Leading Stocks Act Great
Current Market Outlook
It’s been a tricky few weeks, but by our measures, the intermediate-term trend of the major indexes has turned up, which is a sign to increase your exposure to the market’s leading stocks (preferably on pullbacks). And there are a lot of leaders to choose from! In particular, the growth stocks that bounced nicely off the market’s early-February low continue to perform excellently, displaying powerful and persistent action, which usually indicates more upside is in store (albeit with normal pullbacks and shakeouts along the way). We’re not viewing this as a blastoff, but more of a resumption of the market’s longer-term uptrend. Our Market Monitor moves up a couple of notches into bullish territory.
This week’s list is another one that’s filled with enticing growth stories and strong charts. There are a ton of good stocks to choose from, but we’re going with TD Ameritrade (AMTD) as our Top Pick, as it’s one of the strongest Bull Market stocks out there today.
| Stock Name | Price | ||
|---|---|---|---|
| Ligand Pharmaceuticals (LGND) | 267.14 | ||
| Micron Technology, Inc. (MU) | 43.31 | ||
| Palo Alto Networks (PANW) | 236.92 | ||
| Qualys (QLYS) | 0.00 | ||
| Sarepta Therapeutics (SRPT) | 120.93 | ||
| TD Ameritrade (AMTD) | 0.00 | ||
| Teladoc, Inc. (TDOC) | 127.95 | ||
| Twitter (TWTR) | 40.37 | ||
| Western Digital Corporation (WDC) | 0.00 | ||
| Zillow (Z) | 76.64 |
Ligand Pharmaceuticals (LGND)
Why the Strength
Ligand Pharmaceuticals is back in Top Ten again as big investors are clearly accumulating shares due to its unique “shots on goal” business model that should produce rapid growth for many years. To review, the company conducts early research and discovers potential treatments, then partners with others who design (and pay for) clinical studies, manage regulatory work and so on. Ligand also licenses discovery technologies and platforms that, if they lead to a new product, bring royalties and milestone payments. That means costs are very low, margins are high and most royalties and license fees fall right to the bottom line. Right now, Ligand’s partners have more than 17 products approved and on the market, though three account for the vast majority of royalties (including one marketed by Novartis and another by Amgen). Ligand expects at least 24 drugs on the market by 2020, including a couple of more lucrative ones. (One intravenous antibiotic just launched in January is dubbed Baxdela; Ligand will get a 2.5% cut of sales.) Fourth-quarter sales (up 32%) and earnings (up 77%) topped expectations, and management sees royalty revenue in 2018 lifting 30% or so; analysts see earnings up 40% this year and 34% in 2019. We think the company is very well managed and has a ton of potential, and big investors (467 now own shares) agree.
Technical Analysis
We think LGND is an early-stage situation that’s showing exceptional power right now. The stock made no progress from March 2016 through December of last year before ramping on big volume to new highs. But that came just before the market tanked, which pulled the stock back down to its 50-day line a couple of times in February. But since March began, LGND has been soaring day after day on big volume, hitting new highs last week. We think the stock is buyable here or on any weakness.
LGND Weekly Chart
LGND Daily Chart
Micron Technology, Inc. (MU)
Why the Strength
The appetite of the computer and electronic device industries for upgraded memory and image sensors is apparently insatiable. Micron Technology—and Western Digital on page 10—are the beneficiaries of this hunger. Micron’s DRAM, NAND and NOR flash memory sensors go into everything from computers, tablets and mobile phones to servers and USB storage devices. Micron is much bigger than Western Digital (market cap is $68.3 billion), and is even cheaper on a P/E basis, trading at just five times future earnings. The company went through a cyclical rough patch from the beginning of 2015 through Q3 2016, but has stormed back in the fundamentals department. In 2017, revenue grew by 64% and earnings leapt from 26 cents per share in 2016 to $4.96 per share. And analysts are looking for 105% earnings growth in fiscal 2018, which ends in August. A look at the fundamentals box below will show the company’s energetic rebound from its 2016 earnings weakness. And that strength has keyed a round of upgrades from analysts that has increased the stock’s popularity. The next big event for Micron investors will be the release of the company’s fiscal second-quarter earnings results on March 22 after the market closes. Analysts are expecting revenue of $7.28 billion and earnings of $2.74 per share. It’s best to keep any initial investments small this close to earnings.
Technical Analysis
MU had a great 2017, running from 22 to 50 in late November. The stock then entered an 11-week consolidation that ended with the stock trading at 40 on February 8. Starting on February 9, MU began a big-volume run to 60 in today’s trading (with the help of a couple of big analyst upgrades) with only four down days during the whole rally! We think you can take a small (maybe half of your usual buy) position ahead of earnings (especially if it sheds a point or two) and keep a mental stop around 53.
MU Weekly Chart
MU Daily Chart
Palo Alto Networks (PANW)
Why the Strength
Palo Alto Networks is the 21st century blue chip of the cybersecurity field with what is widely thought to be the broadest set of next-generation products to protect client’s data and networks. Fundamentally, there has never been a problem here—Palo Alto has been growing rapidly for years, and ended January with a whopping 48,000 customers, including a ton that use three or four of the firm’s offerings. There had been some worries about a slowdown in demand, but that all changed thanks to the combination of continued security breaches and a likely boom in corporate investment spending. In the quarter ending January, sales (up 28%) and earnings (up 38%) topped expectations, billings rose 20% (including subscription billings up 24%), while renewal rates for the company’s subscriptions are north of 90% and renewal rates for its support services are nearly 100%! Deferred revenue was up 33% and free cash flow was a monstrous $2.39 per share. The corporate tax cut should goose earnings, and management guided toward accelerating billings growth going forward, and said free cash flow should total $9.50 for the fiscal year that ends in July. Bigger picture, the evidence suggests that the cybersecurity group is revving up after a long slumber, and with business very strong, Palo Alto looks like a great way to play the move.
Technical Analysis
PANW topped back in July 2015 and fell as much as 46% by April of last year—a complete, prolonged wipeout. It got off its knees during the next few months but didn’t outperform the market and spent a lot of time meandering sideways. However, since the early-February market bottom, PANW has come alive—the stock has rallied all but one day since that low, a major sign that the stock has turned the corner and a new uptrend is underway. Dips are buyable.
PANW Weekly Chart
PANW Daily Chart
Qualys (QLYS)
Why the Strength
Making its debut in today’s Cabot Top Ten Trader, Qualys is the latest in a long string of computer security firms to show great strength in the current market. Qualys specializes in cloud security; it’s the fifth-largest company in the global $6 billion worldwide security and vulnerability management industry in terms of market share. The company’s signature product is its Qualys Cloud Platform and integrated Cloud Apps that monitor threats across all of a company’s applications and devices, including employee laptops, tablets and smartphones. Qualys has over 9,300 customers in more than 120 countries and has been profitable since 2009, with a string of annual double-digit revenue growth that dates back to 2008. The immediate cause for investors’ excitement is the company’s quarterly earnings report on February 12 that topped analysts’ expectations. Earnings came in at 32 cents per share (analysts had expected 28 cents) and revenue of $62.9 million was ahead of the $62 million estimate. The company issued guidance for earnings of 32 to 34 cents per share in the first quarter and revenue of $63.4 to $64.1 million. Qualys is thriving by consolidating all of an enterprise’s cloud security needs in one integrated program and the results are good.
Technical Analysis
QLYS rallied from its early 2016 panic low near 17 to 40 later that year, but then built a long base-on-base formation, with a 31 to 40 consolidation leading to a 39 to 44 rest period through mid-July of last year. Shares have been trending higher since then, but the enticing action appeared since the market’s early-February low—QLYS soared on seven straight days of giant volume, and has continued to move higher since then, despite the market’s volatility. Like most leading stocks, retreats of a point or two look buyable, with a stop below 70.
QLYS Weekly Chart
QLYS Daily Chart
Sarepta Therapeutics (SRPT)
Why the Strength
Sarepta Therapeutics is a biotech company with a focus on developing treatments for Duchenne muscular dystrophy (DMD), a rare (just one in 3,500 to 5,000 males have it), fatal neuromuscular disease caused by gene mutation. (Patients are usually diagnosed between the ages of four and five, in a wheelchair between 11 and 13 years of age, with a lifespan in the early to mid-20s.) From an investor’s point of view, what’s interesting is that Sarepta is both developmental and commercial. The company’s first DMD treatment (called Exondys 51) addresses about 13% of the DMD population and has been catching on fast (see table below; it’s Sarepta’s only source of revenue right now). Management sees sales of that product nearly doubling in 2018 as its expands in the U.S. and likely gets approval in Europe. But Exondys 51 is just the beginning, as the company has 15 other treatments in various stages (mostly early) of development that should produce a steady stream of data readouts this year. Better yet, the company has north of $1 billion in the till, which should be enough to fully fund its trials for years to come (i.e., no major fundraising is needed). Of course, with a market cap approaching $5 billion, expectations are high, but analysts see the firm turning profitable in 2019 and a few positive data points should keep buyers interested.
Technical Analysis
SRPT was all over the place for much of 2015 and 2016, gapping up or down based on news and rumors. But as Exondys 51 started producing real results, the stock has begun to come under control—shares have trended higher since last September, and while SRPT did get whacked in early February with the market, it has surged back to new highs on excellent volume. We’re OK with nibbling on dips; expect lots of volatility.
SRPT Weekly Chart
SRPT Daily Chart
TD Ameritrade (AMTD)
Why the Strength
Bull Market stocks (those whose businesses benefit from a strong stock and bond market) have perked back up as the market has lifted back to its highs, and TD Ameritrade looks like the strongest of the bunch. The stock is strong today for some of the same reasons as peers E*Trade and Schwab—commissions are kiting higher as more investors jump into the bull market (Q4 commission revenue was up 24% from the year before despite the industry-wide price cuts last spring) and interest income is rising as the Fed hikes rates (net interest revenue was up 83% in Q4). But the thing that Ameritrade has that its peers don’t is a big, recent acquisition that’s paying off—the company swallowed Scottrade late last year, and that’s significantly boosted client assets ($1.2 trillion, up 48%), interest rate-sensitive assets ($156 billion, up 25%) and should lead to meaningful synergies in the quarters ahead. Throw in big growth in bank deposit fees and the corporate tax cut, and Ameritrade should see excellent bottom-line growth going forward—analysts see earnings soaring 70% this year and another 25% next year, though given that Q4’s earnings results topped expectations by 32%, those could prove conservative. A 1.4% annual dividend yield is a plus. Obviously, if the bull market runs into major trouble, business could shrivel up, but right now, Ameritrade has plenty of wind at its back.
Technical Analysis
From early 2015 through May 2017, AMTD made no net progress, which surely wore out most weak hands. The stock advanced from there, but it didn’t really outperform the market; the RP line mostly moved sideways through January. But the stock is gaining steam now—AMTD showed great resilience during the market’s swoon (with multiple days of big-volume support), and after finding support at its 25-day line two weeks ago, has rushed to new highs. We’re OK buying some here or (preferably) on dips.
AMTD Weekly Chart
AMTD Daily Chart
Teladoc, Inc. (TDOC)
Why the Strength
Teladoc is the leader in virtual care (often called telehealth) that’s changing the way many people get diagnosed and treated by doctors. Thanks to deals with more than 300 of the Fortune 1000 companies, Teladoc offers virtual access to board-certified doctors (via partnerships with three dozen health plans and a couple hundred hospitals). The firm’s bread and butter has always been offering people the ability to talk with (and get prescriptions from) doctors for common illnesses—it saves time for customers, and boosts productivity for employers since their workers don’t need to take a half day off to see a physician. But Teladoc has branched out to complex medical consultation in areas like mental health, transmitted diseases and oncology through its acquisition of Best Doctors last year, which has 50,000 doctors who are peer-rated as being in the top five percent of their field. The service has proven to be a big hit thanks to its ease of use: Revenues have grown at triple-digit rates each of the past two quarters (partly due to the acquisition; organic revenues were up 43% in Q4), paid membership totals 23.2 million (up 33% in Q4) and total virtual visits were 464,000 last quarter, up 49%. The bottom line is still deep in the red, though EBITDA has moved into positive territory and the company has 90% visibility into this year’s revenue. There are risks, but Teladoc has a very big story.
Technical Analysis
TDOC came public in July 2015, plunged through March 2016, and then rallied sharply just over its post-IPO highs last June. Then the stock entered a long, choppy sideways phase—TDOC gyrated between 27 and 37 for the next eight months. But since early February, the buyers have been in control, with the stock pushing to new price and RP peaks on solid volume. Dips shoud present solid entry points.
TDOC Weekly Chart
TDOC Daily Chart
Twitter (TWTR)
Why the Strength
Twitter, the real-time social media platform for 280-character messages, has been a very big deal for users—monthly active users worldwide hit 330 million in Q4—but investors have been more skeptical over the years. The issue over the past couple of years has been profitability, as revenue and earnings growth slowed in the second half of 2016 through the first half of 2017, along with user growth. But most of investors’ concerns were answered by Twitter’s Q4 2017 report on February 8 that featured a resumption of revenue growth (after three quarters of declines) and a stunning 73% leap in earnings per share. The report also featured a 12% year-over-year increase in daily active users and the company’s first quarter of profitability in generally accepted accounting practices (GAAP) terms. There’s not much new to the Twitter story, just strengthening evidence that management is figuring out how to monetize the service’s giant user base. Institutional ownership of Twitter stock is at a multi-year high, and the future looks bright.
Technical Analysis
Investors with long memories remember regarding TWTR’s November 2013 IPO leap from 17 to 74 as irrational, and finding the stock’s subsequent double bottom at 14 in May 2016 and April 2017 vaguely satisfying. But from that April 2017 low, TWTR has shown good strength, bouncing back quickly from an August dip and gapping up nicely from 27 to 35 on February 8 after the good earnings news. TWTR immediately scrubbed off about half of those gap-up gains, but has steadily worked its way back to new price highs and a new RP peak. Try to buy on a pullback of a point or more.
TWTR Weekly Chart
TWTR Daily Chart
Western Digital Corporation (WDC)
Why the Strength
Western Digital makes devices and systems that store data, which is a big deal for just about every computer, tablet, phone, enterprise and cloud system in the world. Western is a big company (market cap is nearly $30 billion), but it’s ridden a wave of heavy demand and restricted supply to book two consecutive quarters with after-tax profit margins of 21.0% (Q3) and 22.6% (Q4). Western’s hard disk and solid-state storage devices are sold to manufacturers around the world, and after three years of minor declines (storage is every bit as cyclical as microchips), revenue was up by 47% in fiscal 2017 (ending last June). There is no secret to Western Digital’s success, unless it’s the company’s ability to stay ahead of the innovation curve while keeping costs under control. Western Digital has made 18 appearances in Cabot Top Ten Trader since its debut in 2006, and was the Top Pick twice in 2017. It’s also a remarkable value stock, given its current 8 P/E ratio and its respectable 2.0% trailing annual dividend yield. Western is keeping its technological edge with a new series of NVMe 3D NAND chips that address the need for massive data storage in Internet of Things devices along with more conventional computing devices and monitoring systems. Western Digital is ticking all the boxes right now.
Technical Analysis
WDC went through a huge V-shaped correction/rebound from early 2015 (trading at 115) to May 2016 (35) and back to 96 in July 2017. After the peak at 96, WDC went into a controlled correction that found support in the high 70s in August and December 2017. The breakout came last week, when WDC soared to north of 100 on a nice pickup in volume. The stock’s action since the middle of 2017 provides a very nice launching pad to lift from, and we think the current breakout is buyable on dips.
WDC Weekly Chart
WDC Daily Chart
Zillow (Z)
Why the Strength
When Americans want to see what their home is worth, or what their neighbor’s home is worth, or what homes are for sale in their neighborhood—or any neighborhood—they turn to Zillow for the most current intelligence. And it’s all available for free, because their eyeballs are what Zillow’s advertisers want—and it’s the advertisers who are Zillow’s real revenue source. These are mainly real estate brokers (though there are also mortgage professionals) who get the use of Zillow’s specialized marketing and technology solutions that allow them to target the company’s millions of browsers. (In Q4, 151 million unique users per month visited the firm’s sites, and those users accounted for a whopping 1.4 billion visits, up 21% from a year ago.) Aside from Zillow (coined from “zillions of pillows”) the company’s brands include StreetEasy, HotPads, Naked Apartments and Realestate.com, but the biggest of its sub-brands brands is Trulia, a competitor that it acquired for $2.5 billion in early 2015. With that acquisition, Zillow took out its number two competitor, leaving Realtor.com (which was acquired by News Corp in November 2014) as its biggest peer—but Realtor.com isn’t growing as fast. In the fourth quarter, Zillow’s revenues grew 24% to $282 million, while earnings jumped 36% to $0.19 per share. Looking ahead, analysts expect to see earnings grow 60% in 2018 and 39% in 2019.
Technical Analysis
Z looked like an early leader of the new bull market two years ago, but after a big run, the stock went dead from August 2016 through April 2017. The breakout at that point looked exciting, but it, too, fizzled out, with shares building another big, multi-month launching pad through February. Now, though, Z looks ready to go—the stock has broken out again, with four of the past five weeks showing big-volume accumulation. If you really want in, you could nibble around here, but it’s best to aim for pullbacks.
Z Weekly Chart
Z 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.
