Same Story: Growth Stocks Great, Broad Market Just OK
Current Market Outlook
The market’s rebound since its sharp one-day selloff on Wednesday, May 17, has been impressive and encouraging—the Nasdaq and leading growth stocks spiked to higher highs, and even the S&P 500 nosed out above its March 1 peak. It’s certainly a good sign and pretty much brings us back to where we stood two weeks ago. On the positive side, most growth-oriented stocks are in good shape and most indexes are either at, or just a couple of percent off, all-time highs. But much of the broad market (and many indexes) is just marking time and the number of stocks hitting new lows is at unhealthy levels. Even so, the long-term trend and leading stocks are the most important pieces of evidence, and they’re both bullish. Thus, you should be, too.
This week’s list has another crop of very strong names from many strong sectors. For our Top Pick, we’re going with a big-cap turnaround play—Best Buy (BBY) has surprisingly strong earnings figures, a big share buyback program and the stock just gapped up after its quarterly report.
| Stock Name | Price | ||
|---|---|---|---|
| Alibaba (BABA) | 254.81 | ||
| Best Buy (BBY) | 0.00 | ||
| Domino’s Pizza (DPZ) | 339.47 | ||
| FMC Corp. (FMC) | 0.00 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| MuleSoft (MULE) | 0.00 | ||
| Regeneron Pharmaceuticals (REGN) | 512.96 | ||
| Wayfair (W) | 167.03 | ||
| West Pharmaceutical (WST) | 210.25 | ||
| Wynn Resorts (WYNN) | 121.08 |
Alibaba (BABA)
Why the Strength
There are three things that put Alibaba, China’s eBay on steroids, at the top of many investors’ Buy list. The first is the company’s record of growth, including its 47% revenue growth in fiscal 2017 (which ended in March) and the 50% sales growth in Q1. Earnings growth has also topped 30% for the three most-recent quarters and is forecast to grow 26% this year and 29% next year. After-tax profit margins dipped to 29% in Q1, but were above 40% for the three previous quarters. The second reason Alibaba is so hot is that the company’s free cash flow last year was just a hair under $10 billion. This gusher of cash allows Alibaba to make strategic investments and establish joint ventures with just about anyone, which caused revenue from innovation initiatives to grow 88% in Q1. The third reason for Alibaba’s popularity is that, while its history of revenue and earnings growth would be admirable for any company, coming from a company with a market cap of over $316 billion, it’s almost inconceivable. The real bottom line is that Alibaba is a huge, successful company with a large and growing footprint in Chinese online life. Just as big, liquid tech stocks have been driving gains in the U.S. market, Alibaba is a favorite of institutional investors in China. For anyone with a taste for great fundamentals and big stories, this is one to consider.
Technical Analysis
If it were needed, a fourth reason to look at BABA is that the stock has finally topped its post-IPO high of 120 that it first hit back in November 2014. BABA dipped to as low as 57 in September 2015 and built a double-bottom in February 2016. The stock worked its way to 110 in September 2016, but corrected back to 86 in December. But since the start of 2017, the stock hasn’t had two down weeks in a row, and it rallied quickly to new highs after an intraday dip to 114 on May 18. BABA looks buyable on any weakness. A stop around 112 seems prudent.
BABA Weekly Chart
BABA Daily Chart
Best Buy (BBY)
Why the Strength
Best Buy was a horror show of a company for many years, but a restructuring phase starting in 2012 cut costs and closed down underperforming stores while focusing more on online sales. The fruits of that turnaround, combined with some industry-specific factors (a pickup in gaming- and mobile-related sales), are why the stock is strong today. Earnings rose 27% last year and another 40% in the recently-reported first quarter, despite flat revenues (although online sales were up a healthy 22.5%) and the closing of 11 large format and 31 Best Buy Mobile locations. The bottom line figure crushed expectations, with part of the credit going to a huge share buyback program; the company announced its intention in March to repurchase $3 billion of stock over two years, and it got off to a fast start in the latest quarter, buying back 8.1 million shares or more than 2% of the company. (Best Buy also bumped up its dividend in March; the current annual yield is around 2.2%.) Long-term, we don’t see anything to get super excited about; there remains a ton of competition in the industry and Amazon is an ever-present threat. But for the next few quarters, the focus will be on the continuing turnaround (with a slight tailwind thanks to the implosion of some other major mall retailers), the big share buyback and the reasonable valuation.
Technical Analysis
One rule we try to adhere to: Never underestimate a big, liquid stock when it gaps up huge on earnings. That’s what BBY did last Thursday, rising 21% on nearly eight times average volume and catapulting out of a five-month consolidation following first-quarter results, which extends BBY’s rally since its low near 21 last January. If you’re game, you can buy some around here with a stop in the low to mid-50s.
BBY Weekly Chart
BBY Daily Chart
Domino’s Pizza (DPZ)
Why the Strength
Domino’s is again one of the strongest stocks in the market as the top-notch retail firm continues to deliver. At a time when most restaurants are struggling, Domino’s first quarter saw domestic same-store sales rise 10.2% (the 24th straight quarter of advancing same-store sales) while the same international metric was up 4.3% (the 93rd straight quarter of growth). Add to that a big expansion in the number of stores (up 189 last quarter and a whopping 1,308 during the past year) and great cost controls, and the result was 42% earnings growth. The company gets half its revenue from the U.S. and half from overseas (nearly all stores are franchised), and it sees plenty of room for expansion with new stores and, in the U.S. at least, a rising delivery share; the firm accounted for 27.2% of all pizza delivery dollars last year, up from 24.4% two years ago. Of course, investors don’t pay up for the past, and the good news here is that management believes its momentum should continue—its latest three-to-five year outlook anticipates about 7% annual store growth, 4.5% same-store sales growth and 10%-ish annual sales increases, all of which should lead to 15% to 25% earnings growth. Throw in a modest dividend (0.9% yield) and a decent share buyback program (share count is down 3% from a year ago), and there’s plenty to like.
Technical Analysis
Shares of DPZ jumped from 151 to 160 following Q3 earnings release in October, and rallied to 170 before a quick shakeout sent them down to 153. They bounced back but momentum was lost until February when they blew through resistance, marching up to a high of 192 by the end of March. Another shakeout in early April sent shares to 175. But again, they rebounded quickly and the Q1 earnings report on April 27 stoked investor enthusiasm. Since then, the stock has walked up from 185 to 207. Try to buy on dips.
DPZ Weekly Chart
DPZ Daily Chart
FMC Corp. (FMC)
Why the Strength
As a specialty chemicals company, FMC Corp.’s products don’t get the blood rushing. It sells mainly into the agricultural market (pesticides, herbicides and fungicides), which have historically made up nearly three-quarters of revenue, with its lithium and health/nutrition segments making up the rest. As you can see in the table below, business has been mostly stagnant, with revenues declining slightly, though cost controls have helped push up earnings modestly. But none of that is the reason for the stock’s strength—instead, investors are excited about FMC’s game-changing deal with DuPont, which will result in FMC sending over its health and nutrition business and $1.2 billion, while DuPont gives FMC its crop protection business, which has revenues of around $1.5 billion! The deal is likely to be highly accretive to the bottom line, though since the transaction isn’t expected to close until late in the year, the results won’t likely be seen in 2017. However, 2018 and beyond is looking to be a barnburner; management believes the deal with boost the earnings by something like $1.25 per share next year, and analysts see FMC earnings rising to nearly $5 per share, up from about $2.50 this year. Of course, after that bump, growth will level off, but with a leading position in agricultural products, it should be able to grow the bottom line further in the years ahead. It’s an attractive special situation that investors should discount further as the deal approaches.
Technical Analysis
FMC gapped up at the end of March when the DuPont deal was announced and rallied another few points shortly after, all on huge volume. It was our Top Pick in the April 10 issue, but since then, the stock has basically moved sideways, though it dipped to (and held) its 50-day line on the market’s one-day plunge two weeks ago, and now is testing its recent highs. Sit tight if you own some, and if you don’t, you can buy some here or on a push to new highs above 66.
FMC Weekly Chart
FMC Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
MercadoLibre is usually called the eBay of Latin America, but it might be more correctly described as the Alibaba of Latin America. That’s because, like Alibaba, MercadoLibre is building on its position as a dominant online marketplace and leveraging its online payment platform to create an e-commerce infrastructure for a fast-growing region. MercadoLibre’s MercadoPago system has the potential to facilitate transactions and transfers across national borders (the company serves 18 countries, including Argentina, Brazil, Mexico, Colombia, Venezuela and Peru). Latin America has a collective population of over 605 million people, and rapid Internet penetration is uniting it as a marketplace. Revenue growth in 2016 hit 30% (up from 17% in 2015) and Q1 revenue growth soared by 74%. Earnings are also healthy, with 64% growth in Q1 doubling the 32% growth in Q4 2016. Add in MercadoEnvios, the company’s shipping arm, and you have a robust online commerce system. The core of MercadoLibre’s business is still its online marketplace, and the gross merchandise value of goods and services sold on its site grew by 61.4% in Q1, while total payment transactions grew more than 60%. As the global economy gets stronger, Latin American commerce is growing right along with it.
Technical Analysis
The current rally in MELI dates to January 2017, when the stock emerged from a three-month correction that had pulled it from 193 in October 2016 to 156 at year’s end. MELI rallied to 218 in March, took a four-week breather, then rose strongly into earnings on May 4. The stock gapped up to 276 on the good earnings news and followed through to 298 on May 16. The global (and Brazilian)hiccup on May 17 and 18 pulled the stock back briefly to its 25-day moving average at 248, but it pushed back quickly to 295. Weakness last Friday and today have MELI back in the low 280s, which looks like a good buy point.
MELI Weekly Chart
MELI Daily Chart
MuleSoft (MULE)
Why the Strength
Besides having possibly the most unusual company name ever featured in Top Ten, Mulesoft also has an enticing (though a bit hard to understand) growth story. It all starts with technology integration, a field that’s become far more complex with the cloud, apps, software-as-a-service offerings, the explosion of data and the use of mobile (and now Internet-of-Things) devices. Companies spend dozens of billions of dollars on integration every year, which often involve in-house developers using one-off custom integration coding for every connection. Mulesoft has a better way—its Anypoint platform can tie together various apps, data and devices in a standardized way using application program interfaces (APIs), which dramatically boosts developer productivity and (in the company’s words) increases the clock speed of the IT organization. The company believes it’s playing in a $30 billion market and has a better mousetrap, and the results bear that out—it has more than 1,100 customers including Pfizer, Fujitsu, McDonalds, General Dynamics, Yum! Brands, AT&T, PetSmart, Coca-Cola, Tesla, Barclays and Anheuser-Busch, with most quickly expanding their usage, which directly translates into more money for Mulesoft. The firm is still unprofitable, but revenues have been advancing nicely and deferred revenue ($137 million, up 61%) tells us the future is bright. It’s an intriguing new story.
Technical Analysis
MULE has only been public since mid-March, but it set up a very nice pattern. Shares formed a good-looking IPO base, with a gap up on its first day of trading (it touched 26 after being offered at 17), and then etched a relatively tight consolidation between 21.5 and 25 or so. Then, last week, MULE went vertical, blasting ahead to new highs on solid volume. Expect lots of volatility, but if you want to speculate, a small position here or on dips could work out very well.
MULE Weekly Chart
MULE Daily Chart
Regeneron Pharmaceuticals (REGN)
Why the Strength
Regeneron develops drugs for eye diseases, inflammatory diseases and cancer. We haven’t covered the company since March 2015, when it was trading at about the same level. What’s our old friend been up to? In a word, growing. It currently has five products approved for various indications, including the latest success, Kevzara, which was just approved for rheumatoid arthritis. This is a competitive space (Humira and Baricitinib are competing products), but Regeneron is teamed up with Sanofi and many analysts see peak sales of roughly $1.3 billion in 2023, which of course represents meaningful potential growth for the company. Regeneron’s pipeline is also stacked, with six treatments in Phase 3 trials (including for pain, asthma and edema indications), six in Phase 2 (arthritis, muscle disorders, retinal disease), and 10 in Phase 1 (including several for cancer). Most believe the addition of Kevzara helped to push up revenue growth expectations for the next two years from around 12% to almost 15%. It’s also likely think that expected earnings growth of 12% (2017) and 21% (2018) has room to move higher, too. That said, we’d note that analysts aren’t all pounding the table (price targets range from 400 to 485). With the stock trying to break through resistance right now, we suggest starting small and adding shares if the stock continues to show strength.
Technical Analysis
REGN took a dive with the rest of the biotech group in early 2016 and then started a very long bottoming process. For most of 2016 shares traded in the relatively wide range of 325–450. But the chart suggests that the voracious buying that began just prior to the release of Q1 results on May 4 represents a change in the stock’s character, with the stock rallying 100 points and then holding those gains in recent days. It’s not in a true uptrend yet, but the long bottoming process and the recent strength bode well—REGN looks buyable around here or (preferably) on dips.
REGN Weekly Chart
REGN Daily Chart
Wayfair (W)
Why the Strength
Wayfair is a furniture company that’s trying to move the industry out of its big-box-furniture-showroom past and into its online future. At least that’s the plan. Wayfair has built an online catalog that includes over seven million products from 10,000 suppliers, including furniture, furnishings, home accessories and decorating items. While the company has yet to produce a profitable quarter, it has been hugely successful at growing revenue, with the 44% growth in 2014 (the slowest in the last four years) followed by 71% growth in 2015 and 50% in 2016. The company has been sacrificing earnings to build market share, and while earnings aren’t projected to turn positive until 2019, investors were encouraged by the company’s May 9 earnings report that beat expectations by a handy margin. Analysts had expected a loss of 58 cents per share, but Wayfair reported a loss of 48 cents. That beat caused the company’s stock to gap up, and just led to an increased price target from one analyst. New stories about Wayfair tend to emphasize the danger from Amazon’s competition or the opportunity represented by a potential Wal-Mart takeover. But the company’s management points to its increased traction and market share in the $600 billion North American and European furniture business. It has proven that customers are willing to buy furniture and furnishings online, and that seems to be enough for investors, at least for now.
Technical Analysis
W came public in September 2014, and went through the usual post-IPO correction, eventually bottoming out in the low 30s in November 2016. The stock firmed up at that point and was trading at 51 on the day before the great earnings report kicked it to 64 in one day. The stock has held those gains and is trading tightly under resistance at 65. We think W is a reasonable speculative buy on any weakness of a point or so. The story is big, but it may take some patience. Use a stop at 58.
W Weekly Chart
W Daily Chart
West Pharmaceutical (WST)
Why the Strength
West Pharmaceutical Services doesn’t sell any drugs or treatments, but instead, makes a wide variety (more than 8,000 items!) of delivery and containment products that are used by most big players in the biotech and medical field. Most of West’s offerings are proprietary (about 80% of revenues) and include various stoppers, seals, caps, syringe components and self-injection devices; the rest of its revenues comes from contract manufacturing for customers. All told, the company has more than 2,000 clients (the largest is 7% of business) and 28 manufacturing facilities, and with the medical field steadily expanding and the number of injectable drugs increasing quickly, West’s future is one of steady, predictable growth. Earnings have risen each of the past six years, while some recently completed facility expansions are helping the top line pick up speed. Sales have risen between 6% and 8% during the past five quarters, and management sees 7% to 9% growth this year, while earnings should expand 25% (helped by a tax benefit) and more going forward. The valuation looks elevated, but this is the kind of company that offers both decent growth (likely double-digit earnings growth for many years to come) and lots of surety surrounding that growth (West is a dominant player), which should keep big investors interested.
Technical Analysis
WST has been advancing since it hit a low of 39 in the second half of 2014, though with many fits and starts along the way. The latest pause effectively started last September, when the stock hit 84; by the end of April, the stock was sitting at the same level. But first-quarter earnings gapped the stock to new price and relative performance highs, and after following through on the upside, WST has paused tightly during the past three weeks. You can start a position here or on dips.
WST Weekly Chart
WST Daily Chart
Wynn Resorts (WYNN)
Why the Strength
Long-time subscribers know Wynn Resorts well given we’ve featured the stock 23 times over the years. The company owns gambling resorts in Las Vegas (Wynn Las Vegas and Encore) and Macau (Wynn Macau and Wynn Palace), and is in the early phases of building a new casino just outside of downtown Boston. It was last featured in Top Ten on March 27. The stock never quite dipped into our buy range, but it’s continued to do well and the fundamentals are solid, so we’re stepping back to the table. The big-picture trend helping the stock is continued economic and regulatory improvement in the regions where Wynn operates, plus growth in gambling tourism. The company is growing revenue at a blistering pace, reporting 37% revenue growth in Q4 and 48% in Q1, when it also beat EPS projections of 0.97 by two cents. The Street is now looking for revenue to grow by 30% this year and for EPS to surge 40% (to $4.75). Most of the growth is due to the opening of the Wynn Palace in Macau in Q3 2016, which is off to a good start. The Wynn Boston Harbor Resort is expected to open in mid-2019, so plan for revenue growth to moderate to the mid-single digits in 2018 before another burst of acceleration in 2019 and beyond. The next big data point will be later this week, when Macau’s May gaming revenue figures will likely be released; analysts are expecting the 10th straight month of gains.
Technical Analysis
WYNN was clobbered in 2014 and 2015 when the Chinese cracked down on gambling in Macau. But as regulations eased, shares rallied from a low of 50 in early 2016. They eventually found 85 to 105 to be a comfortable trading range for the remainder of the year. The stock finally broke through resistance at 105 in March, traded up to 125 after Q1 results pleased investors, and it’s been consolidating in the 120–127 range for the past five weeks as the 25-day line has caught up. This looks like a decent entry point with a tight stop in the mid-110s.
WYNN Weekly Chart
WYNN 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.
