Sellers Remain in Control
Current Market Outlook
Sometimes the simplest analysis is the best, and that continues to be the case for the current market—the intermediate-term trend is down for the major indexes and most stocks (we even saw the resilient software sector finally come under pressure today), so until that changes, you should remain cautious, holding a good-sized chunk of cash, limiting new buying and honoring stops. To be fair, there are many signs that the market might be close to a bounce—emotions are beginning to run high, many measures of breadth and sentiment are “oversold” and we still see a fair number of stocks building normal launching pads—but until the buyers actually step up to the plate, those don’t really mean much. (Indeed, today was the Nasdaq’s fifth heavy-volume down day of the past seven sessions.) Our Market Monitor falls to 4 this week.
None of that, though, tells you to stick your head in the sand. This week’s list is again full of solid charts and stories from a variety of sectors. Our Top Pick is Guardant Health (GH), which isn’t tearing up the charts but is in the middle of a nice, tight consolidation.
| Stock Name | Price | ||
|---|---|---|---|
| Advanced Micro Devices (AMD) | 82.24 | ||
| Anaplan (PLAN) | 47.52 | ||
| Beyond Meat (BYND) | 132.87 | ||
| Dynamic Materials (BOOM) | 60.21 | ||
| Guardant Health (GH) | 88.34 | ||
| Heico (HEI) | 134.84 | ||
| Novocure (NVCR) | 0.00 | ||
| Paycom Software (PAYC) | 0.00 | ||
| Smartsheet (SMAR) | 44.12 | ||
| Snap Inc. (SNAP) | 16.68 |
Advanced Micro Devices (AMD)
Why the Strength
We last covered Advanced Micro in early April, a few weeks before the fabless semiconductor company delivered a solid Q1 report (released on April 30). The stock continues to perform well even while many other chip stocks are ailing, largely because demand in its three biggest end markets—personal computers, gaming consoles and cloud servers—remains strong. Advanced Micro supplies these markets with CPUs and GPUs, and Q1 results (revenue of $1.27 billion beat expectations and EPS of $0.06 was in-line) showed that positive trends are still intact. Recall that AMD has been gaining market share since Intel suffered product delays with its new chips, and while Intel is getting back in the game, there is still a lot of buzz around AMD following fresh details on its product roadmap at the recent Computex trade show in Taiwan. In the spotlight is the firm’s new 7 nanometer Ryzen 3 lineup for desktops, which claims a 15% performance improvement versus the previous generation product, as well as the new 7 nanometer Navi graphics processor, which should drive a 25% improvement in performance per clock versus the previous generation. The consensus is that AMD’s management is executing on its growth strategy, and with enthusiasm building for the new product lineup, analysts see revenue growth ramping from 6% this year to over 20% in 2020, with a ton of earnings leverage to go with that.
Technical Analysis
AMD broke out to multi-year highs above 15 last July and rallied up into the low 30s in September before the sellers stepped in. Following a volatile end of 2018 that pulled AMD down into the mid-teens, the stock chopped its way higher through January, February and March. AMD leapt to a six-month high in early-April after earnings came out and has spent the last few weeks trading between 26 and 30, which is solid action considering the market and the overall chip sector. If you’re game, you could nibble here, or just keep it on your watch list.
AMD Weekly Chart
AMD Daily Chart
Anaplan (PLAN)
Why the Strength
Anaplan is one of the newer cloud-based software companies out there, having just come public last October. The elevator pitch is that Anaplan is a pioneer in the connected planning software space, offering companies a platform that makes high-level planning a continuous, dynamic process rather than a static effort that’s completed only once a year. Anaplan’s Connected Platform allows for collaboration across organizational functions, including HR, finance, supply chain, marketing and operations, which gives it a large (estimated at $24 billion) and growing market to target. In large part because of that (and its leading products), analysts figure Anaplan has the potential to crank out revenue growth in the mid-20% range for several years. Given that revenue was up 40% in 2018 and 43% in fiscal 2019 (ended in January), that growth rate is easily attainable. The stock is doing well because the market agrees with Wall Street’s take—Anaplan just reported Q1 results last Tuesday and revenue growth of 47%, to $75.8 million, and EPS of -$0.16 (beat by $0.04) suggest the company is on tract to grow closer to 37% this year. Granted, the growth rate will slow as the revenue base expands, but with management expanding the partner ecosystem and smashing expectations on everything from subscription billings to large customer deals, big investors see this story going from good to great.
Technical Analysis
PLAN came public at last October, and despite the awful market, held up very well through the end of the year and then it immediately got going when the calendar flipped, with shares pushing higher and then gapping up to 40 after earnings in February. PLAN then corrected and consolidated, but acted normally during the first three weeks of May, and then soared to new highs (on massive weekly volume) last week after another blowout quarterly report. There should be good support in the upper 30s if you want to buy a little here or on weakness.
PLAN Weekly Chart
PLAN Daily Chart
Beyond Meat (BYND)
Why the Strength
We remember everyone laughing at Crocs and their funny-looking clogs back in 2007 when it came public, only to see it go bananas on the upside (it was a big winner for both Top Ten and Cabot Growth Investor subscribers) during the next year as business took off. Beyond Meat has a lot of similarities to that in our mind—a consumer-facing company with a unique product (in this case, a specially formulated plant-based “meat” that has similar tastes and textures as real meat, and of course is much healthier, too) that is selling into a giant mass market ($1.4 trillion global annual meat sales) and has attracted lots of laughs. But we think there’s huge potential, as do many in the industry: Burger King has launched a plant-based Whopper using a competitor’s product, and KFC, Chick-fil-A, McDonalds and others are discussing plant-based meat product offerings. This sort of move isn’t unheard of—about 13% of milk sales are now almond, soy or some other vegan variety—and while dairy allergies prompted some of that, many analysts think vegan meat can be a $120 billion-plus market in the years ahead. As mentioned above, there is competition, which is a risk, but there should be room for plenty of players if the industry takes off, and Beyond is an early leader with a solid brand name. As for the numbers, the firm is small but growing rapidly on the top line via retail (16,000 grocery stores in the U.S.) and foodservice (Carl’s Jr., Del Taco, TGI Friday’s, A&W Canada and many hotels). The next update comes on Thursday (June 6), when the firm will release results and its outlook.
Technical Analysis
BYND came public in early May and, despite a horrid stock market, has acted beautifully—the stock has stair-stepped higher since then, with volume expanding in a big way during rallies and easing on the first two pullbacks it’s seen. Granted, BYND is more of a watch list stock right now given the market, its newness and this week’s quarterly report, but any reasonable dip from here could offer an opportunity to nibble if you want in.
BYND Weekly Chart
BYND Daily Chart
Dynamic Materials (BOOM)
Why the Strength
Dynamic Material’s story revolves around the perforation of oil and gas wells (basically creating small holes in the tube casing that allows oil/gas from the ground to move into the well)—in the old days, big explorers would have teams that would collect perforating components from different suppliers and assemble them onsite, which was costly and led to many errors (and poor safety). But Dynamic Materials is leading the move toward factory-assembled, performance-assured perforating systems, which has far higher reliability, quicker use times and reduced transportation and labor costs, which is leading to massive increases in productivity (sometimes 40% more stages drilled per day!) and, hence, profits. Dynamic has a big global reach and is the only firm manufacturing all primary perforating components, which has led to great demand—in Q1, the perforating part of the business saw sales rise 63% from a year ago, while cash flow surged 83%; all told, earnings of $1.02 per share beat by 37 cents! Big picture, as fracking grows in importance and as the number of stages (i.e., number of times a rock is broken to get more oil/gas from an area) expands, so too should demand for the company’s solutions. Dynamic also does a steady, profitable business in welded plates for energy and infrastructure markets, but it’s the perforation story that’s driving growth and expectations. Analysts see revenues up 28% this year and earnings up 78%, with more growth expected in 2020.
Technical Analysis
BOOM is a small-cap name (just $1 billion market cap) that trades just $25 million per day, so it can be choppy, but there’s no question the buyers are in control. The stock plunged from 50 to 30 late last year, and was still hanging around 35 in late February. But BOOM enjoyed a massive earnings gap back to 50, lifted to 60 in April when it hiked Q1 forecasts and ran to 70 a couple of weeks later. The stock has chopped sideways since despite the market and a horrid energy sector. You could nibble here with a stop below 64.
BOOM Weekly Chart
BOOM Daily Chart
Guardant Health (GH)
Why the Strength
We love companies with compelling stories and strong fundamentals, and this describes Guardant to a tee. If you’re not familiar with the company, Guardant is a precision oncology company that develops blood tests that detect cancer in high-risk populations and for those with previously removed tumors. Its liquid biopsy tests are used in both biopharma (GuardantOMNI covers 500 genes) and clinical (Guardant360 covers 73 genes) use cases. It has an addressable market of around $10 billion today, but should adoption of liquid biopsy testing take off that could easily grow to $30 billion. The company reported Q1 results on May 9 and basically every metric looked great. Revenue grew by 120% (to $36.7 million), accelerating in a big way from recent quarters, and beating estimates by a big $5 million. Meanwhile, EPS of -$0.30 (which actually included a one-time charge) beat by $0.06. Outperformance came mostly from clinical testing with a little help from biopharma. Management says it’s still on track to complete FDA filings that could make a few testing panels eligible for Medicare coverage in 2020. The firm is also advancing plans to launch a prospective colorectal cancer screening study, and while details were scarce, this is another big market opportunity. It’s hard not to love the topline growth (analysts anticipate 50% revenue growth this year and next, both of which are likely conservative), even though Guardant won’t be profitable for at least a couple of years. It’s a good story.
Technical Analysis
GH came public last October, and after kicking around in the 30 to 45 range for a few months, the stock tightened up and then went on a tear, eventually spiking over 100 in mid-March. The correction after that was fierce (down to 62), but GH held support in that area and has shown some solid buying since, first on earnings (May 10) and then on a big share offering that was oversubscribed (May 23). It’s since tightened up nicely just south of 80, which is impressive action. We’re not opposed to a small position here.
GH Weekly Chart
GH Daily Chart
Heico (HEI)
Why the Strength
Heico will never be a household name, but it’s a great company that continues to crank out growth in an industry that isn’t overly sensitive to the current global worries. The company is a leading player in supplying replacement parts for the airline industry, and Uncle Sam offering an alternative to the big OEM’s that dominate the market (and, in many cases, charge crazy prices for similar quality). It’s a great business as new jets lead to decades worth of replacement part demand, and Heico has steadily built its reputation over the past 20 years, linking up with most of the world’s top airlines. Business has been great for years, and the stock is strong today after Q1 easily topped expectations: Not only did sales and earnings growth both accelerate in a big way, but management stated that its healthy balance sheet (less than 30% debt-to-equity ratio and no debt maturities until 2023) will allow it to make accretive acquisitions (it closed five in the past year alone) going forward. (Just today it announced taking a majority stake in a surveillance countermeasures outfit). The top brass also boosted its forecast, and analysts have done the same—Wall Street now sees earnings up 36% on a sales gain of 12% or so, with double-digit gains in 2020. It’s not changing the world, but investors are confident that Heico will continue to crank out solid, steady growth as the aerospace industry expands.
Technical Analysis
HEI has been advancing steadily for years, but its pop last August brought it out of trend on the upside, which, along with the market, led to a sharp 24% correction. But the stock rounded out a base from there and has acted very much “under control” in recent weeks—there was a tight rest in the 90 to 95, and after a run higher, another calm consolidation in the mid 100s. And then earnings last week unleashed a multi-day wave of big-volume buying, even as the market tanked. Aim for dips if you want in.
HEI Weekly Chart
HEI Daily Chart
Novocure (NVCR)
Why the Strength
Any treatment that can deliver a lasting blow to cancer cells is bound to have huge demand. That’s the big idea behind Novocure, a commercial-state oncology company that developed a medical device called the Optune system, which treats cancer by mechanically disrupting cancer cell division with electric fields, called Tumor Treating Fields (TTF). The treatment has already been approved for patients with newly diagnosed and recurrent glioblastoma multiforme (GBM), which is where all the current revenue is coming from—sales were up 41% to $73.3 million in Q1 (reported on May 2) while EPS of -$0.13 beat by $0.02. Novocure had 2,631 active patients on Optune as of the end of March (up 31%). That’s exciting growth and there’s more to come from GBM treatments in part due to the recently proposed Medicare coverage for Optune, announced May 10 (there’s still a 45-day public comment period to get through). But the biggest recent news (on May 23) is that the FDA has approved TTF treatment, in combination with Eli Lilly’s Alimta and platinum-based chemo, for the first-line treatment of locally advanced or metastatic malignant pleural mesothelioma (MPM). This is the first treatment for MPM approved in the U.S. in 15 years (!) and marks another major milestone for a technology that continues to kick cancer in the teeth. Revenues should grow 35% to 40% both this year and next, with the bottom line reaching the black in 2020.
Technical Analysis
NVCR broke out of a nine-month base in April of last year and proceeded to more than double, hitting 54 by the end of September. The end-of-2018 market retreat pulled NVCR all the way back below 30, but it rebounded and rallied right back to its hold high in February. But shares ran out of gas again and have since gone on to etch a more reasonable launching pad (27% deep, 13 weeks so far), and it’s shown great relative strength of late (up six weeks in a row). If you’re game, you can start a position here or on further weakness—or just keep it on your watch list.
NVCR Weekly Chart
NVCR Daily Chart
Paycom Software (PAYC)
Why the Strength
We’ve talked many times about how much we like cloud-based human capital management (HCM) software companies because they serve a large market that’s continually growing as they take share from legacy offerings. Paycom Software is one of the leaders in the space so it regularly pops up on our radar. The $12.4 billion market cap company has been selling human resources, payroll, benefits and talent management software since it was founded back in 1998. Paycom keeps giving customers more of what they need, with solutions to cover the entire employment life cycle, from recruitment to retirement. The founders built the company’s technology on a single database for all HCM functions, which not only streamlines things for developers (i.e. easy to build and expand functionalities), it makes it painless for customers to turn on a new solution. The company reported Q1 results a month ago and, yet again, beat expectations by delivering 30% revenue growth (to $200 million) and EPS of $1.19 (beating by $0.08). Consistency is the name of the game here and Paycom is delivering it in spades. Big investors are always attracted to rapid and reliable growth, and that’s exactly why the stock remains resilient.
Technical Analysis
PAYC rallied to fresh highs near 164 last September but got beat up at the end of the year before regaining its composure and blasting off to a fresh high above 165 in early-February. Since then PAYC has been grinding higher, mostly making a series of higher highs and higher lows above its 50-day line. That pattern is being tested now, though, as the intense selling today in software names brought the stock back down to its 50-day line. We’re not counting it out, and if you want to roll the dice, nibbling here is OK—or just watch to see if buyers jump in after the dip.
PAYC Weekly Chart
PAYC Daily Chart
Smartsheet (SMAR)
Why the Strength
Smartsheet is a newer name that has great growth and a nice setup ahead of earnings. The company’s story is pretty simple—in a world where the volume, variety and velocity of work for white collar tasks is increasing, information overload and distractions are becoming more common. The solution? Smartsheet’s cloud-based platform, which offers teams better tools for project and calendar management, dashboards, surveys and data collection, automation and collaboration, all of which integrate with a ton of popular software offerings already out there. The firm thinks it’s playing in a $25 billion market and it’s capturing its share of that in a hurry—not only are revenues growing rapidly and consistently, but the under-the-surface metrics look amazing, including the 34% gain in same-customer sales last quarter (extremely high), average contract value rising 50% thanks to broad adoption from large enterprises, a 63% gain in billings and, most importantly, consistently increasing annualized recurring revenue for new customers as time goes on. (Customers paying at least $100,000 per year to Smartsheet increased 126%, to 147 total, in the quarter ending January.) Earnings are negative, but free cash flow was around breakeven in the prior quarter. The next big update will come in two days—earnings are due out Wednesday (June 5) after the closing bell.
Technical Analysis
After a quick post-IPO rise in the middle of last year, SMAR etched a big consolidation (~20 to 34) for the next eight months before zooming to new highs in February and March. There was some selling after that, but SMAR actually crawled higher along its 50-day line in recent weeks before today’s market-induced plunge back toward its April lows. Given the action and earnings this week, it’s a bit risky to buy—unless this turns out to be shakeout. Thus, we’re going to set our buy range higher than here, thinking a strong earnings move could set up a nice entry point.
SMAR Weekly Chart
SMAR Daily Chart
Snap Inc. (SNAP)
Why the Strength
After a couple of years of awful post-IPO performance, most have figured out that Snap (operator of the popular Snapchat photo-sharing social media app) isn’t going to be another Facebook. But the company has been steadily improving its offerings and results, which has led to good performance this year and a solid setup despite the down market. In recent quarters, Snap has fully revamped its Andriod app (25% smaller, opens 20% quicker), which has led to increased engagement; its Discover offering allow users to keep up on videos of friends and others they follow, with 450 premium content channels in all; and the firm has continued to boost ad capabilities, tightened up costs, and possibly most important, put in a new CEO and other top brass. The result: User growth perked up a bit in Q1 (190 million daily users, up four million from Q4 and reversing declines the prior three quarters), revenue growth is remaining strong (39% in Q1, which was about 10 points higher than expected!), while free cash flow actually totaled 14 cents per share, and management expects Q2 revenue to come in well above 30%. To be fair, the key going forward could be user growth—similar to Twitter, if big investors think the company’s customer base can’t expand, it’s unlikely the stock will crank ahead. But at this point, many are thinking Snap’s past problems are fixable, with Q1 being a sign of that. If user growth picks up and the successful monetization efforts continue, we think Snap could surprise on the upside.
Technical Analysis
From 29 in early 2017 to 5 at last year’s market bottom, it was a massive, long decline for SNAP. But the action since then has been impressive—the stock soared back to 9 after a solid Q4 report and made steady progress after that, rising to 12.6 in early April. The stock pulled back to 10, which was reasonable, and has actually perked up the past three weeks as the market has fallen apart. If you want in, you could nibble here and look to add on any breakout above 13 going forward.
SNAP Weekly Chart
SNAP 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.
