December 9, 2019

Bullish, though More Wobbles Likely

Current Market Outlook

The market hit a little turbulence early last week on renewed trade worries but bounced back nicely, with the major indexes finishing flat (S&P 500 and Nasdaq) to up (small- and mid-cap) on the week. Short-term, though, we wouldn’t be surprised to see some further ups and downs as the market and many stocks/sectors consolidate their two-month runs; we still favor buying pullbacks rather than breakouts at this time. The good news is that we continue to think current pullbacks and consolidations are leading to some good-looking entry points in a variety of leading stocks. All in all, we remain bullish, though it’s still best to be a bit choosier on the buy side at the moment, while giving some stocks that you own breathing room to consolidate if they’ve enjoyed a good run.

This week’s list has many leaders that are retreating toward support or are otherwise showing solid setups. Our Top Pick is Seattle Genetics (SGEN), which looks like a leader in the biotech field, and the stock is now pulling back for the first time after a big run.

Amedisys (AMED)

www.amedisys.com

Why the Strength

Amedisys is a healthcare services company that’s focused on home, hospice and personal care services for patients who are recovering from surgery or injury, or are temporarily, chronically or terminally ill. The firm operates 470 care centers in 38 states, including 137 hospice care centers devoted to terminally ill patients, and it also provides in-home medical care and assistance via a fleet of skilled nurses, therapists and aids. The firm is obviously playing in a longer-term growth area as the population ages, and top-notch management (including cost controls) and M&A has helped that along—in February 2019, Amedisys acquired all 53 locations of Compassionate Care Hospice for $350 million, and last month, it purchased eight locations from Asana Hospice. The stock is strong today because all of these positives are producing steady and reliable growth—Amedisys reported a strong earnings beat in late October, with adjusted EPS of $1.15 handily beating the $0.90 consensus estimate, while the top line slightly surpassed expectations. Revenue growth was enhanced by increases in both same-store patient admissions and billable hours for personal care services. For the second time in recent months, the company increased full-year guidance (analysts now see $4.40 per share, up 21% from last year), and big investors are likely thinking next year’s earnings estimate (+10%) is too low. It’s not going to set the world on fire but Amedisys looks like a steady winner.

Technical Analysis

After a big run into August of last year, AMED began a long, drawn out trading range, with support in the 100-105 range repeatedly holding, but with resistance in the 140 area also failing to give way. Shares tightened up further from July to October, and the buyers showed up after the Q3 earnings report--since then, AMED has surged to new highs (November 1) and has been in a persistent advance ever since. If you’re game, we advise grabbing some on dips.

AMED Weekly Chart

AMED Daily Chart

The Walt Disney Company (DIS)

thewaltdisneycompany.com/

Why the Strength

Whether it’s the firm’s one-of-a-kind theme parks (my wallet basically went up in smoke after a trip to the Magic Kingdom this September), media properties (ESPN, ABC, National Geographic and more) or movie-making brands (including Pixar and Marvel movies), Disney touches millions of people every day and makes a ton of money. (The Frozen 2 release ahead of Thanksgiving looks like another home run for the company, not just in the box office but for merchandise sales, too.) But the real attraction today is the firm’s online and streaming properties, especially Disney+, which allows access to all of its movies and shows, as well as a bit of original content (The Mandalorian is the most streamed show in the U.S.), with much more content coming next year. Plus, the firm owns a majority stake in streaming service Hulu and, of course, operates ESPN+, which gives subscribers added and exclusive content; both are available on the cheap ($13 per month) in a bundle with Disney+. Back in the spring, management released some bullish longer-term projections for these services (60 to 90 million Disney+ subs by 2024, for instance), but the official launch of that service has blown away projections, with 10 million signing up just in the first two days, with more launches since then (Australia, Puerto Rico, New Zealand in late November) and down the road (western Europe in March 2020). Of course, the launch and big investment in original content has crimped earnings, which slipped last year and should ease a bit during the next couple of quarters. But the big idea here is that investors are viewing Disney more as a streaming leader (higher valuation), with plenty of follow-on sales opportunities (merchandise, theme park attractions) based on any hit shows and movies. We think Disney can surprise on the upside.

Technical Analysis

DIS broke out of a four-year base in April when the top brass initially released details about Disney+, but after a decent run, the stock eased back to its 40-week line in September and October. But shares tightened up after that and, once Disney+ was launched, DIS took off on the upside, including seven weeks up in a row (the first five on accelerating volume). The relative performance (RP) line (not shown) is a bit shy of its old peak, but we think you can start a position on the stock’s recent weakness.

DIS Weekly Chart

DIS Daily Chart

DocuSign (DOCU)

docusign.com

Why the Strength

DocuSign hasn’t really been a powerful leader since the market bottomed in early October, but after a bullish reaction to last week’s earnings report, it appears to be joining the party. The big idea here is the company’s leading e-signature offering, which allows clients to sign off on all sorts of documents and agreements right quick, saving them plenty of time and money. (According to DocuSign, 83% of transactions on its platform are conducted in less than 24 hours, with half in less than 15 minutes.) The benefits are obvious (the firm has 562,000 customers, thanks in part to the solution being integrated into most major enterprise software platforms, including Salesforce.com), the market is gigantic ($25 billion) and DocuSign is moving to expand into a broader offerings for agreements in general (not just e-signatures but producing pre- and post-agreement documents, etc.). Growth has been both rapid and reliable in recent quarters, both on the top and bottom line, and last week’s report was another great one—subscription revenue was up 41%, billings rose 36% and earnings of 11 cents per share topped estimates by eight cents. Analysts see growth slowing some next year (sales up “only” 26%), though we think that proves conservative; either way, big investors are thinking DocuSign has years of solid growth ahead as e-signatures and agreements in general go digital.

Technical Analysis

DOCU had its coming out party in September when the prior quarterly report led to an eruption in the stock, with three straight huge weekly gains on massive volume. After that, shares moved higher in a choppy manner, with slightly higher highs and higher lows for the next couple of months. There was even a shakeout early last week, but DOCU’s report helped the stock to pop to new highs last Friday. Some wobbles are possible but the path of least resistance is up.

DOCU Weekly Chart

DOCU Daily Chart

GSX Techedu (GSX)

gsx.investorroom.com

Why the Strength

Online education in China has rapidly grown to a $36 billion market, yet it comprises less than 10% of the education industry—a massive opportunity for providers. Indeed, the importance of education in China is only anticipated to grow from here; thanks to a rise in middle-class incomes and supportive government initiatives in China, long-term forecasts see total K-12 tutoring hours growing 15-fold during the next decade! We don’t hang our hats on such decade-long guesses, but it’s clear this will remain a growth industry for a long time, and GSX Techedu (which IPO’d in June) should benefit. The company’s offerings run the gamut, providing students with after school tutoring, foreign language, professional and general interest courses. It delivers its classes using an online live large-class format, making it the third-largest K-12 large-class provider. And the firm is technology driven, with a platform based on big data analytics and proprietary databases that utilize artificial intelligence to maximize efficiency, improve teaching delivery and the student learning experience. Whatever it’s doing, it’s clearly working—its latest quarter saw revenues soar by nearly six-fold to $78 million, driven primarily by its successful K-12 after-school tutoring program, which grew by 526%. (Total enrollments grew a whopping 238% to 1.62 million, while billings, a leading indicator, was up five-fold.) Better yet, GSX has shown the ability to turn a small profit, and with Morgan Stanley predicting exponential growth in the online education market (reaching $160 billion over the next few years), there’s no reason that GDX can’t capture a large share of that.

Technical Analysis

GSX has been a rare IPO winner this year, getting going about a month after it came public and quickly zooming to 17 in August. Then came the base--the stock consolidated reasonably for three months as it generally hugged its 50-day line. Earnings then became the trigger, causing the breakout on November 22, with GSX picking up ground since then. Because it’s thin and volatile, try to enter on dips.

GSX Weekly Chart

GSX Daily Chart

Incyte Corporation (INCY)

www.incyte.com

Why the Strength

Incyte is a global biopharmaceutical company with a focus on oncology and inflammation & autoimmunity. The company’s main commercial therapy is Jakafi, which treats two blood cancers and graft versus host disease (GVHD), which can affect patients undergoing stem cell transplants. Additional revenue-producing therapies include Jakavi, Iclusig (which treats leukemia) and Olumiant (which treats rheumatoid arthritis). The company has an enviable record of growth, and shares have turned strong as medical stocks advance and the Q3 report easily topped expectations—solid sales of Jakafi and lower-than-expected expenses led to earnings of 82 cents, which topped guesstimates by 17 cents, and management raised full year revenue guidance as well. (The market now expects 2019 revenue to grow 16% and the bottom line to double.) Jakafi will be a solid growth driver for a while (patent protected until 2027), but there are other things to get excited about, too—on November 27, Incyte announced that the FDA granted priority review for pemigatinib as a treatment for patients with a certain type of cancer that arises from the bile ducts; analysts are expecting good results this month when Incyte reports on their Phase III study of itacitanib as a first line treatment for GVHD, and a second Phase III study is ongoing for ruxolitinib cream for the treatments of atopic dermatitis and vitiligo.

Technical Analysis

INCY plunged from 153 in early 2017 to the 60 area in the second half of 2018 before recovering to 89 by February. But then it went stagnant—shares chopped sideways for months despite generally solid results, but now the buyers have stepped back in. INCY has advanced nicely since the market’s early-October low, including a rise in each of the last six weeks, pushing to new recovery highs in the process. We’re OK starting a position here or (preferably) on dips.

INCY Weekly Chart

INCY Daily Chart

Qorvo (QRVO)

qorvo.com

Why the Strength

Chip stocks have become a bit bifurcated during the past couple of weeks, with some names that began showing strength in the summer waffling, while others that just emerged in October/November (including many that are tied to the 5G smartphone boom) are looking peppy. In our mind, Qorvo is one of the leaders, with radio frequency products and solutions for a variety of applications (defense, Internet of Things, satellites, etc.), but the big draw is the aforementioned smartphone trend—there is competition from Broadcom, Skyworks and others, but the complexity of 5G smartphones has (at least to this point) phone makers sticking with high-quality suppliers with integrated (not one-off) systems, which plays into Qorvo’s hands. The big idea here is the size of the opportunity—most analysts see 200 to 250 million 5G smartphones shipped in 2020, but Qorvo actually sees 300 million as the target, with a much larger opportunity in 2021 and 2022. The company earnings have flattened out in recent quarters, and customer concentration is always a risk (Apple is a huge customer), but the stock is strong because the Q3 report crushed estimates and management’s meaningful hike in estimates has big investors thinking the boom has begun—the Q4 revenue forecast was boosted to $850 million (up from $760 estimate beforehand!), and while the consensus is for $6.57 per share next fiscal year, some are thinking $7 to $7.50 is more likely. Chip stocks are always tricky investments, but Qorvo looks near the start of a big growth wave.

Technical Analysis

QRVO was our Top Pick a few weeks ago when the stock exploded out of a multi-year consolidation after earnings in late October. The stock didn’t race ahead from there, but we like the action—shares gave up zero ground despite its moonshot, and after a shakeout toward its 25-day line early last week, has pushed ahead to new highs. You can start small here, though we’d prefer to enter on a pullback.

QRVO Weekly Chart

QRVO Daily Chart

Seattle Genetics (SGEN)

seattlegenetics.com

Why the Strength

Seattle Genetics is certainly acting like one of the leaders in the strong medical field, and for good reason, as it looks to have a ton of oncology irons in the fire. The first piece of bullish news arrived in September, when the FDA granted a priority review for the combination of the firm’s experimental drug (enfortumab vedotin) and a drug called Keytruda (from Merck) that’s used to treat advanced/metastatic urothelial cancer. Then even bigger news came in October, when the company released great trial results from its bladder cancer treatment (drug application to the FDA likely to be submitted in Q1 of next year). Now, Seattle Genetics has announced that it will join with Astellas (a Japanese pharmaceutical outfit) and Merck to begin a phase III study evaluating the combination of these drugs to address patients with previously untreated metastatic urothelial cancer. As well, SGEN recently presented a paper highlighting successes of its Adcetris drug (already on the market) for treating Hodgkin lymphoma—a disease that is fatal to more than 1,000 people in the U.S. every year. Seattle Genetics isn’t likely to be profitable for a while, but revenues should continue to boom in the years ahead and it appears to have a few potential blockbusters up its sleeve.

Technical Analysis

SGEN broke out of a year-long base in September, accelerated higher in October after the bladder cancer trial results and continued to surge all the way to 122 late last month. Now it’s finally taking a rest--the stock eased lower gradually durign the past couple of weeks and took a modest hit today. More near-term weakness is possible, but we’re thinking the next big move will be up. We’re OK buying some around here or further down.

SGEN Weekly Chart

SGEN Daily Chart

Splunk (SPLK)

splunk.com

Why the Strength

Big data is big and growing bigger. The market is forecasted to reach $103 billion by 2022, with every person generating 1.7 megabytes of data every second, with internet users as a whole expected to generate some 2.5 quintillion bytes of data each day. Suffice it to say, all this data has to be corralled and massaged into something useful, which is where Spulnk makes its hay—the company’s new Data-to-Everything platform is a one-stop shop that its customers use to turn their raw data (especially unstructured data produced by the endless number of clicks and views online) into useful stats and information that can be used to launch and improve products and attract/retain customers. Wall Street is very optimistic on this recently-launched platform (in September), which comes with a more flexible pricing model (consumption-based), and analysts appear correct given Splunk’s latest earnings report. In the most recent quarter, the company saw revenues rise to $626 million, up 30% (beating estimates by more than $21 million), primarily from a 40% increase in software revenues, which grew to $454 million. Earnings of $0.58 per share topped estimates by four cents and surged 53%. In addition to Data-to-Everything, analysts are excited by some changes in the way that Splunk is now reporting figures, including metrics on recurring revenue, which is making it easier to understand the company’s potential and progress. Bigger picture, Splunk looks like the standard in the Big Data field, which should keep growth on track—and keep big investors interested.

Technical Analysis

SPLK has had a good story and solid growth for a while, but the stock has been dormant—it reached 118 in April 2018 and was still at that same level early last month. But it’s looking like SPLK is now getting going, with two big-volume buying weeks following earnings to minor new highs. We like the recent rest in the upper 140s and are OK getting some shares around here.

SPLK Weekly Chart

SPLK Daily Chart

TransDigm (TDG)

www.transdigm.com

Why the Strength

We’ve labeled TransDigm as the best growth stock few investors have heard of, with a unique, dependable story and a management team that’s proven adept at making the right moves. The firm makes highly engineered components for the aerospace industry, with revenues split relatively evenly between defense, commercial OEM and commercial aftermarket sales. The most attractive feature here is that TransDigm is one-of-a-kind outfit—around 90% of the widgets it sells are proprietary, and in 80% of the cases, it’s the sole-source provider! Combined with the aftermarket business, that means the company has a steady, dependable (excellent profit margins here) and very long runway of growth opportunities, all of which is like catnip to institutional investors. Recent revenue growth has been bolstered by the huge acquisition of Esterline (M&A is a key driver of growth over time), but organically, the top line was up 8% in the latest quarter (10.5% for the past year) and should be up in the mid- to upper-single digits in 2020, while earnings are expected to expand at a faster clip (up 14%), both of which are likely conservative. And, really, the attraction here isn’t just Q4 or 2020, but the fact that little is standing in the way of TransDigm cranking out mid-teens earnings growth (and occasionally returning value to shareholders—it paid a one-time special $30 per share dividend earlier this year) for many years to come.

Technical Analysis

TDG staged a powerful breakout in January of this year, which was a clue that the stock was a leader. The advance since then has had plenty of ups and downs, including some wobbles before and after earnings in mid November. But shares are up six weeks in a row and have tightened up a bit of late, too. We’re OK starting a small position here and adding more on a decisive push above 585. As for the high price, don’t worry about it—just buy fewer shares.

TDG Weekly Chart

TDG Daily Chart

Tesla, Inc. (TSLA)

tesla.com

Why the Strength

Tesla requires no introduction, as it’s almost always in (or producing) eye-popping news (and tweets). But outweighing the tedious noise are increasingly attractive results and meaningful progress. The latest happening came on November 21, when Tesla unveiled its new Cybertruck with a compelling (some say ugly) futuristic design, and was promoted as having “better utility than a truck with more performance than a sports car.” Despite some skepticism, the company immediately accumulated 250,000 pre-orders from Tesla enthusiasts, each order contingent upon a $100 refundable deposit. While it’s a long way from being a hit, it’s certainly a good start for the product and could be another catalyst going forward. That said, what’s attracting big investors now is that Tesla’s bottom line has turned the corner—third-quarter results (released late October) pleased analysts and brought two days of heavy-volume buying, mostly because gross margins came in above expectations and strong cash flow shocked the market. Production is running ahead of schedule for the Model 3 in China and the Model Y, too. In fact, as we’ve written before, demand has never been the problem—people are buying Teslas in droves, especially the cheaper Model 3, and now it appears the firm has tightened up the expense side of the ledger. Analysts see earnings leaping into the black next year (around $5.50 per share), though even that could prove low if Musk and the other top brass make the right moves.

Technical Analysis

TSLA changed character after its Q3 report, galloping to multi-month highs on huge volume and continuing as high as 361 in mid November. The cybertruck unveiling produced a sell-the-news effect, with shares quickly sinking to the 330 area, but the weekly chart looks fine and TSLA has tightened up a bit since that decline, too. It might need more time to rest, but today’s pop was encouraging and we think higher prices are coming down the road.

TSLA Weekly Chart

TSLA 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.