April 6, 2020

According to Plan

Current Market Outlook

Since the March 23 low, the market has pretty much followed the plan, with a good initial rally, a little upside follow through and lots of up/down, news-driven moves since. To be fair, that is more descriptive than predictive—a few big moves in one direction or the other could change the outlook, and today’s action was encouraging for the bulls. Right now, though, the overall evidence remains unchanged: The trend of the major indexes and most stocks is still pointed down, and while many names are doing a good job of hanging in there, few stocks are in true uptrends. Looking ahead, the first sign of light would be a batch of growth-oriented stocks bursting to new highs, followed by the intermediate-term trend of the major indexes turning up (likely to take another week even if all goes well). Given the unprecedented situation, we’re open to anything, but until the buyers show more muscle, we advise sticking with a mostly defensive stance.

The good news is that we continue to see quite a few stocks that institutions have been accumulating in recent weeks. This week’s list has a few, with our Top Pick being Livongo (LVGO), a newer, fast-growing name that’s popped up of late.

Five9 (FIVN)

five9.com

Why the Strength

Five9 has an easy-to-understand story that’s produced excellent growth for a long time: The firm is the leading provider of cloud-based software for contact centers, helping firms cut costs and improve the customer support experience. Its software increases contact center productivity without the capital expense and maintenance costs of legacy on-premise systems since it’s entirely web-based, a radical departure from traditional customer support solutions. This allows it to absorb massive call loads from thousands of enterprises in the cloud, integrating text, email and phone services. Its groundbreaking artificial intelligence software analyzes real-time calls and provides live assistance to customer agents, and is integrated with major customer relationship management providers like Oracle, Microsoft and Salesforce. More recently, the company launched a fast-track program to help businesses quickly transition to a reliable work-from-home contact center paradigm amid the virus outbreak, and its software is used by COVID-19 hotlines across the U.S. Looking at the numbers, top-line growth for Five9 has been on a roll, rising 28% in Q4 and 27% for the full year, and it’s averaged 26% growth in the last three years. Meanwhile, earnings are ramping up and even EBITDA lifted 31% for 2019 as a whole. The big picture potential remains huge (just 15% of contact centers use the cloud), and we like that 91% of revenues are recurring. It’s a good story that should continue to crank out solid growth for many years—and be relatively insulted from virus fears, too.

Technical Analysis

FIVN has had a huge run in recent years, so it’s not in the first inning of its overall advance, though it has had numerous pullbacks and dead periods along the way. The stock’s virus-related selloff was sharp, but it actually showed support during the worst of the decline (closing near its 40-week line) and bounced all the way back to new highs on heavy volume before pulling in again. Further near-term weakness wouldn’t be surprising, but we’re OK nibbling around here if you want in.

FIVN Weekly Chart

FIVN Daily Chart

Livongo Health Inc. (LVGO)

www.livongo.com

Why the Strength

There are north of 140 million adults in the U.S. with chronic ailments (40% of which have two or more), yet there hasn’t been a widespread service to continually help those in need. Enter Livongo, which offers technology-enabled “coaching” systems that help customers get not just data, but actionable information and alerts. The firm started with diabetes (it integrates Dexcom’s continue glucose system into its platform), offering people not just self-connected meters but real-time coaching, 24/7 monitoring/support and personalized “action alerts” (thanks to some proprietary technology) if need be. The end result: Healthier customers based on various metrics, which is a benefit to everyone, including companies who save on medical costs. Livongo has since moved into other areas (weight management, behavioral health, hypertension), and it sells in a variety of ways (30% of the Fortune 500 are clients, not to mention pharmacy benefit managers like CVS and Express Scripts); most contracts are for one to three years, leading to an ever-growing stream of recurring revenue. The company’s results have been terrific: Not only did sales soar 137% in Q4, but retention rates (94%) were excellent, same-customer revenue growth of 11% was solid and Livongo serviced 223,000 people at year-end, up 96% from a year ago. Management guided to 2020 revenue growth of 65%-plus in early March, and we see no reason business won’t remain strong for many years to come.

Technical Analysis

LVGO came public in July and immediately hit the skids, falling by two-thirds from its post-IPO high. The rebound late in the year was decent, but hit repeated resistance around 30 before the stock fell part again. But the action of the past month has been eye-opening—LVGO closed mid-range on two weeks of heavy volume, and has quickly snapped back toward its prior resistance area on big buying. We’re fine picking up a few shares here, and a move north of 31 would be very intriguing.

LVGO Weekly Chart

LVGO Daily Chart

Newmont Mining (NEM)

www.newmont.com

Why the Strength

Newmont and some other precious metal stocks have roared back from the market’s nadir two weeks ago and look poised for higher prices. As we wrote a month ago, Newmont isn’t as much a growth story as a free cash flow behemoth—the company is the largest gold producer in the world (thanks in part to its acquisition of Goldcorp in early 2019), cranking out north of six million ounces last year mostly via eight top-producing mines (and two more that are ramping up). While production growth is likely to be mild (gold production relatively flat in the years ahead, though some other metals could boost output a bit), the real story here is about Newmont’s own recent actions that put it in a position to crank out lots of cash—thanks to debt reduction and cost cuts (all-in sustaining costs south $900 per ounce this year), the firm believes it will produce more than $2 billion annually of free cash flow if gold stays at $1,500 per ounce, and that figure will rise (or fall) $400 million annually for every $100 increase (decrease) in gold. With that outlook, Newmont is hiking its dividend ($1 per share annually; 2.1% yield) and buying back shares, and there could be more of that on the way if all goes well. Of course, should precious metal prices collapse, all bets are off, but the fundamentals (worldwide money printing, uncertainty) look bullish in the months ahead. As gold stocks go, Newmont and Barrick (written about last week) appear to be the two best positioned.

Technical Analysis

NEM got going in November and gained strength during the initial phases of the virus selloff, but it then got flushed along with everything else, falling more than 35% in just a couple of weeks! But it quickly steadied itself and has since shown tennis ball action, popping back to within a point of its high. Volatility will remain extreme, but we’re not opposed to a small buy here-ish with a stop in the 40 area.

NEM Weekly Chart

NEM Daily Chart

Novavax, Inc. (NVAX)

novavax.com

Why the Strength

Novavax is one of a growing number of companies involved in the coronavirus vaccine development fight, though it’s strong today for other reasons, too. The company recently received $4 million from the Coalition for Epidemic Preparedness Innovations and announced that it’s working on several vaccines that are currently in preclinical animal studies; Novavax foresees a Phase I clinical study by June. That’s good, but right now, NVAX’s NanoFlu, its experimental flu vaccine, is the main thing bringing buyers to the stock. A Phase 3, late-stage clinical trial reportedly achieved a critical milestone, meeting all primary and secondary endpoints in evaluating safety and the treatment’s ability to provoke an immune response in 2,652 healthy adults ages 65 and older. Immediately following those results, Novavax announced an agreement with Emergent BioSolutions—also a partner in one of its potential COVID-19 vaccines—for that firm to manufacture NanoFlu once it has secured FDA approval. The drug now has a fast track designation and is gearing up to be a blockbuster. The Center for Disease Control is predicting—as of the middle of March—that 29,000 to 59,000 folks in the U.S. have died from the flu this year, and worldwide, influenza kills 250,000 to 500,00 annually. Novavax is still a development stage outfit, but NanoFlu could be a game changer.

Technical Analysis

A year ago, NVAX was trading north of 11. The price slid to around 4 and stayed there through much of the past 52 weeks. But momentum kicked in as the coronavirus and flu vaccines stirred investor interest, with shares skyrocketing since mid January. Volatility has been insane, of course, but NVAX held its 50-day line during the crash and has marched nicely higher during the past three weeks. If you want to roll the dice, pullbacks of a couple of points would provide an opportunity.

NVAX Weekly Chart

NVAX Daily Chart

Peloton (PTON)

onepeloton.com

Why the Strength

Another casualty from the coronavirus pandemic is your neighborhood fitness center; most (all?) of which have closed down for now. But that’s been a huge opportunity for Peloton to get its bikes and treadmills in front of new users. Granted, its wares don’t come cheap—the firm’s high-end interactive exercise bikes retail for a whopping $2,000 (though they do offer one-month “free trials” and payment plans), plus about $40/month for full access to its on-demand and live streaming classes. But the company is doing what it can to appeal to more people, especially now; Peloton recently announced that it was expanding platform support by bringing its app to Android TV, which is the operating system most used by smart TVs, and it’s already improved its support for Fire TV, Chromecast and AirPlay. To take further advantage of the current situation, Peloton has recently announced discounts for its bikes, as well as for its memberships, giving 90 days of free workouts. It’s not all good news, as the company has had to shut down its studios, but it’s still considered the best-in-class workout at home offering. As for the virus impact on business, reports have surfaced that Peloton app downloads were five times as high in March as they were in February, so there’s clearly some uptake here, and business was strong even before the virus struck. For its second quarter, which ended December 31, revenue rose 77%, and while analysts see the March quarter top line growing at “only” 51%, most believe that will prove conservative. The bottom line is in the red, but Peloton is a one-of-a-kind company that has excellent potential.

Technical Analysis

PTON came public last October at 29, spiked in December, held its own until February and then declined with the rest of the market. Like many growth names, shares undercut their post-IPO low for a couple of days, but shares have quickly recouped lost ground as the market has bounced, including two weeks of huge-volume buying. There’s still overhead to chew through, so we prefer to simply watch it, but if you want to snap up a few shares, use a stop around 24.

PTON Weekly Chart

PTON Daily Chart

Pinduoduo (PDD)

pinduoduo.com

Why the Strength

Pinduoduo took a few months off, but now the stock is setting up to get going again when the market kicks into gear. The reason for this Chinese firm’s resilience is its unique story: It’s pioneered the “social commerce” industry, which is focused on team shopping via interaction and invitations (often through that country’s most popular social media app). It’s all about finding bargains—merchandise is usually lower priced to begin with, but the more people who join a “team” and snap up a product, the lower the price for everyone on the team. That means customers are Pinduoduo’s own best salespeople, actively encouraging others to join the platform! (The firm’s tag line is “Together, More Savings, More Fun.”) The concept has been a massive hit, with all of its metrics exploding in recent years, and despite some recent slowdown (law of large numbers, plus a little competition as others try to get a piece of the action), the company is still posting excellent growth—in Q4, revenues grew 91% in local currency, gross merchandise value lifted 113%, active buyers in the past year totaled a whopping 585 million (up 40%), and those buyers are purchasing more (annual spending per buyer up 53%). And, even better, while Pinduoduo got its start by focusing on smaller cities, it’s making big headway into so-called Tier 1 cities, too. To be fair, expenses have been running hot, which has kept the bottom line in the red, but that’s expected to change next year; analysts see sales growing 50% or so both this year and next, with a profit in 2021.

Technical Analysis

PDD topped out way back in October of last year, but that might be a good thing these days as many weak hands are likely already out. Shares have now suffered two tough dips to the 30 range, but both found support, and the stock held its 40-week line on the recent virus-related plunge. Now PDD is perking up a bit—there’s still overhead to chew through, but you could nibble here with a stop in the low 30s, or wait to see if shares can leap through resistance in the 41 area down the road.

PDD Weekly Chart

PDD Daily Chart

Regeneron Pharmaceuticals (REGN)

www.regeneron.com

Why the Strength

We wrote about Regeneron in early March, discussing its recent rebound when competitor Novartis’ macular-degeneration drug, Beovu, hit the skids; that significantly boosted the prospects for Regeneron’s own treatment in that category (Eylea), which brought in the buyers. This company isn’t just a one-trick pony, as it has seven FDA-approved treatments and a good pipeline of other drugs, including an eczema drug that just released bullish Phase 3 trial results. But the bigger story today is that Regeneron has become a player in the COVID-19 arena—on two fronts. Its REGN3048-3051 vaccine is based on developing monoclonal antibodies as treatments for the virus, in which it will select the top two antibodies for clinical studies. The company said that that it “identified hundreds of virus-neutralizing antibodies,” and “plans to initiate large-scale manufacturing by mid-April with antibody cocktail therapy.” Additionally, a Regeneron/Sanofi collaboration is dosing patients both inside and outside the U.S. with their rheumatoid arthritis drug Kevzara for treatment of coronavirus-induced lung inflammation. On March 16, Regeneron announced that it had begun a Phase 2/3 trial with up to 400 patients hospitalized with severe coronavirus. A small 19-patient trial in China—not yet peer-reviewed—resulted in reduced patient fevers and 75% of patients had a reduced need for supplemental oxygen within the first few days of treatment. Obviously, more studies are needed, but any positive data points should help the stock.

Technical Analysis

REGN came to life at the beginning of February and got a clear head of steam going later that month as the Novartis treatment fell flat. The stock thrashed around in March, but it held its 10-week line during two dips and the stock has now marched back toward new highs in the 500 area. Buying new highs in a market downtrend is tricky, so we’ll set our buy range down a bit from here.

REGN Weekly Chart

REGN Daily Chart

RingCentral (RNG)

www.ringcentral.com

Why the Strength

Cloud-related communication firms continue to be among the few industries to actually benefit from the global pandemic as demand picks up due to the stay-at-home situation. RingCentral has been a leader in its field for years thanks to its Unified Communications offering, which at its core provides a phone, messaging and text platform that allows firms to adjust to mobile workplace, No longer do employees sit at their desk all day and use a landline; instead they get in touch from a variety of places and devices. The firm estimates less than 10% of the market is penetrated, so the growth potential is huge, especially as it’s inked some massive partnerships (including Avaya and European cloud firm Atos). And now Ring is making a bigger push into video; Its latest service is RingCentral Video (a Zoom competitor), a unified video solution that’s entirely browser-based, eliminating the need for downloading an app. The firm is working closely with Google to ensure the highest video quality, and its new product will also include RingCentral Rooms, which easily transforms any room into a video conference space (available in Q2); both could see solid uptake given some recent security-related worries surrounding Zoom. As for the numbers, Ring is the poster child for rapid, reliable growth, with revenues (mostly subscription-based) growing at a 34% clip for many quarters in a row. Analysts see that slowing somewhat this year (24%), though our guess is that outlook will prove conservative (the company regular beats and raises guidance). The valuation is rich, but the story and numbers remain very strong.

Technical Analysis

RNG’s upside run was virtually non-stop from 2017, and it was only in last month’s coronavirus panic that the stock had its first major decline since late 2018, falling from 250 to 135 before soaring back to a new intraday high at 255. Shares have since pulled back (breakouts in bad markets almost always fail), but the retreat has been reasonable and it actually found some good-volume buying late last week. You should definitely watch it, and if you’re aggressive, you can take a small position here.

RNG Weekly Chart

RNG Daily Chart

Sprouts Farmers Market (SFM)

www.sprouts.com

Why the Strength

Organic food is a nearly $50 billion-per-year industry in the U.S., comprising 6% of total food sales in 2018, and it’s growing at 6% annually. Whole Foods is the obvious, well-known chain that’s capitalizing on this trend, with Trader Joe’s being another that’s popular in certain areas of the country. Less famous, but with a bright future, is Sprouts Farmers Market, a U.S. supermarket chain specializing in natural and organic foods, focusing on fresh produce, bulk foods, vitamins and an array of household wares. It has 320 (mostly small box) stores, mainly in the southwest though it’s expanding quickly into the southeast and elsewhere; the firm is aiming to open 30-ish stores annually going forward as it looks to grab market share. In contrast to many other organic stores, Sprouts offers healthy foods at prices the average consumer can afford (its motto is “Healthy Living for Less”), though that hurt for a bit; while sales have cranked ahead at a decent rate for a grocer, margins have been under off-and-on pressure for a while. But Sprouts has ironed some things out (including finally settling on a new CEO), and it’s benefiting from the recent run on food, toiletry items and the like during the coronavirus pandemic, which is likely to further boost sales and cash flow. In Q4, sales were up 8% compared to a year ago and gross profit increased 11%, while earnings were up 42% year over year. Analyst estimates aren’t anything to write home about, but Sprouts is betting future growth will come from its expanding home delivery program (up 150% in 2019; all of its stores are now live with that feature) and the aforementioned belt tightening. This is a defensive, cookie-cutter story that has a near-term catalyst due to the virus.

Technical Analysis

SFM isn’t our normal recommendation in Top Ten, with a downtrend starting way back in late 2018. But the recent action is very interesting, with huge-volume support beginning in February and then even larger institutional buying after earnings three weeks ago. Moreover, relative to the market, SFM sits at one-year highs. Long story short, the stock looks to be transitioning to an uptrend; it’s worth watching or, if you want to take a stab at it, you can pick up a few shares around here.

SFM Weekly Chart

SFM Daily Chart

Zscaler (ZS)

zscaler.com

Why the Strength

With the rapid increase in online communications and content consumption resulting from the global shut-in, an obvious follow-on play is security, as hackers attempt to take advantage of the boom in traffic. Of course, this was already a big industry (malicious cyberattacks cost the U.S. economy more than $100 billion per year by some estimates), so the recent reality is just fuel for this industry’s growth. Zscaler is one of the “new-age” security leaders, using the cloud to provide security as a service, including firewalls, antivirus, malware and data leak detection. It routs all traffic through its platform to allow for inspection and authentication in order to apply corporate security policies. Of course, there are other security-related firms out there (Okta, written about last week, is a favorite), but Zscaler is certainly benefiting from the move away from older school methods—revenues have been growing rapidly (though decelerating a bit) in recent quarters, while the underlying metrics (new customers up 55% last quarter; same-customer revenue growth rate of 16%; one-fifth of the Fortune 500 are already customers) look great. Better yet, the firm’s been consistently profitable in recent quarters, and analysts see all of this continuing (revenues expected to rise 37% in 2020). To be fair, the stock did get nailed on earnings late last year on worries that the valuation was too rich and business would slow down, but that was before the massive tailwind of the shut-in. Long story short, Zscaler is a good bet to be a winner in the months ahead.

Technical Analysis

ZS topped back in July and fell by more than half over the next couple of months; the recovery was decent, but it plunged to a lower low in early March as the market tanked. Still, that dip is now looking like a shakeout—ZS has rallied three weeks in a row on above-average volume, and it’s near multi-month highs, which few stocks can claim. We’re OK starting a small position here, albeit with a loose stop in the low/mid 50s.

ZS Weekly Chart

ZS 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 will be published on April 13, 2020.