Let the Market Decide
Current Market Outlook
On an intermediate-term basis, the overall market remains stuck in the middle—many areas are still looking ragged, and most major indexes are hanging around their 50-day moving averages. Our screens this weekend did reveal a number of solid five- to six-week setups among growth stocks, as well as lots of solid action in other areas that have recently come to life. If the market gets going from here, there should be plenty of stocks to jump on. We’re not opposed to buying small amounts of a couple of these potential leaders today, but until we see more than just a day or two of rallying, you should play things carefully. We have our Market Monitor at a level 6 (out of 10), and will simply let the market tell us (through its own action) whether the next big move is up or down.
In the meantime, we’re laser-focused on stocks that have either just blasted out of bases or uptrending stocks that have resisted the Nasdaq’s wobbles since early June. Our Top Pick is Medidata Solutions (MDSO), which remains in good shape after lifting from a two-year base in April. Keep positions small.
| Stock Name | Price | ||
|---|---|---|---|
| Alibaba (BABA) | 254.81 | ||
| Align Technology (ALGN) | 316.20 | ||
| American Airlines Group Inc. (AAL) | 0.00 | ||
| Exact Sciences (EXAS) | 116.91 | ||
| First Republic Bank (FRC) | 0.00 | ||
| Medidata Solutions (MDSO) | 0.00 | ||
| Puma Biotech (PBYI) | 0.00 | ||
| RingCentral (RNG) | 238.73 | ||
| Tesoro (TSO) | 0.00 | ||
| WellCare Health Plans, Inc. (WCG) | 271.83 |
Alibaba (BABA)
Why the Strength
One of Cabot’s qualifiers for a great growth stock is that the company should address big mass markets. And there aren’t many mass markets bigger than China, whose 1.3 billion people include over 721 million internet users, 650 million of whom access the internet via mobile devices. The core of Alibaba’s business is its online marketplaces, Taobao.com and TMall.com, where merchants can offer all kinds of merchandise, with Alibaba taking a small cut of each transaction. The company also runs Google-style auctions for advertising space on its sites, a source that will become more important as gross merchandise value growth slowed to 22% in fiscal 2017. Free cash flow has increased steadily over the past five years, rising from $2.1 billion in fiscal 2013 to $9.31 billion in the fiscal year that ended in March 2017. That gusher of cash has allowed Alibaba to move into fields like cloud services, original content production and artificial intelligence and form joint ventures with innovative companies in many fields. In its relentless spread beyond operating retail marketplaces, Alibaba is acting much like Amazon, another ambitious giant. The company’s revenue increased by 47% in the fiscal year that ended in March, and analysts see earnings increasing by 32% in 2018 and 33% in 2019. Alibaba is a big company with an ambitious and charismatic leader in founder Jack Ma.
Technical Analysis
BABA took 30 months to surpass its November 2014 post-IPO high at 120. The stock took out that old high in May 2017, continuing a 2017 rally that has taken the stock from 88 in January to over 140 in recent trading. If that stretch between highs at 120 acts as a long base, BABA should have longer to run. The stock has been trading sideways since it gapped up from 126 to 144 on June 8 after management released optimistic revenue projections. BABA has tightened up under resistance at 145 and the rising 25-day moving average is at 139. Look for any weakness to get started, with a protective stop around 130.
BABA Weekly Chart
BABA Daily Chart
Align Technology (ALGN)
Why the Strength
Align Technology is a simple, better-mousetrap story. The company’s clear, flexible aligners do the same job as old-fashioned metal braces without the discomfort and metal-mouth look of braces. Founded in 1997, the company turned profitable for good in 2007 and has increased revenue every year since. 2016 was a particularly good year, with 28% growth in revenue outdistancing the 11% in 2015. That trend continued in Q1, when Align reported 30% growth in revenue and 18% EPS growth. Align’s product line includes scanners to map the mouth and visualization software to model the desired final outcome of the straightening enterprise, but it’s the clear aligners themselves that supply nearly 90% of revenue. With 15 appearances in Cabot Top Ten Trader since its debut in 2007, Align Technology has proven itself a reliable, well-run company. The company will report its second-quarter results after the market closes on July 27, with analysts forecasting revenue of a little over $343 million and earnings of 73 cents per share. And the bigger picture looks even better, with analysts anticipating earnings growth of 40% this year and 20% next.
Technical Analysis
ALGN has been in a general uptrend for years and could be near a good entry point here. ALGN rallied from 93 in February to 120 April, then gapped up to over 135 in late April, starting another upleg that pushed the stock above 150, which is where it has been resting since early June. ALGN had a big-volume trading day on June 16, when it was announced that it would be added to the S&P 500, but the effect on price was negligible. You should be slightly cautious with earnings just over two weeks away. Look to buy below 150 and use a stop around 135.
ALGN Weekly Chart
ALGN Daily Chart
American Airlines Group Inc. (AAL)
Why the Strength
Transportation stocks are in an interesting long-term spot, near the top of a two-and-a-half-year base-on-base pattern, with recent strength thanks to the rotation in the market and lower oil prices. American Airlines is one of the strongest stocks in the sector for a couple of reasons. First, the stock is cheap (11 times this year’s estimated earnings) and investors see the bottom line stabilizing and beginning to grow again as we start to look into 2018—after seven straight quarters of shrinking revenue, the top line has inched ahead each of the past two quarters, and the second quarter is on pace to see a 6% gain as April and May traffic reports have been solid. (June’s traffic report is due out this week.) Earnings have been plunging mostly due to higher fuel and labor costs, though that is already in the stock price and the increases should level off in the quarters ahead. All told, fundamentally, American Airlines is solidly profitable and spinning off a ton of cash (it bought back about 2% of its shares in the first quarter alone). But there’s also a kicker here—Qatar Airlines is looking to buy a big stake (4.75% of AAL, and more if it gets approval), despite the fact that American’s management is opposed to it. The bottom line for investors is that you might have a big upcoming source of demand (nearly 24 million shares!) for the stock as Qatar looks to invest in the U.S. The stock could be a bit news-driven, but there are many reasons why the stock should move higher.
Technical Analysis
AAL is near the top of a huge two-and-a-half year base that began near the end of 2014 and bottomed in mid-2016 at 25. More recently, the stock has formed a shallower seven-month consolidation, and last week’s action—bolstered in part by the Qatar Airlines reports—have pushed the stock to multi-year highs on average volume. We’re game for a small purchase here, with the idea of adding more if AAL continues higher.
AAL Weekly Chart
AAL Daily Chart
Exact Sciences (EXAS)
Why the Strength
Exact Sciences has had an adventurous past few weeks, but the underlying story remains outstanding. It’s all about Cologuard, which looks like a revolutionary colon cancer screening technique (colon cancer is the second deadliest cancer in the U.S.). Instead of heading in for a colonoscopy (and all the prep work that goes along with it), patients basically “deposit” a sample in a box from home (no prep work, nothing invasive), send it in, and Exact’s DNA methylation technology (looks for DNA markers, developed by the Mayo Clinic) can ID pre- or early stage colon cancer with a high degree of accuracy. (Has a 94% success rate of ID’ing stage 1 or 2 colon cancer, with a reasonable number of false positives and negatives.) The big advantage here is compliance, as relatively few people go ahead with a colonoscopy even as their doctor advises them to, whereas Cologuard has twice the compliance rate because it’s easy to use and backed up by phone call reminders. Insurance companies have bought in, too, with 78% of the addressable population covered (including some positive indications from UnitedHealth). Sales growth has been explosive (see table below), with 70,000 physicians already on board, but that is likely just the beginning—Cologuard has just 2% of the total market today. Some short sellers allege that sales aren’t as good as they appear and Exact also recently completed a share offering (about a 7% dilution), both of which hit the stock. But buyers keep coming back as the growth potential remains huge.
Technical Analysis
EXAS broke out of a very deep base at 24.5 in late-April, with the stock eventually reaching 36 within just a couple of weeks. But then the volatility began, first on a short-selling hit piece (dropping EXAS to 29.5), and then, after a recovery, a share offering (dropping EXAS to 31). However, shares held their 50-day line each time, and have now marched back toward their old highs. You could nibble here with a stop near 32.
EXAS Weekly Chart
EXAS Daily Chart
First Republic Bank (FRC)
Why the Strength
First Republic is a modestly sized bank ($2.5 billion in revenue) that has an extremely impressive history of growth and an even more impressive track record of execution. The company focuses on high net worth clients in four major markets, San Francisco (42% of its loan portfolio), New York (22%), Los Angeles (16%) and Boston (8%), with a few other smaller markets making up the rest. Most of its portfolio is single family residential loans or home equity lines of credit (56% of the total), and because of its well-situated client base, these loans are extremely creditworthy, with an average loan to value well under 60%. That’s led to consistent results—of $176 billion originated loans since the company’s founding in 1985, the firm has booked a total of just $330 million of losses, or a tiny 0.19% of loans! Even during 2008, First Republic’s write-offs only grew to 0.48%, compared to a whopping 1.67% for the top 50 U.S. banks. The growth comes mostly from its own customers (58% of recent loans went to existing clients), and First Republic has just a 2% average client attrition rate, well below industry norms. The numbers in the table below are outstanding, and analysts see the bottom line rising 15% this year and accelerating to 20% growth in 2018. It’s not changing the world, but First Republic is a high-class operation. Earnings are due out this Friday, July 14.
Technical Analysis
FRC hit new highs after the U.S. election last year and rallied into February with most financial stocks before beginning a base-building phase. What we like about the chart is that the stock leapt out to new highs on three straight days of big volume in early June, just as the sector came alive, and it’s worked its way to new highs today. It’s not going to double in a month, but we think FRC is buyable here with a stop in the mid-90s.
FRC Weekly Chart
FRC Daily Chart
Medidata Solutions (MDSO)
Why the Strength
Cloud-based software providers have revolutionized industries by building efficient and scalable solutions that completely displace outdated technologies. And if there’s one industry that remains weirdly outdated, it’s drug development. Many clinical trials still rely on pen and paper, or on stodgy on-premise solutions from Oracle. Medidata is rounding up these customers by offering cloud-based clinical trial software with numerous benefits: It can access data mid-trial to improve site selection, benchmark performance, drive improved trial efficacy, speed up time to market for treatments and even create synthetic control groups. The company’s platform is highly focused on data, which means that as Medidata grows, so too does the value of its datasets. The data is nearly as valuable as a blockbuster drug, because nobody else can get it. The clinical trial market as a whole is north of $100 billion annually, though this company plays in a smaller $10 billion slice; it expects $555 million in revenue, so there’s a long runway of growth ahead. In fact, with roughly 20% annual revenue growth, sales could top $1 billion in 2020. The stock just received an endorsement from Bank of America, though the next big event will be next Tuesday (July 18) when earnings are released.
Technical Analysis
MDSO bottomed at 30 with the market early last year, rallied to the mid-50s last fall, and then built a nice-looking base through March. The breakout came in early April, and shares have been riding their 25-day line higher ever since. Best of all, MDSO notched new highs in mid-June and has carved out a higher low recently, both signs of relatively strength compared to the Nasdaq. You could buy a little here with a stop below the 50-day line.
MDSO Weekly Chart
MDSO Daily Chart
Puma Biotech (PBYI)
Why the Strength
Puma Biotech specializes in cancer treatments, and the stock is one of the strongest in the market thanks to positive news from the FDA back in late May. The FDA’s Oncologic Drug Advisory Committee supported Puma’s neratinib for the treatment of HER2+ breast cancer. This is a subset of patients that limits the drug’s market potential, for now. Given the panel’s 12 to 4 vote, we see a nearly 100% chance that the FDA will approve neratinib for this subset. The panel concluded that, while the benefit of the drug was relatively modest, the pros outweigh the cons, and the drug reduces risk of disease recurrence. Neratinib is an oral treatment, a plus in the eyes of treating physicians given that the main negative side effect (diarrhea) shows up early, and those patients most affected can stop treatment. Analyst upgrades followed as everybody jumped on the bandwagon. And over the past couple of months, potential competing drugs haven’t been shown to be any more effective in trials. Of course, this likely approval is for a relatively small subset of breast cancer indications, but label expansion is possible pending further trial results (a Phase III trial for broader indications of breast cancer is just finished enrolling). Puma generated no revenue last year, but analysts now forecast $17 million this year, $115 million next year, and $320 million in 2019. We’ve heard neratinib can capture around 45% market share, implying peak sales potential of $1.3 billion. It’s an interesting speculation.
Technical Analysis
PBYI spent most of 2016 and early 2017 trading below 50, with the exception of a short-lived rally to 73 late last summer. But that all changed on May 22, when investors first began speculating the FDA panel would support neratinib. Shares rallied from 40 to 80 in the last full week of May, then jumped to over 85 three weeks ago. Impressively, PBYI has been trading in a tight range ever since; if you’re game, you could nibble here with a stop in the upper 70s.
PBYI Weekly Chart
PBYI Daily Chart
RingCentral (RNG)
Why the Strength
Few investors think of RingCentral when they think of cloud software stocks, but that will probably change as the stock continues to work its way higher. (Today is the third Top Ten appearance for the stock this year.) The company is the lead dog in a newer cloud field called Unified Communications as a Service, a market that’s growing north of 20% annually, with RingCentral taking more and more market share. The premise here is that the company is solving a fundamental change in how workforces communicate—gone are the days of sitting at your desk and talking over the phone with co-workers, replaced by mobile devices and multimedia communications, all via collaborative efforts. RingCentral’s platform (especially its Office suite of software, which combines file sharing, instant messaging, conferencing, task management and other applications) allows clients to transition to this new reality; right now, the biggest “competition” is simply legacy, non-cloud systems. And it’s a gigantic market, about $25 billion in the U.S. alone and double that if you include Europe. The company has historically served small businesses, and those still make up the majority of revenues, but its mid-market and enterprise segments are driving growth (up 85% last quarter) and represent a giant opportunity. Sales and earnings trends are great, and the sub-metrics (RingCentral Office recurring revenue up 39%, cash flow four times as large as reported earnings) look even better. It’s a good, little-known story.
Technical Analysis
Most stocks that broke out early in the year have turned a bit ragged, but not RNG. Shares did take a hit in early June, but held their 10-week line, and then eked out new highs in mid-June before dipping with the market again. RNG again has held its 50-day line, and looks ready to make a run if the market behaves itself. You could nibble here and look to average up on a decisive push above 39.
RNG Weekly Chart
RNG Daily Chart
Tesoro (TSO)
Why the Strength
Oil explorers and drillers can be hit hard by falling oil prices, but Tesoro Petroleum—a refiner and retailer of petroleum products—reaps the benefits. Tesoro operates a string of refineries and retail outlets as well as wholesale operations. In 2016, Tesoro announced that it would acquire Western Refining for $6.4 billion, adding Western’s refineries in Texas, New Mexico and Minnesota to the Tesoro network. The merger will be finalized on August 1, and the combined company will take the name Andeavor and its stock symbol will change to ANDV. The combined company will have 1.1 million barrels a day of refining capacity, 13,000 employees and more than 3,000 retail locations to go along with its extensive logistics system. Tesoro has a long history as a Cabot Top Ten Trader selection with 26 appearances since its debut in 2003. That’s a lot of leadership over the years and demonstrates the company’s ability to present a compelling value proposition to investors. Right now, with a 16 P/E ratio, a dividend yield of 2.3% and large savings in store from Western Refining merger synergies, TSO looks like a solid pick in the petroleum sector. Second-quarter earnings will be announced on August 8, after the market closes and analysts are looking for revenue of $5.48 billion and earnings of $1.53 per share.
Technical Analysis
TSO has been a long-term winner since late 2011, but its current rally represents a rebound from a correction that dropped it from 115 in November 2015 to 65 in February 2016. TSO traded up to resistance near 90 in March and December 2016, but was trading at 75 in March 2017 when the current rally began. TSO has now cleared that resistance at 90 and represents a solid value/dividend combination. Look for a pullback of a point or two and keep a stop around 87.
TSO Weekly Chart
TSO Daily Chart
WellCare Health Plans, Inc. (WCG)
Why the Strength
WellCare provides managed healthcare services (Medicaid, Medicare and Medicare prescription drug plans) to roughly 4.1 million members in the U.S. The stock has been on a multi-year run as management executes its growth strategy, which is focused on geographic expansion (most recently into Nebraska and Missouri), acquisitions (four in 2016 and the first half of 2017), and driving membership growth during Medicare open enrollment. These initiatives all helped drive a big first quarter beat (revenue up 10% to $3.9 billion and EPS of $1.61 beat by $0.43), after which management raised guidance to what is still considered conservative levels by most analysts. Wall Street sees 15% annual top- and bottom-line growth over the next two years as easily attainable, especially now that the Universal American and Phoenix Health deals have closed. It’s also worth highlighting that WellCare has nearly $250 million in cash available for more M&A. While there is a lot of noise in Washington about overturning the Affordable Care Act, investors see the company well positioned for the most likely scenarios. And positive sector trends, like M&A and vertical integration, along with reasonable valuation (WellCare’s forward P/E is 27) should keep big investors interested.
Technical Analysis
WCG is up roughly 80% over the last 12 months, has traded above its 200-day line since April of last year, and has toyed with its 50-day line a few times since then. The most recent consolidation phase lasted from December until late April, followed by a solid early-May breakout. And now we see the stock trying to move up despite the market’s wobbles, with higher highs and higher lows since mid-May as WCG finds support repeatedly near its 25-day line. We’re OK with a small buy here and a stop in the high 160s.
WCG Weekly Chart
WCG 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.
