December 17, 2018
The market continues to trend down, with most major indexes sinking to new correction lows today. We are seeing some signs of investors throwing in the towel (usually a good indication), and we are still monitoring a good number of growth-oriented stocks that are etching higher lows over time, even as the market sinks.
Those are rays of light, but with the trends of most stocks, sectors and indexes down, we remain in a defensive stance—cash should be your largest holding, and if you buy, new positions should be kept much smaller than normal (no more than half your normal size, dollar-wise) until the bulls can make a stand.
Lots of Negativity, but No Buying Yet
Current Market Outlook
The downtrend continues, with the major indexes extending their latest leg lower, with most reaching new lows this morning and some (like the S&P 600 SmallCap) falling more than 20% from their all-time peaks. We continue to keep a very open mind, especially given the horrific sentiment environment that’s emerged—various measures tell us investors are beginning to throw in the towel, which, combined with the fact that we still see many resilient growth stocks means it wouldn’t shock us to see another rally attempt unfold. But that’s speculation at this point—with the trends pointed down for the market and most stocks and sectors, you should remain in a defensive stance, with most of your portfolio in cash and, if you buy, buying just small positions.
This week’s list is another that’s full of stocks we think can do very well if the market can get going. Our Top Pick is Tableau Software (DATA), one of the strongest growth stocks in the market today as big investors buy into its transition to the cloud.
|Cree, Inc. (CREE)||67.96|
|Tableau Software (DATA)||126.42|
Why the Strength
Ciena is a well-managed networker, and compared to its peers, and actually well diversified, too, with its hands in many fast-growing cookie jars. While the details of its products can give you an ice cream headache, the big idea is simpler—after many years of investments, Ciena is a leading provider of solutions to a variety of these lucrative end markets, including webscale data center, 5G, fiber deep (putting fiber closer to users to delivery a better experience, which is key for over-the-top services and cord cutters), mobile and IoT, with consistently growing market share. And with growth in these markets picking up and Ciena executing flawlessly, the firm’s best days are ahead of it—sales and earnings growth have begun to accelerate, and last week’s quarterly report easily topped expectations. Just as important to us given networking stocks’ on-again, off-again history, Ciena upped its three-year growth outlook to 7%-ish revenue growth and 20% earnings growth (up from 15% previously), though Wall Street is guessing the company is being conservative per usual—analysts see the firm’s earnings up 35% this fiscal year (which just started in November) and another 25% next year. Ciena appears to be a top play in a new leading theme (5G and webscale infrastructure) during the next market upturn.
CIEN broke out of a three-year base on earnings in August, and has held up very well since, including a new high in November and holding its 50-day line even during the rough market times. Last week, CIEN poked out to new highs after earnings and, while another pullback could come, shares look like they want to head higher once the pressure comes off the market. You can nibble here or keep the stock near the top of your watch list.
CIEN Weekly Chart
CIEN Daily Chart
Cree, Inc. (CREE)
Why the Strength
Cree specializes in LED lighting systems, LED bulbs and semiconductor solutions for power and radio-frequency (RF) applications. Its products are found in homes and businesses, electronic signs, electrical vehicles, and renewable energy, radar and satellite communication applications. Despite the fact that semiconductor stocks have been lagging for about a year, Cree has been doing relatively well since last September. The reason is that it brought in a new CEO (former Freescale Semiconductor CEO, Gregg Lowe) and his turnaround strategy meant splitting the company into three segments: Lighting, LED products and Wolfspeed (power and RF semiconductors). Each of these segments generated roughly one-third of revenue in the last quarter but growth rates are dramatically different. The segmentation seems to have helped internal execution as well as market awareness of Cree’s improved operations. Wolfspeed had been capacity constrained but Q1 fiscal 2019 results (reported in October) showed the segment growing by an impressive 93%, while LED Products grew by just 2% and Lighting shrank by 10%. With Wolfspeed also bringing in 86% of Cree’s total gross profit that’s obviously the main driver and where analysts are focusing their attention. The segment is growing in electric vehicles, solar and 5G and factors heavily into management’s company-wide gross margin target of 40% in fiscal 2022 (versus 27% in fiscal 2018). There are plenty of potential potholes in the road ahead (China trade tensions, auto market uncertainty, etc.) but Cree has earned its slot atop the list of attractive semiconductor stocks right now.
CREE was in the dumps for years, then shares began to rally after the new CEO came in last September. The stock broke out to multi-year highs around 34 following the release of fiscal Q1 fiscal 2018 results in October 2017 and didn’t top out until they hit 52 in August. The selloff in November and October was swift and painful as shares didn’t find support until they hit 34. But since its early-October low, CREE has bounced nicely and actually shown some decent tightness on its weekly chart, which is a constructive sign. We’re OK buying a bit on the recent dip, with a stop in the upper 30s if you want to get started.
CREE Weekly Chart
CREE Daily Chart
Why the Strength
The big picture reason for CyberArk’s resilience is that cybersecurity is one of the most resilient areas of software spending due to the strategic importance of protecting online assets. CyberArk excels at protecting super-sensitive files and IT data, even if a hacker gets past a company’s firewall. The company has evolved from a niche solution provider to the market leader in the strategic security sector of Privileged Access Management (PAM). With roughly 30% market share in a billion dollar plus market (that could quickly evolve to a $10 billion market) there’s a lot of room for CyberArk to grow. Aside from the big picture potential, the stock’s been performing well because investments in the marketing and sales teams and a tweaked go-to-market strategy has resulted in a simpler pricing model, which in tern has helped the company expand geographically and across product lines. In Q3 (reported in the beginning of November) it grew by over 50% in five different verticals and delivered 29% license revenue growth and total revenue growth of 31% (to $84 million). EPS of $0.48 also came in well ahead of expectations of $0.27. Earnings estimates for next year (up 10%) look conservative to us given CyberArk’s history of topping estimates by a mile.
CYBR took off in February 2018 and, with only one major pullback along the way, zoomed just over 80 in early October. Then came the market collapse—while the stock has been all over the place, it continues to demonstrate resiliency, with a brief pop to new highs in early November, repeated support in the 66 area and a higher low today (even as the indexes dipped to new lows this morning). If you want in, keep the position very small given the volatility.
CYBR Weekly Chart
CYBR Daily Chart
Why the Strength
Franco-Nevada touts itself as “The Gold Investment that Works,” and this gold royalty and streaming company has 377 assets that are mostly (210) precious metals-oriented, with other mining assets (84) and oil & gas (83) rounding out its portfolio. The company is well diversified by geography, commodity, revenue type and stage of project, although it aims to get 80% of its revenue from precious metals like gold, silver and platinum group metals. The company enjoyed a 38% bump in revenue in 2016, which slowed to 11% growth in 2017. During the first three quarters of 2018, revenue has been essentially flat. Earnings were up 36% in Q1 and 16% in Q2, but slowed by 3% in Q3. Franco-Nevada doesn’t operate mines or develop products, rather its business model is to own royalty rights and streaming rights that give it an advantage over gold ETFs (ability to leverage to gold prices and generate dividend yield) and over mine operators (no capital costs and no operating costs). And with five straight quarters of after-tax profit margins in excess of 30% and a dividend that yields 1.3%, the company’s superiority seems quite plausible. Analysts see earnings growing by 9% this year and 9% in 2019, but that can change in a hurry based on metals prices. If you’re looking for a way to get some gold exposure into your portfolio, Franco-Nevada looks like a good choice.
FNV has been in a long-term uptrend, but with considerable shifts in fortune along the way. The stock traded flat for three year from 2013 through 2015, then spiked from 40 to 77 in the first half of 2016. A pullback to 58 in late 2016 was followed by a rally to 84 in late November 2017. FNV slipped to 57 again last September, but has now rallied strongly to above 70 again, making it far stronger than most gold stocks. Look to buy in on dips toward 70 and use a stop around 64 for protection.
FNV Weekly Chart
FNV Daily Chart
Why the Strength
You don’t expect to see a Bull Market stock of sorts show up in Top Ten in this environment, but MarketAxess looks like a special situation. The firm operates the largest institutional marketplace to trade credit products (mostly emerging markets, U.S. high grade, U.S. high yield and Eurobonds), promoting price transparency and liquidity to securities that historically didn’t have much to over 1,400 institutional investor and dealers. While growth here has never been out of this world (usually upper-teens earnings and cash flow), it’s a great business (after-tax profit margins hovering around 40%!) and the trend toward greater electronic and one-on-one trading makes it likely growth will continue for many years to come. In Q3, sales and earnings rose 6% and 18% (respectively), while total trading volume lifted 11% (though the firm’s Open Trading platform, which allows customers to trade directly with each other, saw volume grow 58%, accounting for 23% of total volume), and management is optimistic it can continue to gain market share to drive growth. The valuation (49 times trailing earnings) is a worry given the company’s growth rate, but there’s no question there are some long-term trends that look enticing.
MKTX was in a long, smooth uptrend through March of last year, but ran out of steam near 200. And since then, it’s basically been range bound, reaching as high as 230 and falling as low as 172 a few times. But, ironically, the stock has been acting better since the market topped out in early October—MKTX has been riding its 25-day line higher since then, with an earnings surge in late October and a test of its old high near 230 last week. If you want in, dips of a few points would be tempting.
MKTX Weekly Chart
MKTX Daily Chart
Why the Strength
After two and a half months of a downtrending market, there aren’t many big-cap stocks that are poised to be liquid leaders of any market advance that gets going. But PayPal is one of them, with institutions building positions thanks to expectations of excellent, very dependable growth for years to come. While there are competitors, PayPal is the #1 play in the digital payment boom by far, with its various services—its namesake offering, money-transferring services like Venmo and Xoom, and more—having a massive 254 million active accounts (including 20 million merchants) that average a huge 36.5 payments per quarter (up 10% from a year ago) and cranked out a whopping $143 billion in total payment volume in Q3 alone (up 25%). Moreover, as PayPal continues to add services and expand (it just launched Xoom in Canada this month, which can be used to pay bills, send money or reload phones in 130 countries), there’s little reason to think growth won’t continue—it’s hard to see a modest economic slowdown standing in the way of this mega-movement. All told, investment-wise, PayPal looks a lot like Visa and MasterCard five or 10 years ago, as it leads the next wave of the payment revolution that should result in 20%-ish earnings and free cash flow growth for many years. It’s not going to be a glamour stock, but the potential here remains large.
PYPL has a few attractive things in its chart. First, the dip in recent months likely was enough to wipe out most weak hands; as of late November, the stock had made no net progress for about a year. Second, the stock actually hit its correction low in early October, and found huge-volume support soon after. And third, PYPL’s relative performance (RP) line is at a new high, a very positive sign. You could nibble here or watch it for an eventual break out above 92 or so.
PYPL Weekly Chart
PYPL Daily Chart
Why the Strength
Pinduoduo is a young Chinese company whose e-commerce platforms combine online bargain shopping with social interaction. The company has modeled its platform into a “virtual bazaar” where shoppers can browse value-for-money merchandise and share their purchases with online friends, creating a “social shopping” experience. Incorporated just in 2015, Pinduoduo enjoyed 266% revenue growth in 2017 and the growth through the first three quarters of 2018 is even faster, with revenues nearing a $2 billion annual clip, up from just $266 million last year. Analysts see 120% projected revenue growth and the company turning profitable in 2019. That said, there’s also considerable skepticism about the company, with some analysts objecting to paper-thin gross margins and high operating expenses. There has even been an attack by a short-selling specialist based on allegations that the company’s product mix includes counterfeit goods and potentially dangerous products. But none of these objections have found much traction with investors, who have kept Pinduoduo’s stock holding up well during the two-and-a-half month market meltdown in both U.S. stocks and Chinese ADRs. It’s an intriguing new name to keep an eye on.
PDD came public in late July in the high 20s, then dipped to 17 in late August. A rally to 30 on September 13 gave way to another correction, this time to 17 in late October. PDD rallied back to 25 in early December, and is consolidating sideways around 22 today. The chart looks like two bowl-shaped corrections and recoveries with highs in the high 20s and support around 17. With emerging market stocks showing signs of stabilizing, PDD looks like an interesting speculative play if you want to take a tiny bite here, although the safer course would be to wait and see if it can break out above 25 on good volume.
PDD Weekly Chart
PDD Daily Chart
Tableau Software (DATA)
Why the Strength
Tableau sells business intelligence (BI) and big data software solutions that let users engage with their data, ask questions, solve problems and create value. Its five main solutions are sold via both an on-premise and subscription delivery basis and a transition to the cloud is one of the reasons the stock’s been doing well. Another reason is steady growth as enterprises are clearly yearning for insights into the operational datasets that tell them how their business is doing. With easy-to-use and powerful, enterprise-scale solutions, Tableau is better positioned than ever to land big deals with several thousand potential users. A change in accounting standards (to ASC 606) and the transition to subscriptions makes revenue trends a little messy to analyze, but in Q3 analysts were focused on the 45% growth in annual recurring revenue and 160% growth in subscription annual recurring revenue. The punchline was 11.5% revenue growth (to $240 million) and EPS of $0.07 (beat by $0.18). Guidance for 20% revenue growth in 2019 is (with more rapid underlying subscription trends) should keep big investors interested, especially as the trends suggest Tableau has potential to beat traditional players (IBM, Cognos, SAP, Microsoft, Oracle, etc.) and be the first to drive widespread adoption of BI solutions.
DATA’s been doing well since the beginning of 2017. There have been a few normal-looking corrections along the way but the stock has remained above its 200-day line and has mostly made a long series of higher highs and higher lows. During the market correction, you could hardly ask for better action—DATA fell to 95 in October, hit a higher low of 100 in November and soared to new highs above 130 before today’s drop. You can consider picking up a few shares here or on dips, with a stop near 110.
DATA Weekly Chart
DATA Daily Chart
Why the Strength
If a company, big or small, wants to automate and simplify communications to customers, clients or coworkers, Twilio and its well-rounded, customizable and relatively easy-to-use communications platform is fast becoming the go-to choice. Coca Cola Enterprises uses Twilio to rapidly dispatch service technicians; Airbnb uses it to automatically text rental hosts information on potential guests, including dates and the price of a stay; the Red Cross of Chicago automatically sends texts to volunteers in an area with pertinent info about a disaster; Trulia uses Twilio to power its click-to-call app so potential buyers can hook up with an agent right quick; EMC uses the platform to quickly send texts to employees when an IT service goes down; and Twilio’s newer Flex offering (cloud-based, flexible call center application) has already signed up some big customers such as Lyft, while its new Pay app allows developers to process payments over the phone without reading a card number to a rep. The firm exited September with 61,153 active customers (up 32% from a year ago), but it’s getting more big clients (it inked Fortune 500 financial services and medical testing outfits in Q3), helping revenue per customer rise 27%. All told, revenue growth is accelerating in a big way, earnings have leapt into the black and we think this story is very, very big.
TWLO continues to act as if it wants to be among the top glamour stocks in the market once the bulls retake control. Shares did pull back 35% to its October low, but gapped to new highs on earnings in early November, etched a higher low later that month and actually eked out new highs near 100 last week before market weakness pulled it back in. We’re OK nibbling here or on dips if you don’t own any, or just keeping it near the top of your watch list.
TWLO Weekly Chart
TWLO Daily Chart
Why the Strength
Twitter, the dominant U.S. company in short, real-time messages, is making its twelfth appearance in today’s Cabot Top Ten Trader. The company seems to have a consistent flow of criticism about its failure to control fake accounts and fake news, but looking past that to its actual fundamentals shows a potential turnaround in effect. The company’s most-recent quarterly report showed a loss of four million in its monthly active users (MAU), which now amount to 326 million, down from 335 million in Q2. But the report also showed a 29% jump in revenue and a whopping 110% hike in earnings (the third straight quarter with triple-digit EPS growth). After-tax profit margins also topped 20% for the first time. Total revenue came in at $758 million, with $650 million of that coming from advertising revenue and the rest from data licensing and other revenue. Twitter’s stock took a massive hit in late July when its quarterly report revealed a dip in MAU, and the stock continued lower for a while, but a better-than-expected Q3 report in late October eased fears, and the stock is acting like better times are ahead. Analysts see next year’s earnings up only 11%, but given the accelerating revenue trends and the fact that Q3’s earnings beat estimates by 50%, we’re guessing that 11% figure is low.
TWTR plunged from 43 to 31 in July on huge volume, and hacked lower to 26 in October. The recovery began with the great Q3 earnings report in late October, when the stock gapped up and ran to 35 by Halloween. Then, encouragingly, the stock built a brief, tidy base, consolidating between 30 and 35 through early December, poking to new highs on good volume last week before being yanked back down by the market. We’re OK nibbling here, or waiting for a push above 37.5 (and a healthier market).
TWTR Weekly Chart
TWTR 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.
|First||Stock||Symbol||Top Pick||Original Buy Range||Price as of December 17, 2018|
|12/10/18||Kirkland Lake Gold||KL||22-23.5||24|
|None this week|
|None this week|