Continued Shots Across the Bow
Current Market Outlook
We’ve entered the third week of September, and today was another day of sharp rotation, with the market’s leading growth stocks and indexes taking hits while other areas declined modestly (if at all). Big picture, the intermediate-term trend of the major indexes is still up, and most leading stocks, while choppy, are in the same boat; hence, we remain optimistic. That said, we are nudging our Market Monitor down a notch today to respect the repeated waves of selling and, just as important, a bit more iffy action from leading stocks (including a few that are seeing wild swings up and down after a big run, which is often a sign of distribution). Thus, we’re being patient with our top performers, but it’s also a good idea to tread carefully, holding at least a little cash and booking some partial profits on any stocks that are showing wear and tear.
This week’s list is another growth-heavy list, which is encouraging to see given the bouts of rotation. Our Top Pick is CarGurus (CARG), which is aiming to be the TripAdvisor of car information and whose stock is under accumulation after a four-week dip.
| Stock Name | Price | ||
|---|---|---|---|
| Acxiom (ACXM) | 0.00 | ||
| Align Technology (ALGN) | 316.20 | ||
| CarGurus (CARG) | 41.58 | ||
| Centennial Resource Development (CDEV) | 20.33 | ||
| Guidewire (GWRE) | 90.60 | ||
| HealthEquity, Inc. (HQY) | 70.70 | ||
| Jacobs Engineering Group (JEC) | 89.83 | ||
| Sendgrid (SEND) | 33.32 | ||
| Spirit Airlines (SAVE) | 57.03 | ||
| Viper Energy (VNOM) | 36.55 |
Acxiom (ACXM)
Why the Strength
Acxiom is a digital marketing company that’s been growing in the single digits but is on the verge of a massive change. The company recently agreed to sell its Acxiom Marketing Solutions business (AMS), which drove around three quarters of revenue, to Interpublic Group (IPG) for net proceeds of $1.7 billion. Once the deal is completed (should close in Q3), Acxiom will have no debt, begin a $500 million share repurchase program, initiate a $500 million cash tender offer for its stock and rename the company LiveRamp (ticker will be “RAMP”). LiveRamp is the “other” digital marketing business (one-third of revenue) and it is where the real action is. LiveRamp revenue was up 34% in Q1 (reported August 10) and is on pace to hit $250 million a year. Client count rose by 30 to reach 270 (including partners, LiveRamp works with around 625). Customers and partners include Facebook and Microsoft, and LiveRamp helps them use CRM data to target or retarget ads at individuals. One of key channels is TV, which represents an $80 billion market in the U.S. alone. This is a massive transition and forward estimates will change dramatically once the deal closes (disregard estimates of 4% revenue growth and EPS of $0.94 this fiscal year). We think a starter position in what will become LiveRamp could work out for risk-tolerant investors. Digital marketing is big business and there is execution risk, but with current management sticking around we see potential for an interesting future.
Technical Analysis
Shares of ACXM didn’t do much for years then fell apart in late March when Facebook ran into data issues (Cambridge Analytica) and said it might wind down third-party data partnerships, including with Acxiom. Shares rebounded as Facebook softened its position, then rallied as rumors, and confirmation, of the AMS divestment surfaced. The stock has wandered up into the high 40s since because the market sees potential to grow the remaining business, acquire more assets, or even sell off LiveRamp at what could be a very good price, especially given that AMS brought in far more than analysts had expected. You can nibble here with a tight stop.
ACXM Weekly Chart
ACXM Daily Chart
Align Technology (ALGN)
Why the Strength
Align Technology has one target market—dentists and orthodontists—and sells them two products, the Invisalign technology to make invisible plastic tooth aligners and the iTero scanner to map teeth and design the retainers. Together, these two technologies (plus the training and clinical education programs) have made Align Technology a leader in improving people’s smiles. From its first appearance in Cabot Top Ten Trader in 2007, Align Technology has been featured here 17 times, which is an impressive record in itself. But the company continues to grow, booking a 36% jump in revenue in 2017, with 41% growth in Q1 and 38% in Q2. The company has also booked four quarters of after-tax profit margins above 20% and an average of 78% earnings growth over the same period. The company’s great Q2 results were driven by a 42% jump in teenage customers and growth of its customer base to over 50,000, which included over 5,000 new Invisalign-trained doctors. After receiving approval from the Chinese Food and Drug Administration, Align also completed its first iTero scanner shipments to China last quarter, opening up a huge opportunity. It’s not the first inning of this growth story, but Align is selling to a giant market and shows no sign of slowing down.
Technical Analysis
ALGN caught fire in 2017, running from 96 to 222. The stock paused after its late-January 2018 high at 287, spending three months digesting its gains, then heated up again in May, soaring to 372 in June, 375 in July and 393 earlier this month. Overall, the stock’s action since mid June shows that buyers and sellers are fighting it out, but there have been few signs of major selling and the uptrend is clearly intact. You can start a position here and look to add if the market and ALGN head higher from here.
ALGN Weekly Chart
ALGN Daily Chart
CarGurus (CARG)
Why the Strength
The used-car business has been ripe for a technology upgrade for years, with Carmax (seven Top Ten appearances) leading the way with used-car superstores. Carvana (four appearances here) stepped up the innovation with a simplified online shopping site. And recently, CarGurus has made a strong move for both new and used cars. CarGurus was founded in 2006 by the same guy who founded TripAdvisor, but the company didn’t come public until October 2017 and didn’t really catch fire until a couple of months ago. CarGurus is essentially a convenient, highly evolved online technology that uses search algorithms and data analytics to connect buyers with car dealers. In its Q2 report from early August, the company reported that its network of participating dealers had reached just shy of 30,000, up 20% from the previous year. And the U.S. average of monthly unique visitors to its website increased to 36 million, a 56% gain from Q2 2017. Internationally, monthly unique users totaled just 3.5 million, but that represented a 54% year-over-year gain with huge upside potential from here. Revenue gained 45% (thanks to solid growth in both dealer subscription revenue and advertising revenue) and earnings were 50% higher. Unlike Carvana, CarGurus doesn’t own its own inventory or feature car vending machines. But the company’s potential as the TripAdvisor of car research and buying is catching on here and overseas, and big investors (Fidelity owns about 10% of the company already) are taking notice.
Technical Analysis
CARG came public at 16 in October 2017 and, after a choppy and sloppy rally to 41 in April of this year, fell into its first post-IPO consolidation. The stock came to life in July and August, decisively pushing to new highs (seven weeks up in a row) with a pop after earnings, too. Then came a low-volume, four-week pullback, but that appears to be over, with CARG pushing higher recently on a nice pickup in volume. Buying here or on dips with a stop in the mid 40s looks like a good risk/reward situation.
CARG Weekly Chart
CARG Daily Chart
Centennial Resource Development (CDEV)
Why the Strength
Energy stocks have been dogs for a few months, but some names in the group are firming up (two in this week’s Top Ten), and Centennial Resource Development looks like a potential new leader if the group catches on. The company has 80,100 contiguous acres in the oily area of the Delaware Basin (within the Permian), and the stock has been gaining sponsorship for two main reasons. First, the acreage is terrific and Centennial is drilling like mad; the firm has seven rigs in operation, including six in the southern part of its land where it has best-in-class per-well output. All told, in Q2, total output rose 94% from a year ago (oil output up 79%), and that included some drilling delays. The second (and probably more important) reason is that Centennial has done a great job locking up takeaway capacity—right now, many Permian players are receiving low prices for their oil because there’s a glut in that area (not enough pipeline capacity), but Centennial’s lack of hedges and takeaway deals resulted in the highest recognized prices (92% of the benchmark) among its peers! Longer-term, the firm has a goal of boosting oil output another 71% from this year through 2020. As far as energy stocks go, it’s a good story.
Technical Analysis
CDEV came public in 2016 and had a great run, basically doubling in the second half of that year. But since then, it’s built a long, tedious base, with a low near 14 in mid 2017 and highs around 22 earlier this year. Now, after another dip this spring, CDEV is back near its highs, including an intriguing upside volume cluster (five straight days of good gains on big volume). You can start a position here or on dips, and look to average up on strength.
CDEV Weekly Chart
CDEV Daily Chart
Guidewire (GWRE)
Why the Strength
It’s been almost exactly a year since we last featured Guidewire Software, and the story is as good now as it was back then. The company’s software is used by 380 property and casualty (P&C) insurers to handle web-based policy management, underwriting, claims management and billing. Activity picked up following last year’s hurricane season (remember Irma?) and unfortunately history looks ready to repeat in 2018. Beyond the short-term catalysts, though, Guidewire has also shown it can deliver consistent results. Revenue was up 29% in fiscal 2018 (ended in July), and analysts see 14% growth in fiscal 2019. Earnings are consistently positive, and as with most software firms, cash flow from operations ($140 million in the last fiscal year) is much larger than net income ($91 million). The big picture trends benefiting the stock are an effort by major insurers in the U.S. and Europe to update their core systems, as well as to adapt digital engagement solutions to meet evolving market demands. Guidewire’s Insurance Platform helps it do both. Results from Q4 fiscal 2018 (released September 5) came in ahead of consensus and customer count keeps growing (up 15 in the quarter and by 52, to 380, over the last 12 months). While a couple of deals slipped into 2019, overall execution, including a transition to the cloud, remains solid. An upcoming analyst day this Thursday will likely drive near-term interest in the name.
Technical Analysis
GWRE is one of those stocks that’s prone to intense rallies and equally intense pullbacks, which often scare investors. But those who stick with the name have done very well, especially since GWRE broke out to multi-year highs last June. There have still been a number of heart-stopping pullbacks since then, most notably in December and March, but none of these pushed the stock below its 200-day line and the long-term trend is still up. Shares pulled back again following the September 5 earnings report, but true to form that dip was bought and GWRE is trading at all-time highs once again. If you’re game, look for dips of a couple of points.
GWRE Weekly Chart
GWRE Daily Chart
HealthEquity, Inc. (HQY)
Why the Strength
No matter what the politicians do (or don’t do) in Washington, D.C., the trend toward people (and their employers) wanting to cut (or better control) health insurance costs is real, and HealthEquity—the leading non-bank custodian of health savings accounts (HSAs), which go along with cheaper ($1,900 lower average premiums) high-deductible plans and allow users to invest their assets—is one of the main beneficiaries of that. The firm has seen a steady increase in sales and earnings for years as it takes share in a growing industry (it has 14% share of HSA assets, up from 9% in 2015), which has led to big upticks in the number of HSAs under its umbrella (3.6 million, up 23% in Q2) and assets in those HSAs ($7.0 billion, up 31%). HealthEquity makes money in a variety of ways (service, custodial, interchange) and all are growing nicely. Big picture, the top brass sees industry-wide HSA assets growing 50% by 2020 and 12-fold or more in the long term, with industry revenues advancing as much as three-fold down the road, and HealthEquity is sure to get its cut of that. Back to Washington, D.C., there are some bills floating around that would make HSAs more accessible, though it’s unknown if Congress will get around to them. But that’s just potential icing on the cake—the major trends are in place for years of growth in the HSA market and HealthEquity.
Technical Analysis
HQY has had a nice run lately, but we still consider it early-ish stage. The stock tanked during the 2015-2016 market slide and recovered nicely by January 2017, but it then stalled out—net-net, shares made no net progress from that point until February of this year. Since then, shares have been in a solid advance, with its June/July wobbles giving way to higher prices during the past few weeks. Dips look buyable to us.
HQY Weekly Chart
HQY Daily Chart
Jacobs Engineering Group (JEC)
Why the Strength
If an oil & gas explorer/refiner, aerospace and defense company, telecom, biotech or government enterprise wants to build a building or factory, Jacobs Engineering is likely to be at or near the top of their list of candidates for the job. Jacobs has the expertise to build highly technical facilities, but can also design or consult on the design for everything from refineries and chemical plants to high-tech installations. The company went through three years of declining sales (down 5% in 2015 and 9% in both 2016 and 2017), but used a stringent program of cost reductions to keep the bottom line solid. And now, with a good-sized acquisition (CH2M) being completed late last year, Jacobs’ revenue line is hot again, with 71% growth in Q1 and 65% in Q2. Earnings are also up sharply year-over-year, with 28% growth in Q1 and 71% in Q2. In addition to the 13% revenue beat and 14% earnings beat in its August 6 quarterly results, the firm reported that the integration of CH2M is going well—Jacobs expects the transaction to add 15% to adjusted earnings in 2018, and should achieve $150 million in synergies by the end of next year. Jacobs boasts a backlog of $27.2 billion, and with its history of cost controls, the bottom line looks secure. The company will pay a dividend of 15 cents per share on October 26 to shareholders as of September 28.
Technical Analysis
JEC went over the falls in 2014 and 2015, but recovered strongly in 2016. Two significant pullbacks (December 2016 through August 2017 and January through April 2018) interrupted the stock’s recovery, but JEC moved out to new highs in August and has run from 55 to 76 in its most-recent rally. The stock gapped up on big volume on August 6 after its positive earnings report and traded sideways under resistance at 74 through the end of August. September has brought renewed movement, with rotation into cyclical stocks pushing shares to new highs. You could start here or (preferably) on pullbacks.
JEC Weekly Chart
JEC Daily Chart
Sendgrid (SEND)
Why the Strength
Sendgrid bills itself as the world’s most trusted customer communication platform, and it’s become that by focusing exclusively on email, which remains the system of record in most people’s lives (think of shipping notices, password resets, purchase receipts, promotions, newsletters, social media notifications, reservation confirmations, account notifications and so much more). Sendgrid looks to have the best platform to do email delivery at scale, which is a tricky business as it involves knowing each inbox provider’s rules and methods of what trips spam filters and the like (20% of emails don’t reach their intended recipient!). But this company has cracked the code (94% effective rate), sending emails to more than half of the world’s email addresses, totalling about 45 billion a month in Q2! And that’s probably just the beginning—Sendgrid says it’s just 3% penetrated among potential customers, with 74,000 customers (up 35% from a year ago) including a bunch of blue chip firms. Sales have been steadily ratcheting higher thanks to more customers, more spend among its existing base and declining churn, while earnings have been in the black for eight straight quarters and should surge from here. If all goes well, there’s no reason Sendgrid can’t grow many-fold as it becomes one of the key infrastructure partners to all sizes of companies. It’s a big idea.
Technical Analysis
SEND is a bit thinly traded ($33 million per day) but we love the chart. The stock came public last November and enjoyed a choppy rally to 32 by March of this year. Then came the first consolidation, and it was a good one, with a reasonable correction and trading range (24 to 32) and some tightness in June and July. Q2 earnings kicked off a new advance, which stretched to new highs last week before a reasonable pullback. We’re OK buying some here or on further dips to the 25-day line.
SEND Weekly Chart
SEND Daily Chart
Spirit Airlines (SAVE)
Why the Strength
United Continental was the first airline to show up in a while in Top Ten (last week), and Spirit makes it two in a row for the sector. This company is the largest ultra low-cost carrier in the country, with more than 500 daily flights to 67 destinations (including 88% of the top 25 U.S. metro areas). The attraction here is price—Spirit claims its airfare is 35% cheaper than the average competitor because of its cost structure (high seat density airplanes, high aircraft utilization, efficient use of gates, etc.), and the firm relies more on ancillary revenue (which is less susceptible to price wars) than its peers. And management thinks its cost advantages will only grow during the next few years! As for the stock, it’s strong partly because investors think the sector as a whole is turning the corner, and for Spirit in particular, because new capacity and costs getting under control is leading to accelerating revenue growth and (soon) a pickup in earnings. For the year, Spirit anticipates total capacity to be up a whopping 23%, while revenue per seat mile flown is expected to pick up starting in the current quarter. While earnings took a hit last year and should be flat-ish this year, the bottom line should grow north of 20% in Q3 and nearly 30% for all of 2019. Throw in a strong environment for consumer spending and a reasonable valuation (15 times earnings) and we think the stock can have a good run.
Technical Analysis
SAVE has had a rough few years, topping at 85 back in 2014, falling to 33 a year later and actually tapping a new correction low of 30 about a year ago. But after multiple successful tests of the 35 area this year, the stock has not only perked up, but begun to advance persistently—shares have risen in a straight line since early July and reaching their highest level since last July. We think dips or shakeouts will lead to higher prices.
SAVE Weekly Chart
SAVE Daily Chart
Viper Energy (VNOM)
Why the Strength
We like innovative business models and Viper Energy is a perfect example of one that’s caught our eye. It’s an oil stock, but is organized as a royalty master limited partnership (MLP). Viper generates revenue from mineral rights to oil wells operated by other companies; basically it owns the land and lets others drill on it. That means no CapEx or operational challenges for Viper—it just pays its share of production costs and taxes, then passes 100% of available cash flow to investors in the form of (variable) dividend payments. Of course, what’s vital is the acreage, and Viper is in good shape on that front: All of Viper’s assets are in the Permian Basin and Eagle Ford, arguably two of the best oil regions in the world. Roughly 36% of these assets are owned by Viper’s parent company, Diamondback Energy (FANG), which spun it off in 2014 and which still owns around 64% of Viper. As the stock’s performance implies, business has been good lately as drilling activity has picked up. Revenue was up 117% (to $172 million) last year and EPS grew by 143% (to $1.07). In Q2 of this year, revenue was up by 106% and EPS of $1.35 beat by $0.95. Those results were driven by an 83% increase in net royalty acres, to 13,705, and allowed management to increase the quarterly distribution by 81% to $0.60. That implies a current yield of over 6%! Analysts now forecast 75% revenue growth and 118% EPS growth (to $2.33) in 2018. If drilling continues to increase and energy prices remain afloat, Viper should continue to crank out great results.
Technical Analysis
VNOM has performed well since shares broke out last October. The stock has mostly traded above its 50-day line, with the exception of a reasonable pullback and consolidation phase in February through March and a more sizeable retreat (33 to 26) in early June. Since then the stock’s advance has been relatively steady due to solid earnings and potential asset dropdowns resulting from its parents’ buyout of Energen. After a big move in August, shares have been resting for a couple of weeks, setting up a decent entry point.
VNOM Weekly Chart
VNOM 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.
