Sellers Still Lurking
Current Market Outlook
The market had a brutal day today, with the major indexes (especially the Nasdaq, which had been the strongest index) plunging on big volume. (The reason, Facebook’s naughtiness, doesn’t matter much to us.) Today’s dramatic move calls into question the market’s recent rally—most indexes we track are still hovering above key support, but net-net, there hasn’t been any progress for the past eight to 10 weeks, which isn’t ideal. As for leading growth stocks, they did get hit today, though most remain in good shape on their charts. All in all, we’re still in favor of holding your strong, profitable stocks and giving them a chance to consolidate. But with the market evidently still not out of the woods, it’s best to go slow on the buy side and make sure you honor your stops and loss limits while we watch to see how the market reacts to this selling wave.
This week’s list is more full of what we’d term secondary leaders—still great potential, but not the liquid leaders we’ve seen pop up in recent weeks. One exception: Nutanix (NTNX), which looks like an emerging blue chip of sorts, is our Top Pick—pullbacks would be very tempting after its super-powerful breakout.
| Stock Name | Price | ||
|---|---|---|---|
| AAXN (AAXN) | 87.11 | ||
| Baozun (BZUN) | 44.24 | ||
| HCA Healthcare (HCA) | 137.60 | ||
| Insulet (PODD) | 175.69 | ||
| Loxo Oncology (LOXO) | 186.59 | ||
| MKS Instruments (MKSI) | 109.43 | ||
| Nutanix (NTNX) | 55.91 | ||
| Pegasystems (PEGA) | 0.00 | ||
| PTC Therapeutics (PTCT) | 0.00 | ||
| Vipshop Holdings (VIPS) | 14.25 |
(AAXN)
Why the Strength
Axon Enterprises used to be known as Taser International, which was a shooting star back in the early 2000s as its next-generation stun guns gained in popularity. That business is still solid today; Taser weapons are used by more than 18,000 law enforcement agencies in more than 100 countries. But the story is now about much more than Taser weapons—Axon is making hay with its body cameras, in-car video systems and its Evidence.com cloud software system that helps cops store, manage and share data and video, and manage records. These new products also mark a big business shift toward a recurring revenue model (sell the hardware, then get long-term subscriptions to its cloud platform), and investors think the business could be near a tipping point. In Q4, Taser weapons still accounted for two-thirds of revenue, but growth in that area (10%) was nothing compared to the rest of its business (up 27%), and Axon said its annual recurring service revenue was up 74% in the quarter, while future contracted revenue grew 8.5% from the prior quarter to $536 million. In 2018, the top brass sees mid-teens total revenue growth, but with expanding margins and corporate tax cuts, earnings are expected to lift 52%. Interestingly, management at Taser was always just so-so, but the CEO just switched to a 100% performance compensation package that is aligned with company performance and stock returns, which is a good sign.
Technical Analysis
AAXN has a very enticing chart. After testing all-time highs back in 2015, the stock went through the wringer again, dipping as low as 14 in early 2016, bouncing back to 30 in August 2016, and then chopping sideways in a loose range for the next seven months. Then came earnings, which brought a jaw-dropping rush of buying—AAXN soared 28% on 11 times average volume the day after earnings, and ran as high as 40 before pulling back a bit. We’re OK grabbing a small position here with a loose stop.
AAXN Weekly Chart
AAXN Daily Chart
Baozun (BZUN)
Why the Strength
The Chinese market can be a puzzle for western companies, and many have turned to Baozun, which calls itself a brand partner. Western companies like Nike, Levi’s, Fiat, Haagen Dazs, Johnson & Johnson, Pepsi, Microsoft and GoPro, get multiple services from Baozun, including direct sales to consumers (both marketing and fulfillment), support on major online marketplaces like Alibaba’s T-Mall and JD.com, social media and strategic help with websites and other marketing outlets. Goods offered include apparel, appliances, home goods, food, health and cosmetics, insurance and automobiles. In the company’s Q4 earnings report on March 6, revenue was up by 31% for the quarter and 23% for the year. Earnings grew by a whopping 133% for the quarter and 112% for the year. The number of the company’s brand partners also increased from 133 at the end of 2016 to 152 in December 2017. The gross merchandise value of clients’ goods traded via Baozun increased by over 75% during the year and services revenue was up 56%. Baozun isn’t a direct competitor of either Alibaba or JD.com, the giants of Chinese e-commerce, but it has found a way to serve its brand partners with a strategic mix of competition and cooperation. Analysts expect earnings to grow by 77% in 2018 and 52% in 2019.
Technical Analysis
BZUN made its debut in Top Ten in August 2017, when the stock was trading at 33. In the subsequent months, BZUN stayed volatile, trading as high as 40 and as low as 27, but was still at 33 on March 2. The company’s earnings report on March 6 kicked off a powerful rally on big volume, kicking BZUN up and out of its base. The stock has been consolidating that gain, having put a foot above 50 in intraday trading a week ago. You can buy BZUN here or on weakness, with a stop below 44.
BZUN Weekly Chart
BZUN Daily Chart
HCA Healthcare (HCA)
Why the Strength
HCA isn’t the kind of stock you’d expect to see in Top Ten—it’s a Fortune 100 company and one of the largest healthcare firms in the country, with 177 hospitals (with 47,000 beds), 120 acute care surgery locations and 123 urgent care centers that work with about 1,200 physicians in total. Its dominant position (and huge size, with revenues north of $40 billion!) in most of its markets has led to slow, steady growth in recent years, with admissions up 3.0% annually for the past five years, ER visits up 4.5% and revenue up 5.7%, while earnings have advanced similarly. So why is the stock so strong today? Part of it was the Q4 report, where sales and earnings growth picked up steam (and easily topped estimates), while the firm announced a pickup in capital spending to gobble up opportunities (it expects to add 650 inpatient beds and 220 new ER beds this year). There was also the initiation of a decent dividend (1.4% annual yield), which goes along with a beefy stock repurchase plan (the share count dipped 5.5% last year) that is expected to continue. And then there is the corporate tax cut, which management sees boosting earnings meaningfully this year (analysts see earnings up 27% in 2018). Throw in the fact that Washington, D.C. has been mostly silent on Medicaid and the Affordable Care Act of late (insurance coverage shouldn’t sink), and HCA’s steady growth should continue. A modest valuation (12 times expected earnings) is a nice bow on the package.
Technical Analysis
After hitting 95 in July 2015, HCA embarked on a long, tedious consolidation, with lows at 60 (early 2016), 67 (November 2016) and 71 (October 2017) along the way. But the stock changed character starting in December of last year—HCA spiked back above its 200-day line that month, then popped as high as 107 following earnings in late January. And now, the stock has been hugging its 25-day line for the past few weeks, even during the market’s sharp correction. We’re OK with buying some here with a stop near its February lows.
HCA Weekly Chart
HCA Daily Chart
Insulet (PODD)
Why the Strength
Nearly 80% of the 30 million diabetics in the U.S. (including a million that are newly diagnosed every year) still manage their insulin by what’s known as the multiple daily injection (MDI) method, which involves a patient injecting themselves usually 10 to 15 times per day. That is the growth opportunity for Insulet, whose insulin pump (dubbed Omnipod) looks like the best one on the market—it includes just two pieces (and no tubes!), automatically inserts the cannula, can pump insulin for three days straight and is less complex for the user than the competition. It also has an integrated mobile technology platform that allows easy control, scheduling and monitoring of a patient’s insulin regime. All of this (along with factors like Medicare Part D insurance coverage and recent insurance expansion with UnitedHealth) has let Omnipod quickly gain market share in the industry, but as mentioned above, the opportunity for pumps in general (and Insulet in particular) remains giant. The fourth quarter produced another solid quarter of growth (the fifth straight quarter of 24% to 28% revenue growth), and the top brass sees revenues up 23% this year and a similar pace right through 2021, when it believes it will reach $1 billion in revenue. The bottom line is still in the red, but analysts see that changing next year. Overall, this looks like a growth story with years of runway ahead of it.
Technical Analysis
PODD broke out from a multi-year consolidation last June near 48 and advanced to 70 or so by November. Then the stock etched a base-on-base formation, with a recent consolidation between 72 and 79 sitting on top the prior, tight base in November and December. Now, after a false start in late February, PODD looks like it’s getting going—shares have pushed into the mid-80s and notched a new RP peak in the process. You can buy some here or on dips, with a stop in the mid-70s.
PODD Weekly Chart
PODD Daily Chart
Loxo Oncology (LOXO)
Why the Strength
Loxo Oncology is a biopharmaceutical focused on a specific group of cancers that are defined by a single genetic mutation that keeps them alive and spreading. The company creates treatments that target those mutations. When Loxo made its debut in Top Ten in October 2017, the excitement about the company came from news that one of its treatments, larotrectinib, had achieved a 76% objective response rate in trials targeting TRK fusion adult and pediatric cancers, which means cancers that exhibit tropomysin receptor kinase mutations. Larotrectinib is still the big story for Loxo, having achieved high activity ratings against specific thyroid and salivary gland cancers. Last November, the company announced a $400 million partnership with Bayer to develop and commercialize larotrectinib and another candidate drug designated LOXO-195. Loxo got $250 million of the Bayer cash infusion in Q4 and will receive the balance in Q1 of this year. The company has filed a rolling new drug application (NDA) for larotrectinib for use in a few specific patient populations and expects to complete the submission by the end of March. Bayer is making a marketing authorization application to the European Union later in 2018. Loxo is still speculative, but there are a couple of potential triggers for further appreciation, and institutional sponsorship is growing steadily. It’s probably best to keep initial investments small and wait for good news to average up.
Technical Analysis
LOXO rallied in the first half of 2017, then gapped up on heavy volume in June when the good news about larotrectinib was released. The stock rebased from June until an attempted breakout in January pushed it as high as 106 before it slumped back to 85 during the market’s meltdown. LOXO snapped back and broke out to new highs in February, and traded as high as 136 earlier this month. The stock’s pullback looks like a good buying opportunity for anyone with the appetite for a speculative biopharma with big potential.
LOXO Weekly Chart
LOXO Daily Chart
MKS Instruments (MKSI)
Why the Strength
Shares of MKS Instruments have been on the rise as the company just wrapped up a record year (results reported in late January) that featured 48% revenue growth (to $1.9 billion) and 96% EPS growth (to $5.94). The company sells capital equipment, primarily for the semiconductor industry, that helps customers measure and control steps along their manufacturing process for semiconductors and flat-panel displays. And that business has been doing well, growing roughly 30% over the last year. Growth has also been helped along by the acquisition of Newport (closed last April), which diversified the legacy business into microelectronics, health sciences and industrial manufacturing markets. During the Q4 call, management flagged spending on mobile devices, 3D NAND memory and accelerating adoption of IoT and cloud apps as powering demand for its semiconductor manufacturing processes. And management also highlighted that in 2018 a decreased tax rate (from 27% to 19%) is going to push income up by roughly a third over what was expected a quarter ago! Given all that, analyst forecasts appear conservative—analysts currently expect 11% revenue growth in the year ahead, although EPS is expected to jump 33% to almost $8.
Technical Analysis
MKSI has been trending higher for a couple of years, so we can’t say it’s early in its overall run. That said, the stock is just coming off a multi-month consolidation—shares peaked in late October at 110, but found support twice at their 30-week moving average in December and February. The stock then pushed nicely to new highs, and the recent dip looks reasonable. You can buy a little here or on dips.
MKSI Weekly Chart
MKSI Daily Chart
Nutanix (NTNX)
Why the Strength
As companies move to the cloud, many find that their software and applications don’t work well with their legacy, distributed infrastructure. Nutanix aims to fix this with what it calls hyperconverged infrastructure (HCI) which, at a high level, allows IT teams to build and operate powerful multi-cloud (public, private and distributed) architectures. This 100%-software-based solution integrates computing, virtualization, storage, networking and security. And with its transition away from hardware progressing well (contracts with four large U.S. distributors mean passthrough hardware sales will be under 5% of total revenues by 2019), the market is now beginning to value Nutanix for what it is—a rapid growth cloud software story with a $200 billion addressable market! Profitability is likely three years away, but that story is secondary to the off-the-charts revenue growth Nutanix is posting as its customer count grows (up 16% last quarter) and big contracts of over $1 million pour in (up by 104% to 57 in the last quarter). The company grew revenue by 81% last year and analysts now see Nutanix growing by around 47% this fiscal year (FY 2018 ends in July). Even better, at its recent Analyst Day, Nutanix released a huge forecast for billings growth for the next four years, which caused a rush of buying. Look for investor interest to grow as the Nutanix story transitions from one about a hyperconvergence solution to an easier-to-understand story about a cutting-edge cloud operating system.
Technical Analysis
NTNX soared in its early days as a public company (the IPO was in September 2016) but the bottom dropped out within six months and shares were just below the 16 IPO price by mid-2017. A series of stronger-than-expected quarterly results got shares moving back in the right direction and NTNX closed 2017 out around 38. A little weakness preceded the last quarterly earnings report, after which buyers stepped back in and pushed the stock higher for nine consecutive sessions on gigantic volume, and today’s pullback was modest. You can pick up a few shares on dips.
NTNX Weekly Chart
NTNX Daily Chart
Pegasystems (PEGA)
Why the Strength
Pegasystems bills itself as the leading software provider for customer engagement and operational excellence. It’s a competitor to Salesforce.com in a lot of areas and it’s doing something right—Gartner has Pegasystems’ CRM platform ranked higher than Salesforce, and the firm’s client list is a who’s who of blue chip outfits, including eight of the top 10 healthcare companies, seven of the top 10 insurance firms, six of the top 10 global banks and six of the top 10 communications service providers. The secret sauce here appears to be Pega’s artificial intelligence that’s built into its platform, allowing clients to better predict and model customer behavior. Growth has been solid (though not spectacular) for many years, and the stock is strong today because the Q4 report blew away estimates and raised expectations for 2018 and beyond—earnings of 27 cents per share topped analysts’ outlook by 12 cents, and Wall Street sees another round of predictable growth this year (revenues up 13%, earnings up 42%). Like most software providers, cash flow is much larger than earnings (around $2 per share of operating cash flow last year) even though Pegasystems’ cloud offerings are a small part of business (just 22% of revenues, though growing quickly). It’s not changing the world, but this company does a great business that looks set to accelerate going forward.
Technical Analysis
PEGA broke out back in October 2016 near 30 and ran all the way to 65 last June before beginning a new launching pad. The correction did get somewhat ugly, with the stock correcting about 30% over an eight-month period, enough to wipe out most weak hands. But the action during the past month has been excellent, with PEGA ripping back to its old highs on excellent volume before pulling back modestly. If you’re game, you can nibble here or on dips, and look to buy more on a push north of 65.
PEGA Weekly Chart
PEGA Daily Chart
PTC Therapeutics (PTCT)
Why the Strength
PTC Therapeutics is a biotech company working to develop oral treatments for rare, neglected and life-limiting disorders. The company’s small molecule compounds are designed to alter post-transcriptional control processes to correct or compensate for genetic defects. The stock is doing well because sales of its marketed products are growing quickly, label expansions should expand treatment to younger patients, and pipeline assets are advancing as hoped. PTC’s lead products, Emflaza (approved in U.S.) and Translarna (approved in the EU), target Duchenne Muscular Dystrophy (DMD) in patients five and older; they generated $174 million in revenue last year and are estimated to grow by 50% to 70% in 2018. The company also has a Phase 2 trial going for RG7916, which targets Spinal Muscular Atrophy (SMA) in infants and young people (one in every 10,000 children affected). PTC’s SMA program is based on the company’s small molecule splicing platform (SMA is caused by loss of the SMN1 gene), and trial results to date suggest the drug candidate could be a breakthrough. A $20 million milestone payment from collaborator Roche in Q4 2017 helped PTC close out 2017 with over $190 million in cash. And with analysts forecasting 40% revenue growth in 2018, it’s likely big investors will continue buying this rising small-cap biotech star.
Technical Analysis
PTCT etched a nice base starting last July, quieting way down in November and December (always a good sign), preceding a big breakout in early January. A pullback during the market retreat in February was met by buyers and PTCT rose to yet another fresh high after the March 6 earnings report featured 210% revenue growth. The market also embraced news that the study of RG7916 in SMA has advanced into its pivotal phase. Impressively, the stock hasn’t given up any ground in recent days; further pullbacks would provide a good level to take a swing.
PTCT Weekly Chart
PTCT Daily Chart
Vipshop Holdings (VIPS)
Why the Strength
Vipshop Holdings is a Chinese e-commerce company, which puts it into the ring with giants like Alibaba and JD.com. The company differentiates itself from its rivals by running online sales that feature branded merchandise at a discount and in limited quantities. In other words, Vipshop is a flash sale site. The company can offer unique products—apparel, shoes, bags and other popular items—because of its extensive tie-ups with brand partners who use the site to introduce new lines and generate excitement. Vipshop’s revenue grew by 29% in 2017 and earnings are expected to jump by 23% this year and 30% in 2019. In the battle with Alibaba, partnerships are important, and in February, the company inked an innovative deal with London Fashion Week to boost British fashions in China. The company has also received $863 million in strategic investments from JD.com and Tencent Holdings on December 20, and special programs using Tencent’s WeChat messaging system widened the company’s ecosystem. The company revealed strong sub-metrics in its quarterly and annual report on February 12: The average number of orders per customer rose by 22% year-over-year, and average revenue per user in Q4 was also up 22%. E-commerce in China is a fight among big dogs, but Vipshop Holdings has a pack of friends and a history of success in its chosen niche.
Technical Analysis
After soaring in 2013 and 2014, VIPS hit a high of 31 in April 2015 and started a long period of tough sledding. The stock traded flat through 2016 and slipped to as low as 8 in 2017 before the December news of a big cash infusion from JD.com and Tencent Holdings jumpstarted the stock on December 20. After gapping up from 8 to 12 on huge volume, VIPS began a rally that led to a high of 19 in February. The stock has been digesting its gains and is sitting atop its 25-day moving average, just above 18. VIPS has a challenging environment, but with a unique business proposition and strong allies, it looks like a winner. Use a loose stop around 16.
VIPS Weekly Chart
VIPS 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.
