Short-Term Moment of Truth
Current Market Outlook
During the past three weeks, we’ve seen the market’s breadth begin to sag (small- and mid-cap indexes haven’t made much progress in three months), then we saw some key sectors falter (financials have decisively broken down) and now the market’s own intermediate-term trend is on the fence. That’s enough yellow flags for us to advise trimming your sails a bit; we’re nudging our Market Monitor down to a level 6, as the onus is on the bulls to pull us out of this near-term funk. However, longer-term, we’re much more optimistic—today’s show of support was encouraging, of course, and there remains a ton of strong stocks (especially growth-oriented stocks) out there, so you should continue to hold on tightly to your top performers.
This week’s list is chock-full of stocks that have ignored the market’s recent dip. There are many good names to choose from, our Top Pick is Teladoc (TDOC), a newer issue that’s emerging from a long post-IPO droop and consolidation. It has a great story.
| Stock Name | Price | ||
|---|---|---|---|
| Criteo (CRTO) | 0.00 | ||
| Grand Canyon Education (LOPE) | 121.03 | ||
| Lumentum (LITE) | 87.00 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| Momo Inc. (MOMO) | 44.65 | ||
| RingCentral (RNG) | 238.73 | ||
| SiteOne Landscape Supply (SITE) | 98.49 | ||
| Skyworks Solutions (SWKS) | 0.00 | ||
| Teladoc, Inc. (TDOC) | 127.95 | ||
| Wynn Resorts (WYNN) | 121.08 |
Criteo (CRTO)
Why the Strength
Retargeting is the internet technology that shows you ads for a product you’ve previously looked at—even days later when you’re viewing other websites—and Paris-based Criteo is a master of the technology. But last November, the company widened its focus to brand advertising in general with the acquisition of Hooklogic, a New York company whose clients include Walmart, Tesco, Target, Best Buy, Macy’s, Expedia, Hasbro, Intel, LG, L’Oreal, Mondelez, Philips, Microsoft and Marriott. Even before the acquisition, Criteo was a global company, with 41% of revenues coming from the Americas and 37% from Europe, the Far East and Africa, but the increased offerings of the combined companies will strengthen its global footprint, while stabilizing cash flows to some degree. In the fourth quarter of 2016, Criteo added nearly 1,600 net clients, revenues grew 43%, and revenue from existing clients grew 20%. Also, close to 63% of revenue was generated on mobile ads. Trends are good, and analysts expect buyout growth for many quarters to come.
Technical Analysis
CRTO came public in late 2013 at 31 and peaked at 61 in early 2014, a peak that still stands today; the stock has basically been building a long base for three years. But in those three years, revenues and earnings have grown strongly, so the stock has become a much better value. Plus, it’s been in a strong uptrend since November and ignored the broad market’s latest weakness. Short-term, that old high of 61 is the next target, and long-term, a breakthrough into new-high ground could be auspicious.
CRTO Weekly Chart
CRTO Daily Chart
Grand Canyon Education (LOPE)
Why the Strength
Grand Canyon Education is the parent company of Grand Canyon University, a private Christian university that’s been operating in Phoenix, Arizona since 1949. Expertly managed, the school has grown both revenues and earnings every year of the past decade. At the end of 2016, the school had 17,262 students on campus, up 13.6% from the year before, and 64,646 students online, up 9% from the year before. Roughly 40% of students are pursuing graduate degrees. However, there are bigger forces at play in the industry. The low point, back in 2011-2012, came when the Obama administration cracked down on for-profit schools that used aggressive marketing tactics to attract students—along with the federal loans that paid their tuitions—who were unlikely to succeed in college. Many of those schools (notably Corinthian Colleges and ITT) are now out of business. But now the tide has turned, and with the Trump administration’s more pro-business attitude—and less competition for students—investors are betting that Grand Canyon will continue to grow its online business in particular at a good rate.
Technical Analysis
LOPE came public in 2008, bottomed with the industry in 2011, and peaked at 47 in late 2013; for the next three years, it built a base there. But that base became a launching pad in November as the market blasted off and the for-profit education sector in general turned very positive. Cabot Top Ten Trader readers who bought on our original recommendation in January are off to a nice start; if you’re among them, you could average up on the current modest correction. Otherwise, you can start a new position here.
LOPE Weekly Chart
LOPE Daily Chart
Lumentum (LITE)
Why the Strength
The optical networking sector has turned into a mixed bag—some names in the group have begun to break support, but the strong performers, such as Lumentum, remain under accumulation. Lumentum (which was spun off from Viavi in 2015, which itself was called JDS Uniphase back during the bubble) actually has some older product lines that are slowly shrinking (like commercial lasers), but investors are focused on the firm’s telecom and datacom product lines that are in huge demand. Possibly the hottest products of all boost connection speeds both within and between data centers; demand has been so strong for the company’s 100G data center transceivers that they’ve been capacity constrained (Lumentum also had some production snafus). But that was fixed by the fourth quarter, when sales for its datacom product line rose 95% from a year ago, with 100G product revenue mushrooming 500%! The good news is that so-called hyperscale data centers are still relatively early in the transition to 100G speeds, so demand should remain strong for a while. There’s also excitement surrounding 3D sensing (the new iPhone is rumored to include it), a new technology that’s likely to make its way into most smartphones and automobiles and boost demand for specialty lasers. Revenue growth here is slowly accelerating while earnings have been topping expectations. Networking stories are always tricky, but it’s clear the wind is at this company’s back today.
Technical Analysis
LITE seemed to be blasting off after earnings in mid-February, but after ripping to 54, the stock sagged due to analyst worries about the sector (some industry peers got whacked), a terrible earnings reaction from peer Finisar and LITE’s convertible bond offering. But after dipping to support at 43, the stock has taken off again. It’s volatile, but we’re OK with a small position here or on dips, with a loose stop in the 44 area.
LITE Weekly Chart
LITE Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
MercadoLibre is the eBay of Latin America, not only because it is the dominant online platform for auctions and e-commerce, but also because eBay owns an 18.4% stake. MercadoLibre provides online space for individuals and companies to set up stores, list items for sale in either fixed-price or auction pricing, make and receive payments via MercadoPago, a secure online app, and arrange shipping via MercadoEnvios. The company is attractive right now because the South American economy is showing signs of economic recovery, especially Brazil and Argentina, which contributed almost 90% of 2016 revenue. Total payment volumes using MercadoPago increased 84% over 2015, while items shipped via MercadoEnvios were up 75%. Another positive is the increase in mobile users to the platform; mobile registrations constituted two-thirds of new users in 2016, and mobile gross merchandise volume grew by 99% on a currency-neutral basis. Fourth-quarter results were especially heartening, with earnings up 32% on a 42% bump in earnings. MercadoLibre is moving to increase penetration in other Latin American countries for commerce, payments and shipping. As long as the South and Central American economies stay healthy, MercadoLibre should do well.
Technical Analysis
MELI has been in a general uptrend since it came public in 2007, but 2014 and 2015 were marred by heavy pullbacks during the South American economic chaos. MELI had a good 2016, soaring from 84 to as high as 194 before a year-end correction pulled it back to 149. Since starting 2017 at 154, the stock has rallied to 218, then pulled back to 211 on calm volume. We think MELI (and its small, 0.3% yielding dividend) is buyable under 210, as emerging market stocks have been a little stronger than U.S. issues recently. Use a stop at around 200.
MELI Weekly Chart
MELI Daily Chart
Momo Inc. (MOMO)
Why the Strength
Momo Inc. is a Chinese mobile-based social networking platform that allows the usual mix of messages and sharing of pictures, videos and music, plus games and other content. What makes it unique, however, is that it knows where its users are, and can alert users with common interests and profiles when they are close to one another. This got the company a reputation as a hook-up site and the nickname of The Tinder of China. But Momo has moved beyond that by introducing a live video service that has attracted more users. In fact, Momo has been so successful that Alibaba, the biggest e-commerce site in China, tried to buy the company. The Chinese government nixed the sale, but the attempt was a good indicator of Momo’s appeal. The firm’s Q4 earnings release on March 7 was the third consecutive report to feature triple-digit percentage gains in both revenue and earnings (and the seventh of the last eight), driven partly by the increase in paying customers for its live video service. Membership subscriptions, virtual gift revenue and mobile game revenue were also up strongly. The company also said that it expected Q1 2017 total net revenue to increase 370%. This is a strong story.
Technical Analysis
MOMO traded up from 11 to 17 in April 2016 on the Alibaba takeover news, but the stock took a dive after the government blocked the move and corrected to 9 in July 2016 in the aftermath. The stock rebounded sharply, eventually working its way to 28 in November 2016 before hitting another correction to 17 at the end of 2016. But since 2017 started, MOMO has been on a tear, running to 36 at the beginning of last week. The week’s market weakness pulled the stock back a bit, but with MOMO trading above 33, we think it’s well positioned to buy. Use a stop at 30.
MOMO Weekly Chart
MOMO Daily Chart
RingCentral (RNG)
Why the Strength
RingCentral is a cloud software provider, but instead of focusing on a business process like employee management, sales or service management, RingCentral is all about communications, specifically intra-office communications. The company’s offerings provide a comprehensive system that unifies messaging, voice, conferencing, online meetings and more for all sizes of businesses. The growth story is similar to many new-age cloud providers, specifically, by eating the lunch of some older providers (Avaya filed for bankruptcy in January) as companies move toward the fuller functionality and subscription-based cloud model. In the fourth quarter, revenues rose 25%, though its run rate from recurring software subscriptions were up 31% to $414 million, including a 38% bump in recurring revenues from its core RingCentral Office package. And while most cloud providers are bleeding red ink, this company has turned profitable (both earnings and free cash flow) and should see the bottom line expand nicely in the quarters ahead. It’s not changing the world, but it’s a solid story that should gain more institutional sponsorship (36 million shares owned by funds now vs. 29 million a year ago, compared to a 59 million share float) in the quarters ahead.
Technical Analysis
After its IPO in September 2013, RNG spent more than three years building a huge base—shares traded as low as 10 in 2014 and as high as 26 in late 2015, but never decisively rallied to new highs. That now appears to be changing—RNG built a much tighter base for most of last year (20 to 25) and lifted to new highs on excellent volume in February followings its fourth-quarter report. Shares are thinly traded (about $20 million per day), so keep positions small.
RNG Weekly Chart
RNG Daily Chart
SiteOne Landscape Supply (SITE)
Why the Strength
SiteOne Landscape isn’t well known among investors but it has one of the better roll-up stories we’ve seen in a long time. The company is the largest (and only national) wholesale distributor of landscape supplies (it has 483 stores in 45 states and offers about 100,000 individual products to both individuals and professionals), and it’s using its size and resources to consolidate a highly fragmented U.S. market. (SiteOne has about 10% market share but is four times the size of its next largest competitor.) The firm acquired six firms last year that added $150 million in annual revenue (most are leaders in their niche in their geographic area), and it’s already closed four buyouts so far this year, adding about $85 million in annual sales—all of which are highly accretive. All told, this is a $15 billion market opportunity, so as long as SiteOne has access to ample liquidity (its net debt was less than three times cash flow at year-end, which isn’t bad) and successfully integrates these purchases, it should grow for many years. Last year, sales rose 14% (organic sales were up 3%), while adjusted EBITDA rose 26%; this year, management expects EBITDA to rise nearly 20%, which is likely conservative, while earnings are expected to rise 54% this year and another 29% in 2018. It’s a big idea.
Technical Analysis
SITE came public last May and promptly ran up to 41 by the end of July. But then the stock stalled out and fell sharply into the election. That marked the bottom, though shares didn’t start trending higher until the start of this year, with SITE pushing ahead persistently before surging to new price and RP peaks following earnings two weeks ago. After 10 weeks up in a row, SITE is due for a breather, so try to buy on dips.
SITE Weekly Chart
SITE Daily Chart
Skyworks Solutions (SWKS)
Why the Strength
Skyworks Solutions is a designer/maker/marketer of microchips that go into all kinds of devices in cars, smart devices, medical machines and military markets. The company is hot right now because, in the medium term, it’s a supplier of chips for Apple and Samsung devices, and in the longer term, it’s a leader in the Internet of Things (IoT) movement that’s allowing devices like appliances and home controls to communicate via the internet. The shorter term appeal to investors is that analysts expect the company to grow revenue by 11% in 2017 and 14% in 2018, with more upside possible if the IoT movement takes off. The company’s latest quarterly report featured a 1% gain in earnings and a 1% dip in revenue, both figures representing improvements over the previous two quarters. With lots of high-profile clients, a growth path in IoT and a chart that shows increasing enthusiasm from investors, Skyworks Solutions (and its 1.2% dividend yield) looks like a smart bet.
Technical Analysis
SWKS was a growth monster from the middle of 2013 to the middle of 2015, soaring from 21 to 113. But after a 50% haircut, the stock was trading at 55 when 2016 began. After some up and down months, SWKS settled into a tight trading range under resistance at 80 in the last three months of 2016, then blasted off on January 20, gapping up from 78 to 88 in one day and riding a wave of buying to 99 on March 15. SWKS has scrubbed off a couple of points in the recent market weakness and is sitting right on its 25-day moving average. With a reasonable 17 P/E, we think it’s a good buy right here. But with a nod to market conditions, we recommend starting small and using a stop at 88.
SWKS Weekly Chart
SWKS Daily Chart
Teladoc, Inc. (TDOC)
Why the Strength
Teladoc is small company with a very interesting story. The company is the hands-down leader (about 75% market share) in the telehealth industry, which has mass market appeal to consumers (who are able to talk or video chat with a board-certified doctor within minutes, and get a drug prescribed if needed), businesses (huge boosts in productivity as employees don’t spend half the day going to and waiting to see a doctor) and the medical health industry (lowers costly ER and doctor visits, thus cutting health spending). Teladoc has raced out to the lead in the sector thanks to its 220 Fortune 1000 clients, its scalable software (it handled 5,000 daily calls with no problem last November) and lots of marketing spending, which has kept the bottom line in the red. But the industry should end up being many times larger than it is today, and with customer satisfaction north of 90% and with clients using more of Teledoc’s services over time, acquiring as many customers as possible now makes sense, especially with newer niche teleservices like behavioral health and dermatology proving popular. About 80% of revenue comes from monthly subscription fees, with the rest from “visits.” In the fourth quarter, revenues surged 65%, total membership rose 43% (to 17.5 million) and total visits rose 68%, and management sees more of the same ahead, including hitting cash flow breakeven by the fourth quarter. We like it.
Technical Analysis
TDOC came public in July 2015, and promptly plunged from a high of 35 to a low near 9 last March, a huge post-IPO droop. A rally ensued, but the stock then consolidated in the upper teens from September through December. The new year brought a push to new highs, and after a quick shakeout two weeks ago to its 50-day line, TDOC has surged to multi-month highs. It’s thinly traded, so keep positions small and look to buy on dips.
TDOC Weekly Chart
TDOC Daily Chart
Wynn Resorts (WYNN)
Why the Strength
With 22 previous appearances in Cabot Top Ten Trader, Wynn Resorts is certainly no stranger to our subscribers. The company owns gambling resorts in Las Vegas (Wynn Las Vegas and Encore) and Macau (Wynn Macau and Wynn Palace). Wynn ran into trouble in early 2014, when the Chinese government initiated a crackdown on gambling in Macau intended to control money laundering by Chinese officials and others. Wynn opened the Wynn Palace Cotai in 2016, and that, plus an easing of Chinese restrictions, has caused a surge in revenue from Macau operations. Wynn also has a new casino—Wynn Boston Harbor—in the early construction phase just outside downtown Boston. Q4 revenue was up 37%, the third consecutive acceleration in revenue growth. And while the company’s dividend is down from its generous 6% rates in the past, the 1.8% annual yield is a nice addition to the package. The improving prospects for Macau, a bounce in revenue for Wynn’s Las Vegas locations and a strengthening global economy are all expected to contribute to growth. Analysts are forecasting 26% earnings growth for 2017 and 17% for 2018, and the prospects for the Boston project should keep investors interested. Wynn Resorts also has Steve Wynn, a veteran of the casino business who has a reputation for making things work.
Technical Analysis
WYNN peaked at 249 in March 2014, then took a two-year bath, falling to a double bottom at 51 in October 2015 and 50 in January 2016. The stock rebounded to above 100 in April 2016, but spent the year oscillating between support at 90 and resistance at 110. So last week’s rally to 114 represents a breakout above significant long-term resistance. With the stock market threatening to stall, we think it’s best to be cautious, taking a smaller than usual position in WYNN, and using a protective stop around 100.
WYNN Weekly Chart
WYNN 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.
