July 6, 2020

Keep it Simple

Current Market Outlook

Coming into last week, the market was at a key juncture, with many indexes testing their key 50-day lines and even the Nasdaq testing its 25-day line, which has contained its post-bottom advance. Happily, those tests were passed, and now we see the Nasdaq at new highs and other indexes getting some daylight above their 50-day lines. Of course, there are still a few issues out there, as the environment remains relatively bifurcated and there are few stocks at great entry points after 15-plus weeks on the upside; sentiment is also getting a touch euphoric. Thus, you should continue to keep your feet on the ground and not pile into stuff sticking straight up in the air, but you should also respect the primary, bullish evidence and stick to a heavily invested stance.

This week’s list has a bit of a secondary feel to it, though all the names have enticing stories and charts. For our Top Pick, we’re going with Ultragenyx (RARE), one of many biotech stocks that’s showing renewed strength.

Alarm.com (ALRM)

alarm.com

Why the Strength

The home security market is booming, with the number of U.S. houses with security systems predicted to nearly double between 2019 and 2024 (from 37 million to 63 million). Alarm.com is a leader in “smart” security, providing remote monitoring and operating systems (hardware and software) for homes and businesses. The firm works with over 9,000 third-party service vendors (such as ADT) to install and maintain these systems, which are then merged into its cloud-based platform. Its vendors do most of the grunt work, obtaining clients and installing systems, while Alarm handles product development and maintenance. It operates in the Software as a Service (SaaS) space, with roughly 67% of its revenue coming from licensing fees, and once people or firms sign up, they stick around (93% renewal rate). Top-line growth has been impressive, rising at an average annual clip of 25% over the last five years. In the most recent quarter, the firm delivered consensus-beating revenue of $152 million (+35%), along with a 24% earnings beat. Video camera sales are also a big growth contributor, with hardware and other sales in Q1 (+86%) getting a boost from its acquisition of video surveillance firm OpenEye. To be fair, growth is expected to slow this year—analysts see revenues of $527 million this year, up 5%--but with just a 2% penetration of the $14 billion global smart security market, and with smart homes becoming more common by the day, the long-term future is bright.

Technical Analysis

ALRM hit a high of 71 last April, then steadily declined before finally hitting a low of 32 in March. The initial bounce was just OK, but the stock gained strength in early May and again in early June, and buyers haven’t let up in recent weeks. The stock is somewhat thinly traded (around $45 million per day) and extended to the upside (25-day line is around 61 and rising), so we advise aiming for dips if you want in.

ALRM Weekly Chart

ALRM Daily Chart

Biohaven Pharmaceutical Holding (BHVN)

biohavenpharma.com

Why the Strength

Some 12% of the U.S. population suffers from migraines—18% of women, 6% of men and 10% of children. Americans spend $1.29 billion on migraine treatments every year, and that number is predicted to grow to $3.51 billion by 2026. Migraine treatments are one of Biohaven’s specialties: The company’s driver today is Nurtec ODT, which has completed phase III trials for acute treatment and prevention of migraines and was approved by the FDA in February. The drug had sales of $1.2 million in March and has already been prescribed to 6,000 patients, with big expectations going forward (more on that in a second). Beyond Nurtec, the firm has Vazegepant, which has completed Phase 2/3 trials for acute treatment and prevention of migraines, and Troriluzole, which is undergoing an extension trial for ataxias, a degenerative disease of the nervous system that causes slurred speech, stumbling and falling). (Troriluzole also treats Alzheimer’s and obsessive compulsive disorders.) Additional drug candidates include BHV-0223, to treat amyotrophic lateral sclerosis; BHV-5000, which has completed phase I clinical trial for neuropsychiatric disorders; and Verdiperstat, currently in phase III trial for multiple system atrophy. That’s a lot of irons in the fire, but the focus is on Nurtec, and that’s a good thing; analysts see revenues totaling nearly $47 million this year and surging to $260 million or so next, and longer-term, there’s plenty of upside from there.

Technical Analysis

Like most speculative biotechs, BHVN was all over the place in recent years, but as it’s started to come out of the development stage, it’s changed character; shares zoomed back to the upper 40s by mid April, rested for three weeks and then exploded as high as 76 three weeks ago. Now the stock has calmed down again as the 25-day line has caught up. We’re OK grabbing some here, though with a loose stop in the low 60s.

BHVN Weekly Chart

BHVN Daily Chart

Chegg (CHGG)

chegg.com

Why the Strength

Chegg has always had a great growth story, and it’s likely that the virus-related push of everything going online will goose results further going forward. The company started out as a textbook provider (and it still offers those services as an add-on), but the real story is the firm’s online learning platform. Chegg Study ($15 per month) is the biggest draw, a homework learning services with more than 37 million pieces of content and 31 million Q&As in a variety of fields, and there’s also Writing, Tutors and Math offerings (each generally $10 per month), while its Thinkful service provides technology-based skills. As mentioned above, growth has been solid for a while, and the next couple of years should get a boost from cutting down on shared accounts (many students in the same class will often share) and pushing its bundle package for Study, Math and Writing (Chegg Study Pack, which goes for $20 per month). Combined with the fact that students are older than ever (25) and many have jobs (40%) and are looking to get ahead, there’s no doubt demand for Chegg’s leading offerings should expand. As mentioned above, growth has been solid for a while, but the potential remains huge, with 2.9 million subscribers (up 35% from a year ago) out of a potential market of 36 million in the U.S. and another 18 million outside the country. We like it.

Technical Analysis

We have a few “heads up” chart clues to identify new leading stocks, and one of those is when a relatively liquid stock breaks out of a big launching pad on volume at least 10 times normal. CHGG did that after earnings in early May, blasting higher and eventually reaching 68 before a tedious pullback. Shares did hold key support in the mid 50s, though, and have since ratcheted back to new highs. CHGG does move around quite a bit, so aim to start small and use a loose leash.

CHGG Weekly Chart

CHGG Daily Chart

Cloudflare (NET)

cloudflare.com

Why the Strength

If you dig into the details of Cloudflare’s network technology, you’re likely to go cross-eyed, but the firm’s big picture idea is simple and powerful; as the world moves online, and as everything moves to the cloud, Cloudflare’s global network is perfectly suited to handle increasing amounts of traffic by businesses and telecoms thanks to its ability to intelligently route, secure and even learn, resulting in better performance, reliability and security. In the old days, of course, firms would buy a variety of “band aids” for their networks (including physical boxes) to do the job, but that’s becoming impossible as stuff moves to the cloud. Cloudflare’s network that spans 200-plus cities around the world (99% of the Internet population is within 100 milliseconds of its network!) is quickly filling that void, which is one reason it touches more than 27 million internet properties and why 13% of the Fortune 1000 are paying customers. (Another reason: It blocks a mind-boggling 45.1 billion cyber threats per day.) Long story short, it’s well positioned vs. the competition, even vs public cloud operations (like Amazon, Microsoft and Alibaba), which is why it’s quickly taking share in a $30 to $40 billion market. As for the numbers, Cloudflare has been cranking out 50%-ish revenue growth (most of it subscription-based) for many quarters, thanks in part to more big customers (it had 556 outfits paying at least $100k per year, up 65% from a year ago) signing on. And with the rush to the online world caused by the virus, there’s every reason to think business will continue to grow at a fast clip for a long time to come.

Technical Analysis

NET came public last September, built a solid-looking IPO base and actually broke out in February, ahead of the crash. Shares did get tossed around with the market, but not for long, with the stock pushing to new highs in March, April and May. NET did tighten up for about a month after that, but it went through the roof three weeks ago on massive volume and stretched higher today after a two-week pause. We’ll set our buy range down a bit, thinking near-term volatility is likely.

NET Weekly Chart

NET Daily Chart

Nu Skin Enterprises Inc. (NUS)

nuskin.com

Why the Strength

Skin care is big business, with the global market projected to grow steadily in the years ahead no matter what the economy does, thanks in part to China, where the industry is likely to expand in the 7% range annually. And that puts Nu Skin in an enviable position—the company develops and distributes personal care and wellness products worldwide, and interestingly, gets more than a quarter of revenues from China. Its products include skin care systems, such as ageLOC Me customized skin care, ageLOC Spa systems and ageLOC LumiSpa skin treatment and cleansing devices; Epoch products using botanical ingredients derived from renewable sources; and additional other cosmetic and personal care products. As well, Nu Skin offers ageLOC Youth nutritional supplements, ageLOC TR90 weight management and body shaping systems and LifePak nutritional supplements. China is not the only region where Nu Skin is seeing growth—in fact, the stock is strong today because Nu Skin just raised its guidance due to “strong global customer growth with particular strength in the Americas and Europe.” E-commerce has also been a plus, with 80% of its recent volume attributed to online sales. The company now expects to see revenues climb to around $605 million for second quarter, a big, big boost from its previous guidance of $535 million or so. So far, its previous estimates of 2020 remain in place ($2.17-$2.26 billion in sales and $2.05-$2.35 EPS) but Nu Skin has said it will update those figures when it announces second quarter results in August. After a long stretch of rough numbers, big investors are thinking Nu Skin has turned the corner.

Technical Analysis

NUS was in a steady, ugly, long-term decline until the bottom in March near 12. The initial bounce was both solid and persistent (up eight weeks in a row). But it’s the action since then that’s been impressive, with some tight trading for a couple of months, a successful test of the 10-week line and then last week’s pop on the higher guidance. We’re OK snagging some shares here, though dips of another couple of points wouldn’t shock us.

NUS Weekly Chart

NUS Daily Chart

Thor Industries (THO)

thorindustries.com

Why the Strength

We wrote about Thor early last month, discussing the positive effect that the coronavirus was having on the camping industry. Thor is the world’s largest RV manufacturer, with brands including Airstream, CrossRoads, Cruiser RV, Dutchmen, Jayco, Starcraft and Motor Coach. As you’d expect, Q1 was a bummer (though the numbers easily beat estimates), and Q2 should be soft as well, but the stock is strong because the bottom for business is almost surely in, with the firm restarting production a few weeks back. Indeed, eight analysts have upped their earnings forecasts of late in a big way—the average 2020 earnings outlook has risen from $1.80 per share a month ago to $3.37 today (!), and Wall Street sees the bottom line ripping above $5 next year. One RV sector, luxury motor homes, appears especially attractive (Believe it or not, there are some “land yachts” that can set you back more than $3 million!), and Thor is a big participant in the luxury area with its Jayco and Motor Coach brands that run from $120,000 to $429,000. COVID is the driving force behind the expanding RV market, but low gas prices aren’t hurting, either, nor is the expansion in U.S. RV parks, which number about 13,000 strong right now, with some 1.23 million individual trailer campsites and an extra 60,000 trailer sites due to be available soon. With national and state parks (mostly) reopening, the industry has solid tailwinds. A 1.5% dividend yield puts a nice bow on the package.

Technical Analysis

Many stocks have had good runs since the market bottom, but THO’s is one of the most jaw-dropping, with a persistent run (up 10 of 11 weeks) that took it from multi-year lows to multi-year highs. Now shares have taken a break for three weeks. Further retrenchment can’t be ruled out, but all in all, we think THO is a decent buy here or on dips of a few points.

THO Weekly Chart

THO Daily Chart

Trade Desk (TTD)

thetradedesk.com

Why the Strength

Conventional wisdom suggests advertising should decline in the pandemic’s wake as ad budgets are slashed. But Trade Desk isn’t a conventional ad firm, and it has already seen increased internet-connected TV (CTV) advertising. The company’s platform facilitates data-driven digital advertising campaigns across various devices; in fact, it’s the largest aggregator of CTV ad impressions across every major content provider. Earlier this year when the pandemic was in full force, the firm reported CTV ad spending rose nearly 40% year over year in the last part of April, even as traditional advertising collapsed in the wake of the virus. For Q1 as a whole, the firm’s CTV ad spend jumped 100%, while mobile ad spending increased 38% and audio ad spending soared 60%. Although business is expected to decline in Q2 due to the broader economic picture (analysts see overall revenues down 14%, though it’s worth noting the firm often trashes estimates), Trade Desk believes that massive changes created by this year’s shutdowns will soon propel it beyond traditional TV, with a forecast reach of over 80 million U.S. households in 2020. Management is also confident that advertisers will increasingly turn to data-driven (so-called programmatic) strategies to drive precision and value across multiple channels, which is right up this firm’s alley. Following a Q2/Q3 slump, analysts expect a sharp rebound starting after that. Long story short, big investors are thinking the long-term growth trend will soon get back on track.

Technical Analysis

TTD’s comeback from its February/March crash has been astounding, and we think there’s more to go (though possibly after a near-term pullback). After soaring all the way back to its highs by early May, shares tightened up nicely for a month below 320 before breaking out in early June. And since then, the sellers haven’t put up much of a fight. Dips of 10 or 20 points would be tempting as the 25-day line (now at 378 and rising quickly) catches up.

TTD Weekly Chart

TTD Daily Chart

Ultragenyx Pharmaceutical Inc. (RARE)

ultragenyx.com

Why the Strength

Ultragenyx is an interesting biotech story—as the ticker symbol suggests, the firm is focused on rare diseases where there’s no current treatment, and thanks to years of research, it’s just beginning to leap out of the development stage as some products hit the market. The first is known as Crysvita, which was approved a couple of years ago to treat patients for X-linked hypophosphatemia (say that three times fast), a hereditary issue that leads to low phosphate in the blood (and often very weak bones), affecting 48,000 patients worldwide. Crysvita has been the main revenue driver in recent quarters, and the top brass sees direct sales of the treatment rising 65% or so this year, partially thanks to its recent approval for use in a second indication (slow-growing tumors that also lead to phosphate issues; ~3,000 patients worldwide). Then there’s Dojolvi, which just won FDA approval last Tuesday to treat a rare genetic disorder where people can’t convert fatty acids to energy (~11,000 patients worldwide). All in all, analysts see Ultragenyx’s top line growing 71% this year and another 88% in 2021, but that’s likely just the tip of the iceberg, with management thinking the company could produce $1 billion in revenue by 2025 (up from $104 million last year) and have five drugs on the market by then as its pipeline matures. Of course, as a biotech, there will still be trial data-related moves, but perception is growing that Ultragenyx is going to get a lot bigger in the years ahead.

Technical Analysis

RARE has had some big ups and big downs over the past few years, but net-net, it hasn’t done anything great—in fact, at the March nadir near 32, it was sitting at multi-year lows. But shares have completely changed character since then, first rallying persistently off the bottom (five weeks up in a row to 10-month highs), then etching a nine-week ascending base (three higher highs, three higher lows), and last week, breaking out to new highs after the positive FDA news on Dojolvi. We’re OK starting small here or (preferably) on dips.

RARE Weekly Chart

RARE Daily Chart

Upwork (UPWK)

upwork.com

Why the Strength

Any doubts surrounding the work-from-home secular theme were dispelled by the pandemic, as remote platforms are now more prevalent than ever, and it should stay that way—recent surveys point out that up to three quarters of companies anticipate remote work being part of their long-term strategy, and Harvard just today said it’s going fully online in the fall. Upwork, which runs an online talent pool where firms can hire skilled freelancers (similar to Fiverr, which we wrote up recently, but with a longer-term employment focus), was specifically created to fill this need. Its platform makes it easier for employers to collaborate with offsite workers in 180 countries, and its clients include 30% of Fortune 100 companies (including Microsoft and Nasdaq). Upwork broke its own records during the U.S. shutdown by a significant margin in new client registrations and client posts as customers flocked to its platform. Underscoring the surge, Upwork’s revenue grew 21% in Q1 while its take-rate (how much it cleared on every hire) grew 14%, and management believes a 20%-plus annual revenue growth is achievable in the years ahead based on the secular work-from-home trend. The company also just announced a partnership with Citrix in a joint software launch designed to more efficiently manage on-demand talent. Both companies believe that “remote work is here to stay,” and that’s hard to argue with.

Technical Analysis

UPWK came public in early October 2018 (terrible timing for the stock, though good for the company); from the low 20s then, the stock sank steadily all the way to 5 at the March 2020 market low. But now it’s a different animal—shares exploded higher over a six-week stretch starting in early April, consolidated tightly in the 12 area for five weeks and resumed their advance the past two weeks. UPWK is thinly traded (~$40 million per day) and choppy, so aim to buy on weakness.

UPWK Weekly Chart

UPWK Daily Chart

Zscaler (ZS)

zscaler.com

Why the Strength

Cloud growth has exploded, with cybersecurity firms set to play a giant role as everything goes and stays online. One of the new-age leaders in the group is Zscaler, which uses the cloud to provide security as a service, including firewalls, antivirus, malware and data leak detection offerings. Its products are used by firms in more than 158 countries and growth has been solid for a while, including in Q1 as lockdowns pushed businesses to cloud platforms. Growth is the company’s focus, with billings (up 55%) and revenue (up 40%) up impressively last quarter as it had no trouble upselling existing clients new products. Sub-metrics like deferred revenue (up 42%), total future revenue under contract ($654 million, up 31%) and same-customer revenue growth (up 19%) also impressed, while free cash flow (came in at 8% of revenue last quarter) is far larger than earnings. But possibly most bullish were tidbits that management relayed on its conference call, with some large unnamed customers adding tens and even hundreds of thousands of users in matter of weeks as demand surged with the shut-in. (The firm’s network access solution is used by only about a third of Zscaler’s Global 2000 customers, meaning there’s plenty of cross-sell potential.) Its recent cloud security contract with the U.S. Defense Dept. (potentially adding 500,000 users over time) is also a plus. Short-term, analysts see revenues up 37% in the current quarter (earnings won’t be released until August most likely), but big investors are thinking there should be years of rapid growth ahead as migration to the cloud and work-at-home trends remain strong.

Technical Analysis

ZS was a laggard and actually hit 15-month lows in March, but it’s clearly been a leader since then; in fact, the clue was that the stock ripped back to multi-month highs just two weeks after the market’s bottom. ZS then stair-stepped higher for a couple of months before launching on earnings at the end of May. A four-week rest period gave way to higher prices today, though as with many leaders, we think aiming for dips is a better bet.

ZS Weekly Chart

ZS 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.

The next Cabot Top Ten Trader issue will be published on July 13, 2020.