Strong, But a Bit Hot and Heavy
Current Market Outlook
If you’re looking at the trends of the major indexes, the price/volume action of leading stocks (both cyclical and growth) or the breadth of the overall market, it’s hard to find much to fault—the buyers are clearly in control as most stocks, sectors and indexes trend higher. About the only thing to worry about is that there’s not much to worry about; sentiment measures of all stripes (money flows, option activity, surveys) as well as some market action (huge moves in many speculative stocks) tell us that things are a bit hot and heavy right now. To be clear, that’s no reason to dramatically alter your game plan, but it’s a reminder that risk is rising, so keep your feet on the ground, look for good entry points and, once you’re in, honor your stops and book some profits (or partial profits) on the way up.
This week’s list features a wide mix of stocks, including many that have recently staged longer-term breakouts. One of those is our Top Pick: Applied Materials (AMAT) sports accelerating growth and a beautiful chart, and while short-term dips are possible, a major advance looks to be underway.
| Stock Name | Price | ||
|---|---|---|---|
| Applied Materials (AMAT) | 89.25 | ||
| Cleveland-Cliffs (CLF) | 12.62 | ||
| Pinduoduo (PDD) | 146.82 | ||
| Qorvo (QRVO) | 167.01 | ||
| Snowflake (SNOW) | 388.38 | ||
| Tapestry, Inc. (TPR) | 29.75 | ||
| Uber (UBER) | 53.80 | ||
| Vale S.A. (VALE) | 16.29 | ||
| United States Steel Corporation (X) | 17.20 | ||
| Zscaler (ZS) | 178.17 |
Applied Materials (AMAT)
Why the Strength
It has been dubbed “an entire city built of atoms”—the next generation of flash memory storage. Applied Materials, which provides fabrication equipment for the semiconductor, flat panel display and solar industries, has developed the breakthrough technology to help its memory customers manufacture and scale these cutting-edge 3D NAND memory chips. As its customers demand more powerful microchips, new materials technology is required, which is Applied’s specialty. The company has seen increased spending during the pandemic due to the work-from-home and cloud expansion, and 3D memory chips are especially in demand (high-speed DDR5 memory is another major growth area for the firm). Applied’s successful navigation of COVID-related obstacles showed in the firm’s most recent (fiscal Q4) report, which revealed a 25% revenue bump and per-share earnings of $1.25 (up 56%). Even better, that was the fourth straight quarter of accelerating sales and earnings growth, something seen in many past winners. Analysts expect the good times to continue, too, with 18% sales and 28% earnings growth in the current quarter. Further ahead, while the chip industry has faced headwinds from trade disruptions with China, analysts view the incoming administration as a potential tailwind in 2021 due to the likelihood of improved U.S.-China relations (China accounted for 29% of Applied’s revenue last year). The company also believes it’s the fastest-growing etch equipment maker (revenues were up a record 30% in the past year!), and management sees opportunity from several technologies that can be enabled by advances in materials engineering (especially AI). It’s a familiar name, but growth is solid and there are many catalysts going forward.
Technical Analysis
AMAT hit 60 back in late 2017, and while it tried to decisively break out above that area a handful of times in the three years since, sellers beat it back on each attempt. But now the stock is freewheeling—shares formed a normal-looking launching pad from August through October, and the action before and after earnings has been excellent, with AMAT moving straight up over the past few weeks. You can nibble here, though we’d prefer to get in on a shakeout of a few points.
| Market Cap | $79.8B | EPS $ Annual (Oct) | |
| Forward P/E | 17 | FY 2019 | 3.04 |
| Current P/E | 21 | FY 2020 | 4.17 |
| Annual Revenue | $17.2B | FY 2021e | 4.98 |
| Profit Margin | 24.5% | FY 2022e | 5.44 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 4.67 | 25% | 1.25 | 56% |
| One qtr ago | 4.39 | 23% | 1.06 | 43% |
| Two qtrs ago | 3.95 | 12% | 0.89 | 27% |
| Three qtrs ago | 4.16 | 11% | 0.98 | 21% |
AMAT Weekly Chart
AMAT Daily Chart
Cleveland-Cliffs (CLF)
Why the Strength
Commodity markets are breaking out to the upside in 2020 after a multi-year downtrend, with industrial metals and iron ore in particular showing great strength. Combined with hopes for a very strong economic year in 2021, those are the main reasons why investors have taken a liking to Cleveland-Cliffs. The company has long been one of the largest iron ore makers, and its purchase of AK Steel in March of this year gives it a hand in the steel market as well. And both areas as hot, with rising prices starting to push earnings higher—after a big loss during the virus-riddled Q2, Cliffs saw the bottom line return to the black in Q3 as sales growth accelerated. (The top line growth is exaggerated by the AK Steel buyout, but the pace picked up nicely, which counts more.) And the company is remaining on the acquisition path, aiming to buy low as the metals industry bottoms out—Cliffs is set to acquire ArcelorMittal USA for $1.4 billion in cash and stock, which will make it the largest flat-rolled steel producer in North America. The transaction should immediately add to EPS while reducing the company’s leverage. Of course, if the economy or prices head lower, all bets are off, but right now analysts see earnings totaling nearly $1.50 per share next year, which we think could prove conservative as the company cuts costs and takes advantage of the improving environment.
Technical Analysis
CLF bottomed below 3 in March of this year, finishing off a multi-year decline. Like most cyclical stocks, it snapped back nicely through early June, based for a few months and has really caught fire of late—in fact, CLF is now up nine of the past 10 weeks, a sign of persistent buying by big investors. Of course, after the recent run, some retrenchment is likely, so if you want in, aim for dips of 50 cents to a dollar.
| Market Cap | $4.84B | EPS $ Annual (Dec) | |
| Forward P/E | 10 | FY 2018 | 3.63 |
| Current P/E | 600 | FY 2019 | 1.12 |
| Annual Revenue | $3.63B | FY 2020e | -0.37 |
| Profit Margin | 0.7% | FY 2021e | 1.21 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 1646 | 196% | 0.04 | -88% |
| One qtr ago | 1093 | 47% | -0.31 | N/A |
| Two qtrs ago | 359 | 129% | 0.04 | N/A |
| Three qtrs ago | 534 | -23% | 0.25 | -88% |
CLF Weekly Chart
CLF Daily Chart
Pinduoduo (PDD)
Why the Strength
We wrote about Pinduoduo last month, citing the huge growth that this virtual bazaar company had seen in its second quarter. Its team shopping concept (along with its bulk purchasing discounts) has caught on rapidly in China, with the firm increasing its monthly active users to 643 million in the third quarter, up from 569 million in Q2. The company’s mobile e-commerce offering specializes in apparel, appliances, and household goods, and is increasing its market share in China’s gigantic e-commerce industry (in big and small cities alike), which is expected to pass $6.5 trillion by 2023. Looking ahead, one intriguing catalyst is the firm’s recently launched Duo Duo Maicai, an online fresh grocery platform which offers users next-day collection. As opposed to Alibaba and JD.com, which are using larger farms for their grocery offerings, Pinduoduo’s are sourced from local farms, reducing transportation time, minimizing waste and reducing the costs of logistics, with those savings being passed on to consumers in the form of lower prices. (Right now, 20% of China’s grocery shopping is online, but that’s expected to reach almost 50% by 2025.) In its third quarter, Pinduoduo saw its first-ever quarterly profit, while revenues of $2.1 billion were up 89% year-over-year (both of which easily topped expectations). To help fund its expansion of logistics infrastructure, acquisitions, and investments in Duo Duo Macai, Pinduoduo recently issued 28.7 million ADS shares (raising $3.59 billion), as well as $1.75 billion in convertible notes. A potential challenge is the U.S. House’s recent legislation to delist Chinese companies that don’t meet U.S. audit standards. Time will tell how that may affect the stock. In the meantime, big investors don’t seem worried.
Technical Analysis
When we last wrote about PDD it was perking up toward the highs of its three-plus-month consolidation despite some growth stock weakness. That turned out to be a major clue, as shares mushroomed after the Q3 report, nosing above 150 before taking a breather. PDD has been choppy since, but the stock has now closed tightly a few weeks in a row, which is a constructive sign. We’re OK starting a position here or preferably on dips toward the rising 25-day line.
| Market Cap | $172B | EPS $ Annual (Dec) | |
| Forward P/E | N/A | FY 2018 | -0.44 |
| Current P/E | 500 | FY 2019 | -0.55 |
| Annual Revenue | $6.29B | FY 2020e | -0.56 |
| Profit Margin | 3.3% | FY 2021e | 0.29 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 2.09 | 99% | 0.05 | N/A |
| One qtr ago | 1.73 | 63% | -0.01 | N/A |
| Two qtrs ago | 0.92 | 37% | -0.39 | N/A |
| Three qtrs ago | 1.55 | 88% | -0.12 | N/A |
PDD Weekly Chart
PDD Daily Chart
Qorvo (QRVO)
Why the Strength
Qorvo is a chip firm that’s strong today for one main reason: It’s a direct play on the 5G smartphone boom. Apple’s new iPhone is the first major U.S. smartphone to feature faster 5G connectivity, and Qorvo produces the semiconductor chips that make the iPhone faster; in fact, Qorvo is a critical component supplier for the iPhone with 33% of its sales coming from Apple alone. But Qorvo is more than just an Apple story: The company specializes in radio frequency filters, power amplifiers and front-end modules used in many of the world’s most advanced smartphones. One big positive here is that Qorvo is able to offer a comprehensive solution that’s more attractive to clients than integrating chips from a ton of different providers into one phone. Qorvo’s stock actually got going late last year but investors abandoned it when the pandemic hit, figuring that the 5G boom would be delayed for quite a while. But it turns out that view was too conservative and demand for Qorvo’s solutions has been buoyant: In Q3, sales (up 31%) and earnings (up 60%) growth both accelerated nicely, and management also hiked expectations going forward. The fear is that, while 2020 has been great (earnings likely up 35% in the current fiscal year), there could be a slowdown next year, but analysts are typically way too conservative here (Q3 earnings of $2.43 beat estimates by 31 cents per share). Chip makers are always a bit hit-or-miss, but Qorvo is in the right place at the right time as the 5G smartphone boom picks up speed.
Technical Analysis
QRVO was looking ready for a major run before the crash earlier this year, but that ended up being one (very large) speedbump on the way to higher prices. Shares returned to their highs in early June, and while they hacked around a bit after that (not much net progress from June through October), the buyers are back after the recent quarterly report—QRVO pushed to new highs after Q3 results, tightened up for three weeks and then followed through to higher highs last week. Modest weakness should provide a nice opportunity.
| Market Cap | $18.4B | EPS $ Annual (Mar) | |
| Forward P/E | 19 | FY 2019 | 5.76 |
| Current P/E | 22 | FY 2020 | 6.31 |
| Annual Revenue | $3.50B | FY 2021e | 8.55 |
| Profit Margin | 26.6% | FY 2022e | 9.55 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 1060 | 31% | 2.43 | 60% |
| One qtr ago | 788 | 2% | 1.50 | 10% |
| Two qtrs ago | 788 | 16% | 1.57 | 29% |
| Three qtrs ago | 869 | 4% | 1.86 | 1% |
QRVO Weekly Chart
QRVO Daily Chart
Snowflake (SNOW)
Why the Strength
Big data (or complex data sets) enable companies to create “intelligent” software and new opportunities for users, while being a precursor to artificial intelligence (AI). Snowflake has engendered lots of excitement lately because of its next-generation cloud data platform that, using public cloud services, can ingest massive amounts of all sorts of data (structured, unstructured, etc.) and give users computing power to access it and optimization tools for each application. The story can give you a bit of an ice cream headache, but basically Snowflake has a better mousetrap , allowing customers to get more from their data and share it easily and safely both inside and outside an organization; the firm processes hundreds of millions of queries daily across its platform. And that figure is going up quick: In Q3 Snowflake posted yet another quarter of triple-digit top-line growth (up 119%), and while the bottom line is still in the red, losses are narrowing. But far more important are indications of the future—the total customer count lifted 84% to over 3,500, including more larger ones (65 spent over $1 million; same-customer growth was a ridiculous 62%). And, importantly, Snowflake isn’t a subscription service but a usage-based one, so it will grow as customers use the platform more and more. Indeed, last quarter saw the company’s remaining performance obligation (basically all the revenue it’s guaranteed to earn in the future) rise a whopping 240% to $928 million! Big picture, investors are thinking that Snowflake’s service is powerful and unique enough that most big companies (and lots of small- and mid-sized ones, too) will be dependent on the platform to make the most of all the data they’re collecting. There is some competition (Microsoft is getting into the industry), but it’s a very big idea.
Technical Analysis
SNOW came public to much fanfare in September, but as usual, that excitement led to some retrenchment, with the stock gyrating up and down for the next few weeks. But shares lifted to new highs late last month, and after a brief shakeout ahead of earnings, SNOW has gone vertical, with the stock exploding higher on huge volume following earnings. As with any recent IPO, volatility is to expected, but we’re OK taking a swing at it on dips.
| Market Cap | $104B | EPS $ Annual (Jan) | |
| Forward P/E | N/A | FY 2019 | -0.64 |
| Current P/E | N/A | FY 2020 | -1.26 |
| Annual Revenue | $489M | FY 2021e | -0.89 |
| Profit Margin | N/A | FY 2022e | -0.84 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 160 | 119% | -0.61 | N/A |
| One qtr ago | 133 | 121% | -0.28 | N/A |
| Two qtrs ago | 109 | 149% | -0.34 | N/A |
| Three qtrs ago | 87.7 | 139% | -0.30 | N/A |
SNOW Weekly Chart
SNOW Daily Chart
Tapestry, Inc. (TPR)
Why the Strength
The dire predictions that COVID-19 would kill retail have not come to pass. More than $5.1 billion was spent on Thanksgiving Day, a 22% increase over last year. Black Friday online sales were up 22% year-over-year, to $9 billion, while Cyber Monday once again broke records, with sales of $10.8 billion, up 15% over last year. That’s not as much as analysts expected (some were calling for up to a 35% rise), but it’s certainly a respectable showing. That’s good news for the sector and for Tapestry, which is in the midst of a solid turnaround. The owner of luxury brands Coach, Kate Spade and Stuart Weitzman offers handbags, women’s and men’s accessories, footwear, jewelry, seasonal apparel collections, sunwear, travel bags, fragrance and watches. Tapestry has had a rough stretch, with its fiscal first quarter sales down 14% due to the virus, but it’s adjusting well to the new reality. In the most recent quarter, the firm’s e-commerce sales tripled and now account for some 25% of its total sales. Moreover, Tapestry has been better analyzing its customer data to manage its inventory better, which boosted Tapestry’s gross margins by 3%, while its cost-cutting initiatives improved its operating income 37%, to $229 million. The company is focusing on reducing its debt, resetting its Coach brand by reducing the number of products, running more targeted promotions and selective price increases, while also exiting unprofitable markets with Stuart Weitzman. Basically, you have what’s likely to be a recovering top line while the firm as a whole has streamlined operations, and that should lead to a big bottom-line rebound going forward; analysts see earnings up 136% next year to nearly $2.30 per share.
Technical Analysis
TPR was the dog’s dinner for the past few years, crashed along with everything else in March and really didn’t even get off its knees for a few months after that. But the stock did form a low-level base from June through September, and the breakout (and followthrough) action since then has been terrific, with a persistent advance up to 30 before a little recent breather. If you’re game, try to sharpshoot an entry near the rising 25-day line.
| Market Cap | $8.10B | EPS $ Annual (Jun) | |
| Forward P/E | 13 | FY 2019 | 2.57 |
| Current P/E | 25 | FY 2020 | 0.97 |
| Annual Revenue | $4.78B | FY 2021e | 2.29 |
| Profit Margin | 13.7% | FY 2022e | 2.57 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 1.17 | -14% | 0.58 | 45% |
| One qtr ago | 0.71 | -53% | -0.25 | N/A |
| Two qtrs ago | 1.07 | -19% | -0.27 | N/A |
| Three qtrs ago | 1.82 | 1% | 1.10 | 3% |
TPR Weekly Chart
TPR Daily Chart
Uber (UBER)
Why the Strength
Uber continues to have the look and feel of a new leader thanks to two big growth catalysts going forward. The first should involve its Rides segment, which was hammered during the pandemic; revenues fell 68% sequentially in Q2 but began to rebound last quarter and, despite some near-term headwinds (peer Lyft said last week Q4 results will likely come in near the low end of its guidance), big investors seem to be looking over the horizon as the world likely returns to normal in the middle of next year. (Impressively, even during the Q2 plunge, the Rides business was EBITDA positive.) That segment should provide a nice cyclical uplift, but the real driver is Uber’s big move into Delivery services; this is a secular growth area as people become more favorable about having all sorts of things (take-out, groceries, even prescription meds in some markets) delivered to their door. Indeed, bookings in this newer segment are tracking about a year and a half ahead of where Rides was at this point in its life, and Uber’s recent $2.6 billion purchase of Postmates only expands the firm’s reach and technology. Bookings growth for Delivery has been accelerating (up 54%, 113% and 135% during the past three quarters) while cash flow is creeping toward breakeven. In fact, taken together, Uber believes it’s on track for overall cash flow breakeven in 2021 as both Rides and Delivery grow in tandem. Analysts see total company revenues up 41% next year, and long-term, the potential for Delivery to grow manyfold is real as take-out delivery hits the mainstream and adjacent opportunities arise for both consumers and small businesses.
Technical Analysis
UBER has completely changed character during the past few weeks. After a year of post-IPO ups and (mostly) downs, the stock finally tightened up some in September and October and then staged a massive-volume breakout in early November. Better yet, UBER has remained in favor since, rising five weeks in a row to new highs as sellers are unable to put up a fight. Short-term, it is a bit extended to the upside, though we’re not expecting a huge retreat—you can start small here or look for dips of two or three points.
| Market Cap | $94.6B | EPS $ Annual (Dec) | |
| Forward P/E | N/A | FY 2018 | 0.59 |
| Current P/E | N/A | FY 2019 | -5.04 |
| Annual Revenue | $ | FY 2020e | -3.87 |
| Profit Margin | N/A | FY 2021e | -1.51 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 3.13 | -18% | -0.62 | N/A |
| One qtr ago | 2.24 | -29% | -1.02 | N/A |
| Two qtrs ago | 3.54 | 14% | -1.70 | N/A |
| Three qtrs ago | 4.06 | 37% | -0.64 | N/A |
UBER Weekly Chart
UBER Daily Chart
Vale S.A. (VALE)
Why the Strength
With seaborne iron ore prices up sharply, producers are back in the spotlight thanks to China’s insatiable thirst for the industrial metal (which is a key input into steel) and supply constraints in top producer Brazil. One of Brazil’s biggest companies is Vale, a diversified producer of industrial and precious metals and the world’s second-largest iron ore and nickel producer. Through its subsidiaries, it also operates ships, railroads and hydroelectricity plants, but the stock usually gets pushed/pulled based on changing perceptions of commodity prices. On that note, Vale sent shockwaves through the market recently when it lowered iron ore production guidance for a second time this year, underscoring the tight supply situation (and supporting prices). The company also said it expects copper and nickel production growth next year (and longer-term, too) as prices for both commodities are on the rise. But it’s iron ore that’s the main reason for the stock’s strength (it accounts for 85% of its revenues), as it’s driving positive results despite the pandemic. The firm’s Q3 per-share earnings were a solid 57 cents (up from a loss a year ago) while revenue was 5% higher, driven by improved mining output and higher prices. Vale’s higher earnings and cash flow have allowed it to deleverage (paid off $5 billion of its credit lines in September alone) and to reinstate variable dividends (it paid 27 cents per share in September, and there should be more where that came from with analysts expecting earnings of $1.79 per share this year and nearly $2.50 next. Vale is a big, global play on the resurgence of commodity prices in general and iron ore in particular.
Technical Analysis
VALE looks like a lot of commodity stocks: There was a multi-year decline/dead period that culminated with the crash in March of this year, followed by a good-not-great rebound for a few months and a quiet sideways consolidation for a while after that. And now the buyers are back—VALE has mushroomed to multi-year highs on three straight weeks of huge, accelerating volume. Any dip should prove buyable, but use a loose leash.
| Market Cap | $81.3B | EPS $ Annual (Dec) | |
| Forward P/E | 6 | FY 2018 | 1.86 |
| Current P/E | 30 | FY 2019 | -0.33 |
| Annual Revenue | $35.2B | FY 2020e | 1.79 |
| Profit Margin | 27.0% | FY 2021e | 2.48 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 10.7 | 5% | 0.57 | 78% |
| One qtr ago | 7.52 | -18% | 0.19 | N/A |
| Two qtrs ago | 6.97 | -15% | 0.05 | N/A |
| Three qtrs ago | 9.96 | 2% | -0.30 | N/A |
VALE Weekly Chart
VALE Daily Chart
United States Steel Corporation (X)
Why the Strength
When you think of growth industries, steel makers are likely the last sector that comes to mind. But supply shortages, rising expectations for infrastructure-building programs under the new president and general hopes for an economic upturn are boosting steel prices (up more than 50% since August). Moreover, shuttered blast furnaces and reduced capacity rates, along with the continued recovery and replenishment of the automotive supply chain, are expected to further bolster the outlook for steel. All of that is good news for U.S. Steel, the well-known integrated steel producer that was once one of America’s biggest blue-chip companies. The firm is still in the midst of a downcycle (sales off 24% in Q3 and earnings deeply in the red), but investors are looking ahead and like what they see; this year’s shutdowns have actually brought some good news (more home improvement projects and appliance sales), while auto service center inventories are unsustainably low and restocking is expected in the coming months as customer demand rises. Meanwhile, while the Q3 results weren’t great, they did come in better than expectations and management raised guidance for Q4. Impresively, U.S. Steel did generate free cash flow of $76 million (up 533%), a huge improvement and the result of its cost management efforts. Management expects continued strength well into 2021 based on its strong order book and “significant improvements” in flat-rolled steel demand. Analysts concur, predicting around 10 percent top-line growth for both 2021 and 2022, along with sharply rising free cash flow as the increase in business falls to the bottom line. It’s yet another cyclical story with bright intermediate-term prospects.
Technical Analysis
X cascaded from a 2018 high of 45 to a multi-decade low of 5 in March as the U.S.-China trade war put downward pressure on steel prices and then the pandemic crushed business. The initial off-the-bottom rally was decent, but the stock then spent a few months puttering around the 7 level before buyers showed up in October—the advance was solid and steady at first, but since mid November, X has gone vertical as perception rises. We wouldn’t chase it here, but a shakeout of a point or two would be tempting.
| Market Cap | $3.56B | EPS $ Annual (Dec) | |
| Forward P/E | N/A | FY 2018 | 5.40 |
| Current P/E | N/A | FY 2019 | 0.09 |
| Annual Revenue | $10.0B | FY 2020e | -5.58 |
| Profit Margin | N/A | FY 2021e | -1.18 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 2.34 | -24% | -1.21 | N/A |
| One qtr ago | 2.09 | -41% | -2.67 | N/A |
| Two qtrs ago | 2.75 | -21% | -0.73 | N/A |
| Three qtrs ago | 2.84 | -23% | -0.64 | N/A |
X Weekly Chart
X Daily Chart
Zscaler (ZS)
Why the Strength
Cyber security stocks had big moves after the March low but generally spent the past three or four months taking a breather—until last week, when many began to lift again. One of our favorite new-age names is Zscaler, which has a platform built from the ground up for the new cloud age; whether it’s for internet access or private access to a firm’s network, Zscaler’s offering boosts security, cuts down on potential attacks and simplifies a client’s IT bundle (enables ditching on-premise gateway security boxes). Of course, there are some other new-age “frenemies” (both competitors and partners in some cases), but the big opportunity here remains the majority of outfits that are still using old school security patches that are outdated in the new cloud world. Zscaler is taking advantage, especially as the pandemic/work-from-home movement gains steam—last week’s Q3 report was outstanding, with revenue growth accelerating again (up 52%), free cash flow coming in at a whopping 30% of revenues and with management saying that they’re seeing more and larger deals (billings up 64%) as many clients buy both of the firm’s major bundles right off the bat. While there’s some worry that a lessening of the pandemic will hurt growth, the major trend here was in place well before the virus, and nobody is going back to the old digital security methods just because there’s a vaccine out; indeed, management hiked guidance and continues to see a long runway of growth ahead. Analysts expect revenues to rise 41% in the coming year, but given the momentum, we think that could prove conservative. It’s a big idea.
Technical Analysis
ZS actually reached multi-month highs less than a month after the market bottom and gapped to new highs after earnings in late May, part of a huge run that took the stock up to 160 near Labor Day. Then came a choppy period, with some sharp selloffs, bounces and a final shakeout with most growth stocks in early November (after the initial vaccine news). But ZS steadied itself from there and broke out with power last Thursday (seven times average volume, stock up 26%). The stock has seen a little pullback since the rally, and we’re OK starting a position here.
| Market Cap | $23.5B | EPS $ Annual (Jul) | |
| Forward P/E | 599 | FY 2019 | 0.22 |
| Current P/E | 530 | FY 2020 | 0.26 |
| Annual Revenue | $480M | FY 2021e | 0.37 |
| Profit Margin | 14.0% | FY 2021e | 0.58 |
| Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | |
| ($M) | (vs. yr-ago-qtr) | ($) | (vs.yr-ago-qtr) | |
| Latest qtr | 143 | 52% | 0.14 | 250% |
| One qtr ago | 126 | 46% | 0.05 | -29% |
| Two qtrs ago | 111 | 40% | 0.07 | 40% |
| Three qtrs ago | 101 | 36% | 0.09 | 0% |
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.
| HOLD | |||||
| 11/16/20 | Albemarle | ALB | 121-126 | 140 | |
| 10/26/20 | Align Technology | ALGN | ? | 420-440 | 518 |
| 10/19/20 | Avalara | AVLR | 147-152 | 167 | |
| 10/26/20 | Axon Enterprise | AAXN | 99.5-102.5 | 123 | |
| 11/23/20 | Bilibili | BILI | 57.5-60.5 | 73 | |
| 11/2/20 | Bunge | BG | 56-58.5 | 61 | |
| 11/16/20 | Canopy Growth | CGC | 23.5-25 | 28 | |
| 11/23/20 | Celsius Holdings | CELH | 31.5-34 | 37 | |
| 6/8/20 | Carrier Global | CARR | 21.5-23 | 37 | |
| 11/2/20 | Cloudflare | NET | 49-52 | 82 | |
| 11/9/20 | Enphase Energy | ENPH | 112-118 | 129 | |
| 10/26/20 | Exact Sciences | EXAS | 103-107 | 135 | |
| 9/8/20 | Five Below | FIVE | 120-124 | 163 | |
| 8/10/20 | Freeport McMoRan | FCX | 13.3-14.5 | 25 | |
| 8/10/20 | Freshpet | FRPT | 99-102.5 | 135 | |
| 10/26/20 | General Motors | GM | 34-36 | 44 | |
| 10/26/20 | GrowGeneration | GRWG | 16.5-18 | 34 | |
| 11/23/20 | Halozyme | HALO | ? | 38.5-41 | 40 |
| 11/23/20 | Huazhu Group | HTHT | 49.5-51 | 50 | |
| 11/9/20 | HubSpot | HUBS | 335-350 | 385 | |
| 11/23/20 | Inspire Medical | INSP | 172-182 | 200 | |
| 10/19/20 | Invitae | NVTA | 47-49.5 | 54 | |
| 11/16/20 | Lam Research | LRCX | ? | 415-435 | 509 |
| 11/2/20 | Martin Marietta | MLM | 263-273 | 285 | |
| 11/16/20 | Marvell Tech | MRVL | 41.5-43.5 | 44 | |
| 11/2/20 | Mattel | MAT | 13-13.5 | 15 | |
| 10/26/20 | MercadoLibre, Inc. | MELI | 1180-1240 | 1576 | |
| 11/23/20 | Moderna | MRNA | 95-98 | 160 | |
| 8/24/20 | Natera | NTRA | 60-63 | 90 | |
| 11/16/20 | Norfolk Southern | NSC | 235-245 | 239 | |
| 9/14/20 | NovoCure | NVCR | ? | 93-98 | 152 |
| 11/23/20 | Omnicell | OMCL | 100-104 | 108 | |
| 10/19/20 | Paycom Software | PAYC | 360-375 | 437 | |
| 8/3/20 | PINS | 33.5-37 | 70 | ||
| 8/3/20 | Qualcomm | QCOM | 106-110 | 158 | |
| 8/17/20 | Quanta Services | PWR | ? | 48.5-51.5 | 72 |
| 7/13/20 | Roku | ROKU | 147-154 | 300 | |
| 10/26/20 | Shift4 Payments | FOUR | 51.5-54 | 61 | |
| 11/16/20 | Snap | SNAP | 37.5-39.5 | 49 | |
| 11/23/20 | Sonos | SONO | 20.5-22 | 22 | |
| 9/28/20 | Square | SQ | 157-162 | 213 | |
| 10/5/20 | ST Microelectronics | STM | 32-33.5 | 42 | |
| 10/19/20 | SunPower | SPWR | 16.5-17.5 | 21 | |
| 8/10/20 | Taiwan Semi | TSM | 75-78 | 106 | |
| 9/14/20 | Target | TGT | 145-149 | 173 | |
| 11/16/20 | Timken | TKR | 69-72 | 73 | |
| 5/11/20 | Twilio | TWLO | 175-187 | 309 | |
| 11/9/20 | Uber | UBER | 45-47.5 | 54 | |
| 11/9/20 | Yeti | YETI | 50-53 | 64 | |
| 10/5/20 | Zendesk | ZEN | 101-105 | 135 | |
| 11/9/20 | Zillow | Z | 100-105 | 112 | |
| WAIT | |||||
| None this week | |||||
| SELL RECOMMENDATIONS | |||||
| 9/21/20 | Brinker Int’l | EAT | 42-44.5 | 51 | |
| 11/2/20 | Five9 | FIVN | 136-140 | 153 | |
| 11/9/20 | JD.com | JD | 83-86.5 | 83 | |
| 10/5/20 | SeresTherapeutics | MCRB | 27.5-29.5 | 25 | |
| 11/16/20 | Staar Surgical | STAA | 76-79.5 | 78 | |
| DROPPED | |||||
| 11/16/20 | Shockwave Medical | SWAV | 87.5-91 | 94 | |
| 11/16/20 | Upwork | UPWK | 29.5-31 | 33 | |
| 11/23/20 | II-VI | IIVI | 61-64 | 72 | |
The next Cabot Top Ten Trader issue will be published on December 14, 2020.