Very Constructive
Current Market Outlook
While the action of most major indexes wasn’t overwhelmingly positive last week (the S&P 500 was up about 0.5%), there was a bunch of constructive action—the major indexes shook off three big worries (Italian and Spanish political uncertainties and new tariff threats) and some pushed above near-term resistance, with growth-oriented stocks leading the way. There are still many potential potholes out there, including divergences (and overhead) in the major indexes and investor sentiment that’s a bit complacent. However, the primary evidence (trends of the indexes and price/volume action of leading stocks) continues to improve. We’re bumping our Market Monitor up a couple of notches into bullish territory and, while you shouldn’t force it, you can look to take a more positive stance going forward.
This week’s list has a ton of growth-y stories, and even those that have more sturdy stories have recently staged excellent breakouts. Our Top Pick is GDS Holdings (GDS), a smaller Chinese firm with an excellent story. The recent pullback looks like a decent entry point.
| Stock Name | Price | ||
|---|---|---|---|
| Alibaba (BABA) | 254.81 | ||
| Align Technology (ALGN) | 316.20 | ||
| Canada Goose Holdings (GOOS) | 46.21 | ||
| Cheniere Energy (LNG) | 63.82 | ||
| Chipotle Mexican Grill (CMG) | 773.32 | ||
| GDS Holdings Limited (GDS) | 80.15 | ||
| Keysight Technologies, Inc. (KEYS) | 97.20 | ||
| Loxo Oncology (LOXO) | 186.59 | ||
| Novocure (NVCR) | 0.00 | ||
| Tiffany & Co. (TIF) | 132.10 |
Alibaba (BABA)
Why the Strength
Alibaba, the e-commerce giant that provides an online marketplace for a ton of online merchants, is probably the Chinese stock that’s most familiar to investors outside China. Investors remember that company’s massive 2014 IPO and the two-year correction that came after. But Alibaba has continued to make headlines with its active investing and joint-venture programs, its market-leading cloud service platform, moving into finance (with its Ant Financial subsidiary), payments, digital media and entertainment, food delivery, AI, self-driving cars, package delivery and a host of other activities. With a market cap of $528 billion, Alibaba has leveraged its T-Mall and Taobao websites into a thriving online economy where everything can be bought and sold, with Alibaba taking a small slice of every transaction. When the company reported results for the fiscal fourth quarter that ended in March, revenue was up 76% and earnings up 44% (in U.S. dollars), completing a year in which revenue rose 62% and earnings forged ahead by 46%. With 617 million monthly average users on mobile devices (up 22% year-over-year) and free cash flow of RMB8.6 billion (about $1.36 billion) in the latest quarter, Alibaba has all the money it needs to broaden its footprint in China and around the world. And with founder Jack Ma providing the vision and ambition, the company is likely to remain acquisitive and innovative. We like it.
Technical Analysis
BABA made a leap from its 68 IPO price in September 2014 to 120 nine weeks later, but went into a protracted post-IPO droop after that peak, falling all the way to 57 in October 2015. BABA retook that 120 high in May 2017 and ran to 191 in November, which effectively started a six-month rest period. But shares spiked on earnings in early May, and after tightening up below 200, have shot to new highs over the past couple of days. We’re game with buying some here or on dips of a couple of points.
BABA Weekly Chart
BABA Daily Chart
Align Technology (ALGN)
Why the Strength
Align Technologies has been one of the big winners of the past couple of years, and after a long rest, the stock has kicked into gear again. The company’s claim to fame is its Invisalign braces system (about 90% of revenue), which is taking market share worldwide because the braces are virtually clear and modeling software that goes with them provides great results. Align also does a good business with its iTero intraoral scanner, used for restorative crowns, bridges and custom implants. The company has experienced steady, rapid growth for the past couple of years from both product lines and in all geographies, and the stock is newly strong thanks to another great quarterly report (Q1 sales and earnings easily topped expectations) and thanks to management’s very bullish longer-term outlook at the company’s Investor Day in late May—the top brass now believes revenues can rise at a 20% to 30% annual rate for the next three to five years, with operating margins rising a few percentage points and free cash flow expanding at a much faster clip than sales. (An additional $600 million share buyback announcement also helped.) In other words, Align sports both rapid growth and a high degree of dependability that growth will come (braces aren’t terribly economically sensitive), a combination that’s catnip for institutional investors. Analysts see earnings up 31% this year and 27% next. This remains a great story.
Technical Analysis
ALGN certainly isn’t early in its overall run, as it originally broke out in the spring of 2016. But the recent action encourages us for two reasons. First is the five-plus-month rest period from December through mid-May that included some sharp declines that likely scared out some weak hands. Then we have the breakout and recent, persistent advance on excellent volume, a clear sign that big investors are buying. If you’re game, the next pullback or shakeout should provide a solid entry point.
ALGN Weekly Chart
ALGN Daily Chart
Canada Goose Holdings (GOOS)
Why the Strength
Canada Goose continues to have the makings of a new, high-end retail leader that’s making moves to expand from its traditional (and very lucrative) core business. The company remains best known for its high-quality, high-priced winter wear, including jackets, parkas and more, combining luxury with functionality (decades ago, Goose’s outerwear was used in expeditions up Mount Everest and in other harsh weather locations) that’s attracting customers. More recently, the company has launched springwear and knitwear product lines, becoming a three-season brand, though the vast majority of its sales come in the second half of the year. The majority of revenue is from wholesale channels, but the growth is coming from direct-to-consumer avenues (mostly online, as it launched new e-commerce sites in seven different countries last year alone) and overseas. Indeed, Goose said last week it’s aiming to open retail stores in Beijing and Hong Kong this fall and will start selling online in China via Alibaba’s Tmall. The quarter-to-quarter numbers can be a bit choppy, partly due to seasonality and partly due to currency movements, but the main trend of business is clearly up. Earnings are likely out within a couple of weeks, though no set date has been announced.
Technical Analysis
GOOS broke out in November and surged to 38 in early February before being clonked after reporting Q4 earnings. However, the decline lasted just two days before support appeared, with GOOS gradually rising and tightening up into early May before pushing to new highs on good volume the past two weeks. If you want in, you can buy on dips, but keep positions small with earnings likely out soon.
GOOS Weekly Chart
GOOS Daily Chart
Cheniere Energy (LNG)
Why the Strength
Cheniere Energy has all the makings of an emerging blue chip outfit in a fairly new industry. Many years ago, the company was the first to recognize the potential of exporting U.S. natural gas (in liquefied form, hence LNG) overseas, and now it’s recognizing that potential—the company’s Sabine Pass facility on the border between Texas and Louisiana has four trains (a train is a liquefaction and purification facility) running that in total produced 5% of the global LNG supply last year; the cargo was shipped to a couple dozen countries through long-term take-or-pay contracts. (Cheniere is the biggest natural gas consumer in the U.S.) Those four trains alone have kicked sales and earnings growth into high gear and will spin-off a ton of cash. But the stock is strong today because management isn’t sitting on its hands—Cheniere has another train at Sabine that’s expected to come on-line in the first half of 2019, and it’s well on its way to constructing another facility in Corpus Christi, which should have one train of its own going live in the first half of next year, and another in the second half. And there’s plenty in the hopper beyond that! Given the firm’s history of coming in on-time and under budget, big investors (793 funds own shares, up from 648 a year ago) are believers, and management thinks Cheniere has the potential of $7 to $9 of cash flow per share once everything is up and running in a few years. It’s a big story, backed by an industry that has plenty of growth potential.
Technical Analysis
LNG has tried to get going a few times during the past couple of years, but every breakout soon stalled out and led to another base-building effort. This time, though, the stock seems to have changed character—after breaking out to new highs on earnings in early May, shares moved straight sideways and then surged higher on excellent volume last week, when management hiked their long-term outlook. Try to buy on dips.
LNG Weekly Chart
LNG Daily Chart
Chipotle Mexican Grill (CMG)
Why the Strength
We’re seeing more and more turnarounds taking shape from growth outfits, and Chipotle Mexican Grill continues to look like one of the most intriguing. The company’s earnings (and, admittedly, its brand) took a major hit after its quality control broke down a few times, leading to a handful of food illnesses among its customers. But that’s been cleaned up, a new CEO has taken the reins and the company has made moves to control costs, reattract customers and expand via delivery (including a deal with DoorDash, which led to a seven-fold increase in delivery orders in the first week). All of this is working: Revenues have grown six quarters in a row, and while same-store sales growth in Q1 of 2.2% wasn’t amazing, the figure is an improvement over the prior two quarters. Meanwhile, the top brass is continuing with its expansion plan, with 140 new restaurants likely this year, raising the total count by about 6% this year. As for catalysts, the company will hold a special investor call on June 27 to “discuss company strategy and plans under its new executive leadership.” We have no idea what, if any, details will be announced, but a solid intermediate-term outlook could keep the buyers active. Even without any ground-shaking moves, business should improve markedly going forward—analysts see earnings up 28% this year and another 35% in 2019.
Technical Analysis
We wrote up CMG in Top Ten a few weeks ago after its earnings-induced gap up in late April (up 24% on six times average volume) that pushed the stock to its highest level since Jun 3017 and came after two months of tight trading (a sign of accumulation). And we’re mentioning CMG again because the stock has traded nice and tight in the five weeks since, crawling slightly higher during that time as the 25-day line (now near 430) has caught up. You can buy here or on a big-volume push above 445 or so.
CMG Weekly Chart
CMG Daily Chart
GDS Holdings Limited (GDS)
Why the Strength
GDS Holdings is an easy-to-understand story that has big potential. The company is setting itself up as the Digital Realty or CyrusOne (which has a partnership with GDS) of China—it’s the leading high performance, carrier-neutral data center provider in China, operating in seven key economic hubs in that country with centers that average twice the size and power density of its competitors. And it’s expanding rapidly, with management hinting that the biggest challenge is keeping up with demand from, first, cloud service providers, which made up nearly two-thirds of bookings in the latest quarters, with large enterprises and other big Internet players making up the rest; Alibaba, Tencent, Baidu, Ctrip and AliPay are all customers. Best of all, just over half of the firm’s capacity are in “stabilized” data centers (which average 94% utilization), while the rest are ramping up (only 31% utilized, but bookings are very strong), leaving plenty of room for growth. In Q1, revenues boomed 84% in local currencies, EBITDA soared 127% (earnings are negative because of non-cash depreciation expenses), total bookings lifted 80% and area in service surged 69%. Better yet, GDS has a ton of capacity under construction, including a recently purchased Shanghai data center that will start operations soon and is 100% committed to a leading customer. We think GDS has years of rapid growth ahead of it.
Technical Analysis
GDS broke out in mid-September of last year and went on an epic run, more than tripling by early February. Then it entered into a consolidation with the overall market, but the action was solid, with the stock forming higher lows in February, March and April and not many blatant signs of distribution. Now, as the market has begun to get going, GDS has boomed, breaking out in early May after Q1 earnings, rallying as high as 42 and now pulling back after a convertible debt offering. We think the dip is buyable, though use a loose stop.
GDS Weekly Chart
GDS Daily Chart
Keysight Technologies, Inc. (KEYS)
Why the Strength
Keysight Technologies is in the business of helping companies innovate in both software and hardware. The company, which was the measurement arm of Hewlett-Packard and then Agilent for years, was spun-off as an independent entity in 2014. Keysight uses its specialization in measurement to help develop products, standards and software in a few broad categories: wireless communications, networks and the cloud, aerospace and defense and automotive, energy and Internet of Things. While the company’s product line is still heavy with network analyzers, signal analyzers, simulation software and oscilloscopes, its acquisition of Ixia has given it a foot in the network test and network visibility businesses. The company is helping to develop 5G wireless standards and has ongoing research in connected car applications, consumer electronics, defense modernization and security risk control. While revenue growth has been in the single digits, investors were intrigued by the company’s most recent quarterly report on May 30 that featured a 31% jump in revenue (partially bolstered by acquisitions) and a 30% bump in earnings. But it was management’s forecast of fiscal Q3 revenue of $942 million to $972 million that really caught investors’ attention (analysts had forecast revenue of $913 million). Keysight isn’t an easy story to summarize, but it’s broadening its focus into many fast-growing areas, which should pay off going forward. Analysts see earnings up 17% both this year and next.
Technical Analysis
KEYS (note: this stock isn’t related to Keystone Automotive, which used to have the same symbol) went through the traditional pattern after its November 2014 IPO. It rallied from its IPO price of 29 to 39 in early 2015, then fell to 21 in February 2016. Since that low, KEYS has been in a jerky uptrend, trading at 37 at the end of 2016, 41 at the end of 2017 and had been trading sideways under resistance at 55 for a few months before the May 30 earnings report catalyzed a gap up to new highs, and the stock is pushing higher since the report, too. If you like the story, you should look for a pullback of a point or two.
KEYS Weekly Chart
KEYS Daily Chart
Loxo Oncology (LOXO)
Why the Strength
Loxo Oncology specializes in treatments that target rare genetic alterations that play a role in cancerous tumor growth, and it looks like it might have a big, big winner on its hands. We’ve been covering the company since last October and the story keeps getting better and better. A major batch of good news came on May 16 when Phase 1 trial data showed Loxo’s early-stage asset, dubbed LOXO-292, an oral treatment for cancer patients with RET alterations (mostly lung and thyroid cancers), led to tumor shrinkage in nearly 70% of patients. LOXO-292 was also well tolerated by many patients who weren’t being helped by other treatments. And then more data came out over this past weekend at the annual ASCO meeting, the gist of which is that LOXO-292 looks like a best-in-class asset capable of grabbing 70% market share. That translates to annual sales near $1 billion within a decade, and with analysts seeing a good chance of success, the value of Loxo’s stock is surging. Even better, Loxo’s lead asset, larotrectinib, which targets central nervous system tumors with TRK fusions in adults and adolescents, looks very likely to be approved later this year. Loxo is partnering with Bayer for larotrectinib (Loxo already received a $400 million payment), so product sales won’t hit the same levels as they could with LOXO-292 (analysts see $330 million a year by 2028). The bottom line here is a good biotech growth story just got better, and investors are discounting a very bright future.
Technical Analysis
Demand for LOXO has clearly turned up a notch in 2018 as there have been no major breaches of support, and any pullback to the 50-day line has attracted buyers. There was a little topping action in March and April when shares twice failed to break above resistance around 140. But after a dip in April the stock climbed back to that level in mid-May, then gapped up to 160 when a first glimpse at LOXO-292 Phase 1 data looked promising. Shares gapped up huge this morning on the weekend’s news, but quickly reversed to close down a bit. Still, given the overall chart, this volatility doesn’t look abnormal—you can nibble here or on dips.
LOXO Weekly Chart
LOXO Daily Chart
Novocure (NVCR)
Why the Strength
U.K.-based NovoCure is the developer of a novel approach to the treatment of solid tumor cancers, including glioblastoma, an aggressive cancer of the brain. After surgery and chemotherapy, NovoCure’s Optune device delivers high-frequency, alternating electrical fields to the brain that are specifically tuned to interfere with cancer cell division and reproduction. The use of Optune has been approved in the U.S., Europe and Japan for the treatment of glioblastoma, and over 7,000 patients have been treated to date globally. There are almost 1,200 certified treatment centers worldwide and revenue has grown by triple digits for the last three years, with profitability forecast for 2019. But the real excitement for NovoCure is the three different types of cancer that are now in Phase III clinical trials as subjects for Optune treatment. The trial for Optune in brain metastases will have final data collection in 2020, non-small cell lung cancer’s study will have final data in 2021 and pancreatic cancer will finish in 2022. Positive trial results along the way from any of these studies (or for the two cancer targets now in phase II studies) will likely give a further boost to NovoCure’s stock. Today’s steep pullback in NovoCure stock doesn’t have an easy explanation, but is likely a result of a news release at the meeting of the American Society of Clinical Oncology that that wasn’t as complete as expected.
Technical Analysis
NVCR enjoyed a brief rally following its 2015 IPO, doubling from 15 to 30. But a steep correction followed quickly, pulling the stock to a double bottom at 6 in late 2016 and early 2017. The stock gapped up in April 2017 and ran to 22 in September 2017, where it re-based in flat trading until catching fire again in April 2018. NVCR soared to 32 last week, completing a rally of more than 30% in just three months, so today’s dip isn’t completely unexpected or abnormal. Sure, there’s always a chance that today’s selling will continue, but we’re OK starting small here if you don’t own any and adding to your position if NVCR rebounds.
NVCR Weekly Chart
NVCR Daily Chart
Tiffany & Co. (TIF)
Why the Strength
Tiffany is one of the better-known jewelry retailers in the U.S. and around the world, but it hasn’t been a great growth company for many years; sales growth has ranged between -3% and +6% each of the past six years. But that trajectory looks to be changing, thanks to a better economic environment, and some of Tiffany’s strategic initiatives (such as its new Believe in Love advertising campaign, upgraded website, broader distribution and cost controls). Whatever the cause, Wall Street likes what it sees: In Q1, not only did revenues rise 15% (the fastest pace in years), but strength was seen across product lines and geographies (including a 28% sales gain in Asia), and same-store sales boomed 10% (though, to be fair, some of that was due to currency movements). Cost controls and a lower tax rate helped the bottom line rise 54%, which was miles above expectations, and the top brass isn’t being shy about returning some of that profit to shareholders—the dividend was boosted 10% (annual yield now 1.7%) and said it’s likely to buy back $250 million of stock in the current quarter (about 1.5% of shares outstanding), with more coming beyond that. Tiffany isn’t suddenly an amazing growth company (analysts see earnings up 14% this year and 12% next), but after a few years in the wilderness, big investors believe better times are ahead.
Technical Analysis
TIF has a fantastic long-term chart, with a big peak in November 2014 at 111, a bottom at 57 in June 2016 and a rally back to 111 in January of this year. Then came another base-building effort (a handle to a multi-year cup) during the market’s correction, with the breakout (up 23% on six times average volume!) coming after earnings two weeks ago and excellent follow-through since. Any modest weakness looks buyable to us.
TIF Weekly Chart
TIF 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.
