Trim Your Sails
Current Market Outlook
May and June were generally great for leading stocks, but some yellow flags began to appear during the past couple of weeks—the major indexes were showing widening divergences, sentiment reached giddy levels and some stocks (like many recent IPOs) went vertical. Some sort of retreat was likely, but the severity of the selling in recent days looks abnormal; many stocks are pulling back after big runs, but a bunch of others are cracking, and the lagging indexes look sick—the NYSE Composite is below its 200-day line! We don’t advise hitting the panic button, as most indexes and stocks are still above intermediate-term support, so you can hold your strong, profitable stocks. But given the evidence, it’s smart to pare back—honor your stops and loss limits, and on the buy side, keep new positions small until support appears.
This week’s list has stocks that have been yanked down recently, but the action looks normal after strong prior advances. Our Top Pick is Carvana (CVNA), which is early stage and holding up well after a big run. Again, keep new positions small and try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Carvana (CVNA) | 82.90 | ||
| Cheniere Energy (LNG) | 63.82 | ||
| Darden Restaurants (DRI) | 106.63 | ||
| Heron Therapeutics (HRTX) | 35.25 | ||
| Illumina Inc. (ILMN) | 289.74 | ||
| Spotify (SPOT) | 272.82 | ||
| Stitch Fix (SFIX) | 36.79 | ||
| Trade Desk (TTD) | 468.02 | ||
| Turtle Beach (HEAR) | 26.70 | ||
| Wix.com (WIX) | 302.53 |
Carvana (CVNA)
Why the Strength
We’ve always loved the Carvana story, and after more than a year of ups and downs from the stock, it looks like a small/mid cap leader. The company is revolutionizing the huge ($760 billion), highly fragmented (biggest firm has 2% of the market) used car business by selling online. But, more important than the online angle, Carvana seems to have thought of everything to grease the skids for buyers, whether it’s ease of purchase (can be done in 10 minutes), delivery (many sites have next-day delivery), selection (more than 11,000 vehicles online, obtained through trade-ins, auctions and more) savings (about $1,000 less than you’d pay at a dealer), financing availability, plenty of car assurances (cars have never reported an accident; seven-day test drive in most cases, etc.), online features (360-degree “tours” online for every vehicle) and even 12 huge vending machines (seriously), where consumers can pick up their car (it’s proven to be a successful marketing gimmick). All of this is working: Revenues and car sales are lifting at triple-digit rates as Carvana opens up for business in more markets (56 at the end of Q1, up 12 from year-end), and while the bottom line is still in the red due to expansion costs, key metrics are encouraging—in Q1, gross profit per car sold was $1,854, up 59% from a year ago. By year-end, the firm expects to be in 80-plus markets, with continued improvements in gross profits and, of course, sales. It’s expensive ($5.6 billion market cap), but the runway of growth looks enormous.
Technical Analysis
When we recommended CVNA back in May, the stock had broken out from a 10-month post-IPO consolidation. It went on to back-and-fill for a while, but went nuts in late May—CVNA broke out again at 32 and quickly ran to 45 in just a couple of weeks! Not surprisingly, the stock then sank to 36, but so far, that dip looks reasonable; shares are well above all moving averages and volume on the retreat wasn’t overly large. You can buy a little on dips.
CVNA Weekly Chart
CVNA Daily Chart
Cheniere Energy (LNG)
Why the Strength
It’s not a traditional energy firm, but we think Cheniere Energy has great potential as it’s more tied to secular trends (LNG export shipping) than the ups and downs of energy prices. Cheniere is the leading producer of liquefied natural gas (LNG, hence the symbol) in the U.S. via four trains (distribution terminals) in its Sabine Pass facility in Texas via long-term take-or-pay contracts. (Example: Cheniere recently inked 20-year deals with PetroChina and China National Petroleum to supply 1.2 million tons of LNG per year starting in 2023!) One of Sabine’s trains just started deliveries in the second half of 2017, with another starting in early 2018, which has kicked Cheniere’s sales, earnings, and distributable cash flow (nearly $1 per share in Q1) into high gear. But the stock is strong today because investors see a ton of growth ahead. The company plans to bring online another train at Sabine in late 2019, and it has a whole other facility at Corpus Christi, with one train starting up in mid-2019 and another in the second half of next year. And it just gave the go-ahead to start construction of a third train at Corpus Christi, too! Cheniere forecasts that the trains set to be online by year-end 2019 will crank out $5.70 to $6.60 per share of distributable cash flow (quadruple this year’s tally), with the potential for that to reach $8 to $9 per share when all potential trains are up and running a few years down the road. Of course, there’s a ton of debt, some LNG price risk and execution risk (building new trains), but big investors (792 funds own shares) aren’t worried.
Technical Analysis
When we last wrote about LNG, it had tightened up soon after breaking out from a tidy-looking base in early May; sure enough, shares surged higher on excellent volume to as high as 68 before the energy sector’s woes pulled it lower. But LNG’s retreat was very orderly, and after nearing its 50-day line, shares surged right back to new highs on good volume. We’re game with buying some here or on dips, with a stop near the 50-day line.
LNG Weekly Chart
LNG Daily Chart
Darden Restaurants (DRI)
Why the Strength
Darden Restaurants and its string of 1,700 restaurants is in a tough business, one that’s sensitive to economic trends, commodity prices and wage growth. But the company, whose brands include Olive Garden, Longhorn Steakhouse and six other names, has been getting it right. The company’s latest quarterly earnings report on June 21 featured 10% revenue growth, 18% earnings growth and 2.4% growth in same-restaurant sales growth (including 4% growth in the flagship Olive Garden brand). The results were strong enough for management to increase the quarterly dividend by 19% to $0.75 per share and to authorize a new share repurchase authorization by up to $500 million (in addition the $235 million already bought back in fiscal 2018 (ended in May). The company expects to open between 45 and 50 new restaurants in fiscal 2019. Management is forecasting total shareholder return (EPS growth and dividend yield) of 10% to 15% during the coming year. This is a fairly conservative proposition, but management is making the right moves to ensure steady growth, and it doesn’t hurt that retail stocks have been showing strength.
Technical Analysis
DRI made two appearances in Top Ten in 2009, and another in April 2017. But the stock hasn’t been a market beater over any protracted period of time. This week’s appearance comes courtesy of a high-volume gap up in DRI from 93 on June 20 to 107 on June 21. The stock followed-through nicely the next day and held those gains today. DRI looks like a reasonable long-term buy for steady growth and a nice dividend yield. Look for a dip of a point or two to get started.
DRI Weekly Chart
DRI Daily Chart
Heron Therapeutics (HRTX)
Why the Strength
Heron Therapeutics is a biotech stock that’s breaking out to new highs because of huge progress made in developing its pipeline that includes therapies for pain, inflammation and nausea. The biggest recent news came last Thursday when Heron announced its local anesthetic candidate, HTX-011, was successful in two Phase 2b clinical trials for use in knee replacement and breast augmentation surgery. The drug candidate is being watched closely since it’s a non-opioid, long acting, local anesthetic with Breakthrough Therapy status. HTX-011 also looked good in two Phase 3 trials for patients undergoing bunionectomy and hernia repair. With eventual applications topping 13 million procedures around the world, HTX-011 obviously holds huge potential. That said, HTX-011 isn’t the only card in Heron’s deck. The company began generating sales in 2017 from two treatments, SUSTON and CINVANTI, for chemotherapy-induced nausea and vomiting (CINV), which affects over one million people in the U.S. each year. SUSTOL and CINVANTI generated a combined $11.6 million in Q1 revenue and analysts see a steady ramp up in growth. Expected sales growth of 115% this year and 175% in 2019 should keep big investors interested. Plus, there’s still huge upside potential if HTX-011 fulfills expectations of becoming the cornerstone of opioid-free pain management for many surgical patients.
Technical Analysis
HRTX clawed its way modestly higher throughout 2017 then broke out to fresh highs in the beginning of 2018. The stock then seesawed between 20 and 25 for a few months early in the year but broke out again after the Phase 3 trial results for HTX-011 were announced on March 19. Shares marched higher in April and May, and a small dip in June only primed HRTX for another blastoff rally after last Thursday’s positive trial results came out. Given the wobbly growth stock action in recent days, try to buy a little on dips.
HRTX Weekly Chart
HRTX Daily Chart
Illumina Inc. (ILMN)
Why the Strength
We featured Illumina just over a month ago and the story today is just as strong as it was then. To refresh your memory, Illumina is the undisputed leader in genomic sequencing, a position it has secured through constant innovation and proven success disrupting the clinical diagnostic market. It is also a steady grower; in most years Illumina delivers double digit revenue and EPS growth. While 2016 marked a soft patch (revenue up 8% and flat EPS growth), Illumina came roaring back in 2017 to post 15% and 20% top and bottom-line growth, respectively. That strength, and success thus far in 2018, suggests Illumina is on the cusp of another leg up in growth as it penetrates its $20 billion target market. Analysts see Illumina’s Next-Generation Sequencing (NGS) for cancer and prenatal as becoming the standard of care within two years as tests are standardized, reimbursements improve, and guidelines are revised. And the company is achieving huge growth in consumable sales into the consumer genomics market (microarray segment revenue was up 48% in Q1 2018) due to growth in companies including 23andMe, Ancestry.com, and Helix. Illumina genotyped or sequenced over seven million consumer samples last year, which is more than it did over the entire preceding decade! A recent acquisition of a data analysis firm for next-generation sequencing, Edico Genome, is just another incremental positive as Illumina tracks toward 16% revenue and 21% EPS growth in 2018.
Technical Analysis
It’s not uncommon for ILMN to go on a nice, long rally, give up some of those gains as the stock digests the previous move, then resume its major advance to the benefit of shareholders. This is the setup we see developing now, after the stock’s 2017 retreat and subsequent strengthening. In early-2018 ILMN has traded above its 2015 peak of 240 multiple times. And the stock’s convincing breakout above that key level in early May, and ability to keep moving higher in recent weeks are positives. We’re OK taking a stab at the stock on this decline, with a stop below the 50-day line.
ILMN Weekly Chart
ILMN Daily Chart
Spotify (SPOT)
Why the Strength
Spotify is newly public (early April of this year), but it’s the dominant player in a fast-growing, global, mass-market industry—the company is the leader in online streaming music, with more than 35 million tracks available to its 170 million subscribers (as of the end of March). The company does have an ad-supported business (similar to Pandora) that’s growing rapidly; sales of that segment were up 38% in Q1 and most analysts see even faster growth ahead. But it’s the firm’s premium, paying subscribers (about $10 per month), who hear no ads, can build their own playlists, have access to the entire music library and can download songs, that make up most of the business—Spotify ended Q1 with 75 million paying subscribers (up 45% from a year ago), and most analysts see this figure growing 30% to 35% annually for at least another few years as it penetrates markets around the world. All told, revenues grew 45% in Q1, free cash flow was solidly positive and the future is very bright. As for competition, there is some, but Spotify is about twice the size of its nearest competitor (Apple Music) and has a much heavier presence outside the U.S. (Spotify is based in Luxembourg). Also encouraging: The stock has been well-traded from the start, and currently averages a whopping $450 million of share volume per day, a sign that big investors are active. We like it.
Technical Analysis
SPOT had a wild couple of days after coming public in the U.S., but for most of April and May, the stock hovered between the high 150s and the 170 area, a relatively tight range. But after testing 160 again in late May, SPOT changed character—shares not only have risen to new price and relative performance (RP) peaks since then, but the rise included a streak of 17 of 18 up days, which often portends higher prices. It got hot today with everything, but you can buy some on its current dip, with a stop in the low 150s.
SPOT Weekly Chart
SPOT Daily Chart
Stitch Fix (SFIX)
Why the Strength
San Francisco-based Stitch Fix is both a young company (founded just in 2011) and a fairly new idea (personalized online shopping for men and women). The company uses clients’ preferences as the basis of its selections and offers a wide variety of clothing from over 1,000 brands, from footwear to shirts, sweaters and outerwear and at a number of price points. The company calls itself “your partner in personal style” and says that it “evolves with your tastes, needs and lifestyle.” New clients create a profile of likes and dislikes, and Stitch Fix’s team of 3,500 employee stylists select five items for shipment. Clients decide what to keep and what to send back (returns and exchanges are free, including shipping). Except for a small loss in one quarter in 2017, the company has been profitable, although expansion costs are leading analysts to forecast dips of 41% in fiscal 2018 (ends in July) and 26% in 2019. Management points out that online penetration of the $342 billion U.S. apparel, footwear and accessories market is just over 20%, and projects that it will rise to nearly 33% by 2022. This is a big idea company, but the immediate spike in investors’ interest is due to the rumor that Oprah might be interested in taking a chunk of the company. Despite denials from Ms. Winfrey, the stock started a swift rise on June 8 and soared higher until today’s big pullback.
Technical Analysis
SFIX came public at 15 in November 2017 and hit 30 within seven weeks. The stock fell quickly back to support around 18, which is where it was trading on June 4. The Oprah rumor caused a spike to 25 on monster volume on June 8, and the stock topped 30 last Friday. Today’s 10% pullback may mean that the speculative interest has waned, but the dip doesn’t look abnormal. If SFIX can make a stand above its April/May resistance at 24, it may be a good candidate for aggressive growth investors. The reaction after today’s negative action will be crucial. You can nibble here or wait for support to show up.
SFIX Weekly Chart
SFIX Daily Chart
Trade Desk (TTD)
Why the Strength
Making its second appearance in Cabot Top Ten Trader in 2018, The Trade Desk is the leader in the burgeoning business of do-it-yourself online advertising. Trade Desk’s approach is called programmatic ad buying, and it lets customers (ad agencies and other entities) create and optimize ad buys in multiple channels, including video, social media and mobile. The company also provides the tools to optimize campaigns using data-driven analysis. The California-based company has been consistently profitable, with revenue growing sharply—up 52% in 2017 and 17.9% in Q1—and outpacing both analysts’ estimates and the company’s own guidance. The company is hot right now because its May 11 earnings report killed analysts’ estimates, with revenue of $85.7 million and earnings of 34 cents per share well above the $73.2 million and 10 cents that were expected. Streaming TV was cited by management as the biggest driver of business, with mobile video also contributing to the general health of online advertising. Analysts point to regulatory pressure from European regulators as a brake on Alphabet’s Google ad program, which will benefit The Trade Desk. Analysts see the company’s earnings rising by 24% in 2018 and 21% in 2019, but the company’s history of shattering expectations likely makes those estimates conservative.
Technical Analysis
TTD came public in September 2016 and immediately left its 18 IPO price behind, running to 67 in October 2017 before a November plunge kicked off a six-month pullback that found support between 50 and 55. The May 11 earnings beat kicked the stock to new all-time highs in one day, and the stock continued to rally to as high as 94 before market weakness late last week stalled its advance and today’s correction actually saw the stock find decent support. You can nibble here or on further weakness.
TTD Weekly Chart
TTD Daily Chart
Turtle Beach (HEAR)
Why the Strength
Turtle Beach is high-risk, high-reward situation, but the stock is acting well and the upside potential could be huge if all goes well. To review, the company is the hands-down leader in gaming headsets (generally for multi-player games), with a 46% market share in Q1 for Xbox and PlayStation, a broad selection (five of the 10 top-selling headsets come from Turtle Beach) and lots of retail distribution. Historically, that’s been a decent business, but it’s caught fire recently due to the popularity of so-called Battle Royale games (including Fortnite, which has become hugely popular), which include a large number of users who hunt for weapons and goods, with the winner being the last character standing. This genre has a far, far higher attach rate of new headsets, which has led to a sudden surge in demand—and Turtle Beach is there to meet it. After many quarters of declining sales (inventories got too high among its distributors), Q1 revenues nearly tripled and the firm turned a profit, which is nearly unheard of given the seasonality in the industry. And, because of the sudden popularity, there are a bunch of Battle Royale games that are set for full releases later this year, and EA is looking to add a Battle Royale feature to its popular Battlefield V game. Of course, if the genre loses its appeal or if Turtle Beach fails to execute, the stock could get hammered. But if all goes well, sales and earnings could explode for a few quarters at least—the three analysts that follow the firm expect earnings of around $1 per share this year and earnings rising 37%. Consider it an intriguing speculation.
Technical Analysis
HEAR has had a huge, huge run this year, rising from 5 in April to 20 in mid-May. Wow! That’s usually enough to scare us off, but we’re encouraged by the recent action. First, HEAR built a reasonably tight base after that huge run. Second, it lifted as high as 24 earlier this month. And third, while it’s pulled back recently, it’s held support in the 20 area fairly well. If you want in, keep the position very small (certainly no more than half your normal size) and use a loose stop.
HEAR Weekly Chart
HEAR Daily Chart
Wix.com (WIX)
Why the Strength
Wix.com is a $4.7 billion market cap software company that offers a web development platform aimed at the small business and start-up market. In a sense, it’s a smaller version of Shopify, with a greater focus on the small end of the market, a stricter focus on website building and a more limited suite of web development tools. The price point is also lower than Shopify’s; Wix.com’s premium subscriptions range from $5 to $25 per month. The company also offers a free version of drag-and-drop website development tools for clients who are willing to tolerate advertisements on their sites. Its offerings and freemium model (free to start, many upgrade to paid products over time) are striking a chord with businesses searching to expand their online presence. Revenue growth has been between 43% and 47% in each of the last three years, and jumped up to 49% in the first quarter of 2018. Also in the first quarter, Wix.com added 5.9 million registered users (up 21% to 125 million) and converted 231,000 current users into paying subscribers, which should drive an estimated $370 million in collections over the next eight years. As for this year, Wix is expected to grow revenue by 40% and deliver EPS of $0.62, its first annual profit, and a big jump from a loss of -$0.01 in 2017. And free cash flow is even larger than earnings, which is always a plus.
Technical Analysis
WIX rallied in 2016 and early-2017 then topped out at 85 in May. The stock spent nine months digesting that move before buyers flooded in again in February after Q1 earnings were reported and the stock traded back near its all-time highs by mid-March. It took a breather for a few months to consolidate in the 80 to 90 range, but broke out powerfully earlier this month, reaching 109 before the recent sharp pullback. We’re OK buying this dip, with a stop in the upper 80s.
WIX Weekly Chart
WIX 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.
