Keep the Defense on the Field
Current Market Outlook
The major indexes bounced decently last week, though that was quickly given back today as the sellers reappeared. Day-to-day volatility is likely to remain high as the market remains news-driven (the 50-day average of the VIX volatility index is the highest in two years), but the bottom line for the overall market is simple: All of the major indexes we track are below their key intermediate-term moving averages, so until proven otherwise, the trend is down and you should remain cautious. As for individual stocks, many are still in good shape, but with the sellers in control, any buying should be kept small and all stops should be honored. We’re nudging down our Market Monitor another notch to reflect the growing selling pressures we see.
This week’s list does contain a bunch of solid charts despite the market’s carnage, which is an encouraging sign. Our Top Pick is Lululemon (LULU), which is one of many resilient retail names and has just gapped up on earnings.
| Stock Name | Price | ||
|---|---|---|---|
| Energen (EGN) | 77.04 | ||
| Five Below (FIVE) | 134.58 | ||
| Guess (GES) | 0.00 | ||
| Kohl’s (KSS) | 70.62 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Okta, Inc. (OKTA) | 148.41 | ||
| Petrobras (PBR) | 14.78 | ||
| Shutterfly (SFLY) | 94.71 | ||
| Smart Global (SGH) | 0.00 | ||
| Wix.com (WIX) | 302.53 |
Energen (EGN)
Why the Strength
Energen doesn’t have a lot of name recognition, but it has as good a growth story and outlook as just about any energy explorer. The company operates in the lucrative Permian Basin, with activity in the Midland (56% of production), Delaware (33%) and Central Basins (11%)—all told it has about 149,000 net acres and a humongous 4,000-plus untapped drilling locations. (It plans to drill just 3% of those in 2018.) After a couple of years of flat-ish activity as it focused on divesting non-core assets and surviving the oil crash, Energen has embarked on an aggressive expansion plan: In 2017, production boomed 39%, partially thanks to its new Generation 3 fracking techniques, which is boosting well productivity (well returns range from around 40% to 80% at $60 oil). This year, management believes output will rise a solid 25%, with accelerating growth as the year goes on (Q4 ‘18 output should be up about 40% from Q4 ’17). Overall, Energen sees output lifting more than 28% annually from 2018 to 2020. Of course, driving that growth will require a lot of capital spending and higher levels of debt, but the firm has a healthy balance sheet, no debt maturities until 2021 and actually sees costs declining on a per-unit-of-output basis. As for earnings, analysts see the bottom line exploding higher this year and growing another 35% next. With energy prices firm, Energen could be a solid winner.
Technical Analysis
EGN isn’t on many investors’ radars, probably because it hasn’t done much in recent years—after plunging from 91 to 21 during the 2015-2016 energy bear market, the stock rallied back to 60 in September 2016. And then it went straight sideways, moving between 46 and 60—until last week! Last Thursday, the stock eclipsed 60 on excellent volume and remains above its breakout level. We’re OK buying some on dips.
EGN Weekly Chart
EGN Daily Chart
Five Below (FIVE)
Why the Strength
Five Below is a dollar store for the 2010s and beyond, with trendy, popular merchandise for teen and pre-teen buyers, including games and toys, beauty and style, arts and crafts, sports goods, basic technology products and more—all for $5 or less. The concept has been a hit, with same-store sales rising every year for more than a decade, including nearly 6% in 2017 (even as many retailers struggled). And, in terms of the growth story, possibly the most powerful force behind it is Five Below’s amazing store economics; new stores recoup their initial investment in less than a year, a statistic that has held up as the company has opened locations in new states. The combination of the two things—big demand and low costs—is allowing for a rapid store expansion: Five Below is growing its store count by 20% annually (it’s aiming to open 125 new stores this year) and believes there’s room for at least 2,500 stores in the U.S., quadruple the number it had at year-end 2017. Of course, to grow that big, investment will be needed in back-end systems and distribution centers; indeed, the firm is aiming to invest a quarter of its tax cut in such systems this year, which, along with some tough comparisons, should lead to less growth in the middle of this year. But big investors are focusing more on the full year (40% of sales and two-thirds of profits come in Q4), where analysts see revenue up 18% and earnings up 33%. It’s a great story.
Technical Analysis
FIVE hit 55 in November 2013 and didn’t surpass that level until October of last year—a giant five-year launching pad! After hitting new highs, the stock ran to 74 in early January before building a new base for the past three months. Now, following Q4 earnings, FIVE is showing signs of getting going again, with the stock reaching new closing highs and the relative performance (RP) line in the same camp. You can buy a little here with a stop in the mid 60s.
FIVE Weekly Chart
FIVE Daily Chart
Guess (GES)
Why the Strength
Guess began life in 1981 as a jeans company, but has grown into an international fashion retailer with a line of clothing, footwear, watches and accessories for men, women and children, with nearly 1,000 stores in the Americas, Europe and Asia and another 670 licensed stores worldwide. It’s been a tough time for retailers for a while, and Guess experienced small declines in revenue from 2013 through 2017. But the firm is now in a solid turnaround phase—sales and earnings perked up last year and analysts see growth continuing going forward, thanks mainly to the company’s burgeoning European and Asian operations, which made up 59% of sales in Q4 and grew a whopping 40%. There has been a problem with Kate Upton’s allegations of improper conduct on the part of the company’s co-founder, Paul Marciano, but the firm appears to be dealing with them openly and decisively and investors don’t appear to be concerned it will impact business. (Marciano has stepped down from his duties for the duration.) Guess pays a generous 4.3% dividend and has done a good job keeping a very healthy balance sheet. The immediate cause for investors’ enthusiasm for Guess stock is the fiscal Q4 earnings report on March 22 that featured an 18% increase in revenue and a whopping 44% jump in earnings that topped expectations. It’s not a pure growth story, but Guess is another turnaround idea that should see business accelerate in the quarters ahead.
Technical Analysis
GES fell from 49 in last 2010 to below 10 in May 2017, but immediately started an energetic rebound. GES gapped up in late August and topped 19 in late January before the misconduct claims decked it back to 14 in early February. The stock found support quickly and had traded in a range between 14 and 15 for over six weeks when the good earnings news ignited a new rally that blasted GES to 22 last week. Odds favor there will be support on dips following the earnings results, so if you want in, buying on weakness is the right plan.
GES Weekly Chart
GES Daily Chart
Kohl’s (KSS)
Why the Strength
Investors have viewed department stores (including Kohl’s) with skepticism in recent years as competition from e-commerce and off-price retailers threatens sales. Despite the concerns, shares of Kohl’s mounted a convincing rally toward the end of 2017 and early 2018 as the holiday season showed better-than-expected results. Kohl’s fourth-quarter results also blew past analyst estimates on March 1; revenue was up 9.2% and EPS of $1.99 beat by $0.24. Investors were impressed with efficient operating metrics in areas such as inventory management and markdown strategies. But it wasn’t all about keeping a lid on costs—strong sales in footwear, men’s and home drove the firm’s fastest topline growth seen in years. And early evidence suggests a simplified loyalty program, which combines three current programs into one (Kohl’s Rewards), could help move the needle when rolled out to 100 stores in May. Compared to competitors like Macy’s, Kohl’s still has a large footprint that could lead to challenges if consumers don’t open their wallets in 2018. But a partnership with Amazon (select Kohl’s locations sell Amazon’s smart home products) and the possibility of leasing part of its square footage to other tenants (such as convenience stores) could help reduce operating costs while driving incremental foot traffic. With analysts expecting revenue to be flat this year and EPS to grow 26%, Kohl’s is clearly more of an operating improvement story than a growth story. But with a yield of 3.9% and forward P/E of just 12, we think it’s an interesting situation.
Technical Analysis
KSS suffered a sharp correction at the end of 2016 then didn’t do much of anything in 2017. Momentum picked up in September, but that rally was cut short by an earnings shakeout in November. Since then, though, the stock’s action has been much more encouraging. Shares ripped higher to close out the year, then rallied up to 69 in January. And since that point KSS has been consolidating mostly in the 60 to 68 range. We’re OK with nibbling here and adding if the stock (and the market) can push higher.
KSS Weekly Chart
KSS Daily Chart
Lululemon Athletica (LULU)
Why the Strength
Lululemon Athletica is probably the company most responsible for putting yoga pants into the American fashion vocabulary. Founded in 1998 in Vancouver, British Columbia, Lululemon popularized the “athleisure” style and reaped the benefits, pushing its stock to 21 previous appearances in Cabot Top Ten Trader. The company’s appearance today is prompted by a strong quarterly earnings report—revenue up 18% and earnings up 33%—last weekend that prompted a gap up on big volume in the company’s stock. Management also issued optimistic guidance that confirmed the company’s recovery from a four-year-long sluggish patch caused by competition, some product glitches and the general difficulty of growing from a string of boutique shops to an international chain of stores and an online powerhouse. The latest quarterly gains were powered by an 11% increase in same-store sales, driven mostly by a huge 42% jump in online sales. And management is aiming at higher sales to men, higher online sales and higher international sales—all trends that were evident in 2017—to push future growth. In addition to all the good current news, Lululemon is debt free, has $990 million in cash and just authorized an additional $200 million in share buybacks (after completing a $100 million buyback program last year). This is a healthy business that’s showing signs of gradual acceleration.
Technical Analysis
LULU was a rocket from 2009, when it traded at 2, to 2012, when it traded just above 80. But from May 2012, it took the stock almost six years to break out to new highs. The stock was still trading in the low 80s last week when the good earnings news and guidance fueled a 12% jump on heavy volume that kicked shares to 88 in a day and resulted in some follow-through the day after. LULU has enjoyed plenty of increases in analysts’ price targets, but it’s the ascent into new-high territory that impresses us. Given the market, though, you should start small and aim for dips.
LULU Weekly Chart
LULU Daily Chart
Okta, Inc. (OKTA)
Why the Strength
Okta is another high-potential cloud software company with a great story and rapid growth. The firm bills itself as the leading independent provider of identity protection for the enterprise, and because of that, it benefits big clients by boosting both productivity and security. Okta’s Identity Cloud software suite allows clients to target and customize single sign-on services (like one-time passwords), multi-factor authentication, offers a universal directory (one place to manage all users, groups and devices), API access management and a slew of pre-built integrations that connect various apps to an enterprise. The result is fewer data breaches, easier collaboration among groups and partners, a far better customer experience and even easier integrations of acquired companies. It’s not the easiest product to touch and feel, but Okta’s solutions are a huge hit—4,350 enterprises are now customers (up 40% from a year ago), including firms like JetBlue, 20th Century Fox, Nasdaq, News Corp., Adobe, MGM Resorts, Dish, Workday, Western Untion, ServiceNow, Allergan, Broadcom and Del Monte, big companies from a variety of industries. Those clients are spending more (the number of spending at least $100,000 annually rose 56% in Q4), and overall billings lifted 67%. All told, revenue growth has been decelerating slightly but remains very strong, and while earnings are in the red, free cash flow has approached breakeven. Management sees the good times continuing this year, too. Okta is a strong niche story.
Technical Analysis
OKTA came public last April and rallied to 28 a few weeks later; fast forward to early February, and the stock was still at that level, representing 10 months or so of post-IPO consolidation. But the past few weeks have been very strong, first with the stock ripping as high as 43 in early March, and then a mostly sideways pause since then, despite the market’s sharp retreat. You could nibble around here or just keep it on your watch list.
OKTA Weekly Chart
OKTA Daily Chart
Petrobras (PBR)
Why the Strength
Petrobras (which is the everyday name of Petróleo Brasileiro S.A.) is the Brazilian national oil company, a big outfit with massive offshore oil reserves. The company is just emerging from the one-two punch of declining oil prices that started in 2014 and a massive money laundering and bribery conspiracy that has already brought down two Brazilian presidents and a passel of politicians and is still going on. The scandal, which was brought to light by a crusading judge in “Operation Car Wash,” makes for great reading. But Petrobras is showing up in Top Ten because it is finally putting the scandal behind it, the price of oil is providing additional support and the firm is making great progress on a divestiture and debt reduction program. The company’s stock got a big boost in January when it announced a $2.95 billion settlement of a class action lawsuit in the U.S. Petrobras reported its 2017 results on March 15, with plenty of good news about debt reduction and the liquidation of assets to speed the process. Analysts are looking for Petrobras to increase its earnings by 64% this year, and by 13% in 2019. Right now, Petrobras is a solid turnaround play that presents an attractive opportunity to investors with a longer time horizon.
Technical Analysis
PBR peaked at 21 in mid-2014 with most energy stocks (down from a high north of 80 in 2008), fell below 3 in early 2016 and was still hovering below 8 in the middle of last year before perking up. A rally from December 2017 through January 2018 pushed PBR to 14 at the beginning of February (representing three-year highs) where the market took a bite out of it. But PBR pushed to near 15 in early March and has been trading in a range with support just below 14 for a few weeks. The story of a big company emerging from the shadow of a big scandal (with an attractive 11 forward P/E and a small dividend) is a strong one. You can buy a little right here.
PBR Weekly Chart
PBR Daily Chart
Shutterfly (SFLY)
Why the Strength
Shutterfly has been a very well known brand for years, one of the most popular online places to share, print and personalize photos. That’s always been a solid business, and while the consumer portion of the firm’s results have stagnated (active customers actually slipped a couple percent in Q4), management’s done a good job of expanding its offering to businesses and keeping costs in check. (Free cash flow has been very strong.) Despite all that, Shutterfly’s stock has been dead in the water for years—until they announced a game-changing acquisition in January that should significantly boost earnings going forward. The buyout target was Lifetouch, which is the hands-down leader in school photography; it’s the only national player in the industry, is more than 10 times larger than its largest regional competitor and had revenue of around $950 million last year. The combination should result in huge synergies ($50 million by year three, or well over $1 per share) and cross-selling opportunities. In 2018, Shutterfly sees earnings of more than $2 per share (about double last year’s tally), and the company is confident it can basically double EBITDA by 2020. Long-term growth won’t be amazing, as both of these industries are relatively mature. But the new Shutterfly looks like it will be a dominant cash cow in a couple of lucrative fields.
Technical Analysis
SFLY went nowhere from late-2013 through the end of last year, mostly trading between 38 and 55 during that time (with a couple of brief probes outside that range). But that all changed after Q1 earnings and the Lifetouch announcement—SFLY soared from 53 to 73 in just two days on out-of-this-world volume, continued as high as 86 before pulling back with the market. If you’re game, you can nibble here or on dips with a stop below the 50-day line.
SFLY Weekly Chart
SFLY Daily Chart
Smart Global (SGH)
Why the Strength
Smart Global Holdings specializes in memory, storage and hybrid solutions, including DRAM- and FLASH-based storage modules. This has been a hot market as demand is high and supply is tight. The company has significant exposure to the Brazilian market, where it derived 67% of revenue in the last quarter. As the only large provider in that country, Smart is capitalizing on Brazilian demand for smartphones, desktops, notebooks and servers. The stock is doing well because growth has been off the charts. Revenue over the last four quarters has expanded by 38%, 53%, 67% and 83%, respectively. Given the trend, analysts see Smart Global’s sales growing by 64% this year, with EPS surging by 175%, to $6.21. These are monster numbers suggesting this industry is still booming. As always with these cyclical stories, investors need to keep an eye out for signs of easing demand; the turning points for memory products can come quickly. But with Brazil’s economy continuing to recover, and Smart’s management forecasting DRAM prices going up through the first half of the year, the bulls remain firmly in charge.
Technical Analysis
SGH went public last May and trended above its 50-day line through early October. Then came a multi-month sideways period, with the stock briefly leaping to 43 but, in early March, was no higher than it was five months before. But during the past month the roof has blown clean off, with SGH surging to new highs on accelerating weekly volume, which is very impressive. Volatility is extreme here, but it’s clear big investors are taking an interest. If you’re game, keep positions small and use a loose stop.
SGH Weekly Chart
SGH Daily Chart
Wix.com (WIX)
Why the Strength
Wix.com is an Israel-based software company that offers a web development platform to help small businesses and entrepreneurs boost their online presence with slick websites. Wix benefits from the same big picture trends as Shopify, but focuses mostly on web page development and, because of that, comes in at a much lower price point (premium subscriptions typically range from $5 to $25 per month). Users are even able to use Wix’s drag-and-drop website development tools for free, if they are willing to tolerate ads on their sites. This freemium model has been working very well as Q4 earnings showed Wix continues to attract registered users (up 22% to 119 million) and convert registered users to premium subscriptions (up 31% to 3.2 million). It’s also encouraging to hear that retention of current subscribers is at an all-time high. The company’s growing user base is driving big growth. Revenues were up 47% in 2017, and management guided for around 40% growth in 2018! Wix is also expected to deliver its first annual profit this year as analysts foresee EPS improving from $-0.01 in 2017 to $0.60 in 2018, though its worth noting that free cash flow has been growing rapidly (up 95% last year). Strategic initiatives, such as a partnership with Google Cloud for productivity and collaboration applications, and the launch of Wix Code in December (easy web application development) should help keep this growth story intact.
Technical Analysis
WIX had a great run in 2016 and early-2017, but momentum stalled and shares started a jerky downtrend that endured until the beginning of December. The stock stabilized at 50 and traded up to 60 just prior to the release of Q4 earnings on February 14. After that event shares blasted higher and traded up to 88, right near their 2017 high, before pulling back in recent days. You could nibble here, or look for WIX to show decisive strength should the market turn around.
WIX Weekly Chart
WIX 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.
