Sellers Make A Stand
Current Market Outlook
For the first time in two months, last week saw some sellers stepping up to the plate, taking profits in leading names despite some good earnings reports. And today we saw very strong selling across the board, with leaders falling sharply across the board, including many that dipped toward support. In the short-term, given the prolonged run off the bottom, more consolidation is likely, so we’re fine taking a profit (or partial profit) here or there. Intermediate-term, though, we’re still optimistic—while some of the action looks iffy, very few (if any) leading stocks or indexes have broken down at this point, and these type of sharp, scary pullbacks (assuming they find support at logical levels) aren’t unusual during bull moves. We’re knocking our Market Monitor down a notch, thinking the near-term will be more challenging, but remain overall bullish.
This week’s list has a bunch of strong names that have recently emerged, so they shouldn’t have as much pent-up selling pressures. Our Top Pick is MercadoLibre (MELI), where business is reaccelerating and the stock just came out of a big consolidation.
| Stock Name | Price | ||
|---|---|---|---|
| Acacia Communications (ACIA) | 51.83 | ||
| CoStar Group (CSGP) | 589.55 | ||
| Cronos Group (CRON) | 17.62 | ||
| DocuSign (DOCU) | 107.98 | ||
| Etsy (ETSY) | 112.97 | ||
| Euronet Worldwide (EEFT) | 142.83 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| Novocure (NVCR) | 0.00 | ||
| Universal Display (OLED) | 187.54 | ||
| Zscaler (ZS) | 126.22 |
Acacia Communications (ACIA)
Why the Strength
Acacia Communications is an optical networking technology stock. The company delivers silicon-based interconnects that transform cloud and communications networks by making them faster, less power intensive and able to hander more data—all things in big demand as mobile, cloud and 5G deployments pick up. Market concentration is a concern since Acacia gets 85% of revenue from five customers, but the stock just broke out to multi-year highs because Acacia has a market leading portfolio with an impressive roadmap of future product releases (new product production is ramping up) and major customer ZTE (previously banned) has resumed purchases. There is also takeover potential here, and with China demand on the rebound the market is once again looking at Acacia as one of the big beneficiaries in optical componentry. The company delivered a Q4 report that helps sell the bull case too. Revenue was up 24% to $107 million (beating by almost 4%) while EPS of $0.41 beat by $0.06. With catch up orders from ZTE and new product releases, analysts see a big 2019—revenue is expected to be up 32% while EPS should jump 75%. We don’t consider Acacia to be a “forever stock” due to the volatile nature of optical networking stocks and the firm’s customer concentration, but when times are good, business and the stock can do very well, and it looks like Acacia is entering that phase.
Technical Analysis
ACIA went public in 2016 and was one of the hottest IPOs of its time, but the good times quickly faded and shares trended down until mid-2018. The stock bottomed last April at 25, and it enjoyed a jagged advance to 47 from there. Then the stock’s character really changed, with a nice-looking launching pad formed through early February, followed by the powerful earnings-induced breakout two weeks ago. If you want in, you can start a position around here or on minor weakness.
ACIA Weekly Chart
ACIA Daily Chart
CoStar Group (CSGP)
Why the Strength
CoStar is the leading supplier of information services and marketplaces for the commercial and multifamily real estate markets. Its target market is worth roughly $10 billion annually. Based on 2018 results ($1.2 billion in revenue, up 24%), CoStar has captured almost 12% of it. The company touts its research as a major competitive advantage compared to peers, and it’s hard to take issue with that—CoStar’s platform canvasses half a million properties across the country each year, it makes almost 50,000 calls to brokers, owners, developers and other commercial real estate professionals daily, and it takes 14 million digital photographs a year. The stock’s doing well now because Q4 earnings blew past expectations (revenue up 24%, EPS of $2.81 beat by $0.28) and management pointed to a balance of investment and growth that should keep profit margins relatively high going forward. The Commercial Property and Land segment was a standout performer (up 17%), while the core CoStar Suite continued to deliver solid growth in the 11% to 13% growth range. Analysts see revenue growing another 16% this year while EPS expands by 20%. It’s a solid story.
Technical Analysis
CSGP started rallying back in April 2017 when it broke out to new highs above 225, and the stock basically doubled over the next 16 months, topping out around 450 last August. As with most growth stocks, CSGP hit a big pothole in late 2018, falling to where they were at the beginning of 2018 (around 315) at their nadir. But they recovered quickly and were back above 400 going into last week’s earnings report, after which they gapped up then climbed to a new all-time high near 475. Today’s dip was reasonable compared to the recent run; CSGP looks buyable here or on dips.
CSGP Weekly Chart
CSGP Daily Chart
Cronos Group (CRON)
Why the Strength
The action of the marijuana group in recent weeks has been encouraging—after giant runs higher in January, most names consolidated very nicely in February and look poised for another leg up. Right now, Cronos looks like the leader of the sector (it’s one of the few that’s hit new all-time highs this year) and should do very well during the next leg up. Fundamentally, the firm is benefiting from the same trends as most of its peers—Canada’s full legalization is likely to be the big sales driver for the company, and Cronos also has a handful of international operations and joint ventures (distribution, production and a handful of brands) that are making progress in both the medical and recreational weed industry. (Today, it sold its position in one of them to Aurora Cannabis for $175 million of stock in that company.) But the big differentiator for Cronos—and the one we think is attracting more big investors—came in December, when giant Altria agreed to take a 45% stake in the firm for C$2.4 billion, with an option to increase that figure to 55% (by exercising another C$1.4 billion of warrants). Besides the huge cash influx that will accelerate its distribution and production capacity, the deal also promises to bring Cronos know-how and expertise in things like huge-scale manufacturing, regulations and delivery technologies. Obviously, it’s speculative, but the pieces are in place for higher prices if the group gets going again. Earnings are due out March 26.
Technical Analysis
CRON had set up a nice launching pad coming into 2019, and the stock went bananas once the calendar flipped, rallying from 10 to 25 in early February. There was a sharp pullback after that, and another dip last week, but support appeared near rapidly rising 25-day line, a sign of strength. Another dip could occur, but we like the pattern, and the longer CRON can hold up, the greater the chance the next big move is up. Be sure to keep positions small and use a loose leash.
CRON Weekly Chart
CRON Daily Chart
DocuSign (DOCU)
Why the Strength
DocuSign is a recently public company (last April) with a strong, easy-to-understand growth story. The company was the pioneer and is the clear leader in e-signatures, which are part of the firm’s broader electronic contracting platform—basically, the company is bringing a slew of agreements (sales orders, invoices, expense processing, offer letters, purchase orders and dozens more) into the digital age, allowing clients to save huge amounts of time and hassle (far cheaper, and DocuSign allows 50% of transactions to be completed in less than 10 minutes, compared to days or weeks). It’s not just about a simple digital Hancock, though; DocuSign has a complex technology platform (secure, high availability, storage and auditable) that has proven to be a hit and is integrated into most of the top enterprise software platforms out there (Oracle, Workday, SAP, Microsoft, Salesforce, etc.). The company thinks it’s playing in a $25 billion market, and many analysts see this as a very long-term growth opportunity, especially as the firm moves into adjacent areas (like automated document creation). And the company is certainly executing beautifully: Revenues have lifted between 33% and 37% each of the past seven quarters, it added 25,000 customers in Q3 alone (454,000 total) and earnings are beginning to poke into the black. Fundamentally, it’s a great growth story; earnings are due out March 14.
Technical Analysis
After a big three-month run after coming public, DOCU fell off a cliff, eventually falling nearly 50% from high to low. But this wasn’t a V-bottom—we like how the stock etched a bottoming process during the market’s plunge, repeatedly finding support in the 35 to 40 area. And this year, DOCU has advanced persistently with almost no pullbacks along the way. There’s old overhead to chew through, but we’re OK nibbling on any pullback and see how shares react to earnings.
DOCU Weekly Chart
DOCU Daily Chart
Etsy (ETSY)
Why the Strength
Etsy is go-to online marketplace for all sorts of homemade goods, a large and growing niche within the overall e-commerce pie. The company has been executing well for years, but has stepped on the gas in recent quarters—a mid-year 2018 price hike has caused growth to go wild, but more importantly, the company is plowing much of that back into the business, including a TV advertising campaign as well as improvements for sellers (marketing capabilities, analytics, support) and buyers (better search and discovery, much better landing pages, more free shipping), all of which has made the platform more attractive for new users and stickier for current clients. The results are easy to see—Q4 boasted yet another quarter of accelerating growth in gross merchandise volume on Etsy’s platform (up 23% from a year ago) thanks to a pickup in active buyers (39.4 million, up 18% year over year) and sellers (2.11 million, up 9%). The price hike has caused revenue growth to spike during the past two quarters, AND the company’s 2019 outlook blew away expectations—the top brass sees revenues up 30% or so, gross merchandise volume up 18.5% and EBITDA (the preferred measure of profitability for Etsy) should expand 36%. As a heads up, the firm is holding and Investor Day March 9, which could move shares, especially if any bullish long-term forecasts are released. This remains a solid story.
Technical Analysis
ETSY showed great resilience during the market’s plunge in Q4, but then appeared to be stalling out this year—it found resistance in the upper 50s a couple of times in January and a breakout attempt in February fell flat. But ETSY never cracked, and the Q4 report caused the buyers to come rushing in, with an impressive upside gap and follow through. The dip today was sharp, and could go further given the recent run, but the stock remains under control. You can start a position here or on dips.
ETSY Weekly Chart
ETSY Daily Chart
Euronet Worldwide (EEFT)
Why the Strength
Euronet is an electronic transactions and payments company that operates in three segments—electronic funds transfer (EFT) processing (streamlines payment and collection processes), epay and Money Transfer, to facilitate payments between financial institutions, retailers, service providers and consumers. The company does business in roughly 165 countries and operates the largest ATM network in Europe. The stock jumped out to new highs after Q4 earnings were reported on February 8 and we’ve been impressed with the follow-on strength over the past three weeks. Fourth quarter results were solid (revenue was up 7% while EPS of $1.37 beat by $0.09), capping off a year of steady growth (revenue up 10%, EPS up 21% to $5.53) for a very profitable company. Investors that are looking for a true global payments operator should love Euronet. Recent strength in the EFT Processing Segment (up 19% in 2018) was driven by growth in Europe and India while the Money Transfer Segment (up 15%) benefited from strong trends in both physical and digital transfers. Electronic payments are the future and Euronet has one of the widest networks out there among the mid-cap players. Analysts see the growth continuing, with 15% revenue and 25% EPS growth expected this year. It doesn’t have the name recognition of some of its peers, but its growth and stock action are right up there with any of them.
Technical Analysis
EEFT’s long-term chart is up and to the right, even though there have been a few lengthy corrections along the way. That latest of these began in October 2017 when shares retreated from 100 to 70 over the course of five months. The stock broke out to new highs 12 months after that correction began, though after getting up to 120 last fall, shares fell with the market back down to 92 in December. But like most names, EEFT has been strong since then, surging back to 115 in January, breakout out following earnings early last month and crawling higher since. We suggest aiming to buy on pullbacks.
EEFT Weekly Chart
EEFT Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
MercadoLibre remains one of the big e-commerce outfits in Latin America, though the attraction here is that, after some big challenges that ate into its success, the firm is back on track, and the stock is looking ahead to reaccelerating growth. Last year, the firm’s Brazilian (its largest market) logistics operation saw costs soar, forcing them to revamp their free shipping and free listing offerings, which in turn hurt the attractiveness of the platform. Throw in some horrible currency movements and rumors of competition in logistics (Amazon may be setting up a logistics operation in Brazil), and earnings moved into the red, growth in many sub-metrics (items sold, gross merchandise volume) slowed and the stock chopped sideways. But after showing some improvement in the past few months, the Q4 report has convinced big investors that better times lie ahead—currency-neutral gross merchandise volume traded on its platform boomed 31%, payment usage (through MercadoPage) was up 32% from a year ago (and much faster growth is being seen off platform, which is a huge opportunity) and currency-neutral revenues soared 69%. Clearly, currency movements are going to have a huge impact on U.S. dollar results, but analysts think the bottom line is set to leap into the black while revenues boom 44% this year. MercadoLibre is a long-term growth story that, after a tough year, is back on track.
Technical Analysis
MELI had an excellent advance from early 2016 (around 90) to March of last year (all the way to 415!), but then began a long consolidation period—shares mostly meandered between 280 and 400 for the next eight months, though there was a brief plunge as low as 258 at the market’s December low. MELI rebounded back toward the top of that range two weeks ago, and then the Q4 report helped the stock easily gap to new highs on powerful volume. We’re OK buying some here or (preferably) on weakness.
MELI Weekly Chart
MELI Daily Chart
Novocure (NVCR)
Why the Strength
We’ve featured Novocure a few times recently and remain bullish after official Q4 results (management pre-announced back on January 7), and there are multiple near-term catalysts that could keep shares trending higher too (more on these in a second).. The back story is that Novocure is a commercial-state oncology company that developed a medical device called the Optune system, which treats cancer by mechanically disrupting cancer cell division. Fourth quarter revenue was up 30% to $70 million and EPS of -$0.17 missed by $0.04 (full-year 2018 revenue was up 40%). But that’s old news given the early release in January. The excitement right now is that Novocure should get word this week from the Medicare Contractor Advisory Committee (CAC) regarding potential coverage of Optune; the committee’s take won’t be final word on coverage but will be a good indicator, obviously, and with Medicare representing around 25% of the potential market, coverage would be a big tailwind. Further down the road (next year) will come Phase 3 data on Optune’s success vs. a bunch of cancers (Ovarian, pancreatic, NSCLC, etc.) in 2020. Back to the here and now, Novacure will continue to treat patients with newly diagnosed and recurrent glioblastoma multiforme (GBM), which is a huge opportunity all on its own—analysts see revenues rising 33% this year and 40% in 2020.
Technical Analysis
NVCR broke out of a long, tight sideways range last April and ran from there to 54 when the market went over the falls. Frankly, the quick, sharp dip to 26 looked a bit abnormal, but the action since the calendar flipped has been pristine—shares marched persistently back up to 50 in January, crawled to 54 last month and lifted to new highs on Friday, all without any real pullbacks ... until today. Still, the damage has been limited, and while it could dip further, we think the next big move will be up.
NVCR Weekly Chart
NVCR Daily Chart
Universal Display (OLED)
Why the Strength
Universal Display is a direct play on the increased usage of organic light emitting diode (OLED—hence the symbol) displays in all sorts of electronics, especially smartphones, smartwatches, TVs and even computers. With more than 4,800 worldwide patents, the firm is the go-to provider of materials and know-how (license and royalties) to many of the big electronics firms, including Sharp, Samsung, Apple and many more. Unfortunately, Universal’s position also makes it a down-the-food-chain story, and when demand eases a bit, the company can catch the flu—which is exactly what happened last year when Apple and others cut orders due to some oversupply, which caused Universal’s revenues to plung 26% and earnings to be cut in half! But the big-picture outlook never changed, the company continued to secure its long-term future (new long-term deals with Samsung, Visionox and a new agreement with Sharp, among others) and it’s now looking like the OLED boom that began in 2017 is set to resume. Indeed, Universal’s management sees industry-wide capacity up 50% from 2017 through the end of this year, and while Q4 saw continued shrinkage in sales and earnings, the figures whipped expectations, and now Wall Street sees 2019 marking a huge turnaround—analysts see revenues up 36% and earnings surging 65% this year, with 2020 bringing even faster growth as its clients ramp up production. Having gone through the wringer, Universal looks like an interesting turnaround play.
Technical Analysis
OLED originally broke out around 68 in February 2017 and ran as high as 209 by January 2018—and then the wheels came completely off! Shares plunged quickly and persistently, falling all the way to 79 last June. However, while OLED got hit during the market’s late-year decline, it held that low in December (a double bottom), pushed higher during the first few weeks of the year and then, two weeks ago, exploded higher on Q4 earnings. We like the pattern—try to buy on dips.
OLED Weekly Chart
OLED Daily Chart
Zscaler (ZS)
Why the Strength
Zscaler is back in Top Ten again because this secular growth story in the cloud-based security software space is gaining momentum—it’s looking like one of the leading glamour stocks in the market. The stock was acting great heading into last week’s Q4 earnings release then blasted off after results came in way ahead of expectations. Revenue was up 65% to $74 million, beating by $8 million, while EPS of $0.09 beat by $0.10. There’s little doubt Zscaler is emerging as one of the most compelling stocks in the cybersecurity space. Its security platform is purpose-built to meet the needs of modern computing architecture. Plus, there are expansion options beyond its core web security market, which could expand the potential market opportunity to nearly $18 million ($23 billion in ten years). Given the trends it’s entirely possible Zscaler can sustain many years of 25% or more topline growth and 20%+ operating margins; some analysts see revenues topping $2 billion in the long term, compared to $243 million last year. The valuation is very lofty, but if management can step on the gas and push sales team productivity and bundled deals, Zscaler could grab much more of the roughly 2% market share it holds today. The trends here suggest Zscaler can keep trucking higher.
Technical Analysis
ZS went public last March and ran up to 48 last fall before falling with the market. The correction, though, was reasonable, and while the stock didn’t wow investors, it made steady progress since the market low, running up eight weeks in a row and flashed great tightness along the way. The blastoff came last Friday, when ZS closed at an all-time high near 60.5 following the Q4 earnings report. Today’s drop with other growth stocks was sloppy, but acceptable—we’re OK starting a position here or on further retreats.
ZS Weekly Chart
ZS 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.
