Interpret, Don’t Predict
Current Market Outlook
The market had put together a few small positive steps heading into last week, but after a solid G20-induced rally on Monday, it’s been all selling, all the time—the intermediate-term trend has rejoined the longer-term trend in bearish territory, with some indexes (including the S&P 500 today) hitting new correction lows. Because of that, we’re moving our Market Monitor back down a notch to a level 4 and advise remaining in a defensive stance. That said, it’s not all bad news; we’re seeing more stocks that are resisting the market’s pull (forming significantly higher lows), and many indexes are still being defended at their October/November lows. Bottom line, it’s best to take things day-by-day and go with the evidence—which, today, means holding plenty of cash.
This week’s list, though, is a good place to start building a watch list if you’ve yet to do so, as many of these stocks look like they want to move higher if the market gets going. Our Top Pick is MongoDB (MDB), a stock that actually nosed to new highs after earnings before pulling back in.
| Stock Name | Price | ||
|---|---|---|---|
| Guardant Health (GH) | 88.34 | ||
| Kirkland Lake Gold (KL) | 51.30 | ||
| LHC Group (LHCG) | 103.10 | ||
| MongoDB (MDB) | 156.56 | ||
| Okta, Inc. (OKTA) | 148.41 | ||
| RH Inc. (RH) | 252.93 | ||
| Shopify (SHOP) | 585.00 | ||
| Spirit Airlines (SAVE) | 57.03 | ||
| Vanda Pharmaceuticals (VNDA) | 31.04 | ||
| Zscaler (ZS) | 126.22 |
Guardant Health (GH)
Why the Strength
Guardant Health went public in a horrible market at the beginning of October but has posted impressive performance due to a couple of positive fundamental growth drivers. First, the big picture story is impressive: Guardant is a precision oncology company that develops blood tests that detect cancer in high-risk populations and for those with previously-removed tumors. Second, growth has been off the charts. Revenue was up 98% to $50 million last year, and up 95% (to $21.7 million) in Q3 2018 (reported November 19). Guardant’s liquid biopsy tests are used in both biopharma (GuardantOMNI covers 500 genes) and clinical (Guardant360 covers 73 genes) use cases, which gives it an addressable market of roughly $10 billion that’s growing. Analyst coverage is sparse but those who do follow it are expecting revenue growth of around 40% in 2019 then roughly 56%, on average, from 2020 through 2022. Growth should be driven by FDA approval of new tests (LUNAR-1 for recurrence monitoring and LUNAR-2 for early cancer screening) and, longer-term, Medicare coverage. Guardant won’t be profitable for years, which makes it more speculative, but investors are excited about the long-term potential given the early-stage of liquid biopsy adoption and the potential upside from Guardant’s LUNAR programs, which have the potential to expand its target market to at least $30 billion. This could be a monster story if managment pulls the right levers.
Technical Analysis
GH went public in October and rallied almost 70% on its first day, then traded in the 30 to 34 range for a few sessions before crawling up near 44. That was the all-time high until last Monday when the stock broke out of its trading range to close above 45 for the first time. It’s been a little up and down since but hasn’t closed back below 40. Of course, if the market stays weak, GH could get yanked in, but the fact that it hasn’t yet is a good sign.
GH Weekly Chart
GH Daily Chart
Kirkland Lake Gold (KL)
Why the Strength
When times are threatening, some investors still look to gold as a source of lasting value. And while the performance of gold stocks doesn’t exactly bear out the wisdom of that choice, it’s happening again during the recent turmoil. One of the beneficiaries is Kirkland Lake Gold, a successful explorer/miner that made its debut in Top Ten in October. Among its four producing mines, Kirkland Lake owns two high-grade, low-cost mines, Macassa in northwestern Ontario, Canada and Fosterville in Australia. When Kirkland Lake was written up in October, management was forecasting 635,000 ounces of gold production for the year. That number has now been raised to 670,000 ounces, which, together with the company’s successful program of cost cutting, has encouraged investors. Management has said it is targeting a million ounces per year of production, with output increases at existing mines. Kirkland booked revenue increases of 111% in 2016 and 85% in 2017, and analysts are forecasting a 47% jump in earnings this year and 16% in 2019. With an exploration budget that’s well over twice the spending per ounce of its competitors and discovery costs that are less than a third of its peer group, Kirkland Lake Gold looks like a good choice for investors who want some gold in their portfolios.
Technical Analysis
After trading over the counter for years, KL came public on the NYSE in August 2017. The stock was an instant success, soaring from 11 in its IPO week to 24 a year later. KL has been volatile, melting down in August 2018 and falling to 17 in mid-September, then bouncing to 22 in October, falling to 18 in November and, now, zooming back to new highs at 24. Even after its big run, KL trades at a relatively tame 20 P/E and the stock pays a tiny dividend. Want gold? Here’s your best bet. Try to buy on dips.
KL Weekly Chart
KL Daily Chart
LHC Group (LHCG)
Why the Strength
Making its debut in today’s Cabot Top Ten Trader, LHC Group is a virtual instant replay of Amedisys, which appeared here last week. Louisiana-based LHC Group is a health care provider specializing in post-acute care, mostly in the home and primarily for Medicare clients. The company offers home health services and hospice in addition to a roster of in-home services like grooming, respite care, transportation and errands and a range of facility-based services for chronic conditions. With 30,000 employees and 780 locations in 36 states, LHC Group is a sizable player and is the preferred in-home healthcare partner for more than 330 U.S. hospitals. The company boasts a record of double-digit revenue growth from 2014 on, and its partnership with LifePoint to share ownership of home health and hospice providers across LifePoint’s footprint has given revenue a big growth spurt. LHC Group is also working on a program of cost synergies of $25 million in 2018 and 2019. With significant cash flow generation and a $500 million credit facility, the company is actively pursuing growth via takeovers, much like its joint takeover of two facilities via its LifePoint partnership. (The company acquired $114 million in annual revenue in 2017.) With the Baby Boomers aging and management aggressively pursuing growth, LHC Group has a bright future.
Technical Analysis
LHCG made a great run (32 to 69) from late 2016 to June 2017, then went absolutely flat until March 2018. Starting in April, the stock made another run from 60 to over 100 in late September. The October market weakness pulled LHCG back into the high 80s, but the rebound has been energetic and the stock is trading right around 100 after playing above 106 earlier in December. If you like the story, you can nibble on any dip of a couple of points or just wait for a breakout above 106.
LHCG Weekly Chart
LHCG Daily Chart
MongoDB (MDB)
Why the Strength
MongoDB offers a “run-anywhere” general purpose database platform that is used by developers to take advantage of the benefits of the new cloud-based software world. The platform combines the best of legacy and modern platform architecture, which means it can work with both structured and unstructured data, run on-premise or in the cloud, work with a wide variety of use cases and boost developer productivity. Even if you don’t fully understand what it does, MongoDB’s growth numbers are compelling. When the company went public in October 2017 it had 30 million downloads; now it has 45 million. Revenue had just crossed the $100 million threshold (after being founded just 10 years earlier); now it’s approaching a $250 million annual run rate. These growth numbers suggest companies are flocking to MongoDB to help their developers be more productive and create better, more secure applications, and that the “freemium” customer acquisition model is helping the company reach what’s projected to be a $40 billion database market. Third quarter fiscal 2019 results were reported last Tuesday when MongoDB delivered 57% revenue growth (to $65 million) and gave full-year revenue guidance of $244.2 million (at the midpoint), versus $231 million consensus. EPS guidance of -$1.53 was also well ahead of consensus of -$1.63. It’s a “techy” story, but MongoDB’s big idea of having the new go-to database platform could lead to years of huge growth.
Technical Analysis
MDB went public in October 2017 and took about three months to get going. It then went on a seven-month rally that carried the stock from 30 to 85 and was characterized by a pattern of higher highs and higher lows. Like most stocks, MDB’s momentum was curbed in October but the depth of the dip, to 65, was modest in the context of the stock’s previous move. November saw shares oscillate between 65 and 85 a bunch of times, and we were very impressed by last week’s brief move into new-high ground following earnings, one of the few names to reach virgin turf. MDB is worth watching, and you can nibble here if you want to start a position.
MDB Weekly Chart
MDB Daily Chart
Okta, Inc. (OKTA)
Why the Strength
Today’s employees are accessing networks from all sorts of devices when working in and out of the office. This creates security and access-related headaches for large organizations, especially international ones, as IT managers try to provide access to what’s needed without opening up sensitive information to bad actors. Okta offers a suite of cloud-based identity and access management (IAM) solutions that helps deal with the issue. The company’s been growing rapidly (revenue was up 60% in fiscal 2018) because it was the first to develop a cloud native platform and offers solutions for a wide range of end-markets, giving Okta a potential addressable market of roughly $18 billion. The trend of solid results continued in Q3 fiscal 2019 (reported last Wednesday) when Okta delivered revenue growth of 58% and EPS of -$0.27 (beating by $0.04). Investments in partner programs are starting to bear fruit as business with system integrators, including VMware and Deloitte, helped Okta add 100 new customers with annual recurring revenue over $100K. Dollar based net retention was 120% as well, suggesting Okta’s customers are sticking around and expanding their usage over time. We see estimates of 50% revenue growth in fiscal 2019 and 32% in fiscal 2020, along with progress toward becoming profitable (still a few years out), as keeping big investors engaged.
Technical Analysis
OKTA went public in April 2017 and did well at first, but really broke out in February of this year and ran from 32 to 61 in just three months. A choppy three-month rest followed, then shares rallied to 75 on high volume following the release of Q2 fiscal 2019 results in early-September. The stock pulled back to its June-August trading range (mostly between 50 and 65) in October and November, but galloped as high as 70 last week after earnings before being yanked lower. Keep OKTA on your watch list; if you want in, we’re OK nibbling here as there’s support in the upper 50s.
OKTA Weekly Chart
OKTA Daily Chart
RH Inc. (RH)
Why the Strength
RH Inc. (formerly Restoration Hardware) seems like a pretty straightforward story—a high-end furnishing retailer—but the company has had many twists and turns, first with the closing of smaller retail locations and the opening of giant galleries (often including restaurants and high-end attractions); then with an expansion of product lines; then, when the stock was low, borrowing a bunch of money and buying back half the shares outstanding (!); and this year, emphasizing earnings over sales growth. It’s not the norm, but management’s varied paths have worked—in Q3, same-store sales rose 6%, revenues were up 7%, earnings boomed 66% and, for the year as a whole, the top brass expects free cash flow of around $10 per share. And next year should be even better! Of course, there have been worries about a slowing housing market, but management doesn’t sound concerned (it also said China tariffs aren’t expected to materially impact results), and sees a return to 10%-ish top line growth and 20%-ish earnings growth next year, with similar gains in the years that follow. (Long-term, the goal is for $4 billion to $5 billion in North American revenues.) There are risks, of course, but RH has managed to make the right moves in recent years, and with massive profits and cash flow, we think the stock can do well once the market stabilizes.
Technical Analysis
RH has had a big run with a ton of big corrections since early 2017, but the stock eventually topped at 165 in June of this year and eventually falling in the mid 100s during the October meltdown. But shares found support at that level three separate times, and last week, popped nicely following the quarterly report (and holding those gains despite the horrid market environment). If you want to take a stab at it, we’re OK buying a smidge here with a stop near 120.
RH Weekly Chart
RH Daily Chart
Shopify (SHOP)
Why the Strength
Shopify was one of the first glamour stocks out of the gate in 2017, and after a big run, looks to have reset itself, making it ready to get going—once the market cooperates. The company’s claim to fame is its best-in-class ecommerce platform, which lets merchants sell through any type of channel or site with a single integrated back office and thousands of apps and add-ons that help clients run their online business and reach more customers. The platform is used by entrepreneurs, large brands and every size firm in between, with Shopify getting paid in various ways (recurring subscription fees, getting a cut of gross merchandise sales, fees for its payment solution and interest on cash advances to merchants), and all continue to surge—revenues lifted 58% in Q3, driven by a 46% gain in subscription revenue (including a 41% lift in monthly recurring revenue), a 55% gain in gross merchandise volume and a 73% gain in cash advances. Even better, the business model is showing leverage, with earnings in the black each of the past five quarters, and with analysts expecting more to come (next year’s bottom line is expected to rise 123%). The valuation is nothing to sneeze at, but big investors don’t have a problem with it—779 mutual funds owned shares at the end of September, up from 570 at the start of the year. This remains a good story with lots of long-term potential.
Technical Analysis
Since September of last year, SHOP has suffered five corrections of between 20% and 30%, which, along with the market’s mini-crash, likely wore out most of the weak hands. More recently, SHOP has remained very volatile along with the market, but it’s repeatedly held support at or above early October lows and the odds favor it doing so again if the market implodes. You can nibble here or just keep SHOP on your watch list.
SHOP Weekly Chart
SHOP Daily Chart
Spirit Airlines (SAVE)
Why the Strength
Airlines aren’t the usual place to look to find leading stocks, as economic ups and downs and fuel prices can change their fortunes quickly. But there’s no denying that Spirit Airlines has made an impressive run since last July. The company is committed to working the low-price end of the airline spectrum, with basic fares augmented by fees for bags, seat assignments and refreshments. The company has a young, fuel-efficient fleet and flies 500 daily trips to the U.S., Latin America and the Caribbean. Spirit got a little boost in late October when it released its plans for adding planes to its fleet and reported strong Q3 revenue and earnings, headlined by a 56% jump in earnings following declines in seven of the previous eight quarters. Spirit’s stock then got a big boost on November 27 when it released an investor update that guided for 11% Q4 growth in total revenue per available seat mile (TRASM, a key metric for the sector), aided by higher non-ticket revenue and positive results from its recent network realignment and stronger industry environment. (Non-ticket revenue was 48% of 2017’s total, so that’s a bigger deal than with other airlines.) On December 6, the company picked up an analyst’s upgrade from Credit Suisse, largely on the basis of the improved guidance in the investor update. Analysts see next year’s earnings higher by 29% thanks to strong business momentum and falling fuel prices, so this isn’t just a flash in the pan. Spirit is enjoying several tailwinds and still sports an attractive 11 forward P/E.
Technical Analysis
SAVE soared from 16 to 85 in 2013 and 2014, but crashed back to 33 in late November 2015. Since then, the stock has traded in a range between 60 and 30 in 2017 and between 54 and 34 this year until the guidance gap up on November 27 that kicked it to 59 on huge volume. SAVE followed through with a push to 64 last week before market weakness pulled it back below 60 on Friday. The five-point pullback looks like a good entry point if you want to take a small position.
SAVE Weekly Chart
SAVE Daily Chart
Vanda Pharmaceuticals (VNDA)
Why the Strength
Vanda Pharmaceuticals is unique biotech outfit with a couple of drugs on the market and at least one potential blockbuster that’s moving through the pipeline. On the market today for Vanda are Fanapt, a schizophrenia treatment that was approved in 2010, and Hetlioz, which treats non-24 sleep-wake disorder (messes up the circadian rhythms in the body). Hetlioz is the growth driver, with sales up 34% in Q3 (sales should total $110 million this year) and expansion coming both here and overseas. And Vanda is looking to add indications such as non-24 pediatric, jet lag disorder and a rare chromosomal disorder known as Smith-Magenis Syndrome (for which it just released encouraging trial results). Hetlioz should continue to drive solid company-wise growth (revenues are expected to rise 29% next year, with earnings up to 64 cents per share), but the recent excitement concerns Tradipitant, the firm’s potential treatment for gastroperesis, which prevents your stomach from emptying properly. Some think there are six million people in the U.S. with the disease, though “only” a few hundred thousand are diagnosed because the only approved drug for gastroperesis has major side effects and patients must cycle on and off the drug! Tradipitant’s Phase II results (released last Monday) showed a significant drop in nausea from patients with this condition—if Phase III results confirm down the road, Tradipitant could be a multi-billion dollar drug.
Technical Analysis
VNDA had been trendless for the past couple of years, but as the bottom line leapt into the black, the stock’s performance began to improve. Shares marched to new highs in August (22), September (23) and again in November (25), despite the market’s wobbles. And last week the stock rose as high as 31.5 after the release of Tradipitant Phase II results before being yanked down by the market. We’re OK with a nibble here or on dips, or just keep VNDA on your watch list.
VNDA Weekly Chart
VNDA Daily Chart
Zscaler (ZS)
Why the Strength
Zscaler is emerging as a secular growth story in the cloud-based security software space. The company’s modern computing architecture is helping it expand beyond the core market of web security into the $18 billion market of full network security spending. Analysts see potential for 25% annual growth for several years, with 20% operating margins down the road. That profile means Zscaler trades with a premium valuation but that’s just the deal when you’re buying a leading name with fast growth, high net dollar retention (i.e., high renewal rates and lots of upsells to current customers) and improving sales productivity. Last week’s better-than-expected Q1 fiscal 2019 results earned Zscaler another A-plus. Revenue was up 59% to $63.3 million while EPS of $0.01 beat consensus of -$0.05. Full-year revenue guidance of $270 million at the midpoint was also ahead of $259 million consensus. Strength can be partially attributed to adoption of the company’s high-end Tranformation bundle, larger deals, upsell activity and solid renewals, all of which are driving positive leverage in the business model. The stock didn’t blast off to all-time highs following the report, but a few price target increases and Zscaler’s impressive share price resiliency, especially in a relatively volatile market, make for a compelling situation once the market stabilizes.
Technical Analysis
ZS went public in March of this year and was hot right out of that gate, then paused for two months to consolidate in the 25 to 30 range. A fierce rally in June carried shares to a new high near 44, and after another pause, the stock topped at 48 in August. The correction from there was sharp, but reasonable, including a big shakeout in the middle of last month that briefly took ZS as low as 31. But now the stock is well above those lows following a bullish earnings reaction last week. Our advice here is the same as other resilient names—watch it, or if you want to start a position, keep it small.
ZS Weekly Chart
ZS 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.
