Bounce Mode
Current Market Outlook
The first three weeks of December were a complete disaster for the market, with most major indexes falling 16% to 19% during that time. The good news is that, after some historic oversold extremes (we saw three straight days of more than 1,000 stocks hitting new lows on both the NYSE and Nasdaq!), stocks have finally begun to bounce; ideally this upmove lasts for at least a couple more weeks and gives the market a low to work from, while some new leadership takes pole position for the next sustained uptrend. Still, as we have all year, we advise just taking things as they come—right now, the trends of the major indexes and the vast majority of stocks are pointed down (just 15% or so of stocks are north of their 200-day lines), so we’re sticking with a defensive stance and waiting patiently for the bulls to make a stand.
That said, we’re still seeing a good number of resilient ideas, including many with great growth stories. If you’re looking to nibble, our Top Pick this week is Planet Fitness (PLNT), which has a unique, independent growth story that continues to attract big investors.
| Stock Name | Price | ||
|---|---|---|---|
| Alteryx (AYX) | 132.78 | ||
| Atlassian (TEAM) | 182.16 | ||
| Broadcom Limited (AVGO) | 266.26 | ||
| Crocs (CROX) | 0.00 | ||
| Deckers Outdoor Corp. (DECK) | 141.68 | ||
| Elastic (ESTC) | 86.17 | ||
| Planet Fitness (PLNT) | 0.00 | ||
| ServiceNow (NOW) | 341.86 | ||
| Tencent Music Entertainment (TME) | 18.41 | ||
| Zscaler (ZS) | 126.22 |
Alteryx (AYX)
Why the Strength
Alteryx is a Big Data stock that’s emerged as a leading player in a small but rapidly growing niche. Its specialty is self-service data analytics—the company’s software platform lets customers pull data from multiple sources, prep it, blend it together with whatever other data they want, then quickly analyze and report on it with whatever software they want. Slick software for handling cumbersome tasks isn’t a particularly rare story these days, but Alteryx’s sustained revenue growth rate of over 50% for more than two years is. While analysts expect that growth rate to dip to around 35% in fiscal 2019, Alteryx has consistently beaten expectations by a wide margin, so we wouldn’t be surprised to see revenues up 40% or more next year. The company isn’t yet profitable on a yearly basis, but we have seen a few quarters in the black and an EPS beat of $0.13 (reported result was $0.08) in Q3, along with a five point jump in gross profit margin, to 91%, illustrating that earnings and cash flow should surge as Alteryx scales the business. Most importantly, the stock’s resiliency in a very tough market is undeniable and suggests big investors still like the name.
Technical Analysis
Alteryx went public in the spring of 2017 and while there have been some twists and turns along the way, the stock has generally trended upward. There was a nice earnings gap in August that sent AYX from 47.5 to 55 overnight, and follow-on strength carried the stock up near 63 in September before the market fell apart. Since the September high AYX has traded as low as 42.5 but it’s also retested its high on two occasions, and sits just below 60 today. If you got knocked out of the stock recently, you could consider buying a smidge back here, or just keep it on your watch list, looking for an eventual breakout on the upside.
AYX Weekly Chart
AYX Daily Chart
Atlassian (TEAM)
Why the Strength
Atlassian is back in Top Ten yet again (we last featured it in September) since the stock has actually set up a solid-looking launching pad, which is a rarity in this environment. If you’re new to the name, the backstory is that Atlassian sells collaboration software solutions for developers, content management and project managers. The company is all about helping teams work better together. It competes with both Microsoft and Slack in its core market, though the recent divestment of two team communication assets (HipChat and Stride) to Slack, and a small equity investment in that company, means Atlassian and Slack are essentially on the same team now. Those divestments, along with the purchase of Opsgenie and launch of Jira Ops, is intended to help the company go deeper and further into IT markets where it already has a strong brand, targeting over 100 million users. The numbers are awesome. Revenue was up 41% in fiscal 2018 and jumped 37% in the first quarter of fiscal 2019, when analysts project 35% growth. Atlassian is also churning out fat profits—EPS of $0.20 in Q1 beat by a penny, are expected to jump 52% (to $0.78) this year and by another 24% next year. We still think this is one of the more interesting mid-cap software stocks out there.
Technical Analysis
Until October hit, TEAM’s chart had looked great from the time it broke out in the fall of 2017. There were a number of advances and consolidation phases last year, then in 2018 the stock never fell much below its 50-day moving average line. October changed that, of course, and TEAM did retreat to its 200-day line that month (and again in November), but it formed a much higher low in December (75.5 vs. 65) and, after a recent bounce, isn’t far from new high ground. If you want in, we’re OK nibbling here or (preferably) on dips.
TEAM Weekly Chart
TEAM Daily Chart
Broadcom Limited (AVGO)
Why the Strength
The semiconductor market took a turn for the worse in late-2018 as signs emerged that the cycle is slowing; many areas look to have actually toned down though a few niches continue to power ahead. Moreover, valuations remain above previous troughs. So why is Broadcom holding up so well? The short version is that the semiconductor giant is relatively cheap on a valuation basis, is likely to see greater adoption of antenna filtering, 5G solutions and cloud data center networking (all areas that are still seeing good demand), should benefit from its recent CA Technologies acquisition, and is rapidly growing its dividend (increased by 51% in December). All together, those factors could lead to modest multiple expansion and a boost in investor sentiment regarding the company’s M&A growth strategy. Factoring in the acquisition, revenue should be up 17% this year before settling back to a more normal growth rate near 5.5% in fiscal 2020. EPS is off the charts, with analysts expecting $23 this year and $26.30 next. Don’t get us wrong, Broadcom isn’t going to be a glamour stock even if the market does turn positive. But a fat dividend yield north of 4% and the aforementioned positives are likely to keep big investors interested even if the volatile environment persists.
Technical Analysis
AVGO started rallying in 2016 and didn’t stop until late-2017 when the stock topped out at 275. It then plunged as low as 194 in July, which in an odd way, is likely helping shares today as most of the weak hands have already been purged. AVGO did get hit in October, but has etched significantly higher lows since then, and the stock is currently perched just 8% from all-time highs. Dips of a few points would be intriguing, with a stop below the 200-day line.
AVGO Weekly Chart
AVGO Daily Chart
Crocs (CROX)
Why the Strength
Crocs was a great growth stock about 10 years ago (Cabot Growth Investor made big money in the name) during its “romance” phase, but today, the company is a “reality” situation with steady sales growth, business initiatives and cost controls leading to excellent bottom-line growth that has investors excited. About half of revenue still comes from its clogs, with sandals representing another 20% (and representing a sizable growth opportunity); overall, Crocs does good business around the world (a bit over half of revenue comes from Asia and Europe). But just as important are the company’s ongoing restructuring activities, including its move to higher-quality revenues (fewer discounts and promotions, fewer products) and broad cost reductions (closing unproductive stores and manufacturing facilities, transitioning non-core markets to distributors); all told, management sees a multi-year runway of higher margins and profitability. The recent results show that plan is on track—in Q3, sales rose 7% (would have been up 13% absent some one-time hits), while earnings more than tripled and easily topped expectations. And the firm is using much of its excess cash (it has no long-term debt) wisely; it recent repurchased a chunk of convertible preferred stock from Blackstone that will boost annual earnings by 18 cents per share. All in all, Crocs looks like a solid business.
Technical Analysis
CROX was in the abyss in mid 2017, but it’s had an amazing run since, with a relatively smooth upmove interspersed among a few modest corrections. But it’s the recent performance that is eye catching—the stock exploded to new highs in early November, pushed even higher near the end of last month and, while it pulled in during the market’s December meltdown, CROX held its 50-day line and has bounced since. You could nibble here or keep it on your watch list.
CROX Weekly Chart
CROX Daily Chart
Deckers Outdoor Corp. (DECK)
Why the Strength
Deckers is the second footwear company in this week’s Top Ten, but it’s a far different outfit than Crocs—Deckers is about twice the size (revenues are approaching $2 billion) and has a handful of brands in both the fashion and performance areas of the industry. Ugg is still the big driver at Deckers, bringing in more than three quarters of all revenue, though its Hoka One One running shoe is catching on fast and other brands (such as Teva) are well known and solidly profitable. There will probably be some new product additions going forward (even a move into some apparel, too), but the story here isn’t really about growth—while the company’s top line is improving, investors are more excited about the company’s operating improvements due to a rejiggered supply chain, organizational efficiencies and leveraging previous infrastructure investments. The result has been improving margins (operating margin was 18% last quarter, up from 14% a year ago), which, combined with a lower tax rate and a share buyback program (share count down 7% from a year ago!), has led to surging earnings growth in recent quarters. That growth is expected to slow, but that’s very likely conservative given the firm’s history of upward estimate revisions (fiscal 2019 earnings estimate is now $6.86, up from $6.44 three months ago). Deckers looks like a dependable story whose business is dancing to its own drummer.
Technical Analysis
DECK started the year at 80, so it’s been a great 2018 overall, albeit with a couple of long base-building efforts along the way. The stock’s relative strength of late is what earned it a spot in this week’s list—shares popped to new highs in October following earnings, and while they’ve wobbled since then, they’ve held well above their October lows and currently aren’t far from all-time high ground. If you want in, you could nibble here or wait for a breakout.
DECK Weekly Chart
DECK Daily Chart
Elastic (ESTC)
Why the Strength
Elastic is all about search, but we’re not talking about a competitor to Google or Baidu—instead, the company is a play on both the business intelligence and Big Data fields, with its Stack software platform able to take in and store information of all different types and formats, and allow users to “mine” them for relevant data and analysis, including visualization and dashboards. The big attraction here is the widespread uses for Elastic; it’s the engine behind matching drivers to riders on Uber and finding potential matches for daters on Tinder, but it also allows quick and relevant searching of machine (unstructured) data for cybersecurity or to see in real time which systems, web pages, health offerings, marketing pitches or anything else are working and which ones aren’t. All told, as the use cases for Elastic’s solutions have expanded, so has its potential market, which management now estimates at $45 billion. As you can see in the table below, the company is making quick progress capturing business—revenues are growing rapidly, and while the bottom line is still in the red, all of the sub-metrics (deferred revenue up 78% from a year ago, free cash flow near breakeven, total customer count up 15% from the prior quarter, including 5% of which that are already paying Elastic at least $100,000 annually) are very encouraging. The valuation is big, but so is the potential.
Technical Analysis
ESTC came public in early October, just as the market was beginning its plunge, but net-net, this stock has actually been unchanged since then, which itself is a strong sign of relative strength. After a breakout attempt in early December, shares did get dented, but ESTC found support in the 60 to 63 area for the umpteenth time and has begun to bounce. You can nibble here, or just keep the name on your watch list.
ESTC Weekly Chart
ESTC Daily Chart
Planet Fitness (PLNT)
Why the Strength
Planet Fitness isn’t part of any major economic wave or theme, but it remains one of the most resilient growth stocks out there because of its combination solid, steady growth today, a long runway of growth ahead and a lot of predictability given its economically-independent business. The company, of course, operates fitness centers across the U.S., starting at just $10 per month (though more than 60% of the 12.2 million total members now opt for the $22 per month Black Card membership, allowing members to bring a friend, use any Planet location, and get hydro-massages) and attractive to the masses as it targets the “average” person who works out (no muscle heads). Just about all of the firm’s 1,646 locations (as of the end of September) are franchised, with solid new store economics, and management has a goal of 4,000 locations in the years ahead with plenty of new spaces already leased. The growth numbers in the table below are a bit inflated due to some equipment purchases by franchisees (counts as revenue) and some accounting oddities, but the underlying trend remains excellent, with 15% to 20% sales and cash flow growth likely for many years as more people sign up, slight price hikes take effect every now and then, recurring new equipment purchases and as new locations open up. A November accelerated share repurchase plan, which gobbled up 6% of shares in one fell swoop, plus more on the way, should further boost per-share growth. It’s a great long-term growth story.
Technical Analysis
PLNT peaked in late September with many stocks, fell sharply into October, but since then has shown some solid resilience—the stock gapped to new highs on earnings in early November, and while it’s had two sharp dips since then (mid November and again early last week), its lows near 48 were safely above the October bottom (45) and the 200-day line (now near 47 and rising slowly). PLNT is poised to be a leader once the market confirms a new uptrend.
PLNT Weekly Chart
PLNT Daily Chart
ServiceNow (NOW)
Why the Strength
ServiceNow has morphed into a blue-chip stock in our view, and its resilience and repeated snapbacks whenever the pressure comes off the general market tells us it wants to go higher when the buyers take control. As for the story, the company’s platform has become a critical part of enterprise computing infrastructure; in a nutshell, it’s become the go-to platform to boost productivity. It began by just serving IT departments with a cloud- and subscription-based IT service management (ITSM) product. But the platform has spread out to all departments and ServiceNow has seized a commanding presence in the IT operations management (ITOM), IT business management (ITBM), HR, customer service and security verticals, allowing clients to more easily and quickly address problems. Analysts like to point to the company’s 42% penetration in the Global 2000 customer base, continue growth in annualized contract value and future expansion into even more end-markets (on-boarding, payroll, hardware, mobile apps, etc.) as evidence of its increasing dominance. We don’t disagree, but think the numbers tell the story just as well. Revenue grew by 39% in 2017 and should be up 35% this year and 30% next. EPS should also grow by 33% (to $3.13) next year, with free cash flow much larger than reported net income. Those are rare numbers for a $30 billion plus market cap outfit. We like it.
Technical Analysis
NOW enjoyed a choppy uptrend in 2017 and most of 2018 that was mostly characterized by higher highs and higher lows. The stock has taken some big hits during the three-month market correction, but while it hasn’t been as resilient as some other names when the market is weak, its quick rebounds during brief market bounces tell us big investors are buying on dips. We also like the meaningfully higher low this month (158) compared to November (148), despite the market’s implosion. A move above 190 would be intriguing and could take it back near its 52-week high, provided the broad market offers some support.
NOW Weekly Chart
NOW Daily Chart
Tencent Music Entertainment (TME)
Why the Strength
Tencent Music Entertainment is a (very) recent and intriguing IPO that, on the surface anyway, competes with global music giants like Spotify (which, ironically, Tencent Music owns 7.5% of) and Apple Music. But Tencent Music is a different bird—first off, it operates mostly in China, with a whopping 800 million monthly average users, though just 23.3 million of those pay for one of the firm’s four major apps. Second and more important, music (including subscriptions, advertising, downloads and the like) only brings in one-third of revenue; instead, the big idea here is the firm’s karaoke app, dubbed WeSing, allowing users to view, record and send live streams of their own karaoke performances. Believe it or not, it’s a big deal in China, and while many of WeSing’s functions are free, some (like virtual gifts sent online) are huge revenue producers for Tencent Music. Of course, the relationship with its parent company (Tencent still owns more than 50% of Tencent Music) and that firm’s hugely popular messaging apps (such as WeChat, of which WeSing is tied into) is a huge competitive advantage, too. Obviously, expectations are high, but so is the potential if Chinese stocks bottom out and management here continues to pull the right levers.
Technical Analysis
We see a couple of distinct positives since TME’s December 11 IPO. The first is that the stock’s overall movement wasn’t awful given the horrific late-December selloff; after a quick post-IPO droop, TME held firm in the low 12s for over a week while the market was plunging, and snapped about halfway back as the market has perked up. Second, we like the volume, with the stock trading north of $70 million per day, a solid sign of institutional interest so soon after an IPO. TME is mostly for your watch list, but if you want to roll the dice here, keep it small and use a stop below the recent lows.
TME Weekly Chart
TME Daily Chart
Zscaler (ZS)
Why the Strength
We just featured Zscaler three weeks ago and the story, and the stock price, is almost exactly the same today. The company is a secular growth story in the cloud-based security software space, which looks like the place that the next wave of cybersecurity winners will come from. Its modern computing architecture is helping Zscaler grow 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. The stock trades at a premium valuation but that’s just the entry price for fast growth, high net dollar retention (i.e., high renewal rates and lots of customer upsells) and improving sales productivity. The company delivered better-than-expected results in the first quarter of fiscal 2019 (reported December 4). 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. Given the horrendous market the stock didn’t rally to all-time highs following the report, but its resiliency since can be interpreted as a sign of relative strength. Zscaler looks like a new leadership name for the next advance.
Technical Analysis
ZS has been a solid performer since it went public in March of this year. The stock surged on its first day of trading then paused for a few months before blasting off to another new high in June. Since then ZS has been mostly range bound in the 32 to 43 range, with a few small advances and declines outside of that area. It’s basically flat over the last two months (a good thing) and we see potential for a nice move, especially if the broad market can mount a rally in early-2019. As with most resilient stocks these days, you can buy a small position here or wait for a breakout in a healthier market.
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.