AI stocks Broadcom and Arista Networks lead this weekend's watch list of five names near buy points. In addition to AVGO and ANET, the list includes Costco Wholesale, Regeneron Pharmaceuticals, and Chinese gaming leader NetEase.
All five stocks feature flat bases, which indicates that they have held up well as the stock market corrected from its July peak, leaving them within striking distance of new entry points.
ANET is on the flagship IBD 50 list of leading growth stocks and part of the IBD Leaderboard portfolio of elite stocks.
As S&P 500 Slips, AI Stocks Hang Tough
The S&P 500 fell solidly on Friday for the second straight session, as a run at its 50-day moving average faltered. The S&P 500 lost momentum as the consumer price index for September showed that the Federal Reserve hasn't licked elevated inflation in core services. That's likely to mean higher interest rates for longer.
Yet a number of Fed officials said that further hikes of the federal funds rate may not be needed, thanks to the recent surge of the 10-year Treasury yield, which affects car loans and the 30-year fixed-rate mortgage. Still, the 10-year Treasury yield fell 15 basis points to 4.63% on the week, coming off nosebleed levels.
Meanwhile some AI stocks, including hardware plays like Nvidia, AVGO and ANET are managing to outperform the S&P 500. All three stocks have Relative Strength lines at or just off a 52-week high, according to MarketSmith. The RS line is the blue line in IBD charts that tracks its progress vs. the S&P 500.
That suggests these stocks could be poised to break out and lead the way higher, if market conditions improve. Be sure to read IBD's The Big Picture every day to stay in sync with the market direction and what it means for your trading decisions.
AVGO Stock
As earnings season shifts into high gear, Broadcom already has its fiscal Q3 results under its belt. Following the chipmaker's Aug. 31 report, Baird analyst Tristan Gerra raised his price target for AVGO stock to 1,000 from 900, saying that AI-related revenue now exceeds $1 billion, with generative AI investments providing most of Broadcom's growth.
A Sept. 21 report that Google, a major Broadcom customer, might insource AI chips as soon as 2027 briefly set AVGO shares back. But analysts downplayed the threat as a negotiation tactic. BofA noted that a similar scenario that played out with Apple earlier this year resulted in a multi-year contract renewal.
Broadcom is expected to close its acquisition of cloud computing software leader VMware in coming weeks.
On Friday, AVGO stock slipped 2.5% to 883.18, but shares closed up 4.5% for the week. AVGO stock briefly crested a 923.67 flat-base buy point on Friday morning, before closing lower. The official base is fairly short at eight weeks, but it really stretches back to late May, when AI stocks first exploded on the heels of blow-out Nvidia guidance.
ANET Stock
Arista sells computer network switches that speed up communications among racks of computer servers packed into "hyperscale" data centers. In 2022, Facebook-parent Meta Platforms accounted for 26% of Arista revenue, while Microsoft chipped in 16%.
Arista Q3 earnings are due Oct. 30. However, earlier news on Meta and Microsoft earnings and spending plans a week earlier could have an impact on ANET stock.
Analysts see ANET as being in great position to benefit from accelerating growth in cloud-based data-center networking thanks to generative AI. However, Arista got hit with an analyst downgrade to neutral from overweight on Wednesday. Piper Sandler kept a 190 price target, but said double-digit growth for 2024 is already priced in, while there's limited visibility into demand amid enterprise budget concerns.
ANET stock weathered the downgrade pretty well, closing the week down 2.15% to 189.85, finding support at the 50-day line ANET stock has a 198.70 flat-base buy point from a 6-week base.
COST Stock
The September CPI report showed that goods prices keep falling, and retail sales due out Tuesday at 8:30 a.m. could show consumer spending is losing its oomph amid high interest rates and a resumption of student-loan payments.
Yet Costco is defying those headwinds to growth. On Oct. 4, Costco reported that September sales rose 6% from a year ago. Same-store sales grew 4.5%, or 3.7% excluding gas and foreign exchange differentials.
Those results and strong traffic trends show that Costco is taking market share and that its defensive growth attributes are "worth" the price, Baird said. The firm kept a 600 price target and outperform rating for COST stock.
COST stock rose 1.7% to 566.84 last week. Costco has a 571.16 buy point from a flat base. The latest flat base is just eight weeks, but it's pretty much an extension of the long consolidation in Costco stock back to August 2022.
REGN Stock
Regeneron was featured as IBD Stock Of The Day on Friday in a story that highlighted the back-and-forth between bulls and bears over expectations for its eye-disease drug Eylea. The debate is focused on whether the FDA's recent approval of a higher-dose version of Eylea will reignite growth amid competition from Roche's Vabysmo drug and anticipated competition from biosimilars.
On Sept. 15, Argus analyst Jasper Hellweg hiked his REGN stock price target to 920 from 825, keeping a buy rating. He cited progress for REGN's drug pipeline, including recent FDA approval for Eylea and Veopoz, the first treatment for children and adults with Chaple disease, a rare genetic condition that affects the immune system.
REGN stock rose as high as 853.97 early Friday, briefly clearing an 847.50 flat-base buy point, before closing up a slim 0.1% at 839.63.
NTES Stock
NetEase, among the top-performing Chinese stocks, is already demonstrating a structural profit margin expansion and revenue should follow in the second half of 2023, JPMorgan said on Aug. 29.
That followed Q2 results that showed profit up 57% to $1.91 a share, but sales down 4% to $3.31 billion. The firm hiked its NTES stock price target to 125 from 120.
BofA noted that the Q2 revenue miss came in PC game revenue following the termination of NetEase's deal with Activision Blizzard. That slip "should not change the solid mobile game growth outlook and the improving margin trend," BofA said. The firm lifted its NTES target to 135 from 128, keeping a buy rating.
NTES stock slipped 1.6% to 105.50 on Friday, but closed up 4.5% on the week, retaking its 50-day moving average. NTES stock has a 110.82 flat-base buy point.
