Here Comes Earnings Season
Current Market Outlook
Last week was a solid one for the market, not necessarily in the major indexes but in the action of leading stocks, many of which bounced nicely off key intermediate-term support. Looking at the evidence, the vast majority of it is bullish, so we are, too—we’re bumping our Market Monitor up to a level 8 in tonight’s issue. That said, earnings season is just getting underway for most stocks, which will obviously be important. There will surely be the usual ups and downs, but we’ll be looking to see if any new leadership emerges or, conversely, if some of the leading stocks that have had good moves show abnormal weakness.
In the meantime, we’re just following the system, looking for strong stocks that are relatively early in their overall runs. Our Top Pick this week is Okta (OKTA), which looks to be resuming its run after a seven-week rest.
| Stock Name | Price | ||
|---|---|---|---|
| Armstrong World (AWI) | 88.01 | ||
| Avalara (AVLR) | 102.00 | ||
| The Walt Disney Company (DIS) | 144.76 | ||
| Heico (HEI) | 134.84 | ||
| Marvell Technology Group (MRVL) | 36.88 | ||
| Nexstar Media Group (NXST) | 105.68 | ||
| Okta, Inc. (OKTA) | 148.41 | ||
| Yeti Holdings (YETI) | 42.80 | ||
| Yext Inc. (YEXT) | 21.32 | ||
| Zscaler (ZS) | 126.22 |
Armstrong World (AWI)
www.armstrongworldindustries.com
Why the Strength
We wrote about Armstrong World just two weeks ago, but we missed our buy price, and the action of the stock (and other building-related names) have us thinking that (a) a sustained group move has likely begun and (b) Armstrong will be one of the leaders. The company is the top player in the ceiling and wall business, both new and (importantly) repair and remodel, and for a variety of end markets (30% office, 20% retail, 20% education, 10% healthcare, 5% residential, etc.), all of which has kept business growing slowly during the past couple of years. But the stock has turned strong in recent weeks because of optimism that building activity is going to pick up in the U.S. after a lull, and because of Armstrong’s own initiatives that are boosting growth—the firm is moving into some higher-margin areas and playing in an expanded market (specialty walls and ceilings, not just selling tile and grid). Indeed, sales growth averaged just 3% per year from 2013-2016, but Armstrong’s moves have pushed that into the high single-digits since then, and the top brass sees sales growth of 8% to 9% and earnings growth of 15% to 20% annually through 2021. And if the broader industry picks up, it could goose those figures further. Armstrong isn’t sexy or changing the world, but when building stocks get moving, they can trend for a while, and big investors seem to be sniffing out the start of a new run.
Technical Analysis
AWI went nowhere from the start of 2018 through early January of this year, which combined to wear and scare out most weak hands. But the action since then has been pristine, with a smooth run back to its old highs in February, a calm consolidation for three weeks and then a strong-volume move to new highs in recent days. If you don’t own any, you can take another try at catching AWI on modest weakness.
AWI Weekly Chart
AWI Daily Chart
Avalara (AVLR)
Why the Strength
We covered Avalara in-mid February when the stock had just blasted off following a big Q4 2018 earnings beat and a bullish outlook from management. There’s little new news over the past two months, but the stock is still cranking ahead and the potential is as big as ever. The backstory is that Avalara develops cloud-based software for sales and indirect tax compliance. Sales tax compliance is incredibly complex, and Avalara’s software helps companies automate the process. Back in Q4 management highlighted that inbound inquiries are rising after a Supreme Court decision (South Dakota vs. Wayfair) in 2018 that allows states to require out-of-state retailers to collect sales tax from customers, even if the retailer lacks a physical presence in the state. Dozens of states have passed economic nexus laws in the wake of the Wayfair decision, and retailers are scrambling to make sure they are complying. This often pushes them directly to Avalara (and a handful of smaller competitors). The recently public company (it IPO’d in 2018) grew revenue by 27% in 2017 and 28% in 2018, and smashed Q4 2018 expectations when it reported revenue of $77 million (up 33%). Analysts see sales growing around 22% over each of the next two years (probably conservative), though positive earnings are still out in the distance.
Technical Analysis
AVLR popped to nearly 60 right after its IPO last year before drooping significantly back down to 28 near year-end. Momentum picked up again in January and by the end of the month AVLR was back near 40. It walked up near 42 just prior to the Q4 report, then blasted off and closed above 50 afterward. While it hasn’t necessarily powered ahead, we’re impressed that shares have risen nine weeks in a row despite some choppy market conditions. If you’re game, look to enter on dips.
AVLR Weekly Chart
AVLR Daily Chart
The Walt Disney Company (DIS)
Why the Strength
When we see a huge, well-traded name like Disney soar out of a long consolidation on eye-popping volume (usually because of some growth-y news), we don’t underestimate it. After a huge run from 2011 to 2015 (as earnings doubled), the stock has been stuck in a rut as the core business has struggled and its media properties lagged. But growth did pick up a bit last year (sales up 8%, earnings up 24%), and while analysts’ current estimates look poor, there’s a new reason to get excited. Late last week, the company announced details on its long-awaited streaming plan, dubbed Disney Plus—the content will be relatively rich (all Star Wars movies, 18 Pixar films, 5,000 episodes of various Disney shows, all seasons of The Simpsons, a dozen Disney movie classics, its first original content show named Mandalorian, and much more) and ad free, and the firm decided to charge just $7 per month (or $70 per year). And along with that management released a “wow” forecast for Disney Plus (60 to 90 million subs by 2024) and its other streaming properties (Hulu, which is 60% owned by Disney, should have 40 to 60 million subscribers by 2024, with ESPN Plus getting 10 million or so). Obviously, those are long-term guesstimates, competition is intense and the firm will incur a lot of upfront expenses—but big investors are now viewing Disney as likely to be a leading streaming player both here and overseas in the years ahead. It’s a very intriguing story.
Technical Analysis
DIS had an amazing run from 30 in 2011 to 116 in 2015 before stalling out for the past four years. But after a handful of trips into the low- to mid-90s, DIS actually etched a higher low during last year’s market crash (100), ran up into February, and after a quick shakeout last month, exploded higher on Friday on its heaviest daily volume in nearly four years. It’s not going to be a “hot” stock, but DIS’ long-term breakout should lead to solid performance.
DIS Weekly Chart
DIS Daily Chart
Heico (HEI)
Why the Strength
The aerospace supply field isn’t overly sexy, but it has a few steady growth companies whose stocks are in favor today—Transdigm (two Top Ten appearances this year) is one, and Heico is another. The company started under current management almost by accident three decades ago (huge replacement demand for combustors overwhelmed Pratt & Whitney, who referred some customers to Heico), and has since then become a big player in replacement parts to the aerospace industry, offering airlines an alternative to the big OEMs that dominate the market (and sell their wares for crazy-high prices). Heico sells to most of the top airlines by making dozens of replacement parts much cheaper, yet with similar quality. Throw in some M&A (it frequently acquires some small outfits), a good business in specialized electronic systems (mostly for defense and aerospace) and a very healthy balance sheet (debt to equity of just 34%) and you have an under-the-radar firm that’s churned out fantastic growth for years on end. And there’s no reason to expect that to stop—management sees sales (up 10%) and earnings (up 12%) rising again this year, and that’s before any further add-on M&A (it just acquired Decavo, its 7th purchase of the past 12 months). It’s a good story.
Technical Analysis
HEI was in a very smooth uptrend for most of 2017 and 2018 before gapping out of trend on the upside last August—that’s often an intermediate-term sell signal, and indeed, the stock fell 24% with the market to its bottom in December. But HEI immediately began its comeback, running to its old highs in February, pausing for five weeks and then moving out to new highs on OK volume recently. We advise aiming to enter on dips.
HEI Weekly Chart
HEI Daily Chart
Marvell Technology Group (MRVL)
Why the Strength
Marvell is a chip supplier for hard-disk and solid-state drives and has a foothold in the networking processor market. Demand comes from the enterprise networking, cloud computing, automotive, industrial and consumer markets. It has 5G exposure too (representing a $1 billion opportunity, according to Barclays), and last year’s acquisition of Cavium helped build out exposure to infrastructure end markets (CPU, networking and security), while offering customers solutions at a range of different price points. All of this has strengthened Marvell’s competitive position against rivals Broadcom and Intel. It’s still a cyclical stock and order flow depends on customer inventory levels and new product releases, but big investors are sniffing out better times ahead. In the last quarter (Q4 fiscal 2019) storage (43% of revenue) was down, but the networking (52% of revenue) outlook was quite bullish given a new partnership with Samsung for several generations of baseband control plane processors for both LTE and 5G base stations. All in, fiscal 2019 revenue was up 19% (the Cavium acquisition helped a lot) and analysts are looking for a snap back in storage revenue later this year. Total revenue growth is expected to be flat this year, but (a) that’s likely conservative and (b) with projected growth of 15% in fiscal 2021, when adjusted EPS should be up 50% (to $1.41), investors are discounting better times ahead.
Technical Analysis
MRVL went on a nice run in 2016 and 2017 but topped out in March 2018 as the fundamentals soured. It consolidated in the low 20s for a few months but eventually plunged to 14 during the market’s downturn. Like a lot of stocks, the January recovery was swift—MRVL rallied to 18.5 by the end of January, to 20 by the end of March, and then a bullish outlook on 5G sent the stock racing higher on big volume each of the past two weeks. Any dip or shakeout looks buyable to us.
MRVL Weekly Chart
MRVL Daily Chart
Nexstar Media Group (NXST)
Why the Strength
Nexstar is one of those companies you’ve never heard of but probably use on a weekly basis. It’s a television broadcasting and digital media company that acquires and runs TV stations, websites and other digital media properties—all in, Nexstar owns, operates or provides sales and services to 174 TV stations in 100 markets across the U.S. and reaches almost 40% of U.S. households. It became one of the biggest broadcast groups in the U.S. after acquiring Media General for $4.6 billion in 2017, and with the proposed acquisition of Tribune for $6.4 billion, it’s about to get even bigger. Revenue (up 14% in 2018 to $2.77 billion) is about evenly split between advertising (local, national and political), which was up 18% in 2018, and retransmission and digital content (community portal websites, mobile apps, etc.), which rose by 14% in 2018. Investors like the company because it has a resilient business model (even with cord-cutting, pay TV services and TV advertising appear stable) and because free cash flow growth is incredibly attractive (up 46% last year to $684 million or nearly 13% of the firm’s market cap). Analysts will update their numbers once the deal with Tribune is settled, but as of now, look for revenue to be around flat this year then up 15% in 2020, when EPS should rise 75% to $11. A 1.7% dividend is another plus to this story. Earnings are due May 8.
Technical Analysis
NXST has taken investors on a bit of a rollercoaster ride over the last three years. The stock has a tendency to go on multi-month rallies, before pulling back by around 20% and consolidate, then go on a new run to fresh highs. The low point in 2018 was in May when NXST dipped to 59. It moved up through the summer, then traded mostly in the 70 to 85 range through the end of the year. The breakout came in February when shares leapt above 90 and, impressively, have gone on a persistent run ever since. Dips toward the 25-day line would be attractive.
NXST Weekly Chart
NXST Daily Chart
Okta, Inc. (OKTA)
Why the Strength
There are a handful of new-age cybersecurity names that have taken turns this year leading the way higher, and after a multi-week rest, it looks like it’s Okta’s turn. As we’ve written before, Okta is the leader in the new, rapidly growing and (we think) pervasive identity access management sector—it mostly concerns making sure the employees, who are now accessing a firm’s network from a variety of devices and locations, are correctly identified and allowed to see the data they should (and no more). But there’s also a consumer-facing aspect, too, as Okta powers the identity aspect of many leading firms’ websites (single sign-on capabilities, etc.). Basically, in the new world of network security, identity is vital, and Okta is the go-to player in that field. The stock is strong today partly due to a variety of positive analyst commentary following a recent corporate presentation—one thinks the firm’s estimates could prove to be too low by nearly 40% and says the firm is years ahead of the competition, while another said its new advanced server access products open up huge upsell opportunities. Earnings are still deeply negative, but cash flow is improving and revenue growth chimed in at 50% in Q4 (though, to be fair, it should slow to 35% or so this year). Big picture, Okta is the clear leader in a what looks like a must-have technology, which should keep growth humming for a long time.
Technical Analysis
OKTA showed relative strength during the Q4 market decline and was one of the first growth stocks to hit new highs in January. More recently, shares did stall out in mid February and consolidated for seven weeks (including a brief, shape post-earnings shakeout), but now the buyers are back—after a quick shakeout two weeks ago, OKTA returned to new highs on good volume last week. We’re OK buying some here or on dips of a couple of points.
OKTA Weekly Chart
OKTA Daily Chart
Yeti Holdings (YETI)
Why the Strength
Yeti is a newer consumer brand that the market thinks could have years of growth ahead of it. If you’re new to the story, Yeti designs and sells premium outdoor equipment—around 40% of customers identify as hunters, though that percentage is way down in recent years as many non-hard-core outdoorsman (or women) have become customers. It is one of those hot consumer brands that people equate with quality. That’s partially a testament to great products, and partially because, let’s face it, there are a lot of crappy coolers and travel mugs out there (anybody want a lukewarm beer?). These days people are willing to pay up for a superior product, even if that means shelling out $300 for a cooler or foldable chair, or $30 for a coffee/beer/wine mug. The company’s biggest categories are coolers and equipment (45% of sales) and drinkware (52% of sales). About 37% of sales are generated through the direct-to-consumer (DTC) and corporate channel. Growing corporate sales is a recent initiative, as is YETIcustomshop.com, where shoppers can customize their own products. Analysts see potential for Yeti to grow profit margins (10% in 2018) by pushing the DTC/corporate channel to 50% of revenue over the next three years. We like the products and the story, as well as the fact that analysts see steady low- to mid-teen sales and earnings growth for many years to come.
Technical Analysis
YETI came public at 18 in October and got off to a slow start, including a sharp November/December decline with the market. But net-net, shares built a solid post-IPO base through January, with the breakout coming in mid February. And since then YETI has done very well, with an accelerating push as high as 34 before finally hitting some turbulence during the past three weeks. Odds favor the next major move is up, though more consolidation is possible—we’re OK nibbling here or (preferably) on dips.
YETI Weekly Chart
YETI Daily Chart
Yext Inc. (YEXT)
Why the Strength
Yext has always had a good story, as it’s pioneering a new field that applies to every good-sized brand out there. Called digital knowledge management (DKM), Yext’s cloud-based solution gives businesses a single place to manage and control all their public-facing facts about their operations. The underlying reason it’s such a big opportunity is that consumers can now get information anywhere (non-company websites, shopping channels, search, maps, travel apps, etc.) and not just from a firm’s website; being able to easily keep all that information up to date means brand consistency and control. It’s been a hit, with Yext inking a ton of huge brands across a slew of industry groups—it signed up 128 new enterprise (100 seats or more) logos in Q4 alone, up 68% from a year ago, and that says nothing of its renewal and upsells to existing customers (same-customer growth was 10% in Q4) as it expands the platform’s usage (for example, Yext’s platform is now integrated with Amazon’s echo via a deal announced last year). Financially, Yext has been growing revenues at a quick, steady pace in the 30% to 35% range, and while earnings are negative, cash flows are picking up and deferred revenue surged 51% in the latest quarter. And the future should look similar, with analysts seeing revenues gaining around 30% both this year and next. It’s not likely to be a household name, but Yext has a shot at being a must-have product for most big companies in the U.S. and overseas.
Technical Analysis
YEXT broke out near 15 in May of last year and moved all the way to 27 in September. But that party was short-lived, with the stock round tripping that move during the market meltdown (back to 13 in December)! However, YEXT quickly surged back to 23 in February, and despite a share offering, has calmly consolidated during the past five weeks on lessening volume. We think it’s a decent setup—you could start small here and look to add if the buyers rush in.
YEXT Weekly Chart
YEXT Daily Chart
Zscaler (ZS)
Why the Strength
We haven’t covered Zscaler in a while but remain impressed with this secular growth story in the cloud-based security software space, especially since the stock reached an all-time high in March and looks poised to challenge it again soon. The reason behind the strength is that Zscaler’s modern computing architecture is helping the company expand its market beyond what was just web security and into the $18 billion market of full network security spending. The move opens the door to several years of rapid growth and margin expansion, and Zscaler’s outperformance in recent quarters suggests management is executing the growth agenda near perfectly. Back in December when management delivered Q1 fiscal 2019 results it guided for $270 million in fiscal 2019 revenue, but after crushing expectations when it reported Q2 results in late-February (revenue was up 65% and EPS of $0.09 beat by $0.10), management increased full-year guidance to $289 million (a 7% increase). That works out to almost 53% revenue growth this year (and positive EPS of $0.12) but given the trend that could easily prove to be conservative. It’s a great story in a very strong area of the market. We like it.
Technical Analysis
ZS has performed admirably since it went public just over a year ago. The stock etched a nice base from the start of September through mid February of this year (including a ton of tight weekly closes in the first few weeks of 2019), with earnings providing the impetus for a breakout. Shares kited as high as 73 before a sharp shakeout two weeks ago and a partial bounce back. Our biggest thought is that any further dips are likely to find support near the 50-day line—you can nibble here or, better yet, on a couple of points.
ZS Weekly Chart
ZS 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.
