All Eyes on Earnings
Current Market Outlook
The major indexes didn’t do much last week, as big investors seemed content to wait for the deluge of earnings report in the days ahead to hit the wires. We continue to think the majority of the evidence is positive (trends are up, most leading stocks are in good shape), which is why we’re still bullish; the odds continue to favor higher prices down the road. But, clearly, it’s not 1999 out there—relatively few stocks are hitting new highs and we’ve seen a lack of upside follow-through on the names that did reach virgin turf. Thus, be sure to pick your spots and to have a plan as earnings season ramps up—our guess is that the market’s reaction to the reports of leading stocks will determine whether a new leg up is underway or whether the market has more consolidating to do.
This week’s list is again heavy on growth stocks, though a couple of turnarounds make the list, too. Our Top Pick is one of the first earnings winners of the season—V.F. Corporation (VFC) is a steady-eddy type of company that just lifted from a six-month consolidation after topping estimates.
| Stock Name | Price | ||
|---|---|---|---|
| Green Dot (GDOT) | 85.11 | ||
| Keurig Dr Pepper (KDP) | 25.35 | ||
| Madison Square Garden (MSG) | 298.38 | ||
| Sarepta Therapeutics (SRPT) | 120.93 | ||
| SiteOne Landscape Supply (SITE) | 98.49 | ||
| Square, Inc. (SQ) | 91.04 | ||
| Trex Company (TREX) | 117.56 | ||
| TripAdvisor (TRIP) | 55.14 | ||
| VF Corp. (VFC) | 92.46 | ||
| Zogenix (ZGNX) | 46.50 |
Green Dot (GDOT)
Why the Strength
Green Dot is technically a bank holding company, but it’s really more of a payments company than anything else. In fact, the firm believes it has the most widely distributed banking and financial services franchise in the U.S., though it often works behind the scenes. Green Dot has both a product and a platform business. On the product side, it does offer the usual banking and checking accounts and ATM access, but it’s better known for its branded prepaid debit cards that come with various perks (ASAP direct deposit of paychecks and government benefits, for instance); its products are sold at more than 100,000 locations around the world! The platform business is even more interesting, as it allows partners to develop their own financial offerings, with Green Dot running the show behind the scenes (technology, compliance, marketing, risk assessment and more)—Apple, Uber, Walmart and Intuit are four big customers that use Green Dot to run various card programs. Whether it’s transaction fees, monthly account fees, interchange fees or interest income on account balances, Green Dot gets paid every which way, and that’s produced an enviable record of growth, with sales and earnings ratcheting higher (the bottom line is partly being boosted by tax cuts this year), with steady growth expected in the quarters ahead. Earnings are likely on in early- to mid-August.
Technical Analysis
GDOT initially got going in early 2017, so it’s not in the first inning of its run, but the stock continues to be under accumulation. Shares built a tidy-looking base from November through April, then broke out on earnings in early May. GDOT was up and down after that, but following a test of its 50-day line in late June, the stock has pushed to new highs on decent volume. If you’re game, you can buy some here or on dips.
GDOT Weekly Chart
GDOT Daily Chart
Keurig Dr Pepper (KDP)
Why the Strength
Here’s an interesting special situation. Just a couple of weeks ago, on July 9, Keurig completed its merger with Dr. Pepper Snapple Group, creating the third-largest beverage firm in North America with combined annual revenues of around $11 billion and such well known brands as 7Up, Canada Dry, IBC Root Beer, Mott’s, Mr. & Mrs. T’s Bloody Mary Mix, Schweppes, Sunkist and Yoohoo, to go along with the firm’s namesake coffee and soda brands. Obviously, there’s nothing revolutionary about soft drinks and coffee, but after a few years in the wilderness, Keurig is shaping up its operations (brewer gross margins are moving toward breakeven), has plenty of expansion potential still left (20% of U.S. households in the U.S. have a single-serve brewer vs. more than 65% in parts of Europe), and thinks it can achieve $600 million of total synergies, all of which should propel plenty of bottom-line growth. At the company’s Investor Day in March, the firm said it expects sales growth of 2% to 3% annually through 2021, but EBITDA should rise 11% to 12% annually and earnings should total $1.05 or so in 2018 and grow 15% to 17% per year from there. Throw in plenty of deleveraging and a solid early dividend (yield of around 2.4%) with potential increases, and we think this “new” stock could become an institutional favorite. We’re intrigued.
Technical Analysis
KDP’s chart is basically meaningless up until two weeks ago, but that action is very encouraging—the stock spiked on its first three days, rallying from 20 to 25, and has since moved straight sideways on a notable dry-up in volume (usually a sign no selling is coming to market). Of course, it’s early, so we’ll see how it goes, but we’re OK starting small and building a position if the stock works higher.
KDP Weekly Chart
KDP Daily Chart
Madison Square Garden (MSG)
www.themadisonsquaregardencompany.com
Why the Strength
On the sports side, the Madison Square Garden Company owns the New York Knicks NBA basketball team, the New York Rangers NHL hockey team and the New York Liberty WNBA women’s basketball team, among others, and stages other sporting events. On the entertainment side, the company owns a number of entertainment venues, including The Garden, the Radio City Music Hall, The Forum in L.A., the Wang Theater in Boston and the Chicago Theater. Despite the mediocrity of the Rangers and Knicks, the company enjoyed 18% revenue growth in 2017 and 19% in Q1, with earnings, which were negative in 2017 by $3.05 per share, estimated to jump to $5.95 per share in fiscal 2018 (which ended in June). Management announced on June 27 that they are exploring how to split the sports business away from the entertainment business, a move that has created some excitement as investors see the entertainment business as an undervalued opportunity. The company hasn’t set a date for its fiscal Q4 and annual earnings release, but it’s likely to come in early August. Madison Square Garden has caught investors’ attention with its spinoff announcement, so the upcoming earnings release will get a lot of scrutiny.
Technical Analysis
MSG has been through two long flat patches since its IPO in September 2015, one with resistance at 185 from October 2015 to February 2017 and another from October 2015 to February 2018 under resistance at 205. But since waking up last February, the stock has made good progress, running above 280 before the spin-off announcement blasted it above 300 on superb volume. With earnings likely out within a couple of weeks, you may want to tread carefully. If you like the story, you can nibble on any pullback below 319 with a loose stop around 285.
MSG Weekly Chart
MSG Daily Chart
Sarepta Therapeutics (SRPT)
Why the Strength
Sarepta Therapeutics is a biotech company that develops treatments for Duchenne muscular dystrophy (DMD), a very rare (one in 3,500 to 5,000 males) and fatal neuromuscular disease caused by a gene mutation. DMD is typically diagnosed around age four and often means life in a wheelchair around age 12; the expected life span for patients is just 20 to 25 years. Fortunately, these numbers should begin to change for the better given that recent data suggests Sarepta could eventually have a curative treatment for some boys. First quarter sales (reported in May) for its first approved DMD treatment, Exondys 51, hit $65 million and should grow by nearly 100% in 2018. The international launch of this drug is an upcoming catalyst, as is market expansion with microdystrophin DMD genetherapy, which could hit the market as early as 2020. Initial DMD genetherapy data was so much better than expected that it drove shares of Sarepta up over 50% in June! These treatments could eventually help around 60% of boys with DMD who are under 15 and 35% over 15. Another positive is the company’s expansion into Limb-Girdle Muscular Dystrophy (LGMD) through a partnership with Myonexus. LGMD has a similar market size as DMD, but these LGMD drug candidates cover around 70% of that market. The bottom line is that Sarepta has both rapid current growth and huge potential as more treatments hit the market.
Technical Analysis
SRPT chopped around for the first half of 2017 then broke out in September after Q2 earnings were reported. Since August the pattern has been one of mostly higher highs and higher lows with the stock reliably bouncing off its 50-day moving average. In June, shares had a wild rally after the initial read on DMD genetherapy data briefly carried the stock to 160. Things have cooled down since then and for the last four weeks SRPT has been consolidating between 130 and 140. Nibbling here around here should work, with the idea of buying more if the stock heads higher.
SRPT Weekly Chart
SRPT Daily Chart
SiteOne Landscape Supply (SITE)
Why the Strength
SiteOne Landscape has a great, easy-to-understand story. The company is the largest (four times the size of its nearest competitor) and only national distributor of landscape supplies, which is an $18 billion market, offering around 120,000 individual products via more than 500 branches in 45 states and six Canadian provinces. The industry itself is growing slowly and not that exciting, but the big idea here is the roll-up potential of the industry, which is extremely fragmented (SiteOne has just 10% of the market), and the company’s unmatched size and scale gives it the upper hand—the firm acquired six outfits ($150 million in annualized sales) in 2016, eight last year ($130 million) and, so far this year, has already bought out and other eight suppliers (well over $100 million) that have broadened its offerings, increased its branch count and boosted its distribution capabilities. And there’s a lot more where that came from, as SiteOne offers all its product lines in just 20% of its target markets. The business is obviously seasonal, but on a yearly basis, earnings and EBITDA (a measure of cash flow) have been increasing steadily—for 2018, management’s most recent forecast called for 18%-plus EBITDA growth, which is likely conservative as more buyouts get rolled into the company. Earnings are due out on Wednesday, August 1.
Technical Analysis
SITE initially broke out in March 2017 from a good-sized post-IPO base, and ran from around 41 then to 75 by early December. Then came a choppy consolidation that included a shakeout to the 40-week line in April. The breakout came in early June, and while SITE got yanked right back down during the late-June market dip, it held its 50-day line and ramped back up. We’re OK with a small buy on dips, or just seeing what earnings brings.
SITE Weekly Chart
SITE Daily Chart
Square, Inc. (SQ)
Why the Strength
San Francisco-based Square, which got its start in the payments business with a cellphone dongle that allowed users to accept payments by swiping a credit card, has grown into a big player in the global payments game. The company’s software can turn an iPad into a cash register and its payments ecosystem lets commercial customers do their banking and food ordering within the system. The company, which was founded in 2009 and turned profitable in 2016, gets most of its revenue (87% in 2017) from transaction fees, with subscription fees making up most of the rest of the total. Square got a little boost last year as a Bitcoin play, as its Cash app allowed peer-to-peer transfers via cryptocurrency transactions. But even with Bitcoin cooling off, Square continues to roll. Square’s stock got a bump from both Morgan Stanley and Credit Suisse analysts’ upgrades last week, but has been in a strong uptrend since six months after its November 2015 IPO. With a newer thriving line of loans to sellers and user analytics, Square still has enormous growth potential for growth among small and medium-sized businesses. The company’s Q2 earnings report will be out on August 1 after the market closes, and estimates are for $368 million in revenue and earnings of 12 cents per share. This is a story with big potential.
Technical Analysis
SQ came public at 9 in November 2015, and finished its post-IPO droop at 9 in June 2016 despite trading as high as 16 in between. Since that low, the stock has hardly taken a month off, cruising to 14 at the end of 2016 and 35 at the end of 2017. The stock has had three sizable corrections this year, but is still trading near its all-time high above 70. Any normal weakness is buyable, but watch the reaction to earnings closely on August 1.
SQ Weekly Chart
SQ Daily Chart
Trex Company (TREX)
Why the Strength
Despite worries over a bump up in mortgage rates this year, rising materials prices (partly due to tariffs) and a big dip in housing starts last month, we’re seeing a few building suppliers perk up in recent weeks, and Trex is one of the strongest. The company has one of the best known brands in the building industry, making up 45% of all composite wood sales as of a couple of years ago. And the industry itself is both large (exterior property improvements make up 34% of the total) and growing (composites make up just 17% of decking sales, but that figure has been steadily inching higher through the years) thanks to its better lifetime economics (it’s 20% to 30% more expensive than wood, but less/no maintenance needed for many years). Management has done a great job expanding its distribution, which has resulted in solid growth—while quarter-to-quarter numbers can be a bit lumpy, Trex’s sales and earnings have steadily lifted in recent years, and Q1’s 18% sales gain was bolstered by the firm’s move into commercial products. Analysts see earnings surging 35% this year (partly due to a lower tax rate), with sales up 15%; growth is expected to slow next year, but that will all come down to the health of the housing and remodeling market. The next big event will be earnings, which are due next Monday, July 30.
Technical Analysis
TREX has been in a longer-term uptrend since early 2016, but that’s including a bunch of retreats and consolidations along the way. The most recent pause started last December after the stock had lifted to 59—by late April, shares were hanging around 52 and testing their 200-day moving average. But a positive reaction to earnings in May kicked off a choppy uptrend that continues to this day. With earnings due out soon, you can consider nibbling on dips, or just wait to see how TREX reacts to the report.
TREX Weekly Chart
TREX Daily Chart
TripAdvisor (TRIP)
Why the Strength
TripAdvisor has figured out how to leverage traveler-generated reviews of hotels, airlines, restaurants and attractions into the largest travel site in the world. When the company made its last appearance in Cabot Top Ten Trader in October 2015, its site had 250 million reviews and 375 million monthly average users (MAU). These days, the site features 600 million reviews and gets 455 million MAU. In addition to the reviews, which carry a lot of weight with users, the company’s site includes aggregated hotel booking sites, and visitors can book reservations right there, so click-based and booking transaction fees contribute about half of revenue. Because visitors to TripAdvisor are motivated travelers, clicks and bookings for attractions make up almost another quarter of sales, with ads and subscriptions making up most of the rest. TripAdvisor skidded lower through the end of 2017 as earnings growth faltered, but a buyout rumor in early February and two positive quarterly reports—February 15 and May 9, 2018—went a long way toward turning investors’ perceptions around. TripAdvisor will report its latest quarter on August 2 before the market opens, with analysts looking for revenue of $435 million and 39 cents per share in earnings. TripAdvisor was just upgraded by a Barclay’s analyst, citing increased mobile access and global growth as fuel for top-line revenue growth, but the upcoming earnings report will still likely set the tone for the immediate future.
Technical Analysis
TRIP has been through a long, long trip to the woodshed, falling from 111 in June 2014 to 30 in November 2017. But the stock’s rebound has been energetic and TRIP is now trading right around 60, with good volume spikes accompanying two gaps up this year. The stock was turned back by resistance at 60 in June, but topped that number last week before slipping below again. TRIP looks buyable here, but keep a close eye on the reaction to earnings a week from Thursday and a protective stop below 54.
TRIP Weekly Chart
TRIP Daily Chart
VF Corp. (VFC)
Why the Strength
V.F. Corporation is a company whose name tells you absolutely nothing about it, even though there’s a rich and deep history. The company is a worldwide apparel and footwear manufacturer that dates back to 1899. Today, V.F. Corp. owns over 30 brands, including The North Face, Vans, Timberland, Lee, Wrangler, Icebreaker, Reef and JanSport. There have been a few dips here and there, but over the long-term the stock has been as dependable as the outdoor and action apparel V.F. Corp. makes. And it made the Top Ten cut this week because shares just hit a fresh all-time high after a big earnings beat last Friday. Almost all the news was good; revenue was up 23%, international was up 27%, and direct-to-consumer (think e-commerce) was up 22%, and now accounts for a third of total revenue. Those top-line results drove a big EPS beat of $0.10 (to $0.43). Analysts particularly liked the international and e-commerce growth trajectories since they show V.F. is becoming less reliant on foot traffic in malls and elsewhere in the U.S., where the trends are less-than encouraging. With management guiding for full-year revenue and EPS growth of 11% and 12% to 14%, respectively, plus a dividend yield of over 2.0% and a reasonable valuation (forward PE of 23), there’s a good chance shares of VFC will continue to attract buyers.
Technical Analysis
VFC had a rough ride in 2015 and 2016, falling from around 72 to a low of 46 in early 2017 as apparel and retail stocks struggled. But strategic initiatives panned out and with revenue growth returning in mid-2017, VFC walked higher and ended the year at an all-time high. Much of this year has seen a normal base-building effort, with shares making no progress through June, but that changed during the past two weeks, with the big move before and after earnings. Try to buy on dips.
VFC Weekly Chart
VFC Daily Chart
Zogenix (ZGNX)
Why the Strength
Zogenix is a biopharmaceutical stock that we first featured last October after the company’s drug candidate (dubbed ZX008) for Dravet Syndrome did well in its first Phase 3 clinical trial. Dravet Syndrome is a severe, intractable form of epilepsy that begins in infancy and disrupts intellectual development and mobility, and dramatically increases the risk of accidents and infections. The syndrome occurs in one of every 15,700 births. The data showed ZX008 reduced the number of seizures and increased the time between seizures, with some patients experiencing zero seizures during the treatment period. That news lit shares on fire, and they’re on the move again after a second Phase 3 trial showed children and young adults averaged 63% fewer monthly convulsive seizures compared to placebo. Of course, Zoegenix is basically a one-trick pony at this point, but it’s a good pony to bet on. With ZX008 meeting its primary and key secondary endpoints in two Phase 3 trials management is now working with the FDA and European regulators to seek marketing approval. Orphan drug status both here and overseas means the roadmap is clearly laid out (no competition for a while), provided there are no unforeseen bumps in the road. It’s a big story and money is flowing in. Look for an upcoming announcement on time to market and funding requirements to drive the next wave of trading.
Technical Analysis
ZGNX had been up and down since going public in 2010, but that all changed last October when shares blasted from around 10 to over 40 in a just a few sessions. The following nine months were a lot less exciting as ZGNX consolidated in the 32 to 45 range. Then the data from the second Phase 3 trial hit on July 12, and shares blasted off again, this time trading above 60 before a modest pullback. We can’t rule out another extended consolidation phase, but with approval looking more likely at this point, buyers could easily remain active. Start small and on dips.
ZGNX Weekly Chart
ZGNX 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.
