March 9, 2020

Over the Falls

Current Market Outlook

After two weeks of dreadful action, the perfect storm crashed down on Wall Street this morning, with imploding oil prices and more virus/economic fears causing a panic, though the damage was limited after the open. Short-term, today brought many truly extreme readings (more than 2,800 stocks hit new lows on the NYSE and Nasdaq combined!), so short-term, some sort of bounce or relief rally is possible (even probable). That said, (a) the nature of this decline has been breaking some rules, so there are no sure things, and (b) our focus remains on the intermediate-term, where the trends of just about everything are pointed down. Thus, while we’re keeping our eyes open, we’re focusing mostly on capital preservation and hunting for the potential big winners for the next uptrend.

This week’s list is a great place to start, whether you’re building a watch list or looking to nibble. Our Top Pick is Vipshop (VIPS), which is one of many Chinese stocks that is acting very well.

eHealth (EHTH)

www.ehealth.com

Why the Strength

It’s no surprise that many healthcare-related stocks have remained relatively resilient during this selloff, as the coronavirus could actually provide that sector some opportunities. And that includes eHealth, which operates an insurance exchange that helps individuals find coverage tailored to their needs. In fact, the company has the nation’s largest private online marketplace for Medicare insurance, and providing Medicare-related health plans is the company’s main growth driver (something that will only grow as the population ages). It also has one of the nation’s largest selection of health insurance products, and independent research named it the most usable health exchange in the U.S., contributing to its growth story. eHealth posted the best annual enrollment period in the company’s history in 2019 and significantly exceeded its guidance across multiple metrics. Continuing a long-term revenue growth trend, eHealth delivered a strong fourth quarter which boasted revenues 124% higher than a year ago and earnings up 140%; the company also guided 2020 earnings well above expectations, and it anticipates that revenue will be 15% to 23% higher this year. Overall, eHealth has a solid business that should be insulated from today’s high-profile economic worries, which has kept buyers interested.

Technical Analysis

EHTH’s biggest issue is its volatility—after a monster run to 112 last summer, the stock was cut in half before rebounding back to its highs, all within a few months. Even so, we’re putting more weight on the recent action, which saw shares pop to all-time highs in February, pull back to the 50-day line, then rebound sharply after a share offering. Volatility will remain extreme, but EHTH is worth watching. Aggressive investors could nibble here with a stop around the recent lows.

EHTH Weekly Chart

EHTH Daily Chart

Etsy (ETSY)

etsy.com

Why the Strength

Amazon and others have a lock on the market for large-scale e-commerce, but Etsy leads a different niche, as it’s the go-to place for buyers (46 million of them at year-end, up 16% from a year ago) and sellers (2.7 million, up 20%) of homemade, handcrafted goods. The company has been growing nicely for a while, but last year it implemented a bunch of investments (funded by a meaningful price hike) to boost the usability of the site (search, etc.) and the success of its sellers (better marketing tools, including the ability to advertise off Etsy’s site), which crimped earnings and cash flow growth (EBITDA was up just 6% in Q4). But the investments do appear to be working (gross merchandise value (GMS) was up 33% in Q4, partly boosted by an acquisition), and Etsy’s management expects the payoff to start appearing later this year: The top brass expects GMS to rise 27%, revenues to rise nearly 30% and EBITDA to advance in the low 20% range, with margin expansion as time goes on. Big picture, Etsy thinks it has just 5% of its target market, and given its leadership position, there’s no reason the firm can’t get much larger over time if management continues to pull the right levers.

Technical Analysis

ETSY had a huge run in 2017 and early 2018, but it stalled out early last year and began a 45% decline, living below its long-term 40-week line for months. Shares did perk up with the market late last year, but it wasn’t until February that the stock changed character—it held up well on the market’s initial dive, gapped up on earnings, and has remained in solid shape despite the environment. There’s old overhead to chew through, but if you’re game, ETSY could be nibbled at on dips.

ETSY Weekly Chart

ETSY Daily Chart

Everbridge (EVBG)

www.everbridge.com

Why the Strength

In a world beset by disasters, critical communications firms have seen rapid growth since 9/11 and the industry is expected to expand much more in the years ahead. Everbridge is a key player in this field, focused on ensuring safety amid crisis events. The company sends telephone, text and email messages to customers during weather disasters, hostage situations, terrorist attacks and other incidents, stopping only when the message has been read. But this isn’t just a quick FYI alert—the firm’s system also relays data to emergency managers, including police and firefighters, allowing for rapid response to disasters. The city of Boston used Everbridge during the 2013 Boston Marathon bombings, for example. The firm’s notification software is now used by over 4,500 organizations to manage public safety. While the bottom line is still expected to be in the red, Everbridge has been posting impressive revenue results, topping guidance regularly and growing sales 37% for both Q4 and full-year 2019. Its customer base continues to rise (up 14% in the last quarter) and current clients are using more services, too. Its corporate clients include the likes of Goldman Sachs, which recently selected Everbridge to enhance its ability to monitor operational risk and employee safety for its global workforce. The company also launched a risk intelligence package to assist organizations in managing coronavirus impacts; alerts based on pandemics and other widespread health issues could (unfortunately) be a big new growth area in the quarters ahead.

Technical Analysis

EVBG has been in a solid long-term uptrend for a couple of years, though last year it had a real hiccup when all sorts of software-related stocks got crunched—shares fell more than 40% and lived below their 40-week line for a while. But EVBG began shaping up in the fall, and has actually lifted to new highs each of the past three weeks on huge volume, and it didn’t budge today. Dips would be tempting.

EVBG Weekly Chart

EVBG Daily Chart

GSX Techedu (GSX)

gsx.investorroom.com

Why the Strength

One group of stocks that’s been able to avoid most of the pain of late are companies that stands to benefit from the coronavirus scare, and online Chinese educator GSX is one of them. We wrote about the company a few weeks ago, citing its opportunities in the $36 billion education marketplace—of which only 10% is currently being offered online. GSX’s market share is growing significantly, and its ability to host massive classes (as many as 100,000 participants!) should help it to take a big leap during this virus outbreak as more look to learn from home. The company became profitable in 2018 and continued that winning streak with its latest quarterly report. In Q4, GSX saw its revenues increase by a stunning 406%, while earnings of 11 cents were up a similar amount. Enrollments were up 258%, rising to 2.7 million students. Beyond just GSX, the general future looks promising for education in China—estimates are that the sector will have 296 million users with revenues of $62 billion this year, and some forecasts see the market growing to $160 billion in the next few years. Throw in what appears to be GSX’s unique approach, which leverages technology, big data analytics, proprietary databases, algorithms and artificial intelligence to enhance its programs, and it looks like the firm will continue to gain market share. Analysts see rapid growth continuing in 2020.

Technical Analysis

GSX is a small Chinese name that’s had a huge run, so it would have had every right to give up the ghost, but instead, it’s actually formed what’s known as an ascending base during the past seven weeks, with higher highs and higher lows. And it’s still putting up a fight near its 25-day line! Nibbling here with a stop around the 50-day line is one idea, or just keep it on your watch list.

GSX Weekly Chart

GSX Daily Chart

iRhythm Technologies (IRTC)

irhythmtech.com

Why the Strength

Worldwide, some 33.5 million folks suffer from arrythmia, or irregular heartbeat. In the U.S., about six million people have the condition, and that number is expected to rise to 12.1 million within the next 10 years due to smoking, congenital heart disease, stress, excessive alcohol consumption and obesity. While the symptoms can be mild and infrequent for some patients—including chest pain, sudden weakness, trouble concentrating, confusion, fatigue, shortness of breath and palpitations—the disease is fatal to some 250,000-ish people every year, which is more than stroke, lung cancer or breast cancer. Consequently, the market for medical devices to detect arrythmia is growing at a fast pace, which plays right into iRhythm’s hands. As we wrote last month, this company is poised to grab market share with its unique, wearable monitoring devices that analyze heartbeats and apply cloud-based data analytics. Diagnosing arrythmia faster than its competitors’ traditional devices, iRhythm’s ZIO platform uses machine learning to become “smarter” as it receives more data. That means serious medical problems, such as strokes, can potentially be avoided. The company is not in a money-making mode just yet, but revenue growth has remained strong (up 41% in Q4) and the firm forecasts another 30%-plus gain in the top line this year. It’s a good story.

Technical Analysis

IRTC has been base-building for well over a year, but it’s showing some signs that it may want to come out of its funk when the market gets its act together. First, the stock spiked for a few weeks to start the year, then it went mostly tight into February, and after a quick shakeout, the stock surged to multi-month highs (though still shy of all-time highs) after earnings. The dip today brought it back to support, still far more resilient than the average name.

IRTC Weekly Chart

IRTC Daily Chart

Newmont Mining (NEM)

www.newmont.com

Why the Strength

Newmont Corp is the top gold producer in the world, with revenues of nearly $10 billion and output of 6.3 million ounces last year thanks to a handful of top-quality assets around the world. And the company isn’t just big but well managed—it opportunistically acquired Goldcorp a while back, garnered a ton of synergies and cleaned up the balance sheet, all while investing in new projects. While production growth isn’t supposed to be anything to write home about, many costs have been wrung out of the operation, which means Newmont is in position to reap the benefit of higher gold prices—free cash flow is already buoyant, and management sees that metric averaging $1.4 billion annually for the next five years at $1,300 gold. And free cash flow should rise $400 million annually for every $100 increase in the price of gold! Said another way, Newmont is very leveraged to the yellow metal, which in today’s uncertain world, looks like a very good thing. And it’s giving some of that back to shareholders, with a quarterly dividend of 25 cents per share (1.9% yield). Obviously, if the virus panic ends and gold falls back to earth, all bets are off, but Newmont looks like one of the best positioned names should gold continue its surge.

Technical Analysis

Like most of its peers, NEM has had a few big swings during the past few years, but net-net, it didn’t do anything from mid 2016 through the end of last year. But, interestingly, the stock broke out near Christmas (before all the virus stuff was going on), and while it got hit with everything two weeks ago, it surged right back to new highs last week. A minor dip from here would be tempting.

NEM Weekly Chart

NEM Daily Chart

Teladoc, Inc. (TDOC)

www.teladoc.com

Why the Strength

Teladoc is probably the #1 glamour stock in the entire market. As we’ve written before, the company is the hands-down leader in telehealth, with the only comprehensive virtual care offering (both outside and inside the hospital, and for a variety of conditions) out there. Despite losses, the core business has been strong for a while, and this year there have been two catalysts boosting investor perception, the first being its buyout of InTouch, which is the market leader for in-hospital (provider-to-provider consultations) virtual care; management thinks it’s a $10 billion opportunity long term. The second, of course, is the virus, which many think will boost utilization rates in the near- and long-term. Teladoc hosted an Investor Day last week, and while there was no major new projections, the top brass revealed some encouraging tidbits—it’s quite high on its new virtual primary care offering, sees rapid gains in mental health services (expected to grow more than 50% in 2020), thinks it can greatly expand its member base just from further penetrating existing clients and said it has 90% visibility into 2020 revenues at this point. Overall, management sees sustainable 20% to 30% annual growth (and improving EBITDA margins) going forward, and that could prove conservative if the virus ratchets up utilization (paid visit revenue was only 19% of the firm’s total in Q4, but was up 47% from a year ago). It’s a big idea.

Technical Analysis

TDOC’s party really started when 2020 began, as the acquisition of InTouch set off a huge buying spree—the stock has been up every week this year (!) and soared as high as 148 last week. We wouldn’t chase it here, but TDOC should at least be on your watch list, and a dip back toward its recent lows (as the moving averages catch up) could provide an opportunity to nibble.

TDOC Weekly Chart

TDOC Daily Chart

Tradeweb Markets (TW)

Why the Strength

Financial stocks have been massacred with the market of late, but Tradeweb has held up better than most. The company operates over-the-counter markets for companies that trade fixed income products and derivatives, and it’s definitely benefited from the recent panic, seeing a 47% year over year average daily volume increase last month. Increased volatility also contributed to the company averaging $1.1 trillion per day in trading activity across rates, credit, equities and money markets. Among its clients are banks, asset managers, central banks, pension funds and insurance companies, and the firm is focused on making bond trading more efficient and transparent. Credit trading brings the lion’s share of the firm’s profits, so it stands to benefit from rising demand for U.S. sovereign and corporate debt, and it should also profit from the continued rise in automated trading. This isn’t a rapid growth story, but one that’s steady and (over time) likely to be reliable--2019 was Tradeweb’s 20th consecutive year of record revenues, with the top line up 13% from 2018 and earnings rising a similar amount; analysts see similar expansion going forward. The valuation is rich, but given the historic volatility we’re seeing in the markets, it’s a good bet Tradeweb’s volumes will continue to impress.

Technical Analysis

After TW’s IPO last spring, the stock rallied nicely to 50 by July but then had the typical post-IPO droop, with shares retreating 35%. The stock has picked itself up by the bootstraps, getting back to 47 by year-end, resting for a few weeks, and then breaking out in early February. TW was hit hard today with everything else, but it’s still sitting in an area of support. We’ll put our buy range around here, though we’re more interested in watching to see if/how well it can rebound.

TW Weekly Chart

TW Daily Chart

Vipshop Holdings (VIPS)

www.vipshop.com

Why the Strength

Coronavirus is affecting companies worldwide, including Chinese retailers, who are suffering from decreased sales and too much inventory. But one company that just happens to be in the right business to do better than its less-fortunate peers is Vipshop. That’s because the company buys overstocked branded apparel and sells it online at discounted prices. VIPS just released its fourth quarter report, handily beating analysts’ estimates, with EPS of $0.41 per share, $0.11 higher than forecasted. Revenues were up 12%, to $4.21 billion, also higher than estimates of $4 billion, with rising gross merchandise volume, which grew 14%. The company’s top brass did say that the virus would undoubtedly hurt it in the short-term, predicting a 15% to 20% decline in sales for the first quarter (to between $2.46 billion and $2.6 billion) and smaller margins. But longer-term, VIPS is very optimistic. With a growing backlog of clothes to sell, VIPS is looking forward to China’s 6.18 festival—18 days in June, when the country hosts an annual online-shopping extravaganza. And with new virus infection and fatality numbers fading in China, analysts think growth can get back to normal during the second quarter, with margins rebounding thanks to sales of higher-profit items. EPS forecasts are edging up, with seven analysts boosting their estimates for this year. Despite a tough current environment, the firm’s future looks bright.

Technical Analysis

VIPS was the dog’s dinner for many years, but it’s been trending up nicely since late 2018. The stock broke out of a consolidation in October and had a nice run to multi-month highs near 15.5 in January before the first wave of virus-related selling arrived. That led to an eight-week base, but impressively, the stock soared on earnings last week and actually was up today. If you’re adventurous, you can consider a small buy here or on dips.

VIPS Weekly Chart

VIPS Daily Chart

ZTO Express (ZTO)

www.zto.com

Why the Strength

China now the world’s largest e-commerce market, and once the virus issues are cleared up, growth in that huge category is set to resume. ZTO is the leader in China’s express delivery industry, and it also has the country’s largest package delivery service; think of it as the FedEx or UPS of China. ZTO has perfected its package sorting and mapping process through the use of real-time analytics, preventing packages from being lost in transit, and the company delivers an average of 35 million boxes daily. ZTO is also a leader in operations and cost management, owning a fleet of over 2,000 trucks, including 600 high-capacity trucks that allow for larger loads and lower transportation costs. The company sports one of the highest operating margins among publicly-traded logistics companies and boasts consistently strong cash flow and profitability. Looking ahead, the stock is strong because of hopes that China, which was the first into the virus fire, might be the first out, with some economic improvement down the road boosting ZTO’s fortunes. The next big event is earnings (March 16), where investors will be watching management’s comments closely.

Technical Analysis

Since coming public in late 2016, ZTO has had many ups and downs but it’s mostly trended higher. The last big consolidation started with the market back in mid 2018 and lasted for about a year, but the stock got going in August and, impressively, has etched higher highs and lows ever since, despite China’s economic shutdown of late. Last week, ZTO powered ahead on huge volume, and today’s drop looks reasonable in comparison. If you want to nibble, aim for dips.

ZTO Weekly Chart

ZTO 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.