As my boss likes to say, “Trends often last longer than anyone expects.”
That’s very true.
But it’s also true that, once a trend ends, it takes a long time for investors to come to terms with it. That’s true of major market trends—it takes months for the general public to get bullish or bearish after a big turn, for instance—but it’s also true when it comes to individual stocks.
Apple (AAPL) is the classic example.
Relative to the overall stock market, AAPL actually peaked back in August 2012, more than five years ago. And, after correcting for more than a year (from April 2015 through June 2016), AAPL’s resurgence hasn’t returned it to the leadership group.
In fact, it’s lagged the performance of the broad market since the middle of May. Throw in the fact that analysts see Apple’s earnings up just 8% this year, and there’s not much to get excited about.
But what stock do I still get a question or two about every week?
You guessed it: Apple!
People want to know whether it’s still buyable here, what I think of the dividend, the valuation and whether any new product (TV? electric car?) will hit the market and what it would do to earnings.
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I’m not at all bearish on AAPL—the fact is that the stock is pretty cheap, the company is relatively well run and the dividend/stock buyback is nice. I wouldn’t be at all surprised if the stock does OK if the market continues to advance.
But barring something crazy, it’s likely AAPL will be more of a market performer than a dazzling growth stock. And that makes sense, given that it’s such a huge percentage of the major indexes, that the company is gigantic and the stock is followed by every analyst and investor under the sun.
In some ways, I think AAPL is replicating the long, slow decline from market relevance that Intel (INTC) and Microsoft (MSFT) experienced back in the early 2000s. I remember when both companies’ earnings reports were regarded as key indicators of all things technology, and any utterings from management about business could cause a huge move in the market.
But as the years passed and both firms struggled to grow, investors moved on to the next big thing (Apple).
As far as growth stocks go, the torch has likely been passed again.
Is Facebook the New Apple?
For my part, I think Facebook (FB) could be a multi-year flag-bearer for growth stocks—not only is the stock institutionally loved, but the company has as much potential as any as it monetizes its gigantic user base, both for Facebook itself and its myriad properties (Instagram, WhatsApp, etc.).
I see some similarities between Facebook monetizing those emerging properties and Apple’s prior rollout of new hit products (iPod, then iPhone, then iPad, etc.) that kept growth humming for years.
Facebook’s earnings growth is expected to be excellent this year (53% or so, and 23% in 2018), and the stock is routinely heading into new-high ground.
Think Big and Go for Growth
But I’m not writing this to pump Facebook’s stock (though I do still own it in Cabot Growth Investor’s Model Portfolio and believe it will do well over time). Instead, my message today is two fold: You should think big and you should keep an open mind when you’re looking for new leading stocks, especially as the market has been showing some life in recent weeks.
I’ve seen too many instances in which investors get the market-timing aspect correct, holding lots of cash during a market downtrend and then putting money to work soon after the trend turns up. But then they stumble on two points.
The first is buying nothing-to-write-home-about stocks: companies that might have a familiar name but lack a great growth story and powerful upward momentum on the chart. Lots of investors buy “comfortable” stocks that they think are “good companies” instead of really searching for the leaders.
The second issue is that, even when these investors buy a few powerful new leaders, they tend to think small, selling them for 10% or 15% gains. After all, it only makes sense to book profits quickly, right?
I’m not saying right now is necessarily the buying opportunity of the decade—I’ve taken a couple of steps back into the water but am still staying relatively close to shore, at least until I see some better action from growth stocks.
But I am saying that if you are going to do a little buying in growth stocks, the key is to focus on potential big winners—i.e., the next Apple or the next Microsoft or the next Intel—and to give those stocks a chance to do great things for your portfolio. Even if the current rally sputters, keeping to these principles will help you make real money during the next sustained uptrend.
Recent IPOs can Provide New Leadership
So where do you find such potential winners? Especially in a strong bull market like this one, I like to peruse the IPO market for my favorite ideas. And there are plenty today! A couple of Chinese ones—Qudian (QD), an online credit provider, and Best Inc. (BSTI), a supply chain and logistics operation—have caught my eye, and while both sport triple-digit revenue growth (one of my favorite fundamental indicators), the stocks are too new to consider now, at least according to my methodology.
Instead, I still think it’s worth watching the IPOs I wrote up just a few weeks ago—Roku (ROKU) and Floor & Decor (FND). They’re thin, but they’ve both had their post-IPO droop (as we call it in the office) and I think there’s a good chance for one or both to catch fire as the bull market matures.
As new money flows into stocks, there are sure to be more vibrant IPOs to watch in the months ahead. The best of them will show up in Cabot Top Ten Trader, which is the #1 source of new, buyable stock ideas for individuals and professionals alike.
Among all of Cabot’s advisories, Top Ten has by far the highest proportion of professionals and money managers as subscribers.
If you want to be on top of the strongest stocks in this bull market—with specific buy ranges and sell points, and guidance along the way—sign up for Top Ten today!
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*This post has been updated from an original version that was published in November 2016.
