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Why Are These Large Cap Growth Stocks Struggling?

Markets are at all-time highs, but these three large cap growth stocks have yet to fully join the party. That should change, and I’m bullish on one of them in particular.

I’ve been bullish on the market since a week after the Brexit shakeout, and I remain so today. The action of the major indexes has been exemplary, with small caps (S&P 600) and mid caps (S&P 400) joining the big caps (S&P 500) in all-time high territory. And the Nasdaq just joined them there this morning!

But not all large cap growth stocks are doing well.

Facebook (FB), Salesforce (CRM) and Adobe (ADBE), among others, are acting sluggishly. The stocks are near new highs, which is good, but their relative performance (RP) lines aren’t ... a sign they’re being pulled up by the market, not leading it higher.

Here are the charts of FB, CRM and ADBE; the thin black line below the price bars is the RP line. In all three cases, the RP line is just so-so.

What do I make of it?

While most commentators are telling you the bull market has been going on since 2009, the 15% to 20% dip in the major indexes from the spring of 2015 through February 2016 did so much damage to many sectors (commodities, transports, industrials, financials, etc.) and the broad market that it’s possible this rally is an entirely new bull phase—not just an extension of the last one.

And new bull phases often have new leadership. So it would make sense that most of the “old” leaders would languish as institutional investors rotate into newer winners.

Yet the fact is that these large cap growth stocks still have the characteristics of winning stocks—big sales and earnings growth, big earnings estimates for the next couple of years, leading positions in their industries and stocks that are near new high ground. So it wouldn’t shock me if they re-emerged in the days or weeks ahead.

Of the three, today I remain highest on Facebook stock—I really do think its growth can remain rapid for years as its myriad business properties (Facebook, Instagram, Messenger, WhatsApp, Oculus) mature. The latest earnings report was jaw-dropping good, and while the RP line is shy of its old high, the stock itself has made it to new highs lately, which is a positive.

Salesforce and Adobe aren’t bad, either, but notice that neither stock has made it to virgin turf, and the RP lines of each topped out back in May. For me to get interested, I’d want to see a new “coming out party” on the chart—a huge-volume move to new highs over a few days (not just a one-day pop), and then I might look to play the next pullback.

CRM and ADBE are worth watching for sure, but the longer they sit here, the less likely that they’ll retake their leadership roles.

One of the reasons these three stocks are struggling a bit is because they all had big runs during the prior bull cycle. That raises the question: Is there a large cap growth stock that didn’t have a big run during the last couple of years but is set up very well with a sales and earnings outlook that could drive it markedly higher?

I think there is: Alibaba (BABA). The stock’s been through the wringer since it came public in late 2014 (it’s still sitting nearly 30% off its high). But that doesn’t mean the story has worsened—metrics like revenue growth (33% in the first quarter) and gross merchandise volume growth on its online marketplaces (up 24%) remain buoyant. Analysts see earnings up 22% this year and 27% next year (both are likely conservative).

And the chart has a good-looking setup, with months of base-building following its early 2016 low. Recently, BABA has perked up toward 14-month highs. And the catalyst for a breakout could come in a couple of days—its earnings are due out before the market open on Thursday, August 11!

To me, BABA has great potential—few investors are thrilled about it, but a better-than-expected report could kick the stock out of its range and begin a new advance. No predictions, but if it happens, it’ll probably be worth picking up a few shares.

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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.