Play it by the Book
Current Market Outlook
The market had another constructive week, and today, the S&P 500 actually nosed out to new highs, with the Nasdaq close behind. While small- and mid-cap indexes are still further behind, the tenor of the overall market continues to improve—it’s likely not up and away, but the odds continue to favor the next big move being up. Individual stocks remain far trickier, with rotation occurring daily, but our thoughts from last week haven’t changed much: Given the many solid setups out there, a positive earnings season could launch a bunch of new leaders we can hop on (we think we’ve already highlighted some of them), but it’s still up to the bulls to produce a bunch more powerful breakouts in the indexes and individual stocks.
This week’s list is a mix of recent earnings winners and others that are set up nicely ahead of reports this week. Our Top Pick is Vertex Pharmaceuticals (VRTX), which might finally be getting going after years of ups and downs. Earnings are due Wednesday evening so handle with care.
| Stock Name | Price | ||
|---|---|---|---|
| ACADIA Pharmaceuticals (ACAD) | 47.84 | ||
| Allegiant Travel (ALGT) | 170.65 | ||
| Fortune Brands Home & Security (FBHS) | 81.02 | ||
| Lam Research (LRCX) | 268.47 | ||
| Pinduoduo (PDD) | 87.53 | ||
| Reliance Steel & Aluminum Co. (RS) | 117.45 | ||
| Seattle Genetics (SGEN) | 150.85 | ||
| Teladoc, Inc. (TDOC) | 127.95 | ||
| Valero Energy (VLO) | 97.40 | ||
| Vertex Pharmaceuticals (VRTX) | 230.36 |
ACADIA Pharmaceuticals (ACAD)
Why the Strength
We’re not usually big on money-losing biotechs, but we’ve noticed more and more that have come out of the development stage (they have a product or two on the market producing rapid revenue growth) and have some real catalysts upcoming that should further supercharge growth. Acadia Pharmaceuticals is a perfect example, as the firm has one drug on the market (dubbed Nuplazid, though the drug behind the treatment is called Pimavanserin) for Parkinson’s disease-related psychosis (hallucinations and delusions); Nuplazid is the first drug indicated for this symptom, and not surprisingly, sales growth is brisk (see table below); all told, analysts see the top line lifting 46% this year and 38% in 2020 thanks to the treatment. That’s all very good, but there’s even more excitement surrounding future treatments using Pimavanserin, including one for dementia-related psychosis, a market that’s potentially many times as big as the Parkinson’s indication (1.2 million diagnosed patients already, with possibly another million undiagnosed). Interim Phase III results were terrific—they actually stopped the study early it was so effective—which has analysts thinking FDA approval is mostly de-risked and likely to occur in mid- to late-2020. (Some think the dementia indication alone could eventually bring in nearly $2 billion per year for Acadia!) And the firm has other irons in the fire, too (for major depressive disorder, Rett syndrome, etc.). There’s some risk with further data readouts and quarterly reports (Acadia is reporting on Wednesday night, October 30), but we think this story has legs.
Technical Analysis
ACAD was flat on its back near the end of last year before it recovered with the market through March. But it wasn’t until the positive tidings regarding the new dementia indication that the stock really changed character—shares gapped up in early September, and despite a share offering and a whippy market, ACAD has held up well. If you’re aggressive, you can nibble ahead of earnings, or just look for a breakout north of 45 in the days after.
ACAD Weekly Chart
ACAD Daily Chart
Allegiant Travel (ALGT)
Why the Strength
The wave of mergers in the airline industry has slowed down considerably since the mega-mergers in 2010, namely United Airlines and Continental Airlines and US, AMR and American Airlines in 2013. Now, the overcapacity in the industry has subsided, along with fare wars that kept profits down. But for the big players, another challenge remains, and that’s the rising importance of low-cost fare providers like Allegiant, whose stock is strong today partly due to the strength in all cyclical names, but also thanks to solid results. The company had an excellent second quarter, with a 187% rise in EPS, to $2.70, blowing away the estimate of $2.21. That’s the fourth quarter in a row that Allegiant has surpassed analysts’ forecasts and marks 66 quarters of profits for the airline. The company also beat revenue estimates, bringing in $437 million for the quarter, the second consecutive quarterly beat. Allegiant has grown exponentially in the last few years, now boasting 459 routes in 98 small/medium cities and 26 leisure destinations—perhaps most impressively, the company has 359 routes with no competition! Allegiant is also getting into the resort business, recently breaking ground on its Sunseeker Resorts Charlotte Harbor, a destination resort near Punta Gorda that will have 500 rooms and 180 extended stay suites. Throw in a healthy economy and low/falling interest rates (cutting borrowing expenses) and Allegiant’s business should continue to do well for a long time to come. Right now, the company is expected to grow at more than 21% annually over the next five years, and while we never look that far ahead, there’s no question the wind is at the firm’s back today.
Technical Analysis
ALGT has been up and down for the past couple of years, though 2019 has been better, with a choppy, two-steps-forward, one-step-back type of advance. But the stock has come under the control of buyers in recent months—ALGT etched a good-looking 12-week base from late July through early October and has catapulted to new highs on big volume after earnings. We suggest aiming for dips, though given the buying volume we’re not expecting a huge retrenchment.
ALGT Weekly Chart
ALGT Daily Chart
Fortune Brands Home & Security (FBHS)
Why the Strength
The U.S. housing market is alive and well. In August, housing starts and building permits jumped to 12-year high, while resales of homes hit their highest level in 17 months. Add in the estimated $405 billion that U.S. consumers are expected to spend for home improvements this year, and you can see why a company like Fortune Brands is attracting buyers. In North America, Fortune’s Moen brand is the #1 consumer faucet brand; the company is the #1 kitchen and bath residential cabinet manufacturer; it has the #1 entry door brand among building professionals; and owns the #1 Padlock and safe brands. Basically, if home-related spending is going up in the U.S., then Fortune is sure to benefit. As with many in the sector, recent results have been just OK—the firm’s latest quarterly report saw single-digit sales and earnings growth, though plumbing (up 12%) and door/security revenue (up 11%) grew faster. Investors liked the results, but were even happier by the company’s statement that September and October showed a nice pickup in both its new construction and repair/remodel products lines. Fortune’s guidance for sales growth of 5% to 6% for all of 2019 didn’t hurt, either. It’s obviously not changing the world and isn’t the fastest-growing outfit, but Fortune is riding the renewed strength in the housing market and has a great long-term track record (sales up 75%, operating margins up 6% and earnings up 300% since 2012), both of which give big investors confidence to put money to work.
Technical Analysis
FBHS tanked from 72 in early 2018 to 35 at last year’s nadir before pushing back to 55 in April of this year. Like the market, it was choppy for the next few months, but we’re now seeing buyers let loose—FBHS has ramped to its highest level in a year and a half on accelerating weekly volume over the past few weeks, including last week’s earnings-induced gain. We’re game for trying to get in on normal dips.
FBHS Weekly Chart
FBHS Daily Chart
Lam Research (LRCX)
Why the Strength
Lam Research supplies wafer fabrication equipment and it’s a leader in etch technology; nearly every advanced chip is built with Lam technology for use in a wide variety of electronic products. Shares are doing well because Lam reported a better-than-expected fiscal first quarter last week, with earnings of $3.18 topping the consensus estimate of $3.01. (Revenue was $2.17 billion, fractionally higher than expected.) Lam now expects $2.5 billion of revenue in Q4 and approximately $3.80 of earnings, each significantly higher than consensus estimates. After several quarters of guidance cuts, analysts have recently turned bullish on the chip equipment industry, thinking product demand from memory chip makers will emerge from a trough in the second half of 2019 through 2020. And that means recent results are sustainable, largely driven by ongoing Chinese demand and market share gains. Investors are now focused on next year’s strong forecast, with the market anticipating 12% and 22% increases in revenue and profits, respectively (both of which are likely conservative). Adding to the attraction is a shareholder-friendly management—the latest dividend hike was announced in August (current yield 1.7%) and another $78 million of stock was repurchased in the September quarter (share count down 9% from a year ago). Thirteen investment firms promptly raised their price targets on LRCX to a range of 225 to 300.
Technical Analysis
LRCX is one of a handful of leaders in the chip equipment sector, and unlike the market, it’s been acting well for a while—it first hit multi-month highs in July, lifted to higher highs and September and, after a choppy few weeks, has now galloped to another new high following earnings. Like most recent breakouts, we love the action, though we’re favoring trying to enter on a bit of weakness.
LRCX Weekly Chart
LRCX Daily Chart
Pinduoduo (PDD)
Why the Strength
We can’t say Chinese stocks are out of the woods yet, and few investors really know about Pinduoduo—but big investors are catching on and the stock looks like a glamour leader of the next market upturn. The company is taking China’s e-commerce industry by storm as it pioneers a new type of operation—frequently called “social commerce,” Pinduoduo’s platform encourages team shopping via interaction and invitations, and the more people that join a team to buy a product, the lower its price! (Most products are bargain priced anyway, being off season or overbuys by merchants, etc.) In effect, it’s almost like Costco but in reverse and online; instead of the company buying in bulk and requiring buyers to do the same (as well as purchasing a membership), Pinduoduo is customer-driven, which encourages user growth and, in turn, prompts more merchants to join the platform. Growth has been out of this world, both on the top line and in the sub-metrics (spending per buyer up 92% in Q2!), and analysts see the bottom line leaping into the black next year. Looking ahead, there will probably be some more competition since the concept has taken off, but with such a big (483 million users at the end of June) and broad (48% of gross merchandise sales came from larger cities; the rest from smaller ones) customer base, Pinduoduo should remain on top. It’s a great story.
Technical Analysis
PDD is in pole position to be a leader of any sustained market advance that gets going. The stock’s initial breakout came after earnings in August, when it ramped out of a big post-IPO base, but the market had other ideas, which, along with a dilutive offering, pulled the stock back to its 10-week line. But now the buyers are back at it, as PDD exploded to new highs on excellent volume last week. Aim for dips and use a loose stop.
PDD Weekly Chart
PDD Daily Chart
Reliance Steel & Aluminum Co. (RS)
Why the Strength
Reliance Steel & Aluminum is the largest metals service center company in North America, with locations in 40 states and 13 countries. This Fortune 500 company produces more than 100,000 metal products from steel, aluminum, brass, copper and titanium for the benefit of 125,000 customers. The firm has been riding the ups and downs of the sector, bolstered over time by a couple of buyouts per year (the company made over 55 acquisitions since going public in 1994). Despite declining metals prices, Reliance delivered a very profitable third quarter last week as higher-than-expected product demand softened the impact of a typical seasonal slowdown. Non-residential construction, aerospace and automotive markets underpinned the quarter’s successes, while energy markets remained weak. Earnings per share of $2.39 far exceeded management’s previous guidance of $1.90 to $2.00, and revenue came in on target at $2.7 billion. Even better, management sees the current quarter topping expectations, too, with EPS ranging from $1.60 $1.70, above the recent consensus estimate of $1.57. The real story here, though, is that Reliance has been left for dead (dividend yield of 1.9%, P/E of 13) as investors expected results to suffer. Now, though, earnings are likely to remain elevated in the $9 range, which, combined for the market’s affinity for cyclical stocks, has attracted buyers.
Technical Analysis
RS was at 83 in early 2017, and it was at the same level in May of this year, with lots of ups and downs in between. The stock has improved since then, with a move to new all-time highs in July, a tight base between 95 and 105 for the next three months and, last week, a big-volume breakout on earnings. If you really want in you can nibble here, or wait for the first dip of a few points.
RS Weekly Chart
RS Daily Chart
Seattle Genetics (SGEN)
Why the Strength
We wrote up Seattle Genetics a few weeks back after the stock perked up following news that 71% of patients responded well to the company’s bladder cancer treatment in clinical trials. And now the story has taken another big step forward! Just last week, the company announced very positive results for its breast cancer drug (named tucatinib), used to treat HER2-positive breast cancer, an aggressive form of the disease that affects 15% to 20% of cases worldwide. The trial showed that in the combination of tucatinib with Herceptin and Xeloda (versus just Herceptin and Xeloda alone) there was a whopping 46% reduction in the risk of disease progression or death. It was also effective in patients whose cancer had spread to the brain. The successful trial enables Seattle Genetics to submit a New Drug Application to the FDA, which it plans to do in the first quarter of 2020. When you add in the firm’s good results with its Adcetris drug to treat Hodgkin’s lymphoma, this makes three recent drug trials that have impressed Wall Street. The company has enjoyed solid top-line growth for a while, and analysts expect that to continue (25% next year, accelerating after that). Earnings are due out tomorrow evening (October 29), with analysts projecting a loss of $0.36 per share and revenues of $212 million, though far more attention will likely be paid to the developing pipeline. Like all money-losing biotechs, there’s risk, but there’s also lots of upside as investors discount what appears to be a very bright future.
Technical Analysis
SGEN had a ton of ups-and-downs in 2017 and 2018, and it was more of the same for much of this year, with shares whipping around in the 65 to 80 range for months. But now the stock’s character has changed—shares broke out in late September, consolidated those gains for three weeks and then exploded to new highs last week on another round of big volume. If you’re game, dips of a few points would be tempting.
SGEN Weekly Chart
SGEN Daily Chart
Teladoc, Inc. (TDOC)
Why the Strength
Teladoc has one of the better long-term growth stories out there, and while the stock isn’t soaring just yet, it has a great setup following a couple of sharp shakeouts in recent months. The company is the hands-down leader in telehealth (also called virtual care), allowing millions of patients to access expert medical advice and care in hundreds of specialties; 40% of the Fortune 500, thousands of small businesses and a ton of public health plans have partnered with the company. (Teladoc just launched a new service, giving users access to state-licensed doctors for complex physical and mental health disorders, which is a big market.) Growth has been solid for years (it makes money mostly from subscriptions but also some per-visit fees), though the bottom line has bled red as the firm invests in its network and, often, acquires smaller competitors to bolster its offerings. And some recent news is helping investor perception— Teladoc inked a deal with United Health that should bring in a few million more paid subscribers and millions more fee-only members; while United Health didn’t include Teladoc as part of its Medicare Advantage plan this year, there are signs it will happen down the road; and Amazon launched an in-house virtual care offering that uses Teladoc’s platform. Spending will remain heavy (i.e., more losses), but revenues should crank ahead at 25% to 30% rates for a long time to come. The next quarterly report comes Wednesday evening (October 30).
Technical Analysis
TDOC broke out in early 2018 and more than doubled to its peak in September before getting cut in half with the market. The rebound earlier this year was solid, but then the stock stagnated, basically chopping around in the 50 to 74 range since mid February. But evidence suggests the weak hands are out—TDOC rebounded quickly from a shakeout in September and has tightened up recently, too. If you’re aggressive, you could nibble ahead of earnings, but a decisive breakout on above 74-75 is the key to look for going ahead.
TDOC Weekly Chart
TDOC Daily Chart
Valero Energy (VLO)
Why the Strength
Valero Energy needs no introduction, as it’s one of the country’s leading refiners. The stock is strong because business is good and getting better, with investors turning more bullish on cyclical names. The company reported an estimate-beating third quarter last week, with EPS and revenue coming in 9% and 12% higher than expectations, respectively, with management offering soothing words about Q4. The refining industry had hit a road bump in 2019 as prices on heavy, sour crude oil feedstock rose due to infrastructure and production constraints in Canada and Mexico, OPEC cuts, and Iranian and Venezuelan sanctions, all of which put a lid on profit margins; Valero’s 2019 profits are expected to fall 33%. But a huge catalyst is coming in 2020, and consensus estimates now point to 95% earnings growth next year. That catalyst is IMO 2020, the nickname for the International Maritime Organization’s new mandate that the world’s 39,000 ships and tankers use either scrubbers or low-sulfur diesel fuels in order to minimize sulfur oxide emissions into the atmosphere. IMO 2020 is going to be expensive for businesses that import or export products across the world’s oceans, and it’s going to be expensive for consumers who purchase those products. But it’s going to be a windfall for Valero, which will fulfill the demand for low-sulfur diesel fuel and earn good profits from it. Besides the earnings bump, the company’s cash return program is a plus--Valero sports a 3.6% dividend today (should go up with next year’s earnings surge), and it’s been aggressively buying back shares as well.
Technical Analysis
VLO topped out in the 120 area last year, plunged with the market at the end of 2018 and then bounced earlier this year. But the action wasn’t great, with a low-but-steady trading range between 65 and 90. Now, though, it’s a different ballgame—VLO finally broke past 90 earlier this month as the market began embracing value stocks and looking forward to IMO 2020-induced profits. Pullbacks are certainly possible, but given the strength we think any weakness will be temporary.
VLO Weekly Chart
VLO Daily Chart
Vertex Pharmaceuticals (VRTX)
Why the Strength
Vertex Pharmaceuticals is a great company, and after a couple of years of choppy action, it appears the buyers are finally beginning to flex their muscles. The company has made hay with cystic fibrosis (CF) treatments, with approvals of individual drugs (it has three on the market today) and combination therapies gradually expanding the share of the CF market it can address—sales growth has been steady and earnings are following the same upward path. But what’s brought in the buyers recently was news that the FDA approved (five months earlier than expected) Vertex’s triple combination CF treatment—long story short, the combo will greatly expand the number of CF patients the company can serve, and the selling price will be higher than most were anticipating. Bottom line, management hiked revenue guidance after the approval (now looking for a 22% bump in CF revenues this year) and analysts are looking for a very solid 2020 (sales up 26%, earnings up 36%) as the triple combo product gains acceptance, with another round of excellent growth in 2021. The firm has some other early-stage research going on—it eventually wants to diversify away of just CF products—but there’s no question the CF business is going to drive perception in the quarters ahead. Earnings are due out Wednesday (October 30) evening.
Technical Analysis
We’ve been keeping an eye on VRTX for a couple of years, as the stock has etched a series of consolidations with little progress (same level July 2017 as September 2019!) despite bullish fundamentals. But last week might have changed things—the approval of the triple combo caused VRTX to spike back to its old price highs on its heaviest weekly volume in 15 months. We’re not opposed to nibbling here, but we’re more interested in seeing if it break out on earnings.
VRTX Weekly Chart
VRTX 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.
| Date | Stock | Symbol | Top Pick | Original Buy Range | Price as of 10/28/2019 |
| HOLD | |||||
| 9/16/19 | Acadia Pharm. | ACAD | 42-44 | 42 | |
| 9/30/19 | AJ Gallagher | AJG | 87-91 | 90 | |
| 9/23/19 | Apollo Glogal Mgmt | APO | 39-40.5 | 41 | |
| 10/21/19 | Arconic | ARNC | 26-27 | 28 | |
| 10/14/19 | ASML Inc | ASML | 253-260 | 267 | |
| 9/23/19 | Boot Barn | BOOT | 35-37 | 38 | |
| 9/3/19 | Burlington Stores | BURL | 195-198 | 194 | |
| 10/21/19 | Cabot Microelec | CCMP | 143-148 | 159 | |
| 6/17/19 | Casey’s General | CASY | 148-153 | 166 | |
| 2/11/19 | Chipotle Mexican Grill | CMG | 575-605 | 782 | |
| 10/14/19 | Crocs | CROX | 29.5-32.3 | 34 | |
| 9/9/19 | DocuSign | DOCU | 55-58 | 66 | |
| 8/26/19 | DR Horton | DHI | 48-19.5 | 52 | |
| 10/7/19 | Edwards Lifesciences | EW | 222-226 | 237 | |
| 9/30/19 | Entegris | ENTG | 46-48 | 50 | |
| 9/30/19 | Garmin | GRMN | 81-87 | 88 | |
| 7/22/19 | Generac | GNRC | 69.5-72 | 93 | |
| 7/1/19 | Inphi | IPHI | 51.5-53.5 | 60 | |
| 5/20/19 | Insulet | PODD | 100.5-104 | 147 | |
| 9/30/19 | Jabil | JBL | 34-36 | 37 | |
| 9/23/19 | J.B. Hunt | JBHT | 110-114 | 117 | |
| 10/21/19 | Kansas City So. | KSU | 140-144 | 144 | |
| 9/23/19 | KB Home | KBH | 30-32 | 35 | |
| 9/23/19 | KLA Corp | KLAC | 150-154 | 175 | |
| 9/16/19 | Lam Research | LRCX | 227-232 | 281 | |
| 10/7/19 | Lennar | LEN | 57-58.5 | 60 | |
| 9/9/19 | Lululemon | LULU | 193-197 | 206 | |
| 8/12/19 | Martin Marietta | MLM | 243-250 | 269 | |
| 8/26/19 | MasTec | MTZ | 59-61 | 64 | |
| 9/9/19 | Medicines Co. | MDCO | 44-46 | 57 | |
| 7/29/19 | Meritage Homes | MTH | 60.5-63.5 | 72 | |
| 7/29/19 | New Oriental | EDU | 102-106 | 121 | |
| 10/21/19 | Nike | NKE | 92.5-94.5 | 91 | |
| 9/23/19 | Pinduoduo | PDD | 32-33.5 | 43 | |
| 10/14/19 | Quanta Services | PWR | 37-39 | 42 | |
| 9/9/19 | RH Inc. | RH | 147-154 | 186 | |
| 10/14/19 | SAIA Inc | SAIA | 93-97 | 105 | |
| 10/7/19 | Seattle Genetics | SGEN | 83-86 | 106 | |
| 7/29/19 | Sherwin-Williams | SHW | 490-505 | 578 | |
| 10/14/19 | SolarEdge | SEDG | 87-89.5 | 93 | |
| 9/30/19 | Synnex | SNX | 110-113 | 119 | |
| 10/21/19 | Taiwan Semi | TSM | 48-50 | 51 | |
| 10/21/19 | TAL Education | TAL | 38-39.5 | 42 | |
| 8/26/19 | Target | TGT | 101-105 | 110 | |
| 9/30/19 | Taylor Morrison | TMHC | 24-26 | 27 | |
| 10/21/19 | Tempur Sealy | TPX | 79-82 | 81 | |
| 7/29/19 | Teradyne | TER | 55-58 | 64 | |
| 10/21/19 | TJX Corp. | TJX | 58-60 | 58 | |
| 9/23/19 | TopBuild | BLD | 93-96 | 98 | |
| 10/14/19 | Trex | TREX | 87-90 | 92 | |
| 10/7/19 | Visteon | VC | 76-79 | 95 | |
| 9/30/19 | Weight Watchers | WW | 35-38 | 37 | |
| 9/9/19 | Western Digital | WDC | 60-63 | 63 | |
| 10/7/19 | ZTO Express | ZTO | 20.2-21 | 22 | |
| WAIT | |||||
| 10/21/19 | Fastenal | FAST | 35-36 | 37 | |
| SELL RECOMMENDATIONS | |||||
| 8/12/19 | Medpace | MEDP | 75.5-78.5 | 77 | |
| 10/7/19 | Proofpoint | PFPT | 128-131 | 116 | |
| 10/7/19 | RingCentral | RNG | 164-170 | 159 | |
| DROPPED | |||||
| 10/14/19 | Aaron’s | AAN | 66-69 | 77 | |
