Sharp Bout of Rotation
Current Market Outlook
The overall market remains in good shape, with the major indexes and most leading stocks in uptrends. That said, today was a very bad day for growth stocks, as big investors hit the sell button almost from the get-go, leaving most of this year’s winners down sharply. Given the monstrous runs in many of these names and (in some cases) some recent stalling out action, we do take this as a yellow flag—however, to be fair, few have broken any key support and most non-growth issues look completely fine. Bottom line, if you have some good-sized profits and positions, we’re OK booking a couple of partial profits and honoring stops and loss limits going forward. On the buy side, we continue lean toward “fresher” titles, including many steadier growers that have come into favor.
This week’s list has a bunch of names that, until recently, have been marking time, but now look to have begun steady uptrends. Our Top Pick is Teradyne (TER), which leapt out of a huge base on earnings last week.
| Stock Name | Price | ||
|---|---|---|---|
| Chipotle Mexican Grill (CMG) | 773.32 | ||
| Etsy (ETSY) | 112.97 | ||
| Kirkland Lake Gold (KL) | 51.30 | ||
| Lithia Motors Inc. (LAD) | 146.30 | ||
| Meritage Homes (MTH) | 102.20 | ||
| New Oriental Education (EDU) | 113.97 | ||
| Sherwin-Williams (SHW) | 526.09 | ||
| Snap Inc. (SNAP) | 16.68 | ||
| Teradyne (TER) | 82.83 | ||
| TransUnion (TRU) | 83.09 |
Chipotle Mexican Grill (CMG)
Why the Strength
Chipotle isn’t part of one of the “hot” technology sectors, but we continue to see it as a liquid leader of this advance as the company is back on track after a couple years in the wilderness. The stock is strong again today following a great Q2 report that not only continued the overall turnaround, but pointed to good things ahead thanks to some initiatives. Sales (up 13%), earnings (up 39%) and same-store sales (up 10%) all topped estimates in Q2, while digital sales are becoming a metric to watch—Chipotle’s digital revenue roared ahead by 99% and made up 18% of overall sales as the firm’s online ordering, delivery and pick-up options (special pickup section for when you order online, which has been a hit) entice customers. (A side benefit to the digital boom: Higher average ticket prices, helping to boost the firm’s Q2 average ticket by 3%.) And with revamped marketing, more menu initiatives on the way (carne asada is coming soon, while new ovens should allow for special quesadillas and, eventually, nachos and even dessert down the road) and continued store growth (about 150 new openings this year, boosting the count by 6%), Wall Street thinks the good times will continue. Analysts have boosted their estimates following last week’s report, and now see earnings up 50% this year and nearly 30% next. The valuation isn’t cheap (59 times this year’s estimates), but big investors see a ton of earnings power here as Chipotle’s brand recovers and new initiatives take hold.
Technical Analysis
CMG had a nice off-the-bottom move in 2018 but it was the stock’s straight-up move early this year that was the big clue—shares topped resistance at 500 in January and soared to 720 in April before taking a breather. After a dip in May, the stock immediately snapped back to new highs, hung around 750 for a while and popped on earnings last week. CMG isn’t going to set the world on fire, but the path of least resistance remains up.
CMG Weekly Chart
CMG Daily Chart
Etsy (ETSY)
Why the Strength
Shares of Etsy have been moving sideways after a big breakout in February, but with a good story, solid fundamentals and an intriguing acquisition, and with earnings coming up Thursday (August 1), there’s a chance the stock could get back on the move. First, the story: Etsy sells unique, homemade and difficult to find items from a global network of entrepreneurs and artists. Management says its target market is worth over $1 trillion, which obviously implies years of growth ahead if the top brass makes the right moves. The big success is that Etsy has figured out how to link its over 41 million active buyers and 2.2 million sellers to help them complete sales. The new CEO Josh Silverman, who arrived in May 2017, is steering the ship in the right direction and has consistently beaten expectations. Revenue was up 36% to $600 million in 2018 and EPS jumped 135%, to $0.61. Analysts see sales up another 32% this year, while EPS should expand at a slower clip of 23%, mostly due to investments the firm is making in its site and tools for sellers. Two example of that are that Etsy just announced it will offer free shipping (higher costs but more attractive) and it just acquired Reverb, an online marketplace for new, used and vintage musical instruments, for $275 million. All told, the story is solid, but earnings will tell the intermediate-term tale.
Technical Analysis
ETSY wasn’t a great stock until the new CEO arrived. The first big breakout came in March of 2018, then another one in June 2018, when ETSY surged above 40. The stock was a little wild after that, but the overall trend was up and shares broke out again, reaching as high as 73 in February. Shares have consolidated since then in a reasonable range—if you’re aggressive, you could nibble ahead of earnings, or simply look to play any powerful earnings gap up that comes.
ETSY Weekly Chart
ETSY Daily Chart
Kirkland Lake Gold (KL)
Why the Strength
We’re sure the Federal Reserve’s decision this week will have an impact on gold stocks (along with the entire market), but just going with the evidence, it continues to look like the gold sector has turned up after three years of grinding lower. Kirkland Lake remains one of the leaders, as it’s actually seen sales and earnings kite higher in recent years thanks to higher production from all five of its mines, but especially its two core operations, Fosterville (in Australia) and Macassa (in Toronto). And that trend is continuing this year; in Q2, total production boomed 30% thanks to a whopping 82% ramp from Fosterville, even as costs remain in check. (Full Q2 results will be out tomorrow morning.) The only hitch here is that, following a step-function increase this year, output will likely be relatively flat over 2020 and 2021 before taking another leap as production ramps at Macassa and (to a lesser extent) Kirkland’s Holt Complex in Cananda in 2022. Even so, if precious metals prices continue to ramp, there’s no doubt this company will see its already large free cash flow (44 cents per share in Q1, up 85% from a year ago) surge, leading to dividend hikes (minor 0.4% annual yield now) and probably making next year’s earnings estimates (just 2% projected growth) very conservative. Of course, if gold prices implode, all bets are off, but the odds favor higher prices ahead.
Technical Analysis
KL had a great advance through February, built a nice, tight structure through May and, like most of its peers, came to life in early June, surging to new all-time highs. The run since then has been solid, with one modest pullback to its 25-day line earlier this month. And now we see another potential buyable pullback—KL has again dipped toward its 25-day line on light volume in recent days. Earnings are out tomorrow morning, but we’re OK picking up shares in this area or on dips into the lower 40s.
KL Weekly Chart
KL Daily Chart
Lithia Motors Inc. (LAD)
Why the Strength
We’re fascinated by the publicly traded car dealerships since we, along with most everyone else in the world, hates walking into a dealership to buy or lease a new car. But by analyzing these companies you can see where car dealerships make the most money—in financing (including extended warranties) and used cars. Beyond that, we like Lithia Motors because the stock is doing well and the fundamentals are solid. The company operates over 180 dealerships in 18 states across the country, through which it sells almost 30 brands of new and used cars and light trucks. New vehicles make up just over half of sales, used cars about a quarter, and service, wholesale cars, insurance, etc., make up the balance. Lithia has differentiated itself from the competition by excelling in those higher margin used-car sales, which also feed into its parts and service business. The bottom line is that revenue and EPS have been growing in the double digits, in part because of acquisitions, and the stock just broke out after a better-than-expected Q2 report last week. Revenue was up 4.2% to $3.2 billion, while EPS of $2.95 beat by $0.13. Analysts liked the quarter, and with a strong balance sheet see Lithia snapping up more dealerships to keep the growth trend alive.
Technical Analysis
LAD peaked near 120 last March and was cut in half by December, but the stock’s advance this year has been both smooth and powerful, with shares zooming back to 110 in April (including nine weeks up in a row). The stock crawled higher for a couple of months after that, and after a shakeout two weeks ago, LAD surged on earnings last week. If you want in, aim for dips.
LAD Weekly Chart
LAD Daily Chart
Meritage Homes (MTH)
Why the Strength
Housing has been one of the weakest links of the economy for the past year, so it’s no surprise that homebuilding stocks have been sluggish performers. But Meritage Homes—the seventh-largest public builder in the U.S.—is strong today after last week’s quarterly report showed a big uptick in future business. The company focuses on first-time, first move-up and move-down (think retiree) buyers in generally faster-growing states (Florida, Georgia, Carolinas, Arizona, Tennessee and California); Meritage sees big opportunity in the decade ahead as millennials form households (up to two million by some estimates) and as Baby Boomers trade down, with both groups looking for affordable buying options. The headline Q2 results weren’t great (sales down 1%, earnings flat, 5% increase in homes closed), but they crushed estimates (earnings of $1.31 per share topped by 28 cents) and, more important, new orders looked great in dollars (up 14% from a year ago) and homes (up 22%). Add it up, and earnings estimates have gone through the roof, rising by about 50 cents (more than 10%) both this year and next. That means Meritage has probably seen the trough in its business, yet trades at a low valuation (13 times this year’s estimates) and, the way these things go, probably has more estimate-beating results ahead. Nothing revolutionary here, but with the story turning up, big investors should remain interested.
Technical Analysis
MTH topped near 55 in late 2017, fell as low as 32 last year and rebounded back to 53 in May of this year. Then came a shallower, more proper consolidation in the 48 to 54 range during May and June. The stock actually poked out to new highs in early July, and the roof blew clean off late last week after earnings—MTH gapped up 18% on more than five times average volume, breaking free from a 19-month base. We think it’s a buyable gap.
MTH Weekly Chart
MTH Daily Chart
New Oriental Education (EDU)
Why the Strength
Education in China is taken even more seriously than in the U.S. When China had a single-child policy (initiated in 1979, ended in 2015) the aspirations of grandparents, parents, aunts, uncles, cousins and family pets were all centered on one child. That’s pressure! While that policy has been repealed in China, families still spare no expense seeking every advantage for their children—which often leads to added private education. Along with Tal Education (TAL), which we featured in April, New Oriental is one of the major players, providing K-12 language training and test prep courses to over 36 million students through 87 schools and 1,233 education centers. It’s grown revenue more than 20% in each of the past three years and is expected to grow sales by 27% over the next fiscal year (2020) and deliver EPS of $3.38, up 31%. The company just reported Q4 results of fiscal 2019 last week, and they were better than expected, which is largely why the stock popped to new highs. Shares aren’t cheap, trading with a P/E ratio of around 32 based on 2020 expected earnings. But the big picture trend is strong and management has been steering New Oriental straight along the growth path. As an added bonus, business here is relatively insulted from the endless trade battle with the U.S., giving investors more confidence in building positions.
Technical Analysis
EDU delivered huge gains from 2016 through early 2018 when the stock finally stalled out just north of 100. It got slapped around with all Chinese stocks last year, falling 50% at its nadir, but we’re very impressed with the action this year—EDU roared back to 98 in April and, after a reasonable pullback, has marched ahead and moved back toward its old highs last week (far better than most Chinese titles). We’re OK nabbing some here with a stop in the low 90s.
EDU Weekly Chart
EDU Daily Chart
Sherwin-Williams (SHW)
Why the Strength
Sherwin-Williams is the second housing-related stock in this week’s Top Ten (Meritage was the other), which is an encouraging sign for that sector. This company, of course, needs little introduction—it’s the largest global manufacturer of paints and coatings for a variety of applications, and despite a so-so housing market in the U.S. and much of the world, so much of this business is driven by repainting, do-it-yourself and non-residential painting that the firm’s been able to crank out impressive results for years (eight straight years of earnings growth). That’s not to say business conditions aren’t challenging (the firm actually sliced its sales growth target to just 3% for 2019), but despite that, Sherwin-Williams is seeing growth in the U.S. and, importantly, believes decreasing cost pressures and higher selling prices should continue to help profit margins in the quarters ahead. Plus, beyond the company’s controls, there’s optimism that the Fed’s likely easing move this week (and more possibly to come) will boost construction and remodel activity in general. All told, the Q2 report didn’t change much with the overall story, but it’s looking more likely that the company will crank out mid-teens earnings growth both this year and next.
Technical Analysis
SHW isn’t thought of as a growth stock but it does make solid longer-term moves, including its run from 310 in early 2017 to 476 in September of last year. It got hit with everything else after that, then made a slow, choppy comeback; all told, SHW built a solid launching pad over nine-plus months. The big-volume pop in early June was a clue the buyers were returning, and after tightening up, the stock exploded to new highs last week. If you want in, aim for dips.
SHW Weekly Chart
SHW Daily Chart
Snap Inc. (SNAP)
Why the Strength
Snap has always had a unique offering and that remains the case today—while Snapchat isn’t something that most subscribers probably use (except for maybe with their grandkids), it’s definitely one of the top handful of online properties, reaching more than three-quarters of 13- to 34-year olds in the U.S. (using the service an average of 30 minutes per day) who like to take and share a variety of goofy photos and videos (3.5 billion per day in total!) with family and friends. But the stock is strong today for two reasons. First, after many missteps, the firm is succeeding in customer attraction (redesigned app to encourage more sharing and premium/original content; new Android app that has boosted retention rates and usage; augmented reality offerings), with 13 million new users in Q2 (203 million total), its highest number of new additions since 2016. And second, the firm’s improved self-serve advertising platform is producing better results, helping to dramatically boosting monetization (up 37% from a year ago), which helped revenue growth accelerate (up 48%), and there should be much more upside from here (just $1.91 revenue per user in Q2; by comparison, Facebook’s is north of $10 per user). Analysts now see the top line up 44% this year and another 34% in 2020, with the bottom line approaching breakeven next year. If new management continues to execute, Snap should continue to attract buyers.
Technical Analysis
SNAP had a huge rally from its low near 5 late last year to 12.6 in April. Then came a reasonable launching pad, from which the stock lifted on the first day off the market’s June low. A pre-earnings shakeout took SNAP down to its 10-week line early last week, but the big gap up bodes well. We’re OK buying a small position here, or trying to nab shares on dips of a point or so.
SNAP Weekly Chart
SNAP Daily Chart
Teradyne (TER)
Why the Strength
Teradyne is an industrial technology company that supplies automation equipment for test applications, mostly for semiconductors, wireless products, data storage systems and other complex electronic systems. It also sells collaborative and mobile robots that help customers make smarter devices, more powerful and reliable data storage systems and life-saving medical equipment. Sales growth isn’t off the charts but a dividend, and exposure to big and important industrial markets like 5G network infrastructure testing, high power semiconductor testing and industrial automation, makes it an attractive growth and value play. We featured Teradyne back in May when we said the stock was doing well because big picture operational initiatives, including acquisitions, are being well received by investors, as are share buybacks and dividend hikes. That trend continues. Management just reported Q2 results last week, with revenue up 7% to $564 million and EPS up 12% to $0.66 (beating by $0.04). Semis have been a mixed bag lately, but Teradyne’s results, which highlighted strength (especially going forward) in 5G, networking and memory test, offset by weakness in auto and industrial, showed that it’s on the right track.
Technical Analysis
TER is one of many chip- and networking-related stocks that has recently broken out from a long-term range. TER’s prior peak came in March 2018 at 50, and like everything else, fell sharply into the end of the year (low of 29) before ripping back to its old highs in April of this year. Then came a well-controlled 11-week launching pad that led to last week’s huge, earnings-induced breakout. You can start a position here or on dips.
TER Weekly Chart
TER Daily Chart
TransUnion (TRU)
Why the Strength
Along with Experian and Equifax, TransUnion is one of the three biggest credit score companies in the world. It provides information and risk management services to business and consumers throughout the U.S., and other countries, too. Among the most frequently delivered reports are credit scores, consumer reports and a variety of analytical services, such as driver history data and public records data, which it supplies to businesses. Management has strived to differentiate the company by focusing on comprehensive and distinctive data sets, and it’s been a good move. Today TransUnion offers investors faster growth compared to its peers, largely because investments in technology have modernized its infrastructure, processing power and cost structure. Sales were up 20% in 2018, and analysts think they should rise by 14% in 2019, when EPS is seen up 8%, to $2.70. The stock has just broken out because Q2 results indicated analyst estimates could be conservative. Q2 revenue was up 18%, to $663 million, and EPS of $0.69 beat by $0.04. It’s not the most exciting story out there but in a strong (we think) economy where consumers are frequently buying houses, cars, boats and other things that trigger credit reporting, TransUnion should continue to deliver.
Technical Analysis
TRU went public in 2015 and has done well since. Shares went on a multi-year run that carried them from 30 in the beginning of 2017 to almost 80 last autumn. The stock wasn’t immune to the late-2018 sell off, but recovered to 72 in April and, after a four-week retreat, rallied to 75 earlier this month. Like many stocks out there, last week’s earnings report gapped TRU out of its long (10-plus months) overall consolidation, a very bullish sign. We suggest entering on minor weakness.
TRU Weekly Chart
TRU 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.
