Is the Advance Broadening Out?
Current Market Outlook
Nothing about the market really changed last week—small- and mid-cap indexes are lagging and most indexes are still trading tightly with in 10-12 week ranges, but the Nasdaq is in a firm uptrend and leading Top Ten stocks are acting great. The question now is whether the recent push higher that began in mid-April will broaden out; the S&P 500 has been knocking on the door of new highs (above 2,400) and the small- and mid-cap indexes found support at their 50-day lines today. If we see buying pressures strengthen, it could lead to another batch of leaders emerging in the weeks ahead and be a big feather in the bulls’ cap. It’s something to watch for, but right now, we’ll stick with our current stance, keeping our Market Monitor at level 8.
This week’s list has a ton of very attractive growth stories; it was hard to select just one as our Top Pick. But with big-cap growth stocks in favor, we chase Nvidia (NVDA), which has exploded out of a four-month consolidation following a great earnings report.
| Stock Name | Price | ||
|---|---|---|---|
| Atlassian (TEAM) | 182.16 | ||
| Electronic Arts (EA) | 0.00 | ||
| Five Below (FIVE) | 134.58 | ||
| HubSpot (HUBS) | 582.89 | ||
| IPG Photonics (IPGP) | 0.00 | ||
| NVIDIA Corporation (NVDA) | 242.42 | ||
| Ryanair DAC (RYAAY) | 0.00 | ||
| Tesla, Inc. (TSLA) | 818.87 | ||
| Trade Desk (TTD) | 468.02 | ||
| XPO Logistics (XPO) | 0.00 |
Atlassian (TEAM)
Why the Strength
Now here’s a software company with a unique story. Atlassian is trying to do for team productivity what Microsoft Office did for personal productivity many years ago—the company’s software is targeted at solving team-related problems, with various products aimed at helping teams improve the sharing of content, messaging to other group members, and coordinating workflow. Atlassian’s solutions are far more efficient than Excel or iterations of Word that are passed around. What’s most impressive is that the company has no sales force—it has a huge market (basically every software developer or knowledge worker out there) and offers its products for a low price (though it doesn’t negotiate prices or licensing agreements) and is “patient for revenue,” as management says. This “organic” sales model sounds odd, but it’s worked fantastically—Atlassian ended the first quarter with 85,000 customers, up 26% year-over-year, partly because the company spends 35% to 40% of its revenue on R&D! Sales have been growing steadily for many years, and while earnings growth has been just OK, that’s understated because of its subscription revenue model. (In the March quarter, Atlassian’s free cash flow totaled about 30 cents per share, up 68% from a year ago.) It’s an interesting story.
Technical Analysis
TEAM has a great longer-term chart. The stock came public back in December 2015, immediately tanked with the market and eventually recovered by last summer, But that was followed by another, shallower base, which ended with some outstanding tightness in March and April. TEAM has since exploded to new highs on many days of excellent volume, indicating a new advance has begun. Try to buy on weakness.
TEAM Weekly Chart
TEAM Daily Chart
Electronic Arts (EA)
Why the Strength
Shares of video game software developer Electronic Arts have been trending higher since the beginning of the year. And they just gapped up 12.5% after last Tuesday’s earnings report blew past analyst expectations. Revenue of $1.5 billion was up 18%, while EPS of $1.81 demolished expectations by $1.06 (and rose 262% from a year ago). The company has been moving video game sales toward digital channels (online and download vs. physical disk) to reach more gamers globally and extend their games to new platforms. There is also the added benefit of selling live services online. The plan is clearly working—over the last 12 months, Electronic Arts has grown digital sales by 20%, and better yet, they now account for 60% of total sales. And EA was the number-one publisher of games on PlayStation 4 and Xbox One consoles in the western world. The company continues to hit the nail on the head with franchises like Madden NFL, FIFA, Star Wars Battlefront and Mass Effect. Earnings growth is being supplemented by share repurchases, including $127 million in the most recent quarter and more than $1 billion over the last 12 months; a new two-year buyback program for up to $1.2 billion should keep that tailwind to earnings in place. Expectations for the current fiscal year (ending next March) are muted, which we see as conservative.
Technical Analysis
EA entered 2017 flatlined at 80 and right on its 50-day moving average. It moved a little higher before the January 31 earnings release, but gave most of that move back before breaking above 85 in mid-February. A move above 91 lost steam in mid-March, after which the stock tightened up in the 88–90 range. That set it up to break above 95 heading into last week’s earnings report, after which it gapped up above 107 on quadruple its normal volume. You could nibble here or on dips.
EA Weekly Chart
EA Daily Chart
Five Below (FIVE)
Why the Strength
Five Below is another in a line of select retail stocks that are showing great strength in recent weeks after a long period out of favor. The company’s growth story is hard to beat: Five Below is a unique dollar store, with all items selling for less than $5, targeted at teens and pre-teens. Items include beach items, smartphone covers, candy, decorations, toys, T-shirts, workout gear, slippers, nail polish, and a ton more. The low-priced offerings make the firm fairly economically insulated, and its average store is so productive that the payback on new openings averages less than a year. That’s allowing management to rapidly expand the store base—the company finished January with 522 stores, but plans to open 100 more within a year (it already had 555 open as of May 5), which would represent 19% store growth. Longer-term, management believes there’s room for at least 2,000 locations in the U.S. As for the current store base, growth has slowed a bit (most retailers are in the same boat), but same-store sales are still advancing and topped expectations in the January quarter. All told, total sales rose 19%, earnings lifted 17% and management bumped up estimates for 2017 as a whole. Sales and earnings have been rising consistently for years, and analysts see 20%-plus annual growth at least through 2020; our guess is that this cookie-cutter story can lift the bottom line for many years to come.
Technical Analysis
FIVE hasn’t made any net progress since peaking back in late-2013. Shares looked ready to hit new highs last year, but a persistent advance fell flat last August, with shares falling 34% before meandering sideways for five months. But a bullish quarterly report in March kicked off a new advance, with FIVE pushing back toward its highs. We think you can buy a small amount here and look to average up if the stock takes out its all-time high near 56.
FIVE Weekly Chart
FIVE Daily Chart
HubSpot (HUBS)
Why the Strength
HubSpot develops software for inbound marketing, which traditionally revolves around telemarketing calls, spam email and online pop-up adds—all things that normal people despise! But this firm has a different approach to getting consumers’ attention; HubSpot’s software tries to offer helpful content and experiences to consumers when they need it, rather than whack them over the head when they’re trying to have a beer with friends or put the kids to bed. Based on the company’s results, clients are succeeding with the software. Revenue growth last year was 49%, and should top 30% this year. It just reported 40% growth to $82.3 million in Q1, beating expectations by almost $3 million. The Street loves it when small and mid-cap companies (HubSpot has a market cap of $2.5 billion) turn profitable, and this one is flirting with that milestone. First-quarter EPS of $0.03 beat by $0.11, and management drastically cut its expectations for this year’s red ink to just a few cents a share from nearly 30 cents (and most analysts expect a profit next year). Combined with its bump higher in revenue guidance by $6.5 million (to $357.5 million, at the midpoint), it’s clear that things are going the company’s way. Investors will have to pay a premium valuation for the stock, but software stocks are hot and it looks like HubSpot is an emerging leader in the group.
Technical Analysis
HUBS came public in late-2014 and rallied to 60 a year later before going over the falls and building a huge, 16-month launching pad. The stock was looking weak like many growth stocks heading into this year, but it caught an updraft to 66 in mid-March before pulling back sharply (and nearly touching our stop loss). HUBS held its 50-day line, though, and has been pushing nicely higher since mid-April, including a decent earnings reaction two weeks ago. If you’re game, you can grab some shares around here with a stop near the 50-day line.
HUBS Weekly Chart
HUBS Daily Chart
IPG Photonics (IPGP)
Why the Strength
IPG Photonics is about fiber lasers, a kind of laser that has unique benefits for cutting, welding, brazing, drilling, cladding, additive manufacturing, marking and surface treatments. IPG makes the laser diodes themselves, plus the laser fibers, fiber cables, controllers and hardware used by automakers, telecom companies, aerospace manufacturers, semiconductor makers and the medical and energy industries. The company is a totally vertically integrated manufacturer, and many of its products have no competitors. The company’s technologies do many jobs with unparalleled precision and with much lower energy consumption than previous methods. The company is global, with China as its leading customer and North America, Germany and Japan smaller, but significant, customers. The upgrading cycle among global manufacturers has been driving growth at IPG; revenue grew by 12% in 2016, but the company’s Q1 report showed 38% revenue growth, building on 25% growth in Q4 2016. Earnings grew by 26% in Q4 2016 and 50% in Q1 2017. Analysts are looking for earnings to grow 23% in 2017, but the company’s actual trend makes that look very conservative. Global competition should spur more adoptions of IPG’s fiber lasers, and that should keep the heat on revenue and earings trends.
Technical Analysis
IPGP popped above 100 in early 2015, but took a long breather after that, correcting into the 70s several times in 2015 and 2016. It wasn’t until January 2017 that the stock finally punched through resistance just above 100 and kept going. IPGP surged to 125 in February and spent 11 weeks trading sideways until the May 2 earnings beat blasted it to 140 in one high-volume day. The stock pulled back a few points during the week after earnings, but has pushed higher over the past week. We think IPGP looks buyable on any weakness of a few points, with a loose stop around 124.
IPGP Weekly Chart
IPGP Daily Chart
NVIDIA Corporation (NVDA)
Why the Strength
Nvidia is a chipmaker with strong positions in the PC-gaming market, the automotive market, the datacenter and artificial intelligence markets and the virtual reality market. The stock, which has been featured in Cabot Top Ten Trader 13 times since its first appearance in 2003, is strong today because the company’s Q1 earnings report on May 10 was a huge win. Revenue grew 48% and earnings skyrocketed 126% (the third time in the past four quarters that EPS growth was in triple figures). Looking to the future, analysts are excited about the company’s new Tesla V100 chip that heads the company’s server processor architecture. The V100 uses Nvidia’s recent advances in deep learning, and is expected to gain significant market share in the booming data-center business. The great earnings report blasted Nvidia’s stock out of the trading range that has contained it since late 2016. With a market cap of $79 billion, Nvidia is approaching the scale of competitors like Qualcomm and Texas Instruments, which will strengthen its competitive position. With self-driving cars and data-centers providing the growth and games making steady contributions to cash flow, Nvidia looks strong. A dividend with an annual yield of 1.7% adds to the appeal.
Technical Analysis
NVDA was a monster in 2016, soaring from 24 in February to 107 at year’s end. But the stock stalled there, consolidating its gains for over four months with support at 95 and resistance (in March) at 95. NVDA was trading at 103 on May 9, then shot up to 121 on May 10, gaining momentum that pushed it to above 130 in recent trading. NVDA isn’t cheap—its forward P/E is 41—and it has left its 25-day moving average far behind at 106. But the stock has the explosiveness of a real growth name. We think you can nibble here or on any weakness, and use a reasonably relaxed stop around 119.
NVDA Weekly Chart
NVDA Daily Chart
Ryanair DAC (RYAAY)
Why the Strength
Ryanair Holdings is a discount airline based in Ireland. It’s the number-one airline in Europe, carrying 119 million people per year to over 200 destinations in 34 countries on its fleet of 360 Boeing 737s (with 305 more on order). Ryanair boasted great results in April, with an excellent load factor (up 3% to 96%) and a total of 11.3 million customers (up 14% from 9.9 million customers in April 2016). The company started in 1985 with one flight per day from Ireland to London Gatwick and began challenging the British Airways/Aer Lingus duopoly with discount fares in 1986. The company had some growing pains, but by following the formula of Southwest Airlines (the lowest prices in every market and strict cost controls), the business has survived and thrived. Revenue growth has been slow (just 3% in fiscal 2016), but analysts predict a 49% jump in earnings in 2017. Ryanair will report its latest quarterly results on June 2, and analysts are looking for revenue of $1.28 billion and earnings of 24 cents per share. Despite the Brexit uproar, Europe’s economic strength is powering good results at Ryanair.
Technical Analysis
RYAAY made a major move higher in 2015, but stalled in 2016 before falling hard in June. RYAAY recovered to its 2016 trading range in November 2016, and traded sideways until it caught a new updraft last month. RYAAY started April at 83, but finished the month at 92. And the stock’s momentum has remained strong, with a pause last week around 98, then a breakout above 100 today. RYAAY is pretty cheap for a stock with such positive momentum; its forward P/E is just 16. You can buy some right here, although taking a nibble on any weakness and waiting for quarterly results on June 2 may be a better idea.
RYAAY Weekly Chart
RYAAY Daily Chart
Tesla, Inc. (TSLA)
Why the Strength
Tesla remains a very controversial stock, with many claiming it’s wildly overvalued and/or will never make good on its promises; currently, 31.4 million shares are short, or about one-quarter of the stock’s trading float. But the stock is strong today because big investors are looking ahead and seeing the odds of success growing. Tesla is one of the few companies that doesn’t have to worry about demand for its product, as it’s doing all it can to ramp production just to fill the hundreds of thousands of orders it has on the books for its electric Model S, Model X and new Model 3, whose production should begin in July (the goal is for Model 3 output to rise to 5,000 per week by year-end), with initial deliveries later this year. In fact, production growth is the big fundamental story here—Tesla’s first quarter saw revenues soar 135% as production lifted 64%, with a solid gross margin of 28% on the auto side of the business. On the solar side of the business, the company just began taking orders for its new solar roof tiles that are made to look like a normal shingle roof; deliveries in the U.S. are beginning next year. Obviously, the firm is still not making money, which is the big risk—if it can’t ramp production profitably, institutional investors might lose faith. But right now the focus is on the tremendous potential Tesla has, mostly in the gigantic auto business with a reasonably priced all-electric vehicle, but also in the solar business with its new roof tiles.
Technical Analysis
The biggest thing about TSLA is the long-term chart, with the stock breaking out to all-time highs above 291 on April 3, after a two-and-a-half year consolidation. The stock worked its way as high as 328 two weeks ago before a quick shakeout back to 291 pre- and post-earnings. TSLA immediately snapped back to its highs last week before an analyst downgrade knocked it down a couple of pegs today. There might be some further short-term wiggles, but you could buy a half-sized position around here and look to buy more if it punches to new highs.
TSLA Weekly Chart
TSLA Daily Chart
Trade Desk (TTD)
Why the Strength
Shares of small-cap company Trade Desk soared 30% last Friday after the company eviscerated revenue expectations, beating by $10 million (revenue was $53.4 million). That was over 20% better than expected! And the analysts following the stock, from Raymond James, Needham and Citigroup, etc. aren’t slouches either. What does the company do? It offers a self-service, cloud-based platform through which ad buyers can create, manage, and optimize data-driven digital advertising campaigns. These can be rolled out to display, video, social media and more, and on all of today’s gadgets (TV, laptop, mobile, etc.). Growth was excellent across the board, with Mobile In-App sales up 150%, Mobile Video up 200% and Connected TV up 200%. Over 95% of customers are being retained, and the company won new business with auto, financial, restaurant and shoe companies. Revenue growth guidance for the year was hiked to 43% versus previous consensus of 33%. But the market is now thinking that the company will demolish that target as well. This is a high-flying stock that just went public in September of 2016, so we recommend starting with a small initial position.
Technical Analysis
TTD went public in September 2016 at 18, and soared 67% on its first day to close at 30. As is usually the case following an IPO, shares retreated, finding a low of 22 in November. It was then up and down for three months with shares bounding mostly in the 25-31 range through early February 2017. They then rallied from 28 to reach 46 by the second week in March. A pullback followed as shares regrouped in the 35–38 range through the end of April. A modest rally to 41 preceded last Thursday’s earnings release, after which the stock rallied 30% to close just shy of 52. Try to buy on dips.
TTD Weekly Chart
TTD Daily Chart
XPO Logistics (XPO)
Why the Strength
Most investors won’t get overly excited about a trucking and logistics firm like XPO, which is understandable when exciting growth stocks are racing up the charts. But the stock is strong today because investors see huge cash flow growth in the years ahead from continuing cost reductions and, encouragingly, a good amount of new opportunities in its various businesses. In the first quarter, XPO’s revenues were flat and free cash flow came in negative, but both were actually nicely above expectations; the company still expects at least $350 million of free cash flow this year (north of $2.50 per share) and a combined $900 million of free cash flow between this year and next. That alone has attracted buyers, but in its conference call, management sounded very bullish on organic growth, too—the firm inked $716 million in new business, which isn’t a lot but up significantly from a year ago, and also, as part of a contract extension, inked the biggest contract in its history. Some analysts are now thinking XPO can grow organic revenues in the mid- to upper-single-digit range in the years ahead; while that doesn’t sound exciting, much of it will fall to the bottom line and help earnings soar (possibly to $4 within a couple of years) and cash flow do the same. Clearly, XPO isn’t changing the world, but business-wise, it’s just beginning a huge ramp in cash flow that should keep big investors interested.
Technical Analysis
XPO took a big hit during 2015, but then began a stairstep advance, rallying nicely overall but with many long consolidations along the way. The latest of those consolidations effectively started in early December—XPO did nose out to new highs in late February, but shares quickly pulled back with the market in March and April. But now, after first-quarter earnings, the stock has pushed to new price and RP peaks on good volume. We think it’s buyable around here with a stop in the upper 40s.
XPO Weekly Chart
XPO 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.
