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Current Market Outlook
The ping pong environment we referenced on this page last Monday continued last week, with growth stocks bouncing back from a ragged prior week, while some of the recently-strong cyclical groups took a breather. We expect more under-the-surface volatility going forward, mostly due to earnings season, which is now moving ahead at a breakneck pace; so far, there have been a few potholes, but many stocks have reacted well to their reports. All in all, we remain mostly bullish, but two pieces of advice: First, don’t forget to book some partial profits when you have them, and second, be sure to keep your feet on the ground and look for advantageous entry points. We’ll keep our Market Monitor where it is as we see how leaders react to earnings.
This week’s list is heavier on emerging market and retail stocks than usual, which could be a clue to future leadership. Our Top Pick is ServiceNow (NOW), a blue chip-ish cloud software firm that decisively broke out of a tight launching pad on earnings next week. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| GDS Holdings Limited (GDS) | 80.15 | ||
| Huazhu Group (HTHT) | 30.89 | ||
| Ollie’s Bargain Outlet (OLLI) | 103.94 | ||
| Pilgrims Pride (PPC) | 25.52 | ||
| Sea Limited (SE) | 132.86 | ||
| ServiceNow (NOW) | 341.86 | ||
| Sinclair Broadcasting (SBGI) | 54.14 | ||
| Ulta Beauty (ULTA) | 331.95 | ||
| VeriSign (VRSN) | 190.71 | ||
| Workday (WDAY) | 194.88 |
GDS Holdings Limited (GDS)
Why the Strength
GDS Holdings is a small firm with a great story. It’s basically aiming to be the Equinix or Digital Realty of China, opening up a ton of new (and expanding a bunch of existing) data centers in that country as demand for cloud and digital technologies boosts demand—the firm operated 35 data centers at year-end that represented more than 225,000 square feet, which was up nearly 100,000 from a year ago, and it’s having no problem leasing the space to clients (mostly cloud service providers, but also Internet and large enterprises as well), which include most of the big tech firms in China (Baidu, Ctrip, Alibaba, Tencent, JD.com, NetEase and more). Indeed, the firm’s established data centers are 92.5% utilized, while its newer locations are about one-third utilized but have a 90% commitment rate, so those will be ramping up in the quarters ahead. Of course, building these data centers takes cash, so GDS is spending a ton (up to $5 billion this year!), which means there’s a lot of debt to refinance in most years ($1.3 billion in 2019 alone). That’s a risk if demand dries up or credit markets get tight, but there’s no sign of that today—management expects revenues to grow in the low 40% range this year, with EBITDA leaping 60% or so even as it continues its rapid build out (65,000 square feet are currently under construction, with nearly half already committed to clients). Longer-term, the sky’s the limit as China’s Internet and cloud markets boom.
Technical Analysis
GDS had a huge run from around 10 in late 2017 to 46 last summer. Then the downturn in Chinese stocks (and an attack by a short selling firm) took the stock down more than 50%, finally finding its footing in the 21 area in October and December. But like most names, 2019 has been better—GDS has rallied persistently (never much below its 25-day line) and enjoyed a couple of solid buying volume weeks since mid March, too. Now shares have dipped to their 25-day line, which looks like a solid risk/reward situation.
GDS Weekly Chart
GDS Daily Chart
Huazhu Group (HTHT)
Why the Strength
Huazhu Group was last written about a month ago, and it’s set up a good-looking buy point so it makes the cut again this week. (Also of note: Huazhu is one two Chinese and three emerging market stocks in this week’s Top Ten, a good sign that area is finding buyers.) The story here concerns the Chinese hotel industry, which is huge, highly fragmented (only one third of hotels in China are branded vs. more than twice that in the U.S.) and in a long-term growth phase as the middle class (more vacation travel) and business travel expands. Huazhu operates 4,396 hotels (nearly 440,000 rooms) across 18 brands in more than 400 cities and is quickly expanding—in the first quarter, the company added 166 net hotels (total hotel count up 4% from the prior quarter), and it has a whopping 1,311 more in the pipeline right now. Growth has cooled off as the firm has grown, and occupancy rates have slipped a bit (though remain strong at 80.6% at the end of March), but most of the metrics reported in last week’s update looked good to us, including a 6.9% bump in average room rates and a 2.9% gain in revenue per available room (similar to same-store sales for a retailer). All in, analysts see the top line growing at 15%-plus rates both this year and next, with earnings picking up at a faster pace. It’s a good story.
Technical Analysis
When we last wrote about HTHT, the stock had just reacted well to earnings as it rounded out a big launching pad that it began to etch last June. Since then, shares have spiked as high as 45 before some shaking and baking—HTHT suffered a couple of heavy-volume selling days and shook out to its 10-week line, but found support and quickly rebounded to its recent highs. There’s still old overhead to chew through, but we like the look of this three-week rest.
HTHT Weekly Chart
HTHT Daily Chart
Ollie’s Bargain Outlet (OLLI)
Why the Strength
Ollie’s Bargain Outlet is a similar story to Five Below, which appeared here last week and has long been our favorite cookie-cutter retail story. Ollie’s motto is “Good Stuff Cheap” and that effectively explains the big idea here—Ollie’s is a leading closeout retailer, selling its customers a wide variety of items (toys, housewares, food, bed and bath, books, rugs, some electronics and more) at prices that are generally 20% to 50% below even that of mass market retailers. And because of the overall retail troubles at many brick-and-mortar locations and Ollie’s growing size, its merchandise team is having no issues acquiring stuff on the cheap. The company operates 303 stores (mostly in the eastern U.S.), and like all of the best retailers, it has great new store economics (payback of the initial investment in two years), is generating consistent same-store sales growth (up 4% last year, though that’s likely to slow to 2% or so this year) and has a long runway of growth ahead—the company is expanding its store count at double digit rates (about a 14% increase is scheduled this year), and believes it can more than triple the number of locations (to 950 or so) over time. It’s not going to be a lightning fast grower (the earnings gains from last year were helped along by the corporate tax cut), but a reliable 15% to 20% uptick in the bottom line likely for many years to come. Of course, the valuation isn’t cheap (52 times earnings), but Ollie’s is a cookie-cutter story that big investors are happy to pay up for.
Technical Analysis
OLLI had a great run from late 2016 through last September when the market fell apart, causing shares to crack their 200-day line for the first time in years. Such a downturn usually requires some time to repair, and that’s what happened here—OLLI popped toward 90 in February, fell back, tightened up and has now marched back toward its old highs on solid volume. All in, that’s six and a half months of base building—we’re OK starting a position here and buying more if it heads higher.
OLLI Weekly Chart
OLLI Daily Chart
Pilgrims Pride (PPC)
Why the Strength
Granted, Pilgrim’s Pride is about as far as you’ll get from a revolutionary story, but it’s set to benefit from a widespread outbreak of African swine fever in China, as well as from any potential U.S.-China trade deal that opens up Chinese markets to U.S. producers. Starting with the flu, the outbreak has been very severe and caused the slaughter of more than a million hogs in recent weeks. The result? Incredibly high pork prices in China—which has caused consumers to begin substituting chicken for pork. However, chicken has been in short supply in China for a couple of years since it banned U.S. and France imports (total output fell from six million birds in 2016 you 4.2 billion last year, with another 10% drop expected this year), so the switch is now causing chicken prices to motor higher, up 68% in the past year! But what does this have to do with U.S. producers like Pilgrim’s? Simply that any trade deal is between the U.S. and China is likely to at least partially lift the import ban, so Pilgrim’s and its peers could benefit from perfect timing—being able to sell into a “new” market just as prices are sky high. Overall business is solid, too, and the combination is that analysts see the bottom line rising 31% this year and more in 2020.
Technical Analysis
PPC peaked back in December 2017 at 38 and slipped all the way to 15 at the market bottom last year. The rally after that was solid, with a spike back to 20 and some intriguing tightness in February. And since then the roof has come off, with PPC spiking to 27. The trick here is that earnings are due out Thursday morning (May 2)—if you want in, we advise looking to enter on any post-earnings shakeout that comes.
PPC Weekly Chart
PPC Daily Chart
Sea Limited (SE)
Why the Strength
Sea Limited is an internet platform company focused on Southeast Asia that came onto our radar screen in February when the stock blasted off following a monster Q1 report (revenue was up 127%). That report suggested management is figuring out how to monetize the platform and that’s led to higher investor confidence. Since reporting the stock has continued to climb, even after completing a secondary offering. The story is that Sea Limited is backed by China’s Tencent and is tapping into the two big trends of online gaming and e-commerce—the Garena gaming unit generates cash, especially from its first self-developed game, Free Fire, which grew from 13% of revenue in Q2 2018 to 45% of revenue in Q4, while the e-commerce division, Shopee, posted insane growth after it become the most downloaded online shopping app in Southeast Asia and Taiwan; fourth quarter average orders of 900,000 per day drove 78% revenue growth. Analysts were behind the curve on the firm’s growth and since the report have boosted their estimates to reflect a near-doubling in sales this year. We don’t yet have a Q1 earnings date yet, but Sea, while a bit speculative, has plenty of potential, too.
Technical Analysis
SE went bananas after earnings in late February, breaking out of a nice, long post-IPO base by ripping to 25 on an incredible spike in volume. But what happened after that was even more impressive—SE really couldn’t pull back at all, instead just meandering sideways on lessening volume, until the 50-day line kicked the stock to new highs. More wiggles are possible, but we’re OK buying some around here with a loose stop.
SE Weekly Chart
SE Daily Chart
ServiceNow (NOW)
Why the Strength
We just featured ServiceNow a month ago so not much has changed with the underlying story over the last four weeks. But the big software infrastructure company just reported a beat-and-raise first quarter and the stock stepped up to a new all-time high, so we want to stay on top of things. The back story is that ServiceNow started out 15 years ago serving IT departments with a SaaS IT service management (ITSM) product, but growth now is much more broad-based, coming from IT operations management (ITOM), IT business management (ITBM), HR, CSM and security verticals. It’s become an important player in helping large companies and public institutions digitize their organizations and automate many routine functions. The stock jumped in January following a good quarter and bullish guidance. Last week’s Q1 report shows it’s doing even better than forecast, with revenue up 38% and EPS of $0.67 beating by $0.13. Of the many bright spots, management highlighted 15% of annual contract value (ACV) now comes from its U.S. federal business, up from 6% a year ago. With the company doing well just about everywhere that matters you can bet analysts will be raising forward estimates (22% revenue growth expected this year), while keeping an open mind about upside potential from Federal wins.
Technical Analysis
NOW was searching for direction until the Q4 report back in January ignited a blastoff rally to new highs around 220. There was plenty of chop after that, but like many software stocks, NOW built a decent-looking range for a few weeks with a ceiling near 250. Last week’s earnings release ignited another gap to new highs, so the next upleg has likely begun—you can buy some here, though it wouldn’t surprise us to see NOW pull in a bit in the near-term.
NOW Weekly Chart
NOW Daily Chart
Sinclair Broadcasting (SBGI)
Why the Strength
Sinclair Broadcast is a TV broadcasting company that owns and operates programs or provides sales services to over-the-air television stations across most of the U.S. You may have heard of the company last summer as a result of the failed high-profile merger agreement with Tribune, which would have created the biggest TV company in the U.S. Shares of Sinclair took a hit after that deal fell apart and Tribune announced a $1 billion lawsuit (still unresolved). But Sinclair has rallied in 2019 because it’s sitting on over $1 billion in cash (about 25% of its market cap), which can fund acquisitions (21 regional sports networks from Disney/Fox could be in play) or share buybacks ($175 million repurchased in Q4), is likely to benefit from deregulation and sees a ramp-up in political spending as election season heats up. The last quarterly report was back in February, when Sinclair beat expectations with revenue up 25% and EPS of $2.10. As the business stands right now, no growth is expected this year (13% revenue growth expected in 2020), so the real attraction is what could happen on the M&A and stock buyback fronts. One factor that helps balance out the lawsuit risk is that Sinclair offers a dividend yield of 2%.
Technical Analysis
SBGI has been up and down over the years. After retreating from a January 2018 high of 39 it spent most of last year oscillating between 25 and 33. But like most stocks, it’s been a different story since the beginning of 2019. SBGI surged to multi-month highs after earnings in February and has continued to move to all-time highs in recent weeks. It’s a very strong trend, and any shakeout should prove buyable.
SBGI Weekly Chart
SBGI Daily Chart
Ulta Beauty (ULTA)
Why the Strength
While names like Five Below and Ollie’s Bargain Outlet are earlier in their growth curves, Ulta Beauty remains a well-established retailer that has a great longer-term story. The big idea here is that the places people are buying beauty products is changing—back in 2015, 48% of sales came from grocery, drug and department stores, while just 10% were at specialty retailers like Ulta; today those figures are 44% and 15%, respectively, and those trends are likely to persist for many years. Ulta has a 7% share of the giant and still growing beauty market, and big investors believe the company has the formula—a wide product and service (including salons) selection at stores, a growing e-commerce business (up 25% in Q4), a huge loyalty program (getting more money from their best customers) and great store economics (payback in two years) that’s allowing a steady increase in the store count (7% increase expected this year)—to keep sales and earnings heading in the right direction. Analysts see the top line growing in the 10% to 12% range both this year and next, with earnings expanding in the high teens during that time. It’s not a new story at this point, and the stock isn’t likely to be a rocket ship, but Ulta still looks like a winner. Earnings are due out May 30.
Technical Analysis
We wrote about ULTA a few weeks back after its reacted well to its Q4 report, which kicked the stock to new highs. Since then it hasn’t made a ton of progress, but we like the look on the chart—shares have essentially consolidated all month in the 340-360 area, with support near the 25-day line showing up last week. We’re OK taking a position here if you don’t own any with a stop below the 50-day line.
ULTA Weekly Chart
ULTA Daily Chart
VeriSign (VRSN)
Why the Strength
VeriSign is the sole authorized registry for many generic top-level web domains, including .com and .net. Given that these two top-level domains account for around 43% of all registered domains globally, VeriSign is a critical internet infrastructure player. The company also operates two of the world’s 13 root servers that are responsible for directing internet traffic, and it provides security solutions that keep websites up and running. This mix of business, along with multi-year contracts with the U.S. Dept. of Commerce (which rules the internet), makes VeriSign a steady, albeit slow, growth stock. Shares continue to do well because last year VeriSign amended an agreement with the DOC to permit up to a 7% price increases in .com domain names, once the two-year price freeze window closes. And it has also suggested it will release a new .web registry. These longer-term growth plans weren’t the focus when VeriSign reported last week, however. Instead, it was steady operational execution leading to a 4.4% jump in domain name registrations, revenue growth of 2.4% to $306 million and EPS of $1.31 (beating by $0.06) that is keeping big investors interested.
Technical Analysis
VRSN corrected last October and December but the long-term trend is undeniably up. The dips late last year mean VRSN spent over three months knocking around in the 130 to 165 range, but found support at its rising 40-week line multiple times. Shares jumped above 165 in January and have steadily gained altitude since, with last Friday’s pop to 200 coming on solid volume. If you want in, we advise looking for dips.
VRSN Weekly Chart
VRSN Daily Chart
Workday (WDAY)
Why the Strength
Investors looking for exposure to cloud application stocks often view Workday as a core portfolio holding given that the company, which has a market cap of over $40 billion, is one of the bigger players in the market. It sells enterprise solutions for finance, human capital management, payroll and business analytics; collectively, this gives Workday an addressable market of around $70 billion, and with estimated fiscal 2020 revenue of $3.6 billion (up 26%) it works out to having roughly 5% of the market cornered. That leaves a lot of room for long-term growth, which is why the stock is doing so well. Workday is also expanding its portfolio of solutions so it can keep grabbing customers from legacy vendor, like SAP and Oracle. Its International and Financials Management businesses showed great momentum last quarter (reported in late February), up 47% and 50% respectively. And with broad-based customer growth across Fortune 500 and mid-market customers it seems clear management is pushing the right buttons. The next quarterly report (Q1 fiscal 2020) won’t be out until around the end of May so there’s still time to establish a position without feeling like your jumping in right ahead of news. In addition to 26% revenue growth this year analysts see EPS up 22%, to $1.66.
Technical Analysis
WDAY hit an all-time high of 140 early in 2018, trading sideways for about five months, then rallied in August and hit a fresh high of 157. Shares were hit by the market retreat in Q4 2018 but bounced back in November, about a month earlier than most other stocks. WDAY entered 2019 at 160, climbed to 200 by the end of February, then wobbled around in the 180 to 200 range for a few weeks before jumping out to a fresh all-time high last week. You can grab a position here or on dips.
WDAY Weekly Chart
WDAY 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.
