The market continued its quick rebound Wednesday, with the Nasdaq leading the charge, up 0.90% on the day. The S&P 500 and the Dow both popped around 0.80% as all three major U.S. indexes attempt to return to last week’s records, following the pullback.
The Delta coronavirus variant and economic slowdown worries were blamed for the market’s recent fall. But those sentiments remain, which signals the selloff was likely based more on profit-taking after many of the biggest names on Wall Street surged to highs to start the quarter. The roughly two-month climb since mid-May pushed two widely-tracked technology ETFs—QQQ QQQ and XLK XLK—into some frothy technical levels.
Therefore, the recent selling was a healthy recalibration. Investors also shouldn’t be surprised if Wall Street continues to sell amid the impressive earnings season, especially with some of the biggest names set to report during the last week of July, including Apple AAPL and Microsoft MSFT (also read: All-Around Earnings Strength).
Even if there is another pullback during a strong earnings season, investors with long-term outlooks should always be on the hunt for great stocks. The recent fall in Treasury yields makes tech and growth names more attractive.
Plus, even when the Fed eventually raises rates, Wall Street will likely be left chasing returns in stocks for a long time given the current rock bottom levels—the 10-year Treasury has remained well below 3% for most of the last decade.
Most importantly, staying exposed to the market at all times is a proven winning strategy over the long haul. The last 18 months provide a useful example of how difficult it is to time stocks. So here are two strong growth-focused stocks poised to thrive for years that investors might want to consider buying around their Q2 earnings reports…
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Align Technology, Inc. ALGN (Q2 results due Wednesday, July 28)
Align Technology’s Invisalign system has shaken up the traditional orthodontics industry forever. ALGN’s clear aligner system is a true alternative to traditional metal braces and they have grown in popularity over the last 20-plus years. Invisalign’s success since its founding in 1997 (IPO in 2001) has spawned a whole subset of the orthodontics space that includes Candid, SmileDirectClub SDC, and others.
Align offers people the ability to straighten their teeth and correct other orthodontics-related issues, often at lower prices. ALGN has treated over 10.2 million patients. Its portfolio extends beyond clear aligners to its iTero intraoral scanner and exocad CAD/CAM software that identifies the issues and helps create the best plans to fit the patient’s needs. These offerings aim to enhance “digital orthodontic and restorative workflows to improve patient outcomes and practice efficiencies.”
Wall Street and patients love that Align works hand-in-hand with dentists and orthodontists who digitally scan a patient’s teeth in person and work with them through the entire process. Meanwhile, SDC, which has largely underwhelmed since its IPO, and other newer firms are more committed to an e-commerce-focused approach, with at-home impression kits and the like—though it is expanding its in-person offerings.
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ALGN’s revenue has climbed by an average of 25% in the past five years and that’s weighed down by 3% growth in 2020. Even though it took an early covid hit, the company ended the year with 28% sales growth in Q4. ALGN then posted 62% revenue expansion in the first quarter. Peeking ahead, Zacks estimates call for its adjusted FY21 earnings to surge 100% to $10.53 a share on 54% stronger sales to hit $3.80 billion.
The Invisalign maker is projected to post 20% higher revenue and earnings in 2022. Align has easily topped our bottom-line estimates in the trailing three periods and its positive EPS revisions help it grab a Zacks Rank #2 (Buy) at the moment, alongside its “B” grade for Momentum in our Style Scores system. ALGN has improved its balance sheet in the past year and it has significantly boosted its stock buyback program in 2021.
The company has also expanded its reach within the key teenage demographic as it successfully attracts more people who might have otherwise used traditional metal braces. Align is poised to grow long-term as many people favor its in-person approach given that fixing teeth is far more complex than ordering retial goods online. Plus, it is currently expanding its international business.
Wall Street remains very high on the stock, with 10 of the 12 brokerage recommendations Zacks has at “Strong Buys.” ALGN shares have soared 630% in the last five years, including a 95% run in the trailing 12 months. Luckily the stock has cooled off a bit, up only 15% in 2021.
The stock closed regular hours Wednesday just below last week’s records at $619.65 a share. Despite its run, ALGN is sitting right at neutral RSI levels at 51 and it trades at a 30% discount to its own year-long highs in terms of forward earnings.
Shopify SHOP (Q2 results due Wednesday, July 28)
Shopify helps companies adapt to the future of retail by building, maintaining, and growing their e-commerce presence. The firm boasts that it powers over 1.7 million businesses in more than 175 countries. SHOP makes money from recurring subscription fees and add-ons. The company offers different tiers, with some aimed at entrepreneurs, as well as small and medium businesses, with others focused on high volume merchants and big businesses.
The Canadian company’s most basic package starts with a monthly fee of $29 for sellers and a 2.9% transaction fee. SHOP’s point-of-sale products and software have gained momentum as well, competing against the likes of Square SQ. It has also partnered with heavyweights such as Walmart WMT and Facebook FB.
E-commerce had become nearly a necessity for most businesses in the Amazon AMZN age and the pandemic simply cemented the need to thrive online. Most importantly, Shopify was far from a one-hit-covid-wonder. For instance, SHOP surged from under $30 a share in 2016 to over $500 before the coronavirus crash.
Shopify’s sales growth supported the move, with 2019’s nearly 50% revenue growth its slowest since it went public in 2015. The company’s 2020 revenue then skyrocketed 86% from $1.58 billion to $2.93 billion. Most recently, its adjusted Q1 earnings soared from $0.19 a share to $2.01, on 110% higher revenue.
Analysts upped their estimates after its Q1 showing, with some coming in well above current consensus figures in the last seven days. This means Shopify and its history of quarterly beats could be set to do it again on July 28.
Zacks estimates call for its FY21 revenue to jump 50% from $2.93 billion to $4.40 billion, with FY22 ready to surge another 32% to $5.83 billion. Meanwhile, its adjusted EPS are projected to climb by 11% and 13%, respectively.
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SHOP has been a standout on Wall Street for a long time, with the stock up from around $40 five years ago to its current levels at $1,569 a share. Luckily the stock has cooled down a bit, up 62% in the last 12 months to lag Target TGT and others.
It has regained momentum along with other pandemic winners, up nearly 50% since mid-May. SHOP sits right at its new July records and is approaching overbought RSI (70) levels at 66.
Shopify currently lands a Zacks Rank #1 (Strong Buy) and 15 of the 26 brokerage recommendations Zacks has are “Strong Buys,” with only one “Sell.” The stock does trade at a premium compared to its industry, but at 36.5X forward earnings it trades 25% below its year-long highs and right at its median.
There could be some near-term selling pressure given SHOP and the market’s huge run. But long-term investors might want to consider adding Shopify stock for its ability to thrive in a booming growth sector. And e-commerce is far from its peak, considering it accounted for only 14% of total U.S. retail sales in Q1, down from a record 16% in Q2 FY20.
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