If Wall Street offers one guarantee, it's unpredictability over the short run. Since this decade began, the major indexes have been whipsawed between bear and bull markets, with the Nasdaq 100 vacillating the most. The Nasdaq 100 is an index comprised of the 100 largest nonfinancial companies listed on the Nasdaq exchange.
After losing 33% of its value during the 2022 bear market, the Nasdaq 100 has powered higher by nearly 35% year to date, as of the closing bell on Sept. 29, 2023. However, it remains more than 11% below its record-closing high, set just days prior to the close of 2021.
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While a double-digit decline in the Nasdaq 100 over the past 21 months might sound disappointing to some, it represents an opportunity to pounce for long-term investors. Keeping in mind that not every Nasdaq 100 component is necessarily going to be a winner, what follows are two surefire buys in October, as well as one highflier to avoid like the plague.
Nasdaq 100 stock No. 1 that's a surefire buy in October: Starbucks
The first Nasdaq 100 stock that stands out as a no-brainer buy in October is none other than coffee giant Starbucks (SBUX +0.30%).
Arguably the biggest concern for the global coffee chain has been the impacts associated with the COVID-19 pandemic. Store closures, especially in China, presented a significant challenge to Starbucks' near-term growth.
Even with China abandoning its controversial zero-COVID mitigation strategy, the world's No. 2 economy has been growing at a slower pace than anticipated. Thankfully, the worst of the pandemic looks to be in the rearview mirror, which removes a significant growth overhang for Starbucks.
NASDAQ: SBUX
Key Data Points
One reason Starbucks makes for a phenomenal buy is the exceptional loyalty of its customer base. Regardless of the level of product or labor inflation thrown its way, Starbucks has, historically, never had any trouble passing along price hikes to its customers that outweigh its own rising expenses. More often than not, the average ticket size is climbing.
Starbucks' ever-growing Rewards members are another reason for its seemingly sustained double-digit sales growth. As of July 2, 2023 (the end of the company's third fiscal quarter), it had 31.4 million active Rewards members.
In exchange for an occasional free drink or food item, Rewards members tend to spend more. Even more important, Rewards members are more likely to use mobile ordering or store their credit card information on their phones, which makes lines move faster and helps the company's stores operate more efficiently.
Additionally, Starbucks has done a phenomenal job of adapting since the COVID-19 pandemic began. It's completely redesigned its drive-thru ordering boards to include video and promote high-margin food and drink pairings. It's also updated its food offerings to cater more to the lunch crowd. The key point here is that Starbucks is making smart moves to sustain its double-digit sales growth while expanding its operating margin.
The whipped cream on the proverbial frappuccino for Starbucks is that its shares are trading at a forward price-to-earnings (P/E) ratio of 22. Based on where it closed out the previous 10 years, this would represent the company's cheapest forward P/E in at least a decade.
NASDAQ: AZN
Key Data Points
Nasdaq 100 stock No. 2 that's a surefire buy in October: AstraZeneca
A second Nasdaq 100 stock that's a surefire buy in the month of October is pharmaceutical company AstraZeneca (AZN +0.00%). Although the company was briefly in the spotlight when COVID-19 vaccines were initially rolled out, it's three of the company's other areas of focus that can power big gains for shareholders.
AstraZeneca's COVID-19 vaccine ultimately proved far less effective than the vaccines developed by Pfizer/BioNTech and Moderna, which has led to big declines in the company's vaccine sales on a year-over-year basis. Nevertheless, it's generating double-digit constant-currency sales growth from its oncology, cardiovascular, and rare-disease segments.
Four blockbusters are fueling superb growth in AstraZeneca's oncology segment, including Tagrisso, Imfinzi, Lynparza, and Calquence. These novel cancer drugs, which have all increased their sales by at least 10% in the first half of 2023 on a currency-neutral basis, are responsible for a third of AstraZeneca's total first-half sales.
Meanwhile, next-generation type 2 diabetes drug Farxiga is powering the company's cardiovascular segment. Farxiga has a chance to surpass Tagrisso ($2.92 billion in first-half sales) as the company's top-selling drug this year, with first-half sales rocketing higher by 39% on a constant-currency basis to $2.8 billion, through June 30, 2023.
Over the long run, AstraZeneca's biggest catalyst might be its rare-disease drug segment. In 2021, the company acquired Alexion Pharmaceuticals, which specifically focuses on ultra-rare diseases. While there are added risks associated with drug development for very small pools of patients, the reward for an approved therapy is little or no competition, as well as virtually no pushback on list prices from health insurers.
As an added bonus, healthcare stocks are highly defensive. Regardless of what happens with the U.S. economy, patients taking cancer drugs, cardiovascular therapies, and so on, will continue to need these drugs in the future. It means AstraZeneca can count on predictable cash flow in any economic climate.
Although AstraZeneca's forward P/E ratio of 16 isn't the cheapest in the pharmaceutical space, its potential for sustained double-digit sales and earnings growth makes its forward P/E premium well worth it.
Image source: Getty Images.
The Nasdaq 100 stock to avoid like the plague in October: Nvidia
As noted, not every Nasdaq 100 stock is necessarily going to be a winner from this point forward. With considerable headwinds mounting, semiconductor solutions specialist Nvidia (NVDA 2.94%) is the stock to avoid like the plague in October.
Nvidia has been one of the top-performing megacap stocks in 2023, thanks to its role in the artificial intelligence (AI) revolution. It accounts for around 90% of the graphics processing units (GPUs) being used in high-compute data centers.
When Nvidia's fiscal 2024 began (Jan. 30, 2023), Wall Street was expecting the company to deliver high-single-digit or perhaps low-double-digit sales growth. After two quarters, Wall Street is projecting sales will double, with a further 49% sales increase forecast in fiscal 2025. Despite these upward revenue revisions, there seem to be clear warning signs that Nvidia could struggle in the quarters that lie ahead.
NASDAQ: NVDA
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For example, two weeks ago, I pointed to the ironic reason Nvidia could massively underperform in 2024: GPU production expansion. Almost the entirety of the company's sales growth over the past two quarters has come from exceptional pricing power amid scarcity for its AI-powered A100 and H100 GPUs. As chip-fab company Taiwan Semiconductor Manufacturing boosts its chip on wafer on substrate capacity, this scarcity will wane... and so will Nvidia's superior pricing power.
Nvidia isn't going to be the only game in town, either. Advanced Micro Devices debuted its MI300X AI-powered GPU for data centers in June and intends to roll it out to select customers later this year, with a full-scale rollout expected in 2024. Meanwhile, Intel is bringing its Falcon Shores GPU to market as a direct competitor to Nvidia beginning in 2025. The scarcity that drove AI-GPU's prices substantially higher for Nvidia will soon be gone.
There's also no feasible way to justify Nvidia's valuation after it has tripled in price since the year began. Although its forward P/E of 26 is reasonable, given its phenomenal growth rate, the company is trading at a nosebleed 91x trailing-12-month cash flow and nearly 20x Wall Street's forecast sales for fiscal 2024. Historically, massive market-cap gains of the magnitude Nvidia has seen this year are virtually impossible to hold.
The final straw is that every next-big-thing trend over the past 30 years has initially gone through a bubble phase, and I don't expect AI to be the exception. This doesn't mean AI stocks won't be successful over the long run. Rather, it means the technology needs time to mature. If AI enterprise demand fails to meet lofty investor expectations, Nvidia's stock will pay the price.
