In a July note, titled "FOMO Rally: Time For Catch-Up Trades; Analyzing Google And 3 Others," I did a back-of-the-envelope calculation on the major divisions of Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) that justified an above-trillion-dollar capitalization. It was only after I had that behind me, and looking at the chart recognizing the typical behavior, I had the confidence to make the assertion. I focused on large-cap growth names that were far from their all-time highs. In my experience when the market moves ahead, you can find laggards that really have no reasons for underperformance. As far as Alphabet was concerned, it underperformed in the last earnings cycle, but to me, the punishment did not fit the crime. On July 5, I noted the cup and handle formation, and technically, it looked like Alphabet was going to 1,350, and last night GOOGL was up 100 points at 1,235. Here is the chart:
Ruth Porat, the CFO of Alphabet, revealed that Google Cloud grew at 100%. Both Microsoft (NASDAQ:MSFT) Azure and Amazon (NASDAQ:AMZN) AWS are reporting slowing growth (2nd derivative). Neither is near 100% growth with an $8 billion run-rate. GOOGL reasserted its strength in AI infrastructure in its cloud offering. At $8 Bil., it isn't terribly far from Azure at $10 billion. Google Cloud also acquired Looker, a data visualization technology that is competitive with Tableau (NYSE:DATA) (acquired by Salesforce (NYSE:CRM)). The new hire Thomas Kurian was recruited out of the Enterprise application business out of Oracle (NYSE:ORCL).
Alphabet is very serious about the cloud. It has also announced a $25 billion buyback program, saying to the world that Alphabet is underpriced. A number of commentators said that Alphabet is now cheaper today at this higher price with fantastic earnings and revenue on the advertising side and this great new performance in the cloud. I think there are 100 more points in this name. I would advise taking profits today. By that, I mean sell enough so that you capture the profits and let the rest ride. At the very least, take the opportunity to trim a little to generate some cash and let the rest ride into next week. Of course, if you want to sell out the entire holding and have some real cash, that would be just fine. I was also bullish on Facebook (NASDAQ:FB), Snap (NYSE:SNAP) and Twitter (NYSE:TWTR), but that was easy to see. I think all of the above continue to perform very well into 2020, because of political advertising and the all-powerful consumer.
What Have You Done For Me Lately?
Enough about the past; let's talk about housing. I spoke about this area late last year and maybe I was early, but if the consumer is a superwoman and Powell is lowering rates, and household formation is 1.5 million but homebuilding is only 1.2 million, it follows that homes sales, homebuilding, and furnishing should do fantastically. We already see this with great growth in Masco (NYSE:MAS), Sherwin-Williams (NYSE:SHW), Stanley Black & Decker (NYSE:SWK); all doing fantastic in earnings for Q2 already. Also, plenty of homebuilders are already doing. I want to especially look at those focused on the lower end of the market.
So What To Do Now?
The Homebuilder ETF (BATS:ITB); learn about the homebuilders: Pulte (NYSE:PHM), KB Home (NYSE:KBH), Toll Brothers (NYSE:TOL), Lennar (NYSE:LEN), and smaller names like TRI Pointe Group (NYSE:TPH), Five Point Holdings (NYSE:FPH), LGI Homes (NASDAQ:LGIH), and Meritage Homes (NYSE:MTH).
Please note I use the term "buy list" and watch list interchangeably. So when I say buy list, that does not mean buy the ENTIRE list. It means these are the names I hear the most about in this space. Some of the bigger players don't focus on the lower-end segments. I believe they will have to find ways to sell to that segment. I understand that PHM, LGIH and MTH focus on the lower end. Also, this list is not all encompassing. If you are serious about creating alpha, you should get comfortable with the thesis. Maybe you think the high-end will do great in a lower mortgage environment. Maybe I missed some lower-end names; learn enough to be confident. I see this as a long-lived speculation or a long-term investment (as long as they pay out a dividend).
What are other ways of participating in this space? Well, if MAS, SHW, and SWK did very well, then Home Depot (NYSE:HD) and Lowe's (NYSE:LOW)? Also, you can see that in the Insider Corner, a director of United Rentals (NYSE:URI) bought almost $600K of shares. Maybe look into that name. URI is the largest renter of construction equipment in the country. It got hammered in its earnings. There's no dividend; long-term investors should take that into account.
How about the online specialty market places? LendingTree (NASDAQ:TREE) just plummeted on its earnings report. I am still analyzing, but my gut says that the earnings and revenue are very lumpy in this space. I would buy it today, but if it falls below 20% from its all-time highs. Other names would be Zillow (NASDAQ:Z) that has a home-buying business now, and that is really interesting. Redfin (NASDAQ:RDFN) is an online-enabled, low-cost brokerage that should appeal to the first-time homebuyer. We saw recently that Realogy (NYSE:RLGY) had a tie-up with Amazon (AMZN); I would be careful with this name. There are a lot of short-sellers and lawsuits with this name. I just feel obligated to let you know about them. Speaking of Amazon...
...AMZN missed earnings. The bears will come out of the woodwork on how it's all a rip-off or whatever. Market participants who have been active in the market for years know that AMZN doesn't care about growing earnings year after year. The old AMZN hands follow cash flow and they will invest in the services to build a better company. The company went to one-day delivery, and that means it is going to build out its logistics and last-mile delivery. It will probably lag on earnings for several quarters in order to replicate what UPS (NYSE:UPS) or FedEx (NYSE:FDX) can do. Like all high-beta names that are dinged on earnings, I would wait for AMZN to fall 20% from its all-time highs to start accumulating. If it doesn't get there, well, there are plenty of fish in the sea. Let the price come to you.
United Rentals' Donald C. Roof (director) paid almost $600K for shares.
Etsy (NASDAQ:ETSY) was upgraded by analysts at BTIG Research from a "neutral" rating to a "buy" rating. They now have a $79.00 price target on the stock. 14.7% upside from the current price of $68.87.
My Take: Etsy is one of my new eRetail names. I think it's an excellent speculation. I would rather be buying when everyone is selling
LendingTree was upgraded by analysts at Susquehanna Bancshares from a "neutral" rating to a "positive" rating.
My Take: I think that TREE is very interesting, and this upgrade does help. Let's wait for TREE to settle at a lower level; do some analysis and consider speculating.
Facebook (FB) had its price target raised by analysts at JPMorgan Chase & Co., Mizuho, Robert W. Baird, Monness Crespi & Hardt, Citigroup Inc., and Jefferies Financial Group Inc.
My Take: There is no secret that FB is a fantastic earnings machine. I would get aggressive on any weakness,
ServiceNow (NYSE:NOW) had its price target raised by analysts at Bank of America Corp., BMO Capital Markets, KeyCorp, Raymond James, and Canaccord Genuity. They gave a buy/outperform/overweight/strong-buy and buy rating on the stock respectively.
My Take: NOW is a great name; everyone knows it's a great name, and that is why the stock sold off a bit on its earnings report. I hope that the downward momentum continues and feeds on itself, which sometimes happens. I would buy it if it gets to below 20% or close enough.
Xilinx (NASDAQ:XLNX) had its price target raised by analysts at Bank of America Corp., Morgan Stanley, and Mizuho. They now have a buy/overweight/buy rating on the stock respectively.
My Take: XLNX is one of my favored names in the semiconductor sector. It too fell on its earnings report, and that is why we have these upgrades. Let's have some patience and let the price come to us.
As I was finishing up this note, the wonderful news that Q2 GDP was at 2.1% made all the hand-wringing and dire expectations have come to naught. I repeatedly stated that GDP was going to be above 2%, and I won't be surprised if it is revised upward. This is fantastic news! Someone please tell me why we are cutting rates?
Have a great weekend.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.