November 25, 2019

Lockout Rally Thus Far

Current Market Outlook

The market finally hesitated a bit last week, and going through our weekend research, we did spot more leading names that had pulled back during the past five to 10 trading days. But as has been the case since the early-October lows, that weakness was tame (most dips were calm and controlled), with today’s burst of buying pushing many back up. (Encouragingly, even the lagging small-cap indexes are now trying to break out of multi-month ranges.) There’s still some shorter-term yellow flags, so we wouldn’t throw caution to the wind here (don’t forget to take some partial profits!), especially if you’ve put a bunch of money to work in recent weeks. But the fact that most stocks and indexes haven’t been able to retreat much despite those yellow flags is yet another stone in the bullish wall. We remain bullish.

This week’s list includes a broad mix of names, from old winners coming back to life to new names perking up to recently strong performers that have eased to good entry points. Our Top Pick is Axon Enterprise (AAXN), which has come back to life after a year-long rest. Start small and go from there.

Alnylam Pharmaceuticals (ALNY)

alnylam.com

Why the Strength

Alnylam Pharmaceuticals has gotten going lately after the FDA gave early (by three months) approval to the company’s givosiran treatment for adults with acute hepatic porphyria (AHP), which is a genetic condition that can affect the peripheral, central and autonomic nervous systems, and also create cardiovascular, gastrointestinal and skin problems. The treatment is based on RNA interference, a major scientific breakthrough, which harnesses the natural biological process of RNA that occurs in our cells. Whatever the science behind it, Wall Street is excited because givosiran looks like a breakthrough—clinical trials showed that patients taking it (via injection) had 70% fewer porphyria attacks (a group of disorders including pain, breathing problem, high blood pressure and more). The drug will be marketed as Givlaari and is expected to be priced at $575,000 per year. This is the second RNAi therapeutic from Alnylam that has received FDA approval in the past 16 months, following ONPATTRO (patisiran), also a treatment for the nervous, cardiovascular and digestive system conditions. Bigger picture, by the end of next year the company intends to have four drugs available and 14 clinical stage programs, including six in late-stage trials across four strategic therapeutic areas. The bottom line is deep in the red, but analysts see revenues doubling again in 2020 after big growth this year.

Technical Analysis

As a money-losing biotech, ALNY has had some huge swings over the years, the latest being a drop from 154 back in early 2018 to 66 in May of this year. The stock began to trend up after that, with a couple of shakeouts in August and October quickly finding buyers. And now the stock has turned strong, with huge-volume buying coming into the stock following the earlier-than-expected approval. We’re OK starting small here or on weakness.

ALNY Weekly Chart

ALNY Daily Chart

(AAXN)

Why the Strength

Axon Enterprise has one of our favorite growth stories in the market, as it transitions from one-time sales of electric weapons (Taser stun guns) to a recurring revenue business model based on body cameras and in-car video systems as well as a cloud video platform to store, share and analyze that video. (It even sells packages on a monthly payment basis that includes the stun guns, automatic upgrades, training and new cartridges.) Of course, such transitions take time and can be lumpy (55% of revenue still comes from weapons), which has caused results to gyrate, but the stock is strong today after the Q3 report topped expectations and the firm’s “new” recurring business lines showed terrific strength. At the end of September, in fact, Axon’s annualized recurring revenue was at $142 million (up 39% from a year ago); this figure has grown around $10 million per quarter of late, and management believes that growth will accelerate in 2020. Moreover, because of the higher-margin products, much of that increased business will increasingly fall to the bottom line—in Q3, 68 cents of every extra dollar of revenue turned into EBITDA. Further bumps are always possible (some production snafus for the stun guns hit margins earlier this year), but the writing is on the wall: Axon looks set to become a much larger, steadier grower in the years ahead (total contracted revenue is now $1.13 billion, up 38% from a year ago) as more agencies in the U.S. and abroad adopt its offerings.

Technical Analysis

AAXN broke out in March 2018 (breaking out of a 10-plus-year base!) and more than doubled in just four months. The decline (to 39) and recovery (back to 75) were both sharp, and shares settled back to 50 in October. But the stock has changed character during the past three weeks, with a big earnings gap on November 8 and a continued rally through today. There is some resistance here, so you can start small with the idea of buying more if the stock continues up.

AAXN Weekly Chart

AAXN Daily Chart

Kansas City Southern (KSU)

www.kcsouthern.com

Why the Strength

While the railroad industry has been slow to adapt to technological changes, that isn’t the case with Kansas City Southern, whose precision-scheduled railroading efforts are boosting profits. And the company just announced that it has completed the global deployment of the CloudMoyo Operational Testing System, which will reveal potential areas that need safety improvement, something that isn’t a small issue industry-wide—there were more than 1.000 accidents on Class 1 railroads through August of this year. In addition to its safety features, the system will promote more efficient fleet, crew and asset management, which should add to Kansas City’s bottom line. Earnings estimates for the company have been increasing, and analysts see revenues up in the 6% range both this year and next, though earnings should grow faster (up 14% next year, which is likely low). Also helping the cause is a shareholder-friendly management—it’s aiming to return 50% to 60% of cash each year, and started to do so with a nice dividend boost (now 1.1% yield) and an accelerated $500 million repurchase program (buying back about 3% of outstanding shares), part of a larger $2 billion program that will run through 2022. It’s not changing the world, but there’s plenty to like here.

Technical Analysis

KSU broke out in August of this year, and after a quick early-October shakeout, gapped up nicely on earnings. But the action since then has been even more encouraging—shares sagged for a few days at the end of October, but then enjoyed a nice five-day run to new highs on huge volume in early November. The stock has stalled out since then, and like many cyclical names, looks like a good buy on further dips.

KSU Weekly Chart

KSU Daily Chart

Leggett & Platt, Incorporated (LEG)

leggett.com

Why the Strength

We’re seeing many cyclical stocks that had great, powerful and persistent advances in October and early November pull back to buyable points, and Leggett & Platt is one of them. (We missed our preferred entry point three weeks ago so we’re taking another swing at it in this issue.) To review, the firm is the leading maker of all sorts of bedding products, as well automotive seat supports and lumbar systems, flooring underlayments and more. There are three reasons the stock has come to life in recent weeks. First, Q3 earnings easily beat expectations, bolstered mostly by its acquisition of Elite Comfort Systems a while ago, and with most housing indicators pointed up, even better times are likely ahead. Second, it appears likely that the U.S. will go ahead with huge tariffs on mattresses from China, which should help the profitability of firms like Leggett. And third, the stock has sat out the dance for a while (before the recent strength, it hadn’t done anything in five years) and looks reasonably valued, trading for around 20 times earnings and yielding a solid 3.1%. It’s not going to double overnight, but Leggett is one of many cyclical firms with so-so current numbers, but investors are sniffing out better times ahead.

Technical Analysis

LEG hit a wall in the 50 to 55 area in 2015-2016 and collapsed in the years after; it was still in the upper 30s as of a month and a half ago. But then the stock went nuts, rallying straight up to 46 in late October, gapping up to 52 after earnings and eventually nosing above 55. Now it’s pulled back for two weeks on fading volume toward its 25-day line—we think it’s a fine entry point here.

LEG Weekly Chart

LEG Daily Chart

Lithia Motors Inc. (LAD)

lithiainvestorrelations.com

Why the Strength

Lithia Motors is one of America’s largest automotive retailers, offering 70,000 vehicles in 188 nationwide locations that reach nine out of every 10 consumers in the country. The company also has a half dozen OEM certified auto parts stores, as well as service and repair locations across the U.S. As you can surmise, this isn’t a revolutionary story, but the stock is strong today because cyclical-oriented names are doing well and management has a history of pulling the right levers, delivering steady, dependable growth Third quarter results produced record revenue of $3.3 billion that came in slightly higher than analysts’ estimates, while earnings easily topped estimates (the bottom line figure of $3.39 per share beat by 30 cents). Same store new vehicle retail sales rose nearly 5% year-over-year while used vehicle sales rose a huge 14%, combining for a total same store sales growth of 7.6%. In addition, same store service, body and parts sales increased 9.5%. Management believes the firm is well-positioned to accelerate its growth strategy, which includes the acquisitions in greater Tampa, FL in November, and more buyouts down the road. Wall Street expects revenue to finish the year up 6%, and to grow another 4% in 2020, while earnings lift around 10%. Given the low valuation (13 times next year’s earnings) and steady growth record, there’s no reason Lithia can’t continue higher.

Technical Analysis

LAD had a nice recovery from last year’s oversold lows to 139 or so in July, when it finally took a rest, chopping mostly sideways and dipping below support during the market’s early October lows. But that turned out to be a shakeout, with LAD surging after earnings into the 155 area, and the stock has inched higher since then as the 25-day line has caught up. It’s not going to set the world on fire, but you can enter here with a stop in the mid 140s.

LAD Weekly Chart

LAD Daily Chart

Luckin Coffee (LK)

www.luckincoffee.com

Why the Strength

Luckin Coffee is aiming to be the Starbucks of China, which is a story big enough to catch anyone’s attention, but this is far from a copy-cat situation. As opposed to the full service stores seen from Starbucks, Luckin is going bare bones, where customers order and pay for their coffee (or tea, nuts, juices or tumblers—45% of items sold were non-coffee in Q3) via app and pick them up at a specified time. Cost per cup is also 30%-plus cheaper than what’s found at Starbucks. The company is spending hand over fist for expansion, including supply chain improvements, marketing and, especially, new store openings, both directly operated and via partnerships (Luckin provides products, technology and marketing; partners rent, renovate and staff the location). Some of the numbers the company is posting are mind boggling—at the end of September, the firm had 3,680 stores, up 24% from the prior quarter (!!); average monthly transacting customers totaled 9.3 million in Q3, up from 1.9 million a year ago; and monthly items sold rose 470%, too. All of that led to a 500%-plus gain in revenue, and while the bottom is in the red, operating leverage is appearing in multiple areas. There’s definitely risk, but Luckin is expected to continue its hypergrowth (revenues expected to be up 183% in 2020, and even that could be conservative) as the net loss shrinks. It’s a very big idea.

Technical Analysis

LK came public in May of this year and was all over the place through early August. But shares found repeated support in the 18 area for the next two-plus months, and the Q3 report was enough to have big investors hit the buy button—LK has gone vertical since earnings, rallying to new highs on two straight weeks on outrageous volume. It’s going to be extremely volatile, but nibbling on weakness sounds good to us.

LK Weekly Chart

LK Daily Chart

Novocure (NVCR)

novocure.com

Why the Strength

Medical stocks look like the early leaders of this market advance, and Novocure is one that had a nice run earlier this year and is now shaping up a great-looking launching pad. The main attraction here is the firm’s Optune system, which looks like a potentially revolutionary way to treat certain cancers—the system uses electrical fields (dubbed tumor treating fields) to non-invasively disrupt cancer cell division and growth. (The fields are low intensity and the generator is less than three pounds so can be carried around.) This tactic has shown positive clinical results in some cancers (greater survival rates, etc.); right now, it’s used in concert with chemo for glioblastoma (a type of brain tumor) and mesothelioma (first approved treatment in 15 years), but studies are ongoing in many other cancers (brain, lung, pancreatic, ovarian and liver) with key readouts likely in 2021 and 2022. If all goes well, the firm’s target market could quadruple in three years and grow more beyond that. As for the here and now, the Q3 report did contain a couple of sub-par figures (patient totals actually slipped a touch quarter-over-quarter), but sales and earnings topped expectations and analysts still see solid growth going forward (sales up 30% in 2020, earnings in the black). At day’s end, Novocure has a great combination of solid growth today and the potential for massive expansion in the years ahead if it gets approval for new indications.

Technical Analysis

NVCR broke out of a nine-month base back in June and rallied nine weeks in a row, nearly tagging the century mark. Then came a steep 30% correction as growth stocks struggled, but the stock found support near its 30-week line and has rebounded strongly to within a few percent of its old highs. We’re OK nibbling on dips—ideally the stock tightens up for a bit and then breaks out.

NVCR Weekly Chart

NVCR Daily Chart

Palo Alto Networks (PANW)

paloaltonetworks.com

Why the Strength

Palo Alto Networks is a global cybersecurity leader, shaping the cloud-centric future with technology that is transforming the way people and organizations operate. The company is at the forefront of protecting tens of thousands of organizations across clouds, networks and mobile devices through its leadership in artificial intelligence, analytics, automation and orchestration. The stock has been mostly quiet during the past two years as growth slowed somewhat and investors thought newer upstarts were taking share, but now perception is changing for the better. Palo Alto’s most recent earnings report (early September) reflected strong demand for its security products, with billings up 22%, deferred revenue up 27% and earnings topping expectations. (Cash flow is regularly miles above net income for Palo Alto due to its subscription-based model.) Most importantly, big investors think the gradual slowdown of late is coming to an end (analysts see sales up 20% in the year ahead), though a lot more will be revealed tonight—Palo Alto will report its quarter after the bell, and while sales ($768 million expected) and earnings ($1.03) results are key, so are billings and other forward-looking indicators. Investors will also be looking for more info on Palo Alto’s plans to build a Next Generation Cloud Security platform, which has been bolstered by acquisitions (five in the last year), including that of Zingbox (an IoT cybersecurity company in September. All told, there’s a good setup here if earnings are well received.

Technical Analysis

PANW has been mostly up and down during the past year, with no net progress from the spring of last year through September of this year. But now it may have changed character, with PANW rallying six weeks in a row back toward its old highs near 260 ahead of earnings. A big gap up could be buyable, but we’ll set our buy range a bit lower than here, thinking any minor post-earnings weakness will be a good entry point.

PANW Weekly Chart

PANW Daily Chart

Synnex Corp. (SNX)

synnexcorp.com

Why the Strength

Synnex is a distributor of a spate of technology products (more than 30,000) to more than 400 OEMs and 25,000 retail and reseller customers (about 80% of revenue), and it also has a large business services operation (making up the other 20%), with 80 of the Fortune 500 as customers. All in, the firm is a Fortune 200 firm and, despite its lack of sexiness, has a great history of execution (profitable in 129 consecutive quarters; nearly $23 billion in revenue over the past year), and that’s what’s driving it today: Investors piled into the stock in September after the company reported a big third quarter earnings beat, with revenue growth coming from expansion of its PCs, networking and cloud business. Synnex is particularly optimistic about new growth from small business customers in its business services division, a segment that saw revenues soar 136%. Analysts see earnings up just 5% in 2020, but considering the company’s track record of low-balling earnings guidance and delivering earnings beats (past four consecutive quarters, including a 15% beat in Q3), it’s likely that figure is very conservative. Beyond the solid underlying trends, the stock is also strong because it’s dirt cheap—while Synnex will never trade at an elevated valuation, the P/E of 10 and dividend yield of 1.5% should keep the selling pressures light for a while to come.

Technical Analysis

While business has been solid for SNX, the stock was in the doghouse through August of this year, when it fell to 78, not far from last year’s nadir around 71. But since then, it’s been a different story, with a powerful pre- and post-earnings rally in September, a steady advance to the low 120s in October and a little tightness as the 25-day line caught up in November. SNX popped to new highs today, and we’re OK taking a position here or (preferably) on dips.

SNX Weekly Chart

SNX Daily Chart

Target (TGT)

www.targetcorp.com

Why the Strength

We recently told you about Target’s stellar second quarter results, when it beat analysts’ earnings forecasts by 12% and saw its same-store-sales grow by 3.4%. And last week, the stock has resumed its advance after the company announced its third quarter report. Earnings rose 15% to $1.36 per share, pummeling analysts’ estimates of $1.19, while revenues came in at $18.7 billion and same-store-sales grew 4.5%, both clearing estimates of $18.49 billion and 3.6%, respectively. But the real winner was the store’s digital sales—they rose a whopping 31%, due primarily to Target’s same-day delivery services (including delivery right to your car), something that’s giving Amazon a run for its money and was likely a big reason why Amazon has been offering more same-day (even two-hour) delivery options to Prime members. Beyond Amazon, the service gives Target a decided competitive edge over many of its peers, drives more customers to its stores (traffic at its store rose a solid 3% last quarter) and boosts the bottom line. As for the industry, retail sales remain solid (so-called core retail sales are up at a 7.8% annualized rate through October, the fastest pace since 1999) and experts are forecasting that more than 165 million folks are going to be shopping between Thanksgiving and Cyber Monday, driving holiday sales up around 4% this year (better than previously expected). As Target expands its offerings and continues to focus on building its e-commerce business, it’s in great position to capture more than its fair share of the holiday winnings.

Technical Analysis

We never underestimate a big, liquid stock that explodes out of a long-term consolidation, which is exactly what TGT did back in August after Q2 results. The action after that wasn’t thrilling, with some downs and ups, but net-net, the stock held those August gains and was holding near its 50-day line when last week’s report caused a fresh breakout on another round of huge volume. We think TGT heads higher, though probably not in a straight line; aim to buy on weakness.

TGT Weekly Chart

TGT 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.