Still Struggling
Current Market Outlook
The market came close to giving an all-clear signal last week, but the endless U.S.-China trade flareup knocked the market back on Friday. Despite the headlines, we still don’t see the environment as a total disaster—the indexes themselves are still holding above their recent lows, and many individual stocks (and most we’re following) are actually more resilient than that. But the bottom line is that little money is being made, and with the intermediate-term trend continuing to point down, you should remain in a cautious stance, keeping new buying on the small side and holding some cash. From here, we’re open to anything—given the pervasive pessimism, a new uptrend wouldn’t shock us, but the onus remains on the bulls to prove they are retaking control before we become more constructive.
This week’s list has a wide mix of stocks that have resisted the market’s downward pull—with some actually advancing despite the environment. Our Top Pick is MasTec (MTZ), a stock we missed a couple of weeks ago but think it can have a sustained advance due to its exposure to many strong markets.
| Stock Name | Price | ||
|---|---|---|---|
| Allakos (ALLK) | 77.83 | ||
| Blackstone Group (BX) | 49.12 | ||
| D. R. Horton (DHI) | 66.55 | ||
| HubSpot (HUBS) | 582.89 | ||
| Keysight Technologies, Inc. (KEYS) | 97.20 | ||
| LivePerson (LPSN) | 58.55 | ||
| MasTec, Inc. (MTZ) | 66.65 | ||
| Pinduoduo (PDD) | 87.53 | ||
| Synopsys (SNPS) | 137.53 | ||
| Target (TGT) | 124.77 |
Allakos (ALLK)
Why the Strength
Allakos is a clinical-stage biotech company that develops therapeutic antibodies to treat allergic, inflammatory and proliferative diseases. The company has four programs underway with its AK002 asset, two each in Phase 2 and Phase 1 trials. The most advanced is for eosinophilic gastritis (EG), a rare and heterogenous gastrointestinal condition. AK002 is also being evaluated to treat patients with chronic urticaria, more commonly known as hives, which is an allergic skin condition usually resulting from a multitude of other factors. The Phase 1 programs are for indolent systemic mastocytosis (ISM), a rare disorder resulting from a mutation that creates too many mast cells in the body, and severe allergic conjunctivitis, which is most commonly caused by hay fever. The stock more than doubled back on August 5 because management released data from the ENIGMA trial, which is evaluating AK002 in the more advanced EG program. Data showed that the potential treatment met its primary endpoint, reducing the number of white blood cells associated with inflammation/infection by 95% in gastrointestinal tissue—a massive improvement over the 10% improvement in the control group. All secondary endpoints were also met and there were no overwhelming concerning safety issues. It’s obviously speculative given that Allakos has just one asset, but if AK002 can succeed in treating a couple of the above diseases the future will be bright.
Technical Analysis
ALLK came public at 18 last July and traded up as high as 65.5 last December before beginning a long, tedious decline. Shares faltered early in 2019, then traded mostly in the 34 to 45 range through June. A selloff in July and August took the stock down near 30 heading into the Q2 report, after which, with the help of the trial data, ALLK blasted off to around 66, climbed into the high 80s and remains above a recent (and timely) secondary offering price of 77. If you want in, target pullbacks.
ALLK Weekly Chart
ALLK Daily Chart
Blackstone Group (BX)
Why the Strength
With the overall stock market in a correction and investor sentiment in the dumps, you wouldn’t expect to see a giant asset manager like Blackstone perched near highs. But it is, which is a great sign that the stock wants to go higher whenever the market gets its act together. The stock remains resilient for two reasons. The first is that, while Blackstone is a Bull Market stock, it’s really an “alternative” Bull Market stock—the firm’s fingers are firmly in the private equity and real estate cookie jars, along with some hedge and credit funds. A prolonged, deep equity bear market is likely to take down all sorts of asset values, but right now, some bizarre world events like negative interest rates only serve to push more big investors to Blackstone, looking to non-traditional avenues to make a buck. The company had $545 billion of assets under management at the end of June (up 24%), and importantly, its fee-based earnings (which are more reliable than one-time realizations) came in at 35 cents per share in Q2, up 24%. All of that led to a healthy dividend (48 cents per share) earlier this month, with solid payouts expected going forward. (The dividend yield for the stock should be in the 3% to 4% range.) Thus, business is good, and the company’s July 1 transformation into a C-Corp. not only eliminated those pesky K-1 tax forms but also allowed Blackstone’s stock to be bought by hundreds of mutual funds that are prohibited from owning a partnership. (Indeed, despite its leading position, only 423 funds owned shares at the end of June, a figure we think could rise dramatically.) We still see great potential here should the market find its footing.
Technical Analysis
BX’s original breakout was in April of this year, so it still appears relatively early stage. Shares rallied from the high 30s to 50 in mid July before the stock started to get pushed around by the market. However, despite the wobbles, BX has held its 50-day line during the first two market selloffs, actually nosed out to a new price high last week and has barely budged during the past couple of days. We’re OK starting small around here, albeit with a stop in the lower 40s.
BX Weekly Chart
BX Daily Chart
D. R. Horton (DHI)
Why the Strength
D.R. Horton is America’s largest homebuilder, focused on single-family homes and serving homebuyers in 29 states. Their diverse brand portfolio includes D.R. Horton, Express Homes, Freedom Homes and Emerald Homes, with sales prices ranging from $100,000 to over $1 million. Housing has been a weak link in the U.S. economy during the past year or so, but continued strength from the U.S. consumer (bolstered by rising employment and wages) and historically low mortgage rates (down 1.35% since last November!) are facilitating a pickup in the sector. As for D.R. Horton, the stock is strong thanks to a great quarterly report at the end of July, with both EPS and revenue coming in much higher than estimates. CEO David Auld stated, “I think that there are tremendous opportunities, tremendous demand in the affordable market.” Of course, growth isn’t off the charts (see table below), but the key is that business should continue to improve from here—the company expects slightly higher fourth quarter margins as the drop in interest rates contributes to their ability to cut price incentives. Six investment firms immediately raised their price targets on DHI following earnings, and two more analysts initiated research coverage with Buy ratings. Interestingly, last quarter, Soros Fund Management bought approximately 660,000 DHI shares, increasing their long position to 1.6 million shares. A cheap valuation (11 times expected earnings) and modest dividend that’s usually raised annually (1.2% yield) put a nice bow on the package.
Technical Analysis
DHI had a great 2017, but the price weakened during the market’s slump in the fourth quarter of 2018, then recovered back to resistance in the 47 area by April 2019. DHI then etched a three-month zone—it pulled back as low as 41 in June, but perked up after that and, importantly, has run to higher highs in August, ignoring the market’s weakness. We’re fine picking up shares here or on dips with a stop in the mid 40s.
DHI Weekly Chart
DHI Daily Chart
HubSpot (HUBS)
Why the Strength
HubSpot is a cloud software stock, but while most of its peers have made hay either improving operations (planning, supply chains, workflow, human capital management, etc.) or protecting data (identity, endpoint devices), HubSpot works in the other direction, helping business of all sizes (though small- and mid-sized outfits are its bread and butter) with marketing—it helps firms let go of the old ways (cold calls, direct mailings and other invasive stuff) and hone in on useful free content and list building. And it’s broadened out to sales and service offerings as well, which has provided big cross-selling opportunities (of its nearly 65,000 total customers, 25,000 take at least two products, while 5,000 use all three) and increased the attractiveness to developers that make third-party apps on the platform—which in turn increases the usefulness of the platform! Long story short, HubSpot has grown from a marketing app to a suite of products to a platform provider, and that’s led to consistent, rapid growth of 30%-plus on the top line and triple-digit earnings growth in recent quarters. And the stock is strong today because Q2 confirmed those trends are in place if not accelerating, with a 35% leap in customers, a 36% revenue gain in currency-neutral revenues, a 34% gain in billings and a 29% increase in deferred revenue. The one fly in the ointment is that same-customer revenues are flat-ish—i.e., the growth is coming from new customers—but given it’s still in the mid-innings of cross selling its new products, we think that could improve. All told, it’s a solid growth story.
Technical Analysis
HUBS has been trending higher for a couple of years, but it’s been a laggard among its group this year—the stock made no net progress from its peak in mid February to its shakeout, pre-earnings low in early August. But now, with the weak hands out and with a great Q2 report in the books, HUBS is acting well, with a strong rally to 196 after earnings earlier in the month, and after a quick pullback, surging to new highs above 200 last week. It looks like it wants to go higher if the market allows it—nibbling on dips is fine with us.
HUBS Weekly Chart
HUBS Daily Chart
Keysight Technologies, Inc. (KEYS)
Why the Strength
Prior to 2014, Keysight Technologies was the measurement arm of Hewlett-Packard. The company was spun out and it now helps customers develop products, standards and software in areas like wireless communications, network security, aerospace and defense, automotive, energy and Internet of Things. This focus puts Keysight in the center of a lot of investor interest as it is exposed to big trends in developing 5G wireless standards, connected car applications, consumer electronics, defense modernization and design simulation. That’s the big picture reason why the stock has advanced in 2019. The recent strength is because last week’s Q3 fiscal 2019 earnings results suggest the good times will continue. Keysight grew revenue by 9% (to $1.09 billion) while EPS surged by 40% to $1.25, beating by $0.23. Roughly 63% of revenue came from the Communications Solutions Group (CSG), which grew by 13% because demand for 5G solutions is ramping, while the Electronic and Ixia (network testing) segments grew by 3% and 7%, respectively. Analysts are saying Keysight is a top pick for the 5G trend because it will benefit regardless of which original equipment manufacturers (OEM) win business. We think that will keep big investors engaged.
Technical Analysis
KEYS started slowly in 2015 after its spin-off but has been trending higher, mostly above its 200-day line, since mid-2016. There was a very steady advance from 60 to 94 over the first four months of 2019, and though it dipped fairly sharply in May, it rebounded toward its old highs in June. After a few weeks of hesitation, KEYS blasted off on earnings last Thursday; though shares have pulled back since, there should be good support around here.
KEYS Weekly Chart
KEYS Daily Chart
LivePerson (LPSN)
Why the Strength
LivePerson is a small cap ($2.6 billion) company that has developed an AI-powered conversational platform that makes it easy for consumers to purchase products online and to get help from agents through various messaging channels, including text, Apple Business Chat, Facebook Messenger and WhatsApp, as well as the chat tools that brands imbed in their websites and apps. You’ll probably notice the company’s logo on some chat boxes if you pay attention as LivePerson has over 18,000 customers. The stock is doing well because quarterly revenue growth has been steady in the mid-teens since early-2018 and is expected to accelerate to over 20% in 2020, when losses should dwindle off, setting the company up for a return to profitability in 2021. Drilling down, analysts like that management upped guidance after the Q2 report on July 31, citing a record nine $1 million-plus deals (the same number signed in all of 2018), the fifth straight quarter of least 20% gain in revenue per user and the fact that a majority of its top 10 signings were multi-year deals, providing solid recurring revenue going forward. With demand apparently surging and a sales force that appears up to the task of landing big and small fish alike, analysts see LivePerson gaining share in the so-called conversational commerce industry. We like the trends in the business and the stock.
Technical Analysis
LPSN has been public for over a decade but its coming out party started in early 2018, when LPSN broke out at 15 and surged to 27 before the late-year market plunged yanked it down. But the stock quickly snapped back to new highs in February, and after a three-month rest, broke out again in July. LPSN has advanced persistently since then, and while it’s extended to the upside, its continued strength is impressive. Aim to enter on weakness.
LPSN Weekly Chart
LPSN Daily Chart
MasTec, Inc. (MTZ)
Why the Strength
We wrote about MasTec earlier this month and missed our entry price, but we’re impressed with the action and the sneaky-good growth story, so we’re taking another swing at it today. The company is all about infrastructure, as it builds, installs and maintains assets the energy sector, telecom and communications, electrical transmission/distribution facilities and more. The energy segment remains the largest revenue producer (48% of revenue), and it continues to grow nicely (up 22% in the second quarter) as the buildout of pipelines and gathering facilities remains strong (despite the growth, backlog was up 14%). The power generation segment, which includes lots of alternative energy construction, is also surging, with a 71% revenue gain in Q2 and management expecting 40%-plus growth for the rest of the year. But an even bigger source of excitement is the communications segment—while revenues here were up just modestly last quarter (5% or so), the backlog is huge (north of $4 billion) and management is talking very bullishly as 5G spending from telecoms, a first responder network that’s being built out and more should create massive opportunities. (The top brass even compared the communications area of today to the oil/gas pipeline situation back in 2015, just before a major growth wave.) As for the here and now, the stock is strong because the firm is executing brilliantly, breezing past Q2 estimates and raising its outlook for the rest of the year—all while hinting at even better things to come in 2020 and 2021, too. It’s never going to be a “hot” stock, but we think MasTec could be a sneaky winner as it cranks out dependable growth in the years to come.
Technical Analysis
MTZ built a big launching pad from January 2018 through July 2019—18 months of choppy action despite solid business results. But the quarterly report late last month prompted a huge-volume breakout, catapulting the stock up to the low 60s. And, even better, MTZ has shown no inclination to pull back despite the market’s wobbles and economic worries; it hit a new high on Wednesday of last week and has eased modestly since. We’re OK starting with a small position here or (preferably) on dips with a stop around 54.
MTZ Weekly Chart
MTZ Daily Chart
Pinduoduo (PDD)
Why the Strength
With U.S.-China trade tensions hitting a fevered pitch late last week, you wouldn’t expect to see a Chinese e-commerce play in Top Ten, but Pinduoduo looks like a unique situation. As opposed to just another website selling goods, this company offers an extreme value proposition via a “virtual bazaar” format where buyers browse products on the platform while interacting with others on the site or via other social media platforms; the end result is a team shopping concept that has proven wildly popular, and not just for price-sensitive users in lower-tier cities. (Its gross merchandise volume from so-called Tier 1 and 2 cities in China grew to 48% of the total in Q2, up from 37% a year ago.) That’s really the story: A unique concept and flawless execution that has made the company one of the top e-commerce plays in China ($34 billion market cap), and as the firm branches out into new categories (including some products sold exclusively on its platform and a move into produce) and continues to improve logistics, the sky’s the limit. In Q2, local currency revenues boomed 169%, gross merchandise volume lifted 171% and, importantly, active buyers reached 483 million (up 41% from a year ago) while the average user spent 92% more than a year ago, allaying fears of slowing user excitement. The bottom line is still in the red, but analysts see revenues rising at triple-digit rates this year and another 62% next, along with a solid move into the black in 2020. It’s a solid high-flying growth story.
Technical Analysis
PDD has an intriguing 13-month long IPO base. It came public in July of last year and then had some big ups (30.5 in September, 32 in February of this year) and downs (four different dips into the 17 to 19 area). But PDD began perking up in early July, gained steam in early August despite the market’s hiccups and then exploded back toward its old highs on huge volume after earnings last week. If you’re game, we advise starting small and looking to enter on weakness.
PDD Weekly Chart
PDD Daily Chart
Synopsys (SNPS)
Why the Strength
Synopsys is a play on many of the semiconductor and software trends that define the early years of the 21st century, including wearable technologies, Internet of Things, smart medical devices, machine learning, computer vision and autonomous cars. The company supplies semiconductor design and verification platforms, integrated circuit manufacturing software and system-level design hardware and software that help clients in semiconductor chip design, IP integration, software security and quality testing. While it’s in the chip sector, Synopsys is really an intellectual property-oriented business, as licenses make up around 85% of revenue, with services making up the balance. The stock is doing well because Synopsys is growing faster than its overall industry and, with selective investments in emulation and software assurance, is expected to expand margins and push EPS up at a faster clip than revenue growth. It’s not a blazing fast grower—revenue should be up around 8% over each of the next two years, to $3.36 billion and $3.62 billion, respectively. But EPS should grow at almost twice that pace this year, to $4.55, which should convince investors to start paying a greater premium for the stock as growth outpaces the competition, which includes Cadence Design (CDNS) and Siemens (SIEGY). If you like steady growth from broad based technology trends, including 5G, Synopsys is one to consider.
Technical Analysis
SNPS has a beautiful long-term chart. Shares had a smooth, consistent advance from the market low of early 2016 (near 39) to 95 near Thanksgiving 2017, rested for about a year and then took off on a powerful and smooth advance this year, with dips below the 50-day line in late May and early August met with buying. Last Friday was a bit sloppy, but we’re OK nibbling here with a stop under SNPS’ recent low.
SNPS Weekly Chart
SNPS Daily Chart
Target (TGT)
Why the Strength
Many analysts were skeptical of the turnaround of Target, beginning with its Chairman & CEO, Brian Cornell, who took the helm in 2014, but today Target looks like one of the top mega-caps in the market after a terrific second-quarter report that launched the stock—revenues were up 4%, to $18.4 billion, handily beating estimates by $100 million, and its adjusted earnings soared 24%, to $1.82 per share, also surpassing analysts’ forecasts by $0.20 per share. Besides some strong macro factors, one of the big boosts here has been Target’s digital transformation, including improving its website, partnering with startups that appeal to consumers wanting customized, lifestyle products, establishing same day drive-up delivery and pickup and expanding its social media presence targeting those ready-to-spend millennials and GenXers. Throw in some store remodels (300 this year) and Target’s overall comparable store sales rose 3.4% (north of estimates), while digital comps were up a huge 34%. Based on current trends and some other initiatives (Disney is opening up 65 “stores within stores” at Target locations during the next year), the top brass hiked its guidance; Wall Street now expects earnings to rise 14% this fiscal year. It’s not changing the world, of course, but Target has a lot of momentum behind it; throw in a reasonable valuation (17 times earnings, 2.6% dividend yield) and we think big investors will continue to gravitate toward the name.
Technical Analysis
One of our rules is to never underestimate a huge, liquid stock with solid growth prospects that explodes out of a giant consolidation. TGT is the poster child for that—shares effectively built a giant base from late 2015 through last week, with highs in the 85 to 90 range and a low of 48.5 in mid 2017. Of course, the recent action has been tighter (mostly just shy of 90), and a shakeout in late July set the stage for last week’s explosion—TGT soared to new highs last Wednesday on nearly eight times average volume. We’re OK taking a position here or (preferably) on weakness.
TGT Weekly Chart
TGT 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.
