March 23, 2020

Trend Remains Down, though Some Rays of Light

Current Market Outlook

With all of the measures (both in real life, and in the financial markets) taken during the past month, one thing has remained the same: The trend of the major indexes and the vast majority of stocks has been down since late February, which has kept us cautious and holding lots of cash. And until that changes, your top priority is to remain defensive and patient as we wait for the buyers to show up for more than a couple of hours. That said, we’re always on the lookout for rays of light, and we are seeing one from the broad market, as fewer stocks are participating on the downside during the last week. That’s a plus, though we need to see it backed up by real buying and a break of at least some shorter-term moving averages (10-day, etc.) to think a workable low could be in. Right here, we remain cautious.

Encouragingly, though, this week’s list is fairly heavy on the growth side of the equation, including many stocks that found big-volume support on earnings last week. Our Top Pick is Chewy (CHWY), a defensive growth stock that’s executing well and has seen some major accumulation.

Adobe Inc. (ADBE)

www.adobe.com

Why the Strength

As the coronavirus forces economic shutdowns, some companies have shown remarkable immunity to the contraction, and Adobe is among them. The tech leader and PDF pioneer is well known for its graphic design and editing software, and in recent years it’s thrived mostly thanks to its Creative Cloud offerings, especially the Digital Media segment (sales up 22% in Q4), which accounts for two-thirds of the firm’s overall revenues thanks its well-known Photoshop and Acrobat products (among many others). But really, Adobe is more than just design—it’s completely intertwined with the digital economy, with solutions for marketing, analytics, advertising and even e-signatures, too. All of it has produced an enviable record of growth in recent years that shows no sign of abating: Q4 revenues rose 19% and earnings were up 33%, both topping estimates, with huge profit margins (35.8%!) and continued solid gains in recurring revenue and remaining performance obligations (basically all money coming its way in the future; current total is nearly $10 billion). To be fair, management is being conservative in its guidance, assuming the virus could affect things—but even so, it sees Q2 revenue up 16% from a year ago, and given the increased usage/reliance on everything Internet-related in many countries, there’s a chance Adobe’s services could see increased demand longer-term.

Technical Analysis

ADBE was in a smooth uptrend into mid-February, and like everything else, it got caught up in the selling panic of the past four weeks. However, we see some subtle positive signs during the past two weeks—while volume picked up in the intial phases of the stock’s decline, it’s really exploded the past two weeks, but both times ADBE finished in the upper half of its range, which is a sign of support. We’re watching it; if you want to take a swing at it, use a stop near the recent low.

ADBE Weekly Chart

ADBE Daily Chart

Chewy (CHWY)

Why the Strength

Chewy (great name) has a big, easy-to-understand story: It’s aiming to be the go-to online destination for pet supplies (food, treats, health and dental products, crates/pens, grooming offerings and much more). This is obviously a huge ($70 billion!) and growing market as more pet parents decide to forego the trip to the pet store (online purchases of pet food should make up 25% of the total by 2022, up from 14% in 2017) and, for the most part, should be relatively resilient to economic hardships—in fact, the pet industry actually grew in both 2009 and 2010 even as the economy was faltering. The firm is grabbing share in the fragmented market thanks to its huge selection (more than 1,600 brands and 45,000 products, including a big increase in private brands in the past year), quick delivery (can reach 100% of the U.S. in two days, 80% in one day), a reputation for top-notch customer service and its pharmacy business (Chewy’s fastest-growing segment). And once customers come, they tend to stay—the firm’s “autoship” revenues make up 70% of the total, in effect providing a stream of recurring revenues. Another plus: CEO Sumit Singh was previously Amazon’s worldwide director of Consumables, as well as director of North American merchant fulfillment. Sales trends are great, and the next update comes on April 2, when earnings will be released. It’s a good story.

Technical Analysis

CHWY came public last June and immediately entered a post-IPO droop, falling to 22 in November. It got going a bit after that, but could only bounce to 32 before the market crash dragged it back down. However, the recent action has definitely been noteworthy—after briefly undercutting its November low, CHWY found support, and it surged last week on giant volume to multi-month highs. Volatility is extreme, but we’re not opposed to nibbling here or on dips if you’re willing to hold through earnings.

CHWY Weekly Chart

CHWY Daily Chart

Cloudflare (NET)

cloudflare.com

Why the Strength

Cloud computing players could be among the beneficiaries of today’s stay-at-home environment, and new leader Cloudflare is poised to benefit from booming Internet usage and the growing remote-work trend. The firm helps businesses run their websites more securely and efficiently (it automatically routes traffic around any congestion areas, etc.) with a global cloud network that stretches across 200 cities in 90 countries and connects over 8,000 networks. (13% of the Fortune 1000 are customers, up from 10% just a couple of quarters ago, while 18% of the 10,000 most-trafficked sites use them.) The company also provides all key network services – including content delivery, cyber security and domain name server services – on a single platform. Cloudflare’s revenues have been galloping ahead about 50% for several quarters, thanks to an ever-rising customer base and expanding usage among existing clients; its same-customer growth rate, which measures the firm’s ability to retain and expand billings from existing customers, was 12% in the recent quarter and is picking up steam. All told, Cloudflare has the look of a new-age, best-in-class platform that most of the big Internet and media players will use. It will never be a household name, but we think Cloudflare looks like a winner, with the global virus shut-in (more learning, gaming and working at home) likely to help.

Technical Analysis

NET came public last September and etched a very good looking IPO base, with a breakout in mid February and three weeks of big-volume advances. The market’s implosion quickly dragged it down to 15, but last week was an eye-opener—NET surged all the way back into the low 20s on a pickup in weekly volume. The daily moves are wild, but it’s certainly a name to watch, and if you want in, you can buy a little in this area.

NET Weekly Chart

NET Daily Chart

Coupa Software (COUP)

coupa.com

Why the Strength

Coupa has always had our favorite story within the cloud software sector—as the leader in business spend management, the company is inking many large firms who are benefiting from a streamlined process for the billions of dollars they’re shoveling out every year on business-to-business buys. Coupa now has north of 1,300 customers, mostly big outfits, but big picture the company believes it’s just scratching the surface, with over 100,000 potential clients around the world. Growth (mostly via subscriptions) has been both rapid and consistent (it’s actually accelerated a bit in recent quarters) as more customers go live and use new services (like Pay and Travel) and earnings are starting to plow ahead as well; once setup expenses are out of the way, Coupa’s margins are huge. Last week’s quarterly report (quarter ended Jan 31) was excellent, with revenues easily topping expectations, billings up 42%, Q1 guidance solid (sales up 38% year-over-year, despite some headwinds from the global slowdown) and solid metrics from newer offerings (those customers using Pay have a 20% higher average subscription fee than those who don’t). Of course, growth could easily slow this year as businesses pull in sharply, but Coupa said its pipeline remains strong as ever as the firm’s solutions save clients time and money. Near-term uncertainty aside, we think the company has emerging blue chip written all over it—sort of the Salesforce.com of business spend management.

Technical Analysis

One thing some big winners do during a bear phase is have a “wipeout” that undercuts many prior lows, shaking out all weak hands and effectively “resetting” the stock’s overall advance. COUP may be doing just that—shares fell as much as 44% and undercut its multi-month range from last year, but after earnings last Monday, the stock quickly recouped more than half of that on big volume before backing off today. As with most stocks, we’re mostly interested in watching COUP, though you could nibble if you want to roll the dice.

COUP Weekly Chart

COUP Daily Chart

Gilead Sciences (GILD)

www.gilead.com

Why the Strength

Not surprisingly, some of the market’s most resilient stocks of late (including many we’ve written about) are firms that actually stand to benefit from the virus shut-in going on in the U.S. and around the world. Only a handful of biotech companies are on the frontlines of developing coronavirus treatments, and Gilead is one of them. The company researches, develops and commercializes mainly antiviral drugs for treating HIV, hepatitis B and C and the flu, but it’s the firm’s experimental drug Remdesivir that has attracted some adventurous buyers. It was recently reported that the nation of Georgia is in talks with Gilead to receive the trial medicine, which has been used since 2015 against Ebola and which has also been used in China to treat COVID-19; the company has offered it on a compassionate use basis in many other areas, too. Gilead isn’t hanging its hat on this drug alone, though, as the firm has plenty in its pipeline, and its HIV-related drugs consistently generate billions in revenues (Q4 2019 global HIV sales were up 13% year over year) and huge profits. Plus, the firm is a major player in cutting edge CAR-T cell cancer treatment therapies. While the true potential of Remdesivir won’t be known for a while, any positive news from early-stage trials should help, and the stock’s low valuation (12 times earnings) and solid dividend (3.5% yield) are plusses that should keep big investors interested.

Technical Analysis

GILD reached 120 in 2015, but it’s been out of favor for years as earnings slowly slipped; up until recently, in fact, the stock was waterlogged, trading in a 60 to 70 range for months. But the potential of Remdesivir has attracted some buyers, and while volatility has been crazy, the stock has been gyrating higher during the past two months above its 50-day line. If you’re aggressive, you can consider buying a little here, or just keep it on your shopping list.

GILD Weekly Chart

GILD Daily Chart

JD.com (JD)

jd.com

Why the Strength

China was the first country to be devasted by coronavirus, and although the pandemic there is not completely over (and there are doubts about the accuracy of that country’s daily virus count), it’s almost surely on a downhill swing. That’s helped the Shanghai composite to fare better than the S&P this year, and not surprisingly, many (not all) Chinese stocks have shown some interesting resilience during this crisis, especially those in the e-commerce arena, where demand is actually picking up as the population learns, buys and entertains itself from home. That’s playing right into the hands of JD.com (kind of like the Amazon of China, though without the cloud computing and some other businesses), which is one of the leaders in the field; JD currently owns 16.7% of the e-commerce market share in China, surpassed only by Alibaba, with 55.9%, and most see that share rising as it’s been executing brilliantly for a while—investments have dented earnings a couple of years ago, the firm has been growing steadily (sales up 22% in Q4) and earnings have regularly topped estimates (52 cents per share in Q4, 10 cents above expectations). There will obviously be some uncertainty going forward, but if anything, JD could benefit from the lingering virus threat in China—the stocks’ resilience certainly points that way.

Technical Analysis

JD had a nice uptrend with the market from October through February, finally hitting a peak near 45 just before earnings. It’s been caught up with the market decline, of course, but the damage hasn’t been that bad—JD remains well above its 200-day line and is far closer to its old high than any of the major U.S. indexes. The longer it can hold up, the better the chance it can push higher once the pressure comes off the market.

JD Weekly Chart

JD Daily Chart

Moderna (MRNA)

modernatx.com

Why the Strength

Coronavirus has now infected more than 350,000 people around the world, including more than 15,000 for whom it’s been fatal. (One piece of good news: The number of people who’ve recovered from it just topped 100,000, though that’s neither here nor there.) Medical researchers are scampering to find 1) medications to help treat the virus and 2) a vaccine to prevent it. Moderna is in category 2; the company—in less than two months—has developed a potential RNA-based vaccine for coronavirus. RNA can be found across the cell, unlike DNA which resides in the nucleus, so mRNA (messenger RNA, which transfers the information from DNA to the cell machinery that makes proteins) is more readily accessible to scientists. On February 24, the company reported that it had shipped the first batch of mRNA-1273 to the National Institute of Allergy and Infectious Diseases (NIAID), a division of the National Institutes of Health for a Phase 1 clinical trial in the U.S. The trial is being conducted at Kaiser Permanente in Seattle, and the first dose was actually given March 16. Although Moderna anticipates it will take at least a year to have top-line data results, the company is now also preparing for a Phase 2 trial of the vaccine and focusing on improving production capacity so that it can produce “millions of doses” if (when?) the vaccine is proven safe and effective. Of course, it’s a speculative situation that will move based on news and rumors, but Moderna’s upside is giant if its formulation proves to be a silver bullet.

Technical Analysis

MRNA came public in late 2018 and had plenty of multi-week ups and downs through January of this year. But that’s all changed since the virus panic began—the stock exploded as high as 36 in February, and while the sellers tried to smack it back down, MNRA has held above its 50-day line and showed some solid accumulation when positive news hits. It’s a bit of a lottery ticket, but if you’re game, you could nibble here.

MRNA Weekly Chart

MRNA Daily Chart

Smartsheet (SMAR)

smartsheet.com

Why the Strength

Cloud software stocks are coming back to life thanks to better-than-expected quarterly reports and outlooks, as well as the fact that most generally offer products that benefit the new work-from-home movement. Smartsheet’s cloud-based platform allows teams to move away from Excel and old-school collaboration methods by automating and reporting on work across their organization and in a variety of ways, making it easy to compile and share content in a streamlined manner. Along with facilitating work-from-home solutions, the company provides templates for organizations to build their coronavirus preparedness portal. Smartsheet’s sales backdrop is a big reason for Wall Street’s increased interest, as top-line growth since its 2018 IPO has been robust, with revenue rising 51% in Q4, which was reported last week. Per share earnings remain in the red, but just about all of the other sub-metrics looked amazing, including a huge surge in high-paying customers (the number paying at least $100k totaled 350, up 138% from a year ago) and a same-customer revenue growth rate of a whopping 35% as many big firms expanded usage and signed up for new tools. (Smartsheet ended the quarter with around 84,000 clients in total.) The firm guided revenues for Q1 to be up 47%, which was a pleasant surprise, and it says it sees no material financial impact from the virus at this time, with a healthy pipeline of opportunities. Translation: Expect Smartsheet’s rapid growth to continue in the quarters to come.

Technical Analysis

SMAR topped out with the cloud software group last summer, and while it perked up early this year, it never got out to new highs. Then came the virus/market-induced plunge, which briefly took the stock to new lows. But the final four days of last week were excellent, with each showing gains on above-average volume. It’s still south of its 200-day line, so we prefer to just watch it, but if you want to nibble on SMAR, you can do so here with a loose loss limit.

SMAR Weekly Chart

SMAR Daily Chart

Vertex Pharmaceuticals (VRTX)

www.vrtx.com

Why the Strength

Vertex is the champion of treatments for cystic fibrosis (CF), with a handful of products (Kalydeco, Orkambi, Symdeko) that are each targeted to a specific sub-portion of CF patients (certain gene mutations, etc.). Through label expansions and approvals in the U.S. and overseas, Vertex has steadily expanded its available market, and indeed, the firm has been on a solid growth path for the past few years. But the real excitement came when its triple-combination treatment (dubbed Trifafta) was approved here in the U.S. (and quickly in Europe) back in October, which not only again expanded the market (potential to treat up to 90% of all CF patients worldwide) but came with a higher-than-expected price tag, too. And the results of that showed up right away—Q4 results trounced expectations, management significantly boosted 2020 guidance and most analysts see the firm’s bottom line nearly doubling from 2019 to 2021 ($10.17 earnings estimates for 2021). Of course, the world has turned upside down since October, but at least as of March 9, Vertex said that its supply chain was intact and that it stood by its 2020 financial guidance, specifically stating that they “have not seen any impact from COVID-19 on the Trikafta launch or other elements of our business.” That hasn’t completely halted the stock’s wobbles, but it has brought in some support from big investors that are drawn to its rapid, reliable growth outlook.

Technical Analysis

VRTX broke out around 190 in October and got up to 250 before the market’s crash got in the way. As we’d expect, the stock hasn’t been immune to damage, and last week’s big-volume selling wave wasn’t ideal. But even after today, VRTX is holding its 200-day line, and it’s much closer to its prior high than the overall market. It’s one to keep an eye on—and if you want to nibble, you can here, albeit with a stop in the upper 180s.

VRTX Weekly Chart

VRTX Daily Chart

Zoom Communications (ZM)

www.zoom.com

Why the Strength

Even before the virus struck, the trend toward a more mobile and remote workforce had been in place for many years. A December Forbes article cited a 159% increase in remote working in the U.S. since 2007. Interestingly, though, despite this trend, videoconferencing remains relatively rare; a study done a couple of years ago showed that 90%-plus of remote team meetings were audio-only. But Zoom is changing that and is clearly the go-to play as the need for remote work (and play) mushrooms. The company’s platform was built from the ground up for video, able to offer high-quality output even when bandwidth is iffy, with clients remarking that “it just works,” something that often can’t be said about the competition. It also offers unified communication (similar to RingCentral) and other services, basically making it the number one play for “new age” conferencing and communications. Growth has been fantastic for a while (see table below), and the virus reality could turbocharge results; personally, we know of many that have just started using Zoom for tutoring, work and general fun, and one report said that Zoom’s app got 600,000 downloads yesterday alone! For now, most of those are free users, but getting your product in front of that many people is priceless. Thus, even after the virus issue passes (and it will), Zoom’s future should be very bright.

Technical Analysis

ZM is probably one of the top couple of growth stocks in the market, surging into early March, pulling back in a controlled manner to its 25-day line and, in recent days, exploding to higher highs. Now, it’s possible that when the market finally gets off its duff, ZM could pull in for a bit as money looks for “non-virus” stocks. But the trend of business and the stock are in place—we’re OK nibbling on pullbacks.

ZM Weekly Chart

ZM 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.