May 11, 2020

A Positive (but Split) Environment

Current Market Outlook

The market performed well last week, and nothing has changed from a top-down point of view—the intermediate-term trend remains up for the major indexes and many stocks, so we remain optimistic the path of least resistance is up. That said, it’s really all about what you own: Many indexes (small- and mid-caps) and sectors (industrials, financials, transports) look OK, nothing great, but growth oriented stocks are lighting up the sky, with more big earnings-induced breakouts last week than we’ve seen in a very long time. In the near-term, these hot stocks might be a bit too hot; some potholes (or even rotation out of them and into the broad market) could certainly be on the table. But we also think that, assuming the general market holds up, the first retreats in many of these names are likely to provide solid entry points, as the fresh breakouts bode well overall. We’re moving our Market Monitor up to level 7.

This week’s list has many of last week’s most powerful gaps and a few others with solid setups and/or persistent uptrends. It was hard to settle on one, but we’ll go with Chegg (CHGG) for our Top Pick, as it just emerged from a picture-perfect consolidation on earnings.

Atlas Air Worldwide Holdings, Inc. (AAWW)

atlasairworldwide.com

Why the Strength

Passenger airlines may be struggling due to coronavirus, but cargo airline and aircraft lessor Atlas Air Worldwide is doing just fine. The stock has come alive since the market low and that upmove picked up steam last week after Atlas smashed expectations for its first quarter—while revenues slipped 5%, earnings gained 17% (analysts expected a loss of a couple of pennies compared to the $1.15 per share the firm reported). The reason for the excellent report was twofold: Charter services demand increased significantly (rising $22.5 million), while at the same time, Atlas was able to raise airfreight rates: Capacity was cut in half due to the significant decline in passenger plane activity, but cargo demand escalated to ship medical supplies as well as new manufactured goods to meet the needs of an economy that’s beginning to reopen. Demand was so strong that Atlas reactivated three of its 747 converted freighters that had been parked and began operating a 777F that was previously used in its dry-leasing business. Going forward, the company expects the current quarter to see higher maintenance expenses and lower contract passenger flying as a result of the U.S. military pulling back on troop movements, as well as a recent agreement to raise pilot salaries by 10%. Yet the forecast remains solid, with AAWW expecting $770 million in revenue and Q2 net income to be up 40% to 50% from a year ago. Atlas doesn’t have a sexy growth story, but after being under pressure for years, the stock has turned the corner and the valuation is dirt cheap.

Technical Analysis

AAWW has been trending lower for years, though it found support above 20 for a few months before the pandemic crushed the market. Shares plunged as low as 15 in March and looked ready to continue their downtrend, but that turned out to be a bear trap—AAWW has completely changed character since then, immediately snapping back to 25 and, over the past three weeks, ramping to nearly 40 on a big pickup in volume. Despite the move, we’re OK starting a position here or on minor weakness.

AAWW Weekly Chart

AAWW Daily Chart

Atlassian (TEAM)

atlassian.com

Why the Strength

Companies that cater to the burgeoning work-at-home economy are today’s market leaders, partly because business is picking up now, but also because the shut-in is accelerating what was already strong growth—the best of both worlds in the view of institutional investors. One of our favorites in this category is Atlassian, whose cloud-based platform and productivity software facilitate digital collaboration with workforce teams. Growth has been rapid and reliable for a while, and the firm came out with another solid report a couple of weeks ago. While overall revenue growth of 33% was great, subscription revenues (which make up around half the total; maintenance and license revenue are the rest) lifted a big 47% and the company finished with more than 171,000 customers (up 18% from a year ago), 90% of which use at least one of their cloud products. Additionally, like many software firms, the company’s free cash flow was much larger (more than twice as large) than its net income thanks to its subscription business. Business-wise, Atlassian completed a rollout of free cloud editions across its Jira Software, Jira Service Desk and Confluence products as part of a pledge to make its products available to smaller teams, a strategy that should pay dividends given that cloud migrations among its customers are up 60% this year. Analysts expect the good times to continue, with sales and earnings up around 23% in the coming fiscal year (starting in July), which given the firm’s history, is likely conservative. All told, Atlassian is still one of the best-looking digital transformation stocks out there.

Technical Analysis

Like most of its peers, TEAM topped out in the middle of last year, but while it took hits last fall and again this March, the damage wasn’t too bad (30% from high to low) given the crash that occurred. Even bettter, the stock started showing positive action early on. At the market lows this year, the stock saw big-volume support buying in three straight weeks, then later on tightened up just above 150, setting the stage for last week’s solid-volume breakout. We’re OK taking a position here if you’re not yet in.

TEAM Weekly Chart

TEAM Daily Chart

Barrick Gold (GOLD)

barrick.com

Why the Strength

With economic data falling through the floor, safe-haven gold demand has remained elevated, with the yellow metal holding firm at around $1,600 per ounce, its highest price since early 2013. Enter Barrick, which is effectively a leveraged play on rising gold prices, something that’s already showing up in its results. Last week’s Q1 report was fantastic, giving investors a glimpse of why the firm is one of this year’s top-performing miners. Revenue rose 30% in the quarter, earnings surged 45% and free cash flow came in at a big $438 million (a bit higher than Q4 and nearly triple that of a year ago), while its debt load was further reduced by 17%. It now has no significant maturities until 2033! Interestingly, gold production of 1.25 million ounces was actually down from a year ago, but (a) all-in sustaining costs of $954 per ounce are miles below the current gold price, and (b) copper production was up a few percent with falling costs, which helped. Looking ahead, Barrick guided for production to improve in the second half of 2020, while analysts expect earnings to increase in the next four quarters. The firm also said growth from its existing asset base (including six Tier 1 gold mines) would support its recently announced 10-year plan for annual production of around five million ounces of gold. Much of that projected growth could occur at home, as the Carlin Trend mine in Nevada hosts some of the biggest gold concentrations in the western hemisphere and is the most active exploration area in its portfolio; the firm sees major potential in Carlin, with far fewer political risks than other countries it mines. Analysts see the bottom line surging both this year and next, and a modest dividend (1.0% annual yield) is a cherry on top.

Technical Analysis

Gold stocks were some of the first to move to new high ground after the crash in February and March, and GOLD was among the leaders in the sector. And now it looks to be near a new, solid entry point. After ripping high for six weeks (four of which came on big, above-average volume), GOLD has now chopped sideways on tame volume for a couple of weeks as the 25-day line (now at 25.3) catches up. Starting a position here or on dips to that moving average makes sense to us.

GOLD Weekly Chart

GOLD Daily Chart

Chegg (CHGG)

chegg.com

Why the Strength

From its modest beginning as an online textbook hub, Chegg grew into a multi-pronged educational platform. And then the coronavirus—with its stay-at-home dictates—struck, and sent online learning to new heights. Chegg still offers textbooks (and e-textbooks) and allows students to buy/sell them online, but that’s a small part of its business and it operates it at breakeven. The real growth driver is the company’s student learning platform, which offers online tutoring and test prep, homework help (including a library of 37 million pieces of content and 31 million expert Q&A answers) and an online internship and job search platform. With the face of education markedly changing around the world due to the virus, Chegg is in the right place, at the right time, with a market estimated at 36 million U.S. university and high school students, as well as 18 million in Canada, Australia, and the U.K. And its reviews are fantastic, with 90%-plus of its users saying the company helps produce better grades. Revenues for Chegg’s first quarter were up 35% to $132 million, boosted by 33% growth in its services segment (which accounts for 76% of sales) and easily beating estimates of $123 million. Earnings grew 40%, to $0.22 per share, surpassing estimates of $0.16, while total subscribers soared by 35%, to 2.9 million. While Chegg did pull guidance for 2020 as a whole (back to school season is a big unknown at this point), the good news is that they see the current second quarter coming in very strong, with analysts expecting sales to perk up 45% and earnings rising even faster than that. Chegg has always had a great story, and the current reality has quickened adoption of its platform.

Technical Analysis

Chegg is another stock that went nowhere for the last year (it effectively topped out in March 2019 near 42), had a couple of huge declines (to 28 in September and October last year, and as low as 26 in March of this year) but now looks like a new leader. The recovery from those March lows was pretty solid, but it was last week’s gargantuan move to new highs after earnings that really changed the landscape. Yes, it’s extended, but such a powerful earnings move out of a big base bodes well.

CHGG Weekly Chart

CHGG Daily Chart

MercadoLibre, Inc. (MELI)

mercadolibre.com

Why the Strength

MercadoLibre is a dual play on e-commerce and fintech, engaging in both online sales and digital payment solutions. Think of it as a hybrid eBay/Amazon of Latin America, with operations in 16 countries and a user base north of 300 million. Its latest earnings showed why the stock has kicked back into gear, with revenues of $652 million in Q1 (up 38%) far exceeding estimates. Unique active users grew 31% to 43 million, while gross merchandise volume rose 34% to $3.4 billion on a currency-neutral basis. Although there was a user decline during the lockdowns in March, MercadoLibre said that sales rebounded in April on the back of increased demand for toys, games, consumer packaged and health-related goods (100% growth in some markets!), despite other categories being down. Beyond just being a platform for merchants, digital payments and financing are keys for Mercado’s growth plans; while payments were slower in March, payment levels in April were above pre-COVID levels driven by Argentina, Chile, Colombia, and Mexico, rising 120% for the month. Probably most important from Wall Street’s point of view, the company expects to be able to achieve its annual growth targets despite the pandemic, without having to delay or materially modify its strategy. With some 50% of Latin America’s population having limited access to financial services, and with e-commerce just 3% of the region’s retail sales, the long-term prospects for MercadoLibre are immense, and with COVID-related uncertainty diminished thanks to the Q1 report, buyers have stepped in.

Technical Analysis

Like so many stocks out there, MELI had a good run early on in 2019 but stalled out mid year; shares did move to new highs in early 2020 but then quickly fell by the wayside with the market’s crash. But its plunge to 422 now looks like MELI’s final shakeout—shares immediately popped back above 600, tightened up for two weeks, and last week exploded to new highs on earnings. We’re OK starting small here or (preferably) on dips of a few percent.

MELI Weekly Chart

MELI Daily Chart

Peloton (PTON)

onepeloton.com

Why the Strength

Peloton has always had a one-of-a-kind offering—it’s the pioneer of connected fitness, taking the stodgy exercise bikes and treadmills of yesteryear and bringing them into the 21st century with an offering that enables subscribers (886,000 paying members at the end of March, up 94% from a year ago) to toattend a workout class (live or on-demand) with top-notch instructors whenever they choose. The products aren’t cheap (they run a couple of grand for equipment, and $39 per month for content), but Peloton is doing what it can to bring it to the masses, with a free 30-day at-home trial and financing available for its equipment, as well access to its app for $13 per month (now 176,000 subscribers; included if you have the $39 subscription), with recorded classes for strength, yoga, cycling and more. Users love it (90%-plus annual retention rate; number of monthly workouts up 27% from a year ago), and while the shut-in has clearly helped business as fitness centers remain closed, there’s more to Peleton than that. Like so many other sectors, fitness is moving online and on-demand, and there’s no question Peloton is the leader in that. The stock is strong today because the firm is tracking miles ahead of its plan—calendar Q1 results, reported last week, were fantastic, with revenues (up 66%) and EBITDA (turned positive for the first time) crushing estimates, and with management stating that it has a huge backlog of orders it’s trying to fill. (Our neighbor ordered a bike in late April, but delivery is set for early June.) It looks like earnings may turn positive in the coming fiscal year (beginning in July), too, about two years ahead of plan. There’s some competition out there, but as the leader, we think Peloton has huge potential with just 3% of the potential market. We like it.

Technical Analysis

PTON came public last September and had a good run into November before the typical post-IPO droop took place—and it didn’t end until the stock fell below 18 during this year’s crash. However, the rebound from there was immediate, with shares actually nosing to new highs in early April after many weeks of good-volume buying. A two-week rest set the stage for last week, when PTON mushroomed to new highs after earnings on ridiculous volume. Volatility will be crazy, but a small position here or (preferably) on dips should work.

PTON Weekly Chart

PTON Daily Chart

Schrodinger, Inc. (SDGR)

schrodinger.com

Why the Strength

Recent new issue Schrödinger combines physics-based modeling with machine learning in a computational platform that helps pharmaceutical companies discover high-quality molecules and materials applications faster than traditional methods, at a lower cost and with a higher likelihood of success. In traditional methods, drug discovery can synthesize about 1,000 compounds a year, but SDGR’s platform can evaluate billions of molecules per week. The company sells its platform to more than 1,300 customers around the world and has fostered more than 25 collaborative programs for oncology, cardiopulmonary, autoimmune diseases, tuberculosis and metabolic diseases with drug developers such as Sanofi, Ajax, Nimbus Therapeutics, Bright Angel and others. Schrödinger also has a pipeline of its own consisting of five wholly-owned drugs to treat kidney, ovarian, breast, lung and pancreatic cancers. It’s a small company (just $86 million in revenue over the past year), but since 2017, Schrödinger has grown at an annual rate of 25% and the fundamentals continue to improve: Schrodinger just inked a three-year agreement with Google Cloud that will allow its platform to perform several functions at once, further speeding up the whole process of drug discovery; it reported that it had expanded its collaboration with AstraZeneca to refine and speed up the development of antibody and protein-based therapeutic candidates; and it signed a five-year technology alliance with Bayer to accelerate the discovery of innovative high-quality drugs. This week will be telling. Earnings are due out Wednesday morning (May 13) before the open; analysts are looking for a loss of -$0.35 per share and revenues of $22.4 million, though the outlook will be even more important.

Technical Analysis

SDGR went public in February at around 17 per share; it spiked on its first day of trading and almost doubled again by the end of February, but then lost some 38% of its value in March. But since then, the stock has set up a nice IPO base during the past three months, which makes it one to watch into earnings. If you’re aggressive, you could nibble ahead of the report, but we’re more interested in seeing if SDGR can stage a powerful breakout.

SDGR Weekly Chart

SDGR Daily Chart

TG Therapeutics, Inc. (TGTX)

tgtherapeutics.com

Why the Strength

Healthcare in general (and biotech in particular) is one industry very much in the spotlight, with drug companies increasingly commanding Wall Street’s attention. (The biotech sector as a whole just surged out of a big consolidation today, actually.) TG Therapeutics develops treatments to extend and enhance life quality for chronic lymphocytic leukemia (CLL) patients and those with other autoimmune diseases. Its main focus is on targeted and immune therapies that bypass toxic chemotherapy in cancer patients. TG’s pipeline has some promising blood cancer drugs in various stages of development, including the combination of Umbralisib and Ublituximab (U2), used for treating CLL. Last week, the firm created a stir by releasing positive topline results in a Phase III trial involving U2, meeting its primary endpoint by demonstrating a big improvement in progression-free survival. TG is targeting a regulatory submission for U2 later this year in previously untreated and relapsed CLL patients; both drugs could be given simultaneous final approval, greatly enhancing the firm’s pricing ability. There’s other indications in the pipeline as well—Umbralisib has received orphan drug designation for follicular lymphoma—and the company has $140 million in the till (including $60 million that it recently raised), which should provide an operational runway well into 2021. All told, the company has five medicines under development and four potential approvals in 2020-21; analysts see revenues leaping to north of $100 million next year and, if all goes well, profits arriving in 2023. Earnings are due out tonight, though given the recent updates, surprises should be muted.

Technical Analysis

TGTX hit a nadir during the 2018 market meltdown around 3, rallied to 9 by March 2019 and, after months of base-building, rose as high as 16 in February of this year. Then came the crash with the market, but the stock bounced back quickly, and last week looks like a real change in character—TGTX exploded higher on two days of massive volume after the positive Phase III results. We advise aiming to grab shares on weakness.

TGTX Weekly Chart

TGTX Daily Chart

Twilio (TWLO)

twilio.com

Why the Strength

Twilio went into the wilderness in the middle of last year, but after 10 months of rest (including a huge shakeout in March along with everything else), it appears to be a liquid leader once again. And there’s good reason for it—Twilio has a best-in-class communications platform that’s being gobbled up by companies of all sizes (190,000 organizations in all) that allows them to easily and automatically get in touch with suppliers, customers, employees and more via voice, video, messaging and (thanks to its acquisition of SendGrid last year) email. And, while the firm has been growing rapidly for a while, the virus shut-in has only helped, as Twilio is a key enabler of the kinds of communications just about every company is relying on right now (and its revenues are at least partly usage based). Of course, it’s not all good news—ride sharing and travel-related customers have been hit, but sectors like telehealth, online education, contact centers and the like have ramped usage. (Contact centers will likely be a huge growth area, as just 17% of them are cloud-based, a figure that should triple over the next five years.) All in all, it appears that many projects that were to get moving over the next few quarters are taking place right away, which led to a terrific Q1 report; sales rose 57%, earnings of six cents came in 17 cents ahead of estimates, while sub-metrics like the same-customer revenue growth rate (43%!) were fantastic, and management significantly hiked Q2 guidance above expectations. To be fair, the company did cut guidance for 2020 as a whole due to the virus uncertainty, but big investors seem to be focusing on the big picture—whether the economy is shut-in or back to normal, Twilio’s platform looks like one of the key cogs for firms big and small (we use it at Cabot for certain subscriber alerts!) as communications go digital and become automatized. It’s a big story.

Technical Analysis

TWLO had a massive run from its post-IPO lows at 20 to 100 when the market got going at the start of 2019 and to 151 in June of last year at its top. And then the tide turned—shares fell to 90 in October and dove as low as 68 with the market in March, representing a long (10-plus months), deep (45%) correction and consolidation that likely knocked out most weak hands. The initial rebound was just OK, but last week was a game changer—TWLO exploded to new highs on earnings, with volume coming in nearly quadruple its weekly average. (It was the stock’s biggest weekly volume ever.) Despite the move, we think you can take a position here or on weakness.

TWLO Weekly Chart

TWLO Daily Chart

Wingstop (WING)

wingstop.com

Why the Strength

The vast majority of strong stocks these days are in the tech sector, as the shut-in pushes more people to buy/learn/play online, but Wingstop is an old fashioned cookie-cutter story in the restaurant industry that’s thriving. As we wrote a month ago, the firm has been a steady grower for years as it’s expanded its store base (1,413 restaurants at the end of March, up 11% from a year ago; all but 160 are in the U.S. and most are franchised) and enjoyed healthy same-store sales growth (12.2% in the U.S. last year); long-term, the firm thinks there’s room for more than 6,000 locations around the world, so there’s a huge runway of growth ahead. And the pandemic hasn’t dented growth at all—in Q1, system-wide sales were up nearly 19%, U.S. same-store sales were up 9.9% and EBITDA lifted 18%. And believe it or not, business has begun to accelerate wildly; in the first four weeks of the current quarter, same-store sales have lifted a jaw-dropping 33%, partly because the average digital and delivery order has a meaningfully higher ticket than dine-in customers. Part of its success is thanks to Wingstop’s embrace of technology; before the crisis, 80% of the firm’s business was takeout or delivery (obviously 100% now), while digital sales were 40% of its total (now 65%). While nobody expects 30%-plus comparable store growth to keep up, Wingstop has a great long-term growth story and is hitting it out of the park today. There’s little doubt the firm is going to get much, much larger over time.

Technical Analysis

WING went over the falls in March as people assumed its business would hit the skids, but as the opposite transpired, the stock has levitated all the way to new highs; it’s now up seven weeks in a row, and more recently, has been in a steady, persistent uptrend since topping its 200-day line in early April, including last week’s push higher. We think any reasonable dip should present a solid entry point.

WING Weekly Chart

WING 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.