Normal Pause Thus Far
Current Market Outlook
The major indexes and (to a greater extent) leading stocks hit a pothole late last week, but while we see smatterings of abnormal action here and there, the vast majority of stocks are simply undergoing normal rests after what’s been a solid five weeks. Of course, this week has plenty of events on the schedule, including the Singapore Summit Tuesday and the Fed’s likely interest rate hike (and accompanying statement) on Wednesday, both of which could result in some news-driven moves. But we’re just going with the evidence today; the trends of the market and most stocks are up, so we advise sticking with a bullish stance.
As for this week’s list, it’s interesting in that we see a handful of turnaround-type plays that were left for dead until a few weeks ago. A good example is our Top Pick this week: Twitter (TWTR), which just emerged from its first proper launching pad since coming public.
| Stock Name | Price | ||
|---|---|---|---|
| Advanced Micro Devices (AMD) | 82.24 | ||
| Coupa Software (COUP) | 262.20 | ||
| G-III Apparel (GIII) | 45.25 | ||
| Kohl’s (KSS) | 70.62 | ||
| Momo Inc. (MOMO) | 44.65 | ||
| MongoDB (MDB) | 156.56 | ||
| Peabody Energy Corporation (BTU) | 43.32 | ||
| PTC Therapeutics (PTCT) | 0.00 | ||
| Twitter (TWTR) | 40.37 | ||
| Williams-Sonoma (WSM) | 64.96 |
Advanced Micro Devices (AMD)
Why the Strength
Advanced Micro is a semiconductor company that designs central processing units (CPUs) and graphics processing units (GPUs) for personal computers, gaming consoles, servers and a smattering of other devices. In the old days, when it still owned a stake in manufacturing partner Global Foundries, the strategy was to be an integrated device manager. But now Advanced Micro simply designs and sells solutions, and while the transition was painful, it began to pay off in 2016—over the last seven quarters, revenue growth has averaged 27% because of exposure to hot end-markets like set-top boxes, gaming consoles, industrial controls and cryptocurrency mining. The stock is on the verge of breaking out to a multi-year high because analysts see increased potential from sales to OEMs, like Cisco, ramping demand in the PC and server markets and limited competitive risks in the cryptocurrency market. Moreover, Friday’s news that Intel might face a manufacturing issue with its new chip could open the door for AMD to get to market first with its newest solution. The bottom line is that Q1 2018 revenue surged 40% and EPS jumped to $0.11 (up from a penny a year ago). With analysts forecasting 26% revenue growth this year and a 246% jump in EPS (to $0.45) there’s reason to think the firm’s turnaround has legs.
Technical Analysis
AMD has had a choppy history, but as its new strategy began to bear fruit shares gathered momentum—for most of 2016 the stock worked its way higher, finally closing out the year near 12. Trading was choppy in 2017 as AMD oscillated between 9 and 15 without making any real headway. A selloff in early-2018 brought the stock back to 9, but since the beginning of April, buying has been ferocious and shares have rarely suffered a down day. AMD is hesitating near its highs, which could provide a chance to get in.
AMD Weekly Chart
AMD Daily Chart
Coupa Software (COUP)
Why the Strength
The cloud software group has turned mixed, but many newer leaders like Coupa in the group look great. The company has the inside track to be the leading platform that allows businesses to manage their spending (including procurement, invoices, expense management, sourcing, inventory and more) with a great degree of insight, helping to save costs and hassle, especially as companies are often replacing one-off solutions for each spending category. Since inception, the firm’s platform has processed a whopping $747 billion of spending (it estimates it’s saved customers $27 billion during that time), $321 billion of which came just in the past four quarters. Revenue-wise, Coupa believes this is a $37 billion market opportunity that it’s just scratching the surface of. In the first quarter, revenues rose 37% (including a 40% rise in subscription revenues), and while earnings are around breakeven, free cash flow is solidly positive (about 20 cents per share in the quarter). Longer-term, management is thinking big—it believes Coupa can get to $1 billion in revenue, five times the amount it’s collected during the past year, with more potential beyond that. Big investors are beginning to believe, with 258 funds owning 27 million shares at the end of March, up from 140 funds owning six million a year prior. This remains a solid story.
Technical Analysis
COUP has been resilient for all of 2018, so it wasn’t a huge surprise that the stock reacted well to earnings last week. Shares burst to new highs in February, but the key action was the stock’s calm eight-week base during March and April (when the market was weak) and it’s generally positive action since then, as the market has pushed higher. Last week’s rise came on the heaviest weekly volume in more than a year, another plus. We’re OK buying some here or (preferably) on dips.
COUP Weekly Chart
COUP Daily Chart
G-III Apparel (GIII)
Why the Strength
New York-based G-III Apparel has come a long way from its founding in 1956 as an outerwear company. The company has expanded relentlessly over its history, making deals with the major sports leagues and offering a stable of strong brand names like Calvin Klein, Donna Karan, Kenneth Cole, Guess?, Tommy Hilfiger and a host of others. The company has also broadened its focus from outerwear to dresses, sportwear, handbags and accessories. G-III distributes through department stores (including Macy’s and Bloomingdales), wholesale and specialty retailers. The company went through a stretch of pressure on revenue and earnings in 2016 and 2017 as in-store U.S. retail slumped. But the two most-recent quarters have featured huge earnings gains, and revenue now has a six-quarter string of growth in the teens. The company’s earnings report on June 5 beat on both top and bottom lines, with sales at the company’s reduced string of Wilsons Leather and Bass storefronts—the company plans to reduce store count from 350 to 245 by the end of 2018—leading the outperformance. G-III Apparel is constantly adjusting its product lines as management reads the trends and rides the wave of resurgent retail in the U.S.
Technical Analysis
GIII took a two-year dive from 74 in mid-2015 to 18 in mid-2017 as earnings deteriorated. But the rebound reached 31 in September 2017, 41 in January 2018 (when GIII made its second appearance in Top Ten) and blasted out of a four-month consolidation on June 5 on strong earnings. GIII gapped up to 48 on the earnings news and has been trading sideways as it digests its gains. We’re not opposed to picking up some shares here, though dips of a point or two would provide a higher-probability entry point.
GIII Weekly Chart
GIII Daily Chart
Kohl’s (KSS)
Why the Strength
Kohl’s is a traditional department store company that has more than 1,100 stores across 49 states, stocking both national brands and the company’s proprietary brands. While brick-and-mortar retail hasn’t been the flavor of the month for investors for a while, Kohl’s is an exception, as it also features a successful online sales effort. The company’s revenue growth was just 3% in fiscal 2018 (which ended in January), but earnings growth in the two most-recent quarters has been very strong, 30% and 64%. Same store sales were up by 3.6% (after a 2.7% dip in 2017) and the company was able to reduce its outstanding debt by $500 million and increase its earnings guidance. Kohl’s is doing well on earnings in part because of strict cost controls, but is also getting the benefit of its loyalty program and a partnership with Amazon that lets some locations offer Amazon’s smart home products. It’s a bit of a turnaround story and investors and analysts are buying it—Wall Street sees the company’s bottom line rising 28% this fiscal year, leaving the stock to trade at just 14 times this year’s estimates. Even better, Kohl’s will trade ex-dividend on June 12, paying a 61 cents-per-share dividend (equates to a 3.1% annual yield) on June 27.
Technical Analysis
KSS was trading near 80 in April 2015, but slid to the low 30s in 2016 and was trading at 35 in June 2017 despite a rally to 60 at the end of 2016. The turnaround for KSS began in November 2017, when the stock began a rally that lasted for 12 straight weeks and pushed the stock to 69 in January. That led to a sideways consolidation that featured a couple of shakeouts in April and May, and finally a big breakout last week. Look for dips of a point or two to grab shares.
KSS Weekly Chart
KSS Daily Chart
Momo Inc. (MOMO)
Why the Strength
Many strong Chinese stocks get the benefit of a nickname that identifies them as the Chinese version of a well-known U.S. company, and Momo, which is “the Tinder of China,” is no exception. Momo is a mobile-based social networking platform that offers the usual social services like messages, games, photo and video sharing, etc. But Momo’s platform also lets subscribers know when another subscriber is close by, facilitating meet-ups (the company’s version) or hook-ups (everybody else). In the company’s most recent quarterly report on May 29, results—revenue up 64% and earnings up 57%—crushed expectations and guidance for Q2 was very optimistic. Growth in monthly active users (MAUs) topped 20% in Q1, reaching over 103 million, while the roster of paying users (for live video and other services) topped eight million, a 16% gain. Momo recently completed its $800 million acquisition of TanTan, a dating app with about 20 million MAUs. With live video revenue on the rise and a big boost to MAUs driving growth, Momo looks like a real mover.
Technical Analysis
MOMO came public in late 2014, and traded sideways, mostly in the teens, until the middle of 2016, when it caught fire, eventually leaping as high as 47 in August 2017. Then came some trouble when the Chinese government doused investors’ appetite, pulling the stock back to 22 in December. But 2018 has been great for MOMO and its relative performance (RP) line, topping 40 in March, consolidating for a few months under resistance and now rallying to new all-time highs following its powerful quarterly report. With its 25-day moving average back below 43, MOMO may need to pause for a while. You can nibble on any weakness and use a loose stop.
MOMO Weekly Chart
MOMO Daily Chart
MongoDB (MDB)
Why the Strength
MongoDB is a recently public firm (October 2017) whose story is a bit of an ice-cream headache, but the basic theme seems simple enough—the company has the leading new-age database platform that is document based (instead of rows and columns), can work with unstructured and machine data (instead of just structured data), can be used on-premise or in the cloud and be used/edited by co-workers around the world. There is competition, but MongoDB is the leader of this movement, with as many downloads of its database app (it has a “freemium” business model and then upsells customers from there) as all of its new-age competitors combined. Thus, it’s dominating a huge market that’s undergoing a dramatic shift—and that’s why the stock is strong. Revenues have grown between 48% and 58% each of the past eight quarters, while customer growth (6,600 at the end of April, up 83% from a year ago) is soaring and clients spending at least $100,000 annually with MongoDB rose 47%. The firm is still earnings and cash-flow negative, and revenue growth is expected to decelerate a bit (maybe 40% to 45% for the year as a whole), but big investors are looking at the overall potential should the company’s platform become the gold standard in the industry. It’s a very big idea.
Technical Analysis
MDB took about four months to etch a double-bottom base after coming public last October, but then it broke out around 31 and ripped to 46 in five weeks! That was followed by a sharp dip as low as 32 (when the market was tanking) in April before a straight-up advance since then north of 50. Obviously, MDB is extremely volatile in both directions, but the path of least resistance is up. Aim to buy on weakness.
MDB Weekly Chart
MDB Daily Chart
Peabody Energy Corporation (BTU)
Why the Strength
Coal isn’t the energy of the future, but it continues to play a huge role in the world today, both in terms of power (coal plants produce 37% of the world’s electricity, including 30% in the U.S.) and steel production, where prices for metallurgical coal remain elevated thanks to strong demand (and, in the U.S., tariffs). Peabody Energy remains of the pure plays of both thermal and metallurgical coal, with ample reserves and, following a major restructuring during the past couple of years, a much more efficient operation—costs are low and the firm has morphed into something of a cash cow. That fact, combined with the bullish industry fundamentals, is the main reasons the stock is strong today. Q1 results were solid (revenues were up 10% and EBITDA rose 7%, but free cash flow more than doubled), and with no meaningful debt maturities until 2022 and modest CapEx expectations, the firm is buying back shares like mad. During the past year, Peabody has bought back 8% of its outstanding shares ($400 million worth), and just boosted its buyback program by another $500 million! It also pays a small dividend (1.0% annually). There was also news that the Trump Administration might force grid operators to buy electricity from struggling coal plants. Peabody isn’t a great growth outfit any more, but the potential for monstrous amounts of free cash flow is real.
Technical Analysis
BTU emerged from a restructuring in April of last year, and after dipping for a couple of months, put on a nice show—shares rallied from their lows at 23 all the way to 42 in February of this year. Then the stock began a normal basing period, and it was a beauty, with a well-formed cup, a modest low-volume handle and a strong breakout above 42 on May 30 that ran to 48 before BTU rested. Any dip of a point or two would be tempting, with a stop in the low 40s.
BTU Weekly Chart
BTU Daily Chart
PTC Therapeutics (PTCT)
Why the Strength
PTC Therapeutics develops oral treatments for rare, neglected and life-limiting disorders. Its focus is designing small molecule compounds that correct or compensate for genetic defects. Shares are doing well because a March secondary offering is in the rear-view mirror, sales of approved treatments are growing quickly, label expansions are increasing PTC’s market opportunity and pipeline assets are progressing as planned. The main story surrounds PTC’s lead product for Duchenne Muscular Dystrophy (DMD) in patients five and older, which is branded as Emflaza in the U.S. (launched in May 2017) and Translarna in the EU. These two products drove Q1 revenue up over 110%, and management’s wide guidance range of 34% to 52% growth for 2018 has analysts conservatively forecasting 40% growth, implying significant potential for PTC to outperform. A recent catalyst improving the odds of that scenario was a recommendation from European regulators to approve expanding Translarna’s use to include ambulatory children aged two to five years of age. On the pipeline front, RG7916, which targets Spinal Muscular Atrophy (SMA) in infants and young people, and PTC596 and PTC 299, which target types of tumors, are early-stage but showing promise. If you like biotech stocks with both revenue and pipeline potential, PTC should be right in your wheelhouse.
Technical Analysis
PTCT has been working its way higher for the past couple of years with normal-looking (for biotech) pullbacks and consolidation periods along the way. A major rally occurred in early-2018 when shares blasted through resistance near 22 and walked up to 33 before news of a secondary offering stopped the advance. That event pushed the stock down to 25 in April, but after a couple of weeks of digesting the new shares the market got over its indigestion and money began to flow in once again. PTCT just broke out to multi-year highs two weeks ago, and spent most of last week regrouping around the 37 level. We’re OK buying some here, albeit with a loose stop.
PTCT Weekly Chart
PTCT Daily Chart
Twitter (TWTR)
Why the Strength
With well over 300 milling users, Twitter is one of the world’s foremost platforms for real-time content distribution. The open distribution platform for short-form text, image, and video content is readily available at the touch of a button and has increasingly been adopted by world leaders since Trump entered the White House. The stock got off to a rocky start when the company went public in 2013, but its trajectory became more constructive in late-2017 when the fundamentals started to improve, user growth accelerated and analysts began to see potential for revenue growth to return (revenue was down 3% in 2017). Now, after Q1 revenue surged by 21% to $665 million (the fastest rate in almost two years) due to growth in both advertising (up 21% to $575 million) and data monetization (up 20% to $90 million), many analysts are turning bullish on the stock. It helps that a deal for live content and advertising was recently announced with Disney, which further supports the bullish view that Twitter is here to say and that advertisers will keep flocking to the platform. Look for upcoming events like the World Cup to drive user growth and help Twitter meet expectations of 19% revenue growth this year.
Technical Analysis
TWTR chopped around in the 14 to 20 range for most of last year but broke out to fresh highs on heavy volume after Q4 2017 earnings were announced in late-February. The ensuing rally carried the stock up to 37, which was followed by a very orderly and encouraging base-building phase—TWTR dipped as low as 27 but rebounded, tightened up in May and then took off during the past couple of weeks. Short-term, it’s extended, but we’re not expecting a huge pullback.
TWTR Weekly Chart
TWTR Daily Chart
Williams-Sonoma (WSM)
Why the Strength
We’ve seen a few “old world” retailers come under strong accumulation (including Tiffany’s (TIF) in last week’s Top Ten), and Williams-Sonoma is one of them. The company operates three of the top names in home furnishings (Pottery Barn = $2.7 billion of revenue, West Elm = $1.1 billion, Williams-Sonoma = $1.0 billion, with a couple small brands making up the rest), with a vertically integrated operation that employs dozens of designers and artists, operates 15 sourcing offices and has 43 furniture hubs for distribution. The company operates 631 stores, but interestingly, it’s one of the big successes in e-commerce—online revenues now make up more than half of Williams-Sonoma’s total and it’s the 23rd largest e-commerce operation in the U.S. That plays into why the stock is strong: Q1 results showed slightly accelerating sales growth, led by an 11.2% gain from e-commerce, with comparable sales up 5.5% and gains seen across all of its brands. Margins improved, too, helping earnings to easily beat expectations and allowing management to boost its outlook. (Analysts now see earnings up 17% this year.) Combine a reasonable valuation (15 times expected earnings) and a solid dividend (2.8% annual yield) with the accelerating growth outlook and optimism about consumer spending (tax cuts, healthy job market, etc.), and there are many reasons the stock should remain strong.
Technical Analysis
WSM looks like it’s just getting going after years in the doghouse. The stock topped at 89 back in the fall of 2015 and slipped to 47 by early 2016. And then it did … nothing, really, trading between 43 and 57 for the most part during the next two years. But now WSM’s character has changed—shares have exploded higher since earnings on giant volume, with the relative performance (RP) line reaching its highest level since mid-2017. You can buy some here or on pullbacks.
WSM Weekly Chart
WSM 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.
