April 27, 2020

Stick with the Evidence

Current Market Outlook

Last week featured a lot of dramatic news items (including negative oil prices!), but it ended up being a quiet week in the major indexes, which we take as constructive—the action allowed some stocks to settle down a bit, which is often a sign of accumulation. Thus, we’re optimistic, but the key from here is to take things day by day and to stay in gear with the market’s evidence. Right now, with the intermediate-term trend still up and many stocks acting well, you should be putting some money to work, and then see what comes—further upside (especially if we see many bullish earnings gaps) would be a sign to do some follow-on buying, while a couple of sharp, big-volume selloffs in the market would tell you to hold off. As we wrote above, we’re optimistic the path of least resistance is up, but we’ll stay flexible and take it as it comes.

This week’s list again has plenty of good-looking names to choose from. Our Top Pick is Pinduoduo (PDD), which has turned powerful after a five-month rest. You can start a position here or (preferably) on dips of a couple of points.

Alnylam Pharmaceuticals (ALNY)

alnylam.com

Why the Strength

Big news for Alnylam Pharmaceuticals: Blackstone Group announced a $2 billion investment in the company to boost Alnylam’s RNA interference (RNAi) medicines, including inclisiran (a treatment for high cholesterol) and vutrisiran and ALN-AGT, both cardiometabolic programs. Not only does this provide a cash infusion for Alnylam, but represents a huge, institutional backer in the company’s program. (Blackstone is getting 50% of the royalties of inclisiran as well as a good-sized loan and taking a $100 million equity stake.) Alnylam is a leading RNAi therapeutics company, which means it makes drugs that use RNA molecules to inhibit gene expression or translation by neutralizing targeted mRNA molecules. If done right, the process can shut down one gene at a time. The firm recently received Fast Track approval from the FDA for vutrisiran in the treatment of a hereditary, progressive disease resulting in loss of sensations in extremities that can eventually lead to death. Elsewhere in its pipeline, Alnylam has teamed up with Vir Biotechnology for several infectious disease treatments, including one for hepatitis B, which affects some 290 million people around the world; they just reported positive interim results from a Phase 2 study, indicating that patients had significant reductions in symptoms. And earlier this month, the two companies announced that they have expanded their collaboration efforts to include up to three targets for COVID. Q1 results are due May 6.

Technical Analysis

ALNY wasn’t much of a leader for years, but it came to life last November and was up at 134 before the market crashed. The initial rebound was just OK, but the stock has come to life during the past three weeks, including some big-volume buying after the Blackstone deal on April 13. We’re not dead set against a nibble here, but we’ll set our buy range down a bit, thinking some near-term retrenchment is more likely than not.

ALNY Weekly Chart

ALNY Daily Chart

Boston Beer Company (SAM)

bostonbeer.com

Why the Strength

Staying at home has boosted the alcohol beverage industry, which saw sales spike by 55%--in just one week in March! That’s great for the mega wine, beer, and spirits companies, but tough for the 8,000 or so U.S. craft brewers, like Boston Beer (maker of Sam Adams and many other alcoholic beverages, hence the symbol), who traditionally sell some 85% of their products to bars and restaurants. Indeed, the company missed estimates on both earnings and revenues for its first quarter, with large keg returns from distributors and retailers and $4.2 million of other COVID-19-related costs crimping results. Even so, revenues grew 31% on a similar-sized increase in barrel shipments, thanks in part to better-than-expected growth for the Truly brand, including its newly-launched Truly Hard Lemonade. Forecasts for this quarter are revenues of $394 million and EPS of $2.35, with a return to year-over-year earnings growth likely in Q3. Once the pandemic ceases, analysts believe the overall craft beer industry will rebound to its recent 10% growth pattern, and Boston Beer will surely benefit. M&A activity was strong in 2019, and after this interruption, we may see more opportunities as some of the brewers may be ripe for being swallowed up after the virus shut-in. Boston Beer certainly seems to be one of the firms that could be on the hunt, as it’s faring better than most of its competition, partially thanks to its exposure to the hard seltzer market—a fast growing category. Bottoms up.

Technical Analysis

SAM topped in July of last year and fell from 445 to 336 over a few weeks, retested that area a few times and then finally crashed below it with the market in March. But it’s hard to find better action since the low—SAM has risen five weeks in a row back to new high ground, including a strong-volume, post-earnings reaction. We wouldn’t be surprised to see a little giveback, but the stock looks like it wants to head higher.

SAM Weekly Chart

SAM Daily Chart

DocuSign (DOCU)

docusign.com

Why the Strength

DocuSign remains a leader in the market as it’s a poster child for rapid, reliable growth, and it’s unharmed by (and possibly benefiting) from the virus shut-in. The firm’s eSignature software helps companies manage electronic agreements through its Agreement Cloud. Beyond facilitating the eSignature process, the firm makes it easier for companies to validate signers’ identities. Its new auto-tag feature uses artificial intelligence to place signature and date tags, speeding up the document process, while storing and encrypting it. Recently, the refinancing boom has likely helped business, but this story has multi-year legs to it as automated document creation, execution and management saves clients time and money. Most of the company’s revenue is from the core eSignature segment, and it sees Financial Services as a future growth driver along with the Federal division, which allows agencies to transform paper-based processes into a more efficient digital system. Based on fiscal 2020 results, it’s on the verge of joining the list of SaaS firms that have crossed the $1 billion revenue threshold, and with the global e-signature opportunity only around 5% penetrated, DocuSign has plenty of room for expansion. In the latest quarter, the firm delivered total and subscription revenue increases of 38%, as well as 40% billings growth. Total customer count rose to almost 589,000 and the same-customer revenue growth rate was 17%. Looking ahead, it bumped its sales and earnings guidance by a few percent after its earnings report on March 12; analysts see the top line up in the high 20% range this year and next, while earnings are expected to leap north of 60% each year. It remains a unique growth story.

Technical Analysis

DOCU is a member of an exclusive club of stocks making new yearly highs in a broad market otherwise still in recovery mode. The stock has left leadership crumbs along the way in recent weeks, first holding its 200-day line (95% of stocks did not), then popping to new highs in late March (!), and after a sharp three-day retreat, motoring back to new highs north of 100. If you really want to nibble here, you can, but we’re going to set our buy range down a bit given that DCOU is extended above its moving averages.

DOCU Weekly Chart

DOCU Daily Chart

Exelixis (EXEL)

exelixis.com

Why the Strength

Biotechs are hot commodities, partially due to the increased focus on public health, but also because of their recession-resilient business models, as nobody has stopped taking key drugs because of the shut-in. While the focus today is on COVID, research continues to plow ahead on other deadly diseases, and Exelixis is on the front lines of the fight against renal cell carcionoma—the most common type of kidney cancer in adults. It has a growing drug portfolio, including Cabometyx, which treats two types of advanced stage carcinomas, and Cometriq and Cotellic, which treat thyroid cancer and metastatic melanoma, respectively. Moreover, the firm’s pipeline is growing: Exelixis’ latest breakthrough came days ago when it announced with Bristol Myers Squibb that a Phase III trial involving Bristol’s cancer-treating Opdivo in combination with Cabometyx met its goals of progression-free survival. And the payoff could be huge, as this combination may become a first-line option for treating renal cell cancer! When it comes to Cabometyx, the company sees the potential for four new indications this year and next that could possibly quadruple the drug’s market over time (from $1 billion in global revenue last year to $4 billion down the road). With $1.4 billion in cash and no debt, Exelixis has the means to take advantage of opportunities as they come. The next quarterly report is due May 5.

Technical Analysis

EXEL had a big run through 2017, but it got cut in half during 2018 and retested that low near 14 during the market’s crash. The initial bounce wasn’t anything to write home about, but the latest trial data looks like a game changer—shares gapped to multi-month highs on the news and have continued higher since on big volume. We’ll set our buy range a bit lower, thinking a near-term, pre-earnings dip is possible, though we’re not anticipating major downside.

EXEL Weekly Chart

EXEL Daily Chart

Freshpet (FRPT)

freshpet.com

Why the Strength

The pet food industry is massive ($37 billion) and is undergoing a transition, both toward online sales (Chewy is the leader there) and in terms of the type of food that Fido and Pumpkin are eating—as pets have become part of the family, people are willing to spend more on them, especially when it comes to food, where fresh, healthier fare is slowly replacing the decades-old standard of kibbles. As its name suggests, Freshpet offers fresh, natural, vitamin-packed foods for your pets; the company prepares many of them at low temperatures to preserve key nutrients. The result: 54% of its pet food calories are protein, double that of standard dry food, and a whopping 82% of customers report a visible health improvement in their pets! Of course, spending a lot more on dog food isn’t for everyone, but the idea is catching on in small-but-growing segment of the market—of the 76 million U.S. households with a dog or cat, three million are already Freshpet customers, and the firm believes it can expand that to eight million by 2025. Throw in steadily rising spending per customer and very high reorder rates, and management is targeting 20% annual sales growth for many years along with buoyant earnings and cash flow growth, too. As for the here and now, analysts see revenues up 27% this year with earnings leaping into the black, as well as another round of healthy growth in 2021. It’s a good, straightforward story that offers both solid growth and reliability. The next big event is earnings, which are due out May 4.

Technical Analysis

FRPT has had a big run over the years as business has expanded, though there have been plenty of pullbacks and corrections along the way. The stock’s collapse during the market crash was sharp (about 50%), but so was the rebound, with the stock steadily recovering ground (up five weeks in a row) back toward its February highs. We like the rebound, but given the straight-down, straight-up action and the fact that earnings are coming soon, we start small if you want in.

FRPT Weekly Chart

FRPT Daily Chart

MarketAxess (MKTX)

www.marketaxess.com

Why the Strength

Like its peer Tradeweb Markets, which we wrote about last week in Top Ten, MarketAxess is making the bond market more liquid and accessible. MarketAxess has the dominant market share of electronic trading in U.S. corporate bonds, about 85% for investment-grade and 84% for high-yield debt, overall totaling 20% of U.S. corporate bond trading. It also has the broadest liquidity pool available in the global bond market, including an extensive dealer network and over 1,700 institutional firms that can trade with each other on its network. The company makes money via commissions, and revenue growth is driven by its increasing market share as more bond trading is done electronically. Data tools look to be a future revenue driver, making price discovery in the sometimes obscure debt markets much easier. The firm had record numbers in March as average daily credit trading volume rose to over $12 billion and total trading volume rose to $270 billion (up 51%). MarketAxess will report Q1 results this Wednesday morning (April 29); analysts are looking for a 34% revenue gain and earnings of $1.90. As for the future, the underlying fundamentals appear bright: While rates are declining due to aggressive central bank policies, demand for quality corporate bonds is on the rise, as is credit spread volatility—factors that should help the firm’s bottom line. Moreover, the pandemic has accelerated the move from over-the-phone bond trading to electronic platforms like MarketAxess, a trend that should continue even when things return to normal.

Technical Analysis

MKTX broke out at the start of 2019 and had a great run to 420 in September of last year. It’s since suffered two sharp dips, one to 316 a few weeks after its peak, and then as low as 275 during this year’s market crash. But shares have been a hero since the bottom, quickly spiking back into the upper 300s earlier this month and pushing all the way to 450 before resting a bit. If you’re aggressive, you could nibble ahead of earnings, or just wait to see how the stock reacts to the report.

MKTX Weekly Chart

MKTX Daily Chart

Netflix, Inc. (NFLX)

www.netflix.com

Why the Strength

Netflix is positioned as one of the top mega-cap growth stocks in the market for a few reasons. Obviously, everyone knows the general story, so we won’t spend a lot of time on it—despite competition, Netflix is the leader in the streaming revolution, benefiting as more individuals cut the cord and go with “over the top” products. Plus, of course, the global shut-in has only helped business as more people are watching stuff at home; indeed, not only did Q1 sales (up 28%) and earnings (up 107%) look great, but subscriber growth accelerated to 23% year-over-year, and the top brass sees that rate picking up again in Q2 (up nearly 26%). Also playing a role is history: In the past, there have been a few times when Netflix hiked its investment spending (on content, international expansion and the like), which crimps earnings in the near term and caps the stock. Then, as they reap the benefits of that spending, the stock embarks on another run. That’s what seems to be happening now, as a soft patch last year is expected to give way to a 65% earnings bump this year and another 35% gain in 2021. It’s not all good news, of course—Netflix’s new production has mostly shut down due to the shut-in, though that’s affecting everyone in the industry, and management said Q2 releases shouldn’t be affected much. All told, there’s no question business is good, getting better and, if anything, is being helped by the stay-at-home environment.

Technical Analysis

It’s looking like the market’s crash caused NFLX’s final shakeout of a 21-month consolidation—shares broke out nicely two weeks ago, enjoying four straight gains on excellent volume. Last week brought some post-earnings wobbles; it’s always possible that leads to further selling, but so far, the rest looks very normal. We’re fine taking a stab at NFLX here or on dips, with a stop near 380.

NFLX Weekly Chart

NFLX Daily Chart

PayPal (PYPL)

paypal.com

Why the Strength

If there’s a silver lining to the coronavirus, it’s the acceleration of the movement to online sales—for e-commerce, it’s like Christmas all over again, with global online sales up 23% as of mid March, including a 56% leap in packaged goods (mostly groceries) just in the past week. Payment processors like PayPal should be one of the beneficiaries, and even as the world goes back to normal, it’s likely the trends will remain strong. Interestingly, PayPal did give a brief business update in late February, saying that a decline in cross-border transactions could crimp growth by a percentage point in Q1, but investors are looking ahead, not back, and thinking the firm’s strong growth will continue going forward, especially as it’s service isn’t used as much in some of the hardest hit areas of online bookings (like travel). As for catalysts, PayPal got approval earlier this month to distribute small-business loans as part of the Paycheck Protection Program, which should garner the company some 5% in extra income from fees—that program was replenished starting today, which should be a plus. The company is set to report earnings on May 6, with analysts looking for revenues up 15% and earnings about flat with a year ago, though as with every stock, a lot more attention will be paid to the firm’s outlook based on recent business.

Technical Analysis

PYPL is another stock that topped out well ahead of the market (last July) and got wiped out during the crash, which could have “re-set” the stock’s longer-term advance. The decline wasn’t too bad (34%), and since early April, PYPL has advanced both strongly and persistently back toward its old highs. The Q1 report is a risk, of course, but we’re OK nibbling here or on dips and then seeing how the stock reacts.

PYPL Weekly Chart

PYPL Daily Chart

Pinduoduo (PDD)

pinduoduo.com

Why the Strength

We wrote up Pinduoduo three weeks ago and missed our entry price, but the stock’s powerful action since then has us taking another shot at it today. While many of the big, well known Chinese internet plays like Tencent, Alibaba and NetEase are looking better, we think Pinduoduo has the makings of a new leader in the group, with a fresh story and faster growth. The company has pioneered the social commerce industry, which combines bargain prices with a team concept—offerings are usually lower priced, so if you’re shopping solo you can still find good deals, but the real attraction is having more people join your “team” and buy, which results in lower prices for everyone. (Team alerts usually come via the country’s most popular messaging app and other social media platforms.) Pinduoduo continues to build out its supply chain and offerings (it recently took a stake in a Chinese electronics and household appliance retailer), and while the platform initially was a hit in smaller cities, it’s now gaining traction in larger areas, too. Growth has been rapid (currency-neutral revenue growth was 91% in Q4, while gross merchandise value rise 113% and active buyers were up 40%), and while costs have been elevated as the firm expands across China, analysts see a potential profit in 2021. As for the virus situation, it’s likely that Q1 results (probably out in late May) will take a hit, but as China re-opens, there’s no reason Pinduoduo’s growth won’t pick up where it left off. We like it.

Technical Analysis

PDD topped out back in November, so it had a few months to shake out the weak hands even before the virus-induced crash. The stock held its 40-week line during the worst of last month’s decline (it also held the top of its prior post-IPO base, which is a plus), and the action since then has been extremely impressive—PDD has mushroomed to new highs, with just a couple of one-day dips as the stock has advanced nearly 18 points. Coming after a five-month rest, we think a new uptrend has begun. You can start small here or (preferably) on pullbacks.

PDD Weekly Chart

PDD Daily Chart

Snap Inc. (SNAP)

snap.com

Why the Strength

One of 2019’s biggest turnaround stories was Snap, and while it stalled out in the second half of last year, it’s making waves again thanks to a blowout Q1 report. Known for its popular social media app, Snapchat, the company has seen accelerated user growth among the coveted 13-to-34-year-old demographic (it reaches more of that age group than Instagram), with user engagement (and revenue per user) dramatically improving over the past year. The firm reported sustained communication volumes in Q1 that eclipsed peaks normally seen during major holidays, including a 50% increase in some bigger markets. Widespread adoption of livestreaming contributed to a more than 30-fold increase in daily downloads of Snap Camera, a desktop app used on its videoconferencing services. All in, Snap’s daily users grew by 20% from a year ago (to 229 million) including up 5% from Q3, with over four billion “snaps” created daily. Its augmented reality “lenses” are Snap’s calling card and daily use of that tool rose 85%. Thanks to all of this, revenue grew 44% in Q1 (up 40% in North America, 61% in Europe and 49% in the rest of the world), and the company produced its first quarter of positive operating cash flow. Ad budgets are down due to COVID, but given that more people are online (the firm saw a 30% jump in communications over its platform from late January to late March), it’s seeing plenty of benefits, including from so-called direct response advertisers (which prompt customers to respond immediately to the ad). Long story short, the turnaround that began early last year continues as management makes the right moves.

Technical Analysis

SNAP rallied from its post-IPO low of 5 in December 2018 all the way to 18 in July, but that was the top for a while; shares did sneak out to 20 earlier this year but that quickly went by the wayside when the market went over the falls. Frankly, the chart was nothing to get excited about, but the quarterly report changed that—shares exploded from 12.5 to 17 on massive volume and have held most of that move since. There’s still old overhead to chew through, but we’re fine starting small here adding more if SNAP heads higher.

SNAP Weekly Chart

SNAP 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 May 4, 2020.