Still Waiting
Current Market Outlook
Stocks had another punishing week, with all the major indexes off at least 3% and many individual stocks doing much worse than that. Yes, the market remains stretched to the downside, with numerous oversold-type readings and some measures of sentiment that are showing greater caution. But at this point, any bounces have lasted just hours, and the intermediate-term trend remains firmly down (the major indexes are also below all longer-term moving averages), so we advise waiting patiently for the bulls to offer support; our Market Monitor drops to a level 3 in today’s issue. The ray of light is that, as earnings season has progressed, we’re beginning to see some solid reactions, often from names that didn’t do much in the last uptrend. These are names to keep an eye on for potential leadership down the road.
This week’s Top Ten has the first batch of earnings winners and other resilient stocks showing some big-volume accumulation. Our Top Pick is Tractor Supply (TSCO), a steady company that’s found excellent earnings-induced support, even hitting a new high today. If you want in, aim to nibble on weakness.
| Stock Name | Price | ||
|---|---|---|---|
| ACADIA Pharmaceuticals (ACAD) | 47.84 | ||
| Burlington Stores (BURL) | 193.95 | ||
| Cadence Design (CDNS) | 42.95 | ||
| Jacobs Engineering Group (JEC) | 89.83 | ||
| Mellanox Technologies (MLNX) | 92.00 | ||
| MongoDB (MDB) | 156.56 | ||
| PayPal (PYPL) | 147.00 | ||
| Tesla, Inc. (TSLA) | 818.87 | ||
| Tractor Supply Company (TSCO) | 122.24 | ||
| Xilinx (XLNX) | 134.50 |
ACADIA Pharmaceuticals (ACAD)
Why the Strength
Acadia develops small molecule drugs for patients with central nervous system (CNS) disorders. The company was started in 1993 by a professor at the University of Vermont and began working on a schizophrenia treatment in 2001. It was a long road but that drug, NUPLAZID, received FDA Breakthrough Therapy designation for Parkinson’s disease psychosis in 2014 and was finally approved in 2016 to treat hallucinations and delusions associated with that condition. In 2017, NUPLAZID was granted another FDA Breakthrough therapy designation, this time for Dementia-Related Psychosis (DRP). Since the firm first booked revenue in 2016, growth has been superb; revenue jumped from zero to $17 million in 2016 then by 622% (to $125 million) in 2017. The stock’s doing well now because analysts see 76% growth in 2018 and 48% in 2019, because NUPLAZID is inching toward the standard of care in Parkinson’s disease psychosis and because the drug is involved in four late-stage studies for other conditions with high unmet needs, including Major Depressive Disorder (MDD), DRP and Schizophrenia. Also huge is that safety concerns that surfaced early in the year around NUPLAZID have been squashed by the FDA, which looked at all reports of death and serious adverse events since the drug hit the market and found no issues.
Technical Analysis
ACAD didn’t perform all that well after NUPLAZID was approved in 2016. Shares were up and down between 20 and 40 several times, then fell below the 20 floor early in 2018 when concerns over NUPLAZID were raised in the media. That overhang was removed in mid-September and shares immediately shot up from 15 to 19, then kept climbing up to 23. They’ve come down a few points since but have held near their highs despite the awful market. With all the weak hands out, you could nibble here, or just keep ACAD on your watch list.
ACAD Weekly Chart
ACAD Daily Chart
Burlington Stores (BURL)
Why the Strength
While many retail stocks have been yanked down by the market, we are seeing a handful that are resisting nicely, and Burlington is one of them. This Fortune 500 company is an off-price retailer of all sorts of items, including apparel for men, women and kids, sportswear, coats, accessories, beauty products and more. Growth here isn’t amazing, but the stock remains very resilient because business is good and management is pulling all the right levers—comparable store growth has increased 22 straight quarters (up 2.9% in Q2, though that figure is expected to accelerate going forward), new store productivity is exceeding estimates (the top brass now plans to open 43 net new locations this year, boosting the total count by 7% from a year ago, helped by the Toys R Us bankruptcy) and profit margins are seeing fat gains (through both cost controls and by boosting existing store productivity, which had been lagging the sector). Longer-term, the company is very optimistic there’s room for more than 1,000 stores in the U.S., and on the margin front, sees a whopping four to six percentage points of headway in the years ahead. Big picture, while earnings growth should slow from its recent hot pace, institutions think Burlington has years of steady, predictable growth ahead.
Technical Analysis
BURL has been a “sneaky” winner in recent years, rallying from around 51 in mid 2016 to 175 in recent months, albeit with lots of choppinessalong the way. More recently, the stock did take a hit in September and early October, retreating to 148, but encouragingly, BURL has shown excellent power since then even as the market has imploded, surging back toward its highs on repeated bouts of big-volume buying. It’s not going to double overnight, but this steady Eddie is a name to watch. If you want in, start small on dips.
BURL Weekly Chart
BURL Daily Chart
Cadence Design (CDNS)
Why the Strength
Cadence Design Systems is a developer of design and testing equipment for chip companies and other makers of electronics systems. Cadence’s products help integrated circuits shrink and manufacturers in various industries verify and test their consumer devices, communications, cloud and data center infrastructure and automotive and medical systems. The company has been around since 1988, but has been more of a steady grower, without the enthusiastic support from investors that are necessary to qualify for Cabot Top Ten Trader. That changed on October 23, when the company’s Q3 earnings report showed a 10% increase in revenue (the strongest growth since Q2 2015) and earnings growth of 40% (the strongest since 2012). The buoyant results came about because of new product releases, including machines aimed at the 7-nanometer chip market. All of this allowed management to increase guidance for the remainder of 2018 and to increase the company’s stock repurchase authorization to $75 million for the fourth quarter. The company also picked up upgrades from two analysts after the excellent earnings report. Cadence doesn’t have the easiest product line to understand, but the success of the business is obvious.
Technical Analysis
CDNS was a steady grower after its big bounce back from the Great Recession in 2009. That changed in February 2017, when a good earnings report keyed a quicker angle of attack for CDNS. The stock ran from 26 to 46 by January 2018, then ran into a bout of selling that pulled it back to 35 in April. Another rally had the stock near new highs in late August, when a correction began that turned into a free-fall in October. CDNS was trading at 41 when the good earnings news blasted it back to 47 on October 213. The selling since then has been normal, and if you want in, picking up a few shares on this dip makes sense.
CDNS Weekly Chart
CDNS Daily Chart
Jacobs Engineering Group (JEC)
Why the Strength
When Jacobs Engineering made its second appearance in Top Ten Trader on September 17, it was the engineer/facilities builder of choice for oil & gas explorers and refiners, aerospace and defense companies, telecoms, biotech and government enterprises. That changed last week when the company announced that it had accepted an unsolicited offer from WorleyParsons for its Energy, Chemicals and Resources division. Jacobs will get $2.6 billion in cash and $700 million in shares from the transaction. Jacobs’ management says the deal will allow it to invest in its other, higher-margin business lines that are also less cyclical; the deal will close in the first half of 2019. Jacobs is emerging from a three-year stretch of single-digit declines in revenue. The turnaround started in Q3 2017 with tiny gains and gathered speed with revenue growth of 71% in Q1 2018 and 65% in Q2. The company’s improving bottom line—28% EPS growth in Q1 and 71% in Q2—attest to the success of management’s cost-cutting campaign. Jacobs paid a dividend of 15 cents per share last Friday, and it’s likely that the cash infusion from the announced divestiture will boost that payout. The company will announce its fiscal Q4 results on November 20, with estimates running at revenue of $4.27 billion and earnings of $1.24 per share.
Technical Analysis
JEC has some big corrections in its recent history, including a dip from 62 in November 2016 to 49 in August 2017 and from 72 in January 2018 to a double bottom at 55 in March and April. But good reactions to earnings in May and August powered the stock’s rally to 78 earlier this month. A couple of big selling days on October 10 and 11 pulled JEC back to 71, but it popped to 77 again when news of the division sale hit. JEC looks buyable around here if you want to start a position. This is a good revenue story with a divestiture kicker and has been standing up well to the market’s fluctuations.
JEC Weekly Chart
JEC Daily Chart
Mellanox Technologies (MLNX)
Why the Strength
Mellanox is a supplier of Ethernet and InfiniBand intelligent interconnect solutions that are used in major markets like big data, cloud, high performance computing (HPC) and Internet of Things (IoT). In recent years’ management has worked to diversify and today Mellanox generates roughly half of its revenue from InfiniBand and the other half from Ethernet, which is growing faster due to growth in data center demand. It now holds roughly 70% market share in high-speed Ethernet adapters, versus just 7% for the next closest competitor (Broadcom). Given expected average annual growth of 42% in this market through 2021, you can see why analysts are bullish on Mellanox. The stock blasted off last Friday because Mellanox beat expectations when it reported Q3 results on Thursday (revenue up 24% and EPS of $0.68 beat by $0.14). Then on Friday reports surfaced that the company had hired an adviser to work on a possible sale. Who could be interested? Speculation is rising that Xilinx (also featured in Top Ten today) could be on the short list. Takeover speculation is a dangerous game, but we’d be remiss not to mention that analyst price targets have moved higher into the $100 to $110 range based on the company’s own results. Even if Melanox stays independent, next year’s 22% expected earnings growth (likely conservative) should keep big investors interested.
Technical Analysis
MLNX blasted off last November and, despite a shakeout early in the year, climbed steadily to a multi-year high of 90 in June. That was a peak and shares have been retreating at a gradual rate since, declining as low as 66 early last week. But that all changed last week when the combination of earnings and the takeover rumors boosted the stock back into the middle of its range on giant volume. Expect volatility, but if you want in, you could buy a little on dips with a stop near 76.
MLNX Weekly Chart
MLNX Daily Chart
MongoDB (MDB)
Why the Strength
MongoDB describes itself as the “leading modern, general purpose database program.” The company boasts more than 40 million downloads of its free database-as-a-service platform and has more than 6,600 customers in over 100 countries. The company, which was founded in 2007 by the team that created DoublcClick (now owned by Google), makes money by upselling free users to paid services and products, and, while not yet profitable, has an impressive record of growing revenue—65% growth in 2016 (the fiscal year ends in January), 55% in 2017 and 52% in 2018. The two most-recent quarters have reported revenue growth in 49% and 61%. The company announced on October 10 that it would acquire mLab, a cloud database service that has over a million hosted databases on its platform, both free and paid. MongoDB picked up analyst coverage from Oppenheimer on October 17 with an Outperform rating, which follows at least five increases in price estimates from analysts in September. With revenue growth strong, net losses reducing, a beat-and-raise in its latest quarterly report and optimistic expectations from analysts, MongoDB has plenty of support to build on.
Technical Analysis
MDB came public in October 2017 and needed just over three months of sideways trading before taking off in early February. The stock ran into waves of selling in April, June and earlier in October, but has soared from 25 in February to 85 in September. The October correction pulled MDB from 85 in late September to 63 on October 11, but the stock has rebounded nicely, which is notable given the market. The next earnings report isn’t due until mid-December, so you can take a small position here if the story appeals. But remember to keep a tight loss limit given the market environment.
MDB Weekly Chart
MDB Daily Chart
PayPal (PYPL)
Why the Strength
PayPal was nailed for most of this month, but the stock is now back on our radar screen after a positive earnings reaction puts it among the best positioned big-cap growth stocks out there. The company, of course, is one of the leaders in the digital payment and money transfer industry, with a slew of partnerships among big banks, retailers and ecommerce platforms (Shopify just inked a deal to allow its customers to use Venmo, which is PayPal’s up-and-coming peer-to-peer service) that’s helping it keep (and grab) share in this fast-growing industry. And the company’s Q3 results gave every indication growth should continue—on an adjusted basis, revenues rose 21%, earnings lifted 26%, active accounts were up 15% (to 254 million), transactions per account were up 9.5% and total payment volume rose 25% (including a 78% bump for Venmo’s volume). In other words, business is still trending consistently higher, and management boosted this year’s outlook and provided a pleasing (17% adjusted revenue growth, 20% earnings growth with huge free cash flow) outlook for next year as well. Add it up, and PayPal looks to have the combination of solid growth (20% or more) and dependability (competition fears have faded) that should get big investors interested during the market’s next sustained uptrend.
Technical Analysis
PYPL lost momentum in the spring and summer of this year—while shares notched new highs, buying power was light and there were repeated bouts of big-volume selling. That led to the sharp dip in September/October (94 to 75 in four weeks), but buyers then arrived—PYPL scored two straight huge-volume support weeks, including its earnings pop two weeks ago, and it held well last week despite the market mayhem. You could nibble here with a stop near 80, or just keep the stock on your watch list.
PYPL Weekly Chart
PYPL Daily Chart
Tesla, Inc. (TSLA)
Why the Strength
There isn’t a stock with more news, rumors and speculation than Tesla, including reports on Friday that the company is undergoing a “deepening criminal investigation” about whether it misled investors with respect to its production of the Model 3. Despite those uncertainties, the stock has found a bid as institutions are emphasizing the company’s shockingly good Q3 report—not only did revenues boom 129% and earnings of $2.90 per share trounce estimates, but so did Model 3 gross margins (more than 20%), deliveries (more than 56,000) and overall free cash flow ($881 million, or nearly $5 per share). Really, the past couple of years with Tesla have all been about execution—demand has always been robust, and indeed, the Model 3 was the top grossing car in the U.S. in the third quarter (with the fifth most deliveries), but now there are signs that the top brass has finally gotten its act together in terms of output and cost controls. Indeed, the company expects Q4 to show even higher output, stable total operating expenses and another round of solid profits and free cash flow; analysts bumped up their 2019 earnings estimates from $3.21 per share before the report to $5.79 after, and even that should prove conservative if Tesla continues to execute against its huge backlog. It’s worth watching.
Technical Analysis
TSLA really hasn’t done much for many months, hovering in a very wide 245 to 390 range since the middle of 2017. What’s intriguing is that the first time the stock hit the bottom of that range (April of this year) it saw gigantic accumulation. Starting in September, it’s successfully tested that area numerous times, and last week, saw another round of massive accumulation after earnings. It’s not completely out of the woods, but you can nibble here if you’re interested or just keep it on your watch list.
TSLA Weekly Chart
TSLA Daily Chart
Tractor Supply Company (TSCO)
Why the Strength
Tractor Supply bills itself as the largest “rural style” retailer in the country—through its 1,748 namesake stores (with the potential for 2,500 over time) and 181 Petsense locations, the firm is a one-stop shop for recreational farmers and ranchers, offering a huge supply of products for the home, land, pets and livestock, with an emphasis on excellent customer service and exclusive brands (which represent 30% of sales). (Indeed, 60% of customers own a full-size truck, nearly half have livestock and three quarters own a pet.) Tractor Supply is strong today because, despite a so-so farming environment, the firm’s own enhancements (boosting e-commerce and analytics capabilities, tweaking the supply chain) is producing consistent growth. In Q3, sales rose 9.3%, continuing the trend of high single-digit growth, due in part to a strong 5.1% hike in same-store sales. Earnings boomed 32%, partly thanks to the corporate tax cut, though the firm is investing in the business, too, and has some bullish multi-year forecasts, with sales likely to be up around 8% annually (same-store sales up 2% to 3%), earnings up in the low double digits and a growing share buyback program (3% reduction in the share count per year) and dividend (current yield 1.4%). It’s not changing the world, but Tractor Supply is a reliable outfit that’s attractive in these turbulent times.
Technical Analysis
TSCO saw its stock fall to as low as 50 in the middle of last year, and was still near 58 in April of this year. But since then, the buyers have shown some muscle, with shares steadily moving back toward their all-time high (97) by late August, and then moving straight sideways in recent weeks despite the market’s plunge. The strong show of support post-earnings last week was a good sign that big investors are supporting shares. We’re OK nibbling on dips with a stop in the low 80s.
TSCO Weekly Chart
TSCO Daily Chart
Xilinx (XLNX)
Why the Strength
Xilinx is a semiconductor company with a history of major innovations, including the programmable system on a chip (SoC) and field-programmable gate array (FPGA). Its latest big win is a new classification of processor called Adaptive Compute Acceleration Platform (ACAP), which sets the company up to compete better against Nvidia and Intel in major markets including data center, communications, auto and industrials. The stock is bucking the broad market’s downtrend because Xilinx beat Q2 fiscal 2019 expectations when it reported last Wednesday, delivering 9% revenue growth and EPS of $0.87 (beating by $0.11). Despite seeing potential deceleration in auto and industrial markets, analysts are bullish because communications infrastructure solutions (up 33% in Q2) offers exposure to the 5G buildout, while data center solutions (up 28% in Q2) are becoming a greater contributor. These end-markets are less cyclical than consumer and PC markets, and Xilinx is grabbing market share and guiding above consensus for Q3. A few subscribers have written in looking for artificial intelligence (AI) technologies and Xilinx fits the bill. The market is looking for revenue growth of 17% in fiscal 2019 (ending next March) and EPS growth of 41% (to $3.20) to keep the hot streak alive.
Technical Analysis
XLNX has been a scrappy stock over the last two years, with shares rarely dipping below a previous low and making grudging upside progress. That said, the technical picture has brightened recently—the stock broke out of a nice base in August, rallied as high as 84 and, after a month-long dip with the market, surged on earnings last week and isn’t far from new high ground. Expect wiggles, but XLNX is one earnings winner that could do well once the market gets going.
XLNX Weekly Chart
XLNX 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.
