Decent First Step
Current Market Outlook
After a punishing month, last week’s three-day bounce qualifies as a decent first step for the market and many individual stocks and sectors—most now have some breathing room above last week’s low points, and ideally, we’ll begin to see more potential leaders strut their stuff in the weeks ahead as the situation stabilizes. But a good first step is the best description we can give the bounce at this point given that the intermediate-term trends of just about everything (indexes, sectors, stocks) remain pointed down, and the odds favor plenty of volatility (at the very least) going forward. It’s not 2008 out there, but trends are negative, so until the bulls truly retake control, defense is the name of the game. We’re leaving our Market Monitor at a level 3.
The good news is that this week’s list has many recent earnings winners that could do well once a new uptrend gets underway. Our Top Pick is Exact Sciences (EXAS), a name we’re high on and that remains perched near its highs after another excellent quarterly report.
| Stock Name | Price | ||
|---|---|---|---|
| Bilibili (BILI) | 28.71 | ||
| Cooper Tire (CTB) | 31.50 | ||
| Deckers Outdoor Corp. (DECK) | 141.68 | ||
| Exact Sciences (EXAS) | 116.91 | ||
| HealthEquity, Inc. (HQY) | 70.70 | ||
| Keurig Dr Pepper (KDP) | 25.35 | ||
| Omnicell (OMCL) | 81.03 | ||
| Starbucks (SBUX) | 64.49 | ||
| Under Armour, Inc. (UAA) | 26.82 | ||
| VeriSign (VRSN) | 190.71 |
Bilibili (BILI)
Why the Strength
While there are tons of online media companies in China, Bilibili stands out as the one that’s aimed directly at younger users. Bilibili began as a source for the anime, comics and games that interest Generation Z users (those born between 1990 and 2009), but has branched out into videos, live broadcasting, mobile games and other professional user generated content, though the focus is still on Gen Z, who make up a majority of Bilibili’s users. Any company that booked revenue gains of 284% in 2016 and 377% in 2017 would show up on investors’ radar even if the company wasn’t yet profitable. (Bilibili is expected to break into the black in 2019.) But investors are interested in BILI despite the troubles that have beset most Chinese stocks, largely due to two recently announced deals. The first was a $318 million cash investment from Tencent Holdings, the Chinese messaging giant. This secured a 12% equity position for Tencent and gave Bilibili fuel for game development and greater access to Tencent’s enormous user base. The second deal was the announcement on October 31 of a joint venture between Bilibili and Gree, a Japanese tech company with mobile social games, live entertainment and other interests. The two companies will develop mobile games in Japan and China and explore the Virtual YouTuber (VTuber) business. Bilibili will report its Q3 results on November 20 after the market closes, with analysts forecasting revenue of $147 million and an earnings loss of seven cents per share.
Technical Analysis
BILI came public in late March 2018 at 11, and blasted off to a high of 23 in the middle of June. That’s when the wheels came off for most Chinese stocks, and BILI pulled all the way back below 10 on August 15. Since then, though, the stock has been booking a series of higher lows despite the horrid action of Chinese titles. If the reaction to earnings is good, we could be looking at a new leader. You can nibble here or on dips if you want, but it’s probably a better idea to put BILI on your watch list and see if it can build on its bottoming formation.
BILI Weekly Chart
BILI Daily Chart
Cooper Tire (CTB)
Why the Strength
Cooper Tire & Rubber makes tires, and that’s the whole story. The company “specializes in the design, manufacture, marketing and sale of passenger car, light truck, medium truck, motorcycle and racing tires,” and sells into the U.S. aftermarket and in selected markets globally through independent dealers, wholesalers and automotive chain stores. The company’s appearance in today’s Top Ten comes courtesy of a great earnings report that featured earnings that weren’t great in absolute terms (earnings down by 9% and revenue up just 1%), but beat estimates by a wide margin, especially earnings, which were double (!) what was expected. Cooper is an old company (founded in 1914) and has paid dividends in 187 consecutive quarters. The company has also bought back 15.8 million shares of its stock since the program began in August 2014, including 31,000 shares in the latest quarter. But despite increased costs of raw materials and the earnings plunge of recent quarters, investors see Q3’s huge earnings beat (and the fact that sales were up for the first time in seven quarters) as a sign a turnaround is getting underway—analysts see 2019’s bottom line rebounding 79%. A 1.3% dividend is also a plus.
Technical Analysis
CTB has been the dog’s dinner since early last year, falling from a peak near 45 to a low under 23 in May of this year as earnings fell off a cliff. But then came a decent bottoming process, with a couple of retests of the May low (in July and October) and, last week, a surge back above its 200-day line on its second heaviest weekly volume total since the top last year. There’s still overhead to chew through, but we’re OK picking up a few shares given that most weak hands have likely already been worn out.
CTB Weekly Chart
CTB Daily Chart
Deckers Outdoor Corp. (DECK)
Why the Strength
Deckers makes apparel, footwear and accessories for performance and fashion-oriented customers. Performance brands include Teva, Sanuk and HOKA ONE ONE and fashion brands include UGG and Koolaburra by UGG. It’s been one of the better performing apparel stocks since mid-2017, and last week’s breakout above the stock’s all-time high hit in 2011 shows investors feel good about the future. Revenue growth in Decker’s second quarter of fiscal 2019 wasn’t off the charts at 4% (to $502 million), but it beat expectations and EPS of $2.38 demolished the consensus estimate of $1.71 and rose 55% from a year ago, due to a mix of better cost controls, a lower tax rate and aggressive share buybacks (the share count was down 7.2% in Q3 vs. a year ago). Management also guided above consensus for the full-year. The story behind the headline numbers is that the UGG brand remains the cash cow at 79% of total revenue, and improving profitability helped drive gross margin to 50% from 47% last year. The HOKA brand, which features more material under a runner’s foot than normal running shoes, continues to be the fastest grower with sales up 28% (10.3% of revenue), while Teva and Sanuk grew 0.6% and 9.4%, respectively. Big picture, this story is about a company that’s making smart, incremental moves across its brands and distribution channels (wholesale and direct-to-consumer). And it’s resonating with investors as we head into the holiday shopping season.
Technical Analysis
DECK chopped around for a few years then broke out late in 2017 at around 73 and rallied into the spring of 2018. Shares topped out at 99 in February, consolidated for three months, and then zoomed as high as 122 in June. DECK then had another consolidation, this one dipping to the 200-day line as the market tanked last month. But since then the action has been extremely impressive, with shares zooming to new all-time highs on multiple days of huge volume. We’re OK if you want to nibble on dips of a few points.
DECK Weekly Chart
DECK Daily Chart
Exact Sciences (EXAS)
Why the Strength
Exact Sciences has all the pieces in place—potentially revolutionary story, excellent growth numbers and projections and, now, a tidy chart—to be a new leader once the market pulls out of its funk. The company reported another great quarter last week, with the number of Cologuard (its DNA-based test for colorectal cancer that’s easier to take and has higher compliance rates than colonoscopies) tests rising 49%, and since the price per test improved 9%, revenues actually surged 63%. Highlights from the conference call included the fact that 92% of Cologuard users can now use the test at no cost thanks to insurance coverage; the firm has only penetrated less than 40% of primary care physicians, nurse practitioners and physician assistants; competition is very early stage and has too many false positive readings during testing; the Pfizer sales team has been trained and will begin hitting the pavement in months ahead; and management is rapidly expanding capacity (will have annual capacity of three million tests by December and five million by year-end 2019, all compared to 910,000 this year). Throw in expectations for 60% revenue growth in 2019 (Pfizer is sure to help with that) and big investors are thinking the upside here is tremendous. We agree.
Technical Analysis
EXAS did have a huge run last year, rallying from around 15 at the start of 2017 to as high as 64 in November. But the year that followed looked a lot like a “reset” of the stock, with three good-sized corrections and no net progress for 11 months. But last week, the stock popped on earnings, and while it’s not out of the woods the stock is within a few points of all-time highs. Keep EXAS near the top of your watch list; if you want to nibble, you can do so here or on dips.
EXAS Weekly Chart
EXAS Daily Chart
HealthEquity, Inc. (HQY)
Why the Strength
One of our favorite “megatrends” out there is the increasing use of health savings accounts (HSAs), (and, if some proposed legislation passes, could go with regular health plans as well)—the trend is really about cutting health insurance costs and building up a tax advantaged and investible “nest egg” of health savings. (My wife and I have had an HSA for years, with very low premiums and, now that the kiddos aren’t going the doctor all the time, has allowed us to save up a nice little chunk.) HealthEquity is one of the largest custodians of HSAs—it has partnerships with many big insurers and employers (such as Anthem and Blue Cross), and has a growing market share (15% of accounts today, eight straight years of increased market share; #2 market share overall) in an overall market that is still only lightly penetrated (just 20% or so of workers have HSAs). The company makes money a few different ways (transaction, account, custodial fees), and all are growing rapidly and predictably. In the quarter that ended in July, revenue was up 25%, EBITDA was up 33%, EBITDA margins were huge (45%!), while HSA members lifted 23% (to 3.6 million) and assets in those accounts grew 31% (to $7 billion). Analysts expect the growth to continue for years to come as balances grow and new accounts are opened up. HealthEquity continues to have a dynamite story.
Technical Analysis
HQY did have a big run in 2016, but then the stock effectively went dead for 13 months (no net progress from January 2017 to February 2018), resetting the stock. The uptrend since then was a good one, with a run all the way to 100 in September before the market decline took hold. HQY, though, pulled back reasonably (only 19%) and has bounced most of the way back since then. You can nibble here or just keep your eyes on HQY for when the market turns healthy.
HQY Weekly Chart
HQY Daily Chart
Keurig Dr Pepper (KDP)
Why the Strength
Keurig Dr. Pepper looks like a special situation that is back at new highs despite the wobbly market, thanks to some intriguing potential synergies, the prospects for long-term growth and a dash of M&A activity. The new, combined company (the merger was completed in the summer) is a top 10 player among U.S. food and beverage firms, as it’s a leader in both coffee (Keurig) and flavored drinks (with numerous top brands like 7Up, Mott’s, Shweppes, Canada Dry, A&W plus the namesake brands). Of course, growth here won’t be rapid (the top brass expects 2% to 3% sales growth, in-line with the industry), but expects $600 million of annual merger synergies by 2021, as well as EBITDA growth of 11% and earnings growth of 16% (off a base of $1.05 per share this year) annually through 2021. The strong outlook funds a tidy dividend (2.3% annually) and some M&A, too—the firm bought Core Nutrition in September for $435 million (bottled water, fruit hydration) to broaden its portfolio, with some rumors it also might dip a toe into the cannabis market. One other positive: Mondelez, the large confectionery outfit, owns nearly 14% of the company. There’s nothing revolutionary here, but Keurig Dr. Pepper could be a new emerging blue chip in the slow, steady consumer staples field.
Technical Analysis
KDP’s merger was finalized in July, so anything before that doesn’t really apply to the chart. Since a spike to 25, the stock eased in a near straight-line decline to 22.5 in September, and eventually to 22 in early October. But the stock has perked up nicely since then despite the market environment, lifting nicely to new highs on Halloween and holding those gains. We’re OK nibbling on dips.
KDP Weekly Chart
KDP Daily Chart
Omnicell (OMCL)
Why the Strength
We featured Omnicell in late-September and, while we got knocked out of it during its sharp market-induced plunge, we’re very encouraged by the stock’s quick snapback toward its highs. To review, Omnicell is a medical equipment stock specializing in automated delivery of medications and surgical supplies. Roughly 60% of revenue comes from the sale and installation of capital equipment and software, while the rest comes from recurring services and consumables. These services play well into the big picture trend of pharmacies become more strategically important within the health care system. Pharmacy is the fastest-growing area of spending, and Omnicell can help control costs while improving care by automating medication management. Most of the business revolves around medication dispensing, bedside automation, pharmacy storage/retrieval and physician order management. But Omnicell is getting deeper into niche markets like automated IV solutions, too. There were no major changes to the story when Omnicell reported on October 25, but solid execution drove a beat on both the top (revenue up 9.4%) and bottom line (EPS of $0.63 beat by $0.07). And a boost to guidance (analysts see earnings up 44% this year and 19% next) helped re-attract buyers.
Technical Analysis
OMCL had a good 2017 but a good chunk of the gain was given back during a correction in January and February. The stock spent a few months chopping around before finally out again in July after Q2 results were reported; OMCL eventually motored to 73 in September. The pullback in October was sharp but not abnormal, with shares finding support near 60 and, after Q3 results were released, booming back above 70 on outstanding volume. You can nibble on dips, or just keep it on your watch list.
OMCL Weekly Chart
OMCL Daily Chart
Starbucks (SBUX)
Why the Strength
You don’t often see big, liquid blue-chip stocks in Top Ten, but Starbucks appears to be near the start of a new upleg after investors reacted very positively to its quarterly report. In Q3, overall sales lifted 11%, but the focus was on same-store sales growth, which popped 3% overall and 4% in the U.S., both of which topped estimates and reversed the terrible Q2 results. And there’s high hopes going forward given the company’s well-received price hikes, some innovations on the product side (cold coffee), continued store growth (7.1% increase in the store count globally in the next 12 months) and big amounts of share buybacks (share count down 7% from a year ago!) and a solid dividend (2.5% annual yield). Granted, nobody is saying the days of 20%-plus growth are set to return—management expects same-store sales to chug ahead 3% to 4% during the next year, with total currency-neutral revenue growth in the high single digits. But big investors are sniffing out some better-than-expected surprises, with some possible initiatives revealed at the company’s Investor Day next month. After a couple of years in the doghouse, Starbucks is an intriguing turnaround situation.
Technical Analysis
SBUX spent a long 19 months in a trading range between 50 and 65 from October 2015 through this spring. And then things got worse, with the stock diving after earnings in June, bringing the stock down to 47! But that now looks like a shakeout, as the stock rose steadily to 60 last month, held up very well during the market debauchery, and then gapped back to its old highs after earnings. It might need a little time, but if you want in, you can buy a little on weakness.
SBUX Weekly Chart
SBUX Daily Chart
Under Armour, Inc. (UAA)
Why the Strength
Under Armour, the sports apparel company built on the reputation of its moisture-wicking fabrics, is a turnaround story. After a long run of success, the company lost its mojo and got a two-year drubbing at the hands of investors that lasted from October 2015 through October 2017. But it looks like the company’s year-long restructuring effort is finally paying off, as investors were impressed by Under Armour’s quarterly report on October 30. The quarter’s numbers weren’t overly impressive in absolute terms—just 2% revenue growth and 14% earnings growth—but both numbers beat expectations and also came in ahead of the company’s own guidance. Investors also liked the reduction in inventory and the evidence that the company’s products are back in step with consumer tastes. Management delivered guidance that beat expectations, reinforcing the idea that the company has really gotten its year-long turnaround right. There were a ton of bearish investors who were shorting Under Armour’s stock—there were 39 million shares that were sold short as of mid-October—and right now, those shorts are helping the stock’s post-earnings rally. Analysts see 2019 earnings lifting 55%, and even that could prove conservative should this well-known brand continue to execute.
Technical Analysis
UAA was a monster from early 2009, when it was trading at a split-adjusted 1.5, to September 2015, when it topped out at 53. The fall from that high was a 78% haircut that finally hit bottom at 11.4 exactly a year ago. UAA rallied back to 25 in June 2018, then slipped steadily back to 17 ahead of earnings. Last week, shares vaulted to 23 on October 30 on more than five times its average volume, and they’ve tacked on gains since then. As with most stocks in this environment, if you want to take a position, keep it small and look for dips to enter—or just keep it on your watch list.
UAA Weekly Chart
UAA Daily Chart
VeriSign (VRSN)
Why the Strength
VeriSign is a critical internet infrastructure player given it is the sole authorized registry for many domains, including the .com and .net top-level domains, which account for around 43% of all registered domains globally! VeriSign also operates two of the world’s 13 root servers that are responsible for directing internet traffic and it provides security solutions that keep websites up and running. It’s a stable, high-margin (after tax profit margins of 49% last quarter!) business, in large part due to multi-year contracts with ICANN, the U.S. Dept. of Commerce’s (DOC) group that rules the internet. The stock is doing well because VeriSign just amended its agreement with the DOC to permit up to 7% price increases in .com domain names in each of the last four years of its new six-year agreement. This follows a price freeze that’s lasted for six years, and it represents a big win for VeriSign as it will directly boost top-line growth after the two-year price freeze window closes. We would also expect either a jump in EPS or more investment in growth-generating initiatives. Analysts have been looking for 5% revenue growth in 2019 and EPS growth of 12% (to $5.23). With the price hike it’s now fair to expect upper single-digit growth in 2020 and beyond, which, along with its predictability, should keep big investors interested.
Technical Analysis
VRSN’s long-term trend is up though it is susceptible to decent-sized corrections every here and there. The most recent one, which pulled the stock down from 164 to 135 due to the market’s plunge, was cut short by news of the price hike. That news sent VRSN back up to its 52-week high near 165 on Friday (it traded well above that level intra-day). Given that the stock tends to be relatively stable on the way up—it has been above its 50-day line for most of the last two years—it could be a steady leader of the next uptrend. If you want in, today’s dip provides an opportunity.
VRSN Weekly Chart
VRSN 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.
