Just the Facts
Current Market Outlook
Out-of-the-blue tariff threats emerged over the weekend, which roiled markets overnight and led to the usual spate of predictions as to what comes next in the U.S.-China trade saga. But when things get volatile, it’s even more important to simply stick with the facts and not get caught up in the guesses of what may come. Today, while the major indexes were down, they held well above support, which keeps the intermediate-term trend pointed up. And leading stocks fared even better, with many actually finishing up after horrid opens. Of course, it’s always possible that this is the start of a more meaningful pullback/correction, and if the uptrend is cracked, we’ll take a more cautious stance. But so far, the facts remain bullish, so you should remain heavily invested.
This week’s list is relative mixed, with a wide variety of stocks, sectors and growth stories represented. Our Top Pick is Inphi (INPH), a smaller chip and networking firm that looks to be a big beneficiary of the new networking boom.
| Stock Name | Price | ||
|---|---|---|---|
| Abercrombie & Fitch (ANF) | 15.37 | ||
| Coupa Software (COUP) | 262.20 | ||
| Enphase Energy (ENPH) | 46.70 | ||
| Exact Sciences (EXAS) | 116.91 | ||
| Harris Corp. (HRS) | 198.60 | ||
| Inphi (IPHI) | 120.16 | ||
| Lattice Semi (LSCC) | 23.92 | ||
| LPL Financial Holdings (LPLA) | 85.22 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| Strategic Education, Inc. (STRA) | 182.36 |
Abercrombie & Fitch (ANF)
Why the Strength
Abercrombie & Fitch is an American lifestyle retailer that operates over 1,000 stores selling casual wear and personal care products under the Abercrombie & Fitch, Hollister, and Abercrombie Kids brands. It was started in 1892 and is internationally diversified today; roughly 65% of revenue comes from the U.S. with the rest from Europe and other countries. The stock is doing well now because Q4 results (reported in March) beat estimates by a long shot and suggested a sustained recovery in the business is underway. Revenue wasn’t up—in fact it declined by 3.4%--but sales of $1.15 billion beat expectations by $20 million and EPS of $1.35 crushed views by $0.20. Those are big upside numbers, and they came despite the quarter being a week shorter than the comparable quarter a year ago. And investors loved that Abercrombie drove over $1 billion in digital sales for the year and that profit margins are going up. It’s not a rapid growth story (sales expected to rise 2.4% this year), but EPS is set to jump 26% (to $1.45), the stock is trading at a reasonable 21 times forward earnings and the firm pays a solid 2.6% dividend, giving investors plenty of reasons to stick around this self-improvement story.
Technical Analysis
ANF investors endured a choppy downtrend from mid-2011 through mid-2017 with an ultimate bottom coming below 10 in 2017. ANF then battled back into the high 20s last summer, and after a quick trip down to 16 during the December rout, gapped up to 26 after earnings in early March. Shares chopped around for a while before pushing to new highs above 30 last week. Today’s dip was minor, though further dips would mark a good entry.
ANF Weekly Chart
ANF Daily Chart
Coupa Software (COUP)
Why the Strength
There are a fair number of growth stocks that were among the first to hit new highs after the market bottom (in January and early February), rested for a month or two and are now showing signs of getting going. Coupa is one of them, and among cloud software stocks, we’ve always felt it has one of the very best stories out there: The firm has the go-to platform for business spend management, a market that’s as large as any given that it entails all types of business spending (procurement, invoices, sourcing, pay, etc.) for any mid- to large-sized firm out there—Coupa believes it’s playing in a $50 billion-plus market with tens of thousands of potential customers (compared to fewer than 1,000 today). Basically, Coupa sees itself as becoming one of the big handful of key software players (along with Salesforce, Workday, Oracle and the like), and we see no reason to doubt them. The firm’s platform has handled more than $1 trillion in spending since launch, and that’s driven persistent, rapid revenue growth (40%-ish for many quarters) and, despite heavy investment, a bottom line that’s in the black. Management is already talking about its path to $1 billion in revenue (nearly quadruple last year’s tally) as it penetrates the market and current customers expand their usage. It’s a big, easy-to-understand story.
Technical Analysis
COUP originally broke out in February 2018 and enjoyed a great run to 84 in September before its late-year plunge (to 52) with the market. However, the stock made clear it was still a leader after that—shares raced higher eight weeks in a row to new highs in February, though COUP then went dead for a couple of months digesting those gains. Now it buyers are back at it, with the stock (and the RP line) moving to new highs. We’re OK taking a position here with a stop under the 50-day line.
COUP Weekly Chart
COUP Daily Chart
Enphase Energy (ENPH)
Why the Strength
Enphase Energy is a small-cap outfit with rapid growth, a big story and a hot stock. The company is the leading global provider of solar microinverters, which connect to individual solar modules and covert DC power to AC power and, these days, are usually built-in to each module. It sells mostly for panels that are being installed into the residential market, and it fell on hard times a couple of years ago—growth was solid, but costs soared and losses mounted (and market share was lost), so a new CEO was brought in. Through solid business sense (it has inked supply agreements with SunPower and Panasonic), cost controls and investment in better technology, he has Enphase back to growing like mad. And this time it’s making money too! The Q1 report was a complete blowout, with revenues rising 43% and earnings of nine cents per share nearly double estimates. Impressively, this performance came despite component shortages (management spent extra to get things it needed in the quarter; it expects the supply crunch to ease going forward), and the top brass says it’s already sold out for Q2 (it sees revenue growth accelerating to 65% this quarter). Residential-type solar plays have had a rocky past, and we’re not saying Enphase isn’t going to have its ups and downs over time. But right now, there’s no question the wind is at the firm’s back—analysts see sales up 46% this year while earnings boom.
Technical Analysis
ENPH was in penny stock territory in mid 2017 when the turnaround began; shares marched back to 7.6 by last summer (though that was still just half of its higher from two years before). That was followed by a long, deep base that lasted through year-end, and the action this year has been excellent—ENPH has advanced persistently and, last week, soared on giant volume to multi-year highs. It’s low priced and volatile, so you can start small here or on dips with a loose stop.
ENPH Weekly Chart
ENPH Daily Chart
Exact Sciences (EXAS)
Why the Strength
Exact Sciences has been extremely hard to handle this year (more on that below), but despite the frequent wobbles and shakeouts, it’s looking like big investors (632 funds now own shares) are buying into the fact that the company is set to take huge market share in the colorectal cancer screening market. To review, the firms’ claim to fame is its DNA-based Cologuard test, where a patient deposits a sample (ahem) in a specialized box in the comfort of his/her own home, mails it to a special testing facility, and Exact is able to determine with great accuracy if a patient has early- or late-stage colorectal cancer. And because it’s non-invasive and easy to use, compliance is much higher than colonoscopies. It’s been a hit, and the Q1 results only reinforce that Exact is going to get much larger over time, especially now that Pifzer’s sales force is up and running selling the product—in the first three months, 334,000 Cologuard tests were completed (up 79%), driving revenues up the same percentage. The bottom line is still deep in the red, but a lot of that has to do with the company expanding production capacity (should be up to a few million annually by year-end). Longer term, Exact’s management thinks it can grab 40% of the (still expanding) testing market, up from 4.6% in Q1! Analysts see revenue up 64% this year and another 43% next, but even those figures are looking conservative.
Technical Analysis
EXAS moved out to new highs in late January, which was a great sign of early leadership, but the stock became a bucking bronco after that—shares suffered four sharp pullbacks (10%, 15%, 17% and 11%) during the next two and a half months as it tried to get going! Even so, EXAS started acting better in early April, and after a failed breakout and a one-day earnings reversal (choppy!), the stock has moved out to new highs. Expect volatility, but we’re OK buying some here or on dips.
EXAS Weekly Chart
EXAS Daily Chart
Harris Corp. (HRS)
Why the Strength
Harris is an information and defense technology company that generates around 95% of revenue from providing the U.S. government with a host of high tech and mission-critical solutions. The stock is doing well now because organic revenue growth just hit an eight-year high of 11% (to $1.72 billion) in the recently reported (last Wednesday) quarter, and because Harris reported double-digit EPS growth for the sixth quarter in a row (EPS of $2.11 beat by $0.07). It didn’t hurt that management raised full-year EPS guidance to around $8.15, from $7.95, and revenue guidance to reflect 9% growth (to $6.72 billion) either. Growth was solid across the board with tactical communications up 19%, electronic systems up 7% and space and intelligence systems up 7%. Beyond the solid performance from Harris, investors have been looking forward the closing of a merger agreement with L3 technologies (LLL), which also beat expectations last week when it reported revenue growth of 14%, EPS of $2.89 (up 24%) and an increase in 2019 guidance. The merger (which is basically of merger of equals) is expected to close around the middle of 2019 and should create around $300 million in synergies and a company that throws off roughly $3 billion in free cash flow. With both companies doing well and with the industry seeing solid growth, the tie up is another reason big investors are buying in.
Technical Analysis
HRS had a nice multi-year run from mid 2016 (near 75) through April 2018 (170), albeit with a few dead periods along the way. The stock then etched a double top in October and slid as low as 123 during the market downturn before rebounding to rally nine weeks in a row. We like the tightness of the past couple of months, and the breakout last week looks solid. It won’t be the fastest mover, but we’re fine entering here.
HRS Weekly Chart
HRS Daily Chart
Inphi (IPHI)
Why the Strength
Inphi isn’t well known, but this chipmaker is in a great place. The company bills itself as the leader in data movement interconnects, which are products that help move data faster between and inside of data centers with a variety of products that address all aspects of data movement (long haul, metro, edge and 400G applications for data centers). Obviously, with data exploding, this is a growth market, with sales of optical interconnects expected to more than double over the next five years, and Inphi looks to be in a great position to capture its fair share. In Q1, data center sales disappointed, but that was offset by an earlier-than-expected ramp in 5G-related demand among its telecom customers. And while 5G will be a solid tailwind, there’s even more excitement about a data center upgrade cycle to 400G in the quarters to come; Google is already gobbling up Inphi’s products in this space, with Amazon likely close behind and dozens of other design wins in this space set to ramp going forward. Simply put, this small-ish chip maker looks to be in the right place at the right time, and results are beginning to show that—after a slowdown last year, revenues surged 37% in Q1, earnings of 33 cents per share (up from a loss last year) beat by five cents and there looks to be plenty more where that came from, with analysts see revenues up 25% and 18% this year and next, with earnings rising 94% and 34% during the same time frame. We like it.
Technical Analysis
IPHI topped at 52 in early 2017, dipped to 24 in February 2018 and was still hovering around 30 at the market bottom last December. But 2019 has been a totally different story—shares popped to new 14-month highs in February, and after a few weeks of choppy action centered around 45, IPHI moved ahead strongly on earnings during the final three days of last week. Short-term gyrations are possible but we think the stock is headed higher.
IPHI Weekly Chart
IPHI Daily Chart
Lattice Semi (LSCC)
Why the Strength
Lattice semiconductor is a small cap stock that designs and sells programmable logic products and related software to original equipment manufacturers (OEMs) in the automotive, military, communication and consumer markets. It has exposure to 5G, which is a big reason for the recent excitement—management sees the company benefitting from the ramp up in 5G wireless infrastructure upgrades, a trend that management thinks is in the early innings. Beyond 5G, the stock is doing well now because a number of strategic and operational initiatives are paying off. First, Lattice is cutting debt, including a recent $25 million payment in Q1. Second, the firm is rolling out new products, including a next-gen FPGA platform (low power consumption), a new reference design for video applications and solutions for automotive, including advanced driver assistance systems and infotainment. And third, everything it’s doing is translating to revenue improvement and EPS growth. Lattice reported Q1 results last week with revenue of $98 million flat from a year ago, but EPS of $0.05 up from a loss of $0.05 a year ago. Analysts see modest top-line growth of 1.4% this year accelerating to 7% in 2020. EPS growth should be more exciting, up 42% this year and 30% next. What counts most is that, like many chip stocks, big investors see better times ahead.
Technical Analysis
From the beginning of 2017 through the end of 2018, LSCC made no net progress. That changed when Q4 results came out in February, causing shares to gap up and spurring a run all the way to 13 by mid March. LSCC then consolidated for a few weeks, but after testing its 50-day line in the second half of April, gapped to new highs after Q1 results. We’re OK buying a little on weakness.
LSCC Weekly Chart
LSCC Daily Chart
LPL Financial Holdings (LPLA)
Why the Strength
After a hot start to the year, LPL Financial was pulled down by its financial stock peers in March and April, but an excellent Q1 report has the stock back at new highs (with improved action from the financial sector a plus, too). If you’re not familiar with the story, LPL is the nation’s largest independent broker-dealer and is one of the leading players in retail investment advisory services (via nearly 16,200 advisors), which makes it a classic Bull Market stock that should benefit as the market’s uptrend attracts new investors (and assets). To this point, investors aren’t embracing the market rally (which, from a contrary standpoint, is probably a good thing for the market outlook); LPL’s total brokerage and advisory assets were up just 6% in Q1, which along with some higher interest income, had revenues rising 10%. But most of that is falling to the bottom line, which, combined with a healthy share repurchase program (share count down 7% over the past year), drove earnings up 77%, easily topping expectations. And this is coming in an environment when flows to equity funds and ETFs have actually been negative so far this year—once the man on the street begins to pile in, LPL’s business should accelerate further. Throw in a reasonable valuation (13 times earnings) and a 1.3% dividend yield and there are many reasons the stock should head higher. The next big event is an Analyst Day, coming May 22.
Technical Analysis
LPLA stormed off the market bottom in early January and broke out to new highs after the Q4 report in early February, but that was it for a while, as shares dipped from 79 to 67 during the next few weeks. The bounce from there wasn’t great, but LPLA did tighten up in the mid 70s for three weeks before last Friday’s post-earnings reaction kicked shares to new highs. The RP line is still shy of its old peak, which isn’t ideal, but you can grab a position here or on dips.
LPLA Weekly Chart
LPLA Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
MercadoLibre represents one of the best ways to gain exposure to online and mobile commerce in Latin America. The company runs an e-marketplace and electronic payment service that lets companies and individuals set up online stores and sell items through fixed-price or auction-based formats. Online penetration is roughly 70% in Latin America today with around 460 million users, and another 100 million are likely to join that club over the next five years. Compared to the U.S., where 90% of the population uses the internet, there’s still a lot of room to grow. Analysts have been bullish on the stock because MercadoLibre is adding incentives such as free shipping and loyalty programs, plus investing in branding and technology, which should help it draw in new users and expand its network effect with other merchants. Last week’s Q1 earnings blowout shows MercadoLibre is doing the right things. Revenue was up 48% to $474 million (beating by a whopping $50 million) while EPS of $0.13 topped estimates by $0.26. And among the sub-metrics, it was great to see payment volume up 35%. All in all, it was a big quarter for the company, and analysts see it continuing, with 40%-plus revenue growth seen both this year and next, with earnings booming out of the red.
Technical Analysis
MELI didn’t make any progress in 2018, instead trading in the 275 to 400 range for most of the year. That changed when the company reported back in February, with a big beat igniting a blast off rally that took MELI from 375 to 450 overnight. Shares worked their way to 525 by the end of March before pulling back to its 50-day line, but Q1 earnings last week spurred another huge rally. The trade war kerfuffle could hamper things short-term, but we think there will be support on dips.
MELI Weekly Chart
MELI Daily Chart
Strategic Education, Inc. (STRA)
Why the Strength
Strategic Education is a for-profit education company that offers undergraduate (75% of enrollment), masters (22% of enrollment) and associate (3% of enrollment) programs in the U.S. Programs, which are offered both online and in person, are focused on business administration, education, IT, health care, public administration and criminal justice. The big news surrounding the company and the reason the stock is performing well is the beneficial impact of the merger with Capella Education, which closed last August. That deal increased student headcount by around 60% (from just over 50,000 to around 80,000), expanded operations from 17 states to all 50 states and brought a greater online presence into the fold. Through Q1 2019 (reported last week), enrollment trends have remained positive at Strayer University (up 11.5%) and the Capella University segment (up 2.9%). Because of the merger, total revenue jumped 112% to $247 million and adjusted EPS soared to $1.66 from $1.23. Both figures beat expectations, and with merger synergies on track and new programs opening, investors pushed Strayer’s stock up to new highs. Look for revenue growth of 56% this year to cool to 6% in 2020 (after the impact of the merger falls off), but earnings growth should remain buoyant (28% this year, 18% next, both of which look conservative).
Technical Analysis
STRA had a nice run from late 2016 all the way through November of last year, with the stock peaking near 155 after a great earnings report. It didn’t last, of course, as the market pulled it quickly down to 102, but shares tightened up in that area for a while, and after popping back to 150 in early March, tightened up again. And now the buyers are in control, with a few days of big volume driving STRA to new highs. If you want in, we advise entering on weakness.
STRA Weekly Chart
STRA 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.
