Datadog stock, Netflix (NFLX), Nasdaq (NDAQ), Horizon Therapeutics (HZNP) and Palo Alto Networks (PANW) are five top stocks to watch this week, with most near buy points while the market overall continues to struggle.
All five stocks have rising relative strength lines. Most of their RS lines are at or near highs. The exception is Netflix, whose RS line is rising bullishly but well below highs.
With the market in correction, investors should focus on stocks with high RS lines. A rising RS line means that a stock is outperforming the S&P 500 index. It is the blue line in the charts shown.
Overall, it may be a good time to add stocks to watchlists. Any buys should be small, with overall exposure light, given uncertain market conditions.
Stock Market Rally: Watch The RS Line
The relative strength line is a quick way to spot winners in any market — up or down.
The Relative Strength At New High stocks list is a great place to look for quality names with strong RS lines. IBD’s stock research platform MarketSmith has a screening tool that identifies stocks with RS lines making new highs.
In addition, the best growth stocks have an IBD Composite Rating of 90 or better, out of a best-possible 99.
All the stocks to watch this week meet that bar. Netflix leads with a superior Composite Rating of 97. It’s followed by Palo Alto Networks with a 95, Horizon stock with a 94, Datadog with a 93, and Nasdaq with a 92. The Composite Rating combines five separate proprietary IBD ratings, based on key fundamental and technical criteria, into one easy-to-use score.
After Datadog earnings crushed views in early August, the provider of software tools for cloud monitoring and security surged to record highs. It’s in range from support off the 50-day line, offering a buy point around 135.45, according to MarketSmith chart analysis. The 10% buy range falls just a penny short of 149.
Datadog’s rebound has hoisted shares above the 10-day moving average and also above the 21-day line. The RS line has rallied since early May to highs.
New York City-based Datadog earns a solid IBD Relative Strength Rating of 92. That means it has outperformed 92% of all stocks over the past 12 months. However, DDOG shows a lackluster EPS Rating of 44 out of a best-possible 99.
On an adjusted per-share basis, Datadog turned a profit for the first time in 2020 as sales leapt 66%. In all of 2021, Wall Street expects Datadog earnings to grow 26% as sales rise 56%, according to FactSet.
NDAQ stock also provides an entry from a bounce off the 10-week line. A move above 197.33, marking Thursday’s high, would get the stock above a short trend line while still being close to the 50-day/10-week lines. After next week, Nasdaq stock could have a flat base with a 199.98 buy point.
The operator of stock exchanges, too, raced to highs after earnings beat views in July. Its RS line continues to rise bullishly despite the recent pullback to the 10-week average line.
Nasdaq stock owns a solid RS Rating of 88 and an equally solid EPS Rating of 86. In 2020, the company got a huge boost from the pandemic, which led to a spike in stock market trading and boosted earnings 24%. Analysts expect Nasdaq earnings to rise a more subdued 18% in 2021 as revenue grows 17%.
Horizon Therapeutics Stock
Shares are just 2% below a 111.80 buy point, after finding support at the 50-day and 10-week lines on Friday. Horizon stock pegged a fresh high Thursday but closed at lows, before Friday’s rebound.
In early August, Horizon stock gapped up 8% to a high of 11.33 on an earnings beat. The biopharmaceutical company has been relatively rangebound since, while its RS line continues to climb.
Horizon Therapeutics has an 86 RS Rating and a 74 EPS Rating. Earnings doubled in 2020 amid the pandemic. But it’s poised for slower growth in 2021, after a big EPS decline in Q1. For the full year, analysts expect Horizon earnings to rise just 19% while revenue grows 41%.
Palo Alto Stock
Shares of the cybersecurity giant are far extended from their latest breakout, past 386.82, meaning that PANW stock is not in buy range.
However, the RS line for Palo Alto stock has bolted to highs, making this software stock one to watch. The RS line is lackluster in the medium term.
Palo Alto Networks has a 93 RS Rating and 80 EPS Rating. Earnings boomed 26% in fiscal 2021, as the cybersecurity firm benefited from learn-at-home and work-from-home trends. Analysts expect Palo Alto Networks earnings to climb a more modest 18% in 2022 as sales rise 25%.
Shares of the streaming giant are in buy range from a breakout past 593.39. Investors could use 615.70, just above Netflix stock’s mini-consolidation, or high handle, as an alternate entry.
The RS line for Netflix stock is starting to look sharp again after a slide. It rallied nicely for much of 2020.
Netflix stock bears a mediocre 75 RS Rating but an unbeatable 99 EPS Rating. The video streaming pioneer came under a cloud as rivals Amazon (AMZN) and Disney (DIS) emerged. Both earnings and sales growth faltered in 2020. But analysts expect Netflix earnings to jump 54% in all of 2021 as sales climb 19%.
Netflix also is branching out, buying a video game developer last week and launching some games in Europe.
Find Aparna Narayanan on Twitter at @IBD_Aparna.
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