April 13, 2020

At a Key Juncture

Current Market Outlook

Our thought that March 23 would prove to be a workable low was correct, and the past three weeks have seen the major indexes recoup 40% to 55% of their crash declines (depend on the index). It’s obviously been good to see, as is the continued constructive action in many stocks; it appears the wheat is separating from the chaff. Still, we think the next week or two will be the key juncture—if the major indexes can ramp from here, the intermediate-term trend would turn up and could coincide with some powerful breakouts. On the flip side, if the sellers reappear, a deeper pullback or a retest of the lows could be on tap. Right now, we’re optimistic, but we never anticipate signals; today, with the trend still down, you should remain defensive.

Happily, we continue to see a lot of stocks that want to go higher if bulls do retake control. Our Top Pick this week is Inphi (IPHI), which is already at new closing highs as demand for its high-speed goods improves. Start small and/or aim for dips.

Amazon.com (AMZN)

www.amazon.com

Why the Strength

Amazon has been a tower of strength during this epidemic, with most of its businesses benefiting from the virus shut-in. Its core e-commerce segment, which accounts for 40% of U.S. online retail sales, has rocketed, with consumer spending on its site up 35%. Its grocery business (forecast to be a $70 to $90 billion opportunity) was just ranked #1 for new online shoppers, with 60% of customers saying it was their first choice. (Helping the cause is its ownership of Whole Foods.) The company hired an additional 100,000 warehouse and delivery workers last month to meet the added demand, and today, it announced it’s going to add another 75,000, which gives you an idea of the situation. Demand for its Prime Video streaming service (along with all of its competitors) is also leaping; Amazon announced last week that its Prime Video would show 10 days’ worth of films that were originally going to be presented at the now-canceled South by Southwest film festival in Austin, Texas. The surge in its own delivery services caused the company, last week, to announce that it would no longer be delivering non-Amazon packages, but the new hiring caused that decision to be reversed today. Moving on, the cloud computing division (Amazon Web Services) already accounts for a whopping two-thirds of operating revenue, and it may see some slowdown in the near term due to issues among small- and mid-sized customers, but its growth trajectory in the long run is tremendous. The overall story isn’t new to anyone, but Amazon (and Netflix, written about two weeks ago) looks like it will be one of the big-cap growth leaders of the next sustained advance.

Technical Analysis

AMZN broke out from a 16-month base earlier this year, but that went by the wayside when the market imploded. Still, the stock’s correction (25% or so) wasn’t bad; shares found giant-volume support at the lows and, today, surged to within a couple of percent of all-time highs. If you really want in, you could nibble here, but we’re going to set our range lower given the recent run and the overall environment.

AMZN Weekly Chart

AMZN Daily Chart

American Tower Corporation (AMT)

Why the Strength

With more than 180,000 tower sites across the world, AMT will be one of the most important players of the 5G ramp-up, which is expected to be a game-changer, exponentially increasing wireless usage as speeds improve and increased connection possibilities allow for new applications, including autonomous vehicles and drones. As for the effect on business, American Tower’s CEO recently remarked that 5G will require cell towers be closer together, which will obviously represent a big building opportunity for AMT. Of course, bigger picture, the general rise in mobile device usage is driving growth; American adults spend about three and a half hours daily browsing the internet on their phones, a statistic that is expected to rise to four hours by next year. About 88% of AMT’s customer base is the large wireless providers (AT&T, Verizon Wireless, Sprint and T-Mobile), and the recently approved Sprint and T-Mobile merger—which had stymied mobile tower growth for a while—is anticipated to supercharge T-Mobile’s 5G deployment and position Dish as a possible fourth carrier, which should also boost tower build-outs. The company’s growth hit a hiccup in Q4, but funds from operations (the preferred profit measure for REITs like American Tower) are expected to continue their trend of slow, steady reliable growth. The dividend is relatively modest for a REIT (1.7%) but is raised most every quarter.

Technical Analysis

AMT had a big run from late 2018 (150 or so) to its peak earlier this year (near 260) before going over the falls with the market, dropping as low as 175. But it immediately spiked about halfway back, and last week it motored all the way to new highs on heavy volume! As we’ve written many times, new highs usually bring out the sellers in a down market, so if you’re game, aim to grab a few shares on weakness.

AMT Weekly Chart

AMT Daily Chart

Bilibili (BILI)

bilibili.com

Why the Strength

As we’ve written a couple of times this year, Bilibili is cranking out rapid growth in China mostly thanks to its mobile games, display advertising, membership subscriptions, e-commerce and live streaming events. The company has previously attracted deep-pocketed investors like Alibaba and Tencent, and just scored another coup last week when Sony announced it’s investing $400 million for a 5% stake in Bilibili—Sony hopes to capitalize on the company’s 130 million Gen-Z users (born between 1990 and 2009, making up around 80% of Bilibili’s users), as well as collaborating on animation and mobile game apps. Another recent positive was that Bilibili outbid two other rivals for broadcasting rights in China for the esports multiplayer online battle arena game League of Legends—which gets 100 million users per month! In the fourth quarter, revenues rose 74%, while the company’s net loss was substantially reduced. The big contributors were e-commerce (up 241%) and live broadcasting, where revenues increased 184% as the firm focused on monetization, including its first-ever New Year’s Eve Gala whose playbacks have been viewed more than 90 million times. (Many views of that are from non-Gen-Xers, too, possibly broadening the company’s reach.) Best of all, the company sees growth actually picking up, with local-currency revenues expected to rise 88% in Q1. Given that China seems to be steadily re-opening its economy, we’re optimistic the best is yet to come.

Technical Analysis

BILI broke out at the turn of the year and motored as high as 29 before the market caught up with it in February. The dip to 20 was sharp, but more than reasonable given what was going on, and shares steadily rebounded, lifting above their 50-day line last week and briefly nosing to new highs on the Sony news before pulling in. The chart probably still needs some time to set up, but if you don’t own any, we’re OK nibbling on BILI here.

BILI Weekly Chart

BILI Daily Chart

Chewy (CHWY)

Why the Strength

We wrote up Chewy two weeks ago (it was our Top Pick, in fact), but we’re writing it up again today because of the stock’s super-bullish price action, partly in reaction to a solid Q4 report. To recap, Chewy looks like rare merchandise because it combines defensive characteristics with an excellent short- and long-term growth story; the firm is effectively the Amazon of pet supplies, selling everything from food to toys to crates to meds and more. This industry is very recession-resistant (sales grew steadily even through 2008-2009) and Chewy is leading the charge to its move online (25% of sales online by 2022, up from 14% in 2017) thanks to its product selection (45,000 of them!) and fulfillment (can reach all of the U.S. within two days). Growth trends have been excellent, both on the top line (sales up 35% when accounting for 2018’s extra week) and many sub-metrics—Chewy ended the quarter with 13.5 million active buyers (up 27% from a year ago), while sales per customer were up 10%. Best of all, autoship sales made up 70.4% of the total, representing a powerful stream of recurring revenue. (In fact, nearly three-quarters of revenues are staples-like consumables.) Earnings remain in the red, but the company was basically free cash flow neutral for 2019 as a whole, and management said the virus has accelerated business of late as people shift buying to online. The valuation is high for sure, but analysts see revenues growing 34% and 24% this year and next (respectively), with years of 20%-ish growth possible beyond that. It’s a great story.

Technical Analysis

When we last wrote up CHWY, it had shown massive-volume support in early March and catapulted to multi-month highs soon after. Shares actually tested new-high ground after that before pulling back for a few days, but late last week, it let loose again, soaring on huge volume to new highs. Further dips are possible, but we’re OK nibbling here or on dips.

CHWY Weekly Chart

CHWY Daily Chart

Ciena (CIEN)

www.ciena.com/

Why the Strength

The race is on for mobile network operators to upgrade networks and meet higher performance demands, and optical equipment supplier Ciena is at the forefront of helping them move from 4G to 5G, not to mention other bandwidth-enhancing efforts. The firm’s growth can be seen in its strong cash flow and revenue generation in recent quarters, featuring a 37% earnings beat in fiscal Q1 and revenue-topping estimates each of the last four quarters. Its collection of offerings for webscale cloud operators enjoys market share leadership and is a strong growth contributor, adding customers every quarter (9% growth anticipated in 2020). While the company lowered its guidance due to the virus’ impact on the global economy, it still expects Q2 revenues to be up from a year ago, plus sustained EPS growth and improved operating margins this year. Analysts concur, estimating low single-digit Q2 revenue growth, with that figure accelerating later this year. Ciena is better positioned than most of its competitors to deal with logistical challenges as it doesn’t have significant China exposure; in fact, it’s benefited from customers moving away from tech giant Huawei. Ciena’s consistent focus on product development is another strength, including its recent 6500 PTS platform that allows networks to consolidate packet switching and transport functions in one platform, as well as new chipsets and mobile backhaul solutions. Looking ahead, the Fiber Deep trend (pushing fiber ever closer to the end user, boosting performance) is a big potential growth driver. It’s not setting the world on fire, but Ciena should be a solid grower for years to come.

Technical Analysis

CIEN looked like a real leader early in 2019, but it got whacked on earnings in early March at 46 and, despite some huge ups and downs, has never been able to eclipse that level. Now, though, it’s looking ready to get going if the market cooperates; after shaking out below support in early March, CIEN has stormed back toward yearly highs. If you’re game, we think nibbling on dips with a stop under 40 could work.

CIEN Weekly Chart

CIEN Daily Chart

Inphi (IPHI)

inphi.com

Why the Strength

A leader in a fresh growth theme? Check. Benefiting from the continued work/play/learn-at-home environment? Check. Likely to see growth pick up further even after the world turns right side up? Check. Inphi will never be a household name, but it’s strong because it checks all the boxes big investors are looking for today. As the leader in high-speed data interconnects, the company is benefiting from an upgrade cycle within hyperscale cloud data centers (Amazon, Google, Alibaba and Facebook are all ramping up purchases; Inphi has a dominant market share in this field), from the 5G buildout and from demand for faster connections between data centers, too (thanks in large part to a partnership with Microsoft). At a conference in early March, management said that, except for a couple of small customers in Wuhan, the firm’s supply chain was fine (it has many sources for assembly, testing and the like) and demand was steady. And later that month, one analyst’s research effectively found the same thing, saying that intermediate- to longer-term demand trends remain intact and Inphi remains a few steps ahead of the competition; while the current trends should play out over the next two to three years at least, the firm is already testing some next-generation equipment at big clients. After a slow patch, Inphi’s business began to pick up last year, and the best is yet to come—analysts see earnings up north of 30% both this year and next as the need for speed accelerates, especially with the shut-in.

Technical Analysis

IPHI broke out from a multi-year base last July and rallied as high as 85 before being dragged down with the market, dipping as low as 56 at the March 23 bottom. But the action since then has been fantastic, with a quick, big-volume surge back to 80, new closing highs last week and another burst higher today. You can start a position here or (preferably) on weakness.

IPHI Weekly Chart

IPHI Daily Chart

Veeva Systems (VEEV)

www.veeva.com

Why the Strength

Cloud software companies have mostly dodged the recent decline thanks to the work-from-home trend. Veeva, which mainly serves the life sciences industry, is a case in point. Its industry-best suite of offerings helps drug companies manage clinical trial data, stay in gear with regulations, boost quality control and safety and, of course, via its core customer relation management software, help agents do better on the sale front. Meanwhile, the firm’s Vault content management platform is a big hit in life sciences and is also penetrating other industries, allowing clients to better deploy content applications and manage data. Veeva may even benefit from the current health crisis, as its customers are in good shape (life sciences aren’t very economically sensitive) and Veeva has made its Zoom-based Engage software free to pharma sales reps through September, allowing them to connect remotely with doctors. Bigger picture, the firm’s product expansions have greatly expanded its potential market in recent years (now north of $10 billion), and it has a target of $3 billion in revenue by 2024, meaning the firm’s 20%-plus growth rate is likely to continue. As for the here and now, customer count grew 20% in 2019, and in its latest quarter, revenue increased 34% while subscription services revenues rose 33%. Veeva has the combination of fast and reliable growth that big investors pine for.

Technical Analysis

VEEV posted massive gains over the last few years but stalled out in mid-2019 and collapsed to its lowest level in almost a year in March. But that’s when big investors began to step in; shares found big-volume accumulation (closed up on the week) or support (closed in the upper half of a big weekly range) four straight weeks before and after the low, and pushed toward multi-month highs last week. We’re OK with a small position here or (preferably) on dips, with the idea of adding a few more shares on a breakout above 170 and a confirmed market uptrend.

VEEV Weekly Chart

VEEV Daily Chart

Wheaton Precious Metals (WPM)

www.wheatonpm.com

Why the Strength

In the mining world, streaming companies are among the prime beneficiaries of rising gold and silver prices. They make an upfront payment, plus a fixed payment per ounce of metal (often 20% of the spot price), giving them the right to a percentage of a mine’s future production and allowing them to leverage rising metal prices. Wheaton is the world’s largest silver streaming company, with 14 silver purchase agreements, not to mention some other gold and palladium deals as well. Wheaton focuses mainly on high-quality, high-margin operations with a goal of returning a minimum of 30% of cash flow to its shareholders. The remainder is used to grow the company, though it has a healthy war chest (including $104 million in cash) for future acquisitions and investments. Virus-related shutdowns have affected some of its streaming partners, but most are still up and running and the strong bounce in silver (and the new highs in gold) has underscored the benefits of its low-risk, high-margin business model. Though it has withdrawn 2020 production guidance, the company has significant cash flow ($500 million in 2019) and manageable debt levels, and is positioned to fund commitments and contingencies, including dividends. Most recently, Q4 revenues were up 14% from a year ago from higher metals prices, while Q4 and 2019 operating cash flows were up 21% and 5%, respectively. The shut-in creates some uncertainty, but with gold and silver prices on the upswing, Wheaton’s bottom line should push higher; analysts see earnings up 56% this year and more next.

Technical Analysis

WPM’s bull market began in late 2018 when gold and silver prices took off as trade war concerns increased safe haven demand. After breaking out anew in February, the stock collapsed with the market, falling well below all moving averages—but like most of the best-looking stocks these days, WPM quickly bounced back above its 200-day line, and after pausing for a few days, has galloped to within a couple of points of new highs. If you want in, we favor looking for pullbacks.

WPM Weekly Chart

WPM Daily Chart

Wingstop (WING)

wingstop.com

Why the Strength

Restaurants have been among the hardest hit groups during the mandated shut-in, which is what makes Wingstop’s jaw-dropping comeback (driven by a bullish company update) all the more intriguing. The company has long had one of the simplest, but most powerful, cookie-cutter stories—the firm offers wings with all sorts of flavors, as well as the usual pub-ish fare like fries, dips and soda though its 1,413 generally small format restaurants (1,700 square feet), the vast majority of which are franchised. The firm’s track record has been hard to beat, both from new store openings (boosted its store count by 10% last year) and excellent growth from existing locations (same-store sales up a whopping 12.2% last year; plus, each year’s new openings outperform the prior year’s tally), and the big idea here revolves around management’s ambitions—it sees Wingstop as eventually being one of the top 10 global restaurant brands (6,000 potential locations worldwide, including more than 3,000 in the U.S. alone), and at its Investor Day in January, it says it’s seeing zero signs of saturation in any of its markets. The top brass’ digital efforts are also a plus—39% of orders are now digital or delivery, and that rose to 47% in Q1—and overall, it has best-in-class margins among its peers. Most important of all, Wingstop just gave an update on business, and any slowdown has been minor; even in March, domestic same-store sales rose 8.6%, and for Q1 as a whole, the firm opened 28 new restaurants. It looks like even a pandemic can’t slow this steady cookie-cutter story.

Technical Analysis

WING topped out in August of last year at 104 and approached that high again in February before crashing 57% with the market on fears the shut-in would crush business. But shares immediately bounced on good volume, and last week, boomed all the way back toward its highs after the surprising business update. Expect volatility, but we think dips would be tempting to start a position.

WING Weekly Chart

WING Daily Chart

ZTO Express (ZTO)

www.zto.com

Why the Strength

While many are skeptical of the official virus tallies from the country, the fact is China is slowly returning to normal after its virus battle, and while e-commerce did well as people bought more online, an opening up should help further. One sector that should benefit as economic growth resumes is shipping services, including ZTO, which is China’s leading express delivery service. With a fleet of over 2,000 trucks, ZTO delivers millions of boxes daily and is effectively the FedEx or UPS of China. As covered previously, the firm has one of the highest operating margins among all logistics companies along with consistent cash flow and profitability, attributes that were highlighted in its latest earnings report. The company reported solid growth momentum for 2019 with parcel volume increasing 42%—exceeding the industry as a whole by 17 percentage points—helping its market share to rise to 19%. Its top line rose 20% in Q4, thanks largely to its express delivery services unit, while the bottom line grew 25%. For Q1, the company guided for parcel volumes to beat last year’s numbers and also anticipates annual parcel volume growth to be at least 15% above the industry average. The company also announced an extension of its share buyback program to June 30, 2021 along with a 30-cent dividend for the year. (Those forecasts came on March 16, so should include the worst of the virus’ effects in China.) Encouragingly, 391 funds now own shares, up from just 199 a year ago.

Technical Analysis

We could analyze every wiggle ZTO has made in recent months, but the chart’s resilience can be summed up with one fact—despite the global market meltdown ZTO has closed just one day below its 50-day line since the start of March! Even better, after testing that line a month ago, ZTO has nosed out to new highs (albeit on light volume) and held firm there. We’re not opposed to a nibble here or on dips.

ZTO Weekly Chart

ZTO 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.

The next Cabot Top Ten Trader issue will be published on April 20, 2020.