These stocks are set to double, here’s why

Today’s market is driven by one of the most confusing dynamics seen in the last cycle; markets are hitting all-time highs while most stocks appear to be struggling to reach even their 52-week highs. Bond yields are rising on traders’ bets that the Fed’s interest rate cuts won’t come as soon as the market had already priced them in. But, after all, it is a bull market.

As has been the trend for the last two years, from 2020 to 2023, today’s hype and momentum is still focused on the world of technology stocks. Taking the last one in this space, whose performance you can measure by following the SPDR Technology Select Sector Fund NYSEARCA: XLK it has lagged the broader S&P 500 by as much as 22.5% over the past twelve months.

One of the most prominent examples of how much interest there is in the words “Artificial Intelligence” can be taken from the price action at NVIDIA NASDAQ:NVDA compared to the rest of the technology ETFs. Over the past year, NVIDIA stock has outperformed by 175.0% with a huge tear. You can see a more recent example in ARM NASDAQ: ARM, which also more than doubled this week. If your portfolio needs exposure to the next potential rally, you should read on.

What is happening?

The U.S. economy has moved away from its historical standards that typically follow the business cycle. Today there are two economies, whereas once the engine ran as if it were only one. You can spot this divergence by following the ISM Manufacturing and Services PMI indices, where a widening gap is putting traders – and the Fed – in a corner.

Over the past twelve months, US GDP (the size of the economy and therefore the market) has increased. However, the progress is not really coming from the manufacturing sector as the PMI index has been contracting for the last 12 months. Knowing this, you only have one place to run to: the services.

In contrast, the services PMI has provided expansionary data during the same period, which confirms that this is the only sector of the economy where you – and the bigwigs on Wall Street – are likely to find unexpected growth.

Having identified momentum in the tech space, here are the best candidates to see the next doubling. You may consider adding them to your “turnaround” watchlist by focusing specifically on business services technology stocks, which may be the ones that attract the attention of professional traders and money managers.

You may have heard about the massive rally underway Palantir Technologies NYSE:PLTR on their latest explosive earnings announcement; those shares nearly doubled in a single day in true Arm style. Even after that rally, markets still believe the ceiling is not reached. But more on that later.

Another noteworthy mention, for reasons that will become clear shortly, may be Spotify NYSE: POINTa stock flirting with its 52-week high prices and offering the highest earnings growth for the next twelve months as far as the group is concerned.

A story without numbers is a fairy tale and you are not here to invest in a pretty picture, so here are some numbers.

Break down the evidence

Two things you should keep in mind when translating the market’s message to find out where it wants certain stocks to move in the near future are earnings growth projections along with how much these future earnings are worth paying today.

On average, the Business Services (Technology-Oriented) sector is expected to grow its earnings per share by 34.0% over the next twelve months. This is your benchmark for finding positive outliers, putting the odds in your favor for another rally.

Now, how much are markets willing to pay for this future growth? You can take the forward P/E ratio to figure this out; its average today is 25.5x. Time to see who is the best candidate here, Palantir vs Spotify.

In Palantir’s case, analysts expect EPS to rise 31.2% over the next year, which is lower than the industry average, making it a bit difficult to justify its forward P/E of 60.5x. It appears that growth may already be priced into the stock price. Therefore, buying dip might be a more sensible approach to this story.

This leaves Spotify as the last worthy candidate. This stock is expected to grow its EPS by 48.3%, above the industry average and Palantir’s projections. This may be one reason why it trades at a forward P/E of 48.2x, which should be higher than Palantir, but at least represents an 89.0% premium to the industry.

You can mix and match the numbers and story as much as you want, but as you decide, keep in mind that the hype is after all the AI, so be quick in your considerations.

Before considering ARM, you’ll want to hear this.

MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and ARM wasn’t on the list.

While ARM currently has a “Moderate Buy” rating among analysts, top analysts believe these five stocks are better buys.

View the five stocks here