Getting Close
Current Market Outlook
We can’t complain about the market’s action recently—the major indexes have (at the very least) held the strong gains of the past couple of weeks, with the strongest among them (like the Nasdaq) pushing higher. And many individual stocks (especially growth stocks) look vibrant, which is a plus. That said, we can’t conclude that the bulls are back in control, as most major indexes are still hovering around their 50-day lines, and in the broad market, the number of stocks hitting new highs (even on the strong Nasdaq) remains very low. We’re close to an all-clear signal, and think it’s fine for you to hold your strong stocks and do a little buying here or there. But right now, we’re keeping our Market Monitor at neutral until we see confirmation of an uptrend.
This week’s list has a ton of good stories and charts, with growth stocks well represented. It’s hard to pick just one, but we’ll go with Red Hat (RHT), which looks like a big-cap leader of the leading software group.
| Stock Name | Price | ||
|---|---|---|---|
| Arch Coal (ARCH) | 82.27 | ||
| GoDaddy (GDDY) | 0.00 | ||
| MuleSoft (MULE) | 0.00 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Planet Fitness (PLNT) | 0.00 | ||
| Red Hat (RHT) | 0.00 | ||
| TAL Education (TAL) | 50.49 | ||
| Twilio (TWLO) | 183.39 | ||
| Vale S.A. (VALE) | 15.40 | ||
| Zendesk (ZEN) | 82.19 |
Arch Coal (ARCH)
Why the Strength
Coal stocks continue to act well, since most have gone through the wringer, with bankruptcies allowing firms to drastically cut costs. Now, with demand and prices firm, coal stocks like Arch Coal are seeing their earnings soar. Arch sells mostly thermal coal (for electricity), though coking coal (used to make steel) is bringing in most of the profits these days thanks to elevated prices. And on the Q4 conference call, Arch’s management sees excellent demand dynamics continuing for both types of coal going forward; coking coal futures markets indicate no major dip in prices for a few months, a sign that big players expect the tight market to continue, while the top brass sees excess thermal coal inventories being worked off this year. Thus, while Q4 sales were a touch soft due to inclement weather delaying some shipments, earnings were well above estimates, and investors are focused on what looks like another great year in 2018—Arch’s total output should be similar to last year’s, and much of that is tied to lower-priced contracts, but those that aren’t will benefit from the tight market. Combined with a big share buyback program (shares outstanding dipped about 15% last year), analysts see this year’s earnings at around $12 per share, with the bottom line remaining elevated ($9 per share) in 2019, too. Obviously, if coal prices sink, all bets are off, but the stars have aligned for the industry, both in terms of the global economy and the restructurings.
Technical Analysis
We wrote about ARCH last month as the stock had enjoyed a persistent advance from 80 to near 100. Shares pulled all the way back to 84 during the market retreat, but then ARCH staged a big comeback, with four straight big-volume up days (thanks to earnings) and, last week, a push back toward its old highs. Given the volume signature, we’re OK with nibbling here.
ARCH Weekly Chart
ARCH Daily Chart
GoDaddy (GDDY)
Why the Strength
During the past year, we’ve been fans of the broad “helping small- and mid-sized businesses” theme (think Shopify, Square and many cloud software stocks), and GoDaddy fits right into that niche. Besides its goofy Super Bowl ads in years past, the company is best known for its domain business, allowing the little guy to get his own website (with scheduling, blogging, payment and other capabilities) for free, with more features available for a small fee. The domain business serves as a low-cost way to get new customers for GoDaddy, and makes up about 47% of revenues. But then come the upsells, where the company offers hosting and presence services (naming, branding, search engine optimization and social media), making up 38% of revenues, as well as business applications (Office 365, email marketing) which make up 15% of revenue. The stock is strong today because business is accelerating and Q4 cash flow easily topped expectations—revenue growth of 24% was the fastest in years (partially thanks to a buyout that increased GoDaddy’s international footprint), free cash flow rose 43% and came in at 62 cents per share and customer stats (17.3 million total, up 18% from a year ago; revenue per customer of $139, up 7%) were encouraging. Management’s 2018 outlook was also bullish (revenue up 16%, free cash flow up 24%), and big investors are attracted to the firm’s predictable growth. It’s a solid story.
Technical Analysis
GDDY has been just an OK performer for the past few years, but late in 2017, the stock began to gain steam, rallying to new price and RP highs above 50 in November and, after a shakeout, again in January. The stock found support near its 50-day line during the market retreat, but bounced quickly and then soared on earnings last Friday. Dips look buyable with a stop under 55.
GDDY Weekly Chart
GDDY Daily Chart
MuleSoft (MULE)
Why the Strength
MuleSoft (great name) is one of many very strong cloud software stocks, and it appears to be leading the way in what looks to be a unique, new niche. The company helps clients integrate their technology products, a problem that’s become much more complex with the adoption of the cloud, apps, software-as-a-service offerings and the use of mobile and Internet-of-Things devices. These days, companies spend billions of dollars on one-off custom, narrow integration solutions, but MuleSoft has a better way. Its Anypoint platform is used by 1,286 enterprises (including McDonalds, Unilever, MasterCard, Walmart, Target, Coca Cola and Netflix; total figure is up 20% from a year ago) to develop what are known as application networks—basically they allow employees and departments to access and share data between apps and software programs in a much more efficient way. It’s a huge story and Anypoint is catching on quickly—revenue (up 60% in Q4) and deferred revenue (up 55%) growth is both rapid and steady, while free cash flow actually turned slightly positive in Q4 and average revenue per customer was up 30%. In 2018, management forecasts 38% revenue growth (likely conservative) and set a $1 billion revenue goal by 2021 (translates to 35% annual growth during the next four years!). All told, we think this is a very big, worldwide idea (two-thirds of revenue is outside North America) and it looks like MuleSoft is a leader. We like it.
Technical Analysis
MULE came public last March, and while it had some ups and downs in the months that followed, the overall result was that the stock was mostly range-bound through January. But that all changed two Friday’s ago, when MULE exploded to new highs on excellent volume (nearly eight times average) following its Q4 report. It looks like a solid IPO breakout—you can buy a little here or on dips.
MULE Weekly Chart
MULE Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
Netflix is one of the Cabot Top Ten Trader All-Stars, with 46 appearances since its debut in 2003. That’s a long time for any company to stay at the top of the heap for growth stocks, which is what a Top Ten appearance means. And the reason Netflix has stayed on top is clearly the leadership of Reed Hastings. He’s the one who pioneered DVDs by mail (when everyone thought it was impossible) and it was his decision to start streaming content online. And Hastings made the decision to start producing original content that resulted in blockbuster programs like House of Cards and more recently the film Bright and the second season of Stranger Things. Netflix is so popular that virtually every smart TV sold in the U.S. has its software built in, and the company is in advanced negotiations to have Netflix built into set-top boxes. The company has over 117 million members in over 190 countries, and got $948 million of its $2.35 billion in streaming revenue from subscriptions outside the U.S. The company is actively negotiating access to more countries all the time. Netflix’s 33% revenue growth in Q4 was the sixth straight quarter with revenue expansion of 30% or more and the 173% jump in earnings made five of the last six quarters with triple digit growth in EPS. The Q4 earnings report caused a major gap up on huge volume. Netflix can still surprise investors, even after more than 15 years.
Technical Analysis
NFLX has its moment in the spotlight and its time in the shade. The stock’s last major pause was from August 2015 (when it topped out at 129) to January 2017 when it finally got on top of 130 for good. NFLX took a smaller break from late July 2017 through the end of the year. But NFLX advanced from 196 to 228 ahead of earnings and then gapped up 250 on January 23. The market weakness pulled it as low as 236 on February 9, but during the market’s recovery, NFLX has pushed out to new highs, and looks like a good buy on any normal weakness, although you might consider taking a smaller bite until the market finally demonstrates that it’s back in advance mode.
NFLX Weekly Chart
NFLX Daily Chart
Planet Fitness (PLNT)
Why the Strength
Planet Fitness remains one of the market’s best cookie-cutter stories, one with a mass market story, huge short- and long-term growth potential and a management team that’s executing brilliantly. The fitness center operator has made a name in the industry through its cheap prices (starting at $10 per month, though higher-priced plans are more popular) and a non-intimidating environment, which has led to a very broad demographic and geographic (there are locations in all 50 states) appeal and excellent store economics for franchisees (25% cash-on-cash returns in year two even after advertising and royalties). And all of the numbers are cranking ahead beautifully—in Q4, top- and bottom-line numbers topped expectations, as did the huge 11.6% gain in same-store revenue. For the full year, Planet Fitness saw the number of fitness centers grow 16% (to 1,518 at year-end) and added 1.7 million members (now 10.6 million total); impressively, 95% of new franchise locations last year were opened by existing franchisees, so they’re clearly big believers. And 2018 should be another banner year—revenues are expected to rise about 10% to 12%, cash flow in the mid-teens and earnings (partially thanks to the tax reform) should boom 40%. As for the store count, the pace of expansion should continue at a similar rate, and long-term, Planet Fitness sees the potential for 4,000 locations. It’s a solid, steady growth story.
Technical Analysis
PLNT broke out last June around 23 and has been in a choppy uptrend since, with plenty of pullbacks and sideways periods along the way. More recently, after a double top near 35, the stock plunged as low as 29 during the market’s correction. However, PLNT began snapping back immediately and then gapped to new highs after earnings last Friday. We’re OK grabbing a small position here or on dips.
PLNT Weekly Chart
PLNT Daily Chart
Red Hat (RHT)
Why the Strength
We featured Red Hat in July and August and are going back to the well today since shares have reasserted their leadership status after a big rally over the past couple of weeks. To refresh your memory, Red Hat develops application software based on Linux, and the company’s strategic positioning in its core markets (operating systems, virtualization, middleware, storage and cloud computing) has been improving with the introduction of new solutions, including OpenStack and OpenShift. These products are helping the company grow its addressable market in an increasingly cloud-oriented world. And with server operating systems likely to remain the cornerstone of the IT infrastructure, even in hybrid cloud environments, Red Hat is well-poised to keep growing. In fiscal Q3 2017 (reported December 19), the company beat expectations and guided ahead of consensus for Q4 (results due out in late-March); analysts are looking for 20% revenue growth in fiscal 2018. But the real focus is turning toward fiscal 2019 (starting in March), when analysts now see roughly 16% growth on both the top and bottom lines. Red Hat has become synonymous with the open-source software movement, and we continue to see this as an attractive large-cap tech story, complete with organic growth, robust product development and tactical acquisitions.
Technical Analysis
RHT performed well throughout 2017 but began to chop sideways around Thanksgiving, along with many growth stocks. There was no huge selloff, however, even during the market’s volatile weeks earlier this month—RHT basically moved between 120 and 130 for two months. Now, the buyers are back, with shares surging since the market’s February low, notching new highs on excellent volume. We’re game with a small buy here or on dips.
RHT Weekly Chart
RHT Daily Chart
TAL Education (TAL)
Why the Strength
TAL Education is the leading private K–12 after-school tutoring company in China, with 579 learning centers in 38 major cities. The company offers courses in math, English and Chinese in small classes, individual tutoring and online. Total student enrollment in the latest quarter was 1.54 million, up from 834,000 in the same period last year. The company’s revenue was up 66% in Q4 with earnings soaring by 125%. Given the company’s excellent reputation, expanding network of learning centers and China’s continuing emphasis on the importance of education as the road to advancement, TAL Education’s future looks secure. The company relies primarily on word-of-mouth for client acquisition and boasts a 70% retention rate for enrollments. This is a big story in a big market, but the government just put out new regulations to control after-school tutoring and cut down on student’s studying load. One analyst thinks this could have a short-term effect on TAL stock, knocking it down by 10% to 20%. It’s probably a good idea to wait to see how the stock handles this.
Technical Analysis
TAL made a long run from 4.4 in August 2015 to 36 in October 2017, then gapped down in late October after a disappointing earnings report. The stock found support at 27 and made a couple of runs at filling the gap, but couldn’t get past resistance at 34 in January. After another pullback to 29 on February 8, TAL caught a strong updraft and sprinted into new-high territory on February 22 and leapt to 39 last Friday. Today’s pullback looks like a cooling of last week’s big action and returns TAL to its February 21 trading range. With earnings on the books and an excellent market niche, TAL looks like a good buy right here, although it’s best to start small and average up, with a fairly tight stop around 32.5.
TAL Weekly Chart
TAL Daily Chart
Twilio (TWLO)
Why the Strength
Twilio has developed a cloud-based communications platform that lets developers embed messaging, voice and video capabilities directly into web and mobile applications. As companies embrace digital technologies, they are increasingly turning to Twilio to either overhaul or completely replace patchwork, legacy solutions. The result is a much more efficient “Super Network” that dynamically routes communications through the most efficient medium (text, voice, etc.). The company’s addressable market is massive (roughly $45 billion), but Twilio has been dogged by concerns that it is overdependent on its 10 largest customers, including Uber and WhatsApp, who made up 30% of revenue at one time, though that’s dipped to just 12% today. In Q4 2017 (results released February 11), management said Uber-specific revenue fluctuations won’t have a material effect going forward, and that revenue from the top 10 accounts is now only 17%, down from 29% a year ago. The market cheered that news, especially since total revenue was up 40.6% and active customer accounts were up by 33.8%, to almost 50,000! Given the broader customer diversification, consensus estimates for 28% revenue growth in 2018, profitability in 2019, and platform adoption by high-profile customers, including Domino’s Pizza, Twilio has the story and numbers to attract big investors.
Technical Analysis
TWLO went public in 2016 and initially soared to great heights before plunging back to earth. The stock didn’t do much in 2017 as concerns over customer concentration stole the spotlight. Shares entered 2018 trading around 25 and were slightly above that level heading into the Q4 earnings report, which induced a jump above 30 the following day. Over the last few sessions, the stock continued to climb and is now trading just above its October high of 33. There’s still overhead to chew through, but if you’re game, you can start a position on dips.
TWLO Weekly Chart
TWLO Daily Chart
Vale S.A. (VALE)
Why the Strength
Making its debut in today’s Cabot Top Ten Trader, Vale is a Brazilian mining and minerals giant (market cap is over $75 billion) that sells more iron ore, iron ore pellets and nickel than any other company worldwide. Vale gets 75% of its revenue from iron ore products, with more than 40% of sales going to China, plus operations producing manganese ore, ferroalloys, metallurgical and thermal coal, copper, platinum, gold, silver and cobalt. The company has the largest proven and probable reserves of iron ore in the world, but its future is largely dependent on demand from China. And right now, Chinese demand is on the rise. Vale operates at a distance disadvantage to its Australian iron ore rivals like BHP Billiton, but makes up for it by the quality of its ore. The company has reported revenue growth in the last five quarters after years of declines. And earnings growth has been in triple digits in four of the last five quarters. It’s not common for a company this big (especially in the commodities sector) to qualify for Top Ten, but Vale’s stock (and its 3.1% dividend yield) looks attractive here. The company will release its latest quarterly results tomorrow (Tuesday, February 27) after the market closes. Analysts are looking for revenue of $9.07 billion and earnings of 29 cents per share. As always, we think it’s a better to mostly wait and see the reaction to the earnings report than to buy much beforehand.
Technical Analysis
VALE went through a monster slide from 37 in January 2011 to 2.1 in January 2016. So the stock’s run to around 14.5 (with a couple of rejections at resistance at 11.7 in February and September 2017) has a lot of pent-up buying pressure behind it. VALE is trading at its highest level since August 2014, but its immediate future depends largely on the reaction to its earnings report. In the longer term, the outlook is positive, but the shorter term is the dominant concern. A break higher on good volume will be bullish.
VALE Weekly Chart
VALE Daily Chart
Zendesk (ZEN)
Why the Strength
Zendesk provides cloud-based software to the customer service market, which is a massive $20 billion industry. Think of things like technical support, chat, talk and messaging; all support services that today’s customers demand, and in which companies are investing to capture and retain them. Zendesk has always been focused on easy-to-use solutions that are convenient for clients to deploy, and these differentiating factors have helped drive rapid growth, especially in its core small business market. The stock made the cut today because the company delivered another fantastic quarter when it reported Q4 2017 results on February 6 that brought in the buyers. Revenue was up 39% to $123 million, while a loss of a penny per share topped estimates by three cents. Those results suggest the company is on target to hit $1 billion in revenue in 2020 (equates to 32% annual growth for the next three years), a major milestone that analysts see as increasingly likely. As expected, new enterprise solutions are driving growth and the company’s sales teams are getting better and better at landing customers, as well as cross-selling to customers that came into the fold from the firm’s basic chat solution. Zendesk is in the right place at the right time and looks to have a long runway of growth ahead of it.
Technical Analysis
ZEN has grown quickly since it went public in 2014, but the stock was a nothing burger until last November, when it finally broke free from a giant post-IPO base. The stock tightened up into year-end, but has been trending higher this year, with only a mild, brief pullback during the market’s downmove. Dips to the 25-day line would be very tempting, with a stop near the 50-day line.
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.
