Intermediate-Term Uptrend Cracked
Current Market Outlook
The market’s meltdown today cracked the intermediate-term uptrend that got going back in January, with all major indexes (and many leading stocks) closing well below their 50-day lines today. Big picture, we still see this as a bull market, so we’re still OK holding most of your shares in your strong, profitable stocks; encouragingly, despite taking on water, many stocks are still hanging in there. That said, you also shouldn’t be complacent—after four months with no meaningful pullbacks, it’s likely (not for sure, but likely) the market needs more than six trading days to consolidate the January-April advance. In a nutshell, you should keep tight stops in place on losers and laggards, give your profitable names a bit more rope and, on the buy side, be very selective and/or keep positions small. We’re moving our Market Monitor down to a level 5.
Interestingly, this week’s list is very heavy on growth-y names despite the market’s plunge. Our Top Pick is Match.com (MTCH), which has a great long-term story, and the stock has re-emerged after earnings.
| Stock Name | Price | ||
|---|---|---|---|
| Avalara (AVLR) | 102.00 | ||
| HubSpot (HUBS) | 582.89 | ||
| Lithia Motors Inc. (LAD) | 146.30 | ||
| Match (MTCH) | 0.00 | ||
| PayPal (PYPL) | 147.00 | ||
| Roku, Inc. (ROKU) | 150.46 | ||
| Tandem Diabetes (TNDM) | 74.77 | ||
| Teradyne (TER) | 82.83 | ||
| TopBuild (BLD) | 111.00 | ||
| Woodward (WWD) | 111.91 |
Avalara (AVLR)
Why the Strength
We’ve covered Avalara a couple times this year and the story keeps getting better. The company looks like the leading developer of cloud-based software for sales and indirect tax compliance, which is an incredibly complex task (all the different tax rates and exceptions across locales) that a lot of retailers still do manually. But Avalara’s software helps companies automate the process, and that’s been a hit. The stock is doing well now because customer interest is surging after a Supreme Court decision (South Dakota vs. Wayfair) in 2018 that allows states to require out-of-state retailers to collect sales tax from customers, even if the retailer lacks a physical presence in the state. Dozens of states have passed so-called economic nexus laws in the wake of the Wayfair decision and retailers are scrambling to make sure they are complying. Avalara is the clear leader in the industry and a recent IPO in 2018 is helping it maintain a high profile. Management reported a killer quarter last week in which revenue was up 38% to $85 million (beating by $6.3 million) and EPS of -$0.01 beat by $0.15. Management also issued revenue growth guidance of 28%, which was ahead of expectations. The market loves the result because the long-term trends are getting stronger and Avalara is in a great position to capitalize.
Technical Analysis
AVLR went public last June, spiked for a month and then plunged with the market into December. The stock has enjoyed a great run this year, though, and after the Q4 earnings spike in February, the most impressive thing to us was the stock’s consistency—AVLR has had just one down week since that point, finding support near its 10-week line in April and booming on earnings last week. This is a new story with lots of potential, but it’s also a new-ish stock that’s had a big run. Translation: Start small on dips.
AVLR Weekly Chart
AVLR Daily Chart
HubSpot (HUBS)
Why the Strength
HubSpot remains a well positioned cloud-software software firm with a great secular growth story. The company specializes in marketing automation software, and its platform helps businesses excel in social media, search engine optimization (SEO), marketing automation, email, analytics, CRM and website content management. If you want a way to play the digital economy, HubSpot is it. Management is growing the business by focusing on small- and mid-sized clients which need a ton of help getting their word out, and the stock is doing well because the company has a huge potential market that’s approaching $30 billion and, with a growing number of integrations (Zoom, Slack, Shopify, YouTube, etc.), it has an efficient go-to-market strategy. The company just reported a better-than-expected Q1 last Tuesday, where revenue of $152 million was up 33% and EPS of $0.36 beat by $0.11. Management also issued guidance that implies 30% revenue growth (in constant currency), which would mark a decade of 30%-plus annual growth. With around one-third of customers using more than one product and management seeing huge upsell potential for customers to select HubSpot as their core front office platform, there are more analysts saying the company could be similar to a younger version of Salesforce.com. That’s a powerful statement that should keep big investors engaged.
Technical Analysis
With the exceptions of late last year and a few weeks in April, HUBS spent most of the last two years trading above its 50-day moving average line and making a series of higher highs and higher lows. The most recent setup was the stock’s flat trading range from mid February through mid April (160-175), from which HUBS lifted late last month. And the recent trading, while very volatile, hasn’t been bad, with the stock holding its prior high. We’re OK starting a position here.
HUBS Weekly Chart
HUBS Daily Chart
Lithia Motors Inc. (LAD)
Why the Strength
Lithia Motors certainly doesn’t appear to be anything special, effectively operating as a nationwide used car dealership. But the firm has an envious track record of growth, which is a big reason why the stock has come to life. The company operates 182 dealerships across the U.S. that sell and service all types of cars, but a big part of the story is its continual acquisition flow in this fragmented industry, as Lithia purchases underperforming businesses (which, on average, have profit margins south of 1%) and, though top-notch practices, aims to triple that or more. It’s also moved online, partnering with a firm called Shift to provide direct-to-home buying and selling options. All in all, it has the sound of a private equity outfit that’s focused on the car dealership business, and it’s hard to argue with the results—Lithia has grown earnings 10 years in a row, with the latest earnings report (sales up 7%, earnings up 18%, driven by solid gains in used car and finance/insurance revenues) easily topping expectations. Big picture, management sees a clear path to $15 per share in earnings ($11 or so is expected this year). Growth is far from superb, but the dependability, positive Q1 report, low valuation (10 times estimates) and token dividend (1.1% yield) add up to a bullish view.
Technical Analysis
LAD has grown earnings consistently for the past few years, but the stock didn’t reflect that—after tagging 126 in November 2015, the stock found itself down at 68 at last year’s market bottom. The rebound from there was just OK, but LAD picked up steam in late March and then surged for five straight days before and after the earnings report, and it’s held most of its gains since. Lithia looks like a solid defensive play; if you want in, aim for weakness.
LAD Weekly Chart
LAD Daily Chart
Match (MTCH)
Why the Strength
Money can’t buy love, but matchmaking is a very profitable business, and as the dating world goes online, Match.com is the main beneficiary. The company operates numerous online dating properties, including Tinder, Match, PlentyofFish, OKcupid, Meetic and a ton more; all told, its offerings come in more than 40 languages and the firm claims that two-thirds of all relationships that started on a dating site or app began on a Match.com property. Tinder has long been the growth driver here (it ended March with 4.73 million subscribers, up 36% from the year before and making up around 55% of total Match subscribers), but the firm is making inroads with some newer, more targeted products (two for Latinos and African Americans are seeing rapid growth in app downloads), while a refresh of the Match app is boosting engagement. The story has been solid for a while, and while growth is slowing a bit, the stock has kicked into gear in the wake of a great Q1 report—sales lifted 14%, subscriber totals (8.6 million, up 16% from a year ago) topped expectations, revenue per user (up 4% on a currency-neutral basis) is heading in the right direction and earnings of 42 cents topped estimates by 10 cents. Long-term, the move into Asia carries massive promise, too. Analysts see sales and earnings up in the 16% to 21% range both this year and next.
Technical Analysis
MTCH originally broke out in September 2017 near 20 and raced as high as 58 late last year before the market took it down. But as soon as the market bottomed near Christmas, the stock powered right back up to new highs by early February. Then, like many growth stocks, MTCH based out for a couple of months—it was still at 60 last week before the Q1 report, which catapulted the stock to new highs. We’re OK starting a position here or on dips.
MTCH Weekly Chart
MTCH Daily Chart
PayPal (PYPL)
Why the Strength
PayPal is a dependable play on the growth in digital payments and money transfer, which is one of the biggest growth themes out there. For years, competition was a major worry, with banks and other payment platforms causing investors to fret PayPal’s take rate (how much of a cut it gets from every transaction), and it’s true that figure is fading a bit over time. But big investors have come around to the view that (a) the market here is gigantic, with plenty of room for a few players, and (b) PayPal’s size, partnerships, leading position among merchants and in the money transfer business with Venmo effectively mean the company is a blue chip growth outfit. The Q1 report was solid, with sales and earnings cranking ahead and all of the sub-metrics (277 million accounts, up 17% from last year; 37.9 transactions per account, up 9%; $161 billion total payment volume, up 25% on a currency-neutral basis) looking good. Moreover, the company continues to gain new exposure (PayPal is now integrated into Instagram), is making investments (it has stakes in Uber and MercadoLibre) and continues to see amazing growth in its Venmo subsidiary (payment volume up 73% in Q1 with 40 million users!), which it’s beginning to monetize. Bottom line, PayPal looks like Visa or MasterCard from a few years ago, with years of solid, reliable growth that’s attracting many big fish.
Technical Analysis
PYPL isn’t the fastest mover, but after a tedious 2018 that featured two long basing periods and a few dips below its 40-week line during the market wipeout late last year, it’s been a solid winner this year. In fact, PYPL’s persistent advance since a late-January shakeout has been very impressive, with no big selling weeks along the way. That means the recent pullback below the 25-day line looks buyable, with a tight stop below the 50-day line.
PYPL Weekly Chart
PYPL Daily Chart
Roku, Inc. (ROKU)
Why the Strength
For investors that were unsure about Roku’s future in the red-hot TV streaming market, last week’s first quarter earnings stunner should have removed any lingering doubts. The stock gapped up and closed at an all-time high last Thursday after Q1 revenue of $207 million (up 51%) beat by $17 million and EPS of -$0.09 beat by $0.17. If you’re wondering how Roku makes money, customers pay for software, content and hardware. The Platform segment (65% of revenue) generates revenue from advertising, subscription/transaction fees, sales of branded buttons on remotes and licenses from TV operating systems. And the Player segment (35% of revenue) includes sales of over-the-top (OTT) streaming players. Player sales have smaller gross margins (around 10%) and sales were up 18% in Q1. But Platform revenue was up 79%, and because this segment has much bigger margins (around 70%), investors are right to be excited about the potential for Roku’s profit engine to start firing on all cylinders. Management says that, as compared to Q4 2018, active accounts grew two million (to 29.1 million), which helped streaming hours jump by 1.6 billion (to 8.9 billion) and push average revenue per user up by $1.11, to $19.06, over the last 12 months. The bottom line is the business model is clearly working and analysts are bumping up growth projections. We like it.
Technical Analysis
ROKU has had many wild runs since coming public in late 2017, with the latest being a huge off-the-bottom run from 26 at the market bottom to 74 in early March (up 11 weeks in a row). The last two months have shown a possible change in character, as the eight-week pullback and consolidation was relatively well contained, and the stock leapt to new all-time highs on giant volume after earnings last week. It’s powerful, but given the market, we’d target pullbacks if you want in.
ROKU Weekly Chart
ROKU Daily Chart
Tandem Diabetes (TNDM)
Why the Strength
We took Tandem off our list a few weeks back when shares broke support, but now they’re building a nice launching pad and the Q1 report was a jaw-dropper, highlighting the huge potential of the firm’s best-in-class insulin pump. To review, that pump (dubbed the t:slim x2, which is the firm’s sixth pump it’s developed) is smaller, lighter and has a larger touchscreen than competing pumps, is integrated with Dexcom’s glucose monitoring system (so no finger sticks are necessary), is automatically updated and has a predictive technology to reduce the number of low-glucose events. And Tandem is continuing to improve the pump—later this year it will launch an app that can control the pump wirelessly, and it’s also aiming to release a new technology (control-IQ) to further improve results. As pumps like t:slim x2 improve, many are going away from multiple daily injection regimens, leading to potential market in the millions both in the U.S. and overseas. And Tandem is quickly capturing a big share of that—in Q1, the firm shipped 14,700 pumps (thanks partly to its recent international launch), up a whopping 232% from a year ago, driving a 142% revenue burst (another quarter of accelerating growth), and it sees about 87,000 t:slim pumps now in use. Management massively raised guidance in response, and if they continue to pull the right levers, the sky’s the limit.
Technical Analysis
TNDM is extremely volatile, having a mega-run in 2018, a 50%-plus correction late last year and then a massive gap to new highs on earnings in February. As mentioned above, the stock got sloppy after that (maybe partly due to poor action among so many health care stocks), but volume was tame on the weekly chart, and now TNDM has pushed back into the middle of its range. We’re OK buying small here, with the idea of adding if shares push decisively higher.
TNDM Weekly Chart
TNDM Daily Chart
Teradyne (TER)
Why the Strength
Teradyne is a mid-cap industrial technology company that supplies automation equipment for test applications, mostly for semiconductors, wireless products, data storage systems and other complex electronic systems. It also sells collaborative and mobile robots that help customers make smarter devices, more powerful and reliable data storage systems and life-saving medical equipment. It’s not a rapid growth stock; in fact, revenue was down modestly in 2018. But Teradyne offers exposure to big and important industrial markets like 5G network infrastructure testing, high power semiconductor testing and industrial automation (up 35% in the last quarter), pays a dividend (0.75% yield) and is cheap on a valuation basis (forward PE of 15.7). The stock is doing well because big-picture operational initiatives like acquisitions (latest was Lemsys in Q1 2019) are helping round out the portfolio and because management has approved stock buyback and dividend hikes that are bringing more value-oriented investors to the table. Plus, Q1 results, reported on April 23, beat expectations. Teradyne should deliver vanilla results this year with both revenue and EPS up less than 3%. But 2020 looks more interesting with revenue up 14% and EPS up 22%. If you like off-the-radar industrial growth and value stories, Teradyne fits that mold.
Technical Analysis
TER did very little for a few years then took off in 2017 and early-2018, when it peaked near 50. The rest of last year was less fun as TER chopped around (mostly down) and ended the year near 30. The stock raced back to 40 over the first three months of 2019, walked up to 44 prior to the April 23 earnings release, then gapped up a few points and tested the 2018 high of 50. It’s pulled back a few points since, but the action is reasonable given the market’s wobbles. We’re OK taking a stab at shares here, albeit with a tight stop.
TER Weekly Chart
TER Daily Chart
TopBuild (BLD)
Why the Strength
Building-related stocks continue to show relative strength as business picks up, interest rates decline and, more recently, thanks to their non-reliance on anything China. TopBuild is an old operation but a fairly new stock, having been spun-out from Masco in June 2015. The story here is straightforward: TopBuild is the largest purchaser, installer (200 branches, 7,000-plus installers) and distributor (75 branches) of insulation in the U.S.—75% of the firm’s business is insulation (rain gutters, windows and some other stuff make up the rest), with 80% of its wares going into the residential market (though the firm is beginning to make an effort to expand in the commercial market, where it has “just” 10% market share). All told, more than 40% of new housing starts use TopBuild for insulation installation, and it’s twice the size of its nearest competitor. The firm acquired United Subcontractors for $475 million in cash last year, and the integration and synergies are going according to plan. That buyout has boosted growth (revenues were up high single digits organically in Q1) and was partly responsible for the Q1 blowout (earnings of $1.06 per share topped estimates by 26 cents!), but even without those benefits, analysts and management see earnings and cash flow up around 20% this year, with more upside should housing starts pick up steam. It’s not changing the world, but TopBuild is a good company that should see better times ahead.
Technical Analysis
BLD had a nice, steady run from March 2017 through June of last year, but then the wheels came off—shares imploded more than 50% before bottoming with the market in December. However, the upside since the bottom has been just as dramatic, with BLD rising persistently (never dipping below its 25-day line) and, last week, gapping up nicely on after earnings. Given the market and the stock’s old resistance in the mid 80s, aim for dips if you want in.
BLD Weekly Chart
BLD Daily Chart
Woodward (WWD)
Why the Strength
Woodward specializes in making control system solutions and components for aerospace and energy customers. Buyers of its products, which are mostly flow, combustion, electrical and motion control systems, are original equipment manufacturers, and Woodward has become an indispensable supplier because of the highly specialized nature of what it makes. As we’ve seen with the software issues on Boeing’s 737 MAX planes, for which Woodward supplies some components, end-customers can’t afford any missteps, and this company helps them stay out of trouble. Management has said that while there are some uncertainties regarding the 737 MAX order flow for various parts (so far so good), overall business with customers (GE, Airbus, Caterpillar, Cummings, etc.) continues to track to expectations. And that acquisitions, like L’Orange, which specializes in fuel injection technologies, are helping it capitalize on the strength in the aerospace and defense markets and benefit from the shift to natural gas in the power generation market. As for the numbers, revenue was up 38% in Q2 fiscal 2019 (reported April 29) while EPS of $1.40 beat by $0.35. Following the quarter analysts bumped up expectations, with 23% revenue growth and 27% EPS growth (to $4.88) now forecast for this year. There’s also a 0.6% dividend to sweeten the deal.
Technical Analysis
WWD was mostly unchanged in 2018 after trading in the 70 to 85 range, but then gapped up to new highs at the end of January and didn’t stop rising until it got into the mid-90s. It consolidated in the 92.5 to 97.5 range from mid-February to mid-April, then broke out again and kept rallying through the Q2 report. We see potential for another consolidation phase here, but the stock’s orderly pullback in recent days is a good sign that buyers are supporting shares on dips.
WWD Weekly Chart
WWD 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.
