November 11, 2019

To Pullback or Not to Pullback

Current Market Outlook

The major indexes have now rallied five weeks in a row, with most having at least eked out to new highs during that time. That push higher has created a few short-term yellow flags among overbought and sentiment measures; similar readings during the past few months have preceded multi-week, tedious retreats in the market. What happens this time around will be key: With the trends up and longer-term measures supportive, we’re optimistic the market has changed character for the better, but should the market and leading stocks suffer a deep retreat, that would probably put us back in the soup. In the meantime, we’re going with the evidence, which continues to improve both for the indexes and new leading stocks.

This week’s list has another round of stocks that have recently enjoyed outsized accumulation. It’s a tough choice, but our Top Pick is United Rentals (URI), which looks like a potential leader among cyclical stocks.

Cirrus Logic Inc. (CRUS)

www.cirrus.com

Why the Strength

While the overall semiconductor market is expected to see softness into 2020, there’s one spot in the sector that promises big growth starting soon: Chips for smartphones, where the big growth driver will be the launch of numerous 5G handsets. Analysts now believe 5G penetration will be in the mid-teens percentage-wise, double the forecast from just a few months ago, with a couple hundred million likely to be sold in 2020 alone. That’s great news for Cirrus, a fabless semiconductor company that makes high-performance, low-power integrated circuits for audio and voice signal processing applications. The company’s chips can be found in portable and non-portable media players, smartphones, tablets and other electronics. The good news is already showing up in Cirrus’ bottom line. In the latest quarter, Cirrus’ revenues were up 6% to $289 million and earnings soared by more than 44% to $1.55 per share, pummeling analysts’ estimates by 61 cents. Results were helped by production increases of smartphone parts including boosted amplifiers, haptic drivers (used for vibration applications) and a new smart codec (reduces needed bandwidth and storage). There’s no question that Cirrus is a down-the-food-chain stock—the vast majority of its business come from Apple—but Cirrus has been reducing its reliance on them, as it’s now shipping product into eight of the top 10 OEMs. And with the expected easing of tariffs with China, the outlook for the company is excellent. Growth is expected to remain strong in the quarters to come, and EPS estimates have been rising, up a whopping 12% in the past 30 days.

Technical Analysis

CRUS bottomed with the market late last year and 2019 has been fantastic thus far, though not without some sharp pullbacks (50 to 37 in May) and long consolidations (51 to 56 from August through October). But the blowout quarterly report in October caused CRUS to zoom as high as 72, and it’s refused to give up any ground since. We suggest aiming for modest weakness if you want in.

CRUS Weekly Chart

CRUS Daily Chart

Dexcom (DXCM)

dexcom.com

Why the Strength

While the stocks have been mixed during the past year, one of our favorite fundamental growth themes remains treating diabetes—due to major technological advancements, more and more patients (Type 1 and Type 2, kids and adults) are moving away from the tedious and relatively inaccurate practice of measuring their glucose levels by finger sticks (and then injecting themselves with insulin many times per day). A better idea is a continuous glucose monitor (CGM), and Dexcom’s G6 is one of (if not the) best out there, with fingerstick accuracy on its measurements, no need for recalibration every day and the ability to digitally share the ongoing readings with a few people (big for parents with diabetic kids, for instance). CGMs like the G6 are increasingly being integrated into many insulin pumps, too, giving patients far better results in controlling their glucose levels (and thus, enjoying better outcomes) than random monitoring. There is competition from Medtronic and Abbott, but Dexcom is the market share leader at this point, and besides, the major theme is about attracting more and more new patients that are still sticking themselves. Despite that, competitive fears had contained the stock, but the Q3 report has changed that—sales and earnings blew away estimates as adoption surged and sensor (recurring) sales boomed more than 60%. And 2020 looks like another great year, with the next generation G7 set for initial release about a year from now. We see a long runway of growth ahead.

Technical Analysis

DXCM had a big run in 2018, running all the way to the mid 140s in September of last year. But while the stock didn’t implode from there, it lost buyers—14 months later, the stock was still hanging around the 150 area with no upside momentum. But last week’s quarterly report changed everything, with DXCM soaring on eight times average volume as high as 200. We’re fine starting a small position here or on dips.

DXCM Weekly Chart

DXCM Daily Chart

InMode Ltd. (INMD)

www.inmodemd.com

Why the Strength

InMode is an Israeli company that looks to have a better mousetrap when it comes to aesthetic surgery—it’s radio frequency-based (RF) platforms offer a way of remodeling fatty tissue with little to no incisions, no need for general anesthesia (can be done on an outpatient basis), can simultaneously kill fat and tighten skin, allow for permanent hair reduction of most hair types and, for the surgeons, the product costs less and takes up less space than competing solutions. Plus, much of this is backed up by 40-plus clinical studies and peer reviews. It’s not a mass market, but it’s not a small one, either—there are around 11 million surgical aesthetic procedures done annually, a figure that’s rising most years, and InMode is quickly taking share as it launches new products for different end markets, expands internationally (India and Australia look to be next) and boosts its sales force. Throw in experienced management and the company is firing on all cylinders—revenue growth is accelerating, bolstered by sales outside the U.S. (up 88% in Q3), while profits are booming and easily topping expectations (46 cents per share in Q3 compared to estimates for 30 cents). We think InMode has big potential as its products look borderline revolutionary for the aesthetics sector.

Technical Analysis

INMD came public in early August, near a market low, and had a good first few weeks, rallying to nearly 30 by mid September. The market’s wobbles after that caused the stock to etch a five-week consolidation, but the breakout came in mid October and INMD has accelerated higher since then, including a pop on earnings last week. Any pullback or shakeout should provide a good opportunity.

INMD Weekly Chart

INMD Daily Chart

Insulet (PODD)

www.insulet.com

Why the Strength

Insulet is the maker of the Omnipod Insulin Management System, a wearable pump that delivers up to three days of insulin without the use of needles. Omnipod technology can also be used for non-insulin subcutaneous drug delivery in other therapeutic areas. It’s a big growth area (Dexcom, written about earlier in this issue, is another play on diabetes), and investors were thrilled with Insulet’s quarterly report last week. Revenue was $192 million, 27% higher than a year ago and much higher than guidance, reflecting strong growth in both U.S. and overseas Omnipod sales, as well as greater sales in the pharmacy channel. For the third time this year, management raised full-year 2019 revenue guidance, and there should be plenty more of that in the years ahead; Wall Street is expecting $873 million revenue in 2020, a 20% increase from this year (which is probably conservative). Insulet is beginning a trial this week for its new Horizon Omnipod continuous glucose monitoring system (possible launch in the second half of next year; will use readings from Dexcom’s G6). The company is certainly preparing for higher demand, installing a second manufacturing line at their new U.S. facility, with production expected to commence in 2020, and a third manufacturing line should be up and running later in 2020. Bottom line, Insulet looks likely to be a big winner as more diabetics switch to pumps.

Technical Analysis

PODD broke out in May and leapt all the way to 169 by September with the help of a great reaction to Q2 earnings. Then shares entered into a reasonable consolidation—the stock gyrated between 140 and 170 (roughly) for a couple of months on generally light volume. Now buyers are back at it after Q3 results, with PODD shooting to new price highs (though the RP line, not shown here, is a bit shy of its old peak). You could nibble now or (preferably) on dips of a few points.

PODD Weekly Chart

PODD Daily Chart

MKS Instruments (MKSI)

www.mksinst.com

Why the Strength

MKS Instruments is a provider of technologies that enable advanced processes and improve productivity, primarily for the semiconductor, industrial technologies, life and health sciences, research and defense industries. Like most chip equipment plays, business has been soft for a while, but the stock is strong today because of hopes for a pickup in growth, and those hopes are being helped out by solid quarterly results that are finally hinting that an upturn is around the corner. In Q3, both sales (down 5%) and the bottom line (down 40%!) shrank from a year ago, but earnings of $1.12 per share beat the $0.87 consensus estimate by a mile, while revenue of $462 million topped estimates by 4.4%. Management guided Wall Street higher on Q4 revenue expectations, and delivered a wide range of fourth quarter EPS estimates, the average of which matched the consensus estimate. On the M&A front, MKS acquired Electro Scientific Industries (ESI) in early 2019, an innovator in laser-based manufacturing solutions for the micro-machining industry, and that’s expected to enhance margins and profits in 2020—at this point, analysts expect full-year 2020 EPS to grow 42%, and given the magnitude of beats seen across the industry, even that could prove conservative. Overall, MKS looks poised to ride the new bull trend in the chip sector.

Technical Analysis

Like so many other stocks, MKSI had a long run-up that culminated in early 2018. The stock then proceeded to lose half its value by year-end, only to dramatically in the first four months of this year. After trading between 70-100 from May through early October, MKSI rose 20 points after its bullish Q3 and has since consolidated quietly with no big-volume profit taking showing up. We’re fine starting a position here or on further dips.

MKSI Weekly Chart

MKSI Daily Chart

State Street (STT)

www.statestreet.com

Why the Strength

State Street is a leader in various investment bank-related areas—it’s the second largest custody bank, has a good-sized risk management office for clients, is the third largest global asset manager and ETF provider and is the top foreign exchange provider to asset managers. That said, business has been crummy, with revenues flattening out and earnings heading south over the past four quarters. But the stock is picking up steam for a few reasons. First, when it comes to the company itself, it’s looking like business is likely to stabilize (solid servicing wins last quarter should help), and a good-sized expense reduction program helped Q3 earnings top estimates and has analysts seeing the bottom line rising in 2020. Second, the stock is cheap (12 times earnings) and has a shareholder friendly top brass (2.9% dividend yield, share count is down 2.3% from a year ago). And third, looking at the industry, money is flowing back into the big-cap investment houses as the bull market appears to be reaccelerating following a few choppy months. After being taken to the woodshed for much of the past two years, big investors have moved back to the buy side here.

Technical Analysis

STT hit 109 in January 2018 when the bull market reached a fever pitch; by August of this year, it had dipped below 50 as business was heading the wrong way and sentiment toward the group was awful. However, September saw a huge-volume pop higher, and after a pullback into early October, STT has gone vertical, with selling limited to just a day or two at a time. If you’re game, dips of a couple of points should provide a decent entry point.

STT Weekly Chart

STT Daily Chart

Tesla, Inc. (TSLA)

tesla.com

Why the Strength

We’ve been following the market for decades, and we’ve never quite seen a stock be so much in the news as Tesla, yet do so little (no net progress for five years through September) over a long period of time. The reason for that underperformance (and for the extraordinary short interest of 37 million shares, or 28% of the float) wasn’t bad products or fading demand—Tesla has sold as many cars as it’s could produce, and it’s been producing a lot more (more than doubling output during the past 18 months) over time. Instead, it’s been in the crosshairs due to its inability to turn that demand into profits, which in turn caused some fears about its liquidity. But the stock appears to have turned the corner—fundamentally, the company turned cash flow positive in Q2, and the stock has changed character after the Q3 report resulted in a good-sized surprise profit, with many future positives (planned launch of its Model Y electric crossover next summer; ramping up readiness of its Shanghai production facility, which should cut per-unit costs down the road) also talked about. Few are willing to take management at their word here, but S&P said the firm’s credit outlook has shifted positive, Wall Street analysts see earnings surging north of $5 per share next year and the market seems to be sniffing out good things (or at least a lack of downside surprises) going forward. We think Tesla makes for an intriguing turnaround story.

Technical Analysis

TSLA peaked at 385 or so in June 2017; two years later, it bottomed at 177! The initially rally after that was solid (back to 260 this summer), and instead of falling apart during the market’s many weak spells, the stock actually built a decent-looking base. And now the buyers have stepped up—TSLA broke out after Q3 earnings, zooming from 255 to 330 in two days of massive volume, and it’s built on those gains since. We think aiming to buy on modest weakness should work.

TSLA Weekly Chart

TSLA Daily Chart

United Rentals, Inc. (URI)

unitedrentals.com

Why the Strength

While residential construction accounts for some 39% of all construction, the sector has essentially been flat since 2017. Not so for Commercial construction, which has seen fantastic long-term growth since 2003, rising from $218 billion in that year to an estimated $463 billion in 2019. And that has been a boon to United Rentals, where commercial construction comprises 47% of its revenues. The company rents out just about anything you’ll find at a construction site, including backhoes, skid-steer loaders, forklifts, earthmoving equipment, and material handling equipment; boom lifts and scissor lifts; and even power tools. But the fastest-growing division of United Rentals is its Trench, Power and Fluid Solutions segment, which rents specialty construction products such as trench safety equipment, portable diesel generators, electrical distribution equipment and temperature control equipment, as well as equipment primarily used for fluid containment, transfer, and treatment. This segment focuses on infrastructure projects, another part of the construction business that is seeing sustained growth. (Public construction spending has grown from $215 billion in 2003 to $329 billion in 2019.) These expanding markets are propelling United Rental’s growth and profits. For its third quarter, United Rentals posted revenues of $2.49 billion, up 18%, while earnings rose 26%, to $5.96 per share, handily beating estimates. Growth isn’t expected to be anything amazing in 2020 (up 5%), but (a) that’s probably conservative and (b) the stock has already discounted far worse given that it trades at just eight times earnings. United Rentals looks like another cyclical stock whose best days are ahead of it.

Technical Analysis

URI fell from 191 in the spring of 2018 when everyone felt great about the U.S. economy, to a low of 94 last December and it was still near 110 in August of this year when trade war worries were one everyone’s lips. But since early October URI has completely changed character, with a strong reaction to earnings in the middle of last month and a smoke-up-the-chimney advance during November. A pullback is likely, but we’re not expecting a major retreat given the long, drawn out decline and consolidation phase.

URI Weekly Chart

URI Daily Chart

Visteon (VC)

Why the Strength

Visteon is the world’s leading supplier of automotive cockpit electronics and autonomous driving systems. Investors were expecting a strong third quarter, and they weren’t disappointed after the firm surpassed expectations—earnings per share of $0.53 beating estimates by six cents, new product launches helped revenue grow to $731 million (above the $700 million consensus) and Visteon’s year-over-year revenue growth was 10 percentage points higher than its peers. So far this year, the company has inked $4.6 billion of new business, with more than 60% of that stemming from next-generation technology including digital instrument clusters, infotainment and displays. Management reiterated full-year revenue guidance of approximately $2.95 billion, and pleased investors by guiding the year’s free cash flow $10 million higher than previously expected. And investors love the continued share buyback program, which has cut shares outstanding by a mind-boggling 40% since 2014 (share count in Q3 was down 4.7% from a year ago). Despite global auto sales trending downward after peaking in 2017, including declining Asian auto demand, Visteon is expected to grow revenues in 2020 due to significant new contract wins. Despite the relatively good tidings, many are betting against Visteon—short interest of 4.1 million shares is currently at a high point for the year (15% of the float!), which represents a lot of potential buying power should the company continue to execute.

Technical Analysis

VC had a tremendous run-up in 2017 and 2018, peaking at 140, before imploding for four straight quarters, bottoming in June 2019. VC has since rallied strongly, with surges to new recovery highs usually leading to a four- to six-week rest periods, before another round of buying takes hold. That seems to be playing out again, with a calm consolidation following the late-October earnings rip. We’re OK nibbling here or preferably on dips.

VC Weekly Chart

VC Daily Chart

Winnebago (WGO)

www.winnebagoind.com

Why the Strength

It’s ‘on the road again’ for RVer’s. The RV industry set all-time records back in 2017, selling 504,600 units that year as the economy surged and employment/wages followed along, before a rough patch during the past couple of years. Still, there have been good tidings of late from some industry players, including Winnebago, which is helping investor perception. This company owns 9.7% of the RV market, and a combination of better-than-expected results, expectations of an improving economy, a cheap valuation (14 times trailing earnings) and M&A activity is bringing in buyers. The firm’s fiscal fourth quarter results weren’t anything amazing (basically unchanged from a year ago), but results did beat estimates and had some bright spots under the surface. (Winnebago’s Towable RV segment, which accounts for 58% of revenue, actually grew a solid 6.3%.) The company is benefiting not only from industry growth but also from strategic acquisitions, including its most recent—Newmar Corporation—a manufacturer of Class A and Super C motorized recreation vehicles. Winnebago also expanded into the marine business last year with its purchase of recreational boat builder Chris-Craft. Really, though, this is about a stock that was left for dead but now appears to have growth left in it (earnings are seen rising 21% for the year ending next August) going forward. A modest 0.9% dividend puts a nice bow on the package.

Technical Analysis

RV stocks have been weak for the past year or so, but that’s now changing and WGO is leading the way. The stock fell from 59 last year to a low of 20 in December, then rallied back to 42 in June. And then the stock etched a nice launching pad through mid October. The breakout came after earnings, with shares lifting to 52 and holding up well since. We’re fine buying some around here or (preferably) on dips.

WGO Weekly Chart

WGO 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.