Who’d have ever thought, years ago, that United Airlines (UAL) would get booted out of the Nasdaq 100?
Heck, even six months ago, you might not have believed it. But here we are. UAL is no longer among the 100 “largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization,” as Nasdaq defines the index.
How did this happen? That’s no mystery to those of us who follow the financial news, as airlines have captured headlines throughout the COVID-19 pandemic. I myself have written in May and again in June about serious fundamental problems with airline stocks. These problems may prove harder to solve than simply getting back into the skies.
On the flip side of the coin, Nasdaq’s replacement for UAL, DocuSign (DOCU), is an A-rated “Strong Buy” in my Portfolio Grader.
But, again, who’d have expected an electronic signature company to hit the Nasdaq 100?
Well, those of us who knew to pay attention.
From my weekly scan of the markets with Portfolio Grader, which is where I start with all my stock picks, I spotted DOCU as a Strong Buy for my Growth Investor Buy List on May 22.
DocuSign’s e-signature technology has been around since 2003. The trend is what’s moving us away from glitchy fax lines, confusing and error-prone copier/scanners, and the expensive maintenance this all requires.
Through DocuSign’s cloud-based platform, companies can develop, upload and send agreements to all stakeholders for electronic signatures. The agreements can be approved on practically all devices and from nearly anywhere in the world. In fact, DocuSign has more than 500,000 customers and millions of users in more than 180 countries.
Consider this: 18 of the top 20 global pharmaceutical companies, 10 of the top 15 global financial services companies and seven of the top 10 global tech companies all utilize DocuSign’s technology. In addition, 800 federal, state and local government agencies utilize the company’s platform.
So, when you dig a little deeper, you realize that DOCU is just the kind of stock that ranks among “today’s modern day industrials,” which the Nasdaq 100 was designed to capture.
And I bet every single one of DocuSign’s clients is happy to be one, given the recent stay-at-home orders and explosion of e-commerce.
Wall Street analysts certainly noticed. Seeing that they’d hiked their first-quarter earnings forecasts for DOCU by 25% in the two months before my buy alert, I figured it was headed for an earnings beat – its third in a row.
That’s just what happened when DOCU reported on June 4.
In DocuSign’s first quarter in fiscal year 2021, revenue soared 39% year-over-year to $297 million, exceeding forecasts for $281.12 million. Subscription revenue accounted for $280.9 million, which also represented a 39% year-over-year increase. Total billings jumped 59% year-over-year to $342.1 million.
DocuSign also reported that first-quarter earnings per share surged 71.4% year-over-year to $0.12, up from $0.07 per share in the first quarter of 2020. The analyst community was expecting earnings of $0.10 per share, so DocuSign posted a 20% earnings surprise. These are all the kinds of stats I like to see before making any of my growth stock recommendations.
In the afterglow, DOCU has jumped 16.5% to a market cap of $30 billion. (All the while, UAL has plummeted to $11 billion. The two stocks have, essentially, swapped places from where each stood even six months ago.)
And yet, DocuSign really never got much attention prior to this inclusion in the Nasdaq 100. If this is your first time hearing about it, too, then you might be wondering where to go with DOCU from here?
It’s not necessarily that you want to turn your portfolio into a replica of the Nasdaq 100, or any other index, for that matter. Keep in mind, indices rely on arbitrary criteria, like market cap – which means there’s going to be some “dead weight.” Nasdaq 100 investors just learned this with United Airlines, right?
But there are plenty of other examples, too…
Sticking with the Nasdaq 100, that index has plenty of Strong Buys like Microsoft (MSFT) or Apple (AAPL). However, it also has Starbucks (SBUX), which is currently 23% off its highs, closing stores (permanently) left and right, and whose Report Card currently looks like this:
The fact is, SBUX (like UAL) hasn’t made the grade for a while. That’s why I don’t believe in passive investing; I do the homework, and I buy the highest quality stocks I can find.
Certainly, this is no time to settle for lackluster fundamentals, as we saw here today. I believe that if you invest the way I recommend in my services like Growth Investor, then you will be very, very glad you did in the weeks and months ahead.
Now, as for DOCU, the fundamental outlook is just as strong. Looking forward to the second quarter in fiscal year 2021, DocuSign expects total revenue between $316 million and $320 million. That’s well above analysts’ current projections for total second-quarter revenue of $302.98 million. Full-year revenue is forecast to be between $1.31 billion and $1.32 billion.
I do have to advise you that DOCU is currently above my buy-below price. But lately I’ve kept my subscribers very busy with plenty other buy alerts (and sell alerts, too!) Including DOCU, I’ve added three new stocks to my Growth Investor Buy List in the past month alone.