Normal Hesitation
Current Market Outlook
Most major indexes have finally taken a bit of a breather during the past few trading days, with the 200-day moving average providing a bit of logical resistance. So far, the damage has been very limited and, in fact, many leading growth stocks actually hit new highs today. Without predicting any specific path, the big prior run, overhead resistance and still-iffy longer-term trend probably means more choppiness and potholes are on the way, especially as earnings season continues. But the overall evidence (which, by the way, includes a lack of meaningful pullbacks so far) continues to impress. We still think the next big move from here is up, but be sure to pick your spots (and your stocks) on the buy side, and practice patience with your strongest performers, giving them a chance to continue advancing.
This week’s list sports a bunch of recent earnings winners from a variety of industries. Our Top Pick is Array Biopharma (ARRY), which has shown fantastic accumulation pre- and post-earnings as it lifted to all-time highs.
| Stock Name | Price | ||
|---|---|---|---|
| Array Biopharma (ARRY) | 46.35 | ||
| Chipotle Mexican Grill (CMG) | 773.32 | ||
| Columbia Sportswear (COLM) | 102.15 | ||
| Glaukos Corp. (GKOS) | 67.84 | ||
| Kirkland Lake Gold (KL) | 51.30 | ||
| LPL Financial Holdings (LPLA) | 85.22 | ||
| Palo Alto Networks (PANW) | 236.92 | ||
| Paycom Software (PAYC) | 0.00 | ||
| Spirit AeroSystems (SPR) | 92.54 | ||
| Zendesk (ZEN) | 82.19 |
Array Biopharma (ARRY)
Why the Strength
Array Biopharma develops targeted small molecule drugs to treat patients with rare diseases and cancer. It’s an exciting story because one year ago Array had six drugs progressing through trials that were either owned by Array or part of collaborations; fast forward to today and Array now has BRAFTOVI (encorafenib) capsules and MEKTOVI tablets on the market for BRAF-mutant inoperable or metastatic melanoma. Those two drugs delivered $23 million in sales for the December quarter, demolishing consensus estimates of $15 million to $16 million. This two-compound treatment is believed by many analysts to be on track to become the go-to choice in BRAF melanoma, mainly because of a more favorable tolerability profile than other combinations. Array also has other irons in the fire, most notably the encorafenib/cetuximab combination for metastatic colorectal cancer that’s expected to deliver a phase 3 trial readout (BEACON trial) in the first half of this year. Array has collaborations with many of the big biotech players (Bristol-Myers Squibb, Pfizer, Merck, Novartis, Ono, and more), so factoring in collaborations (and a big milestone payment from Loxo Oncology), Q2 fiscal 2019 revenue was $82.6 million (up 96%), while EPS of -$0.05 beat by $0.10. Analysts see 44% revenue growth this year and another 32% in 2020, which should keep big investors interested.
Technical Analysis
ARRY enjoyed a big run in late-2016 and early-2017 on the back of positive trial results, then made another nice move in the beginning of 2018, but that effectively marked the start of a year-long consolidation. Like most stocks, ARRY came alive early this year, but the real action has come since earnings—the stock has blown the roof clean off in recent days, exploding into the low 20s on monstrous volume. Pullbacks are certainly possible, but we’re not expecting a major retreat. You can nibble here or on weakness.
ARRY Weekly Chart
ARRY Daily Chart
Chipotle Mexican Grill (CMG)
Why the Strength
It’s not going to be the glamour stock it was a few years ago, but the evidence continues to mount that, after a couple of years correcting some major corporate issues (and improving customer perception), Chipotle Mexican Grill has its act together, and the stock looks like a liquid leader of this advance. The general story remains the same, with the company a leader in the fast-casual restaurant segment, serving tasty Mexican fare via its 2,500 restaurants (mostly in the U.S.). The growth driver here is, first and foremost, customers are coming back to the brand; in Q4, comparable store transactions grew 2%, which, while small, was the fastest growth in some time, while higher prices helped overall comparable store sales to rise 6.1% (also the fastest in a long time). But a lot of that renewed customer acceptance is directly due to some key initiatives, especially online—the firm saw a 20% boost in digital impressions last year, Chipotle app downloads grew 72%, which, combined with delivery availability in many locations, helped the firm’s Q4 digital sales boom 66% (accelerating from 48% in Q3) and account for a full 13% of total revenue. Throw in some menu initiatives (their lifestyle bowls, which launched in January and come in keto, paleo, whole30 or double protein varieties, look like hits) and a continued, steady restaurant expansion (management sees the store count rising 5%-plus), and analysts are expecting continued solid growth—earnings are expected to rise 37% this year.
Technical Analysis
CMG etched a double-bottom base during the market downturn, with the second (December) low undercutting the first (October) low, shaking out the weak hands. Since then, the stock has dazzled, with a straight-up advance all the way to 545 (leaping to multi-year highs in the process), a tight rest for a few days, and then last week’s earnings gap. Yes, it could pull back, but we think dips are likely to be reasonable if they come—you can grab some shares here or on dips.
CMG Weekly Chart
CMG Daily Chart
Columbia Sportswear (COLM)
Why the Strength
Columbia is a specialty retail outfit, designing, marketing and distributing active outdoor apparel and footwear under the Columbia, Sorel, Mountain Hardwear and PrAna brands. A year and a half ago, the firm underwent an assessment to better adapt to the new and challenging retail environment. And the results, which included some new management and an emphasis on brand boosting, have been terrific. In fact, the stock is strong today mostly because of the fantastic Q4 report—not only did sales and earnings easily exceed expectations (earnings of $1.68 per share topped estimates by 40 cents!), but strength was seen across geographies (up 12% to 20% in every area), across brands (up 8% to 21% across its four brands), across product categories (apparel up 20%, footwear up 17%) and across channels (wholesale up 15%, direct-to-consumer up 24%). Analysts see sales and earnings up high-single digits in 2019, but investors aren’t buying that (at least on the earnings side) after Q4’s report. There’s nothing revolutionary here, just a solid retail operation that’s taking advantage of its opportunities. Throw in a modest dividend (1% annual yield) and share buyback program and Columbia probably works its way higher.
Technical Analysis
COLM emerged from a long slumber in November 2017 and, despite a choppy market, ran from the mid 60s then to the mid 90s by last July. That was followed by a shallow, but tedious, sideways-to-down phase—the stock was sitting near 80 (at eight month lows) in December and January. But then came a rally in January, followed by last Friday’s breakaway earnings gap (up 16% on four times average volume). We think buying here or (preferably) on dips should work out well.
COLM Weekly Chart
COLM Daily Chart
Glaukos Corp. (GKOS)
Why the Strength
Glaukos developed a solution to help people suffering from a glaucoma, a condition where high pressure in the eye results from lack of ocular fluid drainage. Glaukos came up with the iStent insert procedure, which involves inserting a very tiny stent in the eye during cataract surgery. Approved in 2012, iStent has been a big growth driver but is now being phased out in favor of the next-gen iStent Inject platform (injectable two-stent therapy); the commercial launch occurred in Q3 2018 and has limited new doctor signups since Glaukos is mainly focused on training existing docs on the new procedure. At recent conferences, management said around 50% of the customer base is trained, and from that base analysts are projecting around 90% of customers will be on the new platform by the end of 2019. Another big positive catalyst for Glaukos was the voluntary exit of competitor Alcon from the market last year, when its CyPass Micro-Stent was shown to be a flop (no better than cataract surgery alone). That allowed Glaukos to snag some sales reps and gain market share, a good thing since another competitor (Ivantis) just completed a soft launch for its new product Hydrus (only about a dozen sales reps). Given all the variables, analysts expect a dip in growth when Q4 2018 results come out on February 27 (13% revenue growth expected). But investors are looking ahead, and with training making progress and lots of Alcon sales to grab, Wall Street sees the top line surging 27% this year, a figure that could easily prove conservative if management pulls the right levers.
Technical Analysis
GKOS was up and down in early 2018 due to competition concerns and slowing growth, but that changed in late August after news of Alcon’s exit caused shares to catapult up 56% in just one week! Shares held up for a bit before finally giving way to the market’s correction, falling to 51 in early January. The stock has looked sharp since then, though, rallying above its 50-day line in mid January, resting for a bit and pushing back toward its highs last week. If you’re game, you can start a position here and see what earnings brings.
GKOS Weekly Chart
GKOS Daily Chart
Kirkland Lake Gold (KL)
Why the Strength
With the stock market in a solid uptrend and showing great breadth and leadership, you wouldn’t normally expect gold stocks to be thriving, too. But they are, and Kirkland Lake Gold looks like the hands-down leader in the group. (That’s one advantage of Top Ten—it looks for where the big money is flowing, no matter where it may be.) As we’ve written before, Kirkland Lake has five mines in operation, though one in Australia (Fosterville) and another in Toronto (Macassa) are the two big drivers, making up 82% of Kirkland’s 2018 production levels. And, unlike many miners whose prospects rise and fall solely with the price of gold, Kirkland has a solid growth outlook—output rose 21% last year thanks mainly to those two mines, and that should continue, with Fosterville output expected to soar 70% by 2021 with much higher (and usually higher-priced) grades as well (thanks in part to the new Swan Zone deposit there), and Macassa’s growth is expected to kick into gear in 2022. All told, Kirkland sees company-wide output lifting about 10% annually through 2021 and more beyond that, and while exploration spending is likely to rise this year, the company’s growing production is helping the bottom line—free cash flow rose 29% last year, and analysts see the bottom line rising 16% this year, which should prove conservative should gold prices remain strong. For a gold stock, Kirkland has a very solid story.
Technical Analysis
KL has actually been advancing in recent years despite poor action from the gold sector, and that trend has accelerated since November (before the broad market bottomed). In fact, KL has been one of the best performers out there, rallying 12 of 13 weeks and soaring to new highs. It’s not at an ideal buy point here, but we like the good volume and persistency seen in the advance. Look for a shakeout to enter.
KL Weekly Chart
KL Daily Chart
LPL Financial Holdings (LPLA)
Why the Strength
We wrote up LPL Financial three weeks ago in Top Ten, as it looked like the potential leader among Bull Market stocks (those whose business thrives when the markets are acting well), and the action since then—including its reaction to Q4 earnings—only reinforces that view. LPL is the nation’s largest independent broker-dealer and is a major player in investment advice for the retail market via more than 16,000 advisors. As expected, the market’s fourth-quarter plunge cut into the firm’s total brokerage and advisory assets (down 8% sequentially, though still up year-over-year), but commission (up 10%), advisory (up 26%) and asset-based (up 37%) revenues all looked great (helped partially by a good-sized acquisition last year), which, combined with the corporate tax cuts, led to another strong quarter of earnings growth. More important, though, is the future—with the stock market showing great strength this year, LPL’s assets have likely already recovered toward record levels, and you can bet that more men- and women-on-the-street will be seeking investment advice as sentiment heats up. Barring any new acquisitions, revenues are expected to rise mid-single digits this year, but analysts see earnings soaring 36% as costs remain in check and new business falls to the bottom line—and both of those could prove conservative if the bull run continues.
Technical Analysis
When we wrote about LPLA in January, the stock had already shown excellent accumulation in October following its quarterly report, formed a much higher low in December and spiked higher into mid January. And the action since then has been just as good—LPLA paused for eight trading days before soaring on earnings two weeks ago and continuing higher since then. You can buy a little here or target dips of a couple of points to get in.
LPLA Weekly Chart
LPLA Daily Chart
Palo Alto Networks (PANW)
Why the Strength
Cybersecurity stocks have been one of the hottest areas of among all tech stocks—some of our favorites are newer names that address a particular niche or problem, but Palo Alto Networks’ position as the emerging blue-chip stock of the cyber-defense space is also attracting its fair share of buyers. The big picture growth theme is that as data technologies (such as artificial intelligence, cloud computing and automation, not to mention mobile workforces that access data from all over the place) are more widely adopted by enterprises, the need to secure their networks grows. Palo Alto’s currently in the sweet spot to capitalize on this rapidly developing global threat landscape, and an expected firewall refresh cycle in 2019 should help the company draw more customers to its broad-based next-gen security platform. Second quarter fiscal 2019 results are due out February 26, but analysts have grown increasingly confident in the company hitting the numbers as evidence builds that Palo Alto is past challenges with its sales force, onboarding a new CEO and dealing with the threats and opportunities of the shift to the cloud. Expectations for 33% EPS growth (to $5.18) this fiscal year on 24% revenue growth (to $2.82 billion) should keep interest high.
Technical Analysis
After a tough couple of years, PANW got going last February and, with some fits and starts, kept rallying through August, when it peaked around 240. The correction after that was definitely sharp and didn’t look good—shares fell 33% from high to low and lived below their 200-day line for nearly three months. But, like most growth stocks, the action since the calendar flipped has shown a persistent advance (seven weeks up in a row) and PANW has approached its old highs. If you want in, try to nibble on dips and see what earnings brings.
PANW Weekly Chart
PANW Daily Chart
Paycom Software (PAYC)
Why the Strength
We featured Paycom a few times last year because of stellar fundamentals and a fantastic chart. The stock got the nod this week for the same reasons, and the recent buyout of peer Ultimate Software (ULTI) by a private-equity-led group, at a handsome premium, is just the icing on the cake. If you’re not familiar with the name, Paycom is a market leader in the cloud-based human capital management (HCM) software space, as its solutions help enterprises manage HR, payroll, benefits and talent. There are a lot of competitors out there (ADP, Ultimate, etc.), but Paycom’s done better than hold its own and last week the company just delivered one of its biggest revenue beats in two and a half years. In Q4, revenue of $150 million was up 32% and beat by $6.2 million (4.4%); nearly all of that revenue was recurring, too, which is catnip to institutional investors. Meanwhile, earnings of $0.61 per share beat by $0.05. Revenue retention of 92% was another positive and represents the best reading on that measure in six years. Management attributed the improvement to efforts to get employees (the end users) more engaged with its solutions. Finally, 2019 revenue guidance ($710 million to $712 million, up at least 25%) was above consensus and investments (which should slow EPS growth to just 18%) should pay off in 2020, when 23% revenue and 27% EPS growth are expected. The bottom line here is that Paycom is still a heavy hitter. We like it.
Technical Analysis
PAYC’s long-term chart has been great for years, though the spike late last summer (it went from 100 to 164 in under two months) brought the stock out of trend on the upside, which preceded the fourth-quarter correction. However, the base that formed was pretty, with low volume and support a bit below the 200-day line after mid November. And PAYC’s action in recent weeks has been runaway-like, with hardly any pullbacks and, last week, a gap to new highs and some nice follow through last Friday. Try to buy on weakness.
PAYC Weekly Chart
PAYC Daily Chart
Spirit AeroSystems (SPR)
Why the Strength
We’re seeing more and more aerospace names beginning to show up on our screens; granddaddy Boeing appeared last week, and this week, Spirit Aerosystems (not to be confused with Spirit Airlines) makes the cut. Spirit Aerosystems is one of the largest makers of aerostructures in the world, be it fuselages, propulsion systems or wing components. The company does business with many huge customers, including Bell Helicopter, Rolls-Royce and Northrop Grumman, but the main attraction is the firm’s longer-term deals with Boeing and Airbus. (Boeing, which is Spirit’s largest customer, recently extended its agreement with the firm, with production and pricing deals through 2030 in many cases.) Growth here isn’t amazing, but steady production increases are boosting the top line in the mid-single digit range, and tight increased cost controls are allowing any increased business to fall right to the bottom line—earnings growth, in fact, is accelerating, and analysts see a 20% gain in 2019 on top of that. And the firm isn’t just benefiting from the growth in the industry; Spirit is also poised to acquire Asco Industries for $650 million, a European maker of lift wing structures and other key assemblies, which will boost Spirit’s contribution to some popular Airbus planes and even the F35. Throw in buoyant free cash flow and an active share buyback program (share count is down 8% from a year ago) and there’s plenty to like.
Technical Analysis
SPR enjoyed a nice run into market top of January 2018, but the 11 months after that were tough, with shares dipping from 105 at the peak to 78 by April, and after a so-so summer rally, plunging all the way to 65 at the market’s December nadir. But since then, SPR has staged a stunning turnaround, with the Boeing agreement, the general market and a better-than-expected earnings report driving shares back into the 90s on a string of high-volume days. Any dip should provide a good risk-reward opportunity.
SPR Weekly Chart
SPR Daily Chart
Zendesk (ZEN)
Why the Strength
We were knocked out of Zendesk last October when the market began to fall apart, but have kept our eye on the stock given the company’s excellent long-term growth story. That story came back into focus last week after Zendesk’s Q4 report confirmed that revenue growth has been accelerating (up 41% in the quarter) and is likely to be sustained at a 30% annual clip, or faster, for the next two years. That pace of growth, on a larger revenue base and in the middle of an investment phase, is undeniably impressive, especially given that Zendesk is delivering on the bottom line, too. In Q4, earnings of $0.10 per share beat by a huge $0.07, capping off a year that saw revenue grow by 39% while EPS leapt into the black ($0.23, up from a loss of -$0.05 in 2017). In 2019, analysts see revenue growing by at least 34% and EPS to jump 26%, to $0.29 (which is likely conservative; we’d expect estimates will go up over the next month). Back to the big picture, Zendesk’s momentum comes from its software solutions for the $20 billion (and growing) customer service industry and the firm has a reputation for designing sleek and client-friendly products that help businesses catch and keep their customers happy, offer technical support and communicate through chat, talk, and messaging applications. Growth should remain elevated for years to come if management continues to execute.
Technical Analysis
By our measures, ZEN’s initial breakout came in January of last year, which led to a great rally that mostly rode the 50-day line higher through September. The Q4 selloff was significant, but not any worse than it was for other high-growth software stocks. ZEN dipped below 50 very briefly in November then, after a failed attempt to rally in December, the stock finally got trucking last month. ZEN walked up to 70 before last week’s earnings report spiked the stock as high as 78. Expect volatility, but we think the uptrend will continue.
ZEN Weekly Chart
ZEN 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.
