Changing Character
Current Market Outlook
Ever since the mini-blowoff we saw in growth stocks in mid June, the market has been choppy, narrow and tough to maneuver, with many individual stocks going nowhere and a handful of leaders flashing abnormal intermediate-term action. But the character of the market seems to have changed during the past couple of weeks—the day-to-day rotation is gone, leading growth stocks have generally resumed their advances and the major indexes have moved to new highs. It’s still not 1999 out there, of course, and a big factor will be how the market reacts once big investors return from the beach next week. But there’s no question the evidence continues to improve, so we’re bumping up our Market Monitor to a level 8 (out of 10).
This week’s list has a bunch of good setups and great breakouts from growth-oriented stocks. Our Top Pick is Pure Storage (PSTG), which looks like it has recovered from the choppy action of the past few quarters.
| Stock Name | Price | ||
|---|---|---|---|
| Autodesk (ADSK) | 229.00 | ||
| DocuSign (DOCU) | 107.98 | ||
| Horizon Therapeutics (HZNP) | 49.89 | ||
| Nordstrom Inc (JWN) | 60.72 | ||
| Novocure (NVCR) | 0.00 | ||
| PetIQ (PETQ) | 30.82 | ||
| Pure Storage (PSTG) | 25.64 | ||
| SailPoint Technologies (SAIL) | 31.60 | ||
| Splunk (SPLK) | 207.67 | ||
| Williams-Sonoma (WSM) | 64.96 |
Autodesk (ADSK)
Why the Strength
Autodesk is a great company that few investors are focused on even though it’s the main player in its field, which is 2D and 3D CAD software for the engineering, architectural, construction and manufacturing markets. Autodesk has been going through a major business model transition that’s obscured otherwise solid progress as the company shifts away from perpetual licenses (reliant on upgrades and product cycles) to a subscription-based model (which produces a higher and more reliable lifetime customer value). During the transition, the numbers have taken a hit since revenue is recognized over time, not all at once as in a perpetual license model. The transition worked wonders for Adobe, and it’s starting to look like the big payoff is here for Autodesk, too. Last Thursday, the company reported Q2 fiscal 2019 results that beat expectations as revenue jumped 22%, EPS of $0.19 beat by $0.03 and annual recurring revenue growth (ARR, which is the main metric for the subscription model) accelerated to 28%, versus consensus of 25%. Those numbers were great, but what really has investors chomping at the bit is average revenue per subscriber (ARPS) jumped 12% and the subscriber base rose 14%, showing that more subscribers are coming than leaving, and they’re also willing to pay more for their subscriptions. With confidence in the transition rising, we see shares building even after last Friday’s blastoff rally.
Technical Analysis
ADSK originally broke out in September 2016 and was able to rise through most of 2017 before it topped out at 130 in late-November. A big selloff to 103 followed an uninspiring Q3 fiscal 2018 report, and while shares spiked back to new highs in March there wasn’t enough interest in the name to keep momentum going. ADSK spent most of the last six months chopping around in the 120 to 143 range. But that changed last Friday when the stock blew through overhead resistance on heavy volume. We’re game for buying some here.
ADSK Weekly Chart
ADSK Daily Chart
DocuSign (DOCU)
Why the Strength
DocuSign is a new stock (just came public in April), but it’s liquid (trades $65 million per day) as big investors are buying in (298 mutual funds already owned shares as of the end of June!). And when looking at the story we can see why. DocuSign is leading the way in making it easier and quicker for agreements (contracts, purchase orders, invoice processing, licenses, you name it) to get finalized. The firm is best known for its e-signature solution, allowing decision makers to digitally sign off on these agreements; it’s integrated into all the big software applications out there (Salesforce, Workday, SAP, Oracle, Microsoft, etc.) and is used by most of the big firms in a variety of industries (10 of the 15 global financial firms, seven of the top 10 technology companies, 18 of 20 top pharmaceutical outfits). DocuSign is working on expanding its capabilities beyond just signatures, too—its acquisition of SpringCM will allow it to offer document generation, redlining, document management and more. All told, management believes they’re playing in a $25 billion-plus market, and it’s taking advantage of it—revenues are kiting higher in the 30%-plus range, earnings are moving into the black and free cash flow is growing nicely. It’s a big, lucrative story that’s a win-win for all parties involved. The next big update will come on September 5, when DocuSign will release quarterly results.
Technical Analysis
As opposed to many hot IPOs from June, DOCU is setting up a solid base. Shares soared as high as 67 and then fell hard to 50 in June, but that was basically the low—the stock retested 50 in late July and has been generally pushing higher since, albeit on so-so volume. There’s still resistance to chew through and earnings are coming up, but you can consider starting small here or on dips.
DOCU Weekly Chart
DOCU Daily Chart
Horizon Therapeutics (HZNP)
Why the Strength
Heading into its quarterly earnings report on August 8, Horizon Pharma was just a profitable, medium-sized Irish pharmaceutical company specializing in rare and rheumatic diseases. In fact, the company’s 11 marketable drugs include six that target rare diseases, reflecting the company’s transition to a rare diseases medicines company. The company combines a strong in-house research capability with the cash flow to acquire both other pharmaceutical companies (like River Vision Development in 2017) and to build its own pipeline of new drugs by buying strong candidates early in their research. The company’s recent quarterly report featured the good news of a 17% increase in earnings, reversing a six-quarter trend of flat or declining earnings. The 5% bump in revenue and 26.6% after-tax profit margin were also ahead of expectations, and news from Phase III clinical trials and new patents was positive. Management also confirmed 2018 revenue guidance and increased adjusted EBITIDA guidance from $390 to $415 million to $400 million to $420 million. The turnaround in investors’ perception of Horizon Pharma looks to be underway.
Technical Analysis
HZNP was a hot item in 2015, with four appearances in Cabot Top Ten Trader, but had fallen off the radar since its peak at 39 in July 2015. The stock dropped to 13 in October 2015, then traded sideways until May 2017, when it gapped down below 10. The stock started a slow, uneven rebound, then caught an updraft in May and June this year, hitting 18 in June. The stock was trading at 18 when the good earnings news powered a move as high as 21 two weeks ago. If you want in, the recent modest dip looks like a good opportunity.
HZNP Weekly Chart
HZNP Daily Chart
Nordstrom Inc (JWN)
Why the Strength
Department store stocks aren’t loved at all, but Macy’s and Kohl’s have qualified for Top Ten this year, and now Nordstrom, which runs 373 stores in 40 states and Canada, including 122 Nordstrom full-line stores, 239 Nordstrom Rack locations, seven Trunk Club clubhouses, two Jeffrey Boutiques and two clearance stores (plus online service to 96 countries), is making its first appearance here. The company’s earnings report on August 16 was a blowout success, with revenue growth of 7% (the strongest growth in all but one of the previous 12 quarters) and earnings per share leaping a huge 46%. Comparable store sales were up 2.4% in the first half of 2018 (after just 0.8% growth in fiscal 2017) and online sales were up by 23%. The company nudged up its sales and earnings outlook for the full year; analysts see earnings up 22% this year. On August 22, the company authorized a stock repurchase of up to $1.5 billion (with no expiration date), a huge figure considering the market cap is just over $10 billion. Management also announced a quarterly dividend of 37 cents per share payable on September 19 to shareholders of record on September 4 (annual yield currently 2.4%). Obviously, it’s not a long-term growth story, but with a reasonable valuation and with the top brass aiming to return lots of money to shareholders, the stock’s path of least resistance is up.
Technical Analysis
JWN fell (along with most old retailers) from its high of 78 in March 2015 to support in the high 30s through 2016 and 2017. The stock lifted off in late 2017 and early 2018, hitting 54 in February 2018, then trading sideways, first with 50 as resistance, then using 50 as support in June and July. Now we’re seeing an intriguing change in character—the stock gapped up on earnings in the middle of August and has continued to move up on very solid volume. You can buy some here or (preferably) on dips.
JWN Weekly Chart
JWN Daily Chart
Novocure (NVCR)
Why the Strength
Novacure is back in Top Ten (we covered it in April) because shares of the commercial-state oncology company just pushed to a new all-time high. There isn’t a specific catalyst behind the move; it’s more that confidence in the growth story has increased following solid Q2 results (reported a month ago). Novacure’s big idea is a medical device called the Optune system that slows the progression of many types of solid tumors, including brain, lung, pancreatic and ovarian cancer. Optune is very different from surgery, radiation and chemo because it uses low-intensity, alternating electric fields (called tumor treating fields, or TTFields) that interfere with cell division and cause cell death. TTFields are delivered two to three times a week, for 18 hours a day, and treatment can be done when people are at home. Novacure has commercial operations in six markets where Optune is approved for the treatment of glioblastoma (GBM), an aggressive type of brain cancer. The company has treated over 8,000 patients globally, and estimates it is 30% penetrated in the U.S., 20% in EMEA and 10% in Japan. Growth has been excellent, with revenue up 114% to $177 million last year, another 60% in Q2 2018, and should be up 40% to 50% this year and next. If the technology is proven to work on other types of tumors (numerous Phase 2 and 3 trials are in the works), the potential is huge. Look for Phase 2 trial results in the second half of 2018 to drive the stock.
Technical Analysis
NVCR came public in 2015 and after an early rally and fade shares took a break for a while. Momentum picked up again early last year then NVCR spent around 10 months consolidating in the 17 to 22.5 range. It finally broke above its previous high of 31 with a convincing rally in mid-July, but then gave up a good chunk of that move just before Q2 results came out. But shares held its 50-day line and moved out to new highs on good volume last week. You can buy around here or on weakness.
NVCR Weekly Chart
NVCR Daily Chart
PetIQ (PETQ)
Why the Strength
Now here’s an interesting story. PetIQ is the leading provider of pet-related products, services and medications that used to be only available at veterinary clinics—more and more of these products are being sold at retail, and PetIQ has a 95% market share of prescription pet meds sold at retail and the company distributes 500-plus meds and 200-plus of its own products to all the big retail outlets (Walmart, Target, Dollar General. Publix, Costco, BJs, Petco, CVS, you name it.) The firm is also heavy on the vet side of the industry, too—it anticipates opening a whopping 1,000 new pet wellness centers by 2023 (up from just a few dozen today), giving the company its own demand for medications, with the centers producing solid operating metrics after a year. All told, these markets (pet supplies and vet services) are huge and growing (should be $52 billion by 2023!), and PetIQ is taking advantage of that with rapid growth—revenue growth is both big and accelerating, and earnings and EBITDA (up 108% from a year ago in Q2) are growing even faster. Management sees revenues of $500 million this year (up 88%) and thinks they’ll at least double by 2023 (likely very conservative), while EBITDA will do much better than that. It’s not changing the world, but PetIQ looks like it’s in the right place at the right time as the buying patterns of this giant industry shift to retail.
Technical Analysis
PETQ came public in July of last year, advanced to 28 by September and then went to work building a big IPO base—after a couple of dips into the teens, the stock was back near its highs in June when it started to tighten up. Then came the quarterly report, and the action since then has been superb, with PETQ staging an explosive breakout and follow-through. It’s wild and wooly, but we’re OK nibbling here or on dips with a loose stop.
PETQ Weekly Chart
PETQ Daily Chart
Pure Storage (PSTG)
Why the Strength
We’ve covered Pure Storage earlier this year, and the stock continues to do well and the growth story remains intact, so we’re going back to the well again. For those new to the story, Pure Storage specializes in all-flash storage systems for mid-sized and large organizations. Its addressable market includes most IT infrastructure hardware spending that doesn’t fall under the umbrella of mega cloud infrastructure, a market primarily served by Google, Microsoft and Amazon. Pure Storage offers a modular and scalable all-flash array hardware, a cloud-based management platform and flash-optimized hardware. That mix is exactly what its target market wants as evidenced by 65% revenue growth in fiscal 2017 and 41% in fiscal 2018 (ended on January 31). Shares blasted off to a new all-time high last week because second quarter results beat expectations as revenue rose 38% and EPS of $0.01 beat by $0.07. Analysts love that over half of the storage systems shipped in the quarter were Pure’s newest offering with NVMe, a technology where Pure has a lead over the competition and which delivers higher profit margins than prior offerings. It’s primarily an all-flash array growth story, but growing exposure in the hybrid cloud market has investors intrigued about long-term growth and buyout potential.
Technical Analysis
PSTG’s big breakout came last September when shares jumped through resistance at 15 then wandered up to 19 by the end of November. Since then, the stock’s been in an uptrend, though it’s been hard to handle, with lots of choppy action and shakeouts along the way. Last week’s blast off rally came after a multi-month decline from the previous high of 25.5 (set in June) and a retreat to 22. The longer PSTG holds up here, the greater the chance it’s changed character. You can nibble here or on dips.
PSTG Weekly Chart
PSTG Daily Chart
SailPoint Technologies (SAIL)
Why the Strength
Sailpoint is a software company that offers an identity governance platform that helps organizations answer three of their most pressing identity-related questions; (1) Who has access to what data? 2) Who should have access? and (3) How is that access being used? The big picture trend is that, as the digital world become more interconnected and able to be accessed from a variety of devices, companies are increasingly focused on the perimeter of their networks as the battlefront to protect applications, data and users. Sailpoint helps them fight these threats with a platform that efficiently and securely governs the digital identities of employees, contractors, partners and other users. The stock is making its debut in Top Ten because it’s been stair stepping higher since it went public last November and the fundamentals are terrific. Revenue grew at roughly 40% in both 2016 and 2017, expanded at the same rate in Q2 2018 (reported on August 8), and is guided to be up 27% this year (which seems conservative given the trend). A rarity amongst small-cap software stocks, Sailpoint is also profitable, partially due to its hybrid model of offering both on-premise and cloud-based software. EPS was $0.05 last year but should expand 160% to $0.13 this year. It’s a neat little growth story that’s still flying under the radar of most investors, despite the stock’s outperformance.
Technical Analysis
SAIL went public last November at 12 and hasn’t looked back since. The chart shows the stock mostly making higher highs and higher lows, with each advance delivering double-digit gains and each pullback finding support at or a bit below the 50-day line. The late-July dip was nastier than the prior ones, but the stock recovered quickly then shot to their previous high after the Q2 earnings report. A recent secondary offering was digested quickly, and last week SAIL hit higher highs. Aim for modest weakness to enter.
SAIL Weekly Chart
SAIL Daily Chart
Splunk (SPLK)
Why the Strength
Splunk is a very hot IT stock that’s made 10 previous appearances in Cabot Top Ten Trader. The company’s software platform allows businesses to extract meaning from the firehose of machine (i.e., automatically generated via clicks, views, etc.) data generated by a company’s digital network, including websites, apps, servers, networks, mobile devices and the like. Splunk’s software and services develop what the company calls operational intelligence. The appeal of Splunk’s products is evident from its revenue growth that “slowed” to 32% in fiscal 2018 (which ended in January) and its ability to win big contracts (over $1 million), of which it signed 61 in the latest quarter. That’s a 42% jump in big wins from the previous quarter. The company’s latest quarterly report last Friday featured both top- and bottom-line beats and strong guidance. Software sales were up 43% and license revenue was up 35%. And the company is increasing the percentage of revenue that comes from license and cloud products, which represent recurring revenue. The company has also grown by acquisition in 2018, buying security specialist Phantom in April, IT collaborative incident management company VictorOps in June and Internet of Things leader Krypton in July. Analysts are looking for 95% earnings growth this year and 42% next year. Of course, the valuation is in nosebleed territory, but like many software outfits, free cash flow is much larger than reported earnings (19 cents in Q2 vs 8 cents of earnings) and big investors are expecting big numbers ahead.
Technical Analysis
The big chart picture is that SPLK had been trading in a tightening range for years before blasting off in November 2017, a rally that carried the stock to 122 this June. Then came a consolidation phase—net-net, the stock made no progress from early March through mid August. But that pause looks to have ended last Friday, when investors chased the stock higher by almost 16 points (14.8%) on more than five times its average volume. You can either start with a small position or wait for a pullback of two or three points.
SPLK Weekly Chart
SPLK Daily Chart
Williams-Sonoma (WSM)
Why the Strength
We’re still seeing a lot of strength in the retail sector, including plenty of buying in some older, stodgy firms that are showing some nice acceleration in their businesses. Willams-Sonoma operates some of the leading home furnishings brands in the U.S., including Pottery Barn ($3.0 billion in revenue including its kids and teen offshoots), West Elm ($1.1 billion), its namesake brands ($1 billion) and a few others like Rejuvenation and Mark & Graham. The company still operates a lot of stores (627 of them), but that figure is slowing decreasing, with e-commerce picking up the slack. Interestingly Williams-Sonoma is one of the top 25 Internet retailers in the U.S.; e-commerce sales make up 54% of revenue and are rising at an above-average clip (up 9% in Q2). Combine that underlying trend with some smart management, cost controls and an overall bullish retail environment (Target and Walmart recently reported their fastest same-store growth rates in more than a decade!) and we’re seeing a general pickup in revenue growth (4% to 8% in the past five quarters, compared to 0% to 3% the prior four), margin expansion, solid earnings growth and hikes in guidance (analysts see earnings up 20% this year and same-store sales up 4% or so). Throw in a solid dividend (2.4% annually) and a reasonable valuation (16 times this year’s earnings) and we think Williams-Sonoma should remain in favor.
Technical Analysis
WSM looks to be in the early stages of a turnaround. The stock fell from 89 back in 2015 to 47 in January 2016 and from there it built a huge bottoming area, with the stock still hanging around 47 in May of this year. But since then the buyers have been in control, with the May earnings report inducing a run to 66, and after a two-month rest, the recent quarterly numbers causing a gap to three-year highs. We’re OK buying here or on further weakness.
WSM Weekly Chart
WSM 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.
