Nothing Abnormal Yet
Current Market Outlook
Today’s news centered around earnings duds from a couple of big names (Caterpillar and Nvidia), causing the major indexes to take some hits. But stepping back a bit, we’re not seeing anything abnormal—since the start of last week, the major indexes have slipped 1.5% (ballpark) and most leading stocks are acting just fine. Of course, further dips in the short-term are certainly possible given that the Nasdaq ran 1,000 points from its Christmas Eve low, earnings season is revving up and most stocks have plenty of overhead to battle. Even so, the intermediate-term trend remains pointed up and, in general, the market and leading stocks continue to act how they “should” if the sellers have run out of ammo. We remain optimistic, and think many names will be good buys if we do see some more retrenchment.
Tonight’s list has a great batch of mostly growth stocks, albeit from a variety of industries. Our Top Pick is Lululemon (LULU), which, after a great six-month run and fourth-quarter correction, is showing terrific strength. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Ciena (CIEN) | 44.25 | ||
| EPAM Systems (EPAM) | 188.24 | ||
| Exact Sciences (EXAS) | 116.91 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Mirati Therapeutics (MRTX) | 104.98 | ||
| ServiceNow (NOW) | 341.86 | ||
| Shopify (SHOP) | 585.00 | ||
| Splunk (SPLK) | 207.67 | ||
| Tencent Music Entertainment (TME) | 18.41 | ||
| Xilinx (XLNX) | 134.50 |
Ciena (CIEN)
Why the Strength
It seems like in every bull move, there’s a networking stock that has a good run as it benefits from a leadership position in a new(er) field. Ciena is our pick of the litter this time around, as, after a few years of heavy investment (and flat profits), the company is reaping the rewards by having some of the top products in a variety of end markets that are heating up—5G infrastructure, data center interconnect products (Xilinx, written about later in this week’s issue, said demand for 5G and pre-5G installments were very strong in the recent quarter with its data center revenues up double-digits sequentially, both solid signposts for Ciena), fiber deep (getting fiber cable closer to users, boosting speeds and experiences) and more. All told, it looks like Ciena’s view of what it calls an adaptive network (allows customers’ networks to become more advanced, responsive and programmable as they grow) has been a hit, and while investment spending on networks is often volatile, management has a bullish three-year forecast (20% annual earnings growth) that lends some predictability to results. Analysts are warming up to the story, too, seeing more upside and less execution risk. Earnings are expected to rise 35% this year and another 25% next. We think Ciena is in the right place at the right time.
Technical Analysis
The two things, chart-wise, you want to be on the lookout for these days are (a) some resilience during the market’s foruth-quarter meltdown, ideally with higher lows along the way, and (b) a persistent upmove since the Christmas Eve low. CIEN has displayed both of those traits, with higher lows from October through year-end, followed by a strong move up in recent weeks. Yes, the stock could easily pull back, but the overall chart action bodes well.
CIEN Weekly Chart
CIEN Daily Chart
EPAM Systems (EPAM)
Why the Strength
Epam Systems is a mid-cap stock that provides outsourced IT and lifecycle software development services, mostly to clients in North America and Europe. It’s not the sexiest business, but it’s produced great growth for years, partially because Epam is very good at what it does. The CEO says roughly 20% of revenue comes from product engineering from a core group of 70 software and IT firms, while another 15% or so comes from the big dogs of IT—Amazon, Google, etc.—which turn to Epam for highly complex projects. With that relatively stable revenue base, the company has turned its sights on growth from “normal” companies, which in the past might have turned to other vendors such as Accenture, Cognizant or any number of Indian-based outsourcing companies. To win clients Epam has built out its consulting services so that it can help companies quickly implement advanced technologies. This is a competitive advantage when many clients have no idea how to build a product, let alone integrate it with the other products they already have. What Epam is doing is clearly working; annual revenue growth has been between 28% and 32% since 2013, likely grew by 27% in 2018 (Q4 results come out February 14) and are seen rising 22% in 2019. It’s also consistently profitable, with EPS expected to expand another 20%, to $5.21, in 2019.
Technical Analysis
EPAM enjoyed a steady advance that lasted from 2017 through August of 2018, rising from 65 to 145 and never breaking below its 200-day line during that stretch. Momentum turned south in October when the stock retreated to 110, and in December it dipped to 105 after two failed attempts to break above 135. However, the December bottom was a one-day affair, since which EPAM has surged, rising 13 of 15 days through last week and approaching its old high. We’re OK buying a little here or on further dips.
EPAM Weekly Chart
EPAM Daily Chart
Exact Sciences (EXAS)
Why the Strength
If you’ve been with us for a while, you know the story of Exact Sciences, a company that’s greatly expanding the testing industry for colorectal cancer, which is America’s second deadliest cancer and is one where early detection is vital—90% of those diagnosed in stages 1 or 2 survive at least five years, whereas the comparable figure for stages 3 and 4 is just 10%. The firm’s Cologuard product allows patients to deposit a stool sample on their own from home (no sedation, non-invasive, no time off work), send it into a lab, and thanks to the firm’s DNA markers, produce accurate results. (Tests show 94% of those with early-stage colorectal cancer test positive.) It’s not so much aiming to replace colonoscopies as to boost compliance given its ease of use; Exact estimates 48% of its completed tests so far have been from patients never screened before, and 94% of all patients face no out-of-pocket costs. Business has been good for a while, but the stock is strong today because investors think last fall’s marketing deal with Pfizer is already showing signs of paying off—Exact preannounced a 64% gain in Q4 revenues with 292,000 tests completed, both miles ahead of estimates. Analyts see revenues up around 60% more this year, too, and yet Exact Sciences thinks it has just 4% of the total potential market. It’s a great story.
Technical Analysis
EXAS thrashed around a lot during the market correction, including a punishing December decline (83 to 53!) in less than four weeks. But bigger picture, here’s what we see: Shares made no net progress from November 2017 through December of last year, and since the market bottom, EXAS has shot ahead on good volume, testing its old high last week and nosing to new highs today despite the down market. We’re OK buying some here or on dips of a few points.
EXAS Weekly Chart
EXAS Daily Chart
Lululemon Athletica (LULU)
Why the Strength
Lululemon had a great “romance” phase (2009-2012) when the stock ran up rapidly, and a “transition” phase (2012-2017) when the stock went sideways as the firm dealt with a few issues. And now it’s enjoying a successful “reality” phase, as growth reaccelerates and the stock moves on actual results, which have been great—the company is steadily expanding on its offerings (emphasizing men’s and even kids athletic and athleisure wear), has tightened up its operations, expanded its store count and boosted e-commerce capabilities (which rose 44% in Q3). Shares got hit along with everything else in the fourth quarter, but they’re strong again after management’s Q4 update (quarter ends January 31) earlier this month—revenues are likely to rise 23% in the quarter (a small acceleration from last quarter) thanks to continued massive gains in same-store sales (up “mid- to high-teens” percentage, likely boosted by e-commerce revenue), both of which were well ahead of estimates, and analysts are already thinking even these figures could prove conservative. Earnings estimates have been nudged up (17% gain for this year) but haven’t fully factored in the new guidance. All told, Lululemon is firing on all cylinders and everything is lined up for another year of excellent growth—with more beyond that, too. Earnings are likely out in late February.
Technical Analysis
LULU broke out from a five-year base in March of last year and basically doubled by the end of September—a great move that deserved a rest, but given that it only lasted six months, it’s doubtful the run is over. The stock corrected 33% over nearly three months but is now quickly regaining lost ground, helped by the positive Q4 update. Given there’s still overhead resistance to chew through, try to buy on dips.
LULU Weekly Chart
LULU Daily Chart
Mirati Therapeutics (MRTX)
Why the Strength
Mirati Therapeutics is a clinical-stage oncology company whose treatment strategy is to use genomic tests to identify patients that carry the genetic mutations that cause cancer, then administer treatments that go after the genes in tumor cells that result in uncontrolled tumor growth and spread. The stock is doing well now because Mirati has multiple irons in the fire and is teaming up with well-established biotech companies to push its drug candidates through clinical trials. Its most advanced candidate, sitravatinib, targets a wide range of cancers, including non-small cell lung cancer (NSCLC), bladder and gastric, and is in both Phase 2 and Phase 3 trials. The Phase 3 trial is a combination of sitravatinib and OPDIVO, and is a collaboration with Bristol-Myers Squibb, who will provide OPTIVO at no cost. MRTX849 is another potential treatment and is being tested for NSCLC and colorectal cancer (CRC); management just announced on January 15 that it has dosed the first patient in a Phase 1/2 clinical trial. Mirati will be revealing a slew of data from its various trials in 2019 (six pipeline-related catalysts this year), so investors have plenty to look forward to. We like that a recent equity raise of $115 million was well received and even helped the stock. It’s speculative, but there’s certainly the potential for good things if trial results please Wall Street.
Technical Analysis
Like most clinical-stage biotech stocks MRTX doesn’t have a clean chart. Shares were in rally mode in 2015 then fell apart in 2016 when they traded down below 5 for much of the year. A massive pop sent the stock soaring in September 2017 and MRTX didn’t slow down until it hit 66 in July 2018. The following pullback was significant—shares traded as low as 30 in October and were stuck below 43 through late December. But since the market bottom the buyers have been in control, with a push back to its old highs before today’s retreat. If you’re game, you could nibble on dips.
MRTX Weekly Chart
MRTX Daily Chart
ServiceNow (NOW)
Why the Strength
It’s not quite as well known as Salesforce.com and it certainly doesn’t get the publicity of giants like Microsoft or Oracle, but ServiceNow is an emerging blue chip outfit in the cloud software space, with a platform that, simply put, makes big and mid-sized businesses more organized. The firm’s offerings automate, predict and digitize processes and tasks across a client’s operations; it started by simplifying the IT department and requests for fixes (instead of calling IT and asking for help, everything is requested and recorded online), and has branched out to all sorts of departments since, including customer service, human resources and even security operations. Growth has been fantastic for years, as more big clients sign up (860 of the Global 2000 are customers, up 9% from a year ago), as those clients pay more over time ($1.53 million per year in contract value, up 25%), as very few leave (97% renewal rates!!) and expand their usage (that average client that came onboard in 2015, for instance, now has a contract value three times as high as they did back then). The valuation remains big, but (a) this is a unique growth story with legs, and (b) free cash flow is even larger than net income. The next big update will come Wednesday evening, when Q4 earnings are set to be released.
Technical Analysis
NOW trended higher from early 2016 through August of last year, then went over the falls with everything else in October; from high to low, shares sank 28% by November. But, despite lots of chopping around, NOW etched a higher low in December (158), rallied back to resistance in the low 190s earlier this month and has tightened up ahead of earnings. If you’re aggressive, you can nibble here and see what comes on earnings; less aggressive investors can just wait for the report and look to buy a breakout from this four-month base if it comes.
NOW Weekly Chart
NOW Daily Chart
Shopify (SHOP)
Why the Strength
The basic story with Shopify has always been powerful and easy to understand: The company has one of (if not the) best e-commerce platforms to help companies of all sizes (from entrepreneurs to huge brands like Nestle and Frito Lay) make the most of their online operations, develop attractive online stores, boost marketing on social media and apps and more; give them the tools to appeal to more customers (mobile sites, card readers, short-term loans); and provide a fully integrated back office suite (shipping, inventory, reporting and analytics). Prices start at just $29 per month (up to $2,000 or more for large brands), and Shopify thinks it’s playing in a $64 billion market. Some short selling outfits have taken repeated shots at the company (low-quality merchants, etc.), but business continues to crank ahead. Shopify makes money via subscriptions (monthly recurring revenue was $37.9 million in September, up 41% from a year ago, bolstered by more higher-end subscriptions), from special services (Shopify Capital issued $76.4 million in merchant advances in Q3, up 73%) and by taking a cut of every transaction that its platform facilitates (gross merchandise volume rose 55% in Q3, while payments using it’s payment app accounted for 41% of all volume). The end result: Revenues continue to grow rapidly and earnings are expected to kick into gear in 2019. Earnings are due February 12.
Technical Analysis
After a big run in 2017, SHOP mostly chopped around last year—shares thrashed lower after peaking in July near 177, finally hitting a low in December (partly due to an ill-timed share offering that month) at 118. But the action since the market’s low has been excellent, with SHOP rising persistently up through all of its moving averages and, last week, approaching resistance in the 165-170 range. If you’re game, you can nibble on dips and see what earnings brings.
SHOP Weekly Chart
SHOP Daily Chart
Splunk (SPLK)
Why the Strength
We’ve referred to Splunk as the King of Big Data in the past because it’s one of the major players in what could be a $60 billion-plus market. Where does Splunk fit in? The company’s software helps customers mine so-called machine data, which is all the digital information created by anything with a microchip in it. Customers mine the data to gain operational insights in areas such as IT operations, security, analytics and IoT. The stock is doing well because it’s become clear that many are going (and staying) with Splunk as data mining becomes more strategic to their businesses. In the company’s Q3 fiscal 2019 (reported last November), Splunk reported a big jump in security and IT Operations, with deals of over $1 million up by 80% from the prior quarter. The company wasn’t landing tons of new clients (500 added in the quarter), which has some analysts asking if Splunk really can hit its target of 20,000 in fiscal year 2020. However, a new sales team aimed at landing new clients was just formed in early-2018 and hasn’t really gotten rolling yet. The bottom line is that Splunk has been successfully transitioning to a subscription delivery model (Splunk Cloud) and has a disruptive platform to collect, index, store and analyze data. Analysts see revenue up 24% (to $2.1 billion) in fiscal 2020, which gets started on February 1. Add in EPS growth of 38% this year and you can see why shares are heading higher.
Technical Analysis
After a couple years trading sideways, SPLK blasted off from 70 in November 2017 and kept on going, eventually topping out at 120 in June 2018 and poking as high as 130 after earnings in August. Then came the correction—shares plunged to 87 in October, but basically held that level during the next two months, and SPLK has charged ahead (albeit on modest volume) since. There’s still overhead in the mid 120s, but if you want in, you can start a position on this dip (or further weakness), with a stop in the mid 100s.
SPLK Weekly Chart
SPLK Daily Chart
Tencent Music Entertainment (TME)
Why the Strength
The online music segment is a tricky space, with a handful of very big competitors going at it around the world. That competition hasn’t hurt growth in the sector, but it has contained investor perception; Spotify (SPOT), for instance, has fallen flat as a stock in recent months as investors fret about the sustainability of growth with Apple Music (and others) fighting it out. So why is Tencent Music so strong? First, it’s based mostly in China, with a whopping 800 million monthly users, away from much of the intense competition. Second and more important, is its business model—just 3% or so of those users pay monthly, and music-related revenue (subscriptions, advertising, etc.) bring in just one-third of total revenues. Instead, the attraction here is WeSing, the firm’s incredibly popular karaoke app, which allows users to record and send live steams of their own performances, and of course view others recordings as well. While much of the app is free, virtual gifts (sounds odd, but it’s a huge deal over in China) are a big growth driver, with Tencent Music taking a cut of those gifts, driving revenues higher. Obviously, the relationship with is parent (Tencent still owns more than half the firm), including its tie in to WeChat (the most popular messaging app in China), is a big help, too. Growth has been rapid, and analysts see the top line pushing ahead another 39% this year, with earnings picking up steam, too.
Technical Analysis
IPOs can be tough to handle, but so far, TME is displaying many of the characteristics you’d want to see in a potential new winner. The stock came public in early December and got hit during the market’s downtrend, but not too badly. While it sagged earlier this month, it held its December lows, and now the buyers are showing up—TME burst out of its IPO base on many days of excellent volume last week before a quick dip today. Given the stock’s huge percentage swings, we advise keeping the position small.
TME Weekly Chart
TME Daily Chart
Xilinx (XLNX)
Why the Strength
Xilinx is a semiconductor stock that we covered back in early December because the shares acted resiliently despite the horrid market. And now, the blast off rally late last week has our scope pointed firmly at the stock again. If you’re not familiar with the name, Xilinix is evolving into a platform company, which is a much more robust business model than simply being a chip provider. Past innovations, including the programmable system on a chip (SoC) and field-programmable gate array (FPGA), are still paying off. But much of the current excitement is about a new classification of processor, called Adaptive Compute Acceleration Platform (ACAP), which puts Xilinix in a strong position to compete against Nvidia and Intel. The company has inked design wins in the data center sector, which should pay off down the road. But the big move last week was due to an earnings beat that was driven by early 5G deployments, wins in defense and aerospace, and continued strength in the Test, Measurement & Emulation division. All in, Q3 revenue was up 34% to $800 million and EPS of $0.92 beat by $0.07. Those results are pushing forward estimates up, and increasing confidence that Xilinx will still post rapid growth even in an uncertain demand environment for peers.
Technical Analysis
XLNX has posted some relatively big price swings over the last two years but the long-term trend has been up. The stock looked done for, actually, in October, diving below its 200-day line, but Q3 earnings caused the stock to rocket higher, reaching 95 by the end of November. The December pullback was reasonable and XLNX had built a tidy base before the Q4 report (last week) blew the roof clean off. (We’d note that its resilience today in the face of a weak chip sector was a plus.) It’s extended, but we’re OK starting a small position here or (preferably) a bit lower.
XLNX Weekly Chart
XLNX 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.
