Normal Action
Current Market Outlook
After nine strong up weeks, the past two have seen most of the market hesitate (at first) and then pull back (the S&P 500 fell all five days last week), resulting in a few stocks hitting potholes along the way. In the short-term, we think some further consolidation could easily come, shaking out some weak hands. But bigger picture, the recent action looks normal to us—none of the major indexes and very few leading stocks cracked any meaningful intermediate-term support, and today’s sharp rally is a good sign that buyers are still lurking. Be sure to watch your stops and loss limits, and it’s a good idea to be discerning on the buy side, focusing on strong stocks that have pulled back to solid entry points. Market-wise, though, we remain bullish and are keeping our Market Monitor at a level 7.
This week’s list has stocks from all corners of the market, which we see as an encouraging sign. Our Top Pick is RingCentral (RNG), a leader in a new cloud communications field with a stock that’s acting great.
| Stock Name | Price | ||
|---|---|---|---|
| Carvana (CVNA) | 82.90 | ||
| EPAM Systems (EPAM) | 188.24 | ||
| Keysight Technologies, Inc. (KEYS) | 97.20 | ||
| Lending Tree (TREE) | 411.51 | ||
| Omnicell (OMCL) | 81.03 | ||
| Planet Fitness (PLNT) | 0.00 | ||
| Rapid7 (RPD) | 63.52 | ||
| RingCentral (RNG) | 238.73 | ||
| Sea Limited (SE) | 132.86 | ||
| Tandem Diabetes (TNDM) | 74.77 |
Carvana (CVNA)
Why the Strength
There aren’t many growth stories out there larger than Carvana, which is aiming to revolutionize the used car buying process (a $750 billion-plus industry). The company sells used cars online, but it’s not just a plain old website—a large inventory (generally north of 10,000 cars), 360-degree interior and exterior views of every car, guaranteeing none of them have been in an accident, a seven-day test drive period, good prices (usually a grand less, on average) and quick (sometimes next-day) delivery in most markets all serve to make the car buying process as easily and fruitful as possible. Carvana’s stock is strong today because management continues to execute on its plan and big investors are growing more confident the firm will be a huge player in the years ahead—revenues are surging at triple digit rates, and the Q4 trends remained very bullish, with car sales up 105% (to 27,750), gross profit per car up 32% (to $2,131) and continued market share gains. In fact, the pace of share gains in Carvana’s various markets has been very consistent (it has about 2% market share in its oldest market, Atlanta, with 30% unit growth last year), as has the dip in customer acquisition costs, so as the firm enters new markets (85 markets in December, up from 44 a year ago; management expects to be in 140 by the end of 2019), it’s easy to see continued rapid growth. The bottom line is still deep in the red due to expansion costs, but that seems a worthwhile tradeoff given the upside potential.
Technical Analysis
CVNA broke out around 25 in April of last year and zoomed as high as 72 in September before falling apart with the market last fall; it didn’t find support until it was back at 29 in December. Shares didn’t find much buying after the bottom, either—it was still around 30 in early February—but we’re very impressed with the huge-volume buying seen since then, including the push higher last week even as most growth stocks sagged. There’s still overhead to worry about, so if you’re game, start small on dips and use a loose stop.
CVNA Weekly Chart
CVNA Daily Chart
EPAM Systems (EPAM)
Why the Strength
We covered EPAM Systems at the end of January and are going back to the well today because the uptrend remains strong and the recent action is constructive. To refresh your memory, EPAM provides outsourced IT and lifecycle software development services, mostly to clients in North America and Europe. It’s a high-quality IT stock with diversified revenue streams. But the more specific trend powering shares is that EPAM helps companies engage with their clients and react to a changing competitive environment. And there’s a lot of change these days: Approximately 20% of revenue comes from product engineering for a core group of 70 software and IT firms, while another 15% comes from major IT players like Amazon and Google, which rely on EPAM for complex projects. The quality of the company shows up in revenue per employee, which currently sits at around $75,000 per year, 25% above the industry average of $60,000. Fourth-quarter earnings came out on February 14 and were above expectations—revenue was up 26% to $505 million while EPS of $1.27 beat by $0.04. Large accounts (over $10 million) grew by 38% to 36, while the average client lifespan for its best clients is now at 12 years! With a stable client base and a large and productive talent pool, we see the good times continuing.
Technical Analysis
Shares of EPAM began climbing in 2017 at 65 and went on a beautiful run that carried them all the way up to 144 last September. The next few months were tough, and shares fell below both their 50 and 200-day moving average lines and traded as low as 105 in December. But the advance since then has been very impressive, with EPAM advancing in a straight line to 165 (up 10 weeks in a row), and the pullback last week was modest, well controlled and found support near the 25-day line. Further dips look buyable.
EPAM Weekly Chart
EPAM Daily Chart
Keysight Technologies, Inc. (KEYS)
Why the Strength
Back in the day, Keysight Technologies was the measurement arm of Hewlett-Packard. But it was spun-off in 2014 and now helps customers develop products, standards and software in areas like wireless communications, network security, aerospace and defense, automotive, energy and IoT. The company’s product line is centered around network analyzers, signal analyzers, simulation software and oscilloscopes. But the 2017 acquisition of Ixia helped Keysight build out expertise in the network test and network visibility market, too. The company is active in markets investors are focused on, including developing 5G wireless standards, connected car applications, consumer electronics, defense modernization and design simulation. Shares are doing well because those markets are driving above-trend growth and because the company beat expectations when it reported Q1 fiscal 2019 results on February 21. Revenue growth of 20% continued the trend from 2018 (when revenue was up 22%) while EPS of $0.93 beat by $0.13. Those results have analysts revising their EPS estimates upward, which has helped keep a lid on the stock’s valuation even after a nice run year-to-date. With 9% revenue growth and 22% EPS growth expected this year (probably conservative), and shares trading with a current year P/E of 21, there’s no Keysight can keep moving up.
Technical Analysis
KEYS got off to a slow start after its IPO in 2014 but action improved early in 2016 and the stock has mostly been moving higher since. Like many stocks, momentum stalled last October, and KEYS fell through its 200-day line for the first time in several years and flopped around near that technical indicator (and the 60 level) until the beginning of 2019. They then took off again and raced to a new high above 85 by the end of February with almost no pullbacks along the way. In fact, shares barely budged last week, too, another sign of strength. You could nibble here or aim for further weakness.
KEYS Weekly Chart
KEYS Daily Chart
Lending Tree (TREE)
Why the Strength
While LendingTree’s stock can get pushed around by macro factors (interest rates and housing activity mostly), it has a great near- and long-term growth story that we think can push prices nicely higher. The firm is the by far the leading online lending marketplace, providing consumers an easy (three minute) process to receive a bunch of quotes from major lenders, as well as some free add-ons (credit and debt analysis, credit scores and monitoring, etc.). The reason prospects for LendingTree are so bright now is the firm’s diversification efforts—a few years ago, business centered around mortgages (80% of the business in 2014!), but now that segment is “only” 23% of the pie and fading, while other rapidly-growing areas (credit cards, insurance, and auto, personal, student and small business loans) are producing the lion’s share of revenue. A soft housing market capsized mortgage revenue in Q4 (down 31%, though management sees the shrinkage decelerating going forward), but the other products combined grew 67%, allowing total revenue to gain 26% and earnings to lift 45%. And there’s more of where that came from according to management—2019 is expected to see revenue surge 35%, while earnings and EBITDA grow a bit faster than that. Plus, given the size of the industries (it has just 3% or so of its addressable markets right now), there’s no reason LendingTree can’t grow rapidly for years to come (analysts see earnings up 30% in 2020, too). This remains a good story.
Technical Analysis
TREE plunged 55% from January through November of last year as a giant prior run and fears of slowing mortgage revenue caused investors to run for the exits. But after a higher low in December, the stock marched persistently higher to 325 in February before the Q4 report caused some hesitation. Still, while choppy, TREE has consolidated nicely, and with the 50-day line (now at 286 and rising) catching up, we’re OK buying some here with a relatively tight stop.
TREE Weekly Chart
TREE Daily Chart
Omnicell (OMCL)
Why the Strength
We’ve featured medical equipment specialist Omnicell a few times in the past, and the stock’s strong action gets it back in Top Ten this week. The company specializes in automated delivery of medications and surgical supplies, which plays into the big picture trend of pharmacies becoming more strategically important within the health care system. Pharmacy is the fastest-growing area of spend across the industry, and Omnicell can help control costs while improving care by automating medication management. Most of the business revolves around medication dispensing, bedside automation, pharmacy storage and retrieval and physician order management, though Omnicell is getting deeper into automated IV solutions as well. The company modestly missed Q4 revenue expectations when it reported 8% revenue growth (to $212 million) on February 7, but earnings of $0.70 beat by $0.03, and backlog (obviously an important leading indicator) at year-end was up 39% to $478 million. Forward guidance and management commentary suggest the trends behind automated central pharmacy operations are strong. Analysts see revenue growth accelerating in the quarters ahead (up 13% for 2019 as a whole), with earnings up 20%—both of which could prove conservative if management continues to execute.
Technical Analysis
OMCL got off to a slow start in 2018 as the stock took a hit at the end of January, and it didn’t lift to new highs until July. The run from there took the stock to 73 in September, and shares actually held up well for most of the market correction, but December was a doozy, driving the stock down from 79 to 57. The initial recovery wasn’t great, either, but Q4 earnings in early February changed everything—OMCL surged as high as 86 after the report, and like many stocks in today’s issue, held up well during the market’s recent hiccup. We’re OK picking up shares here or on further dips.
OMCL Weekly Chart
OMCL Daily Chart
Planet Fitness (PLNT)
Why the Strength
It doesn’t get a ton of headlines, but Planet Fitness remains one of the market’s best retail stories, with a unique position in a mass market and a very long runway of growth. Planet Fitness is doing for fitness centers what Buffalo Wild Wings did for sports bars, creating a national chain with a consistent offering that’s known for great value ($10 a month to start, $22 per month if you want some perks) and appeals to the average person (no “gymtimidation”); of its 1.9 million new members last year (12.5 million total, up 18% from the year before), 35% were first-time gym goers. Nearly all of Planet’s 1,742 locations are franchised, which keeps costs low and, when combined with steady growth (40 straight quarters of same-store sales growth; 230 new locations opened last year alone), has led to superb results—growth surged last year thanks to some one-time factors (price hikes for many members; equipment sales to many franchisees), but should return to the longer-term trend in 2019 (the initial outlook is for 15% sales growth and 20% EBITDA growth, though both could be conservative). Longer-term, the company thinks it can have 4,000 stores and 40 million members; even if it falls short of that, it’s clear Planet’s steady growth can continue for years to come. We like it.
Technical Analysis
PLNT has been in an uptrend for over a year, but it showed excellent resilience during the market’s fourth-quarter debacle and ramped to new highs on great volume in early January. That was followed by a stagnant few weeks, with many rejections at resistance near 60, including a worrisome post-earnings reversal lower two weeks ago. But since then, it’s been all up, with PLNT pushing to new highs on another round of big-volume buying. Try to buy on dips of a point or two.
PLNT Weekly Chart
PLNT Daily Chart
Rapid7 (RPD)
Why the Strength
Rapid7 is a Boston-based cybersecurity software company. It was founded in 2000 by three men that saw an opportunity to help clients deal with increasingly complex security challenges. Organizations lacked visibility across their networks and IT infrastructure, so they couldn’t address weak spots and persistent threats. Rapid7 developed solutions to secure connected IT environments, and the rest is history. Today, Rapid7’s clients can unify operational data from across their systems and run it through the company’s Insights Platform, which combines visibility, analytics and automation solutions in five modules. Shares are trading at all-time highs because Rapid7 delivered a great Q4 in February and management issued a rosy growth outlook. Fourth-quarter revenue was up 19% to $69 million while the loss of -$0.05 per share beat by $0.04. Even more important than those figures is the annualized recurring revenue (ARR) line item, and growth there was far more impressive, rising 53% to $252 million in Q4, and the top brass guided this metric to 30% growth in 2019. (Total revenues are expected to rise 26% or so.) Impressively, ARR growth accelerated from 46% in Q3 and has now picked up steam six quarters in a row. The company’s same-customer revenue growth in the quarter was 20%, showing that it is upselling and cross-selling additional products to current customers. The bottom line is likely to stay in the red, but investors are focusing on the improving top line and cash flow metrics.
Technical Analysis
After IPOing in 2015, RPD mostly traded below 20 through the end of 2017. The stock heated up in the beginning of 2018 and rallied from 20 to 40 by September. That was the 2018 high, and a choppy downtrend ensued, pulling RPD back to 28 by the end of the year. Like a lot of stocks, RPD jumped early in 2019 and clawed its way back to its previous high in early-February. The Q4 earnings release drove a gap up to 45, and after a brief trip to 47.5 shares have been consolidating near their 25-day line. If you want in, you can grab some shares here.
RPD Weekly Chart
RPD Daily Chart
RingCentral (RNG)
Why the Strength
RingCentral doesn’t get mentioned with the likes of Workday, Coupa or other cloud software names, but it was a great winner last year and, after a building a good-looking launching pad, looks ready to continue its run. The big idea here revolves around a newer field dubbed Unified Communications (UC), and the premise is built around a major change in how employees and work teams communicate—the days of people sitting at their desk all day and talking a bunch over a land line are being replaced by mobile, messaging and multimedia get-togethers, often with a bunch of different workers participating. RingCentral’s cloud-based UC platform (especially its Office suite) allows teams to communicate in any way, anywhere and from any device, and it’s by far the leader in this huge market, nearly twice the size of its nearest competitor. That said, the biggest “competition” at this point is simply replacing the swath of old, legacy systems—management thinks there’s 100 million potential customers in the U.S. alone, compared to a few million that have converted to a UC solution this point. The stock is strong today because the company’s rapid, consistent growth (revenues up 30% to 35% each of the past eight quarters) shows no signs of ebbing, and while the earnings estimates are unimpressive, we’re not sweating that as Ring regularly trashes expectations. It’s a good story.
Technical Analysis
RNG had a huge run last year (it appeared in Top Ten a few times), finally topping at 98 in September. The market-induced correction was reasonable (34% deep), with a higher low in December leading to a rebound to 90 in January. And since then, the picture has only brightened, with a quick 20-points spike before and after earnings and a reasonable consolidation during the past three weeks. We’re OK entering here with a stop in the low 90s.
RNG Weekly Chart
RNG Daily Chart
Sea Limited (SE)
Why the Strength
Sea Limited is an easy story to tell. It’s an internet platform company with a primary focus on Southeast Asia. That means the firm is tapping into the two big trends of online gaming and e-commerce, and shares are racing higher because Q4 results (released February 26) show that management is figuring out how to monetize the platform. Revenue was up 127% to $283 million (the second straight triple-digit growth quarter), beating consensus estimates by a whopping 33%. Growth was driven by the company’s first self-developed game, Free Fire, which has grown from 13% of revenue in Q2 to 45% of revenue in Q4. The e-commerce division also took off as the company’s Shopee app has become the most downloaded app in the shopping category in Southeast Asia and Taiwan, driving average orders of 900,000 per day and 78% top-line growth in this segment. Altogether, 2018 revenue was up 89% to $1.05 billion, and that should pick up this year—management it sees revenue doubling in 2019, which means consensus estimates needed to go up by around 40%! Analysts like that Free Fire is going global, and that e-commerce is likely to approach break-even in its most mature market (Taiwan). That implies the business model works and that management can gain leverage across the business (ideally causing losses to shrink). It’s a big story, and we’re encouraged that the firm’s large share offering ($1.3 billion worth) has so far been swallowed up by big investors.
Technical Analysis
From its IPO at 15 in October 2017, SE mostly sagged for the next year, sitting at 10.5 at last year’s December market bottom. But then things got interesting—SE raced ahead six weeks in a row, the last four coming on big weekly volume. Two weeks later came another big-volume clue. And after tightening up a bit, the roof blew clean off after earnings, with SE booming to new highs on 11 times average volume. You can buy here or on dips, but keep it small and use a loose leash.
SE Weekly Chart
SE Daily Chart
Tandem Diabetes (TNDM)
Why the Strength
There’s a lot of technical and industry jargon included in Tandem Diabetes’ story, but the reason the stock is strong is easy to understand—it’s grabbing share in a huge and growing industry (insulin pumps), with its latest offering (dubbed the t:slim x2) looking like the best mousetrap in a competitive field. The t:slim is around 30% smaller than most of the competition, has a touchscreen, is integrated with Dexcom’s continuous glucose monitoring system, can be updated remotely and comes with a predictive software that reduces the frequency and duration of low glucose events. (There was a snafu with that software recently, but a remote update that fixes it is on the way.) Beyond the t:slim, the entire industry is making great technological advances, which is enticing more diabetics to ditch multiple daily injections (often a dozen or more times per day) and go with pumps; Tandem estimates just 28% of Type 1 diabetics (its target market) in the U.S. currently use pumps, but that could grow to 50% over time. And given the size of the market—three million in the U.S. (Type 1 and 2) are candidates for pump therapy, with another three million overseas in Tandem’s target markets (the firm just launched internationally last summer)—there’s huge potential for all players, especially leaders like Tandem. Growth has been fantastic in recent quarters (accelerating growth), and management’s 2019 guide (revenues up 45%) could even prove conservative. Competition is always a risk and the valuation is high, but there’s no doubt the upside is real if management continues to execute.
Technical Analysis
The last time we wrote up TNDM in February, the stock was changing character as it stair-stepped up the right side of its deep base. And since then the picture has only improved—the Q4 earnings report and guidance caused a huge gap higher, and while the software glitch (and the market) has caused some near-term wobbles, TNDM has held up well. If you’re game, you could start a position here with a loose stop.
TNDM Weekly Chart
TNDM 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.
