A Normal Rest
Current Market Outlook
After a straight-up move in recent weeks, the major indexes had a couple of wobbles during the past few days, which has done some damage to certain areas—small-cap indexes are standing right on top of their 50-day lines and many individual stocks and sectors have come back down to earth, even among large-cap stocks. Even so, the vast majority of major indexes and Top Ten stocks are still acting well, with more than a few racing up the charts following positive earnings reactions. We have our eyes open should the weak broad market “infect” leading stocks, but so far, the market’s recent rest looks normal to us. Thus, you should stick with a bullish stance, giving your strong stocks a chance to continue advancing, while looking for entry points as stocks pause.
This week’s list has something for everyone, with some healthcare, some energy (for the first time in a while) and some true growth stocks. Our Top Pick is Planet Fitness (PLNT), a great cookie-cutter story that just surged on earnings. Buying on some weakness is your best bet.
| Stock Name | Price | ||
|---|---|---|---|
| AbbVie Inc. (ABBV) | 93.53 | ||
| Alnylam Pharmaceuticals (ALNY) | 143.58 | ||
| Continental Resources (CLR) | 66.19 | ||
| Micron Technology, Inc. (MU) | 43.31 | ||
| NVIDIA Corporation (NVDA) | 242.42 | ||
| Planet Fitness (PLNT) | 0.00 | ||
| ProPetro (PUMP) | 23.30 | ||
| Red Hat (RHT) | 0.00 | ||
| ZTO Express (ZTO) | 28.84 | ||
| Zendesk (ZEN) | 82.19 |
AbbVie Inc. (ABBV)
Why the Strength
AbbVie weathered the recent volatility in biotech stocks with barely a wobble. Investors have become accustomed to roughly 10% revenue growth and consistent earnings growth from the company, which specializes in treatments for chronic autoimmune diseases, virology and neurological disorders. The growth trend looks intact following a beat-and-raise Q3 report on October 27 when AbbVie reported 9.5% revenue growth and EPS of $1.41, which beat by $0.03. The growth engine is mostly powered by Humira (63% of 2016 revenue), AbbVie’s biologic treatment for rheumatoid arthritis, psoriasis and Crohn’s disease. The story behind the Q3 numbers includes greater clarity on Humira’s longevity following a patent dispute settlement with Amgen, which prompted a 17% increase to Humira’s 2020 sales forecast (to $21 billion) from management. Sales of its blood cancer treatment (and second biggest revenue generator) Imbruvica were also up a solid 37% in Q3. And the pipeline looks promising with revenue from Elagolix (endometriosis and uterine fibroids) expected to kick in next year, and six additional pipeline candidates expected to hit the market in 2019. That said, pipeline drugs should only make up around 6% of total revenue by 2020, so the biggest driver of the stock’s value will continue to be Humira, so any news/rumors about long-term competition will affect perception. Right now, though, investors see years of steady growth ahead.
Technical Analysis
ABBV has been grinding higher for most of the year with normal pullbacks and consolidations along the way. The breakout came in early September when shares leapt above 75 on heavy volume and reached 90 within a couple of weeks. After rallying to 98, the stock did have a shakeout late last month, but it held its 50-day line and has since nosed back near its old high. We’re OK with buying some here, with a relatively tight stop below 88.
ABBV Weekly Chart
ABBV Daily Chart
Alnylam Pharmaceuticals (ALNY)
Why the Strength
Alnylam Pharmaceuticals, a company specializing in RNA interference (RNAi) therapeutics for the treatment of rare diseases, made its fourth appearance in Cabot Top Ten Trader on September 25 after partial good news from a Phase III clinical trial for patisiran, a treatment for hereditary amyloidosis with polyneuropathy. The news gapped the stock up by 52% on a massive spike in volume. Today’s appearance in Top Ten comes courtesy of the issuance of the complete positive Phase III report on patisiran that confirmed the good news. The company also reported Q3 results on November 7, but the reaction, while positive, didn’t produce so much as a bump in trading volume. Alnylam has also enjoyed news that a committee of the European Medicines Agency has granted an accelerated assessment license to patisiran. Management has set a goal of having three marketable drugs by the year 2020, and with four candidates in late-stage clinical trials, it looks like progress is being made. It’s still speculative, but the odds are improving on Alnylam.
Technical Analysis
ALNY made a big run from 2012 to the middle of 2015, but bounced down from its high of 140 in June 2015 to 31 in November 2016. The stock began to rally as 2017 began and it’s now down a few points from its close at 140 last Friday. It’s possible that ALNY will trade sideways until the next piece of good news from clinical trials, but the stock seems like a reasonable bet. You can use this pullback as a buying opportunity and use a loose stop around 119.
ALNY Weekly Chart
ALNY Daily Chart
Continental Resources (CLR)
Why the Strength
It’s been a long time since we’ve seen broad strength in energy stocks, but the group has turned newly strong as oil and natural gas prices have ratcheted higher in recent weeks. Continental Resources is one of the blue chips in the group, though interestingly, its production is outside of the ballyhooed Permian Basin in Texas—the firm has two million net acres in the Bakken as well as the Stack and Scoop areas in Oklahoma. Like every good explorer, Continental has been improving drilling efficiencies (costs per barrel are down 13% to 26% across its acreage) and now sees a breakeven price of less than $30 per barrel of oil in all of its areas—its well returns at $50 per barrel of oil ranges from 70% to north of 100%! Continental had not been exapnding production as quickly during the uncertainty in the sector, but the stock is strong today because investors see the firm’s earnings power surging as energy prices rise, and as the company aims to quickly hike products. In Q3, total production rose 7% from the prior quarter (oil rose 12% and made up 58% of all output), and it now expects year-end output to be up around 35% from a year ago. Obviously, a lot will depend on energy prices, but with a ton of acreage left to tap, it’s a good bet that Continental will see revenues, cash flow and earnings surge in the quarters to come.
Technical Analysis
CLR peaked at 81 in 2014, slipped to 14 in early 2016, rebounded back to 60 late last year and then bled down to 30 by July of this year. The recovery was modest for the first three months, but after tightening up near 37 in early October, shares have soared on excellent volume during the past three weeks, including a positive move after earnings. It’s extended here, but we view the recent strength as a potential start of a new uptrend. You could buy a small position on shakeouts.
CLR Weekly Chart
CLR Daily Chart
Micron Technology, Inc. (MU)
Why the Strength
Micron’s growth trend looks about as strong as any we can remember, especially for this cyclical chip stock, which specializes in DRAM, NAND and NOR flash memory. Shares wobbled just a little prior to the company’s September 26 fourth-quarter earnings report, but another better-than-expected result (the fifth in a row) has allayed concerns that the story is nearing its final chapters. If you’re new to the name, the big picture trend is a longer peak cycle for Micron this time around given new applications in DRAM (65% of revenue) and NAND (30% of revenue), including artificial intelligence, virtualization and solid-state-drives. Perhaps the best evidence of an extended cycle, and Micron’s strengthening competitive position, is management’s guidance for $7.5 billion in capital spending next year. That’s at least $1 billion more than analysts estimated, and suggests Micron is confident it can go head-to-head on cost with other players (i.e., Samsung and Hynix) and still win. The bottom line is that investors are beginning to value Micron in line with peers (as opposed to being valued cheaper because of the firm’s history of big earnings swings), which means a higher multiple than the stock historically earned. Combine multiple expansion with estimated 2018 revenue and EPS growth of 23% and 55%, respectively, and big investors should continue to snap up shares.
Technical Analysis
MU’s 2017 trading pattern was one of higher highs and higher lows until shares ran out of momentum mid-summer. That break was short-lived, however, and ended after an August dip below its 50-day line. MU broke out in September and has enjoyed a persistent uptrend since. Shares did pause for most of October, but the 25-day line brought in some big-volume buying, and the stock is testing new highs again after a brief breather. Try to buy on dips.
MU Weekly Chart
MU Daily Chart
NVIDIA Corporation (NVDA)
Why the Strength
Nvidia’s stellar Q3 earnings report last Thursday (revenue up 32%, EPS of $1.33 beat by $0.26) marks its ninth consecutive quarter of topping expectations, with growth strong across the board, which has kept big investors hitting the buy button for shares of the GPU specialist. As we stated when we last covered the stock in September, Nvidia has its hands in arguably the fastest-growing chip markets, including PC-gaming, auto, datacenter, artificial intelligence (AI), virtual reality (VR) and cryptocurrencies. The two platforms to watch in Q3 were Gaming and Datacenter, which were up 25% and 109%, respectively. Datacenter strength was driven by shipments of the New Volta GPU, a graphics processor for deep learning and AI, while Gaming was driven by Tegra Processors (for Nintendo Switch), GeForce GPUs (PC gaming) and cryptocurrency mining. We’ve noticed the analyst community is starting to emphasize a long-term view on Nvidia, which is unusual for stocks in the semiconductor space (many analysts see 15% to 20% growth beyond 2020). The bull-case scenario is powered by sustainable growth in gaming and datacenter, with autos and VR kicking in next year and helping the company to maintain pricing power, while grabbing market share from AMD. Analysts have consistently underestimated Nvidia’s growth, and they still see a slowdown to just 16% revenue growth next year. Institutional investors are obviously not buying it, focusing instead on the company’s outstanding execution and leading position in so many high-growth areas. It remains a leading growth stock.
Technical Analysis
NVDA broke out in May and the stock has traded comfortably above its upward-sloping 50-day line ever since. The last consolidation phase lasted from mid-July through mid-September, when shares traded mostly in the 160 to 175 range. A head-fake to 190 on September 18 was quickly rejected by sellers, but by mid-October buyers were back and shares walked up to 200. Momentum paused there for a week or so, then buying resumed and demand has since pushed the stock into the 215 area. You could buy some here or (preferably) on dips of a few points.
NVDA Weekly Chart
NVDA Daily Chart
Planet Fitness (PLNT)
Why the Strength
Planet Fitness remains one of the best retail stories in the entire market, with a unique business model and a very long runway for growth. The company, of course, is a national chain of fitness centers, and it’s thriving fundamentally because of its low price (membership starts at $10 per month, though there are higher-priced plans) and non-intimidating environment (Judgment Free Zones), so it appeals to a wide variety of exercisers (35% of members are under 35, 22% are over 55; 29% make less than $50k per year, 27% make more than 100k, etc.). Because of bullish store economics (about a four-year payback) and a franchisee model (95% of new stores), the firm has a huge expansion plan, with room for more than 4,300 stores in the U.S. and Canada, up from 1,432 today. The stock is strong today because of another great quarterly report last week—not only did sales (up 12%) and earnings (up 19%) top expectations, but EBITDA rose 22%, same-store sales rose 9.3% and the firm opened up 31 new locations in the quarter. Even better, management said it was likely to hike the price of its popular black card membership by 10% (currently $20 per month), which was one reason the top brass hiked guidance. We like this story a lot, and are impressed that, despite a thinly traded stock ($30 million per day), institutions are jumping in—349 mutual funds own 63 million shares today, up from 209/22 million a year ago.
Technical Analysis
PLNT has been in a slow, choppy uptrend for the past few months, generally riding its 50-day line higher over time. There have been some strong, big-volume rallies (including a romp higher in June and an earnings pop in August), along with some listless meandering. Last week brought another big, earnings-inspired jump to new highs that keeps the uptrend intact; minor dips look buyable.
PLNT Weekly Chart
PLNT Daily Chart
ProPetro (PUMP)
Why the Strength
ProPetro is a newly-public company (IPO’d on March 17 of this year) that’s a pure play on fracking in the Permian Basin. The company provides all types of fracking and related services via 16 fleets that are in operation today (including four that hit the field since the start of Q3), with a 17th planned for early next year. These fleets have been designed for the Permian’s wells (longer horizontal wellbores, more frac stages and proppant per well), making them attractive for major drillers in the area. Utilization can dip quite a bit when drilling activity softens (it dipped to 60% or so during the 2016 bust), but right now, it’s the opposite, with all of the firm’s fleets fully utilized, including 90% of the fleet working 24/7! Today, in fact, management is focused on no speculative newbuilds (the new fleet coming on-line next year has a multi-year commitment from a major explorer, for instance), and 2018 as a whole is effectively sold out. The stock is strong today because business is exploding—revenues have risen at triple-digit rates each of the past two quarters, the bottom line is surging (cash flow rose 56% in Q3 from the prior quarter) and the firm’s balance sheet is very healthy, allowing ProPetro room to continue expanding if the recent spike in energy prices sticks (which will surely lead to an acceleration in drilling activity). Analysts see earnings tripling next year, but even that could prove very conservative should the bull scenario play out. It’s an interesting, high-potential situation.
Technical Analysis
PUMP looks to be just emerging from a seven-month, post-IPO base. Shares didn’t move much from its 14 IPO price through July, before a dip to 11 in August likely shook out some weak hands. But after a rally back and quick shakeout in October, PUMP has surged to new price and relative performance (RP) peaks on heavy volume. It’s choppy on a day-to-day basis, but the buyers are in control—dips look buyable.
PUMP Weekly Chart
PUMP Daily Chart
Red Hat (RHT)
Why the Strength
Red Hat is a company that makes operating systems and related systems management services based on the open-source Linux platform. Red Hat’s customers are companies who appreciate the ease and reliability of Linux and use its services in operating systems, virtualization, middleware, storage and cloud computing. Red Hat has been a model of consistency in its revenue growth, scoring percentage gains in the teens over the last five years. Growth has been both organic, through gaining new customers and adding services, and by takeovers of companies like Permabit Technology that augment product offerings. The company’s alliances with divisions of Microsoft and Amazon help to cement its position. The company has scored good earnings beats in June and September accompanied by increased guidance, which appeals to investors. Red Hat forms long-term relationships with many of its customers, becoming an IT partner that supplies tech support, maintenance, training and other services that bring in continuing revenue. It won’t likely be a runaway market leader, but Red Hat is a reliable growth name. The latest quarterly results will come out around December 21.
Technical Analysis
RHT is cyclical, but is now in a solid uptrend. In the chart, you can see the gaps up and spikes in trading volume on June 21 and September 26, and the continuing advances that have followed. RHT started a consolidation in the middle of October, trading quietly under resistance at 122 and last week’s rally that sent it to new highs. This won’t be a rocket shot, but RHT has been featured in Cabot Top Ten Trader 14 times in the past (dating back to 2003), which is pretty good evidence that management has kept the stock in the leadership group for a long time. You can buy RHT on a pullback of a point or two and keep a stop around 112.
RHT Weekly Chart
RHT Daily Chart
ZTO Express (ZTO)
Why the Strength
ZTO Express is the FedEx of China, a company whose delivery area includes 96% of Chinese cities and rural areas. ZTO is full service—both pickup and delivery—and sends packages from its 25,000 pickup and delivery outlets to its 75 sorting hubs for delivery on its 4,200 trucks. The company also uses network partners to leverage its services and has developed its own proprietary waybill tracking and transportation management software to keep costs low. The burgeoning popularity of online retail in China (last Saturday’s Singles Day produced a record $25.4 billion in sales for Alibaba), puts ZTO Express at the epicenter of a huge trend, as it counts both Alibaba and rival JD.com as customers. ZTO’s revenue growth has topped 50% over the last two years. The company has been spending heavily to build out its delivery infrastructure, which has kept earnings low, but analysts are looking for earnings to grow by 31% in 2018. When the company reports Q3 results next Monday (November 20 after the close), they are expecting revenue of $454 million and 15 cents per share in earnings. The trends are all in ZTO Express’s favor.
Technical Analysis
ZTO came public in October 2016 at 18, and immediately tailed off into a correction that bottomed at 11 last March. The stock made a rally to 16 in July, but corrected again to 13 in August before starting a rally that returned it to its IPO price last Friday. Today’s big 5% correction came during the first half hour of trading, at which point ZTO stabilized just under 17. We think the stock is a bargain anywhere under 17, with a loose stop at 15.
ZTO Weekly Chart
ZTO Daily Chart
Zendesk (ZEN)
Why the Strength
Zendesk is a cloud software provider, but instead of focusing on payroll, finances, personnel or workflow, the firm specializes in customer service, offering support, chat, talk, messaging and analysis software to help its clients better serve their customers. We’ve never seen or used the software, but the company must be doing something right—it ended the third quarter with about 114,000 client accounts (up from just over 90,000 near year-end), including firms like L’Oreal, Slack, Uber, Box and Shopify. Zendesk has been in an investment phase this year (and, likely, next) to boost new product offerings, especially in the enterprise space (the firm launched enterprise versions for two of its products, with more coming). And those investments are beginning to pay off. In the third quarter, revenue growth re-accelerated to 40%, and while there was a loss of two cents per share, free cash flow squeaked into the black. Zendesk is expected to remain near breakeven going forward, while analysts see fourth-quarter and 2018 revenue growth of 36% and 30% (respectively). The stock has picked up steam as investors see the new enterprise products goosing growth going forward, and there looks to be evidence that’s the case.
Technical Analysis
ZEN has been a solid growth company for years, but the stock really hasn’t done much since a brief post-IPO rally back in 2014 brought the stock up to 28. The stock, in fact, was just a couple of points higher than that two weeks ago, having hit resistance in the 28 to 31 area multiple times during the past year. But the earnings report two weeks ago helped ZEN leap over that barrier and it’s pushed higher since. We’re OK with buying 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.
