Tricky but Bullish
Current Market Outlook
Individual stocks have been somewhat tricky in recent weeks, with some doing great and others chopping around, while earnings season has done its usual job of helping some names while cutting others off at the knees. Even so, there are far more stocks in good shape than not, and the market itself is in fine shape, with all the major indexes we track above intermediate-term support. Things can always change, but with most of the evidence we see bullish, we’re sticking with a positive stance. Moreover, we see a ton of setups out there (especially among growth-oriented stocks and sectors that have consolidated during the past two months or longer) that should do well if the market continue to push higher.
This week’s list has a solid collection of recent earnings winners from a variety of different groups. There are many strong names to choose from, but our Top Pick is Align Technologies (ALGN), which has a great long-term growth story and a strong chart. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Align Technology (ALGN) | 316.20 | ||
| Brink’s (BCO) | 0.00 | ||
| Caterpillar Inc. (CAT) | 0.00 | ||
| Expedia Group (EXPE) | 0.00 | ||
| First Solar (FSLR) | 83.74 | ||
| iRobot (IRBT) | 103.17 | ||
| Lending Tree (TREE) | 411.51 | ||
| Novocure (NVCR) | 0.00 | ||
| Proofpoint (PFPT) | 113.79 | ||
| YY Inc. (YY) | 0.00 |
Align Technology (ALGN)
Why the Strength
Align Technology, founded in 1997, is proof that building a better mousetrap (in this case, a better way to straighten teeth) can still have the world beating a path to your door. With its soft, clear plastic appliances, Align has taken a good chunk of market share in the industry dominated by metal braces. Invisalign straighteners are more comfortable (and faster) than its metal rivals, leading to seven straight years of double-digit revenue growth for Align Technology, and after a couple of years of investment, that growth is picking up—revenue growth in the first two quarters of this year has topped 30% and earnings were up by 37% in Q2, driven by a 31% increase in Invisalign shipments. (International now makes up 37% of shipments and is growing faster than the U.S.) Management also bumped up guidance going forward; analysts see EPS advancing by 45% in 2017 and 20% in 2018. Align Technology has made 15 appearances in Cabot Top Ten Trader since its debut in 2007, making its something of a Top Ten star. This is a good story with staying power.
Technical Analysis
ALGN made its last previous appearance on April 17, just 11 days before a great earnings report gapped the stock up from 120 to 135. The stock ran to 150 in June (where it had a spike in trading volume after its addition to the S&P 500 Index on June 16), then edged up to 160 just ahead of its last Friday’s earnings report that blasted it as high as 174. ALGN has dipped below 170 today, which looks like a buyable correction. You can take a stab at the stock here or on dips with a stop around 155.
ALGN Weekly Chart
ALGN Daily Chart
Brink’s (BCO)
Why the Strength
With a heritage that dates back to1859, Brink’s has taken a long time to make its debut in Cabot Top Ten Trader. In the U.S., the company’s armored trucks are highly visible as they pick up and deliver money, but the company is now a global player with operations in over 100 companies. Brink’s moves money securely for businesses and governments, manages cash, services ATMs, ships high-value items and processes currency deposits. Management has expanded globally via a string of acquisitions and U.S. revenues are now just 25% of the total. Investors are interested now because the company emerged from a string of 10 consecutive quarters of revenue declines in Q3 2016 and has booked 9% revenue gains in Q1 and Q2, with earnings up an average of 68% in the four most-recent quarters. The stock has benefited from a string of estimate-beating earnings reports, including one last Wednesday that kicked off a day of buying on extremely heavy volume. With earnings in the can and offering a small dividend (0.8% yield), Brink’s has a good head of momentum up and management that has it headed in the right direction.
Technical Analysis
BCO spend years trading under resistance in the mid 30s (with support in the mid 20s), but finally broke out in late 2016. A high-volume rally in February pushed the stock over 50, and after a two-month consolidation the stock started a steady run that topped 70 ahead of last week’s high-volume leap to 80. BCO has pulled back slightly on shallow volume and looks like a good buy under 79, with a lose stop around 70.
BCO Weekly Chart
BCO Daily Chart
Caterpillar Inc. (CAT)
Why the Strength
You don’t see many Dow Industrial stocks in Top Ten, but Caterpillar has actually shown up four previous times (all in 2010 and 2011) as the stock has the ability to trend for long stretches when business turns up after a rough stretch. And that’s what’s going on today—sales fell each of the past four years (earnings slipped three of those four) as demand slackened, especially during the 2015-2016 commodity crash. But now things are picking up as the global economy recovers (especially in developing countries and China, while a recovery in global energy and mining activities isn’t hurting). Caterpillar’s second-quarter report easily topped estimates ($1.49 per share beat expectations by 23 cents), prompting management to hike its guidance for the rest of the year (now looking for about $5 per share). Analysts rushed to hike targets as most believe the firm is in the sweet spot of its upcycle, with relatively tight dealer inventories and other factors pointing to better times ahead. There are risks, including weakness in many Middle Eastern and Latin American economies, as well as some unknowns surrounding steel tariffs, which could spike costs, but the top brass has done a great job of controlling spending, and investors are focused on the business’ underlying momentum. A solid dividend (2.7% annually) is a nice bonus.
Technical Analysis
CAT bottomed at 56 in early 2016 (down from 111 in 2014) and made its way back to the mid-90s following November’s election. Since then, the stock has been in a choppy advance—it made no progress from December through April, gapped up on earnings, and then chopped slightly higher through most of July. But last week’s earnings surge was impressive, taking CAT above its 2014 peak on great volume, which portends higher prices. It’s not a go-go stock, so try to buy on dips.
CAT Weekly Chart
CAT Daily Chart
Expedia Group (EXPE)
Why the Strength
Expedia is a giant in the world of online travel agencies—in addition to its namesake property, the firm also owns controlling stakes in Hotels.com, HomeAway, Orbitz, Travelocity, Hotwire, CarRentals, SilverRail and Trivago, and it just announced a minority stake in Traveloka, the leading online travel player in Indonesia. The stock is strong today because business is good, thanks to the long-term shift of all types of travel bookings (flights, hotels, vacation rentals and more) online and the company’s vast reach, especially overseas—in the second quarter, sales rose 18% thanks to a 12% increase in total bookings, which included a 21% gain in room nights. While earnings were only up 7%, big investors are placing far more emphasis on cash flow: Expedia’s EBITDA rose 19% (most of it comes from its core travel agency businesses) while free cash flow lifted 24%. Beyond the growth, free cash flow is gigantic compared to reported earnings—in the quarter, free cash flow totaled more than $3 per share, and in the first six months of 2017, totaled an amazing $2 billion, or nearly $13 per share! Some of that is seasonal and depends on the timing to CapEx, but the point is that the firm is super profitable and is using its cash flow to pay a small dividend (1.2% annually), pay down some debt from recent acquisitions and, of course, invest in any new, up-and-coming travel firms it sees. It’s a solid story with a long-term growth angle.
Technical Analysis
EXPE built a huge launching pad from November 2015 through April of this year, including a shallower consolidation from October of last year through April. But since breaking out in early may, EXPE has trended persistently higher, albeit with some short, sharp (usually market-induced) dips along the way. Last week, EXPE dipped again to its 25-day line, then shot ahead on good volume after earnings before pulling back today. We’re OK with buying here or on dips, with a stop in the mid-140s.
EXPE Weekly Chart
EXPE Daily Chart
First Solar (FSLR)
Why the Strength
After a horrid couple of years, we’re starting to see more and more solar stocks show up on our screens. JinkoSolar (JKS) made the cut last week, and today, we have First Solar, one of the blue chips in the group. The stock is coming to life for a variety of reasons, including evidence that utility-scale solar demand is firming up, which is helping pricing and, importantly, led to a blowout Q2 report—management now sees earnings of $2 to $2.50 per share this year thanks to better-than-expected shipments (2.6 to 2.7 gigawatts worth), bookings (1.5 gigawatts in the past three months alone), potential new bookings (8 GW!) and improved margins. All of that bodes well for the next couple of quarters, and longer-term, there’s excitement about First Solar’s Series 6 solar panels, which should start production next year and bring with them much higher efficiency and far lower costs-per-watt of output. The quarter-to-quarter numbers are always lumpy depending on project sales and other factors, and the comparisons can be a mess. But the big idea here is that solar industry fundamentals are turning up, First Solar’s new, more efficient panels should be a hit next year, and, with a year-end cash balance of more than $2 billion (about 40% of the current market cap!), shares look cheap. It’s an interesting turnaround story.
Technical Analysis
FSLR actually had a decent run in late 2015 and early 2016 when the market was having trouble, but after peaking at 74 last March, shares plummeted to 26 this April. Usually stocks bottom out for a while after such a big decline, before getting going, but not FSLR—it rallied 16 days in a row off its bottom (!), tested its 50-day line in mid-June and has accelerated higher since, with last Friday’s big earnings surge punctuating the advance. It’s extended to the upside here, so try to get in on dips.
FSLR Weekly Chart
FSLR Daily Chart
iRobot (IRBT)
Why the Strength
Stick vacuums like Dyson’s certainly make the chore of cleaning more tolerable. But let’s be honest; it’s even better if you hire a small robot to do the task for you. That’s why robotic vacuum cleaners (RVC) have grown their market share from 13% to 21% over the past four years (the vacuum market itself has grown by 40% to $7 billion). Leading the charge is iRobot, whose stock is surging because investors see it as the main way to play the RVC trend, and last week’s second-quarter results confirmed the company is set to get a lot bigger going forward. Revenue of $183 million was up 22% and beat by $8.5 million, and earnings (while hard to figure due to some one-time charges and benefits) also topped expectations. The story behind the numbers is that Roomba vacuums (including new Wi-Fi connected models) are flying off the shelves in the U.S. and EMEA (Europe, Middle East, Africa), where iRobot owns 88% and 76% market share, respectively. If there’s an issue, it’s that market share is only 34% in Asia-Pacific, where there is far more competition. That said, iRobot killed it on Amazon Prime day 2017, with sales more than doubling compared to last year. It also recently announced it would buy Robopolis, its largest European RVC distributor. Management increased guidance, so expect revenue to grow by almost 30% this year. EPS probably won’t grow as much, but analysts see the bottom line rising 22% this year and 27% next. We like the story, the numbers and the chart.
Technical Analysis
IRBT rallied from the mid-30s to 60 or so by the end of 2016, but hit some turbulence, with a gap down in February and no net progress through mid-March. But the stock then found buyers, with a gap up in April igniting a run to 105 in June. That led to a sharp correction (to 80), a modest bounce, and then last week’s earnings-induced surge to new highs. We wouldn’t be surprised to see some pullback action soon, so if you’re game, you can start small and look to buy more if IRBT heads higher.
IRBT Weekly Chart
IRBT Daily Chart
Lending Tree (TREE)
Why the Strength
LendingTree remains one of the best growth stories that few investors know about. The firm is the #1 online marketplace for loans; it used to be mostly mortgages, and that’s still a big part of its business, but now its other channels (home equity, credit cards, personal, small business and auto loans, etc.) combine to make up more than half of revenues. The long-term attraction here is that the loan industry is moving online, and as the top dog, LendingTree should benefit from the network effect, as more users attract more lenders (who love the qualified, cost-effective leads they get), and vice versa. The second-quarter report was a barnburner, as revenue growth accelerated in a big way (to 62%), with mortgage revenue growing 28%, non-mortgage revenue rising a whopping 118% and a total of 5.4 million loan requests were made (up 48%). While the firm’s earnings figures are a bit hard to read, management sees both revenue and EBITDA (a measure of cash flow) rising around 50% this year, with the latter rising 20% to 25% annually through 2020, a conservative target in our view. At this point, it’s a matter of the top brass continuing to improve the consumer experience, boost its nascent product lines (personal and home equity loans are small but growing nicely) and even add new lending options. There are definitely risks here if interest rates spike or the economy tanks, but today there’s no sign of either in the quarters ahead.
Technical Analysis
TREE formed a giant base from August 2015 through April of this year, but since breaking out around 130, it’s been in a firm uptrend—shares consolidated normally from mid-June through mid-July while the market wobbled, and last week, TREE exploded to new highs following earnings. A dip of a few points should provide an opportunity to start a position.
TREE Weekly Chart
TREE Daily Chart
Novocure (NVCR)
Why the Strength
Biotech and medical device stocks are back in favor, and at the top of the list are small, commercial-stage companies with a focus on cancer. This describes small-cap company Novocure to a T. The company makes medical devices that have been shown in trials to slow the progression of many types of solid tumors, including brain and lung cancer (in Phase 3 trials), and pancreatic and ovarian cancer (in Phase 2 trials). Its treatments are differentiated from surgery, radiation and chemo because they use low-intensity, alternating electric fields (called tumor treating fields, or TTFields) that interfere with cell division and lead to cell death. TTFields are delivered via a portable medical device, two to three times a week, for 18 hours a day, and there are only mild side effects. Novocure currently has its lead product, Optune, approved in the U.S., Europe and Japan for the treatment of glioblastoma (GBM), an extremely aggressive type of brain cancer (the same cancer Senator John McCain was recently diagnosed with). The treatment doesn’t yet cure the patient, but it increases survival rates. Second-quarter results last week revealed 1,460 active patients (up 64%), revenue growth of 114% (to $38.4 million) and a loss of $0.24 per share. Revenue is likely to double this year, though reimbursement coverage could significantly increase market potential. The company’s unique technology has massive potential and the stock is well liked by analysts. Still, it’s an emerging technology, so don’t go in whole hog.
Technical Analysis
NVCR went public in October 2015 and raced above 28 before the post-IPO blues struck. By early 2017, shares were trading at 6. That level proved to be the bottom and was tested multiple times before shares blasted to 14 on news that Optune increased survival rates for GBM. The stock consolidated through May, but the hook was set, and shares soared as high as 22 earlier this month. The stock has since consolidated near its 25-day line; if you’re game, you can start a position here with a stop below 17.
NVCR Weekly Chart
NVCR Daily Chart
Proofpoint (PFPT)
Why the Strength
The WannaCry ransomware attack in May affected almost 250,000 computers. It was yet another reminder for investors that one of the few positives from cyberattacks is that they fuel growth for cybersecurity stocks. We’ve believed Proofpoint to be one of the top dogs in the sector for a while now, and last week’s great Q2 report only increased our conviction that shares will keep rising. Proofpoint has carved out a defensible market-leading position by offering a subscription based set of security solutions (email, malware, ransomware, etc.) in a market still dominated by stodgy old legacy solutions. Moreover, it continues to innovate on the product front, and the Q2 report suggests its emerging solutions (Email Fraud Defense, Social Media Protection and Threat Response) are pulling in plenty of new subsribers (10% of new business in Q2). That said, core email protection remains the company’s bread-and-butter. And that business is being supported by accelerating adoption of Office365 (cloud-based email) and Intel-McAfee’s retiring of its email products (it has endorsed Proofpoint as its exclusive transition partner). While there’s competition, Proofpoint’s average revenue growth of 40% over the last three years, and likelihood of 30%-plus growth in 2017 and 2018 (along with 60% EPS growth!), lead us to believe that the company is capturing more business than its competitors. Even better, the firm’s cash flow is expected to total well over $2 per share this year, miles ahead of reported earnings. It’s a good story.
Technical Analysis
PFPT suffered a big drop in early 2016 (75 to 36) as the broader software sub-sector fell apart. But its performance since has washed away many company-specific concerns. The stock rallied back to 80 by September of last year, but then corrected and, except for a brief leap to 88 in November, made no progress through April. PFPT then reached new highs at 94 in June and has since paused in the 83 to 94 range. It’s still base-building, so start small here.
PFPT Weekly Chart
PFPT Daily Chart
YY Inc. (YY)
Why the Strength
YY Inc. is a Chinese social media company that doesn’t have an exact U.S. equivalent. The company’s media platform lets users interact in karaoke, play games, discuss movies, listen to music, watch videos and find dates, all in live streaming. The company also streams talk shows and educational content, and enables users to make up their own groups centering on a common interest. Most of the company’s revenue comes from streaming fees, with small increments coming from games (mostly the sale of in-game items) and membership fees. The company’s all-important number of monthly active users doing mobile live streaming reached 63 million in the first quarter (up 12% from the previous year) and the number of live streaming paying users was up 66% year over year. Revenue grew by 31% in 2016 and 29% in Q1. Earnings were up a whopping 97% in Q1, evidence that a program of cost-cutting was having an effect. Analysts are looking for earnings growth of 30% this year and 16% in 2018, although YY Inc.’s rebranded live game channel, Huya, has great breakout potential. YY Inc. has a lot of history, including an unsuccessful attempt by its CEO to take the company private in 2015. But while it’s closer to the speculative end of the growth spectrum, the company appears to be on solid strategic ground, and its 13 forward P/E makes it a bargain. Q2 earnings will come out on August 10, before the market opens, and analysts are looking for revenue of $367 million and $1.24 per share in earnings.
Technical Analysis
YY was a rocket back in 2013 and 2014, but the stock went into a protracted decline after management’s failed attempt to take it private. The stock bottomed in June 2016 but its rebound was too volatile to touch. YY began a steady rally in April 2017, running from 43 on April 18 to 60 on June 1. The stock blasted out of a six-week consolidation on July 14 and 17 with a run to 65 and followed through to as high as 74 last week. A pullback of a couple of points has created a good buying opportunity, although the upcoming earnings report means you should keep any investment relatively small. Keep a close eye on the stock’s reaction on August 10.
YY Weekly Chart
YY 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.
