Part 4

Throughout the last 5 months the stock market has been in one of the strongest and most rapid bull trends ever with new all-time highs reached on all major US indices. The coronavirus pandemic has continued to bring high levels of uncertainty among traders and investors, but most of that negativity has been shut out by people’s greed of generating high returns by joining the rally. Thus, we believe that the most recent market correction will allow investors to reposition themselves and push the best stocks to higher levels in the near future.

After analyzing the performance of the ETF pair, we have picked the two best stocks from each ETF that we believe are expected to have the highest chance of beating the market in the current environment.

One of our top stock-picks from the XLK for the month of September is:

Adobe (ADBE)

Company Background

San Jose California-based Adobe Inc. is one of the largest software companies in the world. Adobe generates the largest portion of its revenue from collecting licensing fees from its customers.

The company also offers technical support and education, which have a much smaller contribution for Adobe’s revenues but are still important services as they allow the company to close the whole services circle.

The company generally operates in three segments: Digital Media, Digital Experience, Publishing

The Digital Media solutions segment provides small businesses and enterprises with the opportunity not only to create highly compelling content, but to also deliver it across a variety of different media channels, platforms and devices – smartphones, tablets, e-readers, and other devices, and then optimize it through systematic targeting and measurement.

The two major components of revenue in the Digital Media solutions segment are the Creative family of products and Document Services products. The target customers are traditional content creators, web application developers, digital media professionals and user interface designers/developers, writers, videographers and photographers.

The Digital Experience segment serves as a business optimization tool focusing on providing businesses with insights into the performance of digital marketing initiatives, thus empowering organizations to make informed decisions, and tries to ensure the success of online marketing programs. The target customers are digital marketers, advertisers, publishers, merchandisers, web analysts, chief marketing officers and chief revenue officers.

The Publishing segment supports technical and business publishing through a special printing and imaging page description language and a PDF-based workflow regulation platform. The target customers are professional graphics and content publishers, as well as OEMs offering workflow software, printers and other output devices.

The company has offices in several countries which include the likes of Australia, Austria, Belgium, Brazil, Canada, Chile, China, Columbia, Czech Republic, Denmark, Finland, France, Germany, Hong Kong, India, Ireland, Israel, Italy, Japan and Mexico, to name a few.

Current Position – Financial Performance and Future Growth Prospects

In fiscal 2019, the company generated $11.17 billion in revenue, which was derived from 3 segments—Digital Media solutions (69% of 2019 revenues), Digital Marketing solutions (28%) and Print and Publishing contributed the remaining 3%. Adobe has a solid balance sheet. At fiscal second quarter-end, cash and short-term investment balance was $4.35 billion, slightly up from $4.17 billion in the prior quarter. Trade receivables were $1.37 billion, down from $1.39 billion recorded in the fiscal first quarter. Cash generated from operations was $1.18 billion versus $1.32 billion in the fiscal first quarter. During the reported quarter, the company repurchased 2.6 million shares.

Adobe Inc. reported second-quarter fiscal 2020 non-GAAP earnings of $2.45 per share, surpassing the consensus estimate of $2.35. The figure increased 7.9% sequentially and 28.4% on a year-over-year basis. Adjusted revenues jumped 14.2% year over year to $3.13 billion. This upside was driven by strong demand for the company’s digital products.

Management said the shift to remote work has driven the demand for digital documents. This led to a 40% sequential increase in the use of web-based PDF services. Also, the number of documents shared in Acrobat increased 50% year over year. Increased mobile usage led to 43% year-over-year increase in Acrobat Reader installations and 66% growth in Adobe Scan installations.

Furthermore, the strong net cash balance will not only help it pursue strategic acquisitions but will also enable it repurchase shares aggressively in the long haul.

Adobe continues to be the market leader in the Digital Media space. The broad-based success of the company comes from the fact that it simply provides one of the best solutions in most categories of the digital world including media design, publishing, Internet and video. In fiscal first quarter, total Digital Media ARR (Annualized recurring revenue), the key cloud performance measure, grew to $8.73 billion. This indicates that the company has seen strong growth in the Creative Cloud and Document Cloud businesses. The digitalization of advertising, entertainment and other content-creation markets is a great long-term positive for the company as Adobe is well positioned to benefit from this trend and should enjoy above-average long-term growth. The acquisition of Omniture was considered to be a rather bold step that Adobe took in order to enter the digital marketing space. This is an area where corporate spending is on the rise. A number of trends are supporting this trend, including the increased adoption of cloud computing, social media and mobile devices, as well as the emergence of big data analytics. Adobe’s current success has been built over the last decade through the great visionary leadership by the senior management of the company. A series of successive acquisitions have enabled the company to provide the full-spectrum of services in the specific sub- industry that it operates in like: analytics, experience management, targeting, social relevance and spend optimization. Furthermore, Acrobat is one of the company’s most successful product lines with a huge installed base of satisfied customers. Through Acrobat.com, the company offers a set of a cloud-based document and collaboration subscription services which include PDF creation, centralized online file sharing and contract signing solutions.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 5 months taking the price from the March 17th lows of around $255 to the $537 all-time highs in the beginning of September. This represented a phenomenal 111% appreciation for the stock in the last 5 months. Since then, we have seen a volatile correction that has taken the price down with over 12% in less than 2 weeks. The stock is currently sitting at the $471 mark after rebounding from the strong diagonal trendline support at $465, the strong horizontal support at $467 and the 50 DMA dynamic support at $460. This correction was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it is now more than normal for us to see this downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVI-19, the upcoming presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we expect that the winners will continue to win. We remain bullish on the ADBE stock and believe that all these profit-taking corrections are giving us great opportunities to buy the stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent correction and are signaling that the uptrend might be resuming very soon.

The daily chart shows that the price is currently testing this important conflux of supports, which appears to be holding quite firmly for now. We believe that the short-term correction for the stock is almost over and that it will soon resume its uptrend movement. However, if the prices manages to break the current support levels in play, then it would be heading towards the next strong support mark of the 100 DMA around the $423 level and towards the other strong horizontal support at $430. The stock is expected to find lots of buying pressure there, which will inevitably send the price back to the all-time highs around $537.

We will start buying ADBE at the first key diagonal and horizontal support lines currently overlapping around the $468 where lots of buying pressure is expected. Should the price break that level to the downside we will be buying more aggressively at the next key support at $430 where we will be able to get a better average cost basis for our positions. Our initial profit-taking target is set at $530, followed by the next target at $560 where we will be fully cashing in our profits and waiting for another profit-taking correction that would give us a chance to buy again at a discount

One of our top stock-picks from the XLY for the month of September is:

Starbucks Corporation (SBUX)

Company Background

Founded in 1971 in Seattle, US, Starbucks has become the largest coffee brand in the world. The company operates 30,000 locations in 77 countries around the world and especially over the past decade has managed to create a very well known brand, globally famous as the “third-place” where the company is committed to creating a culture of warmth and belonging where everyone is welcomed.

In addition to fresh, rich-brewed coffees, Starbucks’ offerings include many complementary food items and a selection of premium teas and other beverages, sold mainly through the company’s retail stores. The company’s popular brands include Starbucks coffee, Teavana tea, Seattle’s Best Coffee, La Boulange bakery products and Evolution Fresh juices.

Other than the company’s own retail stores, it generates revenues through licensed stores, consumer packaged goods and food service operations. The company receives royalties and license fees from the U.S. and international licensed stores. Under its consumer packaged goods operations, Starbucks sells packed coffee and tea products as well as a variety of ready-to-drink beverages and single-serve coffee and tea products to grocery, warehouse clubs and specialty retail stores. It also includes revenues from licensing deals with many partners to produce and sell its Starbucks and Seattle’s Best Coffee branded products. Under its foodservice operations, Starbucks supplies some of its products to restaurants, office coffee distributors, hotels, airlines and other retailers. Starbucks is among XLY’s biggest holdings with its 4.13% weight within the ETF.

Current Position – Financial Performance and Future Growth Prospects

We all know that 2020 has been a very difficult year for many different industries, and the consumer discretionary space has been no exception. A generally weaker economy results in reduced job-related income for consumers, which in turn lowers the overall consumer spending levels, thus affecting companies like Starbucks in a negative manner. In times of difficulty, the one thing that separates successful from unsuccessful businesses is the company’s leadership and the capacity of the senior management to make the right decisions in repositioning the company in a way that will preserve its business. Although the coronavirus pandemic is hurting the company’s original store opening program, it still expects to open at least 500 new stores in China in fiscal 2020. Despite the pandemic, the company opened 130 net new stores in third-quarter fiscal 2020. New store productivity and Return on Investment (ROI) in the United States and China are high. By fiscal 2021, the company intends to open approximately 12,000 stores globally. This will take the total store count to an estimated 37,000. Notably, Starbucks’ long-term growth targets include 3-4% comps growth, yielding high-single digit revenue growth and EPS growth of at least 12%.

Starbucks is strengthening its product portfolio with significant innovation around beverages, refreshment, health and wellness, tea and core food offerings. Starbucks is leaning toward fast-growing categories like Cold Brew, Draft Nitro beverages, and plant-based modifiers, including almond, coconut, and soy milk alternatives.

The company’s financial performance has been very solid over the past few years and we have been following closely its quarterly earnings reports where SBUX has been beating analysts’ expectations every single quarter in a row since the beginning of 2018, without a single worse than expected earnings per share (EPS) figure. That of course has been extremely positive for its overall share price performance and we have been taking advantage of a few great bullish movements on the stock ever since.

By looking at the latest quarter’s results, we shall say that the company beat both revenue and earnings expectations showing that even though its financial performance has taken a meaningful hit during the coronavirus pandemic, the management’s plan of preserving the business and limiting the negative impact of the current social environment is working well. The earnings per share came out at -$0.46, while analysts had expected -$0.61 (24.59% better than expected). Total revenues came in at $4,222.1 million, which also beat the consensus estimate of $4,111 million.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 5 months taking the price from the March 17th lows of around $54 to the $89 highs in the beginning of September. This represented a phenomenal 65% appreciation for the stock in the last 5 months. Since then, we have seen a rather modest correction that has taken the price down with 5.6% in the last 2 weeks 2 weeks. The stock is currently sitting at the $85 mark right above the confluence support zone of $80-82, where we have the strong diagonal trendline support at $80.50, the strong horizontal support at $82 and the 20 DMA dynamic support at $82.50. This correction was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it is now more than normal for us to see this downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVI-19, the upcoming presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we expect that the winners will continue to win. We remain bullish on the SBUX stock as long as the stock remains above the $80 level and believe that all these profit-taking corrections are giving us great opportunities to buy the stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent correction and are signaling that the uptrend might be resuming very soon.

We believe that the short-term correction for the stock is almost over and that it will soon resume its uptrend movement. However, if the price manages to break the $80-82 strong support levels, then it would be heading towards the next strong support mark of the 100 DMA around the $76 level and towards the other strong horizontal support at $71.50. The stock is expected to find lots of buying pressure there, which will inevitably send the price back to the $90 highs.

Chart: Starbucks Corporation

We will start buying SBUX at the $82.50 mark, just above the key support line at $82.
In case of a further depreciation of the price, we will be interested in adding more to our long positions at the next key support mark at $72. Our first profit target would be at $90, followed by the longer term target at $94 where we will be fully cashing in profits and waiting for another correction on the price in order to buy SBUX again at a discount and maximize our followers’ profits to the upside.

We at Dow Experts enjoy analyzing the market and helping our followers maximize their profitability by following our trading and investing ideas, which are always supported by our rational investment approach.

In order to further provide our followers with a strategy on how to fully capitalize on the above-described patterns and correlations, we analyzed the performance of some of the biggest companies within the XLK and XLY that have a big impact on the overall performance of the two ETFs.

You can subscribe to our Full Package in order to receive all of our top stock and ETF picks and analyses for the month plus new Bonus reports every month!

Sincerely,

Add a comment