Broad Market Remains Strong
Current Market Outlook
We’re still of the mind that going slow makes sense—following the vicious rotation of the past week or two, there’s still a chance of continued crosscurrents going forward, especially with the weekend news in Saudi Arabia and the usual batch of uncertainties that are out there (Fed this week, U.S.-China trade, etc.). But at the end of the day, most of the evidence out there is tilted to the bull case: The intermediate- and longer-term trends of the major indexes are up, the broad market is very strong (very few stocks hitting new lows every day) and, while leadership has definitely shifted, we’re seeing a good number of stocks and sectors that are under strong accumulation. We still favor starting with smaller-than-normal positions and holding some cash, but we also wouldn’t be in your storm cellar as the buyers are (mostly) in control.
This week’s list features stocks where the buying has been concentrated of late—and these aren’t beaten-down names, as many are at or near new-high ground. Our Top Pick is Floor & Décor (FND), a mid-sized building-related retailer that has tightened up nicely.
| Stock Name | Price | ||
|---|---|---|---|
| ACADIA Pharmaceuticals (ACAD) | 47.84 | ||
| Arconic (ARNC) | 17.00 | ||
| Elastic (ESTC) | 86.17 | ||
| Floor & Décor (FND) | 68.03 | ||
| Lam Research (LRCX) | 268.47 | ||
| Medpace (MEDP) | 76.28 | ||
| Micron Technology, Inc. (MU) | 43.31 | ||
| Shake Shack (SHAK) | 92.08 | ||
| Teladoc, Inc. (TDOC) | 127.95 | ||
| Teradyne (TER) | 82.83 |
ACADIA Pharmaceuticals (ACAD)
Why the Strength
We took a swing at Acadia in August only to get whacked out by the jittery market, but now it appears the train may be leaving the station thanks to a drug that’s bringing in good money now and should bring in a lot more as new approvals come. The drug is called pimavanserin, and it’s behind the firm’s lone product (dubbed Nuplazid), which was approved by the FDA back in 2016 for Parkinson’s disease-related psychosis. And the drug is selling very well—sales have been clipping along nicely (see table below) thanks to increased awareness (including some ad spending) and smaller tablets. All told, management sees sales of Nuplazid totaling $325 million this year, up around 46% from a year ago, with another healthy 40%-ish growth year in 2020. That’s all to the good, but the reason the stock has come to life is due to excellent recent trial results of pimavanserin in the treatment of dementia-related psychosis, a market that’s likely 10 times as large as the Parkinson’s indication (nearly 1.2 million patients). In fact, while study results were somewhat limited as this was an interim analysis, the study was so effective the trial was stopped early. Analysts now see approval (likely occurring late 2020) as nearly a sure thing, and think this new indication could be a blockbuster (peak sales in the $1.5 billion to $2 billion range). All told, Acadia looks like a “de-risked” biotech story with plenty of growth ahead.
Technical Analysis
When we last wrote about ACAD, it had just shaken out in July and zoomed to multi-month highs. But the market sagged and rotated and sent the stock sinking back a bit below its 200-day line—until the new trial results came out! ACAD gapped up from 24 to 39 on the news and has built on those gains since. These trial-related pops often come and go, but given the prior base and shakeouts, we’re OK starting small here and seeing how it goes.
ACAD Weekly Chart
ACAD Daily Chart
Arconic (ARNC)
Why the Strength
Arconic is a mid-cap company that makes lightweight manufactured goods from aluminum, titanium and nickel, serving the aerospace, construction, transportation and automotive industries. To be upfront, there’s nothing overly sexy here but the company is doing well today, management is executing well and a restructuring plan provides an added boost. Second quarter results reflected solid performance, with strong growth at all three business segments, two of which (engineered products, where it makes gas turbines, fasteners and the like; and Rolled Products, which includes differentiated aluminum sheet and plate for aerospace) it’s the clear global leader in. Profits are rising due to strength in the commercial aerospace end market and successful cost-cutting efforts. And the stock is strong after Arconic increased guidance for earnings per share by 10% and free cash flow by 7%; it’s the second time the top brass has hiked guidance this year. Four investment firms promptly raised their price targets for the stock, and the market now expects EPS to grow 47% in 2019 and another 15% in 2020 (likely conservative). The company repurchased $1.1 billion of stock year-to-date through August, with another $400 million authorized for repurchase. Structurally, Arconic will be separating into two companies in the second quarter of 2020 in order to maximize shareholder value, something that should keep buyers interested.
Technical Analysis
ARNC had a nice, persistent recovery from its lows last year through June. The consolidation after that was more than reasonable, with a quick recovery after a July shakeout. And now the buyers are at it again, with ARNC motoring to new highs during the past three weeks. We’re OK taking a position here if you want in.
ARNC Weekly Chart
ARNC Daily Chart
Elastic (ESTC)
Why the Strength
Elastic’s had a great story and numbers ever since it came public late last year, and now the chart is improving, too. The company has the makings of the next big deal in the Big Data industry—the firm’s best-in-class software platform helps businesses quickly and easily get information from the mountains of data they’re now collecting, including the ability to automatically take in specific data from a variety of sources regardless of format and present it (chart, graph, table) how the user wants. What we’ve always liked is that it’s not just a business intelligence story. Elastic’s products help many consumer-facing companies (Uber uses it to automatically match ride seekers with drivers; Match uses it to find potential dating partners), has a lot of applications in security (it provides a dashboard for continuous monitoring of cyberthreats to the Dept. of Homeland Security, and also serves other government agencies) and is a natural fit for those monitoring performance (of servers, networks or specific areas of websites to see how consumers browse and purchase), inventory (GM is a customer so it can better keep track of vehicle inventory) and more. Not surprisingly, Elastic’s top line has been growing rapidly, and the sub-metrics look even more enticing—in Q2, billings rose 61% on a trailing 12-month basis, total deferred revenue was up 59% and same-customer revenue growth topped 30% for the 11th straight quarter! The bottom line is still in the red, but it’s clear Elastic has a special product and is focused on grabbing share (8,800 customers today, up from 8,100 a year ago). We like it.
Technical Analysis
ESTC moseyed up to 100 in February of this year, but that ended up starting what has turned into a six-plus-month consolidation. The stock tried to get going in July, but the breakout attempt failed with the market in August. But now the weekly chart is offering some real clues—ESTC has found massive-volume support for three straight weeks. It still has overhead to chew through, but we’re OK starting small here and building if the stock continues to rally.
ESTC Weekly Chart
ESTC Daily Chart
Floor & Décor (FND)
Why the Strength
Floor & Décor Holdings is a small-ish specialty retailer of a broad range of hard surface flooring and accessories in 17 states, employing a large-warehouse format that stresses visual appeal, and additionally offering e-commerce resources to homeowners and building industry professionals. (About 60% of business goes to professionals, with the rest do-it-yourselfers.) The firm’s always had a good story, playing in a growing industry (hard flooring continues to take share from carpets and such) and with great cookie-cutter potential—it has 106 stores today, is boosting the total count by 20% this year, and long-term thinks there’s potential for 400 in the U.S.! The stock is showing strength today partly due to rising investor perception for all buildings stocks, but also due to some improvement among Floor’s own results—revenue growth is accelerating and Q2 earnings topped estimates by a couple of pennies. Full year 2019 revenue and profits are now expected to grow 24% and 14%. Lower interest rates and fading worries over tariffs on Chinese imports are bringing a renewed investor focus to Floor & Décor’s strong growth trajectory. As far as building-related stocks go, this is one of our favorites.
Technical Analysis
FND went through the typical pattern of most building stocks with a peak in the first half of last year, a low in December and a solid rally into April. Then came three months of consolidating, but the action lately is intriguing—FND has popped back to its recovery highs and tightened up nicely just south of 50. Starting a position here with the idea of buying more on the way up sounds like a good plan.
FND Weekly Chart
FND Daily Chart
Lam Research (LRCX)
Why the Strength
Lam Research is one of three chip outfits in this week’s issue as the sector vies for a leadership position. The company supplies wafer fabrication equipment and it’s a leader in etch technology. Today, nearly every advanced chip is built with Lam technology that’s used in a wide variety of electronic products, including cell phones, computers, storage and networking equipment. Shares are doing well because Lam reported a better-than-expected fiscal fourth quarter a few weeks back, with a strong earnings beat. Gross margins came in above guidance and consensus expectations, driven largely by operating improvements. Inventory was down 5.1% vs. the prior quarter. Most importantly, after several quarters of corporate guidance cuts, analysts have recently turned bullish on the industry, foreseeing product demand from memory chip makers emerging from a deep trough in the second half of 2019 through 2020. The current quarter might extend the firm’s streak of shrinking profits, but at this point big investors are looking to the rebound—the forecast for next year is strong, with the market anticipating 28% and 15% increases in revenue and profits. Adding to the attraction is a shareholder-friendly management—the company plans to return at least 50% of free cash flow to investors in the coming years, which means the upturn in business will boost dividends and buybacks. Indeed, the latest dividend hike was announced in August (current yield 2.0%) and another $1.1 billion of stock was repurchased in the June quarter (share count down 2% from a year ago).
Technical Analysis
After an extended run-up that peaked at 220 in early 2018, LRCX got crushed by the fourth-quarter 2018 market correction. The stock promptly retraced most of that pullback by May, then built a solid launching pad into July. The breakout attempt was foiled by the weak August market environment, but now LRCX is stretching its legs—shares are pushing to new recovery highs on many days of solid volume. If you’re game, aim to enter on weakness.
LRCX Weekly Chart
LRCX Daily Chart
Medpace (MEDP)
Why the Strength
Medpace Holdings provides clinical contract research organization (CRO) services to the global biotechnology, pharmaceutical and medical device industries. It covers Phase 1 to Phase IV of the drug development process, and its services include development plan design, coordinated central laboratory, project management, regulatory affairs, clinical monitoring, data management and analysis, new drug application submissions and post-marketing clinical support. The company’s revenues are relatively diversified, though its largest concentration is among fast-growing biopharma businesses—companies with less than $250 million in sales—which combined account for 75% of Medpace’s revenues. As well, the company provides CRO services to a wide range of therapeutic areas, including autoimmune diseases, cardiovascular, oncology, endocrine, infectious diseases, neurology and nephrology. Medpace has been perfect on earnings surprises for the past four quarters, including its last quarterly beat—$0.81 vs. analyst forecasts of $0.63. Revenues also topped estimates, all of which is a big reason the stock has come to life in recent months. There wasn’t any magic bullet when it came to the results, just Medpace riding a growing industry and increasing its own market share. Even better, forecasts have been climbing, up more than 12% for this year and 14% for next, driving in part by the company’s increasing backlog (up 19% in Q2). It’s not changing the world, but this company is a steady grower in a growth-oriented field.
Technical Analysis
Shares of MEDP have risen more than 7% since its quarterly earnings announcement at the end of July and 63% since the beginning of the year. The stock broke out nicely on that earnings report, lifting out of a year-long range, and have crawled higher since then, with recent support near the 25-day line leading to a new round of buying. We’re OK picking up some shares on dips.
MEDP Weekly Chart
MEDP Daily Chart
Micron Technology, Inc. (MU)
Why the Strength
Micron Technology makes memory solutions for use in the mobile, consumer, industrial, networking, and server markets in 18 countries around the globe; somewhat surprisingly to us, it’s the 5th largest semiconductor company in the world. Micron’s solutions can be found in just about every type of electronic device these days, including smartphones, smart watches, 4K TVs and smart speakers for the consumer market; industrial internet of things (IoT) connections; networking applications such as security and 5G connectivity; and server products for cloud computing and data centers. The flash memory sector has been in a slump with suppressed demand and excess inventory, which has caused prices to plummet—indeed, Micron’s earnings are falling off a cliff and analysts see that continuing for a while longer. But big investors are thinking the downcycle is close to bottoming out; indeed, the company’s last earnings report saw the bottom line top expectations by a mile ($1.05 per share reported vs. estimates of 79 cents). Moreover, industry-wide, next year should be 5G’s coming out party, and that could be a huge opportunity, as it’s expected to result in sales of 120 to 140 million new smartphones. As well, sales improvements should come from the growing autonomous vehicle and IoT markets. The next update will come on September 26, when the company will release its latest quarterly report.
Technical Analysis
MU went through the wringer last year, and even in mid-June of this year, was just three points above its December 2018 nadir. But since then the stock has definitely improved, with six straight up weeks into late July, a sharp-but-normal pullback during the market’s August wobbles, and now shares have zoomed to new recovery highs. Earnings next week are a risk, of course, but if you’re game, you can nibble here or on dips.
MU Weekly Chart
MU Daily Chart
Shake Shack (SHAK)
Why the Strength
Just about every stock in the market that’s had a good run this year has come under severe selling pressure, but interestingly, Shake Shack’s avoided most of the pain. In our opinion, the reason for that is that the firm looks like one of the next big cookie-cutter success stories: Shake Shack’s roadside-like burger joints, complete with 100% all-natural Angus beef, began as a hit in New York City but have spread throughout the country; there were 237 locations at the end of June (both domestic and international, owned and licensed), up 14% from the end of 2018 in just six months! And there’s more where that came from, with management aiming for around 320 locations by the end of 2020. While revenue growth has been consistently rapid, the worries here over the years have been growth at the expense of profits—labor costs have been an off-and-off issue, and same-store sales have been just OK. But there’s some new initiatives that should help with that, one of which is a nationwide deal with Grubhub to boost its delivery and digital business that’s been so key to some other restaurant chains. Another is the testing of new menu items, new cooking equipment and better processes that can help with margins. Moreover, same-store sales growth in Q2 came in at 3.2%, which is higher than recent quarters, while EBITDA (a measure of cash flow) grew nearly 19%. The combination of the firm’s prospects and improving execution has changed investor perception, with more big investors thinking Shake Shack is in line to become the next big restaurant chain around the U.S. and overseas. We like it.
Technical Analysis
SHAK trended persistently higher for the early part of this year, broke out of a good-sized base in June and then went vertical after earnings in early August. The stock finally ran into some resistance around the century mark, and then the recent rotation took effect, driving SHAK down about 10 points in just a couple of days. But shares found support near their 25-day line and have held in there since. Further dips would be tempting, with a stop near the 50-day line.
SHAK Weekly Chart
SHAK Daily Chart
Teladoc, Inc. (TDOC)
Why the Strength
You won’t find many stories bigger than Teladoc’s: The company is the clear leader in virtual care (often called telemedicine), allowing millions of people to get medical advice (and often run-of-the-mill prescriptions) over the phone or videoconference in a variety of fields. All told, clients can access 50,000 experts across 450-plus specialties along with 7,000 clinicians—and those clients include 40% of the Fortune 500 and thousands of small businesses (including 30,000 small businesses in Canada that recently signed up) along with many public health plan users (Medicare Advantage has 20 million members and is a new opportunity for Teladoc next year) and 300 hospital health systems. (At the end of Q2, the firm had 26.8 million paid U.S. members, up 19% from a year ago.) There are a lot of moving parts and costs (the bottom line is drenched in red), but it’s a simple, powerful concept that’s working. Not only are revenues cranking ahead (up 38% from a year ago; subscription access fees, which make up 85% of revenues, were up 39%), but the sub-metrics look great, too, with total visits expected to rise 66% this year (up 70% in Q2), while utilization continues to rise (9.1% of members used the service in Q2, up from 8.0% a year ago), with 40% of U.S. members accessing at least two products. The biggest recent news is of an expanded relationship with United Health, which could bring in an addition five million paid members and 10 million fee-only members, with further upside beyond that. This remains a big idea with plenty of potential if management continues to execute.
Technical Analysis
TDOC had a big run from its original breakout in early 2017 near 20 to its high of 89 last September. The 50%-plus fall during the next three months was par for the course late last year, but it stagnated for most of this year, too. But after six months of consolidating, it now looks like the buyers have taken control—following the United news, TDOC has been shot out of a cannon, ripping back to the 70 area on two weeks of big volume. Starting small here is fine with us.
TDOC Weekly Chart
TDOC Daily Chart
Teradyne (TER)
Why the Strength
Teradyne is an under-the-radar industrial technology company that’s benefiting from big trends like 5G network infrastructure and industrial automation. Its automation equipment (including collaborative robotics) and electronic test solutions help customers bring new electronics to market more reliably and more quickly. We’ve featured the stock a few times this year and it continues to perform well because, in addition to the big market potential, management has embarked on a self-help operational improvement initiative. That means growth-fueling acquisitions, stock buybacks and dividend hikes, all of which are raising expectations for future growth on the top and bottom-line. To be clear, Teradyne isn’t a lightning-fast growth; sales were down 2% in 2018. But modest revenue growth (2%) should return in 2019 then accelerate to 13% in 2020, when EPS growth should also pick up, to 23% (EPS of $3.09 expected). Investors are now looking ahead to next year’s acceleration, which, along with a modest dividend (yield is now 0.6% now) and a reasonable valuation (23 times earnings), has prompted buying. We like the big picture trend in testing and automation and are intrigued by management’s claim that Teradyne’s processes or equipment has touched almost every device that consumers use these days. After a few quarters of iffy fundamentals, the future is looking bright for Teradyne.
Technical Analysis
TER looked like it was up, up and away in July, when earnings prompted a huge-volume breakout to 59 on massive volume, lifting the stock out of a 16-month consolidation. The market pulled it back in during August, but the stock found support near its 50-day line and has now begun to reassert itself. If you want in, start small here with a stop near 52.
TER Weekly Chart
TER 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.
