Very Encouraging
Current Market Outlook
After the umpteenth test of their February lows and 200-day moving averages, the major indexes have surged over the past couple of days, with many potential leading stocks going along for the ride. Put together, the action is very encouraging and raises the odds that we’ve seen a tradeable bottom. However, despite the uptick, we haven’t yet gotten a green light from our intermediate-term—a good day or two from here could do the trick, but we don’t anticipate signals. Thus, right here, we’re sticking with our current, cautious stance, though we’re keeping our eyes open for definitive signs that a new intermediate-term uptrend has begun.
This week’s list is chock-full of stocks that look like they want to move higher if this rally is the real McCoy. Our Top Pick is Shake Shack (SHAK), which catapulted higher on earnings last week on its heaviest volume ever. Keep positions small and use a loose leash.
| Stock Name | Price | ||
|---|---|---|---|
| Box Inc. (BOX) | 0.00 | ||
| Ecopetrol (EC) | 22.17 | ||
| Interactive Brokers (IBKR) | 0.00 | ||
| Realpage (RP) | 0.00 | ||
| Sarepta Therapeutics (SRPT) | 120.93 | ||
| Shake Shack (SHAK) | 92.08 | ||
| Shutterfly (SFLY) | 94.71 | ||
| Splunk (SPLK) | 207.67 | ||
| Valero Energy (VLO) | 97.40 | ||
| Zendesk (ZEN) | 82.19 |
Box Inc. (BOX)
Why the Strength
Box is small-cap software company that has developed an enterprise-wide content collaboration platform allowing users to securely access, edit and add to a firm’s content from anywhere and on any device. Box’s cloud-enabled solutions integrate with a wide variety of third party platforms, including Microsoft Office, Slack and Salesforce.com. Revenue growth has been solid, and was up 40%, 32% and 27% over each of the last three years, respectfully. The only issues lately have been profitability, a little bit of deal slippage in the last quarter (reported on February 28), and a modest decline in retention rates. But on the conference call management highlighted 26% adjusted billings growth, solid international traction (now 22% of revenue), improving upsell trends and a jump in free cash flow. Analysts see new products helping Box expand its addressable market, and potential for Box to push average selling prices higher. If so, Box could be at a critical infection point as leverage in the business drives future earnings growth. Look for the release of first quarter fiscal 2019 results (due out May 30) to set the stock’s next direction. Investors see revenue growing 20% to 22% over each of the next two years, and EPS going up 56% (to -$0.19) this year, then 132% (to $0.06) in fiscal-year 2020.
Technical Analysis
BOX went public in early-2015 and immediately rallied to 25 before a massive decline brought shares back to 9 in early 2016. Buyers have been in control ever since however, with shares advancing steadily and usually finding support at their 200-day line. Shares consolidated in the 17 to 21 zone late last summer, then broke out and traded up near their all-time high in late-November. Since they, they’ve been up and down, mostly in the 19 to 25 area. We see potential for a big move higher if shares are able to break above resistance.
BOX Weekly Chart
BOX Daily Chart
Ecopetrol (EC)
Why the Strength
Ecopetrol is a large, Colombia-based integrated oil exploration and production company. It was hit hard by the fall in oil prices a few years back, with revenue essentially getting cut in half between 2013 and 2017. But business has been on the upswing as the price of oil advances, as evidenced by revenue growth of 7%, 16% and 13%, respectively, over each of the last three quarters. The company reported very solid first quarter 2018 results last Thursday, highlighted by record high margins (roughly 80%) in Ecopetrol’s transportation segment, the company’s lowest leverage since 2014 and good progress ramping up operation at its Reficar refinery. A few of the lingering concerns with the stock remain a trend of declining quarter-over-quarter production (down 2.2% to 701,000 boe/d in Q1), even in a strong oil price environment, and myriad social and operational issues in Colombia. Still, shares of Ecopetrol have been advancing steadily, suggesting that, while analysts are split on the stock, the current cycle offers ample opportunities for management to get the company back on track. Analysts see solid growth in 2018, with revenue up 21% and EPS up 24%, to $1.36. Add in a cheap valuation (forward PE of just 14.8) and 2.8% yield and it’s easy to see why the buyers are in control.
Technical Analysis
EC had a great run after it went public in 2008, as shares ran up for several years to an all-time high above 50. Then oil prices fell apart and social issues in Colombia became the prevailing story. EC declined to below 10 in late-2015 and stayed there through late-2017—a huge, flast bottoming area that wore out all the weak hands. The stock broke out in November and went on an epic run to 20 by late-January. A 10-week base set the stage for an early-April liftoff to 22, where the stock has tightened up. We’re OK buying a little here or on a retreat of a point or so.
EC Weekly Chart
EC Daily Chart
Interactive Brokers (IBKR)
Why the Strength
Founded in 1977 and located in Greenwich, Connecticut, Interactive Brokers Group has always been an industry leader when it comes to adopting technology that drives prices down for its customers; you can buy or sell 100 shares of stock through the company for a commission of one dollar! Because of this and other initiatives, the company earned Barron’s 2018 awards for Best Online Broker, Best for Options Trades, Best for Frequent Traders, Best for Occasional Traders and Lowest Cost Broker Rating. And traders are clearly flocking to the company today, as illustrated by the company’s first quarter report: Revenues grew 52% from the year before, to $621 million; earnings grew 85% from the year before, to $0.63 per share; net interest income grew 53%; commissions grew 43%; customer equity grew 33% to $129.2 billion; customer accounts increased 27% to 517,000 and total daily average revenue trades grew 43% to 939,000. Credit for this growth, of course, must be shared with the bull market, and we all know that when the bull market ends, times will get tougher for Interactive Brokers. Still, the trends are great now—all of the above led to a return on equity (ROE) of 12.4%, the highest in the past four years—and the company can be counted on to continue to innovate; you can now trade bitcoin futures through them. Bottom line, Interactive Brokers is a well-managed innovative broker thriving in the current bull market.
Technical Analysis
IBKR had a big run up in 2013, 2014 and 2015, gaining 200% in that period—and then it paused to cool off and let its valuation catch up. And the cooling-off phase—base-building as it were—lasted two years. But it ended in mid-2017, and for the past year, the stock has been climbing steadily higher, with the stock’s increase often matched by improvements in the fundamentals. Most recently, we saw the stock peak at 74 in early March, pull back to 64, and then return to resistance at 74 before tightening up during the past two weeks. And now, IBKR is moving to new highs. You can buy around here with a stop below 70.
IBKR Weekly Chart
IBKR Daily Chart
Realpage (RP)
Why the Strength
We’ve written up numerous cloud software companies that target a specific department within a larger enterprise (HR, finance, IT, etc.). But what about a company that targets a specific industry? That’s RealPage, which is the leading software and analytics provider to the real estate rental industry, offering property management, leasing and marketing, asset optimization (how a portfolio of assets is performing, where’s the best place to invest) and resident services (notifications, rent collection). All in all, it has thousands of customers that together manage 13.2 million properties; combined with its revenue per unit, the firm thinks it has just 6% of its target market, so there’s plenty of room for steady expansion. Indeed, RealPage has an outstanding history of growth, and that continued in Q1, with revenues lifting 32%, earnings surging 68% and the more important EBITDA figure rising 46%, all of which were above expectations. For the full year, the top brass sees EBITA rising 38% (a big hike from prior expectations), and growing in the mid-teens (at least) for the next couple of years. Of course, if the rental market went kaput, that would probably crimp RealPage’s outlook, but right now, occupancy levels are very strong and rents are still advancing. It’s a solid short- and long-term story.
Technical Analysis
RP has been running since the fourth quarter of 2016, albeit with plenty of corrections and consolidations along the way. Still, the stock has acted excellently during the market’s correction, with higher highs and lows during the past three months. And last week, after holding its 50-day line when the market dipped, RP shot ahead to new highs following earnings on Friday. You can buy on dips with a stop near the 50-day line.
RP Weekly Chart
RP Daily Chart
Sarepta Therapeutics (SRPT)
Why the Strength
Mid-cap biotech Sarepta Therapeutics develops treatments for Duchenne muscular dystrophy (DMD), a very rare (one in 3,500 to 5,000 males have the disease), fatal neuromuscular disease caused by gene mutation. The disease is usually diagnosed around age four, leads to life in a wheelchair around 12, and (on average) results in a lifespan of 20 to 25 years. Exondys 51, Sarepta’s first DMD treatment (and sole source of revenue), targets around 13% of the DMD population and has been growing rapidly. First quarter sales, reported last Thursday, were up 295% to $65 million, and should grow nearly 100% in 2018! One fly in the ointment was that European regulators requested more information on the treatment before they can give it the green light (expect a four-month delay in approval there). But investors still drove shares higher given that Sarepta has 15 other treatments in various stages of development (most are early-stage). Plus, it expanded its gene therapy portfolio with five products for Limb-Girdle Muscular Dystrophy (LGMD) through a partnership with Myonexus. LGMD has a market size similar to DMD, but these LGMD drug candidates cover around 70% of that market. Now all eyes are turning to June 19 when Sarepta will host an Investor Day, complete with its product development strategy and in-depth review of pipeline programs. It’s still speculative, but Sarepta has big potential if management executes.
Technical Analysis
SRPT has been up and down on speculation and news over the years, but more stable hands took over in mid-2017 and since August the pattern has been one of mostly higher highs and higher lows with the stock reliably bounding off its 50-day moving average line. More recently, shares topped near 85 in March and, like many growth stocks, etched a tidy seven-week zone (between 71 and 84), with support at the 50-day line appearing a couple of times. Then Thursday’s conference call catalyzed a blastoff to new highs on excellent volume. Look to buy on a pullback of a few points.
SRPT Weekly Chart
SRPT Daily Chart
Shake Shack (SHAK)
Why the Strength
Most great cookie-cutter stories are in traditional retail, but there are a few in the restaurant space as well, and Shake Shack is one of the best. The company dubs itself a modern day “roadside” burger joint, with premium burgers, dogs, fries and shakes. In recent years, though, competition, higher costs (labor, food and paper) and sluggish industry-wide sales in recent years trashed the stock. That said, revenues have always grown rapidly, and now it appears more of that is falling to the bottom line, which, combined with huge long-term growth potential, has brought back the buyers. In Q1, revenues grew 29%, and same-store sales lifted 1.7%—not a great figure, but better than been in recent quarters and above estimates. EBITDA (up 33%) and earnings (up 50%) also topped expectations. The most exciting part of the story, though, is the store count—the firm had 159 restaurants in operation at the end of 2017 (90 of which were company operated, with the rest licensed), but anticipates growing that by a whopping 50 or so this year alone (35 of which will be company owned), including a bunch in new markets. Looking ahead, the firm is aiming for 200 company-operated locations by 2020 (up from 90 at year-end 2020) and 450 over the long term! Profitability isn’t as consistent here as we’d prefer, but the growth story is big and investors are looking ahead. We like it.
Technical Analysis
SHAK came public in early 2015, had a great first few months and then crashed and burned. But that started a massive 21-month bottoming process where the 30 level held multiple times, providing a very firm base to work from. SHAK rallied to 47 last December before building a new, proper launching pad during the past few months, and last week was the blastoff—shares exploded to multi-year highs on enormous volume after earnings. Go ahead and buy a little here or on dips, though use a loose loss limit.
SHAK Weekly Chart
SHAK Daily Chart
Shutterfly (SFLY)
Why the Strength
We’ve written up Shutterfly a couple of times in Top Ten since its coming out party back in February, and the story continues to get better. The company has always been a nice online photo printing and sharing business, but it was never enough to excite big investors—the firm has shown some decent execution in its newer business solutions printing business (revenues up 52% in Q1, for instance), but it’s a tiny slice of the pie. Today, the story is about Shutterfly’s acquisition of Lifetouch, which was completed April 2. Lifetouch dominates the school photo market, making it a natural extension of the Shutterfly brand; management expects EBITDA to nearly double during the next three years, including $50 million of synergies. Moreover, the top brass is pleased with how Lifetouch has performed in recent months (before the official buyout), and their guidance in the Q1 conference call last week opened eyes—revenues for 2018 for the combined company should be just over $2 billion, with $400 million of EBITDA (up a whopping 71% and miles ahead of the initial outlook for $270 million) and earnings a bit north of $3 per share. (Management’s outlook for 2020 looks extremely conservative given these numbers.) The new company won’t be a great growth story (single digit organic growth is most likely), but Wall Street knows an emerging cash cow when it sees one. Shutterfly remains an intriguing special situation.
Technical Analysis
SFLY’s gargantuan-volume breakout in January was the tip-off that a new advance had begun, but nearly as encouraging has been the stock’s action during the past two months—shares built a shallow 12% deep base from mid-March through May 1, before popping to new highs on excellent volume last Wednesday. We advise buying on dips, with a stop near the 50-day line.
SFLY Weekly Chart
SFLY Daily Chart
Splunk (SPLK)
Why the Strength
The King of Big Data is back in Top Ten for the third time this year boosting a large and growing addressable market, emerging opportunities in high growth areas like IoT, business analytics and security, and signs of significant profit growth. The chart’s not bad either! If you’re not familiar with Splunk, its software helps customers analyze machine data, which is all the digital information created by anything with a microchip in it, basically providing companies with a definitive record of all the activity of customers, IT infrastructure, applications and more. Splunk’s clients mine the data to gain operational insights, and Splunk is the clear market leader in this very specialized (but huge) market. Morgan Stanley estimates Splunk’s platform can address $62 billion in spending across IT operations, security, analytics and IoT. Morever, that market is growing (up 13% over the past year, with more growth on the way), and Splunk’s security and IT operations bookings are attracting huge numbers of clients (bookings up 50% and 25% in those two fields, respectively, over the past few quarters). Management has said it sees the company having 20,000 clients by 2020, which implies an accelerating pace of new client wins during the next couple of years. That pace of growth should help revenue expand by 28% this year and 25% in 2019. Perhaps more importantly, with scale comes leverage, which should drive EPS growth of 63% this year and 45% in 2019. Earnings are due May 24.
Technical Analysis
After a couple of years trading sideways, SPLK blasted off last November and kept going higher through the middle of March, with a few normal pullbacks to the 50-day line along the way. However, the stock topped out in the middle of March around 110, and it’s since been consolidating normally—there have been a couple of sharp dips to the 95 to 98 area, but overall, shares have etched a seven-week zone, and the relative performance (RP) line is perched near a new high. We’re OK buying a little here, or on a breakout above 110, and then seeing what earnings brings.
SPLK Weekly Chart
SPLK Daily Chart
Valero Energy (VLO)
Why the Strength
Valero is one of the largest players in the refining field, with 15 refineries that have capacity of 3.1 million barrels per day (bpd), a majority-owned master limited partnership that has one million bpd of pipeline capacity and 2.9 million bpd of terminal capacity and even 11 ethanol plants with 95,000 bpd of capacity. Like most of its peers, Valero is thriving as it’s getting relatively cheap inputs (management said the company is taking advantage of discounted oil in certain areas of the U.S.; it expects to get its hands on more cheap Permian Basin oil in early 2019) but its refined outputs are selling for higher prices alongside rising oil prices. That’s the main reason the stock is strong today—earnings topped expectations and rose 47% in Q1, and analysts see the bottom line rising 46% this year and another 22% in 2019. Also helping is some recent M&A in the sector (Marathon Petroleum is buying Andeavor for a cool $23 billion to leapfrog Valero as the largest refiner in the U.S.) and Valero’s own capital return program—the stock’s dividend yields 2.8% annually, and the firm’s share count is down 4.2% from a year ago. Bigger picture, the question running through big investors’ minds is whether the refining group is beginning a new era of prosperity with elevated U.S. production leading to tame input prices, tight refining capacity keeping outputs priced high and lower corporate tax rates boosting earnings. It’s not changing the world, of course, but Valero has a lot of tailwinds today.
Technical Analysis
After a persistent run to 100 in late January, VLO corrected and consolidated with the market through March; shares dipped sharply early but, after a bounce back, tightened up nicely for about seven weeks, a good sign. Since April began, VLO has been surging, including a stretch of 14 of 15 up days, and the stock actually saw additional good-volume buying last week. You can start small on minor weakness.
VLO Weekly Chart
VLO Daily Chart
Zendesk (ZEN)
Why the Strength
Zendesk is taking customer service to the cloud, with one of the leading platforms that allow all sizes of clients to more efficiently handle their support functions, as well as integrating chat, call center and a knowledge base (multilingual content, answer bots, etc.) as needed. And customers can get started for a reasonable price, too—as low as $5 per agent per month, though that can quickly scale to north of $200 per month for all the bells and whistles. The company has been a major success story, with steady, rapid growth in both revenue (now at a $500 million annual run rate) and customers (125,000 paid accounts in Q1, up 23% from a year ago). Zendesk started with a focus on small- and mid-sized outfits, but it’s expanding its offerings for enterprises, which make up a good chunk of its growth today (38% of its recurring revenue now comes from clients that have at least 100 agents on the platform, up from 34% a year ago). Given that Zendesk is a clear leader in its field and its offerings are leaps and bounds better than legacy systems, success is just a matter of management continuing to expand the platform’s functionality, attracting more customers and boosting cross-selling opportunities. The Q1 report last week was well above estimates, and management now sees revenues up another 32% this year (likely conservative) with earnings and free cash flow nosing into the black. Lastly, it’s good to see that some big investors are big believers—Fidelity owns more than 13% of the entire company!
Technical Analysis
Despite ZEN’s growth, the stock didn’t really get going until January of this year when it eclipsed 36. Since then, the stock has shown outstanding action, running to 50 in mid-March, and holding its 50-day line during the past few weeks of sloppy market action. Then, last week, the stock surged to new highs on good volume following earnings. ZEN looks like it wants to go higher if the market lets it—you could nibble here or on dips.
ZEN Weekly Chart
ZEN 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.
