Excellent Snapback, but Still Question Marks
Current Market Outlook
Last Wednesday’s huge decline was a shot across the bow—most indexes threatened the lower end of their three-month trading ranges and even the strong Nasdaq showed some abnormal action. But few leading stocks broke down, and the action since then has been encouraging, with the indexes snapping back toward their highs. Overall, we remain more bullish than not, but given Wednesday’s action and the continued sideways action for most of the market, we’ll nudge our Market Monitor down a notch to level 7 and watch the next few days closely. Another big bout or two of distribution would darken the intermediate-term outlook, but the longer the market can hold up (or advance) from here, the greater the odds that last Wednesday was a news-driven shakeout.
In the meantime, we continue to find a variety of great charts and stories in a few different sectors. We’re sticking with the big-cap theme with our Top Pick this week—Global Payments (GPN) isn’t a barnburner but it has surged out of 13-month base on great earnings.
| Stock Name | Price | ||
|---|---|---|---|
| Adobe Inc. (ADBE) | 315.23 | ||
| Boyd Gaming Corporation (BYD) | 0.00 | ||
| Deere & Company (DE) | 0.00 | ||
| Global Payments Inc. (GPN) | 0.00 | ||
| MiMedx Group (MDXG) | 0.00 | ||
| Parexel Corp. (PRXL) | 0.00 | ||
| RingCentral (RNG) | 238.73 | ||
| Teladoc, Inc. (TDOC) | 127.95 | ||
| Vertex Pharmaceuticals (VRTX) | 230.36 | ||
| Yum China (YUMC) | 0.00 |
Adobe Inc. (ADBE)
Why the Strength
Adobe Systems remains one of the market’s liquid leading growth stocks because it’s at the heart of the wave of content creation in today’s internet-centric world. Years ago, only professionals created digital content, but today, everyone is a potential Adobe customer, whether it’s a student doing a photography project, a film maker, or a Fortune 500 digital marketing manager. Adobe has always had the leading products in this field with Photoshop, Illustrator, InDesign, Premier Pro and other software, and demand has been soaring as the digital revolution continues. The company is also doing great business in marketing services (analytics, cross-channel campaign management and the like) and digital document services, which allow businesses to transition from inefficient paper-based activities, but the Creative Cloud suite of offerings is what’s driving business today. Also helping has been the firm’s transition to a subscription-based model, which has lowered entry prices (and thus bolstered overall subscriptions), yet boosted the lifetime value of subscribers and renewal rates. The results have been pristine: In the quarter ending in February, revenues rose 22%, earnings were up 42% and cash flow from operations totaled $730 million (55% more than net income), up 47% from a year ago. Analysts see earnings up 31% this year and another 26% next. Adobe remains a great story.
Technical Analysis
One pattern we like to see is when a stock has been advancing persistently (relatively smoothly for many weeks) and then has a sharp shakeout that finds support. That’s what ADBE may be offering here—shares had been plowing higher since the calendar flipped but then dipped suddenly to their 50-day line last week before finding support. Encouragingly, the volume on Thursday and Friday (when the stock rebounded) were both larger than Wednesday’s dip. You can buy some here with a stop near the 50-day line.
ADBE Weekly Chart
ADBE Daily Chart
Boyd Gaming Corporation (BYD)
Why the Strength
Boyd Gaming is a U.S. casino operator with a string of 24 casino/entertainment locations in 14 markets in seven states. While bigger gambling companies have moved major operations to Macau, China, Boyd is sticking to the U.S., with Las Vegas casinos that cater to residents, and operations in Chicago, New Orleans, Biloxi, Memphis, Shreveport and Wichita. Boyd Gaming is a modest turnaround situation. After three years of revenue declines, the company’s Q1 earnings report showed a 10% jump in revenue and a 45% increase in earnings. The company also affirmed its full-year guidance, reinstated its quarterly cash dividend (five cents per share) and reaffirmed its existing share buyback program that has $92 million left in the tank. Boyd has increased its footprint in the Las Vegas area with the acquisition of three existing casino/hotel operations and is in a multi-year, $100 million campaign to update and upgrade its hotels, bars and restaurants. Like all casino operators, Boyd’s business has a cyclical element, but right now, the cycle is in a definite uptrend.
Technical Analysis
BYD made a great run from 9 in October 2014 to 21 in November 2015, but then spent 16 months trading under resistance at 21. The breakout came at the end of March 2017 when BYD finally topped 22. The stock kept climbing, and got a major boost from the constructive earnings report on May 3 when it jumped from 22 to 24 on more than triple its average volume. BYD has continued to climb since then; it’s a buy anywhere under 25, with a stop around 22.5.
BYD Weekly Chart
BYD Daily Chart
Deere & Company (DE)
Why the Strength
There aren’t many U.S. companies whose history goes back more than 200 years, but Deere is one of them. The company’s distinctive green tractors are a common sight in farming areas and its combines, backhoes, forestry equipment and turf equipment are sold around the globe. The persistent depression in commodity prices has kept a lid on the company’s revenue, with three years of declines, including a 20% dip in 2015. But the company has kept earnings positive via a stringent program of cost reduction, and now we’re seeing evidence of a turnaround. The company’s Q1 earnings report on May 19 featured strong growth in sales of farming equipment in South America that pushed revenue ahead of expectations. Revenue growth of 5% and a 37% jump in earnings really caught investors’ attention. Analysts are calling for 10% earnings growth this year and 12% in 2018. Deere also pays a dividend with an annual yield of 2%. Management is cautiously optimistic for the coming year, which says more about the uncertainty of agriculture than the strength of Deere.
Technical Analysis
DE has been an income stock for years, with little appeal for growth investors. That changed in late 2016 when the stock caught a major updraft in November that propelled it past 100 after years of resistance in the 90s. DE followed through on that breakout with a slow advance to 112 in February, where it hit resistance that lasted until April. DE gapped up by a couple of points on April 25 and began using its old resistance at 112 as support. So when the earnings report last Friday was good, the stock had a good base for its leap above 120. We think you can buy DE on any weakness of a couple of points, with a loose stop around 105.
DE Weekly Chart
DE Daily Chart
Global Payments Inc. (GPN)
Why the Strength
Global Payments provides payment technology services so its customers can accept all types of payments (card, electronic, check and digital) all over the world. The company sells solutions that integrate payments into enterprise software, facilitate payments for e-commerce and omnichannel businesses, and provide cash access to gaming markets. Revenue growth was averaging around 10% per quarter until a year ago, then the $4.4 billion acquisition of Heartland added to both the top and bottom line. The stock just broke out in early May after Global Payments reported 47% revenue growth, EPS growth of 33% to $0.85, and an increase in full-year guidance. Based on high customer retention, integration of recent acquisitions (including Heartland) and strength in Europe and APAC, consensus is now calling for $3.4 billion in sales this year (up 19.4%) and EPS of $3.91 (up 23%). Analyst upgrades have poured in and price targets are falling in the 90–100 range. We see those targets inching higher as the company executes, given the company’s high level of profitability and the relatively stable nature of its revenue base. The stock trades at a small premium to the S&P 500 in terms of valuation, but given the faster top and bottom-line growth, big investors should remain interested.
Technical Analysis
GPN didn’t do a whole lot after the Heartland acquisition closed last year. Shares bounced around in the 70-80 range until a shakeout to 65 in November 2016. A solid quarterly earnings report in January finally catalyzed a jump to 80, but then the stock resumed the sideways trading pattern, albeit in a higher and tighter range of 75-82. The May 4 Q1 earnings report sent the stock up to 86, and it has walked up to 91.5 over the past couple of weeks. Try to buy on dips.
GPN Weekly Chart
GPN Daily Chart
MiMedx Group (MDXG)
Why the Strength
The human body is not bad at self-healing minor cuts, breaks and bruises, but more significant injuries require some assistance. MiMedx is trying to increase the number of applications where products derived from human tissues can supplement what the body can do on its own. The regenerative biomaterials specialist makes implantable tissue products that are derived from human placenta tissue, umbilical cord tissue and amniotic fluid. The main end markets it currently serves are wound care, surgical, sports medicine, nerve and tendon repair, burn treatment and spine repair. Business has been good, with sales up 31% in 2016 to $245 million and consistent profitability (EPS of $0.22 in 2016). Some of this growth is due to acquisitions, which have helped position the company for an aggressive transition to a biopharmaceutical company by 2020. By that point, management believes it can triple revenue to $560 million and more than quadruple EPS, to $1.00. The company’s initial biopharma focus will be pain management; MiMedx’s strategic plan highlights just the knee, foot and ankle markets as being worth $4.7 billion, based on $500 injectable doses that it expects to be far more effective than physical therapy, current drug options and even joint replacement. Investors should take it one step at a time and set reasonable expectations, including 25% revenue growth in 2017.
Technical Analysis
MDGX has been on fire since February when the stock finally reversed a two-month slide (from 10 to 7.6). Shares moved above both their 50- and 200-day moving averages in early March at 8. Since then, there have been very few down days. Volume increased in mid-April when the stock moved back above 10. Then a heavy day at the end of the month sent shares above 12.5. They topped out at 15.4 last week when Wednesday’s market selloff dropped the stock back to 14.5. If you’re game, you could nibble here.
MDXG Weekly Chart
MDXG Daily Chart
Parexel Corp. (PRXL)
Why the Strength
There are three stories supporting Parexel International right now. The first is the long-term story of the successful drug-research business in which Parexel is a prime outsourcer for pharmaceutical companies wanting to save money on clinical research, medical communications and commercialization activities. Massachusetts-based Parexel is a capable partner for many international pharmaceutical businesses, though sales and earnings growth has slowed in recent quarters. The second story, is Parexel’s earnings report on May 3 that beat analysts’ expectations of 73 cents per share in earnings by a penny while its revenue of $605 million matched projections. That report triggered a rally in the company’s stock. But it’s the third story that’s really heating things up for Parexel’s investors. An activist hedge fund called Starboard Value recently disclosed a 5.7% stake in Parexel, along with a demand that the company either improve results or seek a buyer. Parexel was already well into a program of cost-cutting via layoffs, so Starboard’s demands seem to conform to reality. If either of Starboard’s demands—the improvement of results or the sale—is met, investors stand to benefit.
Technical Analysis
Until a couple of weeks ago (despite a brief tick up to 76 in August 2015), PRXL had been stuck under resistance in the low 70s since March 2016. The good earnings report in early May changed that and the stock was heading up when news of the activist investor’s demands really lit a fire under it. PRXL nicked 80 on May 16 and is hanging around that level now. There’s a lot of uncertainty about the company’s future, but the potential changes look like they will only increase its stock price. There’s no certainty in either one, but if you like the odds, you can buy a little right here, with a tight stop below 74.
PRXL Weekly Chart
PRXL Daily Chart
RingCentral (RNG)
Why the Strength
RingCentral is one of many successful cloud software companies these days, and the stock is strong today as the company continues to crank out better than expected results in its niche. That niche is an important part of the attraction—RingCentral offers a communications platform for businesses that unifies messaging, voice, conferencing, online meetings and other types of collaboration, something few others focus on. But this company is proving it can be a very lucrative market. In the first quarter, revenues rose 29%, though the more important recurring software subscription revenue figure was up 32%, with the firm’s core RingCentral offering up 39%. Moreover, more than 40% of new RingCentral business came from existing customers, and the momentum in business from mid-market and enterprise customers (where revenues leapt 85%) points to continued strong growth ahead. Indeed, management sees revenues up nearly 30% this year, and then believes it can more than double between 2018 and 2020 all while profitability (especially cash flow, which was four times as large as earnings in Q1) expands at an even quicker clip. Eventually, there could be some big-fisted and more focused competition, but today, the company has made a name for itself in the communications space and it’s paying off in spades.
Technical Analysis
RNG effectively built one big, giant post-IPO base from March 2014 through February 2017, but it kicked off a new advance following fourth-quarter earnings in February and has been trending nicely higher since. RNG, in fact, hasn’t dipped below its 25-day line since it got going, and performed well during last week’s volatility, actually notching new highs on Friday. We think aiming for dips toward the 25-day line (now near 32) make sense for a buy point, with a stop around 29.
RNG Weekly Chart
RNG Daily Chart
Teladoc, Inc. (TDOC)
Why the Strength
We recommended Teladoc on March 27 and were shaken out on a pre-earnings dive, but we’re going back to the well this week because the company’s story, and the stock’s recent action, bodes well for higher prices. Teladoc is the hands-down leader in telehealth, which allows users to talk or video chat with a board-certified doctor within minutes, and even get a prescription if need be. Businesses sign up to offer their employees this service, which works for them by reducing employees’ time spent visiting doctors. And medical providers are pushing it because it often cuts down on expensive ER and doctor visits. (The company is also expanding into new services like behavioral health and dermatology.) Teladoc makes money by charging both subscription fees and tele-visit fees (on certain types of visits), and both are booming—in the first quarter, total revenues grew 60%, with subscription fees up 66% (making up 80% of total revenues) and visit fees rising 39%. (Total tele-visits rose 60% to nearly 385,000 in the quarter.) All told, membership rose to 20.1 million (up 34%), bolstered by implementations for Marriott Vacations, Yale University, Southern California Edison and health plans like Fallon and Aultcare, among others. (During the quarter, Dillard’s, Bayer and Paychex signed up, too.) There’s plenty of red ink here, but management continues to aim for cash flow breakeven by the end of the year. This is a mass market that could take the company far in the years ahead.
Technical Analysis
TDOC got going in late January and accelerated higher in March, when it appeared in Top Ten. But after a month of choppy trading with the market, shares broke their 50-day line on big volume in early May, tripping our stop. But then TDOC immediately soared right back! Such action can be frustrating, but the pattern (we call it a shake-and-snap) portends good things, and TDOC’s resilience last week is a good sign. You can buy a little here or on dips, with a loose stop near 26.
TDOC Weekly Chart
TDOC Daily Chart
Vertex Pharmaceuticals (VRTX)
Why the Strength
Shares of Vertex jumped back onto our radar in early April, right after the cystic fibrosis (CF) specialist released favorable Phase III results on a combo therapy that included its VX-661 drug candidate. The trial results showed that VX-661 helped lung functions for CF patients over 12 years old with certain conditions. The news sent shares up nearly 20% overnight and prompted a slew of analyst upgrades based on much higher probabilities that at least one of Vertex’s drugs will ultimately be approved for this difficult to treat population. It hasn’t hurt that the M&A rumor mill is grinding again given Vertex’s potential to add a third treatment to its stable of CF drugs. Vertex currently sells Orkambi for the treatment of CF in patients over six with two copies of the F508del mutation, and Kalydeco for treatment CF patients over two that have one of several mutations in their CF gene. This year’s revenue from Orkambi and Kalydeco should come in at roughly $1.2 billion and $720 million, respectfully. This would represent around 30% revenue growth. And Vertex has the added allure of over 80% expected EPS growth this year. Given that a third CF treatment could easily generate an incremental $2.5 billion in peak sales, it’s easy to see why big investors remain interested.
Technical Analysis
VRTX was up and down in the 70-100 range for most of 2016. But shares jumped into action at 75 in early 2017, and rallied to 95 by the second week in March. A brief retreat to 90 came just before the favorable Phase III data readout, after which shares immediately gapped up to 107. The stock walked up to a high of 122 by the beginning of May. Since then, it’s been consolidating in the 114-120 area. You can buy a little around here.
VRTX Weekly Chart
VRTX Daily Chart
Yum China (YUMC)
Why the Strength
Good-sized spinoffs from bigger outfits can often be a source of new market leadership, and we think Yum China fits the profile perfectly. The company is the Chinese arm of giant Yum Brands, having been spun off last November from its parent. Yum China has more than 7,600 quick service restaurants in China, most of which (about 5,300) are KFC locations, with Pizza Hut (1,700 locations), Taco Bell and some homegrown brands making up the rest. In our view, the stock has three things going for it. First and foremost, the most recent quarterly report (for the quarter ending in February) revealed positive same-store sales growth and a good-sized beat on the bottom line; analysts see earnings up 17% this year, and free cash flow (71 cents per share last quarter) is much larger than earnings. (In terms of costs, the firm is making a bigger move into online ordering and loyalty memberships.) Second, the long-term growth story here is big—Yum China is aiming for a 7% to 8% boost in the store count this year and believes it can eventually triple its store base in China thanks to its excellent store economics (KFCs pay back the initial investment in three years, Pizza Hut’s in four years). And third, the stock is relatively new, which means there are more potential buyers than sellers; big investors will take time to build positions as they anticipate years of solid growth. We like it.
Technical Analysis
YUMC formed an excellent post-IPO base with lots of tightness and then blasted off on earnings in early April and followed through on the upside, rallying to north of 35 in early May. The stock finally pulled back at that point, moving sideways for about three weeks as the 25-day line caught up. And then YUMC rallied to new highs late last week as the market bounced back from Wednesday’s decline. You can buy some here or on dips.
YUMC Weekly Chart
YUMC 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.
