Onus Remains on the Bulls
Current Market Outlook
Last week was the third straight down week for the major indexes. More importantly to us, all remain clearly below their 50-day moving average. That keeps the intermediate-term trend pointed down, which combined with some soggy action from key groups (oils and chip stocks look like death) is a good reason to remain relatively cautious. Of course, not all is bleak—the longer-term evidence is still positive, and most leading stocks are in decent shape (though many did take on water last week). Overall, then, the song remains the same: We advise holding most of your strong, profitable stocks, but also holding a good-sized chunk of cash and being very choosy on the buy side. The onus remains on the bulls to retake control—until then, step lightly.
This week’s list has another strong group of stocks; a nibble here or there is fine, or simply put your favorites on your watch list. Our Top Pick is Array Biopharma (ARRY), which emerged on big volume last week, and it helps that many biotech names are acting resiliently.
| Stock Name | Price | ||
|---|---|---|---|
| Array Biopharma (ARRY) | 46.35 | ||
| Ascendis Pharma (ASND) | 119.09 | ||
| Copart (CPRT) | 74.80 | ||
| GW Pharmaceuticals (GWPH) | 174.52 | ||
| Legg Mason Inc. (LM) | 37.44 | ||
| PulteGroup (PHM) | 45.93 | ||
| RingCentral (RNG) | 238.73 | ||
| Sea Limited (SE) | 132.86 | ||
| Viasat (VSAT) | 81.22 | ||
| Wix.com (WIX) | 302.53 |
Array Biopharma (ARRY)
Why the Strength
Despite a solid first few months of the year for growth stocks, biotech names have mostly been the dog’s dinner, but we’re beginning to see many perk up even as the market continues to struggle. A name we’ve been following off and on for the past few months—and one of our top ideas in the sector—is Array Biopharma, which is transitioning to a commercial-stage outfit after years of trials and research. The draw here are two drugs (Braftovi and Mektovi) that were approved last year for the treatment of a subset of melanoma patients that have a certain gene mutation; they were just launched in the middle of last year, but sales are ramping steadily ($14 million, $23 million and $35 million the past three quarters), and that should continue as penetration picks up in the U.S. and as sales efforts in Europe and Japan (launched February 26) pick up steam. The melanoma business alone should be big, but the reason the stock popped last week was because it looks like Braftovi and Mektovi are going to be a big player in treating a chunk of colorectal cancer patients, too—a study released last week showed combination treatments that included Array’s two drugs led to a meaningful improvement in overall response rate and survival. (Filing for approval/expanded label should happen in the second half of 2019.) Given that there are no FDA approved therapies for this group, the potential is big. Losses should continue through 2020, but revenues are expected to boom 56% this year and 31% next, and the latter figure could rise with the new data. We like it.
Technical Analysis
ARRY hit 18 in March of 2018 and was sitting at 13 at last year’s December bottom, but the stock was an early leader of this year’s advance—shares showed strength in January and then zoomed to new highs after earnings in February. The stock did sag for six weeks after peaking near 25 (living below its 50-day line), but last week looks like a trend change, with ARRY booming to new highs on monstrous volume following the trial data. You can start small on dips.
ARRY Weekly Chart
ARRY Daily Chart
Ascendis Pharma (ASND)
Why the Strength
Ascendis Pharma is a Danish company that’s developed a drug delivery technology that extends the duration of a drug’s action in the body. Called TransCon, the delivery technology releases the unmodified drug at predetermined rates, while preserving its original mode of action. The stock exploded to all-time highs in March when data came out that supported TransCon’s hGH (in Phase 3) superiority. The event also cut the stock’s risk profile given that investors could be confident that the platform technology worked and Ascendis has at least one asset with a good shot of making it to market. Since then, the focus has been mostly on the company’s broader portfolio of three rare disease endocrinology candidates, TransCon hGH for hormone deficiency, TransCon PTH for hypoparathyroidism and TransCon CNP for achondroplasia, as well as the potential in oncology. Early estimates suggest TransCon hGH could generate $2 billion in annual revenue with approval likely in 2020. The next big checkpoint for investors will come at the June 26 R&D Day, when management is likely to review the entire pipeline and potential time to market for the leading candidates. As with all pre-commercial biotech stocks, the risks are elevated, but so too is the potential reward, and we see the action in the stock as evidence that big money is working its way in.
Technical Analysis
Early last year ASND basically doubled in value over a three-month time frame, then spent the rest of 2018 trading in a 20-point range between 55 and 75. The big breakout came in early-March when ASND gapped up 74% to close at 120. It reached an all-time high of 131 about a week later, and has built a decent-looking launching pad since. You can consider grabbing a small position on dips, using the 50-day line as a stop.
ASND Weekly Chart
ASND Daily Chart
Copart (CPRT)
Why the Strength
When you think of great growth companies, Copart doesn’t usually get into the conversation, but maybe it should—the company has grown earnings in all but two years since 2000 (sales up all but one year during that time), rising from 9 cents per share to an estimated $2.21 this year. And it’s produced that growth in an unusual business—the firm is a global leader in online salvage vehicle auctions, with well over 100,000 vehicles on auction at any one time (everything from classic autos to popular models to industrial vehicles), backed up by an infrastructure of more than 200 physical locations (for inventory and pickup) in 11 countries. The firm has a few hundred thousand members that include dismantlers, dealers, salvage buyers and even individuals (total buyers up 14% domestically in Q1, including international buyers up 22%), while the inventory comes from deepening connections in the insurance industry and elsewhere. Growth slowed to a crawl a couple of years ago, but it picked up last year and the stock remains strong because it remains in good shape today—in the quarter reported last week, sales (up 16%) and earnings (up 27%) both topped expectations, and investors were encouraged with the underlying trends in the business (aging vehicle fleet overall; more easily rebuilt cars these days). Analysts see the current year (ending July) showing 28% earnings growth, with 14% next year—which is likely conservative. It’s not changing the world, but Copart remains a solid growth company.
Technical Analysis
CPRT’s had a great run since early 2016, zooming from 20 to as high as 67 last year, before a poorly received earnings report in September caused a big breakdown. Shares didn’t stop falling until they hit 45 in December, but have gotten back on track this year. More recently, after kissing its old high and pulling back to its 50-day line, CPRT surged to new highs on two nice days of volume last week. We’re OK nibbling on dips with a stop under the recent low.
CPRT Weekly Chart
CPRT Daily Chart
GW Pharmaceuticals (GWPH)
Why the Strength
It’s no secret that marijuana and CBD stocks have been on fire. But you don’t have to go with the flock of growers, packaging companies and hemp derivative companies to play the trend. GW Pharmaceuticals has been researching cannabinoids for two decades and is one of the global leaders of plant-derived CBD therapeutics. The stock is doing well because GW recently launched its flagship product, Epidiolex, into the U.S. market and it’s off to a great start. Revenue in Q1 (reported in early May) was twice as good as expected with Epidiolex bringing in $33.5 million in sales. The treatment is for a couple of congenital seizure conditions known as Dravet and Lennox-Gastaut syndrome. With a pending label expansion for Tuberous Sclerosis (pivotal Phase 3 data was good) and several off-label uses for the general epilepsy patient population, plus an annual sticker price of around $30,000 per patient, the market potential for Epidiolex is now looking far bigger than initially anticipated. The drug is early in its launch and there are more potential treatments in the pipeline (one of them, dubbed, nabiximols, is a treatment for MS and enters Phase 3 later this year), so if all goes well growth should remain solid for years to come. Current consensus is for revenues to hit $169 million this year, then grow 182% to $476 million in 2020. It’s looking like a monster story.
Technical Analysis
GWPH has had its ups and downs over the years, including last year’s rush to 180 in September and 50% decline to 90 in December. But the stock spiked back to the 180 range in February (up nine weeks in a row), built a solid nine-week base after that and has been toying with a breakout in recent weeks. We like the resilience and the volume clues—we’re OK picking up some shares around here.
GWPH Weekly Chart
GWPH Daily Chart
Legg Mason Inc. (LM)
Why the Strength
It’s interesting that our screens are picking up on a fair number of Bull Market stocks that are showing strength despite the market correction, with LPLA two weeks ago, BX last week, and now Legg Mason appearing this week. Unlike the prior two, we can’t say there’s a solid growth story here, as it mostly rides the market’s ups and downs—the company has $768 billion in assets under management, and it’s spread around in fixed income fund ($423 billion), equity ($209), alternatives ($69) and liquidity-related funds ($67), but any increases generally come from the market itself (Q1 actually saw a net $8 billion outflow, with April showing a mere $1.2 billion inflow). Combined with some horrible recent quarterly results, why is the stock acting well? Two reasons. First, the top brass is starting to focus on costs—it’s spending $140 million to tweak/cut compensation and boost efficiencies, but sees this one-time cost leading to $100 million of savings annually (well over $1 per share) by the end of 2021, which by itself should help stabilize earnings. (Indeed, Q1’s earnings tally of 70 cents was 16 cents above estimates.) The second reason for the strength: The stock is very cheap at just 12 times earnings, especially when you consider the recently raised dividend yields 4.3%! Throw in some potential longer-term upside from an overall bull market, and Legg Mason could be a special situation that runs for a while.
Technical Analysis
LM was at 140 in 2006, 59 and 2015 and 47 in 2018, so this isn’t a long-term winner. But it has shown the ability to trend higher for months at a time, and after the 11-month decline last year, it looks like a new upleg is underway. The initial recovery following the December low was decent, but the real action began in early April, when LM surged on many days of big volume, tightened up for a few weeks and then shot ahead following Q1 results. You can consider entering on dips to the 25-day line.
LM Weekly Chart
LM Daily Chart
PulteGroup (PHM)
Why the Strength
Homebuilding stocks had their own bear market last year (down 39% from January through the December bottom), but things have been improving this year—the industry saw a multi-year high in new home sales two months ago, and with mortgage rates declining, unemployment low, wages growing and no China exposure, investors are supporting the group. Pulte is one of the big boys of the sector, with sales north of $10 billion and operations in a couple dozen states in the east, south and western U.S. (Florida is its biggest market, bringing in 19% of revenue last year), selling homes at a range of price points (26% of closings were under $300K, 25% above $500k). Business has slowed the past couple of quarters, but there are a couple of things that are helping the stock. First, Pulte likes what it sees out there—it’s actually boosting land investment this year by 10% due to the positive environment. Second, having already gone through the wringer, the stock is dirt cheap (9 times earnings, even with a 1.4% dividend yield). And in response, management has been buying back a good amount of stock; the share count was down 3.3% from the prior year in Q1, and the top brass just approved an addition $500 million repurchase authorization ($700-plus million total), too. Thanks partly to those buybacks, earnings are forecast to remain elevated both this year and next, which doesn’t jive with the stock making no net progress since early 2018. We think Pulte can be a solid turnaround play.
Technical Analysis
PHM mostly followed the sector’s lead last year, as shares fell from 35 in January and bottomed below 21 in October (down 41%), then bounced back into the upper 20s by January. The stock then went flat for nearly three months, but after holding support near 25 in March, PHM has shown impressive action, rising to its highest level since last June and holding its 25-day line even during the market’s recent declines. If you want in, you can start a position here with a stop around 29.
PHM Weekly Chart
PHM Daily Chart
RingCentral (RNG)
Why the Strength
RingCentral has had a huge run during the past couple of years, which can make it choppier and harder to handle, but there’s no denying it has a great story, great growth numbers and room for a ton of expansion ahead. The company is one of the leaders in a new-ish field known as Unified Communications (UC), which is built around a big change in how and where people work—instead of John Q. Public heading into the office and sitting at his desk all day and talking a bunch over a land line, he’s now working from a variety of places (home, office, road, client site) and communicating via mobile phone, messaging, videoconferencing and the like. RingCentral’s platform and offerings are easy to implement and boost productivity of clients, and the industry is poised for years of growth; management thinks there’s 100 million potential users of UC out there, but just a few million have upgraded to this point. There is competition (including recent hot IPO Zoom Communications, though it’s not their main focus), but RingCentral is by far the top dog, and it’s benefiting in a big way, especially as it moves up the food chain—revenues have grown between 30% and 35% each of the past nine quarters, and in Q1, annualized recurring revenue from the core RingCentral offering leapt 36%, including a whopping 95% leap in that figure when looking at enterprise clients. Earnings growth has been spottier, but cash flow is strong and the outlook is bright.
Technical Analysis
RNG originally broke out in February 2017 (its first feature in Top Ten was in March 2017) back at 27, so it’s not in the early stages of its advance. But it’s hard to say there’s much distribution from big investors—shares returned to new highs in mid February, and while it dipped below its 50-day line in April (shaking us out!), it’s pushed to higher highs since then and held up well during the market’s downturn. If you want in, dips under 120 should provide an entry.
RNG Weekly Chart
RNG Daily Chart
Sea Limited (SE)
Why the Strength
We covered Sea Limited at the end of April, and after another blastoff rally following the release of Q1 earnings early last week, it’s earned another spot in Top Ten. First, the backstory: Sea Limited is an internet platform company focused on Southeast Asia that is backed by China’s Tencent. The company is tapping into the two big trends of online gaming and e-commerce—the Garena gaming unit, led by Free Fire, is the cash cow, but the e-commerce division, Shopee, is also posting insane growth and is now the most downloaded shopping app in Southeast Asia and Taiwan. Sea Limited’s management seems to have figured out how to monetize the relatively new platform, and that’s driving higher investor confidence. Revenue has grown by 118%, 127% and 127%, respectively, over the last three quarters; consensus estimates now suggest 94% top line growth, to $2.04 billion this year, followed by 40% growth in 2020. But let’s be honest— analysts are still trying to figure this company out, which can be seen by the fact that Q1 revenue beat by 33%! Sea Limited’s games are expanding beyond Asia (more releases are on tap) and Shopee could still be early in its growth phase. It’s not without risks, but if you want exposure to global gaming and emerging market e-commerce, this is the stock to own.
Technical Analysis
SE came public at 15 in October 2017 and got off to a slow start—that is until after the Q4 report in February 2019. The massive earnings beat drove a gap up to 22. SE then walked up to 25 over the following three months before gapping up to 31.5 after last week’s earnings report on another round of heavy volume. The pullback of the past three days looks normal, and we’re not opposed to nibbling here or (preferably) on further weakness.
SE Weekly Chart
SE Daily Chart
Viasat (VSAT)
Why the Strength
Viasat is a global communications company that has developed a platform of satellites, ground infrastructure and user terminals to deliver high-speed, high-quality broadband solutions to enterprises, consumers and government entities (it gets a good portion of revenue from contracts with the U.S. government) around the world, whether they be on land, over water or in the air. The stock is doing well now because the company has put some issues behind it and last week reported fiscal 2019 Q4 results that beat on both the top and bottom-line. Revenue in the quarter was up 27%, bringing the full-year growth rate to 30%, while EPS of $0.33 was $0.27 better than expected. Performance was partially driven by an insurance claim for the ViaSat-2 satellite that had been damaged but is now up and running. But that aside, analysts see the government systems division outperforming, 189 commercial plane additions (versus 175 expected) and 15% growth in average revenue per residential customer as bullish data points. Big picture, confidence in Viasat’s future is rising because management is executing a rationale growth agenda complete with satellite service expansion in international markets (Latin America and China) and momentum in commercial aviation, a market GoGo has thus far excelled in.
Technical Analysis
We like to see stocks that break out of long trading ranges, and that’s exactly the scenario with VSAT. Through the end of March 2019, VSAT had spend 300 days trading in the 56 to 80 range. There was a gap up in January that could have tipped investors off to a coming rally. But to our eye it was the jump above the previous high of 80 in early-April, followed by last week’s gap up over 94, that’s the most convincing evidence that VSAT’s uptrend can continue. If you’re game, aim to get in on weakness.
VSAT Weekly Chart
VSAT Daily Chart
Wix.com (WIX)
Why the Strength
Wix.com is a $6.5 billion market cap software company that offers a web development platform aimed at the small businesses and start-up market. Its specialty is really helping these small fries develop their own, attractive websites. Wix.com’s market focus and freemium model (it offers a free version of drag-and-drop website development tools for clients that are willing to tolerate advertisements) have resonated with the throngs of potential users looking to expand their online presence. But the company isn’t resting on its laurels—Wix.com is now embarking on a well-received effort to follow GoDaddy and move upmarket to attract larger customers. That means higher spending, which drove an EPS miss in Q1 2019 results (revenue up 26.5% to $174 million, EPS of $0.03 missed by $0.05). Management says its research shows personalized support is highly valued and thus will spend $15 million this year to build out Customer Solutions, so analysts have revised EPS estimates down to reflect a 12% decline, to $0.93 this year. Still, with revenue growth expected at around 27% annually for the next two years, and upside potential from a new payments solution and an existing technological advantage, investors approve of the investments and are bidding up the stock.
Technical Analysis
WIX rallied early last year and shares peaked at 121 at the end of September. They then spent the next 95 days retreating 36%, then reversing course and shooting right back up to 121. It wasn’t all sunshine and roses after that, however. A gap down in February led to a 17% pullback. But WIX recovered in March and walked up to 144 in May. The stock’s current consolidation looks solid given the market environment—there should be solid support near the 50-day line.
WIX Weekly Chart
WIX 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.
