There’s little difference between the roller coaster at your favorite theme park (remember those?) and the one that the market has been on recently. In both cases, heads spin and stomachs churn. And sometimes you lose your wallet.
The antidote? Pepto Bismol in the first instance and stability in the second. Tom Carr explains…
— Bob Bogda, Editor
P.S. Like what you see? Don’t like what you see? Let me know.
October has been quite a month for the market and we’re barely a week into it. We’ve seen more shifts in the news cycle than a trucker driving over Independence Pass. From the President getting Covid-19 to a rejection of Congress’ stimulus bill, the market has been under sharp selling pressure. On October 2, and again on October 6, the major indexes were pushed down to test recent lows. Then, right on cue, we saw good news – an apparent return to health for the President and a potential compromise on a stimulus bill – that lifted the indexes back up again to test recent highs.
It is uncommon to see 50 to 60-point swings in the S&P 500, up and down on back to back days, and it has investors nervous. Money follows certainty, and all this uncertainty has many of the big money players staying on the sidelines.
But it is possible to turn this volatility to our advantage. Savvy investors know that it is times like these that make the leading companies stand out clearly. It makes them easy to spot, for they are the stocks showing stability when everything else is riding the proverbial roller coaster. Now, finding these stable stocks is another matter, but in truth it is not that hard. One place I like to look is the list of new “strong buy” initiations in TipRanks.com. Then I check the charts for price stability, and then I drill down into company fundamentals. When I did that this week, two companies rose to the top of my list.
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One is Bonanza Creek Energy (BCEI), a value play in the oil and gas exploration-and-production space. I know, I know, oil is not exactly a hot commodity these days, what with global demand dropping due to the pandemic and the increasing popularity of green alternatives. Still, Bonanza has harnessed some amazing technology that enables it to extract oil and natural gas from shale found by drilling horizontally (far cheaper than vertical drilling) at a fraction of the cost of traditional well operations. Bonanza is profitable, has little debt, and commands a massive profit margin of 29%, which is the envy of the entire energy space.
Shares of BCEI trade at just 5.6 times earnings (second lowest among peers), just 2.1 times free cash flow (fifth lowest), and a price/earnings-to-growth (PEG) ratio of only 0.37 (lowest). On September 25, Wells Fargo analyst Thomas Hughes initiated coverage of the company at a “strong buy” with an upside price target a full 64% above current levels.
Shares of BCEI have been trading in a tightly coiled consolidation range ($18 to $21) throughout the recent market volatility, and they look ready to break out above that range. When that happens, we should see a run to test the 52-week high above $25.
Action to Take: Consider buying BCEI below $22, with a view to selling near Hughes’ target price of $35.
The other stock atop my list is Cloudflare (NYSE: NET). Despite all the ups and downs of the market indexes, Cloudflare has been trending higher in nearly straight-line fashion. From a dip below $35 last month to a recent high of $44.60, shares of this cloud-based cybersecurity and app-developer platform play are on a tear. The stock is up 154% year-to-date and it looks ready to break out to new all-time highs. The company is not yet profitable but it has no debt to speak of and its EPS growth rate has ranged from 44% to 51% in each of the past seven quarters.
Cloudflare has received a buy or better from 13 analysts who cover the company, including 5-star analyst Shebly Seyrafi of FBN Securities. On Thursday, Seyrafi initiated coverage of NET with an “outperform” rating and a price target of $55. In fact, 12 of the 13 analysts who cover Cloudflare hold the rare 5-star rating from TipRanks.com – a ranking based on the return of investment of the stocks to which they give “buy” ratings – a highly unusual consensus among top analysts.
Unlike other tech firms, Cloudflare’s focus is on bringing tools to market for individual developers and small businesses, often for free. Once in the funnel, end users typically pay up for add-ons, upgrades, and larger scale. While Cloudflare boasts of 3 million free users in its system, it has seen a big move into its high-paying category (those who pay $100,000 or more per year), which grew 65% year on year to 637 big rollers. Several of these enterprise clients – like Door Dash, LendingTree, and 23andMe – got started with Cloudflare because one of their developers had been a free user.
NET shares have also seen a huge uptick in call volume from some rather deep-pocketed players. With a current call-to-put ratio over 10, the option flow in NET suggests that few feel the need to hedge against a downturn, and many are preparing for a big move higher.
Action to Take: Consider buying NET up to a price of $47.50 and look to pare back your position once shares reach $60.
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