Uptrend in Effect, But Watch for Rotation
Current Market Outlook
The market’s intermediate-term trend turned back up last week after the major indexes tacked on more gains following the Fed’s dovish words. Combined with a bullish longer-term trend and many indicators that suggest investors remain hesitant, the path of least resistance for stocks remains up. That said, the market rarely makes it easy, and on that note, we’ve seen a fair amount of rotation in recent days out of some of the strong (and in many cases, extended) growth stocks and into other areas of the market. Overall, we remain bullish, but you should take things on a stock-by-stock basis—if you own something at a good profit, consider booking partial profits and trailing a stop for the rest, while honoring loss limits on any recent purchases. On the flip side, many “fresher” names look poised for higher prices as they’ve only recently emerged from multi-month slumbers.
This week’s list contains all types, but includes a few of those fresher-looking charts. Our Top Pick this week is Iqvia (IQV), a steady, reliable medical play that just blasted off from a good-looking rest period.
| Stock Name | Price | ||
|---|---|---|---|
| Agnico Eagle Mines (AEM) | 79.05 | ||
| AAXN (AAXN) | 87.11 | ||
| CoStar Group (CSGP) | 589.55 | ||
| Exact Sciences (EXAS) | 116.91 | ||
| Insulet (PODD) | 175.69 | ||
| IQVIA Holdings (IQV) | 157.93 | ||
| Rapid7 (RPD) | 63.52 | ||
| Sea Limited (SE) | 132.86 | ||
| Tempur Sealy (TPX) | 85.53 | ||
| Under Armour, Inc. (UAA) | 26.82 |
Agnico Eagle Mines (AEM)
Why the Strength
This marks the third straight week we’ve had a gold stock in Top Ten, and the most important factor for the sector’s strength is obviously the price of gold, which last week surpassed $1,400 per ounce for the first time since 2013. But one thing we’re seeing in many gold companies, including Agnico Eagle, is increasing output while costs, which in the past have gone crazy at times, come steadily down. Agnico is a well-run operation (production and costs have bested guidance seven straight years), though to be fair, output has basically stagnated during the past four years. But that’s set to change, as the firm has invested heavily in some areas in (very) northern Canada and should begin to reap the benefits going forward (7% production growth this year, 14% in 2020 and 3% in 2021—all likely conservative). And as CapEx declines, all-in costs per ounce should decline a few percent during that time. The result should be solidly rising cash flow, and if gold prices continue their uptrend, all of that goodness will fall to the company’s bottom line, which could lead to higher dividends (current 1% annual yield) and/or share buybacks. But, again, the main driver here looks like the price of gold—even before the recent pop, analysts see Agnico’s earnings roaring back in a big way, rising north of 70% both this year and next. It looks like one of the leaders of the sector move.
Technical Analysis
Form a peak of 60 back in mid 2016 to a low of 32 last September, AEM was in the doghouse along with most of its peers. But what separates it from many was the solid comeback to 46 in March, a tight, controlled pullback for two months after that, and then a rally to 20-month highs on big volume as gold perked up. Buying on a dip of a point or two makes sense.
AEM Weekly Chart
AEM Daily Chart
(AAXN)
Why the Strength
We took a swing at Axon back on May 20, but it never fell into our buy range within two weeks. Now, after a good-sized shakeout and recovery, we’re stepping up to the plate again. The story here is really one about transformation—while Axon (formerly known as Taser) still gets the majority of its revenue from “electrical weapon” sales (basically stun guns), the growth is all about software and body cameras, which allow law enforcement entities to record, edit, share, store and analyze reams of video. And they sign up for these services on a subscription basis, creating a recurring revenue stream to Axon. (Even the firm’s newest Taser weapons are often bought in ongoing bundles that include training and unlimited cartridge replacements.) Thus, instead of keying off current sales (OK growth) or earnings (shrinkage the past two quarters), big investors are keying off sub-metrics like annual recurring revenue under contract ($122 million at the end of March, up 47% from a year ago) and total future contracted revenue ($930 million, up 43%). One short selling outfit is very bearish on Axon, claiming underlying business trends are softening and Chinese tariffs will hike costs, but the stock got a boost last week after a patent challenge against AXON was tossed out in court. To be fair, the firm’s history has been spotty, but the future looks bright.
Technical Analysis
For all its day-to-day movements, AAXN has been trending persistently higher since a shakeout in early March. The action has been choppier during the past few weeks, but the stock hit new highs in early June, and after a quick pre-court-ruling shakeout to its 50-day line last week, boomed right back to new highs on three days of excellent volume. We’re OK grabbing some here with a stop in the mid 60s.
AAXN Weekly Chart
AAXN Daily Chart
CoStar Group (CSGP)
Why the Strength
CoStar Group has a solid story: It’s the leading provider of information, analytics and online marketplaces for the commercial real estate industry, similar to an MLS listing-type of operation but on the commercial side of the sector, while also providing products and services that allows buyers and sellers to gain insight into property values, evaluate market conditions and find availabilities. The firm’s suite of products includes LoopNet (most popular commercial real estate marketplace with six million monthly visitors; revenue up 13% in Q1), Realla (a big U.K. marketplace), Apartments.com and related sites (big for both renters and property managers; revenue up 30%) and special marketplaces for rural land, businesses for sale and software specifically designed for lease accounting (it’s small but revenue up 95% in Q1). Because many of these services are sold on a subscription basis, business has been steadily growing for years, which combined with a healthy commercial real estate sector (much stronger than residential) and hopes that Fed rate cuts will cushion any economic dip, has kept the buyers active. As it stands today, analysts see earnings up 20% this year and nearly that amount in 2020, though we think those could prove slightly conservative if the Fed cuts. Like we wrote above, it’s a solid story.
Technical Analysis
CSGP enjoyed a nice, smooth advance to 448 last September before careening lower to 316 with the rest of the market around year-end. But the comeback from there was excellent, with 10 weeks up in a row, capped by a big earnings gap to new highs in February. The action after that was choppy, but positive, with CSGP holding its 50-day line a few times, and now the stock is stretching its legs to new highs on Fed hopes. We think the stock is likely to head higher.
CSGP Weekly Chart
CSGP Daily Chart
Exact Sciences (EXAS)
Why the Strength
For a stock that’s been a solid winner this year, Exact Sciences has been one of the harder ones to handle (more on that below), so if you managed to hang onto it, pat yourself on the back. But the good news is that, after a decisive move to new highs, it could offer a new entry point on any dip. As for the story, it remains the same—the company is revolutionizing the colorectal cancer (which is the second leading cause of cancer death in the U.S.) testing market with its non-invasive Cologuard test, which can be done at home and is based on DNA testing. Cologuard is driving far higher compliance than colonoscopies (a recent sample of Medicare-ordered Cologuard tests shows a whopping 71% compliance rate, which is way above colonoscopy compliance of around 40%) and it works (94% of those with early-stage colorectal cancer are correctly ID’d by the test). Pfizer is onboard for the next two-plus years to help sell the test, which is probably a reason Q1 results were outstanding (revenue and test volume both grew 79%, posting strongly accelerating growth). And the big picture is enormous—Exact’s goal is to have 40% of the testing market (possibly $6 billion or more of revenue), vs. less than 5% currently! There will be competition from potential liquid biopsies, but those are still very early-stage and unproven, whereas Cologuard is growing like mad and has a powerful sales team behind it. The bottom line is still deep in the red, which isn’t ideal, but big investors are paying up for the huge growth potential.
Technical Analysis
EXAS was one of the first growth stocks to hit new highs after the market bottom in December, but then it went haywire, with five corrections of at least 10% (!) in three months! But since early May, the stock has come under control, with support in the low 90s and a persistent advance to new highs. You could nibble here, though we’re setting our buy range down a bit, thinking the first pullback will be a good entry point.
EXAS Weekly Chart
EXAS Daily Chart
Insulet (PODD)
Why the Strength
We covered Insulet a month ago and the stock is still cranking higher, so we’re featuring the company again. The big picture story is that diabetes affects over 365 million people globally, and treatments can be improved by reducing the inconvenience and cost of multiple daily insulin injections. Insulet’s innovative Omnipod Insulation Management System does both. Omnipod is a pump patch that can be worn on the body and injects insulin based on pre-set parameters. The product drove sales growth of 22% in 2018 and revenue growth should be about the same both this year and next, driving earnings significantly higher. Insulet is also newly profitable, which considerably lowers the stock’s risk profile and reduces the need for dilutive stock offerings just to pay the bills. First quarter results were reported in early-May and were great (revenue up 29% to $160 million and EPS of $0.07 beat by $0.06). But that’s not the only reason we like the stock now. Rather, the strength after the earnings release points to growing confidence in management’s execution and the long-term potential for Ominipod sales to remain resilient, despite competition. The firm’s ongoing expansion efforts with Medicare, Medicaid and United Health Group (UNH) should help keep growth on track.
Technical Analysis
PODD enjoyed a great 2017 and 2018 until a market-induced 35% pullback at the end of last year. It came out of that swiftly, like most of the market’s current leaders did. There was a good-sized wobble in April, but PODD jumped back above its moving average lines in short order and has since rallied nine weeks in a row, moving decisively out to new highs. We think dips of a few points—the first pullback since breaking out—would provide a solid risk-reward opportunity.
PODD Weekly Chart
PODD Daily Chart
IQVIA Holdings (IQV)
Why the Strength
Iqvia is one of those companies that just sounds right. The company came about through the 2016 merger of IMS Health and Quintiles, and today it helps healthcare clients with their clinical development and commercialization programs by offering data-rich technology solutions and contract research services. It helps these customers optimize trial designs, better execute trials, improve trial site selection, cut administrative time during trials, speed time to submission and streamline the entire process through automated workflows that focus on high-value clinical tasks. The evidence is impressive: Industry reports suggest IQVIA’s Human Data Science Cloud provides services to the top 20 pharmaceutical companies and that it cuts observational study costs by 20%, speeds up patient recruitment by 15% and can predict adverse events in a biotech study with a six-fold increase in precision through use of AI. Growth isn’t astronomic, but it’s steady and reliable, with a multi-year forecast sure to keep big investors interested. Indeed, analysts had seen revenue growth of 6% this year, but the top brass recently issued guidance for annual growth of 7% to 10% through 2022, with cash flow up 8% to 11%, lower leverage and continued double-digit earnings growth, as well as more than $1 billion annually for M&A and share repurchases. That’s based on accelerating organic expansion across all segments of the business as demand for Iqvia’s expertise in health care data, analytics and technology infrastructure is driving new business to its door.
Technical Analysis
IQV’s long-term trend line is up and to the right, though there have been plenty of corrections along the way. There was a short-lived dip below the 200-day line last December but IQV pulled out of that quickly, broke out to new highs in February and then consolidated in the 130 to 146 range for the next three months. Now it looks to be getting going again, with a huge-volume surge to new highs last week. We’re fine buying here or on dips.
IQV Weekly Chart
IQV Daily Chart
Rapid7 (RPD)
Why the Strength
Rapid7 is a cybersecurity software company based in our backyard of Boston, MA. The company’s software helps clients unify operational data from across their systems and run it through the Rapid7’s Insights Platform, which combines visibility, analytics and automation solutions. The stock’s been doing well ever since the market realized management was on the tail end of a rotation from an on-premise software business model to a cloud-based one. That transition has not only helped the company more efficiently roll out new products to increase its addressable market but has helped with cross-selling and landing new clients. The upshot is that recurring revenue is going up, and that’s music to Wall Street analyst ears. The most recent earnings report was in early-May when management reported 34% revenue growth and EPS of $0.02 (a $0.10 beat). At the time the stock didn’t react all that much, but that’s because it had been consolidating its gains from earlier in the year. We like that shares just broke out to fresh highs this week (after a few months of basically doing nothing) and that the fundamentals look great. Analysts see revenue up 33% this year and EPS at $0.05, marking Rapid7’s first full-year of profits, with another round of solid growth next year.
Technical Analysis
RPD went public in 2015 and didn’t do much for the first couple of years, but finally had its coming out party in 2018. It corrected 33% last fall, but quickly recovered to break out to new all-time highs above 40 in February. The uptrend stalled out in early-April, leading to a two-plus month consolidation, before leaping to new highs on good volume last week. We’re OK starting a position here with a stop in the low 50s.
RPD Weekly Chart
RPD Daily Chart
Sea Limited (SE)
Why the Strength
Sea Limited has been white hot since February, and we covered the stock in both April and May. Little has changed since our last update, which followed the release of Q1 earnings on May 22. The company is still arguably the best way to play the big trends of online gaming and e-commerce in Southeast Asia. It’s backed by China’s Tencent, which adds another layer of legitimacy and financial backing. And the mashed up business model of a big e-commerce division, Shoppee, and an online gaming unit, Garena, gives investors something they can’t get in many other places. The market is bidding up shares because management has figured out how to monetize the platforms. Revenue is up 158%, 137% and 194%, respectively, over the last three quarters. Analysts now see full-year growth of 140% (to $2.5 billion). That’s up from expected top line growth of 118% just a few weeks ago! As we’ve said before, this company is high risk, high reward situation—revenue beat by 33% in the first quarter, and if new game releases are as successful as previous ones, and if expansion beyond Asia goes successfully, growth could remain rapid for many quarters to come. It’s a wild stock for sure, and the ever-present U.S.-China trade shenanigans are a risk. But just going with the evidence, Sea is one of the leading glamour stocks in the market with some of the best growth numbers out there.
Technical Analysis
SE soared to new highs after earnings in February, but like many growth stocks, it actually chopped around for a couple of months after that, with a few breakout attempts that fell flat. But the stock has been in gear since Q1 earnings, with the stock gapping up to 32, pulling back for a bit and then stretching to higher highs last week. If you want in, look for a retreat of a point or two.
SE Weekly Chart
SE Daily Chart
Tempur Sealy (TPX)
Why the Strength
Tempur Sealy is the world’s largest bedding provider, making mattresses, bases, pillows and other products under the Tempur-Pedic, Stearns & Foster and Sealy brands. It’s been one of the innovators in the market, offering technologies like temperature sensitive visco-elastic pressure foam and adjustable bases. Roughly 80% of sales come from North America, and the company has been rolling out a direct-to-consumer sales channel that now accounts for 8% of revenues and grew by 38% in Q1 2019. That’s one of the reasons the stock’s doing well now. With two “bed in a box” products, Seal and Cocoon By Sealy, the company is tapping into consumer interest in foam bedding shipped right to their door. The brick-and-mortar business is thriving as well, as evidenced by the recent announcement that Tempur Sealy will add 700 positions in the U.S. and just signed long-term supply agreement with Mattress Firm and Big Lots. These deals will supplement its current company-owned Tempur and Sleep Outfitters retail store distribution strategy. It’s not changing the world, but the pieces are in place for accelerating growth—2019 expected revenue growth of 9% is expected to pick up to 15% in 2020, and EPS growth should surge from 13% this year to 46% next (to $4.97).
Technical Analysis
TPX has been all over the place in recent years, with big but relatively brief upmoves and plenty of down action. But since the low in December, it seems to have changed character—TPX has held its 50-day line all the way up to two-plus-year highs, and the recent surge higher on excellent volume tells us buying pressures are building. If you’re game, we’re fine picking up some around here.
TPX Weekly Chart
TPX Daily Chart
Under Armour, Inc. (UAA)
Why the Strength
Under Armour was one of the market’s great growth stocks for a few years after 2009, as the firm’s high-end athletic gear that included some technical advancements (like self-wicking apparel) took the industry by storm and drove sales and earnings through the roof. But competition and some management missteps ate into margins and caused the bottom to fall out of the stock. Now though, shares are strong again as more and more big investors are buying into what looks like a steady turnaround situation—granted, top-line growth isn’t amazing (low single digits for the next couple of years, then accelerating slightly after that), but tight inventory controls (which was a big bugaboo recently, but inventory levels have fallen 24% over the past year), restructuring and cost cuts ($200 million of annual savings within a few years) and debt reductions (down 36% from a year ago) should all help earnings mushroom an average of 40% per year during the next five years. Those targets were presented at the firm’s Investor Day last December, and so far, management is actually exceeding its plan—currency-neutral revenues were up 3% in Q1, gross margins expanded a full percentage point and earnings estimates were hiked; indeed, analysts see the bottom line (which is coming off a low base) rising 30% this year and more than 40% in 2020. It’s not the great growth story of yesteryear, but Under Armour is a great brand with lots of international opportunities and, after hitting a major pothole, looks to be back on track.
Technical Analysis
UAA (we prefer UAA instead of UA simply because it’s a more well-traded, but they both track each other closely) fell a whopping 80% from high to low, but finally bottomed last October (ahead of the general market) and doubled off that bottom by late May. Then came a choppy, loose consolidation, with shares thrashing between 17 and 25 for a few months before getting going in recent weeks—UAA lifted to new recovery highs on solid volume before pulling in a bit. We’re OK starting a position here or on dips.
UAA Weekly Chart
UAA 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.
