March 16, 2020

Story Remains the Same

Current Market Outlook

First and foremost, with the virus now affecting most everyone, all of us here at Cabot are hoping you stay safe (and if you’re home with your kids, sane!). As for the market, there’s not much to say except the obvious: We remain in a very steep selloff, with bounces limited to a couple of hours, though we’re seeing such crazy extremes (price and sentiment) that a near-term low is possible at any time. Our advice really hasn’t changed despite the once-in-a-lifetime action of the past couple of weeks: You should remain cautious, holding plenty of cash and keeping any new buying on the small side. Eventually, there will be huge opportunities, but we need to see the market and potential leading stocks find support before thinking a workable low could be in.

In the meantime, we’re mostly focused on eying stocks that are showing some resilience—if something can hold up in this disaster, it’s definitely worth at least keeping a close eye on. Our Top Pick is Masimo (MASI), which could be a port in the virus storm.

Acceleron Pharma (XLRN)

acceleronpharma.com/

Why the Strength

First, the bad news: Acceleron just announced that it would discontinue developing ACE-083, as it didn’t demonstrate functional improvement in its targeted secondary endpoints such as quality of life. That’s the way it often goes with potential drugs. However, the good news is discontinuing ACE-083 gives the company more time and resources to devote to its two main disease areas of hematology via a drug called reblozyl (to treat anemia), and with sotatercept, which targets pulmonary arterial hypertension; we wrote about both last month. Each treatment is showing great promise, and results of sotatercept’s Phase 2 trial are expected in May. Plus, the company is expecting the FDA to take action next month for reblozyl’s indication for myelodysplastic syndromes, which are diverse blood cancers that prevent the bone marrow stem cells from making healthy blood cells. Despite the historic market selloff, the stock is holding up pretty well as this is a company-specific story that appears insulted from the virus. Analysts are still optimistic, too, with most still thinking the stock has price upside ahead.

Technical Analysis

XLRN soared in January after the excellent results from a mid-stage study for sotatercept, with the stock eventually pushing into the mid 90s in February. And, despite the fact that this is a speculative, development-stage biotech outfit, XLRN has actually done yeoman’s work trying to hold up—yes, it’s been whacked with everything else, but it’s not far below its 50-day line even after today’s market implosion. If you want to roll the dice, you could nibble here.

XLRN Weekly Chart

XLRN Daily Chart

Apple (AAPL)

www.apple.com

Why the Strength

There’s obviously a lot of uncertainty when it comes to all earnings forecasts for 2020, and it’s pretty much a given that Apple itself will miss initial forecasts in Q1. But the company looks poised to be one of the blue-chips best positioned to rebound whenever the virus storm passes. Several new products are awaiting rollout, including the newly designed iPad Pro 2020, with a 3D time-of-flight camera allowing users to manipulate images. Also coming this year is a new version of the entry-level iPhone 9 and the hotly demanded Apple Watch Series 6. But the most anticipated release of the year is unquestionably the iPhone 12 (originally scheduled for April but now pushed back at least a month, probably longer, due to coronavirus). While analysts have cut earnings expectations, this comes on the heels of the firm’s biggest earnings and revenue quarter ever in Q4. Moreover, both Apple and Wall Street anticipate a strong rebound in the last half of the year on the back of demand for its many new product releases. Apple CEO Tim Cook has also vowed to put $163 billion in cash to work this year, which could include more buybacks, dividends or M&A. Obviously, the near-term outlook is cloudy, but bigger picture, we think Apple could be one of the first places big investors put money back to work when the crash ends.

Technical Analysis

AAPL built a huge base from mid 2018 through September of last year, then enjoyed a great, persistent advance to 327 or so before going over the falls with the entire market. The stock’s initial decline was ugly, but it’s actually shown some resilience since; even today it finished above its 40-week line. If you want to try to buy low, you could take a swing at AAPL here, but as with most every stock, we’re just keeping an eye on it.

AAPL Weekly Chart

AAPL Daily Chart

Bilibili (BILI)

bilibili.com

Why the Strength

We’ve written about Bilibili a couple of times this year, as its 3C strategy (commercialization, community and content) to entice China’s younger generation with its wide offerings of online entertainment is driving results higher. The firm began its life with anime, comics and games but has expanded into multiple channels, including mobile games, display advertising, membership subscriptions, e-commerce and especially live streaming and offline performance activities. (It should soon be adding music, too, thanks to its partnership with QQ Music, which is controlled by Tencent). The company has been growing its content (27 new anime series) and its users (almost 128 million per month, some of which pay up), and analysts have been revising their earnings estimates upward. The company will release fourth quarter results tomorrow after the close of trading, though what will really count will be the firm’s outlook—with the coronavirus subsiding somewhat in China, as well as China’s decision to pump $173 billion into its economy, big investors will be looking for rays of light on the horizon. Plus, it’s possible that the coronavirus outbreak has possibly helped business, as more are going online to entertain themselves while stuck at home.

Technical Analysis

Shares of BILI broke out in late December, enjoyed a huge run and held up very well during the initial phases of the virus selloff. But as the selling has intensified, they’ve come around for everything, including BILI—it closed just a point shy of its 50-day line on Friday though fell further today. We’re actually going to set a buy range (small positions only) a bit higher than here, thinking that a powerful rebound may lead to a tradable opportunity.

BILI Weekly Chart

BILI Daily Chart

DocuSign (DOCU)

docusign.com

Why the Strength

DocuSign continues to sport one of the best combinations of rapid, reliable growth today with a very long runway of growth potential going forward, which is the main reason big investors remain interested. The main driver is the firm’s e-signature product, which leads the industry and still has huge potential given that it’s proven to save clients so much time and money. But also beginning to contribute is the firm’s “Agreement Cloud,” a broader offering that helps firms automate anything involved in business agreements (preparing documents, signing, acting on and managing them); DocuSign is seeing some integration of these offerings into popular cloud packages to help, say, HR departments more easily produce/execute offer letters and sales teams do the same with sales contracts. Last Thursday’s quarterly report was fantastic, with results topping expectations on all metrics—revenue lifted 38%, billings were up 40%, cash flow was up 31% and earnings of 12 cents per share were double that from a year ago. (The same-customer growth rate of 17% also picked up from recent quarters.) The outlook was also above expectations, and management has said that it hasn’t seen any impact on its business from the virus quite yet; long-term, it could actually accelerate the move from laborious, in person paper-based processes.

Technical Analysis

DOCU trended higher from its initial blastoff in September of last year through the recent virus top, and the selling got ugly last week; shares dipped about 30% from their peak at last Thursday’s low. But shares did bounce off the 40-week line that day, and then surged on their heaviest volume since early December on Friday after earnings. A small position could work, or feel free just to keep it on your watch list.

DOCU Weekly Chart

DOCU Daily Chart

Equinix, Inc. (EQIX)

www.equinix.com

Why the Strength

Equinix isn’t a household name, but it’s one of the most straightforward ways to play the world’s move to the cloud and overall digitization of business. The company is one of the leading data center REITs out there, with the best set of interconnections (363,000 networks!) and scale (in 55 metro areas in 26 countries; 9,700-plus customers) available. It’s a capital-intensive business to be sure ($25 billion invested over the past few years!), but big clients ink long-term contracts and sign up for a greater amount of services over time, leading to ever-increasing recurring revenues and cash flow. (Revenue has increased sequentially every quarter for the past 17 years!!) It’s not the young buck it was a few years ago, but the stock remains resilient because of its steady, reliable growth that’s sure to continue—revenues and funds from operations (the REIT equivalent of earnings) should continue to grow in the high single-digits as its high-quality customer base expands usage and as Equinix slowly grows its footprint. Of course, as a REIT, the dividend is decent (1.9% annually), though this is more of a steady growth story than an income story.

Technical Analysis

EQIX has been a steady winner over time, but its advance steepened after the market’s December 2018 low, with the stock doubling from its nadir back then to its high this year. The stock got whacked off the top when the selloff began, but encouragingly, EQIX was actually up each of the past two weeks, including last week’s huge-volume rebound off the 40-week line, though it slipped today. If you’re game, we’re not against nibbling here.

EQIX Weekly Chart

EQIX Daily Chart

FTI Consulting (FCN)

www.fticonsulting.com/

Why the Strength

When businesses flounder, they often turn to FTI for help in turning things around. Comprised of five segments, this company is a big consulting outfit and has the largest restructuring business in the U.S., providing corporate finance, business turnaround services, cybersecurity and legal support. The demand for the firm’s restructuring services – particularly in the energy, telecom and healthcare sectors – helped make 2019 one of the best years ever for FTI. In fact, earnings have picked up sharply in recent years as more firms have needed its help. In a sense, then, FTI is something of a counter-cyclical stock, and given what’s happening in the world right now (especially in the energy patch), demand should remain strong in the quarters ahead. Management emphasized the firm’s strong cash position that could fund acquisitions (when warranted) and share repurchases. All in all, FTI’s war chest ($369 million in cash on hand at the end of Q4 compared to $258 million in Q3), combined with its unique position to benefit from economic weakness, will afford additional growth opportunities in the coming year.

Technical Analysis

FCN has been advancing since the middle of 2017 despite its counter-cyclical businesses, and it enjoyed a smooth advance to new highs around 130 in February. Like everything else, it got clocked as the virus selloff began, but the stock has been defended near its 200-day line repeatedly (starting in late February). If you want to take a flyer with a stop near 105, that’s fine, or just see if FCN can continue to hang in there.

FCN Weekly Chart

FCN Daily Chart

Inphi (IPHI)

inphi.com

Why the Strength

With businesses mostly turtling and the global economy shutting down, you wouldn’t think a firm that’s directly tied to data center and network spending would be relatively resilient. But Inphi (while taking its lumps along with everything else) has been, partly due to the firm’s dominant market position (the leader in all types of high-speed interconnects), partly due to the underlying momentum in the general industry (major upgrade cycles in and between data centers, bandwidth expansion among telecoms, etc.) and partly because the virus might actually be having a net positive effect on its business—management said earlier this month that supply hasn’t been an issue, and while a couple of Wuhan customers have pared back, other big clients like Tencent and Alibaba are seeing spikes in demand as people are working, learning and playing more at home, which actually boosted demand in certain places. Of course, that was a couple of weeks ago, so it’s possible things have worsened, but it certainly seems that Inphi is in good position to at least hang in there during the virus storm (in and outside of China, most of its clients are huge cloud and network operators), and longer-term, there’s no reason these firms won’t continue to upgrade their wares. Earnings are still projected to rise 40% or more both this year and next, and if the company comes anywhere close to that, we think the stock can be a leader after the market bottoms out.

Technical Analysis

IPHI was a name we were quite high on for the prior few months, but it stalled out in the mid 80s for a few weeks (including a big churn day on earnings in early February) and broke down with the market when the virus selloff began three weeks ago. But since then, the damage has been reasonable—it actually rose on good volume two weeks ago, and found support (and closed mid-range) near its 40-week line last week. As with most resilient names, you could nibble, but we’re more interested in watching.

IPHI Weekly Chart

IPHI Daily Chart

Masimo (MASI)

www.masimo.com

Why the Strength

The race is on for solutions that reduce health costs while saving lives, and Masimo, which makes noninvasive patient monitoring devices, is a front runner. Its products are being widely adopted due to their significant benefits. Among them is an oxygen blood level test, which could see greater use during the coronavirus epidemic. Masimo’s calling card is its rainbow SET system which measures oxygen, hemoglobin and 10 other parameters in a single device, reducing hospital “machine clutter.” It’s also tackling the opioid epidemic by developing a system for opioid prescribed patients; recently submitted to the FDA for clearance, it sends an alarm to revive the patient and warn caregivers or emergency responders of problems that occur after taking opioids. Its Patient SafetyNet remote notification system is used for opioid monitoring in hospital patients and, impressively, has resulted in a 0% death rate from post-surgery opioid use patients. It further showed a 65% reduction in distress code activations and a 48% decrease in patient transfers, saving 135 days per year for hospital ICU units. As for the numbers, Masimo is a steady Eddie, with top-line growth in the 10% range and earnings likely to expand just a bit faster than that going forward. Given that demand for its wares is likely to increase as hospitals ramp up capacity, Masimo could be a safe haven in the virus storm.

Technical Analysis

After hitting a peak of 187 in February, MASI’s initial selloff was sharp (down to 159), but shares held their 40-week line and actually found huge-volume support last week, rallying all the way back toward its highs before falling back some today. It’s hard to buy much of anything in this waterfall environment, but MASI looks like a “defensive” name that could attract money—you could nibble here with a stop near last week’s lows.

MASI Weekly Chart

MASI Daily Chart

Repligen (RGEN)

www.repligen.com

Why the Strength

Demand for drugs produced from living organisms (as opposed to synthetics) to treat chronic diseases has risen dramatically, comprising 75% of top-revenue drugs since 2016. Firms specializing in biologics have accordingly seen immense growth, with Repligen benefiting from this trend. Its bioprocessing technologies improve the drug manufacturing process while maintaining high quality and safety standards. As the industry moves increasingly toward single use (disposables), the company has created a family of profit-driving single-use products to capitalize on it, including the XCell ATF – a system used by drug makers to increase cell culture and improve upstream processes. Repligen’s key growth drivers are its filtration products, accounting for 60% of its overall revenue, with gene therapy and chromatography products also top-line contributors. It ended last year with 21% organic growth in Q4, and 39% overall revenue growth in 2019, while earnings (though only up 5% in Q4) topped estimates. The growth story is based on new accounts and key wins in its gene therapy applications, and Repligen had over $500 million in cash at year-end, which it plans to use for possible M&A and for what should be a banner year in terms of product launches. All told, Repligen should continue to do well fundamentally even in the extremely uncertain environment.

Technical Analysis

RGEN hit a peak at 99 last summer, corrected sharply to 72 in September and steadily rallied back to new highs above 110 last month. The initial virus selloff was tough on the stock, with shares plunging to 81, but RGEN has risen each of the past two weeks on big volume, actually closing last week a bit above its 50-day line, though it fell back with everything today. RGEN is one to watch, and there could be support in this area if you want to grab a few shares.

RGEN Weekly Chart

RGEN Daily Chart

TAL Education (TAL)

www.100tal.com

Why the Strength

The Chinese education group has been hanging in there despite the market’s crash as (a) education in that country should be relatively economically independent and (b) more and more will be learning from home post-virus. We recently wrote about competitor GSX Techedu, and TAL is another name in the group that’s doing well despite—and maybe, because of—the coronavirus keeping folks indoors. The company provides after-school tutoring programs for primary and secondary school students. It uses small classes and offers personalized premium services, such as one-on-one tutoring, and, of course, a host of online courses. TAL is one of the more seasoned participants in the growing education category and is poised to take a large share, as online education continues to blossom. Right now, only 10% of education is offered online in China, but forecasts see the market more than doubling (if not more) in the years ahead. The firm released preliminary results for its quarter ending in February late last month, and they did cut guidance due to the virus outbreak (sales should still be up nearly 20%), but long-term, the prospects for TAL look very promising, especially as the worst of the virus shut-in passes in that country.

Technical Analysis

TAL has come down with everything else of late, but it looks like a mountain of stability compared to most things—it broke out near 40 last October and ran to nearly 60 last month, and while it’s gotten caught up in the selling the past few days, it’s still well above its January low. Given the stability of the business, we’re not opposed to a nibble here, or just watch it.

TAL Weekly Chart

TAL 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.