Very Encouraging Action
Current Market Outlook
The market’s rebound continues, and encouragingly, we’re seeing some power develop—stocks have shown two major accumulation days (one the day after Christmas, when the Dow rose 1,000 points, and the other last Friday after soothing words from the Fed) and breadth has been terrific. We can’t say we’re out of the woods yet; even after today’s rally, the intermediate-term trends of the major indexes are clearly down (all indexes are still near their 25-day moving average, in fact). But even so, there’s no denying the rally is off to a good start, and to this point, the market and potential leading stocks are doing what they “should” to carve out a sustainable low. You should still keep plenty of cash on the sideline, but we’re not opposed to adding some small positions in potential leaders and seeing how things progress. We’re nudging our Market Monitor up a notch.
This week’s list has a broad mix of stories and charts, but all of them look like they want to head higher if the market cooperates. Our Top Pick is Chipotle Mexican Grill (CMG), which, after a massive shakeout, looks primed to continue its turnaround.
| Stock Name | Price | ||
|---|---|---|---|
| AZUL (AZUL) | 29.41 | ||
| Buenaventura (BVN) | 16.23 | ||
| Chegg (CHGG) | 74.21 | ||
| Chipotle Mexican Grill (CMG) | 773.32 | ||
| Etsy (ETSY) | 112.97 | ||
| Incyte Corporation (INCY) | 76.98 | ||
| Kirkland Lake Gold (KL) | 51.30 | ||
| Okta, Inc. (OKTA) | 148.41 | ||
| Telephone & Data (TDS) | 35.36 | ||
| Workday (WDAY) | 194.88 |
(AZUL)
Why the Strength
Airline stocks have been hit and miss of late (Delta’s profit warning last week didn’t help), but Azul is a different breed—the company is the fastest growing and largest airline in Brazil, serving more than 100 destinations and sporting the largest network among its peers in that country, including being the exclusive provider on some key routes. There’s obviously a lot of cyclical aspects to this story, such as oil prices and the economic health of Brazil and South America, but Azul has some long-term tailwinds, too—domestic passengers are expected to rise 59% from 2017 to 2022 as the middle class expands, and to meet that demand, the company is expecting its fleet to expand 31% over that time, including a bunch of next-generation aircraft that should cut costs on a per-passenger basis. Throw in growing business travel and cargo segments (cargo revenues up a whopping 62% in the first nine months of the year, yet there’s plenty of share gains possible from here) and there are reasons to think growth can remain rapid. Q3 was fine in terms of demand (load factor and average fair were up), and those trends have continued (traffic up 14.4% in November). But currency issues and higher fuel prices in Brazil crimped Q3 results, though investors and analysts see the overall trends of passenger growth and increased margins to resume this year—Wall Street expects revenues to rise 17% in 2019 while earnings surge. December traffic results are likely out this week.
Technical Analysis
AZUL came public in 2017 and rallied choppily to 35 in January of last year. But then the stock got nailed, falling more than 50% to a double bottom in the 15.5 area in July and September. But AZUL has trended against the market ever since, snapping back to 28 in November, and after a December test of its 50-day line, a push to new recovery highs. If you’re game, aim to buy small positions on dips.
AZUL Weekly Chart
AZUL Daily Chart
Buenaventura (BVN)
Why the Strength
Buenaventura is Peru’s biggest publicly traded precious metals mining company. With a market cap of just over $4 billion it’s not a giant in its sector, but it’s been mining in one of the best regions in the world for over 65 years and has a portfolio of nine current operations, plus three more with partners, that produce gold, silver and base metals. Buenaventura isn’t expecting 2018 gold production to be up much, if any, but it’s all about the future—with new projects starting up this year, 2019 is expected to be a lot better. Of course, gold and silver prices were down in 2018, so analysts forecast Buenaventura’s revenue was down 3% in 2018, yet lower costs and greater efficiencies likely pushed EPS up an impressive 93% (to $0.54). Most importantly, gold and silver prices are streaking higher right now and if the trend continues expectations for 2019 revenue growth of 5% and EPS growth of 59% could easily prove conservative. Mining stocks are notoriously choppy so we’d caution that it’s best not to fall in love with them. But if you can hit the timing right you can win big. We like that Buenaventura is trying to break out to new highs right now, one of the few (including Kirkland Gold, also written about in this issue) in its sector to do so.
Technical Analysis
Not surprisingly, BVN’s chart looks a heck of a lot like the chart of gold bullion. Shares streaked high in 2016, consolidated for much of 2017, peaked in early-2018, then retreated into the summer months. The stock eventually found support around 12 last summer, which is also when gold bottomed out near $1,200 an ounce. Prices for both have been steadily increasing since, though BVN is trading at multi-year highs while gold is still well off its 2018 high. BVN’s been making a series of higher highs and higher lows since August and we think this trend can continue.
BVN Weekly Chart
BVN Daily Chart
Chegg (CHGG)
Why the Strength
With roughly 47 million students in the U.S. from middle school through college, and with spending representing about 7% of U.S. GDP, education is big business in this country. One of the ways to play the digital revolution angle on this industry is via Chegg, which offers a student-first learning platform that provides tools and services to support students throughout their educational journey. A few years back the company sold textbooks and ran inventory warehouses, but a 2015 deal with Ingram Content Group allowed Chegg to shed its textbook inventory. Chegg continues to market texts under its own brand, but given that print textbooks and eTextbooks only make up around a third of total revenue, with services making up the bulk of sales, this is really a digital growth story. Those services include Chegg Study, Chegg Writing, Chegg Tutors and Chegg Math Solver, which together form a connected learning platform that reaches around 11 million unique visitors a month, and saw revenues grow by 45% in 2017 and likely by 35% (to $251 million) in 2018. Factoring in both services and textbooks, analysts see Chegg’s 2019 revenue to rise around 25%. That’s a huge jump from flat growth back in 2017, which represented the tail end of the company’s transition to the digital model. Even better, expected EPS growth of 26% (to $0.63) in 2019 illustrates the improving margins of the new model.
Technical Analysis
CHGG got off to a rough start as a public company. The stock fell from its 2013 IPO price of 11 all the way down to 3 in 2016. But it’s been mostly up since then with a few intense rallies along the way. Shares climbed through 2017 and most of 2018, eventually topping out near 33 in the beginning of September 2018. The stock gave back 10 points by the end of October but has shown resilience since, with a slightly higher low in November and another in December, and today the stock reached new three-month highs. We’re OK nibbling here or on dips if you want in.
CHGG Weekly Chart
CHGG Daily Chart
Chipotle Mexican Grill (CMG)
Why the Strength
Many of the stocks that have held up well and/or bounced back nicely after dipping during the past couple of months have what we call independent growth stories, i.e., businesses that aren’t subject to the whims of trade negotiations, aren’t directly impacted by Fed rate rumors and have their own levers to pull to continue driving growth. Chipotle Mexican Grill is one of them, with a domestic store base and a turnaround story that’s on track thanks to some smart moves from management. The memories of the firm’s food safety issues are slowly fading, and with the top brass emphasizing digital sales and quality control, as well as some increased marketing, revenue and earnings are steadily advancing. In Q3, not only did revenue growth accelerate slightly to 9%, but comparable store sales lifted 4.4% (the fastest in many quarters), driven in part by a 48% boom in digital sales (which accounted for 11.2% of total revenue). Better yet, earnings boomed 62% thanks to higher margins, a trend that’s likely to continue in 2019. (Analysts see the bottom line revving up another 40% this year.) And there’s still plenty of room for store growth, though the rate of new openings are obviously slower than they were a few years ago; Chipotle ended September with 2,463 restaurants, but plans to boost that by 6% or so this year (opening between 140 and 155 locations). We see no reason this turnaround can’t continue. Earnings are due out February 9.
Technical Analysis
CMG enjoyed a great rally from its lows of 248 earlier this year to a high of 531 in August. The stock bounced off its 200-day line in October, but that rally failed in December, when shares dipped to eight-month lows! But that dip now looks like a shakeout—CMG has stormed back into the middle of its range in recent days, with its relative performance (RP) line rushing out to new highs. If you want in, start small and consider adding shares above 500.
CMG Weekly Chart
CMG Daily Chart
Etsy (ETSY)
Why the Strength
There’s a growing consensus that the U.S. consumer didn’t hold back during the holiday season; same-store sales reached their fastest growth rate in years, early reads on e-commerce saw big gains while broader measures of holiday season retail sales grew at the best rate in six years. That’s enticed some investors back into retail stocks, especially ones with unique stories like Etsy, which operates the go-to online marketplace for differentiated, handcrafted goods, servicing 37.1 million active buyers and two million sellers. It seems like a small niche, but there’s $155 billion spent annually online on products from its top categories in its top geographies, yet Etsy handles just 2% of that. The company was already delivering excellent results—growth in the value of goods sold on its marketplace has accelerated four straight quarters on a currency-neutral basis (20.8% in Q3)—since the new management team came in place in 2017, and with a meaningful price hike last year, Etsy is investing heavily in its website (more personalization, better landing pages and search algorithms), seller services (live chat and direct inbound calls for sellers) and marketing (TV advertising) to continue to drive growth. Indeed, analysts see revenues up 29% and earnings up 42% this year, with solid cash flow, too. Big investors are believers, with 568 owning shares on September 30, up from 308 at the end of 2017.
Technical Analysis
ETSY’s resilience in recent months is even more impressive given its huge run in early 2018, when it ran from a low of 17 in February to a high of 53 in September. Since then, shares have been as high as 58 and as low as 38, but have generally etched higher lows and we’re encouraged to see the stock recently flash two good-volume days, including one last Friday when it popped back above its 50-day line. There’s still overhead to chew through, but you can nibble or keep ETSY on your watch list.
ETSY Weekly Chart
ETSY Daily Chart
Incyte Corporation (INCY)
Why the Strength
Incyte is a biotech stock that develops small molecule drugs to treat cancer and inflammatory diseases. The key to the story is its commercial drug, dubbed Jakafi, which gives a stable revenue base to fund Incyte’s drug discovery pipeline. Jakafi is the standard-of-care drug in myelofibrosis (a type of leukemia), and is also approved for patients with polycythemia vera, a condition in which the bone marrow makes too many red blood cells. Most analysts see Jakafi growing at 10% to 15% annually, implying product revenue of around $1.6 billion in 2018 that should expand steadily to $2.9 billion by 2025. This drug accounts for around 70% of the company’s value today, with the other 30% coming from pipeline drugs. The lead asset here is Baricitinib, which is already approved in 50 countries to treat rheumatoid arthritis and was recently fast tracked by the FDA for the treatment of systemic lupus erythematosus (SLE). Investors will be looking for key data readouts in 2019, including a Jakafi label expansion in acute graft-versus-host disease (GVHD), to support the storyline that Incyte will become more than a one-trick pony. Some recent mega-M&A activity in the biotech space (Celgene acquired last week) isn’t hurting investor perception either. Look for expectations for 2019 revenue growth of 19% and EPS growth of 94%, to $2.13, to keep interest high.
Technical Analysis
INCY certainly doesn’t have any hot money in it—the stock peaked in early-2017 and was range bound through September of that year before falling apart, finally dipping as low as 60 in April 2018. But shares then began a long bottoming process, bouncing between 60 and 75 for many months, and now we’re seeing a change in character. After a shakeout to new lows two weeks ago, volume picked up as the stock bounded above its 40-week line for the first time in 16 months. It’s an interesting turnaround pattern; if you want in, keep it small and try to get in toward 70.
INCY Weekly Chart
INCY Daily Chart
Kirkland Lake Gold (KL)
Why the Strength
Gold stocks are undergoing only their second major rally since their mid-2016 peak, and while no one can be sure if it will continue, the fact is we’re seeing more gold stocks appear in Top Ten, which is a plus. Kirkland Lake looks like one of the leaders in the group—this mid-cap (market cap of $5.4 billion) outfit not only is benefiting from the rise in gold prices, but has a real growth story to boot. The firm operates five mines in Canada and Australia, although its Macassa mine (in Toronto) and Fosterville mine (in Victoria) are the big drivers. Output has expanded at a steady clip in recent years, and in fact, Kirkland is one of the few miners that can claim a consistent track record of growth. And the future looks just as bright—the top brass released a bullish three-year outlook a few weeks ago, with production expected to expand at a 10% to 15% clip from 2019 to 2021, all while costs per ounce decline (in fact, exploration costs on an absolute basis should fall off after 2019). Analysts see earnings up 20% this year, and encouragingly, free cash flow is about as large as net income, giving the firm plenty of options (higher dividends, share buybacks, further expansion) going forward. Encouragingly, 414 mutual funds owned shares at the end of September (including a decent chunk owned by Fidelity Contrafund), up from 292 a year ago.
Technical Analysis
KL has been a lone ranger in the gold group in recent years, actually advancing solidly from the fall of 2017 to a peak of 24 in early August. The correction from that point was tedious, but the stock found support at its 200-day line twice, and since mid-November, the buyers have been in control. KL has advanced persistently since then, moving decisively to new highs. We think you can pick up a small position on today’s dip or on further weakness.
KL Weekly Chart
KL Daily Chart
Okta, Inc. (OKTA)
Why the Strength
Many of the well known cybersecurity firms are still doing well fundamentally, but the stocks (like most) have lots of overhead to chew through. But some newer names in the space—generally those that focus on a specific slice of the industry—are acting better. Okta is one of those, and the story is relatively easy to understand: With workforces growing more mobile, remote and global, and with the number of devices that can connect to a firm’s network and data sources exploding, there’s a need for identity management to make sure only the right people and devices are accessing certain data. And it also works on the consumer side as well; JetBlue uses Okta, for instance, to better personalize customers’ browsing experience on its site. As with all software outfits, there’s some competition, but Okta looks like the leader and the big opportunity is from mid- and large-sized clients that have few (or no) identity solutions and need to upgrade. The company is certainly taking advantage of its opportunity—revenues have been consistently ramping at a 60%-ish pace, and while that’s forecast to slow, we’re not so sure given the firm’s history of trashing estimates. And while earnings are in the red, free cash flow was actually positive in Q3. We think this is a big story and could be one of the next cybersecurity winners.
Technical Analysis
It takes time to build and set up a launching pad, and that’s exactly what OKTA has done since topping out in early September. It held up well during the market’s initial plunge in October, but then got wiped out in November, diving well below its 200-day line for a few days. But the recovery (aided by earnings in early December) was swift, December’s low was well above the November nadir and shares are approaching resistance. We’re OK nibbling here and looking to add more above 70 if the market returns to health.
OKTA Weekly Chart
OKTA Daily Chart
Telephone & Data (TDS)
Why the Strength
It’s a rare individual that gets fired up to invest in a low growth telecom service stock like Telephone & Data Systems. But with the market hitting the skids in late-2018, investor interest (and growth potential) in 5G ramping up and a major M&A deal (Sprint and T-Mobile) likely to influence the sector, this typically sleepy stock has been anything but lately. The company provides wireless products and services, cable and wireline broadband, TV and voice services, as well as a smattering of other hosted and managed services, to roughly six million customers across 34 states. It’s also a majority shareholder of US Cellular (USM). The big picture story behind the stock is an intense focus on growing its broadband penetration and investing in its cloud TV platform to help grow residential revenue per connection. In Q3, the company beat on both the top and bottom line, largely because of growth in the residential and cable businesses, along with strong wireless performance. There is some ongoing softness in commercial wireline connections, and there’s not much to celebrate on the top line, with revenue expected to rise around 2% in 2018 and be flat in 2019. But with EPS growing by 105% last year (to $1.13) and 25% this year (to $1.41), investors looking for some growth and safety should remain interested. The earnings uptick also portends good things for the dividend, which yields 1.8%.
Technical Analysis
TDS isn’t a stock known for making big moves. For the past three years it’s been mostly trading in the 24 to 29 range, with the occasional adventure a point or so higher or lower. It finally broke out above 30 with conviction in November, shortly after a solid Q3 earnings beat. Shares topped out at 36, then fell back to a low near 31 in December. But they’ve since advanced back near their peak, suggesting that the story is becoming more compelling to big investors.
TDS Weekly Chart
TDS Daily Chart
Workday (WDAY)
Why the Strength
Workday is one of the powerhouses in the cloud software industry, a position that’s given it a market cap of $36 billion and annual revenue that should top $2.8 billion in the current fiscal year (which ends this month). Growth has always been solid, but stock is resisting the market’s pull because a number of long-term growth drivers are starting to pay off. First, Workday plays in a big market ($70 billion) selling enterprise solutions for finance, human capital management (HCM), payroll, and business analytics. Second, with roughly half of revenue recurring and a large existing customer base, there’s a lot of predictability when it comes to its results, which is obviously attractive in this environment. Finally, Workday is expanding its portfolio of solutions and snagging customers from legacy vendors (SAP and Oracle) left and right. Its Q3 earnings report (released November 29) was one of the company’s most impressive yet and caused a stampede into the stock. Revenue was up 34% (beating by $20 million), the fastest growth rate in five quarters, while EPS of $0.31 demolished expectations of $0.14. Analysts liked the growth in the customer base, including both Fortune 500 and mid-market customers, as well as steady growth in International (up 47%) and its newer Financials Management (up over 50%) offering. Look for sales and earnings to rise in the 25% to 30% range again this year as Workday continues to attract new customers and upsell existing ones.
Technical Analysis
WDAY hit an all-time high of 140 early in 2018 before trading sideways for about five months, which led to another leg up (to 157) into August. The stock didn’t escape the market’s carnage in Q4 but compared to most it acted relatively well. In fact, WDAY’s November low near 118 matched up with the stock’s summer low, which came during a normal looking consolidation period. A gap up to new all-time highs near 164 following last quarter’s earnings report was encouraging to see, and WDAY never lost its 50-day line during the December meltdown. This remains one of the top liquid growth stocks in the market.
WDAY Weekly Chart
WDAY 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.
