December 16, 2019

A Bit Divergent, but Still Bullish

Current Market Outlook

As we steamroll toward the end of the decade, the overall market remains in good shape—the intermediate-term trend is firmly up, the number of stocks hitting new highs is expanding and many longer-term studies tell us that 2020 is likely to be another solid year. That said it’s not all peaches and cream out there—short-term, huge number of new highs often leads to some retrenchment, and we’re also seeing a bit more divergent action among individual stocks, with some growth titles hitting potholes while investors rotate elsewhere. None of that is “bad,” per se, but it is a reminder to honor and update your stops as time goes by, and to take a couple of partial profits if you score a decent profit.

This week’s list has a wide variety of newer names, from construction to precious metals to biotech to chips. Our Top Pick is Synaptics (SYNA), which has the makings of an intriguing turnaround as it’s riding a few powerful growth trends.

Aecom Technology (ACM)

www.aecom.com

Why the Strength

Aecom Technology bills itself as the world’s premier infrastructure firm (more than $20 billion in revenue during the past year), offering clients design and consulting services (nearly 60% of revenues; planning, architectural and engineering design), management services (24% of revenue; maintenance, training logistics, etc.) and construction services (15% of revenue, for energy, sports, and commercial and industrial projects) to a ton of clients around the globe. Aecom has been solidly profitable for a while, but growth has been hard to find for the past few years. But the stock is perking up for three reasons. First, investor perception of the global environment is improving, which is always a help. Second, Aecom itself is seeing some green shoots—while the recent quarter’s results weren’t anything to shout about, the company saw bookings of $6.3 billion (20% larger than completed projects) and its backlog hit a mind-boggling $60 billion, up 11% from a year before. (The firm released some bullish projections for the next couple of years as well.) And third, and possibly most important, Starboard Capital (an activist investing outfit) has taken an interest in the company, and that’s pushed Aecom’s management to start thinking about unlocking value—the company is set to sell its management services business for $2.4 billion and use the money to reduce debt and potentially buy back a bunch of shares. Also, Aecom’s CEO is retiring and Starboard now has three directors at the company. It’s not a great growth story, but the combination of an improving environment and the activist tailwind should keep buyers interested.

Technical Analysis

ACM hit a bottom with everything else a year ago and bounced nicely in the first half of the year. The stock built a launching from July through September, with the breakout coming after news of the sale of one of its divisions hit the wires in mid October. ACM got up to around 44 after that and has now tightened up for four weeks as the 10-week line approaches. It looks like a solid risk/reward entry around here.

ACM Weekly Chart

ACM Daily Chart

GDS Holdings Limited (GDS)

gds-services.com

Why the Strength

GDS Holdings might be our favorite story in China—the company looks like the Equinix (or Digital Realty) of that country, operating an ever-growing network of carrier-neutral data centers for 615 customers (73% of which are cloud service providers, including all the big players like Alibaba, JD.com Huawei, Baidu, Tencent and others). At the end of September, total capacity (both in service and under construction) was up 48% from a year ago, and while the company is expanding fast, this isn’t a speculative business model; 72% of its area currently under construction is booked and its mature data centers (those open a few years) are well over 90% committed. The risk here has always been debt (the firm’s liabilities are equal to three times equity), as it takes a lot of cash to build the data centers, but the firm has solid liquidity and investors haven’t been hesitant to lend as they see GDS as an emerging blue chip of sorts in China’s increasingly interconnected economy. Sales have been growing nicely for a while, and while earnings are in the red, EBITDA (a better measure of cash flow for capital intensive businesses) is solidly positive (up 45% in Q3), and that’s true even if you factor in interest expense. Risks remain given the Chinese economy and any trade shenanigans, but GDS has a big idea.

Technical Analysis

GDS has been a tough bronco to ride in recent months, with a three-step-forward, two-steps-back type of advance from May through October. But now it appears to be getting its act together, with shares advancing nicely during the past few weeks to new highs, and that’s in spite of a recent share offering. GDS can still jump around a lot, so we advise aiming for dips.

GDS Weekly Chart

GDS Daily Chart

Inphi (IPHI)

inphi.com

Why the Strength

Very few investors have heard of Inphi, but we think this small/mid-cap company (market cap of $3.4 billion) is just starting a wave of huge growth thanks to the desire for faster speeds inside of and between data centers, as well as along telecom networks. The stock is strong today because numerous factors are lining up that should help the firm grow rapidly for the next few years. First is a huge upgrade cycle going on in data centers to 200G or (usually) 400G, where Inphi has a dominant market share; Google is ramping right now, Amazon will be buying a lot starting in Q1 and Facebook and Alibaba are likely to upgrade later on in 2020, with Microsoft possibly following suit in 2021. Second, data center interconnect products are in big demand, too, with the firm possibly taking share in the market after Cisco’s buyout of Acacia earlier this year. And for telecom (long haul and metro) applications, Inphi’s business could double next year as demand picks up for its ultra-low power, high performance optical systems. Beyond that, the firm’s new datacenter interconnect platform (higher price and performance) is already being tested out by numerous big players (that would be more of a 2021 driver). All told, it’s looking likely that the company can grow 20% to 30% annually for the next three years on the top and bottom line, which is always a good thing.

Technical Analysis

IPHI broke out of a multi-year base in July, part of a string of 13 weeks up in a row, which is a sign of persistent buying that doesn’t go away overnight. Shares chopped around for the next couple of months before gapping higher on earnings, but then pulled back yet again, this time to its 10-week line. But last week, that retreat ended, and while further choppiness is possible (IPHI can be a bit squirrelly), we think the next big move is up.

IPHI Weekly Chart

IPHI Daily Chart

Pan American Silver (PAAS)

panamericansilver.com

Why the Strength

Precious metals stocks (and their underlying commodities) have become a mixed bag, especially with some global uncertainties seemingly cleared up, but Pan American Silver is pushing ahead nonetheless thanks to some company-specific catalysts in addition to higher gold and silver prices. As the name suggests, the company is one of the larger silver mining outfits in the world (mines in Canada, Mexico and South America), but the firm has diversified its output, partly through its acquisition of Tahoe Resources in February 2019; this year, about half of the firm’s revenues will come from gold. Still, long-term, silver is the attraction, and investors are thinking the future could bring big growth when Pan American is able to reopen the huge Escobal mine in Guatemala (been closed for a couple of years due to local politics, though Tahoe originally thought it could reopen by year-end), which has years worth of reserves. And Pan American’s La Colorada (Mexico) and Navidad (Argentina) deposits have yet to be tapped but have giant potential. In the meantime, the company has plenty of mines up and running (6.7 million ounces of silver and 150,000 ounces of gold in Q3), is benefiting from higher sales prices (up 15% for silver, up 22% for gold) and is cutting costs (and debt) following the Tahoe acquisition. Analysts see sales (up 28%) and earnings (up 61%) surging next year, though the prices of gold and silver will obviously play a role. All told, Pan American is doing quite well today and has lots of upside as it makes progress on bringing other mines on-line.

Technical Analysis

PAAS got going with its peers near the end of May, nearly doubling in just over three months. The correction (20 to 15) after that was quick, and then the stock began to show plenty of support , with lots of weekly “tails” in the 15 to 16 area. And since the start of November, the buyers have been in control, with the stock decisively moving to new highs on solid volume. Dips of a point or so would be tempting.

PAAS Weekly Chart

PAAS Daily Chart

Planet Fitness (PLNT)

www.planetfitness.com

Why the Strength

Oftentimes successful retail stocks can have nine lives, and it appears that Planet Fitness—a nationwide (1,899 locations as of the end of September), low-cost (starting at $10 per month, but for $22 you can go to any location and get some perks, too) gym operation that prides itself on an easy-going environment (no muscle heads, etc.)—may be rounding out new launching pad after a multi-month re-set. And the reason is simple: While the general fitness industry is seeing a slight loss of members, Planet Fitness is growing steadily via its franchise-heavy business model, mostly in the U.S. but beginning overseas as well (first Australian location is going up soon). Same-store sales have been positive for a whopping 51 quarters in a row (up 7.9% in Q3, three-quarters of which was driven by greater member fees), and there’s plenty of runway for growth, with hundreds of new locations already under contract (management believes it can double the store base over time). There are a few oddities in how the company reports numbers (it collects money for a national advertising fund, etc.), but this is a healthy, easy-to-understand business that should continue to grow nicely for many years to come. An accelerated share buyback program (swallowing up nearly 4% of all shares in one gulp) is also helping the cause.

Technical Analysis

PLNT had a big run from late 2017 to mid 2019, but it finally broke down in early July—from top to bottom, the stock corrected 31% and spent more than two months below its 40-week line, which likely wiped out most weak hands. But the action recently has been encouraging, with 10 weeks up in a row (a very bullish clue) and a low-volume dip last week. There’s some old overhead for PLNT to chew through, but if you’re game, you could start small here with add on decisive strength.

PLNT Weekly Chart

PLNT Daily Chart

PTC Therapeutics (PTCT)

www.ptcbio.com

Why the Strength

PTC Therapeutics is a biopharmaceutical company that focuses on orally administered, small-molecule therapeutics. These gene therapies can attack and mitigate rare diseases and cancers such as muscular dystrophy, spinal muscular atrophy, cystic fibrosis and cancer stem cells. The company is growing nicely today thanks to a couple of treatments for Duchenne muscular dystrophy (DMD), a genetic disorder that causes severe dystrophy and can hit kids as young as four. PTC’s products are basically the standard of care for DMD, and that’s helped revenues plow ahead, something that should continue into 2020 (analysts see the top line up 42% next year). Those products alone are expected to nearly double by 2023, but PTC also has other irons in the fire, too--the FDA recently granted priority review for a treatment that targets spinal muscular atrophy (SMA), which causes an ongoing loss of muscle movement in afflicted patients; management believes the treatment could bring $200 million in royalties to PTC when the drug reaches its full potential. (The firm should get a thumbs up or down from the FDA by May 24.) And the company has another new drug application likely coming in 2020 for a gene therapy treatment that goes after a couple of rare diseases. All told, with current and future products, the top brass believes the top line can reach $1.5 billion by 2023! Who knows if that comes true, but we like the combination of current solid growth and upside from approvals down the road.

Technical Analysis

After rising for two years through mid-2018, PCTC settled into a wide-but-consistent trading range between 27 and 48. But after a big drop in September, the stock has changed character, with a persistent advance into early December (including a push to new price highs) and, now a modest pullback during the past few sessions. We’re fine taking a stab at it around here.

PTCT Weekly Chart

PTCT Daily Chart

Reata Pharmaceuticals (RETA)

www.reatapharma.com/

Why the Strength

Clinical drug studies are fraught with risk, but when they go right, fortunes can be made. And that’s what happened recently with the shares of Reata Pharmaceuticals. In 2010, Reata sold the rights to bardoxolone methyl and omaveloxolone to AbbVie, but on October 10, the firm announced that it would reacquire them for $330 million. That move sent the stock higher, but the real fireworks followed a few days later--soon after the announced acquisition, Reata reported that patients receiving 48 weeks of omaveloxolone to treat Friedreich’s ataxia (a disease that causes a progressive loss of neurological function, afflicting in 1 in 50,000 people worldwide) showed a statistically significant improvement. And then, last month, similar results were announced for a 48-week Phase 3 clinical study of bardoxolone methyl treatment for Alport Syndrome, a disease with no approved therapies that can lead to chronic kidney failure, hearing loss and eye abnormalities. To give you a sense of the potential, chronic kidney disease forces 468,000 Americans onto dialysis, and 95% of the 114,000-plus people on the organ transplant waiting list need a kidney or liver. Since the results, Reata closed a financing round, resulting in about $505 million of gross proceeds that will be used to file applications for these drugs and to make payments to AbbVie. All in all, Reata looks like an interesting speculation.

Technical Analysis

Shares of RETA were pretty flat throughout most of the year, but began to rally after the drug repurchase was announced October 10 and then went vertical following the trial results. Shares eventually rallied to 215 or so and then, most impressively, RETA has calmed down—the stock has moved mostly sideways in recent weeks, despite a share offering, as the 50-day line is catching up. We’re OK nibbling here with a loose stop near 180.

RETA Weekly Chart

RETA Daily Chart

Shopify (SHOP)

shopify.com

Why the Strength

More than 174 million Americans shopped between Thanksgiving Day and Cyber Monday, and it’s estimated that they spent over $29 billion, up some 19% over last year. Online sales continue to make a dent in brick-and-mortar, rising to $7.4 billion on Black Friday, an increase of $1.2 billion from 2018, and an all-time record. And mobile online orders were up 35%, accounting for 65% of all transactions. Those numbers were supported by Shopify, who reported that over 6.1 million consumers in the U.S. made a purchase from a Shopify merchant on Black Friday, 49% higher than last year, and 70% of the transactions were on portable devices. The company has been big investors’ favorite way to play the mega-trend of helping small- and mid-sized businesses make the most of their online presence— Shopify is the e-commerce platform of choice for these clients, which has led to consistent and rapid growth in recent years. Yet there’s still a big untapped market, especially as it works up the food chain to larger outfits. Right now, the company serves some one million customers and has annual sales around $1.5 billion, and analysts are forecasting that Shopify could triple its market share in just five years. It remains a big idea, and now the stock is showing some life again.

Technical Analysis

Our biggest rub with SHOP is that it’s not early in the overall move—shares originally broke out near 50 in early 2017, and just this year, had a massive run through mid August. SHOP still has some old overhead to chew through, but it appears the buyers are coming back to the name, as the stock is up five weeks in a row, the last two on heady volume. If you’re game, you could start small on dips and look to add more on a powerful breakout.

SHOP Weekly Chart

SHOP Daily Chart

Skyworks Solutions (SWKS)

www.skyworksinc.com

Why the Strength

Skyworks Solutions is chip firm that looks to be uniquely positioned to capitalize on emerging 5G and Internet of Things opportunities. Skyworks’ global customer base includes OEMs, smartphone providers and baseband reference design partners. Like many peers, customer concentration is an issue—Apple made up around half of Skyworks’ 2019 business during the past year—but right now and over the next few quarters, that’s likely to be a good thing. As mentioned above, the big idea here is 5G, with a suite of products (including its Sky5 platform) that apply to both the end-user devices (smartphones) and the infrastructure supporting them. But the company also does a great business outside of mobile, with specialized wares that go into all things WiFi, IoT and the like. Encouragingly, even in a slow industry year, Skyworks’ margins were through the roof (free cash flow margins of nearly 30%!), and with the aforementioned catalysts management is thinking the industry (and the company in particular) is at an inflection point. Sales and earnings have been skidding for a while, but the valuation is reasonable (18 times earnings, 1.6% dividend yield), recent reports have nosed ahead of expectations and analysts think next year will bring a return to growth. We think earnings estimates (bottom line up 16% next year) are likely to prove conservative.

Technical Analysis

SWKS was stuck the mud as of a couple of months ago, buried below multi-year resistance in the 115 area, but there’s no doubt the buyers are now in control. After the early-October market bottom, the stock quickly marched up to the century mark, and while it wobbled a bit after earnings, it held its 25-day line and has gone bananas during the past few sessions. We think any dips from here will be buyable.

SWKS Weekly Chart

SWKS Daily Chart

Synaptics (SYNA)

synaptics.com

Why the Strength

Synaptics is a leader in touch, display and biometrics offerings that are integrated into mobile, PC and automotive products—basically, it’s a big beneficiary of the move to touch screens, fingerprint sensors, use of voice technology and the increasing popularity of smart homes. Business has skidded for a while now, but the stock is strong for a couple of reasons. First, Synaptics looks like a turnaround play: The firm hired a new CEO and CFO around mid-year (the new CEO held that same title at Finisar and has promised to re-focus the firm’s energies and investments). Indeed, sequential revenues popped nicely in the September quarter thanks to some OEM product launches, and the top brass sees further growth in the current quarter. The second reason for the recent strength came last week, when an analyst deducted that Synaptics may have won a contract to supply touch controller components for upcoming iPhones; Broadcom revealed the loss of a display-related contract from its largest customer at about the same time that Synaptics commented about a recent win. Long story short, business has bottomed out, the valuation (16 times earnings) is reasonable and investors are thinking there’s further upside surprises ahead.

Technical Analysis

From 102 back in 2015 to 26 in May 2019, it was a dreadful past few years for SYNA. But that’s all changed now, with a steady uptrend from June through October, a moonshot after earnings in November, and after a tight trading range, a big-volume push to higher highs. You could buy a little up here, though we’d prefer to get in on minor weakness in the days ahead.

SYNA Weekly Chart

SYNA 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.