressing well, and the U.S. economy appears to still be quite strong.
All in all, the risks which plagued markets in late 2018 are easing in early 2019. As they have, financial markets have rallied, and growth stocks — which were the biggest losers in late 2018 — have been among the biggest winners in early 2019.
This trend should continue. As bullishness returns to the market, money will continue to flow into growth stocks, and growth stocks will outperform.
With that in mind, let’s take a look a 10 growth stocks that could win big as markets rebound in 2019.
One growth stock that should perform well in both 2019 and over the next five to 10 years is Canadian based e-commerce solutions provider Shopify (NYSE:SHOP).
The long-term growth narrative supporting SHOP stock is quite promising. E-commerce is the future. More than that, decentralized e-commerce is the future. Today, the e-commerce market is dominated by a few big players. That won’t remain the case forever. Eventually, everyone and anyone in the retail world will have a digital footprint, and that means that over the next several years, there will be a huge influx of new digital retail operations.
Shopify provides the building blocks for those digital retail operations. As such, Shopify’s addressable market should grow by leaps and bounds over the next several years. Considering Shopify is the head-and-shoulders leader in this space, huge growth in the addressable market will translate into huge growth for the company. Reasonably speaking, huge growth at the company will lead to huge gains for SHOP stock.
The stock is already up over 25% since bottoming on Christmas Eve. Thus, a near-term pullback is healthy here and now. But that pullback should be bought, because the stock will ultimately head way higher in a multiyear window.
Tesla (TSLA)
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Next up on this list is one of the more controversial names on Wall Street, but nonetheless one that represents huge upside potential in a multiyear window.
There has been no shortage of controversy surrounding Tesla (NASDAQ:TSLA) over the past several quarters. But in the big picture, Elon Musk has remained at the head of the company, Model 3 production and delivery ramp has been wildly successful, the company has managed to turn a profit, international expansion is progressing as planned and cash burn issues are no long front and center. Those are all positive developments. As such, Tesla stock is currently at the upper tend of its 52-week trading range.
This strength in Tesla stock will persist in the long term. At its core, this company is at the center of a huge electric vehicle growth narrative that will inevitably and perhaps rapidly sweep across the globe over the next several years. As it does, Tesla will announce more vehicles with better prices, and the company will grow its market share dramatically. Revenue growth will huge. Profit growth will be huge. Tesla stock will march higher.
Tesla stock is up 16% since Christmas Eve. That’s a pretty big rally. Much like Shopify, a near-term pullback is warranted. But, also like Shopify, that pullback is a buying opportunity, since long-term growth trends imply massive multiyear upside.
One of the biggest losers in late 2018 was payments processor Square (NYSE:SQ). But, that also means that this stock has an opportunity to be one of the biggest winners in 2019.
Square is at the heart of tomorrow’s commerce world, which will inevitably be cash-less and dominated by card and digital payments. Right now, Square dominates on the physical card payment side of things. The company is famous for its payment processors, which allow essentially any retailer with a smartphone to accept card payments. Go to any mall or street market. You will see Square machines everywhere.
The proliferation of these payment processors will continue over the next several years as cash becomes increasingly less used. But, that’s just one peg of this growth narrative. The other peg has to do with e-commerce. For a long time, Square didn’t really have an e-commerce presence. Until now. The company recently launched an in-app payments system that looks very much like PayPal (NASDAQ:PYPL). In so doing, the company has plunged itself into the e-commerce growth narrative too, and only added more firepower to the long-term growth narrative.
Square stock is up over 30% since Christmas Eve. That’s a huge rally. A pullback is warranted here. But, much like the other stocks on this list, pullbacks in Square are buying opportunities.
Salesforce (CRM)
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A discussion of big-growth stocks has heavy overlap with a discussion of cloud stocks, and if you were to have a discussion regarding cloud stocks, that conversation would likely be dominated by Salesforce (NYSE:CRM).
CRM stock is truly at the heart of the cloud and data revolutions. Salesforce leverages data and analytics to deliver robust cloud solutions to enterprises that want data-driven insights on their customers. In this sense, the company takes data and turns it into insights via cloud solutions. That promises to be one of the most valuable processes in a world defined by Big Data.
There’s a lot of competition in this space, but Salesforce has time and time again squashed the competition. Despite rising competitive threats and tougher laps, revenue growth at Salesforce has hardly slowed over the past several years. Back in 2014, revenues grew by 33%. In fiscal 2018, revenues grew by 25%. They are projected to grow by more than 25% this year. Resilient revenue growth in a secular growth industry implies that this company has huge long term potential.
CRM stock is up 22% since Christmas Eve. But, it remains well off its all time highs, and technical indicators don’t scream overbought. As such, this stock has more runway to the upside in the near to medium terms.
Trade Desk (TTD)
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Programmatic advertising is the future of the entire advertising industry, and the company at the forefront of the programmatic advertising revolution is The Trade Desk (NASDAQ:TTD).
Ads used to be transacted through individuals and firms. You call somebody, you discuss, you negotiate a price and then you have an ad. Now, ads are bought and sold by computers. This computed-powered ad buying is called programmatic advertising. It’s the future. Through leveraging AI and data, programmatic advertising makes ad buying and selling quicker, more convenient and cheaper than ever before.
In this space, Trade Desk has emerged as a clear leader. But Trade Desk only has a $6 billion market cap. The global advertising industry measures in at $1 trillion. Eventually, all $1 trillion worth of ads will be transacted programmatically, and most of that programmatic spend will happen through Trade Desk. Thus, this is a small company attacking a huge market, and that implies huge gains ahead for TTD stock.
Right now, the stock is up 27% since Christmas Eve, and is entering a near-term overbought position. Thus, a near-term pullback is likely in the cards. But, much like other pullbacks in this stock before, the next pullback will simply be a buying opportunity.
Despite weakness in the stock, the long term bull thesis surrounding streaming giant Netflix(NASDAQ:NFLX) is only getting stronger every day.
The Netflix growth narrative is all about two things: cord cutting and content. So long as consumers cut the chord and pivot to streaming, and so long as Netflix’s content is superior to content offered by streaming peers, Netflix’s subscriber base will grow. Prices will go up without churn, too, and margins and profits will explode higher.
Those two trends are progressing favorably for Netflix. The cord-cutting trend isn’t slowing. If anything, it’s accelerating. Moreover, Netflix’s content isn’t getting worse. Again, if anything, it’s only getting better, thanks to recent hits like Bird Box and Black Mirror. As such, the two long-term growth trends here remain favorable, meaning that the long-term bull thesis on NFLX stock is only gaining credence and visibility.
NFLX stock is up a whopping 52% since Christmas Eve. This stock has fundamentally supported upside from here. But it is technically overbought, and needs to cool off and consolidate before taking another leg higher.
Roku (ROKU)
Source: Shutterstock
Among the biggest losers during the market sell-off in late 2018 was streaming player maker Roku (NASDAQ:ROKU). But the growth narrative underlying the company only strengthened in late 2018, thus implying huge rebound potential in 2019.
Much like Netflix, there are only two trends that matter in the long run with Roku: cord cutting and competition. As stated earlier, the cord cutting trend is only accelerating. That means more streaming subscribers than ever, and more streaming services than ever, too. All those subscribers need a content-neutral centralized aggregation system to curate and access all those streaming services. As such, so long as consumers keep cutting the cord, demand for Roku devices will head higher.
On the competition front, Roku has tons of competition. But, the company still commands 40% share in the streaming device market and 25% share in the smart TV market. So long as the company can defend its market leadership position, Roku will continue to convert the lion’s share of cord cutters into Roku ecosystem users.
ROKU stock is up nearly 50% since Christmas Eve. The stock needs to cool off and consolidate here. But, once that consolidation period is over, this uptrend will resume for the duration of 2019.
While many other growth stocks remain well off their all-time highs, cloud giant Twilio(NASDAQ:TWLO) is right near its all-time high, and that’s a testament to the strength of this company’s underlying growth narrative.
Over the past several quarters, Twilio has emerged as the uncontested leader in the rapidly growing and potentially huge Communication Platforms-as-a-Service (CPaaS) market. The CPaaS market largely consists of companies that are integrating real-time communication into their services. This market promises to be huge to continuous shifts towards cloud-based communication, personalized customer experience and digital engagement.
Twilio is growing its customer base and revenues rapidly in this secular growth market. They also have a 95%-plus retention rate and very high gross margins. Put that all together, and this company has all the ingredients to be a big time winner in a long-term window.
TWLO stock is just below all-time highs today. This resilience is impressive, and it means that the stock hasn’t rallied as much as the other stocks in this list over the past two weeks. As such, you don’t have any near term overbought conditions, and now could be as good a time as any to load up for the long haul.
Nvidia (NVDA)
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Once high-flying chipmaker Nvidia (NASDAQ:NVDA) saw more than half of its value wiped out in late 2018 thanks to near-term inventory, growth, and margin issues. But, in the big picture, those issues are overstated, and NVDA remains one of the best growth stocks in the market.
The growth narrative at Nvidia is all about AI and data. Recent numbers suggest there is absolutely zero slowdown in those businesses. All businesses related to AI and data, including the data-center and automated driving businesses, reported record numbers and huge growth last quarter. Instead, all the issues with Nvidia have to do with a pop in cryptocurrency mining demand that created inventory issues which will take time to work through.
Nvidia will inevitably work through those issues. Once they do, the narrative will re-focus on this company’s long term growth drivers in AI and data. Those drivers have been very strong, are still very strong, and will remain very strong, given secular shifts towards data-driven decision making and automated technologies. So long as those drivers remain strong, NVDA stock will head higher.
NVDA stock is up 20% since Christmas Eve. That’s a solid rally. But, the stock isn’t flashing any overbought signals. As such, it looks like this rally can and will continue in the near term.
Amazon (AMZN)
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The world’s most valuable company — Amazon (NASDAQ:AMZN) — is also one of the market’s most attractive and promising growth stocks.
We all know Amazon for its e-commerce and cloud business. Between those two businesses, Amazon has a ton of long term growth potential as e-commerce becomes the global retail norm and cloud becomes the enterprise norm.
But, that’s just the tip of the iceberg for Amazon. The company also has a $10 billion and rapidly growing digital advertising business with presumably sky-high margins. There’s the offline retail business, which started with bookstores, moved to Whole Foods and will eventually include thousands of convenience stores and potentially evenTarget (NYSE:TGT). There are also potential multi-billion logistics and pharmaceutical businesses in the pipeline. Between all these growth opportunities, it’s easy to see that Amazon is still in the early innings of arguably the market’s biggest and most exciting growth narrative.
AMZN stock is up 20% since Dec. 24. But, it’s also still 20% off recent highs. Thus, while a near term pullback is warranted and healthy, this stock still has plenty of room to rally in a medium to long term window.
As of this writing, Luke Lango was long SHOP, TSLA, SQ, PYPL, TTD, NFLX, ROKU, NVDA, AMZN and TGT.
Recent incidents involving autonomous vehicle crashes, have made industry participants assume a lower profile. While these setbacks may slow progress in the sector, it does not mean the companies involved are taking their foot off the gas pedal in developing technology to move autonomous vehicles forward.
Any advanced technology industry will encounter growing pains, and as I said in my latest report, this space is just getting interesting. Allied Market Research puts the global autonomous vehicle market at $54 billion this year and $556 billion in 2026, growing at 40% per year. Even if these numbers are off by 25%, we’re still looking at a rapidly growing market.
And while the regulatory issues are real, there is growing economic pressure to solve the regulatory puzzle. Over 68% of freight travels on U.S. roads for an extended period of time. And with the trucking industry unable to fill driver positions, even with increasing pay and benefits, the American Trucking Association reports delays and costs are rising.
This lack of drivers, combined with an explosion in delivery of everything conceivable that consumers may purchase, as we recently looked at in our piece on the sharing economy, is placing growing pressure on regulators to formulate solutions to the autonomous vehicle problem. Trusting these issues will be resolved, let’s take a look at a few companies that are forging ahead in the autonomous vehicle space.
NXP Semiconductors (Nasdaq: NXPI)
Netherlands based NXP Semiconductors is the world’s largest supplier of automotive semiconductors, and will have a major role to play as cars and trucks move to autonomy. One of the things I like about NXP is the fact that it is already deeply embedded in the auto industry. This gives the company insight into customer needs as autonomous vehicles move through the Levels of Autonomy I detailed in my previous article.
NXP is aggressively expanding its relevance in autonomous vehicles, both through internal development of products as well as through acquisitions. Late last year the company acquired OmniPHY, a pioneer in high-speed automotive Ethernet IP. Through the acquisition, NXP is ensuring it can maintain the speed and number of connections necessary as vehicles become increasingly autonomous.
As Ian Riches, Executive Director of Strategy Analytics Global Automotive Practice puts it, “One of the vexing questions of the Autonomous Age is how to move data around the car as fast as possible. Cameras and displays will ramp the number of high-speed links in the car to 150 million by 2020 and by 2030 autonomous car systems will aggressively drive that number to 1.1 billion high-speed links.”
By purchasing OmniPHY, NXP is enhancing its capability to capture the entire value chain in the connected automobile. Controlling connectivity points is a major strategic competitive advantage, and allows NXP to work not only with automakers, but with other equipment and sensor companies, cementing NXP as a vital player in the autonomous vehicle ecosystem.
From a valuation perspective, NXP trades at a 13 PE ratio, and pays just over a 1% dividend. The company has grown earnings per share an average of 62% over the past 5 years, and currently has profit margins of over 28%. NXP shares have never fully recovered from a failed merger attempt with Qualcomm (Nasdaq: QCOM) in 2018 after a prolonged, almost 2 year courtship. The deal fell through and many NXP stock owners, who had been in the stock only for the merger, abandoned ship. The stock appears to have bottomed around $70, and now trades close to $80, well off the pre-merger prices in the $120s.
A combination of value and strategic market positioning makes NXP a buy at these levels. The company has ensured its relevance in the autonomous vehicle market and should reap the benefits as this market matures.
Magna International (NYSE: MGA)
Magna International is a Canadian company that wants to ensure the autonomous vehicle is not only safe and secure, but retains the style and design each automotive manufacturer has heavily invested in. As Magna explains, it does not want the autonomous car to look like a science experiment with vehicle sensors, such as LIDAR, mounted obtrusively all over the car.
Using what it terms MAX4, Magna has developed a self-driving system that can enable up to Level 4 autonomous capabilities, while at the same time disguising the fact that the automobile is anything different than what the manufacturer has on the showroom floor today. The MAX4 system can be mounted on an automobile, such as a Jeep Grand Cherokee, with the LiDAR, radar, and ultrasonic sensors all contained within the bumpers and other currently existing cavities of the car.
While I’m not a huge fan of the company, the Tesla (Nasdaq: TSLA) business model does demonstrate consumers want not only the latest technology, they want functionality wrapped in design. And they will pay premium prices for this combination. Magna ensures that each automaker can retain and enhance vehicle look and design, without concern that the sensor requirements of the autonomous vehicle impinge on their branded look.
And, Magna is not only offering the ability to retain design, the company is also forward thinking in addressing the changing needs, and look and feel, of the interior of future autonomous vehicles. The company recently released its flexible seat configuration design for autonomous vehicles.
The seating system allows for three variations in seating patterns that are fully automatic, with seats moving electrically along tracks mounted in the vehicle floor. Consumers have the option of a “campfire” seating arrangement with all seats facing the middle of the vehicle, a “cargo” configuration where seats move to the front of the car to provide a large cargo area in back, and a seating configuration with electronically insulated sound barriers which allows for private phone conversations in a ride sharing environment. Magna is closer to the ride share business than other companies, with a $200 million private investment in sharing economy company Lyft (Nasdaq: LYFT, pre-IPO).
Magna currently trades with a PE of 7 and pays just over 2.5% in dividends each year. The company has averaged 14% earnings growth over the past 5 years, and is projected to grow earnings 13% this year. As with NXP, a pullback in the stock in 2018 is providing an excellent entry price at these levels. Magna’s innovative designs and technology should provide earnings expansion as the company outfits the car of the future.
Aptiv (NYSE: APTV)
Finally, I would like to revisit a portfolio holding of the Growth Stock Advisor service, Aptiv. Aptiv is an Ireland based company that was spun out of Delphi Technologies (NYSE: DLPH), formerly Delphi Automotive, in late 2017.
Delphi Technologies is now the “powertrain” part of the business providing propulsion, combustion and electronic solutions. This is the old industrial commodity side of the business, and the stock has performed abysmally since the spinoff of Aptiv.
Aptiv is, as former Delphi Automotive, and now Aptiv CEO Kevin Clark stated, focused on “active safety, autonomous driving, enhanced user experiences, and connectivity”. Aptiv provides the sensors, connectivity, and most importantly deep industry and product expertise, which is so important to establishing credibility and trust from automotive manufacturers moving into the autonomous vehicle space.
As I detailed in my latest report on autonomous vehicles, there are hurdles to full autonomy, one of which is working out the legal liability issues that arise from a fully autonomous vehicle. But, Aptiv is making the incremental improvements that ensure the autonomous vehicle will be ready when the regulatory issues are resolved.
After getting the lowdown at CES on the Aptiv fleet of Lyft cars that is ferrying passengers around Las Vegas, Extreme Tech put the Aptiv advancements over last year this way, “For example, implementing RTK (Real-Time Kinematic GPS augmentation) has allowed the cars to locate themselves within 2.5 cm (instead of 10 cm). That makes the difference between not knowing and knowing whether a pedestrian is standing on the edge of the curb or in the crosswalk.” Advancements like these are crucial to the developing regulatory framework, and to putting fleets of autonomous vehicles on every road, not just in test environments like that taking place in Las Vegas.
Aptiv is continually advancing technology, and with deep roots in the automotive industry, it is one of the purest autonomous vehicle plays available to investors. The company has a forward PE of 13, and is expected to grow earnings this year 31%.
Each of these companies offers a great way to play advancements in the autonomous vehicle industry as it matures in the coming years. Whether through the brains and connectivity of NXP, the technology and design of Magna, or the autonomous integration provided by Aptiv, it’s hard to go wrong with these top players in the space.
Markets were closed Monday for the Martin Luther King, Jr. holiday, but may take their cue from overseas markets when they reopen for business Tuesday. European markets were flat to lower as they digested final GDP numbers out of China for 2018. The Chinese economy grew 6.6% in 2018, its slowest growth in almost 30 years.
When markets reopen Tuesday, they will also return to the stalemate in Washington, with nothing being resolved over the long holiday weekend. President Trump’s offer to extend the DACA program for three years in exchange for funds to build a border wall with Mexico was announced dead on arrival by Democratic leaders.
In addition to impacting federal workers and the businesses they frequent, the extended shutdown is preventing companies, like Uber (UBER, pre-IPO) and Lyft (LYFT, pre-IPO), from proceeding with their IPOs. A skeleton staff at the Securities and Exchange Commission (SEC) is on duty to police market misconduct, but not to approve IPOs and other registration filings.
Tuesday analysts will see the release of Redbook retail data. A major economic victim of the government shutdown has been retail data. The Redbook data has therefore taken on more importance in recent weeks. Last week showed a 6.7% rise in sales year-over-year. This weekly data is being watched closely for any cracks in consumer confidence. Also released Tuesday are existing homes sales numbers.
Investors will get a reading on brokerage earnings Tuesday when TD Ameritrade (AMTD) and Interactive Brokers (IBKR) report. With several reports showing investors moving to the sidelines in late 2018, analysts will be monitoring the level of trading activity at these brokerage firms, given the swift rebound so far this year. Did investors reengage in the market, or are they still waiting for an all clear? Also releasing earnings Tuesday are Johnson & Johnson (JNJ), International Business Machines (IBM) and The Travelers Companies (TRV).
Proctor and Gamble (PG), United Technologies (UTX), Texas Instruments (TXN), ASML NV (ASML) and Las Vegas Sands (LVS) report earnings Wednesday. Like the other casino stocks, Las Vegas Sands started trending lower in mid-2018, but looks to have found a bottom in the mid-$50s. The company is expected to report $.86 per share on Wednesday. Investors will be looking for an update from United Technologies on its plans to separate into three different companies. Announced in 2018, the company has said that the reorg could take as much as two years to complete.
Mortgage applications, the FHFA House Price Index, and the Richmond Fed Manufacturing Index will all be released Wednesday. With both orders and shipments contracting unexpectedly in December, when the Index came in at -8, investors are keeping a close eye on the Richmond Fed numbers for January. Projected to bounce slightly to -3, the number is an important gauge of where the economy may be heading in early 2019.
