January 6, 2020

Reasonable Retreat (So Far)

Current Market Outlook

Usually when the market is stretched and sentiment is complacent, the market latches onto a reason to retreat, and last week provided it, with the Middle East conflict offering an excuse for sellers to get active and buyers to pull in. The good news is, thus far, the retreat has been reasonable—the major indexes are still even above their 25-day lines, and few stocks have cracked key support or flashed any abnormal action. That said, we’re leaning toward the view that, Iran or not, the short-term is likely to remain tricky, with rotation, potholes and news-driven moves likely to be the norm for a while. Thus, we remain bullish, but continue to advise picking your spots—many stocks have etched nice month-long rest periods, though some others probably need time to consolidate.

This week’s list has a bunch of names that haven’t appeared in Top Ten for a long time (if ever). Our Top Pick is Alibaba (BABA), which has finally kicked back into gear after a long time in the wilderness. Try to buy on dips.

Alibaba (BABA)

alibabagroup.com

Why the Strength

Alibaba is the famed Chinese e-commerce giant that connects merchants and brands with over 600 million Chinese customers. The company operates all over the world in both retail and wholesale markets, including Cainiao logistics services, its Taobao Marketplace (China’s largest online consumer-to-consumer shopping site), Tmall (China’s largest third-party business-to-consumer platform for branded goods), cloud computing through AliCloud and other digital media and entertainment services. Alibaba’s online retail business is thriving, as total online sales of goods and services in China grew 17.9% year-over-year in November, and with a trade ceasefire in December, most expect growth to continue (or pickup) in 2020 and beyond. Indeed, Alibaba management expects their retail business to grow north of 20% annually for the next five years, including revenue growth of 33% in the current fiscal year due (ending in March) to higher customer spending and a growing user and seller base. Alibaba is spreading into new markets, much like Amazon, recently building a vehicle-infrastructure cooperative systems (VICS) platform that enables developers to build applications for smart city/transportation management. Long story short, Alibaba is a global blue-chip online operator, and the market is once again paying up for what should be years of solid growth ahead.

Technical Analysis

BABA had a rough 2018 and really wasn’t a leader during 2019, either; all told, the stock built a huge base during that time. But it’s now in a clear uptrend, with shares having staged a persistent uptrend ever since getting going in November. It’s a bit extended here, but we’re OK nibbling now or looking for dips of a few points.

BABA Weekly Chart

BABA Daily Chart

Bilibili (BILI)

bilibili.com

Why the Strength

Bilibili is a Chinese outfit that offers and produces online entertainment offerings aimed at Generation Z (20 to 25 year olds, ballpark). This includes a wide array of genres and media formats that emphasize animation, comics and mobile gaming. The company has a unique 3C strategy (commercialization, community and content) comprised of multiple monetization channels: mobile games, display advertising, membership subscriptions, e-commerce, live streaming and even offline performance activities. Investors are excited about Bilibili’s user growth, with plenty of expansion coming down the road (a potential doubling of users from 110 million in the middle of last year to 220 million in 2021), bolstered in part by some partners—Tesla, for instance, plans to offer its Chinese customers more video and gaming content in its vehicles, including a video-streaming channel from Bilibili, and it doesn’t hurt that both Tencent and Alibaba own stakes in the company. The stock is strong today mainly due to a strong tailwind from China in general (where many names are acting well), though reports that the firm inked a deal with QQ Music (owned by Tencent) to share content and create new online music events is also helping the cause. As for results, the company is still losing money, but revenue growth has been superb, and analysts see more of that in 2020 (up 48%).

Technical Analysis

BILI came public in early 2018 and had a huge initial run, but then crashed later than year and built a huge launching pad for the next 18 months. The stock worked its way decently higher with the market since October, but the real fireworks came just last week—BILI exploded to new highs on huge volume and haven’t stopped for breath. If you really want in, you could buy a little here, though we prefer to aim for pullbacks.

BILI Weekly Chart

BILI Daily Chart

Coupa Software (COUP)

coupa.com

Why the Strength

Cloud software stocks have been correcting and consolidating for months, with some names cracking longer-term uptrends. But the best are beginning to rise to the top, and Coupa Software—which has nosed to new price highs—is the best of the bunch. And the reason for the strength is simple: Coupa has the best growth story in the sector. The firm’s business spend management cloud platform is helping hundreds of (mostly large) clients save money by allowing them to automate and gain insight into the massive amounts of supply chain spending they do every year. In the past year, Coupa’s platform has processed more than $540 billion of spending, which in turn has produced rapid, predictable and profitable growth (mostly on a subscription basis). And given the fact that new clients really pay off for Coupa after the first year, the huge number of customer wins last year (such as BMW in December) basically guarantee great growth going forward. Even beyond the numbers, though, is the big idea: Coupa has all the makings of an emerging blue chip, fitting right in with players like Salesforce whose offerings are must-haves for many giant, multinational operators. There’s no reason big investors won’t remain interested.

Technical Analysis

Like most of its peers, COUP has had a huge run, advancing more than four-fold from early 2018 to the summer 2019. Thus, the stock isn’t early in its run, but it’s acting like it wants higher—despite wild volatility, COUP has been etching higher lows since October, its swings became a bit less pronounced last month and it pushed to new price highs last week. We wouldn’t say it’s necessarily straight up from here, but you can start small now or on dips and add if the stock heads higher.

COUP Weekly Chart

COUP Daily Chart

Eldorado Resorts (ERI)

www.eldoradoresorts.com

Why the Strength

Few investors have heard of Eldorado Resorts, but it’s got a solid story—the firm is a U.S.-based casino operator that’s been growing steadily via acquisitions in recent years, going from six properties in five states back in 2014 all the way to 26 properties in 12 states right now (seven of which came via the purchase of Tropicana Entertainment last year). And the company has done a nice job integrating them and squeezing out some profits; Q3 EBITDA was up 8% and solidly in the black, though same-store revenue actually fell. But the real excitement here isn’t about the past but the future: In a fish-swallows-whale transaction, Eldorado is in the process of acquiring Caesars for a total consideration of $17.3 billion, which, when completed (expected to close in the first half of 2020), will result in the largest owner of U.S. gaming assets, with around 60 properties (including nine on the Vegas strip), 51,000 hotel rooms and four million square feet of gaming space! Not only will the deal provide scale, but Eldorado thinks there’s at least $500 million of synergies that can be achieved in the first year and management has a good track record of meeting those targets with past buyouts. Of course, there are risks, both financial (lots more debt, though it’s freeing up some cash with sale/leaseback transactions) and execution-wise, but big investors are thinking the Caesars deal will be a hit.

Technical Analysis

ERI had a great run through the middle of 2018, and then like so many stocks, it hit a wall; it did nose into the mid 50s last June, but net-net, shares made no progress for more than a year. But the stock took off after earnings in early November and has advanced persistently since, rising 13 weeks in a row. Last week’s dip could be the start of a pullback, but the odds favor any dip being buyable.

ERI Weekly Chart

ERI Daily Chart

Global Blood Therapeutics (GBT)

www.globalbloodtx.com

Why the Strength

Many money-losing biotechs rise and fall depending on FDA actions (and rumored actions), as well as sector merger & acquisition activity, and Global Blood Therapeutics is no different. Its shares, too, are volatile, but have been on an upward trajectory since November, which is when the FDA gave the nod (three months ahead of schedule) to the company’s voxelotor (will be marketed as Oxbryta) treatment for sickle cell disease (SCD) in patients who are at least 12 years old. SCD is a chronic, inherited blood disorder, and although somewhat rare (fewer than 200,000 new cases per year), the disease can cause anemia and jaundice, as well as lead to infections, delayed growth and chronic pain that can harm many different parts of the body. Oxbryta is the first approved therapy that directly inhibits sickle hemoglobin polymerization (a major cause of SCD), and costs $10,417-a-month for its once-a-day dose. Sales are estimated at $60 million next year, but long-term projections call for possibly $2.5 billion by 2027 (if all goes well, of course). The play here is the potential as the company transitions to commercial status, as well as the company’s partnerships to develop additional treatments. As well, the approval also strengthens Global’s potential as a buyout candidate.

Technical Analysis

GBT topped in early 2018 and built a big, deep consolidation through October of last year. But since then, the stock’s character has changed, with a powerful four-week advance to new highs, and since then, a volatile (but reasonable) four-week rest period in the mid- to upper-70s. We wouldn’t be shocked to see a deeper retreat, but if you want to grab a few shares here, you can.

GBT Weekly Chart

GBT Daily Chart

Lumentum (LITE)

www.lumentum.com

Why the Strength

Lumentum is a designer and manufacturer of optical and photonic products, with leadership positions in lucrative, high-growth markets like ROADMs (reconfigurable optical add/drop multiplexer) and 3D sensing. ROADM technology has revolutionized optical networks and offers huge bandwidth for data transport; Lumentum expects the ROADM market to increase 50% over the next few years, led by growth in China. The company should also benefit from the smartphone replacement cycle as excitement over new 5G technology creates increased demand for customer Apple’s 2020 iPhone. And it also has some other irons in the fire, such as today’s joint venture with Ambarella and ON Semiconductor to provide a 3D sensing platform for things like smart video doorbells and door locks. As for the numbers, growth has picked up in recent quarters, and while analysts see earnings up just mid-teens during the next few quarters, that’s probably conservative given the history of topping expectations (Q3 results of $1.44 per share were 24 cents above estimates) and the powerful underlying trends in the business.

Technical Analysis

Like so many stocks out there, LITE looks to be emerging from a long launching pad, which bodes well. In this case, the stock made no net progress from mid 2017 through October of last year, but LITE then gapped up on earnings and has trended solidly higher since. Retreats toward the 25-day line (now near 76 and rising quickly) would mark good entry points.

LITE Weekly Chart

LITE Daily Chart

SolarEdge Technologies Inc. (SEDG)

www.solaredge.com

Why the Strength

We wrote about SolarEdge a few months ago after the stock had rocketed up following a great earnings release. The company’s inverter systems, power optimizers and other solutions turn solar panel’s direct current into an alternating current for residential and commercial use. The company has been a sector leader, growing at double-digit rates despite some hiccups in the industry—it’s now shipped more than 45.4 million optimizers, 1.9 million inverters, and 14.6 GW of DC optimized inverter systems during the past decade, and it leads the industry in revenue and megawatts shipped. SolarEdge has added to its product line through acquisitions and is doubling its manufacturing capacity, too, a clear sign that management sees a bright future. And why shouldn’t it? After tariffs caused some issues (both with SolarEdge and the industry as a whole), it’s estimated that solar installations likely surged nearly 18% last year (to 114.5 gigawatts), with more of that coming in 2020 and beyond. There’s little doubt that SolarEdge will grab its fair share of that given its history (sales and earnings have grown rapidly in recent years) and Wall Street agrees (it sees sales up 17% and earnings up 43% in 2020).

Technical Analysis

SEDG is known for big moves and it hasn’t disappointed during the past couple of years, with a sharp downtrend (70 to 34) in 2018 and a huge rally (back to 90) during much of last year. However, instead of going on another toboggan slide, shares chopped sideways for the next four months, and now SEDG is starting to break out, despite the market’s recent dip. Given its choppiness, we advise starting on pullbacks.

SEDG Weekly Chart

SEDG Daily Chart

Tenet Healthcare (THC)

www.tenethealth.com

Why the Strength

If there’s one trend among big healthcare companies it’s the flood of both mergers & acquisitions as well as divestitures that are designed to 1) gain market share in a specific area of expertise and 2) eliminate subsidiaries or divisions that are not highly-focused on a given company’s primary force de jour. Tenet Healthcare has been expanding via M&A for years, and it now operates 23 surgical hospitals, 475 outpatient centers, 255 ambulatory surgery, 36 urgent care and 23 imaging centers in the United States. For the past three years, the firm has been consolidating and streamlining its focus and recently announced that it is divesting some of its non-core and unprofitable facilities in order to reduce debt and maintain liquidity. In 2018, the company sold nine Aspen facilities in the United Kingdom and eight hospitals in the United States. Last year, THC divested three hospitals in the Chicago area and purchased controlling interests in several multi-specialty surgery centers in Virginia, Florida, Tennessee and Colorado and a single-specialty endoscopy center in Florida. Additionally, the company reported that it will complete the spin-off of its Conifer health care services business by the end of the second quarter of 2021. It’s not a great, pure growth story, but Tenet’s bottom line is lifting nicely—the earnings likely surged 44% last year, so it seems that analysts’ estimates for this year (earnings up 12%) are likely too low, with the reasonable valuation (13 times 2020 earnings) being another plus.

Technical Analysis

THC has been all over the place in recent years, but we’re very impressed with the stock’s recent action. After forming a big double bottom in the 17 area, the stock steadied itself for a couple of months and then took off starting in October, rallying 11 weeks in a row and, during the latest two-week pullback, it’s only given up a fraction of those gains. Buying on a bit more weakness makes sense.

THC Weekly Chart

THC Daily Chart

WPX Energy (WPX)

www.wpxenergy.com

Why the Strength

We haven’t had an energy explorer in Top Ten in a very long time, but WPX Energy has a solid story and the stock is showing some rare power. The company has two main areas of operation, one in the Williston Basin and the other in the Delaware Basin (part of the larger Permian), and it’s expanding quickly in both—in Q3, production in the Williston was up 58% while Delaware output rose 28%; all-in, oil output was up around 30% in the quarter. What’s unique is that the company is focused on the bottom line, not just boosting production—some wells pay back in just 14 months, and management has been paying off debt and CapEx in 2019 likely fell from the year before. All of that is to the good, but the reason the stock has taken off is thanks mostly to a big acquisition: WPX has agreed to acquire privately-held Felix Energy, which will dramatically boost its presence in the Delaware (1,500 oil-heavy locations), and partially because of a good price (about half of comparable Delaware Basin deals during the past couple of years on a per-acre basis), should be immediately accretive to basically all of WPX’s metrics. (It’s even going to implement a small dividend after the purchase is finalized.) Obviously, energy prices will have an impact, but it looks like WPX has years of solid, profitable growth ahead of it.

Technical Analysis

WPX was nearly cut in half in the second half of 2018, and despite an early-2019 rally, the stock was actually tagging lower lows last summer. But bigger picture, it now looks like the stock etched a multi-month bottom—buyers supported the stock in the 9 to 10 area many times from July through mid November, and when the Felix acquisition was announced in December, the stock exploded higher and hasn’t stopped since. We suggest entering on weakness.

WPX Weekly Chart

WPX Daily Chart

Scorpio Tankers (STNG)

www.scorpiotankers.com

Why the Strength

Scorpio Tankers has the largest (124 ships on the water, 10 more newbuilds under construction) and most modern fleet (average ship is four years old) of product tankers, shipping oil and other petroleum products. You won’t find an industry that has more (very sharp) ups and downs than this one, and during the past two to three years, it’s been bust times for shippers. But as with most cyclical industries, such a long bust sows the seeds of the next boom—while demand for oil shipping has continued to grow, the order book for new ships has plummeted (less than half of the 10-year average), the on-the-water fleet is getting old (will have to be scrapped in the years ahead) and some other fundamentals (more Middle Eastern refining coming on-line) help the cause. The result: Spot charter rates have begun to boom and most expect the good times to continue for many quarters if not longer—while Q3 results were still sour, Scorpio’s stock moves on perception of the future, and it’s pretty much established now that 2020 will be a banner year (analysts see earnings of $3.61 per share!). Moreover, it’s not just analysts that are bullish: Scorpio’s CEO bought $450,000 of call options in mid November (expiring this month) that have worked out. A modest dividend (1.0% or so annual yield) that could grow with earnings adds to the attraction.

Technical Analysis

STNG was up at 98 in 2015, but by late 2018, it had fallen all the way down to 15! But that turned out to basically be the low—shares bottomed out between 15 and 20 for a few months and began to get going in April. Volatility was high, but buying gradually accelerated, and now the trend is clearly up, with STNG rallying eight weeks in a row. You can start a position here or on dips of a point or two.

STNG Weekly Chart

STNG 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.