More Constructive Action
Current Market Outlook
We’ve now seen four constructive weeks in a row for the overall market, not just because the major indexes are rallying, but also due to the amazing breadth during the advance (a good longer-term sign and indicative of a vacuum of selling pressure) and the action of individual stocks, a ton of which are setting up good-looking launching pads. That said, it’s not all peaches and cream—the intermediate-term trend is still on the fence (could turn up this week, but hasn’t quite yet), most indexes and stocks are below longer-term moving averages and, after four good weeks, some shakeouts and potholes (possibly on earnings) could emerge. Overall, we’re optimistic and are bumping up our Market Monitor to a level 6, but it’s best to step (not plunge) into stocks and keep looking for lower-risk entry points.
This week’s list contains another batch of great stories, with a variety of strong charts (some coming off lows, others at new highs, others setting up). Our Top Pick is Coupa Software (COUP), which is in a strong group and has seen superb buying volume in recent days.
| Stock Name | Price | ||
|---|---|---|---|
| Alarm.com (ALRM) | 71.33 | ||
| Bilibili (BILI) | 28.71 | ||
| Coupa Software (COUP) | 262.20 | ||
| Cronos Group (CRON) | 17.62 | ||
| HubSpot (HUBS) | 582.89 | ||
| Lending Tree (TREE) | 411.51 | ||
| LPL Financial Holdings (LPLA) | 85.22 | ||
| Novocure (NVCR) | 0.00 | ||
| Pinduoduo (PDD) | 87.53 | ||
| Veeva Systems (VEEV) | 180.23 |
Alarm.com (ALRM)
Why the Strength
Alarm.com is a provider of cloud-based security solutions. Most customers are looking to keep intruders and undesirable visitors away from their families, homes and businesses and Alarm.com’s solutions do that by allowing for remote monitoring, as well as energy management and home automation services, through use of a tamper-resistance GSM cellular connection. The company’s go-to-market strategy is solely through service provider partners, of which is has over 7,000. And it offers an incredibly robust platform that’s in an entirely different league from all the DIY monitoring solutions out there. Alarm.com was an early-mover in the mobile app market with integrations for Apple Watch, Amazon Echo, Google Home and other hub-type solutions, all of which have helped it grow its footprint and maintain a loyal subscriber base (the most recent accounting shows over 5.5 million subscribers) that generates recurring revenue. Revenue growth has been above 25% for the last seven years, though that likely slowed a bit last year and is expected to drop to the 10% range this year. That said, management has been pushing to expand internationally and consensus estimates aren’t factoring in the same margin expansion that has persisted for years (EPS growth is expected to be 25% in 2018 and 8% in 2019). There’s a good chance these estimates are overly conservative, and the stock’s recent action tells us the market is wising up to that potential.
Technical Analysis
ALRM hit a high of 50 in October 2017 and then built a long launching pad through July 2018. A great earnings report launched a rally that took the stock to 60, but the market correction got in the way, driving shares back to 41 in October. However, ALRM then went on to hit slightly higher lows in November and December and has pushed steady higher so far in January, reaching new highs on good volume last week. We’re game for buying on dips of a point or two.
ALRM Weekly Chart
ALRM Daily Chart
Bilibili (BILI)
Why the Strength
Bilibili is one of many online media companies in China, but it stands out from the crowd because it’s squarely aimed at younger users (most new users are between the ages of 19 and 20) and because it’s gaining traction in people who live in smaller cities around the country. The company started out as a source for the anime, comics and games that interest Generation Z users (those born between 1990 and 2009), but more recently has branched out into videos, live broadcasting, mobile games and other professional user generated content. Shares are strong today because analysts see average revenue per user going up in 2019 as the company doubles revenue from live streaming and other value-added services. With higher ad loads (currently under 5%) and new ad formats, advertising should be another growth driver. Another bonus has been growing confidence in the company’s future due to a $318 million cash investment from Tencent Holdings, the Chinese messaging giant, to fuel game development and opening access to Tencent’s huge user base. Most recently, an e-commerce partnership with Taobao (announced December 2018) will be a boon for content creators on Bilibili’s platform and should contribute to growth in the back half of 2019. Speaking of this year, analysts see revenues up 58% and the loss shrinking. There are macro risks (slowing Chinese economy), but this company’s best days are ahead of it.
Technical Analysis
BILI went public last March and was a hot stock right out of the gate, shooting up from around 10 to 23 in the middle of June. Then the wheels came off, and by mid-August, the stock was right back at 10. The big “tell” since then was that the stock crawled higher for months even as Chinese stocks were getting nailed. And now the buyers are showing up—BILI has pushed to six-month highs on OK volume this month. We like it here, or a little lower, but would suggest keeping new positions small given the volatility.
BILI Weekly Chart
BILI Daily Chart
Coupa Software (COUP)
Why the Strength
There are many strong cloud software stocks out there, and in our mind, Coupa Software’s story is right up there with any of them. The company is effectively aiming to be the Salesforce.com of business spend management (BSM)—its platform is becoming the go-to option in that field, with its software providing an easy-to-use, all-in-one solution for all BSM areas, including procurement, invoices, expenses, sourcing, inventory, payment and more; simply put, the firm’s solutions save clients time and money. This is as mass a market as you’ll find in business, applying to every firm out there (Coupa thinks it could be a $37 billion opportunity in total), and the company is grabbing market share hand over fist—the platform has processed $370 billion of spending in the past year alone (an 80% gain over the prior-year period), likely saving $15 billion in costs for clients during that time. And by getting a tiny cut of transactions (and getting money for some professional services), Coupa is growing fast—revenues are pushing higher at a 40%-ish clip, and free cash flow has been positive each of the past five quarters. Longer-term, Coupa thinks it can have free cash flow margins of 30% or so (vs. 8.5% over the past year) as it inks more big customers and benefits from higher spending from the hundreds of current clients it has. Like we said above, it’s a great story.
Technical Analysis
COUP originally broke out from a long post-IPO base in January of last year and had a great run after that, reaching the low 80s by September. The correction during the market downturn was sharp, and frankly, COUP wasn’t showing any terrific relative strength as of a couple of weeks ago. But last week, shares exploded higher on their heaviest weekly volume since the IPO more than two years ago (!), a clear change in character. Dips are likely, but given the huge volume, we’re not anticipating a major retreat.
COUP Weekly Chart
COUP Daily Chart
Cronos Group (CRON)
Why the Strength
Marijuana stocks took big hits along with everything else in the fourth quarter (hurt partly by the buy-the-rumor, sell-the-news reaction to Canada’s nationwide legalization), with many names in this volatile group getting cut in half (or worse). But since the calendar flipped, the sector has been strong, and Cronos (third largest weed stock by market cap) is poised to be a leader. The company has cultivation, distribution and IP operations in five countries under a variety of brands (as well as a couple of joint ventures), though Canada remains the big opportunity here, with big growth off a small base in recent quarters (in Q3, kg of cannabis sold rose 213%, helping revenues to nearly triple). The stock is strong today for two reasons—first, of course, is the anticipation of booming business this year as Canada’s market opens up and other countries ease restrictions. But second and more important is a giant C$2.4 billion investment from Altria (along with an option to buy another C$1.4 billion) in December (now owns 45% of the company, with an option to take it to 55%), which provides Cronos with a monster backer, gives it a ton of capital to expand its production and distribution infrastructure and gives it access to Altria’s expertise in large-scale manufacturing, regulation compliance and its device technology (for cannabis vape products down the road). Like every firm in the sector, it’s speculative and expensive, but the potential is huge and having Altria as a backer is a massive plus.
Technical Analysis
CRON has been all over the place in recent months, spiking from 6 to 14 in August/September, plunging back to 6.5 in October, pushing back to 14 in December and then dropping back to 9.5 later that month! Big swings will continue, but there’s no doubt the recent action has been impressive (first marijuana stock to move to new highs) and persistent (steadily advancing this month). If you’re game, start small, ideally on dips of a point or so, and use a loose stop.
CRON Weekly Chart
CRON Daily Chart
HubSpot (HUBS)
Why the Strength
HubSpot is another (along with Coupa) mid-cap cloud software stock with a great story. The company specializes in marketing automation software, and its platform helps businesses excel in social media, search engine optimization (SEO), marketing automation, email, analytics, CRM and website content management. In other words, it’s a perfect tool to help clients make the most of the digital economy. HubSpot is scaling the business by focusing on the small business end of the market where tons of companies need its services; many potential customers are slow adopters and don’t even know they need marketing automation yet! The company likely has an addressable market of $28 billion to grow in to, though with an expanding list of integrations (Zoom, Slack, Shopify, YouTube, etc.), that market opportunity is likely growing. Finally, the company’s profit engine is kicking in as revenue expands and it gains pricing power (price increases took effect in late-2018). Analysts see a 224% improvement in EPS (to $0.81) on 36% revenue growth last year, and in 2019, they’re looking for more margin expansion, with EPS growing 40%, to $1.13, on 25% revenue growth. And it’s likely that sort of growth will persist for years as every company moves toward inbound marketing and away from cold calls and the like.
Technical Analysis
HUBS has enjoyed a solid, though sporadic, advance during the past couple of years, with good progress but plenty of consolidations during that time. The stock’s fourth-quarter pull back was deeper than most of late, which isn’t surprising, with HUBS falling below its 200-day line in November and retesting that low in December. But the action of the past month is extremely encouraging, with the stock racing back toward its high on good volume. With resistance up here, aim to buy on weakness.
HUBS Weekly Chart
HUBS Daily Chart
Lending Tree (TREE)
Why the Strength
LendingTree has a powerful, simple story—it’s created the largest online lending marketplace, bringing together millions of loan seekers with a ton of large loan providers in a variety of lending fields. Mortgage loans was what the company was founded on (made up 89% of revenue in 2013), and it’s still a big part of the business today (28%), which is one reason why growth has slowed; mortgage revenue declined 17% in Q3 as housing sales have fallen off and interest rates lifted. But the stock is strong today because investors see those trends reversing and, more important, the company’s various other products (credit cards, personal loans, insurance and more), many of which were acquired and built on by LendingTree, continue to grow like mad (non-mortgage revenue surged 45% in Q3). And at its December Investor Day, management made it clear it expects growth to continue—for 2019, even with an expected decline of 10% in mortgage-related revenue (could prove conservative if rates stay contained), the top brass sees sales and EBITDA both surging around 30%, with growth accelerating throughout the year due to easier comparisons in the second half. Long-term, LendingTree will continue to benefit from its network effect (being the largest marketplace will attract more customers and providers) and the markets it’s playing in are enormous. Analysts see earnings up 32% this year.
Technical Analysis
TREE broke out from a huge base in April 2017 and had a fantastic run, moving from 130 to 404 in just nine months! (We wrote about it in Top Ten a few times during that move.) But as the housing market caught a cold, growth slowed and investor perception waned, with the stock falling all the way back to 183 at last October’s low. The Q3 earnings report led to a surge of buying, and after retesting its low in December, TREE has run to seven-month highs on accelerating volume. We think you can grab shares on weakness.
TREE Weekly Chart
TREE Daily Chart
LPL Financial Holdings (LPLA)
Why the Strength
If the recent persistent recovery in the market leads to a sustained advance, it’s likely some Bull Market stocks (firms whose businesses directly benefit from a healthy market) will do well. And right now, LPL Financial looks like the strongest Bull Market stock out there. LPL is the nation’s largest independent broker-dealer, and it’s also one of the leading providers of advisory services to retail investors (now has more than 16,000 advisor)s; in other words, if the market heads higher, more men-on-the-street will be investing in stocks and looking for advice, which should continue to boost LPL’s bottom line. Helped along by some acquisitions, LPL’s Q3 commission (up 21%) and advisory (up 28%) businesses advanced nicely, helping to drive total revenues up 25%, with earnings (helped by great operating leverage and the corporate tax cut) booming 80%. The fourth quarter (with the down market) likely saw asset and advisory assets fall, but at the end of the November, they were still up nicely from the year before (15%-ish), and of course, investors are now looking ahead given that the market has moved well off its lows. Analysts see LPL’s bottom line rising 19% in 2019, though we think that will prove low if the bull market kicks into gear. A solid share buyback program and decent dividend (1.4% annual yield) put a nice bow on the package. Earnings are due out January 31.
Technical Analysis
LPLA had a long, smooth advance from the middle of 2017 through June of last year. But the stock stagnated for a while after that and got nailed when the market went over the falls, falling as much as 26% off its high by late October. But a bullish earnings report led to a great rally, LPLA held above that low in both November and December, and now it’s pushing persistently higher and approaching its old high. Like many names, we think you can start a position on dips and buy more should it head higher after earnings.
LPLA Weekly Chart
LPLA Daily Chart
Novocure (NVCR)
Why the Strength
Novocure is a commercial-stage oncology company that broke out last August and, after a retreat in late-2018, is showing intriguing strength again. The excitement around the stock stems from the company’s Optune system, which slows the progression of many types of solid tumors, including brain, lung, pancreatic and ovarian cancer. The system uses low-intensity, alternating electric fields (called tumor-treating fields, or TTFields) that interfere with cell division and cause cell death. It’s an exciting technology because patients can go about their lives with relative freedom—Optune delivers TTFields two to three times a week, for 18 hours a day, and treatment can be done at home, at the office or while travelling. The company pre-announced preliminary 2018 results on January 7, saying that Q4 revenue likely rose around 30%, while full-year revenue expanded 40%, to $248 million. It also said that active patients on Optune increased by 30% (to 2,383) as of the end of 2018, with another 1,315 prescriptions received in Q4 (up 21%). Other positives included geographic expansion and reimbursement in Sweden and Hong Kong. Official results come out on February 28, when analysts will be looking to see if their expectations for 2019, including 31% revenue growth and an EPS loss of $0.20, seem likely. It’s a great story as growth could persist for years if Optune is extended to other types of tumors and is approved elsewhere around the world.
Technical Analysis
NVCR began a durable uptrend in the spring of 2017 after which NVCR went through an extended consolidation phase, mostly in the 17 to 22 price range. The stock then went on a fierce rally that carried it north of 50 by in September of last year. The late-2018 market correction was harsh on NVCR, as shares fell by roughly 50%, but shares basically stopped falling in late October and have shown great price and volume action during the past couple of weeks. Given the overhead resistance, pullbacks are likely; if you’re game, start small on dips seems the way to go.
NVCR Weekly Chart
NVCR Daily Chart
Pinduoduo (PDD)
Why the Strength
On the surface, Pinduoduo is just another Chinese e-commerce company, but it has a unique approach that’s proving wildly successful—the firm’s platform popularized a “virtual bazaar” format, which integrates getting bargain deals (which is even more popular in China than in other countries), social media and “team shopping,” where people can share product information on social networks, and invite friends or family to purchase in groups. Pinduoduo is exploiting the gigantic, untapped market of lower income folks from lower-tier cities (who aren’t the target market for big e-commerce players), along with many smaller merchants looking to move their wares. The platform (and the company’s execution) has led to almost unbelievable numbers—in the third quarter, revenues continued their ridiculous growth trends (driven mostly by marketing services, though commission fees are also surging), gross merchandise value during the past 12 months lifted 386%, average monthly users grew 226% (to 231.7 million) and annual spending per active buyer doubled. And while earnings are still stuck in the red, Pinduoduo has seen positive operating cash flow each of the past five quarters. Analysts see revenue growth slowing to “only” 122% this year, but it’s hard to take estimates too seriously when growth is this rapid. Obviously, if the Chinese economy really slows, it could hurt—but it also could help, given the deep discounts found on the platform. It’s a unique story, and we’re impressed to see 200 funds already owning a position.
Technical Analysis
PDD came public in late July and had a nice run to 30 in September before the market’s decline, which pulled the stock down to 14 in October and early November. But the action since then has been encouraging—PDD held firm in December (low of 20), pushed to nearly 27 on good volume earlier this month before backing off calmly over the past week. You can start a position here and look to add shares on the way up.
PDD Weekly Chart
PDD Daily Chart
Veeva Systems (VEEV)
Why the Strength
Veeva Systems sells cloud-based customer relationship management (CRM) and enterprise content management software tailored to the specific needs of the life sciences industry. All in, its target market is around $9 billion today, but there’s a lot of upside given that the life sciences industry spends north of $40 billion on IT. Plus, Veeva is expanding its addressable market into other regulated industries and content management use cases through its Vault Platform. Current solutions include data warehousing, a suite to facilitate clinical trials, industry-specific sales and marketing tools and a smattering of specialty services. In addition to subscriptions (which are very sticky and lead to recurring revenue), it also generates around 21% of revenue from professional services. The company beat expectations when it reported Q3 fiscal 2019 results in November, and when it reports full-year results in late-February, analysts are looking 67% EPS growth (to $1.57) on 25% revenue growth. Early estimates for fiscal 2020 suggest a more modest pace of expansion (19% revenue growth and 13% EPS growth), though cash flow growth rates look a bit better and Veeva’s profit growth should speed up again once R&D spending eases. The combination of solid growth, a big market and lots of dependability has made Veeva an institutional favorite.
Technical Analysis
VEEV built a base in the second half of 2017 but returned to form in 2018, breaking out around 68 in February and rising to near 110 by the end of September. Like everything else, the stock took a hit in October and November, but found support in the low 80s several times and the persistent rally back toward its September highs since then has been very impressive (up 14 of the past 17 days, which, after a deep correction, is a good sign). You can buy some here, though like most stocks these days, you may be able to get in on minor weakness.
VEEV Weekly Chart
VEEV 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.
