By Kevin Marder
It was really too much to expect the growth sector to lead a shiny, post-election bull market advance.
There is no question that value stocks are the place to be right now, especially at the large-capitalization level, but also among small issues. The number of pattern setups in a market that has booked handsome gains, though, isn't many.
Growth issues most often come into their own during the early portion of a bull market which normally is stoked by central bank cuts in the federal funds rate. Expecting an entire bull to be led by growth is just not realistic.
It is a common misconception among those who consider themselves growth-stock aficionados that a market led by something other than the growth sector is an unhealthy market and one destined for cheaper quotations.
Growth shares have roughly led a bull market about 40% of the time. The rest of the time, leadership emanates from either value/cyclical industry groups or defensive segments. In most cases, however, the biggest market gains coincide with a period of growth-stock leadership.
For the committed breakout player, value/cyclical titles are generally more challenging to trade because their post-breakout follow-through from a basing pattern is usually less impressive. In part, this is due to their being influenced by economic news releases much more so than growth stocks.
Because the latter are largely recession-resistant, they are less prone to being buffeted around by economic reports. A growth stock tends to march to the beat of its own drummer.
Another reason for growth shares' more-impressive moves is that their price-earnings multiples are greater. A rise in the earnings component has a greater effect on the price component, all else equal. Market participants have a harder time valuing growth titles since the potential of their market is often unknown. This often results in an overshoot to the upside by its stock price.
Otherwise, there has been a decided lack of enthusiasm for growth issues, i.e. those recession-resistant names that are expected to grow earnings in the high teens percentage-wise, or more. This is to be expected in a mature bull market amid a rising interest-rate backdrop.
Among the names, Everbridge (NAS:EVBG) is a recent new issue, having come public three months ago at $12. The company has lost money for the past three years. Most Wall Street analysts who track the enterprise software developer eye more red ink this year and next.
Despite this, top-line growth has been exemplary, with rates of 32%, 35%, 39%, 30%, 31%, and 31% over the past half-dozen quarters, respectively.
As previously mentioned, initial public offerings that advance at least 50% in the first two months are accorded special attention. Empirically, these types of actors tend to be among the better performers going forward. In Everbridge's case, price jumped as much as 56% in its first two days of being a publicly traded issue.
The stock then corrected as the general market weakened during October. This past week, the price cleared the top of a cup-with-handle pattern. It currently sits 11% past its entrance pivot, or the high of its handle.
Aggressive momentum players shouldn’t chase Everbridge since it is more than 5% past its pivot. It can be monitored for a pullback into the top of its base, or around the $18 area. The first pullback following a breakout tends to present an opportune spot to enter. With that said, the current market, being that it is not especially hospitable to growth stocks, should be respected.
Hence, any pullback entrance that might present itself would represent a higher-risk play. The thesis here consists of 1) the big move in the first two days after the offering, 2) last week's breakout from a constructive base on big volume, 3) the impressive level and stability of quarterly revenue growth, and 4) the extreme accumulation over the past several weeks.
As always, a protective stop should be used to mitigate risk, along with a starter position that is half normal size, or less. This initial position could be added to if the stock proves itself. In most cases, a position should not be entered when price is extended, i.e. more than 5% past the top of its base.
Green Plains (NAS:GPRE) isn't a growth stock. Earnings growth over the past seven years has been up, down, up, and down. What is important, though, is the Street's expectation for 2017. It amounts to a forecast of $1.88 a share in earnings vs. the 19 cents a share anticipated by most analysts in 2016.
The behavior of a stock itself is always more important than what the Street thinks. In the case of Green Plains, the producer and distributor of ethanol and corn oil has shown solid relative price strength since last spring, its price more than doubling in the process.
Too, the stock has been under extreme accumulation over the medium term. It is up 32% during the past five weeks vs. the 4% rise of the S&P 500 (S&P:SPX) .
Technically, Green Plains shares cleared an 11-week base on Thursday with volume more than double normal. Friday saw turnover expand even more, to 157% above average. Aggressive speculators might consider monitoring price to see if it can pull back a bit closer to the 28.37 base top (see chart below) before considering entry.
Alternatively, an entry could be taken around Friday's close of $29.65 using a half-sized position and a 10% stop. While 10% seems like a wide stop, this equates to a de facto stop of 5% due to the half-sized starter position. However, the view here is a decided preference for the first (pullback) entrance. This despite the risk of missing the move if there is no immediate pullback.
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Separately, market participants should resist the temptation to pick up senior growth stocks that have corrected off their highs. These include Alphabet (NAS:GOOGL) (NAS:GOOG) , Priceline.com , Facebook (NAS:FB) , Adobe Systems (NAS:ADBE) , and Amazon.com (NAS:AMZN) .
They are out of favor, not the leaders they were earlier in the cycle, and are likely over-owned by institutions. Over-ownership is what happens in a mature bull when large participants have all they want of the senior growers that had previously benefited by the big guys building positions in them over a period of months.
In summation, despite a seasonal tendency for upward revaluation, substantial post-election gains may suggest a short-term pullback sooner rather than later. This should be welcomed by momentum players, since pattern setups don't abound at present, and a market pullback might create more of them. This is more of a time to be cautious than a time to be backing up the truck.
For intraday market comments and stock ideas, see https://twitter.com/mardermarket Earnings estimate data are provided by Thomson Reuters.
The views contained herein represent those of Marder Investment Advisors Corp. ("MIAC"). At the time of this writing, of the stocks mentioned in this report, Kevin Marder and/or MIAC held no positions, though positions are subject to change at any time and without notice. This information, which may have been previously disseminated, is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance of any security or strategy is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to MIAC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Neither MIAC nor any of its affiliates will be liable, and we accept no liability whatsoever, for any losses any recipient of this report may suffer as a result of his or her or its use of this report or any of its contents.