Indexes vs. Leading Stocks
Current Market Outlook
The market’s two-plus-week rally hit a wall last week, with the major indexes suffering three days in a row of distribution (higher volume selling), that caused most to fall back below their 50-day lines. That’s reason enough to remain relatively cautious—we’re keeping our Market Monitor in neutral territory. On the flip side, though, is the action of leading stocks, a ton of which are actually pushing higher despite the market’s wobbles! Of course, good-looking stocks can go bad in a hurry in a bad market, but there’s no question this broad resilience (including a slew of solid earnings reactions) is very encouraging. Our thought is to pick up a few shares of some potential winners of the next leg up, but because of the market, do so in small amounts, while continuing to hold a chunk of cash on the sideline.
This week’s list is chock-full of strong growth stocks (and a couple of old world stocks, too). It’s hard to narrow down our choice to just one, but we’re going with Proofpoint (PFPT), which looks like a mid-cap leader in the newly strong cybersecurity group.
| Stock Name | Price | ||
|---|---|---|---|
| Coupa Software (COUP) | 262.20 | ||
| Etsy (ETSY) | 112.97 | ||
| Lumentum (LITE) | 87.00 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| The New York Times Company (NYT) | 0.00 | ||
| Proofpoint (PFPT) | 113.79 | ||
| Salesforce.com (CRM) | 0.00 | ||
| Splunk (SPLK) | 207.67 | ||
| United States Steel Corporation (X) | 0.00 | ||
| Veeva Systems (VEEV) | 180.23 |
Coupa Software (COUP)
Why the Strength
Coupa Software is another cloud software stock that’s been ignoring the market’s wobbles of the past few weeks. The company bills itself as the leading cloud platform for business spending—procurement, contracts, invoices, expenses, sourcing, inventory and more are all covered by Coupa’s offerings, making it a one-stop shop for customers. (Many firms have a different software vendor for each of the areas Coupa covers.) The company is just scratching the surface of what it believes is a $19 billion annual market for business spend management, and it’s making quick progress—Coupa has been inking some major deals lately (including Caterpillar, Toyota Financial Services, Zurich Insurance in Q3 alone, joining Bankrate, Staples, Salesforce, H&R Block and others), and in total, its platform processed $267 billion of spending during the past four quarters, up from $113 billion the year before. Many sub-metrics are also appealing, such as its history of $6 in lifetime customer value for every $1 it takes to acquire a new customer. Long-term, management is thinking very big: It sees it as a natural fit in the client ecosystem along with big boys like Salesforce, Workday and ServiceNow. Revenue growth has been solid, and while earnings are still in the red, free cash flow has been positive for each of the past three quarters. It’s a new name in the group with great potential. Earnings are due out March 12.
Technical Analysis
COUP came public in October 2016 but immediately went the wrong way, falling from an opening day high of 42 to as low as 23 last March. The stock began to shape up after that, but it wasn’t until the calendar flipped to 2018 that the buyers showed up—COUP surged off its 200-day line in January, barely hesitated during the market’s February drop, and has continued ripping to new highs on excellent volume ever since. It’s thinly traded, but we’re game with a small position on dips.
COUP Weekly Chart
COUP Daily Chart
Etsy (ETSY)
Why the Strength
Etsy is the complete opposite of Amazon, which is where we all go for non-differentiated goods. If you want unique and difficult to find items from a global network of entrepreneurs and artists, then Etsy.com is the place to shop. The company targets a market worth well over $1 trillion, and over 90% of buyers say they can’t find the goods elsewhere, which makes Etsy’s business and network of buyers and sellers extremely difficult to replicate. And big investors are coming around to this point of view—led by new CEO Josh Silverman, who joined in May of last year and has been pulling all the right levers, helping growth to reaccelerate. Etsy’s Q4 revenue growth of 24% (to $136 million) and EPS of $0.15 (up from a loss a year ago) both beat expectations, which means Mr. Silverman has a perfect earnings beat streak going. That’s a big improvement from the underperform streak that went on for four quarters before he arrived! Gross merchandise sales of $1 billion (up almost 18%) passed through Etsy’s platform in the quarter, spurring management to project 21% to 23% growth on the same measure for all of 2018. Concerns that Amazon will kill Etsy, which were prevalent a year ago, are fading fast. Analysts have bumped up 2018 revenue and EPS growth forecasts to 20% and 35%, respectfully. It’s a good niche story.
Technical Analysis
Before the hiring of the new CEO last May, ETSY was a dud. But since then, it’s spent far more time above its upward sloping 50-day line than below it. A very tight three-month consolidation period last autumn was very constructive, and was following by a December rush to 22. ETSY then built another base, but it bottomed with the market in early February and, after a nice rebound, soared on earnings last week. And, encouragingly, it held its ground despite the market’s wobble. If you’re game, you can grab a small position on weakness.
ETSY Weekly Chart
ETSY Daily Chart
Lumentum (LITE)
Why the Strength
As websites, streaming video, mobile services and data centers move to the cloud, demand for bandwidth is mushrooming, and that’s playing into the hands of many optical equipment outfits. Lumentum is one of the leading stocks in the field, as it’s enjoyed a surge in demand for 3D sensing products, an emerging technology that’s moving into smartphones (including Apple’s iPhone X) today, and cars by 2020. On the company’s fiscal Q2 2018 earnings call in early-February, management said the 3D market should double this year, though it noted demand in the first half is slow due to the product cycle. For the full year, analysts see EPS of roughly $2.25 from 3D sensing alone! Lumentum is also enjoying a bump in demand from lasers (up 57% in the quarter) and telecom solutions. On the downside, increasing competition in the Datacom area is pushing the company to distance itself from the hyperscale data center buildout market. In the most recent quarter, revenue surged by 53% to $405 million, a full $47 million ahead of analyst expectations, and EPS of $1.67 beat by a whopping $0.55. The one caveat here is that networking stocks can be fickle beasts. But it appears Lumentum’s huge beat is the start of a multi-quarter wave of rapid growth.
Technical Analysis
LITE made good progress for most of 2016 and the first half of 2017, yet with very tough downturns along the way. But then shares topped out in July near 69 and ground lower for months; in early February of this year, it was 39% off its peak. But the quarterly report changed everything, with LITE soaring on four straight days of big volume and pushing higher since, despite the challenging market environment. There’s still overhead to chew through, so start small and build if the market and stock push higher from here.
LITE Weekly Chart
LITE Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
Argentina-based MercadoLibre operates an online marketplace that mixes standard e-commerce with auctions. In earlier days, the model for the MercadoLibre Marketplace was eBay (which provided tons of technical assistance and owned a 19.5% stake in the company until October 2016 when it sold a majority of it off), with the emphasis on online auctions. But in recent years, the model has been shifting to Amazon, with more fixed-price sales, including high ticket items like cars, boats, aircraft, real estate and the like. The list of services offered is wide, including a secure online payment service (MercadoPago), MercadoLibre Advertising, a software-as-a-service solution that helps users set up their own webstores (MercadoShops) and a shipping service (MercadoEnvios). Like China’s Alibaba, MercadoLibre is growing as more potential users go online in the 18 countries in which it operates in Central and South America. The company enjoyed a strong 66% jump in revenue in 2017, and got a boost from investors after its February earnings report despite taking a loss for the quarter (the first in many years), as it announced that it was kicking results from its Venezuelan operations out of its accounting base and taking a one-time charge of $86 million. Venezuela’s inflation, currency devaluation and bond defaults have long been a drag of MercadoLibre’s results, so investors see this as a positive development. Analysts see the company’s 2018 earnings to jump by 212%, with an additional 75% in 2019.
Technical Analysis
MELI made zero net progress from the start of 2012 to early 2016, but enjoyed a jump from 84 in February 2016 to 315 as 2017 ended. Since the start of 2018, MELI has continued to roll, bouncing back quickly from an early February dip from 396 to 320. MELI came within a hair of topping 400 last week and looks to be consolidating in the 390s as it gathers itself to get past that level. You can take a small position anywhere under 395.
MELI Weekly Chart
MELI Daily Chart
The New York Times Company (NYT)
Why the Strength
The New York Times may have been founded in the 19th century, but it’s adapting to 21st century realities pretty well. The company, which is making its debut in today’s Cabot Top Ten Trader, has been adapting to the decline of traditional newspaper subscriptions by shifting away from its traditional mix of paper-based subscriptions and advertising toward a digital subscription model. When the New York Times reported its Q4 results on February 8, earnings came in at 39 cents per share, while estimates were for 29 cents, and revenue was $484 million, well ahead of analysts’ estimate of $467 million. Beyond the headline numbers, the stats that caught investors’ eyes were the 19.2% jump in advertising revenue and the addition of 157,000 digital-only subscribers in the quarter. Indeed, this is now a subscription-based story, with advertising bringing in just one-third of revenues. Management also pointed to strong retention of the new subscribers who came to The Times last year. The company’s revenue grew by 8% in 2017 after four years of virtual stagnation and accelerated as the year progressed. The company is helped by its vertical integration, including interests in paper mills and other daily newspapers. But it’s the health of The Times itself that is keeping investors interested.
Technical Analysis
NYT was trading at 11 in November 2016 when the presidential election provided the spark for a new rally. NYT broke out to new multi-year highs in May 2017 and built a nice base under resistance at 20 from July 2017 through the middle of January 2018 when the stock caught an updraft. The rally got more fuel from the good earnings news and NYT popped to 26 on heavy volume on February 8. The stock has given back a little during the market’s weakness, but looks to be consolidating its gains well. You can buy anywhere under 25, with a stop around 22.5.
NYT Weekly Chart
NYT Daily Chart
Proofpoint (PFPT)
Why the Strength
Proofpoint is a mid-cap online security company that provides a mix of on-demand security-as-a-service software that protects data along with with threat protection, regulatory compliance, archiving and governance. Proofpoint is attracting attention from investors now because of two good pieces of news. The first good news came from the company’s Q4 earnings report on February 9 that beat expectations handily, featuring 36% revenue growth and 61% earnings growth. Earnings of 29 cents per share were well ahead of both analysts’ estimates and the company’s own guidance. Revenue growth came from a good mix of new subscribers, increased usage by existing subscribers and a strong renewal rate. Proofpoint turned profitable in the middle of 2016 and the company’s subscription model assures a continuing revenue stream. The second piece of good news is that Proofpoint just completed the takeover of Wombat Security for $284 million. Wombat is a specialist in phishing simulation and computer-based security training and Proofpoint expects the takeover to raise 2018 revenue by $26 million to $36 million. Analysts expect the company to grow earnings by 18% in 2018 and 59% in 2019, while free cash flow expands quicker. It’s a good story.
Technical Analysis
PFPT was range-bound for seven months (June 2017 through January 2018), trading between support in the 80s and resistance in the 90s. The stock finally cracked its resistance by topping 100 in late January, just in time for the January/February market weakness to pull it back to 92 just ahead of earnings. The good earnings report and the Wombat acquisition pushed the stock to new highs in late February, and PFPT ignored the recent market weakness to shoot ahead to 114 in recent trading. With a long base to build on and two good catalysts, PFPT looks like a solid choice. Look for a possible pullback after the recent hot action as a chance to get in and use a loose stop.
PFPT Weekly Chart
PFPT Daily Chart
Salesforce.com (CRM)
Why the Strength
Salesforce.com is making the cut for Top Ten again because the company continues to exceed expectations, which is bringing in buyers, and because its sector (cloud software) remains possibly the strongest area in the entire market. Last week’s fiscal Q4 2018 result strengthened the case that it is the top stock to own for exposure to big markets, including mobile, social and cloud. Even though this is one of the biggest enterprise software companies out there, growth remains fantastic—revenues have lifted between 24% and 27% each of the past 11 quarters, and management is sticking with a bullish longer-term view that puts Salesforce.com on track to double sales (to a range of $20 billion to $22 billion) over the next four years. Performance is being driven by growth in the firm’s Service Cloud (up 28%), App Cloud (up 37%), Marketing Cloud (up 33%) and Sales Cloud (up 16%). With a large and expanding addressable market, the company is making big investments to further secure its leadership position. Management’s guidance implies the company will invest an incremental $1 billion in distribution, security, engineering and partnerships over the next year, which could put pressure on margins. But big investors aren’t dissuaded, with cash flow and earnings growth (estimated to rise 50%) likely to remain rapid. In sum, Salesforce is a fast-growing blue chip outfit with lots of room for growth ahead.
Technical Analysis
CRM has performed well since the beginning of 2017 with most dips down to (or slightly below) the 50-day line bringing buyers. There was a wobble in November, followed by a couple of down weeks in early-February when the market retreated. In the grand scheme of things, those dips were reasonable, and of course the best part was that both resulted in a quick rebound. The latest rally saw CRM hitting new highs just two weeks after the market’s February low and then push higher after earnings. Try to buy on dips.
CRM Weekly Chart
CRM Daily Chart
Splunk (SPLK)
Why the Strength
We call Splunk the King of Big Data, and the main attraction of its story was summed up in last week’s conference call: “Organizations are increasingly using machine data (digital information created by activity of computers and other devices) to provide critical context to the transactional data they store in their databases and data warehouses. Splunk’s platform is the best solution to enable customers to harness these data sets to gain operational intelligence. There is no other solution on the market today that does what we do, and our customers are gaining more insights from their data than ever before.” The stock remains a leader thanks to another great quarterly report last Thursday—sales (up 37%) and earnings (up 76%) continued their accelerating trend in recent quarters, with billings up a huge 44% and free cash flow of nearly $1 per share. Even better, the firm inked another 570 enterprise customers (it now has more than 15,400 total clients and is aiming for 20,000 by 2020) and is making excellent progress in its cloud business, which is still a small piece of its business; cloud-based revenue was $30 million in Q4, but that was up 100% from the year before. But this is really more a machine data story—helping big companies gain value from all the data being generated for marketing, security or operational efficiencies—that has a long way to run.
Technical Analysis
SPLK is still in the relatively early innings of its advance. The stock blasted off from a multi-year consolidation last November, made solid upside progress through mid-January, and held up well during the market’s correction over the past few weeks. SPLK popped to new highs, in fact, in mid-February, tightened up for a bit and then shot to new highs on Friday after reporting results. You can buy around here, with a stop near the 50-day line.
SPLK Weekly Chart
SPLK Daily Chart
United States Steel Corporation (X)
Why the Strength
U.S. Steel needs no introduction—it’s one of the largest steelmakers in the country, which puts it right in the middle of one of the most competitive (and, now, politically sensitive) industries out there. Obviously, last week’s report that a 25% steel tariff will be implemented (supposedly this week) is a main driver of the company’s recent strength. But U.S. Steel had already seen business turn up markedly in recent quarters thanks to an accelerating world economy (especially in manufacturing—February U.S. manufacturing growth was its strongest since early 2004) that’s tightened capacity and boosted prices. Earnings have shot ahead in each of the past three quarters, analysts see the bottom line doubling this year, and management sees EBITDA (a measure of cash flow) lifting nearly 50%. Back to the tariffs, they certainly have the potential to boost prices even further, though a lot will depend on the details; it’s still possible there could be some exemptions from the tariffs (country or otherwise), but it’s also possible Europe retaliates (U.S. Steel does good business in Europe, accounting for about 40% of its cash flow). Thus, there are uncertainties that could move the stock short-term, but bigger picture, business is good and getting better, which is likely to keep buyers interested even if there are short-term dips.
Technical Analysis
X hit a major peak in 42 last February and plunged as low as 19 in May. The stock recovered modestly after that, but its character didn’t change until December—once the stock cleared 30, it roared to 42 in a straight line! It did get yanked down to the mid-30s during the market’s early-February plunge, but immediately snapped back, soaring to new highs two weeks ago and holding those gains since. You can start small here or on dips, but use a relatively loose leash.
X Weekly Chart
X Daily Chart
Veeva Systems (VEEV)
Why the Strength
Veeva Systems has always had a great story—the company is the dominant provider of cloud software solutions for the biotech and pharmaceutical industries. Its customer relationship manager (CRM) suite is by far the most popular in its niche and remains a solid producer, but Veeva has expanded far beyond CRM, with software bundles that help clients run clinical trials and efficiently share the data, handle regulatory submissions, boost quality control, better manage sales teams, manage and track events and more—basically, Veeva is aiming to be the Salesforce.com of the life sciences industry. And with its breadth of offerings, the firm is beginning to attract companies outside of its core sectors (20 customers are non-life sciences, including two top-30 chemical companies). Growth has slowed a bit, but investors are thinking things will reaccelerate after last week’s terrific Q4 report: Sales and earnings both topped expectations, billings rose 27%, while the client count came in at 625, up 21% from a year ago. Management hiked guidance, too, with analysts now forecasting revenues to rise about 19% (probably conservative) and earnings to surge 42% (due to expanding margins and corporate tax cuts). Big investors are certainly believers—676 funds owned shares at year-end, compared to 450 a year prior.
Technical Analysis
VEEV broke out way back in May 2016 and ran as high as 68 a year later before putting in a meaningful top. Then came a long base with multiple waves down, though the pain was relatively modest; its low didn’t come until a shakeout in early February with the market, when VEEV sank to 52 (off 23% from its highs). But now the buyers are back, with the stock recovering quickly late last month, exploding to new highs following earnings and continuing to surge in the days since. Weakness should provide an opportunity to start a position.
VEEV Weekly Chart
VEEV 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.
