Evidence Improving but Not Conclusive (Yet)
Current Market Outlook
The positives are starting to accumulate when you’re talking about some secondary measures of the market’s performance—many growth stocks are holding up well, the broad market showed positive divergences when the indexes retested their February lows and the market’s clearly shrugged off a bunch of bad news. All of that is encouraging, and we’re nudging our Market Monitor up a notch in response. However, we’re still advising a relatively cautious stance because the market’s intermediate-term trend hasn’t turned up; most major indexes are still below key moving averages and, at best, are basically stuck in the middle of three-month trading ranges. We’re still in favor of giving your resilient stocks a chance to get going, and we don’t think the evidence supports being outright defensive. But holding some cash on the sideline, picking entry points carefully and/or keeping new positions on the small side still make sense.
This week’s list has many stocks that have staged breakouts (or come close) in recent days, even as the market is still iffy. Our Top Pick is WPX Energy (WPX), one of many oil stocks that’s come to life as that sector sets up.
| Stock Name | Price | ||
|---|---|---|---|
| Alcoa (AA) | 0.00 | ||
| Coupa Software (COUP) | 262.20 | ||
| Fiat Chrysler (FCAU) | 0.00 | ||
| GoDaddy (GDDY) | 0.00 | ||
| Heron Therapeutics (HRTX) | 35.25 | ||
| HollyFrontier Corporation (HFC) | 0.00 | ||
| Melco Resorts (MLCO) | 0.00 | ||
| RingCentral (RNG) | 238.73 | ||
| Semtech (SMTC) | 51.09 | ||
| WPX Energy (WPX) | 0.00 |
Alcoa (AA)
Why the Strength
Alcoa needs no introduction—it’s one of the largest producers of aluminum, alumina and bauxite (a commercial ore of aluminum), all of which are key to manufacturing and construction. It’s only been a standalone company for one year (the engineering business is now named Arconic, symbol ARNC), but management’s done a good job of wringing out costs (it just transferred $555 million of pension obligations in Canada, for instance), boosting efficiencies (last year saw production records at Alcoa’s three largest mines, refineries and smelters) and cleaning up the balance sheet (the firm has no net debt!). More importantly, a strong global economy and limited new capacity (especially in China) has boosted prices. The result: Strong sales and earnings growth and a ton of free cash flow. And the stock is strong today because investors see these positives continuing. Just last week, in fact, aluminum prices soared around 15% following U.S. sanctions on a major Russia producer; while that spike could easily fade, markets remain tight and Alcoa is poised to benefit. Even before the recent price advances, management saw EBITDA rising to $2.7 billion this year, and free cash flow has averaged a $1.1 billion annual pace during the past three quarters, which is more than 10% of the stock’s market cap! Obviously, this is a cyclical and commodity-type story, but there’s no question the winds are at the company’s back today. The next update is due this Wednesday (April 18) after the close, when earnings will be released.
Technical Analysis
AA has made good progress since its spinoff in November 2016, albeit with lots of pullbacks along the way. The latest dip started with the market in January, dropping the stock from 58 to 44 within a month. The stock went on to test that 44 level two more times (including a 40-week test in early April), and now the buyers are back, with AA surging toward its highs on excellent volume. There’s still overhead and earnings to contend with, but we like the action—if you want in, you can nibble ahead of the report.
AA Weekly Chart
AA Daily Chart
Coupa Software (COUP)
Why the Strength
Coupa made the Top Ten cut in early March due to its strong chart and great story, and it’s a good sign to see it back again despite a tough market stretch since then. The company’s target market is giant and easy to understand: Coupa bills itself as the leading cloud platform for business spend management, which is a $37 billion opportunity. The firm’s unified platform covers everything (procurement, contracts, expenses, sourcing, inventory, supplier management, etc.) and thus eliminates the need for a bunch of one-off systems for each category. Throw in a “consumerized,” easy-to-used interface and (most importantly) massive cost savings for customers and the service has been a hit—at year-end, the company had more than 1.5 million licensed users from a ton of big-name companies (new Q4 wins included Lululemon, CIBC, Nasdaq, Bass Pro Shoppes, Qatar Airways, National Grid, Farmers Group and more) that connect more than three million suppliers and saw $320 billion in spending through its platform in 2017 that resulted in more than $11 billion of savings. Revenues are growing rapidly thanks to steady recurring, subscription-based income, earnings nosed into the black in Q4 and free cash flow was solidly positive last year. Big picture, Coupa sees itself as a major player along with Salesforce, Workday and ServiceNow—aiming to become the major back-office cloud software provider to businesses around the world. We like it.
Technical Analysis
When we wrote about COUP in March, the stock was in a sustained, big-volume run that cleared multi-month resistance near 38 and ran as high as 51 before stalling out. The stock then got yanked down by the market, but the damage was very reasonable—COUP never touched its 50-day line and volume dried up nicely on the decline. Now buyers are starting to show up, with COUP bouncing last week. We’re OK buying a little here but with a stop below the 50-day line.
COUP Weekly Chart
COUP Daily Chart
Fiat Chrysler (FCAU)
Why the Strength
When Chrysler went bankrupt back in 2009 in the depths of the Great Recession, Fiat was the company that bought it. Over the years, Chairman Sergio Marchionne has transformed London-based Fiat Chrysler into a profitable collection of automotive brands—Jeep, Dodge, Ram, Chrysler, Fiat, Alfa Romeo, Abarth, Maserati and Ferrari—with a global footprint. While Fiat Chrysler has been consistently profitable for years, revenue was flat in 2016 and up just 4% in 2017. But earnings growth has been robust over the last four quarters—18%, 58%, 32% and 127%, respectively, and analysts are forecasting a 43% bottom line gain in 2018. But even more important is that Marchionne is going to be stepping down as Chairman in 2018, and speculation is rife that there will be some big deals involving investments by other car companies. Marchionne himself has long said that Fiat Chrysler needs a major corporate merger or partnership to distribute the costs of developing electric and self-driving automobiles. Some analysts see the value of the Jeep and Ferrari brands as bigger than the market cap of Fiat Chrysler itself, but there doesn’t appear to be any spinoff of its holdings of those brands in the cards. So what we have is a big company that has worked hard to drive earnings higher and sports a very attractive 8 P/E. It’s something of a value play, and Fiat Chrysler has some big possibilities coming up in the next year.
Technical Analysis
FCAU has come a long way since it relisted at 6 in October 2014 following the Chrysler bankruptcy. After a run to 11 in March 2015, FCAU found itself back below 6 in July 2016, and the base it built after that low proved durable. FCAU really got moving in October 2016, spent months rebasing under resistance at 12 in 2017, then broke strongly higher in August. The stock reached 18 in September and spent a few months consolidating before another breakout move to 25 in January. The stock corrected to 20 in March and again earlier this month, but has bounced back to 23 in recent trading. You can nibble here and use a loose stop while you wait for whatever transformations 2018 brings.
FCAU Weekly Chart
FCAU Daily Chart
GoDaddy (GDDY)
Why the Strength
GoDaddy is best known as one of the largest website domain registrars and basic service providers (blogging, scheduling, payment, etc.). That remains a core business, with 75 million domains under management at year-end that accounted for 46% of revenues; sales in that segment rose 16% in Q4, though that will probably slow going forward. However, that business isn’t driving growth today—domains are effective at getting customers in the door, but GoDaddy’s best growth is coming from its upsells that include hosting and presence services (naming, branding, search engine optimization, social media; 38% of revenue, up 29% in Q4) and business applications (email marketing and more; 15% of revenue, up 38% in Q4). The result is a big and steadily growing customer base (17.3 million at year-end, up 18%), solid retention rates and growing spending per customer ($139, up 7.4%) that leads to excellent unit economics—GoDaddy says the lifetime value of a customer is near $700, which is 10 times its cost to acquire a new customer! In all, revenue growth has been accelerating gradually during the past couple of quarters, and while earnings are around breakeven, that’s mostly because of non-cash depreciation expenses; free cash flow is solidly positive and growing quickly. It’s not changing the world, but GoDaddy is riding the mega-trend of helping independent and small-sized customers maximize their online businesses. Earnings are due out May 8.
Technical Analysis
GDDY ground its way higher for the past couple of years, but began to show more power starting in December—shares advanced eight weeks in a row, and after dipping with the market in early February, surged as high as 64 (thanks in part to a great earnings reaction in mid-February) on good volume. Its action during the downdraft of the past few weeks has been solid, with support at the 50-day line and some good-volume buying days last week. You could nibble here with a tight stop.
GDDY Weekly Chart
GDDY Daily Chart
Heron Therapeutics (HRTX)
Why the Strength
Heron Therapeutics is an emerging biotech company that specializes in therapies for pain, inflammation and nausea. It began generating sales in 2017 from two treatments for chemotherapy-induced nausea and vomiting (dubbed CINV), which affects over one million people in the U.S. each year. All sales to date have come from Sustol (approved August 2016), the market’s first extended-release, injectable 5-HT3 receptor antagonist. Sustal sales in Q4 grew 17% from the prior quarter and raked in $31 million for 2017 as a whole. Even better, management sees revenue from the CINV franchise up roughly 120% in 2018, with a good portion likely to come from Cinvanti, an injectable NK1 receptor antagonist approved for both acute and delayed CINV that was just approved in November. But the biggest news of late has been Heron’s long-acting local anesthetic candidate HTX-011, which is a non-opioid drug injection based on the company’s proprietary drug delivery program. The fast-track tagged candidate succeeded in two Phase 3 trials for patients undergoing bunionectomy and hernia repair. With this target market topping 13 million procedures annually worldwide, HTX-011 holds huge potential. Shares haven’t slowed down since the positive results were released a month ago, even though Heron sold nearly seven million shares to help fund the commercial launch of HTX-011. If you like biotech, Heron should be right up your alley.
Technical Analysis
HRTX was a dud heading into 2017, bottoming at 12 early last year, and was basically still on its knees in early December as it hovered near 15. But the stock has changed character since then—HRTX surged to 25 by late-January before the market’s first retreat pulled it back down to 20. Then the stock gapped up as high as 32 on the positive drug trial news, held firm during the market’s next leg down, and has begun to perk up. It’s speculative, but a nibble on dips could work.
HRTX Weekly Chart
HRTX Daily Chart
HollyFrontier Corporation (HFC)
Why the Strength
Even for a well-run company like HollyFrontier, the result of the 2011 merger of Holly Corp. and Frontier Oil, the vicissitudes of the refining business have been challenging as crack spreads (the difference between the company’s cost of inputs like oil and price of outputs like refined gas) stayed tight for a long time. But that began to change in June 2017, when the price of U.S. crude oil bottomed and began to rise. It’s no coincidence that HollyFrontier’s stock price began to rise at just about the same time. The company is an independent petroleum refiner with operations in the mid-continent U.S., southwest and Rocky Mountain region, able to process gasoline, diesel, jet fuel, heavy products and specialty lubricants. The company also owns Petro-Canada Lubricants, which operates in Ontario, Canada. The company can process 457,000 barrels of crude oil a day and produce 28,000 barrels of lubricants a day. After five quarters of declining earnings starting in Q1 2016, including three quarters of losses, the company has enjoyed a booming bottom line over the last three quarters, while revenues have also surged, averaging 37% growth over the past four quarters. The company’s revenue model is nearly 100% fee-based, which limits commodity risk, and it enjoys long-term contracts with major customers that account for over 80% of revenues. The stock also pays a handsome dividend (2.4% annual yield), and analysts see the bottom line booming to near $4 per share this year. There’s nothing revolutionary here, but HollyFrontier is a leader in the newly strong refining group.
Technical Analysis
HFC hit a high of 59 in March 2013, then meandered lower until it bottomed at 22 in July 2016. After an attempted breakout reached 35 at the end of 2016, HFC corrected back to 23 in June 2017, when the improving price of oil began to fuel growth. HFC rallied steadily to 53 in January 2018, before etching a nice cup-shaped base for the past couple of months. The breakout came earlier this month, with steady follow-through buying since then a good sign. If you’re game, you can buy a little on dips.
HFC Weekly Chart
HFC Daily Chart
Melco Resorts (MLCO)
Why the Strength
Melco Resorts & Entertainment is a direct play on gambling in Macau, the only place in China where gambling is legal. Melco, which has 12 previous appearances in Top Ten to its credit, operates the City of Dreams, Studio City, Altira and Mocha Club casinos in Macau, as well as City of Dreams resort casino in Manila, the Philippines The company changed its name (from Melco Crown Entertainment) and ticker symbol (formerly MPEL) about a year ago when its Australian partner withdrew from the business. After a couple of years of declines when the Chinese government restricted access to Macau gambling, Melco Resorts has enjoyed a solid past couple of years, with 14% revenue growth in 2016 and 17% in 2017. Results in 2017 included three quarters of triple-digit earnings growth (200% in Q1, 220% in Q2 and 138% in Q3), with Q4 dipping to 62%. (Cash flow is growing along with revenues, up 12% in the fourth quarter.) With the relaxation of government restrictions and Macau’s gaming revenue growing nicely (20 straight months of gains, including a solid 22% year-over-year gain in March), Melco Resorts looks like a solid choice in the gaming industry. Yes, there’s some regulatory risk, but the reward potential is also very high. A 1.8% dividend yield puts a nice bow on the package. Earnings are likely out in early May.
Technical Analysis
MLCO went through a long skid from 41 in March 2014 to a double bottom at 11 in February and July 2016. The stock rebounded from that point, reaching 18 in November 2016, 24 in June 2017 and 29 in December of last year. Despite a minor new high in January, MLCO actually traded sideways from that December peak, with resistance around 30 and support at 25. The breakout came last Thursday, when MLCO jumped from 29 to 31 in a day, marking its highest price since July 2014. You can consider a small position on any dip below 31.
MLCO Weekly Chart
MLCO Daily Chart
RingCentral (RNG)
Why the Strength
RingCentral provides cloud-based communications and collaboration solutions to companies of all sizes. Its platform allows workers to easily use their own mobile devices and computers, as well as in-office phones, fax machines and desktops, to connect to online meetings, conferences, contact center solutions and more. The buzzwords here are “Unified Communications” and it’s a burgeoning market, estimated at $25 billion in the U.S. alone, and it’s growing rapidly as the world moves to a mobile workforce that needs to collaborate on the go. The stock blasted off in February when RingCentral surprised analysts by reporting accelerating revenue growth of 35% in Q4. That capped off a year of 32% revenue growth (up from 28% in 2016) and suggested the company could continue to grow at 30% for a while longer as its target market embraces cloud-based solutions. While consensus estimates are calling for a more conservative 26% growth rate in 2018, impressive bookings from the mid-market and enterprise segment (35% of Q4 bookings) suggest a long runway for growth from this relatively new segment, and as RingCentral’s brand recognition is excellent and expanding. Combine that with flawless execution, ongoing new feature introductions and rising profitability (EPS should be up 190% to $0.58 this year), there’s a good chance big investors will continue to embrace the stock. Earnings are due out May 9.
Technical Analysis
Since RNG broke above resistance last February, the stock has etched higher highs and higher lows, with buyers stepping in quickly whenever shares dipped back to (or a bit below) their 50-day line. The stock accelerated higher in February after earnings, with buyers pushing the stock as high as 70 before the market pulled it down. But the recent retreat has been mild and 50-day support is holding so far. You can nibble here or just keep it on your watch list.
RNG Weekly Chart
RNG Daily Chart
Semtech (SMTC)
Why the Strength
Semtech makes high-performance analog and mixed-signal semiconductors for Internet of Things (IoT), network infrastructure and portable device applications. The company’s biggest end-market is enterprise computing (34% of revenue), followed by consumer (28%), industrial (27%) and communications (11%). Semtech has begun to garner a dedicated analyst following because of its emerging LoRa low power wide area network (LPWAN) platform, which holds huge potential for industrial and consumer IoT applications. Smart sensors and internet gateways that use Semtech’s proprietary LoRa platform can help in the development of everything from smart cities and GPS-based location services to connected cars and connected satellites! LoRa has the potential to become the industry standard for global LPWAN uses, which could drive billions of unit sales over the next five years. It’s also a plus that the company reported better-than-expected results for fiscal 2018 (ended January 28) on March 12. Revenue was up 8% for the year and EPS jumped 36% to $1.87. Analysts see a similar growth rate on the top-line this year. But EPS should grow faster, by about 16%, and hit $2.17. That said, with $47 million remaining in a stock buyback program, there is potential for EPS to top expectations.
Technical Analysis
Shares of SMTC topped out at 42 last November after an extended run that began in 2015. The stock then began etching a new base, with shares dipping to the 32 level a couple of times (December and February) before regaining its composure in March. The catalyst to right the ship was the Q4 earnings release, which lifted SMTC back above its moving average lines and right back to resistance at 42. There was a little wobble a couple of weeks ago with the market, but the stock’s ability to punch through that 42 level last week on excellent volume is a great sign. We’re OK nibbling here.
SMTC Weekly Chart
SMTC Daily Chart
WPX Energy (WPX)
Why the Strength
WPX Energy isn’t well known, but this is no small outfit—the company has a market cap north of $6 billion and owns 131,000 net acres in the Delaware basin (part of the Permian), 85,000 net acres in the Williston Basin (part of the Bakken) and some midstream assets (gas and water gathering facilities). And like many energy firms, it’s embarking on a strong growth phase as years of cost cuts, boosts in drilling efficiencies (it has two of the most productive wells ever drilled in the Williston, for instance, with many more on the way) and, now, higher oil prices, has the company expanding its drilling program. Led by the Delaware Basin, the company saw total output surge 47% in Q4, including a 134% leap in the Delaware and a 34% hike in the Williston, and growth in oil production (up 160% in the Delaware!) was even faster. EBITDAX (a measure of cash flow before drilling expenses) was up 89%. This year, thanks in part to an extra rig coming online in the Williston, the growth should continue, with double-digit production gains this year even after accounting for a good-sized divestiture in the San Juan Basin that accounted for 47% of the WPX’s gas production and 14% of its oil output. There’s nothing revolutionary here, but the combination of its huge, lucrative acreage (7,000 drilling locations!), higher oil prices and efficiencies means the next few quarters should be boom times for WPX.
Technical Analysis
WPX hit 16 in the wake of the Presidential election in 2016, fell to 8 in the middle of the year and rallied right back to 16 in January—before the market’s correction yanked it back down. However, the past two months look like a reasonable base-building effort for the stock, with support appearing above its 40-week line near 13 a couple of times. And last week, shares bolted higher on solid volume as the energy sector strengthened. If you’re game, you can buy a little here or on minor weakness.
WPX Weekly Chart
WPX 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.
