Same Story
Current Market Outlook
Not much has changed with the market’s tenor during the past week. The major trends are still positive, but not powerful, with many indexes not making much headway during the past two months. And for individual stocks, again, there’s more good than bad, but the advance is narrow and news driven, and we’re seeing more buying of defensive stocks. Overall, we’re still more positive than not because most of the evidence favors the bull side—and it’s worth noting that it wouldn’t take more than a couple of good days to get all the major indexes to all-time highs! But we also think it’s a good idea to go slow, look for solid entry points and, of course, honor your stops. We’re keeping our Market Monitor at a level 7.
This week’s list has a nice mix of solid stories from a few different industries. Our Top Pick is a stock that’s been a leader all year—Coupa Software (COUP), which has tightened up after a couple of months of consolidation. Start small and see what comes on earnings early next month.
| Stock Name | Price | ||
|---|---|---|---|
| CenturyLink (CTL) | 22.88 | ||
| Chipotle Mexican Grill (CMG) | 773.32 | ||
| Coupa Software (COUP) | 262.20 | ||
| Dexcom (DXCM) | 421.36 | ||
| Five9 (FIVN) | 78.35 | ||
| The Flowserve Corporation (FLS) | 54.70 | ||
| Ligand Pharmaceuticals (LGND) | 267.14 | ||
| Sendgrid (SEND) | 33.32 | ||
| Trade Desk (TTD) | 468.02 | ||
| Trex Company (TREX) | 117.56 |
CenturyLink (CTL)
Why the Strength
During the past few years CenturyLink has been a giant (more than $21 billion in revenue), sleepy telecom outfit that offered the usual array of services (IP and data services, infrastructure, voice, managed services, etc.). And the results weren’t pretty—the firm was in the market’s doghouse for a while, with revenues flat-to-down from 2014 through most of 2017, and the stock collapsing from above 40 to below 14. But then management made a bold move last year, buying Level 3 Communications, greatly broadening its reach (it now connects more than 350 metro areas with over 100,000 buildings, including a bunch in emerging market countries) and bringing on a huge sales force. Just as important, the merger brought with it a ton of synergy opportunities that it’s capitalizing on ($675 annualized EBITDA savings so far, eventually rising to $850 million annually!). Free cash flow (cash flow less CapEx and acquisition expenses) is booming and monstrous—CenturyLink produced $919 million of free cash flow in Q2 alone, and expects around $3.7 billion for the full year ($3.45 per share), which is enough to sustain its huge dividend (9.3% annual yield!), pay for plenty of CapEx and have more than a billion dollars leftover besides. To be fair, there’s a ton of debt on the balance sheet ($37 billion!), but that’s being chipped away at, and relative to cash flow it’s reasonable. It’s not a growth story, but CenturyLink is a special situation worth considering.
Technical Analysis
CTL was a dumpster fire through November of last year, when it finally bottomed after a multi-year decline. It bounced from a low near 13 to a high above 19 by February, and then built a tightening base for the next few months on mostly lower volume. And now CTL’s character has changed—following its Q2 report, the stock has exploded higher on many days of huge volume, lifting to 13-month peaks. We’re OK picking up shares here or on any retreat, with a stop near 20.
CTL Weekly Chart
CTL Daily Chart
Chipotle Mexican Grill (CMG)
Why the Strength
Chipotle Mexican Grill needs no introduction—its fast-casual dining model and fresh, tasty Mexican cuisine made it a hit across the U.S. during the past decade. And it remains on the comeback trail after a couple of years in the doghouse as earnings collapsed following bad press from a string of customer illnesses at its restaurants. Recently, what’s most interesting is that Chipotle was actually hit with another piece of bad news this month; customers at an Ohio plant became ill after meat and pre-cooked food was left out at unsafe temperatures. Two years ago, that would have crushed the stock, but this time around, shares were hit for a day—and then quickly ramped back to new highs! While there’s still event risk here (another widespread outbreak of illnesses wouldn’t be good), Wall Street is more focused on the firm’s solid turnaround, with same-store sales (up 3.3% in Q2) accelerating, margins increasing, earnings picking up steam and a steady store expansion plan (140 new restaurants this year); all told, analysts see earnings up 27% this year and accelerating next year, to 40%. It’s not going to be the young buck it was a few years ago, but with big investors buying into the turnaround, we think Chipotle can be a solid performer in the months ahead.
Technical Analysis
CMG broke free from a bottoming base in April following its Q1 earnings report and made decent progress in the weeks after, rallying to 474. Then came a couple of sharp shakeouts with the market in late June and late July, each time seeing the stock briefly dip below its 50-day line. But since the latest dip, the buyers have been in control, albeit with some wiggles along the way. We’re OK buying on weakness with a stop near 460.
CMG Weekly Chart
CMG Daily Chart
Coupa Software (COUP)
Why the Strength
Cloud software stocks have turned into a mixed bag, but Coupa has remained in a solid uptrend thanks to its big, easy-to-understand story and management’s top-notch execution. The company is aiming to be one of the big boys in the software sector thanks to its best-in-class spending management platform, which more and more big players are signing up for to save big money on procurement, invoices, sourcing, inventory and more. Its platform has more than 1.5 million licensed users and has processed a whopping $745 billion of spending since launch (including $325 billion just last year), saving customers $27 billion ($12 billion in the past year), all of which has led to steady revenue growth and improving cash flow (free cash flow is positive despite the breakeven-ish earnings line), which in turn has attracted a stampede of institutional investors (301 funds owned shares at the end of June, up from 165 a year ago). Big picture, the attraction here is that Coupa’s management sees it as a “core” software player in the mold of Salesforce or ServiceNow, as its offering could serve tens of thousands of customers over time. It’s a big idea, and the next major update will come on September 4, when quarterly results are released.
Technical Analysis
COUP broke out of a 16-month post-IPO base in February of this year and has basically been trending higher since then. There have been a couple of sideways periods (March-April and mid-June through July), but the stock hasn’t dipped below its 50-day line during the entire run! That fact does make it susceptible to some profit taking if the market and/or bad news hits, so consider starting small and seeing how earnings are received in a couple of weeks.
COUP Weekly Chart
COUP Daily Chart
Dexcom (DXCM)
Why the Strength
Diving into the details of any medical products company can give you an ice cream headache, but at its heart, DexCom’s story is relatively simple: The market for continuous glucose monitors (CGMs) is expanding rapidly as product usefulness increase in a big way, and DexCom’s new G6 CGM (which hit the U.S. market in June and will likely hit Europe later this year) is probably the most technologically advanced among them, with demand outstripping supply so far. Some of the attractions include the finger stick accuracy, predictive glucose alerts that can be sent to a smartphone and the ability to be used in patients as young as two years old (a friend of ours has a daughter using the G6 at seven years old), compared to 14 to 18 years minimum for others. Yes, there is competition from some big boys (Medtronic and Abbott), but as mentioned above, the market is huge, still relatively underpenetrated and DexCom has been growing rapidly for years—and now it’s picking up steam. Revenue growth is accelerating, including a 42% pop in Q2, and while earnings are solidly in the red, EBITDA is hovering around breakeven. It’s not going to be a triple-digit grower, but we see a great chance of excellent growth for a long time to come as the G6 gains in popularity.
Technical Analysis
DXCM topped at 103 back in 2015 and slid as low as 43 late last year (competition fears and some execution issues) before finally bottoming. But the stock’s character didn’t really change until March of this year, when it began an advance that continues to this day. More recently, DXCM hesitated around 100 in June and July, but then soared on earnings and has held those gains since. We’re OK buying some here or on dips of a few points.
DXCM Weekly Chart
DXCM Daily Chart
Five9 (FIVN)
Why the Strength
In this digital world companies are striving to make their customer service interactions more dynamic to earn and keep clients. That often means investing in cloud-based contact solutions to help with customer service, sales and marketing functions. Five9 has one of the best platforms out there, and incremental steps forward in artificial intelligence (AI) are about to make it even better. The greatest challenges facing the industry are in offering the briefest possible wait times and real-time analysis, which requires access to the right data sets. Once these challenges are overcome, customer service agents can be better allocated. With a recent partnership with Google, which will provide the processing power, Five9 is knocking down technology barriers and positioning itself to offer contact center services at scale. That potential has the market excited, especially since the company has already proven itself as a leader in the space. Revenue has been growing above 23% since forever, and Five9 delivered its first profit (of $0.11) last year. This year, analysts are looking for revenue growth of 23% and for EPS growth to soar 218%, to $0.35. Given that Q2 results (delivered on August 7) surpassed expectations and shares blasted off to a 52-week high immediately after, we see both the business and the stock delivering on promises to shareholders.
Technical Analysis
FIVN has an absolutely beautiful chart. The stock’s been trending above its 200-day moving average line since late 2015 in a stair-stepping pattern, and every consolidation phase has lasted just a few months, during which shares traded right around the stock’s 50-day moving average line. The most recent consolidation started in July, when shares pulled back from 40 to 35 and sat still for almost a month. A slight dip to 32.5 preceded the Q2 earnings release, after which shares rallied to a new all-time high. Aim for minor weakness when buying.
FIVN Weekly Chart
FIVN Daily Chart
The Flowserve Corporation (FLS)
Why the Strength
Texas-based Flowserve specializes in the hardware—pumps, seals and valves plus related services—the helps industries like oil & gas explorer/producers, chemical and power companies get liquids to where they’re supposed to go. The company’s business lines include nearly 50 different brands of fluid motion and control products, with revenue about evenly divided between aftermarket sales and original equipment sales. The firm is coming out of a four-year stretch during which sales and earnings declined steadily, although Flowserve remained profitable. The company’s Q1 earnings report turned positive (revenue up 6% and earnings up 4%) and Q2 results on August 8 improved to 11% revenue growth and a whopping 86% jump in EPS. Rebounding activity in the oil & gas industry plus improved cost controls and an improved focus on the core business made the difference. Flowserve does business in over 50 countries, and the company has an order backlog of about $1.8 billion. Analysts also noted that Q2 results were even better when foreign exchange effects were backed out. In the company’s latest earnings report, management reaffirmed its full-year guidance of $1.50 to $1.70 in adjusted EPS and revenue growth of 3% to 6%. The trends appear to be flowing in Flowserve’s favor.
Technical Analysis
FLS went through a long, tough correction in 2014 and 2015, and has been trading sideways for almost three years. But the stock caught fire in July and has roared out to its highest price since June 2015, which clears a lot of overhead. The rally got a big burst of energy on August 9 when FLS jumped from 46 to 49 on more than triple its average trading volume. You can buy a little right here, but it’s probably better to wait for a down day or two, as the stock’s 25-day moving average is back at 45.5, which indicates that a pause or correction may be in order.
FLS Weekly Chart
FLS Daily Chart
Ligand Pharmaceuticals (LGND)
Why the Strength
Ligand Pharmaceuticals is an odd duck among pharmaceuticals, but there’s no disputing the success of the company’s strategy of conducting early research on drugs, then licensing them to other companies to develop and market. This idea of generating lots of potential candidate drugs is what management calls its “shots on goal” strategy; take lots of shots and count on a few hitting the mark. Ligand’s approach keeps development costs down, which results in great earnings lines: in Q2, the company’s earnings per share was up 287% and its revenue was up 222%, with an after-tax profit margin on 67.3%. Earnings were also up by triple digits (162%) in Q1, when revenue popped higher by 92%. Analysts expect the company’s 2018 earnings to be up by 106%. Ligand has multiple partnerships and licenses with most of the big pharmaceutical firms, including Novartis, Amgen, Merck, Pfizer, Celgene, Gilead, Janssen, Baxter International and Eli Lilly. The company has also just made (on August 9) an offer to acquire Vernalis, “a leader in structure-based drug discovery,” for $43 million in cash. Vernalis specializes in structure-based drug discovery, which makes it a perfect fit for Ligand’s basic research and early development strategy. Ligand has made 14 previous appearances in Cabot Top Ten Trader, which is a testimonial to its continuing strength.
Technical Analysis
LGND took a break from the middle of 2015 to the middle of 2017, trading under 140. The stock broke out for good in January of 2018 and got a real shot of energy in May, starting a rally that’s still going on. Institutional sponsorship is on the rise, topping 500 for the first time in Q2 and the stock gapped up to 250 earlier this month after its blowout quarterly report. LGND has chopped sideways-to-down in recent days, but we’re OK buying here or on dips.
LGND Weekly Chart
LGND Daily Chart
Sendgrid (SEND)
Why the Strength
It’s difficult for organizations to reliably deliver email at scale and building the resources in-house to achieve high deliverability rates just isn’t practical for many firms. This is why businesses turn to companies like SendGrid, which offers a SaaS-based platform so developers and marketers can reliably communicate with prospective and existing customers. Services range from shipping notifications and friend requests to newsletter sign-up confirmations. The numbers are astounding; SendGrid says over 50% of the world’s email addresses have received email through their service in the last 12 months! That scale (and SendGrid’s leadership in its $9 billion addressable market) are what differentiates the company. This year, analysts project EPS of $0.15 on 29% revenue growth. The analyst community is mixed on the stock. Some see a large market opportunity, while others focus on concerns about a long-term secular headwind from businesses culling contact lists to cut back on unresponsive recipients. SendGrid is plowing ahead and delivering great results while the market debates. Core email API growth in Q2 was up 32% after rising 30% in Q1, and management said that over 95% of its email volume is transactional in nature (meaning no opt-in requirements). It’s a good story.
Technical Analysis
SEND went public last November and while it has almost doubled in value since, shares have been range bound between 24 and 32 for most of the last six months, though that could now be changing. The stock had a muted response to the Q1 report in May but was much more lively after the Q2 report on July 31, after which shares rallied from 25 to 34 over the course of two weeks. We can’t say there’s yet been a decisive breakout, but with the fundamental story improving and a nice setup here, you could start a position and look to add shares if the stock heads higher.
SEND Weekly Chart
SEND Daily Chart
Trade Desk (TTD)
Why the Strength
Trade Desk is the market leader in the rapidly-growing programmatic ad buying market, which is just a fancy way of saying do-it-yourself online advertising. The California-based company’s self-service cloud-based platform helps ad agencies (and other organizations) design data-driven digital advertising campaigns for video, social media and mobile channels. It’s been growing like a weed on both the top and bottom line—revenue was up 78% in 2016 and 52% in 2017—and with results consistently coming in ahead of analyst expectations the stock is back in Top Ten for the third time this year. Second quarter 2018 results were just reported two weeks ago and came in so far ahead of expectations that shares blasted 30% higher! Growth is insane. Mobile (in-app, video and web) ad volume grew by 89% to reach 45% of gross spend, mobile video grew 156%, mobile in-app grew 104%, audio grew 191% and connected TV more than doubled. This all boiled down to EPS of $0.60 (beating by $0.16) on revenue of $112.3 million (up 54%). Trade Desk is the clear market leader in programmatic advertising and is seen grabbing market share from other players, including Google. With the stock soaring after reporting for the second quarter in a row, and barely a dip in the chart despite some growth stock wobbles, it’s clear that big money wants in.
Technical Analysis
TTD went public in September 2016 and hasn’t looked back at its 18 IPO price. Shares topped out at 67 in October before dipping and finding support in the 50 to 55 range. The May 11 earnings beat drove the stock up to a new high and it continued to climb in the months that followed. There was a little dip to 85 before the August 9 report, but shares rallied to over 120 the next day and have been trading in the 125 to 135 range for the past seven sessions. We’re OK starting small here or on dips, and using a loose stop in the mid 100s.
TTD Weekly Chart
TTD Daily Chart
Trex Company (TREX)
Why the Strength
Trex Company is a building materials specialist, turning waste wood fibers and reclaimed polyethylene into decking, railing and fencing that looks and works like wood, but requires much less maintenance and lasts longer. With excellent brand recognition and distribution through Home Depot and Lowe’s and over 6,700 stocking locations, Trex is the clear leader in the wood composite field and makes its products from 95% recycled content, which is a great cost advantage. The housing market, which drives much of the growth potential for Trex products, can be up and down, but the company has a record of positive revenue and earnings growth since Q4 2015, with the strongest revenue growth in years (31%) in Q2, along with 49% growth in EPS. Trex has recently expanded into the commercial railing market with its $71.5 million acquisition of SC Company, which is a market leader in stadium railing and has a strong position in both custom and standardized railing solutions. Trex has excelled at returning capital to investors with $178 million returned to shareholders since 2013 and a 2.9 million share repurchase program authorized in February 2018. With a green advantage a steadily expanding U.S. market and rapid expansion outside North America, Trex Company is a solid grower.
Technical Analysis
TREX has enjoyed an uptrending RP line since September 2015, and the stock came out of a 10-month correction (from 29 to 16) in February 2016 and has climbed steadily, with a pause under resistance at 60 from last December through April as it digested a big November gap up. The stock gapped up on May 8 after earnings and jumped from 64 to 80 after its July 29 earnings report. TREX has been consolidating that monster gain with a few weeks of trading sideways under resistance at 80, although it inched above 80 last Friday. TREX looks like a solid choice on a normal pullback, with a stop around 72.
TREX Weekly Chart
TREX 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.
