Headwinds
Current Market Outlook
You can blame interest rates or the Chinese or the economic cycle or politicians or even the celestial bodies, but it when all is said and done, it doesn’t matter why stocks have been struggling; the fact is that they are. And if you simply recognize that fact and accept it, then you can turn to the next step, which is to protect the profits you’ve earned in the long bull market and be selective when it comes to venturing into new stocks. That’s what Cabot Top Ten Trader is all about. The Market Monitor falls one notch lower to 5, but the ten stocks in today’s issue are still—on their own—quite attractive, plus they come from a wide variety of industries.
Our Editor’s Choice is Clean Harbors (CLH), a stock that was last hot in 2011, after which it spent nearly seven years out of the limelight. But now it’s back and the chart risk looks low.
| Stock Name | Price | ||
|---|---|---|---|
| American Outdoor Brands (AOBC) | 13.69 | ||
| Canopy Growth (CGC) | 38.82 | ||
| Clean Harbors (CLH) | 66.42 | ||
| Endo International plc (ENDP) | 13.32 | ||
| EOG Resources, Inc. (EOG) | 101.98 | ||
| Exact Sciences (EXAS) | 116.91 | ||
| Glaukos Corp. (GKOS) | 67.84 | ||
| Novocure (NVCR) | 0.00 | ||
| Roku, Inc. (ROKU) | 150.46 | ||
| Square, Inc. (SQ) | 91.04 |
American Outdoor Brands (AOBC)
Why the Strength
American Outdoor is the firearm company formerly known as Smith & Wesson, which was founded in 1852. Today, the company owns 18 consumer brands across firearms, electro-optics, and outdoor accessories. Like other firearm stocks, American Outdoor has been a lighting rod for criticism and shares often rise and fall depending on rumors of changing regulations and background checks. Those factors are partially responsible for it being a streaky stock, but not as much as the fact that it’s a cyclical story that tends to enjoy robust growth for two to three years followed by a down year. Fiscal 2018 was the most recent down year (it came after back-to-back years of 25% to 31% revenue growth) when revenue declined by 33% (to $607 million) and EPS plummeted by -82%, to $0.46. The year ahead looks a lot better, which is why the stock is up roughly 40% since late-August. The catalyst for the rally was a solid Q1 and forward guidance that trounced analyst expectations. Revenue was up 7.6% while EPS of $0.21 beat by $0.09. More importantly, management guided for $620M to $630M (vs. $596 million consensus) and EPS of $0.62 to $0.64 (vs. $0.49 consensus). This isn’t a stock to own forever but given the history, it’s clear money can be made during expansions. The early evidence is that American Outdoors is on the upswing now.
Technical Analysis
AOBC has been up and down over the years. The last big moves were 2005 to 2008 and 2012 to mid-2016 (there was a correction in late-2014). Aside from one fake-out rally last summer, AOBC was in the dumps from August 2016 through this July. That changed in late-August when the stock blasted 40% higher following the release of Q1 fiscal 2019 results. You can nibble here and average into the stock as you develop a profit, or just keep the stock on your watch list and see if it continues to handle the market’s selloff in reasonable fashion.
AOBC Weekly Chart
AOBC Daily Chart
Canopy Growth (CGC)
Why the Strength
We remain quite high on marijuana stocks over the long haul for the main reason that the trends of greater acceptance and legalization in Canada, the U.S. and around the world are in place. If there’s going to be an institutional favorite in the group, we believe Canopy Growth could be it—the company has operations in 11 countries, 10 production facilities in Canada and eight supply agreements (which is more than one in three such deals handed out so far) in that country for the upcoming nationwide legalization. Most important, though, it has the backing of a major player; Constellation Brands (owner of Svedka, Corona, Modelo, Kim Crawford and others) now owns 38% of Canopy (it’s paid more than $4 billion for that right), with an option to increase that stake to north of 50% going forward. That means plenty of shelf space and distribution for Canopy’s variety of products (medical, adult use, beverages and the like). Revenues have been expanding nicely in recent quarters, but all eyes are on the future—Constellation believes Canada’s cannabis market could rise to $230 billion within 15 years, and anticipates Canopy having a 30% to 40% share of that market with very healthy margins. It’s a big idea.
Technical Analysis
CGC was listed in the U.S. in May and stumbled for its first three months, but the Constellation investment in August caused the stock (and the sector) to go vertical; what impressed us most was the giant volume expansion, with four straight gains on huge institutional buying. And since then, while very volatile, CGC has held tough, especially on the weekly chart, where there have been some tight closes. With the market weak, you can either keep CGC on your watch list or nibble on dips.
CGC Weekly Chart
CGC Daily Chart
Clean Harbors (CLH)
Why the Strength
Clean Harbors has come a long way from its founding as a tank-cleaning operation in 1980. The company diversified into comprehensive environmental services, cleaning up after oil spills and hurricanes. Clean Harbors is now a diversified commercial services that has added to its business of collecting and disposing of hazardous and non-hazardous waste with recycling and re-refining used oil and oil-field services. With a majority of the Fotune 500 companies as clients and facilities across North America and Puerto Rico, Clean Harbors is a key player in the environmental business. Clean Harbors is strong right now because of two consecutive quarterly earnings reports—one on May 3 and one of August 1. The August 1 report featured a 13% increase in revenue, the strongest in years, and a 125% jump in earnings. This comes after a 7% increase in revenue in 2017, which followed three years of declines. In late 2017, the company doubled the size of its stock repurchase plan from $300 million to $600 million, financing the plan from cash on hand. That’s another sign of good fiscal health as Clean Harbors rebounds from its years-long slump.
Technical Analysis
CLH first popped above 70 in early 2012, then spent almost seven years trading below resistance at that level. The stock traded as low as 37 in 2016, but generally traded in the 50s for years. The change came with the May earnings report that gapped CLH up from 45 to 54, then the August report that kicked it from 57 to 65. The stock topped 70 in early September and has been trading in a tightening range right at 70 for more that four weeks. You can nibble anywhere under 70, but in this market environment it may be a better idea to wait for the breakout above that price.
CLH Weekly Chart
CLH Daily Chart
Endo International plc (ENDP)
Why the Strength
When Endo International made its last previous appearance in Top Ten Trader in 2011, the company was still just Endo Pharmaceuticals, a drug company that was worried about losing patent protection on its main product. Today, as a result of the steps taken to prevent dependence on a single product, Endo is a holding company for Endo Pharmaceuticals (high-value branded drugs in aesthetics, endocrinology, men’s health and orthopedics), Par Pharmaceutical (generics) and Paladin Labs (specialty pharmaceuticals for the Canadian market). Endo International is coming out of a long period that had its stock plummeting from the middle of 2015 to the middle of 2016 and an even longer period of slow decline that lasted until June 2018. The company stayed profitable through its long ordeal, but it wasn’t until the well-received Q2 earnings report on August 8 that investors really began to pursue the stock. Endo picked up upgrades from analysts in June, August and September, and sports a deep-value 6 P/E ratio. If today’s story about a labeling error on two lots of Robaxin tablets doesn’t trip the stock up, Endo International looks to be on the road to recovery. Endo will report its Q3 results before the market opens on November 8, with analysts calling for 59 cents per share in earnings and $698 million in revenue.
Technical Analysis
ENDO was trading at 97 in April 2015, but fell for three long years, finally bottoming below 6 this April. The stock began to show signs of life in June, and had jumped all the way back to 12 in August when the good earnings news catapulted it to 17 in one huge-volume day. It’s built a base at 16 since, and is now working to break out above 17, and with the quarterly report a month away, you can nibble here, with a loose stop around 15.
ENDP Weekly Chart
ENDP Daily Chart
EOG Resources, Inc. (EOG)
Why the Strength
EOG Resources is a giant energy explorer with its hands in most of the lucrative basins in the U.S., including the Permian, Williston, Marcellus Shake, Powder River Basin and DJ Basin, as well as some overseas operations, too—all told, it has rights to about 2.17 million acres. And, simply put, business is good, partially due to stubbornly elevated energy prices and partially due to the firm’s own operations, which are producing industry-leading returns; at $60 oil, the firm’s average payback on its wells is less than one year. The company expects $1.5 billion of free cash flow (after CapEx and dividend) at $60 oil! Moreover, EOG is expanding and derisking its acreage so quickly that the number of premium drilling locations continues to soar (now around 9,500, up 58% during the past year and a half) even as its drilling increases. In Q2, total output rose 16% (oil output was up 15%), with projections of 18% growth for the full year, while costs are actually falling (5% drop in well costs projected this year), which has helped earnings and cash flow to soar. Looking out the next couple of years, EOG expects a ton of debt reduction (46% drop by 2021), higher dividends (0.7% annual yield today but boosting the payout quickly) and production growth in the 20% range, all with excellent returns. It’s not a young buck like some other energy outfits, but EOG looks like a liquid leader in the group.
Technical Analysis
EOG got hit in the 2015-2016 time frame, though the decline was much more modest than most of its peers, and not surprisingly, it was one of the first to get back to its all-time high near 120 early this year. Since then, EOG has been chopping higher, pushing as high as 130 in July before a pullback to the 40-week line. But now the buyers are back—shares have moved straight back to their highs on a bunch of above-average volume days. We’re fine buying some here or on dips.
EOG Weekly Chart
EOG Daily Chart
Exact Sciences (EXAS)
Why the Strength
Exact Sciences is a single-product company, but the product—Cologuard—is a good one. Cologuard is a home diagnostic test for colorectal cancer. Buyers use the company’s specialized kit to take a poop sample and mail it in. It’s quick and easy and has the approval of the FDA for safety and reliability. Colorectal cancer causes 50,000 deaths a year in the U.S., and early detection via Cologuard would save a lot of lives. Exact Sciences has booked two years of triple-digit revenue growth (152% in 2016 and 168% in 2017) with 90% growth in Q1 and 103% in Q2, showing continuing strong growth. The company isn’t profitable yet, and a disappointing quarterly report in early August took some air out of the stock’s sails. But news on August 22 that Pfizer would use its massive sales force to sell Cologuard to physicians and health systems lit a new fire under Exact Sciences’ stock. There’s a longer-term story here as well, with the company working on the development of similarly easy and effective tests for other common forms of cancer. But that’s a secondary consideration right now. The next hurdle for Exact Sciences will be its Q3 earnings report after the market closes on October 30. Analysts are forecasting revenue of nearly $109 million and an earnings loss of 43 cents per share.
Technical Analysis
EXAS has an interesting chart, with a rally from a low of 38 in April to over 70 in June. But there’s a gap down on August 2 following the earnings miss that took EXAS at 48 before the Pfizer news on August 22 fired it back to 80 in early September. EXAS has pulled back a little with the market, and looks like something of a bargain trading around 70. With the market a bit soft, it’s best to go slow, buying a little less and looking for pullbacks to get started.
EXAS Weekly Chart
EXAS Daily Chart
Glaukos Corp. (GKOS)
Why the Strength
Glaucoma affects two million people in the U.S. and tens of millions worldwide. It is a high-pressure condition in the eye resulting from lack of ocular fluid drainage, and it can lead to blindness if not treated. Cataract surgery is often used to address the issue, but Glaukos has developed another solution. Its proprietary iStent insert procedure (FDA approved in 2012) involves inserting a tiny stent in the eye during cataract surgery to reduce pressure. This procedure drove revenue from zero in 2012 to $159 million in 2017, a year in which sales grew 39%. The story got better this August when Alcon voluntarily withdrew its CyPass Micro-Stent from the market after a five-year study showed it was no more effective than cataract surgery alone. Alcon’s withdrawal means Glaukos can grab back up to $30 million in business this year, $90 million in 2019 and tens of millions more in the future. The stock responded by blasting off to new highs and shares have held up well over the last six weeks, suggesting this could be the beginning of an extended move higher. Plus, there’s another catalyst coming down the pike; Glaukos’ newest platform, iStent Inject (an injectable 2-stent therapy) is preparing to launch in the U.S. later this year. Analysts see revenue growth accelerating from 11% in 2018 to 29% in 2019. They also see a profit of around a penny next year, a big improvement from a projected -$0.43 loss this year.
Technical Analysis
GKOS was up and down over the last 12 months because of competition concerns. Shares traded up near 53 in 2017 but bottomed out at 24 just before the beginning of 2018. The trend has been a lot better in 2018 as GKOS advanced back above 40 by mid-June, then flat-lined in the 40 to 44 range for a few months. Shares blasted off in late-October following news of Alcon’s withdrawl. We see the stock’s ongoing six-week consolidation phase, mostly in the 60 to 65 range, as a signal that the next big move will be up.
GKOS Weekly Chart
GKOS Daily Chart
Novocure (NVCR)
Why the Strength
Novacure makes a medical device called the Optune system that slows the progression of many types of solid tumors, including brain, lung, pancreatic and ovarian cancer. Optune uses low-intensity, alternating electric fields called tumor treating fields (TTFields) that interfere with cell division and cause cell death. TTFields are delivered two to three times a week, for 18 hours a day, and treatment can be done when people are away from home. Novacure has commercial operations in six markets for the treatment of glioblastoma (GBM), an aggressive type of brain cancer. The company has treated over 8,000 patients globally, and estimates it has just 30% market penetration in the U.S., 20% in EMEA and 10% in Japan. Revenue soared 114% to $177 million last year, was up 60% in Q2 2018, and is projected to jump 40% to 50% in 2018 and 2019. Long-term, rapid growth could persist if TTField treatment is extended to other types of tumors. That scenario is looking increasingly likely after news broke in early-September that a Phase 2 trial showed TTFields extending survival in mesothelioma patients. We like big stories, and Novacure checks all the boxes.
Technical Analysis
NVCR went public in 2015 and while it was strong early, shares paused for a while before gathering momentum again early last year. The stock looked ready to break out to fresh highs this past July, but a little head-fake pullback kept shares under 36 until Q2 results came out later in the month. Since then the stock has been walking steadily higher. Shares have leveled off a little over the past week. We think you can use the pause to pick up a few shares.
NVCR Weekly Chart
NVCR Daily Chart
Roku, Inc. (ROKU)
Why the Strength
We last featured Roku in early August and while shares took a little hit last week, the stock still looks strong enough for the brave. Roku is a play on the TV streaming movement, offering exposure to two areas of the market. The Platform segment (46% of revenue) generates revenue from advertising, subscription and transaction fees, sales of branded channel buttons on remote controls, and licenses from operating systems installed on TVs. The Player segment (54% of revenue) includes sales of over-the-top (OTT) streaming players. Roku generates a small profit margin on Player sales (22% gross margin) and a much larger profit on Platform revenue (70% gross margin). That means investors are looking for Roku to keep pulling in new users and selling them high-margin advertising. The model is working well. In the Q1 and Q2 active accounts were up 47% and 46%, respectively. Average revenue per user (there are over 20 million of them) jumped 48% to $16.60 because people are spending more time on Roku’s ad-supported programs, which now make up 41% of inventory (versus 36% last year). With a new operating system and streaming players just released, Roku is now seen growing 41% this year and 36% in 2019, while also inching closer to break-even next year (estimated EPS loss is -$0.02).
Technical Analysis
ROKU went public at 14 last September and shares were strong right away, but eventually faded and gave back a good portion of their gain before finding support this past April. The stock consolidated before Q1 earnings came out and since then investors have been piling back in. ROKU crossed above its 50-day line in May and hasn’t dipped below it since. A breakout rally in August lifted shares above 55, and they walked up to 75 before getting caught up in market’s turmoil last week. We think you can use the current retreat to dip another toe, but keep a close eye on your stop.
ROKU Weekly Chart
ROKU Daily Chart
Square, Inc. (SQ)
Why the Strength
While PayPal was arguably the biggest thing to happen to online payments, San Francisco-based Square is the unquestioned leader in point-of-sale software. Starting with the revolutionary dongle that turned any smartphone into a credit-card scanner, Square moved into software that turned pad computers into cash registers, then offered software that would manage receipts, inventory, payroll, sales reports, analytics and feedback. Transaction fees are still the largest source of income, as Square takes a small cut of every transaction, just like credit card companies. The company’s Caviar service lets restaurants offer pickup, catering and delivery services and the company has moved into business loans and a kind of savings/cashcard/banking hybrid for consumers. Square has grown both organically and via M&A, and longer-term subscription services now make up more than 10% of revenue. Revenue growth slowed to 30% in 2017, but bounced back to 45% in Q1 and 48% in Q2. Analysts are calling for earnings to grow by 67% this year and 73% in 2019. With a growing set of services that will integrate Square more and more deeply with businesses, the future is bright.
Technical Analysis
With a P/E now around 260, SQ isn’t cheap by any means. But the stock’s roster of institutional sponsors is growing rapidly, and its price history shows only the briefest of post-IPO corrections following its late-2015 IPO. SQ started 2018 at 35 and topped 100 briefly at the end of September before the market started to take a bite out of it. SQ has now pulled back below its 25-day moving average at 85. The stock’s 50-day MA is around 83, which might represent a good buy point if it holds its September support there. Be cautious here, because a dip from 100 to 85 is only a bargain if support shows up.
SQ Weekly Chart
SQ 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.
