More Degradation
Current Market Outlook
The big-cap indexes started strong today on news of a new NAFTA deal, but under the surface, we’re seeing continued rotation and signs of degradation. Small- and mid-cap indexes took hits today and remain below their 50-day lines, while most growth stocks continue to act iffy. To be fair, the start of a new quarter often sees many crosscurrents, and most leading stocks, while choppy, remain in uptrends. But we’ve now seen funky action and lots of rotation for over a month, which has our antennae up. We’re moving our Market Monitor to a level 6 and feel the next few days will be telling—if leaders are OK, we expect to see support show up, but if not, the odds of a longer pullback will increase.
As for our screens, we’re still finding a good number of good charts, albeit in a variety of sectors. Our Top Pick today is Allegheny Technologies (ATI), a specialty metals firm that is showing signs of getting going after months of base-building.
| Stock Name | Price | ||
|---|---|---|---|
| Alarm.com (ALRM) | 71.33 | ||
| Allegheny Technologies (ATI) | 27.78 | ||
| Ecopetrol (EC) | 22.17 | ||
| Intelsat (I) | 25.46 | ||
| Paycom Software (PAYC) | 0.00 | ||
| PetIQ (PETQ) | 30.82 | ||
| Teladoc, Inc. (TDOC) | 127.95 | ||
| Vale S.A. (VALE) | 15.40 | ||
| WPX Energy (WPX) | 0.00 | ||
| Zendesk (ZEN) | 82.19 |
Alarm.com (ALRM)
Why the Strength
When a company offering security services shows up on Cabot Top Ten Trader, there’s usually a “cyber” attached to security. But Alarm.com, while it has a very high-tech component to its business, is intended to keep intruders away from families, homes and businesses. Founded in 2000, the company offers remote monitoring of homes and businesses through a tamper-resistance GSM cellular connection, as well as energy management and home automation services The company’s devices are sold through a nationwide network of over 7,000 outlets and it has over 5.5 million subscribers to its software-as-a-service monitoring plans. The company was the first to market with mobile apps (including for Apple Watch) and is integrated with Amazon Echo, Google Home and similar networks. The company also has a growing global footprint. With SaaS and licensing providing recurring revenue, the company’s revenue growth has topped 25% annually for the last seven years and earnings have popped higher by 113% (Q1) and 55% (Q2) this year. The company is forecast to grow earnings by 18% in 2018 and 15% in 2019, but those estimates are likely quite conservative. With management pushing hard on expansion in the U.S. and globally, there’s the potential for a long run of growth.
Technical Analysis
ALRM came public in 2015 and rode a general uptrend from 16 at IPO to 49 a year ago. The stock’s one big correction pulled it back to 33 in March and a hiccup in June took some steam out. But the stock gapped up on four times its average volume on August 8, running to 58 on August 22. Since that rally, the stock has been consolidating with support at 52 and even made a quick spike over 60 in today’s trading before returning to its consolidation area. ALRM looks like a good buy on any normal weakness with a stop around the 50-day line.
ALRM Weekly Chart
ALRM Daily Chart
Allegheny Technologies (ATI)
Why the Strength
Allegheny Technologies is loosely placed in the steel sector, and it does have some commodity-like business lines. But the main attraction here is the firm’s specialty materials outfit that has some proprietary manufacturing and machining capabilities that makes it unique. The big driver here is the aerospace field; in Q2, jet engine-related metals contributed 27% of revenues, with airframe and government/defense contributing another 16% combined; all told, commercial aerospace revenues grew 14%, including a 39% surge in so-called next-generation jet engine products (which by themselves made up 15% of revenues). Meanwhile the flat-rolled product segment, while not growing fast, is solidly profitable as the company has worked to cut costs. Thus, there’s not one ruling reason for the company’s success, but strength in its end markets (demand from construction, mining and energy is also picking up) and prudent cost controls are resulting in consistent top-line growth in the mid teens and booming earnings and cash flow growth—in Q2, earnings not only surged nearly six-fold from last year’s tally but the 52 cents per share topped estimates by 16 cents. The next quarterly report is due out October 23.
Technical Analysis
ATI has put in a very firm foundation in recent months and is now showing signs of getting going. The stock topped with the market in January of this year near 30, and since then it’s put in a tightening base, with the swings becoming less extreme as time has passed, and with consistent support in the 24 to 25 area in recent months. Now, ATI has rallied back to its highs on three straight weeks of above average volume. You can start a position here or on dips and look to buy more on a push above 30.5 or so.
ATI Weekly Chart
ATI Daily Chart
Ecopetrol (EC)
Why the Strength
Colombia-based oil explorer/producer Ecopetrol is making its second-ever appearance in Top Ten today based on a convergence of factors. First, the price of crude oil futures has increased from below 30 in January 2016 to over 73 today. Second, the company made a major offshore gas discovery in 2017 that is now being drilled and explored. And third, the company itself is ramping up capital expenditures, increasing capacity at two of its refineries (where it has increased the percentage of Colombian feedstock from 42% a year ago to 79% in Q2) and expanding its markets. Cost reductions are also part of the story. These efforts have resulted in triple-digit earnings growth in six of the last seven quarters, and revenue growth that has jumped from 7% in Q3 2017 to 34% in the latest quarter. Analysts are forecasting 83% earnings growth this year. Institutional ownership of Ecopetrol has been rising steadily (228 now, up from 161 a year ago) and the last three quarters have averaged after-tax profit margins of 20% after years of single-digit figures. There’s no magic bullet here, but with three solid factors supporting it and a dividend that yields 2.3% going forward, Ecopetrol is a solid proposition.
Technical Analysis
EC went over the falls for three years, slipping from 52 in early 2013 to 5 in January 2015. The stock traded as flat as a piece of paper around 9 through most of 2016 and through September 2017, but woke up in October 2017. EC has had three legs up since then, with a couple of consolidation periods. The latest leg has taken the stock from 22 in late August to over 27, with a September 12 volume spike supplying the fuel. EC is a little extended (its 25-day line is back at 24.3), so look for a pullback of at least a point to get started.
EC Weekly Chart
EC Daily Chart
Intelsat (I)
Why the Strength
Intelsat is a satellite communications company that operates a fleet of over 50 satellites, plus teleports, that provide a secure communications network for media companies, telecom operators and the U.S. government. The stock has been on a tear this year partially thanks to a number of capital reorganization moves (equity and convertible debt offerings, as well as debt refinancing) aimed at reducing total debt. Perhaps more meaningful has been Intelsat’s effort (with partner SES) to establish a market-based framework to allow wireless operators in the U.S. to access 100 MHz of its C-Band downlink spectrum to speed the deployment of 5G services. The details of this deal are too complex to take a deep dive here, but the big picture is that 5G is a priority of the Federal Communications Commission (FCC) and this spectrum is quite valuable (some analysts have said north of $20 a share). If combined with a more stable capital structure, Intelsat starts to look like an interesting opportunity. Additionally, Intelsat has just launched two more communication satellites (on its Ariane 5 rocket) into high orbit to provide direct-to-home services in Europe, Asia, and sub-Saharan Africa. Intelsat is atypical for Top Ten in that revenues aren’t projected to grow at all over the next two years. This is more of a speculative special situation that could pay off if the 5G story plays out successfully.
Technical Analysis
Intelsat did absolutely nothing until April when it began to look like the FCC was serious about the idea of monetizing the C-Band. Since then the stock has been trading almost exclusively above its 50-day line, though a recent pause may be providing a buying opportunity—shares began to level off in August after hitting a high of 25, consolidated for six weeks and, impressively, tightened up near its 50-day line two weeks ago. Then another big-volume rally carried shares to 30 last week following the launch of the Ariane 5 rocket. If you’re game, you can nibble on dips.
I Weekly Chart
I Daily Chart
Paycom Software (PAYC)
Why the Strength
Paycom was our Top Pick on August 6 because the stock had just staged a fantastic earnings gap out of a big consolidation, and the follow-through since then has been fantastic. We’re going back to the well again because the fundamentals remain enticing and the chart is nearing a solid risk/reward entry point. To review the story, Paycom is the market leader for cloud-based human capital management (HCM) solutions, which help enterprises manage HR, payroll, benefits and talent. There are a lot of competitors out there, including big names like ADP, but Paycom’s been eating their lunch and beating expectations for the past few years and Wall Street expects that to continue. There haven’t been any big changes over the last eight weeks—Paycom continues to expand geographically, 98% of revenue still comes from recurring subscriptions, and Q2 results are still the most recent (revenue was up 31% and EPS grew by 69% to $0.59, easily topping estimates). One thing that has changed is that analysts have bumped up full-year earnings expectations from $2.50 to $2.62 and we’re much closer to the Q3 earnings report date, which should be around Halloween. The stock’s not cheap (59 times this year’s earnings estimates), but growth has consistently topped expectations and cash flow is very healthy. Paycom is a best-of-breed software stock, and investor perception of the future continues to increase.
Technical Analysis
PAYC’s long-term chart is still up and to the right. The last consolidation phase began in May when PAYC failed to make a fresh high and shares moved sideways—mostly in the 100 to 115 range—through the end of July. That lack of momentum culminated in a blastoff rally following the Q2 earnings report, which sent the stock to 135 over just two days and eventually took shares to 164 in early September. The current pullback to the 25-day line has looked very normal; we advise picking up shares on further weakness.
PAYC Weekly Chart
PAYC Daily Chart
PetIQ (PETQ)
Why the Strength
PetIQ remains one of our favorite small-cap ideas, with a unique retail story that is grabbing share of a giant veterinary market. The company bills itself as the leading provider of products and services to the retail market that were previously only available from vet clinics, with a broad product line of prescription and OTC meds, flea and tick offerings and health and wellness products. All told, it distributes 500-plus medications, makes 200 of its own products and sells them all in more than 40,000 locations including all the big box retailers. And that’s not all! It’s also one of the few national veterinary clinic operators through its VIP Pet Care brand, treating about one million pets in 2017; PetIQ is also aiming to open 1,000 pet wellness centers by 2023, effectively creating its own supply (sort of like if a big pharma company also operated doctors offices). Combined, these markets are north of $30 billion annually and growing 6% per year, and PetIQ is rapidly grabbing share, as you can see in the table below. Growth will likely slow going forward, but management is aiming to book $500 million in revenue this year and growth of at least 15% annually for many years going forward, with EBITDA rising more than 20% annually and earnings 25%-plus. Customer concentration is an issue to watch (though it’s becoming less so as time passes), but overall, we think this is a great story with a long runway of growth.
Technical Analysis
PETQ formed a big double bottom, post-IPO base from October 2017 through early August of this year, and then ripped to new highs in massive volume and rallied as high as 44 two weeks ago. Now it’s finally pulling back, partially due to a just-completed share offering (five million total shares, though only two million were newly issued) at 39. Our thought is that, barring a market meltdown, PETQ’s first pullback toward its 50-day line should provide support—i.e., nibble here or (preferably) on dips.
PETQ Weekly Chart
PETQ Daily Chart
Teladoc, Inc. (TDOC)
Why the Strength
As the hands-down leader in virtual care, Teladoc continues to have one of the biggest stories in the entire market—penetration is just 1% or so but growing rapidly, as the idea of talking (or Facetiming) with a doctor to get some answers makes too much sense for common ailments (colds, flus) and many specialties (dermatology, behavioral health, etc.), too. The stock has been strong for a few months, but caught a big-volume updraft late last week after the company’s Investor Day on Thursday, where a bunch of positive anecdotes were shared. First, the company nudged up its 2018 numbers and stuck to its longer-term targets (20% to 30% organic revenue growth, EBITDA margin of at least 20%, etc.). Second, it highlighted some recent big customer wins in a variety of segments (including ExxonMobil, Centene and Partners Healthcare). And it also said the new CVS relationship is ramping up (offered in 18 states now, expanding number of indications covered, etc.) thanks to high satisfaction (95% liked the experience in pilot tests), along with being bullish on its international opportunities now that Advance Medical is in the fold. (One other piece of evidence Teladoc is far in the lead: Google brand queries are running higher than its three closest competitors combined.) There are a lot of moving parts here, but there’s no doubt virtual care is an idea whose time has come, and as it becomes more prevalent, Teladoc is going to be the biggest beneficiary.
Technical Analysis
TDOC broke free from a big base in early May and had a big run, zooming from around 45 to 71 by early July and, after a sharp dip, rallied into the mid 70s by Labor Day. Then, impressively, while many growth stocks wobbled in September, TDOC actually went tight, closing nearly unchanged for a few weeks. Then the buyers returned following last week’s Investor Day, pushing TDOC to new highs. Nibbling on dips makes sense.
TDOC Weekly Chart
TDOC Daily Chart
Vale S.A. (VALE)
Why the Strength
When a very large company makes an appearance in Cabot Top Ten Trader, there’s often an interesting story behind it. Vale S.A. is a Brazilian mining and minerals company with a market cap over $78 billion. It’s the largest producer of iron ore, iron ore pellets and nickel in the world, with global mining and prospecting operations as well as transportation, power, coal mining and other operations in its native Brazil. Vale gets about three-quarters of its revenue from iron ore products, with more than 40% of sales going to China, plus operations producing manganese ore, ferroalloys, metallurgical and thermal coal, copper, platinum, gold, silver and cobalt. The interesting story is that there has been an increase in the global demand for steel, producing higher prices and margins. In response, the steel industry has increased its need for higher quality iron ores and pellets. But on the supply side, the available ores in China and Australia are showing higher levels of alumina and phosphorous (a bad thing), all of which raises the value of Vale’s high-quality mined and processed iron precursors. And with Chinese and Australian investment in new mines on the decline, the future markets for Vale’s products look bullish. The company’s Q2 earnings report featured a 19% jump in revenue and a 150% increase in earnings, partly because of management’s decision to concentrate output on premium quality products and partly from supply chain improvements. The company announced a $1 billion share buyback program in July and pays a dividend that yields 3.4% annually.
Technical Analysis
VALE went through a monster slide from 27 in January 2011 to 2.0 in January 2016. And the rebound that started in 2016 has had plenty of corrections along the way, as well as a period of range-bound trading through most of 2018. The stock rallied to 14.4 after its July earnings report, but fell to 12.5 in early September on concerns about the U.S.–China trade war. But September finished with a rally to 15.2, its highest price since 2013. With a nice combination of momentum, a generous dividend and a bargain-basement 9 P/E, VALE looks like an intriguing play.
VALE Weekly Chart
VALE Daily Chart
WPX Energy (WPX)
Why the Strength
We’re seeing a bunch more energy stocks appear on our Top Ten screens during the past couple of weeks, an intriguing sign that the group may be turning the corner. WPX Energy is a name we’ve written about a couple of times this year and looks like it could be a winner if the group gets moving thanks to its great growth story. The firm has transformed itself during the past few years, selling off a variety of assets to focus on the Delaware Basin (where it has more than 6,600 drilling locations on its 131,000 acres!) and the Williston Basin (85,000 acres). The acreage is very lucrative and WPX is drilling like mad—in the second quarter, Delaware output rose 83% from a year ago (oil volumes up 94%), while Williston output was up 45% from a year ago (oil up 39%), causing management to hike forecasts for the rest of the year. (The choppy sales growth figures in the table below are due to a big divestiture this year—same-location output growth has been superb.) WPX also has a good-sized midstream business (gathering and processing facilities, pipelines, water recycling, etc.), and very importantly, the company has locked in lucrative sales agreements through next year, so it’s not suffering from lower prices in the Permian, where there’s currently an oil glut (not enough takeaway capacity). And with no meaningful debt maturities for four years, WPX is free to spend heavily to tap as many wells as it can. We like the story.
Technical Analysis
WPX looked like it was ready for a sustained advance in May when it lifted to new highs after a two-month basing effort (which was part of a larger 16-month base). But instead the stock moved straight sideways—WPX has hovered between 17 and 20 for the past four months. But now it’s perking up again, with the stock nosing to new highs on Friday on excellent volume. We’re OK starting small here and averaging up if the buyers take control.
WPX Weekly Chart
WPX Daily Chart
Zendesk (ZEN)
Why the Strength
Zendesk sells software solutions for the $20 billion (and growing) customer service industry and has a reputation for designing sleek and client-friendly products that help businesses catch and keep clients, offer technical support and communicate through chat, talk, and messaging applications. Second quarter earnings trounced expectations (again) when Zendesk reported 40% revenue growth and EPS of $0.03 (beating by $0.03). Investors also liked to hear that growth is accelerating, and that full-year guidance was increased by more than the Q2 beat, implying things will go Zendesk’s way in the back half of the year. Another highlight was that the company announced a partnership with Facebook’s WhatsApp solution (which has 1.5 billion monthly users!) to allow consumers to interact with businesses directly through that app. The biggest news since the earnings report is that Zendesk has acquired Base CRM, which will bring sales force automation (SFA) functionality to its current product lineup; Base has 5,000 users, mostly small businesses, and most believe the move will be another tailwind that will boost Zendesk’s revenues to $1 billion (130% more than last year’s tally in 2020. That means 30% plus revenue growth this year and next, plus triple digit EPS growth (granted, off a small base of a few pennies). Bottom line, Zendesk is another rapidly-growing, new-age software provider that institutional investors are gobbling up (fund ownership rose from 379 to 477 in the first six months of this year).
Technical Analysis
ZEN has put up terrific numbers since it went public in 2014 but by our measures the stock’s original breakout came in January this year. And since then, the action has been outstanding, with ZEN generally riding its 50-day line higher, though there were a couple of quick shakeouts below that support area in June and July. More recently, ZEN chopped around in September, but found good-volume support last week. We’re OK buying some here, albeit with a stop near the 50-day line.
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.
