Part 1

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 SPY for the month of September is:

Facebook (FB)

Our first stock pick from the S&P500 Select Sector SPDR Fund (SPY) is Facebook (FB). The company is the 4th largest holding in the SPY exchange traded fund with a 2.34% weight, which makes its price movement essential for the whole ETF.

Company background

As we all know, Facebook Inc. is the world’s largest social media platform. The company’s portfolio of products has substantially expanded throughout the last decade as the company has evolved from a single Facebook app to multiple apps like photo, video sharing and messaging apps like Instagram and WhatsApp. Acquisitions have played a major part in Facebook’s growth initiatives and expansion strategies as both WhatsApp and Instragam were acquired by the company in order to expand its reach and global usage base. Now, along with in-house developed Messenger, these apps now form Facebook’s family of products used by almost 3 billion people on a monthly basis.

Facebook uses metrics like daily active users (DAUs) and monthly active users (MAUs) to measure its user base. As of June 30, 2020, there are over 3.14 billion people actively using Facebook, Instagram, WhatsApp or Messenger each month and according to Facebook are considered Family Monthly Active People (MAP). Worldwide, there are over 2.70 billion monthly active users (MAUs) as of June 30, 2020. This is a 12 percent increase in Facebook MAUs year-over-year. Furthermore, 1.79 billion people on average log onto Facebook daily and are considered daily active users (Facebook DAU) for August 2020. This represents a 12 percent increase in year-over-year and compares favorably to the 1.66 billion DAU for December 2019. (Source: Facebook 07/2020). A newly introduced but yet a very important metric for the company is the family daily active people (DAP) that measures daily users of its family of products, was 3.14 billion. Facebook is following Apple’s example of trying to create one ecosystem of products and services for all of its users, which is a great long-term growth driver for FB.

Headquartered in Menlo Park, CA, Facebook generated revenues worth $70.70 billion in 2019. Advertisement accounted for 98.5% of revenues. Marketers buy ads that can appear on multiple platforms including Facebook, Instagram, Messenger and third-party applications and websites.

Facebook, thanks to its huge user base gained a significant market share in the advertising space wherein it faces tough competition from Google, Twitter, Amazon and Snapchat-parent Snap.

The company’s major competitors in the messaging and advertising space are: Apple (messaging), YouTube (advertising and video), Bytedance (social media) and Tencent (messaging and social media).

Facebook core app enables people to connect, share, discover and communicate with one other on mobile devices and personal computers. User engagement on core Facebook platform is fostered by News Feed that displays an algorithmically-ranked series of stories and advertisements customized for each user. There have been plenty of new Facebook tools and features that have been introduced throughout the last few months including Facebook Groups, Marketplace, Jobs and Gaming.

Instagram is a community for sharing photos, videos and messages, enabling people to discover interests that they care about. People can express themselves through photos, videos and private messaging via Instagram Feed and Stories.

Messenger helps people to connect with friends, family, groups and businesses across platforms and devices. WhatsApp is a simple, reliable and secure messaging application, used by people and businesses around the world to communicate in a private way.

Facebook also offers virtual reality (VR) products through its Oculus division.

Current Position – Financial Performance and Future Growth Prospects

When we look at Facebook’s most recent Q2 Earnings report for 2020, we could see general strength and overall consistent growth across all of the company’s divisions. The company had managed to not only shrug off the negative impact from the pandemic but it has shown signs of resilience in this tough economic environment announcing double-digit revenue growth for the second quarter of 2020 and better-than-expected user gains. This in turn has been one of the major catalysts for the stock rallying higher ever since. Revenues came up at $18.69 billion, up 11% compared to the same time period last year, and a substantial growth in daily active users of Facebook was also registered with the number coming up at 1.79 billion people. The EPS reading was also impressive with $1.80 vs. $1.39 expected. Average Revenue per User (ARPU) growth was highest in the United States & Canada, increasing 14% year over year followed by Europe’s 12%. ARPU in the Asia-Pacific and RoW grew 10% and 5.3%, respectively. Worldwide ARPU rose 8.3% to $6.95.

The company is facing an ongoing advertiser boycott over its policing of hate speech, but despite that is still expecting roughly 10% year-over-year revenue growth for Q3 — similar to in Q2.

Facebook is currently facing intense political and regulatory scrutiny over issues ranging from content moderation to alleged antitrust violations. It is also in the midst of an unprecedented advertiser boycott over to its approach to hate speech.

Facebook continues to witness significant traction in online and mobile advertising spending. However, while the online advertising space is growing it is also changing, as there is a new “king” in town when it comes to online ads and that’s – video. The company intends to capture the opportunity presented by ever-increasing video viewing on social media platforms. Online video is the most lucrative component of digital advertising. As video ads generate more revenues than its photo and text-based substitutes, Facebook is trying to incorporate more and more video-oriented content to bring in more ad dollars. The company launched Watch, a dedicated tab for video viewing, to achieve its goal.

The biggest cash cow for Facebook currently is Instagram as it has introduced its ad platform to worldwide advertisers. To attract more advertisers (over 3 million and counting), Facebook has unveiled tools to promote posts and evaluate business performance directly on Instagram. Moreover, the Facebook is also looking for ways to monetize Instagram Stories, and adding the Checkout feature to the platform is a step toward that direction. The feature allows Instagram users to browse and purchase products from 23 top brands in the United States, all within Facebook’s app. Further, solid adoption of the Explore tab, which is used by more than 50% of Instagram users every month, increases the platform’s monetization opportunities. Recently, the company started placing ads on the Explore tab that is expected to drive the top line.

Messenger and WhatsApp are the other extremely prized possessions. Facebook is aggressively working on monetizing the opportunities presented by its subsidiaries. The company is pretty excited as it opened the Messenger app, which has more than 1 billion users, to developers for creating chatbots that would enable businesses to extend customer service and other transactions. Facebook is rewriting the app from scratch to make it the fastest and most secure major messaging platform in the world. It is also working to bring end-to-end encryption and ephemerality to boost user experience.

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 $140 to the $303 all-time highs in the beginning of September. 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 $266 mark after rebounding from the strong diagonal trendline support at $263. 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 see the winners counting to win. We remain bullish on the FB 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 montioring 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 the first key diagonal support line at $263, which actually matches with the strong dynamic 50 DMA support sitting at $260. Even if it manages to break that support it would be heading towards the next strong support mark of the 100 DMA around the $243-245 levels where lots of buying pressure is expected to occur, thus sending the price back to the all-time highs around $300.

Chart: Facebook (FB)

We will start buying FB at the first key diagonal support at $264. Should the price break that strong support mark it would be heading towards the next strong support area around $247-8 where we will be buying the stock even more aggressively in order to get a better average cost basis on our positions. Our initial profit-taking area is placed at $303, followed by the next target at $315 where we will be fully cashing out our profits and waiting for another pullback on the stock so we can buy it again at a nice discount.

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

Netflix Inc. (NFLX)

Company background

Netflix was founded in 1997 by Reed Hastings (the current CEO) and Marc Randolph. Both had previous experience in the West Coast tech scene – Hastings was the owner of debugging software firm Pure Atria, while Randolph had cofounded, and then sold computer mail order company MicroWarehouse for $700 million

Netflix.com started back then as a DVD rental service in 1998; an online rival to the then dominant Blockbuster Video. Hastings had claimed that he was inspired to found Netflix after being fined $40 by Blockbuster for the late return of Apollo 13, though he later revealed the story was a fiction intended to help foster a creation myth.

Now many years later Netflix Inc. is the world’s leader in the streaming entertainment business with its 183 million paid subscribers in more than 190 countries around the world, enjoying documentaries, TV series and feature films across a huge variety of genres and languages. The company has got more than 20 years of experience in the sector it operates. In the past 5 years especially Netflix has done an incredible job in increasing the quality of the content it provides to its paid subscribers and expanding in many new countries around the world, which has given the company a chance to further boost its subscription revenues and profits. In fact, Netflix’ s revenue has more than tripled since 2015 while the net profit has gone up tenfold. In other words, the company has done an incredible job in growing its customer base globally and that has been a key factor in its overall market and financial performance, which has in turn been boosting the share price and making more money for its shareholders.

As we all know 2020 has so far been a very difficult year for companies and individuals around the world “thanks” to the global COVID-19 pandemic and the broad economic shutdown that the global economy has experienced. However, there are a few companies out there that have actually benefited greatly from the current economic and social environment that the pandemic has caused. Due to the imposed social distancing and quarantine around the world, people have been staying mostly at home. Thus, they have been having more time for watching TV series and movies and therefore that has led to a huge increase in the company’s new paid subscribers for the quarter. Additionally, it is important to note that the subscription growth numbers for the company were higher in the beginning of the year throughout the Q1, as then most of the world was locked down at home as a result of COVID-19. However, with the slow but progressive reopening of the global economy Netflix has seen a generally weaker new subscription numbers in Q2, which were the main reason as to why the company missed the Q2 earnings estimates. At any rate, Netflix remains an innovator, leader and a dominant force in a rapidly growing niche market, which makes the company and respectively the stock a very attractive long-term investment option for growth investors.

Current Position – Financial Performance and Future Growth Prospects

We saw Netflix reporting one of the best quarters in the company’s history at the end of Q1 this year when the company added more than double its target for subscriber growth and beat by far Wall Street’s expectations for the period. The entertainment giant added 15.77 million new paid subscribers globally, which was the highest number of new subscribers the company has ever gained in a single quarter. The Q2 Earnings report was also very impressive altogether as the company beat the revenue and net subscriber additions expectations delivering $6.15 billion vs. $6.08 billion expected in revenue and adding 10.09 million vs 8.26 million net subscribers expected. The only metric that Netflix was not able to meet with analysts’ expectations was the EPS front where the company delivered $1.59 vs $1.81 EPS expected. However, it is important to note that Netflix missed analyst expectations on earnings per share largely due to a one-time charge in California related to research and development tax credits.

The one thing that sets Netflix apart is the fact that the company has now become much more than an online streaming service provider, it is one of the best production companies in the world. It all started back in 2012 when Netflix added another differentiator to its overall service offering: original content. Lilyhammer led the charge in 2012, but it was House of Cards and Orange is the New Black, both launched in 2013, that really changed everything. Netflix is now seen a heavyweight producer of original series, with a number of Emmys to its name. In 2018, Netflix was nominated for 112 Emmys – ending a 17-year run by HBO as the top-nominated network.

Since 2015’s Beasts of No Nation, Netflix Originals content also includes films. Indeed, Netflix has been behind some of the biggest and most highly-acclaimed films in the world in recent years. These include Oscar nominees such as Martin Scorsese’s The Irishman, Alfredo Cuaron’s Roma, and Noah Baumbach’s Marriage Story. Indeed, Netflix earned more nominations than any other film studio at the 2020 Oscars.

Another important growth driver for the company is the massive international expansion, adoption and growth that Netflix has experienced in recent years. At the end of 2019, Netflix subscribers numbered 167.1 million. Of these, 61 million accounts were registered in the US, with the remaining 106.1 million (63%) spread over the rest of the globe.

International growth in Netflix subscriptions has far outpaced domestic growth in recent years, since international users first came to account for the greatest proportion of international users as recently as 2017. Since 2015 the number of international Netflix users has increased nearly fourfold, while domestic users have increased by less than 50%

As you can see Netflix has all the tools in the box to continue its meteoric rise as one of the entertainment heavyweights of our time!

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 $290 to the $576 all-time highs in the beginning of September. Since then, we have seen a volatile correction that has taken the price down with over 16% in less than 2 weeks. The stock is currently sitting at the $482 mark approaching the strong horizontal trendline support at $466, which also overlaps with the 100 DMA dynamic support. 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 see the winners counting to win. We remain bullish on the NFLX 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 the first key diagonal support line at $465, which actually matches with the strong dynamic 100 DMA support sitting at $467. Considering the fact that two important support levels have already been broken (the 50 DMA and the diagonal trendline support) if we see the price breaking down below the current strong support levels, then we could expect a steeper decline towards the next major horizontal support line at $394 where lots of buying pressure is expected to occur, thus sending the price back to the all-time highs around $550.

We will start buying NFLX at the first key horizontal support at $475. Should the price break that strong support mark it would be heading towards the next strong support area around $465 where we will be buying the stock even more aggressively in order to get a better average cost basis on our positions. Our initial profit-taking level is placed at $550, followed by the next target at $605 where we will be fully cashing out our profits and waiting for another pullback on the stock so we can buy it again at a nice discount.

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 SPY and XLC 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,

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