Quarterly Crosscurrents
Current Market Outlook
The major indexes have scored a couple of solid gains, though we’re seeing plenty of crosscurrents underneath the surface; this could be the start of a rotation out of growth, but it may just be normal action that’s often seen around quarter-end (as hedge funds, most of which get paid quarterly, book profits and reposition themselves). Just looking at the evidence, the push higher has kept the intermediate-term trend pointed up, and while some leaders have hit potholes, most remain in uptrends and have avoided abnormal action. Overall, then, we remain mostly bullish, though we’ll keep our Market Monitor at a level 7 for a bit longer to see if this recent push (a) continues and (b) is led by leading, Top Ten-style stocks.
This week’s list has many familiar names from earlier this year—a good sign, in our view, that leading stocks are continuing their uptrends. Our Top Pick is Ionis Pharmaceuticals (IONS), a unique drug firm with a powerful chart. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Armstrong World (AWI) | 88.01 | ||
| Array Biopharma (ARRY) | 46.35 | ||
| Carvana (CVNA) | 82.90 | ||
| Ionis Pharmaceuticals (IONS) | 73.34 | ||
| Paylocity (PCTY) | 97.34 | ||
| ServiceNow (NOW) | 341.86 | ||
| Survey Monkey (SVMK) | 19.97 | ||
| TAL Education (TAL) | 50.49 | ||
| TransDigm (TDG) | 599.41 | ||
| Universal Display (OLED) | 187.54 |
Armstrong World (AWI)
www.armstrongworldindustries.com
Why the Strength
Most building supply firms have struggled in recent quarters, but Armstrong World has been an exception, as its long-standing position as a leader in ceiling and wall structures for commercial buildings means the company has a giant installed base, which has led to a ton of repair and remodel business. Indeed, Armstrong has the highest combination of profit margin and market share of any public building products company. There’s nothing terribly unique here, but Armstrong is strong today because it’s well managed, is moving into some higher-margin areas (tectum, plasterform, exposed structure and steel ceilings, etc.) and there’s hope that the downtick in interest rates could boost real estate activity in general. Sales were growing at just a 3% clip for a few years, but solid execution and a bigger push into walls and higher-end ceilings have made a big difference—the top line has grown 10% or more three quarters in a row, and the top brass sees high single-digit growth each of the next three years. Throw in some efficiencies, and earnings and free cash flow are expected to grow at a 15% to 20% pace (free cash flow margins of near 30%!). The risk here is if business spending really fell off a cliff due to a slowing economy, but there’s zero sign of that today—just the opposite, in fact, as corporations continue to invest. It’s not going to set the world on fire, but Armstrong looks like one of the better building plays out there.
Technical Analysis
As business turned up after the 2015-2016 slowdown, AWI had a nice run from the 40 area up to the low 70s last fall. It then got knocked around with everything else, but held support in the mid 50s twice and has been acting very well ever since the calendar flipped. More recently, we like the stock’s post-earnings pause in the 72 to 76 area, followed by its pushed to new highs on good volume last week. We advise looking for minor dips if you want in.
AWI Weekly Chart
AWI Daily Chart
Array Biopharma (ARRY)
Why the Strength
The biotech sector has been mixed, with many big names (especially Biogen) struggling, but a fair number of small and mid-sized players acting well. One that has a mix of real results today and huge promise in the future is Array BioPharma, which is being driven by Braftovi and Mektovi, two drugs that are approved for treatment in later-stage melanoma patients who have a couple of specific gene mutations—trial results were extremely positive (nearly doubling life expectancy, well tolerated, etc.), and not surprisingly, sales are off to a great start; Q4 sales (just its second on the market) saw 2,600 prescriptions (double the prior quarter), bringing in nearly $23 million of revenue and quickly becoming the treatment of choice in this niche. The potential here is big, especially as sales ramp in Europe and Japan (Array is positioned for milestones and royalties from partners overseas), but the story goes beyond just melanoma—Array is also testing Braftovi and Mektovi for colorectal cancer (again, with certain gene mutations that make up about 15% of patients) that has no FDA approved therapies thus far and (very) early results have been bullish. The next big non-earnings event will be a mid-year readout on colorectal cancer test results: Expectations are high, but a great set of results could prove to be game changer. As it is now, analysts see revenues ramping 43% this year (to $249 million) and another 34% next. There’s definitely event risk, but we like the combination of fast growth today and the potential for lots more going forward.
Technical Analysis
ARRY built a long, good-looking base from the start of March 2018 through the end of last year. But shares quickly spiked back to 18 in January, then exploded higher before and after earnings, rallying above 23 in mid-February. And the action since then has been solid—there have been ups and downs, but selling volume has been light and ARRY successfully tested its 10-week line last week before bouncing. We’re OK buying here or (preferably) on pullbacks with a stop around 21.
ARRY Weekly Chart
ARRY Daily Chart
Carvana (CVNA)
Why the Strength
We wrote up Carvana three weeks ago after the stock had shown unusual price and volume strength, and we’re doing it again as the stock’s action remains unique and the story is huge. The company is revolutionizing the used car industry with a full-featured website and sales pitch that’s thought of everything to grease the skids when buying a used car, from price (averages about a grand less on each car than you’d get at a dealership) to visuals (360 degree interior and exterior views) to selection (usually more than 10,000 vehicles) to history (no car has ever been in a reported accident) to assurances (seven-day test drive) and delivery (next-day in many areas, including some vending machines that are marketing hooks). It’s been a hit, and from an investing standpoint, what we (and many big investors) like is that repeatability of the business model—nearly all of the markets Carvana has entered have followed a roughly similar growth trajectory, with its oldest market (Atlanta) resulting in solid market share (nearly 2%, double that of four years ago, with the number of cars sold up 30% last year alone.) Of course, the expansion costs are high, but those are being put to use to expand into new markets (44 at the end of 2017, 85 at the end of 2018, 140 at the end of this year) and open new inspection, reconditioning and distribution centers, which is driving triple-digit revenue growth. Given the size of the used car market (north of $600 billion!), it’s easy to see the potential.
Technical Analysis
Three things have caught our eye on CVNA’s chart. First, of course, is the huge price move, with shares basically doubling from mid February to late March. Second is the volume, with CVNA enjoying its three heaviest volume weeks ever during this run. And third, the stock has actually tightened up a bit during the past two weeks. There’s still overhead to chew through, so sharp shakeouts can’t be ruled out, but we’re OK starting small here with a loose stop and looking to slowly average in on the way up.
CVNA Weekly Chart
CVNA Daily Chart
Ionis Pharmaceuticals (IONS)
Why the Strength
Ionis Pharmaceuticals is a complicated story to tell when you get into the weeds of its drug pipeline. But if you step back and look at the big picture, it’s relatively straightforward. The big idea is that Ionis uses a proprietary antisense technology platform to develop treatments for cardiovascular, cancer and metabolic and neurodegenerative diseases. The drugs coming out of its platform bind to RNA instead of proteins, and it has over 40 of them in the pipeline. Ionis has collaborations with Biogen, AstraZeneca, Bayer, GSK, Janssen, Novartis and Roche. The recent focus lately has been on Spinraza, an approved blockbuster treatment for spinal muscular atrophy (SMA). Tegsedi, a treatment for transthyretin amyloidosis that is being launched globally through partner/subsidiary Akcea Therapeutics (AKCA), is also a near-term growth catalyst. And Waylivra, which is likely to be the first treatment for two severe and rare genetic conditions called familial chylomicronemia syndrome (FCS), is coming up soon as well. Altogether Ionis has at least 10 programs entering pivotal studies over the next 24 months so there’s plenty to keep investors engaged. Plus, the company is not just selling dreams, as sales are expected to be up 31% (to $785 million) this year, while earnings should remain solidly in the black.
Technical Analysis
IONS spent most of 2017 and 2018 knocking around in the 40 to 60 range. But things changed in late-February after the Q4 earnings report when (after a very tight area) the stock broke above 60, then rallied up to a fresh multi-year high around 70, and with very little rest, zoomed to north of 80 last week. We do think pullbacks are likely, but given the giant volume on the advance, we’re not expecting a major retreat.
IONS Weekly Chart
IONS Daily Chart
Paylocity (PCTY)
Why the Strength
Paylocity is one of the smaller companies operating in the Human Capital Management (HCM) software industry. Its cloud-based products cover the gamut of typical offerings, including Payroll, HR, Benefits Administration, Talent Management and Time and Labor Tracking. The company’s sweet spot is small to mid-sized businesses, and the stock’s doing well because sales reps have done a bang-up job landing new clients that have around 20 to 50 employees. Paylocity’s mobile-first delivery model and cloud-based solutions are a good fit for these outfits because they have a lot to gain from easy-to-use subscription services that can be turned on without a lot of upfront costs. The company reported a beat on both the top and bottom lines back on February 6, and the stock has remained strong since. Revenue in Q2 of fiscal 2019 was up 25% to $107.2 million while EPS of $0.23 beat by a penny. The all-important recurring revenue line showed growth of 26% to $104.7 million. At the same time management upped forward guidance, calling for fiscal year 2019 revenue growth of around 23%. We readily admit HCM software stocks aren’t glamorous, but they remain in favor because they generate a lot of steady business and because so many firms are still using old school legacy systems, meaning the future potential is still large.
Technical Analysis
PCTY spent a lot of time trading in the 42 to 50 price range in 2017, then finally found a groove and wandered up to 65 by the end of last summer. There was a big rally to 85 in August and September, but PCTY gave it all back during the market swoon in November and December. It entered 2019 around 60 and wasted no time joining the bull move; by the beginning of February, PCTY was back above 70, then it raced up to 90 after earnings. For the past five weeks shares have traded between 80 and 92.5. We think this consolidation marks a solid entry point.
PCTY Weekly Chart
PCTY Daily Chart
ServiceNow (NOW)
Why the Strength
ServiceNow is one of the bigger infrastructure software companies out there and has become the leading productivity platform in a guargantuan $77 billion addressable market, where it’s grabbing share from legacy vendors like HP and BMC. When it was founded 15 years ago, the company was just serving IT departments with a SaaS IT service management (ITSM) product, but ServiceNow has since seized a commanding presence in the IT operations management (ITOM), IT business management (ITBM), HR, customer service management and security verticals. It is also investing in R&D and sales to bring new products to market, including onboarding, payroll, hardware, mobile apps and more. Shares blasted off in January, and have crawled higher since because of a big beat in subscriptions billings and a bullish forecast for 2019. Fourth quarter subscription billings of $952 million beat consensus by $49 million, and management guided for 2019 subscription billings and revenue of around $3.72 billion and $3.22 billion, respectively, both of which were ahead of consensus. This guidance represents growth of around 29% for subscription billings and 33% for revenue. That’s rapid growth for such a large company, and there’s a good chance management is being a touch conservative given their history. Because of investments, EPS should be up slightly less, by around 25% (to $3.11), but big investors see ServiceNow as an emerging blue chip that should see earnings and cash flow grow rapidly for many years.
Technical Analysis
NOW was in a relatively steady uptrend until the market plunge last year, which took shares down as much as 28% in November, dipping below the 200-day line as well. Shares tightened up a bit in January and then gapped out of their base on three straight days of strong volume. NOW has crawled higher since then, generally holding its 25-day line. We think it looks like a good buy around here, with a stop a bit below the 50-day line.
NOW Weekly Chart
NOW Daily Chart
Survey Monkey (SVMK)
Why the Strength
SurveyMonkey is a small cap company that has emerged as the leading online survey platform for businesses. The platform combines machine learning and artificial intelligence with all the data it has collected over nearly 20 years of operations, including answers to over 47 billion questions (!), which makes it far and away the most robust dataset for survey responses out there. That all adds up to a best-in-market survey methodology and defensible business model that’s hard to emulate. Despite an operating history that dates back to 1999, SurveyMonkey just went public last year, so investors are only beginning to learn the ins and outs of the business. The Q4 2018 report (issued on February 13) provided some more insights, but it wasn’t until after management met with analysts at investor meetings in March that the stock broke out to multi-month highs. The latest scoop is that analysts see mid-teens revenue growth this year, accelerating to around 18% in 2020 and then jumping at least 20% for several years thereafter. Growth tailwinds include a ramp up in the sales force (from 100 today to over 250 in the next year or so), the Usabilla acquisition (a digital customer feedback platform) and greater enforcement of Terms of Service to cut down on account sharing. Moreover, with the number of paying users leaping by 26,000 in Q4 (versus historical average of 4,000 or so per quarter), there’s growing optimism that the company can hit its target to double the business within three to four years.
Technical Analysis
SVMK went public at 12 last September and blasted out of the gate, trading as high as 20 on its first day. Then came the typical post-IPO droop, with shares sinking below their IPO price in short order and meandering between 10 and 16 for most of the next few months. But after tightening up in the middle of March, a number of analyst upgrades helped the stock take off early last week on solid volume. It’s a squirrely name, so aim to enter on weakness.
SVMK Weekly Chart
SVMK Daily Chart
TAL Education (TAL)
Why the Strength
Education in China is taken very seriously. When China had its one-child policy (initiated in 1979, ended in 2015) the aspirations of four grandparents and two parents were centered on one child. Talk about pressure. Even though the policy has been repealed, families still spare no expense seeking every advantage for their children, and that often means private education. TAL is arguably the leading tutorial operator in the country, focused on high-achieving students in K–12 programs; courses are offered online, but the big money is made in small-classes and tutoring. The stock is doing well now because a few growth initiatives are bearing fruit. First is a ramp-up of dual-teacher learning centers outside of the top 50 largest cities in the country. Academic outcomes of these programs should be almost as good as small live classes, and they should have higher profit margins too (much lower cost per student). Second, TAL ramped up marketing in fiscal 2019 to 19% of sales from 14% in fiscal 2018. This should drive years of sales growth and can be reduced when needed to drive margin improvements. The bottom line is that the latest quarterly results (reported January 24) were way ahead of expectations and caused analysts to hike their estimates. Wall Street sees revenues in the next year leaping 38%, with earnings up 23%. The next earnings report is due out April 25.
Technical Analysis
TAL’s performance since 2015, when it traded near 5, has attracted a lot of attention. Shares rose steadily in 2016 then rallied hard to fresh highs above 35 late in 2017. There was a modest retreat, then they got going again and briefly touched 48 last summer. After a 50%-plus correction in the second half of last year, TAL had returned to the low-20s in October 2018. The recovery was choppy at first but has been much steady over the last two months, including etching a reasonable shelf in recent weeks. We’re OK taking a stab at it here with a stop in the low 30s.
TAL Weekly Chart
TAL Daily Chart
TransDigm (TDG)
Why the Strength
Boeing’s recent woes have temporarily dented most of the aerospace sector, but Transdigm—one of the better long-term growth stocks most investors have never heard of—remains unaffected, which is no surprise. The company’s claim to fame are its dozens of proprietary (90% of sales), sole source and highly engineered aerospace components (about two-thirds commercial with the rest defense-related), which, best of all, benefit from a significant aftermarket business (about three-quarters of EBITDA comes from aftermarket parts and services). Obviously, the proprietary aspect of its business limits competition and boosts prices and margins (EBITDA is expected to be nearly 50% of revenue this year!), and the benefit from aftermarket services lengthens the reach of its recurring business to many decades in some cases. Throw in a bunch of small, generally accretive acquisitions over time and growth has been mostly consistently and very solid over time. The one exception to that rule—the firm’s recent buy of Esterline for $4 billion—dramatically expands the firm’s proprietary content collection and should be another leg to the growth story. Analysts see earnings up 25% this year and 21% next as business plows ahead. It’s not likely to make many headlines, but the Transdigm should remain an under-the-radar leader over time.
Technical Analysis
TDG has been in a long-term advance for years, but it traded down from 378 in late July last year to 350 near the end of January. Then came the earnings blastoff near the end of that month that took the stock to 440 in early February. And since then, the action has been excellent—just modest pauses and pullbacks and holding the 25-day line despite the Boeing shockwaves. If you want in, we advise looking for dips.
TDG Weekly Chart
TDG Daily Chart
Universal Display (OLED)
Why the Strength
Most of the longer-term turnaround situations we’ve spotted in Top Ten have avoided much recent selling pressure so far, which makes sense—stocks like Universal Display went through the wringer for months, so the weak hands are out and the advance is so fresh there are far more potential buyers than sellers. And that’s especially true when examining the firm’s fundamental underpinnings: Universal Display is the go-to way to play the increased usage of organic light emitting diode displays, which are becoming common in TVs, smartphones, smartwatches and other products; with thousands of patents and plenty of know-how, it has supply and royalty deals with Sharp, Samsung and others (including a recent deal with China Star, a leading panel maker in that country). Growth really kicked into gear two years ago, but oversupply and disappointing end-product sales saw Universal’s business (and stock) sink. But that’s viewed more as a one-time hiccup, as total industry capacity is still ramping up and, accordingly, Universal’s management has guided investors to very strong growth in 2019, and that pace is likely to accelerate further in 2020. While Q4 results were crummy, analysts see that turning around right quick—revenues are expected to rise 50% in Q1 and 36% for the whole year, while earnings (up 131% and 65%, respectively) should also power ahead. And 2020 estimates call for even faster growth! The risk of another “hiccup” is always there, but right now, the wind is again at the company’s back.
Technical Analysis
From 209 in January 2018 to 79 in June, it was a quick, vicious decline for OLED last year. But the stock held support in the upper 70s during the fall correction, marched back to 120 in February and then exploded as high as 160 following its 2019 outlook. And, just as impressive, the stock has held those gains—OLED has suffered no big-volume selling and held up near its 25-day line in recent weeks. We think starting a small position here or on further dips will work out.
OLED Weekly Chart
OLED Daily Chart
Previously Recommended Stocks
Below you’ll find Cabot Top Ten Trader recommended stocks. Those rated HOLD are stocks that traded within our suggested buy range within two weeks of appearing in the Top Ten and still look good; hold if you own them. Stocks rated WAIT have yet to dip into our suggested buy range … but can be bought if they do so within the next week.
Those stocks rated SELL should be sold if you own them; they will no longer be listed here. Finally, Stocks in the DROPPED category are those that failed to trade within our buy range within two weeks of our recommendation; that’s not a bad thing, we just never got the price we wanted. Please use this list to keep up with our latest thinking, and don’t hesitate to call or email us with any questions you may have. New recommendations each week are in green.
