Leading Stocks Hammered
Current Market Outlook
The last week has been brutal, as the sellers have come out of the woodwork and driven most leading stocks down sharply. And this isn’t just a couple of bad days, either—the action since mid June has been spotty, with sharp pullbacks and low-volume, narrow rallies preceding this drop, which has seen a fair amount of abnormal action. The rest of the market isn’t nearly as bad off, and in fact we’ve seen rotation into beaten-down areas like industrials, financials and transports. But our focus is on the leaders, and given the widespread breakdowns, it’s vital to honor your stops and cut back on new buying. If the buyers return soon, we’re not ruling out this being one big shakeout, but the onus is on the bulls at this point, at least when it comes to leading stocks. We’re dropping our Market Monitor back to neutral.
Encouragingly, even amid the recent selling, we saw plenty of positive reactions to earnings and other pieces of news last week, many of which made it into this week’s list. Our Top Pick is Advanced Micro Devices (AMD), which is one of the strongest stocks in the market. Given the environment, start small and buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Advanced Micro Devices (AMD) | 82.24 | ||
| Atlassian (TEAM) | 182.16 | ||
| GrubHub (GRUB) | 140.03 | ||
| HCA Healthcare (HCA) | 137.60 | ||
| Hi-Crush Partners LP (HCLP) | 12.18 | ||
| IQVIA Holdings (IQV) | 157.93 | ||
| Robert Half (RHI) | 78.58 | ||
| Stitch Fix (SFIX) | 36.79 | ||
| USANA Health (USNA) | 133.03 | ||
| Yext Inc. (YEXT) | 21.32 |
Advanced Micro Devices (AMD)
Why the Strength
Advanced Micro designs central processing units (CPUs) and graphics processing units (GPUs), primarily for personal computers, gaming consoles and servers. The company separated itself from manufacturing partner GlobalFoundries a few years ago and that transition held shares back for a couple of years. But starting in 2016, Advanced Micro has been delivering very solid growth numbers. Revenue was up 24% last year and is on track to jump 25% this year. The stock has done very well year-to-date and got another boost last week when second-quarter results beat on both the top and bottom lines. Revenue was up 53%, and EPS of $0.14 beat by a penny. While sales of GPUs for the cryptocurrency market were a relative weak spot due to bitcoin’s bust this year, overall sales of computing and graphics solutions were outstanding (up 64%). Another positive factor is yet another delay with Intel’s 10nm chip, which is now likely to be released a year later than expected, which should help Advanced Micro grab increased market share. The stock isn’t for the faint of heart, but if things fall into place, Advanced Micro could have more room to run. Analysts say that for that scenario to play out the company will need to achieve higher than expected sales in gaming consoles and continued success in performance desktops and servers—something the market believes could come to pass. Analysts see earnings quadrupling this year and rising another 35% in 2019.
Technical Analysis
Because of its strategy shift, AMD doesn’t have the cleanest chart. But as the new strategy began to deliver so did the stock, and shares rose throughout 2016 before consolidating for most of 2017. We saw a little weakness in the first few months of this year, but once May arrived AMD moved steadily upward. Shares briefly nosed out to fresh highs above 17 in June, then chopped around in the 15 to 17 range for a couple months before blasting off to new heights after earnings last week. If you want in, you can buy a little on dips with a stop near 16.
AMD Weekly Chart
AMD Daily Chart
Atlassian (TEAM)
Why the Strength
Atlassian is an Australian software company that makes collaboration solutions for software developers, content management and project managers. The company’s offerings are based around helping teams work better together (hence the ticker symbol), which puts Atlassian in a relatively crowded market where both behemoth Microsoft and startup Slack also play. That said, the competitive dynamics are likely to change given the recent news that Atlassian has divested two underperforming assets (HipChat and Stride) to Slack and made a very small investment in that company; the end result means that the duo are joining forces to better take on Microsoft’s Team solution, which it’s been marketing to its 135 million Office cloud customers. Atlassian should be a more focused company going forward, which is extremely exciting to investors given its outstanding history of growth, which continued in Q2 when it delivered 41% revenue growth and 36% EPS growth (to $0.49). (Results came out last Thursday.) The combination of great results, the Slack collaboration and increased fiscal year 2019 guidance drove a monster rally in the stock on Friday though it’s been yanked back down by the market. This is a big-time growth story that has a long runway ahead of it, and with management calling for 31% revenue growth and 57% EPS growth over the next twelve months. We think it’s one of the more compelling mid-cap software stocks out there.
Technical Analysis
TEAM came public in December 2015 and, after nearly two years of ups and downs, tightened up nicely before breaking out in October of last year. The action since then has been mostly up but very choppy—more of a two-steps-forward, one-step-back type of advance. But TEAM tightened up again during the past two months, which set the stage for last week’s leap to new highs on heavy volume. It’s going to be volatile, but you can consider buying a little around here with a stop in the mid 60s.
TEAM Weekly Chart
TEAM Daily Chart
GrubHub (GRUB)
Why the Strength
If the market holds itself together, Grubhub certainly looks like one of its leading stocks, with as good a combination of story/numbers/chart as you’ll find. The company, of course, is by far the largest player in the online takeout and delivery business (estimated at four times the size of its largest competitor), an industry that’s still in its infancy (2% to 3% of takeout orders are placed online). But that’s changing in a hurry as Grubhub expands both organically and via acquisitions (it just announced a deal to acquire LevelUp, boosting its technology platform for restaurant customers) and makes progress on some of the big deals it’s inked—the company has launched delivery in 70 new markets this year, which are experiencing better-than-expected demand, and it’s beginning to pilot some Yum! Restaurants (Taco Bell and KFC) in anticipation of a nationwide rollout starting in Q4 and continuing for a few quarters after that. The stock is strong because of a blowout Q2 report that not only beat on sales (up 51%) and earnings (up 92%) but most sub-metrics as well (daily average grubs up 35%, and—excluding acquisitions—growth in this stat has accelerated three straight quarters), which reinforced the perception that Grubhub is still in the early stages of a big growth wave. This remains a big idea.
Technical Analysis
In our minds, GRUB’s initial breakout was back in late October of last year—that’s when it really changed character, and the stock more than doubled from that liftoff through mid March. Then came a four-month rest, and while it featured some sloppy action, the key was that GRUB never corrected more than 20%, a sign of strength given the wobbly market and the prior run. Last week’s big gap up on earnings tells us the stock wants to go higher—if the market allows it. If you don’t own any, you can consider buying a little here or on dips with a loose stop.
GRUB Weekly Chart
GRUB Daily Chart
HCA Healthcare (HCA)
Why the Strength
With a market cap of over $43 billion, Tennessee-based HCA Healthcare is one of the largest providers of healthcare services in the for-profit hospital sector. The company serves more than 28 million patients every year, including 8.6 million emergency room visits, and employs 38,000 active physicians and 87,000 nurses. With years of steady single-digit revenue growth and a modest (1.1% annual yield) dividend, the company would ordinarily be regarded as a buy-and-hold Fortune-500 kind of investment. But with a strong tailwind from the Tax Cuts and Jobs Act, HCA Healthcare’s Q2 earnings report on July 25 impressed investors with its 31% jump in earnings on a 7% gain in revenue. Following Q1’s 34% EPS bounce and 8% revenue growth, the numbers beat expectations by a healthy margin. The submetrics were also strong, with same-facility admissions up 2.7% and outpatient surgeries up 2.8%. The company bought back $470 million of its stock during the quarter and has $910 million remaining in its repurchase authorization. As part of the Q2 report, the company declared a dividend of 35 cents per share to shareholders as of September 4. In a market that’s taking some skin off glamour stocks, HCA Healthcare is attracting buyers thanks to its steady, predictable growth.
Technical Analysis
HCA has basically a two-phase history, with the first phase being its run from 16 in August 2011 (after a post-IPO slump from 33) to 95 in July 2015. Phase two was a 29-month consolidation after the stock’s free-fall to 44 in August 2015. HCA finally took out that old resistance with a rally from December 2017 to February 2018, when it broke out to new highs. The stock edged up to 110 before earnings, and blasted off on big volume on July 25, running to 118 last Wednesday and 124 on Thursday. If you’re game, starting a position on dips makes sense.
HCA Weekly Chart
HCA Daily Chart
Hi-Crush Partners LP (HCLP)
Why the Strength
Frac sand producers are near the bottom of the totem poll in the oil service industry, so when the drilling activity started to drop in 2015, firms like Hi-Crush were, well, crushed—in 2015 and 2016, revenues fell a total of 47% and earnings went from $3 per share to a loss of $1. But the company survived and, importantly, diversified; it not only owns a handful of mines in Wisconsin and one in the Permian, but has a huge owned and operated terminal and logistics network and its PropStream operation focuses on last-mile delivery and other proppant services. And now that drilling activity is ramping up, so too has Hi-Crush’s sales—the firm sold 2.6 million tons of frac sand in Q1, up 89% from the prior year, and that was actually restricted by bad weather and rail issues. More than that, though, cash flow is exploding and management is making some bold moves, which is the real reason the stock has turned strong—last Monday, the company announced the acquisition of FB Industries (boosting its last-mile delivery capabilities), inked an expanded supply agreement with a supermajor oil firm in the Permian that will have the Hi-Crush increase its mine capacity, and dramatically boosted its dividend to 75 cents per share, per quarter, resulting in a ridiculous annual yield of 19%! (Ex-dividend date is August 2; firm issues a K-1 at tax time.) There are some worries that the boost is too dramatic, but the initial reaction has been bullish and if the oil patch remains strong, Hi-Crush’s cash flow should continue to surge.
Technical Analysis
HCLP fell from 72 to 4 during the energy bear market, and after rallying to 23 in early 2017, dipped back to 7 late last year. Since then, the action has been better but choppy, with a 10 to 15 range developing in recent months. HCLP looked like it was set to breakdown two weeks ago, but the flurry of announcements caused a huge four-day buying spree. Expect volatility, but we’re OK nibbling around here with a stop under 13.
HCLP Weekly Chart
HCLP Daily Chart
IQVIA Holdings (IQV)
Why the Strength
Connecticut-based IQVIA was formed in 2016 when IMS Health Holdings, a health-care information and technology provider, merged with Quintiles Transnational Holdings, a pharmaceutical research and clinical trial company. The resulting company is now a leader in contract research, technology and analytics with 55,000 employees in 100 countries. IQVIA’s extensive experience in pharmaceutical and healthcare research lets it operate where big data, IT and domain expertise meet. The company’s revenue growth sped up from 5% in 2015 to 20% in 2016 and 42% in 2017 when the effects of the merger kicked in. The company’s 2018 results have shown revenue growth back at a healthy 9% in both Q1 and Q2, with earnings growth at 20% in Q1 and 25% in Q2. The company’s Q2 earnings report beat expectations soundly, with projections for future growth also ahead of analysts’ expectations. The company has bought back $659 million of its stock so far in 2018, and had $1 billion of repurchase authorization remaining as of the end of June. The company’s stock has benefited from an upgrade from a Bank of America analyst. All kinds of healthcare and pharmaceutical companies have been using M&A activities to increase their clout in the industry, and IQVIA’s merger looks like it’s working well.
Technical Analysis
IQV has been in an uptrend since 2014, with one major correction from 80 in July 2015 to 55 in February 2016 and a shallow cup-shaped correction from 110 in November 2017 through July. The stock started a rapid advance ahead of earnings, hitting new highs before gapping up over 120 on July 24. IQV followed through to as high as 124 last week before relaxing back. This feels like a good, steady story in the healthcare sector, and you can buy a little on any normal weakness as the stock digests its gains.
IQV Weekly Chart
IQV Daily Chart
Robert Half (RHI)
Why the Strength
Robert Half is one of the biggest staffing companies around with over 325 locations worldwide. Its biggest business is temporary staffing, which accounted for 76% of revenue last year. But it also has a significant permanent staffing segment, as well as an in-house consulting arm under the name Protiviti. While the company has benefited from an industry-leading brand and long-time leaders in Harold Messmer (CEO) and Keith Waddell (CFO), there are also structural shifts in employment trends helping Robert Half to deliver steady growth. These include growth in outsourcing, demand for temp help for project-based work and an ability to fill a clients’ short-term and long-term needs by pulling people from any of the company’s three divisions. (The very tight labor market right now isn’t hurting, either.) The stock was already doing well this year, but last week’s better-than-expected second quarter report ignited a blastoff rally that carried it to fresh highs above 76. Revenue was up by 11.5% and EPS of $0.89 beat by $0.04. The staffing business isn’t revolutionary, but in a strong economy Robert Half is able to increase the spreads on what it pays workers and what it charges them out at. This “bill-pay” spread is a key metric watched by analysts and with the trends working in Half’s favor, the firm’s growth stands a good chance of continuing to beat expectations.
Technical Analysis
RHI spend most of 2017 consolidating in the 43 to 50 range but was able to punch above resistance later in the year and climb up near 60 by the time 2018 began. The stock’s trading pattern this year has mostly been one of higher highs and higher lows, with the exception of a dip below the 50-day line in February and a retracement to that trend line after shares got overextended to the upside in June. Stepping back, the big picture trend is strong and this most recent blastoff rally into the mid-70 implies big investors are buying. Given that it’s not a runaway-type stock, look to enter on dips.
RHI Weekly Chart
RHI Daily Chart
Stitch Fix (SFIX)
Why the Strength
One of the rare characteristics we like to see in a stock is that it’s the top player in a brand new industry, and Stitch Fix fills the bill—the company is the leader in emerging online personal styling sector, where customers take a 10 minute survey that shares 85 data points about them and their tastes, including measurements, what clothing or styles they like and own and what price point is desired. That data is inputted into a proprietary algorithm and, with the help of one of Stitch Fix’s 3,700 designers, selects and ships a handful of items to the customer. The customer can then keep (and pay for) or return any of the items, within three days (with a minimum $20 per box charge, which itself can be replaced by a yearly $49 membership that allows for unlimited shipments). The idea’s been a hit, with steady (and recently accelerating) revenue growth, earnings in the black and a big and growing customer base (2.7 million active clients as of April, up 30% from a year ago). Analysts see the bottom line sagging as Stitch Fix invests in category expansions (such as Plus-size, which is off to a great start over the past year, and a new Kids segment that should be a hit for the back-to-school season), marketing and more, but Wall Street’s OK with that given the newness of the sector and the massive longer-term potential.
Technical Analysis
SFIX came public last November, rallied for a few weeks and then went on to build a five-month base. Then we saw the key trait in this charts—after earnings were released in early June, SFIX soared on three straight weeks of massive volume and eventually reaching 35 two weeks ago. The pullback since then has been sharp, but reasonable. It’s very volatile, but a nibble on this dip with a stop below the 50-day line could work.
SFIX Weekly Chart
SFIX Daily Chart
USANA Health (USNA)
Why the Strength
USANA Health Science calls itself a cellular nutrition company, which translates in terms of actual products to vitamin and mineral supplements, nutritional supplements and personal care products. The company has an odd history in Cabot Top Ten Trader, with eight former appearances that were all in 2003. The company uses a direct sale model, with independent distributors (called “associates”) building their own networks of “preferred customers” who also do direct sales. The company operates in 24 countries, but over 80% of Q2 sales came from the Asia Pacific region (including 56% from China) and a scant 20% from the Americas and Europe. The company ran into a spot of bother back in 2007 when it was accused of being a pyramid scheme, but that passed quickly. The company got a huge boost from its Q2 earnings report on July 24, with sales up 17.3% from the previous year and earnings up by a sharp 39%, aided by favorable currency fluctuations between the Chinese yuan and the U.S. dollar. The company also increased its guidance for the rest of 2018, but noted that the recent strengthening of the dollar might take a bite out of its earnings. The company is currently conducting a voluntary, internal investigation of its China operations, BabyCare Ltd., aimed at compliance with the Foreign Corrupt Practices Act (FCPA) and other issues, but doesn’t expect the findings to materially affect its financial results, and the 342 mutual funds that owns shares apparently don’t either. Management’s guidance for the rest of 2018 is positive, including the opening of four new European markets (Germany, Spain, Italy and Romania).
Technical Analysis
USNA spent years (2004 through 2012) trading sideways in a range from 9 to 30, but caught an uptrend in 2013 and 2015 to reach 88 in August 2015. The stock spent all of 2016 and much of 2017 bouncing along over support at 55, but caught an updraft in October 2017 that kited it to 121 in May 2018. After a correction to 110 ahead of earnings, USNA gapped up 138 on July 25, and has given back just a few points in the days since. If the story appeals to you, you can buy on any dip of a few points, with a stop loss around 117.
USNA Weekly Chart
USNA Daily Chart
Yext Inc. (YEXT)
Why the Strength
Yext has a unique and high-potential story. On the surface, the firm looks like another software outfit, but we don’t know of any other major player doing what it does—Yext has built what it calls a digital knowledge management platform that allows companies to aggregate and share the data that they want shown to the public. The demand for this type of platform stems from the fact that third party sites (Yelp, Grubhub, TripAdvisor or Google) get nearly three times as much traffic as a company’s website these days, and the information presented to potential customers on those sites isn’t always what a firm wants. Yext’s cloud-based platform provides a simple way for businesses to manage that information, effectively controlling all the public-facing information about itself—it’s basically a system of record a company can update regularly and is connected to most big search (Apple, Google, Facebook, Yahoo), social media (Youtube, Snapchat, Twitter, Instagram), local (Google Maps, Yelp), food, health and travel sites out there. And its reach is getting larger—last week, the firm inked a deal with Amazon to integrate its platform with Alexa, to give businesses control of what information Alexa provides about them. Yext is not yet profitable, but cash flow from operations is, and revenue growth has been both steady and quick, with 30%-plus rates expected for at least another couple of years. It’s a good story.
Technical Analysis
YEXT, which came public in April 2017, broke out around 14 in May of this year and quickly surged to nearly 20 in early June before taking a breather. That consolidation was a beauty, moving straight sideways for five weeks as its 10-week line caught up. Then, after the Alexa news, YEXT shot to new highs last week on two days of big volume before pulling back. If you want in, we’re OK nibbling here or on dips with a stop near the 50-day line.
YEXT Weekly Chart
YEXT 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.
