Evidence Remains Impressive
Current Market Outlook
It’s been six weeks since the market bottomed, and the evidence since then has steadily improved—whether it was the blast off from the lows (2-to-1 Blastoff Indicator), the lack of any sustained selling since, the amazing upside breadth or the increasing number of setups and breakouts among growth stocks, it’s all been going the bulls’ way. Of course, now that the market has basically marched ahead for six weeks, things could easily get trickier; even some intermediate-term measures (84% of NYSE stocks above their 50-day lines) are stretched. That’s no reason to worry (longer-term, such power is probably a good sign), but we’d be looking to buy mostly on dips, though we’re still interested in the occasional earnings breakout, too. And, as things head higher, don’t forget to book some partial profits along the way. We’re bumping up our Market Monitor another notch tonight.
This week’s list is another diverse set of stocks that are acting well. Our Top Pick is Entegris (ENTG), where an upcoming merger (and a uptick in the chip group) has investors piling in.
| Stock Name | Price | ||
|---|---|---|---|
| Boeing (BA) | 432.22 | ||
| Cree, Inc. (CREE) | 67.96 | ||
| CyberArk (CYBR) | 111.74 | ||
| Elastic (ESTC) | 86.17 | ||
| Entegris (ENTG) | 48.08 | ||
| ServiceNow (NOW) | 341.86 | ||
| Smartsheet (SMAR) | 44.12 | ||
| Spirit Airlines (SAVE) | 57.03 | ||
| Woodward (WWD) | 111.91 | ||
| Zscaler (ZS) | 126.22 |
Boeing (BA)
Why the Strength
A Dow Industrials stock in Top Ten? It’s obviously not the norm, but following Boeing’s powerful quarterly report and earnings reaction, it’s earned a place in this week’s issue. The company, of course, needs no introduction—Boeing is the world’s largest aerospace company, and simply put, business is very good. In Q4, sales, earnings and free cash flow growth were just OK, but all easily topped expectations, and as we’re seeing with many recent earnings winners, institutional investors are placing their emphasis on the gigantic backlog ($490 billion from nearly 5,900 airplane orders) and the 2019 outlook. Thanks to a pickup in deliveries company sees operating cash flow rising 13% this year, which, thanks to some further margin expansion and share buybacks (share count was down 4% in Q4 vs. a year ago), is expected to drive earnings higher by 25% (analysts estimates are still below management’s). Stepping back a bit, despite its huge size, Boeing has always been a stock that’s been able to trend for long periods of times when the order cycle for new jets picks up steam, as greater deliveries lead to a torrent of growth and cash flow. The beginning of this upcycle started back in late 2016, and after a year-long rest, it looks like the stock is ready to resume its longer-term rally.
Technical Analysis
BA effectively peaked in early February of last year after a big run that started 15 months before. Shares mostly bobbed and weaved before the November/December dive brought the stock to new lows, but the comeback since then has been extremely impressive—BA quickly rallied back to the mid 360s, tightened up a bit, then gapped up to its old price highs (and to new RP peaks) on nearly triple its average volume (which is huge for a mega-cap stock). We’re OK buying some here or (preferably) on dips.
BA Weekly Chart
BA Daily Chart
Cree, Inc. (CREE)
Why the Strength
Cree is trading near multi-year highs following a slightly better than expected Q2 fiscal 2019 report late last week. The company, which specializes in LED lighting systems, LED bulbs, and semiconductor solutions for power and radio-frequency (RF) applications, delivered quarterly revenue growth of 12% (to $413 million) and adjusted EPS of $0.23 (which blew away expectations by $0.06). Importantly, growth in the Wolfspeed segment (power and RF solutions), which has been the main driver of business and attraction of the stock, was slightly better than expected, with revenue booming 92% to $135 million. The Lighting segment also surpassed expectations by delivering $133 million in revenue (down 8%), while the LED segment underperformed modestly (revenue of $145 million). All in, the results met high expectations and forward EPS guidance (for Q3) of $0.13 to $0.19 provides upside potential over consensus of $0.15, even though revenue guidance is a hair light. The bottom line is that management sounds bullish on big picture trends, like SiC and GaN adoption, and exposure to electric vehicles, solar and 5G are likely to keep investors focused on Cree. While the stock’s valuation is relatively high historically, Cree looks like one of the strongest names in the sector. Analysts see earnings up 321% this fiscal year (ending in June) and another 60% next.
Technical Analysis
CREE fell from 52 in August to 34 in October (which was its bottom, two months ahead of the market), rallied to 47 in December and “only” pulled back to 38 or so later that month. In other words, the stock showed signs of relative strength before the bottom, and now we see the result—CREE has marched persistently higher since the start of the year, and while last week’s earnings move brought in a little selling, the path of least resistance is up. You can start a position here or on weakness.
CREE Weekly Chart
CREE Daily Chart
CyberArk (CYBR)
Why the Strength
We just featured CyberArk in mid-December and the story hasn’t changed much since—and that’s a good thing. The company is benefitting from many of the secular growth trends that are helping Zscaler (also featured in this week’s Top Ten), namely increasing strategic importance of robust cybersecurity solutions and a growing preference for the cloud-based delivery model. But CyberArk has another thing going for it; the company specializes in protecting super-sensitive files and IT data, even if a hacker gets past a company’s firewall. That valuable capability has helped the company become the market leader in the strategic security market of Privileged Access Management (PAM)—it holds around 30% market share in a billion dollar market that many believe will eventually become a $10 billion market, meaning there should be years for CyberArk to grow. Management is going after it with guns blazing, simplifying its pricing model and expanding into new geographic markets. Fourth quarter 2018 results will be out next week (February 14), so forward estimates are likely to change soon. But at the moment the market is looking for 18% revenue growth in 2019 and EPS of $1.94. Should CyberArk deliver above expectations for full-year 2018 (revenue growth of 26% and EPS of $1.76 expected) those forward estimates, and the stock price, are likely to rise.
Technical Analysis
CYBR broke out in February 2018 when shares advanced from 42 to 70 over just five months. They took off again after an earnings report in August 2018, when CYBR recovered from a slight correction and rallied up to 81. The stock got caught up in the market malaise in Q4 2018 when it oscillated in a wide range between 65 and 84 for three months. But the trend has been much more steady in 2019, with a powerful breakout last week and some nice upside follow through since. Try to buy on modest weakness, and consider keeping positions small this close to earnings.
CYBR Weekly Chart
CYBR Daily Chart
Elastic (ESTC)
Why the Strength
Recent IPOs are often a crapshoot, but near start of new market advances, some can morph into new leadership as there are no meaningful sellers (insiders can’t get out in size for at least a few months) and bigger investors accumulate positions. There are a few good-looking IPOs now, and Elastic is our favorite partially because of its outstanding story. The company’s Stack platform takes in all different types of data from a variety of areas and allows users to easily search for relevant information; it has unmatched speed, scale and produces the most relevant results. The big idea to us is the pervasiveness of the platform—whether it’s for consumer-facing applications (Uber and Tinder use Elastic to match drivers, riders and data seekers), for infrastructure (Barclays uses it to view server logs and infrastructure activity to see what’s working or not), for cybersecurity (Indiana University uses Stack to protect its thousands of assets) or for simple monitoring (Brazil uses it for real-time healthy spending and service quality data search), Elastic’s offerings can do it all, and customers are responding. In Q3 (its only public earnings report so far), sales, billings and deferred revenue all grow north of 70% from a year ago, and each of the past eight quarters has seen current customers average a 30% hike in their usage of Elastic from the prior year. Of course, the valuation is huge ($6.2 billion!), but this looks like a unique growth story. Interestingly, 142 mutual funds picked up shares in the first three months it came public.
Technical Analysis
ESTC came public in early October—probably the worst time to do so. But instead of falling off a cliff repeatedly found support in the 60 to 63 range through year-end. And with the market heading higher this year, ESTC has performed excellently, spiking to 78, resting for two weeks and then zooming to new highs. We think pullbacks are likely, so aim to get in on weakness.
ESTC Weekly Chart
ESTC Daily Chart
Entegris (ENTG)
Why the Strength
Entegris is a semiconductor equipment stock that’s been around for over 50 years, developing products that help manufacturers make smaller and faster microchips, eliminate steps in drug manufacturing and improve efficiency in aircraft engines. It’s been a steady growth business with revenues up an average of 11.7% over each of the last three years. And Entegris is consistently profitable too; EPS grew by 53% to $1.44 in 2017 and likely popped another 31% last year. Recent strength in the chip group is one reason for the strength, but the truly big news was announced last week: Entegris will join forces with Versum Materials (VSM) in a “merger of equals” that will result in a company with roughly $3 billion in revenue, $1 billion in adjusted EBITDA and an enterprise value of $9 billion. Entegris shareholders will own 53% of the combined company (which will retain the Entegris name), while Versum shareholders will own 47%. The pitch is similar to that of most deals of this nature, namely better scale, greater utilization of manufacturing and infrastructure resources, stronger competitive positioning and a more efficient organization that can cut redundant costs; indeed, management sees $75 million in synergies (30 cents per share or so) when all is said and done. Also helping is that Entegris recently pre-announced full-year fiscal 2018 results, which showed revenue up 15% (to $1.6 billion) and EPS of $1.88 to $1.90. All forward estimates have gone out the window given the proposed merger, which is expected to close in the second half of 2019. Given the significance of this deal and the positive reaction in both stocks, it’s fair to say big investors see a bright future.
Technical Analysis
ENTG started climbing in the beginning of 2016 and for about two and a half years trended upward, without ever retreating to its 200-day line. But the uptrend ended in June of last year around 39 (a few months after the general top in semi stocks), and the decline was swift and punishing—shares didn’t bottom until October down near 23. A double bottom in December was the first ray of light, and ENTG rallied to its 200-day line two weeks ago—and then soared last week after the merger announcement on truly explosive volume. We’re OK starting a position here or on any weakness.
ENTG Weekly Chart
ENTG Daily Chart
ServiceNow (NOW)
Why the Strength
We almost never re-write a stock two weeks in a row in Top Ten, mostly because nothing much new can be said and the chart doesn’t change much in just a few trading days. But ServiceNow is the exception, as last week’s great setup has led to a powerful, earnings-induced breakout; the stock now looks like a liquid leader of the current market advance. It’s true that sales growth decelerated again (to “only” 30%) in Q4, but investors focused on the leading indicators, which looked great—subscription billings grew 39% and management expects some reacceleration in 2019, with billings and revenue seen rising 31% and 35% (respectively), both of which are likely conservative (as ServiceNow’s top brass tends to lowball these numbers). Also positive was strong demand for some newer products like HR and customer service (made up 31% of net new bookings), and it’s seeing more and more huge customers embrace its offerings wholesale (the number of clients with more than $5 million of annual contract value grew 54%). The best number of all: ServiceNow inked deals worth $1.5 billion in the quarter alone, more than half of its total revenues for last year. Margins aren’t likely to ramp as quickly as expected, but big investors aren’t worried, focusing more on free cash flow growth of 30%-plus annually for the next three years. ServiceNow continues to look like an emerging blue chip.
Technical Analysis
We won’t repeat everything we wrote about NOW’s chart last week, but suffice it to say that the stock etched a great-looking launching pad for 19 weeks, falling 28% from high to low, with the tightness near the end a great sign the weak hands were out. The earnings move (up 13% on five times average volume) looks like a buyable breakaway gap to us, though use a loss limit down around 200 to give shares room to breathe.
NOW Weekly Chart
NOW Daily Chart
Smartsheet (SMAR)
Why the Strength
Smartsheet is a member of the class of 2018 small cap cloud software IPOs. It’s basically a business efficiency story given that Smartsheet specializes in cloud-based workflow solutions. The firm’s suite of Smartdashboards, Smartportals, Smartcards, Smartgrids, Smartprojets, Smartcalendars and Smartforms help teams plan, capture, manage, automate and report on work deliverables. The platform integrates with the usual platforms and offerings, including Microsoft, Google, Salesforce.com, Dropbox and Slack. And it’s been a hit. Smartsheet’s customer count tops 95,000, which includes over 70% of the Fortune 500. Given that the company is maturing some (but still relatively young), growth in new customer additions might slow down but revenue and profit growth is still cranking ahead due to the efficiency of the business model. Revenue growth was likely around 62% last year (Q4 results are likely due out in early March), though the bottom line is still stuck in the red, which is acceptable for a newer outfit. We like that analysts are generally positive on the stock, that management tends to beat expectations and that the IPO lockup expiration date is now behind us. And, most importantly, that shares of Smartsheet are running back toward all-time highs.
Technical Analysis
SMAR went public last April at 15 and blasted higher soon after, ultimately peaking just above 32 in early summer. That was effectively the top, as, while there was one more lift toward those highs, the stock pulled back into the low 20s during November. Like so many other stocks, though, SMAR etched a slightly higher low in December and has come to life this year, running higher on many days of excellent volume. You could nibble here, though with resistance just above, a shakeout wouldn’t be surprising.
SMAR Weekly Chart
SMAR Daily Chart
Spirit Airlines (SAVE)
Why the Strength
Airlines stocks (and transportation stocks in general) remain a mixed bag, but Spirit Airlines is dancing to its own drummer. The company is the leading ultra low cost carrier in the U.S., serving 22 of the top 25 U.S. markets as well as a ton of small/mid-sized destinations as well, and thanks to tight cost controls (excluding fuel, the firm’s cost per seat mile flown has fallen a few percent in recent years), it’s able to offer base fares that average 35% less than the competition (though it makes great money on all the “add-ons” they charge for). Those are some nice advantages, but the stock is strong today because management is charging ahead with an aggressive expansion plan and is seeing big benefits from its dynamic price of non-ticket items—the firm’s revenue per seat mile flown has boomed of late (to 11.4% in Q4 from 6% estimated earlier), which many analysts have taken as a paradigm shift of sorts; combined with rapid capacity expansion (up 15% in Q4, and rising 13% to 15% annually through 2021) and tamer fuel costs, the step function in revenue per mile means Spirits earnings potential should be through the roof both this year and next. Wall Street sees earnings lifting to $6.41 per share this year, but if the growth trends continue, even that could prove extremely conservative, with some thinking $8 or $9 per share is possible if the stars align. We’ll find out more on Wednesday, when earnings are released.
Technical Analysis
SAVE began a nice turnaround around starting in June of last year, and the big move came in November, when management’s raised guidance caused a gap to the mid 60s. The market pulled SAVE lower after that, but it’s gone on to build a tidy nine-week base ahead of earnings, with some accumulation showing up last week. If you’re aggressive, you could nibble here and buy more on a push above 65 after earnings; or you can wait and see what the report brings.
SAVE Weekly Chart
SAVE Daily Chart
Woodward (WWD)
Why the Strength
Woodward doesn’t have a sexy story, but it’s executing well, is morphing into a cash cow and has solid opportunities for growth—combined with a great Q4 report and the stock has stock to life. The company makes so-called control solutions, things like fluid, combustion and electrical items that make larger pieces of equipment work more efficiently. (Like we said, not sexy.) Aerospace is the main driver, with propulsion systems, flight deck controls and aircraft actuators and airframe content; the firm’s been taking market share in recent years, and management sees most of its end markets growing solidly in the years ahead. The other part of the business is Industrial control products, which serves the power generation, oil and gas and transportation markets (again, all in long-term growth phases) with engines, controls and turbine and distributed energy control systems. That segment got a boost with the purchase of L’Orange, last summer (for $811 million), which brought a big installed base that’s broadening the segment’s reach and potential. In Q4, sales boomed 39% (still up 20% even excluding the acquisition), while earnings easily topped expectations. Analysts see earnings up 21% this fiscal year (ending in September), though the market clearly thinks that’s conservative after the recent report. If the economy continues to outpace expectations, demand for Woodward’s products should remain strong.
Technical Analysis
WWD has made good progress over time, but usually with long rest periods along the way—shares went sideways from mid 2014 from early 2016, then ran from the mid 50s to the low 80s in late 2017. Then came another year-plus rest, with the stock chopping around through all of last year. And now it looks like WWD is starting another run, with a very strong gap up on earnings last Tuesday and some follow-through on Thursday. We’re OK buying some here or on dips with a stop in the low 80s.
WWD Weekly Chart
WWD Daily Chart
Zscaler (ZS)
Why the Strength
Zscaler is back in Top Ten again because the provider of cloud-based security software has, after a brief rest, broken above resistance and is on the verge of moving to a fresh all-time highs. The stock is doing well because companies are shifting toward cloud-based models for their security needs. Zscaler’s modern computing architecture means the company has expanded beyond just web security and into the $18 billion market of full network security spending. With secular tailwinds blowing firmly at its back, Zscaler’s cloud-first model is helping resellers penetrate new accounts while, thus far, competition appears manageable; even as some new-age cybersecurity players develop solutions, there remains so much business to be had just from clients transitioning from legacy security systems. There haven’t been any big changes to the story following the release of Q1 fiscal 2019 results on December 4. Revenue was up 59% to $63.3 million while EPS of $0.01 beat consensus of -$0.05. Full-year revenue guidance of $270 million at the midpoint was also ahead of $259 million consensus. Those results have analysts calling for revenue growth of 42% in fiscal 2019 and 30% in fiscal 2020, when Zscaler is also expected to deliver first profits (estimated EPS of $0.07). And longer-term, some analysts see the company ramping revenue to $1 billion within a couple of years. The next quarterly report is likely out in early March.
Technical Analysis
ZS has performed well since it went public in March of last year. The stock jumped on its first day of trading then paused for a few months before rallying to another new high in June. Since then ZS mostly traded in the 32 to 43 range, with a few breakouts and retreats outside of those parameters. The stock’s move to 45 in early-January, tight consolidation and recent rally to all-time highs near 49, is a strong sign that the buyers are in control. You can pick up shares here or on dips of a couple of points, with a stop below the recent rest area.
ZS Weekly Chart
ZS 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.
