Lots of Rotation and Crosscurrents
Current Market Outlook
Leading stocks stabilized somewhat during the second half of last week, but we’re still seeing plenty of potholes (mostly on earnings reports) and a bunch of rotation out of fast-growing names and into more cyclical, defensive areas. That’s not to say all growth stocks look terrible—we’re still seeing a good number of positive earnings gaps, including a few in today’s issue—but there remain a bunch of crosscurrents on a day-to-day basis, making it difficult to latch onto top performers. As for the overall market, it’s in solid shape, with the intermediate-term trend tilted up. All in all, we don’t advise hiding in the closet, but it’s important to hold some cash and honor your stops, and on the buy side, to pick your entry points and focus on names that have shown recent, powerful buying.
This week’s Top Ten has a diverse mix of stocks, and happily, it includes a good number of stocks with solid growth stories. Our Top Pick is Paycom Software (PAYC), which staged a fantastic earnings gap (and follow-through) last week.
| Stock Name | Price | ||
|---|---|---|---|
| BJs Wholesale (BJ) | 36.69 | ||
| CarGurus (CARG) | 41.58 | ||
| Chart Industries (GTLS) | 72.05 | ||
| Greenbrier (GBX) | 57.73 | ||
| Illumina Inc. (ILMN) | 289.74 | ||
| Ingevity Corp. (NGVT) | 99.98 | ||
| Neurocrine Biosciences (NBIX) | 123.40 | ||
| Paycom Software (PAYC) | 0.00 | ||
| SodaStream (SODA) | 142.91 | ||
| Zendesk (ZEN) | 82.19 |
BJs Wholesale (BJ)
Why the Strength
BJs Wholesale is a warehouse club store operator in the mold of Costco, offering bulk items at big discounts (members can save 25% on many items) for a reasonable fee (more than five million members pay $55 to $110 annually), with a focus on New England (though it has 215 clubs spread across 16 states, as well as 134 gas stations). The warehouse club sector is mature and growing slowly, but BJs, which just came public in late June, has some appeal thanks to improvement in its own operations. During the past two years, the company has revamped its C-level executive team, implemented far more cost controls (it’s negotiated $260 million of annual procurement savings during the past two years), increased its use of data for marketing and customer attractiveness and boosted its e-commerce offerings. The results have been solid: same-store club sales have increased and accelerated each of the past three quarters (up 2.0% in Q1), EBITDA has surged a total of 31% during the past two years and cost of goods sold has dipped 1.6 percentage points. Throw in some slow, steady growth in sales and a few new club openings per year, and analysts see the bottom growing nicely from $1.15 per share this fiscal year (ending next January) to $1.39 next, and growing 12% to 20% annually in the years after. BJs isn’t a great growth company, but as a new stock and with internal improvements on the way, we could easily see institutional investors taking positions.
Technical Analysis
BJ just came public a few weeks ago, but it’s off to a solid start, and if the rotation out of glamour stocks and into stable growers continues, the stock should continue to do well. Shares were priced at 17, opened at 21 and raced to 27 within a couple of weeks before easing back in a normal-looking pullback. It’s thinly traded and sure to be a bit jumpy, but we’re OK nibbling around here and adding if BJ heads higher.
BJ Weekly Chart
BJ Daily Chart
CarGurus (CARG)
Why the Strength
Making its debut in today’s Cabot Top Ten Trader, CarGurus is a major player in the business of getting buyers and sellers of new and used cars together. The company was founded in 2006, and now operates in the U.S., Canada, the U.K., Italy and Germany, but the U.S. is still the source of most of its income. Dealer subscription fees make up almost 90% of revenue, with the total number of paying dealers reaching just over 29,000 in Q1, up 24% from a year earlier, with each dealer contributing nearly $12,500 per year. The balance of revenue comes from advertising. Revenue growth has been slowing from triple digit levels in 2016 (101%) to 60% in 2017. Analysts see earnings growing by 25% in 2018 and 30% in 2019. CarGurus is the largest automotive shopping site in the U.S. by unique monthly visitors, a metric that’s reached 30.8 million in the U.S. (up 33% year-over-year) and 3.5 million internationally (up 37%). CarGurus will report its Q2 results tomorrow, August 7, after the market closes. Analysts are expecting $103.7 million in revenue and four cents per share in earnings.
Technical Analysis
CARG came public in October 2017, and enjoyed a bumpy rally to 41 in April 2018 before a correction to 30 in May. Since that pullback, CARG rounded out a nice launching pad, with some tightness in early June and then an accelerated rally starting in July that’s completely ignored the wobbly environment for growth stocks. CARG is now trading near its all-time highs just under 45, and will likely take its cue from the reception of its quarterly report on August 7. The prudent course is to watch the reaction from investors before jumping in—anything but a complete meltdown should provide a nice opportunity.
CARG Weekly Chart
CARG Daily Chart
Chart Industries (GTLS)
Why the Strength
Gases like oxygen, nitrogen and more exotic varieties are used everywhere in industry. Chart Industries makes the specialized cryogenic equipment to extract these gases from the atmosphere, store them and use them. The company operates in three segments: Energy & Chemicals, Distribution and Storage and BioMedical. Through the CAIRE brand, the company is the leading provider of oxygen products for the home healthcare market and its tanks and systems enable liquefied natural gas transportation. The company’s July 19 Q2 earnings report was a blockbuster, with 34% revenue growth topped by a 162% jump in earnings per share, even after some restructuring costs, a cryobiological tank recall and severance pay for the former CEO. The company reported its sixth consecutive quarter of sequential order growth, including Asian orders that were up 28% from the previous quarter and 18% year over year. The report showed strength across all geographies and all segments. The company also upped its full-year revenue and earnings guidance (from $1.15–$1.20 billion in revenue to $1.20–$1.25 billion and from $1.75–$2.00 per share in earnings to $1.85–$2.05). It’s hard to touch and feel, but this is a very fundamentally sound story.
Technical Analysis
GTLS has been in a fairly steady uptrend since it bounced out of a two-year correction in January 2016. There was a seven-month pause from February 2017 to August 2017 that pulled the stock from 41 to the low 30s, but once GTLS got moving again in September 2017, it showed some real strength. The stock was trading as high as 74 in June, but corrected to near 60 when a new CEO was named. The stock strengthened ahead of earnings and gapped up to new highs on July 19. Since that earnings gap, the stock has been dithering under resistance at 80. It looks buyable on a dip into the mid-70s, with a stop around 69.
GTLS Weekly Chart
GTLS Daily Chart
Greenbrier (GBX)
Why the Strength
Transport stocks have been dead in the water since late January, but they, like many cyclical stocks, are beginning to perk up (the Dow Transports are near six-month highs), and Greenbrier is joining the parade. The company is one of the biggest manufacturers (78% of revenue) and servicers (including leasing, maintenance and repair; 22% of revenue) of railroad freight car makers in the U.S., Europe and Brazil; it currently has the second largest backlog of rail cars in North America. The firm’s made improvements over time—even during slow times like recently, it’s still solidly profitable, and it has effectively no net debt—but the reason the stock is attracting buyers is because demand is picking up. While earnings dipped in the most recent quarter, backlog ($2.3 billion) increased a touch for the first time in a couple of years, with new orders outpacing shipments for the first time since May 2017. And the momentum has continued recently—just last week, Greenbrier announced that new orders during June and July totaled $425 million (more than 5,000 units) in a diverse array of railcars, a pace that’s greater than the quarter before. Analysts still see earnings slipping in the upcoming fiscal year (starting in September), but the market seems to be thinking the firm’s two-year slide is over, and a new demand rebound is underway. A modest dividend (1.7% annual yield) is also a plus.
Technical Analysis
GBX hit a peak near 78 in 2014, bottomed at 20 in early 2016 and rallied back to 50 at the start of 2017. From there, the stock basically went sideways for a year and a half; it did get as high as 54 late last year, but as of late June, GBX was trading at 46. However, the stock’s character has changed since its earnings report, surging to new highs around 60 on excellent volume. It’s not the fastest horse, but after a long rest, the stock looks to be starting a new, sustained uptrend.
GBX Weekly Chart
GBX Daily Chart
Illumina Inc. (ILMN)
Why the Strength
Illumina was a leader a few years ago, and now, after nearly three years in the wilderness, it’s looking like a real liquid leader as demand for its various gene sequencing solutions surges. While Illumina has always been a steady grower (it typically delivers double digit revenue and EPS growth), business accelerated in 2017 when Illumina posted 15% revenue growth and 20% profit growth. This year looks even better. Last week Illumina delivered Q2 revenue growth of 25%, while EPS of $1.43 was up 62% (and beat by an impressive $0.32). Management said that sequencing consumables, array consumables and lab services each grew by more than 30%, illustrating the intense interest in genomic information, not only in research and clinical markets but in consumer markets as well. The latter point bears further discussion because Illumina is now selling consumables to consumer-oriented companies including 23andMe, Ancestry.com, and Helix. Plus, analysts remain excited about Illumina’s Next-Generation Sequencing (NGS) for cancer and prenatal markets, which could become the standard of care within two years. Analysts were surprised by the accelerating pace of growth, which inspired management to push 2018 revenue growth guidance to 20% and EPS guidance to $5.35 to $5.45, implying 35% growth at the midpoint.
Technical Analysis
ILMN is known to go on massive, multi-year rallies before pulling back and consolidating before the next run. Now is one of those rally phases. It began when ILMN blasted through its previous all-time high of 242 (set in 2015) following the Q1 2018 earnings report in late April, and the stock has continued to rise steadily since then with only limited dips along the way. The stock declined to its 50-day line just before last week’s earnings report. But following that event ILMN is trading at a new all-time high around 330. The near-term could see volatility, but the path of least resistance is up.
ILMN Weekly Chart
ILMN Daily Chart
Ingevity Corp. (NGVT)
Why the Strength
South Carolina-based Ingevity is a specialty chemicals company that uses the byproducts of pine pulp and paper processing to make products used in various industrial applications, including asphalt production, oil exploration and automobile components. Investors are buying shares because the company’s July 26 quarterly earnings report showed 19% growth in revenue (the strongest since the company was spun off from WestRock in 2016) and a 44% jump in earnings. The quarterly results were helped by a strong beginning of the paving season (up 18% from the previous year) and increasing rig count in the U.S. oil exploration industry that keyed a 49% jump in oilfield technologies sales. Industrial specialties revenue was also up 23% in the quarter. Part of the strong revenue performance is also explained by faster-than-expected benefits from the $315 million purchase of Georgia-Pacific’s chemical-related assets from an Arkansas plant. With positive news in all three of its business segments and further synergies from M&A activities, Ingevity looks like a solid industrial growth story.
Technical Analysis
NGVT came public at about 24.5 in May 2016, and immediately started a strong rally and advanced (with a couple of major pauses) to 90 the week before earnings. The good earnings news booted the stock into the high 90s, which is where NGVT has been hanging out for the past week or so. While not in a traditional glamour sector, NGVT has excellent momentum and its area is one that’s finding buyers as some money comes out of growth stocks. The longer it holds its gains, the better the chance it will continue higher. You can buy a little right here or on dips, with a stop around the bottom of its earnings gap around 90.
NGVT Weekly Chart
NGVT Daily Chart
Neurocrine Biosciences (NBIX)
Why the Strength
Neurocrine Biosciences is one of a handful of young biotechs that is just turning the corner from development stage into commercial stage, with the prospect of huge earnings growth ahead. The company focuses on neurological-, psychiatric- and endocrine-related disorders, and its first product—Ingrezza, which hit the market in May 2017 and is the first U.S.-approved medication that treats a side effect of certain antipsychotic medications, with an estimated market size of 500,000 people—is growing nicely. In Q2, Ingrezza saw 16,700 prescriptions and $96.7 million of revenues, both up around 35% or so from the prior quarter. Ingrezza should continue to grow both through market penetration and label expansion. And now there’s also excitement about Orillissa, which was licensed to AbbVie and was just approved by the FDA for a uterus growth abnormality that can cause extreme pain; Neurocrine will get a $40 million milestone payment for the approval and big royalties (looks like north of 20%) after AbbVie starts selling the product in August. (Some see Orillissa as a billion dollar drug within a few years, especially if it’s also approved for use combating uterine fibroids, where Phase III data has been very encouraging.) There’s plenty more in the pipeline, too. Analysts see revenues of $439 million this year and that figure rising another 48% in 2019, and, importantly, the bottom line leaping into the black next year. The market cap is big ($10.5 billion!), but big investors aren’t afraid (617 mutual funds own shares).
Technical Analysis
NBIX broke out from a two-year base in October 2017 around 58 and ran up sharply, finding its way to 92 in February. Then came a three-and-a-half month consolation, from which the stock broke out of in May. The upside after that was muted, though, with NBIX even slicing through its 50-day line during the recent growth stock selloff. But the stock popped right back after earnings and held those gains. We’re OK buying a little on dips with a stop near the century mark.
NBIX Weekly Chart
NBIX Daily Chart
Paycom Software (PAYC)
Why the Strength
Paycom is arguably the market leader for cloud-based human capital management (HCM) solutions. Its pole position was further cemented last week when the stock blasted to all-time highs after another terrific quarter, even in the face of a volatile market. The company’s solutions help enterprises manage HR, payroll, benefits and talent. It’s a big and fragmented market, but Paycom’s uncanny ability to keep grabbing market share from the likes of ADP and Paychex and surpassing expectations quarter after quarter have made it the HCM stock to own. We think there’s still gas in the tank given that the company continues to expand geographically, just delivered another quarter of 30% plus growth and is generating an eye-popping 98% of revenue from recurring subscriptions (implementation revenue accounts for the remaining 2%). Not only did Q2 revenue beat expectations, but EPS of $0.59 was up 69% (beating by $0.11), the company bought back 400,000 shares and full-year revenue growth guidance was bumped up to 28%. This is a best-in-class software provider and the stock has been about as steady as you’ll find out there. If you have any appetite at all for mid-cap stocks, Paycom should be right up your alley.
Technical Analysis
PAYC’s long-term trend is up and to the right with only a few dips down to its 200-day moving average line over the last two years. For the most part shares have historically bounced off their 50-day line and gone on to fresh highs afterwards. That pattern did begin to change in March, when PAYC effectively stalled out, trading mostly in the 100 to 115 range for the next few months. The spring was loaded at 105 heading into last week’s earnings report, however, after which buyers drove PAYC north of 130. We suggest aiming to buy on modest weakness with a stop in the mid 110s.
PAYC Weekly Chart
PAYC Daily Chart
SodaStream (SODA)
Why the Strength
Sodastream is an Israeli company that’s always had a great recurring revenue business model—the firm’s sparkling water makers use CO2 carbonators and bottles and also offer flavors so that people can make their own soda right in the house. Benefits include no more lugging stuff from the grocery store, it’s better for the environment (less plastic bottle use), the soda is healthier than popular brands and it can save users up to 70% for sparkling water. The company estimates that, for every $60 purchase of a Sodastream, another $400 comes during the next 10 years in recurring revenue. The firm had some issues in 2014 and 2015, but the turnaround since then has been powerful, and the stock is strong today because Q2 continued the trend of accelerating growth. Not only did sales (up 25%) and earnings (up 78%) easily top estimates, but growth was broad based (up 33% to 36% in its three largest markets), with both sparkling water makers and consumables revenue growing quickly (up 38% and 26%, respectively) thanks to a solid increase in units sold (up 22% water makers, up 17% CO2 refills, up 8% flavors) and higher prices. And best of all, management significantly hiked estimates going forward that still might be too conservative (analysts see earnings up 28% this year and another 19% in 2019). If the firm continues to boost its household penetration, there should be plenty of growth ahead.
Technical Analysis
SODA, which is somewhat thinly traded (just a couple hundred thousand shares per day, only 159 funds own shares), has been running higher since mid 2016, so we can’t say it’s at the beginning of its run. But the recent action has been terrific—after advancing as high as 98, SODA etched a reasonable 16% deep base over 14 weeks, soared to new highs on 16 times average volume after earnings and has continued higher since then. Dips look buyable to us, with a loose stop.
SODA Weekly Chart
SODA Daily Chart
Zendesk (ZEN)
Why the Strength
Zendesk develops cloud-based software solutions for the large (roughly $20 billion) and growing customer service industry. The company was started on a desk made from a kitchen door by three guys in a Copenhagen loft who wanted to design a sleek and consumer-friendly customer support software platform. They did it, and today Zendesk sells all the solutions businesses need to catch and keep clients, including technical support, chat, talk and messaging. The stock is back on our list because Q2 earnings beat expectations (again) when Zendesk reported 40% revenue growth and EPS of $0.03 (beating by $0.03). Investors are excited to hear that the company has partnered with Facebook’s WhatsApp solution (which has a mind-boggling 1.5 billion monthly users) so that consumers can interact with businesses directly through that app. The market also liked that growth is accelerating and that full-year guidance was increased by more than the Q2 beat, implying that management is very confident things will go Zendesk’s way in the back half of the year. Investments are going up to make sure the company remains on the forefront of the customer experience market, which will limit profits. But with a history of developing easy-to-use solutions, analysts see Zendesk maintaining its edge in the enterprise segment and capturing fresh prospects among smaller businesses. It’s a big growth story.
Technical Analysis
Despite rapid fundamental growth since ZEN went public in 2014, the stock took a few years to get going—by our measures, the stock’s original breakout came in January this year. But now, it’s running free. Despite the wobbly market this year, ZEN has mostly traded north of its 50-day line since that breakout, though it had a couple of shakeouts, one in June and the other in July. But earnings last week brought the buyers back, with the stock and relative performance (RP) line nosing to new highs. We’re OK starting a position here with a stop in the mid 50s.
ZEN Weekly Chart
ZEN 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.
