Some Encouraging Signs
Current Market Outlook
While the major indexes took another hit last week, we actually saw a few encouraging signs from the market—the broad market, for instance, continues to display some positive divergences (i.e., it’s in better shape now than back in February, when the indexes were at a similar level) and many leading stocks held key support (often near their 50-day lines), with a few actually shooting to new highs. All of that is a good reason to keep your antennae up—but with the major indexes still in intermediate-term downtrends, we’re keeping our Market Monitor in neutral territory. If this is the start of a sustained rally, there will be plenty of opportunities to jump on, but right now it’s best to mostly stand pat, holding resilient stocks but also keeping some cash on the sideline.
This week’s list is a mixed bag, with lots of turnarounds and some growth stocks sprinkled in. Our Top Pick is Etsy (ETSY), which, despite a big run, has refused to budge during the market’s latest downdraft.
| Stock Name | Price | ||
|---|---|---|---|
| BofI Holding (BOFI) | 42.93 | ||
| Delek (DK) | 0.00 | ||
| Etsy (ETSY) | 112.97 | ||
| Kirby (KEX) | 0.00 | ||
| LGI Homes (LGIH) | 86.04 | ||
| NetApp (NTAP) | 0.00 | ||
| New Relic (NEWR) | 103.70 | ||
| Planet Fitness (PLNT) | 0.00 | ||
| Proofpoint (PFPT) | 113.79 | ||
| Urban Outfitters (URBN) | 0.00 |
BofI Holding (BOFI)
Why the Strength
BofI Holdings operates BofI Federal Bank, an online operation that’s been growing for years thanks to its lower cost structure (non-interest expenses average 45% less than comparably-sized banks, while net interest income is 13% higher as a percent of assets) and differentiated business model. Of course, the company is still a bank and its loans aren’t much different from most of its peers—73% of its loans go to residential mortgages (52% single family), with another 15% commercial and industrial. But BofI’s advantages have produced excellent growth for years—in Q4, sales and earnings rose 13% and 22% (respectively) thanks to a 9% hike in total assets, a 12% increase in deposits and excellent sub-metrics like return on equity (where it outdoes more than 90% of its peers). Analysts see earnings growing north of 20% both this year and next, helped by the corporate tax cut, generally strong economy, a healthy housing market and some selective acquisitions (it recently bought the fiduciary and trustee business for bankruptcy situations). It’s not changing the world, but BofI has a unique story among financial stocks and excellent prospects for growth.
Technical Analysis
BOFI hit 36 back in October 2015, and two years later, the stock was sitting at 24. But since late last year, the stock has been acting very well, trending higher above its 25-day line for months (including a bullish reaction to earnings in January) and reaching new all-time highs above 42 last March. BOFI has been yanked down with the market recently, but it’s held its 50-day line—usually the first test of the 50-day line is buyable after a strong trend. You can buy some here with a stop under last week’s lows.
BOFI Weekly Chart
BOFI Daily Chart
Delek (DK)
Why the Strength
Shares of refining and marketing companies are on the rise as gasoline prices tick higher and we head toward the busy summer driving season. One way to play the strength is Delek, a small-cap outfit involved in refining, logistics, asphalt supply and retail. Delek’s network of terminals and pipelines extends as far west as California and as far east as Tennessee, but the firm’s presence in the lucrative Permian Basin is a key value driver as Delek sources over 70% of its feedstock from the region. Analysts are bullish on the stock due to a return to growth (revenue was up 73% in 2017, while earnings surged into the black), Delek’s vertical integration strategy (it’s aiming to bring $100 million in third-party payments in-house from its Big Springs refinery) and potential to turn into a major cash return story. From November through February, Delek raised its dividend by 33% and bought back $119 million of its own stock; expect buybacks to continue at around $25 million per quarter. And with a number of asset sales, nearly $1 billion in cash on the balance sheet, plus a projected $225 million in free cash flow after dividends this year, Delek is morphing into a virtual cash cow. Analysts see the current dividend yield of 2% going up this year, plus 37% revenue growth (to $9.96 billion) and 113% EPS growth (to $2.39). Of course, refining stocks are notoriously cyclical, but there’s no question the wind is at Delek’s back today.
Technical Analysis
Like most oil-related names, DK was crushed during the 2015-2016 oil price collapse, finally bottoming in mid-2016. But, with only one exception (in August of last year), shares have traded above their 200-line since September 2016. More recently, the stock had a nice, persistent advance through mid-January, pulled back with the market in February, but has been pushing higher ever since, despite the rocky market. Upside volume has been impressive, but if you’re game, try to buy on dips.
DK Weekly Chart
DK Daily Chart
Etsy (ETSY)
Why the Strength
Etsy has established itself as the Amazon for homemade goods—at year-end, its marketplace has 1.9 million active sellers, 33.4 million active buyers, over 50 million items and is clearly benefitting from the network effect, where more sellers and items attract more buyers, which appeals to more sellers, and so on. (The company saw $3.3 billion of goods solid on its platform last year, up 18% from a year ago.) Most of the firm’s revenues come from (in order) marketplace fees (20 cents listing fee per item; 3.5% transaction fee), payment solutions (Etsy Payments causes you to fork over another 3% to 4% of the transaction!) and promoted listings, with shipping labels and custom websites contributing a smidge. The stock is strong today because Etsy’s business trends are accelerating, and, longer-term, the company’s leading position in its niche areas should lead to plenty of growth—revenue growth has been accelerating in recent quarters, and unlike the past few years, that’s translating into solid earnings growth as well. Analysts see sales and earnings up 23% and 54%, respectively, with much more upside in 2019 and beyond. The valuation is big, but institutions are buying in—305 owned shares at year-end, up from 223 six months before.
Technical Analysis
ETSY broke out of a beautiful tight base in December and ran up to 22 by year-end, but then sank back to the top of its base when the market plunged in February. But the buyers weren’t finished, pouring back into the stock after that low, gapping it up on earnings and rallying it as high as 29 before the market’s latest slide. But instead of falling, ETSY has moved straight sideways, a solid show of relative strength. We’re not opposed to buying a little on dips.
ETSY Weekly Chart
ETSY Daily Chart
Kirby (KEX)
Why the Strength
Houston, Texas-based Kirby is the largest tank barge operator in the U.S., moving bulk liquids like petrochemicals, black oil, refinery products and agricultural chemicals up and down the Mississippi river, on the Gulf Intracoastal Waterway and along U.S. coasts, Alaska and Hawaii. The company also transports dry-bulk commodities and provides service on diesel engines, transmissions and reduction gears. Shipping is a cyclical business, and Kirby has booked twelve quarters of declining earnings. But the company has remained profitable throughout its rough spell and revenue has been on the rise (and accelerating) for the last four quarters, including a strong 63% gain in Q4. Analysts expect earnings to turn around in 2018, estimating a 37% jump, with a further 31% bump in 2019. On February 2, Kirby closed on the $419 million cash acquisition of Higman Marine, a move that will add 159 inland tank barges and 75 inland towboats (and, likely, many synergies) to its considerable fleet. The company will release its Q1 results after the close on April 25, with analysts looking for earnings of 58 cents per share on revenue of $628 million. After a long, slow correction, Kirby is back on investors’ radar screens, but the earnings news will likely set the tone for the near future.
Technical Analysis
KEX took a break from a long rally in 2014, falling from 124 in September to 45 in early 2016. The stock bounced back into the low 70s, in May 2016, but got stuck there until the start of this year, when it headed into the high 70s, paused for a few weeks and then broke out above 80 last week. KEX pulled back from its high during Friday’s big dip, but the volume on the liftoff was encouraging, and of course the stock has a giant base to build from. If you like the rebound story, you can take a nibble here, but don’t bet big and keep your stops fairly tight.
KEX Weekly Chart
KEX Daily Chart
LGI Homes (LGIH)
Why the Strength
It’s been a rough three months for homebuilding stocks, as fears of rising mortgage rates (and a big prior run) brought out the sellers. But the group is showing signs of life, and mid-cap LGI Homes is poised to be a leader of any group advance that develops. The company had 78 active selling communities at year-end in a handful of states all over the country (Texas, New Mexico, Colorado, Minnesota, North Carolina, Tennessee and more). The stock is strong today thanks to a bullish quarterly report from industry peer Lennar, the perception that mortgage rates will remain tame and because of LGI’s own bullish monthly update—the company announced last week that it closed 599 homes in March and 1,244 for the first quarter as a whole, with both figures up 64% from a year ago. Of course, last year’s Q1 was a slow one for LGI (which inflated the year-on-year gains), but even so, the figures reaffirmed management’s bullish outlook for the year (an 11% gain in home closings and earnings between $6 and $7 per share) after the aforementioned industry worries. While the P/E is a reasonable 16 (and 12 on a forward-looking basis), analysts see the bottom line rising 30% this year and another 22% in 2019. It’s a nice growth story in a sector that appears ready to resume its longer-term uptrend—if the market can get out of its own way.
Technical Analysis
LGI broke out of a huge base last June and enjoyed a solid run from 35 to 50, including 10 weeks up in a row. After a two-month rest, the stock put on another show, this time ripping from 50 to 80 and rising an incredible 17 weeks in a row! The stock is unlikely to match that feat again, but after a sharp pullback to its 40-week line, LGIH is showing strength, popping back to within a few percent of its highs on good volume. You can nibble here or keep it on your watch list.
LGIH Weekly Chart
LGIH Daily Chart
NetApp (NTAP)
Why the Strength
NetApp is a nuts-and-bolts play on cloud computing, digital transformation and big data, which add up to a roughly $50 billion market. The firm sells a variety of hardware and device management software for the networked storage, hyperconverged infrastructure and cloud storage markets. At the end of the day, NetApp is strong today because it helps customers manage and safeguard their data, and a renewed focus on cloud-first product development and buyer-centric marketing has helped bring a wave of new customers in the door. The numbers tell the story: In 2016, revenue and EPS both fell, but in 2017 revenue surged by 28%, and EPS jumped by 14%. The growth streak looks to continue, albeit at a slower rate. NetApp hosted its financial analyst day last Thursday and forecast revenue growth in the mid-single digits in fiscal 2019 (which just started this month), suggesting consensus of 4.2% is conservative (analysts currently expect 6.3% revenue growth in fiscal 2018, which ended in April). The real growth is on the bottom line however—EPS likely grew 26% last year and should rise at lease 14% in fiscal 2019. To sweeten the deal, management announced a whopping $4 billion stock buyback program (nearly 25% of the current market cap) and a doubling of the dividend, making the forward yield is around 2.5%. It’s not as dynamic as it was a decade ago, but NetApp is a successful player in a growing field.
Technical Analysis
NTAP had a rough time in 2015 but came back to life in early 2016 and began to bump up against multi-year resistance in the middle of last year. The breakout came last November when NTAP gapped up to 54 after earnings and eventually rallied to 64 in mid-January. It’s been choppy since, but that’s normal given the market environment—in fact, NTAP has etched a higher low and a higher high during the past two months, a sign big investors are still grabbing shares on weakness. We’re OK doing the same thing, albeit with a tight stop in the upper 50s.
NTAP Weekly Chart
NTAP Daily Chart
New Relic (NEWR)
Why the Strength
New Relic was founded in 2008 with a core vision of using the cloud and software-as-a-service (SaaS) to help businesses control and optimize their software. The company’s application performance monitoring (APM) gives businesses instant, real-time data about their software applications’ performance. It’s been taking market share away from rivals by giving software-driven businesses the tools they need to build, monitor and fix their software and IT infrastructure. In its blockbuster fiscal Q3 earnings report on February 6, New Relic achieved profitability (a quarter ahead of expectations) and booked a 35% jump in revenue and a 156% leap in earnings. The company also reported that large paid business accounts (larger than $100K) had grown from 586 in Q2 to 629 and annual recurring revenue from enterprise business accounts grew to 52% of revenue, up from 44% a year earlier. When New Relic reports its fiscal Q4 results in early May, analysts are forecasting revenue of $92.3 million and earnings of five cents per share. And in the fiscal year that begins in April, earnings are expected to hit 23 cents per share. It also hasn’t hurt that there were whispers of a possible buying of New Relic a few months ago, though the company has enough going for it to stand alone.
Technical Analysis
NEWR has been in a strong uptrend since January 2017, soaring from 28 as the year began to 58 at the end of the year. NEWR built a constructive base by trading sideways from late November 2017 to February 6, when the good earnings news gapped the stock up and resulted in a run to 79 by the middle of last month. Market weakness has taken a small toll since then, but shares are still hanging around their 25-day line. With the market unsettled and earnings up in a month or so, it’s best to keep any position small, and use a stop in the upper 60s (below the 50-day line).
NEWR Weekly Chart
NEWR Daily Chart
Planet Fitness (PLNT)
Why the Strength
Planet Fitness remains a very solid long-term growth story, and with retail stocks showing strength, its shares have begun to perk up. To review, the story is both simple and enticing, as the company’s fitness centers have a very wide appeal, attracting people from all over the economic spectrum who want a low-stress (and reasonably priced) place to work out. The firm ended 2017 with 1,518 fitness centers (up 16% from the year before, almost all of them franchises) and 10.6 million members (up 19%), and the top brass believes there’s room for 4,000 or more locations in the U.S. Throw in some solid store economics (pay back within four years in general, if not sooner) and healthy sales from existing locations (same-store sales were up a huge 11.6% in Q4!) and there’s a clear map for Planet Fitness to get much bigger over time. Beyond the top-level numbers, the firm’s national advertising campaign has been a great success, and a recent price hike for Black Card members (who can use any Planet Fitness location) and higher royalty rates from franchisees are helping to boost results. Revenue growth isn’t lightning fast, but has been generally picking up steam in recent quarters, while earnings and EBITDA (a measure of cash flow) have been advancing 15% to 25%. This year looks like much the same thing, with years of growth beyond that.
Technical Analysis
When we last wrote up PLNT back in February, the stock had just gapped out of a modest eight-week, double-bottom base following Q4 earnings. Shares rose as high as 40 in the wake of that report, but most encouraging is its action during the market’s plunge of the past four weeks—PLNT calmly pulled back to its 50-day line before bouncing on solid volume. If you want in, you can nibble here or on dips, or just keep it on your watch list.
PLNT Weekly Chart
PLNT Daily Chart
Proofpoint (PFPT)
Why the Strength
Proofpoint is a $6 billion market-cap security-as-a-service provider with increasingly popular subscription-based security solutions. The stock is doing well because of market share gains, new product advancements, accretive acquisitions and high renewal rates, all of which add up to estimated revenue growth rates of 35% this year and 28% in 2019. The company’s emerging solutions (Email Fraud Defense, Social Media Protection and Threat Response) are just one of the attractions as they are fueling growth above Proofpoint’s core offering of email protection. But investors have also been pleasantly surprised by the recent acquisition of Wombat Security, which specializes in phishing simulation and computer-based security training. Analysts believe Wombat is growing at around 50%, which will help extend Proofpoint’s growth streak, as will accelerating adoption of Microsoft Office 365, for which Proofpoint offers a variety of threat protection and compliance-related solutions. Finally, we’d note that cybersecurity remains at the top of the list for stable IT spending by large companies. With Proofpoint’s solid growth profile, good story and booming free cash flow (the company expects about $3 per share this year, up 30%), we see the name remining at the top of big investors’ buy lists.
Technical Analysis
PFPT spent the greater part of 2017 trading in the 80 to 90 range, then finally broke above resistance in late-January. The market’s early-2018 pullback dragged shares back to their 50-day line, but they quickly bounced back above 100 and walked up to 124 by mid-March as solid earnings, and news of the Wombat acquisition, drove a wave of fresh buying. A modest pullback over the last two weeks never cracked the stock’s 50-day line, and the stock bounced nicely in recent days even as the market continued to wobble. PFPT looks like a leader in the strong cybersecurity sector—you can buy a little around here.
PFPT Weekly Chart
PFPT Daily Chart
Urban Outfitters (URBN)
Why the Strength
For companies in most industries, a 2% increase in annual revenue wouldn’t be good news. But for Urban Outfitters, a Philadelphia-based retailer of fashion and lifestyle products, it was great news. The entire retail industry came out of a long slump in the second half of 2017, and fiscal 2018, which ended in January, featured stronger-than-expected results. Urban Outfitters’ roster of brands includes Anthropologie, GHLDN, Free People, Terrain and Urban Outfitters, with Free People and online sales leading the company’s growth. The quarterly report on March 6 featured a 6% hike in revenue and a 21% bump in earnings, which was the strongest growth in revenue since 2015 and the best earnings increase in even longer. The company opened 18 new locations during the year and bought back $157 million (8.1 million shares) of its stock and still has 18 million shares authorized for repurchase. Urban Outfitters is benefiting from the resurgence of the retail sector, but also appears to have regained its mojo in finding an attractive offering of merchandise. It’s not likely to be a rocket shot, but it’s a good story.
Technical Analysis
URBN has spent years and years trading sideways under resistance in the high 30s or low 40s and support swinging from the teens to low 20s. But now the stock appears to have changed character—after URBN embarked on a strong rally that booted it to 36 at the end of the year, the stock has held up very well during the recent market turmoil and has pushed out to its highest price since November 2016. The stock rallied on rising volume last week and has pulled away from its 25-day moving average. You can take a small bite right here if you like the retail rebound story.
URBN Weekly Chart
URBN 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.
