September 10, 2018
The market was met with some selling pressure last week, and short-term, that could continue, giving some extended leaders a chance to consolidate their heady August gains. But, while we’re always willing to change our outlook, the intermediate-term evidence remains mostly bullish, so you should, too.
This week’s Top Ten has a growth-oriented tilt despite the Nasdaq’s dip last week. Our Top Pick looks like a new leader that just lifted from a three-month rest on earnings.
Short-Term Wobbles, Intermediate-Term Bullish
Current Market Outlook
Not surprisingly, we saw some selling come into the market last week, as many stocks and indexes were stretched to the upside and some near-term sentiment measures (put-call ratios, etc.) showed complacency. In the short-term, such wobbles could easily continue, as we’re seeing some bigger names get hit on decent volume. Intermediate-term, though, we’ve seen very little abnormal action among individual stocks and the trends of the major indexes are pointed up. It’s still a good idea to go slow and look for solid entry points, and don’t forget to book some partial profits on the way up. But with the evidence still bullish, we’re remaining heavily invested.
This week’s list is centered on growth ideas, including a few that have emerged after nice rest periods. Our Top Pick is Okta (OKTA), an early-stage leader that just busted loose from a three-month zone on huge volume.
|BJs Wholesale (BJ)||36.69|
|Glaukos Corp. (GKOS)||67.84|
|Okta, Inc. (OKTA)||148.41|
|Palo Alto Networks (PANW)||236.92|
|Ulta Beauty (ULTA)||331.95|
|United Continental Holdings (UAL)||96.76|
|Yext Inc. (YEXT)||21.32|
BJs Wholesale (BJ)
Why the Strength
BJ’s Wholesale Club’s name says it all. The company’s 215 warehouse stores and 135 gas stations sell $12.5 billion worth of general merchandise, sporting goods, home and seasonal products, perishables, gas and tires to more than five million members, who pay from $55 to $110 per year to get savings that management claims average 25% from regular retail. The Massachusetts-based company, which came public in early July, isn’t the fastest grower in the retail group (revenue declined by 2% in 2016 and 1% in 2017 and rose just 3% in the most recent year), but management has done a good job of controlling costs and boosting earnings. The bottom line was up 43% in the company’s fiscal Q2 report on August 28, and have grown by triple digits in five of the nine most-recent quarters. Management guided to 1.8% to 2.1% same-store sales growth for the upcoming year. Analysts are forecasting 28% EPS growth in fiscal 2019 (ends in January) and 18% the year after that. The company’s growth is helped by a slow-but-sure program of opening just a few new stores every year, and with operations in just 16 Eastern states, there’s plenty of room to expand. The newness of BJ’s stock is also a plus, as institutional support sits just at 185, so there’s also lots of room for more mutual funds to buy in. We’ve seen a handful of large, steady growers come public that caught the market’s eye, and we think BJ’s could be next in line.
BJ came public at 22 on July 29 and soared to 27 by the middle of July. A five-week consolidation in the 24 to 27 area in late July and August served as the stock’s post-IPO correction, and BJ was trading at 27 the day before earnings came out on August 28. There has been significant volatility since the earnings report, but BJ has headed higher after an initial shakeout. Given the stock’s volatility, you should be able to grab shares on minor weakness.
BJ Weekly Chart
BJ Daily Chart
Glaukos Corp. (GKOS)
Why the Strength
Glaucoma is a high-pressure condition in the eye resulting from lack of ocular fluid drainage. It affects two million people in the U.S., tens of millions worldwide and can lead to blindness. But there is a potential cure aside from cataract surgery. Glaukos developed the proprietary iStent insert procedure (FDA approved in 2012), where a surgeon inserts a tiny stent during cataract surgery to reduce pressure. This procedure put Glaukos on the map and drove revenue from zero in 2012 to $159 million in 2017, a year in which sales grew 39%. Things slowed down for awhile due to competition, but the story was reaffirmed two weeks ago when Alcon (owned by Novartis) 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 opens the door for Glaukos to grab back a ton of business, potentially as much as $30 million this year, $90 million in 2019 and tens of millions more in the out years! With its main competitor out of the way, Glaukos is now the undisputed leader. Its newest platform, iStent Inject (an injectable two-stent therapy), is preparing to launch in the U.S. later this year and expectations are that surgeons will stampede to Glaukos. Price targets are rising and forward revenue and EPS estimates are likely to surge as well; one analyst now sees top-line growth of 23% annually through 2022 and earnings turning positive next year.
GKOS has been up and down over the last year because of competition concerns, which caused revenue growth to slow markedly in recent quarters. Shares rallied to 53 in 2017 then bottomed out at 24 just before the beginning of 2018. The action improved after that, with shares getting back above 40 in Juen and building a flat base for two months after that. But news of the Alcon retreat is a game changer that sent GKOS north of 60 two weeks ago on 18 times normal volume! Expect volatility as the market digests the news, but this blastoff looks like the real deal. You can start a position around here.
GKOS Weekly Chart
GKOS Daily Chart
Why the Strength
HubSpot is a rising star in the customer relationship management (CRM) market. It sells cloud-based marketing automation software, which handles inbound marketing and sales activities (which is where all the action is these days, with outbound methods like cold calls being shunned), including internet pop-up adds, email and telemarking calls. Most customers are small to medium-sized businesses, which is why HubSpot has recently integrated with Shopify and Slack (which serve similar markets) to help broaden its reach. The stock just broke out to fresh highs following last week’s user conference, which came roughly a month after HubSpot beat expectations in Q2 2018. Analysts remain bullish because the Boston-based conference was at full capacity and management, which has always been very product-focused, spoke about how it is moving modestly upmarket (toward enterprises with 2,000 employees), will introduce video clips across all three hubs (Marketing, Sales and Service) and, most important, will increase prices starting in November. Given HubSpot’s history of introducing winning products and retaining customers, while maintaining pricing power, it appears HubSpot is well-positioned to sustain rapid growth on both the top and bottom lines. Revenue was up 39% last year, and is projected to rise 33% this year, while EPS should jump 160% to $0.65.
HUBS has been a solid winner since breaking out to new highs in May 2017, but it’s had plenty of multi-week dips along the way, including a few trips below its 50-day line. The stock zoomed as high as 122 in March, but then went on to build a base-on-base formation, with the first consolidation (101 to 124) being the foundation for the more recent rest (120 to 143). The breakout came last week on good (not great) volume. If you’re game, aim to buy on weakness.
HUBS Weekly Chart
HUBS Daily Chart
Why the Strength
When people go online looking for love and marriage (or something a little more temporary), they frequently point their browsers to one of Match Group’s dating sites. Match Group gives itself credit for founding the whole idea of online dating, starting in the mid 1990s with the sites Match and Meetic. The company now has a portfolio of dating offerings that’s led by Tinder and includes Match, PlentyOfFish, OkCupid, OurTime, Meetic and Pairs, each with a slightly different approach and target audience. The company boasts more than seven million average subscribers and claims that 60% of all dates, relationships and marriages that started on all online dating programs are traceable to a Match Group site. Tinder is the hottest product; it’s the number one downloaded dating app worldwide, the top grosser among dating sites and is the second highest grossing app overall worldwide. The company’s combined subscriber annual growth rate has been 17% in North America and 41% internationally. Management has done a great job of monetizing the popularity of its products, with triple digit earnings growth (117% and 156% in Q1 and Q2, respectively) and analysts forecasting 117% earnings growth for this year and 22% in 2019 (likely conservative given that the company regularly trounces estimates). The company slipped badly in 2017 in earnings terms and was punished by investors, but the earnings report on August 7 seems to have rekindled the romance.
MTCH came public in November 2015 in the mid-teens, and moved glacially until September 2017, when it caught fire, soaring to 49 in April 2018. The chart shows a huge dip on May 1 (a result of a poor quarterly report) and a corresponding gap up on huge volume on August 8 after a well-received one. Since that jump from 39 to 46, MTCH has chopped higher and looks ready to head higher, possibly after a bit more rest. There’s plenty of volatility, so buying on a dip of a point or so looks advantageous. Use a stop around 46.
MTCH Weekly Chart
MTCH Daily Chart
Why the Strength
NuVasive is focused on treating problems of the spine with improvements in surgical hardware, low-X-ray imaging, improved surgical procedures and innovative materials. The company gets almost half of its revenue from sales of hardware—implants, fixation devices and NuVasive Specialized Orthopedics (NSO)—with the balance divided between U.S. surgical support and international sales. The company, which has seven previous appearances in Cabot Top Ten Trader, is hot right now because of a good quarterly earnings report on August 1 that showed great results from new product introductions and advances in the services business. The report also featured optimistic guidance for 2018 full-year performance that showed 6.7% to 7.6% revenue growth based on 2% to 3% growth in U.S. sales of spinal hardware, 7% growth of U.S. surgical support revenue and 22% increases in international sales. With six new products in Q2, the company is improving its positioning versus competitors. There’s no magic bullet in this highly competitive industry, but NuVasive’s steady introduction of new or improved technology and outstanding international prospects are attracting investors.
NUVA made a long run from 12 in October 2012 to 82 in July 2017 when the wheels came off—NUVA plunged to 45 by February 2018. The stock built a base under resistance at 56 from April through the end of July, then blasted off on more than four times its average volume on August 1 after the excellent quarterly results and positive guidance. NUVA followed through on that blastoff by soaring to 70 in August and has now pulled back by a point or so after a three-week pause. You can buy a little right here while using a stop in the low 60s.
NUVA Weekly Chart
NUVA Daily Chart
Okta, Inc. (OKTA)
Why the Strength
One of the big challenges of today’s interconnected business world is that workers inside and outside a company (like, say, an employee at a supply chain partner) are accessing networks from all sorts of devices and times. Managing who can see what, when is becoming a vital issue, especially for large, international enterprises that are going to the cloud. We’ve seen a few companies thrive in this emerging area (SailPoint, written about two weeks ago), and Okta is a leader in this “identity for the enterprise” sector. The stock took three months off in the summer, but it’s strong today after quarterly results last week have big investors building positions. Revenues rose 57%, easily topping expectations, while the outlook was very positive and management relayed some bullish numbers (six-figure contracts rose 55% in the quarter; billings were up a strong 53%) and sounded a confident tone on the call, saying it has the best identity solution due to its quick deployments (days or weeks, not quarters), its neutrality (can work with any workflow or cloud system a company uses) and is providing huge returns for clients (Allergan streamlined its identity system that used to have four HR systems, four EPR systems and 20 methods to onboard an employee!). Earnings are still in the red, but improving, and big investors are focusing more on the big opportunity as thousands of firms sign up and expand their usage. We like it.
OKTA came public in April 2017 and made some progress, but really didn’t decisively break out until February of this year, which sent shares on a dizzying run from 32 to 61 in three months! Then came a choppy three-month rest that included a couple of sharp dips (in June and July), leading to last week’s earnings-induced pop on its heaviest daily volume ever. We’re OK starting a position here or on modest dips, and using a loose stop.
OKTA Weekly Chart
OKTA Daily Chart
Palo Alto Networks (PANW)
Why the Strength
Palo Alto Networks is a cybersecurity stock that’s leading the sector’s charge higher. The big picture theme is that as data technologies like artificial intelligence, cloud computing and automation flow deeper into enterprises, the need to secure networks multiplies. We view Palo Alto as the emerging blue chip of the cyber-defense stocks as it’s been gaining market share quickly in recent years (often from older legacy players, as firms switch to new offerings), in large part because it’s building out a broad, next-generation security platform that helps clients defend against a quickly evolving threat landscape. The numbers tell the story. Palo Alto reported Q4 fiscal 2018 results last week that were well ahead of expectations; revenue was up 29% to $658 million while EPS of $1.28 beat by $0.11, and free cash flow of $252 million ($2.70 per share!). The company now has over 54,000 customers, up 5.6% over the previous quarter, and most of these clients are increasing their security spend with Palo Alto in the quarters after their initial purchase. Analysts see the company differentiating its solutions, improving its cloud positioning and expanding margins, all good things, especially given that the company has a new CEO at the helm. It’s a big-time growth story.
PANW began showing power in February and March when shares bounced off their 50-day line, then rallied 20 out of the next 21 days on massive volume. That was a signal the big money was moving in, and the evidence over the last five months has only cemented the case. PANW has continued to climb, mostly making higher highs and higher lows, except for one spike lower in July. But that dip was quickly bought and shares advanced to a fresh high in late August. A little sell-off early last week reversed course after earnings came out, and the stock followed through nicely on the upside today—confirmation that the buyers are in control.
PANW Weekly Chart
PANW Daily Chart
Ulta Beauty (ULTA)
Why the Strength
Ulta Beauty was one of the market’s favorite cookie-cutter stories in the 2014-2016 period, as the company opened new locations and grabbed major share of beauty product sales from traditional sellers like department and drug stores. The stock took the past couple of years off as growth eased a bit, but the underlying story remains intact—and now big investors are getting back onboard. The company has just over 1,000 stores (90% of them are off-mall; new stores pay back initial investment in just two years) that carry a huge array of products (more than 20,000 on average) from hundreds of brands, as well as offering salon services in a growing number of its locations. (Long-term, the firm expects 1,400 to 1,700 locations in the U.S.) The stock has turned strong after Q2 earnings nosed ahead of estimates, and money managers are thinking growth will pick up, partly thanks to a new partnership with Kylie Jenner, one of the hottest/trendiest names in fashion, and from optimism that the firm’s CapEx requirements are declining as a heavy investment phase ends, which should help earnings. Not that things are slow today—in Q2, square footage of its stores rose 11%, same-store sales rose 6.5%, e-commerce sales leapt 38% and earnings gained 33%. Toss in a solid share buyback program (share count down 3.2% from a year ago) and there are many reason to believe Ulta has turned the corner.
ULTA had a huge run that finally topped at 315 in June 2017, with the stock skidding quickly to 188 four months later. The stock retested that low in March of this year, rallied to 260 and then formed a nice, tight consolidation through most of August. But since earnings, ULTA has skyrocketed on a few days of huge volume, a sign that the long correction and consolidation is over. Look for a shakeout to get started.
ULTA Weekly Chart
ULTA Daily Chart
United Continental Holdings (UAL)
Why the Strength
United Continental is no secret to anyone, with the firm’s massive fleet of planes (768 mainline aircraft and 554 regional aircraft by year-end; total fleet up 4.7% from year-end 2017) shuttling millions of passengers around the globe. Industry consolidation (less competition) and an avoidance of price wars helped United and other peers see earnings boom from 2013 through 2015, though the past few years have seen earnings level out (albeit at high levels). Now investor perception is improving, with already-elevated earnings beginning to push higher (with more likely to come) thanks to a strong economy, moderating fuel prices and, for UAL, its continued fleet expansion. For 2018, the company sees total capacity rising nearly 5% and traffic growing faster than that (up 7.2% and 6.9% in June and July, respectively; August’s report should be out next week), leading to big earnings (north of $8 per share) and free cash flow (already totaling $2.4 billion in the first six months of the year). With continued modest price and traffic hikes (the firm just upped its checked baggage fee to $30 from $25), analysts see earnings up around 20% both this year and next.
Airline stocks aren’t exciting, but when they get going they can really move—UAL’s last uptrend took it from 30 in March 2013 to 75 by January 2015. After that, it was a very long slog (shares were at 73 in July of this year!), but the earnings gap in July and relatively persistent upside since then looks like a change in trend. We think dips are buyable.
UAL Weekly Chart
UAL Daily Chart
Yext Inc. (YEXT)
Why the Strength
Yext remains one of the market’s more intriguing smaller-cap companies (market cap under $3 billion), with a unique business idea that’s catching on quick. The crux of the story is that consumers view a firm’s information online nearly three times as often on third party sites (Yelp, TripAdvisor, Grubhub, Google, Facebook, you name it) than on the firm’s own website, which often leads to conflicting and confusing data (not to mention non-ideal marketing) for a company. Yext’s platform allows companies to manage all of the public facts about itself that it wants the world to know in one place; signing up with Yext allows clients to have its public-facing data consistent across dozens of search, social, maps, international, health, food, travel and other sites. The stock is strong today because the idea is gaining momentum—in Q2, not only did sales nose above expectations (up 35%), but deferred revenue rose 50% as the company inked nearly 80 new logos, including AT&T, Deutsche Telecom, Chanel, MetroPCS and Vodafone, not to mention renewals or expansions with Domino’s Pizza, Enterprise, Home Depot and Jaguar Land Rover, among others. Even better, Yext signed a deal with Amazon in July to integrate its clients’ data into the answers Alexa will give. We think it’s a big idea.
YEXT broke out of a year-long post-IPO base in mid May and raced from around 15 to 20 in just a few weeks. Then came a nice, flat base for a few weeks, which led to a surge in July when the Alexa tie-up was announced. And since then YEXT has continued higher, with shares holding the 25-day line after a little post-earnings selling. We’re OK starting small on dips.
YEXT Weekly Chart
YEXT 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.
|First||Stock||Symbol||Top Pick||Original Buy Range||Price as of September 10, 2018|
|6/11/18||Advanced Micro Devices||AMD||14.2-15.5||30|
|8/20/18||Chipotle Mexican Grill||CMG||490-505||489|
|None this week|
|None this week|