Market Holding Firm
Current Market Outlook
The market’s not out of the woods yet, as many indexes are still hovering below their 50-day moving averages. But the way stocks have handled themselves in recent days is encouraging—there’s been little follow-on selling following the initial dump on September 9, and growth-oriented stocks and indexes have perked up nicely, with some reaching new highs late last week. Throw in a still-healthy broad market (there are very few stocks hitting new lows, which is a good sign), and we remain optimistic, though we’ll keep our Market Monitor in its current place (7 out of 10) and will continue to advise you to keep newer positions smaller than normal until the indexes clearly kick into gear on the upside.
Encouragingly, this week’s list contains a ton of growth stock ideas, including a few newer names to consider. Our Top Pick is Arista Networks (ANET), a fast-growing networker that’s benefiting from the big shift to cloud computing and offers a unique software option for developers. Today’s dip looks buyable.
| Stock Name | Price | ||
|---|---|---|---|
| gdxi (gdxi) | 0.00 | ||
| Tata Motors Limited (TTM) | 0.00 | ||
| Seattle Genetics (SGEN) | 150.85 | ||
| Gigamon (GIMO) | 0.00 | ||
| Glaukos Corp. (GKOS) | 67.84 | ||
| Clayton Williams Energy (CWEI) | 0.00 | ||
| Cirrus Logic Inc. (CRUS) | 0.00 | ||
| Arista Networks (ANET) | 0.00 | ||
| Aerie Pharmaceuticals (AERI) | 0.00 | ||
| Abiomed (ABMD) | 0.00 |
(gdxi)
Why the Strength
Less than a month ago, Wynn Resorts opened its much-anticipated $4.2 billion Wynn Palace casino resort in Macau. The new 350-table resort is reported to be off to a good start. Paired with Las Vegas Sands’ (LVS) $2.6 billion Parisian, which opened last week, and MGM’s $3.1 billion MGM Cotai set to open, it’s clear that many smart business people are betting on a recovery in Macau afer a tough couple of years. For the month of August, gambling revenue in Macau increased for the first time in more than two years. So Wynn Palace—which more than doubles Wynn’s hotel-room count in Macau—appears to be opening at a time when the Macau gaming industry is finally on the uptick after a couple of down years. There were already signs of life last quarter, as Wynn’s sales grew (albeit just 2%) for the first time since 2014. Analysts are estimating 13% sales growth in the current quarter, as improvements in Macau and the new Wynn Palace counterbalance continued weakness in Wynn’s Las Vegas resorts. In anticipation of the Macau gaming turnaround picking up steam, investors have been pouring into Wynn, Sands (which we recommended last week) and other casino stocks in recent weeks.
Technical Analysis
After reaching all-time highs in the 240s in March 2014, WYNN lost nearly 80% of its value over the next 18 months, dipping as low 51 last October. It tested that bottom again this January, but started to get going in February, and by April, WYNN was approaching triple digits again. The stock hit 103 in June and 104 in July before getting knocked back to 89 at the end of August. Now it’s stretching out to new 52-week highs, breaking to 108 last before pulling back today. That might be all the opening you need, though be wary of a deeper pullback. Keep the stock on a short leash, with a loose stop in the mid-90s.
gdxi Weekly Chart
gdxi Daily Chart
Tata Motors Limited (TTM)
Why the Strength
Tata Motors is the largest automotive company in India and also a global force in auto sales as the owner of the Jaguar and Land Rover brands. The company makes passenger cars, utility vehicles, light, medium and heavy commercial vehicles and defense vehicles. The business includes factories, dealerships, service centers and spare parts manufacturing. The company has had 10 previous appearances in Top Ten, but has faced many challenges, including India’s own oppressive bureaucracy and the turndown in the Chinese economy that crimped sales of Jaguars and Land Rovers. Its appearance today is the result of a reversal in the company’s profitability and revenue growth after a year of losses and declining revenue. The turnaround also coincides with the appointment of a new CEO in February 2016. Tata’s earnings fell from $3.53 per share in fiscal 2015 (ended March 2015) to $2.51 per share in fiscal 2016. But estimates call for a 55% leap in earnings in the current year and 36% gains in the next year. Tata Motors sold well over a million vehicles in 2015–16, but with significant sales operations in China (18% of last year’s revenue) the U.K. (17%) and the U.S. (16%), the impact of shifts in buying activity in different countries can be significant. The trends are all in the right direction now. And with an attractive 11 forward P/E ratio, many big investors are becoming interested.
Technical Analysis
TTM had a great 2014, but 2015 was a disaster, with the stock falling from 52 in January to 22 in late September. A bounce to 32 in late November ran into a weak broad market, and TTM fell to 20 in February 2016. At that point, the good financial news (and the new CEO) turned investors hopeful, and TTM began to rally, including a monster gap up on volume in late May that kicked off a sustained rally that’s still going on. TTM tagged 45 in early September and has been consolidating at 42 for the last week. With such a low P/E, this is a fairly conservative growth stock and a buy right here should be fine.
TTM Weekly Chart
TTM Daily Chart
Seattle Genetics (SGEN)
Why the Strength
The last time Seattle Genetics appeared in Top Ten in February 2013, the cancer-focused bio-pharmaceutical company’s big product was Adcetris, an antibody-drug conjugate (ADC) that used the body’s antibodies and a linking agent to target cancer cells. Today, the big news is still Adcetris, now an established treatment for Hodgkins Lymphoma and another rare lymphoma; the treament is approved in more than 60 countries. The drug is gaining acceptance in transplant situations and is in late-stage clinical trials against other types of cancer. According to one analyst, Adcetris could be a $2 billion drug! Despite the company’s success with the drug, profits have yet to materialize for Seattle Genetics. Revenue grew by 35% in Q1 and 24% in Q2, and more solid top-line growth is likely. But analysts see the bottom line remaining in the red through 2017. But investors are banking on further success for Adcetris from ongoing clinical trials that will ultimately power big profits. The story is still all potential, but that potential is huge.
Technical Analysis
From a high of 56 in February 2014, SGEN fell sharply during the next two years, falling to a low of 26 in February 2016. The rally that started in late February pushed SGEN to new all-time highs last week, and the stock is holding those gains. SGEN is a bit speculative, but probably no more so than any other one-drug biopharma, and the drug is a good (and proven) one. SGEN looks buyable on a dip of a point or two, as it has left its moving averages far behind. Try to get in at 53 or lower and use a stop at 49, which was resistance in August.
SGEN Weekly Chart
SGEN Daily Chart
Gigamon (GIMO)
Why the Strength
Modern companies operate online, period. And any company that can help them visualize, manage and protect traffic on their networks is going to find buyers. Gigamon is a Santa Clara, California company whose products can be bought separately, but work together. GigaSecure keeps watch on networks and reports to cyber security apps, while Gigamon Visibility Fabric lets network operators see what’s happening in both the physical and virtual network. Other programs can be selected to form what Gigamon calls a Security Delivery Platform that makes networks more secure. Gigamon’s products are used by over 75% of the Fortune 500, and the company has adapted to doing its job in a cloud environment. Revenue grew by 41% in 2015 and has strengthened to 43% gains in Q1 and 46% in Q2 2016, with earnings up 69% in Q1 and 88% in Q2. The company is benefiting from the increasing move toward the cloud, but it’s clear that the strength of its product line is playing a big role in attracting new coverage from analysts with positive ratings. Gigamon is still a small company (market cap is $1.8 billion), but it’s attracting a large amount of interest from investors.
Technical Analysis
GIMO came public at 19 in June 2013, but after an IPO rally to 42 in September 2013, the stock went over the falls, as losses in Q1 and Q2 2014 dropped the stock to 10 in October. GIMO has been volatile, soaring to 35 in June 2015, then skidding to 19 in October. But the rally that began in January 2016 at 21 has been powerful, with a nice re-basing structure in April and May and another in August. The stock soared last week from 44 to 52 as continuing ratings upgrades from analysts encouraged investors. With its 25-day moving average back at 46, buying will be tricky; look for a pullback of a couple of points or tiptoe in with a small buy and average up. A loose stop at the stock’s August resistance at 47 makes sense.
GIMO Weekly Chart
GIMO Daily Chart
Glaukos Corp. (GKOS)
Why the Strength
Glaukos is a small medical company that’s taking dead aim at the huge glaucoma market; more than four million people in the U.S. alone have the disease, with the global industry raking in north of $5 billion in treatments. Glaucoma is typically associated with intraocular pressure (IOP) because the eye’s drainage system is restricted. Typical treatments (prescription eye drops, laser treatments, invasive surgery) aren’t bad, but all have drawbacks (including high failure rates). Glaukos has a better way through its iStent, which is a minuscule (1 mm long, 0.33 mm wide!) device that’s implanted in the eye’s drainage system, relieving IOP. A host of clinical trials and real-world results have shown a consistent improvement in patient’s IOP compared to current treatment options (especially when combined with cataract surgery), and Glaukos is working on expanded indications for iStent (including a two-stent implanting system) that appear to further boost outcomes. The FDA signed off on iStent a few years ago, and Glaukos has made steady progress since then, boosting coverage (92% of targeted patients are covered by Medicare or private insurance) and its sales force. Growth has been excellent—revenue growth has actually accelerated recently and earnings have nosed into the black during the past two quarters. If management executes on its plan, there’s no reason the top and bottom lines won’t continue to move nicely higher going forward. It’s a good story.
Technical Analysis
GKOS came public in June 2015, and quickly went through the wringer, diving from a high of 34 to a low of 14. But the recovery was excellent, helped along by a powerful earnings gap in early May (on 11 times average volume!). After running back to 35, GKOS pulled back last month to shake out the weak hands, and now the stock is running again, ramping to new highs last week on excellent volume. You can buy some on dips with a loose stop in the low 30s.
GKOS Weekly Chart
GKOS Daily Chart
Clayton Williams Energy (CWEI)
Why the Strength
Clayton Williams Energy is a small driller that operates in a couple of lucrative areas. The first, as you’d expect, is the Permian Basin, specifically the Delaware Basin; it owns 66,000 net acres in the area with a conservative estimate of 400 drilling locations. It also owns 170,000 acres in the Eagle Ford, with 600 potential drilling locations there. That said, Clayton Williams has been in a rut, partly because of the plunge in energy prices, but also because of a cash crunch; it had to get a term loan from Ares Capital earlier this year to clean up its balance sheet. (It still has $915 million of debt, though no near-term debt maturities.) And even now, Clayton Williams has just one rig operating. So why is the stock so strong? Part of it is the general expectation for better times ahead; the firm expects to complete 10 new wells this year, and it has the liquidity to ramp production if prices rise. But another part of the stock’s strength is definitely its value—there have been many Permian acquisitions this year, with some going for $30,000 an acre or more, including nearly $40,000 per acre paid by SM Energy in a recent buyout! Thus, even after subtracting its huge debt load, Clayton Williams’ Delaware acreage is probably worth well over $1 billion, and that says nothing about its Eagle Ford lands. Of course, if oil prices tank or if a buyout never comes, this is the type of story that could go south in a hurry, but there’s no question Clayton Williams has lots of value that the market is beginning to recognize.
Technical Analysis
CEW plunged from 147 to 6 during the energy bear market, so this clearly isn’t a big, leading stock. But shares have been exceptionally strong in recent months, especially since early August, when a better-than-expected second-quarter report pushed shares back above 40. And as M&A activity has heated up, CWEI has continued to surge, rising to new recovery highs last week despite softness in most energy stocks. If you’re game, you can nibble on dips and use a loose stop as CWEI is extremely volatile.
CWEI Weekly Chart
CWEI Daily Chart
Cirrus Logic Inc. (CRUS)
Why the Strength
The words “no headphone jack” during Apple’s iPhone 7 and iPhone 7 Plus unveiling earlier this month were music to the ears of Cirrus Logic investors. It’s the first Apple iPhone that doesn’t include a place for headphones, instead offering a digital link to external headphones and their own wireless “Lightning” earpods—in essence, a new way to connect headphones to smartphones. That’s great news for Cirrus Logic, which makes audio chips for consumer and commercial use, and counts Apple as its biggest customer, accounting for more than 70% of revenues. With pre-order demand for the latest iPhones stronger than expected, Cirrus Logic is viewed as the single biggest beneficiary among Apple suppliers. Cirrus’ latest earnings projections support that belief—it expects a 35% EPS bump this year, which would mark its first bottom-line improvement in four years. In August, the company issued current-quarter sales guidance as high as $410 million, well ahead of the $322 million consensus analyst estimate. But that was before the new headphone-jack-less iPhone 7s were revealed! Now that it appears the new phones could be a bigger seller than anticipated, and Cirrus’ $410 million estimate (which would represent a 34% year-over-year increase) could prove conservative.
Technical Analysis
We last recommended CRUS in early August, on the heels of a late-July gap up from 40 to 49, as a result of the much-better-than-expected sales guidance. For the next six weeks, it built a solid-looking base, operating in a tight range between 48 and 52. Last week brought a breakout, with the stock touching as high as 55 before pulling back to 54 to close the week. You may want to wait for it to dip another point before nibbling with a stop around the 50-day moving average, which has acted as support since May.
CRUS Weekly Chart
CRUS Daily Chart
Arista Networks (ANET)
Why the Strength
Arista is a pioneer in the booming software-defined cloud networking industry, and has been grabbing market share from Cisco every year. It builds scalable data centers and cloud computing environments (warehouses full of servers) for Fortune 500 companies. The stock is on a tear because its flexible software solution, EOS, is open to third-party development. This is a perfect fit (and disruptive force) for the shifting dynamics of today’s networking industry. The Amazons and Googles of the world no longer need to buy a full solution—they can build some of it themselves, then layer in a dynamic solution from Arista to finish it off. That software capability, combined with hardware to meet the needs of an industry seeking faster networks (10 to 40 Gigabit Ethernet and above), has vaulted Arista to the top of the industry’s growth chart. Over the last three years, annual revenue growth has averaged 56% and EPS growth has averaged 78%. Yet shares of Arista have been trading at a discount. Analysts expect annual revenue growth of 30% and EPS growth of 20% over the next two years, and many of them have recently raised price targets (most range from 80 to 105). Networking goes through boom and bust cycles, but right now, datacenter and cloud networking is booming—and Arista is a major beneficiary.
Technical Analysis
ANET has done what most rapid growth technology stocks have done this year. Shares fell early, rallied into late June, fell again on the Brexit vote, then quickly raced higher. In the beginning of July, ANET was at 62; today it’s at 84, with some big volume buying showing up last week. The rally has been consistent, and shares trade in a tight range. It’s coming off a three-day rally so look to buy on the next dip, preferably below 84.
ANET Weekly Chart
ANET Daily Chart
Aerie Pharmaceuticals (AERI)
Why the Strength
Shares of AERI surged over 60% late last week on news that its glaucoma drug, Roclatan, performed well in the first 90 days of its 12-month Phase 3 “Mercury 1” trial. Glaucoma is an eye disease in which pressure damages the optic nerve, potentially causing irreversible loss of vision. The U.S. market for drugs that lower intraocular eye pressure (IOP) is around $2.2 billion. If Roclatan works as well as trial results suggest, Aerie could capture a good portion of that market. Roclatan is a once-daily eye drop that combines market-leading latanoprost, an off-patent eye drop manufactured by Pfizer, with Aeri’s first-generation IOP drug, Rhopressa. Phase 3 trial results showed Roclatan worked better than both Rhopressa and latanoprost individually. Results from a second Phase 3 trial (Mercury 2, which began in March) are needed to support Roclatan’s efficacy. If all goes well, Aerie could have an application for FDA approval submitted within a year. Shares shrugged off a $125 million share offering, and most analysts punched their price targets up to a range of 50–55, implying 50% near-term upside remains if all goes well. That should pull more speculators out of the woods. Despite all the bullishness, caveat emptor—clinical-stage biotech stocks are fickle beasts and will rise and fall based on both trial results and speculation.
Technical Analysis
AERI traded in a 10% range (from 17 to 20) from June through mid-September, then exploded over 60% higher (from 20 to 34) on massive volume on its trial results. Shares should stay strong heading into the next round of data from both the Mercury 1 trial and 90-day Mercury 2 trial. Expect the stock to jump (or fall) on each round of positive (or negative) results. It’s obviously a speculation, but we’re not opposed to a small position here or on dips with a loose stop.
AERI Weekly Chart
AERI Daily Chart
Abiomed (ABMD)
Why the Strength
We’re seeing more medical stocks pick up steam in the market, especially medical devices (Glaukos, in this issue, has a nice story). Abiomed, though, has as much potential as any thanks to its Impella heart pump, which is approved for a couple of temporary uses—first, for a few hours during certain high-risk surgeries (effectively allowing doctors to “offload” the heart, boosting the number of patients that can be approved for such surgeries), and second, for a day or two following cardiogenic shock. In both indications, Impella significantly reduces unfavorable outcomes (including death in the case of cardiogenic shock), so it’s no surprise it’s been catching on fast. Because of heavy investments, earnings actually fell in a couple of recent quarters, but we believe the stock is strong today because investors are looking ahead toward accelerating growth in 2017 and beyond—analysts see the bottom line rising 54% next year (versus “only” 38% this year), and long-term, management has a goal of $1.2 to $1.8 billion in revenue by fiscal 2020 (up from $330 million last year). A big boost could come from the firm’s entry next year into Japan, which is a huge medical device market with an older demographic. Of course, the valuation here is big, but if management can hit its longer-term targets, today’s price could prove to be a bargain.
Technical Analysis
ABMD was one of the first growth stocks to lift to new highs after the Brexit shakeout, and it did so on good volume, rallying above resistance at 105 and making it to 125 by early August. The pullback during the next few weeks was more tedious than damaging (it fell just 8% from its peak), and as growth stocks have perked up, ABMD has as well. We’re OK with a small buy here or on dips with a stop near the stock’s recent low.
ABMD Weekly Chart
ABMD 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.
