Generally speaking, investors want to own a piece of companies with real growth prospects and proven staying power. If they do, stocks' prices will eventually take care of themselves. Conversely, chasing a hot stock simply because it's hot is rarely a great idea. When unsupported rallies take a turn for the worse, the turns can become mighty painful.
There are cases, however, where a red-hot stock rally really is an indication of the company's underlying strength. At the very least, these stocks are worth a closer look. Here's a rundown of three such recently hot prospects you might want to consider for your portfolio.
1. Nvidia
It would be easy to assume the worst of chipmaker Nvidia (NVDA 6.18%) right now. Not only are the warning bells of a semiconductor supply crisis still ringing, but macroeconomic weakness tends to take an exaggerated toll on the technology sector. Revenue for its fiscal 2023 third quarter (ended Oct. 30) dropped 17%, and the top line for its recently ended Q4 is projected to fall over 21%. Sales for the quarter currently underway are expected to slide even more.
And yet, the stock's up nearly 50% over the past month, and still steaming higher.
Why the discrepancy? Two things.
First, much of the recent rally is related to the overzealous selling seen in 2022. The market's just correcting its mistake. Second, investors are seeing the bigger picture, recognizing Nvidia's longer-term potential is incredible despite the current turbulence.
It's easy to overlook, but this company isn't just making graphics cards for video gamers anymore. Data center processors are its biggest business now, and most of its data center offerings are artificial intelligence (AI) computing platforms. That's a very resilient, high-growth arena. Precedence Research predicts the AI hardware market will grow at an average annualized pace of nearly 27% through 2030. Market research outfit Omdia estimates that around 80% of the world's artificial intelligence processors are already made by Nvidia, so it's clearly got the right stuff to help hold onto this dominant degree of market share.
2. Tapestry
It's curious. Consumers are seemingly losing interest in expensive fashion labels, while appreciation for value and quality is growing. Traffic at mall-based department stores also continues to wane as the world finds other, more cost-effective and efficient means of shopping. The shift seemingly works against luxury clothing and accessory specialists like Tapestry (TPR 1.68%), which owns brands such as Coach, Kate Spade, and Stuart Weitzman.
Yet it continues to persevere. While initially adversely impacted by the COVID-19 pandemic, sales for the fiscal year ending in mid-2021 were up an impressive 16%. They grew the same amount for the next 12 months. Revenue is on pace to roll in a little below last year's top line for fiscal 2023 ending in June, but it is then predicted to accelerate again. Oh, and the company is increasingly profitable despite stiff inflation and a wobbly economy.
The explanation for this unlikely success is simple enough: This isn't your mother's (or your grandmother's) Coach and Kate Spade.
It's admittedly so subtle that it's difficult to see. This company, however, is truly connecting with consumers willing and able to spend a bit more than average for access to luxury. It does a significant amount of repair and refurbishment business, for instance, appealing to the buyer that's also worried about the fashion business's impact on the environment. At the same time, Tapestry's management understands its current core customers -- Gen-Z -- are looking to fashion as an expression of their individual style as much as they're looking for affordable luxury.
And yes, it all makes a difference. While Goldman Sachs concedes the average consumer is strapped right now, the investment bank's researchers suggest shoppers are more likely to spend less on basic goods like denim so they can continue to purchase higher-end handbags.
3. SolarEdge Technologies
Finally, add SolarEdge Technologies (SEDG 2.81%) to your list of red-hot stocks that may not be slowing down anytime soon. Its shares notched a 46% gain in the past three months, including a 13% advance over just the past month.
If you're not familiar, SolarEdge makes power inverters for solar panels. The solar panels collect the sun's electricity-producing photons, and inverters like the ones made by SolarEdge convert them into the usable AC electricity being piped to your home's light fixtures and wall sockets. As it turns out, while they're generally efficient enough, poorly conceived inverters have been as big of hurdle to mainstreaming solar power as relatively inefficient panels were at one point. Not only can SolarEdge's inverters be easily managed with an app, but they also integrate nicely with solar's common add-ons like EV chargers and battery-based power storage.
There's never been a better time to be in the business, either. New legislation turned into federal law in the middle of last year boosts the industry in a big way. Namely, the Defense Production Act encourages more domestic production of solar panels, while the Inflation Reduction Act offers generous tax credits for all facets of new solar power system installations. Much of the rest of the world is taking similar stimulative measures as well.
These tailwinds are expected to make a major impact, too. The International Energy Agency indicates the planet's annual pace of solar panel installations will quadruple between 2022 and 2030. This market growth is a key reason SolarEdge Technologies' top line is expected to have grown by nearly 60% last year, and will likely rise another 30% this year.
