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All Contents © 2019The Kiplinger Washington Editors
By James Brumley, Contributing Writer
| July 13, 2018
Not all that long ago, a Nasdaq listing of a stock was met with a bit of derision. While it wasn’t as lowly as the “pink sheets,” the up-and-coming exchange – which was more of a telecommunications network and less of an actual trading floor – just didn’t have street cred. Thus, Nasdaq stocks weren’t taken as seriously as the tickers associated with the New York Stock Exchange.
But a funny thing happened as the 1990s turned into the 2000s. Largely thanks to the explosive growth of Microsoft (MSFT) and Apple (AAPL) – both of which were listed on the Nasdaq exchange – the little tech-heavy exchange began to be recognized as the place where investors could participate in the technology evolution.
The rest, as they say, is history.
Little has changed in the meantime. The Nasdaq still is a technology-oriented exchange, and still home to some of the stock market’s most rewarding names. So rewarding, in fact, that they have driven the Nasdaq composite to numerous fresh highs in 2018.
Here’s a rundown of 10 of the most compelling Nasdaq stocks. Some are familiar, some not so much. In all cases, though, these companies offer something special their peers don’t.
Data is as of July 12, 2018.
Market value: $5.4 billion
Most investors might not be familiar with MKS Instruments (MKSI, $97.95), but Wall Street analysts certainly are, and they love what they see. It’s one of the few Nasdaq stocks the professionals rater better than a buy, leaning toward a strong buy – the highest possible rating. Better still, the average analyst price target of $137 is a whopping 40% higher than the stock’s current price.
In May, Citi went so far as to name MKSI as its top mid-cap/small-cap in the technology fabrication equipment space.
MKS Instruments, as the name suggests, makes a variety of scientific instruments. From optical gas analysis to pressure measurement to motion control, the company makes solutions the average consumer couldn’t care less about – but that the average manufacturer can’t live without.
The results underscore that demand. MKS Instruments is expected to grow revenues by 14% this year, and the bottom line should expand at an even faster pace. For the record, MKSI has topped estimates in most of its recent quarters, by a lot.
The kicker: With MKSI priced at less than 14 times trailing earnings and a forward-looking price-to-earnings ratio of about 10, MKSI is an unusual bargain amid technology stocks.
Market value: $18.4 billion
If MKS Instruments is a growth machine, Abiomed (ABMD, $414.61) is a growth factory. The company’s revenues are expected to grow 29% this year, then at the same clip in 2019. Profits are even more peppy; last year’s per-share profit of $2.45 is projected to reach $3.55 this year, then swell to $4.77 next year.
Abiomed is the maker of a medical device that’s earned the accolade “game changer.” Its lineup of heart pumps, branded under the name Impella, are not only the smallest heart pumps in the world, but also one of the most technologically advanced. In February, the FDA approved an upgrade to the Impella CP, adding an optical pressure sensor to the device that makes it more effective and create more information about a patient’s heart for caregivers.
ABMD shares aren’t cheap. The stock’s 191% rally over the past 12 months has driven shares to a frothy valuation; even with strong earnings growth on tap, the forward P/E of 87 is tough to swallow. But this might be a case where the hype and potential of the Impella device, three years down the road, still puts it among Nasdaq stocks you should add to your watchlist.
Market value: $15.6 billion
Here’s an appropriate coincidence: The exchange where many great-but-overlooked stocks trade is a great investment in and of itself.
The company is simply called Nasdaq Inc. (NDAQ, $93.37), and it’s not just focused on its U.S. exchange. Nasdaq operates more than 90 markets in 50 different countries, serving as the middleman for stocks, options, futures, commodities and more.
That diverse revenue stream doesn’t make Nasdaq immune to economic ebbs and flows. It’s a small, inter-related world, and an economic cold contracted anywhere in the world can be felt everywhere else. Nevertheless, that diversity smooths out some of the rough edges.
That’s not even the clincher. The reason investors may want to step into Nasdaq is, for all the fear that seems and sounds prevalent about stocks right now, young companies still are hungry for funding, and investors still are hungry for new opportunities. Both parties are coming to Nasdaq to make it happen, more than ever. The exchange added 151 new listings during the first half of this year, and as of the end of the second quarter, Nasdaq has been the IPO leader for 18 consecutive months. More listings mean more fee revenue.
As long as the global economy continues to move forward, Nasdaq has an edge.
Market value: $28.1 billion
The prospects of an all-out trade war between China and the United States have terrified investors. They’ve been particularly haunting for technology investors because disputes about intellectual property have been particularly tense. In short, both countries have been increasingly hesitant to let the other have access to certain pieces of critical hardware.
Lam Research (LRCX, $171.32), however, may not be as vulnerable to the geopolitical spat as it might seem.
Moody’s Senior Vice President Richard Lane made the call in late June, flatly noting, “China’s tariffs and/or trade restrictions would have only a limited impact on Applied Materials Inc., Lam Research Corp. and KLA-Tencor Corp., since indigenous Chinese customers represent just 6%, or $1.8 billion, of their annual aggregate revenue.” Lane also said non-Chinese customers will drive plenty of revenue for these outfits for the foreseeable future.
Lam Research, by the way, isn’t so much a technology maker as it is a company that allows more conventional tech companies make their wares. Its wafer fabrication equipment, for instance, allows chipmakers such as Intel (INTC) and Advanced Micro Devices (AMD) to make ever-better computing solutions.
It’s still subject to the cyclical nature of technology, but much less so than other technology players. The race among chipmakers to offer the fastest, smallest chips never really stops, setting the stage for consistent revenue.
Market value: $765.1 million
The solar-power investing movement mostly fell off the radar a few years back, following a frenzied 2008 that turned many of the industry’s publicly traded companies into temporary heroes. That’s especially true of Canadian solar panel makers such as Canadian Solar (CSIQ, $13.06), which doesn’t enjoy the benefit of being squarely in U.S. investors’ sights.
Solar isn’t fading into the background, nor will it become just a footnote in the world’s history of energy. A projected 104 gigawatts worth of solar power production capacity should be installed this year, with similar installations expected every year through 2022.
Canadian Solar – one of the survivors of solar’s post-2008 headwind – may well be the proverbial gold standard in the business. Not only is it still innovating, creating wares like more efficient bifacial panels, but it’s also doing development deals with partners that should theoretically be making their own panels. Case in point: Japan’s Yamaguchi Shin Mine solar power project tapped Canadian Solar as the supplier of the panels used in the 56-megawatt facility.
The distant future rarely looks all that bright for Canadian Solar (or its peers). Prospects tend to turn into buyers on a last-minute basis, however, setting the stage for significant long-term, even if uneven, revenue and income growth. Analysts are looking for 25% sales growth this year.
Market value: $124.8 billion
Think Adobe (ADBE, $248.12) is just the company that pioneered the Portable Document Format (PDF), making it easy for web users to view and handle identical copies of documents? Think again. Adobe’s Acrobat is arguably the least important piece of its portfolio now. Adobe is a full-blown digital marketing company, with some pretty impressive tools to offer current and prospective customers.
Morningstar analyst Ali Mogharabi explains, “While Adobe was not the first mover in marketing software (now dubbed Experience Cloud), an argument can be made that it is the leader.” He adds, “While we believe there are some companies whose needs may not align with Adobe’s marketing value proposition, we think there is plenty of room for multiple large-scale winners in the marketing cloud, with Adobe having an inside track.”
The fiscal numbers agree with that thesis. Analysts collectively expect sales to soar to the tune of 22% this year, followed by 19% growth next year. Profits are expected to grow at an even faster clip. (And for the record, Adobe hasn’t missed a single quarterly earnings estimate in the past three years.)
ADBE shares aren’t cheap, at 33 times next year’s expected earnings. But you have to pay for quality.
Market value: $800.5 billion
Microsoft (MSFT, $101.98) needs no introduction or explanation. The software giant was the heart and soul of the advent of the personal computer, and then the internet itself. While the introduction of mobile devices – and mobile internet in particular – has since made Microsoft’s software less relevant than it used to be, the company has reinvented itself into something perhaps even more marketable than it used to be.
The reinvented Microsoft is a cloud-centric company. Although the company doesn’t pinpoint exactly how much revenue that cloud computing generates, last quarter, Office 365 (its legacy productivity software, in a cloud-based subscription format) for commercial clients saw revenue growth of 14%. The consumer-oriented version helped drive 12% growth in that arm’s cloud revenue. Microsoft Azure, which is the company’s enterprise-level cloud platform, saw a 93% year-over-year improvement in sales a quarter ago.
It’s also noteworthy that as of the first quarter, Microsoft eclipsed Amazon.com (AMZN) in terms of cloud computing revenue.
That matters. As much as the world has made good use of the cloud and all the flexibility that comes with it, we’ve only scratched the surface. IT research outfit Gartner predicts that the total public cloud computing market will exceed $400 billion by 2020, up from last year’s $260 billion.
Market value: $3.3 billion
While most everyone’s heard of Microsoft, many people likely haven’t heard of FireEye (FEYE, $16.90). Still, it’s one of those Nasdaq stocks worthy of a closer look.
FireEye offers a suite of cybersecurity solutions, primarily offered to enterprise-level customers. But it’s more than just a collection of firewalls and malware detection tools. FireEye provides services like iSIGHT, which can identify and predict a potential threat to a network before it becomes an actual problem.
There is one significant red flag that casts a shadow on the stock: FireEye isn’t profitable. It’s not even close. A series of acquisitions made over the course of the past several years – before demand for security-as-a-service platforms had gelled – made things fiscally tough for FireEye. A closer inspection of the revenue and income trend, however, suggests a swing to a profit is in sight. Analysts expect the company to turn last year’s per-share loss of 16 cents into a 2-cent profit this year, then ramp it up to 17 cents in per-share earnings in 2019.
This trend, and this product lineup, prodded Piper Jaffray to upgrade FEYE just a few days before this writing. Analyst Andrew Nowinski wrote, “Our channel contacts noted that the new pricing bundles are having a positive impact on overall demand trends, which we believe is sustainable and will drive positive operating income and free cash flow starting in (the third quarter of 2018).”
Market value: $2.8 billion
NuVasive (NUVA, $54.01) isn’t exactly a heavyweight, even within the medical equipment world where it resides. It’s also not exactly a fast grower; this year’s revenue is only expected to improve by 7%, and that pace will likely slow to less than 6% next year.
However, this company has commanding control of its relatively small niche – more than enough control to make it worthy of adding to a watchlist.
NuVasive offers spinal surgery solutions. Not only does it create innovate surgical equipment, but it develops the specific procedures to make use of them. Its XLIF procedure is the world’s only lateral-approach spinal surgery procedure, made better by improvements like the use of 3D-printed porous titanium implant based on the porous PEEK (polyether ether ketone) technologies it garnered when it acquired Vertera Spine late last year. The modest tweaks and improvement, in sum, keep NuVasive on the cutting edge of the small but reliable spinal surgery market.
The past 12 months haven’t been stellar. While the Nasdaq has roared ahead by nearly 25%, NUVA shares are off by almost 30% as investors have sought out faster-growing companies. Given Nuvasive’s steady, reliable earnings growth though, shares are falling back into favor.
Market value: $60.5 billion
Last but not least, add another biopharma name to a list of Nasdaq stocks that too many people are overlooking: Celgene (CELG, $83.33).
Like Nuvasive, Celgene shares have struggled of late. The stock is down roughly 20% year-to-date, unable to escape from the broad downtrend that has dragged most of the industry lower.
But this is a case where investors proverbially threw the baby out with the bathwater. Revenue is on pace to grow nearly 15% this year, and the pros are looking for the top line to swell another 12% next year, largely on the heels of strong growth of Revlimid sales. Revenue driven by the cancer drug grew 19% a quarter ago, and the organization’s guidance says it’s looking for more of the same kind of growth from its breadwinner going forward.
Where Celgene is really starting to shine now that Revlimid is firing on all cylinders, however, is on the earnings growth front. Last year’s per-share earnings are projected to reach $8.53 this year, then grow to $10.21 per share next year. With that double-digit earnings growth pace on the table, the forward-looking P/E of 8.2 is arguably a huge bargain.
For the record, CELG shares have gained nearly 10% from their June lows, implying investors are starting to realize Celgene shares were unduly punished.