March 30, 2020

Short-Term Looking Better, but Plenty of Work to Do

Current Market Outlook

There are no sure things, especially in this unprecedented environment, but we think it’s a decent bet that last Monday represents a workable low in the indexes, bolstered by short-term positive divergences in the broad market and some encouraging snapback action among a good number of growth stocks. Given that the evidence is slightly better, we’re open to some nibbles here or there, especially among the stocks that have shown strong signs of accumulation. That said, we still believe it’s best to be mostly defensive—the intermediate-term trend remains strongly down, and even if a bottoming process has begun, the odds favor a volatile, news-driven few weeks (and, of course, there’s always the chance stocks break their lows down the road). Long story short, the rain has stopped for now, but the overall storm system hasn’t yet moved out to sea.

Encouragingly, for the second straight week, Top Ten is finding a lot of growth-oriented stocks that are showing peppy action. Our Top Pick is Seattle Genetics (SGEN), which has a nice four-month launching pad and isn’t far from new highs.

Atlassian (TEAM)

atlassian.com

Why the Strength

Cloud computing platforms that make it easier for work teams to collaborate from any location have been in high demand for a while, and of course the global shut-in is accelerating the move in that direction. One of the strongest performers of this group is Atlassian, whose platform lets teams plan, engage and manage projects and workflow. The company’s Jira software is the big attraction, allowing agile project management, and most recently making news when the company launched free versions of Jira Software, Confluence and two other cloud-based products for teams of up to 10 people (in an effort to get a foot in the door of new shut-in affected users). Jira is also one of the few workflow apps used by pharmaceutical companies like Eli Lilly to connect multiple teams when developing new drugs. The firm’s task management app, Trello, is also widely used and got some attention when popular game developer Media Molecule made public what its developers were up to at every stage of its PS4 game development. Atlassian is no upstart, as it brought in $1.4 billion in revenue last year and sports nearly 165,000 customers, though it believes it’s just scratching the surface of its potential, as it aims to sell to every knowledge worker in the world. The firm’s track record is outstanding, with rapid, reliable growth in recent quarters, and analysts see that continuing, with upper-20% earnings growth expected both this year and next. Atlassian remains one of the best looking growth stocks out there.

Technical Analysis

After such a huge run in recent years, TEAM has had every excuse to go over the falls in recent weeks, but while it took a hit during the initial selling (knocking us out), it’s shown great tennis ball action since—shares dipped below all moving averages two weeks ago, but it quickly sprung back to within a few percent of all-time highs. Expect further ups and downs, but we’re not against nibbling here, or just keeping it near the top of your watch list.

TEAM Weekly Chart

TEAM Daily Chart

Barrick Gold (GOLD)

barrick.com

Why the Strength

With COVID-19, plunging oil prices, credit/health worries and central bank printing, it’s a time of maximum uncertainty—and such uncertainty plays right into the hands of gold, which has popped back toward multi-year highs. Barrick Gold, the world’s second-largest gold mining company, is well positioned to benefit from this strength. The metal’s improving fortunes even before the virus allowed the company to deliver a huge earnings surprise in Q4, and revenue, net income and free cash flow have seen impressive upward trends since bottoming in 2018. Higher gold prices have also made growth through M&A attractive for miners once again, with Barrick gobbling up with Randgold Resources earlier this year; it further combined its Nevada mining assets with Newmont to create a joint venture company (Nevada Gold Mines) that’s the world’s largest production complex. Barrick forecasts all-in sustaining costs, a key metric for miners, at $945 per ounce this year, miles below current prices, giving the firm plenty of room to take on additional projects. (Analysts see sales and earnings up 12% and 33% (respectively) in 2020.) The company is disposing of non-core assets, rapidly paring its long-term debt (halved in 2019!) and has announced a 10-year plan to become the world’s most valued bullion company, focusing on steady production and gushing free cash flow. The wind is certainly at Barrick’s back today.

Technical Analysis

Despite the global uncertainties, gold and gold stocks got hit hard during the first wave of the virus-related selling, and GOLD was no exception, nearly getting cut in half at its nadir! However, the buyers quickly stepped in—shares finished up two weeks ago after that huge shakeout and have now powered back to their 50-day line. If you want to play gold, then GOLD looks like the one of the best options.

GOLD Weekly Chart

GOLD Daily Chart

Dexcom (DXCM)

dexcom.com

Why the Strength

Dexcom has had the look of one of the market’s top liquid leaders (well-traded, institutionally owned stock with huge numbers and potential) since the market got going late last year, and it looks ready to lead any coming advance that develops down the road. The main story here remains unchanged—big-picture, a ton of Type 1 and now even Type 2 diabetics (early data suggests great results for Type 2s; Dexcom has a deal with UnitedHealth to expand into Type 2s this year) are transitioning from self-done daily injections many times per day to continuous glucose monitors (either individual devices or integrated into insulin pumps). And Dexcom has the leading glucose monitor on the market, with 650,000 patients using (and reordering) its technology at year-end, with its G6 device offering some the best accuracy and ease-of-use out there. (Dexcom is also working on its next-generation G7, with a full launch in 2021.) Business was red hot heading into the virus shut-in, with sales up 37% in Q4 (34% in the U.S., faster overseas) and profits easily topping expectations. And while there’s uncertainty with every company, Dexcom has stated that its supply chain is intact and it’s still taking/filling orders despite the virus shut-in. Thus, growth likely remains strong, and even if there is a short-term hiccup, big investors are clearly betting Dexcom’s growth trend will resume as things go back to normal. Analysts see earnings up 20% this year and 40% next.

Technical Analysis

DXCM held up well during the first two weeks of the market’s crash, though it finally got caught up in the selling after that. But despite the downside, this is where some chart-reading showed encouraging clues—while volume picked up as the stock fell, it closed mid/upper range each week, it held its 40-week line, and last week, as the market lifted, DXCM bounded back above its 50-day line. It’s not out of the woods, but the action is certainly among the best out there to this point.

DXCM Weekly Chart

DXCM Daily Chart

GDS Holdings Limited (GDS)

gds-services.com

Why the Strength

GDS Holdings is one of our favorite Chinese growth stories, and it has all the makings of the Equinix or Digital Realty of that country. The firm is one of China’s largest data center operators, effectively building out the backbone of that country’s Internet and attracting a ton of blue-chip cloud, hyperscale and e-commerce customers in the process. GDS provides colocation, managed hosting and managed cloud connection services, and business has been expanding at a fast clip for a while. In Q4, revenue rose 42% from a year ago, while EBITDA leapt 59%. Debt is high as it’s a capital-intensive business, but GDS doesn’t build these data centers out speculatively; the firm’s mature locations are 95% utilized, while its so-called developing data centers are 82% committed. Along with organic growth, the firm is actively pursuing several M&A targets and aims to do more deals as opportunity allows. Meanwhile, total capacity rose 44% in the latest quarter and it has over 320,000 square meters secured for future development – far more than anyone else in the market. Wall Street is expecting the good times to continue going forward, with sales expected to rise 40% in 2020 and another 35% next year. Lastly, if anything, demand for its offerings should only increase due to the virus-related move toward working/playing at home.

Technical Analysis

GDS broke out from a year-long base in November and enjoyed a relatively smooth advance through February before getting caught up in the market’s mess. The wipeout was sharp, but the stock closed near the top of its range two weeks ago on huge volume (support) and followed that up with some good-volume gains last week—it’s hanging around its 50-day line, which is far better than 95% of stocks. It likely needs time, but if you want to roll the dice near here, use a stop near 50.

GDS Weekly Chart

GDS Daily Chart

Netflix, Inc. (NFLX)

www.netflix.com

Why the Strength

Coronavirus infections and the resulting economic damage have not yet peaked, and the U.S. government believes that before the pandemic ends, we could be seeing hundreds of thousands of infections (right now it’s around 143,000 ID’d cases) and fatalities in the six figures (2,800 or so now). While thousands of companies are struggling to stay afloat, businesses like Netflix are profiting from the transition to social distancing, which may be around with us far after the virus fades. At the end of last year, Netflix had 167.1 million subscribers—61 million in the U.S., and the rest around the globe, and that number is steadily rising (up 20% in Q4 from a year ago). Recent stats show that in the first two weeks of March, streaming hours using connected TVs rose 24% over a year ago, while hours watched via a streaming box or stick increased 16%. Of course, growth could ease once the virus dissipates, but there’s a good chance that folks who don’t watch a lot of TV normally and sign up for Netflix will find something that hooks them, hence increasing viewing time permanently. One of the challenges to Netflix (and all the streaming companies) is lack of new content, since most production has ceased, but big investors are looking out over the horizon. After some earnings wobbles in late 2018 and early 2019, Netflix’s bottom line has soared over the past two quarters, and it’s one of the few companies out there expected to grow earnings at least 40% both this year and next.

Technical Analysis

NFLX topped way back in the middle of 2018 and hasn’t eclipsed that level (423) since, with two big drops into the 230 to 250 area in the meantime. However, it had a good few months after last October’s low, and it’s acting peppy recently—like everything, NFLX got hit hard initially (falling about 100 points), but it’s since rebounded sharply and stands above its 50-day line. You can nibble here or just keep it on your watch list.

NFLX Weekly Chart

NFLX Daily Chart

NVIDIA Corporation (NVDA)

nvidia.com

Why the Strength

NVIDIA has its hands in many growth-oriented markets, including high-performance graphic processing units (GPUs) and processors for gaming, computer-aided design, special effects, data center and artificial intelligence. The company vies with AMD for the top spot in gaming GPUs, which make up 57% of Nvidia’s revenues, while data centers comprise 21% and are the fastest-growing segment of the firm’s business. (Some analysts expect data center-related sales to account for 30% of revenue this year). Nvidia has also expanded its product offerings into chips for self-driving cars and machine learning. The company has prospered by making strategic acquisitions like Israeli designer Mellanox Technologies (bought for $6.8 billion) as well as internal innovations like its upcoming release of Ampere, its next generation GPU. And NVDA is also joining the coronavirus challenge, offering Parabricks, which can complete genome processing in less than an hour, compared to the several days it used to take. After a string of challenging results, the company’s underlying business began to reaccelerate in Q4, and like many of today’s strong stocks, it will probably end up benefiting from the virus as demand for cloud storage is soaring as the shut-in grows. There’s obviously uncertainty near-term, but analysts see earnings up 21% this year and more than 30% next.

Technical Analysis

NVDA got going with the market last October and soared all the way back to all-time highs after earnings. But then came the market’s crash, and the stock was hit hard over a month’s time, falling around 45% from its peak. However, it found big-volume support two weeks ago and acted very well last week; it’s sitting north of its 50-day line, which is rarified air. We’re more interested in watching than buying, but if you wanted to roll the dice here, you could.

NVDA Weekly Chart

NVDA Daily Chart

Okta, Inc. (OKTA)

okta.com

Why the Strength

Okta was one of the market’s glamour stock leaders in the second half of 2018 and (after that year’s wipeout) early 2019. The reason: It might be the bets positioned new-age cybersecurity firm, with the leading identity and access management solution out there, which is in huge demand as everyone connects to everything from many different devices—Okta’s solutions keep only the right people logging into what they should see, whether that’s for a business (employees and departments accessing databases and information) or a consumer-facing operation (customers logging in to get the offers, content and information they should). Interestingly, 70% of hacking-related breaches are caused by stolen credentials, and now that the perimeter of a network is gone (which used to keep hackers out), identity has become the key lever of protection, and Okta is the leader. The growth here has been both rapid and reliable, and as of the firm’s early-March quarterly report, all systems were go—revenue was up 45% in Q4, remaining performance obligations (basically total billed and unbilled deferred revenue) rose 66% as the firm attracted more (total customers up 30%) and higher-paying (those paying at least six figures to Okta per year rose 41%) clients. While earnings are negative, free cash flow was strongly in the black (10.8% of revenue in Q4), and the same-customer revenue growth rate of 19% is very solid. Going forward, management sees the top line increasing more than 30% in 2020, though it’s historically lowballed those estimates. Okta will give its latest update on Wednesday (April 1), when it hosts an Investor Day.

Technical Analysis

OKTA peaked last July and has had two big downdrafts since then (a 34% decline last year, and a 38% plunge with the market recently). But like most of the best stocks, this one has shown some encouraging clues—after wiping out below its September low, OKTA found massive-volume support two weeks ago, and rallied further last week, now “only” 15% off all-time highs. The Investor Day will be key; we’re watching it closely, and if you want to nibble here, you can.

OKTA Weekly Chart

OKTA Daily Chart

Quidel Corp. (QDEL)

www.quidel.com

Why the Strength

Joining the fight in the coronavirus pandemic is Quidel. The company offers a number of rapid point-of-care tests for detection and diagnosis of many critical diseases and conditions, including influenza, respiratory syncytial virus, Strep A, herpes, pregnancy, thyroid disease and fecal occult blood, among others. With point-of-care testing, hospitals, urgent care centers and emergency rooms can see the test results within minutes instead of sending them out to a laboratory (getting a response in a few days), and that is boosting this firm’s prospects during the current pandemic. The number of coronavirus tests has ramped up in the U.S. (running north of 100k per day), but speed of results is still an issue. Thus, the FDA just approved Emergency Use Authorization for Quidel’s Lyra® SARS-CoV-2 Assay—which detects nucleic acid—to include three additional thermocyclers (machines that amplify segments of DNA). As well, the authorization adds to the specimens from which testing can be done, now including nasal and nasal turbinate swabs. The company says that the reagents used in the test “allow simple transport and storage, improved workflow, shorter time to result, and other benefits that favorably affect diagnostic test outcome.” Quidel has also received The CE Mark, which allows it to market and sell its test in Europe and elsewhere, and got the thumbs up from Canadian authorities, too. Historically, growth hasn’t been fantastic here, but Quidel’s revenue growth has been picking up steam, Q4 results easily trounced estimates and there’s no question demand for its new devices should be strong in the months ahead
.

Technical Analysis

QDEL broke out of a year-long base in November and rallied to the low 80s near the start of this year, after which it has some gyrations but was still holding in that area as of two weeks ago. But that’s when the stock clearly changed character—QDEL has boomed each of the past two weeks on monstrous volume and is perched near its highs. Dips would be interesting, with a stop in the prior (low 80s) range.

QDEL Weekly Chart

QDEL Daily Chart

Seattle Genetics (SGEN)

seattlegenetics.com

Why the Strength

Right now there’s a premium put on companies that (a) shouldn’t see much disruption in sales due to the global virus shut-in, and (b) should see their underlying growth quickly resume (or reaccelerate) once the situation passes. Biotech stocks are a natural sector that possesses those characteristics, and Seattle Genetics, which we’ve written about recently, looks like an increasingly de-risked oncology story with big potential. The firm is no development-stage outfit, with $917 million in sales last year thanks to Adcetris, which has become a top-line treatment for a couple types of lymphoma, usually along with chemo. The firm sells it directly in the U.S. and Canada (sales up 26% in Q4) and receives good-sized royalties from Takeda (up 70% in Q4!) for overseas sales. Adcetris still has solid growth potential, but there’s great excitement about two new treatments—the first, dubbed Padcev, received approval late last year for advanced urothelial cancer, while the second (Tucatinib) is in front of the FDA as a potential treatment for breast cancer; the latter likely has big upside down the road, and both should benefit from label expansions in the years to come. The company hasn’t said anything in response to the virus issue, though analysts see only a little growth this year (up 5%) as new products ramp up. Next year, though, should be a bonanza (sales up more than 40%) and, bigger picture, we think Seattle Genetics has a shot to be one of the next big oncology franchises.

Technical Analysis

SGEN is one of the few growth stocks out there that has a legitimate launching pad set up right now. Part of that is because the stock topped out earlier than the market (back near Thanksgiving), though it got hit with everything else of late. But the stock has shown great resilience—SGEN held its 40-week line on two straight weeks of supporting volume (big volume and closed mid-range) and has popped above its 50-day line as the market has bounced. We’re not opposed to a small buy here with a stop near its recent lows.

SGEN Weekly Chart

SGEN Daily Chart

Slack (WORK)

Why the Strength

As we’ve documented in this issue, virus-related lockdowns have been a boon for many cloud stocks as work-from-home becomes the rule, not the exception (and could remain that way even after the worst of the virus passes). Another beneficiary of this trend is Slack, which we’ve actually been using here at Cabot for the past couple of years (all content posted through Slack, editing done on it, etc.). The firm’s online collaboration platform facilitates workflow among teams, allowing users to communicate without relying on email or texting, making it easier and quicker to get in touch and share thoughts. Its subscription-based revenue model has been immensely successful as testified by the high retention rate, which has been in the high 90% range for the firm’s larger clientele for the past three years. (The overall same-customer revenue growth rate was a whopping 32% in Q4.) Not surprisingly, then, business was doing just fine heading into the virus, with revenues up 49% in the most recent quarter and consistent gains in engagement (23% sequential gain in shared channel usage) and larger customers (893 clients pay more than $100k per year, up 55%). And now it looks the virus will help Slack’s growth accelerate—management announced last week that it’s added 9,000 new customers in the first eight weeks of its current quarter (it added 27,500 all of last year) and that it reached a record 12.5 million simultaneously connected users, up 25% from just two weeks before! Back on March 12, the top brass guided to revenue growth of 35% or so this year, but that’s looking conservative, as it’s unlikely many (any?) of Slack’s new customers will leave even after the pandemic dissipates. It’s a good growth story with a strong near-term catalyst.

Technical Analysis

WORK was one of last year’s high-profile IPOs that went splat, and it easily sliced to lower lows during the market’s recent implosion. But there’s no question some buyers have stepped in recently—three weeks ago, the stock closed mid-range on huge volume, two weeks ago it surged on its heaviest weekly volume since the IPO and last week it followed that up with another huge-volume gain. We’re more interested in watching WORK than buying it here, but you could consider buying a little on weakness.

WORK Weekly Chart

WORK 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.