Why You Should Expect a Narrower Market

It’s been a wild two days for the stock market. Yesterday, the U.S. Commerce Department reported that GDP growth shrank 4.8% for the first quarter, well below estimates for negative GDP growth of 3.5%. The last time the GDP saw a contraction was in the first quarter of 2014, where GDP growth declined 1.1%.

However, the stock market rallied.

The NASDAQ ended the day up 3.6%, and the S&P 500 and Dow closed up 2.6% and 2.2%, respectively. This was largely thanks to positive results from Gilead Sciences’ (GILD) trial for remdesivir. The drug is showing good promise as a treatment for the coronavirus, so Wall Street was willing to look past the economic data.

The good news was that yesterday’s rally was more broad-based. The Russell 2000 was also on fire, up 4.8%. So, the Russell 2000 has now posted gains of 1% or more for five-straight days. This has only happened three times in the past 40 years. And, historically, the Russell 2000 follows up this performance by climbing to even higher levels in the following months.

The bad news is there were a lot of stocks rallying that I wouldn’t touch with a 10-foot pole. Wall Street was hyping stocks with cash flow problems and no earnings. Let me give you two examples…

The first is AMC Entertainment Holdings (AMC), which we talked about in the beginning of April. As you may recall, Adam Aron, the CEO of AMC, said that the company isn’t seeing a “penny of revenue.” So, earnings and revenue are going to take big hit in the coming quarter. Currently, analysts are expecting a first-quarter earnings loss of $1.44 per share, compared to a loss of $1.25 in the first quarter of 2019. Sales are estimated to decline 17.80% year-over-year to $981.5 million, versus sales of $1.19 billion a year ago.

In addition, the company took on $500 million in debt to help keep it afloat. And it doesn’t help that California might not allow AMC to reopen its theatres this year or that China won’t play Trolls World Tour, as it violates the Chinese ethics standard.

And yet, the stock surged 25.4% yesterday.

And then there’s Virgin Galactic Holdings, Inc. (SPCE), a space travel company. For the first quarter, the analyst community estimates an earnings loss of $0.15 per share on $320,000 in sales. Clearly, it has no earnings and its sales are very weak. You can certainly book a flight to go to space, but given the current economic environment, people aren’t very interested in space travel right now. However, the stock still climbed 3.8%.

Wall Street might be hyping up low-quality stocks now, but the rising tide will not continue to lift all boats. This is why now, more than ever, it’s crucial to be invested in the fundamentally superior stocks. These stocks are set to do well regardless of where the stock market turns next.

Case in point: AudioCodes Ltd. (AUDC).

The voice over IP (VoIP) and data networking company saw its stock soar 25% after topping analysts’ revenue and earnings forecasts for the first quarter. During the first quarter, revenue rose 11.7% year-over-year to $52 million, up from $46.58 million in the same quarter a year ago. The consensus estimate called for revenue of $50.85 million. AudioCodes noted that service revenues accounted for $17.7 million, or a 25.2% year-over-year increase.

First-quarter earnings soared 41.8% year-over-year to $7.8 million, or $0.25 per share, compared to earnings of $5.5 million, or $0.18 per share, in the first quarter of 2019. Analysts were expecting earnings of $0.23 per share, so AudioCodes posted an 8.7% earnings surprise.

AudioCodes noted that the coronavirus outbreak impacted its hardware products manufacturing in China during the quarter. However, the company bounced back quickly and was still able to fulfill all of its product orders. As a result, AudioCodes expects to still meet its financial goals for the second quarter and fiscal year 2020.

The stock hit a new 52-week high of $31.49 yesterday and is up 33% since April 24. And it’s up 20% year-to-date, while the S&P 500 is down 10%.

In January 2019, I added AUDC to my Platinum Growth Club Model Portfolio, as it’s had a strong history of growing earnings and sales. It has also beat earnings estimates every quarter since 2017. AUDC is now sitting pretty with a 170% return on the Model Portfolio.

So far, earnings have been strong across the board for my services. On Tuesday, one of my Growth Investor companies, DexCom, Inc. (DXCM), reported a 214.3% first-quarter earnings surprise. Since then, the stock has soared 11.9% to a new 52-week high of $350.97 today. On my Growth Investor Buy List, it holds a 159% return.

And Paycom Software (PAYC), another stock on my Platinum Growth Club Model Portfolio, surged 13% yesterday following its first-quarter earnings beat. It is up 164% on the Model Portfolio.

All that said, the reality is there’s still some froth in the market. It’s going to get bumpy, as we saw today. (I just recorded a brand-new Special Market Podcast for my subscribers to share my latest thoughts following today’s pullback. Sign up here so you can listen to it now.) So, investors are also going to get more selective. For now, enjoy the market rallies as they come. But don’t get complacent and think it will last forever.

Be aware that when the dust settles, the stocks with the best earnings and guidance will emerge as the market leaders. And those are the stocks that we’ll continue to own.

Note: Besides my Model Portfolio, Platinum Growth Club also includes my VIP chats. (I’ve also been recording podcasts constantly in this crazy market for subscribers to Platinum Growth Club and ALL my services.)

In addition, you’ll have access to all the other services – Growth Investor, Breakthrough Stocks and Accelerated Profits, as well as the Power Portfolio 2020 my InvestorPlace colleague Matt McCall and I created. Sign on now to take part in our Open House and try Platinum Growth Club for 30 days, risk-free – at a steep discount.

Not only that, but your timing would be excellent for another reason. I recently published my newest special report, the Crisis Master Plan. So if you’re interested in smart diversification for a bear market, don’t wait. Go here for the details now.

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