Positive but Tricky
Current Market Outlook
It’s not perfect, but from a top-down perspective, the market remains in good shape—today’s stretch toward new highs for many indexes (the S&P 500 made it, though most others didn’t) keeps the intermediate- and longer-term trends pointed up. That said, under the surface, things are a bit disjointed, with selling on strength seen in some extended growth leaders and buying picking up in names that are either cyclical (oils, financials) or fresher (those that haven’t had huge runs). That doesn’t mean you should chase every stock and sector that’s moving and ditch those that are wobbling, but it is important to avoid complacency with your winners (honor stops and take partial profits when offered) and, on the buy side, focus on stocks showing outstanding accumulation in recent weeks.
Those are just the type of charts we’re honing in on these days, and this week’s list has another batch of (mostly) newer names showing excellent action. Our Top Pick is Anaplan (PLAN), which looks like a new leader in the software space.
| Stock Name | Price | ||
|---|---|---|---|
| AGCO Corporation (AGCO) | 76.24 | ||
| Anaplan (PLAN) | 47.52 | ||
| eHealth (EHTH) | 122.74 | ||
| Inphi (IPHI) | 120.16 | ||
| Kratos Defense (KTOS) | 24.08 | ||
| Novocure (NVCR) | 0.00 | ||
| Roku, Inc. (ROKU) | 150.46 | ||
| Shake Shack (SHAK) | 92.08 | ||
| Smartsheet (SMAR) | 44.12 | ||
| Snap Inc. (SNAP) | 16.68 |
AGCO Corporation (AGCO)
Why the Strength
It’s been a mundane few years for big agricultural firms, as generally soft crop prices and (over the past year) the trade war have hurt the sector. AGCO is a big agricultural equipment maker, selling things like tractors, harvesters, hay and forage equipment, seeding implements and grain storage products under a variety of brand names (Challenger, Fendt, Valtra and more), and it was hit by the farm recession along with many peers—earnings were off 35% from 2014 through 2017, and sales growth continues to fade. But the stock is strong today for a few reasons. First, demand has finally stabilized—total company production was up 1% in Q1 and is expected to rise 3% for the full year, and revenues on a currency-neutral basis actually rose 7% in the quarter. Second, AGCO has been laser focused on cutting the fat; even during the slow times, the company was solidly profitable, and now earnings are pushing ahead nicely (earnings doubled estimates in Q1; analysts see the bottom line up 27% this year). And third, the firm is shareholder friendly, with lots of shares buybacks over the years (Q1 share count down 3.7% vs. a year ago), a modest dividend (0.8% annual yield) and a reasonable valuation (16 times expected earnings). Throw in some hope on the trade war front (China is reportedly set to ramp up purchases of U.S. farm goods during the current round of negotiations) and some reflation efforts by central banks (usually good for commodity prices) and it looks like a new upcycle is underway for AGCO.
Technical Analysis
AGCO slipped from 76 in late 2017 to 51 at the market bottom late last year, but then enjoyed a steady, persistent advance through April that took it back to its old highs. The reignited trade war in May caused a sharp correction, but AGCO found support in the mid 60s and, impressively, has recently zoomed to new highs on many days of above-average volume. We’re OK buying here or (preferably) on dips.
AGCO Weekly Chart
AGCO Daily Chart
Anaplan (PLAN)
Why the Strength
Everyone likes to think that the higher ups at every company are always on top of things, planning out each line of business in meticulous detail and adjusting plans along the way. In reality, though, planning can be off-the-cuff and scatterbrained even at the most respected firms, especially in today’s rapidly changing global world of business. That’s where Anaplan comes in—as its name suggests, the firm has pioneered a planning platform that helps decision makers (usually at large enterprises) better organize, collaborate and plan for the unexpected thanks to a data-driven technology and a proprietary multi-dimensional modeling engine with over 30 predictive algorithms. Whether it’s financial, workplace, marketing, OpEx planning or more, Anaplan has been shown to dramatically boost productivity. Not surprisingly, it’s been a hit among larger organizations; in Q1, the number of Anaplan’s clients with at least $250,000 in annual contract value totaled 279 (up 43% from a year ago), while same-customer revenue growth has been north of 20% each of the past three years. Best of all, management recently said the firm is becoming an emerging standard in a number of industry verticals.Earnings are still in the red, but like many peers, free cash flow is approaching breakeven. Overall, we like this story a lot.
Technical Analysis
PLAN came public in October last year, held up well during the market’s implosion and lifted to 41 by late February. Then came a nice base-building effort, with shares resting for three months and pulling back only 20% from high to low. Q1 earnings produced a breakout on May 28, and we love the action since then—PLAN has surged as high as 52 on a huge pickup in volume before chilling out for a bit last week. We think the stock is headed higher—you can buy here or (preferably) on dips.
PLAN Weekly Chart
PLAN Daily Chart
eHealth (EHTH)
Why the Strength
eHealth is a private online marketplace for health insurance, which enables both individuals and businesses to research, analyze, compare and purchase health insurance products. And business is booming! In the first quarter, revenues were $68.8 million, up 60% from the year before, and management increased its full-year revenue guidance to $315 to $335 million. Particularly notable is the company’s strength in the Medicare market, which accounted for 64% of profits in the first quarter. In a report on trends among Medicare consumers, in fact, the company noted that in the recent Medicare open enrollment period (January through March), the average Medicare Advantage premium of customers who purchased a Medicare plan from eHealth dropped 33%; additionally, average out-of-pocket limits for those customers decreased 11%. Commenting on the results, CEO Scott Flanders stated, “Our first quarter financial results were driven by strong performance of our Medicare business, which exceeded our expectations, demonstrating both our unique value proposition for health care consumers and our ability to drive those consumers to our market-leading engagement and enrollment platform at scale. We continue to see significant potential to scale customer acquisition in the Medicare market while maintaining attractive costs and achieving operating leverage with our fixed costs.” In short, prospects are bright, especially as consumers in general (and retirees in particular) look to cut their health costs.
Technical Analysis
EHTH was a thinner, lower-priced stock in early 2018, but that changed as the year went on, as the stock rallied and volume picked up. Sellers finally showed up in February and again in April, which contributed to a choppy four-month consolidation in the 55 to 70 range (give or take). But the stock has come back under control since late May, advancing to new highs in a steadier pattern. With the 25-day line down near 75, we advise aiming to buy on weakness.
EHTH Weekly Chart
EHTH Daily Chart
Inphi (IPHI)
Why the Strength
We had high hopes for Inphi back in early May, but the stock fell apart after the Huawei ban flushed the chip sector down the pipe. Impressively, though, the stock has crawled all the way back to new highs (far better than the sector), which we take as a sign the underlying story is intact—a story that is both powerful and easy to understand. The company is the leader in data movement interconnects, which are products that move data faster between (for long haul, metro and edge applications) and inside of (400G products) data centers. Big picture, this is a growth market thanks to cloud, mobile, 5G, IoT, autonomous vehicles, e-commerce and the like, with sales of these data interconnects expected to double between 2018 and 2023 (thanks mostly to spending from some big customers like Google and Amazon), and Inphi is set to take its fair share. Business was beginning to pick up after a slowdown in 2018 (thanks to telecom customers but especially an upcoming data center networking upgrade cycle), and while the Huawei news did lead the company to cut its Q2 forecast, (a) results are still expected to be darn good (20% sales growth with earnings more than doubling rom a year ago), (b) this looks more like a one-time hit to growth and (c) this weekend’s trade cool down could actually ease some of those sales restrictions anyway. Analysts see the top line growing 18% this year and next, with earnings surging 70% this year and nearly 30% in 2020.
Technical Analysis
IPHI had a nice rally after its low near 30 early in the year, hitting multi-month highs in March and, after a quick shakeout, gapping toward all-time highs after earnings in late April. Then came the Huawei ban, causing shares to sink from 52 to 39 in two days. The bounce wasn’t overly impressive at first, but it picked up steam in mid June and IPHI is at new highs now. We’re OK starting small around here or on dips.
IPHI Weekly Chart
IPHI Daily Chart
Kratos Defense (KTOS)
Why the Strength
San Diego-based Kratos is the type of company about which one might joke, half-seriously, “I could tell you what they do, but then I’d have to kill you.” Which is a way of admitting that we don’t know exactly what Kratos does, given that most of its work is for entities in the U.S. Department of Defense. Just last week, for example, the company announced a $5.9 million contract “to provide hardware and subsystems in support of a Command, Control, Communications, Computing, Combat and Intelligence, Surveillance and Reconnaissance aerial defense related program and platform” but gave no other details. What we do know is that Kratos specializes in unmanned aerial systems (UAS), satellite communications, cyber security/warfare, microwave electronics, missile defense, hypersonic systems, training, combat systems and next generation turbo jet and turbo fan engine development—and that drones are a key factor for the growth. First quarter results, which were very well received, saw revenues of $160 million, up 12% from the year before. And Eric DeMarco, Kratos’ President and CEO, noted, “Every Kratos business unit exceeded its financial forecast in the first quarter. Kratos’ Unmanned Systems business had a very successful first quarter, including the initial flight of the XQ-58A Valkyrie and a 1.7 to 1.0 book to bill ratio [70% more orders than production]. Since the first Valkyrie flight, potential customer interest in Kratos’ affordable, high performance unmanned aerial drone systems has increased significantly, and we are more confident than ever that we will successfully achieve our strategic objective of being the leader in this [likely] large and fast growing tactical UAS area class.” With defense spending ramping, Kratos looks set to benefit.
Technical Analysis
After hitting 14 in September and October 2017, KTOS didn’t do much for a couple of years—shares did pop to new highs earlier this year, but by mid April, they were back at 14.5. But the picture has changed since then! KTOS gapped up on earnings in early May and ran all the way to 23 on giant volume. The past month has seen a relatively tight consolidation, which is constructive. We’re fine buying here or on dips.
KTOS Weekly Chart
KTOS Daily Chart
Novocure (NVCR)
Why the Strength
We remain bullish on the medical sector in general, as many stocks are attempting to provide new leadership to the market. Novocure is one of them thanks to its high-potential Optune system, which successfully battles certain types of cancer without damaging surrounding tissue. How? By using what’s known as tumor treating fields, which are (basically) alternating electrical fields that, when applied at specific frequencies, serve to disrupt cancer cell division and cause cell death. Optune (which can be applied at home) is approved for both newly diagnosed and recurrent glioblastoma (type of brain tumor) and has been shown to boost survival rates (interestingly, more Optune use and higher intensity fields are positive correlated with survival, too), and in late May it received FDA approval for combination treatment for a type of mesothelioma, a rare cancer (3,000 diagnosed in the U.S. each year) often associated with asbestos exposure. (It’s the first approved treatment for this type of cancer in 15 years!) Glioblastoma usage continues to rise steadily (up 31% in Q1), and the mesothelioma approval should boost that further. And long-term, Novocure is in trials for many other types of cancer, too. Revenue should continue to rise at a 35% to 45% through 2020 at least, with earnings leaping into the black next year. We like it.
Technical Analysis
After a big drop last year with the market and a big recovery by early March, NVCR went on to build a shallower, more proper structure, etching a 27% deep base over three months. The breakout came in early June, with the stock racing up to 62 on a pickup in volume. Impressively, a five-day dip to the 25-day line was met with huge buying late last week, driving the stock back to new highs. Try to start a position on dips.
NVCR Weekly Chart
NVCR Daily Chart
Roku, Inc. (ROKU)
Why the Strength
Roku has a few different legs to its business, but the underlying ruling reason here is simple: Cord-cutting (consumers canceling cable TV and instead subscribing to over-the-top services like Netflix, Prime, Hulu and more) is a trend that’s firmly in place (three million did so in 2018, with another one million cutting in Q1 alone!), and Roku looks like one of the best ways to play it, with a “neutral” platform for streamers—it doesn’t create its own content, but effectively provides a hub that offers dozens of pay-TV options (HBO, Showtime, etc.), streaming services (like those mentioned above) and thousands of ad-supported movies. The key for that business model, of course, is to have enough users and eyeballs to get the attention of big content providers, and Roku has that in spades: It’s now the #1 smart TV operating system in the U.S. (one in three smart TVs sold in Q1 were Roku-powered), helping its platform have 29.1 million members at the end of March (up 40% year-over-year) who watched a mind-boggling 8.9 billion streaming hours (up 74%). Basically, Roku provides content creators a huge audience, which attracts more content, which in turn attracts more users (the network effect). The firm still gets revenue (but little profit) from hardware (TV) sales, but the excitement is all about the company’s platform hub (sales up 79% in Q1). EBITDA being slightly in the black is another plus. It’s expensive, no doubt, but we think the story has legs.
Technical Analysis
ROKU has been a wild child since coming public in September 2017, with a ton of crazy multi-month moves up and down. But the stock changed character in March and April, building a tamer launching pad, before exploding to as high as 107 in June. The pullback last week was sharp, but came on light volume, and shares are approaching their 50-day line for the first time since breaking out. We’re OK starting small and using a loose leash.
ROKU Weekly Chart
ROKU Daily Chart
Shake Shack (SHAK)
Why the Strength
People gotta eat—but they don’t necessarily want to eat at their grandfather’s favorite restaurant. So it’s only natural that old stalwarts like Burger King and McDonalds are going to be upstaged by younger and faster-growing companies with fresher images, like Shake Shack. The company operates restaurants known for 100% Angus beef burgers, chicken sandwiches and Vienna beef dogs (no hormones or antibiotics), frozen custard, beer and wine and more. Since the original Shake Shack opened in New York in 2004, the company has expanded to more than 220 locations in 27 states as well as more than 70 international locations. Traditionally, all the U.S. stores have been company-owned, but that is changing. In the first quarter, the company opened five company-owned stores in the U.S. , four international licensed stores—including the company’s first in mainland China—and three domestic licensed stores in the international airports in Dallas-Fort Worth, Phoenix and Cleveland. Revenues in Q1 grew 34% to $133 million, topping analysts’ estimates, and following the report, management increased their projections for the year; they’re now aiming for 36 to 40 domestic store openings, 16 to 18 licensed store openings and revenues of $576 to $582 million. Additionally, the company has been testing a four-day work week at a few of its West Coast locations, a move that adds expense but may improve job satisfaction and retention—a major issue in the industry. Earnings growth has been spotty, but analysts see that picking up, too.
Technical Analysis
SHAK looked to be getting going early in 2018, but the rally topped out at 70 in July—and by the December market bottom, the stock was down to 40! The recovery from there hasn’t been powerful, but it has been persistent. Shares rose to the mid 60s in early May, and after a post-earnings consolidation, SHAK just last week stretched out to new multi-year highs on a pickup in volume. If you’re game, you can target buying on weakness as the 25-day line (65 and rising) catches up.
SHAK Weekly Chart
SHAK Daily Chart
Smartsheet (SMAR)
Why the Strength
Some of the well-known cloud software stocks are beginning to look ragged, but a lot of fresher ones like Smartsheet (and Top Pick Anaplan) act great. Smartsheet’s story is an easy one to grasp: In the “old” days, work was fairly straightforward, as most headed to the office, made decisions, sat in a few meetings, had a martini with lunch (ahem) and headed home at day’s end. Today, though, it’s obviously a different ballgame, with much higher volume of contacts (email, messaging) and need for quick turnaround resulting in information overload, distractions and (importantly) making it hard to prioritize what needs to get done. Enter Smartsheet’s projects and portfolio management, workflow and automation and data capture and dashboard platforms that help all departments boost productivity and become better organized. The company believes it’s playing in a $25 billion (and growing) market, and it’s results so far have been fantastic—not only has sales growth been rapid and consistent in the 50% to 60% range, but the sub-metrics are extremely enticing. Average contract value was up 48% in Q1, driven by more big customers (number of firms with at least $100,000 of annual contract value up 139% in Q1) and one of the best growth rates from current customers in all of software (same-customer growth of 34% each of the past two quarters). Free cash flow and earnings are still in the red, but management sees a path of $1 billion in revenue (five-fold increase from today’s levels) in the years ahead.
Technical Analysis
SMAR etched a good-looking two-month base with a big shakeout at the June market bottom, but the action since then has been fantastic—the stock reacted well to earnings, and even bolted higher after a good-sized share offering, too. It did hit some resistance near 50, but the two-week dip since then has been reasonable (mostly light volume, still above its moving averages). You can grab shares here if you don’t own any.
SMAR Weekly Chart
SMAR Daily Chart
Snap Inc. (SNAP)
Why the Strength
SNAP calls itself a camera company, but really, it’s an application company bent on capturing the attention of young people through photo-centric content and then monetizing those eyeballs by connecting them to the appropriate advertisers. And after many hiccups in its first couple of years as a public company, the plan is working. In the first quarter, the company had 190 million daily active users—including 90% of all 13-24 year olds and 75% of all 13-34 year-olds in the U.S.—making it a priority for advertisers trying to reach those age groups. Revenues were $320 million, up 39% from the prior year. And a new, smaller, Android app optimized for lower-end devices increased user engagement by opening faster and using fewer resources. Since then, the company has unveiled Snap Games (a live multi-player gaming experience with huge growth potential), introduced a number of augmented reality (AR) innovations and announced 10 Snap Original Shows, putting it in the content world that includes giants such as Netflix, Amazon and Disney. Obviously, those big boys are in a different league, but we’re impressed by the company’s vision and execution so far and believe that SNAP—which has been viewed as an unreliable upstart but has begun to come into Wall Street’s good graces—has the potential to surprise on the upside in the years ahead.
Technical Analysis
SNAP probably has some of the best price-volume action among all growth stocks right now. The biggest positive here is that, after a big run to start the year and a tidy seven-week base, the stock broke out to new highs on the first day off the market’s June low (we featured it here June 3). And since then there’s been two more giant buying days with next to no big-volume selling. We’re OK starting a position here or (ideally) on dips to the 25-day line.
SNAP Weekly Chart
SNAP 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.
