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Investing, Stocks  | July 2, 2019

About a year ago, publishing software provider Adobe (ADBE) was consolidating in a flat base. Adobe stock formed a third-stage base, which basically meant the move it initiated in early 2017 was getting stale.

As a stock rises, it pauses to consolidate. Breakouts from the first two patterns are more likely to work than those from later consolidations. Adobe reacted predictably to the third-stage base. The stock broke out in late August, rose 5% and then fell apart.

Yet, constructive action followed. Adobe undercut the low of the previous base, which reset the base count at first stage. The stock corrected as much as 26% and then began to rise.

A breakout in strong volume came on June 19, a day after the company's earnings, and more emphatically the next day. The buy point was 291.80. Adobe is now trading in the 5% buy zone, which tops out at 306.39. That makes it today's pick for IBD 50 Stocks To Watch.

So the chart action looks fine, but what about the fundamentals?

Fundamentals For Software Provider

Current earnings grew 10% in each of the past two fiscal quarters. But that represents a decline from 40% or greater growth in the previous nine quarters. Revenue growth remained strong, up 25% in the past two quarters.

When it reported earnings on June 18, Adobe forecast current-quarter adjusted earnings of $1.95 a share on sales of $2.8 billion. That translates to year-over-year growth of 13% in earnings per share and 22% in sales.

The Street expects earnings to grow 16% in fiscal 2019 ending in November and then 25% in fiscal 2020. Analysts expect revenue to jump about 24% and 18% in fiscal 2019 and 2020.

The three-year growth rate for earnings and revenue is 45% and 24%, respectively.

Pretax margin stepped up to 39.6% in fiscal 2018, the best in at least nine years. Return on equity, a gauge of financial efficiency, was 37.8% in fiscal 2018, also the highest in at least nine years. It was also well above the 17% or higher historically found among leading stocks.

A Drawback

One drawback is Adobe's industry group. Going into Monday's session, the desktop software group was No. 75 among 197 industry groups. Six weeks ago, desktop rated No. 41.

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