Stocks to Watch as Market Leadership Changes Hands

I have two main thoughts on Thursday's market.

The first is that the bull market is healthy as a horse, and it will remain healthy until enough people stop arguing with it, questioning it and simply denying it.

The second is that market leadership is probably beginning to narrow, as the identity of the greatest growth stories becomes clearer.

Last Friday, for example, brought an awesome 23% jump in Amazon.com (AMZN), the result of a crackerjack earnings report. In short, Amazon.com is selling an enormous (but secret) umber of Kindle e-book readers, and they’re very profitable.

What gets my attention is this number, $11 billion. That’s the amount of value that Amazon.com’s stock gained in the market on Friday, thanks to the buying of major investors. At the market close on Thursday, AMZN was judged to be worth $40 billion. Twenty-four hours later, the market said it was worth $51 billion!

This big number tells me that some very serious investors, are projecting some terrific earnings power for Amazon.com, through both its main retail operation and its proprietary Kindle unit. Both are revolutionary. The Amazon.com Web site has already changed the world and is still increasing in its influence. And the era of the Kindle is just beginning. With newspapers and magazines shrinking and dying, Amazon.com has an enormous opportunity to become a preferred information/entertainment medium.

Other new leading stocks, all of which have been written about in Cabot Wealth Advisory before, include Apple (AAPL), Baidu (BIDU), Maxwell Technologies (MXWL), Netflix (NFLX) and Rackspace (RAX) … and I could write about any of them again, but I don’t want to bore you. If any of them are unfamiliar, go to our Web site and in the left column, under “NEWSLETTERS,” click on “Featured Stocks.”

Today, I can’t resist noting that an event I’ve been waiting for finally occurred last week; Coca-Cola (KO) broke down. It happened on Tuesday, after the company released an earnings report that revealed the fourth consecutive quarter of no growth from the previous year. Trading volume on the breakdown was only slightly elevated, so this was not a major technical signal … but it’s a start.

And I think there will be more breakdowns in the future, as the realization slowly dawns that in the new world, where the fight against obesity is taken increasingly seriously, Coca-Cola’s products, full of empty calories, are the enemy.

And here’s the thing. Coca-Cola is an icon. It’s a universally known, well-respected institution. To most people, that means it’s something to be respected. To me, that means it’s something to be questioned, because I know that when every last buyer of a stock has bought, and public perception reaches a peak, there remains only one direction for a stock to go, and that’s down. In the future as I see it, doubt slowly creeps into investors’ perceptions about Coca-Cola, and they begin to sell some of their stock and move into other, more attractive alternatives.

It starts as a trickle, but it ends as a deluge.

So consider this. Less than a year ago, KO was owned by 648 mutual funds. At the end of June, the number was down to 622, and I expect it to keep on shrinking in the quarters ahead. Meanwhile, Amazon.com, which is changing the world in a good way, has yet to see its mutual fund ownership cross the 600 level; it was at 512 at the end of June (its highest level ever). And little Netflix, also a great growth story today, had just 213 mutual fund owners at the end of June.

If you want to make money, I suggest you be aware of these trends. Get out of KO and get into growth stocks like AMZN and NFLX.

Comments

[Shabba:]

I don't understand how investors can justify a PE of over 70 on Amazon. The company is over 10 years old and earnings seem to be growing by about 20%. Some of the other higher fliers like google and apple have PEs roughly half of Amazon. The valuation just seems absolutely ridiculous, even in a great economic climate (which of course we don't have). I am curious if there is some explanation here for the valuation, I really don't know.

Oct 30 12:34 PM

[Windsun33:]

This AMZN "rally" looks almost like the FSLR one of a year or so ago - before it started dropping like a rock once investors realized it could not keep growing at the same pace given the crappy economic conditions.

Oct 30 03:29 PM

[manuel:]

You are right, on Nasdaq´s Website they say Peg is over 2, and 2009 P/E 66 forward 2010 50, price could drop and P/E could be 25 or 30(like Google now), so even if earnings grow people could say it is fairly vaueld and it could stay at the mentioned P/E level for years. Seems one of those stocks that give you a sense of security and one you fall in love with, but the article is right, new Generation of Leaders and decision makers will be more familiar with Google, Apple, Amazon and they will buy it much more than the sceptic old generation(few thought different) of moneY Managers, they will be their GE, Procter and Gamble or Coca Cola, and if they may think of Coca Cola because they started with studying Buffett (just as nearly everyone, me too), once they see the last 10 years performance even value investors will rather buy some more Google, I wonder why Buffett still holds it......, one of the old that could benefit is Nike, people who buy Ipods will may buY Apple, people who buY nike shoes or who have bought them for many years could buy Nike Stock, everyone who Googles realizes how strong Google is, and when dad or grandpa are not involved in Decision making anymore they will BuY......, much non professional moneY flows into these Stocks, what else would they buy? All most average investor know about Stocks is Amazon Google and Nike, or you think they buY Vale, Petrobra or peabody energy, they do not even know that they exist, I hope they will get familiar with Potash, and to explain them the Potash Idea it takes you 5 or 6 minutes and they get it and probablY buY, it takes me 5 or 6 minutes to convince Friends who do not know anything about Stocks and Market to buY Potash, psicologiclly Potash has Great strenght, people can sleep well with it without selling even on temporary weakness and so many get the Idea behind and BuY on weakness......


On Oct 30 12:34 PM Shabba wrote:

> I don't understand how investors can justify a PE of over 70 on Amazon.
> The company is over 10 years old and earnings seem to be growing
> by about 20%. Some of the other higher fliers like google and apple
> have PEs roughly half of Amazon. The valuation just seems absolutely
> ridiculous, even in a great economic climate (which of course we
> don't have). I am curious if there is some explanation here for
> the valuation, I really don't know.

Oct 30 05:36 PM

[Snitzer:]

I'm a well satisfied Amazon customer, but do not own their stock, no reason, probably will one of these days but I've other sticks in the fire for now. The Kindle is a game changer, but the game is changing ahead of the Kindle and Kindle must improve and adapt to survive. For now I like the The Nook over the Kindle, more features, same price and not as inflexible format wise. But there is a jolting, jarring ride ahead in the coming e-reader shake-out and it's a bit early to pick the ultimate winners. I want one (I really, really want one!) but I'm not one of those legendary RICH stock traders, and the money matters, so for now I'm on the sidelines.

Oct 30 09:17 PM

[j-dub:]

"I have two main thoughts on Thursday's market.

The first is that the bull market is healthy as a horse, and it will remain healthy until enough people stop arguing with it, questioning it and simply denying it."

"The second is that market leadership is probably beginning to narrow, as the identity of the greatest growth stories becomes clearer."


I have two main thoughts on Friday's market.

The first is that the bull market built on straw is over. I just compare the volumes between Thursday's snapback and Friday's plunge. By 2PM Friday's volume equaled all of Thursday's.

The second is that this is not 1999. Extreme overvaluation and the indisputable force of gravity have a way of meeting up in a dark alley with only gravity walking out alive.


But anyway, thanks for recommending a company with a 50 foward PE, Mr. Lutts. The readers at SA owe you one.

Oct 31 12:04 AM

[Roger Knights:]

"Healthy as a horse"?

What, this old gray mare?

Oct 31 01:44 AM

[Anthony Alfidi:]

How will AMZN and NFLX keep their growth up if consumer spending stays weak? Style investing has its drawbacks, among them a disregard for fundamentals that affect all styles and asset classes.

Oct 31 11:30 AM

[William M. ...:]

After a $25 dollar and $10 billion market cap pop I'd advise people to sell every last share and take a short position now. Amazon is clearly a success story. Interesting how these types of articles always come out after a doubling in price and not before. The biggest Amazon success comes from investors willing to pay for a P/E of 70 for a retailer which normally even the best only can command a P/E of 30.

It's true that it's much harder to make money in any old-line blue chip that everyone already owns like KO, PFE or WMT. No chance of a $20 pop but much less chance of a $20 drop and you get paid a steady eddy dividend as you watch the corn grow.

Congrads to anyone with the balls to hold a stock that has already doubled in value like Amazon into earnings. But cash in your year-end bonus now!

Oct 31 08:27 PM

[User 231215:]

whoops! "if you want to make money you better get into these stocks like amazon and netflix!" isn't this a bit late as an entry point? time to buy was 6 months ago at the march low! anyone sticking their necks out now after a 60% run up in the market is an absolute fool.....the economy sucks, its getting worse, not better (what part of the word UNEMPLOYMENT don't you understand?), and all technical indicators and pundits who aren't crazy bulls are warning of a severe correction! i am not long these stocks....if anything, now is the time to short amazon! bullish mania is an amazing creature......it still lives! as this article attests.....

Nov 01 08:49 AM

[MarvinMBA:]

I would think an investment in GE would make a lot of sense///they are into everything the world needs and cannot get along with and at bargain basement price. I also like INTC which is a fundamental stock that supplies everybody and everything....MarvinMBA

Nov 01 02:45 PM