Lots of Short-Term Crosscurrents
Current Market Outlook
Bigger picture, nothing has changed with the market’s stance—the intermediate- and longer-term trends of the major indexes and most leading stocks look solid, sentiment (while heating up a bit) isn’t stretched and many background measures (like our 7.5% Rule) bode well for the months ahead. Short-term, though, things continue to look tricky, as earnings season combined with all the news/rumors out there surrounding the Fed, trade negotiations and even Iran is leading to daily wiggles and a ton of under-the-surface rotation. As we’ve been writing for a while, you shouldn’t get caught up in the day-to-day gyrations, but taking partial profits when offered and being choosy on the buy side (keeping positions small ahead of earnings, looking for good setups near support) makes sense as the myriad crosscurrents continue.
Reflecting the environment, this week’s list produced much more diverse than in recent weeks. Our Top Pick is ASML Inc. (ASML), a chip equipment maker that just broke out on earnings from a year-long base.
| Stock Name | Price | ||
|---|---|---|---|
| Ally Financial (ALLY) | 30.44 | ||
| Arrowhead Pharmaceuticals (ARWR) | 32.16 | ||
| ASML Holding (ASML) | 350.01 | ||
| CrowdStrike (CRWD) | 105.02 | ||
| EPAM Systems (EPAM) | 188.24 | ||
| Generac Holdings (GNRC) | 86.60 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Match (MTCH) | 0.00 | ||
| Proofpoint (PFPT) | 113.79 | ||
| Wheaton Precious Metals (WPM) | 34.43 |
Ally Financial (ALLY)
Why the Strength
When most investors think of successful, good-sized financial outfits, few think of Ally Financial, but maybe they should, as it has one of the better growth track records in the industry. The company is the old General Motors financing arm (GMAC) and it’s still a giant in car-related lending today ($9.7 billion of originations in Q2 from a record 3.3 million applicants), though it’s also branched out into traditional retail deposits (1.87 million customers, up 62% over the past three years; $116 billion in deposits, up 18% from a year ago), investment accounts (up 24% from a year ago), insurance and mortgages ($600 million financed in Q2). Combined with lower charge-offs (0.95% from autos, down 9% from a year ago; total charge-off rate of 0.56%) and higher yields from its loans, Ally has seen its book of investments grow nicely (book value $33.60 in Q2, up 20% from a year ago), driving sales and earnings consistently higher over time. The stock is strong today following its better-than-expected Q2 report, with the economic backdrop (low unemployment, rising wages, etc.) boding well for auto and other lending. Throw in a solid dividend yield (2% annually), a nice share buyback program (share count down 7.8% from last year) and a bargain valuation (nine times earnings!) and some value players are stepping up to the plate. It’s not going to double overnight, but we think Ally has a good shot at being a steady winner going forward.
Technical Analysis
Despite consistently rising earnings, ALLY made no net progress for years, but now perception is beginning to change. After falling from 31 early last year to 21 during the market collapse, the stock ran back to around 30 in April and built a nice, tight, calm eight-week base. The breakout came late last month on excellent volume, and last Thursday, ALLY surged following quarterly results. You can buy some here or on weakness with a stop near the 50-day line.
ALLY Weekly Chart
ALLY Daily Chart
Arrowhead Pharmaceuticals (ARWR)
Why the Strength
Arrowhead Pharmaceuticals is a small-cap company that develops medicines that treat intractable diseases by shutting down the genes that cause them. It has developed a portfolio of RNA chemistries and modes of delivery that set off the necessary RNA interference and quickly and continuously silence the targeted genes. It doesn’t have any treatments on the market just yet, but has eight candidates in the pipeline (three of which are partnered with either Janssen or Amgen) to treat various liver, lung and tumor-related diseases. The most advanced candidate, ARO-AAT for Alpha-1 Liver Disease, is about to begin a pivotal Phase 2/3 trial and was just granted Fast Track designation in late June. There is also mounting excitement for ARO-ANG3 (for Dyslipidemia), a rare and life-threatening disease that can lead to cardiovascular disease—the treatment, which has been granted an orphan drug designation, recently began a Phase 1 trial, with first-in-human dosing occurring in January. It will be a while before Arrowhead generates any revenue so investors should be prepared for equity secondary offerings and/or more partnering of assets to help cover development costs. But the big catalyst in the weeks and months ahead will be rumors and reports on how the clinical trials are going, so expect shares to move significantly up, or down, as potential treatments move through the pipeline.
Technical Analysis
ARWR came to life at the beginning of 2018 when shares began to climb on pipeline optimism. The stock traded over 20 for a brief spell last September, then slid back to 10 before rallying with the market this year. The breakout came in mid-May when ARWR jumped back above 20, then climbed to near 29 by late June. After a little dip ARWR has ramped back to new highs in recent days. If you’re game, you can start small on dips.
ARWR Weekly Chart
ARWR Daily Chart
ASML Holding (ASML)
Why the Strength
ASML is a Dutch semiconductor company that makes lithography systems, which are used to fabricate integrated circuits (imprinting microscopic circuitry onto wafers). Customers are logic and memory chip makers, to whom ASML also provides a smattering of installation, customization and training services. The stock has been doing well in 2019 and just stepped out to fresh highs following a slightly better-than-expected Q2 result (revenue down 6%, but EPS beat) and bullish comments from management surrounding strength in the logic end market, which is expected to offset ongoing weakness in memory. Management’s commentary aligns with what many analysts have been expecting, which is that spending on logic will be driven higher by the move to 7 nanometer nodes. ASML is helping this progression with its latest-generation extreme ultraviolet (EUV) lithography system, which lays out the roadmap to shrink to 5 nanometers and, ultimately, to 3! In addition to strong demand for EUV tools, ASML is enjoying higher services revenue. It’s a cyclical industry, but the bottom line is that analysts see 2019 as the trough, with revenue and EPS down -2% (to $12.7 billion) and -4% (to $6.85), respectively. Things pick up in 2020 when revenue is seen up 13% and EPS jumps 34%, to $9.16, both of which are likely conservative if the sector’s trends truly turn up.
Technical Analysis
ASML broke out in early 2017 and raced to new all-time highs near 220 in mid-2018. But that began a year-long consolidation, with shares dipping to 143 at the December market bottom, rallying back to 211 in April, and then etching a tighter, more controlled base in May and June. Last week’s quarterly report resulted in a powerful breakout—we’re fine buying here, though use a relatively loose stop near 200.
ASML Weekly Chart
ASML Daily Chart
CrowdStrike (CRWD)
Why the Strength
Cybersecurity has been a great group so far this year, but it hasn’t been across the board—legacy players are having their lunch eaten by new-age outfits who have offerings built from the ground up to better address today’s business environment (mobile workforce, rapid and widespread cloud adoption). Recent IPO CrowdStrike fits squarely in that new-age category, with its Security Cloud (company’s words) representing a huge step forward in endpoint security (securing all the devices connecting to an organization’s network and system) and, more recently, other areas like IT operations and vulnerability management. One big advantage is that all 3,000-plus clients use a shared cloud infrastructure managed by CrowdStrike, which drastically cuts deployment time and, as the firm’s name suggests, leverages crowdsourced data—as more high-quality data is fed into the platform, it trains the artificial intelligence to better prevent and combat future threats. Legacy players like Symantec and Trend Micro still have a lot of market share, but that’s changing in a hurry: CrowdStrike is growing revenue and annualized recurring revenue at triple-digit rates, has quickly gotten a ton of big customers (40% of the Fortune 100 and many government agencies) and its same-customer revenue growth rate is well above 20%. It’s an expensive stock ($16 billion market cap!), but this company has an emerging blue chip-type of story.
Technical Analysis
There’s not much chart to analyze with CRWD, but what action there is has been impressive. First, the stock gapped up strongly on its initial offering in June. Then, after running to 80, pulled back reasonably (low of 61) and built a flag for three weeks on low volume. And then came last week’s big-volume breakout, with a nice upside follow-through action today. We’re fine buying around here, but keep it small and use a loose leash.
CRWD Weekly Chart
CRWD Daily Chart
EPAM Systems (EPAM)
Why the Strength
EPAM provides outsourced IT and lifecycle software development services, mostly to clients in North America and Europe. It’s a high-quality IT stock with diversified revenue streams, which is the overarching reason investors have been steadily bidding up shares since the beginning of 2017. Digging into some details, EPAM helps companies, including major players like Google and Amazon, in North America and Europe engage with their clients and react to a changing competitive environment. There’s a lot of change these days, and while EPAM is one of the smaller firms of its type out there, it’s arguably the most efficient. It has roughly 28,000 IT professionals, and each one generates revenue of around $75,000 a year, which is a whopping 25% above the industry average. The stock recently broke out to fresh highs following the announcement that EPAM acquired Competentum, a full-stack educational content services company. The acquisition should help EPAM grow into the media, publishing and education technology industries. That’s exciting news, but the underlying reason the stock continues to perform is that management is executing well on its growth plan. Revenue was up 27% last year and should be up 23% in 2019, when EPS should jump 19% to $5.22. And 2020 should continue the solid growth trend. Earnings are due out August 8.
Technical Analysis
After a tough retreat to 105 during the market correction late last year, EPAM punched back to new highs in February and rallied all the way to 180 in late-April. Then came a very reasonable nine-week rest with some nice tightness near the end—followed by a breakout earlier this month, offering a fresh entry point. We’re OK nibbling here if you want to take a stab at it ahead of earnings.
EPAM Weekly Chart
EPAM Daily Chart
Generac Holdings (GNRC)
Why the Strength
Generac is one of the only pure plays on power generation equipment, selling to everyone from individuals to telecom and data center, healthcare, energy and construction clients. All told, business is split pretty evenly between residential buyers (standby generators, power washers, field mowers, log splitters, leaf vacuums, etc.) and commercial and industrial clients (larger stationary generators for backup; light towers, heaters and pumps), and it sells around the world through a distribution network that consists of thousands of retailers, wholesalers, dealers and e-commerce outfits. It’s even moving into green energy solutions, including the purchase of an energy storage outfit this year. The products aren’t revolutionary, of course, but as individuals and businesses demand reliable power during vicious storms, weather and other events, these markets are growing nicely and have solid potential—just 4.5% of single-family homes have backup power, and Generac is a supplier for every tier 1 telecom firm, and is the #1 player in backup power for telecom in Mexico. Throw in a bunch of key acquisitions and growth has been steady for many years, with Q1 earnings of 91 cents per share topping expectations by 13 cents. Throw in a reasonable valuation (15 times earnings) and there’s no reason the stock can’t continue to crank ahead. The next update will come next Thursday (August 1) when Q2 results are released.
Technical Analysis
Like many recently strong stocks, GNRC has been dead money for a while, with the stock making no progress from November 2017 (at 54) through May of this year. But the past couple of months have been very impressive—GNRC boomed from 55 to 71 in just four weeks on very heavy volume, and it’s moved sideways over the past two weeks, catching its breath as the 25-day line has caught up. We’re fine nabbing some here or on dips if you’re OK playing it ahead of earnings.
GNRC Weekly Chart
GNRC Daily Chart
Lululemon Athletica (LULU)
Why the Strength
Retail stocks have been a mixed bag, and Lululemon itself isn’t grabbing the headlines. But the stock continues to work its way higher both short- and longer-term as business outperforms expectations. The big idea with the company now is that it’s dramatically expanded its potential, having transitioned from being “just” a pioneer of the athleisure movement back in the early 2010s to a well-rounded apparel retailer that sells outerwear, office and travel wear for ladies, men’s wear and even some self-care products. In other words, instead of a niche provider for a certain type of clothing, Lululemon has emerged as a top higher-end brand for all sorts of products, and it believes it has years of growth ahead as some of its newer ventures boom (it has a goal to double digital sales, double men’s sales and quadruple international revenue over time). So far, management is making great progress—in the quarter ending in April (reported in early June), e-commerce revenue surged 35%, men’s grew 33% and international was up 39% from a year ago. Overall, currency-neutral revenues were up 20% and earnings surged 35%, with same-store sales (excluding digital) rising a very solid 8%, leading analysts to boost estimates. The valuation isn’t cheap (41 times this year’s estimates), but that’s not unusual given Lululemon’s long runway of rapid and reliable growth.
Technical Analysis
LULU broke out of a five-year base in in April 2018 and basically doubled by September before getting yanked down by the market. That led to six-month consolidation, with earnings in late March producing a breakout. Progress since then has admittedly been slow and choppy, but there hasn’t been much selling volume and the reaction to earnings in June was great. We’re OK starting a position here or on dips, with a relatively tight stop in the low 170s.
LULU Weekly Chart
LULU Daily Chart
Match (MTCH)
Why the Strength
It didn’t take long after mobile devices and applications became mainstream for dating websites and apps to pop up. Match Group has emerged as one of the best at developing properties and has enjoyed immense success with Tinder, in particular. Management says that roughly 60% of all dates, relationships and marriages that originated from online dating sites came from a Match Group property! That’s not hard to believe given that Match’s subscriber base is approaching nine million, with roughly five million of those on Tinder. The rest are spread across its other properties, which include Match, PlentyOfFish, OkCupid, OurTime, Meetic and Pairs. The stock can be volatile at times when investors loose faith, like late last year when shares got clipped during the market’s implosion. But IAC Interactive (IAC), which owns the majority of the company, has been steering Match in the right direction for long-term growth and that’s why investors are bidding up shares right now. Second quarter earnings will come out on August 7 so mark that on your calendar; analysts are looking for revenue to rise 16% in the quarter, to $489 million, while EPS is seen staying about flat at $0.40 (though the firm typically crushes estimates). More importantly, Match should crank out 15% to 20% sales and cash flow growth for the next couple of years, with potential upside based on how the company executes.
Technical Analysis
MTCH took investors for wild ride late last year when shares slid as much 45%. But they perked back up quickly when management paid a special dividend, and the stock rebounded back to its previous high by February. Since then, the stock has etched two tight consolidations—one February-April, and another May, June and early July—with the stock staging a fresh breakout last week. You can grab shares here, but as usual, keep it on the small side ahead of earnings.
MTCH Weekly Chart
MTCH Daily Chart
Proofpoint (PFPT)
Why the Strength
Proofpoint is a $6.9 billion market cap company offering subscription-based security solutions spanning threat protection, information protection and brand protection. The stock is doing well because of success in its core market of mid- to large-size organizations, new product development, acquisitions (it announced it would buy Meta Networks for $120 million in May) and high renewal rates. That’s against a backdrop of strong security demand due to all the changes out there in a cloud-first computing world. One strength for the company has been for social media, for which Proofpoint released a new product just a little while back. The solution fits in Proofpoint’s portfolio of emerging solutions, which contributed 30% of all new and add-on business in the first quarter. This is a bullish sign as it shows management’s ability to target a new market and develop producst that customers will pay for. Competition has been a concern, but those fears are subsiding and a few bullish analyst calls ahead of the upcoming Q2 earnings report, scheduled for this Thursday (July 25 after the close), has the stock trading just a few points off all-time highs. Look for at least 23% revenue growth in the quarter, to $211 million, and 38% EPS growth, to $0.36.
Technical Analysis
PFPT has a great long-term set-up, and if earnings are well received, it could begin a sustained advance. The stock formed a deep cup base (130 to 78 back to 130, from last May to this April), and has since gone on to etch a more reasonable 11-week zone. You can simply wait to see if a breakout above 130 occurs, or if you’re more aggressive, you can nibble here and look to add if the stock takes off after the report.
PFPT Weekly Chart
PFPT Daily Chart
Wheaton Precious Metals (WPM)
Why the Strength
It might not be exciting fundamentally, but gold and precious metals stocks remain one of the top groups in the market; we’ve hit on a few so far in Top Ten that are acting well, and Wheaton Precious Metals looks like another leader. Wheaton is one of the largest streaming companies in the sector, where it gives a mine some funding early on in exchange for the right to buy, at a low price, a certain percentage of a mine’s gold and/or silver output. (Its cash costs per ounce of gold should average $426 in the years ahead, with silver at $5.15 per ounce.) All told, Wheaton has streaming rights with 19 mines that are in operation today and nine more that are in development. With precious metals prices in the dumps and with some silver streaming agreements expiring, recent sales and earnings trends have been tough, but the future looks bright—output should total about 690,000 gold equivalent ounces this year, but the next five years should see an average of 750,000 annually as some mines come online, and that figure doesn’t even include a couple of big mines that should ramp up in 2024 or beyond. Of course, the big story here is the big upticks in gold (up $150 per ounce since mid May) and silver (up $1.50 or so) prices, which will fall right to Wheaton’s bottom line. Analysts see earnings up 10% this year and 28% next, but our guess is that both of those will prove conservative. Earnings are due out August 8.
Technical Analysis
Like most of its peers, WPM performed poorly from 2016 (up at 31) to late 2018 (down to 15) before rallying nicely to start the year. After peaking at 25 in late March, the stock went on to form a crisp three-month base, but the breakout came last week and it looks powerful—WPM has soared north of 27 on many days of good volume. If you want in, you can start a position here or preferably on dips.
WPM Weekly Chart
WPM 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.
