Caution is in Order
Current Market Outlook
The repeated bouts of heavy-volume selling have driven the major indexes below their key 50-day moving averages, and that’s a clear sign that the bulls are not in control. We’re moving our Market Monitor down to a level 5 and advise you to hold a good chunk of cash on the sideline, cut back on new buying (keep any new positions much smaller than normal) and honor your stops. None of this is to say that we’re bearish—it’s certainly possible the market snaps back, as there’s plenty of pessimism and many liquid leaders are holding up well. But after weeks of sloppy action and distribution, the odds favor further downside in the near-term, and we’ll need to see a few strong days before concluding the overall uptrend is resuming.
This week’s list, though, has a bunch of resilient growth-oriented names, which is encouraging. Our Top Pick is DXC Technology (DXC), which is the product of a recent merger and sports giant cash flow.
| Stock Name | Price | ||
|---|---|---|---|
| Abiomed (ABMD) | 0.00 | ||
| Alibaba (BABA) | 254.81 | ||
| DXC Technology (DXC) | 0.00 | ||
| Insulet (PODD) | 175.69 | ||
| Kite Pharma (KITE) | 0.00 | ||
| Realpage (RP) | 0.00 | ||
| Red Hat (RHT) | 0.00 | ||
| Salesforce.com (CRM) | 0.00 | ||
| Stamps.com (STMP) | 0.00 | ||
| Weibo (WB) | 98.16 |
Abiomed (ABMD)
Why the Strength
Abiomed remains a great growth company thanks to its one main product, Impella, a heart pump that’s been approved for short-term “offloading” of heart functions during surgeries in high-risk patients, as well as for use over a couple of days after cardiogenic shocks—in each case, numerous studies have shown that Impella (which is the smallest heart pump on the market) leads to far fewer negative outcomes, including death. So far, more than 1,150 hospitals in the U.S. and overseas (mainly Germany) have ordered an Impella, while the number of patients (up 27% in the U.S. during the second quarter), revenues (up 30% worldwide) and earnings (up 55%) all crank ahead. Abiomed’s consistent growth is one reason for the stock’s strength, but another is its move into Japan, the world’s second largest medical device market—the firm recently won reimbursement for Impella at a rate similar to that in the U.S., and expects its first patient in that country in September. Abiomed is aiming for a slow launch (just into 10 hospitals by March), but over time, Japan could prove to be nearly as large an opportunity as the U.S. One-product companies are always risky, but this one has a history of executing and a long runway of growth ahead.
Technical Analysis
ABMD has had a few big shakeouts over the past few years, but in recent months the uptrend has smoothed out, probably as more institutions own shares (507 at the end of Q2, up from 326 two years ago). The uptrend got going in February, and it’s been mostly contained by its 50-day line since then. More recently, shares popped to new highs following earnings in late July, and while it’s gyrated during the past two weeks, it remains in good shape. If you’re game, you could start a position here with a stop around 140.
ABMD Weekly Chart
ABMD Daily Chart
Alibaba (BABA)
Why the Strength
Alibaba, which made headlines when its U.S. IPO in September 2014 was the largest in history up to that time, is one of the largest e-commerce companies in the world. Alibaba’s T-Mall and Taobao websites provide retailers with web space to offer their goods to Chinese consumers on both PCs and mobile devices, with Alibaba taking a small cut of every transaction. The company’s Q2 earnings report showed a 53% jump in revenue and a 60% boost in earnings, with growth fueled by the core commerce business and a 96% jump in revenue from the company’s cloud service, which reached a milestone with one million paying customers. The number of consumers accessing Alibaba’s sites via mobile devices grew to 529 million. The report also noted free cash flow of $3.3 billion, a number that helps to explain how Alibaba can be as active as it is in funding joint ventures, acquisitions and special projects. Like Amazon, its closest U.S. equivalent, Alibaba is fiercely competitive and ambitious, as represented by its promotion of China’s Singles Day, a day roughly equivalent to Amazon Prime Day or Black Friday in the U.S., to a global event that generated $18 billion in sales in a 24-hour period last year.
Technical Analysis
BABA leapt from its 68 IPO price to 120 just nine weeks later, but went into a protracted post-IPO droop after that peak. It took BABA until May 2017 to retake that 120 high, but since then, it has raced ahead, hitting close to 170 last Friday. While this is no longer an unknown story, the scale of Alibaba (market cap is over $424 billion) makes it an institutional darling. We think you can buy BABA, which has been ignoring the market’s vicissitudes, on any weakness, with a stop around 150.
BABA Weekly Chart
BABA Daily Chart
DXC Technology (DXC)
Why the Strength
DXC Technology is the name of the company formed when Computer Sciences Corp. merged with the enterprise services division of Hewlett Packard Enterprise, and it’s a giant in the IT services industry—in fact, it bills itself as the #1 independent, end-to-end firm in the sector, with 170,000 employees, 6,000 clients, $25 billion in revenue and a huge network of partners (more than 250). For investors, though, the attraction isn’t the firm’s size or growth—revenues are expected to be flat for a bit before inching up in the low single digits—but the synergies and cash flow the merger will likely produce. DXC’s management believes it will achieve a run-rate of $1.5 billion in synergies within a year, which (through improving margins) will help produce a whopping $6.50 to $7 per share of earnings in the first year. And better yet, free cash flow is expected to be even larger than reported earnings! Moreover, the top brass thinks it can continue to wring out costs over time, with earnings and cash flow growing 20% annually for the next few years. Of course, there are always risks when it comes to such a huge merger, but Computer Sciences has a history of successfully incorporating new acquisitions. Bottom line, DXC looks like a leader in its field and an emerging cash cow, both of which should keep institutional investors interested. Consider it a unique special situation.
Technical Analysis
DXC began trading as a new stock in March and rose to 81 by mid-May. Then came a nice, tight base—the stock didn’t even fall 10% before finding support and shares meandered in the high 70s through early August. Then came the first quarterly report as a combined company, and that caused the breakout, with DXC surging to 86 last week before pulling back. If you want in, we think the recent dip is a good entry point, with a stop in the high 70s.
DXC Weekly Chart
DXC Daily Chart
Insulet (PODD)
Why the Strength
Diabetes is a worldwide epidemic that’s expected to affect 365 million people and cost the global healthcare system $490 billion by 2030. It represents a huge market, and one of the areas targeted for improvement is reducing the inconvenience and cost of insulin injections. That’s Insulet’s goal. The company has designed a small pod that can be worn on the body that injects insulin based on pre-set parameters. The idea is that diabetics can eliminate needle injections, and tubed pump patients can free themselves from tubes and other components that are part of the conventional insulin pump assembly. Insulet’s device, called Omnipod, comes with just two parts; a handheld wireless monitor for programming and insulin management, and the pod. Revenue growth is strong, with sales up by 39% last year, and by 26% in Q2 2017 (released August 3). Second-quarter results beat estimates, management raised forward guidance and the company announced that it would take over the distribution and marketing for its Omnipod System in Europe in the middle of 2018. That is welcome news since sales outside the U.S. are growing faster (by around 38%, versus 14% in the U.S.). By taking over distribution, Insulet should be able to accelerate sales growth and expand gross margins in its fastest growing market. Look for 22% revenue growth this year and the assumption of control in Europe to keep demand for shares high.
Technical Analysis
PODD bounced around in the 25 to 45 range for most of 2015 and 2016. It then leapt off its 50-day line at 37 in early 2017 and rallied to 48 by the beginning of March. Shares then built a three-month consolidation, eventually returning to the high 30s in early May. The breakout came in June, and the stock has been trending higher since then, albeit with a couple of shakeouts (including one before earnings at the end of July) during that time. You could nibble on dips of a point or two.
PODD Weekly Chart
PODD Daily Chart
Kite Pharma (KITE)
Why the Strength
Shares of Kite Pharma are trending higher on the back of solid Q2 results, confirmation that its lead cancer treatment is on track to launch in late 2017, and positive press on the long-term potential of CAR-T therapies, which is Kite’s area of expertise. The company’s CAR-T cancer-fighting strategy works by modifying a patient’s own white blood cells so that they can recognize and destroy cancer cells (which attack and disable T cells). The modification takes place outside of the body, then the cells are re-injected to go to work. Kite’s most advanced CAR-T cell therapy candidate, axi-cel/KTE-C19, is a treatment for a range of blood cancers and looks set to launch toward the end of the year, pending approval from the FDA, which has set a PDUFA action date of November 29. Analysts believe the probability of success is going up, and they also like that Kite Pharma just submitted a marketing application for the therapy in Europe. The PDUFA action date will be a major event, but it’s also worth noting that Kite’s pipeline includes therapies targeting solid tumor cancers. The technology could even help patients like Senator John McCain, who was recently diagnosed with glioblastoma, an often deadly form of brain cancer. The potential is huge, which is why analysts have increased their price targets over the past two weeks.
Technical Analysis
KITE had a couple of volatile years in 2015 and 2016 as it advanced candidates through its pipeline. Shares looked ready to break out to a multi-year high in early March 2017 after positive trial data was released, but the stock had to work through a two-month consolidation period and a modest dip following Q1 results in May before finally blasting out to an all-time high above 90 in June. Since then, shares have advanced steadily higher and closed at 130 on Friday. If you’re game, try to buy on pullbacks, especially with the market acting funky.
KITE Weekly Chart
KITE Daily Chart
Realpage (RP)
Why the Strength
RealPage is a small cloud-based software provider with a focus on the real estate industry. The company got its start with property management software, which helps automate the leasing, renting and management of any type of property, and has since expanded its software suite, offering sales and marketing, applicant screening, revenue and spend management, renters insurance, resident services and more. All in all, it’s the leading global provider of software and data analytics to the real estate industry, with more than 11,000 customers that house more than 30 million residents. Business has been good for many years, with average contract value rising 60% since 2014, while revenue per unit is up 33% over the same time, and the top and bottom lines look likely to perk up going forward—analysts see earnings up 22% this year and 25% next, while cash flow is much higher than reported earnings (similar to other cloud software outfits). And beyond the next few quarters, investors see a long runway of growth ahead of RealPage, as the company believes its captured just 6% of its total market and, through both organic growth and acquisitions, will see revenues north of $1 billion in 2020 (up from $568 million last year) and cash flow margins of 30% (up from 24.3% in the second quarter). RealPage’s top position in its industry, huge opportunity and history of execution are all reasons why the stock remains in a solid uptrend.
Technical Analysis
RP topped at 26 back in late 2013 and didn’t regain that level until the post-election rally of last November. After that, shares stretched to 37 in March of this year where it hit resistance. But the pullback was shallow, only retreating to 32, before the uptrend resumed. RP had a wild day on earnings two weeks ago, pulling back to its 50-day line, but then found big-volume support and remains near its highs. If you want in, you can nibble here or on dips.
RP Weekly Chart
RP Daily Chart
Red Hat (RHT)
Why the Strength
Not much has changed with Red Hat since we featured the stock after a beat-and-raise earnings report two months ago. The stock is still trading around the same level (a positive given the market’s action), but with the next quarterly report due in mid-September and a few incrementally positive developments, there is plenty to keep investors excited about. Red Hat develops application software based on Linux, and the company’s strategic positioning in its core markets (operating systems, virtualization, middleware, storage and cloud computing) have been improving. Investors are particularly bullish on its fast-growing OpenShift solution (part of the Emerging Tech segment, which is 21% of revenue), which is gaining ground as more large enterprises adopt hybrid cloud environments (a mix of on-premises, private cloud, and public cloud services). Alliances with Microsoft Azure and Amazon Web Services helped OpenShift grow by 41% last quarter, and the recent release of OpenShift Container Platform 3.6 likely resulted in more customer wins (details likely will be revealed when quarterly results are released). Red Hat also just acquired Permabit Technology, which, while not a large deal, will allow it to offer more efficient storage options to large customers. With consistent double-digit growth in revenue and EPS the norm here, it’s easy to see why buyers keep lining up.
Technical Analysis
RHT built a huge base for most of 2016, but the stock has been a solid winner since the calendar flipped, marching to new highs in March, rising along its 10-week line for the next couple of months, and then soaring on earnings in mid-June. The action since then has been just as encouraging—despite plenty of market wobbles, RHT has traded tightly, and again found support near its 10-week line two weeks ago, propelling it to new highs last week. RHT is a good risk-reward trade here if you want in.
RHT Weekly Chart
RHT Daily Chart
Salesforce.com (CRM)
Why the Strength
Salesforce.com is one of the pioneers in cloud computing and is a household name given the immense success of its Customer Relationship Management (CRM) platform. It’s the world’s fourth largest enterprise software company, yet despite its size, it hasn’t seen annual revenue growth dip below 24% since 2010! The management team has reinvigorated investor interest by pledging to grow revenue to $20 billion within the next four to five years. That represents a 138% increase from last year’s $8.4 billion result (20% or so annual growth)! Analysts think the aggressive growth target is achievable given its market share gains, as well as tons of cross-sell and up-sell opportunities given its multiple products (Sales Cloud, Service Cloud, Marketing Cloud, Commerce Cloud, and Platform Cloud). It helps that Salesforce.com competes in a massive CRM market estimated at roughly $70 billion today, and which is growing at around 10% a year. Another positive trend is the company’s discipline controlling costs, which has led to EPS (and cash flow) growth rates that are 10% to 20% faster than revenue growth rates over the past three years. Salesforce.com will announce quarterly results tomorrow after the close, and that event is sure to move shares. Analysts currently expect revenue and EPS growth of 23% and 33%, respectively. But given its long history of topping estimates, those figures are likely conservative.
Technical Analysis
CRM peaked in late 2015 around 83 before going over the falls, and was still stuck in the mud at 69 when 2017 began. But since then, we’ve seen impressive action—CRM rose 10 weeks in a row to start the year (a sign of persistent accumulation) and leapt to all-time highs near 92 in May. Since then, the stock has etched a tight (9% deep) base, and is now sitting near its highs ahead of earnings. You could nibble ahead of the report if you want, but we’re most interested in seeing if CRM can morph into a leader by gapping up on earnings.
CRM Weekly Chart
CRM Daily Chart
Stamps.com (STMP)
Why the Strength
Stamps.com has had a long history with decent results as an approved reseller of U.S. Postal Service postage stamps, mostly targeting individuals. But through four acquisitions in recent years (Endicia, ShipStation, ShipWorks and Shipping Easy), Stamps now targets larger shippers and the ever-growing e-commerce market, and that has made a big difference. The company’s various platforms have deals with a couple of dozen parcel carriers, are integrated in up to 250 third party software platforms, serve both mail and packages and are targeted at e-commerce outfits, enterprise mailers and high-volume shippers like fulfillment houses, as well as its traditional individual and home-office customers. Clients are big fans because Stamps saves them money (average discount of 10% from USPS.com rates) and streamlines much of the shipping process (organize daily tasks, address verification, shipping insurance, etc.). All of that has led to excellent growth, including the firm’s second-quarter report—sales and earnings growth both topped expectations, and many of the sub-metrics (total paid customers rose 14%, up from 11% and 8% the prior two quarters) looked great as well. Moreover, Stamps has just a small fraction of the total market, so as e-commerce expands, there’s no reason Stamps’ bottom line can’t continue to ramp.
Technical Analysis
Three things that catch our eye when we look at STMP’s chart over the past few months: (a) the four weeks in a row of heavy volume in May that drove STMP to new price highs, and (b) the giant earnings move three weeks ago that resulted in new relative performance (RP) peaks, and (c) the very tight action since, a constructive sign. That said, STMP is extended here and the market is iffy at best, so keep any position small or aim to buy on dips.
STMP Weekly Chart
STMP Daily Chart
Weibo (WB)
Why the Strength
Weibo, which is making its eighth Top Ten appearance since its debut in December 2015, is China’s most popular social media company. Weibo was originally a blogging service offered by Sina.com, a major Chinese web portal, but was spun off in 2014. Its main attraction is its Twitter-like service that connects millions of users. Weibo gets the bulk of its revenue from advertising and marketing, just like Twitter, and also benefits from support from Sina, which retains a large stake, and also from an equity position taken by Alibaba, which allows close integration with that company’s enormous e-commerce network. Weibo reported its Q2 results on August 9, and the results were typically strong, with 138% earnings growth (the 11th consecutive quarter with triple digit EPS growth!) and 72% revenue growth. The company’s monthly active users (MAU) grew to 361 million, up 28% year over year, with 92% of users accessing the site via mobile devices. Analysts expect Weibo’s earnings to grow 99% this year and 55% in 2018. Unlike Alibaba, which is featured earlier in this issue, Weibo is still relatively undiscovered, with just 381 whales on board, although that number is growing quickly—the number was just 115 last year. There is always a little regulatory risk involved with Weibo, as the Chinese government holds all online companies responsible for any posts of unapproved content, but the growth story is strong enough to outweigh that risk.
Technical Analysis
WB took a long time from its April 2014 IPO to really get moving, but when it happened, the stock ran from 12 in February 2016 to 56 in October 2016. After another long consolidation, WB broke out to 82 in May 2017. A V-shaped correction and recovery from mid-May to early August came next, and while the stock has been wild lately, it’s showing great relative strength. Consider starting a position here or on dips.
WB Weekly Chart
WB 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.
