Not Perfect but Very Good
Current Market Outlook
There remain some imperfections in the market’s armor, including a continued lack of pep from small- and mid-cap indexes. And there are still plenty of uncertainties, including the upcoming earnings season and the ongoing U.S.-China trade negotiation/battle. But you can always find things to worry about in the stock market—the key is to focus on a handful of time-tested indicators and let them guide you. For us, that involves the trends of the major indexes (intermediate- and longer-term trends are pointed up), the action of Top Ten stocks (vast majority look solid) and, to a lesser extent, sentiment (which remains neutral at best). You should still be following your loss limits and stops, and on the buy side, picking your stocks (and your spots) carefully, especially if something has earnings coming up in a couple of weeks. But overall, you should remain in a constructive stance.
Impressively, this week’s list has a nice batch of growth-oriented stocks with solid stories. Our Top Pick is Sunrun (RUN), which is a bit thin and wild, but has shown fantastic action lately and has a solid growth story.
| Stock Name | Price | ||
|---|---|---|---|
| Amarin (AMRN) | 14.06 | ||
| Arconic (ARNC) | 17.00 | ||
| Avalara (AVLR) | 102.00 | ||
| Baozun (BZUN) | 44.24 | ||
| First Solar (FSLR) | 83.74 | ||
| Illumina Inc. (ILMN) | 289.74 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| Royal Gold, Inc. (RGLD) | 129.66 | ||
| Sunrun (RUN) | 38.40 | ||
| Zscaler (ZS) | 126.22 |
Amarin (AMRN)
Why the Strength
Now here’s a potentially giant story: Amarin is targeting cardiovascular disease (CV), the #1 cause of death in the U.S., which to this point has been addressed only by decreasing “bad” cholesterol—even though about two-thirds of CV risk comes from other factors. In fact, there are about 12 million U.S. adults on statin therapy that also have very high triglyceride levels. Enter Vascepa, an omega-3 based treatment that has shown excellent results for this population; studies show that using it in concert with statins led to a 20% drop in CV death, a 31% drop in heart attacks and a 28% decrease in strokes, and the results were consistent across all subgroups (male/female, diabetes/not, etc.). Plus, as a bonus, triglyercide levels were shown to drop about 20% in the first year, with bad cholesterol off nearly 7%. Right now, Vascepa is approved as an adjunct to diet to for patients with super-high triglyceride levels, but the FDA is expected to rule by the end of September whether it will be approved for the 12 million population (on statins, still-high triglycerides) mentioned above. That isn’t stopping Amarin from posting great growth now—the company just hiked Q2 and full-year revenue guidance, though it thinks Vascepa can be a multi-billion dollar drug down the road. There’s event risk (the FDA decision), but the potential is huge. Analysts see revenues up 73% this year and 56% next, with solid profits in 2020 and beyond.
Technical Analysis
AMRN was a low-priced nothingburger until September of last year, when the stock exploded as high as 23 following positive trial results. Since then, the stock has gradually quieted down, with its pullback this year finding support near the 40-week line for many weeks in a row. Then, last week, AMRN surged on a pickup in volume after raising guidance. It’s going to be volatile, but we’re OK picking up some shares around here or on dips.
AMRN Weekly Chart
AMRN Daily Chart
Arconic (ARNC)
Why the Strength
Arconic will never be a household name, but it’s a key supplier of high-performance materials, components, systems and engineering for many industries, especially aerospace. The firm operates from three divisions: Engineered Products (57% of total operating profit in Q1) includes things like gas turbines, titanium ingots and fasteners (#1 global supplier); Global Rolled Products (24% of operating profit) includes differentiated aluminum sheet and plate products for aerospace (#1 aluminum sheet provider to that sector) and industrial applications; and Transportation and Construction (19% of operating profit), where it’s the top global supplier of aluminum heavy-duty truck wheels and also provides architectural frames. However, the stock is strong today because Arconic has embarked on a restructuring plan, which first includes cost cuts (aims to cut about 50 cents per share of costs, including half of that by year-end 2019), and it’s also looking to spin-off one of its two largest segments and possibly sell some non-core assets as well by Q2 of 2020. Add in the fact that business is good and getting better (Q1 earnings easily beat estimates; analysts see the bottom line rising 36% this year) and a ton of share buybacks (share count down 8% from a year ago) and there are plenty of reasons this special situation should move higher.
Technical Analysis
ARNC has been in the doghouse for years, meandering in the 15 to 30 range (give or take) since late 2015. But the stock has changed character since early February, when the restructuring/spin-off intentions were released—ARNC has been advancing steadily since then, and the stock has accelerated higher on a pickup in volume since the market’s June low. We think pullbacks of a point or two would mark a solid entry point.
ARNC Weekly Chart
ARNC Daily Chart
Avalara (AVLR)
Why the Strength
Avalara is a cloud-based software company that develops solutions for sales and indirect tax compliance. Sales tax compliance is becoming increasingly complex, and Avalara’s software helps retailers automate the process, helping them to become more efficient and accurate with respect to sales tax calculations, returns filing and remittances. The stock has been doing well because management has reported an increase in customer inquiries following last year’s Supreme Court decision (South Dakota vs. Wayfair) that allows states to require out-of-state retailers to collect sales tax from customers, even if the retailer lacks a physical presence in the state. With sales tax collections approaching $400 billion a year in the U.S., and dozens of states having passed so-called economic nexus laws in the wake of the Wayfair decision, Avalara has a lot of room to grow. Sales rose by 28% in 2018 and by 38% in Q1 2019, which was well ahead of expectations. Avalara isn’t profitable now, and it won’t be until around 2020 at its current trajectory. But the Street is more interested in topline growth and grabbing market share in what is really a brand new industry. And with management guiding for revenue to be up 28% in 2019, big investors continue to accumulate shares. Earnings are likely out in early August.
Technical Analysis
AVLR’s coming out party occurred in early February, when the stock exploded higher on earnings. Shares marched slowly and steadily higher after that on a big pickup in volume before gapping up again on earnings in May. The market downturn around that time led to a seven-week rest, but now AVLR is again tagging new highs. If you want in, aim for dips of a couple of points.
AVLR Weekly Chart
AVLR Daily Chart
Baozun (BZUN)
Why the Strength
Chinese stocks still aren’t in a solid uptrend, but they are improving, and should the sector decisively turn up, Baozun looks like a good bet to help lead the way because of its strong chart (more on that below) and enticing story. The company bills itself as the leading brand e-commerce provider in China, providing many major overseas brands (a total of 200 customers, up from 156 a year ago) with all the services needed for them to successfully navigate China’s e-commerce world, including big data-driven digital marketing, fulfillment and logistics and IT solutions (setting up official online branded stores and chat functions, digital tools to improve automation and more). Despite a slowing Chinese economy, demand for Baozun’s services remains very strong, and it keeps executing for its clients—revenues leapt 31% in Q1 (up 40% in local currency), with earnings up 44% (topping estimates by a penny per share) as total gross merchandise volume boomed 58% from the prior year. Even better, management forecast that Q2 would show similar gains. Of course, the U.S.-China battle royal will have an impact on perception, but Baozun’s growth has remained strong in recent quarters and is expected to remain so going forward; analysts see sales up 30%-plus this year and next, with earnings booming even faster.
Technical Analysis
BZUN broke out in May 2017 near 19 and ran all the way to 67 in June of last year, but despite continued strong gains in sales and earnings, investor perception hit the skids—shares collapsed to 26 at the December market bottom and even as of late May was only at 36. But the action since then looks like a change of character, with BZUN up six weeks in a row to 11-month price highs. Given the run, we advise targeting dips for entry.
BZUN Weekly Chart
BZUN Daily Chart
First Solar (FSLR)
Why the Strength
First Solar was one of the hottest clean energy stocks a decade ago. Those glory days are gone, but with age comes discipline and the new and improved First Solar is a much more stable company than it was back then. The firm sports a stronger balance sheet and posts annual revenue that’s consistently above $2 billion, plus has delivered positive earnings in 12 of the last 13 years. Last year (2018) wasn’t great, but at the midpoint of 2019 analysts are looking for revenue to grow by 56% to $3.5 billion and EPS to soar by 80% to $2.45. Those are huge numbers and are the main reason the stock has been advancing since the beginning of the year. Big picture, the global solar market is increasingly stable and First Solar is helping bring costs down, in large part through the release of its more efficient Series 6 module (launched in 2017), which makes First Solar more competitive on price with the flock of new Chinese firms that stole its cost advantage years ago. Estimates have been inching up over the last couple of months and bullish analyst reports as well as some positive industry-wide forecasts (megawatts installed are expected to surge 25% in the U.S. this year) are drawing more investors into the name.
Technical Analysis
FSLR retreated in the second half of 2018, bottomed out in the 38 to 42 range in November and December, then began to move higher this past January. The uptrend paused after a post-earnings breakout in April took FSLR above 60, but the stock found repeated support near its 50-day line (end of May and again in mid June) and has lifted to new highs on solid volume recently. We’re OK nabbing a position here.
FSLR Weekly Chart
FSLR Daily Chart
Illumina Inc. (ILMN)
Why the Strength
Genomic sequencing stocks are on fire as the industry continues to grow at a consistent rate and revolutionize drug research. Illumina is the undisputed king of the hill, with sequencing and array-based solutions that help a wide variety of customers analyze genetic variation and function, including research, genetic health, oncology, pharmaceutical and consumer-oriented organizations. The stock is doing well because Illumina posted 21% revenue growth and 43% profit growth in 2018, and while the pace of growth is expected to slow (not factoring in acquisitions) into the mid-teens this year and next, the company is still benefiting from bullish big-picture secular trends. Management says there is intense interest in genomic information across research, clinical and consumer markets, with an uptick in business from consumer-oriented companies (23andMe, Ancestry.com, and Helix) being one of the unexpected surprises. There is also building excitement about Illumina’s Next-Generation Sequencing for cancer and prenatal, which could become the standard of care within two years. There are a few moving parts affecting the financial statements this year, mainly the pending acquisition of Pacific Biosciences (PACB) and the deconsolidation of Helix (effective as of April 25). But these are minor in the grand scheme of things. We think the (likely conservative) mid-teen revenue and EPS growth outlook will keep big investors at the table.
Technical Analysis
ILMN broke out to multi-year highs above 250 a year ago and didn’t stop running until it hit 370 late last year. The stock then retreated as low as 270 and as of late May was still hovering near 300. But since the market’s June low, ILMN has done excellently, with a strong five-week run to new price highs, lifting out of a nine-month base. Modest pullbacks look buyable to us.
ILMN Weekly Chart
ILMN Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
MercadoLibre is arguably the best way to play online and mobile commerce in Latin America. The company runs an online marketplace and electronic payment service that allows companies (big and small) and individuals to set up digital stores and sell items through fixed-price or auction-based formats. Industry reports suggest “only” around 460 million users in Latin America shop online now, which implies roughly 70% penetration (versus 90% in the U.S.). With another 100 million that could move online over the next five years, MercadoLibre still has room to grow. Management is adding incentives, such as free shipping and loyalty programs, while investing in branding, technology and distribution (three new logistics centers set to open in Argentina, Brazil and Mexico this year). Analysts believe this will fend off some competition and help bring new users into the fold. There hasn’t been much new news since MercadoLibre released an estimate-beating Q1 2019 report in early-May. Revenue was up 48% to $474 million, EPS of $0.13 beat by $0.26, and payment volume (which is a key growth driver) was up 35%. Look for revenue growth above 40% this year and next, along with a booming bottom line, to help the cause. Earnings are likely out in early August.
Technical Analysis
MELI broke out of a year-long base in February of this year, so, while it’s had a good run, we still think it’s in the early- to middle-innings of its overall advance. The stock has had a couple of wobbles during the advance since then, but each has found support north of its 50-day line. The current three-week rest looks like a solid entry point, though dips toward 600 are possible if the market pulls in.
MELI Weekly Chart
MELI Daily Chart
Royal Gold, Inc. (RGLD)
Why the Strength
Despite a good-looking jobs report last Friday, the market still thinks the Fed is likely to loosen policy later this month, which is one reason gold prices continue to hover near multi-year highs. And that, of course, is the main driver behind Royal Gold, which has one of the best stories in the precious metals sector—the company is one of the biggest owners of royalty and streaming agreements (77% of production is gold, with silver and copper each making up 9%) in the sector, allowing it to have stakes in a ton of different mines (43 in production), have plenty of upside should prices increase (about 75% of any increased revenues falls to the bottom line) and to run a very efficient operation—Royal Gold has just 23 employees (the firm sports the second highest revenue per employee in the S&P 500), and from 2012 to 2018 (when gold declined 19%), the firm’s cash flow lifted 90%, little new debt or equity was sold and the dividend (yielding 1.0%) was ratcheted higher. Business has fallen off with gold prices in recent quarters, but investors are looking ahead to a surge in earnings (analysts see next year’s earnings up 37%) and cash flow as royalties pick up with higher gold prices (and, looking further out, higher production from its mining partners to take advantage of the increased prices). It’s always been a great business model, and now the wind is at the company’s back.
Technical Analysis
RGLD surged from a low of 25 to a high of 88 in 2016, but the stock basically marked time for the next three years—it did make it into the mid 90s a couple of times after that, but as of two months ago, it was hanging around 80. But now the buyers are in control, with RGLD marching higher nine weeks in a row to all-time highs (a rarity in the sector) on solid volume. We suggest buying on dips of a few points.
RGLD Weekly Chart
RGLD Daily Chart
Sunrun (RUN)
Why the Strength
The solar sector looks to be in the early innings of a new upleg (many stocks have lifted to new highs of late), and Sunrun looks like a small-cap (market cap $2.3 billion) leader in the space. The company is the leading residential solar installer in the U.S., offering rooftop solar and battery storage systems in 22 states and Puerto Rico. At the end of Q1, it had 242,000 customers, who pay little up front for installation, ink long-term (20-plus years) contracts with Sunrun that cut their monthly electric bills by 10% to 40% (providing a long-term stream of income to Sunrun) and also get a stable backup system via the firm’s Brightbox battery storage systems. Even better, while there were initial fears of customer defaults, experience has shown that not to be a big worry (about 1% loss rate over time), allowing Sunrun to securitize groups of these contracts. All told, its current installed base should throw off a net present value of $1.43 billion over the long term. Back to the industry, recent excitement comes from some mandates (all new houses in California this year will have solar panels) and higher installation estimates from industry groups (one thinks solar installations overall will jump 25% in the U.S. this year) and individual firms (Sunrun expects to install 17% more in 2019 vs last year). It looks like a legit growth story in the solar space.
Technical Analysis
RUN enjoyed a nice advance from February through July of last year, but then lost steam, falling as low as 9 late last year. The rebound back toward its old highs around 16 was quick, but that led to a more reasonable consolidation from March through May. And now we see a decisive breakout—RUN (which is more thinly traded) has pushed to new highs on three straight weeks of huge volume. You can start small here or on dips.
RUN Weekly Chart
RUN Daily Chart
Zscaler (ZS)
Why the Strength
Zscaler has an easy story to tell. It’s benefiting from the secular growth in cybersecurity spending that’s being powered by the global movement toward the cloud, and all the potential opportunities this creates for bad actors. Zscaler has emerged as a leader in the enterprise market because management successfully anticipated how cloud computing would change the market and it was early to develop a multitenant security platform that would meet the evolving needs of its target customers, which are increasingly reliant (along with their employees, partners and customers) on mobile, cloud and internet-based solutions. All of these factors create gaps in an organization’s security blanket, and Zscaler’s job is to keep the stitching as tight as possible. We love the trend. Sales surged 51% last year and were up 65% and 61%, respectively, over the last two quarters. EPS is positive too, with $0.05 reported in the quarter ending in April. Looking forward analysts see Zscaler delivering $300 million in revenue this year, an increase of 58%, then growing another 33% in 2020. EPS should surge 190%, to $0.18 in 2019 too. In short, it’s a good story with good numbers. We like it and think it’s one of the top growth plays in the security market today.
Technical Analysis
ZS staged its original breakout in February of this year, surging out of a great-looking post-IPO structure which formed during the market’s meltdown. The stock ran as high as 73 in April, but has since gyrated higher, with three higher lows and three higher highs (including one today) during that time. If you don’t own any, you can start a small position here or (preferably) on dips.
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.
