February 24, 2020

Intermediate-Term Uptrend Cracks

Coronavirus fears re-emerged in a big way over the weekend, causing today’s across-the-board selloff. As we look at the evidence, here’s what we see: The intermediate-term uptrend has been cracked, especially when you look at the broader major indexes, and given that this selling comes after a big run and more than a few yellow flags during the past month, it’s likely we’re in a correction that will take some time to play out. That said, it’s also very unlikely that this is the end of the overall bull market, as the longer-term trends and stance of the indexes and most leading stocks are positive; heck, many stocks look just fine (so far) on their charts. Put it together, and we think it’s time to play a little defense and build up some cash by cutting losers and laggards, though we’re also aiming to hold most of our resilient, profitable performers, giving them a chance to hold up and get going.

Encouragingly, this week’s list has a bunch of decent-looking growth-oriented names to consider. Our Top Pick is Zoom Video Communications (ZM), which has not only a very strong chart but also a growth story that appears to benefit from the spread of the coronavirus.

Advanced Micro Devices (AMD)

amd.com

Why the Strength

We wrote AMD up a couple of months ago, citing its new 7-nanometer chips (one billionth of a meter) that were beating the socks off the competition, grabbing orders that required very small chips and high performance computations (HPC). AMD’s processors are essentially the brains for personal computers, servers and graphics cards. And with its second generation EPYC processors, designed for data centers, its virtualization, cloud, HPC and enterprise applications businesses should continue to excel. Last year, 65-70% of AMD’s sales were from its Computing segment, with 13-15% from Data Center customers, with 70-80% of that from EPYC servers. Analysts are expecting the company to detail its 2020 EPYC expectations at its March 5 Analyst Day. But with Alphabet’s GOOGL, Amazon’s Web Services, Microsoft, Oracle, Tencent, and Dell all on board using EPYC processors for their data centers, the prospects look very healthy for AMD. And with competitor Nvidia’s recent good earnings report showing fantastic demand for its gaming chips (AMD’s graphic processing units are also contenders), the future looks very bright for AMD. Institutions seem to think so, and in the past few months, have amped up their purchases of AMD’s shares. In the past 30 days, 23 analysts have increased their EPS estimates for AMD. The company has grown its revenues by 16.73% and its earnings by 322.08% in the past three years, and it looks like that stellar growth will continue into the near future.

Technical Analysis

Shares of AMD have been on a roll, particularly since October, and the shares are up some 151% in the past 12 months. However, they’ve taken a bit of a breather, down 10% in recent days. Analyst price targets for the chipmaker are as high as 66 right now, and we think buying this dip is smart.

AMD Weekly Chart

AMD Daily Chart

Carvana (CVNA)

carvana.com

Why the Strength

We’ve written up Carvana a handful of times over the past year or two, and while the stock has proven hard to handle (more on that below), the story has only improved as the company executes on its plan. The big idea here is that Carvana looks like the next big nationwide used car retailer, and the first that does most of its business online, providing an ever-growing number of buyers with best-in-class photos and information, a huge selection (15,000-plus vehicles) and many factors that get hesitant customers to take the plunge (oftentimes next-day delivery, seven-day test drive period, no car has been in a reported accident, etc.). And the firm is also expanding its buy-side capabilities, too (I sold my car to Carvana last year for a fair price; the company purchased 32,000 cars from customers in Q3 alone), which gives it a reasonable-cost way of boosting inventory. Top-line growth has remained in triple-digit territory, and while that could slow, there’s no reason Carvana can’t get much bigger over time; the used-car market is nearly $700 billion per year, and the company is now in 161 markets, up from less than 150 at year-end. Of course, the big snafu here is the continuing red ink, but so far big investors are looking beyond that and steadily signing on (372 funds owned shares at year-end, up from 241 a year ago). The next big event comes on Wednesday (February 26), when the firm will release Q4 results.

Technical Analysis

CVNA rallied back to its old highs in May of last year, but since then it’s been a very choppy ride, with three tedious pullbacks and consolidations, including one that started when the calendar flipped to 2020; net-net, the stock made no progress from May through late January. But last week CVNA may have changed character, with a bevy of high-volume days as the stock exploded to new highs. Earnings are the big risk here; you can wait to see how the report is received, or if you’re more aggressive, try to sharp-shoot a small buy a bit lower than here.

CVNA Weekly Chart

CVNA Daily Chart

Domino’s Pizza (DPZ)

www.dominos.com

Why the Strength

Along with their thin-crust pepperonis, Domino’s shareholders are rolling in cash these days. For its fourth quarter, the pizza maker saw its earnings rise by 19%, earning $3.13 per share and besting analysts’ estimates of $2.93. Sales rose 6%, to $1.15 billion, also above the forecasts of $1.12 billion. Both U.S. and international same-store sales were up, 3.4% 1.7%, respectively. The company thinks its technology innovations and focused promotions will keep the momentum continuing, over the next two to three years. And to help ward off increasing competitive pressures, Domino’s is exercising its ‘fortressing strategy’, a maneuver in which the company blankets an area by opening stores in lots of locations, especially in areas already serviced by an existing store. And these initiatives seem to be working well; the company is forecasting 7%-10% global retail sales growth. Domino’s has been honing its delivery business, with more than 50% of its drives now using GPS, which considerably reduces the driving learning curve. Carryout orders—another strategic focus for the company—also grew as a result of focused promotions—with same-store sales up 3.9%. And with its new ‘Pie Pass’ technology, where store employees will be alerted when the customer arrives, and an in-store digital display that will welcome them by name, Domino’s hopes to boost this category further.

Technical Analysis

Domino’s shares have risen some 68% in the past 52 weeks, but broke out with a 26% spike after the company reported its fourth quarter earnings. Although they look a bit pricey, Wall Street is on board, with some research analysts raising their price targets for the shares up to 410. We agree, and think you can judiciously buy in here, and add to it on the inevitable dips. Along the way, you can add to your topping with the stock’s 0.84% dividend yield.

DPZ Weekly Chart

DPZ Daily Chart

Floor & Décor (FND)

flooranddecor.com

Why the Strength

Real estate stocks are on fire right now, thanks largely to plunging mortgage rates and record lows in housing inventories for sale. With building permits at a 13-year high, and builder sentiment near a 20-year high, companies that specialize in home construction and improvement have been among this year’s big winners on Wall Street. Floor & Décor is one such winner; it’s a home construction-related retail operation specializing in hard flooring (wood, tile, stone, etc.) that was featured in our December 30 issue. As mentioned then, the company is benefiting from a growing trend toward hard flooring as homeowners move away from carpet. Last week, the company released Q4 and full-year 2019 results which topped expectations, as sales for the latest quarter rose 21% to $527 million from the year-ago quarter, while earning 0.26 per share (24% above the consensus). Store expansion has been a key strategy for the company’s continued success and has risen at a 20% annual rate over the last seven years, with seven new stores opened in Q4 alone. The company expects to open 24 new warehouse stores in 2020 and believes it’s entering this year with a more favorable economic backdrop compared to early 2019. With a strengthening housing market in its favor, and its warehouse store growth increasing at a solid clip, the sales and earnings outlook for Floor & Décor still looks promising.

Technical Analysis

FND exploded to a record high last Friday after releasing its excellent earnings report. The stock had spent five months building a high-level basing pattern between the 45 and 50 levels before breaking out of it in February. With little in the way of overhead resistance to obscure its path, FND’s long-term chart suggests that a significant longer-term rise may lie ahead. Buying on pullbacks looks smart to us.

FND Weekly Chart

FND Daily Chart

HealthEquity, Inc. (HQY)

www.healthequity.com

Why the Strength

Soaring medical costs are a major concern for millions of Americans, and health savings accounts (HSAs) are a popular way of addressing this issue. HealthEquity, the nation’s largest non-bank health savings trustee, allows customers to lower monthly premiums and long-term payments and serves as a custodian of HSAs regardless of which financial institution the funds are deposited with. HealthEquity offers a large selection of mutual funds, allowing individuals to set up a portfolio of funds (by percentage allocation) to accompany an HSA. There are no minimum investments and gains don’t decrease the customer’s annual contribution rate, while losses aren’t penalized as non-qualified medical expenses. The company just announced sales metrics for fiscal year 2020, and the numbers reflect the company’s expanding reach. The total number of HSAs for which it serves as custodian increased 34% from a year ago. The company also ended FY 2020 with 12.8 million total accounts (+180%), while HSA assets grew 43% from the prior year. Its CEO noted that HealthEquity enters fiscal year 2021 with its largest ever balance of HSA assets, which underscores its growth prospects. The company’s next big event is its full-year and Q4 2020 results due on March 17. HealthEquity has a history of beating analysts’ earnings expectations, but more importantly, it’s well positioned to continue its outperformance in the coming years.

Technical Analysis

After a powerful rally in 2016-2017, HQY dropped 40% in late 2018 before stabilizing above the 50 level. The stock spent most of last year establishing a bottom and finally appears ready to resume its long-term uptrend. HQY gapped impressively higher on the latest sales metrics report, and while you could do some nibbling here, waiting for dips to build a new position is ideal.

HQY Weekly Chart

HQY Daily Chart

MercadoLibre, Inc. (MELI)

mercadolibre.com

Why the Strength

Companies that specialize in online sales or digital payments present exciting growth prospects for emerging market investors. MercadoLibre, an online marketplace company known as the eBay of Latin America, is at the forefront of both frontiers. With operations in 16 nations, the company has a user base 320 million strong and growing, making it one of Latin America’s most popular e-commerce sites. While it showed a net loss of $54 million in Q4 2019, MercadoLibre’s growth has been stellar, with net revenues rising 57% in the quarter, year over year. Gross merchandise volume (a key metric for e-commerce companies) increased 20% to $3.9 billion in Q4, while the number of unique buyers continued to accelerate (+27%). Significantly, the company has augmented its revenue stream by expanding into areas beyond e-commerce, including real estate and motor vehicle sales. But its online payment platform, MercadoPago, is by far the company’s crown jewel. Created as a secure payment system to ease transactions on the MercadoLibre marketplace site, MercadoPago’s off-platform payments have drastically expanded in recent years, increasing 63% year over year in Q4 alone. MercadoPago is also widely used as an off-platform and mobile point-of-sale payment vehicle, similar to PayPal. With Latin American online sales approaching tsunami-like volumes, MercadoLibre is on the leading edge of the wave.

Technical Analysis

After a 116% rally in the first seven months of 2019, MELI declined in the latter part of the year, providing some relief for the overheated stock. A V-shaped bottom and reversal pattern was established last fall, with MELI hitting an all-time high last week. The stock tends to stay fairly close to its rising 25-day and 50-day lines, which is ideal. A position can be started here.

MELI Weekly Chart

MELI Daily Chart

SiteOne Landscape Supply (SITE)

siteone.com

Why the Strength

The ability to diagnose and treat irregular heartbeat is beA corollary of the healthy U.S. real estate market is surging demand for landscaping. SiteOne Landscape, the nation’s largest wholesale distributor of landscaping products, is reaping the benefits of this trend. The company serves residential and commercial landscapers who specialize in the design, installation and maintenance of lawns, gardens and golf courses. It also offers 90,000+ lawn care-related products to an ever-growing network across the U.S. and Canada. SiteOne’s Q4 earnings report last week highlighted the company’s growth prospects in the midst of a booming market for property renovations. The firm crushed the per-share earnings consensus and grew its quarterly (+13%) and full-year (+12%) net sales. Meanwhile, Q4 net income rose to $2.5 million compared to a net loss of $2.1 million a year ago, and net income increased 5% for the year. The company’s double-digit sales and outstanding cash flow allowed it to complete 10 acquisitions in 2019, with approximately $100 million in trailing twelve-month net sales – a reflection of its commitment to continued growth. SiteOne expects a strong residential housing market to support further sales growth and acquisition activity this year, and it expects year-over-year earnings growth of 6-13%. Given the robust economy and strong property market outlook, SiteOne looks to continue its impressive growth story in 2020 and beyond.

Technical Analysis

SITE’s chart is a thing of beauty – a sustained rise with intermittent consolidative pauses along the way, which has kept it from becoming over-stretched. SITE’s last major pullback was in 2018, but the recovery since then has been total. A solid basing pattern in late 2019 serves as the launching pad for the latest rally. The stock looks buyable here.

SITE Weekly Chart

SITE Daily Chart

SolarEdge Technologies Inc. (SEDG)

www.solaredge.com

Why the Strength

We’ve recommended SEDG a couple of times in recent months, discussing the fantastic growth in the solar industry as well as the company’s earnings beat and its double-digit growth in its inverter systems, power optimizers and solutions that turn solar panel’s direct current into an alternating current for residential and commercial use. The company’s shares took a big leap after fourth quarter results were announced. Net income soared to $52.8 million or $1.65 per share, up from $12.9 million or $0.63 per share last year, beating Wall Street’s forecasts of $1.30. Revenues came in at $418.2 million, also beating estimates of $413.8 million. And while the coronavirus will certainly affect shipments—maybe in the first or second quarters—so far, the company hasn’t been impacted, primarily due to the pre-outbreak actions like increasing manufacturing to build up inventory for its forecasted rising demand, prior to the usual Chinese New Year slowdown. As well, SEDG’s increased capacity in its factories in Hungary and Vietnam can help mitigate any slower manufacturing in China. The demand for the company’s commercial and large residential solar systems is robust, and some analysts expect it to command 40% of the residential market. And its recent electric vehicle investments should pay off in the longer-term. SEDG updated its guidance, saying that it expects first-quarter revenue of $425 million to $440 million, higher than the analysts’ consensus estimate of $388.9 million. Yet, the shares look undervalued to us.

Technical Analysis

SEDG is on a fast-track, with shares up 293% in the past year, and rising some 32% since its great earnings report. Industry growth, as well as forecasted double-digit expansion for the company, makes this stock attractive, even after the appreciation. Wall Street’s targets are running around 160 now, so a bit of a nibble here looks interesting.

SEDG Weekly Chart

SEDG Daily Chart

Zillow (Z)

www.zillow.com

Why the Strength

Housing stocks have turned strong, which bodes well for traditional firms in the space (homebuilders, for instance), but also for the growth-oriented names in the sector; Redfin, featured here last week, is one that’s thriving, and Zillow is another. While many think of these two as direct competitors due to their real estate websites, they’re doing well for different reasons: Redfin is taking on the traditional real estate brokerage establishment, but Zillow is being driven by its burgeoning Offers business, where the firm buys homes directly from sellers, spruces them up and sells them a bit later. (Zillow still does a good, though slow-growing, business allowing agents to get leads from its website.) The Offers business started less than two years ago, but in Q4, Zillow bought 1,787 homes, sold 1,902 and ended with 2,707 homes (which are likely appreciating in value) in its inventory, resulting in north of $600 million in revenue, up 57% from the prior quarter. So far, the business isn’t profitable, but there’s progress on that front (gross profit was actually positive in Q4), which gives investors more confidence that management’s longer-term goal of making a couple of percent on each home (even after interest, maintenance and improvement expenses) is achievable. Offers is now available in 23 markets, with three more coming by mid year. It’s not a sure thing, but if Zillow executes on its plan, the upside potential is enormous, with an improving housing market only helping the cause.

Technical Analysis

Z was near its lows in early October, but when the market turned up, so did the stock, and it enjoyed an impressive and relatively persistent advance over the next few months, with just one dip (during the January virus-related selloff) to the 10-week line during that time. And last week, the roof blew clean off, with Z exploding back to its 2018 highs on its fourth-heaviest volume day ever. As with most stocks, we advise aiming to enter on modest dips.

Z Weekly Chart

Z Daily Chart

Zoom Communications (ZM)

www.zoom.com

Why the Strength

Video conferencing is a fast-rising trend in today’s workforce, allowing virtual face-to-face communication and circumventing the need for travel. Founded in 2011, Zoom Video is a rapidly growing video conferencing provider at the forefront of this trend. Zoom’s software can be quickly and easily installed on mobile phones or desktop computers, and its most basic service is available free to users (much like Skype). Unlike many tech firms, Zoom is actually benefiting from the coronavirus as the epidemic has caused travel restrictions in China and elsewhere, leading to spiking demand for video conferencing. CEO Eric Yuan recently told CNBC the company’s products are experiencing “record usage” in the virus’s wake. Although it trades at a lofty multiple (Zoom was listed in April 2019), its sales and user growth outlook appear to justify the impressive share price performance to date. Top-line growth has been exceptional, with a consensus-beating 85% annualized revenue increase in fiscal Q3 2020. Meanwhile, its customer base also grew an eye-popping 67% in that quarter (to 74,100). Zoom’s fiscal Q4 earnings are due on March 4, and the firm expects revenue of $175-$176 million in the latest quarter, as well as a profit of 7 cents per share. All told, Zoom is arguably one of the most popular video conferencing providers today, and there’s lots of room for this young company to grow.

Technical Analysis

After a post-IPO pop last spring, ZM gave back all its gains over the ensuing months but eventually established a suitable base above the 60 level. The stock has impressively recovered all of last year’s losses during the last two months, so it’s a bit over-extended and may need some time to calm down before proceeding higher. We’re fine doing some nibbling on any pullbacks from here.

ZM Weekly Chart

ZM 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.