Broad Market vs. Growth Stocks
Current Market Outlook
Last week saw a continuation of the market’s rally, with most major indexes (save small caps) lifting to new recovery highs, led by many “old world” sectors like financials, mining, transports and the like. Meanwhile, many hot growth stocks (mostly technology) lagged, with a bunch falling to key intermediate-term support. What does it mean? As we wrote in Friday’s update, you should take things on a stock-by-stock basis—most stocks still look great, and if you have some winners, you should continue giving them a chance to crank higher. But it’s important not to be complacent, either, so be sure to honor your loss limits and stops in case the selling in growth stocks continues and/or the selling spreads to other corners of the market. Overall, we remain mostly bullish as most of the evidence continues to point up.
Not surprisingly, this week’s list has many newer names to the publication as the buying power rotates to other areas. Our Top Pick is Wynn Resorts (WYNN), which, along with many gaming peers, looks to have changed character last week. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Acacia Communications (ACIA) | 51.83 | ||
| Advanced Micro Devices (AMD) | 82.24 | ||
| Amphenol (APH) | 91.75 | ||
| Autohome (ATHM) | 98.65 | ||
| Cabot Microelectronics (CCMP) | 156.17 | ||
| Delta Air Lines (DAL) | 54.28 | ||
| Lennox International (LII) | 270.56 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Rio Tinto plc (RIO) | 57.05 | ||
| Wynn Resorts (WYNN) | 121.08 |
Acacia Communications (ACIA)
Why the Strength
We featured Acacia Communications in early March and the stock remains in favor despite some hiccups in growth stocks. Acacia is an optical networking stock and analysts have recently raised price targets based on the firm’s solid market positioning and it having the right technology for the current demand environment. More specifically, Acacia delivers silicon-based interconnects that transform cloud and communications networks by making them faster, less power intensive and able to handle more data. Market concentration remains a potential concern (85% of revenue comes from just five customers), but the bottom line is that sales are concentrated because Acacia has an industry-leading portfolio and a convincing roadmap of future product releases, so customers keep coming back. Major customer ZTE, which was previously banned, recently resumed purchases, and M&A speculation is still out there now that demand from Asia is picking back up with Acacia being one of the big beneficiaries in optical componentry. There is no new fundamental news since Q4 results came out in February, when revenue was up 24% to $107 million (beating by almost 4%) and EPS of $0.41 beat by $0.06. For the full year, revenue is still expected to be up 32%, while EPS estimates have inched a few pennies higher, to $1.53, over the past month.
Technical Analysis
ACIA was a hot IPO when it went public in 2016. But shares trended down until mid-2018, when the stock finally bottomed at 26.5. It choppily gained ground during the next few months, then built a great-looking launching pad from November through mid February. The earnings-induced breakout was a beauty, and despite some weakness in growth stocks, ACIA has extended its gains in recent days, a good sign. You can enter here or on further weakness.
ACIA Weekly Chart
ACIA Daily Chart
Advanced Micro Devices (AMD)
Why the Strength
Advanced Micro is a fabless semiconductor company that designs computer and graphics processing units (CPUs and GPUs) for business and consumer products; its three biggest end markets are personal computers, gaming consoles and cloud servers. Gaming has received the most media coverage lately given the mid-March unveiling of Google’s Stadia video-game streaming platform, which is based on custom AMD horsepower at data centers (Stadia is cloud-based). What this means for AMD in terms of revenue growth and competitive positioning as cloud gaming platforms ramp up remains to be seen, but when combined with other factors like market share gains versus Intel (which suffered product delays with new chips) and analyst commentary that AMD has build a compelling product roadmap for 2019 and beyond, it looks like the company’s star is rising. The consensus is that AMD has done a terrific job executing its product roadmap (not an easy task in a rapidly-evolving industry) and keeps innovating in multiple markets, while keeping an eye on margins. Last year was undeniably great. Revenue was up 23% in fiscal 2018 (reported January 29) and EPS surged 360% to $0.46. Things are likely to moderate this year, as analysts are looking for revenue to grow 5.2% and EPS to jump a comparatively modest 40%. But those are still compelling growth numbers that could prove conservative.
Technical Analysis
AMD spent most of 2017 consolidating big gains from 2016. Then the stock broke out to multi-year highs above 15 last July and rallied up into the low 30s in September before the stock came crashing back down to Earth during the market correction. But the action this year has been solid, with bullish volume clues in late January (earnings), mid March (Stadia) and last week as AMD approaches its old peak. If you want in, try to buy on dips.
AMD Weekly Chart
AMD Daily Chart
Amphenol (APH)
Why the Strength
Amphenol is one of the biggest makers of interconnected products out there, with a portfolio of electrical, electronic and fiber optic connectors, coaxial and cable that serves virtually every end-market that needs computing power (TV, cell networks, data, aerospace, military, transportation, etc.). The company’s been a steady performer (average annual growth of 10% over last decade), largely because of a conservative management team that’s developed a nimble operating structure, feathered in accretive/strategic M&A targets over the years, and pursued the right opportunities in its diverse mix of end markets (none of which accounts for over 20% of revenue). Recently, excitement has been building around Amphenol’s push into sensors, a market that’s two and a half times the size of the company’s core market of connectors and is causing some analysts to hike expectations. Looking back at 2018, Amphenol grew revenue by nearly 17% while EPS jumped by 21%, to $3.77. Without factoring in acquisitions, 2019 growth will be much more modest (2% revenue and 5% EPS growth expected). But, as usual, final results will likely be higher on M&A and big investors are looking at the potential for Amphenol’s new sensor business to eventually add a whopping $3.00 per share in earnings.
Technical Analysis
APH had a down year in 2018 after posting big performance in 2017. The late-2018 sell-off was certainly a factor, but even stripping that out shares of APH spent most of the year oscillating between 80 and 92. But it’s a different story in 2019, with a straight-up move back to 95 after the market bottomed, a month-long rest and then a huge eruption to new highs last week on excellent volume. We like it, preferably on dips.
APH Weekly Chart
APH Daily Chart
Autohome (ATHM)
Why the Strength
Autohome is a Chinese stock that went public in 2013 and has huge growth potential because of a massive target market. The company’s goal is to become the dominant player in China’s online automotive advertising market, which despite being young, is already bigger than the U.S. market and has more room to grow. Autohome began operations in 2004 and has since become the leading online destination for automobile consumers in China. Its growth strategy is simple: Provide automotive shoppers with everything they want to complete the car-buying experience. The company’s business currently revolves around two websites, www.autohome.com.cn and www.che168.com. Revenue comes mainly from dealers and is generated by three segments: media services (ads and professionally produced editorial content), lead generation services, and an online marketplace (Autohome Mall) where consumers can complete the car-buying experience. Mobile is a big focus, too, and average daily unique visitors continues to climb (up 10% in Q4 2018 to 29 million). Analysts have raised questions about the long-term growth outlook given concerns over China auto sales trends and dealer boycott threats due to Autohome raising prices. But Q4 2018 results still beat expectations (revenue up 18% to $327 million and EPS of $1.32 beat by $0.25) and analysts see 21% topline growth this year.
Technical Analysis
ATHM went on a beautiful run in 2017 and 2018 that carried the stock up near 120 by last summer when Chinese stocks topped out. The retreat from there pulled shares down sharply, but the stock found repeated support in the 60 to 70 range from October through January. ATHM rounded out a reasonable low-level base from there, with the past two weeks showing huge buying volume. Pullbacks are likely, though we’re not expecting a huge retreat.
ATHM Weekly Chart
ATHM Daily Chart
Cabot Microelectronics (CCMP)
Why the Strength
There are firms that make semiconductors, there are firms that make the equipment that makes semiconductors, and then, further down the chain, there are firms that provide the slurries, chemicals and specialized pads that make sure these semiconductors are perfectly etched, cleaned and dried so that they function properly. That last category is where Cabot Microelectonics (no relation to us) plays—it’s the world’s largest supplier of polishing slurries, the second leading provider of polishing pads and (thanks to its recently closed acquisition of KMG Chemicals) a leading provider of high purity process materials. And because these materials are consumed (and need to be reordred) demand is steadier than most other firms in the industry, so there are smaller swings up and down. Cabot also does business in some other industries (performance materials for pipelines, treating wood and more), but it’s the chip area that drives sales and earnings, and strong demand from equipment makers and optimism that the chip cycle is turning back up is what’s causing the stock to get moving. The Q4 report (released in early February) crushed expectations, and analysts see the bottom line rising a big 36% this year (thanks in part to the KMG deal) and more in 2020. Cabot is a unique down-the-food-chain story with a great recent track record of growth, in a sector that looks to be getting going again.
Technical Analysis
CCMP enjoyed a great run during the chip stock bull run of 2016-2018, rising from the mid 40s to a high of 124 last August. Then came the correction, though the damage was reasonable (33%) and shares ripped back to 116 on many days of strong volume after earnings in February. CCMP then rested for a month, but after testing its 50-day line, shares have spiked back to their old peak. You could start a position here or (preferably) on dips.
CCMP Weekly Chart
CCMP Daily Chart
Delta Air Lines (DAL)
Why the Strength
Most transportation stocks have kicked into gear during the past couple of weeks, and Delta Air also has a number of company-specific catalysts that have caused it to come under strong accumulation. The first is that, despite fears of a global economic slowdown, business is good—March traffic grew 5.3% from a year ago (including a strong 6.9% boost in domestic traffic), which led management to hike its Q1 revenue outlook to a 7% gain (up from estimates of 5.5%), with earnings of around 90 cents per share (80 cents expected). Second, the firm accelerated its share repurchase plan in Q1, buying back a whopping $1 billion of stock in the quarter (about 2.5% of the entire firm). Third, the firm signed a renewed its deal with American Express (SkyMiles credit card), with the new agreement to be a big help to Delta, possibly boosting cash proceeds by about $3 billion annually by 2023. And fourth, the combination of the stock’s reasonable valuation (10 times earnings), the new AmEx deal and its huge cash flow (2.4% dividend yield) has led to continued rumors that Berkshire Hathaway could consider buying the company (a regulatory filing in March showed Berkshire owned just over 10% of the firm already). The quarterly report is due out Wednesday morning (April 10), but with the numbers preannounced, investors will be looking for any full-year adjustments to guidance.
Technical Analysis
DAL has been highly profitable for years, but the stock has been stuck in the mud, mostly trading within a wide range from the mid 40s on the low end (which it hit in early January) and the low 60s on the high side. The action early this year wasn’t overly encouraging, but after so many ups and downs, DAL finally tightened up in the low 50s and, last week, shot ahead on its heaviest weekly volume in 14 months. We’re OK starting small here and looking to buy more on a push above 62.
DAL Weekly Chart
DAL Daily Chart
Lennox International (LII)
Why the Strength
We’re seeing more and more construction and building stocks begin to show unusual strength; Armstrong last week was one, and this week we have Lennox, which is a leader in providing climate control products (basically air conditioning, heating and refrigeration offerings) for a variety of end markets and via some retail outlets (PartsPlus stores). About two-thirds of the firms’ profit comes from residential heating and cooling systems, with 25% from commercial systems and the rest from refrigeration, with a heavy emphasis on replacement systems (about three-quarters of business), which provides a steady stream of business. A tornado did a number on one of the firm’s production facilities in Iowa last summer, which is why revenues have fallen off (the company has been capacity limited), but the stock is strong today because big investors see residential real estate activity picking up, the Iowa facility ramping up and continued cost controls leading to a solid 2019. Analysts see revenues up mid single digits and earnings gaining 30%, but many are thinking that could prove conservative as demand picks up. A solid three-year outlook (6% sales growth, expanding margins), a modest share buyback program (about 3% of shares this year alone) and dividend (0.9% annual yield) are also positives.
Technical Analysis
Like most stocks tied to the housing industry, LII stalled out last year—shares topped in January 2018 at 223 and was sitting in nearly the exact same area one year later. But once it moved to new highs after earnings in early February, LII kept going; there was a brief pause a month ago as the 25-day line caught up, but the stock has motored straight up during the past couple of weeks. We think a sustained uptrend is likely underway, but dips are likely in the short-term.
LII Weekly Chart
LII Daily Chart
Lululemon Athletica (LULU)
Why the Strength
We’ve seen a bunch of companies in the past decade have two or three legs to their growth story (think Netflix, which started with DVDs by mail, then streaming and then original content). We think Lululemon is following a similar path, with the company’s yoga-wear (which led the “athleisure” apparel movement a few years back) causing a huge growth wave in the early 2010s. Now, after a few years of snafus, the company is showing accelerating growth again as it succeeds in a number of new areas—yoga is still a core business, but Lululemon has branched into apparel for outerwear (including cold weather) and office travel commuting for women, while men’s wear (much of it athletic, but some not) is a big growth area and selfcare products (well received in testing, including things like deodorant, balm and face moisturizer) are set to be launched in the near future. Throw in expansion overseas and investments in the firm’s distribution and e-commerce capabilities and the results are outstanding—Q4 revenues lifted 26%, the fastest pace of growth in years, while earnings soared 39%, same-store sales rose 7%, e-commerce revenues shot ahead by 39% and management had a solid outlook for the upcoming year. With Lululemon transitioning from a niche apparel and lifestyle brand to something much more, there’s the potential for the firm to grow in a big way from here. The firm’s upcoming Analyst Day (later this month) should provide more details.
Technical Analysis
LULU broke out from a five-year base last March and had a big run, about doubling by the time the market got cranky in the fourth quarter. What followed was a sharp-but-reasonable correction (33%) and what turned out to be a new, six-month launching pad. And then LULU blasted out of that base on earnings two weeks ago (heaviest weekly volume since June 2017!), and tacked on a bit of ground last week. We think you can buy in here.
LULU Weekly Chart
LULU Daily Chart
Rio Tinto plc (RIO)
Why the Strength
Except for the occasional gold stock, it’s been a long time since we’ve seen strength from the mining sector, but Rio Tinto made the cut this week thanks mostly to a very unique situation that’s unfolding in the iron ore industry, which is one of the key inputs used in the making of steel. In January, a huge iron ore mine operated by Vale in Brazil saw its dam burst, which immediately crimped supply and caused prices to spike to their highest levels since 2014. But instead of that being a short-term spike, ore prices have remained sky-high thanks to further production hiccups from Vale and Rio Tinto in Brazil (in total, nearly 6% of the seaborne iron ore market went offline at one point), a cyclone that hit key mines in Australia (causing Rio Tinto to actually cut its 2019 ore production guidance) and, on the demand side, some signs that a U.S.-China trade deal could be in the works, which should help both economies (and, in theory, demand for base metals). Could this price spike melt away? It’s possible, but big investors don’t seem to buy that—Rio Tinto’s stock has kited higher for many weeks, and analysts see earnings this year gaining 27% for the large miner, with those estimates continuing to head higher. This reminds us a bit of the hard disk drive market a few years back, when a major disruption led to higher prices for two or three years—we’re not predicting that, but at the very least, it’s looking like the relatively low iron ore price environment of the past couple of years is over.
Technical Analysis
RIO is a giant operation (sales north of $40 billion), but the stock can get moving when industry trends are favorable. Indeed, after making no net progress from early 2017 through mid-December of last year, the stock has risen an amazing 16 of the past 17 weeks as earnings prospects have improved, easily moving out to new highs. That buying persistency usually leads to higher prices down the road, so any dips should be buyable.
RIO Weekly Chart
RIO Daily Chart
Wynn Resorts (WYNN)
Why the Strength
Wynn Resorts is an independent hotel company that owns and operates gambling resorts, restaurants, and spas in Las Vegas, Macau, and (soon) Boston Harbor, MA (the latter of which is opening in June 2019). The big picture trend behind the stock’s recent strength is continued economic and regulatory improvement in the regions Wynn operates, plus growth in gambling tourism. The company has been growing at a solid clip with revenue up 36% in 2017 and 11% in 2018, when EPS rose 62% (to $5.46) and 20% (to $6.54), respectively. For the last year-plus investors have been anxiously anticipating this year’s opening of the Boston resort, a Las Vegas strip conventions space and golf course and more investment in Macau. On the downside, there has been a major slide in the stock on sexual misconduct allegations (CEO Steve Wynn resigned over a year ago) and worries over China’s economy (where Wynn gets most of its money). But the efforts to smooth out the firm’s reputation have gone well, and signs of renewed strength in China have prompted analysts to upgrade the stock and big investors to snap up shares. It doesn’t hurt that management is trying to deleverage the business, which should translate to stock buybacks and increases to the dividend (current yield is 2.2%). Revenues are expected to rise just 5% this year, but (a) that could conservative and (b) investors are now focused on reaccelerating growth late this year and into 2020.
Technical Analysis
WYNN had a solid run from the market low of early 2016 to its highs last May, but then the wheels came off as investors tossed overboard anything related to China. A double bottom near 90 late last year led to a rally to 134 by February before another correction took hold. However, we think WYNN changed character last week, with a big-volume surge to multi-month highs. We think minor weakness is buyable.
WYNN Weekly Chart
WYNN 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.
