Ride What’s Working
Current Market Outlook
The market’s not all peaches and cream, as many sectors have been doing more gyrating than advancing, the broad market is iffy and the number of stocks hitting new highs has been falling on each push higher. But we always place most of our emphasis on the primary evidence—the trend of the major indexes and the action of leading stocks—and on that front, the evidence is clearly positive, so we remain heavily invested. The goal from here is to simply follow the system—hold on to your strong performers (though taking partial profits here or there is fine), honor your stops with any stocks that hit potholes and look for new leaders that show explosive strength.
This week’s list is again heavy on recent earnings winners, though it has more of a small- and mid-cap flavor to it. Our Top Pick is Splunk (SPLK), a leading Big Data software firm that has gotten going after a long consolidation.
Scheduling Note: Due to the Thanksgiving holiday, there will be no Movers & Shakers this Friday or Top Ten issue next Monday (one of our two scheduled weeks off all year). Have a great holiday weekend!
| Stock Name | Price | ||
|---|---|---|---|
| Bluebird Bio (BLUE) | 0.00 | ||
| Canada Goose Holdings (GOOS) | 46.21 | ||
| Cypress Semiconductor (CY) | 0.00 | ||
| ICU Medical (ICUI) | 0.00 | ||
| Nutanix (NTNX) | 55.91 | ||
| Red Rock Resorts (RRR) | 34.70 | ||
| RH Inc. (RH) | 252.93 | ||
| Splunk (SPLK) | 207.67 | ||
| Westlake Chemical Corp. (WLK) | 0.00 | ||
| Wingstop (WING) | 121.52 |
Bluebird Bio (BLUE)
Why the Strength
Bluebird Bio is a clinical-stage biotech company developing drugs for three rare genetic diseases: childhood cerebral adrenoleukodystrophy (CALD), transfusion-dependent beta-thalassemia (TDT) and sickle cell disease. It has also partnered with Celgene for a CAR-T cell therapy for relapsed and refractory multiple myeloma. The stock has been grinding higher because Bluebird’s most advanced CALD drug candidate, Lenti-D, is still on track to be the first approved one-time treatment for the fatal childhood disease. Another positive surprise was that recent sickle cell data suggests a new method for cell collection could improve hemoglobin production (more data coming in mid-2018). And lastly, the company just announced that its bb2121 anti-BCMA CAR T therapy (partnered with Celgene) was granted breakthrough therapy status in the U.S. and PRIME status in Europe for treating multiple myeloma. The next date to watch there is December 2018, when a Phase 1 study should be completed. In short, the pipeline looks increasingly valuable, and even skeptical analysts are raising their outlook for Bluebird. The company should generate around $40 million in collaboration revenue this year (growing to $45 million by 2022). Pending approvals, product revenue should begin to trickle in in 2018, hit $35 million in 2019, and break above $1 billion in 2022. It’s speculative, but M&A activity is picking up in this sub-sector in the biotech field and Bluebird has some of the best assets in the group.
Technical Analysis
BLUE has been grinding higher in 2017 with each advance followed by a pullback and consolidation around its 50-day line. The most recent consolidation phase lasted from July through August, after which shares blasted off to break out to a multi-year high above 125. The stock paused there, then jumped above 140 in mid-October, and has walked up to 163 since. It’s a very volatile name, so keep positions small and use a loose stop.
BLUE Weekly Chart
BLUE Daily Chart
Canada Goose Holdings (GOOS)
Why the Strength
Canada Goose is a recent new issue in the retail space (coming public in March of this year, although it got its start way back in 1957), focusing on very high quality (and high priced, $500-plus in most cases) outerwear; the firm originally focused on functional items (snowsuits and parkas for outdoor workers and hikers in harsh environments), though as time has passed, it has expanded the focus to looks as well, with vests, jackets, hoodies and even some spring outerwear (still a smaller part of its business; most of Goose’s revenue comes in the third and fourth calendar quarters) like rain and wind jackets. Growth has been fantastic during the past few years, and the stock is strong today because investors are thinking that Goose might be one of the next great high-end retail brands. Third-quarter sales (up 35%) and earnings (up 32%) easily topped expectations, and the rest of the news was encouraging as well—the company is slowly opening up flagship stores (should have seven open this quarter), is testing some knitwear products that have been well received, and e-commerce revenue is spiking as Goose has “opened” online sites for seven new markets this year. The top brass meaningfully hiked guidance for the fiscal year (which ends next March), now looking for sales growth of 25% and earnings to rise 35%. High-end retail can be fickle, of course, but Goose has a long history of pulling the right levers.
Technical Analysis
After GOOS’ IPO is March, the stock had an explosive post-earnings move in early June, but that turned out to be a top—shares slid 30% into August before steadily recovering into October. On the weekly chart, notice how the stock then went tight (closing five straight weeks right near 21 per share), a sign of accumulation. Then came the earnings-induced breakout, which the stock has built on in recent days. It’s thin and choppy, but dips look buyable to us.
GOOS Weekly Chart
GOOS Daily Chart
Cypress Semiconductor (CY)
Why the Strength
Cypress Semiconductor is mid-sized player in the semi space, specializing in programmable systems-on-a-chip, general-purpose microcontrollers, analog ICs, wireless and USB-based connectivity solutions, and high-performance memories. Business has taken off since it acquired Broadcom’s Internet of Things (IoT) segment in 2016, which strengthened Cypress’ portfolio of embedded solutions and software, and set the stage for more dependable revenue from a diversified base of fast-growth markets. The company’s current end-market exposure is roughly 32% automotive (connected car, infotainment, ADAS, instrument clusters), 30% consumer (connected home, PCs, mobile devices), 24% industrial (smart factory) and 14% enterprise (networking and servers). After the company reported a better-than-expected Q3 on October 26, analysts upped their growth estimates, and now see Cypress growing 2017 revenue and EPS by 20% and 76%, and 2018 is now expected to bring earnings gains north of 30%, though on tepid revenue growth. One of the more important revelations from the quarter was that gross margins are expanding after Cypress moved customers to long-term contracts with premium pricing. Also, cross-selling efforts are bearing fruit; the company reported success growing its content in Samsung and Apple handsets, as well as in 78 PC models (growing to 120 next year).
Technical Analysis
CY kicked 2017 off with a steady advance from 11 to 14.8, but momentum stalled in April and shares moved sideways for the next six months. The breakout came in early October when shares moved above 15 on decent volume. That move not only marked a 2017 breakout, but also moved CY into its highest level since early-2012. A brief consolidation phase in the 15.5 to 16 range was followed by a three-day move to 17 two weeks ago. Shares are digesting the move now. You can dip a toe in here or on dips and set a stop just below the 50-day line.
CY Weekly Chart
CY Daily Chart
ICU Medical (ICUI)
Why the Strength
ICU Medical is a pure-play infusion therapy medical firm, offering IV smart pumps, connectors and sets, along with cardiac monitor and pain management systems. Historically, the firm was a nice company but didn’t show much growth, but the stock is strong today because a game-changing acquisition earlier this year is starting to pay dividends. ICU Medical purchased Hospira Infusion Systems (from Pfizer) for $675 million (with another $225 million of possible future payments)—the buyout boosted ICU’s overseas presence, broadened its product line and is beginning to result in a ton of efficiencies. While the near-term results have been a bit messy (revenues are up because of the acquisition, and earnings have fallen due to the elimination of sales between ICU and Hospira), investors are focused instead on the bullish 2018 guidance management gave out recently. The top brass sees various synergies adding up to $50 million (nearly $2.50 per share), which should result in EBITDA of around $250 million for the year and earnings between $6.05 and $6.65 per share. That caused analysts to hike their estimates, and given ICU’s penchant for topping expectations, it’s possible next year’s guidance will continue to rise over time. This isn’t a great growth story, but the Hospira acquisition is paying big dividends and should keep buyers interested.
Technical Analysis
ICUI isn’t a fast mover, but it’s been trending mostly higher during the past year, albeit with periodic corrections below its 50-day line in April, August and again right ahead of earnings earlier this month. Interestingly, that November dip served as a nice shakeout before the stock gapped up on earnings (and the bullish 2018 guidance), though we don’t expect a runaway move. Dips of a few points would provide a nice entry point.
ICUI Weekly Chart
ICUI Daily Chart
Nutanix (NTNX)
Why the Strength
Many companies that move their enterprise IT operations to the cloud find that their old software just can’t handle the demands of coordinating separate servers, storage networks and storage arrays. Nutanix, a 2009 Silicon Valley startup, offers a solution called hyperconverged infrastructure (HCI) that turns all those disparate elements into an agile datacenter that can grow along with a client’s business. There’s no hardware involved, just HCI nodes that turn separate resources into one transparent fabric. Nutanix isn’t profitable, and doesn’t expect to be through 2019 (the company’s fiscal year ends in July), but revenue has been growing like crazy: 90% in 2015, 84% in 2016, 72% in 2017 and 77%, 67% and 62% in the first three quarters of 2017, respectively. The company’s customer count has also been ballooning, with an increase in big contracts. The company wasn’t a favorite with investors until a good earnings report on May 2 turned things around with excellent results and strong guidance. Nutanix will report its latest quarterly results on November 30, and analysts are looking for revenue of $267 million and a loss of 26 cents per share.
Technical Analysis
NTNX came public in September 2016 at 16, and soared as high as 47 in its second week of trading. But the post-IPO correction set in quickly, pulling NTNX as low as 23 in November 2016 before the stock looked like it was calming down in the low 30s in early 2017. Then the bottom dropped out, with NTNX gapping down big in February and free-falling all the way to 14 in May. But a series of stronger-than-expected quarterly results got the stock moving again and, after a consolidation from mid-July through early October, NTNX started another rally that’s still going on. If you’re interested, you can take a small position here and watch the reaction to earnings like a hawk.
NTNX Weekly Chart
NTNX Daily Chart
Red Rock Resorts (RRR)
Why the Strength
Making its debut in today’s Cabot Top Ten Trader, Red Rock Resorts is a youngster (incorporated just in 2015) in the gaming industry. The company operates in two segments, Las Vegas operations and Native American management. The company’s 10 Las Vegas hotel and Station casino properties offer 24,000 casino games, plus restaurants, entertainment, spas and meeting/event spaces. The company also manages Native American casinos in northern California and western Michigan. Investors’ interest in Red Rock Resorts was pretty flat until the company’s November 7 earnings report. That report showed a 15% jump in revenue (the fourth consecutive quarter with double-digit revenue growth), solid results from same-store Las Vegas operations and continued strength in Native American operations. Coming on the heels of a November 3 cash dividend (the holding date was last Wednesday), the news was catnip to investors, who pushed the stock into a strong rally that is still in high gear. The company’s continuing redevelopment of the Palms Casino Resort were also well received, as they represent an ambitious plan to move the company into the gambling and hospitality big leagues. Capital expenditures on the Palms project are keeping a lid on earnings through 2017, but analysts see a 239% jump in the bottom line in 2018.
Technical Analysis
RRR came public at 18 in April 2016 and climbed steadily to 24 by August of that year. But the stock went straight sideways from that point and was trading at 25 on the day before the great November 7 earnings report kicked off a big rally. With RRR now above 28 and volume calming down, a pullback is possible, but not certain. If you like the story of a young, aggressively expanding casino operator, you can nibble right here, with a stop around 25.5.
RRR Weekly Chart
RRR Daily Chart
RH Inc. (RH)
Why the Strength
More and more retail stocks are beginning to come to life, and RH (formerly known as Restoration Hardware) is one of the glamour stocks in the group. We’ve written about the company a few times recently (including in early October), and nothing has changed with the general story—it’s a high-end furniture, bathware, lighting and decorative hardware firm that’s in the midst of a major business model transition from many mall-based stores to giant galleries (including one in Toronto that opened in late October and another in West Palm Beach that opened this weekend) and catalogs, as well as redoing their supply chain (fewer distribution facilities); the net effect has both cut costs (by more than $1 per share) and attracted customers. Top-line growth here isn’t amazing, as RH guided third-quarter revenues to a gain of around 8%, but the combination of higher efficiencies and a huge share buyback plan in the first half of this year (management bought back half the company!) means a ton of money is falling to the bottom line—last week, the top brass hiked estimates for Q3 to around $1 per share, and for 2018, sees earnings well above $4 per share and free cash flow somewhere in the neighborhood of $8 per share! That lit a fire under the stock, and given RH’s recent history of topping expectations, there’s a chance even those bullish estimates could prove conservative (especially if tax reform gets done). It’s a unique story.
Technical Analysis
RH was all over the place during the first half of the year, but the stock changed character after it gapped up 45% (!) on earnings in early September. Following that, shares tightened up for a bit before riding its 25-day line higher into last week. The excellent guidance caused another gap up on quadruple normal volume last Thursday. RH is volatile, so if you want in, keep positions small.
RH Weekly Chart
RH Daily Chart
Splunk (SPLK)
Why the Strength
Splunk is a big data software company with a platform that allows companies to search, access, analyze and report on machine-generated data. Machine-generated data is exactly what it sounds like: data generated by networks, websites, mobile devices, which can be very unstructured but also extremely insightful—if you know how to mine it. By giving customers tools to monitor and analyze things like consumer clickstreams, transactions, security threats and network activity, Splunk has become a valuable partner in the digital age. The numbers behind its growth story are impressive. In 2010, the company had less than 1,000 customers. Today, it has almost 15,000, and believes it will have at least 20,000 in three years. Revenues per customer are going up, and in the most recent quarter (reported last Thursday), management said Splunk’s cloud solution landed two of its largest deals ever. The performance from the quarter was better than even the most bullish analysts expected (which is why the stock jumped almost 18% on Friday!). Revenue was up 34%, while EPS of $0.17 (up 70%) beat by $0.03. Management provided full-year guidance that was better than forecast, implying top-line growth of around 30%, with EPS growth slightly faster. Analysts see momentum building, and believe Splunk is emerging as a leading security provider as cybersecurity evolves into an analytics-driven challenge.
Technical Analysis
SPLK has oscillated between 55 and 70 for most of the past couple of years, and 70 became established as a fierce resistance level after shares failed to break through in May, September and early November of 2017. The glass ceiling was shattered on Friday after Splunk reported a knockout Q3, and shares gapped up to over 80. Significantly, this breakout also lifted SPLK above its 2015 high, which suggests higher prices ahead. We’re OK buying some right here, albeit with a loose stop.
SPLK Weekly Chart
SPLK Daily Chart
Westlake Chemical Corp. (WLK)
Why the Strength
Texas-based Westlake Chemical isn’t the sexiest story around; every year, the company makes about 40 billion pounds of basic chemicals like olefins, vinyls and polyethylene that go into residential siding, pipes, decking, food packaging, carton linings and dry cleaning bags. Growth varies from year to year, from 17% in 2014 to 1% in 2015 to 14% in 2016. But revenue has been up big over the last four quarters due to Westlake’s $3.8 billion takeover of Axiall last year. Earnings have been boosted by persistent low prices for crude oil and natural gas, which are the feedstock for the company’s products. With demand spread over both consumer and industrial markets, the company is well-positioned to benefit from strong economic activity. Investors liked the results of Westlake’s November 7 earnings report, which featured a 78% jump in earnings on a 65% increase in revenue. Since that earnings report, the company has announced the issuance of $500 million in senior unsecured notes, which will refill its coffers for future takeovers or to refinance some older debt. The company just declared a regular dividend of 21 cents per share payable on December 11 to those who hold the stock on November 27. Westlake, which was featured in Cabot Top Ten Trader in August, is a large cap-stock/dividend package that should appeal to investors with a lower risk tolerance.
Technical Analysis
WLK has been in a long-term rally since June 2016, but with a long consolidation from February through June 2017. Strong performance following its August earnings and a gap up after the November 6 earnings report have kept the fire on under the stock. WLK has been trading sideways under resistance at 94 since its November 7 gap up, and a pullback below 93 would make for an attractive buying opportunity.
WLK Weekly Chart
WLK Daily Chart
Wingstop (WING)
Why the Strength
Wingstop is a relatively small ($102 million) restaurant that specializes in wings (made three ways, with 11 enticing flavors), fries and sides. It’s a simple concept that’s worked wonders for the company, which has cranked out steady growth for years (2017 will be the 14th straight year of same-store sales growth!) as it’s expanded its store base (store count up 17% on average during the past three years) and implemented a national advertising campaign. The stock is strong today because a better-than-expected third-quarter report confirmed that the company’s growth could accelerate going forward—in Q3, both sales (up 19%) and earnings (up 31%) accelerated and topped expectations, domestic same-store sales rose 4.1% and the restaurant total increased 32 to 1,088 (including 994 in the U.S. in 44 states, mostly franchised). Like many successful cookie-cutter stories, though, the real payoff is in the longer term, as the top brass believes there’s room for a whopping 2,500 Wingstops in the U.S. alone, which should lead to many years of 10%-plus unit growth and near-20% earnings growth, with solid free cash flow, too. (Wingstop even pays a token dividend with a 0.7% annual yield, and has paid special dividends in the past.) Throw in a few new twists that are boosting growth (it’s teamed up to provide delivery in some markets; results have shown sales rising an extra 10%) and there’s a lot to like here.
Technical Analysis
WING is thinly traded (about $20 million per day), but it looks like one of many stocks this year to be breaking out of a huge, post-IPO consolidation. The stock came public in mid-2015, fell more than 40% later that year, then rallied back to 33 last fall. WING consistently hit resistance in the 33 to 35 range after that, but now it’s freewheeling—shares gapped up on earnings earlier this month and have pushed higher since. We’re OK buying some here.
WING Weekly Chart
WING 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.
