March 2, 2020

Be Cautious, but Don’t Panic

Current Market Outlook

Following last week’s rolling crash in the market, everyone is wondering what comes next, but instead of predicting (guessing), it’s better to stick with the facts. Here’s where the evidence stands: The intermediate-term trend is clearly down for all major indexes and most (though not all) stocks, and given that this comes after a prolonged advance, some time is likely going to be needed to repair the damage. Short-term, though, we did see some legitimate extremes in a few key measures (900-plus new lows on the NYSE on Friday; just 3% of S&P 500 stocks above their 50-day line; record SPY volume on Friday) that says today’s bounce could go further. All together, it’s best to be in a cautious stance (holding cash, limiting new buying, pruning your worst performers), though you shouldn’t panic out of everything—holding on to your resilient winners is fine, and if you have plenty of cash, a little buying is fine as well.

This week’s list is a good place to start building your watch list (or, if you’re in the buying mood, looking for candidates to nibble on). Our Top Pick is Regeneron Pharmaceuticals (REGN), which has a good overall story and what could be a big catalyst, too. Aim for dips.

Atlassian (TEAM)

atlassian.com

Why the Strength

It’s hard to ignore the resilience of cloud-related stocks as coronavirus fears have swirled over Wall Street and investors hunt for companies that allow people to avoid physical meetings and communicate online. As we wrote last month, Atlassian is an enterprise software developer specializing in project and content management solutions, and while the stock has dipped slightly since then, the company’s prospects remain strong as remote workforces continues to expand. Atlassian’s software helps workplace teams plan, engage and track progress, a strong selling point for today’s highly mobile and dispersed work teams, and the company has an enviable record of growth (sales up 36% to 49% each of the past six years!). The latest quarterly report in January revealed another round of great top- and bottom-line growth, thanks to both more customers and bigger usage from current clients. More recently, Atlassian announced it would aggressively grow its cloud business in India over the next year and double its number of Indian employees. What’s more, the firm’s latest offerings allow customers to integrate its cloud products with Google Cloud Identity for added cloud security. Analysts see the good times rolling on, with earnings up in the mid- to upper-20% range both this year and next.

Technical Analysis

Cloud software stocks have been hit or miss of late, but TEAM is one of the better-looking names—it rounded out a multi-month base in the second half of last year, and after earnings in January, nosed to new highs. TEAM’s breakout failed with the market’s plunge, but so far, the 50-day line has held, with big-volume support seen three times last week. You can grab a small position with a stop in the mid 130s, or just keep an eye on it.

TEAM Weekly Chart

TEAM Daily Chart

Bill.com Holdings (BILL)

bill.com

Why the Strength

Large companies have deep pockets when it comes to investing in technology, helping them to quickly adopt new digital tools. But for small and medium businesses (SMBs), the cash outlay can be a real burden; in fact, 90% of all SMBs are still using pen and paper for their accounting and payments systems! And that’s where Bill.com fits the ‘bill’, so to speak. We first wrote up this stock a few weeks ago, describing how its artificial intelligence cloud platform allows clients to digitize and automate its payments while syncing up with the most popular accounting software packages, such as QuickBooks, NetSuite and Expensify. Bottom line: A reasonably small investment in automation(as you might conclude) can save the SMBs a tremendous amount of money. The market is estimated at around $9 billion in the U.S. alone right now, and projected to reach $1.05 billion by 2026, an annual growth rate of more than 18%. (Bill.com’s target are firms with employees, not proprietorships.) And BILL is taking its shares of that growth, with revenues expanding more than 50% in each of the past three quarters. The company now counts more than 600,000 network members who are using its platform to handle over $19 billion in payments. Wall Street is on board, with seven analysts increasing their earnings forecasts for the company in the past month.

Technical Analysis

Many recent IPOs went kaput with the market’s collapse, but BILL did not, which is a telling sign. After running from 42 to 63 or so, the stock has “only” pulled back to the low 50s (near its 25-day line) before bouncing. Of course, resilient stocks can go bad in a hurry in a bad market, but BILL is certainly a stock to keep an eye on—or nibble on dips if you’re in a buying mood.

BILL Weekly Chart

BILL Daily Chart

Cloudflare (NET)

cloudflare.com

Why the Strength

As business applications, computing and storage shift to the cloud, the old solutions of VPNs, firewalls and other hardware “boxes” (say, to improve performance) have become less effective—opening up a big opportunity for Cloudflare. The company has effectively built a global cloud platform that delivers a range of network services to many big businesses, boosting both security and performance; better yet, it’s an all-in-one solution, so there’s no need to incorporate a bunch of products from many different vendors. All in all, Cloudflare’s giant network (in 194 cities, 90 countries, interconnects with more than 8,000 networks globally—it operates within 100 milliseconds of 99% of the world’s internet population) looks like the next-generation content delivery platform, and it’s been a hit, with 13% of the Fortune 1000 signed up (up from 10% a few months back). Growth has been both rapid and consistent (and accelerating slightly in recent quarters), and the firm is making solid headway toward profitability (gross profit up 55% in Q4), while the number of large customers (those paying at least $100k per year to Cloudflare) rose a solid 76%. Management guided toward 36% top-line growth in 2020, though that could prove conservative if big businesses keep their wallets open. We think it’s a big idea.

Technical Analysis

NET came public in September, had a good first couple of weeks but then went on to experience a few months of post-IPO seasoning, including a sharp dip to 14.5 in October and a trading range (16 to 20) during December and January. But it’s come to life since February 20 (on no news), actually nosing to new highs on massive volume and finishing last week up a bit despite the market’s collapse. If you’re aggressive, you could pick up a few shares here or on dips, or you can wait to see if NET tightens up going forward.

NET Weekly Chart

NET Daily Chart

Datadog (DDOG)

datadoghq.com

Why the Strength

Some of the market’s best performers over the decades have been so-called “follow-on” opportunities—for instance, when flights became cheap enough for the masses to travel across the country and elsewhere, a follow-on opportunity was created for hotels, which were needed for business and vacation travelers. Today, the widespread, ongoing move to the cloud by businesses of all sizes means there are all sorts of customized apps and differentiated hardware that don’t always work together the way they’re supposed to. Enter Datadog (and, somewhat similarly, Dynatrace (DT), which has also appeared in Top Ten), which has one of the top new-age monitoring and analytics platforms for development, operations and business users, providing real-time, actionable insights and alerts regarding these firms’ infrastructure. Of course, the details of the products can give you an ice cream headache, but the overall story is easy to understand, and so are Datadog’s numbers, some of which are jaw-dropping—revenue growth has been north of 80% in recent quarters, and the underlying metrics are just as impressive, including a same-customer growth rate of more than 30%, an 89% increase in “big” customers (those that pay the firm at least $100k per year), around 1,000 new customers in Q4 alone (nearly twice the number of new customers from a year ago) and the fact that 60% of clients now use multiple products (up from 25% a year ago). The valuation here is huge ($13.3 billion market cap, $363 million in revenue!), but some smart funds have started buying in. We think there’s big potential.

Technical Analysis

DDOG etched something of a base-on-base after its IPO, breaking out in January near 44 and running to 50. Then it backed off a bit on earnings, but while it initially took a hit with the market last week, the damage ended up being limited—DDOG found big volume support on Thursday at its 50-day line, and at Friday’s close, it was down just 1% on the week (vs. 11.5% for the S&P 500). We’re mostly interested in keeping it on a watch list, but if you wanted to nibble with a stop under the 50-day line, you could.

DDOG Weekly Chart

DDOG Daily Chart

Dexcom (DXCM)

dexcom.com

Why the Strength

In a tough market, good stocks can go bad in a hurry, so you always want to stay flexible. But all the evidence of the past few months—from the fundamentals, to the numbers, to the stock’s action—reinforces the view that Dexcom is likely one of the market’s liquid leaders, a name that big investors are willing to pay up for because of the firm’s rapid and reliable growth story that has a very big upside ahead of it. To review, Dexcom is a leader in bringing the technology revolution to diabetics—the firm’s G6 continuous glucose monitoring system leads the competition and (on its own and via integration with leading insulin pumps) is enticing more and more diabetics away from old school multiple daily injections, fingersticks and the like. At year-end, about 650,000 patients were using Dexcom’s technology, with Dexcom making hay not just with Type 1 patients but also insulin-dependent Type 2s as well via a few channels (United Health, Medicare, etc.). And, while there is competition from some big players, the entire market is set to grow rapidly in the years ahead—and Dexcom should remain in the lead as it launches its next-generation G7 later this year (full launch in 2021). Q4 results were fantastic (sales up 37%, earnings up 105%), and while management guided toward so-so growth this year (19% for revenues), they almost always under promise and over deliver. Analysts see earnings up 21% this year and 39% next, both of which could be conservative. Dexcom remains a growth stock every investor should at least have on their watch list.

Technical Analysis

DXCM busted loose from a 14 month rest in November, kicking off a new advance. There was a tough pullback in December (230 to 200), but it came out of that and crawled to new highs before gapping up again on earnings in February. The 300 level was too much to overcome, but despite the market’s implosion, DXCM has handled itself pretty well, holding north of its 25-day line and ending last week down less than half of the S&P 500. Further dips are possible, so if you want in, aim for small positions on weakness.

DXCM Weekly Chart

DXCM Daily Chart

Enphase Energy (ENPH)

enphase.com

Why the Strength

A key input in the white-hot solar energy industry is microinverters, which convert the DC current from solar panels into AC current that can be used in an electrical grid or elsewhere. Enphase Energy is the world’s top supplier of microinverters, so it’s benefiting in a big way thanks to the charge toward more efficient solar energy production. Enphase is strong today because business is good and getting better—the firm’s Q4 report was a barnburner, featuring revenue of $210 million in Q4, up 128% from a year ago, which was the second straight quarter of triple-digit growth, while earnings of 42 cents per share topped estimates by nine cents. Beyond the numbers, the firm is also inking some key deals that should help, including one with Petersen-Dean, a full-service roofing and solar company that selected Enphase as its premier supplier of inverters and battery storage systems, and a similar deal with Sunrun, the top residential solar installer in the U.S. But a big reason why Enphase’s growth story still has plenty of upside is its Encharge battery system, available in March, which will allow homeowners to generate, store and control energy in a single system for the first time ever. All told, at its Analyst Day last December, the firm believes its target markets will nearly quadruple in size by 2022; given solar’s ups and downs, that’s not a sure thing, but there’s no doubt the potential is huge if things go right.

Technical Analysis

ENPH is a very volatile stock, enjoying a huge run to 35 that ended last August, a 50% correction (we said it was volatile) into November, and a mushrooming advance to 59 before and after earnings in February. Regardless of the market, a pullback was due, but, while sharp, ENPH’s dip last week looks normal on the chart, and volume, while elevated, wasn’t anything crazy. Encouragingly, peer SolarEdge (SEDG) is also acting solidly. ENPH is a name to watch; if you’re aggressive, you could nibble here.

ENPH Weekly Chart

ENPH Daily Chart

Regeneron Pharmaceuticals (REGN)

www.regeneron.com

Why the Strength

Coronavirus has infected more than 89,000 and killed more than 3,000 people around the world, and as the minute-by-minute headlines remind us, the spread is continuing. Drug companies are working around the clock to come up with treatments for the virus, and Regeneron is right in the mix, which is one reason shares are acting well. The company is working hand-in-hand with Uncle Sam to develop new treatments to combat the virus; Regeneron’s REGN3048-3051 combines neutralizing monoclonal antibodies and is being tested (in 48 patients) in a first-in-human clinical trial sponsored by the National Institute of Allergy and Infectious Diseases. It may be awhile before treatments are available, but investors are clearly interested. However, the real near-term driver is Regeneron’s blockbuster macular-degeneration drug Eylea, which had investors worried due to a ramp up in Novartis’ competing drug Beovu. However, last week, The American Society of Retina Specialists warned its doctor members of potential vision loss from Beovu (!), which sent Novartis stock down and Regeneron shares up, and this isn’t likely to be a short-term situation. Indeed, 13 analysts increased their EPS estimates for the company, and at least three analysts increased their price targets. With a robust drug pipeline, including treatments for atopic dermatitis, asthma, cardiovascular disease, rheumatoid arthritis, squamous cell carcinoma, and colorectal cancer, Regeneron has a good long-term story with an attractive near-term catalyst.

Technical Analysis

REGN hasn’t really been a leader since the biotech boom that ended in 2015, with lots of big ups and downs since then. But last week may have changed that pattern—shares had been improving since October, but they exploded higher last week on their heaviest volume in years. If you want in, aim for dips of 10 or 20 points and be prepared for some big swings.

REGN Weekly Chart

REGN Daily Chart

RingCentral (RNG)

www.ringcentral.com

Why the Strength

Cloud-based communication providers (the firms in the industry call it unified-communications-as-a-service) have fared resiliently during the coronavirus panic as they allow people to reduce exposure risk by holding meetings remotely via the Internet. RingCentral is a leader in the $50 billion unified communications industry, offering a full cloud of communication offerings, including online voice calls, multi-user web conferencing, team messaging, conference calls and contact center solutions. Growth has been consistent and rapid for a while now, and there’s still a long runway of potential growth (Ring estimates less than 10% of potential customers are using its or similar services). But a big part of the story here is some of the giant partnerships Ring has signed, including with AT&T, Avaya, and more recently, Atos. In the latest quarter, RingCentral delivered outstanding results and surpassed its goal of a $1 billion annual revenue run rate. Although it reported a Q4 operating loss of $20 million, total revenue was an eye-catching $253 million, increasing 34% year over year for the fourth straight quarter. Importantly, subscription growth is equally strong, with annualized recurring revenue (ARR) increasing 32% in the latest quarter. Going forward, it should be more of the same as RingCentral guided for a 29%-ish increase in Q1 revenue, which is likely conservative. The valuation is up there, but there doesn’t seem to be much standing in the way of Ring growing nicely for many years to come.

Technical Analysis

RNG has had a huge, huge run during the past few years, but that hasn’t hurt the stock, as pullbacks have tended to be brief and/or market induced. Shares tightened up nicely near year-end and then boomed seven weeks in a row before hitting some turbulence. However, weakness has been tame, and last week RNG closed basically unchanged. If you want in, you can buy some on minor weakness, but we prefer to simply keep an eye on it and see if it remains resilient.

RNG Weekly Chart

RNG Daily Chart

Seattle Genetics (SGEN)

seattlegenetics.com

Why the Strength

Seattle Genetics was one of the leaders when the market came out of its funk back in October, and while it stalled out during the past three months, it’s in decent position to resume its leadership role whenever the market can find its footing. The company is on the verge of morphing into an oncology powerhouse, with some exciting drugs on the market and some others that are likely to be approved in the quarters ahead. The lead dog is Adcetris, which is a front-line treatment for a couple types of lymphoma, used in concert with chemo; Seattle sells it in the U.S. and Canada (sales up 26% in Q4 from a year ago), while Japanese giant Takeda handles sales elsewhere (royalties up 70%-plus in Q4, and that doesn’t include a $40 million milestone payment). There’s still growth potential with Adcetris going ahead (though potential competition from Merck has the attention from some investors), but Seattle also received approval for Padcev for advanced urothelial cancer and has submitted an application for Tucatinib in breast cancer, with approval expected by year-end. (Both products also should see many follow-on approvals in other indications going forward.) Sales growth is likely to slow this year, but as Padcev ramps and Tucatinib (which could be big) hits the market, analysts see the top line growing north of 40% next year, with lots more expansion after that. It’s a big idea that continues to be “de-risked” as approvals come.

Technical Analysis

SGEN actually started to get going in late September (ahead of the market), breaking out of a multi-year launching pad and booming to north of 120 in November. Shares then began to lag, but never really did anything wrong—the dip to 104 in January was reasonable given the prior run, and it’s closed north of that level even during the market’s recent mayhem and some Merck competition news today. The market will obviously be vital in the short-term, but the overall pattern looks encouraging.

SGEN Weekly Chart

SGEN Daily Chart

Square, Inc. (SQ)

squareup.com

Why the Strength

Mobile payments are expected to grow at an annual rate of 28% from this year through 2023, and that expansion is only helping payment and point of sale provider Square. The company just reported EPS of $0.23 per share for its fourth quarter, two cents higher than analysts had forecast, higher than the company’s $0.19-$0.21 per share estimate and up a strong 63% from a year ago. Revenues also surpassed estimates, rising 41%, to $1.31 billion. The biggest revenue component, at $938 million, was Square’s Seller ecosystem that targets small- and medium-sized businesses (though is increasingly making headway into larger clientele). But coming up as a huge contributor to the top and bottom lines is its second ecosystem, its Cash App. The app contributed $361 million to revenues, an increase of 147% from a year ago, and saw users grow a whopping 60% to 24 million. Subscription services grew 45% and the company’s lending arm, Square Capital, saw revenues rise 42% as it leant out more short-term cash (and cash advances) to merchants. Wall Street liked the earnings report, but loved Square’s guidance even more. The company is forecasting first quarter revenues of around $1.35 billion (higher than the prior consensus estimate of $1.20 billion) and EPS of 17 cents per share, higher than analysts’ estimate of $0.14. For the year, Square expects revenues north of $5.9 billion and EPS of $0.90 to $0.94. Square has always had a great story, and the Cash App could be the “new” catalyst that brings it into favor once again.

Technical Analysis

SQ had a monster run for a couple of years starting in mid 2016, but topped with the market in the fall of 2018, fell apart and fell out of favor—as of the end of last year, it was still sitting around 40% off its all-time high. But we really like the action this year, with SQ up seven weeks in a row and finding big-volume support after earnings last week. It’s swinging around wildly, but we’re OK taking a (small) stab at it here, or just keeping it on your watch list.

SQ Weekly Chart

SQ 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.