Growth Takes the Lead
Current Market Outlook
The market’s action last week—three days up and two days sideways in the S&P 500 and a run to new highs by the Nasdaq—looks excellent, and we think it’s time to put a little more of your sidelined cash to work. Yes, it’s a light-volume summer rally and earnings season will provide plenty of landmines to go along with the blastoffs, so we’re not advising going all in. But given last week’s early progress and stubborn refusal to give any of its advances back, we will bump our Market Monitor up by one step, putting it in the green. As always, we will listen to what the market tells us from here.
This week’s list has a couple of newcomers, including one of three Chinese stocks that have been making great strides. A few stocks with long Top Ten histories also made the grade. Our Top Pick is a Chinese retailer, JD.com (JD), that’s growing revenue at a blazing rate.
| Stock Name | Price | ||
|---|---|---|---|
| ASML Holding (ASML) | 350.01 | ||
| Huazhu Group (HTHT) | 30.89 | ||
| JD.com (JD) | 39.58 | ||
| JinkoSolar Holding (JKS) | 0.00 | ||
| Littelfuse (LFUS) | 0.00 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| NRG Energy (NRG) | 0.00 | ||
| TD Ameritrade (AMTD) | 0.00 | ||
| Vertex Pharmaceuticals (VRTX) | 230.36 | ||
| Workday (WDAY) | 194.88 |
ASML Holding (ASML)
Why the Strength
Based in the Netherlands, ASML Holding isn’t well known, but is a huge player in the semiconductor equipment space ($8.5 billion in revenue, 14,000-plus employees) with a focus on lithography systems, which are used to make memory and logic chips. That’s a great place to be right now, as demand for those kinds of chips (especially DRAM) is accelerating, leading to strong sales and earnings growth and a slew of new orders, which is adding to its backlog. In the second quarter, ASML’s top and bottom lines topped expectations and bookings hit nearly 2.4 billion euro, while backlog reached 5.35 billion euro (up 19% from the prior quarter). Management sees sales up 25% this year (driven by sales to memory customers, which are expected to rise 50%), and expects the positive trends they see so far in 2017 to carry into next year. Of course, chip equipment demand can dry up in a hurry if the chip sector slows; it’s a bit of a down-the-food-chain industry in that sense. That said, there’s no sign of waning demand today—in fact, it’s clearly the opposite, with demand for ASML’s lithography systems (which are key to making thinner and smaller chips) picking up steam.
Technical Analysis
ASML broke out from a 19-month base in January, and while it wasn’t the strongest chip stock out there, it did make its way to 134 in late-March. That effectively began a three-month consolidation, with the stock breaking its 50-day line in June (and knocking us out!) a couple of times. However, July has been decisively up—ASML reached new highs in the middle of the month and gapped even higher on big volume following earnings. We think dips are buyable.
ASML Weekly Chart
ASML Daily Chart
Huazhu Group (HTHT)
Why the Strength
The Chinese lodging market has always been fragmented, and China Lodging Group, making its debut in today’s Cabot Top Ten Trader, is moving to consolidate it. While 70% of the U.S. lodging market consists of branded establishments, in China just 20% is branded. China Lodging has grown its share of the Chinese market from less than a third of one percent in 2009 to 3.2% in Q1. The company’s hotel count grew from 2,763 in 2015 to 3,269 in 2016. China Lodging’s strategy is aimed at acquiring existing hotels, often using a management style it calls “manachising,” which involves managing and franchising hotels, and raising them to a standard of quality. This is called an “asset light” route to growth, since it doesn’t involve huge capital outlays. The company is also working to expand its footprint in middle- and top-tier accommodations, a segment that has grown from 27% of revenue in Q1 2016 to 31% in Q1 2017. China Lodging grew earnings by 40% in Q4 2016 and by 74% in Q1 2017, and when Q2 results are released on August 16, analysts are looking for revenue of $280 million and earnings of six cents per share. Earnings estimates call for 34% growth this year and 35% in 2018. This is a big Chinese story.
Technical Analysis
HTHT finished a modest correction at 15 in March 2015, and has seen a long series of new highs and progressively smaller corrections right up to the stock’s present 94 price. The stock is a little more volatile than the average, but the main trend has been steadily up. The recent run from 77 on July 7, coming after an eight-week consolidation, was sparked by news of high occupancy rates. HTHT looks buyable on any pullback of a few points, with a stop around 85.
HTHT Weekly Chart
HTHT Daily Chart
JD.com (JD)
Why the Strength
Where do Chinese online shoppers go when they want authentic merchandise and fast delivery? The answer is usually JD.com, the biggest direct online seller of goods in China. JD.com makes a huge majority of its sales in electronics and home appliances, but the company is fast becoming a one-stop e-commerce platform for apparel, fresh food, home furnishings, fast-moving consumer goods and whatever else its more than 236 million active customers are looking for. The company’s standard same- or next-day delivery is unmatched by any other online retailer in the world. The company is also a place where Chinese shoppers can buy goods from around the world, get credit, join crowdfunding programs and get supply chain financing. JD.com grew revenue by 35% in 2016 and by 33% in Q1. The company’s relentless buildout of its delivery infrastructure has kept a lid on earnings in the past, but earnings growth has been in triple digits over the last four quarters and analysts expect EPS growth of 255% in 2017 and 108% in 2018. The company’s research into a heavy-lift drone for delivery to remote locations across China is a good indication of management’s commitment to growth through aggressive customer service. This is a strong story.
Technical Analysis
After years of up and down trading, JD changed character at the beginning of 2017, running from 26 in January to 40 in May. The stock hit a couple of air pockets in June, dropping from new highs to its 50-day moving average, but the snap-back has been rapid, and JD is now trading near its June resistance at 43. Earnings are likely out around August 10, but you can take a position in JD on any weakness with a loose stop around 39.
JD Weekly Chart
JD Daily Chart
JinkoSolar Holding (JKS)
Why the Strength
JinkoSolar makes silicon wafers, solar cells and solar modules, employing 15,000 workers in eight productions facilities in China (5), Malaysia, Portugal and South Africa, and 16 overseas subsidiaries and 16 global sales offices. With an integrated annual capacity of 5 gigawatts (GW) for solar ingots and wafers, 4GW for solar cells and 6.5GW for solar modules, the company has scale; it’s the 3rd largest crystalline module manufacturer in the world and has over 12GW of products deployed. Also, the fact that it survived the Great Recession, which put a damper on solar incentives from governments, is a good sign. Companies that appear in Cabot Top Ten Trader are often riding the wave of good quarterly earnings, but JinkoSolar’s Q1 report in June was a little disappointing. What’s driving investors’ interest now is that China’s efforts to clean up its air pollution have resulted in the installation of 24GW of new solar electricity-generating capacity in the first half of 2017. China, the largest governmental buyer of solar capacity in the world, is pursuing aggressive pollution reduction targets, and JinkoSolar is a logical beneficiary. The company’s Q2 results aren’t expected until late August. With a trailing P/E of just 6, there’s good potential here.
Technical Analysis
JKS ran from 2 in August 2012 to 38 in January 2014, then entered a protracted correction to 13 in November 2016. The stock then traded up slowly until blipping up to 22 in May. But the relevant rally kicked off on July 7, when JKS was trading at 20, and progressively accelerated to top 28 on July 19 on volume on that was 288% above average. JKS has traded sideways since last Wednesday’s peak, showing that investors are sticking with it. If you like the story, you can look to buy on a pullback of a point, with a stop at 25.
JKS Weekly Chart
JKS Daily Chart
Littelfuse (LFUS)
Why the Strength
Littelfuse is a new name to Top Ten. The small-cap electrical components maker made the cut this week because investors like how its products are tapping into mega trends, including safety, connectivity and energy efficiency. The company, which makes circuit protection systems and electrical fuses for the industrial, automotive and electrical markets (picture things like automotive fuses and sensors, HVAC relays, circuit breakers, etc.), has been growing at a brisk 20% to 30% quarterly rate. And it just made another strategic acquisition by buying U.S. Sensor on July 10. That news only mildly boosted shares, given that management said it won’t have a material impact on this year’s results. But last Tuesday, the company increased Q2 revenue guidance by 2.5% (implying 15% growth), and EPS guidance by 10.5% (implying 46% growth). Drivers of the better-than-expected results are strong market demand and a lower effective tax rate. That news inspired a slew of analyst price target increases, which helped propel shares 10 points higher. We see the strength continuing. If you like under-the-radar companies with talented management teams and a history of executing well, Littelfuse should be right up your alley. A small dividend of 0.7% is a cherry on top.
Technical Analysis
LFUS blasted off from 125 last October and ran as high as 155 before buying pressure eased in early December. The stock then etched three bases—one between 145 and 156 (through most of January), another from 150 to 165 (through April) and lastly from 158 through 172 before last week. Now LFUS is at it again, gapping to new highs on the back of its strong guidance, launching what could prove to be a sustained run. It looks buyable around here with a stop near 170.
LFUS Weekly Chart
LFUS Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
For most of the past few months, Netflix was a relative laggard among big-cap tech stocks, but after Q2 results blew away estimates, that could be changing. The story, of course, hasn’t changed—Netflix is the king of streaming content, morphing into an on-demand entertainment source for millions of people. At the end of June, the company had 99 million paid subscribers (up 19% from a year ago), with international subscribers making up about half the total (and rising nearly 44% from the year before). The main driver here is the company’s ever-growing collection of original content; 27 of its programs were nominated for 91 Emmys recently (double last year’s total), including five of the 14 total Best Series nominees. That content, as well as its international expansion, comes with a hefty price tag—despite consistent revenue growth in the mid-30% range, free cash flow has been heavily negative as the company invests for the future. But that could be changing, as earnings are perking up, analysts are looking for big earnings growth in the future, and, importantly, management even said it expects its international division to turn cash flow positive in Q3. The valuation is high, but that hasn’t stopped the stock in the past, and big investors are probably more focused on the momentum in subscriber totals and the expected surge in earnings.
Technical Analysis
NFLX has been in a general uptrend since gapping higher in October, but it really wasn’t a star performer—in fact, from mid-January through early July, the stock made no progress, even in a dynamic year for growth stocks. But now it looks like NFLX is getting its act together, with shares gapping higher on more than six times average volume last Tuesday and stretching a bit higher since. You could start small here or on dips, with a stop about 10% below your buy price.
NFLX Weekly Chart
NFLX Daily Chart
NRG Energy (NRG)
Why the Strength
NRG Energy is an S&P 500 company and a major integrated power provider in the U.S. (not a regulated utility), with 49 gigawatts of capacity using just about every power source available (gas, coal, wind, solar, nuclear, etc.). The company has been through a rough stretch as margins shrank due to competitive pressures, project delays, a high debt load and less cushion from price hedges have hurt cash flow. However, that’s the past—investors are now focused on the future, specifically, the company’s three-year transformation plan that should result in booming cash flow and higher stock prices. NRG is aiming to unload $2.5 to $4.0 billion of assets next year, monetize 50% to 100% of its interest in its yieldco (NRG Yield) and slice $1 billion from its recurring cost structure. With that, it will pay down a whopping $13 billion of debt from its balance sheet and have up to $6.3 billion of cash available for distribution and investment through 2020 (including up to $4 billion by year-end 2018—well over $10 per share). The stock has responded by exploding to the upside, as big investors are thinking this decisive move will finally unlock the value of NRG’s assets and underlying business. Obviously, this isn’t a true growth story, but it’s a special situation that looks to have caught the market by surprise, and management’s big projections mean the buying should continue, especially as the firm makes progress on its goals. It’s an interesting speculation.
Technical Analysis
NRG crashed from 38 in mid-2014 to 9 in late-2015 before rebounding back to 18 last June. Then the stock formed a very wide trading range (10 to 19) for an entire year, eventually finding itself sitting at 16 two weeks ago when the restructuring news came out. The blastoff since then has been very powerful, with NRG showing no inclination to retreat despite its huge move. If you’re game, you could buy a little here or on dips and use a loose stop.
NRG Weekly Chart
NRG Daily Chart
TD Ameritrade (AMTD)
Why the Strength
TD Ameritrade is another Bull Market stock that’s picking up steam as the firm’s results improve and investors anticipate better things to come as equity prices rise. Like many brokerages, the company is leveraged to both trading activity (commissions and fees for insured deposits and investment products) and higher interest rates, as it earns a chunk of money on customers’ deposits. In the second quarter, commission revenue fell a bit, though that was mainly due to the industry’s price cuts this year; average trades rose 10% in Q2 year-over-year. On the asset side of things, total client assets came in at $882 billion (up 20% from last year), including $120 billion interest rate-sensitive assets (up 6%) and $194 billion fee-based balances (up 18%). In total, revenues grew at the fastest rate since Q3 of 2014, and the only reason earnings slipped was a one-time tax benefit a year ago (pre-tax earnings per share were up 12%). Looking ahead, the Fed’s slower pace of rate hikes isn’t a plus, but greater option, equity and derivative trades should offset that; analysts see earnings up 26% in the current quarter and rising 21% in the fiscal year beginning in October. All told, TD Ameritrade should see accelerating growth going forward, with the modest dividend (1.5% annual yield) putting a bow on the story.
Technical Analysis
AMTD has seen its bottom line flatten out for the past couple of years, and the stock has followed suit—the stock hit 36 in March 2014, and was trading at the same level in mid-May. But since then, shares have changed character, advancing persistently since early June, including a pop higher last week following earnings. There’s still some overhead to chew through, so we advise aiming to buy on minor weakness.
AMTD Weekly Chart
AMTD Daily Chart
Vertex Pharmaceuticals (VRTX)
Why the Strength
Shares of this cystic fibrosis (CF) specialist have soared once again after shockingly strong efficacy and impressively clean safety data was released from Phase 1 and 2 trials. Last Tuesday, new data from the studies of three different triple combination regimes was the first to show potential to treat the underlying cause of CF in affected patients (the key is restoring 80% to 85% chloride transport, and Vertex’s treatments are up to 60% to 70%). Given that these regimes target a difficult-to-treat segment within CF, with roughly 24,000 people affected (total potential CF market is around 70,000), Vertex is sitting on a portfolio (including its current two products) that could treat 90% of CF patients. That’s huge! Many see the new CF treatments launching in 2020, though there’s an outside chance for a 2018 approval under an accelerated, best-case scenario. On the back of the trial data, many analysts increased their probabilities of eventual FDA approval to 100%, and bumped up peak sales estimates to near $2.7 billion. Approval of the four correctors in question (VX-152, VX-440, VX-445 and VX-659) won’t impact revenue for a few years, so Vertex is still relying on current CF treatments Orkambi and Kalydeco (which treat around 30,000 people) to drive cash flow. Those products are doing well; revenue should be up 30% this year and EPS should be up by 100%. Vertex has a good short- and long-term growth story.
Technical Analysis
VRTX’s character changed in March of this year, when the stock soared on giant volume above 100 on some positive trial results. Shares stair-stepped higher in the intervening months, rallying as high as 137 before tightening up near 130 last week. Then came last week’s trial data, which caused another massive rise on even larger volume than the March liftoff! Some pullback is possible, so new buyers could consider a small position here or on dips.
VRTX Weekly Chart
VRTX Daily Chart
Workday (WDAY)
Why the Strength
It’s been a little touch and go for many cloud-based software stocks over the past two months, but Workday has held up well and looks poised to break out to fresh highs. It’s been just over a month since we last covered the company, which sells enterprise solutions that cover finance, human capital management (HCM), payroll, and business analytics. In that time, not a lot has changed, and that’s mostly a good thing. Unemployment is still low, hiring trends are still good, and companies continue to flock to cloud-based HCM solutions, including Workday’s, to better manage their businesses. Recall that in the last quarter, the company landed a few big clients, including Puma and Nasdaq (it already counts Patagonia, Amazon, Toyota and Netflix as clients), and we noted that analysts are looking for continued growth in large enterprise bookings from the upcoming Q2 earnings release (due out in late August). Given Workday’s leadership position in upper mid-market and large enterprises, these big client bookings are needed to fulfill expectations of 31% revenue growth this year. Workday has a particularly large opportunity with its financial offerings because cloud-based applications are used by only about 30% of target customers. EPS growth is still huge (expecting $0.65 this year), and note that earnings reports from mid-market competitor Cornerstone OnDemand’s (CSOD) and cloud peer ServiceNow (NOW) (this Wednesday) could impact the stock a bit.
Technical Analysis
WDAY hit a 2016 high of 93 last October, then the stock fell all the way to 66 by the end of the year. The snap-back rally was fierce, however, as shares were right back near 93 in late February. After that run, buying demand cooled and WDAY consolidated in the 80 to 86 range through the end of April. Shares then broke out and raced to a fresh high of 104 in early June. Since then, it’s been up and down in the 94-to-105 range, with a tightening to the 102-to-104 range over the past week. You could nibble here and look to average up on a push above 105.
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.
