Step by Step
Current Market Outlook
Last week, the market took another step on the road to health, as the intermediate-term trend of the major indexes began to turn up and many potential growth leaders showed strong accumulation. That’s enough for us to nudge up our Market Monitor another notch and, assuming you’ve been in a relatively defensive stance, you should begin to put some money to work. That said, we also think it’s best to go slow—the longer-term trend remains sideways-to-down, very few stocks have hit new highs (as many new lows as new highs on the Nasdaq today) and there’s still a bunch of overhead for most indexes, stocks and sectors to chew through. Still, despite the potential issues, we’re growing more positive as the market’s action has improved in recent weeks.
This week’s list is full of stocks from a variety of sectors that look poised to do well if the market’s recent strength continues. Our Top Pick is Workday (WDAY), which, while it could pull back a bit, is acting like a liquid leader of any sustained advance that develops.
| Stock Name | Price | ||
|---|---|---|---|
| Amedisys (AMED) | 174.06 | ||
| Delta Air Lines (DAL) | 54.28 | ||
| Glaukos Corp. (GKOS) | 67.84 | ||
| Omnicell (OMCL) | 81.03 | ||
| PRA Health Sciences Inc. (PRAH) | 96.08 | ||
| Tesla, Inc. (TSLA) | 818.87 | ||
| Trade Desk (TTD) | 468.02 | ||
| Veeva Systems (VEEV) | 180.23 | ||
| Workday (WDAY) | 194.88 | ||
| Xilinx (XLNX) | 134.50 |
Amedisys (AMED)
Why the Strength
The aging of the Baby Boomers means an increase in patients who need personal care, recovery and rehabilitation after operations or injuries, chronic disease management and hospice care. Amedisys operates 421 care centers in 34 states and has partnerships with more than 3,000 hospitals and 59,000 physicians nationwide. Growth isn’t rapid, but revenue has increased by double digits in three of the last four quarters, including a 12% bump in Q3. The company’s $340 million acquisition of Compassionate Care Hospice—which made Amedisys the third-largest hospice provider in the U.S.—is seen as a driver of future earnings growth, which is forecast to hit 62% this year. The company’s Q3 earnings report in late October showed a 23% increase in EBITDA, with $64.7 million in free cash flow and a 35% increase in revenue per episode in the Home Health division, which makes up 70% of revenue. Amedisys experienced 6% growth in Home Health same-store volume in Q3, with an 8% increase in Hospice and a 32% increase in billable hours in Personal Care. Institutional investors in the stock have increased from 348 in Q3 2017 to 498 now, which is a strong recommendation all on its own. There’s a good story behind Amedisys.
Technical Analysis
AMED has always been profitable, but the company hit a four-year stretch from 2010 through 2013 when weakening earnings pulled the stock from the mid-60s to 9. The stock has been volatile, including five sizable corrections since then, but has always gotten moving again without taking out its previous correction lows. AMED started a strong rally at 51 in February 2018 that topped at 126 in late August. The stock was dragged lower by the market in October, dipping to 97 on October 26, but rebounded after its October 30 earnings report on substantial volume, and last week, blasted through its old highs. You can either buy a little right here or wait for a pullback of a few points.
AMED Weekly Chart
AMED Daily Chart
Delta Air Lines (DAL)
Why the Strength
It wasn’t long ago that airlines were the butt of investment jokes, but years worth of decreasing competition (partially through mergers), increased demand from a healthy world economy and price hikes (charging for bags, etc.) have turned most into relative cash cows. And recently, the 35% plunge in oil prices increases the odds the group will continue to crank out excellent results in the quarters ahead. Delta is one of the big players in the sector, serving more than 300 destinations in 57 countries, and despite some fuel cost-related headwinds, the company has been cranking out solid results—in Q3, sales (up 8%) and earnings (up 17%) topped estimates thanks to higher capacity (3.9% more seat miles flown), higher revenue per mile (up 4%) and cost controls that kept non-fuel expenses flat from the prior year. And when that’s combined with what’s likely to be a big drop in fuel costs, the bottom line should continue to perk up next year. Analysts see the bottom line rising 16% in 2019, though we feel that’s very conservative unless the economy implodes. Back to the cash cow story, Delta is making sure to reward shareholders with that cash—the dividend has been raised regularly in recent years and now yields 2.4%, while the company regularly buys back stock (Q3’s share count was down 4.5% compared to last year). A big snapback in energy prices is a risk, but Delta looks like a leader in the newer uptrend in airline stocks.
Technical Analysis
Despite huge profits, DAL hasn’t done much for years—it basically went sideways from late 2016 through September of this year. But the action since then has been intriguing, with higher lows formed in late October and mid November, and last week, a pop to new 10-month price highs (and 15-month highs in its relative performance (RP) line). Dips of a point or two look buyable.
DAL Weekly Chart
DAL Daily Chart
Glaukos Corp. (GKOS)
Why the Strength
Glaukos is all about glaucoma, a big mass market (two million people in the U.S. alone and millions more overseas) that is still predominantly treated via cataract surgery. But starting a few years ago, Glaukos began selling a better solution—its iStent insert procedure puts in a micro stent during cataract surgery to decrease the pressure on the eye (15% decrease in one month after surgery, with that decline growing over time), which helped the company grow rapidly (sales from $21 million to $159 million in four years). Competition picked up, which caused growth to decelerate sharply starting in the middle of last year, but the main reason the stock is strong is because that competition has vanished—Novartis’ CyPass Micro-Stent was proven to be no more effective than cataract surgery alone, and the firm withdrew it from the market, causing Glaukos’ stock to explode higher in August as big investors think Glaukos will grab most of Novartis’ market share. Indeed, with the exit of the competition and a major new product (iStent Inject, an injectable two-stent therapy that has shown even better results than iStent alone), analysts see the top line likely to grow 30% or more in 2019. Earnings are still in the red as the company works to regain share, but the story is a solid one.
Technical Analysis
GKOS gapped up 40% in 18 times average volume when Novartis threw in the towel in August, but then came the market correction, which led the stock to slowly sag. But it really didn’t sag much—from a high of 70, GKOS tested support in the 54 to 56 area multiple times in October and November, held firm, and has now perked back up toward the top of its base. You can start a position here, with the idea of adding more on a push to new highs.
GKOS Weekly Chart
GKOS Daily Chart
Omnicell (OMCL)
Why the Strength
On the one hand, Omnicell is a medical equipment maker whose pharmacy automation machines can handle procurement, dispensing, packaging and billing of medications, providing clients automation of surgical, IV and anesthesia supplies. Omnicell’s technologies can reduce mistakes in dispensing and manage inventory, and management is reaching for a vision of a totally automated pharmacy. On the other hand, the company has a broader vision of moving into medication adherence for the 38 million Americans who take five or more medications daily. The company has a history of growing by acquisition, with the latest takeover being InPharmics (a pharmacy software company) in 2017. Omnicell’s products can lower costs, eliminate errors and improve patient outcomes, and the company has an excellent history of adoption of its systems into new markets. This improves both the 60% of revenue that comes from equipment sales and adds to the 40% of revenue from service and disposables that recurs. Earnings growth is back on track following a slight dip in 2016 and Q1 2017, with Q3 results showing 37% growth and a 12.6% after-tax profit margin, the best in years. With management aiming at expansion outside the U.S. and the Big Idea of the completely automated, self-contained pharmacy driving innovation, Omnicell looks like a good bet for future growth.
Technical Analysis
OMCL traded flat in a range centered on 50 in late 2017 and early 2018. But after a February dip on big volume, the stock found support at 42 and got moving again in June. OMCL ran to 73 in September, corrected to 59 with the market in October, then blasted off on huge volume on October 26 to regain its September highs. The stock broke out to new highs on November 28, though found some sellers after today’s open. A little patience should get you an opportunity to buy in under 75, with a stop in the upper 60s setting up a nice risk/reward situation.
OMCL Weekly Chart
OMCL Daily Chart
PRA Health Sciences Inc. (PRAH)
Why the Strength
Companies in the biotech and pharmaceutical industry have enormous potential, but also big risks if drug trials don’t go well or expected approvals are stalled. PRA Health Sciences is a clinical research organization (CRO) that provides research, development, clinical trial and design services to big drug companies, cutting their costs and saving clients a ton of time. The company can develop everything from niche drugs to blockbusters and manage clinical trials from Phase I through Phase IV. The company was named the International Clinical Research company of the year last May, and PRA Health is a way to gain participation in the pharmaceutical sector with less volatility. The Q3 earnings report on October 31 blew away analysts’ expectations with 23% revenue growth and 28% earnings growth, continuing the company’s string of double-digit growth in both revenue and EPS that dates back to 2015. Investors are currently interested in the company’s Center for Pediatric Clinical Development initiative that will focus on research in clinical trial design for very young patients. The emphasis will be on enhancing safety and efficacy data for pediatric drugs. With a thriving core business and an aggressive move into a new area, PRA Health Sciences looks like it has the juice to continue its success.
Technical Analysis
PRAH has had two major corrections so far this year—a dip from 96 to 79 in the first half of 2018 and a quick dip from 113 in September to 91 in late October. The stock got a boost from the company’s Q3 earnings report on October 31 (and the raised guidance that accompanied it), but had slipped back to 96 two weeks later when the pediatric initiative was announced, sparking a strong rally. PRAH ran from 93 on November 20 to 119 on December 3 on rising volume. Institutional investors are piling in, with sponsorship up from 499 a year ago to 627 at the end of October. With new all-time highs under its belt, PRAH may need a little break, but we’re OK starting a position here or (preferably) on dips.
PRAH Weekly Chart
PRAH Daily Chart
Tesla, Inc. (TSLA)
Why the Strength
When you get down to it, the market is a perception game—how investors (specifically institutional investors that buy stock in bulk) perceive a company’s future is a huge influence on whether the stock get going. For many years, perception of Tesla was so-so at best; at its lows in October, the stock had made no net progress in four and a half years (!) despite all the chatter surrounding the company. But the evidence is growing that, after years of sloppy execution, Tesla has turned the corner, and investor perception is on the rise—Q3’s sales and earnings easily topped expectations, with gross margins north of 20%, free cash flow well above net income and deliveries of 56,000 vehicles, led by the newer Model 3, which was the top grossing car in the U.S. during the quarter! And reports suggest the firm continues to pull the right levers—last week, Tesla reportedly hit a milestone by making 1,000 Model 3’s in a single day, with CEO Elon Musk telling employees to focus on cost efficiencies. Analyst’s estimates for next year have basically doubled since the Q3 report, with $6.51 now expected (EBITDA is likely to rise 70% or so), though even that can prove conservative if the firm continues to execute. It’s not the undiscovered stock it was back in 2013, but after a few years in the market’s wilderness, Tesla looks ready for another run if the market cooperates.
Technical Analysis
Our biggest thought with TSLA is that it’s formed a very, very solid bottom near 250, with shares holding that level many times since the spring and with a couple of huge shots of accumulation in that area, too. More recently, after spiking from that 250 support to 360, TSLA has basically gone straight sideways on low volume, an encouraging sign considering the market’s wackiness. The stock could pull back a bit as it tests resistance in the 360-370 area, but we’re OK buying some here or on dips, with the idea of adding on a decisive push above 370.
TSLA Weekly Chart
TSLA Daily Chart
Trade Desk (TTD)
Why the Strength
Trade Desk is a name we’ve watched on and off for the past year, and now it’s shaping up a nice launching pad, and for good reason—Trade Desk’s online advertising platform appears to be taking the industry by storm, allowing ad buyers to manage integrated campaigns across a range of channels (mobile, audio, social, display, connected TV). The platform is targeted solely at buyers (usually ad agencies or other tech companies) and is heavily data-driven, giving real-time analytics and allowing clients to access Trade Desk’s unique data management platform to make better-informed buys. As you can see in the table below, this “programmatic” approach to ad buying has taken off, and Trade Desk is growing at twice the rate of its competition—sales and earnings have boomed and crushed expectations in recent quarters (Trade Desk gets a platform fee from customers depending on their ad spend), and the future looks bright as more big advertisers sign up (Q3 saw them grab three of the top 200 global ad buyers) and those clients stick around (95%-plus retention rate for 19 straight quarters) and buy more ads (of the top 200 brands that had come onboard by 2017, their ad spending on Trade Desk’s platform had grown five-fold from the prior year!). Big investors are certainly giving the firm a thumbs up, as the number of funds owning shares leapt from 281 in March to 425 in October. We’re big fans of this story.
Technical Analysis
TTD’s coming-out party came in May of this year, when the stock catapulted on giant volume for two straight weeks after earnings. The stock eventually soared as high as 162 before the market took it down 35% in the October/November wipeout. But during that drop, TTD found support in the 105-110 area for four straight weeks, and then surged back into the middle of its base last week. Shares could still need some time to consolidate, but we’re OK starting a small position here.
TTD Weekly Chart
TTD Daily Chart
Veeva Systems (VEEV)
Why the Strength
Veeva’s bread and butter business is selling cloud-based customer relationship management (CRM) and enterprise content management software tailored to the specific needs of the life sciences industry. It also generates around 21% of revenue from professional services. Solutions include data warehousing, a suite to facilitate clinical trials, industry-specific sales and marketing tools and a smattering of specialty services. It sounds like a niche market, but Veeva has over 650 customers and targets roughly $9 billion of client expenditures today. And that target market should grow significantly given that the life sciences industry currently spends $44 billion on IT, and because the company is expanding its addressable market into other regulated industries and content management use cases through its Vault Platform. Vault posted subscription revenue growth of 52% in the just-reported third quarter of fiscal 2019 (released last Wednesday). Big wins included a top 20 pharma company and a third “top 7” CRO that will standardize on the product. All in, Veeva’s Q3 revenue was up 27% (versus 25% expected) and EPS of $0.45 beat by $0.07. Management’s guidance for fiscal 2020 revenue growth (17.4% at the mid-point) was also higher than consensus, driven by steady, profitable growth in the CRM area and further rapid gains from Vault. Health care tends to be strong late in the economic cycle and Veeva is a specialty asset growing at a good clip with expanding margins. With that backdrop it’s easy to make a case for the stock’s next move to be higher.
Technical Analysis
After sluggish performance in the back half of 2017, VEEV’s 2018 performance has been more typical of a secular growth stock. Shares broke out in late-February and kept trucking higher, eventually reaching 90 by mid-August. A gap up over 100 and modest follow-on strength took shares to 109 in September, but then market forces took over and the stock was back below 90 by the end of October. The stock chopped around in November, mostly following the market’s gyrations, but after tagging its 200-day line it’s performed well, rallying back toward the higher end of its base. We’re OK starting a position here with the idea of buying more if VEEV moves higher.
VEEV Weekly Chart
VEEV Daily Chart
Workday (WDAY)
Why the Strength
With annual revenue approaching $3 billion next fiscal year and a market cap surpassing $30 billion today, Workday is one of the big dogs in the world of cloud application stocks. It’s been attracting attention from analysts because several long-term growth drivers are starting to bear fruit. First, Workday plays in a big sandbox, with a nearly $70 billion addressable market selling enterprise solutions for finance, human capital management (HCM), payroll and business analytics. Second, with roughly half of revenue recurring and a large existing customer base, it’s about as defensive as a growth stock can get, with a lot of dependability. And third, the company is growing quickly by expanding its portfolio of solutions and snagging customers from legacy vendors, including SAP and Oracle. Last Thursday’s Q3 fiscal 2019 earnings report—one of the most impressive Workday has reported yet—put the bull case scenario back in focus. Revenue was up 34% (beating estimates by $20 million) while EPS of $0.31 demolished expectations of $0.14. Analysts are impressed with growth in the customer base, including both Fortune 500 and mid-market customers, and by continued growth internationally (up 47%) and Financials Management (up over 50%). Implied guidance above consensus from a conservative management team is another bullish sign. Workday could be a liquid leader should the market’s recent rally continue.
Technical Analysis
WDAY hit an all-time high of 140 early in 2018 and built a tidy five-month base, leading to a powerful breakout and rally to 157 in early September. But then the market got in the way—the breakout failed, with the stock sinking as low as 118 in November. That said, the damage was reasonable (that low matched up with WDAY’s summer low), and WDAY has shown unusual strength since, with the stock ripping to 145 just six days after its low and gapping up to new highs after earnings last week. You could nibble here if you really want in, but we’ll set our buy range a bit lower, thinking a short-term dip is possible.
WDAY Weekly Chart
WDAY Daily Chart
Xilinx (XLNX)
Why the Strength
Xilinx has bucked the weakness in the broad semiconductor group because innovations are making it more of a platform company than simply a chip provider. The firm’s successes, including the programmable system on a chip (SoC) and field-programmable gate array (FPGA), are still paying dividends. And a new classification of processor, called Adaptive Compute Acceleration Platform (ACAP), has positioned Xilinx to compete better against Nvidia and Intel. Central to the growth strategy is the firm’s emphasis on data center-related sales (compute, storage and networking), which accounts for just 5% of revenue now but should be closer to 10% in fiscal year 2021. Xilinx is also strong in the communications space, especially 5G, and continues to enjoy secular growth in autos (ADAS and autonomous), the later of which drives 7% of sales right now. These three end-markets are less cyclical than consumer and PC markets, and with Xilinx seeking to grab market share with specialty solutions, the long-term growth story looks attractive. M&A rumors are also swirling, though Xilinx is more likely to be a buyer than a seller from what we’ve read. There hasn’t been a big change in the growth outlook since Xilinx beat expectations when it reported Q2 fiscal 2019 results back in October (revenue was up 9%). Estimates call for mundane growth starting early next year (10%-ish), though we feel that’s conservative given Xilinx’s recent earnings beats.
Technical Analysis
Like many semiconductor stocks XLNX has experienced some relatively big price swings over the last two years, but the trend has either been sideways or higher. For the first six months of 2018, shares bounced around between 62 and 77. The stock appeared ready to breakout in September, but October’s market weakness pulled XLNX back below 70 for a brief spell. The earnings report on October 24 lit a fire under the stock and it gapped back up near 80, then ran to 87 over the next week. A normal-looking consolidation phase in November saw XLNX trade between 82.5 and 90. Last week the stock broke out again, suggesting the rally still has legs. Try to buy on dips.
XLNX Weekly Chart
XLNX 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.
