The Chop Continues
Current Market Outlook
The market cracked its intermediate-term uptrend last week, with all the major indexes diving below their 50-day lines decisive fashion, and it appeared they could be ready to go over the falls. But as has been the case for months, the market reversed, with a decent-looking bounce to end the week. Overall, the trend of the major indexes remains effectively sideways, with no net progress for five-plus months at this point. And for individual stocks, it’s mostly the same story—we’re still seeing many that are holding up well, but few are going up, so no real money is being made. We’re still game for holding your strong, resilient stocks, especially if they’ve already taken some hits and held support. But we also think it’s best to mostly lay low, holding plenty of cash and being choosy on the buy side until the buyers flex their muscles. We’re dropping our Market Monitor down to level 5.
This week’s list has a good number of names that have recently shown strong accumulation and have held most of their gains, despite the soft environment. Our Top Pick is RingCentral (RNG), which announced a game-changing deal last week that lit a fire under the stock. Dips would be tempting.
| Stock Name | Price | ||
|---|---|---|---|
| Coupa Software (COUP) | 262.20 | ||
| Edwards Lifesciences (EW) | 228.06 | ||
| Lennar (LEN) | 61.85 | ||
| Medicines Company (MDCO) | 56.98 | ||
| Proofpoint (PFPT) | 113.79 | ||
| RH Inc. (RH) | 252.93 | ||
| RingCentral (RNG) | 238.73 | ||
| Seattle Genetics (SGEN) | 150.85 | ||
| Visteon (VC) | 89.82 | ||
| ZTO Express (ZTO) | 28.84 |
Coupa Software (COUP)
Why the Strength
We can’t say that the cloud software group, which led the way up through July of this year, is out of the woods. But if/when the sector gets moving, Coupa Software is in pole position to lead the higher—it’s been by far the most resilient name among its peers. And why shouldn’t it? It’s rare to find a growth story this big and easy to understand: The firm is the king of business spend management, with a cloud platform that’s being adopted by dozens of new (and often large, multinational) outfits to help them automate, gain more insight to and save money on their spending decisions. Clients spent $495 billion on the platform in the past 12 months alone! Even so, management sees the potential to grow many-fold from here, especially as, after some initial set-up and training costs, clients produce a torrent of cash flow (mostly subscriptions) for Coupa in the years after. (Recent customer wins include Waste Management, Volkswagon, Redfin, BC/BS of Minnesota and Wawa.) More important than the story are the numbers, which are still picking up steam—revenue growth is accelerating, the company is consistently profitable on an earnings and free cash flow basis and the most recent quarter saw billings rise 57% from a year ago. The valuation, of course, is way up there, and in this environment, that’s likely to be a headwind. But bigger picture, Coupa looks like an emerging blue chip-type of company that should become a major player in the business world.
Technical Analysis
Like all cloud software stocks, COUP has had a huge advance since originally breaking out in early 2018, including a heady run this year. But as the sector has corrected, COUP has really stood out—dips into the 125 to 130 area have been consistently bought, and the stock actually zoomed higher last week despite the market’s weakness. If you want in, aim for dips—or just keep it on your watch list, as a breakout above 150 (and a healthier market) would be bullish.
COUP Weekly Chart
COUP Daily Chart
Edwards Lifesciences (EW)
Why the Strength
Edwards Lifesciences is the global leader in patient-focused innovations for structural heart disease and critical care monitoring. Considering that 30% of the U.S. population is over age 54, and another 20% is represented by Generation X (ages 40-54), Edwards is likely to experience unrelenting long-term demand for solutions to heart disease—and the current market environment emphasizing dependable growth is a help, too. Two-thirds of Edwards’ revenue comes from TAVR products, which are aortic valve replacements inserted via catheter. The company also makes hemodynamic monitoring systems used to measure a patient’s heart function and fluid status. These offerings continue to gain share and regulatory acceptance—in August, the FDA approved the Edwards SAPIEN 3 and SAPIEN 3 Ultra valves for low-risk patients, and in September, the company released data demonstrating early and sustained health status advantages for severe aortic stenosis (AS) patients at low surgical risk treated with the Edwards SAPIEN 3 TAVR valve. Sales and earnings growth aren’t going to wow anyone (low- to mid-teens growth or thereabouts), but big investors have usually been willing to pay up for the company’s long-term growth and reliability, while management’s solid history of pulling the right levers is another plus. Earnings are due out October 23.
Technical Analysis
EW has been in a long-term uptrend for a while, albeit with plenty of corrections along the way. The latest push higher began in July after earnings, with the stock leaping to new highs on excellent volume. And since then, shares haven’t been remotely affected by the August and early October corrections in the broader market, with EW actually nosing to a new peak last Friday. That brought in the sellers today (a symptom of the market environment), but the stock is still in good shape if you want to grab a few shares.
EW Weekly Chart
EW Daily Chart
Lennar (LEN)
Why the Strength
Falling interest and mortgage rates (30-year fixed rates well below 4%, often in the 3.5% range at some lenders) have reignited the real estate industry after a year-long stagnant period: New home sales rose to 713,000 in August, which was up 18% from a year ago, while housing starts were up 6.6% from a year ago and building permits (a leading indicator) were up 12%. Joining in the celebration is Lennar Corporation, which is the largest home builder in the U.S. Whether you are a first-time home buyer (40% of Lennar’s customer base), looking to move-up, want to live in an active adult community (55+ communities in 13 states) or are consolidating your family into a multi-generational home, Lennar can build something to suit your needs. Its entire model line includes a forward-thinking program called Everything’s Included®, which—at no bump-up cost—offers its customers a Wi-Fi package, some luxury finishes, and green building features such as Energy Star® appliances and WaterSense® faucets. Both its own efforts and (more importantly) the industry’s upturn is beginning to pay off: Lennar earned $1.59 per share in the third quarter, beating analysts’ estimates by $0.27, and while analysts still see the firm’s bottom line falling for 2019 as a whole, forecasts have been rising and big investors are thinking the next year will be a lot better than the past one. Indeed, Lennar’s new orders in the recent quarter were up 9% in unit terms (up 3% in dollar terms), a pickup from the prior quarter. It now looks like the housing sector is in a recovery, which, combined with a cheap valuation (10 times earnings), is attracting buyers.
Technical Analysis
LEN went through the wringer last year, falling from a peak of 72 in January to a low of 37 at the December bottom. Shares recovered to the mid 50s by April and then corrected and consolidated for a while. But now the buyers are at it, with LEN rising five weeks in a row and tagging its highest level since April of 2018. If you’re game, aim for modest dips to enter.
LEN Weekly Chart
LEN Daily Chart
Medicines Company (MDCO)
Why the Strength
Most speculative situations have been taken to the woodshed during the past few weeks, which makes Medicine’s resilience so intriguing. The company has no sales or earnings, but it has a potential blockbuster drug in one of the largest medical areas (LDL cholesterol, a leading cause of cardiovascular disease), and it should be submitted for approval later this year. Using an architecture called RNA interference (RNAi) that tweaks a protein regulator for LDL metabolism, Medicines’ treatment has shown outstanding results in clinical trials—patients taking a 300 milligram dose just twice per year showed a quick and sustained halving of LDL cholesterol levels (starting at about three months after first treatment and remaining that low for the entirety of the study to this point, about 18 months). Moreover, safety data doesn’t appear much different than a placebo (including a recent study that met all endpoints; full results will be presented on November 16). Management believes that 80% of high cholesterol patients don’t meet recommended guidelines for LDL levels, and given the ease of use (just twice per year) and impressive results, there’s nothing that says Medicines’ treatment can’t take a chunk of this giant market. The stock will surely be news driven in the months ahead, but it’s possible big investors are starting to discount the future.
Technical Analysis
MDCO has been an excellent performer since its oversold low late last year. Shares zoomed to 39 by July and had a tough shakeout in the first half of August, but the trial data released later that month launched a huge rally, pushing the stock up to 48 by the start of September. Even more impressive is the action since—despite numerous air pockets among strong stocks, MDCO has actually crawled higher on solid volume. If you’re game, you can nibble on dips, or just keep it on your watch list.
MDCO Weekly Chart
MDCO Daily Chart
Proofpoint (PFPT)
Why the Strength
Cybersecurity stocks still look rough, but Proofpoint is one in pole position to lead any sector upturn. The firm’s integrated suite of cloud-based solutions protects more than half of all Fortune 1000 organizations from targeted threats and safeguards their data. Proofpoint holds a #1 position in email security, which in and of itself is a huge market—89% of security breaches are accomplished through email, which has historically been a low-priority area of IT security spending but that’s changing fast. The company is broadening their product suite via development and acquisitions, addressing additional security needs that include training, archiving, compliance and a host of threat protections. Second quarter revenue and profits beat expectations, and operating margins rose to management’s targeted range of 13% to 15% a year ahead of schedule. Revenue has grown at a compounded rate of 35% annually since 2012, and the top brass expects annual revenue growth in excess of 20% for several years to come. Wall Street expects EPS to increase 11% and 31% in 2019 and 2020, with free cash flow much larger than earnings, too. Also helping sentiment is the fact that Proofpoint’s solutions announced in early September integrations into two of the fastest-growing cybersecurity outfits (CrowdStrike and Okta). The next quarterly report is due out October 24.
Technical Analysis
PFPT looks ready to get going if the market’s mood improves. The stock has etched a huge base dating back to the spring of 2018, with repeated resistance in the 130 to 135 area. But it certainly looks like buyers are beginning to take control, with PFPT enjoying solid accumulation three of the past five weeks as it probes all-time highs. You can start small here or look for a decisive breakout on volume (possibly after earnings).
PFPT Weekly Chart
PFPT Daily Chart
RH Inc. (RH)
Why the Strength
Formerly known as Restoration Hardware, RH serves the luxury lifestyle market, offering home furnishings that feature design, quality and value in North American retail galleries, source books and online showcases. The company is an oasis amid a troubled retail landscape, with plans to open three new giant galleries this quarter (the firm has moved away from mall-based stores and toward huge high-end locations that can fit a larger percentage of their offerings), and another 12 to 14 galleries through 2021. The stock is strong today because business is good and management continues to pull levers to drive earnings higher. The firm reported record second quarter revenue, operating margins and earnings in early September, with the bottom line of $3.20 per share blowing away the $2.70 estimate. On the heels of this great news, management then successfully issued a $350 million 0% convertible note offering that will pay off $200 million in higher-rate debt and some short-term obligations, which in turn led them to hike full-year guidance for the fourth time this year! Analysts now see earnings up a whopping 48% this year, with another mid-teens gain coming in 2020. Ongoing share repurchases have reduced the outstanding share count by approximately 60% between the first quarter of 2017 through the second quarter of 2019, which is a big reason for the earnings surge during that time. As for the trade war, the top brass is on record that they’re seeing no business impact from tariffs on China-sourced products, which they’re mitigating via price increases and vendor negotiations. This is a solidly-run outfit with estimate-beating results and a reasonable valuation (16 times this year’s estimate).
Technical Analysis
RH rose to an all-time high of 160 in June 2018—15 months and plenty of ups and downs later, the stock finally broke through that level on earnings in September of this year. Impressively, despite the “sell anything near new highs” market environment, shares settled into a tight range between 165 and 175 during the last four weeks, and after tagging its 25-day line last week, has pushed back to new highs. We wouldn’t chase it, but we’re fine grabbing a small position on dips if you want in.
RH Weekly Chart
RH Daily Chart
RingCentral (RNG)
Why the Strength
RingCentral has been a hard stock to handle in recent months, with numerous ups and downs to shake people out. But at the very least, it should be back on your watch list after a huge show of strength following a major deal. Starting with the main story, the company is one of the leaders in what’s clunkily known as Unified Communication as a Service, which is a cloud field that helps teams better communicate (file sharing, instant messaging, conferencing, task management, phone, etc.) in today’s environment of mobile workforces and multimedia communications. There is competition, but the main opportunity is from firms that are transitioning away from legacy, non-cloud systems; all told, it’s likely a $50 billion market. RingCentral’s growth has been both rapid and consistent for a while (sales up between 30% and 35% for 10 straight quarters thanks to its recurring revenue-heavy business model), and a big announcement last week should only help: RingCentral paid $500 million and agreed to become the exclusive provider of Unified Communications services to Avaya, which has a huge installed base (100 million legacy users, serving 90% of the Fortune 500) and sales force (more than 4,000 employees) that will now sell Ring’s products. By comparison, Ring has around five million subscribers today. It’s a great growth industry, and the Avaya deal has a chance to supercharge growth.
Technical Analysis
RNG hit a new high in early February after a deep Q4 correction last year, but the action after was tricky, with every upmove to a new high followed by weeks of correcting and consolidating, including a sharp pullback in August and early September. But the recent news has changed the landscape—RNG soared to new highs after the Avaya deal on its heaviest daily and weekly volume ever, with more gains today! It’s bound to be volatile, but we’re OK nibbling on dips if you want in.
RNG Weekly Chart
RNG Daily Chart
Seattle Genetics (SGEN)
Why the Strength
Every year in the U.S., some 1.7 million new cases of cancer will be diagnosed and more than a third of those will die from the disease. Cancer remains one of our biggest challenges, but there are thousands of companies fighting the good fight, and some are making excellent headway. Seattle Genetics is one of them, and its shares have recently seen a nice boost on exciting drug trial results for the firm’s bladder cancer treatment. The company has been testing a combination of its experimental drug, dubbed enfortumab vedotin, and an immuno-oncology drug called Keytruda from Merck, used to treat advanced/metastatic urothelial cancer. The good news is that it found that an astonishing 71% of patients responded well to the drug, considerably more than the 41% of patients who only took chemotherapy drugs. The results were fast too—researchers said 91% showed improvement at the first clinical assessment after taking the combined drug. And this data was preceded by the FDA giving priority review of the biologics license application for the drug combination, with a decision expected by mid March of next year. At this point, the attraction to the stock is based on expectation of ultimate drug approval and market acceptance, as well as the company’s other therapeutics, including Advetris to treat Hodgkin’s lymphoma, tucatinib for metastatic breast cancer, and tisotumab vedotin for metastatic cervical cancer, which are on track to come to the market sooner. But predictions for profit in 2021 look pretty good, based on 25%-ish annual revenue growth between now and then.
Technical Analysis
SGEN peaked with everything else in September of last year, crashed in the fourth quarter, then recovered early this year. But that recovery led to another, tighter consolidation (62 to 80 or so), with numerous sharp ups and downs during that time. But now SGEN looks ready to go if the market will allow it, with the stock catapulting to new highs on excellent volume early last week before pulling back calmly. We’re OK nibbling here or on dips.
SGEN Weekly Chart
SGEN Daily Chart
Visteon (VC)
Why the Strength
Visteon is the leading supplier of cockpit electronics (instruments, head-up displays, infotainment, cockpit computers) and driver assistance systems to carmakers around the world—it’s not going to win any beauty contests story-wise, but it is leveraged to some growth-ier trends within the auto industry. For instance, more than 60% of its new orders in the first half of this year were for next-generation digital offerings, including its Smartcore and Drivecore products, which are effectively the brains behind all the displays and autonomous driving capabilities in a car. Even so, Visteon is still linked to the auto industry, and that’s been a bad thing in recent quarters; Q2 saw global volumes dip 8%, led by China, which was down a whopping 19%! (About a quarter of Visteon’s sales are China-related.) Sales-wise, Visteon has held up better than the industry, but that hasn’t stopped the top line from declining and earnings from sinking. So why is the stock picking up steam? First, there’s new hope for at least a truce (or no further escalations) in the trade war. Second, the Fed is now in an easing mood, bolstering hopes that the economy’s trajectory will pick up. And third, analysts see earnings picking up in a big way next year (back above $5 per share), bolstered by some recent stabilization in sales trends. Simply put, Visteon is a likely turnaround play for the quarters ahead, and after a massive decline, the stock is finding buyers.
Technical Analysis
VC had a slow, steady advance through the middle of 2018, finally topping out around the 140 area. And then the bears took control, with VC falling to a nadir of 44 in May of this year, at the height of the China trade war fears. However, the rebound since then has been strong and persistent, and we think the stock’s normal hesitation during the past couple of weeks (despite the weak market) is a good sign. We’re fine starting a position here or on weakness.
VC Weekly Chart
VC Daily Chart
ZTO Express (ZTO)
Why the Strength
ZTO Express has a good story that’s easy to understand: Simply put, it’s the FedEx of China. The red, white, and blue trucks of The company’s delivery services travel the far reaches of China, covering some 98% of China’s major cities and counties, sending online merchandise from the likes of e-commerce platforms Alibaba and JD.com through the country. The company is reaching beyond China, too, expanding its services across the globe through its network of business partners. ZTO’s shares recently saw some positive momentum following its second quarter report which beat analysts’ estimates by a penny. Revenues grew 29% in local currency, stoked by a 47% increase in parcel volume, handily beating the growth in the industry as a whole. Of course, there is some competition, but ZTO owns almost 20% of the Chinese delivery market (in terms of parcels—it delivered a whopping 3.1 billion in Q2 alone), so it’s clearly the major player. (The company forecasts parcel deliveries will rise by 35% to 40% for all of 2019.) ZTO now has a fleet of almost 5,000 trucks with 87 sorting hubs and 30,000 pickup and delivery outlets across China. Its rapid expansion is a result of 1) its technology savvy, including the company’s waybill tracking and its state-of-the art transportation systems, and 2) its collection of network partners, currently around 4,650 and rising. For all of 2019, local currency earnings are expected to rise in the 20% range, with another round of solid growth in 2020. ZTO looks like a good bet for some time to come.
Technical Analysis
ZTO tried to get going in the middle of last year but succumbed to Q4 market plunge before turning around. Shares consolidated for most of March though July in the 17 to 20 area, then pushed higher in September, retesting its 2018 peak two weeks ago. The pullback since then has been normal and, if you’re aggressive, could mark a solid risk-reward entry point.
ZTO Weekly Chart
ZTO 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.
