What’s the Most Bullish Thing a Market Can Do?
Current Market Outlook
The answer to the question above is simple: Go up! And that’s what all of the major indexes have been doing in recent days, knocking out all-time highs amid a vacuum of selling pressure. Short-term, there are some signs of complacency, and of course earnings season is coming up, which always adds volatility to the mix. Both of those factors probably mean you shouldn’t buy stocks with both fists. But the big picture is clear: It’s a bull market, and while the below-the-surface action continues to show some rotation, the odds favor higher prices ahead. You should be holding your top performers and looking to grab shares of new leaders as opportunities arise.
This week’s list has a nice mix of growth, “old world,” big and small, reflecting the broad strength in the market. Our Top Pick today is HubSpot (HUBS), which is a bit thin and jumpy, but has a great fundamental story and recently broke out on excellent volume.
| Stock Name | Price | ||
|---|---|---|---|
| BeiGene (BGNE) | 170.20 | ||
| Five Below (FIVE) | 134.58 | ||
| HubSpot (HUBS) | 582.89 | ||
| LGI Homes (LGIH) | 86.04 | ||
| MyoKardia (MYOK) | 108.56 | ||
| RH Inc. (RH) | 252.93 | ||
| ServiceNow (NOW) | 341.86 | ||
| Tronox (TROX) | 0.00 | ||
| United Rentals, Inc. (URI) | 0.00 | ||
| Yelp (YELP) | 41.30 |
BeiGene (BGNE)
Why the Strength
BeiGene is a clinical-stage Chinese biomedical company that’s developing molecularly targeted and immuno-oncology treatments for cancer. The company’s treatments combine targeted therapies that disrupt biochemical pathways or mutant proteins that allow tumors to grow. The company currently has one immuno-oncology agent and three targeted therapeutics in clinical trials. Preclinical trials have shown that different combinations of BeiGene’s drugs have extraordinary potency in treating various types of cancer. News of those promising results led to a development deal with Celgene that was announced on July 6. Since that announcement, BeiGene has presented preliminary data on September 11 that confirmed the anti-tumor activity and acceptable patient tolerance in Phase 1 trials of one candidate drug against advanced solid tumors. Further news from the same trials made another splash on September 28. BeiGene’s deal with Celgene brought a substantial equity investment and potential licensing fees, with nearly $1 billion in benchmark fees and sales milestones should clinical trials continue to generate positive results. This will be a story that is driven by news from clinical trials, but there’s no doubt that the Celgene deal has secured BeiGene a steady beam of attention from investors.
Technical Analysis
BGNE came public in the U.S. in February 2016 and traded in a range between 25 and 35 until December 2016 when it started to use 35 as support rather than resistance. The stock had crept up during June, and was trading at 45 in July when the Celgene news gapped it up to 66 in one day and sent it up to 79 on July 20, where it traded under resistance for eight weeks until the September news releases rocketed it over 100. BGNE remains super strong, and looks like a reasonable (speculative) buy on dips.
BGNE Weekly Chart
BGNE Daily Chart
Five Below (FIVE)
Why the Strength
Five Below is probably our favorite retail story from a fundamental perspective, and the stock is strengthening as the weak hands have been worn out over many years and investors head back to the sector. The company is a unique dollar store, offering teen and pre-teen merchandise for $5 or less, including everything from smartphone cases to makeup to sports equipment to books to candy to party supplies. The secret sauce here is the combination of the company’s outstanding store economics and the underlying attractiveness of its products. On the economics front, a successful retail firm might earn back its initial investment in a new store in two or three years, but Five Below has a history of making it back in a year or less, which has allowed for rapid expansion. Five Below is boosting its store count by about 20% this year (it had 584 locations at the end of July), with 15% to 20% growth likely for years to come. Long-term, management believes there’s room for more than 2,000 locations in the U.S. alone! And, as for its products, the company has notched 11 straight years of comparable store growth, and last quarter’s tally (up 9.3%) was its strongest in years. All told, 20%-ish growth is likely for a long time to come. We like it.
Technical Analysis
Despite a history of strong growth (earnings have risen solidly every year since 2011), FIVE topped back in 2013 and consolidated for nearly four years. Shares began to show some intriguing action last year, and this spring, FIVE rallied 11 weeks in a row, a hint it was getting ready to break out. Then the stock built a relatively tight (18% deep over 18 weeks) base from June through September, and during the last two weeks, finally surged to new all-time highs. Short-term, dips are possible, but the long-term potential is big.
FIVE Weekly Chart
FIVE Daily Chart
HubSpot (HUBS)
Why the Strength
HubSpot is a small-cap stock that specializes in cloud-based software for inbound marketing and sales—things like internet pop-up adds, email and telemarking calls. Its solutions are designed not to be intrusive to consumers; HubSpot’s software tries to offer helpful content and experiences to consumers when they need it, rather than whack them over the head when they’re least open to a marketing message. The stock is doing well because it’s the category leader for inbound marketing, its products are hitting the mark (a new integration with Shopify was just announced), and at a recent analyst day, management bumped up third-quarter revenue guidance. HubSpot is also launching new products focused on customer support, which have the potential to significantly expand its market. Analysts expect revenue to grow by 35% this year and by 26% in 2018. Even better, HubSpot should deliver its first annual profit in 2017, with earnings of around $0.09 per share. That’s a major milestone that’s typically cheered by analysts and investors alike. Given that EPS is forecasted to skyrocket by 247% (to $0.33) in 2018 and that analysts have just bumped up price targets, institutional investors should remain interested.
Technical Analysis
Shares of HUBS sold off heading into the year but turned north at 45. The stock regained its 50-day line in late February, and began a choppy uptrend best characterized as two-steps-forward, one-step-back. A sharp pullback from 78.5 to 65 in early June was the most notable selloff, and that led to a three-and-a-half month consolation. But after tightening up in early September, HUBS has decisively broken out on the upside on excellent volume. It’s a bit thinly traded and choppy, so try to buy on dips.
HUBS Weekly Chart
HUBS Daily Chart
LGI Homes (LGIH)
Why the Strength
Homebuilders have been perking up with the broad market in recent weeks, and LGI Homes is a relatively new name in the sector and looks like a leader in the group. The company has 77 communities across 10 states in the U.S., with a focus on central and southeast, which make up about 80% of its holdings; LGI is focused on first-time buyers, offering move-in ready homes and using targeted marketing to accelerate their closings. The stock is strong today in part because of an excellent earnings report from peer KB Home (which lit a fire under the sector in late September), and LGI’s own monthly update last week, which was outstanding—the firm announced that third-quarter home closings totaled 1,729, up 64% from a year ago, which forecasts a major earnings gain when the company reports third-quarter earnings (likely in early November). Analysts expect the company’s excellent string of earnings growth will continue, with 29% growth this year and 17% next, but LGI’s history of topping expectations means those figures are likely conservative. A low valuation (just 12 times this year’s estimates) is another plus. With the economy remaining resilient despite many worries, LGI’s future looks bright.
Technical Analysis
LGIH came public in 2013 and rallied to 36 in late 2015, which effectively marked a peak for the next year and a half. But the stock changed character starting in June this year, when it began a stretch of 10 weeks up in a row that took it to new high ground in August. LGIH then built a new base below the 50 area for another eight weeks, but the KB Home report and LGI’s own monthly sales report brought back the buyers. Try to buy on dips.
LGIH Weekly Chart
LGIH Daily Chart
MyoKardia (MYOK)
Why the Strength
MyoKardia develops targeted therapies for rare, genetically-driven cardiovascular diseases. Its lead product, MYK-461, targets hypertrophic cardiomyopathy (HCM) and is, thus far, the primary driver of the stock’s strength. Analysts are bullish on the prospects of MYK-461 to advance into Phase 3 trials by the end of the year, but before everyone gets too excited, MyoKardia needs the go-ahead from the FDA (positive early results from a Phase 2 trial were released on August 7). The market is currently awaiting an end-of-Phase-2 meeting with the FDA and experimental design of the (hopefully) upcoming pivotal Phase 3 study. The stock has also enjoyed a boost from news that MyoKardia’s second asset, MYK-491, recently appeared to be well tolerated in a Phase 1 trial. MYK-491 targets dilated cardiomyopathy (DCM), and is now moving into an expanded trial which will include additional dose cohorts. While analysts aren’t yet adding much (if any) value for MYK-491 since it’s so early stage, the potential for a second shot on goal is certainly a plus. With an August secondary offering extremely well received and cash milestones crossed with ex-U.S. partner, Sanofi, there’s plenty of positive, though speculative, potential here.
Technical Analysis
MYOK spent most of 2017 trading in the 10 to 15 range before blasting off after releasing Q2 results, a secondary offering, and positive results from the first cohort in the MYK-461 Phase 2 clinical trial on August 7. Following that event, the stock gapped up from 17.5 to 32.5 and kept climbing to 47 over the next four weeks. The strength was great, but more important to us is that, over the past month, the stock has handled itself well, holding most of those gains and recently pulling back toward its 50-day line. If you’re game, you could nibble here with a stop in the mid-30s.
MYOK Weekly Chart
MYOK Daily Chart
RH Inc. (RH)
Why the Strength
Shares of Restoration Hardware look strong even after its stunning 40%-plus earnings gap a few weeks ago. Like many retailers, Restoration Hardware’s growth story is somewhat cloudy. But investors are lining up to buy given that the company delivered a big Q2 earnings beat in early-September, has been buying back a massive amount of its own stock and, after a longer-than-expected business transition, is expected to grow revenue by 14% in fiscal 2018 and more beyond that. If you’re not familiar with the story, Restoration Hardware sells furniture, bathware, lighting and decorative hardware in North America. Revenue growth averaged 23% from 2011 to 2016, but plummeted to just 1% in fiscal 2017 (ended January 28), which also marked the first year of earnings contraction since 2009 (EPS were down 54%, to $1.26). What’s different now? Management has tweaked the business more toward a membership model then promotional one to strengthen the brand, and it appears to be working. Revenue in fiscal Q2 (reported September 3) was up 13%, driven by organic growth, the acquisition of Waterworks (acquired a year ago) and direct-to-consumer sales. Also, EPS of $0.65 beat by a whopping $0.18, and the buyback program has reduced shares outstanding by 30% from a year ago! That’s a massive program, and while it’s fueled by a lot of new debt, it has driven buyers back to the table. Analysts see the bottom line continuing to surge in the quarters ahead.
Technical Analysis
RH has been all over the place this year, with a huge run from February through early May (24 to 60!), a quick plunge to 42, then a rally to 80 in July followed by another implosion to 44. Yikes! But the stock may be changing character—after its Q2 report, the stock gapped up more than 40%, and though shy of its prior high, shares settled in for the next month in the low 70s, a sign that the wild action could be in the past. It’s still volitile on a day-to-day basis, but you could buy a small position here.
RH Weekly Chart
RH Daily Chart
ServiceNow (NOW)
Why the Strength
ServiceNow sells cloud-based enterprise software that helps businesses define, structure, manage and automate their businesses. Its platform delivers next-generation technologies to critical business segments, including IT, Security, Human Capital Management (HCM) and Customer Support. The company has been growing rapidly; sales have expanded at an average annual pace of 62% for the past five years! It’s also quite profitable, with EPS of $0.70 in 2016 up 75% and free cash flow much larger than that. The firm has been growing so quickly because it’s the clear market leader in cloud service management, and many of today’s companies need its delivery platform to enable their digital transformations. Its platform-first approach is seen by analysts as having the scale to turn ServiceNow into the next Oracle or Salesforce.com; it continues to look, then, like an emerging blue chip. Part of the reason is scale: ServiceNow has 1,100 partners, including 600 integration partners, and 250 third-party apps in the NOW Store. Its total market opportunity is likely north of $60 billion, and with sales this year likely to hit “only” $1.9 billion (up 67%), it looks like there’s a lot of room left to grow. Indeed, management (which has a long history of hitting its targets) is looking for 30% annual revenue growth for the next three years and free cash flow to hit around $6 per share in 2020.
Technical Analysis
NOW has been generally moving higher since it jumped off its 200-day line at 75 near the start of the year. There have been a few retreats to the 50-day line, most notably for a consolidation session that lasted from early-March through May, when shares traded in the 85 to 90 range. Since then, the trend has mostly been one of higher highs and higher lows, and NOW just punched out to new highs (albeit on so-so volume) last week. You can grab some here or on dips with a stop near 110.
NOW Weekly Chart
NOW Daily Chart
Tronox (TROX)
Why the Strength
Australia-based Tronox is in the business of extracting titanium dioxide (63% of 2016 revenue) and alkali (the other 37%) from mineral sand. TiO2 is a key component of lots of paints, coatings, plastics and paper and some of Tronox’s other products are used as feedstock for the production of both TiO2 and metallic titanium. Titanium dioxide is an economically sensitive commodity and responds to macroeconomic trends, which partly explains why Tronox’s stock is doing well. The other reason is that the company is in the final stages of acquiring the TiO2 business of the National Titanium Dioxide Company (Cristal), subject to approval by the U.S., the E.U., Saudi Arabia and South Korea. Tronox has staged a secondary stock offering to help finance the takeover. Tronox has been through a string of four money-losing years, but booked a profit in Q2 (on a 120% jump in earnings and a 16% bump in revenue) and is forecast to return to profitability this year and to grow earnings by 109% in 2018. Institutional ownership has been on the rise since the beginning of 2016 and the company’s small (0.8% yield) dividend makes a nice package.
Technical Analysis
TROX went over the falls from its high at 28 in August 2014 to as low as 3 in February 2016. The stock has been in a volatile uptrend since that low, with two major pullbacks and a two-month stretch of weakness during its run to its recent high at 25. TROX has been in a high-volume rush higher since September 29, with a spike in trading volume on October 5. It looks like a reasonable buy on any normal weakness, with a stop below 22.5.
TROX Weekly Chart
TROX Daily Chart
United Rentals, Inc. (URI)
Why the Strength
United Rentals has come a long way from its beginnings in 1997 and is now the biggest equipment rental company in the world, a giant with 960 locations in North America (up from 887 in March) and 11% of the U.S. market share. The company’s business is about evenly divided between the industrial-non-construction sector and the non-residential construction sector, with residential rentals making up the rest. The company is constantly upgrading its fleet of lifts, excavators, welders, plumbing equipment and tool trailers, and sales of used equipment make up nearly 10% of last year’s revenue. The rental business is fairly fragmented, and United Rental uses the M&A route to add to its organic growth. The company just completed a $1.3 billion acquisition of Neff Corporation, which will add $867 million of fleet and 69 branch facilities and boost the company’s earthmoving business in the southern regions. United’s revenue growth slowed to 2% in 2015 and actually declined by a percent in 2016, but rebounded to 4% in Q1 and 12% in Q2. There’s no secret sauce here, but United Rentals is a well-run, expanding business with good prospects, especially if construction and infrastructure activity remains strong, with most sales gains falling right to the bottom line.
Technical Analysis
URI, along with a ton of other stocks, began its bounce from lows in February 2016, when it was trading at 42 (down from 120 in September 2014). The stock made steady progress to new highs at 134 in March 2017, then staged an orderly retreat to 101 in June. One more rally/retreat cycle saw the stock at 107 in August, after which it went on a hot run to 141 in recent trading. A pullback is always possible when a stock is trading 10 points above its rising 25-day moving average, and URI has been showing signs of losing steam. Look for a dip below 140 as an entry point and use a stop around 126.
URI Weekly Chart
URI Daily Chart
Yelp (YELP)
Why the Strength
Yelp is an online platform where users can locate local businesses and post reviews of their experiences and where merchants can advertise, post menus and other materials and interact with customers on social media. There are more than 20 million local businesses in the U.S., and Yelp has at least some connection with almost four million of them, including 150,000 that pay for better placement. Yelp is already the leader in mobile reach, with penetration of 38% of U.S. smartphones, just ahead of TripAdvisor and nearly double the penetration of Groupon. With 135 million cumulative reviews, Yelp’s reach and relevance for app users, Yelp is a uniquely useful resource for users, which has driven great revenue growth—30% in 2016 and 24% and 20% in Q1 and Q2 2017, respectively. Earnings are growing nicely, too, after a bout of lower margins as Yelp invested in the business. The best news is that Yelp’s advertising revenue among its oldest communities still grew at 20% year-over-year in Q2 2017. And the company’s partnership with Grubhub has increased the number of order-enabled restaurants on Yelp from just over 40,000 to around 75,000. Yelp is expanding and executing at a high level.
Technical Analysis
YELP has had its ups and downs, including a steep plummet from 102 in 2014 to 15 in February 2016. The stock recovered strongly, but formed a double top at 43 in October 2016 and February 2017, leading to a correction to 27 in May. But since that gap down, the stock has been in an uptrend, punctuated by a gap up from 31 to 40 on August 4. YELP resumed its steady progress and, after correcting with the market in late September, has been appreciating at a faster clip. YELP looks like a good buy on today’s modest pullback with a stop around 41.
YELP Weekly Chart
YELP 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.
