December 30, 2019

Same Story: Strong Bull Market with Short-Term Risks

Current Market Outlook

As the year winds to a close, nothing has changed with the market’s overall stance—big picture, it’s a bull market, and numerous factors tell us that the uptrend has farther to go; the odds favor higher prices when looking months down the road. Shorter-term, though, there are also many signs that tell us risk is elevated—that doesn’t necessarily mean a huge correction is on tap, but we think it’s safe to say that the next few weeks are likely to be more challenging than the past few weeks, with potholes, rotation and news-driven moves possible. As we’ve been writing, that’s no reason to bail out, but being discerning on the buy side (good entry points, starting small, etc.) and booking some partial profits makes sense.

Our last list of 2019 is a broad mix of strong stocks, including turnarounds, recent breakouts and fresh setups. Our Top Pick is Crocs (CROX), which is benefiting from some rotation into retail titles and a string of solid quarterly reports.

Bed Bath & Beyond (BBBY)

www.bedbathandbeyond.com

Why the Strength

All the numbers are not yet in, but it looks like the holiday season was good for retailers, with total sales (ex-automobiles) up 3.4% between Nov 1 and Dec 24, with e-commerce being the big winner, with revenues rising by 18.8% (now accounting for 14.6% of total retail sales). And in a surprise to investors, Bed Bath & Beyond, which has been hard on its luck for years, turned out to be one of the top five retailers of the season. The company’s turnaround looks strong and can be credited to new CEO and former Target Merchandising Manager Mark Tritton. At Target, Tritton launched 30 proprietary brands, and that is one of his stated goals for Bed Bath & Beyond, along with a refreshed store look, technology upgrades, management incentives, life-stage marketing and branding, sourcing cost optimization and workforce reduction. And that reduction isn’t just average Joe’s and Jane’s—last week, in fact, Tritton made a big move by sweeping six top executives from office, including the chief merchandising officer, chief marketing officer, chief digital officer and chief legal officer! Those departures follow the ousting of the former CEO (initiated by hedge fund activists and leading to Tritton’s hiring) BB&B co-founders Warren Eisenberg and Len Feinstein. Next, the strategy will turn to growth, with Tritton building a new team as he plans to mirror his success at Target. Recent numbers have been rough, but Q3 results easily topped expectations and next year’s earnings are expected to stabilize—leaving the stock trading at just nine times earnings and a dividend yield of 3.9%.

Technical Analysis

Shares of BBBY were in the doghouse from 2015 through the middle of this year. But since bottoming in August, the stock has turned strong and even the longer-term trend appears to now be turning up. More recently, the stock did retreat to its 50-day line in November but has since surged to multi-month highs, including last week’s housecleaning-induced rally on big volume. A dip of a point or so should market a solid entry point.

BBBY Weekly Chart

BBBY Daily Chart

Cardlytics (CDLX)

cardlytics.com

Why the Strength

Big brother is alive and well, as we can tell by all the targeted ads that pop up when we search online and by the coupons we get for our frequent purchases at the grocery store. Data collection and analysis for a relatively new field called purchase intelligence is becoming a bigger deal every day, and Cardlytics is proving itself a master at this strategy. The company partners with financial institutions to run their banking rewards programs, which gives it access to customers’ debits, credit, bill pay and automated clearing house information ... which is then shared with its marketing customers to help them develop online and mobile rewards programs. That’s why, when you log into your banking account, you see all those personalized offers! The company’s growth has been terrific, with revenues up 63% in the most recent quarter and an estimated 33% increase next year. Look for more expansion with its recent appointment of Michael Akkerman, Pinterest’s former Global Head of Strategic Partnerships, as its Chief Product and Strategy Officer. While at Pinterest, Akkerman grew its Pinterest Partners program from only a handful of partners in 2015 to over 80 in 2019 while drastically increasing revenues, too. CDLX’s bottom line eked into the black in Q3 (though breakeven-ish results are more likely going forward) and big investors are learning the story (182 funds owned shares at the end of Q3, up from 104 a year ago). We like the overall story here and see plenty of potential if management makes the right moves.

Technical Analysis

Most software names are (at best) still base-building, but CDLX has been in a solid uptrend for months—a good sign, though like most stocks, it could be ready for a shakeout, too. The most recent bullish clue came on earnings in November, when shares bolted ahead on record volume, and while it’s been a bit choppy since, it’s clear the trend is up. If you’re game, aim for pullbacks and use a stop near the 50-day line.

CDLX Weekly Chart

CDLX Daily Chart

Carvana (CVNA)

carvana.com

Why the Strength

On the surface, Carvana doesn’t seem to have a terribly unique story—it sells used cars online, which doesn’t appear to be much different than thousands of dealerships across the country. But this is far more than just a dealership with a so-so website: Carvana’s website is feature-rich, with 360 degree views of every car; the firm puts its cars through a 150-point inspection and guarantees that they’ve never been in a reported accident and have no frame damage; it offers a seven-day test drive period after purchase to entice hesitant buyers; offers a huge selection, currently around 15,000 cars; and has a nationwide setup with many inspection and reconditioning facilities that often results in next-day delivery. (It also offers plenty of financing options and, on the sell side, makes it easy to sell them your car—I did it earlier this year!) It’s a gigantic market (north of $750 billion per year), and Carvana continues to move fast to grab a larger share of the pie—it’s currently in 146 markets in the U.S. (up from 85 a year ago), and growth remains astounding, with revenues (up 105% in Q3) and retail units sold (up 83%) regularly topping expectations. (There’s no official 2020 forecast from management yet, but the firm is already making preparations for another year of a big growth.) The bottom line is deep in the red, which isn’t ideal, but many sub-metrics are pointing in the right direction (gross profit per car sold was $2,996 in Q3, up 30% from a year ago) and management has a goal of selling two million vehicles per year (up from 155,000 during the past four quarters). This remains a big idea.

Technical Analysis

CVNA set up three bases starting in September of last year, with the first very deep (60%!), the next briefly poking out to new highs before pulling in, and the third (September through mid November) etching during a tough time for growth stocks. But CVNA finally broke out for good after that, and while it remains choppy, the stock is perched just south of all-time highs. You can start a position here or on dips and look to average up.

CVNA Weekly Chart

CVNA Daily Chart

Crocs (CROX)

crocs.com

Why the Strength

Crocs is one of the 10 largest non-athletic global footwear brands in the world. The stock is strong today because there’s a big turnaround underway for these iconic clogs, flip flops and more as Crocs continues their focus on reducing costs, expanding gross margins and growing revenue through e-commerce, rightsizing current retail stores and Asian expansion. All of the firm’s moves are working, which is why revenue growth has started to accelerate (the late-October quarterly report easily topped estimates, with currency-neutral revenues rising 22%, leading to a good-sized hike in guidance) and 2020 should see a far faster pace of expansion compared to recent years. Encouragingly, the company’s sandals and clogs are each achieving double-digit revenue growth, and new products are meeting with good success, including Crocs’ LiteRide brand and their Reviva collection that features molded air bubbles that provide comfort and a massaging and bounce effect. In 2019, Crocs brands advanced to number seven among all teens as a preferred footwear brand, up from number 27 two years ago. It’s not changing the world, but Crocs is executing at a high level and further estimate-topping results seem likely.

Technical Analysis

CROX was looking awful in the middle of this year, but since then, the stock has put on a great show; in fact, it was one of the first names to lift to new highs after the market’s bottom in early October. Shares did consolidate in November and early October, but after a test of the 50-day line, buyers have flexed their muscles again. Look for dips of a point or two to get started.

CROX Weekly Chart

CROX Daily Chart

Floor & Décor (FND)

flooranddecor.com

Why the Strength

Floor & Décor has always had a great story—the company looks like one of the best cookie cutter stories in construction-related retail, operating large (75,000 square feet on average) warehouse-style locations that specialize in hard flooring (tile, wood, stone, laminate and the like). Of course, other outlets sell similar products, but Floor & Décor has a far better selection (1,450 products actually in stock compared to at most a hundred or two at competitors) due to its store size, making it a favorite among professional buyers (which account for 60% of revenue). It also doesn’t hurt that hard flooring in general is gaining share away from carpets (55% of flooring revenues now vs. 44% six years ago). The firm has been growing for years, thanks in part to a rapid store expansion plan (about 20% annually), but the on-again, off-again housing market has crimped perception. Now, though, with signs that the economy and the housing are set to pick up steam in 2020, analysts see bottom line earnings growth accelerating next year (up 22%) and the stock is setting up a nice launching pad. But what we like is that this isn’t just a cyclical play—longer-term, management believes there’s potential for 400 stores in the U.S. (up from 113 at the end of September), and continued rapid store growth along with healthy same-store sales (up 4.6% in Q3) mean there’s the potential for many years of solid earnings expansion.

Technical Analysis

FND peaked back in April 2018 and imploded into year-end before rallying with the market. Since then, it’s etched two bases—the first (April through August) looked OK, but the breakout failed as the market wobbled. But the current launching pad looks tasty, with some bullish clues (two biggest volume weeks were up; six weeks up in a row) and a little tightness recently. You could nibble here and look to buy more on a decisive push above 53, or just wait for the breakout before entering.

FND Weekly Chart

FND Daily Chart

GSX Techedu (GSX)

gsx.investorroom.com

Why the Strength

We wrote about GSX (one of the top Chinese online education firms) a few weeks ago; we missed our buy price but are taking another swing at it this week. The company provides technology-driven, after-school tutoring services, offering primary- and secondary-grade classes, as well as foreign language, professional and interest courses. At this point, GSX—after less than a year as a public company—is the third-largest K-12 large-class provider in China. Its platform is based on big data analytics and proprietary databases and algorithms that utilize artificial intelligence to maximize efficiency and improve teaching delivery and the student learning experience. Whatever it’s doing, it’s working: Revenues in its latest quarter rose a whopping 441% to $78 million, and there’s more from where that came from as GSX is in a big and growing market—online education in China is forecasted to grow to $62 billion in 2020, and analysts see GSX’s top line booming another 159% in 2020 while earnings (which are just north of breakeven) power ahead. Of course, the stock isn’t without risks—just 23 funds currently own shares and the stock is relatively thinly traded—but the company has the kind of rapid and reliable growth that should attract many more big investors over time.

Technical Analysis

GSX came public in June and had a good (but choppy) first few months, building a base in the 14 to 17 area from August through November. The breakout on earnings was powerful and shares have marched steadily higher since then. We think a correction here (possibly toward the 25-day line near 20) would be normal and healthy—and buyable.

GSX Weekly Chart

GSX Daily Chart

Luckin Coffee (LK)

www.luckincoffee.com

Why the Strength

Luckin Coffee is set to become the largest coffee player in China. The firm is the pioneer of a technology-driven retail pick-up model that provides coffee and other products to customers in a 100% cashier-less environment, with customers ordering online and given a time to swing by and pick up their drink. The Chinese coffee market remains shockingly underpenetrated by western standards—China is a nation of tea drinkers, while coffee consumption was a mere 6.2 cups per capita in 2018, though Luckin is selling other stuff (food and drink) besides just coffee. Indeed, Luckin Tea launched in July 2019, and while the Coffee brand is marketed in China’s tier one and two cities, Luckin Tea is expected to also be marketed in tier three, four and five cities. And in September, Louis Dreyfus Company signed an agreement with the company to establish a joint venture to develop a co-branded Luckin Juice business in China. Thus far, marketing costs for new store openings and customer promotions are heavily outpacing revenue, but the company expects to generate positive free cash flow by fourth quarter 2020. Revenue is projected to quickly expand from $732 million in 2019 to $2.0 billion in 2020 from both organic growth and the onset of franchisees reaching revenue-sharing goals. It’s a huge idea.

Technical Analysis

The big clue with LK were the two massive-volume weeks in November when the stock broke out on the upside after earnings. Shares consolidated for nearly a month after that, but now it’s stretching its legs again, pushing to new highs on many days of big volume. LK probably goes a bit higher, but we advise aiming for pullbacks in this volatile name before starting a position.

LK Weekly Chart

LK Daily Chart

Paycom Software (PAYC)

paycom.com

Why the Strength

Paycom Software is a leading human capital management (HCM) cloud software company that helps employers manage payroll, human resources, talent acquisition, learning, time and labor. The company began as a payroll company that offered easy-to-access information online, then added additional services to their offerings. More recently, Paycom began rolling out their offerings directly to clients’ employees, enabling them to handle expense report and retirement benefit transactions via the Paycom app, saving corporate clients additional money and plenty of man hours via far fewer emails and phone calls. (CEO Chad Richison joked, “We couldn’t make it fun, so we made it easy!”) Engaging their clients’ employees turned out to be a brilliant move, resulting in an increased client retention rate and cutting attrition in half over the last two years. Bigger picture, the move to cloud-based HCM systems is well underway but still has a long runway of growth (most firms use legacy systems or no system at all). Sales and earnings are expected to grow 25% or so in 2020, and those figures will likely prove conservative as the company has outperformed estimates in each of the last five quarters, which partially explains why the buyers have been in control. It’s not a new story, per se, but the rapid, reliable growth profile continues to attract big investors.

Technical Analysis

PAYC has had a huge run in recent years, which raises risk, but the stock continues to act like it wants to go higher. Shares took a steep drop in September and nosed below their 40-week line in October but then soared to new price highs in November. PAYC has now rested for about a month, and today’s drop doesn’t look abnormal. We’re OK starting a position around here.

PAYC Weekly Chart

PAYC Daily Chart

Sea Limited (SE)

seagroup.com

Why the Strength

Sea Ltd. isn’t well known, but we think it has the makings of the next big e-commerce operation in Asia—possibly a follow-on play to some of the large Chinese outfits. The company has two divisions, and both have posted eye-popping growth this year as it grabs share in countries like Taiwan, Indonesia, Thailand, Vietnam, Malaysia, Singapore and elsewhere. Sea’s digital entertainment operation (online games, e-sports events, etc.) actually made up more than half of revenues in Q3 and grew 212% in the quarter, led by its Free Fire game (launched two years ago), which was the highest grossing game in Latin America and Southeast Asia and is making big inroads elsewhere, too. Even so, that side of the business is likely to grow more slowly in 2020 as no major new games are introduced—which leaves the excitement for Sea’s e-commerce division (revenues up 261% in Q3!), which is the largest in Southeast Asia by monthly active users and by time spent on its app. Sea has been regularly topping estimates, and the stock is nosing to new highs because investors think 2020 will be another banner year—analysts see revenues up 36% next year, though odds favor that will prove conservative as Asian economic growth accelerates. The bottom line is still deep in the red, but metrics are improving and losses should shrink meaningfully going forward. We see big potential here if management pulls the right levers.

Technical Analysis

SE originally broke out from a big post-IPO base in February and had a great run (18 to 38) during the next five months. Then came a well-deserved correction and consolidation (including a dip to the 40-week line), with a gap after Q3 earnings pushing the stock back toward its highs. Now SE has tightened up in the upper 30s for a few weeks and is toying with new highs. We’re OK starting small here and looking to buy more if you see decisive strength.

SE Weekly Chart

SE Daily Chart

United Rentals, Inc. (URI)

unitedrentals.com

Why the Strength

You’re not going to find a much more economically-sensitive company than United Rentals—the firm is the hands-down leader in equipment rentals (nearly twice the market share of the next largest competitor, though the industry is highly fragmented), with nearly 1,200 branches, 680,000 pieces of equipment (!) and 19,000 employees. Longer-term, there is a tailwind here, as more companies look to rent (instead of buy) to boost flexibility and lessen CapEx (non-residential construction is the biggest driver), and despite some ups and downs in the economic outlook, United’s business has been solid in recent years thanks to organic growth, acquisitions (which boosted Q3 results) and share buybacks, along with a move into specialty services (HVAC, safety products, etc.). That said, the stock almost always moves based on investor perception of the economy, and that’s helping it today—the combination of an easing trade war, low interest rates and Fed rate cuts have investors thinking 2020 will show reaccelerating growth, and along with United’s bargain basement valuation (9 times trailing earnings), that’s enticing buyers to jump in. Analysts don’t see anything amazing on the growth front next year (earnings up 6%), but that’s probably low, especially as any improvement in demand will fall to the bottom line. It’s not changing the world, but United Rentals looks to at least have a few promising quarters ahead of it.

Technical Analysis

Despite rising earnings, URI got clobbered late last year and really didn’t bounce all that much through September of this year, when it was hovering near multi-month lows. But the stock has changed character since the early-October market bottom, booming five straight weeks on the upside, consolidating tightly for a month and then stretching higher in December. We think the next pullback should provide a good opportunity.

URI Weekly Chart

URI 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.