Top Picks 2017: Arista Networks

01/20/2017 7:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

I think growth stocks, which really haven’t done too much since mid-2014, could get a spark in 2017 as economic growth accelerates, suggests Mike Cintolo, Cabot Top Ten Trader.

My Top Pick for growth investors in 2017 is Arista Networks (ANET), which in many ways looks like the next Cisco (CSCO) — the company was built from the ground up to deal with the realities of the new networking paradigm.

It has an expertise in cloud computing and data center switching technologies, which is helping it to consistently grab market share from legacy players that don’t have the cheaper, better, and faster offerings of Arista.

Indeed, in the high-speed data center switching market, Arista’s market share is up to 15% (from 7% three years ago), while Cisco’s is now 53% (down from 71% three years ago).

And there’s every sign that trend will continue in the quarters and years ahead.

Growth-wise, we love Arista’s solid sales and earnings growth going back for years—sales have risen, 35%, 37% and 33% during the past three quarters, while earnings growth accelerated from 36% to 37% to 41%. And after-tax profit margins of 20% or so reveal a very healthy business.

The only hitch here is litigation that’s ongoing with Cisco, who believes Arista is infringing on some of its patents.

However, late in 2016, Arista got two pieces of good news on that front, one from an import panel and one from a jury, both of which pushed the stock higher.

Analysts had been expecting higher costs and some possible disruptions, but as the litigation worry fades, growth expectations are moving higher.

Best of all, long-term, it looks like ANET has just emerged from a big, two-year, post-IPO base, with shares finally topping their 2014 high in late-November.

As companies open up their wallets next year, I think Arista’s bottom line could surprise on the upside, attracting more and more big investors (437 now own shares, versus 318 a year ago) and driving the stock higher.

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Editor's Note: Mike Cintolo was the #1 performer among the 80 Top Picks in last year's report. His pick, Nvida (NVDA),  rose 219%. He now says, "Much of the fundamental factors I wrote about a year ago came true, creating a wave of buying demand. Today, though, I think NVDA is near a meaningful top. 

"Fundamentally, growth looks great, and I'm not claiming the stock is set to crash. But my guess is that after a huge run last year, the stock needs a prolonged rest period. If you have a big profit, there's nothing wrong with hanging onto a small position, but I think there will be better stocks to own in 2017."

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