Super Strong, A Bit Frothy
Current Market Outlook
We have a few main thoughts when it comes to the market. First, of course, the intermediate-term trend remains up, and most stocks are acting well, thus we continue to advise a bullish stance. Second, though, divergent action is still in evidence, with small caps and growth stocks racing up the charts, while many sectors and indexes (the NYSE Composite is down 1% this year!) are stuck in the mud. And third, we’ve seen a bit of froth emerge, with some IPOs and other growth names going vertical, whether it’s on news or not. Like we said, we remain bullish—it’s hard not to be when the leading indexes (Nasdaq, S&P 600 SmallCap) and stocks are acting well. That said, given some of the froth we see out there, be sure to keep your feet on the ground, looking for decent entry points and taking some partial profits on the way up.
This week’s list is chock-full of rapidly growing companies with super-strong charts. Our Top Pick is Nutanix (NTNX), which blasted off in March and, after months of up-and-down action, looks to be resuming its uptrend here.
| Stock Name | Price | ||
|---|---|---|---|
| Canada Goose Holdings (GOOS) | 46.21 | ||
| Dropbox (DBX) | 31.80 | ||
| Etsy (ETSY) | 112.97 | ||
| Exact Sciences (EXAS) | 116.91 | ||
| HealthEquity, Inc. (HQY) | 70.70 | ||
| HubSpot (HUBS) | 582.89 | ||
| Inogen (INGN) | 210.84 | ||
| Nutanix (NTNX) | 55.91 | ||
| RH Inc. (RH) | 252.93 | ||
| Twilio (TWLO) | 183.39 |
Canada Goose Holdings (GOOS)
Why the Strength
When a utilitarian brand breaks out of its narrow intended market and becomes a fashion statement, the results can be astonishing. That’s what happened with Timberland footwear a few years ago and it’s what is pushing Canada Goose, once just a niche maker of down-filled winter outerwear into a rapidly expanding line of fashionable clothes and accessories for other seasons as well. The breakout from its former market has supercharged the company’s results, with Q1 revenue up a whopping 144% and earnings up by 164%. Support from institutional investors is rising quickly, up from 147 a year ago to 234 today. While investors have been warming to Canada Goose since its IPO in early 2017, last Friday’s gap up breakout on monster volume in the company’s stock was fuelled by the company’s report of an unexpected profit in its fiscal fourth quarter, a quarter when seasonal buying patterns usually keep profits under wraps. Revenue, which was forecast at $77 million, came in at $125 million, crushing expectations. Results were boosted by both strong increases in sales at the company’s Toronto and New York City retail stores and “incremental revenue from four new retail stores and eight national e-commerce sites opened during the fiscal year.” Canada Goose has always had a reputation for high quality and practical functionality, but investors see the brand blooming into international fashion status as a huge driver of growth.
Technical Analysis
GOOS came public at 15 in March 2017, and after a post-IPO correction from 24 in June 2017 to 17 in August, the stock has been on a tear. After hitting 38 in February of this year, the stock took a break, trading flat for a couple of months before getting back on track. GOOS was trading at 46 last Thursday, gapped up to 61 on Friday after the good earnings news and continued to soar today. With the stock near 65 and the 25-day moving average back at 43, the risk of a pullback is fairly high. Either look to get in on a pullback of a couple of points or start with a tiny position and try to build from there.
GOOS Weekly Chart
GOOS Daily Chart
Dropbox (DBX)
Why the Strength
Dropbox is a recent new issue, but it’s a good-sized company—with over $1 billion in revenue, the company is one of the leaders in the cloud storage and collaboration market, allowing users to upload, share and edit content from anywhere in the world. (80% of its paying customers use Dropbox for work purposes, and the firm estimates that it has paying customers in 50% of Fortune 500 companies.) There are some big boys competing here, including Microsoft and Google, but Dropbox’s combination of competitive pricing (for basic cloud storage) and, more importantly, security, content controls for file sharing, more advanced syncing options and platform neutrality are attracting more users (it has more than 500 million total users) and converting them into paying customers (11.5 million paying customers). The firm offers a range of plans that include greater storage, customer support and sharing tools, and it estimates that 60% of its free users (300 million!) are quality targets that it could convert to paid subscriptions. (Incredibly, the firm says 90% of its revenue comes from self-service customers who may never speak to a sales rep!) The plan is working, with revenues lifting in the 30% range, while earnings are ratcheting into the black and free cash flow is much larger than earnings. It’s a big story.
Technical Analysis
DBX just came public in March, but there’s quite a bit to see in the chart. The first are the multiple big-volume jumps in April and May; while the stock pulled back after, it was a good sign big investors were buying. The second is the very tight action near 30—again, a sign of accumulation. And then last week, the roof blew off, as DBX exploded to new highs on two days of extreme volume. Expect a ton of volatility, but we’re OK buying a little on dips.
DBX Weekly Chart
DBX Daily Chart
Etsy (ETSY)
Why the Strength
If you want to buy something unique and/or homemade online, you usually surf past Amazon and go directly to Etsy, which is proving there’s room in this world for e-commerce sites catering to people with more eclectic tastes. If you don’t know about Etsy, the company sells unique and difficult to find items from a global network of entrepreneurs and artists. Management says its target market is worth over $1 trillion, which we’d say implies virtually unlimited potential. How exactly Etsy links buyers and sellers to help them complete sales is where the rubber meets the road, and recent success suggests the new CEO Josh Silverman is on the right track. The company has two million active sellers and 35 million active buyers as of March. And when we covered the stock in March we highlighted that Etsy had beaten expectations since Mr. Silverman arrived in May of 2017. His beat streak has now been extended after Etsy delivered better-than-expected Q1 2018 revenue growth of 25% and EPS of $0.10, which beat by $0.05. But the biggest reason for the stock’s strength came from last week’s big announcement—starting July 16, it will hike both shipping and seller transaction fees from 3.5% to 5%. Management said the price hike will boost projected revenue growth in 2018 from around 23% to around 33% and crank up earnings as well. With the lead position in its industry, Etsy has a bright future.
Technical Analysis
ETSY was a dud before the new CEO arrived last May, but since then the stock has spent far more time above its upward sloping 50-day line than below it. There was a three-month consolidation period late last year, then a quick slide in January. But shares have been extremely resilient after that, with the Q4 2017 earnings release in late-February driving a gap up to 25 and a wave of follow-on buying that pushed the stock above 33 in early-June. Then the Q1 2018 earnings beat, along with the news of the price hike, ignited a blastoff rally that has ETSY trading above 40 right now. Like most growth stocks, ETSY is extended, so try to buy on minor weakness.
ETSY Weekly Chart
ETSY Daily Chart
Exact Sciences (EXAS)
Why the Strength
Exact Sciences is a biotech company that’s developed Cologuard, a revolutionary, DNA-based, non-invasive diagnostic screening test for colon cancer dubbed, which claims over 50,000 lives annually in America, second only to lung cancer. Cologuard has been quickly gaining credibility and has the potential to displace more expensive and more invasive alternatives due to its far higher compliance rates (you can do the test at home and tests have shown excellent accuracy). The test is already available to individuals age 50 and older who are at average risk for colorectal cancer, and management says over 1.1 million people have been screened to date, revealing roughly 5,200 early-stage cancers. The pace of testing is likely to go up significantly given that Exact has 110,000 providers (and growing) currently ordering the test. Around 186,000 people were screened in the last quarter alone. While that sounds like a lot, the company currently holds only a 2.6% market share, which leaves a ton of room for expansion in a $14 billion addressable market, especially given that the American Cancer Society (ACS) recently recommended that screening begin at age 45. Management expects over 900,000 Cologuard tests just this year, which translates into revenue of roughly $430 million. That represents 64% growth over last year, which could be conservative given the recent guidelines by the ACS, and Q1 2018 revenue growth of 87%. Earnings are still a ways off, but the potential is huge.
Technical Analysis
EXAS went on a tear in 2017 as quarterly revenue growth reached triple digits. Shares eventually topped out around 60 in November, then the next four months were marked by a pattern of lower highs and lower lows as EXAS retreated to 37. The stock’s bottoming process was swift—after just a couple of weeks shares were back to 50, and following a few weeks of tightness, news of the ACS’s recommendation drove a wave of fresh buying, which recently carried EXAS above its previous high. With the stock extended to the upside, we advise looking for shakeouts to grab shares.
EXAS Weekly Chart
EXAS Daily Chart
HealthEquity, Inc. (HQY)
Why the Strength
Consumers who want to save money on health care are often finding that an insurance policy with a high deductible can provide lower cost and, when combined with a Health Savings Account (HSA)—a plan that uses pre-tax savings to meet health-care expenses—gives the best results. HealthEquity provides cloud-based savings and spending platforms that let users manage accounts to make savings and spending decisions, pay bills and compare options. It’s the largest non-bank custodian of HSAs, with 3.5 million accounts that have $6.9 billion in assets in a total current market with $45 billion in assets and 22 million HSAs. As to the future, estimates of the HSA market at maturity run to $600 billion to $1 trillion in assets and 50 to 60 million accounts. Given the company’s preferred relationship agreements with giants like Blue Cross Blue Shield and the renewal of its Anthem partnership, investors see plenty of potential for growth. HealthEquity reported its fiscal Q1 results on June 4, and the 26% jump in revenue and 63% hike in earnings caused a nice spike in the stock price. Analysts see earnings growing by 54% for fiscal 2019 (ending next January) and 27% in 2020.
Technical Analysis
HQY made next to no progress during 2017, despite trading in a range from a low of 38 to a high of 55. But 2018 has seen a rally that pushed HQY from 47 as the year began to 81 in recent trading. The stock hasn’t closed below its 25-day moving average since February, and that was just for one day. With a long base supporting the rally and a 101 P/E reflecting significant enthusiasm in the growth investing community, HQY is a target of short investors, with 11% of the stock’s float traded short. That’s a potential source of support if the rally continues, but be aware that many investors are betting against that. We think HQY looks buyable on any normal weakness with a stop around 72.
HQY Weekly Chart
HQY Daily Chart
HubSpot (HUBS)
Why the Strength
With a market cap of just over $5 billion, HubSpot is a fraction of the size of larger competitor Salesforce.com. But it is a rising star in the broad customer relationship management (CRM) market and recent integrations with Shopify and Slack are helping the company expand its reach. If you’re unfamiliar with the name, HubSpot’s bread-and-butter business is selling cloud-based marketing automation software, which handles inbound marketing and sales activities, including internet pop-up adds, email, and telemarking calls. The software is mostly used by small businesses, which represent a medium-sized slice of a large but fragmented market worth roughly $28 billion. With differentiated products, HubSpot has been able to win new customers while improving retention (roughly 100%) of existing ones. And new products, including Service Hub, which was released early this year, look likely to help keep the winning streak alive. Analysts are mostly focused on HubSpot’s impressive growth. Revenue was up 39% in 2017, and another 39% in Q1 2018. For the full-year, consensus estimates are calling for 31% revenue growth, and EPS growth of 152% (to $0.63), which reflects the trend of improving margins and strong customer growth (up 44% in Q1 2018). With HubSpot tracking toward $500 million in revenue this year, we see big investors sticking with the name.
Technical Analysis
HUBS has been performing well since the beginning of 2017, albeit with lots of pullbacks and periods of no progress during that stretch. The latest pullback started in late-March after the stock went on a post-Q1 2018 earnings rally that carried it from 90 to 125 over just four weeks. Shares dipped to around 105 three times in March, April and May, then steady buying pushed HUBS above prior resistance in early June. A sharp one-day pullback was quickly bought a couple weeks ago, and shares are now trading near an all-time high. Dips look buyable to us.
HUBS Weekly Chart
HUBS Daily Chart
Inogen (INGN)
Why the Strength
Making its debut in today’s Cabot Top Ten Trader, California-based Inogen is a specialized medical technology company whose portable oxygen concentrators provide long-term oxygen therapy for patients with respiratory conditions like chronic obstructive pulmonary disease. Inogen’s advantage over traditional oxygen-filled tanks is that its oxygen concentrators deliver a continuous supply from ordinary air—both the portable Inogen One and the Inogen At Home stationary unit deliver supplemental oxygen without the threat of running out. The company’s addressable market is estimated at 2.5 million in the U.S. and 4.5 million worldwide, with just 8% of U.S. patients using portable oxygen concentrators. The company’s Q1 earnings report on April 30 showed a 51% jump in revenue and a 78% increase in earnings, beating estimates by a healthy margin and keying a gap up in the stock. Inogen was subjected to an attack from short-selling specialist Citron Research on May 24, which caused a temporary dip in the stock; the report alleged a high level of insider selling, over-reliance on a single product and high valuations. But another analyst immediately stepped in and defended the company’s stock, leading to a recovery of the entirety of the Citron-inspired pullback. Investors seem to be believers in the fundamental story; analysts see sales up 29% this year and earnings up 36% in 2018.
Technical Analysis
INGN has come a long way from its low of 30 in early 2016. The stock rallied to 125 in November 2017, then put in a nice four-month base with support at 113 and resistance at 130. INGN rallied to 140 ahead of earnings and gapped up to 173 on big volume on May 1. After following through to 190 on May 21, the stock dipped briefly to as low as 157 after the short-selling attack, but rebounded to above 190 on June 5. INGN is now trading calmly with support at 180. Obviously, the stock’s had a big run, but we’re OK nibbling around here with a stop near the 50-day line.
INGN Weekly Chart
INGN Daily Chart
Nutanix (NTNX)
Why the Strength
Every few years there’s usually a new networking or data center technology that takes the IT world by storm, and the leading firm in that area almost always enjoys a huge advance. Today, the technology is hyperconverged infrastructure, which looks like the next big thing when it comes to best managing a company’s data center resources—due to specialized software, it streamlines the deployment and management of a client’s storage, computing and networking, leading to lower costs (including less IT staff demand), better data protection and much easier management and support of the systems. While there’s competition, Nutanix looks like the lead dog in the industry, with best-in-class solutions as rated by Gartner. And that’s led to jaw-dropping growth—revenue growth is decelerating solely because the firm is no longer selling hardware to go with its software (no change in gross profit), but all the other metrics look great. We like that around 70% of bookings come from current customers, who generally quadruple their initial purchases over time. Indeed, Nutanix’s management sees billings rising to $3 billion by 2021 (from $750 million last year) as hyperconverged infrastructure goes mainstream. It’s not the easiest story to grasp, but Nutanix could be another VMware if management pulls the right levers.
Technical Analysis
The big clue in NTNX’s chart was the March blastoff, which drove the stock to post-IPO highs on enormous volume—a coming-out party of sorts. That was followed by some choppy trading during the past three months while the market generally bobbed and weaved; shares had three pullbacks, each with higher highs and lows, and even got dinged on earnings in mid-May. But now the buyers are back, with NTNX pushing to new highs on solid volume, telling us higher prices are likely. You can buy some here.
NTNX Weekly Chart
NTNX Daily Chart
RH Inc. (RH)
Why the Strength
RH (formerly Restoration Hardware) is one of the more popular high-end furnishing companies, but growth here isn’t fantastic—while Q1’s sales shrinkage was due to some one-time factors, revenue growth is still only expected to rise about 5% this year and in the high single digits in 2019. So why is the stock going through the roof? Because of some deft moves by management. First, last year, when the stock was on its knees, the company engaged in what looked like a risky move, using borrowings and free cash flow to buy back a ton of stock—the share count has dropped by 33% in the past year! And this year, the top brass is focusing on wringing costs out of its operations; it’s consolidating its distribution network, streamlining operations, cutting inventory and focusing on capital-light leasing deals for new locations. The result: A huge (and likely sustainable) leap in margins and return on capital, which led to a blowout Q1 earnings figure (30% above estimates) and free cash flow that should total more than $10 per share in 2018! Longer-term, management is firm that it can grow the top line in the 10% range and double revenues; if so, the bottom line could soar. Right now, though, RH is more of a special situation, with big investors excited about its booming cash flow and earnings.
Technical Analysis
RH has had a huge run during the past 16 months, but it’s been nearly impossible to hold on for the entire ride, with some hair-raising drops (60 to 41; 80 to 44; 110 to 75) along the way. The good news is that the stock etched a reasonable six-month base starting in January, and showed some tightness in May and early June, with last week’s earnings gap (on 14 times average volume!) being the breakout. If you’re game, you can nibble around here, but be sure to keep positions small and use a loose stop.
RH Weekly Chart
RH Daily Chart
Twilio (TWLO)
Why the Strength
We covered Twilio a couple of months ago and truth be told not much has changed since, other than the stock has gone up a little more and the growth story seems to be more galvanized in the analyst community. The company is a leading provider of cloud-based communications services that are offered via a platform-as-a-service (PaaS) delivery model. Its solutions empower clients to connect and drive customer satisfaction through digital channels, which mostly means embedding messaging, voice and video capabilities directly into web and mobile applications. The big picture story is that Twilio’s products are replacing an old patchwork of legacy solutions that don’t work all that well. Instead, the company offers a “Super Network” that dynamically routes communications through the most efficient channel (text, voice, etc.). The best evidence of the market’s acceptance is Twilio’s stellar growth in a market that totals more than $45 billion. Revenue was up 44% in 2017, and in the first quarter of 2018 sales surged by 48%, active accounts jumped by 33% and gross margins reached 55%. As importantly, analysts are beginning to see Twilio as a credible threat to market incumbents, including Cisco, and last year’s fears of customer concentration have faded as the customer count has rocketed higher. With 36% revenue growth projected this year and 23% next year (likely conservative), Twilio should have enough leverage in its business to turn a small profit of $0.06 in 2019.
Technical Analysis
TWLO didn’t do a lot in 2017 but shares jumped into action in early 2018 when a Q4 2017 earnings beat sent the stock back near its 2017 high of 35. That event opened the market’s eyes to the growth story again, and while there was one modest pullback in March, shares kept gaining momentum and traded up to 45 in the second week of May. Another better-than-expected quarterly report then sent the stock above 50, and over the last five weeks the stock has been steadily grinding higher. TWLO is still extended, but it’s shown no desire to retreat, even when the market wobbles. You can nibble here or (preferably) on dips with a loose stop.
TWLO Weekly Chart
TWLO 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.
