Look, I am still worried about a sell-off. I don't want to be complacent.
So, let me give you a game plan for the next day like Friday's session.
The thing about sell-offs is that the best stocks tend to go down the hardest. But, and this is a big but, they're also the first to come roaring back -- something, by the way, that Bob Lang has stressed over and over again on this site.
Why do the best stocks go down the hardest in a major sell-off? Because of doctrine -- the doctrine that says never let your gains turn into losses. The stocks that I'm going to highlight here are all up magnificently. For professional money managers, there's nothing worse than giving up these gains.
Plus, it's September, so if you're a hedge fund manager who's lucky enough to own some big winners, why not take some profits and coast through the rest of the year?
But why do these winners also bounce back the hardest? Because of what caused them to run in the first place. They didn't need the Fed's help to arrive at their lofty destinations. They've defied the naysayers and they're armed with secular growth stories. That means they aren't going to be harmed by a quarter -point, or even a half-point, rate hike. Otherwise they never would've gotten this high.
So which winners are likely to get hammered and then rebound following a rate hike, and how did I find them? First, I took the list of the best-performing stocks in the S&P 500. Then I did the same for the Nasdaq. Then I added in a scan of the best IPOs.
Next, I took out any stocks that were on the list because of takeovers, since those are one and done. Then I cut the pure commodity stocks since they usually got on the list because they were down so much coming into the year that their percentage gains simply reflect the fact that they were able to rebound from what many viewed as a terminal condition. I also eliminated any gold stocks, because they often depend on the desire of central banks worldwide to keep rates low. That's no longer what's in play in the United States.
What does that leave us with? Primarily with a handful of stocks that are in the semiconductor business and largely connected with the Internet of things, with Apple (AAPL) (which is a part of my Action Alerts PLUS charitable trust) being either a small part or no real part of their existence -- an important criteria given suspicions that the iPhone 7 won't be a strong performer, suspicions I want to make clear I do not share. In fact, I think it's going to be very popular. Other stocks represent value versus where they were because they turned out to be doing better than people thought. Finally, there are companies that have simply built better mousetraps.
Because I'm an inveterate tease I'm going to start from the bottom up. Here are my top 10 fall-and-rise stories for the 10 days leading up to and immediately following next week's Federal Reserve meeting, where I expect the governors to raise rates. Remember, even if they don't -- and most people think they won't- -- I believe these stocks can work because I expect them to be hammered on rate hike fears going into the meeting. If the Fed decides not to tighten, these stocks will still come back hard.
No. 10 on my comeback list is Micron (MU) . Here's a company that makes two kinds of basic commodity chips, DRAMs and flash memory, which chiefly go into personal computers but also have a ton of other applications. Micron, like Western Digital (WDC) , which owns Sandisk, has had some great success of late in the flash business as competitors have dropped out and new product cycles have kicked in. We know when HP Inc. (HPQ) reported, it talked about a shortage in both commodities. Micron is a winner in that scenario.
Qualcomm (QCOM) is next. After a terrific run year to date, this wireless technology stock had pulled back because it lost some Apple business to Intel (INTC) and because it had been fighting with some Chinese communications companies. But those disputes have been resolved and the negative Apple news is now water under the bridge.
Then we have two medical device companies that have both produced the proverbial better mousetraps. There is Edwards Lifesciences (EW) , with its revolutionary device that lets surgeons perform a heart valve replacement without cracking open the patient's chest cavity. I think we'll look back and wonder how the heck we ever thought to do it the old way, via open heart surgery. Then there's Intuitive Surgical (ISRG) , with its Da Vinci surgical robot and its razor/razorblade business model, which continues to defy the critics and put up better-than-expected numbers.
Sixth, lots of people thought that Symantec (SYMC) had been left behind by other, better cyber-security plays. But then in January, it shelled out $4.65 billion to buy Blue Coat, a private-equity-led security firm that blocks out threatening and inappropriate websites. It was a two-fer because Symantec, which had been poorly led by all admissions, got Blue Coat's CEO Greg Clark to take the helm. The stock hasn't looked back since and it's a natural bounce-back candidate after the Fed-induced sell-off I'm expecting runs its course.
Here's an odd one: Microchip Technology (MCHP) . It's another basic building block semiconductor name that's come into its own. Microchip is on fire because it's viewed as a terrific way to play both the Internet of things and potential takeovers in the sector. We know the consolidation is rife here, and you can win either way.
Next, we're not fans of retail by any means, but we do like the suppliers that have come into back-to-school season with lean inventories, namely PVH (PVH) , the maker of Calvin Klein and Tommy Hilfiger products, which is enjoying a European comeback of stunning proportions and could be a big winner in what's regarded as a pretty non-promotional environment. Same with Urban Outfitters (URBN) , the retailer that scored big with fashion even though it's in the mall. Urban's namesake flagship store had been in the dumps for years. No longer. When these kinds of stories get legs, they're not easily stopped by a couple of Federal Reserve hikes.
Second, one of the best-performing groups this year is the semiconductor equipment industry, which is what happens when chipmakers have under-invested in new equipment and their end markets get stronger. I happen to be partial to Lam Research (LRCX) , which is trying to buy KLA-Tencor (KLAC) , but Applied Materials (AMAT) is really the star of the show. Of all the stocks on this list, Applied Materials has had the most upside surprises in a row. That should continue as this company was supposed to be left for dead when its deal with Tokyo Electron dissolved over antitrust concerns a little more than a year ago.
Finally, one more semiconductor, the hottest of all because it participates in both the Internet of things, principally autos, and also gaming chips: NVIDIA (NVDA) . It takes a big market-wide sell-off to rein in a horse like NVIDIA, but that won't last long -- too much momentum in both its end markets. This one has the most momentum of any stock in the Nasdaq or the S&P 500.
Oh, and as promised, two IPO bonus picks: Twilio (TWLO) and Acacia Communications (ACIA) . We had Twilio on the show Friday and it's clear that its software platform, which powers communications for Netflix (NFLX) , Nordstrom (JWN) , Facebook's (FB) WhatsApp, AirBNB and Uber, has the best client list on Earth and these companies can't live without them, which is why Twilio is able to take a cut from every transaction. Acacia is all about the best communications equipment. Its stock is expensive as all get out and has amazing momentum, which is what you're looking for after a Fed-induced trashing, as those are the ones that bounce back the hardest. But first they have to come down.
So, I've waited for a supremely up day to tell you what I think could happen when -- not if -- but when the Federal Reserve raises interest rates. When it occurs, expect the biggest winners to get hit hard and I need you to be ready to buy them when the smoke clears. You now have my buy list of trampoline stocks for the last third of 2016.