Some Cracks in the Bullish Wall
Current Market Outlook
The Nasdaq and leading growth stocks were whacked again last week, extending the correction in that group to just over three weeks. At this point, the major trend is still up, but intermediate-term, the onus is on the bulls, as many stocks (and the Nasdaq itself) have fallen toward key support—a couple of big selloffs from here would be a red flag, especially for names that have had big runs during the past year, though a strong sign of support could arrest the decline. Right now, we remain mostly bullish because many stocks are still in good shape, especially early-stage growth stocks that are trading resiliently and new leadership is emerging as money rotates into other areas.
This week’s list is a mix of both categories. Our Top Pick this week is Citigroup (C), which, despite its huge size, has great potential thanks to industry trends and recent news flow. The stock was the first big bank to leap to new highs recently, too.
| Stock Name | Price | ||
|---|---|---|---|
| Carvana (CVNA) | 82.90 | ||
| Citigroup Inc. (C) | 0.00 | ||
| Exelixis (EXEL) | 27.35 | ||
| iRhythm Technologies (IRTC) | 51.15 | ||
| Nintendo Co., Ltd. (NTDOY) | 0.00 | ||
| Packaging Corp (PKG) | 0.00 | ||
| Square, Inc. (SQ) | 91.04 | ||
| Teladoc, Inc. (TDOC) | 127.95 | ||
| Wayfair (W) | 167.03 | ||
| Winnebago (WGO) | 48.56 |
Carvana (CVNA)
Why the Strength
Now here’s a huge, mass market story with giant potential! Carvana is aiming to revolutionize the used car industry by selling cars online, and it’s growing like a weed because management has thought of nearly everything to grease the skids for consumers to take the plunge. It starts with the firm’s auto acquisitions, which come from customer trade-ins, cars coming off rental and leases and from auctions; Carvana puts these cars through 150-point inspections (and guarantees there’s no body damage and that the car has never been in an accident). Then users can browse more than 7,000 vehicles, with tons of pictures, data, 360 degree interactive viewing, order online, get financing, even trade in their own vehicle. Carvana also allows for scheduled delivery (often next-day delivery!) and a seven-day test-drive period. The company was in 21 markets at the end of last year, but is in 30 today and should be in 38 by year-end. Because of that investment, the firm is bleeding red ink, but revenues and vehicle sales are exploding (8,334 cars sold in Q1, up 120%), and metrics like gross margin per unit sold (expected to rise 49% this year) are booming as well. Long-term, the sky’s the limit because used car sales is a giant industry ($710 billion annually!), people hate bargaining with dealerships and Carvana’s customers love the service (95% would recommend to a friend)—they saved an average of $1,430 last year versus the Kelly Blue Book price. It’s a huge idea.
Technical Analysis
CVNA just came public in early May and got off to a slow start—it priced at 15, but opened below that and was sitting at 9 at the start of this month. But then the company released its quarterly report, which caused the stock to begin a jaw-dropping gallop to nearly 24 in just three weeks! CVNA has since backed off a bit, but not much given its advance. You could nibble on today’s dip, but keep positions small and use a loose stop.
CVNA Weekly Chart
CVNA Daily Chart
Citigroup Inc. (C)
Why the Strength
We wouldn’t blame investors who were scorched by Citigroup’s meltdown during the credit crisis if they never wanted to see the ticker symbol again, much less buy the stock. But for those more forgiving souls, we suggest peeking inside Citigroup today. In recent years, the bank has become much more attractive. And after clearing last week’s stress test, management immediately fired its double-barreled elephant gun, doubling its dividend and increasing the share buyback by $15.6 billion. The stock jumped, and buyers continued to line up through the end of the week. Over the past couple of years, Citigroup has raised capital, loaded the management bench and board of directors with seasoned bankers, and prioritized share buybacks over dividends to boost earnings and reduce shares outstanding. Today, it is a global bank, operating in over 160 countries (revenue breakdown is 47% North America, 20% Asia, 14% EMEA, 13% Latin America and 6% other), which sets it apart from most competitors, a potential plus given low interest rates here in the U.S. Analysts see 2% revenue growth this year and 4% in 2018, with EPS growth around 10% in both years. But both of those could prove conservative as higher interest rates and a gradually accelerating U.S. economy (plus hopes for corporate tax cuts later this year) should be winds at the company’s back.
Technical Analysis
C fell from 61 to 35 during the market’s mini-bear phase in 2015 and 2016, before recovering to around 50 later that year. Then it took off with all financial stocks after the U.S. election, rallying as high as 61 in February. That began a consolidation, with shares consolidating between 55 and 63 through May, but now the buyers are back—C spiked to new highs as soon as financial stocks showed strength in early June, and extended their gains in the wake of last week’s dividend and share buyback news. You can buy a little here or (preferably) on dips.
C Weekly Chart
C Daily Chart
Exelixis (EXEL)
Why the Strength
Exelixis develops small molecule cancer treatments, and the stock looks ready to break out following positive Phase 2 clinical trial results (released June 19) for treating first-line advanced renal cell carcinoma with cabozantinib. This puts the company on track to file a supplemental New Drug Application in Q3 2017. And it could expand the potential blockbuster drug’s market beyond renal cell carcinoma (approved in 2016), and small medullary thyroid cancer (approved in 2012). Given that cabozantinib was just approved for renal cell carcinoma last year, revenue growth is off the charts. Sales surged 415% in 2016 and should rise another 90% this year. The company is likely to turn a profit (the first in five years), and could top EPS of $0.50 in 2018. Exelixis also just paid off $124 million in debt, which brings debt reduction to more than $490 million over the last year. That amounts to massive interest expense savings, freeing up capital for R&D spending, acquisitions and other initiatives that can accelerate growth. Of course, the big picture story is that the biotech sector is back in style. And that resurgence in popularity is no doubt helping to drive some of the interest in Exelixis.
Technical Analysis
EXEL rallied 300% from April through September of last year, then fell abruptly through November, eventually finding support at 10. The stock then embarked on a volatile stop-and-go rally characterized by higher highs and higher lows. It topped out at 23.5 in February, then moved grudgingly lower during the next few months (though it did briefly poke to new highs in late-May). A few buyers stepped in at the beginning of June, then a lot more stepped up to drive shares to 25 after the recent Phase 2 results were released. Nibbling here or on dips should work out.
EXEL Weekly Chart
EXEL Daily Chart
iRhythm Technologies (IRTC)
Why the Strength
iRhythm Technologies is a small firm with a potentially revolutionary product. The company’s Zio technology is a wearable patch heart monitor that can give up to two weeks of electrocardiogram (ECG) data on cardiac arrhythmias like atrial fibrillation. Extended monitoring is recommended for patients who have undergone an ablation procedure for the treatment of an arrhythmia as well as diagnostic monitoring for suspected arrhythmias. The gold standard for this kind of monitoring has been a Holder monitor, a portable device that uses between three and eight attached electrodes and a recording device that either hangs on the patient’s neck or is attached to the belt. iRhythm’s Zio patch is a compact, wire-free wearable device that packs both electrodes and recording technology into an unobtrusive water-resistant patch. The Zio device was found to be “substantially equivalent” to a Holter in 2013. But iRhythm is being favored by investors now because a recent study by a number of professional organizations found that Zio’s long-duration recording and ease of use actually made it superior to Holter technology in post-ablation monitoring. iRhythm’s 150-million-hour database of sample ECGs is also useful to physicians for diagnostic purposes. The cardiac monitoring market in the U.S. is around $1.4 billion annually, and while iRhythm isn’t yet profitable, revenue growth has been strong—66% in 2015 and 73% in 2016. iRhythm is making its debut in today’s Cabot Top Ten Trader, but it looks likely to return.
Technical Analysis
IRTC came public in October 2016 at 26, and after a couple of false starts, soared to 40 in February 2017. The stock’s orderly dip to the low 30s in April and May looks like its post-IPO consolidation. IRTC blasted off on heavy volume on June 1 and 2, and continued higher all month with multiple huge volume spikes. You can buy on any weakness, with a stop around 38.
IRTC Weekly Chart
IRTC Daily Chart
Nintendo Co., Ltd. (NTDOY)
Why the Strength
We covered Nintendo in October when the video game company was in the midst of the Pokémon Go craze, before a quick drop kicked us out in December. We haven’t heard of mobile players walking off any more cliffs or strolling into busy highways with eyes glued to their smartphones (yes, both happened). And that suggests the stock may have moved into a sustained uptrend based on sales of Nintendo’s own gaming consoles and brand name games (Pokémon Go is owned by Niantic). The focus now is the $299 Switch, a gaming console that can be used at home or on the go. This dual functionality means there could be households buying multiple Switches. Because sales remain strong three months after launch, Nintendo is boosting production and analysts are bumping up estimates (some believe Switch could outperform the 150 million unit sales record held by the Nintendo DS). Nintendo has recently released an updated Mario Cart game, as well as the new Zelda, Splatoon 2 and ARMS games, with SuperMario Odyssey coming in October. We also heard rumors from June’s E3 show that titles in the Pokémon franchise could come to Switch. The valuation is rich (forward P/E of 58), but that’s mostly because analysts see sales booming and earnings lifting nearly 70% next year.
Technical Analysis
NTDOY exploded higher last July, surging from 18 to 38 in a matter of days, but dipped as low as 24 by the end of the year and spent a couple of months tightening up in the 26 area. It began moving higher again in March when it crossed above both its short and long-term moving average lines. Over the last four months, it has walked up to 44, with only a brief stall during the tech selloff in recent days. You can buy into the current retreat, and set a stop near the 50-day line.
NTDOY Weekly Chart
NTDOY Daily Chart
Packaging Corp (PKG)
Why the Strength
On the one hand, Packaging Corp. of America has a simple story: The company makes traditional brown kraft corrugated boxes and (through its Boise Paper division, acquired in 2013) white paper. On the other hand, Packaging Corp.’s expertise in packaging runs to imaginative custom printing and coating, shipping for all shapes and sizes of products, retail displays and special protective packaging. About 80% of revenue comes from packaging and 20% from sales of paper, with additional income derived from leases of cutting rights to the company’s timber holdings. Revenues declined by 2% in 2015 and grew by only 1% in 2016, but the real story is in the last couple of quarters when revenue grew by 6% (Q4 2016) and 10% (Q1 2017). And earnings were up by 14% in each of those quarters. Analysts are looking for 22% earnings growth in 2017 and 11% in 2018. And the company’s stock pays a handsome 2.3% annual dividend. Packaging is deeply correlated to economic growth, and analysts (and investors) are optimistic that the U.S. economy will keep the bottom line expanding.
Technical Analysis
PKG was a monster from the middle of 2012 to early 2015, roaring from 26 to 85 during that period. The stock corrected through most of 2015 and hit a correction low of 44 in February 2016. PKG bounced sharply from that low and pushed to new all-time highs at 97 in February, followed by a three-month consolidation before the current rally kicked it to 111 last week on rising volume. PKG has been ignoring the wobbles of the market while booking six straight weeks of advances. You can buy on any weakness, with a stop just above 100.
PKG Weekly Chart
PKG Daily Chart
Square, Inc. (SQ)
Why the Strength
Square has provided some new leadership to the market this year, and the stock continues to show outstanding relative strength, even during the recent growth stock selloff. We’re not going to repeat the firm’s basic story—suffice it to say that its various card readers are gaining in popularity (gross merchandise volume rose 33% last quarter) and its customers love its value-added services (marketing, cash advances, instant deposit, etc.), which are growing at far faster rates and now make up 15% of revenues. All of that is helping, but we believe the stock moved into a faster gear after its Analyst Day on May 16. That’s when management talked more about its strategy to grab larger merchants (those with at least $500,000 in annual gross merchandise volume are now 15% of the total, up from 4% a year ago) and its international opportunity (where it’s hitting it big in places like Australia, with 80% sequential growth, and has recently entered the U.K.), while revealing some outstanding profit margin figures for new clients—Square’s new customers cost $36 million to acquire, but returns $62 million (72% return) after eight quarters. And when you include add-on services, the return leaps to 120%! The top brass sees revenues up 31% this year and EBITDA up 150%, but just as important, big investors are becoming convinced that (a) the market opportunity for Square is massive and (b) the firm can scale in a big way as it grows. A total of 313 funds owned 99 million shares at the end of March, up from 180 and 37 million two quarters before. We like it.
Technical Analysis
SQ has been in a great uptrend for many months, but it seems to have gained strength since mid-April, when the stock lifted out of a tight two-month consolidation and marched to 20. Then came the analyst day, which helped the stock to spike to 25 in just over two weeks! SQ did get whacked during the early-June market selloff, but it’s held up very well since, trading in a tight 10% range during the past three weeks. We’re OK with a nibble here and buying more if the stock can surge above 25.
SQ Weekly Chart
SQ Daily Chart
Teladoc, Inc. (TDOC)
Why the Strength
The never-ending Washington, D.C. tug-of-war concerning health care is taking up most of the country’s oxygen on the subject, but while the politicians debate, companies like Teladoc are pushing the industry forward. The company was the first and remains the largest telehealth provider today, allowing users (mostly employees of large firms that offer the service to cut time spent visiting doctors for routine issues) to talk or video chat with a board-certified doctor within minutes and get prescriptions if need be. The stock has been strong thanks to rapid top-line growth (see table below), driven by higher visits (up 60% last quarter) and membership (now 20.1 million, up 34%). But the firm isn’t resting on its lead—the big news last month was the firm’s acquisition of Best Doctors for $440 million (the company had sales of $92 million last year). A leading medical consultation firm with a team of more than 50,000 medical experts who are peer-rated as the top 5% in their field, Best Doctors covers more than 450 specialties, including even the most complex medical fields like oncology, critical care and mental health. With Best Doctors in the fold, the combined company will have the first digital solution to address the entire spectrum of medical concerns, and financially, could accelerate Teladoc’s move toward cash flow breakeven this year. It’s a big idea.
Technical Analysis
TDOC has had a couple of big shakeouts since its post-earnings liftoff in early May, once because of the market (in early June) and again after a convertible note offering to help pay for Best Doctors. But each dip found support near the 25-day line, and TDOC spiked to new highs on huge volume a few days ago. The pullback since then has been modest. If you’re game, you can start a small position on weakness.
TDOC Weekly Chart
TDOC Daily Chart
Wayfair (W)
Why the Strength
Boston-based Wayfair, the online furniture, furnishings and home accessories company is making its sixth appearance in today’s Top Ten, just two years after its debut in July 2015. That’s a pretty good record for a company that has yet to book a profitable quarter. But investors see Wayfair’s ambitious business plan—listing seven million products from 10,000 suppliers in five websites distinguished by style and price points—has produced growing revenue, with the 44% growth in 2014 (the slowest in the last four years) followed by 71% growth in 2015 and 50% in 2016. Q1 results showed a 29% jump in revenue and beat earnings expectations with a loss of just 48 cents per share versus analysts’ expectations of a 58-cent loss. Investors are likely keeping the success of Amazon in mind when they look at Wayfair, whose ambition has pushed its expansion into the European market. A push for market share at the expense of earnings is a gamble, but with earnings expected to turn positive in 2019, investors seem to be regarding it as a reasonable one. Wayfair generated $3.38 billion in revenue in 2016, but grew to $3.6 billion in the 12 months ended March 31. The most recent reason for the stock’s strength is the earnings report on May 9 that beat expectations. But the longer-term appeal of Wayfair is for a big, ambitious strategy to dominate an enormous market.
Technical Analysis
After its IPO at 29 in September 2014, W peaked at 57 in August 2015. The stock then took 21 months to consolidate those big gains, punching its way to new highs on May 9 with an earnings gap up from 51 to 62. W has kept its positive momentum in the face of a dodgy market, touching 78 on June 23. The stock has been consolidating its gains as its rising 25-day moving average catches up. If you’re game you can grab a small position near here.
W Weekly Chart
W Daily Chart
Winnebago (WGO)
Why the Strength
Everyone has heard of Winnebago, which has one of the most iconic brands (and the third largest market share) in the motorized RV business. But what most people don’t realize is that the company’s recent moves have greatly expanded its opportunity, diversification and earnings potential, which is beginning to pay big dividends. The big event during the past year was Winnebago’s purchase of Grand Design for $500 million, which was the fastest-growing RV manufacturer (with a focus on towable RVs—a larger market than motorized RVs), increasing Winnebago’s top line by more than 40%! The buyout has been a hit, and when that’s combined with a generally positive environment for RVs (low fuel prices and interest rates, along with a steadily growing economy, has increased the number of RVs on the road), Winnebago looks to be in the middle innings of a solid growth wave. In the just-reported quarter ending in May, sales rose 75% (partly due to the acquisition), earnings were up 17%, and free cash flow for the prior 12 months totaled $99 million (more than $3 per share). Most encouragingly, analysts see the bottom line rising another 21% in the year that begins in September while cash flow grows further. A modest dividend (1.2% annual yield) and reasonable valuation (16 times trailing earnings) puts a nice bow on the package.
Technical Analysis
WGO has an intriguing long-term chart, as shares rallied to multi-year highs in 2013 near 32, but sagged as low as 15 early last year, despite relatively stable earnings. Shares spiked to 39 in the wake of the acquisition last year, but sagged again for the first five-plus months of 2017. But now the stock has shot ahead on excellent volume following earnings. There’s some resistance around here, so try to buy on dips.
WGO Weekly Chart
WGO 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.
