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Growth Stocks Poised for Banner 2017

Most growth stocks missed the late-2016 rally, and many have been stuck in neutral for nearly three years. Expect that to change in a big way next year.

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The book is all but written on 2016, as the calendar will flip after just two more trading days. There were many ups and downs, but on balance, the major indexes racked up a modestly positive year, thanks mostly to the action from mid-November through mid-December. But for growth stocks, it was a mixed bag.

There were only a few weeks when growth stocks - which I define as high-relative-strength stocks with good sales and earnings growth and solid stories - were leading. That was for a few weeks post-Brexit. Other than that, the market was either falling or treading water (in January and early February, much of May and June, and in September and October) or was being led higher by cyclical stocks (February through April and early-November through now).

In fact, among the big, well-traded growth stocks that I love to home in on (the so-called liquid leaders), there was only one big winner this year, Nvidia (NVDA).

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Yet as the New Year approaches, I’m very optimistic growth will take the lead in the not-too-distant future. With growth stocks as a whole having made no net progress from March 2014 through November 2016, the economy set to accelerate in a big way (the ECRI Weekly Leading Index is now growing at its fastest rate since 2010) and because many growth stocks are now setting up in solid launching pads, I believe 2017 will be a year when many growth stocks thrive.

Of course, I have my own Watch List of high-potential names to jump on should they lift off in the weeks ahead, but today I want to take a top-down approach, highlighting a few sectors I’ll be watching as bellwethers that indicate growth is taking the lead. And I’ll also highlight a handful of individual stocks in those groups that are worth watching.

Biotech Stocks

Biotech stocks were a leading sector from 2012 to mid-2015, but few investors realize just how gigantic the advance was. If you look at the iShares Nasdaq Biotech Fund (IBB), it broke out above 110 in early 2012 and ran all the way to 400 (!) by the middle of last year—a whopping 263% advance in three and a half years. And that’s for the sector as a whole; many individual stocks did even better.

After such a huge run, of course, you need a reset, and that’s what the sector has seen for the past year and a half—IBB fell 40% from its highs and has been mostly bumping along near its lows for the past 10 months. The good news is that action represents a sturdy bottom, and the group is beginning to tighten up after a solid post-election bump.

Bottom line: If IBB can leap decisively above 300 in the weeks ahead, it would be a sign that the momentum (both intermediate- and longer-term) is turning up, which would likely tell you investors are looking past any drug pricing-related concerns.

Stocks to watch:

Celgene (CELG) continues to look like the leader of the group, with steady 20% to 25% earnings growth, gigantic margins, solid cash flows and many irons in the fire, both on the market and in the pipeline. A move above 127 would be a solid first sign the buyers are taking control.

Incyte Pharmaceuticals (INCY) is riding the strength of one drug (called Jakafi) that treats a rare form of bone marrow cancer and some other bone marrow diseases. Sales and earnings are booming, and the stock has been trending higher for many months. A push above 110 would be tempting, though there’s old overhead to chew through up to 130.

Networking Stocks

Networking stocks aren’t always the easiest to understand, but I’ve always found them highly correlated to great growth stock performance. Moreover, the sector has a history of launching leading stocks, as those with the latest and greatest technology often ride a huge growth wave for one to three years as demand for their switches, routers and other connectivity solutions soars.

As for the sector, what’s interesting is that the iShares North American Networking Fund (IGN) was rejected in the 37 to 40 area six different times from 2001 through 2015—but now it’s freewheeling! I wouldn’t say it’s leading the market higher per se, but should its relative performance (RP) line accelerate higher, it would be great to see.

Stock to watch:

Arista Networks (ANET), which is grabbing market share in the high-speed data center switching market. There’s been some litigation with Cisco, which is a worry, but the company got two positive rulings (one from an importing authority, and one from a jury) just in the past few weeks. Sales and earnings have been cranking ahead at 30% rates, and the stock remains in a modest uptrend.

Restaurant Stocks

I was going to say retail in general, but many apparel stocks are dancing to their own sour drummer due to worries about upcoming tariffs on imports. Thus, restaurants are more of a pure play on the consumer because they’re more insulated from swings in currencies and the like.

There’s no reliable ETF for the group that I can find (one just came public a few weeks ago, but that’s too soon to make any judgments), but looking at the sector chart, the group effectively topped in early 2015 and ended up falling 27% from high to low. Since then, it’s acted like the biotech group—showing a solid bottoming effort but not a ton of upside, with the group still about 13% off its high.

My thought is if we see a few of the large-cap stocks in the group like Starbucks (SBUX) and Chipotle Mexican Grill (CMG) show some decisive strength (possibly on earnings in the weeks ahead), it would be a good sign the group is starting to outperform, which would likely launch some growth stocks within the sector.

Stocks to watch:

Dave & Buster’s (PLAY) is a unique restaurant because about half its revenue comes from games. I also like that its concept (almost like a restaurant/sports bar with an arcade aspect) is friendly for the whole family—people can watch the game, have a few drinks, get some food and the kids can go nuts with games. Sales and earnings are cranking ahead, there’s plenty of room for steady store growth (management is aiming for 10%-ish store count expansion in the years ahead) and the stock recently blasted off on its heaviest volume ever. PLAY also could be a big beneficiary of a corporate income tax rate cut, though we’ll have to see how that plays out. I actually think the stock is buyable around here, though a dip of a couple of points would be more enticing.

Another stock I like is Jack in the Box (JACK), which operates a ton of Jack in the Box and Qdoba restaurants. Revenue growth is modest but accelerating, and the big story here is a mix of cost cuts and a refranchising initiatives to boost margins—profits are growing at 20% annually (quicker recently), and the stock lifted to new price and RP peaks a couple of weeks ago. Like PLAY, JACK could use a little shakeout, but otherwise I think you could nibble here with a stop near 102.
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A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.