February 3, 2020

Solid Bounce, but Probably Not Out of the Woods

Current Market Outlook

The market rebounded nicely today, and we won’t pooh-pooh that, as a show of support is always a positive. That said, we need to see more to conclude the sellers have left the building—the intermediate-term trend, for instance, remains on the fence, and while there are no sure things, it’s likely the market will need more than six days to consolidate a four-month advance. Bigger picture, nothing has changed our view that this is a bull market, though, so we’re certainly not advising you to become overly defensive, but we’d stick with the plan of holding some cash, keeping your weakest stock or two on a tight leash and being careful on the buy side, especially when it comes to buying on strength (most moves to new highs are being met with selling). Our Market Monitor will remain at 6 for now, though we’re obviously watching things closely.

Believe it or not, many stocks did well last week, and today’s list features some of them. Our Top Pick is Yeti (YETI), which is set up nicely ahead of earnings in two weeks; you could nibble here, or just wait until you see a powerful breakout.

Atlassian (TEAM)

atlassian.com

Why the Strength

Having sat out the first three months of the market’s rally, cloud software stocks have (thus far) acted resiliently during the coronavirus selloff. One of the better performers, thanks mainly to the afterglow of a great quarterly report, is Atlassian, a British outfit that, as its stock symbol suggests, is thriving thanks to offerings that help workplace teams plan, interact, engage, track progress and more, all of which is becoming more difficult as workplaces become more mobile. Atlassian’s core Jira software offering is the main driver, though it also does well with Trello (a visual collaboration product—one home designer we know uses it for big projects), its marketplace of apps (has produced north of $1 billion of revenue since 2012) and its recently launched Forge cloud development app platform, among many others. It’s a huge market, with every knowledge worker in the world a potential customer, and the stock is strong today because the firm’s growth (which has been rapid and reliable for years) is showing no signs of slowing down—in Q3, sales (up 37%) and earnings (up 48%) both topped expectations, while other sub-metrics like total customers (nearly 165,000, up 19% from a year ago) and free cash flow (up more than 60%) impressed. Just as important, analysts see the trends continuing, with earnings expected to rise in the mid- to upper 20% range both this year and next. This remains a solid growth story.

Technical Analysis

Like many cloud software names, TEAM isn’t early in its overall run—the stock originally broke out near 40 in October 2017. That said, the stock also isn’t overheated in the intermediate-term, as it corrected with most of its peers in the second half of 2019, tightened up in December and just got going this year. The earnings move two weeks ago was great, and the stock held its own during the market’s wobbles last week. As with most stocks, we’d lean toward buying on weakness.

TEAM Weekly Chart

TEAM Daily Chart

Dynatrace (DT)

dynatrace.com

Why the Strength

It’s becoming clearer that big investors are getting interested in the application performance management and infrastructure management theme, which is booming as a “follow-on” to the popularity of the use of cloud-based apps. Dynatrace’s all-in-one platform (driven by a powerful AI engine) gives IT operations teams an instant heads-up as soon as any app or system starts having issues, instead of having to rely on various, separate alerting and monitoring systems. And Dynatrace’s offering also helps with things like digital business analytics and improving customer experiences online, not to mention speeding up software updates across the enterprise. It’s been a hit, and the stock actually lifted to new highs last week despite the sour market thanks to a bullish Q3 report—total revenues grew a solid 25%, but that actually underestimates the real growth here as clients switch from Dynatrace’s old platform to its newer, more dynamic one. All in, the company’s annualized recurring revenue (subscription + services) was up 44% from a year ago, total customers on its core platform leapt 20% from the prior quarter (!) and same-customer revenue growth exceeded 20% for the seventh straight quarter. Even better, Dynatrace is solidly profitable too, and raised guidance nicely for 2020. This is a business trend we think highly of, and Dynatrace is one of the leaders.

Technical Analysis

We wrote up DT just a few weeks back, when shares had just lifted out of a post-IPO base. That breakout didn’t get off to a great start, with a quick pullback soon after, but it held its 50-day line and, last week, gapped up to new highs following its Q3 report. The post-IPO lockup (and tricky overall environment) caused DT to pull in today, but it still looks fine.

DT Weekly Chart

DT Daily Chart

Fortune Brands Home & Security (FBHS)

fbhs.com

Why the Strength

The housing market continues to improve, with prices heading higher and some recent positive readings from new housing starts and building permits. That’s creating some fabulous opportunities for Fortune Brands, which reported a great fourth quarter last week and likely has more in store going forward. EPS came in at $1.00, up 16% from last year, beating the $0.97 analysts had expected. Revenues were up 4%, to $1.47 billion. That’s not mind-bending growth, of course, but the stock is in favor as big investors are thinking double-digit growth is a good bet going forward. For the second quarter in a row, the main drivers of Fortune were a 12% improvement in Plumbing sales and an 8% rise in Doors & Security’s revenues. Looking out to 2020, the company forecasts its U.S. home products will grow at a 5%-ish pace, and its global business 4% or so, for a total revenue increase of nearly 6%. The company also estimated 2020 EPS of $3.93 per share, a rise of 9.2%, though it often under-promises and over-delivers. With mortgage rates still at historically low levels, and housing demand continuing to climb, 2020 looks to be another excellent year for Fortune—the #1 consumer faucet brand in North America, the #1 kitchen and bath residential cabinet manufacturer, the #1 entry door brand among building professionals, and the #1 Padlock and safe brand. A reasonable valuation (17 times earnings estimates) and modest dividend (1.4%) also help the cause.

Technical Analysis

FBHS kicked off in September and October with a big clue, rising eight weeks in a row, including four on accelerating weekly volume. Since that time, shares have crawled higher, and while last week brought some wobbles, the stock found big-volume support above its 50-day line. If you want in, you could start a position here with a tight stop in the low to mid 60s.

FBHS Weekly Chart

FBHS Daily Chart

Franco-Nevada (FNV)

www.franco-nevada.com

Why the Strength

The growing outbreak of the coronavirus has boosted uncertainty, and one of the big beneficiaries of uncertainty is precious metals prices, especially gold, which has extended its December strength as investors look for safe havens. Franco is one of the leading royalty and streaming operators in the sector, with stakes in a few dozen producing mines that crank out mostly gold but also silver, platinum and some copper; interestingly, Franco is also moving into the energy field, grabbing shares from royalty owners and private equity firms that want out. Even so, gold is the big producer here (nearly two-thirds of Q3 revenue), so the spike is set to help, as are some organic expansions going on at a variety of mines has stakes in; analysts see earnings up 26% in 2020, and that could easily prove conservative should prices continue due north. That said, there’s actually a longer-term story here—given the ramp at its largest mine (30% gain in output from during the next few years) and its expected investments into energy (leading to a doubling of oil/gas revenue), Franco thinks its cash flow is likely to soar 50% from 2018 to 2023. Obviously a lot of that will depend on prices and future decisions, but with gold back in an uptrend and a solid overall outlook, this company’s prospects continue to brighten.

Technical Analysis

FNV had a nice run with most precious metals stocks from May through August last year, then based out for a while, with shares tightening up in November and early December. A pickup in gold prices at that point helped FNV break out above 100, and the advance has accelerated this year as the world’s uncertainties grow. Shares are extended here, but normal dips should offer good buying opportunities.

FNV Weekly Chart

FNV Daily Chart

Momenta Pharma (MNTA)

www.momentapharma.com

Why the Strength

Biotech outfit Momenta is transitioning from a developer of biosimilars (biologic drugs very similar to another already-approved biological medicine) and complex generics to a developer of novel drugs. The company has a nice pipeline of treatments, but just two are biosimilars, neither of which will be available until 2023. Instead, the real story is its three novel drugs in development. MNTA recently got a big bounce when it announced results from M254, its drug for treating immune thrombocytopenia (ITP), a condition in which the immune system mistakenly attacks platelets, causing easy bruising and bleeding. M254 is an alternative to intravenous immunoglobulin (IVIG), a blood product prepared from the serum of between 1000 and 15,000 donors per batch and the treatment of choice for patients with antibody deficiencies. It’s a big ($6 billion) market, but suffers from shortages, costs, and tons of infusion-related problems. Momenta believes M254 could be more than 10 times as potent as standard IVIG! The study completed Part A, showing that five of six patients treated with M254 responded well to the treatment. Now, the drug advances to Part B, enrolling more patients at lower dosages; results should be reported in the second quarter. Its other two novel drug candidates are 1) Nipocalimab (M281), currently in trials to treat Warm Autoimmune Hemolytic Anemia (wAIHA), Hemolytic Disease of Fetus and Newborn (HDFN) and Myasthenia Gravis (MG); and M230, a recombinant Fc multimer that Momenta is partnering with CSL (CSLLY), for treating rheumatoid arthritis, immune thrombocytopenic purpura, and epidermolysis bullosa. As with many resilient biotech names, Momenta is speculative, but it has a bright future if trials go well.

Technical Analysis

MNTA plunged from 32 to 10 in late 2018, then banged near that bottom for much of last year before finally getting going in the fall. The advance was looking good anyway, but the real action came in January, when the stock mushroomed after trial results for M254—and impressively, MNTA has held up just fine since then. It’s a bit of a lottery ticket, but we’re not opposed to starting a position around here or on dips.

MNTA Weekly Chart

MNTA Daily Chart

Penn National Gaming (PENN)

pngaming.com

Why the Strength

Online sports betting is an up-and-coming growth area, and Penn National Gaming, a U.S.-based operator of casinos and racetracks, is positioning itself to be a leader in the field. The big recent event came last Wednesday, when Penn purchased a 36% stake in sports blog and content provider Barstool Sports, which should soon lead to one of the most popular sports gambling destinations; the companies have jointly planned to launch a Barstool-branded sports-betting platform later this year, which should provide an excellent opportunity. As for the industry as a whole, Barron’s reported on the nationwide growth of sports gambling, noting that the industry has “mushroomed” since the Supreme Court struck down federal legislation in 2018 that had banned sports wagering in most states. Since then, sports betting has exploded and that should continue—some are looking for revenues to increase from $1 billion in 2019 to around $7 billion by 2025. With Americans, and especially Millennials, migrating away from traditional casino gambling and moving toward online gaming, Penn’s purchase of Barstool Sports should prove to be a major growth driver in the coming years, going along with the firm’s other sports betting initiatives, both at casinos and online (it opened a handful in Q3 alone). Penn also has some other irons in the fire—it swallowed Pinnacle Entertainment last year, boosting its nationwide presence and it has a couple of new casinos under construction, too. The next update will come on Thursday, when Penn will release quarterly results.

Technical Analysis

PENN was flat on its back for many months from late 2018 into the middle of last year, but a new uptrend finally got underway when the market turned up in early October. Encouragingly, the advance was very persistent (up 14 of 15 weeks!), but the real action came last week—after a quick dip to the 50-day line, the Barstool transaction caused the stock to spike on huge volume. Nibbling here or on further dips is fine by us.

PENN Weekly Chart

PENN Daily Chart

PulteGroup (PHM)

www.pulte.com

Why the Strength

Housing prices have remained buoyant, but one of the reasons for that is a lack of construction—housing starts leveled off for much of 2018 and 2019 due to a variety of factors. But now it appears the next leg up in the long post-2008 housing recovery is getting underway thanks to solid demand and super-low mortgage rates. (Not hurting perception is that U.S. housing should be relatively isolated from virus effects.) PulteGroup, the nation’s third largest home construction company, is poised to benefit and is strong today because it’s already showing signs that business is turning up. It recently reported Q4 earnings of $1.14 per share, besting expected earnings of $1.09, while sales rose a respectable 11%. But what investors keyed off of were the forward-looking indicators that say better times are ahead—Pulte’s net new orders boomed 33% in Q4, while its unit backlog lifted 20% and the value of that backlog surged 18% from a year ago (to $4.5 billion). Even more encouraging were management’s comments that orders and sales were strong across all of its buyer groups (first-time, move-up and active adult). Not surprisingly, analysts are looking for growth to continue, with the bottom line rising 15% this year. Throw in reasonable valuation (13 times trailing earnings) and a modest yield (1.0% annually) and we think Pulte’s uptrend can continue.

Technical Analysis

PHM’s price plunged more than 40% during the rising interest rate environment of 2018. In the past year, however, the stock has gradually recouped that lost ground, and the recent action is very encouraging—shares consolidated in a very tight range for November and December, but PHM has lifted steadily this year before a little market-induced selling last week. We’re fine taking a stab at it around here.

PHM Weekly Chart

PHM Daily Chart

ServiceNow (NOW)

www.servicenow.com

Why the Strength

Analysts are jumping on board and raising their target prices on ServiceNow after the company’s stellar earnings report reflected substantial strength in the cloud-based enterprise software market, which is its specialty. The firm reported fourth-quarter earnings of 96 cents per share, up 25%, beating analyst estimates by 9%; revenues rose 33%, also topping estimates. The catalysts behind the numbers were an amazing 36% boost in subscription revenues, to $907 million, with total billings improving 35%, while the always-strong renewal figure continued to impress (97% in the quarter). ServiceNow is effectively the emerging blue chip of the cloud software field, with a growing list of global customers who utilize its software for better organization and ultimately, efficiency. Wall Street loved the report, but liked the company’s 2020 forecast even better, with the firm looking for subscription revenues to rise in the low 30% range, which itself is probably conservative. Beyond the flawless execution is the stock market angle—cloud software stocks have not just gotten going in 2020 but have also acted resilient so far during the virus-related market dip; while the group move won’t likely be as fruitful as a year ago, ServiceNow is clearly one of the leaders.

Technical Analysis

Like the whole sector, NOW built a big, relatively deep base during the second half of last year, but it began a solid push higher in December, albeit on so-so volume. The shakeout last Monday found support near the 25-day line, and then earnings kicked the stock to new highs on big volume. You could buy a little here, though in this environment, we favor targeting dips.

NOW Weekly Chart

NOW Daily Chart

Tandem Diabetes (TNDM)

www.tandemdiabetes.com

Why the Strength

Tandem Diabetes hasn’t been a leader in the strong diabetes field during the post-October market rally, but we think it may soon join the party. The company has what many consider the best insulin pump on the market—called the t:slim x2, it has many advantages over competing pumps, including being smaller and much lighter, having a larger touchscreen and the ability to be updated remotely. But probably the most unique part is its predictive software—last year, most x2s came with Basal-IQ technology, which (interacting with Dexcom’s G6 continuous glucose monitoring system) predicts glucose levels 30 minutes ahead of time and suspends insulin delivery for a bit if need be. And just in December, Tandem got approval for its new Control-IQ technology, which further improves the percent of time a patient’s glucose levels are in the recommended range. Growth has been fantastic during the past couple of years, and while that’s expected to slow down this year (analysts see only 22% revenue growth), we doubt those numbers will prove true, especially as Tandem has been making huge inroads into various overseas markets during the past couple of quarters. (Even with the slowdown, earnings are expected to nose above breakeven.) Single product companies are always a bit risky, but the x2 should continue to drive growth for many quarters. Earnings are due out February 24.

Technical Analysis

TNDM was in the low single digits in early 2018; by early 2019, the stock was in the mid 70s as sales had exploded higher. That obviously called for a long rest, and that’s what the stock has experienced—TNDM mostly chopped between the upper 50s and low 70s for 10 months, but is now showing strength, with the stock actually nosing to new price highs last week despite the market. If you’re game, you could start small here with a loose stop.

TNDM Weekly Chart

TNDM Daily Chart

Yeti Holdings (YETI)

yeti.com

Why the Strength

YETI Holdings is known for its iconic coolers, which keep food and beverages cold for days, as well as for its line of insulated stainless-steel mugs and drinkware that keep coffee hot for hours at a time or beers nice and cold (and tasty). The high-end outdoor and recreational products maker continues to expand its reach, with a growing number of nationwide retail outlets carrying its most popular products. In the third quarter, YETI beat Wall Street’s consensus revenue and earnings expectations, with earnings up 25% while revenue rose 17% on a year-over-year basis. Drinkware is one of YETI’s fastest growing product lines (not surprising if you’ve been to a beach during the past year), with net sales increasing 21% to $126 million during the quarter. Meanwhile, its direct-to-consumer business is powering the company’s growth, with that segment seeing revenues rise 31% from a year ago. There is knock-off competition, of course, but the firm has a loyal (and growing) following, which keeps margins high, and it’s not sitting on its hands, as it expands its product lineup—last year, YETI introduced its popular LoadOut GoBox, a weatherproof tool and cargo container which retails for $250. Like many retail winners, YETI’s growth isn’t lightning fast but it’s fairly reliable, and its longer-term growth potential looks big. Earnings are due out February 13.

Technical Analysis

YETI came public in October 2018 and, after a market-related dip, had a great first few months of 2019. But since reaching 37 in April of last year, the stock has been building a solid launching pad, etching many higher lows over the past few months, and last week the stock actually perked up despite the market. It hasn’t broken out yet, but we’re OK starting small ahead of earnings and averaging up on a decisive breakout.

YETI Weekly Chart

YETI 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.