Evidence Continues to Improve
Current Market Outlook
Stocks had another great week, with the major indexes posting solid gains, many potential leaders approaching new highs and market breadth being so positive that it flashed a rare “blastoff” green light. Thus, our confidence is growing that the worst has passed—though that doesn’t mean the market doesn’t face many weeks of bottom building, either. Long story short, the evidence has improved, though it’s worth remembering that the intermediate-term trend of the indexes and most stocks remains down. All in all, we’re OK extending your line a bit, doing some new buying in high-potential stocks, but we’re also still keeping a good chunk of cash on the sideline and waiting for more strength to develop (maybe after a retrenchment) before turning bullish. Our Market Monitor moves to a level 5 this week.
As for the list, today is another batch of good-looking stocks from a variety of sectors, albeit with a heavier emphasis on medical. Our Top Pick is old favorite Dexcom (DXCM)—start small and build if the recent strength continues.
| Stock Name | Price | ||
|---|---|---|---|
| Array Biopharma (ARRY) | 46.35 | ||
| Cree, Inc. (CREE) | 67.96 | ||
| Dexcom (DXCM) | 421.36 | ||
| Everbridge (EVBG) | 107.90 | ||
| Five Below (FIVE) | 134.58 | ||
| Ionis Pharmaceuticals (IONS) | 73.34 | ||
| Keysight Technologies, Inc. (KEYS) | 97.20 | ||
| LGI Homes (LGIH) | 86.04 | ||
| Tandem Diabetes (TNDM) | 74.77 | ||
| Vertex Pharmaceuticals (VRTX) | 230.36 |
Array Biopharma (ARRY)
Why the Strength
Array BioPharma is one of many biotech outfits that’s just hitting the commercialization stage, with a set of intriguing, targeted cancer products that have shown great results. In the second half of last year, Array got U.S. and European approval for Braftovi and Mektovi for the treatment of later-stage melanoma that shows a couple of specific gene mutations; these targeted therapies (taken by pill) inhibit the signals of certain genes that have gone wild, hence slowing or stopping the growth and spread of melanoma cells. Clinical trials have shown a meaningful improvement in life expectancy (33 months vs. 17 months in one study) the drugs were well tolerated and, not surprisingly, sales are off to a good start—the combo brought in $14 million of revenue in their first full quarter of sales (1,300 prescriptions). And with some big partners in Europe and Japan (Japan’s authorities are currently reviewing for approval), analysts see revenues up 24% this fiscal year (ending in June) and 44% next as milestones and royalties flow. Beyond the current label, the FDA has granted breakthrough designation for Braftovi/Mektovi in the treatment of a specific form of colorectal cancer; Phase II trials were encouraging, with Phase III topline results expected in the first half of this year. Expectations are high (market cap is around $3.8 billion), but so is the potential.
Technical Analysis
ARRY hasn’t done anything on a net-net basis since last February, but appeared in our screens this week due to its strong relative performance (RP) line (new six months highs and near all-time highs), because of the higher low formed in December and because of the big-volume thrust last week that took it to 18. Overall, this looks like a solid base-building effort—we’re OK nibbling here with a loose stop, and looking to add shares if ARRY (and the market) move higher.
ARRY Weekly Chart
ARRY Daily Chart
Cree, Inc. (CREE)
Why the Strength
We last wrote about Cree in December and are going back to the stock today since it continues to be one of the stronger semi names out there. Why? The company is at the top of the food chain in the Lighting and LED bulb markets, each of which brings in about a third of total revenue. But it also makes semiconductor solutions for power and radio-frequency (RF) applications through its Wolfspeed division, which accounts for the other third. The Wolfspeed segment is where the growth is, as evidenced by 93% revenue growth in Q1 fiscal 2019 (reported in October). In comparison, LED Products grew by just 2% and Lighting shrank by 10%. While those two segments aren’t really growing, they’re still relatively healthy, but clearly Wolfspeed is the main attraction here and end-market exposure to electrical vehicles, solar and 5G is a big part of why management thinks the company can attain its aspirational goal of 40% gross margins by 2020 (Wolfspeed generates 86% of gross profit dollars now). As we mentioned in December there are some uncertainties, including trade tensions, slowing growth in China and lower economic activity elsewhere in the world. But Wolfspeed’s traction, recently exemplified by a deal with STMicroelectronics to supply $250 million worth of automotive-grade silicon carbide wafers, is expected to help Cree deliver 11% revenue growth and a quadrupling of EPS (to $0.75) this fiscal year. And that’s keeping big investors in the game.
Technical Analysis
CREE underperformed for years but the stock picked up in September 2017 after a new CEO took the helm. Shares broke out to multi-year highs around 34 following the release of Q1 fiscal 2018 results soon after, and didn’t top out until they hit 51 last August. Shares did dip as low as 34 during the early stages of the market decline, but they’ve acted well since, with a push to 47 in December, a higher low of 39 later that month, and last week, a push back toward resistance. We’re OK starting a position here.
CREE Weekly Chart
CREE Daily Chart
Dexcom (DXCM)
Why the Strength
Dexcom continues to ride the success of its G6 continuous glucose monitor, which, after launching last year, has led to a slew of new patient additions and driven rapid growth in recent quarters. There is competition from some big boys, but the G6 has many advantages, including a true “no fingerstick” designation, being approved for patients as young as two years old and just a 9% error factor on readings. Looking to this year, G6 should continue to gain share, with an expanding international presence and moving into Medicare sales as well. But even before those catalysts Dexcom is heading into 2019 with a ton of momentum—management said last week that Q4 revenues likely grew 50% from a year ago, blowing away estimates and representing the fifth straight quarter of accelerating growth. The top brass’ outlook for 15% to 20% revenue growth (and profitability) in 2019 was also a plus, though most believe that view is conservative given the pace of expansion seen in recent quarters. (Analysts are currently pegging revenues to rise 20% this year and see earnings of a quarter per share.) Next year, Dexcom is also looking to penetrate the Type 1 market via a partnership with a Google subsidiary, but the G6 is the main driver today. Earnings are due February 21.
Technical Analysis
After a sour couple of years, DXCM started a huge comeback in late 2017, lifting above its 200-day line in March of last year, leaping to new all-time highs in August and moving all the way to 149 in September. And despite that big run, the stock held up very well during the market meltdown—DXCM actually nosed out to new highs in November, held its 200-day line (unlike 90% of stocks!) during the December wipeout and, last week, popped toward its highs after its positive preannouncement. We’re OK nibbling here (or on dips) and adding shares on a move north of 152.
DXCM Weekly Chart
DXCM Daily Chart
Everbridge (EVBG)
Why the Strength
Everbridge is a small cap cloud software company that sells critical communication solutions to keep people safe and businesses running. The company’s critical event management (CEM) platform sends automated real-time threat detection alerts for over 100 different types of risks, including terrorist attacks, active shooter events, severe weather incidents and missing person situations. Just over half of revenue comes from corporate customers, with healthcare accounting for 15% of revenue and public sector organizations making up 31% of sales. The stock is doing well now because Everbridge has shown it’s capable of adding new solutions to the platform that customers will buy, it’s expanding internationally, it’s FedRAMP certified (meaning it’s an approved vendor for federal agencies) and it’s landing country-wide deals. The growth profile is undeniably attractive, with revenue growth likely hitting 44% last year and 27% in 2019. The company isn’t yet profitable (expected EPS in 2019 is -$0.34), but it’s moving in the right direction and with greater scale will get there in a few years. This is one of those secular growth stories that seems particularly sustainable since organizations will want to keep people safe regardless of how the economy is doing.
Technical Analysis
EVBG rallied through 2017 and most of 2018 in a nice, smooth uptrend. After getting a bit out of trend on the upside in September, the stock fell as low as 42, but for the most part EVBG held up well during the market correction in late-2018 and found consistent support around 47. We like the recent bouts of big-volume buying, too—while volatility will be high, we think the odds favor EVBG rallying from here. You can buy some here or on dips.
EVBG Weekly Chart
EVBG Daily Chart
Five Below (FIVE)
Why the Strength
Whether it’s because of an expectation of a more restrained Federal Reserve, prospects for a U.S-China trade deal or continued consumer-friendly economic reports (like the recent employment report), many specialty retail stocks have rebounded nicely, and Five Below, which possesses one of the market’s top cookie-cutter stories and has been featured in Top Ten numerous times in recent months. To review, the firm is basically a new kind of dollar store (everything for $5 or less), offering trend-right stuff for teens and pre-teens in a variety of categories (sports, candy, décor, some clothes, arts and crafts, even some gadgets). To us, the real secret sauce here is the firm’s best-in-class new store economics; for many years and in all different states, Five Below has been able to recoup the cost of opening a new store in less than a year, which allows for a rapid store expansion plan (about 20% boost in the store count per year), which, combined with persistently higher same-store sales (up more than 10 years in a row) has produced an enviable record of growth. More recently, management has said it can handle the 10% China tariffs that are now in place via a variety of methods (price hikes, supply chain changes, etc.) and today the company pre-announced positive sales results for November and December (revenues up nearly 25%, same-store sales up 4.9%), affirming that growth is on track.
Technical Analysis
FIVE is certainly acting like a tennis ball—shares topped in
September after a great earnings report and skidded all the way
into December for a total decline of around 37%. But the action
since the low has been fantastic, with the stock ripping back
toward its November highs on many days of good volume. The slide of the past couple of sessions could go on for a bit, but the action is normal given the recent ramp. We’re OK buying some here.
FIVE Weekly Chart
FIVE Daily Chart
Ionis Pharmaceuticals (IONS)
Why the Strength
Ionis specializes in treatments for cardiovascular, metabolic and neurodegenerative diseases, and cancer. The company uses a proprietary antisense technology for drug development and currently has over 40 potential treatments in development. The focus lately has been on Spinraza, an approved blockbuster treatment for spinal muscular atrophy (SMA). Spinraza has been licensed to Biogen (BIIB) and brought in over $2 billion in revenue (which translated to $280 million in royalties paid to Ionis) through the first 11 months of 2018. The next big growth catalyst is Tegsedi, a treatment for transthyretin amyloidosis (buildup of proteins that leads to a loss of sensation in the extremities) that is being launched globally through partner/subsidiary Akcea Therapeutics (AKCA). Then there is Waylivra, which is likely to be the first treatment for two severe and rare genetic conditions called familial chylomicronemia syndrome (FCS). Management held an investor day in December and signaled that more information on Tegsedi and Waylivra launches should come in the first half of 2019, and that at least 10 programs should enter pivotal studies over the next two years. That means a lot of news flow and potential value creation in both 2019 and 2020. It’s not the easiest story to follow given all the programs and partnerships, but if you step back you see a mid-cap biotech stock that should deliver 18% revenue growth in 2018 and 34% in 2019, when first profits (expected 2019 EPS of $0.39) should also hit the bottom line.
Technical Analysis
IONS hasn’t made a lot of upward progress over the last 18 months. It’s mostly been chopping around in the 44 to 58 range, with a few bigger spikes and dips here and there. The stock’s most recent high of 65 was hit back in October 2017, and the low of 39 was struck in May 2018. Since that low, progress has been a little more consistent (look at the weekly chart). Both the 50-day and 200-day lines are now trending north, and shares have made a series of higher highs and higher lows. If that pattern holds IONS should be able to break above its December high of 60.
IONS Weekly Chart
IONS Daily Chart
Keysight Technologies, Inc. (KEYS)
Why the Strength
Keysight was part of Hewlett-Packard for man years, then was spun-off as an independent entity in 2014. It now applies its expertise in measurement, electronic design and test solutions to help customers develop products, standards and software in areas including wireless communications, networks and the cloud, aerospace and defense, automotive, energy and Internet of Things. The company’s product line is still heavy with network analyzers, signal analyzers, simulation software and oscilloscopes, but the acquisition of Ixia increased exposure to the network test and network visibility market too. The company is playing in a few big ponds, including developing 5G wireless standards (including a recent deal with mobile device operator OPPO), connected car applications, consumer electronics, defense modernization and design simulation. Its diversity is one of the reasons Keysight is a steady grower, though the flipside is that it’s not the most rapidly growing company, either. But stabile growth in a volatile market, combined with a reasonable valuation (forward PE is 17.8), have kept big investors interested. Revenue was up 22% in 2018 (fiscal year ended in October) and should be up around 8% to 9% over each of the next two fiscal years, while EPS should grow by 16% (to $3.77) this year and 12% next.
Technical Analysis
KEYS got off to a slow start after its IPO, but in early-2016 shares turned around and have mostly been moving higher since. Like many stocks, KEYS ran out of momentum last October and soon after it fell through its 200-day line for the first time since mid-2016. But like most potential leaders, it formed a higher low in December and has spiked as the pressure has come off the market in recent weeks, notching new closing highs. If you want in, aim for pullbacks of a point or two.
KEYS Weekly Chart
KEYS Daily Chart
LGI Homes (LGIH)
Why the Strength
From its peak in January of last year to their nadir in December, the homebulding sector fell a whopping 39% as investors bet that a peak in the housing cycle was in. But now, with a less-aggressive Federal Reserve and a strong U.S. consumer, many are rethinking that, leading to some powerful turnaround-type charts. LGI Homes is one of them, and we think it can do well if the group has indeed bottomed out—the firm focuses on faster-growth markets (88 communities in Texas, New Mexico, Arizona, Colorado, North Carolina and a bunch of other states), and that’s one reason that, while growth has slowed, it’s still positive (sales up 4% in Q3, with earnings up 9%). The big reason for the stock’s strength, though, is that business actually strengthened in Q4 and management is sounding bullish notes for 2019—while home closings actually fell 7% in Q3, LGI said they actually inched up in Q4, and the top brass said that if the current economic conditions persist, home closings should actually grow 11%-ish this year. (Analysts see earnings up 11% this year as well.) Of course, there’s a decent chance the economy does soften, but even if it does that’s probably been discounted at this point—LGI’s stock trades at less than 10 times trailing earnings, down from a 15 P/E ratio a year ago. We think LGI (and the homebuiding group in general) could be in the early stages of a nice turnaround. Earnings are due out February 26.
Technical Analysis
LGIH eked out to a new high in May after earnings but then got
blasted, falling as low as 37 during the market’s initial leg down
in October. But the stock began a bottoming process after that, hitting slightly higher highs in both November and December and
blasting ahead after the jobs report two Fridays ago. (The move was also bolstered by the positive outlook from management a few days before). Expect pullbacks, but it sure looks like the worst is over.
LGIH Weekly Chart
LGIH Daily Chart
Tandem Diabetes (TNDM)
Why the Strength
Tandem Diabetes is the second diabetes-related firm in this issue, but it’s not a competitor to Dexcom—instead, the company has one of the leading insulin pumps on the market (dubbed t:slim X2) that actually uses Dexcom’s platform and is driving huge growth. The market is gigantic (about 3.3 million diabetics are candidates for pump therapy in the U.S., with another three million overseas), and with pumps being far easier and more effective (drastically lowering the number of low-glucose events) than the standard multiple daily injection option that many diabetics still use, the pump market should grow rapidly. In fact, right now, just 28% of Type 1 diabetics use a pump, but Tandem thinks that figure can grow to 50% over time as technology advances (about 90% of Tandem’s users are Type 1). Back to the t:slim X2, it looks like the best option on the market, with a touchscreen (and larger screen), remote update capability and much smaller form factor (30% smaller, 13% lighter) than the competition. Tandem only recently launched the t:slim internationally and has about 70,000 total users, so there’s obviously massive potential should management continue to execute on its sales plan. Analysts see revenues advancing 33% in 2019 (we think it’s likely conservative given recent growth trends), and the top brass says it will get to cash flow breakeven in the second half of the year. It’s a big story.
Technical Analysis
TNDM went on a massive, massive run last year, rallying from a low of 2 to a high near 53 (!) in just seven months. Given that move, it had every opportunity to implode late last year, but while shares did get hit (50% at its nadir), the decline was reasonable given the move and it’s forming a reasonable base here—TNDM etched a higher low in December, held well above its 200-day line and is now pushing higher on good volume. If you’re game, you can nibble here with a loose stop.
TNDM Weekly Chart
TNDM Daily Chart
Vertex Pharmaceuticals (VRTX)
Why the Strength
Vertex Pharmaceuticals is a rare example of a biotech company that not only develops most drug candidates in-house, but also successfully launches them, a strategy that has helped it become a cystic fibrosis (CF) powerhouse. CF affects an estimated 75,000 people worldwide, and Vertex has three of the most successful treatments on the market; Symdecko was the third CF treatment to launch (early-2018) and joins Kalydeco and Orkambi in rounding out Vertex’s CF portfolio. Each treatment targets a specific sub-segment of the CF market (certain ages and certain gene mutations), though label expansions are helping Vertex vastly expand its addressable market (and, hence, earnings potential). In Q3 2018 (reported in October), CF revenue was up 42%, with each of the three assets generating sales between $246 million and $282 million. Expected revenue of around $3 billion in 2018 puts Vertex on track for 20% growth, a pace that should moderate only slightly this year (18% revenue growth expected). With scale, Vertex is also becoming incredibly profitable, with expected EPS of $4.13 in 2019 more than double the $1.95 in EPS delivered in 2017 (and we’d guess this year’s estimates are too low). We like that the company is expanding into other indications as well, including pain, hemoglobinopathies, influenza and oncology (with partners). It’s a solid story.
Technical Analysis
Similar to IONS (early in this issue), VRTX hasn’t made a ton of progress over the last year and a half but is looking like it wants to get moving. For the most part it traded between 145 and 190 in 2018, with no clear trend. What’s changed recently is that since Christmas the stock has raced higher (from a low of 152), with big volume coming in last week. Combined with a double bottom in October and December and improving sector action, we think the stock wants to move to new highs if the market holds together. As with most stocks, try to buy on dips.
VRTX Weekly Chart
VRTX 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.
