Sellers Still Active
Current Market Outlook
The market and many growth stocks had a solid three-day rally in the middle of last week, but the intermediate-term trend never turned up and the past couple of days tell us the sellers are still active—all major indexes we track are below their 50-day moving averages, with some (like the S&P 600 SmallCap) dipping to new correction lows. Stepping back, the longer-term trends are still positive, and the relatively resilient trading of many leading stocks is also a plus. But with the intermediate-term trend down and with the market having just enjoyed four months up without any pullback, it’s best to practice some caution—limiting new buying, not letting losses getting away from you and holding some cash makes sense. It wouldn’t take all that much strength to produce a new green light, and when one comes, we’ll adjust. But the evidence remains iffy here, and we think you should respect that.
Encouragingly, for the second straight week, the list is heavy on growth-oriented ideas that have held up pretty well. Our Top Pick, though, is Blackstone (BX), the huge Bull Market stock that’s benefiting from a company-specific change and the overall longer-term uptrend in asset values.
| Stock Name | Price | ||
|---|---|---|---|
| AAXN (AAXN) | 87.11 | ||
| Blackstone Group (BX) | 49.12 | ||
| Insulet (PODD) | 175.69 | ||
| Lending Tree (TREE) | 411.51 | ||
| Mercury Systems Inc. (MRCY) | 68.92 | ||
| Paylocity (PCTY) | 97.34 | ||
| SolarEdge Technologies Inc. (SEDG) | 124.37 | ||
| Twilio (TWLO) | 183.39 | ||
| Zoom Communications (ZM) | 155.83 | ||
| Zscaler (ZS) | 126.22 |
(AAXN)
Why the Strength
Axon (formerly known as Taser) was featured in Top Ten a handful of times last year, and after going through the wringer for a few months, looks to be back on track. The company is best known for its Taser stun guns, which have been sold to law enforcement agencies for many years, but the big-picture reason the stock is way up over the past 15 months is because the company has transformed itself into a software outfit—gone are lumpy one-time sales of weapons driving the business, replaced by a suite of software products that can take in, edit, share, store (in the cloud) and analyze video from the firm’s new body cameras (which now operate on LTE networks), resulting in a subscription-based business. Even Axon’s new Taser 7 weapons are being sold via a bundle package, which includes user training and unlimited cartridges! The numbers in the table below have been up and down, as Taser weapon sales still make up a majority of revenue (and they aren’t growing much, up just 3% in Q1, though the new 7 series should help that). But the future looks very bright—sales (up 16% to 18%) and earnings (up 36% and 32%) should expand nicely both this year and next driven by the software offerings, and key sub-metrics like annual recurring revenue ($122 million in Q1, up 47% from a year ago), cumulative software seats sold (371,100, up 64%) and total future contracted revenue ($930 million, up 43%) are all booming. To be fair, the firm has a lumpy history, but the new business model seems to be paying off.
Technical Analysis
AAXN broke out in February 2018 and enjoyed a huge run, finally topping out near 76 in July. Then came a plunge to 40, partly due to a couple of iffy quarterly reports and also due to the market. The stock didn’t bounce all that well early in the year (it was still at 46 after earnings in March), but AAXN has now been in a relatively persistent advance for a couple of months, unfazed by a one-day wobble after Q1 earnings and the market’s recent weakness. If you want in, dips of a couple of points should provide an opportunity for a small position.
AAXN Weekly Chart
AAXN Daily Chart
Blackstone Group (BX)
Why the Strength
Blackstone Group is one of the world’s leading investment firms, with its hands in a variety of cookie jars, including funds and solutions for real estate (accounting for 48% of distributable earnings over the past year), private equity (35%), hedge funds (11%) and credit (8%)—all told, the firm had $512 billion under management at the end of March (up 14% from a year ago). That makes Blackstone one of the largest Bull Market stocks out there, and that’s one reason for the stock’s strength: Given the overall bull market in stocks (despite the recent hiccups), healthy credit markets and rising asset values, the company is benefiting from greater assets under management, thanks to both strong inflows and solid realizations; in the past 12 months, the company earned $2.20 per share of distributable earnings for shareholders (that figure is up at a 19% annual rate over the past 10 years!), and it pays an irregular dividend based on this figure (37 cents per share for Q1 and $2.17 during the past year). The other reason for the stock’s strength: Blackstone is shifting from a partnership (confusing K-1 tax forms) to a C corporation (qualified dividends, 1099 tax form) by June 30, which should dramatically expand the number of funds that can buy in (only 416 funds owned shares at the end of March, which seems low to us given the firm’s stature). Bottom line, Blackstone is a best-in-class Bull Market stock and the recent C-Corp conversion should bring in new buyers.
Technical Analysis
BX has been a nothingburger of a stock for many years; it was sitting at 27 at last year’s market bottom, down from 44 way back in 2015. But the stock now appears to have changed character—BX rallied back to the mid 30s in February, tightened up for a few weeks, and then surged on huge volume after Q1 earnings and the C-Corp news in mid April. And, despite the market’s wobbles, shares have held firm since. We’re OK nibbling here or on dips toward the 25-day line.
BX Weekly Chart
BX Daily Chart
Insulet (PODD)
Why the Strength
Diabetes affects over 365 million people globally, and treatments can be improved by reducing the inconvenience and cost of insulin injections. Insulet has achieved both with its innovative Omnipod Insulation Management System, which is a pump patch that can be worn on the body and injects insulin based on pre-set parameters. Omnipod has been driving a nice wave of revenue growth for the mid-cap company, including sales of $563 million in 2018 (up 22%). It also helped Insulet achieve its first profitable year in 2018 when it delivered EPS of $0.05. The stock is doing well now because recent evidence suggests Omnipod sales remain resilient in the face of competition, and Insulet’s addressable market has grown with Medicare, Medicaid and United Health Group (UNH) coverage expansions, an ongoing shift to the pharmacy channel in the U.S. and a successful takeover of its distribution facilities and operations in Europe. Add in potential pipeline technologies, including Omnipod Horizon, which allows a user to control the patch pump with a smartphone, and Insulet looks capable of delivering on its goal of $1 billion in revenue by 2021. To get there it will need to keep growing at around 20% a year, which looks doable given the trend.
Technical Analysis
PODD went on a nice run in late-2017 and early-2018 but after that it suffered three good-sized corrections, including a deep one with the market late last year. The final of those dips occurred in April, but that proved to be a shakeout—PODD found support near 80, rallied sharply on earnings and has kept crawling higher this month even though the market is getting in the way. There should be solid support in the mid 90s if you want to enter here.
PODD Weekly Chart
PODD Daily Chart
Lending Tree (TREE)
Why the Strength
LendingTree has been a mid-cap leader all year as more and more investors see the company benefiting from an improving environment as well as some major secular trends. The big idea here revolves around the company’s leading online lending marketplace, which connects lenders and millions borrowers (including 11.4 million who are signed up for the company’s personal financial analyzer) in a growing number of fields. Historically, mortgage lending was the big draw, making up the vast majority of the firm’s revenue, but thanks to credit cards, insurance (bolstered by its buyout of QuoteWizard last year) and auto, small business, personal and home equity loans, mortgages now make up “just” 18% of revenue (down from 41% a year ago). After a tough 2018, even the firm’s mortgage lending has stabilized (it should increase sequentially in the quarters ahead), and more importantly, the other products are flying (in Q1, these other businesses more than doubled), which is driving huge top- and bottom-line growth. And this is likely just the beginning—the company thinks it has just 3% of an addressable market that’s growing every year. The Q1 report was terrific—not only did revenues pop 45%, but cash flow (a better measure of LendingTree’s profitability than earnings) rose 36% and management hiked the full-year outlook, with revenues and cash flow both expected to rise a bit over 40%. We think it’s a solid near-term (better housing market, lower interest rates) and long-term story.
Technical Analysis
TREE hasn’t made many headlines, but after a punishing decline last year (404 in January to 183 in October), the stock has been an excellent performer this year, with shares popping to 300 in January and trending higher above their 10-week line ever since. Interestingly, shares have chopped around but held firm during the market’s wobbles, with some intriguing tightness on the weekly chart. If you’re game, you could start small here with a stop under the 50-day line.
TREE Weekly Chart
TREE Daily Chart
Mercury Systems Inc. (MRCY)
Why the Strength
Mercury Systems is a leading provider of secure sensors, safety-critical processing subsystems and intelligence applications to over 25 defense prime contractors, including Lockheed Martin and Raytheon, with over 300 programs in all. Leading products include radar, electric warfare and intelligence, surveillance and reconnaissance (ISR) systems. Big picture, the stock is doing well because we’re in an environment of strong and rising defense budgets and, just as important, the U.S. military is focused on weapons modernization. Double-digit quarterly revenue growth is the norm and Mercury’s growth is expected to accelerate to 32% this year from 21% in 2018. EPS growth should follow suit, with analysts calling for 28% EPS growth, to $1.82, in 2019. Acquisitions add interest to the story (Athena Group, Syntonic Microwave and GECO Avionics were all purchased this year), but investors are mostly focused on the steady organic growth Mercury is delivering by selling things like rugged and miniaturized microwave transceivers and GPS Selective Availability Anti-Spoofing Modules (SAASM). Looking through Mercury’s order history, which shows multiple new and follow-on orders every month, it’s clear the company has highly specialized technologies that are valued by both big defense companies—and big investors.
Technical Analysis
MRCY’s stock has been performing well for over four years, though there were a couple of concerning drops last year that cut the stock down by 45% and 28%, respectively. In hindsight, those were great buying opportunities and we’re impressed by MRCY’s performance this year—the stock exploded to new highs in January after earnings and has climbed steadily higher since. There was a little selling after the Q1 report, but the dip to the 25-day looks normal so far.
MRCY Weekly Chart
MRCY Daily Chart
Paylocity (PCTY)
Why the Strength
With a market cap of $5.4 billion, Paylocity is one of the smaller companies in the Human Capital Management (HCM) software industry. Its cloud-based products cover the typical range of offerings, including Payroll, HR, Benefits Administration, Talent Management and Time and Labor Tracking. Paylocity’s sweet spot is medium to small businesses—it’s done a great job growing its base of these customers, which usually have 20 to 50 employees, because its mobile-first delivery model and cloud-based solutions are easy to set up and convenient to use. Like other successful cloud-based HCM solution providers, Paylocity has a steady growth profile. Quarterly revenue has grown in the 23% to 28% range for 10 consecutive quarters and should expand at around 22% both this year and next. As the revenue base expands, Paylocity is gaining leverage in the business, which is helping EPS push ahead at a faster than revenue. Following yet another earnings beat in Q3 fiscal 2019 (delivered on May 2), analysts are now looking for EPS to jump 125% (to $1.28) this year and 28% (to $1.64) in 2020. Of course, there are many HCM providers, but the market opportunity is huge as so many firms either have no solution or an old, ragged legacy package that needs replacing. Paylocity has a steady business that keeps customers coming back, and the opportunity for plenty of growth ahead.
Technical Analysis
PCTY gave back last year’s gains during the market swoon in November and December. But it entered 2019 around 60 and wasted no time returning to form, surging back to new highs by the end of February. That move did result in a seven-week rest, but after holding its 50-day line, PCTY has resumed its upmove, with the earnings-induced surge last week helping the cause. If you want in, you can start small here with a stop under 90.
PCTY Weekly Chart
PCTY Daily Chart
SolarEdge Technologies Inc. (SEDG)
Why the Strength
It took the U.S. solar industry 40 years to achieve one million cumulative installations (which happened in 2016), but over the past three years, the sector has reached two million, and industry analysts expect installations to double again by 2023. Tack on international installations and the numbers go up exponentially. SolarEdge is a way to play the macro trend given it does well when the volume of solar-related units goes up. The Israel-based maker of DC optimized inverter systems, solar power harvesting and PV monitoring solutions sells its products to large solar installers, engineering and construction firms and distributors and electrical equipment wholesalers. This diversity gives it a global network—only 54% of revenue last year came from the United States, with Europe (19% of revenue) and the Netherlands (13% of revenue) representing SolarEdge’s other major markets. The stock is strong today because management just reported a blowout first quarter result with 30% revenue growth and adjusted EPS of $0.64 beating by $0.07. That result, along with increased guidance for Q2, is prompting analysts to raise full-year revenue growth estimates to around 31% (EPS should stay flat). SolarEdge continues to introduce new products, including storage solutions, to stay on the leading edge. And, so far, it’s been able to pass tariffs on to customers by pushing up prices. Combined with peer Enphase Energy (ENPH) recently showing up in Top Ten, it looks like the solar sector could be getting its legs under it.
Technical Analysis
SEDG had a giant run from the low teens to as high as 71 in early 2018 before the buyers ran out of steam; shares didn’t stop falling until they reached 35, which the stock tested numerous times from last September through March of this year. But now SEDG has changed character—the stock raced up to 45, paused for a week, and has since exploded higher on huge volume after earnings. Volatility is big, so look for dips if you’re considering a position.
SEDG Weekly Chart
SEDG Daily Chart
Twilio (TWLO)
Why the Strength
Twilio continues to look like one of the top handful of well-traded leaders of this bull phase, with a growth story and growth numbers that are hard to beat. Starting with the story, the company’s communications platform is the best in the industry and is extremely pervasive—whether you’re Coca-Cola using it to automatically alert servicemen of vending machines are out of order, Trulia using it to quickly text agents when a potential buyer fills out a contact form online or little old Cabot using it to route some phone calls to the right person, Twilio appeals to thousands of firms. And as the need to communicate with vendors, customers, employees and suppliers grows, so, too, will use of the platform. (Indeed, the firm’s same-customer revenue growth of 46% in Q1 is about as high as we’ve ever seen.) Moreover, the acquisition of SendGrid’s best-in-class email capabilities not only boosts the platform’s usefulness but also adds 84,000 customers and, hence, a ton of cross- and up-selling opportunities. As for the numbers, revenue growth has accelerated for a few straight quarters (even without the SendGrid buyout, revenue growth chimed in at 60% in Q1), with earnings consistently in the black (though not growing much as Twilio invests heavily). Analysts see the top line up 70% this year and another 33% next, with earnings set to pick up steam in 2020, but all of those figures could easily prove conservative given the underlying trends.
Technical Analysis
TWLO held up very well during the market meltdown last year and ran steadily higher into mid-March, when the stock hit some resistance near 136. And the next few weeks have mostly brought a rest period—shares moseyed sideways for a few weeks and, last Monday, dipped below their 50-day line on big volume. But the action after that was eye opening, with TWLO spiking to new highs on big volume before being yanked lower again by the market. You can consider a small position around here and using a loose stop.
TWLO Weekly Chart
TWLO Daily Chart
Zoom Communications (ZM)
Why the Strength
Names like Pinterest, Uber and Lyft have gotten most of the hype, but of the recent IPOs, we’re most intrigued by Zoom Video, which is playing in a massive market, sports lightning fast growth and has a stock that’s well traded (north of $100 million per day). The company looks like a disruptive player in the video conferencing market, which, despite being around for years, is still riddled with issues; one firm estimates 94% of virtual meetings are still audio only because current solutions have too many snafus. Zoom’s solution is built from the ground up as a cloud-native, video-first platform that includes proprietary multimedia router optimized for the cloud and a global architecture. By contrast, many competitors have simply added video on top of platforms that were originally built for conference calls or chat. The result: Far higher ease of use, higher-quality video and many loyal customers, thanks in part to its 24/7/365 customer support. (A striking example: One hospital uses Zoom to connect specialists live into the operating room to improve and quicken surgeries.) All told, the videoconferencing market is huge ($11 billion estimated in 2023), but the ultimate potential market could be quadruple that as Zoom’s solution catches on and more firms and entities are enticed to switch from audio to video. Zoom’s revenues grew at triple-digit rates last year, with the firm eking out a small profit. Of course, the valuation is massive, so there’s risk, especially with a quarterly report coming out on June 6. But the story and numbers cant be ignored.
Technical Analysis
ZM priced its IPO at 36 but closed its first day of trading at 62 and quickly soared to 80 in early May. Even better: As the market has wobbled during the past two weeks, this stock held relatively firm, and as soon as the pressure came off the market last week, ZM exploded to new highs above 90. Obviously, volatility here is going to be off the charts, especially with earnings coming up. If you want in, keep positions small, aim for dips and use a loose leash—or just keep it on your watch list and see what earnings bring.
ZM Weekly Chart
ZM Daily Chart
Zscaler (ZS)
Why the Strength
Zscaler keeps jumping onto our radar because the stock continues to make new highs (despite an iffy market) and the fundamentals look terrific. If you’ve missed our coverage on the name so far, the backstory is that Zscaler is one of the leading mid-cap stocks in the cloud-based software security space. It’s addressing a big and growing market, and the company is winning business in part because management anticipated that cloud computing would change the industry and, in turn, developed a multitenant security platform from the ground up to meet customers’ evolving needs. The company focuses on large enterprises, and given the trends of greater reliance on mobile, cloud and internet-based solutions, all of which open customers up to security vulnerabilities, the long-term growth potential is huge. Basically, instead of having to protect the “perimeter” of a network when everyone worked in the office, global firms must now have a new solution for a dispersed and mobile workforce. Revenue was up 51% in 2018, is projected to grow another 52% this fiscal year (ends in July), then jump 34% in fiscal 2020. This year should also mark the first full year of profitability (EPS of $0.12 expected). The next big event will be earnings, which are due out May 30.
Technical Analysis
ZS built a great-looking base from September through mid-February, then blasted off on Q4 earnings and ran as high as 73. The pullback from there was sharp, but found support at the 50-day line, and ZS has actually boomed to new highs on big volume during the past two weeks despite the market retreat. We’re OK nibbling on this dip, but keep it small given the market and the upcoming earnings report.
ZS Weekly Chart
ZS 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.
