Seeing Some Rotation
Current Market Outlook
The overall action from the major indexes and leading stocks remains about as good as you could hope for considering we’re two months off a major bottom—we’re nudging up our Market Monitor another notch (to 8) in this issue to respect the continued improvement in the overall evidence. That said, after a strong eight-week run, we’re starting to see a bit of greed set in, as well as a bit of rotation, with some left-behind areas (like energy and regional banks) perking up. To be clear, such action is not negative—if anything, it’s probably a good thing—but it could lead to some ups and downs among individual stocks and sectors, especially those that have had good runs. Overall, though, you should continue to put money to work as opportunities arise.
This week’s list is still heavy on growth, though with a couple of new areas popping up, too. Our Top Pick is Chart Industries (GTLS), a little-known name that looks like a great way to play the booming LNG infrastructure area.
| Stock Name | Price | ||
|---|---|---|---|
| Chart Industries (GTLS) | 72.05 | ||
| Chegg (CHGG) | 74.21 | ||
| CyberArk (CYBR) | 111.74 | ||
| Guardant Health (GH) | 88.34 | ||
| Incyte Corporation (INCY) | 76.98 | ||
| iRobot (IRBT) | 103.17 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Okta, Inc. (OKTA) | 148.41 | ||
| Trade Desk (TTD) | 468.02 | ||
| TransDigm (TDG) | 599.41 |
Chart Industries (GTLS)
Why the Strength
Chart Industries is a rare energy-related stock that’s hitting new highs, though it’s not your traditional oil driller or pipeline operators. The company provides some key infrastructure equipment (gas-to-liquid systems) for the energy and chemical (heat exchangers, cold boxes, systems for LNG and petrochemicals, etc.) and distribution and storage industries (cryogenic distribution, stage, packaged gas and LNG applications). Demand can wax and wane quite a bit (sales slipped every year from 2015 through 2017), but demand for industrial gas-related products is picking up, which is a big help, and Chart looks like a strong play on a couple of massive opportunities. The firm’s standard beverage tanks, grow houses and CO2 extraction offerings should be big in the cannabis market (management sounded a bullish tone in the conference call on cannabis), and Chart is doing very well with LNG, both in fueling stations (mostly in Europe, where orders have tripled over the past three years) and in liquefaction terminals, where it sees the potential for some very large orders in 2019, potentially $400 million or more, compared to $1.1 billion for the entire company last year! Even without those orders, management hiked its guidance after last week’s quarterly report, seeing revenues up around 20% (partially thanks to an acquisition late last year) and earnings up 36%. We’re very intrigued here, as Chart could morph into one of the top ways to play the LNG boom. We like it.
Technical Analysis
GTLS has had a good run from its major bottom in early 2016, so it doesn’t dance to the beat of the overall energy section. Shares did top out around 80 last July, meandered for a bit and then hit the skids, falling 28% from its highs by year-end. But GTLS trended back toward its high in January and early February, and last week, exploded to new highs on big volume before and after earnings. You can buy here or on dips, but use a looser stop.
GTLS Weekly Chart
GTLS Daily Chart
Chegg (CHGG)
Why the Strength
This California company with the funny name (derived from chicken or egg) was founded in 2005 as a textbook-rental company but over the past two years has transitioned to a purely digital company, and now provides study guides and textbooks (through a partnership with Ingram) to more than 3.1 million high school and college students. Chegg is not only the best non-required homework help service, it’s also the largest, with 21 million expert answered Q&As and 5 million step-by-step textbook solution sets. And the purely digital business model has the advantage of enabling both faster growth and higher margins. Fourth quarter results were announced last week and they were excellent; revenues grew 30% to $95.7 million, while earnings jumped 67% to $0.25 per share. For 2019, the company is projecting total revenues between $390 and $395 million, up roughly 22% from 2018, while analysts are expecting earnings growth of 24%.
Technical Analysis
CHGG has been advancing strongly for three years, driven by the buying of investors discovering the benefits of the company’s shift to its all-digital business model. The stock broke out to new highs in mid-January and climbed higher for the most of the month, finally pulling back with the market as the earnings report loomed. And then the good news sparked a wave of buying that gapped the stock up to nearly 39 before it pulled back to the current mini-base between 37 and 38. Buying between here and the old high of 36 makes sense, with a stop at 34.
CHGG Weekly Chart
CHGG Daily Chart
CyberArk (CYBR)
Why the Strength
We’ve seen good results (and reactions) from cybersecurity stocks this earnings season, so the secular trends powering the group remains intact. As we’ve said before, protecting online assets is so core to the operations and reputation of companies that spending on security solutions is essentially a must. CyberArk’s big attraction is that it’s the best at protecting super-sensitive files and IT data, even when nefarious actors breach a company’s firewall. The stock continues to perform well today because better-than-expected Q4 results show the management team is still executing very well on the long-term growth opportunity staring it in the face. Revenue was up 36% to $109 million (beating by $13 million) while EPS of $0.89 beat by $0.30. We’ve mentioned before that CyberArk has become the market leader in the strategic security market of Privileged Access Management (PAM), which, over time, is expected to evolve into a $10 billion market opportunity. Investments in the marketing, sales teams, and go-to-market strategy have helped the company expand geographically and across product lines. Fourth quarter results show those investments continue to bear fruit, and a new cloud offering and product bundling strategy is helping pull in new customers from a broader range of industries. Analysts see revenues up 17% this year, but that estimate is very likely to kite higher as Wall Street catches up to the story.
Technical Analysis
The big positive clue in CYBR’s chart was the mostly-sideways movement during last year’s fourth quarter, helped along by a bullish earnings reaction in early November—a sign that the stock wanted to be a leader of the next advance. After rallying back to its old high near 80 in January, shares calmed down for a bit before breaking out on January 28. And then, last week, CYBR catapulted to new highs on seven times its average volume after earnings. Some dips are possible, but we’re not expecting a major retreat.
CYBR Weekly Chart
CYBR Daily Chart
Guardant Health (GH)
Why the Strength
Guardant Health is a precision oncology company that develops blood tests that detect cancer in high-risk populations and with previously-removed tumors. We’ve been impressed with the company for a number of reasons, not the least of which is that Guardant went public during the historically awful market last October but held its own anyway, never lost momentum and, last week, actually broke out to fresh highs. The underlying reasons for the strength are a compelling story, and strong fundamentals back it up. Guardant’s liquid biopsy tests are used in both biopharma (GuardantOMNI covers 500 genes) and clinical (Guardant360 covers 73 genes) use cases. It has an addressable market of roughly $10 billion right now, but that could grow to $30 billion as liquid biopsy adoption takes off and grabs market share from tissue-based testing. Look for growth to be driven by FDA approval of new tests (the LUNAR blood-based assay intended to detect early-stage cancer and recurrence of disease just launched a couple of weeks ago) and, longer-term, Medicare coverage could provide a sizable boost. The company won’t be profitable for at least a few years but the growth here is beyond impressive (see table below) and it’s clearly a breakthrough technology. There’s no set date yet for the upcoming quarterly report, but analysts see revenue up 43% next year, a figure we think will prove very conservative. It’s a good story.
Technical Analysis
GH went public in October and jumped almost 70% on its first day, settled down in the 30 to 34 range for a few days, then walked up near 44. For most of the next four months shares traded up and down in the 33 to 44 range, with a few spikes higher and lower here and there. Then came a nice area of tightness for much of January and early February, preceding the breakout last week on solid volume. GH is a bit thinly traded ($25 million or so per day), so start small and try to buy on dips.
GH Weekly Chart
GH Daily Chart
Incyte Corporation (INCY)
Why the Strength
Incyte develops small molecule drugs to treat cancer and inflammatory diseases. Most of the company’s current value derives from sales of its commercial drug, Jakafi, which is the standard-of-care drug in myelofibrosis and is also approved for patients with polycythemia vera, a condition in which the bone marrow makes too many red blood cells. This blockbuster treatment is also being evaluated for acute graft-versus-host disease (GvHD), and has a key data readout due in the second half of 2019. Jakafi has helped Incyte achieve a relatively stable revenue base and reach profitability, and with estimated forward growth of around 10% to 15% a year (estimated 2025 revenue of almost $3 billion), it’s also a critical generator of cash flow to fund Incyte’s growing pipeline. Baricitinib is the most advanced pipeline drug and was recently fast tracked by the FDA for the treatment of systemic lupus erythematosus (SLE). Then there is itacitinib, which is also being evaluated for GvHD, with a data readout due this year. Incyte reported Q4 2018 results last week (revenue up 25%, EPS of $0.40 way ahead of last year’s tally) that pleased Wall Street, so investor attention continues to be centered on the pipeline. There’s obviously some risk going forward with the numerous data readouts, but Incyte has a combination of solid current growth and profitability, as well as a few big potential hitters in the pipeline.
Technical Analysis
INCY continues to act like it has a new lease on life since the market’s December low. Before that was a year-long plunge and a long bottoming process, with support appearing near 60 numerous times from last April through the market bottom. But now INCY is in a solid uptrend, with basically zero selling pressure showing up despite its move up to the mid 80s. With earnings out of the way and the 25-day line (near 80) offering support, we’re OK taking a position here or on dips.
INCY Weekly Chart
INCY Daily Chart
iRobot (IRBT)
Why the Strength
iRobot makes robots that do all those chores people don’t want to do. If you hate to vacuum, iRobot has a product for you (the Roomba). Sick of mopping? Buy a Braava or Scooba. Dirty pool? Get a Mirra. In the early days these robots were a little gimmicky but there’s little doubt iRobot’s made considerable progress on the product quality front, helping to build a steady growth business that delivers consistent profits, too. The stock is doing well now because iRobot completely shocked investors when it blew expectations out of the water with its Q4 report (released February 6). Revenue was up 18% to $385 million (beating by $3.4 million) while EPS of $0.84 beat by $0.34. That quarter capped a year of 24% revenue growth (and the company’s first billion-dollar year for revenues), driving earnings up 67% to $2.98. On the back of those results analysts have bumped up 2019 estimates to reflect 18% revenue growth and EPS of $3.09, both of which are likely conservative. On a product level, the market is getting excited about the launch of the Terra lawnmower, among other new products. We should note that iRobot does a lot of business internationally and has been impacted by tariffs, though the Q4 impact of $3 million (versus $5 million expected) was one of the reasons for the earnings beat.
Technical Analysis
IRBT went on a nice run in 2016 and 2017 after it exited the military business and focused its attention on robots for consumers. But by mid-2017 momentum petered out and started what essentially was an 18-month consolidation—the stock fell to 57 in March 2018, rallied back to 120 in August and sagged again after that. But the last two weeks look like a real change in character, with the stock exploding higher after earnings and pushing back to 120 on huge volume. You can buy some here or (preferably) on dips.
IRBT Weekly Chart
IRBT Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
Netflix is no stranger to this publication; it’s earned a spot here more than a dozen times over the years, as management has continued to reinvent the company to stay on top of—or ahead of—trends in the video entertainment business. (Remember, the company started out by mailing DVDs—but that was two decades ago.) Today, Netflix is the world’s leading internet entertainment service, with more than 139 million paid members in over 190 countries, and expanding quite successfully from distribution into content creation. The company earned five Golden Globes this year and is hoping for its first Oscar this weekend from the film Roma. The most recent big fundamental news, which preceded the delivery of an excellent fourth quarter report, was a big price hike in the U.S. But management noted that they’d already increased prices last year in Canada and Argentina and Japan, so there’s little chance that this price hike will backfire. The stock isn’t cheap, but great leading stocks seldom are.
Technical Analysis
NFLX hasn’t been an easy stock to hold long-term, because there have been some very serious drawdowns in the stock from time to time; the correction that ended last December, for example, pulled the stop down a whopping 45%! But now the stock is back on track; it climbed back above its 200-day moving average in early January and has been building a base somewhere above it, trading between 320 and 360, ever since. A pullback toward the 200-day moving average, now nearing 340, would provide a nice buying opportunity, but the stock may not be so accommodating, so it also may pay to jump on any big-volume surge higher.
NFLX Weekly Chart
NFLX Daily Chart
Okta, Inc. (OKTA)
Why the Strength
While many broad-based cybersecurity stocks look just fine (like Palo Alto Networks, written about in Top Ten last week), many that focus on a specific area look even better. CyberArk (see page 4) is one, and Okta is another, with what looks like the leading platform for identify access management, protecting and enabling employees, partners and contractors (single sign-on, secure aps and servers) and, on the front end, providing a better and more secure customer experience (self registration, modern authentication and identification). Okta’s offerings already integrate with most of the popular cloud-based systems (ServiceNow, Mulesoft, Palo Alto, etc.) and, not surprisingly, customers are stampeding to the firm’s door—revenues are cranking ahead at a near-60% clip, and the sub-metrics are just as impressive, with billings up 58% in Q3, same-customer revenue rose 20% from the prior year, and the total customer count (5,600) up 42%. Yet it appears Okta is just scratching the surface, as international revenues make up just 15% of the total, and the firm’s own analysis shows customers quickly become highly profitable to its bottom line after just a year or two. Management sees revenues up at a 30% annual clip through at least 2023 with huge improvements in margins—it thinks it will have a free cash flow margin north of 20%, compared to 1% in Q3. The next quarterly report is due out March 7.
Technical Analysis
OKTA had a nice run during the early and middle parts of last year, followed by a wicked decline in the fourth quarter. But the most important parts of the chart to use are (a) the much higher low formed in December, (b) the breakout above 70 in mid January, one of the first names to stage a legit breakout, and (c) the strong upmove since then amidst a vacuum of selling pressure. We’re OK nibbling here, but dips to the 25-day line (now near 80) would provide a solid entry point.
OKTA Weekly Chart
OKTA Daily Chart
Trade Desk (TTD)
Why the Strength
The Trade Desk is the number one company in the programmatic ad buying market, a rapid growth market mostly consisting of DIY ad agencies that buy up and manage multiple campaigns online, as opposed to manually and through negotiations with a broker. The California-based company’s self-service and cloud-based platform lets ad agencies and other organizations design and broadcast data-driven digital advertising campaigns for video, social media and mobile channels. The company has posted consistently impressive growth numbers (revenue is expected to have grown 52% in 2018) and with an earnings report coming on Thursday there’s a near-term potential catalyst here. The trends within the business have been incredibly strong, with omni-channel growth being the most impressive as the industry shifts toward programmatic buying; last quarter, management said connected TV grew over tenfold, audio grew 192% and mobile was up 65% and accounted for a record 46% of gross spend. The company has also been expanding internationally (a new Toronto office just opened) and has been posting consistent customer retention over 95%. Given that management gave full-year guidance at the Q3 reporting date the market will now be looking for details on 2019. Some think expectations of 32% revenue growth and 14% EPS growth (to $2.77) are overly conservative. We like the big picture story, though the reaction to the quarterly report will be key.
Technical Analysis
TTD really got going last May, when shares exploded higher on earnings; the stock didn’t stop running until it tagged 161 last September. Then came the correction, which brought the stock down to the 105 level a couple of times, as well as testing the 200-day line in December. Since then, TTD has acted superbly, pushing back over 150, and after a quick shakeout, popping back toward its all-time highs late last week. If you’re aggressive, you can nibble ahead of earnings and see what comes.
TTD Weekly Chart
TTD Daily Chart
TransDigm (TDG)
Why the Strength
Three’s a crowd, but in the market, that’s usually a good thing—this is the third straight week that we’ve seen an aerospace name in Top Ten, a good sign that big money is flowing into the group. (Boeing and Spirit Aerosystems were the prior two.) Transdigm has long been a great company, serving the industry with a bunch of proprietary and sole source products that also have a big aftermarket business—everything from ignition systems to pumps to batteries to laminates to audio systems to safety restraints and much more. The firm’s revenues are well diversified, split nearly equally between defensive, commercial aftermarket and commercial newbuilds (just over half are aftermarket, the rest for newbuilds), while a whopping 90% of its revenue comes from proprietary products! Growth has been steady for years, and it should get another boost with the proposed acquisition of Esterline (announced last year; closing likely in March or April), which will expand TransDigm’s collection of proprietary content and specialized manufacturing. The stock is strong today after yet another solid quarterly report, where all three of its segments saw revenues and new orders top expectations, with another strong bushel of free cash flow ($914 million during the past year). This is a great long-term story, with the recent results leading to a fresh breakout.
Technical Analysis
TDG has made great progress over time, with plenty of long base-building efforts along the way. The recent launching pad began forming last August, with shares falling 20% or so and making no progress for about six months. But the quarterly report and outlook caused the buyers to rush in—TDG has exploded higher on huge volume, easily racing out to new highs. It’s high priced, but we think it will go higher—try to buy on dips.
TDG Weekly Chart
TDG 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.
