Ping Pong
Current Market Outlook
From a top-down perspective, nothing has really changed with the key evidence; there remain a couple of divergences (number of new highs, lagging small-cap indexes), but the intermediate-term trends of the major indexes and most leading stocks (and even non-leading stocks) are pointed up. Under the surface, though, we’re seeing some ping pong action—the major indexes have been alternating up and down days for the past couple of weeks, while many sectors are whipping in and out of favor on a weekly basis. (Growth stocks have been alternating good and bad weeks for a month.) What does it mean? It’s fair to say the broad buying pressures have eased up, though to this point, the sellers haven’t done much damage at all. We’re going along with the back-and-forth action, nudging our Market Monitor down a notch—we remain overall bullish, but the current earnings season will have a lot to say about the intermediate-term outlook for the market and leading stocks.
In the meantime, we’re still seeing a good number of setups from a wide variety of stocks and sectors. We have a couple of favorites this week, but for our Top Pick we’ll go with Qualcomm (QCOM), which has shown extreme power after a game-changing deal with Apple last week. We’re OK buying here or (preferably) on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Ctrip.com International Ltd. (CTRP) | 34.94 | ||
| D. R. Horton (DHI) | 66.55 | ||
| Fastenal (FAST) | 37.08 | ||
| First Solar (FSLR) | 83.74 | ||
| Five Below (FIVE) | 134.58 | ||
| Kansas City Southern (KSU) | 176.54 | ||
| ManpowerGroup (MAN) | 90.84 | ||
| Microchip Technology (MCHP) | 79.12 | ||
| QUALCOMM Incorporated (QCOM) | 106.36 | ||
| Redfin (RDFN) | 40.40 |
Ctrip.com International Ltd. (CTRP)
Why the Strength
Ctrip has long had an outstanding story, operating as the Priceline or Expedia of China—it’s that country’s largest travel company in both hotels and accommodations (covering hundreds of thousands of hotels both in China and outside the country) and transportation ticketing (working with all domestic and more than 300 international airlines, plus bus and other ticketing), also provides vacation packages and is making a move into corporate travel management, too. The company’s had some margin issues (gross market was 80% last year, down from 83% in 2017) in recent years that have capped earnings despite continued revenue growth, and of course there have been some worries about China’s economy over the past year, too. But the long-term drivers here are undeniable (10 to 20 million young people are moving to Chinese cities each year, boosting the firm’s target market), and the near-term outlook is improving—after revenues grew 22% in Q4 on a currency-neutral basis, management sees the top line lifting 20% or more in Q1, and expects the top line to grow faster than the overall industry for the year as a whole and (importantly) to deliver operating leverage (higher margins). Earnings estimates are mundane, but Ctrip regularly beats expectations. We’re intrigued.
Technical Analysis
CTRP had a huge run for the five years into 2017, but the stock topped out near 61 that year (well ahead of Chinese stocks) and slipped all the way to 25 in November of last year. The rally after that was so-so, but things changed after the Q4 report in early March—CTRP rallied 20% on the news, with its weekly volume the largest in more than three years. The stock eventually reached as high as 46 before easing back to its 25-day line. If you want in, you can start a position here.
CTRP Weekly Chart
CTRP Daily Chart
D. R. Horton (DHI)
Why the Strength
Despite continued iffy economic reports (housing starts in Q1 were down about 10% from a year ago), there’s budding optimism that the housing slowdown of the past few quarters is set to reverse going forward thanks to tamer mortgage rates and a reaccelerating economy. D.R. Horton is one of the granddaddy’s of the homebuilding sector—in fact, it’s been the largest builder by volume since 2002 and currently constructs all sorts of homes (entry level, move-up, active adult and luxury) in 29 states. As you’d expect, growth has slowed in recent quarters along with the industry, but Horton hasn’t stood still—it bought three small, private homebuilders in Q4, has closely managed investory and boosted its returns to shareholders (it repurchased about 1% of the company in Q4 alone and sports a 1.3% dividend yield). But, really, the stock is strong today because big investors see indications that a turnaround is coming—while Horton’s sales orders rose just 3% in Q4, the backlog of homes ordered was up 10%, and industry-wide, confidence measures from home buyers and builders are picking up while mortgage applications surge. Throw in a cheap valuation (11 times earnings) and the setup for a sustained run is there—but a lot will depend on earnings, which are due out this Thursday morning (April 25).
Technical Analysis
DHI plunged from a high of 53 last January to a low of 32 in December, and even as of early March, shares were still hanging around the upper 30s. But the stock has changed character since then—DHI has now advanced seven weeks in a row (the longest streak since 2017), with the buying pressures really picking up during the past few days. With earnings coming up, we’d either keep it small here or, ideally, buy on a reasonable shakeout in the days to come.
DHI Weekly Chart
DHI Daily Chart
Fastenal (FAST)
Why the Strength
Fastenal is an industrial company that provides customers with the fasteners, tools and supplies they need to make products, build structures, protect employees and maintain their facilities and equipment. Most of its products are consumables, so it’s known as a short-cycle bellwether stock (as compared to longer-cycle companies like Caterpillar that sell more expensive equipment). The company has succeeded despite the online retail explosion because its clients are more consistent consumers of its products, usually using them on a daily basis. That buying pattern is one of the reasons Fastenal launched its Onsite Program, through which it basically operates a mini-store inside the physical presence of larger customers. Beyond Onsite, Fastenal has been able to maintain pricing power, customer service and delivery speed so clients keep coming back. Revenue hasn’t contracted since 2009, was up 13% in 2018 and should grow 10% this year. Earnings are also consistent (2016 was the only down year since 2009), with EPS up 24% last year and projected to climb 9%, to $2.86, in 2019 (likely conservative). It’s a straightforward story and, while the stock will have some ups and downs it’s been in a major uptrend for a while. A Q1 beat from April 11 propelled it to another all-time high, and we think the trend will continue.
Technical Analysis
FAST was up and down in 2018, gyrating between 46 and 60 for the most part. But like many stocks, this one changed character after the market bottom, with six weeks up in a row into February, a tight consolidation for five weeks, and then a strong pre- and post-earnings surge to new highs. FAST isn’t a runaway stock, so if you want in, aim to buy on dips.
FAST Weekly Chart
FAST Daily Chart
First Solar (FSLR)
Why the Strength
Many investors are probably familiar with First Solar since it was one of the red-hot clean energy stocks back before the Great Recession. The days of blistering, triple-digit growth are over but First Solar is still one of the better respected cleantech stocks out there. With a market cap of over $6 billion, a strong balance sheet, annual revenue consistently north of $2 billion and positive earnings, it’s a totally different beast than the speculative start-up from 15 years ago. That said, the stock underperformed in 2018 as revenue and EPS fell (down 24% and 48%, respectively), but things have turned north in 2019 as analysts see improving fundamentals in the global solar market and steady growth in the U.S. utility-scale development pipeline, mainly because costs keep coming down. First Solar should be well positioned to benefit from both given the emphasis on its Series 6 module (far more efficient than prior solar panels and capacity and production are both ramping quickly), which makes it more competitive on price with the upstart Chinese firms that stole its cost advantage years ago. Management has been retooling the company for years to regain its leadership position. Estimated 2019 revenue growth of 49% and EPS growth of 86% (to $2.53), plus the recent addition to Goldman’s conviction buy list, should draw more big investors into the name.
Technical Analysis
FSLR trended down for the second half of 2018, falling from 82 in April to 37 in October. The uptrend began after the market’s Christmas bottom, and the move has been tight and steady, with shares staying above their 50-day line. A quick shakeout in late March led to a surge to the 60 area on huge volume after Goldman’s positive commentary. The buyers are in control, and dips should set up a decent risk-reward entry.
FSLR Weekly Chart
FSLR Daily Chart
Five Below (FIVE)
Why the Strength
After months of worries concerning slowing growth, higher costs due to tariffs and slowing retail foot traffic for the industry as a whole, Five Below is back in gear on the upside as the recent quarterly report (and a brighter overall economic outlook) cause buyers to jump in. Top-line growth has slowed a bit from the heady days of early 2018, but the firm’s holiday-quarter report (released in late March) topped expectations and, essentially, reaffirmed Five Below’s best-in-class cookie-cutter growth story: Management recently expressed great confidence in driving sales and earnings higher at a 20%-ish annual clip for many years, thanks to a continued rapid store expansion plan (19% gain in the store base this year), awesome new-store productivity (payback within one year) and many levers to drive same-store sales higher down the road (including a great licensing slate this year, a growing loyalty program and a new remodel program for many older locations). The firm is even testing a “Ten Below” program in some stores to see if they can expand into higher-priced merchandise. Despite heavy investments in new distribution facilities and other infrastructure, Wall Street sees the firm hitting its 20% growth targets this year, with a pickup in earnings growth possible in a few quarters as some of these investments taper down. It’s not cheap, but Five Below remains a unique, reliable longer-term growth story.
Technical Analysis
FIVE broke out of a five-year base in late 2017 and zoomed all the way to 136 last fall. The Q4 pullback was sharp, though so was the recovery back toward new highs in January and February. But the stock wasn’t ready yet, retreating yet again to etch a shallower, eight-week structure. All told, FIVE rested for seven months, but now the buyers have taken control—shares have moved up on big volume in recent weeks to new price and RP highs. You can buy here or on normal weakness.
FIVE Weekly Chart
FIVE Daily Chart
Kansas City Southern (KSU)
Why the Strength
We’re not huge on rail companies since it hasn’t been a big growth industry in decades, but we’ll put our ear to the track every now and again to see if it’s signing a growth song, and right now it appears to be doing just that for Kansas City Southern. The company operates around 1,050 locomotives and 20,275 cars in the U.S., Mexico and Panama. It’s one of the best secular growth stories (relatively speaking) in rail given limited exposure to the most challenged end markets in the U.S. and biggest exposure to Mexico. That bull thesis came into focus last week when the company reported Q1 results that lurched past estimates (revenue was up 5.7% while adjusted EPS of $1.54 beat by $0.10) and drove the stock to an all-time high. Revenue was driven by 21% growth in Chemicals and Petroleum and 8% growth in Agriculture and Minerals. Autos and Intermodal were down 4% and 12%, respectfully, due to auto plant shutdowns and teacher protests. But big picture, management’s transition to a precision-scheduled network appears to be delivering the revenue growth, capital efficiency and asset and labor utilization it was supposed to. The company’s growth isn’t going to blow you away, but 6% topline and 13% EPS growth, plus a 1.2% dividend yield and attractive valuation as compared to peers (forward PE is 18), should keep the stock chugging higher. And if the economy revs up, these estimates will likely prove too low.
Technical Analysis
Every now and then KSU will go on a monster run, like the one that took it from 11 in 2009 to 117 in late-2013 (making it almost a 10-bagger). We’re not calling for that type of move now, but if you step back you see KSU topped out at 117 in 2013, 119 in 2014, and 119 in 2018. If fell to 90 late last year, but the persistent recovery since December and last week’s earnings-induced surge to 125 (new all-time highs) probably marks a change in character. As for as cyclical stocks go, we like it.
KSU Weekly Chart
KSU Daily Chart
ManpowerGroup (MAN)
Why the Strength
Manpower is a giant provider of staffing services through a few different brands, both temporary and permanent, and in a variety of industries, for companies around the world, with an emphasis overseas—about two thirds of revenue comes from Europe, with 20% from Americas and the rest spread around the globe. Thus, the company is a relatively pure cyclical play: As the global economy has weakened (especially in Europe, where some countries are teetering on a recession) and the U.S. dollar has strengthened, hiring has slowed and revenue growth has turned negative (-9% in Q1, and -2% on a currency-neutral basis). But the market is beginning to sniff out a turnaround—some macro global indicators turning up, and like many cyclical firms, Manpower is forecasting some improvement going forward, with Q2 currency-neutral revenues expected to be flat and with gross margins ticking higher. Earnings estimates aren’t anything to crow about, but they’re likely low and, besides, the valuation is in the basement (13 times expected earnings), so expectations are, too. Throw in a solid dividend (2.3% annual yield) and a healthy balance sheet and Manpower looks like a possible turnaround in the making.
Technical Analysis
MAN had a nice run from the middle of 2016 through early 2018, but it then retraced the entire advance, bottoming out with the market in late December. Interestingly, the stock advanced nine weeks in a row right after that bottom, a very positive sign, and then etched a tight seven-week consolidation. And last week, despite its so-so Q1 report, brought the breakout—shares zoomed 12% to multi-month highs on its heaviest volume since October. If you want in, we advise aiming for minor weakness.
MAN Weekly Chart
MAN Daily Chart
Microchip Technology (MCHP)
Why the Strength
Microchip Technology makes microcontroller (MCU), mixed-signal, analog and flash-IP solutions. The stock is liked by analysts because of its market share-gaining trends in the analog and MCU markets, with solid execution leading to consistent profit growth (EPS up 37% to $5.45 in 2018, which marked the fifth consecutive year of expanding earnings). The stock is doing well now thanks to follow-on strength after management’s comments on February 6, when it called the quarter ending in March 2019 as the bottom of the cycle for the company. Those comments referred to several slow quarters due, in part, to trade tensions with China. But the CEO’s reference to a potential “bonanza” got the market’s attention and has propelled the stock higher. Beyond those words, Microchip tends to do well in the current quarter, and it says the acquisition of Microsemi (closed last May) is going well with excess inventory well down from where it was, which should help EPS to pop 19% (to $6.48) this year. Microchip will likely keep growing through acquisition once it cuts debt, which it could do faster than expected if price increases are well received (too early to tell). With the stock trading near a 52-week high and 37% revenue growth expected this year, we see shares keeping a high profile among big investors.
Technical Analysis
MCHP’s chart tells a familiar story. The 2018 high came last summer then the stock slid into the end of the year before bouncing back to 91 in February. That rebound had some positive clues (including a stretch of six weeks up in a row to start the year), and after a six-week retreat, MCHP has surged back to its 2018 highs on a ton of days of good volume. Any weakness will likely lead to higher prices.
MCHP Weekly Chart
MCHP Daily Chart
QUALCOMM Incorporated (QCOM)
Why the Strength
Qualcomm makes chips and licenses technologies for mobile devices. It’s been doing surprisingly well given just about every big move it tried in recent years failed, including an attempt to sell itself to Broadcom and an effort to acquire NXP Semiconductors. It’s also been slugging it out with Apple for years over everything from illegal practices to patent infringement—and the net effect wasn’t pretty, with revenue slipping three of the last four years (it was up 2% in 2018). But now the coast is clear! Last week Qualcomm and Apple settled and dismissed all litigation by forging a six-year agreement that includes payment from Apple to Qualcomm on past royalties and a multi-year chipset supply agreement. Based on the market reaction—Qualcomm rose 23% on Tuesday and another 16% on Wednesday—it seems the market thinks Qualcomm got a great deal. Qualcomm now has considerable leverage to enforce future royalty compliance with other manufacturers, and the news inspired Intel, which was going to ship 5G chips to Apple in 2020, to step out of the 5G smartphone modem business, which is another win for Qualcomm. Management will update guidance on the May 1 earnings call. You can bet analysts will be boosting estimates (from the 10% revenue contraction and 5% EPS growth that was expected) given early indications this deal adds $2 in EPS within a couple of years—indeed, next year’s earnings outlook already calls for a 40%-plus gain.
Technical Analysis
QCOM topped out at 75 last September then slid all the way down to 49 in January of this year. Shares had begun to form a nice little uptrend in February and March and were consolidating around the 58 mark when news of the settlement ignited a blastoff rally to multiyear highs above 75. We love high-volume breakouts on big, liquid stocks, and while short-term dips are certainly possible our guess is that QCOM’s path of least resistance is now up.
QCOM Weekly Chart
QCOM Daily Chart
Redfin (RDFN)
Why the Strength
Redfin is another play on the rebounding housing group, albeit with far more risk and reward than your standard homebuilder or materials firm. The company’s big idea is to upend the brokerage industry—its popular listings website (27 million monthly unique visitors) gets eyeballs, and the firm’s lower commissions (1% to 1.5%) and quicker sales times are attracting more sellers to sign up with Redfin’s agents. (Those quicker sales also attract agents to the platform, who make more money with Redfin than with other brokerage outfits.) Redfin is also branching out into added services—for an extra 2% listing fee the company will clean, stage and repair a house prior to sale; the company is getting into the home-buying business, grabbing homes (for the right price) and then using its agents to sell them down the road; and it’s offering mortgage and title services, too. All told, Redfin is grabbing share (it closed 0.81% of all homes sold in the U.S. in Q4, up 10 basis points from the year before), is inking deals with some big players (it has a referral deal with Re/Max in areas Redfin doesn’t have agents) and revenues are lifting at a 30%-ish clip. There are some gross margin worries and earnings are still negative, which has attracted many short sellers (17 million shares sold short, or about 14 days of trading volume!), but there’s no question that, if management pulls the right levers the upside is huge. Earnings are likely out in early May.
Technical Analysis
From its post-IPO high of 33 in August 2017, RDFN collapsed to a low of 13.5 last fall. Interestingly, though, the RP line bottomed in November (six weeks ahead of the market) and the stock has shown some solid action this year—there were two big-volume weekly gains after earnings in February, and following a brief rest, there was another round of heavy buying three weeks ago. The very low-volume pullback of late is constructive, too; we’re OK starting a position here.
RDFN Weekly Chart
RDFN 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.
