A Couple of Worries, but Bulls Remain in Control
Current Market Outlook
The market’s snapback last week was very encouraging, with the major indexes and most leading stocks leaping back toward (or in some cases, out to) new highs. As we wrote last week, there are a couple of short-term issues to keep an eye on—namely, we saw some non-confirmations, as small- and mid-cap indexes didn’t bounce that much and far fewer stocks hit new highs even as the S&P and Nasdaq did. At this point, that action is more descriptive than predictive; it does raise the odds that the market could throw us another curveball over the next week or two, but it’s not something we’d necessarily trade off of. Big picture, we remain mostly bullish, though for new buying, we still favor entering on weakness.
This week’s list is just about all tech, med tech and biotech, and we’re happy to see some improved setups after the past two to three weeks of action. Our Top Pick is Zendesk (ZEN), which looks like it wants to continue its breakout from a few weeks back.
| Stock Name | Price | ||
|---|---|---|---|
| Amarin (AMRN) | 14.06 | ||
| Cree, Inc. (CREE) | 67.96 | ||
| Exact Sciences (EXAS) | 116.91 | ||
| iQIYI (IQ) | 0.00 | ||
| Paycom Software (PAYC) | 0.00 | ||
| Q2 Holdings (QTWO) | 80.81 | ||
| Ubiquiti Networks (UBNT) | 170.11 | ||
| Ulta Beauty (ULTA) | 331.95 | ||
| Xilinx (XLNX) | 134.50 | ||
| Zendesk (ZEN) | 82.19 |
Amarin (AMRN)
Why the Strength
Cardiovascular disease is the #1 cause of death in the U.S. (more than 800,000 deaths per year) with an annual treatment cost of a mind-boggling $550 billion. However, to this point, much of the focus has been on management of bad (LDL) cholesterol, but there’s a huge market (more than 12 million people in the U.S. alone) that have very high triglyceride levels and are taking statins that could use a better solution. Enter Vascepa, Amarin’s drug for this huge population, which has been growing nicely thanks to its current label (for those with very high triglyceride levels). But much bigger things are on the way: Late last year, the firm released a jaw-dropping comprehensive study for statin-treated patients taking Vascepa—highlighting the results were 25% to 30% reductions in death, heart attacks, strokes and other endpoints, with these data points showing up consistently among all categories of patients (men/women, diabetic/not, etc.). Not surprisingly, Amarin is aiming to submit an application for a greatly expanded label in the weeks ahead, and has rapidly built up its sales force (400 at the start of the year vs. 150 a year ago) to prepare for eventual approval (likely late 2019/early 2020). Here’s the kicker: Even without this new label, management sees Vascepa revenue rising around 55% this year, with massive upside after that once the FDA gives the green light. Some takeover chatter is also out there, but Amarin has enough real growth today and potential tomorrow to attract buyers.
Technical Analysis
AMRN was a nothingburger for years, but the clinical results with Vascepta caused the stock to rise from 3 to 23 within a few weeks. Shares did fall to 12 in December (market pressures), but it’s been acting both strongly and under control this year, with a handful of big-volume up days and orderly pullbacks when the buyers ease up. AMRN’s latest dip looks like a good chance to take a small position, with the idea of buying more if the stock can lift above 29.
AMRN Weekly Chart
AMRN Daily Chart
Cree, Inc. (CREE)
Why the Strength
Years ago, Cree had a big run as it was a first mover in the LED bulb industry that was just taking off. But that business is now cutthroat, with lots of competition and fading prices; Cree actually announced it sold its lighting business last week for total consideration of $310 million. And that was good news! Why? Because Cree is now all about (and has more money to invest in) Wolfspeed, the firm’s subsidiary that focuses on semiconductors (both silicon carbide and gallium nitride) that are key in many fast-growing end markets, including faster 5G networks, electric vehicles and LEDs for specialty applications (such as for horticultural purposes). While lighting revenue has been relatively stagnant (actually shrunk 8% in Q4), Wolfspeed has been inking long-term deals ($500 million worth) and growing like mad, with revenues surging 92% total and 50% not including the acquisition of Infineon’s chip business last year. And, with the announcement of the lighting sale last Friday, Cree’s management updated Q1 expectations that show continued growth for the chip business, too. The numbers going forward will be a bit messy given the acquisition last year and now the sale of the lighting business, but the overall story is easy to understand—Cree has transformed itself into a leading chipmaker in some big markets, and now it can focus solely on those opportunities. Analysts see earnings surging this year and next.
Technical Analysis
CREE etched a nicely higher low last December, and while it didn’t grab many headlines, the stock made solid, steady progress when calendar flipped, rising eight weeks in a row to new highs. Shares did pullback to just below their 25-day line two weeks ago, but they bounced quickly after and then, last Friday, surged to new highs on more than triple average volume. We’re OK buying here or on normal weakness.
CREE Weekly Chart
CREE Daily Chart
Exact Sciences (EXAS)
Why the Strength
One-product companies usually aren’t our favorites, but when the product looks revolutionary, has proven successful and management believes it could grow more than 10-fold over the long-term, we’re willing to take a swing. That’s the case with Exact Sciences, whose Cologuard test for colorectal cancer continues to catch on fast thanks to its ease of use—done at home, no missed time from work or family obligations, etc.—and accuracy, as 94% of those that have early-stage colon cancer (where survival rates are obviously the highest) are properly diagnosed using the product. Last year alone, 934,000 Cologuard tests were completed, representing about 4.1% of its target market—and that market could grow this year, as Exact is aiming to get approval to use Cologuard for those gained 45 to 49 years old (right now it’s approved for 50 and up). However, the real story here is the potential for Cologuard to be the standard initial test (many who test positive are referred for a colonoscopy) for colorectal cancer; Pfizer has teamed up to help sell the product for the next three years, and Exact is thinking big, with production capacity of three million tests annually at year-end 2018, a figure that should more than double again in the quarters to come, and a goal of capturing 40% of the testing market and $6 billion of revenue in the long run. The valuation is high and earnings are still in the red as the firm spends on gaining share, but it’s clear the potential is just as large—analysts see revenues up 60% this year and another 45% in 2020.
Technical Analysis
EXAS lifted to new highs on good volume in late January, making it one of the first wave of stocks do reach virgin turf. But the market didn’t make it easy on buyers, as the stock dipped about 10% ahead of earnings, then, after rallied to new highs near 97 after the report, suffered another quick shakeout of 15%! But that dip held both the high of the prior base (around 80) and the 50-day line, and the stock marched back toward its highs before pulling back sharply today. We think the next big move is up—EXAS is buyable around here.
EXAS Weekly Chart
EXAS Daily Chart
iQIYI (IQ)
Why the Strength
Iqiyi was a shooting star in the middle of last year before crashing along with most Chinese names. But the stock has rebounded this year, the numbers and story remain solid and there’s a decent setup on the chart. The company is a leading video streaming firm in China, with original, professional-produced and user-generated content that includes videos, games, animations and more—a bit like a YouTube/Netflix mix, with much of the most popular and award-winning streaming content in that country. And the firm’s scale is big and growing: During 2018, the firm averaged a whopping 454 million monthly active users that watched a combined 9.4 billion hours of video per month on the Iqiyi platform; that’s obviously a big help for advertising, which makes up about one-third of revenue and is growing steadily. But the real money here is in subscription revenue, as the company had 87.4 million paying users at year-end (who get some exclusive content, early access and ad-free streaming), bringing in nearly half of revenue and growing 76% in Q4. Helping the cause with all of this is Baidu, which is Iqiyi’s parent (IQ was spun off about a year ago), lending AI technology and infrastructure support. The bottom line is still stuck in the red, but revenue growth remains solid and analysts expect that to continue (up 34% in 2019, which is probably conservative).
Technical Analysis
IQ zoomed from 16 a few weeks after its spinoff to as high as 46 before round-tripping that move by year-end. But the stock finally turned around in January, rallying persistently back to 23 before the Q4 before boosted the stock to 28 on great volume. The action since then has been just as encouraging—IQ has consolidated calmly on declining volume, setting up a relatively tight shelf. We’re OK starting a position here (with a loose stop) and adding if the stock heads higher.
IQ Weekly Chart
IQ Daily Chart
Paycom Software (PAYC)
Why the Strength
Paycom is one of the leaders in the cloud-based human capital management (HCM) software space. The company has been slinging human resources, payroll, benefits and talent management software since it was founded by Chad Richison in 1998, and it’s done very well, in part because demand is constant and because Paycom has expanded its solutions to cover the entire employment life cycle, from recruitment to retirement. Mr. Richison is still the CEO, and part of his special sauce is that Paycom uses a single database for all HCM functions. That streamlines things for developers and it makes it relatively seamless for customers to expand their relationship with Paycom (revenue retention was 92% in Q4 2018). There really isn’t any single catalyst to point to for the stock’s current strength, and nothing materially new to add since we covered Paycom in mid-February after Q4 results came out. Its mostly that the market is once again rewarding Paycom for the stellar execution it’s posted quarter after quarter. Q4 revenue of $150 million was up 32% and beat by $6.2 million (4.4%) while EPS of $0.61 beat by $0.05. Management also guided for around 25% revenue growth this year, which is probably low. We continue to like the trend in the business, and the stock.
Technical Analysis
PAYC has been through its fair share of corrections and pullbacks, but since the company went public in 2014 the overall trend is up. The pace of the advance was a little wild in 2018 when there was a spike early, followed by a multi-month consolidation phase, then a massive rally to all-time highs near 164 in September. Shares retreated in October and November but found support around the prior breakout base (roughly 100 to 110). PAYC took off again in January, then blasted off to a fresh all-time high after the Q4 earnings release in February. We like the month-long pause since that report on generally tame volume—it looks buyable here or on dips.
PAYC Weekly Chart
PAYC Daily Chart
Q2 Holdings (QTWO)
Why the Strength
Q2 Holdings provides a cloud-based virtual banking platform to regional and community financial institutions (RCFIs). Its platform helps them reduce the complexity and cost of implementing and maintaining virtual banking solutions, and it also helps them create and pursue new revenue generating opportunities. Solutions span deposits, money movement, lending, security and fraud. In short, Q2’s solutions help RCFIs deliver the same type of personalized, local service that drove account holders to them in the first place. The stock’s doing well because growth has been accelerating and profitability has been on the rise. While there are some ups and downs in revenue quarter to quarter due to the timing of go-lives (especially the larger ones, which can take some time to implement), the overall growth trends are very strong and are likely to remain so. The company released quarterly results back in mid-February, with Q4 revenue up 30% and adjusted EPS of $0.08, up from $0.05 in Q4 2017. Management also gave a very bullish long-term outlook at a recent analyst day, saying its addressable market has grown to $8 billion, up from $3.5 billion in 2014; it sees the business growing at 20% annually with gross margins above 40%, over the long-term. It’s a great under-the-radar story.
Technical Analysis
QTWO went public in 2014 and with the exceptions of corrections in early-2016, late-2017, and late-2018 the uptrend has been steady. The pace of the advance accelerated in the first half of 2018, which may have set QTWO up for a rather large decline (from 67 to 43) during the market debacle late last year. But the stock didn’t waste any time before taking off again this January and was back probing its previous all-time high by mid-February. It’s now consolidating the two-month run as the 25-day line has caught up. We’re OK starting a position here or on dips of another point or two.
QTWO Weekly Chart
QTWO Daily Chart
Ubiquiti Networks (UBNT)
Why the Strength
Ubiquiti Networks specializes in networking hardware and software, which it sells through a global network of over 100 distributors and on-line retailers. The company says it has over 85 million devices already deployed in 200 countries around the world, with a customer base that includes service providers, enterprises and consumers, meaning it has a solution for just about every potential customer out there. The stock has been strong going back to 2016 when quarterly revenue growth jumped into the double digits, and it is doing well today largely because of the same reason. The company reported Q2 fiscal 2019 results back on February 8, with revenue up 22.5% to $307 million and a massive adjusted EPS beat ($1.33 beat by $0.30). Ubiquiti did especially well in its Enterprise segment, where revenue of $194 million (63% of total sales) rose by 48%. It also did well in its biggest markets of North America (up 28%) and EMEA (up 32%). And the stock completely shrugged off the February 11 news release that Amazon bought Eero, an Ubiquiti competitor that specializes in mesh Wi-Fi systems for the home. With 17% revenue growth and 30% EPS growth expected this year, and the business firing on all cylinders, it’s likely the path of least resistance will remain up.
Technical Analysis
Like a lot of stocks with hardware exposure, UBNT will occasionally slap investors across the face with a sharp correction, as was the case in February 2017 and February 2018. The trade off is that the stock goes on equally sharp rallies, and over time enduring those corrections has been well worth it! The action late last year was a clue that UBNT had good things in store—shares didn’t budge much during the market implosion, then rebounded toward its highs in early February and blasted off after earnings. Try to buy on dips toward 140.
UBNT Weekly Chart
UBNT Daily Chart
Ulta Beauty (ULTA)
Why the Strength
Ulta Beauty isn’t growing as fast as it was a few years ago, but the overall story remains the same—beauty product and salon sales are steadily shifting from drug and department stores to big, specialty outlets like Ulta—and the multi-quarter slowdown in same-store sales growth looks like it’s over. In Q4, overall sales growth did slow down to just 10%, but same-store sales growth increased to a very strong 9.4% (more than 2% above Street expectations), including 7% for retail sales and a 25% pop in e-commerce. And management thinks that momentum will likely continue in 2019 (6% to 7% same-store growth, including a 25%-ish gain in e-commerce), all of which caused big investors to pick up shares. As we said above, Ulta’s growth isn’t going to be red hot—store expansion will drop from a double digit pace to 5% to 7% during the next three years, with a bigger focus on productivity gains (up to $200 million in cost savings through 2021) and some share buybacks. Still, most analysts see low double-digit sales gains and upper double-digit earnings gains for the next few years, with upside if margins continue to expand and/or the economy reaccelerates. Overall, Ulta offers the growth and dependability that should keep big investors interested.
Technical Analysis
After falling from 315 to 188 back in 2017, ULTA spent many months bottoming out and was looking peppy late last year, resisting the market’s decline until December, when the wheels came off (falling from 322 to 224). But it starting coming back as soon as the market shaped up, rising back into resistance in February, and after a brief shakeout two weeks ago, moved out to new all-time highs after earnings. We’re OK starting a position here or on dips.
ULTA Weekly Chart
ULTA Daily Chart
Xilinx (XLNX)
Why the Strength
Xilinx is a semiconductor stock that’s become well-known after a number of high-impact innovations, including the programmable system on a chip (SoC) and field-programmable gate array (FPGA). Those solutions are still part of a growth story that’s going strong (revenue likely up 20% in fiscal 2019, which ends in March). But the real excitement surrounds a new classification of processor, called Adaptive Compute Acceleration Platform (ACAP). ACAP puts Xilinix in a strong position to gain market share and it marks another significant milestone in the company’s transition to a platform company instead of a device-focused one, which should lead to greater adoption from customers over time. Xilinx has done particularly well in the automotive and industrial markets with its Zynq products (ARM cores along with FPGA fabric) which generated 20% of revenue (up 80%) in the last quarter. And management says the next generation of its MPSoC solution (16nm) is being adopted much faster than its first gen solution (28nm). Then there’s the Versal product family (7nm ACAP), which is the first to merge hardware and software programmable engines and has wide applicability in wireless (i.e., 5G), data center, aerospace, defense and auto markets. The bottom line is there’s a lot of chip innovation and growth here, along with M&A speculation, and that’s why the stock is a major leader of this advance.
Technical Analysis
If you step back to a multi-year chart you see that XLNX made a long series of higher highs and higher lows in 2016 and 2017, consistently finding support at its 200-day line. Shares mostly consolidated in early 2019, but XLNX bucked the broad market weakness at the tail end of 2018 when it rallied to an all time high near 95. A modest pullback in December set shares up for a monster post-earnings rally in January, which carried the stock all the way to 128 before the recent two-week breather. You can buy some here or (preferably) on dips.
XLNX Weekly Chart
XLNX Daily Chart
Zendesk (ZEN)
Why the Strength
We’ve covered Zendesk a few times in recent months and are going back to the name today because the long-term growth picture looks as good as ever and the stock looks peppy. If you’re new to the stock, Zendesk is an up and comer in the Customer Services software space, which is a huge ($20 billion) market opportunity. And Zendesk has done an excellent job grabbing an increasing share of that by designing intuitive and easy-to-use products that help businesses catch and keep clients, provide technical support and communicate through chat, talk and messaging applications. Zendesk’s market cap has grown to $9 billion, in part because revenue and EPS growth has been so strong. In 2018 revenue was up 39% while EPS leapt to $0.23, up from a -$0.05 loss in 2017. Digging deeper, investors loved that Zendesk’s Q4 results (released on February 5) showed revenue growth of 41%, as well as management commentary that Zendesk could post 30%+ growth through 2020. The company continues to invest in its Sunshine platform and distribution and is wrapping up a migration to Amazon Web Services. This could cap margin expansion in the near term, but analysts are still looking for EPS to rise by 26% in 2019 (to $0.29) on revenue growth of 34%.
Technical Analysis
ZEN went public in 2014 but it didn’t really get going until its breakout to new highs in November 2017. In 2018, ZEN had a banner year, running from 35 in January to 72 in September before the market correction walloped the stock back to 50 or so. But as with most strong growth stocks, ZEN jumped out of the gate in January, was back near it’s previous high by the end of the month, then treated investors to a blast off rally to 80 after the February Q4 earnings release. We like the good-volume rebound to new highs last week, too. If you want in, you can buy here or on dips toward the 25-day line.
ZEN Weekly Chart
ZEN 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.
