Great Bounce! Now What?
Current Market Outlook
Most major indexes have recouped a bit more than half of what they lost in the recent two-week plunge and are now standing above or just below their 50-day moving averages—so what happens from here will be vital. A continued rally would turn the intermediate-term trend positive and tell us to become more aggressive, but renewed weakness would be a sign that the sellers are still lurking. Meanwhile, it’s hard not to be encouraged by the action of leading stocks, many of which have rebounded nicely, with some (including a few in this issue) pushing to all-time highs. We’re nudging our Market Monitor back to neutral, and will take our cues from the market and leading stocks in the days ahead.
This week’s list is the second straight that’s featured a bunch of resilient growth stocks, which tells you where big investors are putting money to work. Our Top Pick is Weibo (WB), the Chinese social media giant that broke out to new highs last week.
| Stock Name | Price | ||
|---|---|---|---|
| HubSpot (HUBS) | 582.89 | ||
| Okta, Inc. (OKTA) | 148.41 | ||
| Paycom Software (PAYC) | 0.00 | ||
| Sangamo BioSciences (SGMO) | 0.00 | ||
| Shopify (SHOP) | 585.00 | ||
| SolarEdge Technologies Inc. (SEDG) | 124.37 | ||
| Steel Dynamics (STLD) | 0.00 | ||
| Weibo (WB) | 98.16 | ||
| Workday (WDAY) | 194.88 | ||
| Yandex (YNDX) | 0.00 |
HubSpot (HUBS)
Why the Strength
HubSpot is making its mark by helping companies avoid the irritating practice of pushing online ads toward people who don’t want to read them. HubSpot’s alternative to outbound marketing is to attract users with useful content and a positive experience, then gradually convert them from visitors to leads to customers to promoters. The company is aimed specifically at helping mid-sized companies with between 10 and 2,000 employees, which represents $45 billion in total addressable market. HubSpot’s software-as-a-service model builds consistent revenue flow; revenue growth averaged 38.5% in 2017 and earnings turned positive in Q1. EPS growth has streaked from 137% in Q1 2017 to 192% in Q4. Analysts are forecasting earnings growth of 116% in 2018 and 59% in 2019. The company’s graduated levels of service encourages existing customers to increase their monthly fees and the company is getting an increasing slice of its revenue from sales outside the U.S. All in all, the numbers certify HubSpot’s success in changing how companies do their sales and marketing.
Technical Analysis
With the exception of a short, steep correction from 60 to 27 in early 2016 and a more leisurely correction from 60 to 45 in the last four months of that year, HUBS has been in rally mode, albeit with plenty of volatility. The stock dipped from 102 to as low as 86 during the steep correction in the broad market that ended on February 9, and was trading at 97 when earnings came out on February 13. Investors reacted positively to that earnings report, and HUBS is now trading above 105. The volatility of HUBS should make it possible to pick up shares a couple of points lower, but the post-earnings run may not be over yet. A buy on any normal weakness should do well.
HUBS Weekly Chart
HUBS Daily Chart
Okta, Inc. (OKTA)
Why the Strength
Okta is a newly public cloud-based provider of enterprise identity solutions. Its Okta Identity Cloud platform features over 5,000 integrations, including with ServiceNow, Microsoft, Slack, Zendesk and Box. And it helps thousands of customers, including LinkedIn, Dish, Adobe and Experian, connect employees, partners, suppliers and customers. The stock’s breakout came last week after analysts became more bullish on the company’s potential to beat Q4 expectations when it delivers its earnings report on March 7. The trends are strong here. Back in December, Okta crushed Q3 expectations and management outlined bullish demand trends for secure enterprise access and identity management solutions. Revenue growth soared 61.4% to $68 million (beating by $5.4 million), while an EPS loss of $-0.19 beat by a nickel. With a pure software-as-a-service (SAAS) business model, and an addressable market of nearly $20 billion, it looks like there’s a lot of room left for Okta. Analysts currently expect the company to deliver 58% revenue growth in Q4, then 33% over the next 12 months. But with limited visibility into the company given that it just went public last April, it’s possible analysts are being conservative with their estimates.
Technical Analysis
OKTA enjoyed a terrific IPO as shares jumped from 17 to 23.5 in their first day of trading. Like many new issues, buying demand eased quickly and trading action turned choppy. While shares traded over 30 a few times during 2017, they also traded below 25 a number of times. By the time the year was over, shares were only modestly above where they closed their first week as a public company. A January run above 30 was quashed by the market rout, but shares broke out to a fresh high last week, signaling higher prices ahead.
OKTA Weekly Chart
OKTA Daily Chart
Paycom Software (PAYC)
Why the Strength
Paycom sells a suite of cloud-based human capital management (HCM) solutions that help enterprises manage HR, payroll, benefits and talent. The company operates in a large, fragmented market, and has a history of beating analyst expectations. Paycom continues to grab market share from larger competitors (like ADP), and is rolling out new sales offices to expand the reach of its sales force, which is typically among the most productive in the industry. The stock has been strong for years and has a history of shrugging off market corrections relatively unscathed. It did so again in February, mounting a swift recovery last week on the back of yet another better-than-expected quarterly report on February 6, right in the middle of the market’s meltdown. Fourth-quarter revenue was up 30% to $114 million, and EPS of $0.29 beat estimates by $0.05. Forward guidance for 2018 was in line with expectations and implies roughly 26% revenue growth and 89% EPS growth. But we’ve seen Paycom do better than expected for years now, so it’s safe to say management is being a little conservative. Bigger picture, Paycom is one of the leaders of the cloud software sector, which has a ton of resilient names in it today—we think it can do well once the market confirms a new uptrend.
Technical Analysis
PAYC has been trending higher for the better part of the last year, with a number of normal pullbacks to just below its 50-day line occurring from March through November. A more sizeable pullback in early December pushed PAYC down to 76, and by year-end, the stock had made no net progress for about 10 weeks. But the buyers returned in January, driving the stock to new highs, and while the market-induced pullback was sharp, so was the snapback. You can buy a little here or (preferably) on pullbacks.
PAYC Weekly Chart
PAYC Daily Chart
Sangamo BioSciences (SGMO)
Why the Strength
Sangamo focuses on gene therapy, genome editing, cell therapy and gene regulation. It specializes in engineered zinc finger proteins (ZFPs), which it designs for the highly specific recognition of desired DNA sequences. It uses this targeting capability in zinc finger nucleases (ZFNs) to edit the human genome, knocking out a specific gene or adding a new DNA sequence where needed. Revenue comes from research grants and collaborations, but no treatments are currently on the market. That said, the firm has plenty of irons in the fire—Sangamo has six ongoing therapeutic programs, including gene therapy candidates SB-525 (hemophilia A, Phase 1/2, collaboration with Pfizer), stem cell transplant therapy ST-400 (on track for a Phase 1 clinical trial, beta-thalassemia, collaboration with Bioverativ), and genome editing therapies SB-318 (Phase 1/2, MPS I) and SB-913 (Phase 1/2, MPS II). Shares have been responding well on trial enrollment, achievement of Orphan Drug status in the E.U. for SB-318 and SB-913, an expanded collaboration with Pfizer, and an award from Uncle Sam to study the potential for Sangamo’s ZFN gene-editing technology to eradicate persistent HIV infection in certain patients. With multiple shots on goal (albeit all relatively early-stage), data readouts beginning in the first half of 2018, and gene therapy stocks in focus after Celgene snatched up CAR-T developer Juno, Sangamo is a high-risk but high-reward situation.
Technical Analysis
SGMO was in a longer-term downtrend for years until last May, when the stock soared 40% on news that it teamed up with Pfizer to develop gene therapies to treat hemophilia A. Shares ran as high as 17 before a shakeout move in October took them just below their 50-day line. Buyers stepped back in, however, and SGMO ended 2017 at its highs. Impressively, shares held up well during the market’s maelstrom two weeks ago and moved to new highs last week. You could buy a little here or on dips.
SGMO Weekly Chart
SGMO Daily Chart
Shopify (SHOP)
Why the Strength
We wrote about Shopify three weeks ago as the stock was showing definitive signs of getting going after a tough correction, and the bullish evidence (both fundamental and technical) has only grown since. The company’s e-commerce platform remained as popular as ever in the fourth quarter, driving estimate-beating revenue (up 71%) and earnings growth (15 cents per share vs. five cents expected), and the sub-metrics also wowed—monthly recurring revenue (most subscription-related charges) rose 62%, gross merchandise volume lifted 65% and the company issued twice as many cash advances than the year before. Total clients reached 609,000 by year-end, including more and more big ones like Cummins, Ford, FAO Schwarz and Polaroid. While Shopify isn’t specifically targeting big accounts, its Shopify Plus subscription (3,600 merchants) is proving very popular among the big boys. Management significantly boosted guidance for 2018, looking for revenues to rise about 45%, though profits are forecast to remain near breakeven as Shopify invests in new products and solutions. It’s likely both those figures are conservative, especially as the firm’s profits have been ramping. Big investors are certainly buying the story—541 funds owned shares at year-end, up from 307 a year earlier.
Technical Analysis
After a poor fourth quarter that included a September dive, SHOP showed signs of a change in character when the calendar flipped, nosing out to new price highs in late January. And, very encouragingly, the stock handled itself well during the market’s recent plunge—it found big-volume support north of its 50-day line, then zoomed to new highs and held those gains following earnings. You can nibble here or (preferably) on dips of a few points.
SHOP Weekly Chart
SHOP Daily Chart
SolarEdge Technologies Inc. (SEDG)
Why the Strength
While many solar power companies fight it out in the commodity business of making solar cells and arrays, SolarEdge Technologies addresses the demand from large solar installers and construction companies for the inverter systems and other infrastructure technology that gets solar sources connected to the grid. The company’s intelligent inverter solutions actually maximize power generation and lower the cost of solar photovoltaic electricity. This Israel-based company gets more than two-thirds of its revenue from the U.S., but has surprised investors by continuing to grow despite the headwinds affecting the U.S. residential solar industry. The company’s quarterly revenue growth in 2017 strengthened from -8% in Q1 to 9% in Q2, 30% in Q3 and 70% in Q4, with similarly remarkable earnings growth peaking in a 166% jump in Q4. After last quarter’s earnings release on February 14, management painted a rosy picture of $200 million to $210 million in revenue and gross margins of 36% to 38% in the first quarter of 2018, which investors applauded. Despite new tariffs on imported solar power equipment, the numbers indicate that SolarEdge will be just fine.
Technical Analysis
SEDG peaked at 43 in June 2015, then fell in step with the broad solar industry, bottoming at 11 in November 2016. After a three-month consolidation, the stock started to pick up in February and really got moving in May. SEDG gapped up on good quarterly results in August and again in November, when it nudged 40, but slipped back to 32 on February 9, just a few days before the earnings release. SEDG gapped up to 46 last Thursday and held its gains on Friday. SEDG looks like a good play on the future of solar power. Try to buy on dips of at least a point and use a loose stop at 40.5.
SEDG Weekly Chart
SEDG Daily Chart
Steel Dynamics (STLD)
Why the Strength
We’ve long believed that Steel Dynamics is the best-in-class company in the steel sector—a great, well-managed firm in a cyclical, challenging sector. Today, the company looks poised to thrive thanks to the upswing in the global economy (auto demand remains strong, with energy and construction demand improving), tariffs on some imports that should keep prices elevated (import totals were up 15% last year, but should subside going forward) and corporate tax cuts, which should boost the bottom line. Impressively, fourth-quarter results easily topped expectations, with sales and earrings growth reaccelerating and with cash flow totaling about $3.50 per share for the entire year. Another plus is that Steel Dynamics continues to move into higher-margin areas—the company recently completed a $100 million paint line addition in one of its plants, diversifying its client base and allowing it to play in the coated sheet steel market. It’s also on the lookout for acquisitions of firms that use its steel in order to keep demand elevated regardless of the environment. That said, a hiccup in the economy or a key sector (construction makes up about 39% of sales) could dent results, but analysts are very bullish, seeing earnings up 44% this year thanks in part to the tax cuts.
Technical Analysis
STLD formed a very long sideways pattern after its post-election romp in late 2016, before finally breaking out around 40 in early December. The stock rallied as high as 48 last month before plunging as low as 41 during the market’s correction. However, STLD has proven to be a tennis ball, bouncing back nicely and pushing to new highs on great volume last Friday. Dips look buyable, with a stop near the 50-day line.
STLD Weekly Chart
STLD Daily Chart
Weibo (WB)
Why the Strength
With 10 appearances in Cabot Top Ten Trader since 2015, Weibo is getting to be a familiar story. This Chinese social networking platform lets users connect online in short messages (like Twitter) but, because Chinese characters are more like words, with a richness of message, pictures, videos and documents that’s closer to Facebook. Since its spinoff from Sina.com in 2014, Weibo has made a strong record of growing revenue (77% in 2014, 43% in 2015, 37% in 2016 and 75% in 2017) and earnings ($-0.01 per share in 2014, $0.32 in 2015, $0.82 in 2016 and $1.80 in 2017). The company’s Q4 earnings report features 77% revenue growth and 88% earnings growth, and analysts are expecting 53% earnings growth this year and 43% in 2019. Weibo’s strength comes from its continuing growth in monthly active users (MAU), which were up by 25% year-over-year (to 392 million) in the company’s Q4 report. Most Chinese internet users now get online on their smartphones, which have become as big a part of their lives as they have for Western users. And Weibo, which makes money by selling advertising and marketing access to its users, has proven quite skillful at monetizing that huge, growing user base. There’s always the danger that China’s government will slap the company’s wrist for allowing prohibited content to get online, but the long-term trend for Weibo is clearly up. We like it.
Technical Analysis
WB came public at 17 in April 2014 and spent two years building a post-IPO base. A big rally in 2016 shot the stock from 12 to 56 and an eight-month pause fuelled it for a rally to 82 in May 2017. Since then, the stock has been in an advance-and-correct pattern, but with momentum clearly up. The stock hit a new high above 140 last week before giving back a few points as the week ended. WB looks buyable right here, or on a dip below 130, with a loose stop around 117.
WB Weekly Chart
WB Daily Chart
Workday (WDAY)
Why the Strength
Workday sells enterprise solutions that cover finance, human capital management (HCM), payroll and business analytics. The company has been landing big clients as they flock to cloud-based HCM solutions to better manage their businesses. And it is also enjoying strength in Financial Applications, where cloud-based applications are only used by around 30% of its target customers. Notable wins in 2017 added Oshkosh, Dell, Coca-Cola, Lowe’s, Puma and Nasdaq to the long list of well-known customers that already included Patagonia, Amazon, Visa, Sony, Toyota and Netflix. While Workday has been a winning cloud software stock for years, debate over the durability of growth fractured analyst support in 2016 and early 2017. However, in recent months, some big investors have come to appreciate that the company could capture around 25% of its nearly $70 billion addressable market over time. And with improving profit margins and free cash flow, plus evidence that the company can sustain top-line growth, analysts are more bullish on Workday’s potential. The company will report Q4 results next week (February 27), and while those results could be a catalyst for shares, the longer-term trend depends on 2018 guidance. All told, Workday has the look of an emerging blue chip stock, and if the stock can get through its quarterly report in good shape, it could be ready to run.
Technical Analysis
From March 2014 though May of last year, WDAY built a giant base. The breakout was good, but not great, and the stock entered into another choppy phase; shares made no net progress from the beginning of June through last week! But WDAY’s action during the market’s retreat (found support at its 50-day line) and rebound (soared to new highs) tell us the weak hands may finally be worn out. We’re game with a small position around here, and then see what earnings brings.
WDAY Weekly Chart
WDAY Daily Chart
Yandex (YNDX)
Why the Strength
Most of the publicity Russia has been getting in American media over the past year or so hasn’t been positive, but Yandex is a notable exception. This Netherlands-base company is the top dog in online search in Russia, with a 56.5% market share in Q4, up more than 2% from Q2. The company’s market share of search on the Android platform hit 45% in Q4, topping its 41.2% share in Q3 and 37% in Q4 2016. When Yandex revealed its Q4 numbers last week, its 34% revenue growth and 69% earnings growth missed analysts’ expectations for quarterly earnings and for both revenue and earnings for the entire year. But the improvement in absolute terms and the company’s positive guidance for 2018 got a warm welcome from investors, who were also intrigued with the company’s takeover of Uber’s ride-sharing service in Russia and progress in self-driving automobile technology. Yandex offers several additional services like online weather, traffic reports, transport schedules and the like, but it’s the promise of taking over Uber’s (and another taxi-hailing service called Taxi) operations in Russia, Kazakhstan, Azerbaijan, Armenia, Belarus and Georgia that really has investors intrigued.
Technical Analysis
YNDX took a huge dive from 45 at the start on 2014 to 10 in August 2015 as international sanctions against Russia dampened interest. But the stock has executed a nice turnaround, hitting 30 at the start of September 2017, where it put in a four-month base, then jumped to 39 at the end of January. YNDX pulled back below 35 during the market weakness (and ahead of earnings), then gapped up to 43 last Thursday after earnings. Now trading just above 42, the stock looks buyable on a pullback of a point or two, with a fairly tight stop around 38.
YNDX Weekly Chart
YNDX 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.
