Taking on Some Water
Current Market Outlook
There’s been a bunch of news during the past few trading days, including this morning’s revelation that a likely autumn Italian election could threaten the euro, as well as continued China trade shenanigans, both of which attracted sellers. Today’s move did put a dent in a couple of indexes—the NYSE Composite’s intermediate-term green light went up in smoke, for instance—but the other indexes continue to hold most of their early May gains. Much more selling from here could put a fork in this rally, so our antennae are up. But right here, we are still leaning bullish though we are knocking our Market Monitor down a notch. Thus, continue to hold your resilient performers, but don’t forget to take some partial profits when you have them and hold some cash until the buyers truly take control.
This week’s list has an array of ideas from various corners of the market. Our Top Pick is Carpenter Technologies (CRS), a specialty metals firm with huge earnings estimates and whose stock is hitting new highs.
| Stock Name | Price | ||
|---|---|---|---|
| Carpenter Technology (CRS) | 53.25 | ||
| Foundation Medicine (FMI) | 136.68 | ||
| iQIYI (IQ) | 0.00 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Macy’s, Inc. (M) | 36.36 | ||
| Micron Technology, Inc. (MU) | 43.31 | ||
| PBF Energy (PBF) | 38.93 | ||
| Turtle Beach (HEAR) | 26.70 | ||
| WTW (WTW) | 100.47 | ||
| ZTO Express (ZTO) | 28.84 |
Carpenter Technology (CRS)
Why the Strength
Carpenter Technology often gets thrown in with the steel and metals sector, but the company is far higher up on the food chain than most of those firms—its specially designed, premium alloys and materials go into a bunch of specialty and critical end-use products. Just over half of sales go to aerospace and defense uses, with medical, energy and transportation making up another 23%. Of course, that doesn’t mean Carpenter doesn’t have its slow times when its end markets fall (sales and earnings slipped the last few years), but the stock is strong today because a sustained recovery is underway, driving up demand for its products. In Q1, not only did sales (up 21%) and earnings (up 36%) top expectations, but Carpenter’s closely-watched backlog surged 27% from the prior year, including a 35% bump in the aerospace segment (the seventh straight quarter of higher backlog in that area). Digging deeper, within the aerospace segment was a 32% sales gain in engine components; Carpenter is involved in many new engine platforms that should continue to drive growth. And oil and gas revenue is beginning to surge (up 35% from a year ago) as drilling increases, with prospects bright going forward. Overall, analysts see sales up 18% this year with earnings more than doubling; another 51% earnings hike is expected next year.
Technical Analysis
CRS looks like it’s in the early stages of getting off its duff after a long decline (67 to 24 in 2014-2015) and bottom-building effort (mostly range bound between 30 and 42 in 2016-2017). Shares did rally to new highs last October, but again stagnated, with a sharp market-induced decline in March. But CRS then rallied eight straight weeks off its lows to new highs before pausing south of 60 last week. You can nibble here or on dips to the 25-day line.
CRS Weekly Chart
CRS Daily Chart
Foundation Medicine (FMI)
Why the Strength
Foundation Medicine is a molecular information company changing how patients with cancer are evaluated and treated. The big picture trend is that comprehensive genomic profiling will become the standard of care for cancer patients and help to inform clinical treatments moving forward, and that Foundation is an emerging player in this highly specialized market. Currently, Foundation sells a range of diagnostic assays under the FoundationOne umbrella, including varieties for solid tumors, hematologic malignancies and sarcomas, circulating tumor DNA and ovarian cancer. In addition to developing new assays, the company is also building out its molecular information knowledge base, which it calls FoundationCORE, to help drive revenue from physicians and biopharmaceutical customers. Revenue has been ramping nicely with sales up 31% in 2017 and expected to grow 40% to 50% both this year and next. Even better, a big Q1 revenue beat of $8 million (revenue was up by 101% to $52.8 million) illustrates just how well Foundation is executing. Highlights from the quarter included broad Medicare coverage for certain FoundationOne products, the successful launch of new assays, new overseas partnerships and biopharma collaborations. On this last point, Friday’s announcement of a companion diagnostic collaboration with Merck for use with KEYTRUDA is another positive sign. It’s an interesting story.
Technical Analysis
FMI has had a big run during the past year, but there’s been plenty of choppiness along the way. Shares built a nice-looking base from July through October last year before ramping to 70, then chopped sideways, then stretched as high 87 before building a new base during the market’s correction. That consolidation looks like it’s over, though, with FMI moving straight up to new highs during the past three weeks. We prefer to try to buy on dips.
FMI Weekly Chart
FMI Daily Chart
iQIYI (IQ)
Why the Strength
China has the biggest internet population, with about 772 million of the country’s 1.4 billion people online at the end of 2017. This enormous (and still growing) market has produced dozens of thriving businesses doing e-commerce, search, messaging and social media. iQIYI (it’s pronounced ee-chee-yee) is loosely following in the footsteps of Netflix, with a platform for streaming high-quality videos, live events, games, literature, animations and social media content. Other companies have tried to crack this market, but iQIYI has two things going for it. First, the company is a top source of original content, with five of the top 10 original internet variety shows and six of the top 10 original internet drama series in 2017. And second, the company has a major corporate champion in Baidu, which spun iQIYI off in a $2 billion offering in late March of this year. Baidu’s enormous internet footprint is a major reason for iQIYI’s rapid user growth (at the end of 2017, it was averaging more than 126 million daily average users). The company hasn’t achieved profitability yet, and probably won’t for a couple of years, but revenue growth was 104% in 2016, 56% in 2017 and 63% in iQIYI’s Q1 earnings report. With a proven business model based on selling targeted advertising, iQIYI appears to be on a fast track for growth.
Technical Analysis
IQ came public on March 29 at 15.5, and ran to over 20 in April before slipping back below 16 in early May. The stock caught fire on May 9 and 10, running to 23 in intraday trading before slipping back below 20. A rally last Tuesday and Wednesday pushed IQ back to 23 and it’s sitting just below that level today. IQ is still very young, and volatility may be considerable for a while. But the business behind the stock appears solid, and we think the stock is worth careful consideration. If you like the story, consider nibbling on any normal weakness under 22.5, with a loose stop around 20.
IQ Weekly Chart
IQ Daily Chart
Lululemon Athletica (LULU)
Why the Strength
Lululemon is once again a leader in the retail sector, though these days it’s more of a steady performer with a proven brand. The company, of course, was one of the firms that started the athleisure movement (people wearing athletic clothes around the house, to the grocery store and what not), as its yoga-wear gained in popularity. After years of slowing growth and some corporate snafus, the firm is on a solid growth trend today thanks to refocused management and four key growth areas. One is e-commerce, with a revamped, more sales-y website that’s helping online sales to surge (up 42% in Q4). Another is the men’s segment—Lululemon has been launching new products for men and boosting advertising, too; the top brass sees men’s products accounting for a quarter of revenue by 2020, up from 19% today. Then you have international, where the company is expanding rapidly (comparable store sales up 52% in Asia in Q4!); overseas sales are also expected to account for one quarter of sales in 2020, up from just 10% today. And finally you have continued store openings, with square footage growth of 14% last year and 10% to 12% in 2018. Sales and earnings growth has been steadily accelerating, and the next data point will come this Thursday (May 31) when the company will release first-quarter results. Bigger picture, though, we think the path of least resistance is up.
Technical Analysis
LULU tightened up beautifully for the first three months of the year before breaking out on earnings in late March (which also lifted the stock out of a massive six-year base). The rise since then has been very persistent, with just one shakeout day earlier this month. Earnings on Thursday will probably tell the intermediate-term tale, but we’re thinking LULU is early stage and, barring a total meltdown, should do well over time. We’ll set our buy range down toward the 25-day line should there be a normal pullback going forward.
LULU Weekly Chart
LULU Daily Chart
Macy’s, Inc. (M)
Why the Strength
There probably hasn’t been a more disliked group in the market than mall-based brick-and-mortar retailers like Macy’s, and for good reason—mall traffic has been ebbing, competition is heating up and the growth is in e-commerce, especially with Amazon. But Macy’s is strong today because investors are sniffing out a turnaround, and because the stock is dirt cheap. On the business front, the company is actually doing pretty well—Q1 saw growth across all three of the firm’s franchises (Macy’s, Bloomingdale’s and Bluemercury), leading to same-store sales growth of around 4%. E-commerce is growing at double-digits, a new loyalty program is boosting business from the firm’s top shoppers and the firm’s newer Backstage storefront (affordable clothing from top designer brands) looks like a winner, with 100 new locations opening this year. And management has also expanded its popular in-store pick-up program, has kept inventory in check and the firm is getting high marks for its product updates. Earnings are still expected to shrink this year, but analysts have been hiking their estimates as a result of recent reports—they now see earnings of around $3.80 per share this year (sales about flat from a year ago) and $3.50 next. But that could prove conservative, and given the valuation metrics (nine times expected earnings; a sustainable-looking dividend yield of 4.4%), big investors are thinking the stock has discounted the bad news. Macy’s is an intriguing turnaround play.
Technical Analysis
M fell from 74 three years ago to 17 last November, but it’s been trending jaggedly up since then, and we’re impressed with the numerous big-volume buying weeks (we count four huge-volume “skyscrapers” since the bottom), a sign that institutions are active. The most recent wave of buying came after earnings two weeks ago; M had been going mostly sideways since the start of March, but the gap brought shares to a 52-week high, and it’s held those gains since. We’re OK buying some here.
M Weekly Chart
M Daily Chart
Micron Technology, Inc. (MU)
Why the Strength
Micron benefits from demand for more powerful memory and image sensors in computers, tablets, mobile phones, servers and USB storage devices. The company feeds that demand with DRAM, NAND and NOR flash memory sensors. If you look under the hood you see a wildly cheap cyclical growth stock with a management team hellbent on proving that it can improve profitability through cycles. We can’t predict what will happen during the next downcycle, but recent results look terrific and growth projects look solid too, based on favorable outlooks for AI, autonomous driving and cloud capex, all of which benefit Micron. Sales soared 64% last year and 58% in Q2 2018 (reported March 22), while EPS jumped by 1,808% (to $4.96) and 213% (to $2.82) during the same periods. As far as this year goes (fiscal year ends in August), analysts see revenues up 47% and EPS up 133%, to $11.55. However, those numbers are creeping up after last week’s Analyst Day, when Micron upped revenue and EPS guidance for fiscal Q3 2018 and announced a $10 billion share buyback program beginning in fiscal 2019; overall, it’s aiming to return half of its burgeoning free cash flow to investors. The bottom line is that Micron is trading at a meager 5.4-times current year estimated earnings. Frankly, this guidance has analysts struggling to justify conservative price targets, though we’d note Needham recently broke ranks and says Micron has nearly 70% upside! More conservative shops will downplay the potential for sustainable profits through the next downcycle, but we’ll let others fight that out—what matters to us is that, right now, the stock is showing plenty of pep.
Technical Analysis
MU has been trending higher for a few years now and had a particularly strong 2017, during which shares never touched their 200-day moving average line. Thus, the stock is likely later stage, but the uptrend has continued in 2018 too, though the stock has been prone to much wider swings this year than last. It entered the year relatively flat, but rallied from 43 to 60 from mid-February to mid-March. By early May MU was sitting back below 50, but with the help of bullish comments from the Analyst Day we’re right back near all-time highs! You can start small here or on dips with a stop in the low 50s.
MU Weekly Chart
MU Daily Chart
PBF Energy (PBF)
Why the Strength
PBF Energy is a New Jersey-based company producing gasoline and other high-value distillates (84% of revenue), along with a bit of asphalt, lubricants, diesel fuel and petrochemicals, through its five oil refineries. It also owns a network of pipelines and terminals for distribution, mainly through its significant ownership interest (100% of general partner and 44% of limited partner interests) in PBF Logistics LP (symbol PBFX). The story is straightforward: PBF Energy picked up some business due to storm-related refining capacity challenges elsewhere in the country last year and also made significant progress improving operations across its well-diversified refining base. Each refinery (in Delaware, New Jersey, Ohio, Louisiana and California) contributes roughly 20% of capacity. Investors have been pleased with operational improvements at the Torrance (California) and Chalmette (Louisiana) facilities and see PBF as having room to stretch its legs as the busy summer driving season zooms into view, even though some peers have better exposure to favorable crude price differentials. We see demand for the stock staying high given that PBF has been delivering on growth expectation—revenue was up 37% in 2017 and 22% in Q1 2018 (reported May 3), currently offers a yield of 2.6%, and has guided for above-consensus throughput in the second quarter. Analysts see earnings nearly tripling in 2018 with more growth ahead next year.
Technical Analysis
PBF spent a number of years trading either sideways or down until it jumped off support around 20 in August 2017 and made a sustained run to 36 by the beginning of 2018. It gave up a portion of that gain in January, but buyers stepped back in at around 28 in February and the stock has been unstoppable since. Notably, shares blew through their 2015 high of 38 with barely a pause in April. Since then, they’ve walked up as high as 46. There was a little dip at the end of last week as the price of oil prices softened, but given the momentum our guess is that this dip will eventually lead to new highs.
PBF Weekly Chart
PBF Daily Chart
Turtle Beach (HEAR)
Why the Strength
Turtle Beach is a small-cap, speculative outfit that could be on the cusp of something big. The company is the clear market share leader in head sets for use with gaming consoles like Xbox and Playstation—in fact, its share is growing rapidly, with its revenue market share at 46% in North America, more than the share owned by the next four closest competitors combined. Headsets have been a relatively mundane business during the past few years, but now it appears a major growth wave could be beginning due to the advent of “Battle Royale” games, which have large numbers of players who search for weapons, battle other players and the winner is the last man standing. Details aside, the genre has become extremely popular thanks to two newer games (including Fortnite, which is the #1 console and #5 PC game as of March 2018), drawing new gamers into the industry and producing a much higher attach rate of new headsets. And it’s nearly a sure bet that big game makers like Activision and EA Sports will dive into the Battle Royale category going forward, which should continue to boost sales. Turtle Beach’s Q1 was a massive blowout, with sales nearly tripling, and analysts see revenues up 37% this year and earnings of nearly $1 per share—and that could prove extremely conservative if current trends continue. Obviously, if Battle Royale games turn out to be a fad, all bets are off, but there’s no sign of that here. Consider it an intriguing speculation.
Technical Analysis
HEAR was a low-priced dog, with shares in a longer-term downtrend that bottomed below 2 (!) in March. Shares picked up steam through April and then staged a wild gap up on earnings, soaring from 7 to 16 in two days and quickly running to 20 (on gargantuan volume) before finally taking a breather. HEAR is clearly speculative and super volatile, so it could easily fail—but the story, numbers and chart suggest a flier could work out well. If you’re game, you could nibble (small positions only!) here or on dips with a loose stop.
HEAR Weekly Chart
HEAR Daily Chart
(WTW)
Why the Strength
Weight Watchers has long been a big name in the weight loss business, but except for a run from the middle of 2010 through early 2011, investors haven’t been much interested in the stock. That changed in October 2015 when Oprah Winfrey, the queen of daytime TV and a frequent, very public, weight loser and gainer, bought a 10% stake in the company for $43.2 billion. The infusion of cash, combined with Oprah’s high media profile, gave the company a boost, but 2015 still featured a 21% dip in revenue and a 67% drop in earnings. Business improved a bit after that, but it wasn’t until the company hired former Home Shopping Network CEO Mindy Grossman in April 2017 that things really began to perk; revenues were up 12% in 2017 and earnings rose by a strong 113%. The company is still a global weight management service based on Weight Watchers meetings (which provide over half of revenue in fees), digital subscriptions to weight management plans, food products, magazines and food and restaurant guides. But its sharpened image, TV ads and customized diet plans are simply gaining more traction. With revenue growth accelerating for seven quarters in a row, the roster of institutional investors expanding (342 funds own shares now, up from 211 a year ago) and analysts predicting 56% earnings growth this year and 31% in 2019, Weight Watchers looks like a winner.
Technical Analysis
Except for a run to 87 in 2011, WTW spent its entire life, from IPO in late 2001 to its death spiral to 4 in 2015 trading either flat or down. The Oprah event shows up clearly with a sprint to 28 in November 2015, but that was followed by another correction to below 10 in late 2016. But the rally that began at that point (when the new CEO came aboard) has been strong and durable, pushing WTW as high as 84 after a breakout from a three-month base earlier this month. The stock’s recent pause looks buyable, with a stop in the low 70s.
WTW Weekly Chart
WTW Daily Chart
ZTO Express (ZTO)
Why the Strength
ZTO Express, making its second appearance in today’s Cabot Top Ten Trader, is a great story for two reasons: First, it’s the FedEx of China. The company is both a simple delivery provider for China’s thriving e-commerce giants like Alibaba and JD.com and also a provider of logistical services. Second, the company just got a $1.38 billion investment from Alibaba and Cainiao Network (Alibaba’s logistics arm) to improve its local pickup and delivery capabilities, warehousing and international logistics. With a service area that includes virtually all of China, ZTO has an extensive network of partners to augment its 75 sorting hubs, over 4,200 trucks and proprietary tracking system, and the Alibaba/Cainiao deal will improve both its delivery speed and range. China’s 6.8% GDP growth is the engine of e-commerce growth and is steadily expanding the volume of parcels that need express delivery. This powered ZTO Express to 52% revenue growth in 2016, 34% in 2017, and 48% in Q1 2018. Profitability has been consistent, and after a slight slowdown in the first three quarters of 2017, EPS growth bounced to 35% in Q4 and 70% in Q1 2017. ZTO is an efficient company, and consistently produces after-tax profit margins of over 20%. Analysts expect earnings to grow by 34% in 2018 and 23% in 2019. With China sporting the fastest growth of any large economy in the world, ZTO is in the right market at the right time.
Technical Analysis
ZTO came public in October 2016 at 18, and immediately tailed off into a correction that bottomed at 11 in March 2017. A rough rally through November 2017 got the stock back to its IPO price, but a sharp correction to 14.5 and months of choppy trading kept the stock under wraps despite several runs at resistance at 17. The stock finally caught a real updraft in April and just broke out to new highs last week after a 21-day rally with just two down days. ZTO really stretched out last Thursday and Friday and then soared today on the Alibaba tie-up. Thus, the stock is extended, but given the persistent run and the fact that shares just broke out to new highs, we’re OK with a nibble here or on dips, albeit with a loose stop.
ZTO Weekly Chart
ZTO 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.
