Blogs -Momentum List: September 2020

Momentum List: September 2020


September 24, 2020

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I/O Fund

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By David Marlin

This is the inaugural momentum list report written by David Marlin. We will release this report on a monthly basis.

Process Overview:

Identifying stocks that have superior momentum is a proven way to outperform the market. The key is evaluating which stocks show the fundamental and technical trends to sustain the type of momentum that will outperform the broader market.

In this report, I use a combination of fundamental, technical, and industry analysis to determine the top momentum stocks in the tech space. Please note, we’ve included one featured stock in this report: Sea Limited.

For evaluating the strength of a stock’s performance, I use a few time frames: YTD performance, performance from key market lows (in our case, the March lows), and short-term momentum.

For short term, I often look at stocks on a quarterly basis as it is very common to see a stock post big gains after earnings and continue that momentum for the rest of the quarter.  With the current sell off in the market, I am also closely looking at how stocks have performed during the market decline as technical strength is best revealed during pullbacks. 

On a technical basis, I like to use a few moving averages to help determine trends – the 8ema & 21ema for short terms trends, the 50 MA for medium term, and the 200 MA for long term.  In the current market environment, many previous leaders are now trading under their 50-day moving averages.  This is a key indicator that there has been a momentum change in these stocks and their previous uptrend has slowed considerably. Many stock trading legends, including William O’Neil, recommend avoiding stocks trading under their 50-day MA’s all together.         

The strongest stocks tend to be in the strongest industries. Identifying growing and evolving industries is a key to finding big gainers.  Companies with large addressable markets that are ideally positioned to capitalize on emerging trends are the focus of this list.  

High growth stocks obviously trade at a premium valuation, so this is not the most important factor in the creation of this list.  However, valuation cannot not be ignored, even for high growth stocks.  For this list, I analyzed historical valuations and valuation in comparison to peers.     

The criteria in the creation and maintenance of this portfolio moving forward is outlined below. Note that I only focus on stocks in the tech space with large addressable markets and market caps exceeding $3B. 

Momentum List Criteria:

  1. Financial Performance & Momentum
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  2. Technical Strength & Momentum
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  3. Industry Analysis
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  4. Valuation
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David’s Top Stocks List:

The top momentum stocks list is listed in order of highest to lowest revenue growth last quarter:

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1. Sea Limited (SE)

Rev Growth: 102%
YTD Return: 271%
Proj 1yr Fwd Rev Growth: 39%
EV/Fwd Rev: 13.9x

Summary: Sea Limited is one of the top growth stocks to own based off its strong growth and leadership position in a rapidly growing market that remains underpenetrated.  See the attached PDF for the full report on Sea Limited.    

2. CrowdStrike Inc (CRWD)

Rev Growth: 84%
YTD Return: 158%
Proj 1yr Fwd Rev Growth: 36%
EV/Fwd Rev: 33.7x

Summary: CrowdStrike continues to prove it is a secular winner in the cybersecurity industry, displacing the existing participants and gaining significant market share.  The fundamental performance in Q2 confirms this company is a best-in-class business worth owning as security software continues to be the top priority for organizations around the world.        

3. Fiverr International (FVRR)

Rev Growth: 82%
YTD Return: 426%
Proj 1yr Fwd Rev Growth: 37%
EV/Fwd Rev: 23.8x

Summary: Fiverr has seen a surge in consumer demand related to COVID, and the company has now seen 4 consecutive quarter of accelerating YoY revenue growth.  I believe Fiverr is ideally positioned to become a sustained beneficiary of the digital transformation long after the economy reopens and see a tremendous runway for growth ahead of them.  At a roughly $4B valuation, Fiverr is in the early innings of its lifecycle, as management estimates that its TAM is north of $100B. 

4. Square Inc (SQ)

Rev Growth: 64%
YTD Return: 133%
Proj 1yr Fwd Rev Growth: 22%
EV/Fwd Rev: 8.7x

Summary: Square has built a platform around digital payments and commerce, positioning itself to benefit from the transition to a cashless society.  Square is ideally situated for sustained growth with the ongoing shift towards digital payments, both on the B2C and P2P side with its Seller and Cash App ecosystems.     

5. Fastly Inc (FSLY)

Rev Growth: 62%
YTD Return: 311%
Proj 1yr Fwd Rev Growth: 33%
EV/Fwd Rev: 28.0x

Summary: Fastly has proven itself as a disruptive and innovative company focused on creating cutting-edge technology for developers and DevOps teams.  Fastly is one of the main beneficiaries of the digital transformation, as the subsequent increased internet usage in its clientele has led to accelerating revenue growth and net retention rates for the company. 

6. MercadoLibre Inc (MELI)

Rev Growth: 61%
YTD Return: 71%
Proj 1yr Fwd Rev Growth: 32%
EV/Fwd Rev: 13.6x

Summary: MercadoLibre is the leader in the Latin American e-commerce market, and is poised to continue to benefit from the increasing shift to online shopping in those underdeveloped nations.  The company received a massive boost from COVID across all its businesses, including tremendous growth in MercadoPago, the company’s digital payments segment.  MercadoLibre has a long runway for growth ahead of it as the top e-commerce and fintech company in a developing region.

7. Pinterest Inc (PINS)

Rev Growth: 4%
YTD Return: 96%
Proj 1yr Fwd Rev Growth: 33%
EV/Fwd Rev: 13.9x

Summary: Pinterest stock soared after its Q2 earnings report, as management predicted a return to +30% YoY growth levels.  Pinterest has a golden opportunity to accelerate its growth by increasing monetization per-user, particularly internationally.  As advertisers around the globe gradually ramp up their spending again, Pinterest is positioned to be one of the main beneficiaries.

8. Tesla Inc (TSLA)

Rev Growth: -5%
YTD Return: 406%
Proj 1yr Fwd Rev Growth: 42%
EV/Fwd Rev: 13.4x

Summary: A list of the top momentum stocks would not be complete without Tesla.  Tesla is a company with massive potential for growth ahead of it as it attempts to revolutionize the future of the transportation industry.  The top auto companies in the world are all chasing Tesla to catch up to its EV leadership status and the company continues to widen its lead with its proprietary innovation.       

9. Penn National Gaming Inc (PENN)

Rev Growth: -77%
YTD Return: 186%
Proj 1yr Fwd Rev Growth: 39%
EV/Fwd Rev: 3.3x

Summary: Penn Gaming has a tremendous opportunity to become a dominant player in the rapidly growing sports betting industry.  Newly acquired Barstool Sports will be the main driver of this growth, as the company’s social media following allows Penn to digitally reach millions of potential customers.  In its launch last Friday (9/18), the Barstool Sportsbook app was the most downloaded sports app in the US, even as the app is only available for use in 1 state (PA).  I expect Penn will continue to leverage the Barstool brand to acquire a dominant position in the industry, making it significantly undervalued in comparison to its peers.      

Outside Looking In: ETSY, NET, ZS, SNAP

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We are starting out with 9 stocks to include in this portfolio, a number that may change based off conviction and new opportunities.  There will be a new tab for monitoring the Momentum Portfolio next to the Active Portfolio moving forward.       

I will be covering the list of the top momentum stocks in depth and releasing an updated report each month.  Businesses and industries are always changing and new opportunities emerge — my goal is to identify them and bring these to your attention.

The portfolio may change at any time due to a change in fundamentals, technical strength, new opportunities for inclusion on the list, etc.  In the coming weeks, I will be releasing in depth reports on each stock included in the momentum portfolio. 

Knox and I will also be working together to provide entries/exits in the names included. Please find me on the forum for any questions or comments on this report.

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