January 13, 2020

Powerful and Persistent—and More Selective

Current Market Outlook

The big-cap indexes remain in rarified air, as they continue to levitate and the sellers refuse to put up a fight. Even more encouraging is that many stocks that took the prior few weeks off (generally building tight ranges) have resumed their advances, a good sign. That said, the upmove has become a bit more selective (small- and mid-cap indexes haven’t participated lately) and numerous yellow flags among secondary indicators are still in place. All of that is a longwinded way of saying that not much has really changed—it’s a strong bull market that should go higher down the road, but the risk of near-term potholes is elevated. Thus, you should remain bullish and continue to hold most of your strong performers, but picking your spots on the buy side makes sense as well.

This week’s list includes a bunch of names that have shown excellent strength after resting for a few weeks—or in some cases, months. Our Top Pick is blue chip Salesforce.com (CRM), which has accelerated to new highs after a 15 months of base-building.

Aecom Technology (ACM)

www.aecom.com

Why the Strength

Aecom Technology isn’t a dazzling growth stock, but we think a few key catalysts can continue to push this special situation higher going forward. Aecom is a giant infrastructure outfit, with north of $20 billion of annual revenue from design, consulting and construction services, as well as through maintenance, training, logistics and more. The company’s been profitable forever, but may not have been operating at peak efficiency—at least that’s what activist investor Starboard Capital believes, as it’s taken a small stake (4% or so) in the company and now has a few friends on the Board, too. And it’s the push from Starboard (along with a general perception that the global economy will pick up speed) that has helped the stock to turn strong: First, Aecom has agreed to sell its management services for a cool $2.4 billion, which will be used to meaningfully cut down debt and buy back shares. And second, the firm is getting its act in order, looking to take advantage of its huge backlog ($60 billion) while hiking margins, too—at its analyst day last December, the firm sees its core professional services (includes design and consulting services and construction management) growing cash flow by 14% this year and, longer-term, boosting operating margins by a few percentage points. Long story short, Aecom looks like a solid turnaround situation.

Technical Analysis

When we wrote up ACM a little over a month ago, the stock had begun to rest after a solid August-through-October advance. That pause ended up lasting seven weeks and testing the 50-day line, but last week saw the buyers return, with ACM exploding to new recovery highs on excellent volume. We’re OK taking a position here or on modest weakness.

ACM Weekly Chart

ACM Daily Chart

Axsome Therapeutics (AXSM)

www.axsome.com

Why the Strength

Axsome Therapeutics develops therapies for central nervous system disorders, including depression, agitation associated with Alzheimer’s, smoking cessation, narcolepsy and migraines. It’s a speculative outfit (no earnings or revenue), but a couple of recent announcements have sent the stock soaring. The first came in early December when Axsome saw promising results in the Phase III trial of AXS-07, a compound for the treatment of migraines that met the two regulatory endpoints in a late-stage study. Then, later in December, came the big news, when the firm’s lead drug candidate, AXS-05, met its primary endpoint in a Phase II trial for major depressive disorder (17 million Americans affected), also receiving FDA Breakthrough Therapy for the drug. Beyond that, there have been positive results for its drug targeting narcolepsy, and just today, the company has agreed with Pfizer to exclusively license in the U.S. that company’s intellectual property for reboxetine, the active pharmaceutical ingredient in AXS-12, which Axsome is developing for the treatment of narcolepsy. Bottom line, the company has a bunch of irons in the fire, and is set to play in some huge markets, and the potential of AXS-05 should keep investors (and possibly suitors) interested.

Technical Analysis

AXSM got off its duff in early 2019 and rallied nicely through mid May, when the 25 to 30 area became stiff resistance. Then came a few months of ups and downs, but the stock has been on fire since October, rising 11 weeks in a row, including a huge December gap. If you’re game, the pullback since then looks like a good chance to enter.

AXSM Weekly Chart

AXSM Daily Chart

Dexcom (DXCM)

dexcom.com

Why the Strength

There’s a huge healthcare conference going on this week, which has already begun to push around many leading medical-related stocks, but we’re thinking reasonable weakness in leaders (like Dexcom) will prove buyable. As we wrote in November in Top Ten, Dexcom is making hay thanks to its G6 continuous glucose monitoring (CGM) system, which, like the name suggests, helps many diabetics more easily and accurately measure their glucose levels throughout the day, with no need for repeated finger sticks to get a small blood sample. And that means far better results and outcomes for patients, whether the firm’s CGM is paired with an insulin pump or not (the G6 is used in some of Tandem’s and Insulet’s pumps, and will be integrated into Lily’s personalized system). There’s competition, and Dexcom’s stock has regularly been tossed around in past years by news on that front, but big investors are now focusing on this firm’s leading position (most think the G6 is best in class) and the size of the opportunity as diabetics adopt better technologies (i.e., there will be room for many to thrive). Beyond the G6, Dexcom is expected to release the next generation G7 later this year (limited launch), though G6 growth remains fantastic, with the firm pre-announced estimate-beating Q4 results this morning (revenues up 33%).

Technical Analysis

DXCM busted loose from a 14-month period of no progress in November and rallied to 230 by early December. Not surprisingly, the pullback was sharp (to 200 in just a few days), but it didn’t crack any key support, and DXCM bounced back, steadied itself and then shot to new highs last week. Shares took a hit today after its conference presentation (guidance for 2020 was in-line, and probably conservative), but we think it’s OK to buy here or on further dips.

DXCM Weekly Chart

DXCM Daily Chart

Dynatrace (DT)

dynatrace.com

Why the Strength

As companies invest oodles of money building out their cloud networks and infrastructure, a new demand has arisen—the ability to efficiently monitor all of the various hardware and software applications that are now being depended on. Dynatrace, which just came public in July, appears to be the market leader in this new field: Instead of having to use different monitoring and alerting systems and then combining the data to find out what’s going on, Dynatrace’s platform uses instrumentation technology, artificial intelligence, dependency mapping and code analysis to provide instant heads-ups to IT teams when any system degradation or anomalies appear. As you’d expect, Dynatrace is of most use to bigger outfits (it targets the 15,000 largest global enterprise firms; new customers sign up for $97,000 annually on average), and it’s been a hit, with 1,828 now using the company’s platform, up from 899 a year ago, and same-customer revenue growth has topped 20% each of the past six quarters. Revenue growth has started to accelerate, thanks mostly to recurring subscription revenue (annualized recurring revenue was up 44% from a year ago), and the bottom line has moved into the black. It’s a good, fresh growth story.

Technical Analysis

DT came public at a bad time for the stock price, as the market’s August/September struggles pushed it down from a post-offering high near 27 to a low of 17. But it quickly recovered with the market, paused for a few weeks near its old highs, and then last week, began to push out to new highs. As always, recent IPOs are usually very hectic, so keeping new positions small and using a loose leash is your best bet.

DT Weekly Chart

DT Daily Chart

Fortinet Inc. (FTNT)

fortinet.com

Why the Strength

If you think you hear a lot about cybersecurity today, just wait! Last year, there were at least 7.9 billion records—including credit card numbers, home addresses, phone numbers and other highly sensitive information—that were compromised by computer hacks, mainly through invasions of business networks. That’s why the global cybersecurity market amounted to some $161 billion last year, but is expected to more than double (to $363 billion) by 2025, a mid-teens annual growth rate. And some think even that could prove conservative, as the launch of 5G and the rapid growth of Internet of Things take hold, both of which will create more devices and opportunities for hackers—and a greater need for protection. Among the new-age players in the field, Fortinet is one of the bigger beneficiaries, as it provides a wide range of integrated, automated cybersecurity solutions worldwide. From posting earnings of 29 cents per share a decade ago, FTNT earned $1.84 in 2018 and is estimated to rake in $2.40 per share when 2019 is in the books. (Fourth-quarter results will be released February 6 after the market close.) The sex appeal isn’t super high, but Fortinet is a proven outfit with a history of pulling the right levers, which, combined with the positive industry trends, has big investors clicking the buy button.

Technical Analysis

FTNT based out for a year starting in October 2018, then took off before and (mostly) after earnings on November 1. It had a couple of small pullbacks in December, and it nearly tested its 10-week line around year-end, but it’s started 2020 with a bang, pushing to new highs. A normal dip would look buyable to us.

FTNT Weekly Chart

FTNT Daily Chart

Guess (GES)

www.guess.com

Why the Strength

Guess is a global apparel firm, selling sexy clothes and merchandise to Gen Z, Millennial and Heritage consumers through 1,743 stores worldwide in over 100 countries. Guess had a #metoo moment in 2018 that led to a CEO change in early 2019. The new hire is former Guess executive Carlos Alberini, who hit the ground running by immediately cutting the dividend in half in order to reallocate cash to share repurchases. Management then announced a five-year plan of cost-cutting and streamlining operations; Alberini foresees “a lot more operating margin expansion opportunity” which is already bearing fruit. Guess was already more than holding its own amidst a dismal retail landscape (it’s been one of the only well-known clothing retailers that’s consistently producing attractive profits), and now things are improving further. While top line growth isn’t going through the roof, improved operations are boosting earnings—the bottom line rose 40% two years ago, are expected to have risen 39% last year, and analysts see a 24% bump in the fiscal year that’ll get underway in February, with a stronger economy and easing trade tensions with (and exposure to) China helping the cause. (Management plans to decrease the volume of merchandise that’s sourced in China from 47% to 23%, to help avoid potential tariffs.) A reasonable valuation (14 times this year’s earnings) and a still-healthy dividend yield of 2% put a nice bow on the package.

Technical Analysis

The CEO change hit GES last year, with sellers driving shares as low as 13 in both June and August. But now that investors have gained confidence in Alberini, the stock has changed character—it bolted off the bottom in August, consolidated for three months and has been very strong since November, including a recent string of 10 weeks up in a row. We’re OK entering on minor weakness.

GES Weekly Chart

GES Daily Chart

JD.com (JD)

jd.com

Why the Strength

JD.com is the second-largest e-commerce player in China. Online retail sales of goods are growing dramatically in China, with November 2019 revenue up 19% vs. a year ago despite economic headwinds in that country. JD.com employs an asset-heavy business model, owning their inventory and warehouses (competitor Alibaba follows an asset-light business model), and the company is expanding into lower-tier cities where they expect to eventually lead customers toward higher margin, name brand products, something they’ve successfully accomplished during previous expansions. JD.com is focused on revenue growth in 2020, though profits are on the upswing as well—the company made efficiency improvements in 2019 and sees improving margins in the coming years. JD.com’s logistics unit, which operates more than 650 warehouses, discussed a potential IPO with bankers in December, targeting a valuation of at least $30 billion. Proceeds of a second-half 2020 IPO would be used for warehouse expansion and potential acquisition purposes. JD is no small fry ($57 billion market cap!) and has been profitable since 2016, and earnings are beginning to kick into gear, with a tripling in 2019 and another 34% gain (likely conservative) in 2020. It’s not as well known as Alibaba, but JD should be one of the main beneficiaries from an accelerating Chinese economy going forward.

Technical Analysis

JD rebounded from its late-2018 lows last spring and then built a good-looking base between 26 and 32 for a few months. The breakout in November looked promising, though a post-earnings wobble got in the way, but now we see buyers letting loose—JD has rallied eight weeks in a row to new recovery highs on solid volume. Like most names, we prefer to enter on a little dip following this strong run.

JD Weekly Chart

JD Daily Chart

Qorvo (QRVO)

qorvo.com

Why the Strength

The two leading growth-oriented themes since the market bottom have probably been biotech/medical and 5G-related chip firms, and Qorvo looks like one of the top plays in the latter theme. Digging into the details of the firm’s various radio frequency (RF) products, both for smartphones and Internet of Things devices, can cause the proverbial ice cream headache, but suffice it to say that they’re integral to any communications device, and the 5G boom is likely to set off a major growth wave for the industry as a whole, with Qorvo getting at least its fair share. Besides the boom in devices sold (estimates call for 200 to 250 million 5G phones sold in 2020, with far greater numbers in 2021 and beyond), each 5G phone will use far more RF content (50% to 60% more by some estimates), and the early signs are that big phone makers are leaning toward firms that can provide integrated solutions (like Qorvo and other big players), rather than trying to save a buck with one-off components (which generally offer lower performance and reliability). The past couple of quarters haven’t been anything to write home about, but analysts see the 5G smartphone (and infrastructure) boom getting underway in the months ahead, and Qorvo looks like one of the big beneficiaries. Analysts see earnings up 16% in the coming year, but given the size of the Q3 beat-and-raise report, the odds favor that being low.

Technical Analysis

QRVO has had a big run in recent months, blasting out of a multi-year base on November 1, resting just above 100 for a few weeks and then surging to as high as 118. Now it’s finally coming under some pressure, with a quick dip to 10-week line last week. Some further wiggles could be in order, but we’re OK starting a position here or on dips.

QRVO Weekly Chart

QRVO Daily Chart

Salesforce.com (CRM)

salesforce.com

Why the Strength

The stock symbol for Salesforce used to encompass the company’s entire focus (customer relationship management), but the firm has come a long way since its founding in 1999. Today, the bulk of its revenues still come from CRM products, though it’s developing far more offerings that appeal to huge customers (including social networking, marketing, commerce and more), often making it a must-have suite for big customers. Of course, the broader industry is in growth mode—software as a service (SaaS) is expected to grow to $116 billion this year due, and the industry has become more mainstream now. Salesforce is also benefiting from its successful acquisition strategy, most recently acquiring data cruncher Tableau Software in a $15.7 billion deal. And the company has pushed into artificial intelligence in the past few years, going after financial service firms that are undergoing digital transformation. Despite its larger size, Salesforce is still expected to grow organically at 20%-plus rates, and analysts see that continuing going forward. Salesforce will report earnings in March, with analysts expecting 21% EPS and 31% revenue growth (bolstered partly by buyouts). It’s not a new story, but this longer-term winner appears to have just started a fresh uptrend.

Technical Analysis

We’ve seen a ton of longer-term breakouts in recent months, and now CRM has joined the list. From October 2018 through November of last year, the stock made no net progress, but it decisively broke out on January 6 and has gone straight up since. We’re not opposed to buying a little here, but officially we’ll set our entry range a bit lower.

CRM Weekly Chart

CRM Daily Chart

Western Digital Corporation (WDC)

www.westerndigital.com

Why the Strength

Excitement over a series of new products and a better overall industry environment is driving Western Digital stock out of an 18-month slump. The firm has historically been (and still is) a leader in the hard disk drive market (HDD), though that area is touch and go due to falling PC unit sales and product advantages of solid state drives (SSD). To combat that, Western Digital purchased SanDisk to lock in a competitive place in the growing SSD market, and it also invested heavily in transitioning from HDD to flash storage. Western Digital revealed several new products at the CES 2020 show this month, including the world’s highest capacity, pocket-sized SuperSpeed USB 20Gbps portable SSD. The company will also be shipping several new hard drives in the first half of 2020. Prices on solid state products tanked for a while but have improved recently and are expected to continue rising in the coming quarters, helped along by 5G smartphone builds and gaming console upgrades. That’s a big reason why, after some horrible results in recent quarters (five straight reports with dour numbers), analysts see the situation picking up in 2020, with earnings in the coming fiscal year (starting in July) rising more than 150%. That said, the next big event will be earnings, due out January 30; management’s forecast should have a big impact on investor perception.

Technical Analysis

WDC was taken apart in 2018 and was still on its knees in June before finally enjoying a big rally as hopes picked up for a rebound in SSD pricing. There was another tedious correction into November, but the stock’s action since has been great—WDC has risen five weeks in a row to new recovery highs on some solid upside volume. We prefer aiming for dips of a couple of points.

WDC Weekly Chart

WDC 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.