Some Breakouts—Some Set-Ups
Current Market Outlook
The broad market continues to be challenging, with last week’s low having the potential to kick off a renewed market uptrend and at the same time holding the potential to establish a floor that—if it collapses—could bring a fresh round of pain. In short, the path ahead is foggy and continued caution is advised. But don’t put your head in the sand! Our OptiMo system continues to dig up top-performing stocks with the potential to bring you substantial profits, if you play your cards right—and one of the most promising characteristics of these stocks is that they tend to be under-owned, meaning far more institutional money could arrive to boost them higher over time.
Today’s roster includes some strong breakouts and a handful of set-ups, and our Top Pick is AMN Healthcare (AMN), which has a steadily growing business in the field of healthcare staffing.
| Stock Name | Price | ||
|---|---|---|---|
| AMN Healthcare Services Inc. (AMN) | 0.00 | ||
| Chipotle Mexican Grill (CMG) | 773.32 | ||
| Dexcom (DXCM) | 421.36 | ||
| Integra LifeSciences (IART) | 0.00 | ||
| Michael Kors Holdings Limited (KORS) | 73.22 | ||
| Novocure (NVCR) | 0.00 | ||
| Oil States International (OIS) | 0.00 | ||
| Phillips 66 (PSX) | 0.00 | ||
| SVB Financial Group (SIVB) | 0.00 | ||
| Transocean Ltd. (RIG) | 0.00 |
AMN Healthcare Services Inc. (AMN)
Why the Strength
AMN Healthcare is one of the biggest providers of high quality healthcare workers in the world. Its biggest focus is providing travel nurses, but it has a reputation for providing just about any medical worker, including medical and surgical nurses, physical and respiratory therapists, surgical technologists and dialysis technicians. Add in AMN’s ability to take over a customer’s entire staffing and employee measurement process and it’s easy to see why AMN has a sticky business with high retention. In this industry, consistent top-line growth and slightly faster EPS growth is extremely attractive, which is why shares of AMN are doing so well. The company’s most recent quarterly report was in February when revenue grew by 4.3% and EPS came in at $0.63. Since then, it has made three acquisitions; Florida-based MedPartners, Boston-based Phillips DiPisa and Leaders For Today. AMN shelled out around $263 million for the purchases and will pick up roughly $150 million in annual revenue (based off last year’s results). The deals are also immediately accretive to EPS, which is part of why analysts love them! Current consensus is for 11% revenue growth and 32% EPS growth in 2018, and with AMN reporting this Thursday, investors don’t have to wait long to find out how things are tracking.
Technical Analysis
AMN has been moving steadily higher since it broke out to fresh highs last November. Since then the stock hasn’t dipped materially below its 50-day line, and the pattern of higher highs and higher lows, with a few weeks of sideways action mixed in, is suggestive of high institutional interest. The most recent dip to the 50-day line came late-March when AMN pulled back from 60 to 56. But shares jumped out to a new 52-week high on April 10 after the three acquisitions were announced. The stock’s trading history suggests the current pause around the 62 to 67 area is an opportunity to pick up a few shares before another leg up.
AMN Weekly Chart
AMN Daily Chart
Chipotle Mexican Grill (CMG)
Why the Strength
Chipotle Mexican Grill was one of the market’s leading growth stocks back in 2010-2014, but business took a hit and the stock was crushed after a bunch of food illnesses led to plunging earnings—the bottom line fell from $15 per share in 2015 to $1.28 the next year! But, slowly but surely, the company has tightened up operations, improved quality control and won back customers, with the firm’s first-quarter report last week indicating that, while the rapid growth days are gone, the firm’s best days are still ahead of it. While total sales rose just 7.4%, same-store sales were up 2.2%, a figure that accelerated compared to the past couple of quarters. More importantly, costs were controlled, leading to a 33% jump in earnings (the $2.13 of earnings per share beat estimates by 57 cents!), and both management and analysts see the good times continuing. The top brass expects same-store sales to continue rising in the low single digits for the rest of the year and plans to open about 140 new restaurants in 2018 (boosting the store count by 5.7%), which has analysts expecting earnings to rise 28% this year and another 34% in 2019. This isn’t the same dynamic cookie-cutter story it was a few years ago, but after a couple of years in the doghouse, Chipotle looks like a durable turnaround story with solid potential.
Technical Analysis
CMG crashed 65% from mid-2015 through October of last year, a decline that wiped out all the weak hands as business collapsed. But the stock basically began to build a bottom at this point; there was a one-week dip to new lows in February, but the stock immediately snapped back. What’s interesting is that CMG then tightened up for the next couple of months, a good sign that big investors were starting to accumulate shares—and then, last week, the stock gapped up nicely on earnings. Nibbling on dips makes sense.
CMG Weekly Chart
CMG Daily Chart
Dexcom (DXCM)
Why the Strength
Diabetes is a widespread condition, with around 60 million affected people in the U.S. and the European Union (E.U.) and around 6 million diabetics on intensive insulin therapy. DexCom specializes in continuous glucose monitoring (CGM) devices; the company’s G5 CGM was approved in 2016 and has made a great difference in the management of Type 1 diabetes. But the real buzz now is about the unexpectedly quick FDA approval of DexCom’s G6 CGM system, the first such system that can send continuous blood-glucose data to compatible medical devices and electronic interfaces, including automatic insulin injection systems. The G6 is already shipping in limited quantities, but is targeted for wide U.S. distribution on June 4. The G6 sensor can stream data for 10 days straight before needing replacement and doesn’t need twice-daily finger-sticks for calibration. The company anticipates E.U. approval and distribution in the second half of 2018. DexCom hasn’t achieved profitability yet, although Q4 2017 results were a positive ten cents per share, up 211% year over year. Revenue growth for 2017 was 25% and the rapid FDA approval, new partnerships with Eli Lilly, UnitedHealthCare and multiple data partners and established Medicare coverage all bode well for future results.
Technical Analysis
After a monster run from 1 in 2008 to 103 in late 2015, DXCM stalled out for a couple of years. The stock took a huge hit to 43 last September when Abbott Labs got FDA approval for a rival monitoring system. But the stock began to rebound in early November as progressive good news about the G6 system changed investors’ perception. DXCM took off in March and has been trading under resistance at 75 for a couple of weeks. There’s no word yet on when Q1 results will come out, but we think you can take a nibble on DXCM on any normal weakness and keep a stop around 67.
DXCM Weekly Chart
DXCM Daily Chart
Integra LifeSciences (IART)
Why the Strength
Integra is a medical device company that specializes in surgical instruments, implants and biomaterials used in neurosurgery, extremity reconstruction and general surgery. Investors have been drawn to the stock because of Integra’s consistent growth profile, which is currently powered by regenerative and advanced wound care products. These strengths are expected to drive average annual organic revenue growth in the 5% to 7% range through 2020, with faster EPS growth. But the kicker is growth through acquisitions, and this is what’s responsible for the stock’s surge following last Wednesday’s first quarter report. In February 2017 Integra bought Codman Neurosurgery from J&J for $1.05 billion in cash, which worked out to roughly 2.8-times sales. The acquisition helped Integra punch through the $1 billion revenue mark in 2017, and should drive 25% revenue growth in 2018, as well as 21% EPS growth (to $2.39). Clearly, this was a big acquisition (Integra has a market cap of $4.9 billion), and investors are increasingly bullish after management inched up forward guidance. Management executed well in Q1, had positive things to say about ramping up the sales force, and helped mitigate concerns about integration risk related to Codman. With ample room for Integra to beat what still seems like conservative guidance we see shares marching higher.
Technical Analysis
IART has a pattern of rallying for a few months then pausing for several months to regroup before the next rally. The latest two examples of this pattern date back to last April, when IART broke out and rallied up to 55 following the release of Q1 2017 results. It then pulled back and traded in choppy, sideways action in the 46 to 54 range through the beginning of 2018. The stock poked its head above 56 in late-March, but the real breakout didn’t come until after last Wednesday’s quarterly report. If history is any guide IART has a good chance of going on another run.
IART Weekly Chart
IART Daily Chart
Michael Kors Holdings Limited (KORS)
Why the Strength
Michael Kors is a global luxury fashion powerhouse, selling clothing, footwear (including Jimmy Choo), eyewear, watches, jewelry and fragrances to men and women in more than 100 countries. At the end of December, there were 998 retail Michael Kors stores and 234 retail Jimmy Choo stores. The company has grown at double-digit rates for years, but 2016 (the fiscal year ends March 31) saw revenue growth decline to 8% and 2017 saw the picture worsen, as revenues fell 5% and earnings shrank 9%. The main reason: lower wholesale sales of women’s accessories, apparel and footwear. But management has turned the ship around and analysts now estimate that earnings will grow 6% in 2018 and 5% in 2019. Going forward, there’s still plenty of room for growth, as North America accounts for 70% of revenues and there are no products for children and babies yet.
Technical Analysis
From its 2014 peak (when revenue growth began to slow) to its June 2017 bottom at 32, KORS lost 68% of its value, transitioning from a popular glamour stock to a has-been. But that bottom (and time) set the stage for a new uptrend. Cabot Top Ten Trader recommended the stock last October at 48; the stock climbed all the way to 70 in early February, just before fiscal third quarter results were announced; that announcement (plus the weak broad market) triggered some profit-taking; and that marked the start of a long cup-and handle formation that culminated in a breakout last week. Translation: KORS is once again a leading glamour stock with plenty of runway ahead.
KORS Weekly Chart
KORS Daily Chart
Novocure (NVCR)
Why the Strength
Novacure makes medical devices that slow the progression of many types of solid tumors, including brain and lung cancer, and pancreatic and ovarian cancer. Its treatments are differentiated from surgery, radiation and chemo because they use low-intensity, alternating electric fields (called tumor treating fields, or TTFields) that interfere with cell division and cause cell death. TTFields are delivered via Novacure’s portable medical devices, two to three times a week, for 18 hours a day. The stock is on the rise because on April 17 Novacure released positive topline results from a Phase 2 study assessing TTFields plus chemo in patients with mesothelioma. Then investors received good news in last Thursday’s Q1 report. Optune, which is approved in the U.S., Europe and Japan for the treatment of glioblastoma (GBM), an extremely aggressive type of brain cancer, has been driving impressive patient growth (up 59% in Q1) and revenue growth (up 49% to $52 million in Q1). Optune was also recently added to National Comprehensive Cancer Network guidelines as a category 1 treatment for newly diagnosed glioblastoma when used in combination with temozolomide. Revenues are seen soaring over 40% annually for the next couple of years, with positive EPS of around $0.29 coming in 2019. It’s an exciting story with numbers to back up the potential.
Technical Analysis
NVCR went public in late-2015 at 22 and initially soared before coming back to earth a few months after its IPO. The stock got going again in early-2017 when it ran to its post-IPO high of 22. Aside from one surge to 24 in January, NVCR was rangebound, mostly in the 18 to 22 zone, from July 2017 to just a few weeks ago. The recent blastoff suggests higher prices ahead.
NVCR Weekly Chart
NVCR Daily Chart
Oil States International (OIS)
Why the Strength
Oil States International provides oil well completion and production services and sells offshore production equipment. The stock has been up and down over the years depending on the price of oil. It made the cut this week since recent IHS data shows North American frac stages were up 65% in 2017 and are forecast to average 15% to 30% growth over each of the next three years. That, along with Oil State’s better-than-expected Q1 earnings report last Wednesday, suggests this cyclical stock has years of growth ahead of it. Bigtime demand for completion services across U.S. shale plays is the main driver of strength, as evidenced by a 46% jump in completion jobs performed in Q1. Revenue surged by 67% and EPS loss of a penny beat consensus expectations by $0.14. Helping to drive growth were two timely acquisitions. Last December, Oil State acquired GEODynamics, which makes consumable engineered produces used in completion applications. Then in February it bought Falcon Flowback, a full-service provider of flowback and well testing services. Now that Q1 is in the bag analysts see revenue soaring 47% this year, followed by 13% in 2019. EPS is likely to be -$0.21 in 2018, but with efficiencies kicking in we should see EPS jump to $0.48 next year.
Technical Analysis
OIS hit a cyclical high of 65 back in 2014, but with the dip in the price of oil has traded mostly in the 20 to 40 range since the beginning of 2015. The last significant run was at the end of 2016 when the stock traded up near 42. However, that rally was short-lived, and shares were back in the mid-20s by late 2017. A quick rally to 35 in January restoked investor interest, but again, shares dipped into the mid-20’s soon after. With the stock running up to 35 ahead of the Q1 earnings report, then blasting off to 39 in the days after, we see solid potential for a breakout to multi-year highs above 42, especially given the pace of expected revenue and EPS growth through 2019.
OIS Weekly Chart
OIS Daily Chart
Phillips 66 (PSX)
Why the Strength
Phillips 66 is a gigantic player in the energy field, with its hands in numerous cookie jars, including midstream operations, refineries, chemicals and specialty products that, combined, have cranked out $81 billion of revenue during the past year. The stock is strong today because business is excellent across the board, with the environment for refining as bullish as it has been in years (big demand for output like jet fuel, and lower prices for inputs due to booming onshore production) and with midstream operations surging as well. Q1 earnings, reported last week, easily topped expectations ($1.04 per share beat estimates by 18 cents), and analysts think there’s more where that came from as hurricane-affected refineries ramp back up and as the company takes bold steps in repurchasing its shares. In February, the company bought back 35 million shares (about $3.3 billion) in one fell swoop from Berkshire Hathaway, instantly erasing about 7% of the share count! Add in some benefits from the corporate tax cut and analysts see the bottom line surging 60% this year and another 20% in 2019, which, in addition to the dividend (2.5% annual yield), is keeping big investors interested. It’s not changing the world, but Phillips 66 is in the right place at the right time, and it’s using its tremendous cash flow to bolster the stock.
Technical Analysis
PSX has mostly been a slumbering stock during the past few years, generally moving between 70 and 85 for most of the past three years. But it started to change character last September, when it moved to new multi-month highs and eventually powered to 107 in January. After a market-induced plunge in February, PSX found support near its 40-week line for a few weeks, and now the buyers are back, with shares ripping to new highs during the past couple of weeks on solid volume. Try to buy on dips.
PSX Weekly Chart
PSX Daily Chart
SVB Financial Group (SIVB)
Why the Strength
SVB Financial is a unique bank, focusing on loans (and, occasionally, investments) to the economy’s most dynamic sectors including technology, life sciences, healthcare, software, Internet private equity and venture capital. And that’s been a great place to be! The stock is strong today because business is great and growth is accelerating thanks to the buoyancy of its target sectors, rising interest rates (which boost interest income) and the corporate tax cut. In the first quarter, total assets rose 15%, loans surged 20% and total deposits lifted 12%, which (along with higher rates) drove interest income up 35%. The end result was a huge 34% gain in revenue and a 90% boom in earnings per share as profit margins leapt thanks to the tax cut. Best of all, SVB is doing this while maintaining a solid risk profile; the firm’s provision for loan losses as a percent of total loans was just 0.44%, which is actually down from 0.57% a year ago. This year should be a great one for the company, but what we’ve always liked about this story is that the growth outlook has legs—earnings are expected to boom 56% this year thanks to the above catalysts, and analysts see another 20% hike in 2019 as demand for loans from its target industries should remain strong. It might be a bank, but SVB has a great story.
Technical Analysis
SIVB consolidated from March through October of last year, with a solid breakout coming after third-quarter earnings were released. But that move didn’t really lead to much—at the end of last month, the stock was no higher than it was in November! But the buyers are back after the Q1 earnings report last week, with SIVB surging to all-time highs on good volume. If you’re game, you can try to buy on weakness.
SIVB Weekly Chart
SIVB Daily Chart
Transocean Ltd. (RIG)
Why the Strength
Of all the sub-sectors within the oil patch, it was the deepwater, offshore drillers that took the hardest hit, and most remain in rough shape even now, due to the popularity (and far lower costs) of onshore fracking. Transocean is one of the big boys in the offshore sector, with a massive $12.8 billion backlog (these huge rigs are usually leased out for years at a time) and you can see in the table below how rough things have been. However, investors are beginning to sniff out a turnaround for a few reasons. First is the recent rise in oil prices, which will only help demand and keep current clients content. Second, the company has been busy cutting costs and repositioning toward ultra deepwater and harsh environment rigs (84% of its 49 rigs are in those categories, compared to 45% of its 91 rigs four years ago), which will allow it to thrive when the sector rebounds; last year, Transocean divested its jackup fleet and retired nine other ships (including five older, less-efficient deepwater rigs), but brought two new rigs online (both with 10-year contracts) and even bought Songa Offshore, which owned five harsh-environment rigs that added $3.7 billion of backlog. Third, management has hinted that some customers are again looking for longer contracts, a very positive sign. In the just-reported Q1 report, many of the sub-metrics continued to point toward a bottom and turnaround in the offshore sector—as it happens, Transocean will be positioned to benefit.
Technical Analysis
RIG collapsed from 163 in 2008 to just 8 in February 2016, but what’s interesting is that the stock has basically been moving sideways ever since (bobbing between 8 and 13 for the most part)—a very long two-year bottoming process. And now we’re seeing some buyers emerge, with RIG perking up to multi-month highs on a couple of weeks of outstanding buying volume. We’re OK nibbling and adding shares if the turnaround takes hold.
RIG Weekly Chart
RIG 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.
