April 20, 2020

Wading Back In

Current Market Outlook

While the day to day volatility remains extreme, the market’s intermediate-term trend has turned up (according to our measures), which argues for a more constructive stance toward stocks. Of course, that doesn’t mean you should dive in headfirst—there remain plenty of headwinds, including the fact that most stocks are still below their 50-day and 200-day moving averages (i.e., plenty of potential selling to chew through on the upside). But there’s no question the evidence has improved, so it’s a good idea to slowly put money to work, and then use the market for feedback; If you develop some solid profits, you can become more aggressive, but if the uptrend decisively cracks (would take a 6% to 7% drop from here), you want to hold off further buying and honor your stops.

This week’s list continues the trend we’ve seen of many high-potential stocks spiking back toward their old highs. Our Top Pick is Okta (OKTA), which has rejoined the leadership ranks after nine-months of correcting and consolidating.

ACADIA Pharmaceuticals (ACAD)

www.acadia-pharm.com

Why the Strength

Acadia Pharmaceuticals has had a great story for the past few quarters, and after a multi-month rest and shakeout, it looks to be getting back on track. The company’s big idea revolves around a compound called Pimavanserin, which has already been approved for Parkinson’s disease-related psychosis (hallucinations, delusions and the like); the brand name of the drug is Nuplazid, and it’s the only approved treatment for this disease. That’s been driving Acadia’s rapid top-line growth, and there’s plenty more where that came from, as it expands market share (currently in the high-teens) by grabbing business from off-label competition. (Nuplazid sales are forecast to rise another 34% in 2020.) Even better than that, though, is the opportunity of Pimavanserin to treat Dementia-related psychosis, a market that’s about 10 times as large as Parkinson’s—a Phase III trial was actually stopped early last September due to positive results, and Acadia is expected to officially file for approval by mid-2020 (final approval likely by year-end). Some analysts think the Dementia indication alone could eventually bring in $2 billion a year! Beyond that, the firm has some other irons in the fire (pivotal Phase III data for the drug to treat Major Depressive Disorder is expected in Q4 of this year), but the other two indications alone should be big. Analysts see revenues up 33% this year and 70% in 2021 should the new indication get approval. The Q1 report is due out May 7.

Technical Analysis

ACAD gapped up after that Phase III trial was stopped early last September and rallied as high as 54 in early December before topping out; it didn’t finally bottom out until it hit 30 during the market’s nadir in March. But after shaking out below support, the stock has acted beautifully, with big-volume support at the bottom and four straight up weeks, pushing all the way to multi-month highs. We’re OK starting small here or (preferably) on dips, and adding more on continued strength.

ACAD Weekly Chart

ACAD Daily Chart

Advanced Micro Devices (AMD)

amd.com

Why the Strength

As manufacturing in China resumes and laptop production recovers, the prospects for firms that make microchips and other components are becoming increasingly bullish. Advanced Micro, a semiconductor stalwart, is challenging Nvidia’s dominance in the $157 billion graphic processing unit (GPU) market based on its Radeon technology. Indeed, much of AMD’s future growth will come from the booming video game market as gamers increasingly switch to gaming laptops. Advanced Micro’s Ryzen 4000 H-series chips are used to power Lenovo’s new models, and both Ryzen and Radeon graphics cards are used in popular Asus gaming laptops. The company is also banking on continued cloud adoption, with its data center-driving EPYC processors in big demand from hyperscale cloud providers like Amazon, Google, Microsoft and others. The firm was firing on all cylinders coming into 2020 (Q4 was a barnburner), and it hasn’t appeared to have suffered any major virus-related setbacks; analysts still see revenues up 40% in Q1 and 28% for 2020 as a whole, driven by continued momentum in its aforementioned markets and some new product releases in the months ahead. The next big update will come next Tuesday (April 28), when Q1 results will be released.

Technical Analysis

As chip stocks have snapped, AMD has again positioned itself as a leader in the group, with a relatively modest decline during the crash (finding support at its 40-week) line, many weeks of support or accumulation around the low, and last week, an above-average volume surge that brought it close to new-high ground. With earnings coming up in a week, we’re going to set our buy range a bit down from here, thinking some pre-report profit taking is likely.

AMD Weekly Chart

AMD Daily Chart

ASML Holding (ASML)

asml.com

Why the Strength

The outlook for the semiconductor sector is improving, with industry watchers now expecting 8% growth for the sector this year despite the global recession. And the made-to-order foundry business—ASML’s niche—should see a rise of 17%. (All of this assumes business begins stabilizing by mid-June.) ASML makes advanced lithography equipment that etch tiny circuits onto chips that are used in just about every electronic device out there. These giant machines can cost up to 200 million euros (north of $217 million) each, so its customers aren’t fly-by-night operators (two of its major customers are Samsung and Intel). The coronavirus is, of course, affecting all industries; the company just reported that its first quarter was disrupted due to delayed deliveries as a result of COVID-19, and it missed analysts’ projections. However, the company’s earnings of $1.03 per share still beat last year’s $0.94, and revenues of $2.69 billion were higher than the $2.5 billion the company posted in the same period of 2019. More importantly, the outlook is solid with 3.1 billion euros of new orders booked during the first quarter, with Logic orders comprising 66% and Memory the remaining 34%. As well, ASML fully expects the second quarter to be strong, with some “catch up” demand taking place. While chips for automakers are sluggish, the company said it’s seeing growing demand for chips for notebooks, advanced communications systems and data warehouses. Long story short, ASML is doing well and looks poised to benefit from the likely pickup in business going forward. Analysts see earnings up nicely this year despite all the hiccups.

Technical Analysis

ASML had a great run from late 2018 through early February, but it imploded along with the rest of the market, falling as low as 191 last month. Interestingly, though, the stock bottomed a few days ahead of the major indexes, quickly gapped back into the high 200s and has since stretched toward 300. If you want in, you can start small here with a stop near 260.

ASML Weekly Chart

ASML Daily Chart

CrowdStrike (CRWD)

crowdstrike.com

Why the Strength

Despite the self-induced recession, the stay-at-home economy is booming thanks to companies that are letting employees work from home—and even after things go back to normal, it’s likely some of this new workplace flexibility will be here to stay. Helping keep the cloud secure is CrowdStrike, which facilitates endpoint detection and protection on or off networks, as well as on major platforms such as Google Cloud and Microsoft Azure. Using crowdsourced data from users, it deploys artificial intelligence to predict whether a threat is malicious or not and its services span beyond security into “systems hygiene,” which allows clients to see who’s on their network and what applications they’re using, as well as how user accounts are being accessed. CrowdStrike has been growing rapidly for a while, but the stock has perked up due to expectations of continued excellent results thanks to the world’s new reality. CrowdStrike’s revenues are mostly subscription-based, and this metric was up by an eye-popping 99% last year. For the latest quarter, subscription revenue (+90%), annualized recurring revenue (+92%, up to $600 million at year-end) and subscription gross margin (+77%) also grew impressively. Despite negative earnings, the company was cash flow positive in Q4. Best of all, once companies go with CrowdStrike, they don’t leave (98% retention rate) and tend to add a lot more services over time (same-customer revenue growth of 24% in Q4). Looking beyond the pandemic, CrowdStrike is definitely one of the leaders in the “new-age” cybersecurity sector, as firms need new solutions to deal with the move of their systems and apps to the cloud.

Technical Analysis

After a post-IPO rally to 100 last summer, CRWD was cut in half by October and really couldn’t get off its knees, even as the market went nuts through February. The COVID panic resulted in a huge break of support, but what’s been impressive has been the rebound—CRWD exploded off the bottom on two weeks on huge volume, and after some tightness in the 60 area, it’s extended to multi-month highs. We suggest aiming for a bit of a pullback and using a loose stop.

CRWD Weekly Chart

CRWD Daily Chart

Franco-Nevada (FNV)

www.franco-nevada.com

Why the Strength

Despite the market rally, some signs of economic re-opening around the globe and a collapse in most commodities, gold and precious metals prices remain elevated and/or have bounced back sharply of late. That’s helping all firms in the gold mining group, though our favorites are the high-margin operators that own gold streaming contracts or royalties without the capital expense involved in mining it. One of those is Franco-Nevada, whose main business is streaming, providing up-front payments to miners in exchange for the right to buy gold and other resources at a set, low price. Franco’s extensive portfolio includes some 300 royalties in gold, silver and platinum (two-thirds of its overall assets) and oil/gas projects (one-third). With financing likely to become harder to come by during the economic downturn, miners will increasingly turn to companies like Franco to provide money to sustain their operations; in exchange for providing assistance, Franco can leverage downturns to grow its portfolio at advantageous prices (as happened in the 2015 commodity slump). Still, the main reason or the strength today is that business is good and, despite the hit in energy, should get better in the quarters ahead. In fact, business is already picking up—sales and earnings have ratcheted higher during the past couple of quarters, and while energy will crimp growth a bit this year, analysts still see the bottom line up 20% in 2020 as the firm benefits from higher metals prices, all while maintaining gigantic profit margins (47.8% pre-tax margins last year!). A token dividend (0.8% yield) puts a nice bow on the package.

Technical Analysis

FNV looked like the leading gold stocks even before the virus hit (it was written about in Top Ten in early February), though it knocked us out when the stock plunged with the market in March. But shares found big-volume support at the lows, snapped back quickly, and last week, staged a good-volume move to new highs. (It’s now up five weeks in a row, which is a rarity.) FNV looks like one of the top two or three leaders in the group, so if you want a stake in precious metals, we’re fine snagging shares here or on weakness.

FNV Weekly Chart

FNV Daily Chart

Immunomedics (IMMU)

immunomedics.com

Why the Strength

Immunomedics has come to life thanks to some great news of late. Last week, the FDA gave the firm’s cancer drug (named sacituzumab govitecan for some reason) Fast Track designation. The drug, which treats adult patients with locally advanced or metastatic urothelial cancer (mUC, formed primarily in cells that line the urethra, bladder, ureters and renal pelvis organs), is currently in Phase II testing, and interim results showed that it demonstrated an overall response rate of 29% in 35 patients with mUC who had relapsed or are refractory (resistant) to immune checkpoint inhibitors. But even bigger than that was the news that came on April 6, when a study investigating sacituzumab govitecan in triple-negative breast cancer (doesn’t respond to hormonal therapies and has very limited treatment options; 10% to 20% of all breast cancers are in this category) was actually halted early because results were so good; the study confirmed that the drug is indicative of a “potential major advancement in the treatment of this devastating disease.” The drug is already in front of the FDA, with an expected approval date of early June. Investors, both retail and institutional (including Point 2 Asset Management, which just bought 1% of the company), like both pieces of news and have piled into the stock. Following likely approval, analysts see $53 million in revenue this year growing to $185 million next as Immunomedics leaves behind the development stage.

Technical Analysis

IMMU has been in a very choppy downtrend for the past few years, and the stock wasn’t able to escape the market’s crash, as it sank to multi-year lows in March. But that was then, and this is now—IMMU basically doubled on the breast cancer-related news and has traded well since, challenging resistance near 22 today. It’s still speculative, but we’re OK nibbling around here with a loose stop.

IMMU Weekly Chart

IMMU Daily Chart

Okta, Inc. (OKTA)

okta.com

Why the Strength

Okta has emerged as the favored new-age cybersecurity name among institutional investors (859 mutual funds now own shares, up from 496 just one year ago) thanks to a leading position that should produce rapid growth for years to come. The story here is all about identity; whether it’s on the business side (allowing employees to access a firm’s network, apps and data from anywhere and any device … but only the data they’re supposed to see) or the consumer side (presenting the right offers and accessing the content they are allowed to), Okta’s identity solutions are possibly the “must have” solution that just about every good-sized company needs as they transition away from on-premise technology and toward the cloud. Backing that up is one amazing stat: 70% of hacking-related breaches are caused by stolen credentials, so there’s no doubt identity is a top priority among IT teams. The firm has been operating a bit south of breakeven, but free cash flow looks better (totaled 6% of revenue last year) and all the other metrics look great, including sales growth (up 45% to 50% each of the past five quarters), customer count (up 30% in Q4; more than 20% of the Global 2000 are already customers), contracted future revenue (up 66%) and same-customer growth (19% over the past year). At its Investor Day in early April, management said it’s looking for 30% to 35% annual top-line growth through 2023, with free cash flow growing around 10-fold during that time. However you slice it, Okta continues to have a big story.

Technical Analysis

OKTA originally broke out back in February 2018 and had a huge run through July of last year. Then came two steep drops, with the one this year bringing the stock down to 11-month lows and likely re-setting the overall advance. Shares found massive-volume support at the bottom, and they’ve really put on a show this month, with OKTA galloping all the way to new highs. A pullback is possible, but we’re not expecting a huge drop—we’re OK starting here or on any weakness.

OKTA Weekly Chart

OKTA Daily Chart

Sea Limited (SE)

seagroup.com

Why the Strength

Sea has been a glamour leader for much of the past year, and after a sharp correction with the market, it’s been one of the first to reemerge to new highs. The company is all about southeast Asia (mostly Indonesia, Thailand, Philippines, Vietnam, Singapore and Malaysia), where it has the largest digital entertainment and e-commerce platforms in the region, both of which have been driving the massive growth you see in the table below. For digital entertainment, it’s mostly about games—the firm’s Free Fire offering was the most downloaded game in the world in 2019 (!), hit a peak of 60 million daily active users in Q4 and had related content on YouTube that produced about 30 billion views! All in all, paying users were up 180% in Q4, driving a 107% gain in digital entertainment revenue. Still, with no new games, the excitement in 2020 is likely to surround Sea’s e-commerce efforts, where its Shopee platform not only saw great growth to finish up last year (revenues up a whopping 182% as gross merchandise volume rose 65% and gross orders were up 113%), but analyst checks during Q1 point to continued rapid growth as more people have been shopping from home—indeed, the number of stores on Shopee Indonesia grew 30% in just three months, with mostly solid (5% to 15%) growth seen in other countries as well. All told, analysts see revenues growing “only” 38% this year, but given that the company has a history of trashing estimates, we’re guessing that will prove quite conservative. Bigger picture, as e-commerce in southeast Asia booms many-fold in the years ahead, Sea should be the primary beneficiary.

Technical Analysis

SE had a big run from February through July of last year, and then, after building a four-month launching pad, it enjoyed another run from December through February. Shares got yanked down with everything else during the market’s crash, but they generally held their 40-week line (better than 90% of stocks), bounced back well initially, and last week, leapt all the way to new highs on solid volume. Short-term, aiming to enter on dips makes sense.

SE Weekly Chart

SE Daily Chart

Shopify (SHOP)

shopify.com

Why the Strength

For leading e-commerce operators, the current environment is looking a lot like Black Friday, with the coronavirus stay-at-home orders continuing to push buyers online. Amazingly, from March 22 through April 4, online orders were up 56% in North America for store-based retailers and 52% for web-only retailers, while online grocery sales in March alone rose 233%. That overall trend is benefiting Shopify, which is one of the leading technology providers to online merchants (mostly small- and mid-sized operators, but increasingly large ones, too). These merchants can set up and manage their own online stores and get back office and marketing help (and short-term loans, too), while Shopify collects monthly fees (recurring subscription revenues) between $29 to $299, as well as add-on charges for shipping, payments and fulfillment. Last week, the firm’s Chief Technology Officer tweeted that Shopify’s traffic was near peak holiday levels, and “it won’t be long” before the shopping platform’s traffic more than doubles; all in all, the firm expects to top its first-quarter outlook (results are due out May 6). Of course, the buying in the stock of late isn’t due to a short-term bump—Shopify has been growing rapidly for years, and investors are thinking the shut-in is only going to accelerate its growth trend.

Technical Analysis

SHOP has had a huge, huge run in recent years, which raises risk, but there’s no question it remains in favor today. Shares had been nearly cut in half at their nadir in March, and the stock actually returned to that low a couple of weeks later, which wasn’t ideal. But SHOP has gone bananas since, ripping straight up to new highs on many days of good volume. We wouldn’t chase it here—if you’re game, look for dips.

SHOP Weekly Chart

SHOP Daily Chart

Tradeweb Markets (TW)

Why the Strength

The bond market has undergone a dramatic transformation in recent years. A formerly opaque client-to-dealer system is now more democratic with fewer barriers, allowing all sorts of investors to trade with each other globally at lower costs, with more liquidity and greater price transparency. Tradeweb, a pioneer in this field, operates over-the-counter markets for banks, asset managers, funds and insurance companies, making bond trading more efficient and transparent. Aside from transaction fees, the firm makes money by collecting and selling market data to investors across its various platforms and offers a host of products and trading models. Rates and credit markets account for most of the firm’s profits, and its markets are expanding rapidly due to high levels of safety-related demand for sovereign and high-grade corporate bonds. Tradeweb’s team works to “electronify” workflows and ensure continued network growth; in 2017, for instance, it expanded into China by offering clients access to the Chinese bond market through an initiative with BondConnect. As for the numbers, growth has been steady, and analysts see that continuing with mid-teens sales and faster earnings growth likely in 2020. Bigger picture, the global bond market is still less than 50% electronic by some estimates, so there’s still plenty of digitization—and profit—opportunities ahead for Tradeweb. Earnings are due May 7.

Technical Analysis

TW came public last April and had a good first couple of months, but then began a big base-building effort in July. It broke out nicely in February, but the timing was off, as the market’s crash pulled the stock as low as 33 during the panic. However, TW has shown tennis ball action since, galloping straight back up to new highs before a little weakness. We’ll put our buy range down a bit from here.

TW Weekly Chart

TW 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 27, 2020.