Not Dead Yet
Current Market Outlook
Last Friday’s surge higher by the broad market was a powerful sign that the lack of progress by growth stocks in recent months might be over, and for that reason alone, we are raising our market gauge one notch above neutral to the 6 level. But until we see true follow-through, and numerous growth stocks hitting new highs, we can’t be sure. In the meantime, however, there are still plenty of individual stocks acting well, with the potential to make big moves if the broad market cooperates.
Our Top Pick this week is the world leader in electronic signature technology, DocuSign (DOCU), which is making it easier to do business securely as the world turns increasingly digital.
| Stock Name | Price | ||
|---|---|---|---|
| Aaron’s (AAN) | 74.35 | ||
| ASML Holding (ASML) | 350.01 | ||
| Chipotle Mexican Grill (CMG) | 773.32 | ||
| Crocs (CROX) | 0.00 | ||
| DocuSign (DOCU) | 107.98 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Quanta Services (PWR) | 91.45 | ||
| Saia Inc. (SAIA) | 129.19 | ||
| SolarEdge Technologies Inc. (SEDG) | 124.37 | ||
| Trex Company (TREX) | 117.56 |
Aaron’s (AAN)
Why the Strength
Aaron’s has put together a string of solid growth over the past decade by addressing a large but underserved niche; the company offers numerous home goods (furniture, electronics, appliances, even jewelry) on a lease-to-purchase basis. As you’d expect, the firm focuses on customers with FICO scores in the 500 to 700 range; all in, Aaron’s believes the total market is around $30 billion, serving around 30% of the U.S. population. The company does solid business in that area, but the big driver these days is the firm’s Progressive Leasing operation, which it acquired in 2014. Progressive effectively provides a platform for lease-to-own solutions to the entire industry (about 20,000 locations), automating the evaluation process for a bunch of big names in the industry. In Q2, the Progressive segment actually made up 53% of total revenues and its top line expanded 19%, thanks in part to a 20% bump in invoices. (By comparison, Aaron’s core leasing business was up just 2% in the quarter.) Interestingly, the firm may also be a beneficiary of a slowing economy—one analyst recently talked bullishly about the stock, noting that the company actually saw accelerating growth and profitability during the economic implosion of 2009. Analysts see earnings up 17% this year and 15% next, both of which are likely conservative.
Technical Analysis
AAN isn’t a zinger, but it’s made solid progress over time and looks like it’s just getting going. Shares futzed around for most of 2017 and 2018 before enjoying a solid run to 65 in early July. Then AAN went tight in July, August and September, a good sign the weak hands were out, and now the buyers are stepping up, with three straight days of good-volume buying, including Friday’s romp to new highs. If you want in, we’re OK taking a position here or on minor weakness.
AAN Weekly Chart
AAN Daily Chart
ASML Holding (ASML)
Why the Strength
Traditionally, challenging environments for growth stocks correlate with weak performance from semiconductor stocks, but not this time, as the chip group has been holding up well after a long consolidation in 2018 and early 2019. ASML, with 23,000-plus employees, looks like one of the big-cap leaders of the sector, as big investors believe the relatively brief slowdown of 2019 will give way to a major ramp in earnings in 2020. The company makes lithography systems that implant circuitry onto wafers for logic (61% of revenues in Q2) and memory (39%) chip makers. The biggest factor here is the industry environment, with memory chip makers working off some excess inventory; sales to memory makers are likely to be down 30% this year alone, but that’s to be offset by strength in logic customers, up 65%. But the story here is ASML’s next-generation extreme ultraviolet (EUV) systems, which are seeing increased orders as the industry moves to more precisely etched chips; overall, the company’s bookings were up 100% quarter-over-quarter in Q2 (two-thirds of that logic, including 10 EUV systems) and analysts see the firm’s bottom line soaring 36% to a new high after a modest downturn this year. Throw in a modest dividend (0.8% yield) and share buyback program (share count down 1.4% from a year ago) and you have institutions jumping on board (356 funds own shares, up from 310 six months before).
Technical Analysis
ASML rebounded strongly after a big decline late last year, rallying to 210 or so by the start of May. Since then, the stock (along with the group and overall market) has had three pullbacks, but it’s etched higher highs and higher lows during that time, which is usually a sign the next big move is up. And sure enough, as soon as the pressure came off the market late last week, ASML surged to new highs on two straight days of good volume. We’re OK taking a stab at it here or on pullbacks.
ASML Weekly Chart
ASML Daily Chart
Chipotle Mexican Grill (CMG)
Why the Strength
We continue to think Chipotle Mexican Grill is in the early- to mid-stages of a great turnaround story that should play out for a while longer. The biggest issue, of course, is quality, as the company leaves behind the food poisoning scares of the past and replaces them with perceptions of clean, healthy, delicious food. But more than that are some company-specific initiatives, the biggest of which is management’s emphasis on digital sales; not only does the company have a delivery pact with DoorDash (sort of a mini-Grubhub), but the firm has upgraded its app and online ordering process and put fast digital pickup areas in most stores; customers who order online can walk in, grab their food and quickly check out without waiting in the burrito line. All told, digital sales nearly doubled in Q2 and make up 18% of all revenues. The company is also expanding the menu, with its most recent addition being a Carne Asada meat option, while it’s experimenting with new ovens for quesadillas and even nachos and dessert! Most of all, though, the top brass is executing to a T, leading to steadily accelerating revenue growth in recent quarters and surging earnings—and yet there’s plenty of upside likely left, as Chipotle’s sales per square foot are still 20% below their peak from a few years ago despite the uptick in digital revenue. Analysts see earnings up 30% next year, though we think that could prove conservative.
Technical Analysis
CMG broke out in January of this year and has since had two corrections and consolidations—the first in April-May and the second since early September. While there was a big-volume selloff to start this latest rest, there’s also been some solid-volume buying since, and the stock has basically meandered sideways in the 780 to 850 range. We’re OK starting a position here and averaging up on further strength, or if you want to be safer, wait for a decisive breakout above 850.
CMG Weekly Chart
CMG Daily Chart
Crocs (CROX)
Why the Strength
In the early 2000s, Crocs appeared on the scene selling cheap, plastic shoes that were unusually comfortable yet unusually unattractive (to some observers). Happily, comfort won out over style and sales soared—to the extent that today almost every woman medical professional I see is wearing Crocs. More important, today the shoes are sold in more than 90 countries and the company has expanded into additional footwear lines, including children’s products, as well as more attractive, but still comfortable footwear and accessories. Its casual sandal line has now seen its 9th consecutive quarter of double-digit revenue growth, and its ecommerce arm, now serving 13 markets, is enjoying accelerating growth. And Crocs is profitable! The company beat analysts’ earnings estimates by $0.13 last quarter and it continues to post significant growth rates, forecasted at 240.6% this year. CROX is now one of the top 10 non-athletic footwear brands in the world, a $4 billion marketplace, and there’s still plenty of room for international and digital growth for the company (it’s rapidly expanding into Asia, which has tremendous long-term growth potential), so we can expect double-digit sales growth (at the least) for the next few years.
Technical Analysis
Shares of CROX had a great run in 2017-2018, climbing 430% from bottom to top, but the stock peaked at 32 in early January of this year, and then a correction took hold, driving the stock down 44% to its June low. However, buyers stepped right back in at that point, and in four months the stock has recovered most of that lost ground. It’s now setting up for an eventual breakout to new highs—which could come tomorrow or could take weeks, but when it does, the sky’s the limit.
CROX Weekly Chart
CROX Daily Chart
DocuSign (DOCU)
Why the Strength
DocuSign continues to look like one of the real growth stock leaders of the next sustained market advance, as it sports just about every characteristic big investors look for before building significant positions. The company’s core e-signature offering is a huge time and money saver for companies executing just about any type of transaction (sales orders, legal documents, policy changes, licenses, offer letters, etc.), with half of all uses completed in just 15 minutes (83% done within a day). Plus, the service is integrated into a ton of leading software offerings (SAP, Oracle, Workday, Salesforce, etc.). Not surprisingly, the service has been a hit, with the company having a slew of blue-chip names as customers (including 10 of the top 15 financial services firms, 18 of the top 20 pharmaceutical outfits and seven of the top 10 tech companies), who not only sign up (average contract length is around 19 months) but also use the product more over time (same-customer revenue growth of 13% in the latest quarter). The end result: Rapid and reliable growth (sales up between 33% and 41% each of the past 10 quarters!) and with earnings just beginning to lift off. While there is some competition, management sees this as a $25 billion opportunity, and DocuSign is also moving into adjacent areas (automated form preparation) that could boost that. It’s a great story that should produce years of excellent growth.
Technical Analysis
DOCU etched a big 15-month post-IPO consolidation from June 2018 through August of this year, but the firm’s Q2 report was the catalyst for the coming out party, with DOCU surging higher on three straight weeks of huge volume. Just as impressive, the stock held those gains during the market’s recent retreat and, as soon as the market perked up, shares zoomed to new recovery highs on big volume. You can buy a little here or (preferably) on dips of a couple of points.
DOCU Weekly Chart
DOCU Daily Chart
Lululemon Athletica (LULU)
Why the Strength
When Lululemon Athletica came to market with its pricey and stretchy yoga pants, the naysayers called it a “fad.” But while it’s certainly seen its share of stumbles, the company now has 460 stores around the world, and its growth strategy has propelled its earnings, revenues, and stock price to record highs. LULU is now the seventh-most popular brand for teens. And now, the company’s move into women’s commuting and office wear, menswear and personal care products (dry shampoo, deodorant, moisturizer and lip balm), as well as its drive to significantly expand its digital and international presence seems to be setting it up for even greater share appreciation. Digital sales traffic grew 31% in September. The company is forecasting a doubling of both men’s and digital revenues by 2023, and a quadrupling of international sales by expanding in China, and the APAC (Asia-Pacific) and EMEA (Europe, Middle East and Africa) regions. Sales have risen more than 20% for the last six quarters, and earnings have grown even faster (35% last quarter). Next quarter, Wall Street expects 24% earnings and 20% revenue growth for LULU. That growth is attracting some big money on the Street, with hedge fund interest up 17% in the last quarter.
Technical Analysis
Since reaching a low in May 2017 and despite some recent pullbacks, shares of LULU have been on a steady upswing, and after breaking out in September are now trading at new all-time highs. LULU shares are up 82% in the past 52 weeks, and have been moving up recently after rumors of a deal with China and increasing earnings forecasts. We’re OK nibbling on dips.
LULU Weekly Chart
LULU Daily Chart
Quanta Services (PWR)
Why the Strength
Quanta Services is a leading international infrastructure solutions company that serves the electric power, energy and communications industries, including design, installation, repair and maintenance. The company recently acquired a large gas utility contractor in the northeastern U.S. that’s expected to promptly boost profitability, carrying Quanta’s Pipeline and Industrial Infrastructure Services segment more quickly to their goal of achieving operating income margins of upper-single digits. Quanta’s northeast markets are characterized by aged infrastructure and mandatory, regulated multi-decade gas system modernization programs that are in their early stages, providing Quanta with long-term growth opportunities and protection from economic downturns. Quanta also bought two specialty utility foundation and pole-setting contractors in the southeastern U.S. Costs from these acquisitions are expected to modestly lower 2019 EPS, but increase 2020 EPS, while immediately increasing revenue. In September, Quanta was selected to provide engineering, procurement and construction solutions for the Wataynikaneyap Transmission Project in Canada, one of their biggest contract wins. Quanta acquired Northwest Lineman College in 2018, the premier training ground for future industry employees, giving them a huge advantage in hiring the most talented graduates. Quanta is growing rapidly, with revenue rising from $7.6 billion in 2016 to a projected $12.4 billion in 2020. Adjusted earnings per share have increased annually and aggressively, from $1.51 to an expected $3.74 during the same time frame. Investors might additionally be presented with a dividend increase in December, on the one-year anniversary of the announcement of Quanta’s initiation of quarterly dividends.
Technical Analysis
This mid-cap stock appears capable of surpassing 41 in the near term, the April 2019 top of its gradually-rising three-year trading range. Investors can nibble at PWR here, and be ready to increase positions upon a breakout.
PWR Weekly Chart
PWR Daily Chart
Saia Inc. (SAIA)
Why the Strength
Saia is an interregional LTL trucking company that provides complete transportation and logistics solutions. Their 10,000 employees deliver 26,000 shipments each day throughout the U.S., Canada, Mexico and Puerto Rico. The company routinely wins Carrier of the Year awards from a variety of industry groups, and business is booming. The company opened a second terminal in Long Beach, CA this month, on the heels of significant expansion in the Northeast, now totaling seven new terminals in 2019. Organic business expansion combined with experienced management has resulted in 36 consecutive quarters of year-over-year improvement in LTL yields. Saia is growing rapidly, with revenue rising from $1.25 billion in 2016 to a projected $1.9 billion in 2020. Adjusted earnings per share are expected to rise from $3.99 in 2018 to $5.28 in 2020. Wall Street expects Saia to report $1.28 EPS on the morning of October 30. Buying activity has been spurred on by a variety of good news since July, including a second-quarter earnings and revenue beat that generated five immediate increases in analyst target prices, and an announcement detailing July and August year-over-year increases in LTL shipments and tonnage that boosted price targets yet again.
Technical Analysis
This small-cap stock quadrupled in price from 2016 through mid-2018, briefly touching 85, then spent over a year bouncing around, with pullbacks exaggerated by fears of a recession and trade wars that hit the broader market. Strong second-quarter results on July 31 caused SAIA to run up over 50% to new all-time highs at 96. Volume has remained strong since the earnings report, and the stock appears quite willing to keep climbing. Investors can nibble at SAIA here, and be prepared to take advantage of any pullback to the low 90s.
SAIA Weekly Chart
SAIA Daily Chart
SolarEdge Technologies Inc. (SEDG)
Why the Strength
Hearty forecasts for the global solar market have been pushing up industry stocks this year. It’s now projected that global solar PV installations will reach a new high of 114.5 gigawatts in 2019, up 17.5% over 2018. And that forecast has propelled the shares of Israeli solar company SolarEdge up very nicely. SEDG has grown annual earnings 31% and sales 36% over the last five years, and is forecasted to grow another 75% this quarter. Last quarter’s sales grew to record levels, up 19.5%, and earnings beat analysts’ estimates by $0.09, coming in at $0.94 per share. The company makes inverter systems that convert direct current (DC) electricity into alternating current (AC) electricity. They are used to maximize power generation at the individual photovoltaic (PV) module-level, which reduces cost—an important factor in the alternative energy markets. And estimates for this quarter are solid, boosted by global demand and hope for a better tariff picture. Analysts and institutions have been jumping into the stock lately.
Technical Analysis
Shares of SEDG are up 174% in the past year and have been accelerating—along with the industry—for about a year and a half. They’ve pulled back a bit from their April breakout, and now trade just below their 52-week high. We’re good with a nibble here.
SEDG Weekly Chart
SEDG Daily Chart
Trex Company (TREX)
Why the Strength
Trex is the world’s largest manufacturer and number-one brand of high-performance wood-alternative decking and railing, with products stocked in more than 6,700 retail locations worldwide. Trex decking is made from 95% recycled content, and over 50% of aluminum used is from recycled sources. Economic and consumer trends are driving consistent balance sheet growth and new product offerings. The last four years brought annual increases in revenue, EBITDA and gross margins at Trex, alongside increases in consumer confidence and annual remodeling spending. Exterior property improvements capture 34% of home improvement spending. Consumers are increasingly opting for composite deck products over high-maintenance and potentially-deteriorating wood decking that currently has an 83% market share. Housing starts and existing home sales have been improving in recent months – a trend that’s expected to accelerate in 2020. After a second-quarter revenue beat that included an increase in third-quarter revenue guidance, seven investment firms raised their price targets on TREX. Analysts are expecting EPS to grow 4% and 22% in 2019 and 2020, respectively, with potential tariffs on Chinese imports already factored in, and corresponding revenue growth of 10.3% and 13.3%. The company is expected to report $0.68 EPS on the afternoon of October 28.
Technical Analysis
This small-cap stock completed a multi-year run-up in September 2018, nearing 90, then pulled back as investors worried about recession prospects, which ultimately failed to materialize. But the stock had a huge, bullish response to second-quarter results in late July of this year, then continued upward, retracing its previous high and now pushing to new highs above 90. Investors can nibble at TREX here. Be prepared to pounce on any brief pullback to 87.
TREX Weekly Chart
TREX 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.
