November 18, 2019

Minor Worries, but Main Evidence Remains Bullish

Current Market Outlook

When we did our research over the weekend, we really liked what we saw: Not only are the intermediate- and longer-term trends up for all the major indexes, the big-cap measures are in new high ground and, perhaps more importantly, we see a ton of recent breakouts acting well across a variety of industries. Combined with prior positive studies, we think the bull move has farther to run. That said, there are some minor worries to keep in mind—short-term sentiment measures are very complacent, and many leaders are also extended for the time being, meaning a rest/shakeout is a growing possibility. We think any pullback will offer up a bunch of solid entries, but in the meantime, it’s best to be a bit choosy on the buy side.

This week’s list has a nice collection of names that have either recently shown rare strength or have run for a few weeks and could make for solid pullback buys. Our Top Pick is Jabil (JBL), which is beginning to retreat after a major long-term breakout and advance.

Advanced Micro Devices (AMD)

amd.com

Why the Strength

Advanced Micro Devices is a high performance, innovative computing and graphics chip company, with products that power servers, processors for desktops and laptops and graphic architectures for PC, console, cloud and mobile gaming. In late October, the company reported third quarter revenue up 9% at $1.8 billion (their best quarterly revenue total in 14 years), while profits came in on target. Sales at AMD’s computer and graphics segment were the story, rising 36% year-over-year to $1.28 billion as its new 7-nanometer chips are filling a demand for smaller chips for commercial use ahead of competitors (such as Intel). And the stock is surging as investors see great things coming down the pike—in the coming year, AMD is rolling out new products in the areas of 7 nm notebooks, cloud gaming, data center graphics, ray tracing and server chips, all solid growth markets. Thus, 2020 is looking to be a blockbuster year, with a big acceleration in sales growth and with profits expected to grow 76% on top of this year’s expected 35% growth.

Technical Analysis

AMD more than tripled in the four months leading up to August 2018, then spent eight months correcting and consolidating before settling into a calmer trading range between 28 to 34. Excitement over management’s 2020 outlook, delivered on October 29, was the catalyst to finally push AMD past 34, and the stock has since soared to higher highs on big volume. We’re going to set our buy range a bit lower.

AMD Weekly Chart

AMD Daily Chart

Arconic (ARNC)

arconic.com

Why the Strength

Arconic is a key supplier of high-performance materials, components, systems and engineering for many industries, especially aerospace, making things like gas turbines, titanium ingots and fasteners, differentiated aluminum sheet and plate products for aerospace, aluminum heavy-duty truck wheels and much more. It’s a leader in many of its end markets, and the stock is strong today because recent results look good and the firm has a catalyst going forward. First, the results: Q3 numbers thrilled investors in early November, with favorable product and aluminum pricing, higher volume, and cost reductions helped earnings to reach $0.58 per share, beating estimates by a nickel,, causing the top brass to increase guidance. Wall Street now expects the bottom line to grow 54% in 2019 and another 17% in 2020 (likely conservative). As for the catalyst, Arconic is also a restructuring story—it realigned operations during the quarter into two segments (Engineered Products and Forgings (EP&F) segment and Global Rolled Products (GRP)—in preparation for splitting into two companies during the second quarter of next year. The EP&F segment will remain in the existing company and be renamed Howmet Aerospace Inc., while the GRP segment will be spun off and be renamed Arconic Corporation. The company divested five businesses this year, with two more to be sold prior to the big event. Looking way down the road, watch for Arconic to host and investor day in February where they’ll give more color on future plans and goals, though there’s no question the split-up should unlock shareholder value.

Technical Analysis

ARNC got hit very hard in 2018, but shares enjoyed a nice, persistent recovery from its lows through June of this year. The consolidation after that led to two big shakeouts alongside the broader market in early August and early October, but now the stock is surging, bolstered in part by its positive reaction to earnings. Like many leaders, you could nibble here, but we prefer aiming to enter on dips of a point or two to enter.

ARNC Weekly Chart

ARNC Daily Chart

Boot Barn (BOOT)

bootbarn.com

Why the Strength

Retail stocks have turned mixed, with some winners from earlier this year hitting the skids, but Boot Barn—our favorite niche story in retail—continues to impress. The company is the leader in western-style apparel and accessories, including for blue collar work. (Work wear is 60% of sales.) Business has been good for a while, and the stock has decisively pushed to new highs after Q3 results showed exceptional strength in the underlying business. Sales and earnings both topped expectations (accelerating earnings growth), but even better were the 7.8% same-store sales growth (8% for stores, 7% for e-commerce) and that Q4-to-date comparable store sales were running at 10% (though management guided for a slowdown from that pace as the quarter goes on). Moreover, some post-earnings management meetings revealed that new customer acquisition is strong (two-thirds of same-store sales growth is from transaction growth, so it’s not mostly price hikes); the company has just 4% to 5% of the $20 billion western/work wear industry and isn’t overly dependent on the health of the oil/gas industry; and the firm has the infrastructure in place for 10%-plus store growth in the years ahead (248 stores now, and management sees the potential for 500 down the road). Analysts see sales (up 12%) and earnings (up 18%) continuing their growth path next year, and our guess is those figures will prove conservative.

Technical Analysis

BOOT had a big drop late last year, a big recovery early in the year, and staged a very choppy advance for the next few months, with slightly higher highs and slightly higher lows. But after some tightness in September and a shakeout after earnings in October, BOOT has shot to new highs so far this month. We’re OK taking a stab at it here.

BOOT Weekly Chart

BOOT Daily Chart

Fortinet Inc. (FTNT)

fortinet.com

Why the Strength

Many of the “new” cybersecurity names remain so-so at best, but interestingly, some leaders of the past are beginning to shape up, and Fortinet is the best looking of that bunch. Fortinet provides network security appliances and Unified Threat Management (a single hardware or software installation that provides multiple network security functions) solutions to enterprises, service providers and government entities worldwide. That plays into the trend among buyers these days (consolidating security spending into fewer providers that can do more), which is a big reason why Fortinet has been growing quickly and consistently for a long time. In its third quarter, the company saw its revenues rise by 21% and earnings of $0.67 share, which was 11 cents north of forecasts. (The company has beat earnings forecasts 13 quarters in a row, so don’t be surprised if it manages the same feat in Q4.) The company is making the successful transition from firewalls and security on individual servers and personal computers to the emerging computer infrastructure SD-WAN, which is designed to patrol software-defined wide area networks and the cloud, as cyberattacks continue escalating. It even sees itself as a leader in security for 5G networks and the Internet of Things. The prospects are solid for 15% to 20% revenue growth and faster cash flow expansion going forward.

Technical Analysis

FTNT formed a beautiful launching pad over the course of a year—each successive pullback was tamer, with the final one showing lots of tightness near the lows (a sign the sellers have left the building). And since earnings, FTNT has acted like a homesick angel, pushing nicely higher on big volume and eclipsing the century mark. It looks extended, but the odds favor any pullback being relatively tame.

FTNT Weekly Chart

FTNT Daily Chart

Jabil Inc. (JBL)

jabil.com

Why the Strength

Jabil offers contract manufacturing services and supply chain solutions, serving a ton of different customers and industries, and its electronic (63% of revenue) and diversified manufacturing (37%) services are seeing growing demand while management is keeping costs in check. Some of the business involves old world stuff, but the growth drivers are linked to the firm’s ties to new-age areas—5G should be a big one (the company recently opened a new 5G intelligent manufacturing innovation center in China), while advances in automobiles (advanced driver assistance systems, etc.), cloud, 3D printing solutions and healthcare are all leading customers to Jabil for specialized manufacturing. The stock is strong today because business is good, the stock is cheap and management is shareholder friendly—Q3 results (from late September) topped expectations, and analysts see mid-teens earnings growth going forward, helped along by some share buybacks (a new $600 million authorization was enacted in September). Throw in a low valuation (13 times earnings) and a token dividend (0.8%) and there isn’t much of a reason for sellers to jump in. Of course, fundamentally, Jabil is a down-the-food-chain company—if industry trends slow, business will dry up quickly—but right now the opposite is happening, something that should continue for at least a few quarters.

Technical Analysis

JBL is one of many stocks that did a whole lot of nothing for years and now appear to be early in a new, sustained advance. The stock topped at 31 in mid 2017, dipped as low as 21 late last year and was hanging around 32 in mid September when earnings catapulted shares to new highs. It proceeded to push nicely higher, approaching 40 last week before beginning to pullback. We think further weakness will mark a solid entry point.

JBL Weekly Chart

JBL Daily Chart

KBR Inc. (KBR)

kbr.com

Why the Strength

KBR is one of the big engineering, procurement, construction and professional services outfits, with more than 38,000 employees across the globe that that help governments and energy-related customers accomplish a variety of big projects. The stock is strong today because business is good, leading indicators (both from the company and economy-wide) are getting better and management has a very bullish view of the next few years. As you can see in the table below, KBR is keeping busy; Q3 results weren’t awe-inspiring but they did top estimates as all of its business segments grew (especially energy solutions, which was up 31%). But the real excitement is about what’s to come—KBR’s orders have boomed three of the past four quarters, with orders more than doubling finished projects in Q3. (The company’s backlog is a whopping $14.6 billion, up 9% from a year ago, driven by a whopping 76% leap in energy solutions.) And the top brass sees more where that came from, with LNG projects, clean energy projects and growing defense budgets in the U.S., U.K. and Australia expected to lead to 12% top line growth and 16% earnings growth annually through 2022—and that’s not based on hopes and dreams, as KBR has nearly two-thirds of that growth already signed and booked! It’s unlikely to be a hot stock, but demand is clearly heading the right way, and with a reasonable valuation (19 times trailing earnings, 1.1% dividend yield) and some very solid, predictable results going forward, we think KBR will do well.

Technical Analysis

KBR came public back in 2006, hit 45 a few months later and … has never been back to that high since! In fact, the stock was dead as a doornail for years and was languishing at 14 late last year. But now shares are back in gear, with a nice, persistent rebound through July of this year, a tidy double-bottom base (nice shakeout in early October) and an earnings-induced breakout around Halloween. We’re fine taking a position near here or on weakness.

KBR Weekly Chart

KBR Daily Chart

Neurocrine Biosciences (NBIX)

neurocrine.com

Why the Strength

Biotech stocks are certainly looking like one of the market’s leadership sectors, and Neurocrine Biosciences is participating in the move. As we’ve written before (last in early September), Neurocrine is making hay with Ingrezza, which is the first FDA-approved treatment for Tardive Dyskinesia (a side effect of certain psychotic medications). Besides a touch of collaboration-related revenue, Ingrezza is the sole revenue producer, and that’s been a good thing in recent quarters—thanks to a decent-sized market (half a million people in the U.S.) and ease of use (once-daily capsule), it’s been a hit, with sales soaring 78% in Q3 as 34,800 people are on the treatment (up from 19,400 a year ago). But the stock is also strong because there’s more than just Ingrezza for investors to love—it’s teamed up with Abbott for a treatment for uterine fibroids (painful growths in a uterus that can lead to infertility; 300,000 new diagnoses annually in the U.S.) and has a treatment that lessens the symptoms of Parkinson’s disease, both of which are in front of the FDA for possible approval next year. There are more drugs in the pipeline, but as it stands now, analysts see the top line surging 37% next year with earnings north of $3.50 per share, with some thinking $5 to $6 per share is possible in 2021 as Ingrezza grows and new treatments gain steam.

Technical Analysis

NBIX got cut in half during last year’s market mayhem and ended up bottoming out for the first few months of this year. But July and August showed some encouraging action (nine weeks up in a row), and then the stock built a decent-looking launching pad through mid October. And now NBIX is heading up—the breakout came in early November and shares have continued higher since on solid volume. We advise aiming for dips.

NBIX Weekly Chart

NBIX Daily Chart

Oshkosh (OSK)

www.oshkoshcorporation.com

Why the Strength

Oshkosh Corporation is a leading manufacturer and marketer of access equipment, specialty vehicles and truck bodies, and Oshkosh’s expertise has led many of their brands to rank #1 globally or in North America, their largest market. Of course, access equipment and trucks are not a glamorous business, and they’re very cyclical, so they’ll be subject to the reality (and perceptions) of global economies, trade wars and gov-ernment budget delays. But right now, that’s a good thing as investors expect better times ahead. Oshkosh reported earnings in late October, with sales (up 7%) and earn-ings (up a strong 21% and nicely ahead of estimates) giving reason for cheer. Aging ve-hicles in their target markets are leading to an upcoming surge in replacement cycles and expectations of multi-year revenue growth at Oshkosh. The company is expanding manufacturing in China to support regional growth. Rising margins are fueling the com-pany’s ability to enhance shareholder value, including a recent dividend hike (annual yield 1.3%). Since 2016, the percentage of free cash flow returned to shareholders rose from the high single digits to about 50% in fiscal 2019 (September year-end), and from about $200 million to $1 billion annually. A cheap valuation (11 times trailing earnings) rounds out a solid, cyclical story.

Technical Analysis

OSK peaked around 100 nearly two years ago and followed that up with an extended period of consolidation despite some solid business results. But the improved market and the firm’s October earnings release have helped the stock change character—OSK has advanced persistently during the past few weeks. We’re OK buying some here or (preferably) on dips.

OSK Weekly Chart

OSK Daily Chart

Peloton (PTON)

onepeloton.com

Why the Strength

Peloton is popular because it’s pioneering a new industry of sorts—Peloton bills itself as the largest fitness platform in the world, allowing members to access (via a big screen attached to their equipment) live or recorded instructor-led classes. It’s literally like being in a quality fitness class (nearly 1,000 original programs per month from 81 showrooms) from your own home! The concept has caught on fast (the beautiful Mrs. Cintolo has been using the bike for three years; 650-plus rides so far!), and the key here is the business model—not only does Peloton make money from the sale of the bike and treadmill (which can run two grand or so, though there’s a 30-day free test period, installation included), but it also makes recurring revenue (~$40 per month) from a monthly subscription to access the live and recorded workout sessions. At the end of September, paying members totaled 562,777, up 103% from a year ago (1.6 total member accounts—more than one person can use each bike), few people are leaving once they sign up (94% 12-month retention rate) as members are working out more (11.7 times per month, up from 8.9 a year ago), all of which has produced triple-digit revenue growth. Earnings are deep in the red as the firm expands (vast majority of users are in the U.S., but it’s selling in the U.K. and Canada as well), but the potential is there, especially if Peloton moves down the price chain and attracts more mass market consumers. It’s a high-potential story.

Technical Analysis

PTON came public in September when IPOs were out of favor, and the stock opened below its pricing (at 29) and sold off after. But it found consistent support in the 21-22 area, reacted well to earnings, and has since ripped to new price highs. PTON will be very volatile, of course, but we think it can have a good run if the market cooperates. If you want in, you can nibble here or on dips and add on the way up.

PTON Weekly Chart

PTON Daily Chart

Sea Limited (SE)

seagroup.com

Why the Strength

You won’t find many faster-growing outfits than Singapore-based Sea Limited—it’s seeing triple-digit growth on its top line, and its two primary market groups (Digital Entertainment and e-Commerce) both posted sales growth of more than 200% in the firm’s recently-reported third quarter! Revenues for Sea Limited’s digital entertainment platform for online games and eSports (people watching others play sports video games) rose by 212%, while its Shopee e-commerce platform saw revenues leap 241%. Sea Limited has made huge strides in the global expansion of its digital entertainment business, but with no new gangbuster games close to launch, growth in that segment is likely to slow going forward (likely to rise in the low teens next year). But investors are focusing on the potential in e-commerce, which should more than make up for any softening in digital--that side of the business is expected to grow nearly 60% next year (which, given recent results, is very likely conservative) as it cements its market share throughout Southeast Asia. The firm’s $1 billion convertible note issuance last week was dilutive, but many think Sea will use some of that cash for M&A, which could be a plus. Still, the big idea here is that Sea could be on its way in joining the ranks of other major e-commerce plays around the world, and that’s what’s attracting big investors today.

Technical Analysis

SE originally broke out of a big post-IPO base in February of this year and ran as high as 38 in July. Then came a deep (but well deserved) retreat to its 40-week line, where the stock found support in October. It bounced a bit after that, but last week’s earnings report was the key—SE surged back near its old price highs and has held those gains despite the convertible offering. We’re OK starting small here and adding on a push above 39.

SE Weekly Chart

SE 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.