Likely an Important Week
Current Market Outlook
The lagging action of the broad market finally caught up with the major indexes last Friday, with everything taking a big hit and, more important, small- and mid-cap indexes falling below their 50-day lines. Right now, most of the evidence remains positive, so we remain mostly bullish. But it’s fair to say our antennae are up and the next few days will be important—the intermediate-term trend is basically on the fence (another bad day could turn it down) and many leading stocks have been running for many weeks and are extended to the upside. Bottom line, we’re sticking with our current stance, but be sure to honor your stops and loss limits, take partial profits where available and, on the buy side, be discerning and aim to buy on weakness.
The good news is we’re seeing a decent amount of strong stocks that hit new highs recently and are pulling back normally. This week’s list is full of them, and our Top Pick is iRobot (IRBT), a stock with a solid growth story and a good-looking setup on the chart.
| Stock Name | Price | ||
|---|---|---|---|
| Forescout (FSCT) | 41.92 | ||
| Huazhu Group (HTHT) | 30.89 | ||
| Invitae (NVTA) | 32.06 | ||
| iRobot (IRBT) | 103.17 | ||
| ProPetro (PUMP) | 23.30 | ||
| Shopify (SHOP) | 585.00 | ||
| Sleep Number (SNBR) | 35.80 | ||
| StoneCo (STNE) | 27.54 | ||
| Wheaton Precious Metals (WPM) | 34.43 | ||
| Wix.com (WIX) | 302.53 |
Forescout (FSCT)
Why the Strength
There are an estimated 12 billion connected devices in use today, and that number will swell to over 30 billion by 2022. A growing percentage of them are being used in the workplace, and each one acts as a potential entry point for malware and exit point for corporate information. Forescout helps customers address the security problem by providing device visibility and control solutions—the company’s agentless technology discovers and classifies IP-based devices in real time as they connect to the network, and it continuously monitors them so action can be taken the second any policy (such as trying to access info above someone’s pay grade) is broken. The stock’s doing well now because the market opportunity is large and growing, and because Forsescout also offers orchestration capabilities (integration with third-party systems) that can help customers that work with other security providers, too. This approach has led to rapid growth, with revenue up 33% and 34% in 2018 and 2017, respectively. Forescout ended last year with 3,300 customers across 80 countries and the company’s average selling price (ASP) is up 25% during the past year and a half. A big beat in Q4 2018, when revenue was up 35% and EPS of -$0.01 beat by $0.24, has kept the stock moving higher. Analysts see the top line rising 24% in 2019 and profits to appear in 2020. Forescout is another successful new-age cybersecurity firm to keep an eye on.
Technical Analysis
FSCT went public at 22 in October 2017 and did pretty well during its first year, eventually rising to 41 last September. When the market retreated late last year FSCT did as well, and by the end of 2018 it had briefly traded down to its IPO price. However, that price acted as a springboard, with shares surging to 32 before the Q4 earnings report in early-February, blasting off to 36 after the report and ripping all the way to new highs last week before the market’s latest wobbles. Dips toward the 25-day line look buyable, with a stop under 38.
FSCT Weekly Chart
FSCT Daily Chart
Huazhu Group (HTHT)
Why the Strength
When you think of cookie-cutter stories, we usually think of restaurants or apparel stores, but Huazhu Group, a leading hotel brand in China, fits squarely in that category, too. The company operates 4,230 hotels under 18 different brands in around 400 cities in China, focusing mostly on the midscale and economy segments of the hotel industry, which is extremely fragmented (just one-third of hotels are branded in China, vs. 70% in the U.S.) and growing quickly. The firm has been growing steadily through both new buildings and acquisitions, yet has just 3% or so of the economy hotel pie, and with all of the macro factors pointed in the right direction (growing Chinese middle class, more business travel, etc.), there should be years of growth ahead. Not that Huazhu is struggling now—the stock is strong today thanks to a much better-than-expected Q4 report, with sales and earnings growth both topping expectations as the number of hotel rooms in operation lifted 11%, the average daily room rate rose 9% and the occupancy rate remained relatively stable (and strong) at 85.2%. Looking ahead, management sees revenues up 16% or so, with the hotel base growing north of 15%, and analysts see earnings up in the 30% range both this year and next. The valuation is a bit up there (46 times trailing earnings), but Huazhu remains a great growth story.
Technical Analysis
HTHT has a big run from early 2016 (around 9) to the middle of last year (nearly 50!) before the weakness in Chinese stocks dragged it down, with shares basically getting cut in half by November. Progress after that was slow and choppy, with the stock still fighting with its 200-day line in early March. But after a quick shakeout, HTHT has come alive, lifting into the low 40s on great volume before a modest dip. We’re OK starting with a small position here and adding on the way up.
HTHT Weekly Chart
HTHT Daily Chart
Invitae (NVTA)
Why the Strength
We covered Invitae about a month ago and, after another round of big-volume strength, its latest dip looks tempting. Fundamentally, not much has changed with the company over the last four weeks, other than the fact that the firm went through with a well-received equity offering that raised $125 million for its coffers. As for the story, Invitae is a genetic information company that’s bringing comprehensive genetic information to mainstream medical practices. The company specializes in genetic diagnostics across all stages of life and is attempting to combine many genetic tests into a single service that can offer lower prices and faster turnaround time. This approach requires streamlining lab work and using software to stitch everything together. And it seems to be working, with genetic diagnostic tests in areas like miscarriage analysis, inherited disorders, neurological disorders and cardiovascular disorders driving impressive growth. Revenue was up 117% (to $148 million) in 2018, driven by higher test volumes and several new biopharma and other partnerships. Management is also gaining leverage in the business, with Q4 per-sample costs down $17 to $243. Look for 2019 expectations of 50% revenue growth (to $221 million) and a decrease in operating losses (EPS of -$1.78 expected) to keep investors interested.
Technical Analysis
NVTA didn’t do much for the first two years after its 2015 IPO, but the buyers finally showed up in the middle of last year, pushing the stock up to 18 in September. A 50% correction during the market swoon late last year took the stock briefly below 10, but we’re extremely impressed with the action in recent months—not only did NVTA march back to new highs in February, but it staged a big-volume, persistent advance all the way to 26 before Friday’s shakeout. You could nibble here or (preferably) on dips, but use a loose stop if you enter.
NVTA Weekly Chart
NVTA Daily Chart
iRobot (IRBT)
Why the Strength
iRobot is an interesting position right now because the stock is in an uptrend, has pulled back normally, and yet most of the headlines lately have been about analysts downgrading shares after a 45% runup in February. We wouldn’t argue that a pause in the advance is likely (and healthy), but we think that process could have begun in March. If the bull case that firmed up after Q4 earnings in February holds up, shares could easily get going again this spring. If you’re new to the story, iRobot makes robots that do all those chores you don’t want to do—the Roomba vacuums, the Braava mops, and the Mirra will clean your pool—and all are selling well. The company trounced expectations with its Q4 2018 report (released February 6), when revenue was up 18% to $385 million (beating by $3.4 million) and EPS of $0.84 beat by $0.34. All in, 2018 was a year of 24% revenue growth and a 67% jump in EPS, to $2.98. Analysts rushed to recommend the stock (as mentioned above they’ve become more conservative lately) after updating their models to reflect expectations for 18% revenue growth and EPS of $3.09 in 2019. Look for the 2020 release of the Terra lawnmower (2019 in Germany), and other new products, to keep consumers and investors engaged in the story.
Technical Analysis
IRBT has been an up-and-down stock during the past couple of years, including a sharp pullback into the low 70s at the end of 2018. But after a modest recovery for most of January, IRBT exploded to new all-time highs following the Q4 report in February and rallied as high as 133 earlier this month. The two-and-a-half-week pullback since then looks normal—if you want in, you can grab some shares here with a stop below the 50-day line.
IRBT Weekly Chart
IRBT Daily Chart
ProPetro (PUMP)
Why the Strength
Oil stocks remain one of the worst areas in the market, but ProPetro has a unique story that’s kept growth humming and is attracting big investors. The company is a leading provider of fracking crews and equipment, with 28 crews wielding equipment with a combined 1.4 million hydraulic horsepower (HHP), as well as 21 cementing units and eight coiled tubing units that serve mostly Permian customers like Parsley, Diamondback, Exxon and Pioneer Natural Resources. Despite energy price fluctuations, ProPetro has kept utilization near 100%, helping sales and earnings to surge. One of the big things that makes ProPetro unique, though, was its deal at the turn of the year with Pioneer—in exchange for $400 million (mostly stock), the firm acquired Pioneer’s pressure pumping business (500,000 HHP worth) and, importantly, inked a 10-year service agreement with the big explorer, locking up 30% of its fleet with a steady business. The legacy fracking crews will probably suffer some from price deterioration as demand wanes, but the Pioneer acquisition and tie-in should keep growth intact—analysts see sales and earnings both rising around 25% this year, with more growth likely in 2020, especially if oil prices firm up. Throw in a pristine balance sheet (just $70 million of long-term debt) and a reasonable valuation (11 times trailing earnings) and we think the stock can continue to do well, with large upside potential should energy stocks kick into gear.
Technical Analysis
PUMP came public in March 2017 and had a decent first 10 months, reaching as high as 23 in early 2018. But that was the top, and after a lot of chopping around, shares eventually plunged toward 11 last December. However, since then, PUMP has pushed persistently back to its all-time highs, which is very intriguing when you consider the iffy energy sector. You could nibble here, though we’d prefer buying on dips toward the 25-day line.
PUMP Weekly Chart
PUMP Daily Chart
Shopify (SHOP)
Why the Strength
It won’t likely repeat its dazzling 2017 performance, but after a multi-month correction, Shopify looks like a leader again thanks to its best-in-class e-commerce platform that’s appealing to businesses of all sizes. That’s not to say there isn’t competition—in recent weeks, Square and (to a lesser extent) Instagram have introduced some features to attract merchants—but (a) the market is gigantic and (b) Shopify clearly continues to hold its own thanks to its platforms’ functionality (single integrated back office, works with all sales channels and devices), add-on features (payments, lending) and innovations (marketing dashboards, automate repetitive tasks like reordering, etc.). Importantly, the company is now working up the food chain, with an increasing number of big brands (J&J, General Mills, Steve Madden, Unilever and P&G all signed up in Q4 alone) signing up. Growth has cooled a bit but remains rapid (see table below), thanks to still-strong growth in monthly recurring revenue (up 37% in Q4, thanks mostly to subscription revenue), an ever-increasing flow of sales through its platform (up 54% to $14 billion in the quarter) and a continued surge in its lending business to its merchants (81% jump in cash advances). Going forward, growth among its current customer base, attracting more big fish and expansion overseas (24% of merchants were in generally non-English speaking countries at year-end) are all big opportunities. We like it.
Technical Analysis
SHOP initially broke out at 45 at the start of 2017 and ran as high as 155 in March 2018. But, while the stock did make new highs in the summer, that was effectively the start of a tedious period—the stock chopped up and down and eventually bottomed at 118 in December, marking no net progress for 15 months. But the action since then has been superb, with 10 weeks up in a row and clear new price and relative performance (RP) highs. Dips are likely buyable.
SHOP Weekly Chart
SHOP Daily Chart
Sleep Number (SNBR)
Why the Strength
Sleep Number is an established mattress brand and has been around since Robert and JoAnn Walker founded it in Minneapolis back in 1987. Visit Sleep Number’s website today and you’ll see there’s a lot more to find than just a comfortable mattress. Some of Sleep Number’s offerings allow customers to adjust the level of firmness, pre-warm areas of the mattress, and gently raise their partners’ head to help him or her stop snoring! All that technology isn’t cheap (some beds are pushing $5,000) but they’re selling well. When Q4 results were released in mid-February, management delivered 13.4% revenue growth (to $412 million) and EPS of $0.81 (beating by $0.09). Even better was the forward guidance, with the top brass now looking for 2019 sales growth of 6% to 10% (versus 6.5% consensus) and EPS of $2.25 to $2.75 (versus $2.36 consensus). Management pointed toward strong brand positioning and its new 360 smart beds as driving consumer interest. The company also extended a six-year share repurchase program, with $125 million to $145 million of repurchases expected in 2019. It’s not changing the world, but it looks like the company has a strong operating structure and a better go-to-market strategy than its competitors, both of which are resulting in solid growth.
Technical Analysis
SNBR’s chart has been up and down over the last five years, with more recent action (since mid-2017) largely occurring in the 27 to 40 range. Shares bumped up against resistance at 40 a few times, but finally blasted through following the release of Q4 results on February 13. The stock climbed up to 48, and after stalling for a few days, dipped last Friday before finding support. It looks like a normal shakeout to us—you can buy here or (preferably) on further dips.
SNBR Weekly Chart
SNBR Daily Chart
StoneCo (STNE)
Why the Strength
StoneCo is an up-and-comer in the relatively underpenetrated Brazilian fintech industry. The management team says that only 30% of personal consumption in Brazil is done with cards, so there is a lot of room to grow in the company’s existing merchant-acquiring business (estimated market size is $20 billion). However, the real reason analysts are excited is the potential for StoneCo to grow into new markets, including credit (estimated at $75 billion), banking ($10 billion) and software ($9.5 billion). All in, these three areas could expand the company’s addressable market nearly five-fold. In fact, the company has already made some progress in software (currently it has 14,000 clients), but the reality is there is still a large degree of uncertainty (and opportunity) regarding just how much business it can grab. That’s led some investors to worry about competition, while others would like to see more concrete progress on new initiatives before jumping in. All that said, there are plenty of bulls (just look at the chart) and recent results suggest StoneCo must be doing something very right—revenue in 2018 soared 77% (to $413 million), including 83% revenue growth and 467% adjusted EPS growth (to $0.17) in Q4. The active client base also more than doubled in Q4, to 268,000. Perhaps most interesting of all, Warren Buffett snagged an 11% stake in the company soon after it came public last year.
Technical Analysis
STNE went public at 24 last October and initially jumped into the low-30s, then wandered down into the high teens by the end of the year. Buyers stepped in and helped the stock do a U-turn, flexing their muscle in mid February and, after a pause near the post-IPO peak, pushing STNE as high as 44 after earnings. The stock remains very wild, but also very resilient, unwilling to give back much of its gains. Our advice: Aim to grab a small position on dips and use a loose leash.
STNE Weekly Chart
STNE Daily Chart
Wheaton Precious Metals (WPM)
Why the Strength
Wheaton Precious Metals is aiming to be the top play for those wanting exposure to precious metals, but like a couple of peers it doesn’t operate any mines—instead, the firm focuses on streaming deals with mines, which get funding early on to ramp up production, in exchange for delivering (for a set, low price, currently around $415 per ounce of gold and under $5 per ounce of silver) a certain percentage of a mine’s gold, silver and/or other output to Wheaton. The company has streaming deals with 23 mines in total (including many still in the development stage), but it gets most of its output from eight mines and is aiming to grow both organically (as these mines expand operations) and via acquisition (it announced three new deals last year, including one with Stillwater that brings in palladium and its first foray into a cobalt mine, too). Obviously, precious metals prices are a big factor here and the reason why sales and earnings slipped last year despite higher streaming totals. But, with a looser Fed, prices may head higher, and Wheaton thinks output is headed up as well—it expects total production to tick up 7% this year and thinks the next five years will average 16% higher production levels than 2018. Throw in a modest dividend (1.5%), the fact Q4 results easily topped expectations and the firm putting a Canadian tax dispute behind it, and there’s reason to think buyers will remain interested.
Technical Analysis
From 31 in August 2016 to 15 last November, WPM had a rough go of it in recent years. The stock initially got going in December after the tax dispute was settled, and has been acting well since, reaching 22 in February, resting near its 25-day line for a couple of weeks and then coming alive on big volume after the Q4 report. If you want in, we suggest aiming for dips.
WPM Weekly Chart
WPM Daily Chart
Wix.com (WIX)
Why the Strength
Based in Israel, Wix is one of many firms that we place into the category of helping independent and small businesses do more (and do better) online. Most users start out by registering for one of the company’s free website-building tools, but then many upgrade to Wix’s premium features, which provide top-notch marketing and branding tools, allow for a personalized domain, customer support, industry-specific website tools and payment and cashier services. It’s a simple business model, and it’s working great as more people find Wix’s offerings easy to use and reasonably priced (even the most comprehensive premium plans are a few hundred bucks per year). And that’s led to an enviable record of growth, with five straight years of at least 40% revenue growth, with Q4 results continuing the trend—revenues were up 39%, total paying subscribers totaling four million (up 24%), revenues per user lifted 12% and free cash flow surged 67%. Management expects the pace of growth to slow this year to the mid-20% range (though cash flow should grow in the mid 30% range), which caused a quick post-earnings selloff, but the stock is starting to pick up steam again as more big investors take positions (410 mutual funds owned shares at year-end, up from 298 one quarter before).
Technical Analysis
WIX was a big winner from the market bottom in early 2016 to mid 2017, and while it had some downs and ups after that, the stock was sitting at 80 in December of last year—no net progress for about 20 months. WIX marched back toward its highs in February before Q4 results nailed the stock, but shares held their 50-day line and, last week, showed some life. There’s still overhead to chew through, but you can buy a little here and look to add if the stock gets above 126 or so.
WIX Weekly Chart
WIX 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.
