Next Few Days Will Be Telling
Current Market Outlook
It’s been four weeks since the August 24 panic low and the market has done a decent job hanging in there—all of the major indexes probed higher into last week before selling off on Friday. Currently, the major trends of the market remain down, so we’re staying defensive. However, the next few days will be telling—if the indexes can advance from here, we could receive an intermediate-term buy signal late this week, which will have us loosening the wallet a bit. But if the sellers show up again, all bets are off. For now, it’s best not to anticipate anything; you should continue to hold plenty of cash and keep new buys small. We’ll let you know on Friday if the outlook has changed.
In the meantime, we are encouraged by the action of many individual growth stocks, which are showing lots of relative strength even as the market struggles. Our Top Pick this week is Activision Blizzard (ATVI), which is pushing higher on the back of some very good product news. Consider nibbling on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Tyler Technologies (TYL) | 0.00 | ||
| T-Mobile US (TMUS) | 0.00 | ||
| Sucampo Pharmaceuticals (SCMP) | 0.00 | ||
| Pandora Media Inc. (P) | 0.00 | ||
| Masco (MAS) | 0.00 | ||
| Expedia Group (EXPE) | 0.00 | ||
| Dexcom (DXCM) | 421.36 | ||
| Activision Blizzard, Inc. (ATVI) | 0.00 | ||
| Athenahealth (ATHN) | 0.00 | ||
| Adaptive Biotechnologies Corporation (ADPT) | 39.41 |
Tyler Technologies (TYL)
Why the Strength
Tyler Technologies just keeps motoring ahead. A supplier of software solutions to state and local governments and school districts, Tyler Technologies just introduced two new data capture products for its signature iasWorld and Orion, both of which help assessors perform property appraisals and tax administration. They’re called “SmartFiles,” and are integrated online solutions that allow jurisdictions to share and collect information from people without having to use printed documents or file paper forms. In lay terms, Tyler’s new SmartFile products improve government workers’ efficiency by eliminating paperwork and manual data entry. The new solutions should greatly improve already fast-growing sales: state and local governments are willing to pay a pretty penny for the upgrades. Lake County, Illinois, for example, just signed a five-year, $8.5 million contract to purchase Tyler’s software. Local governments in Mississippi, California, Hawaii and Alaska have signed similar deals with Tyler in recent months. Though each deal is relatively small, they add up: Tyler Technologies’ earnings and sales have improved in each of the last four years, with EPS expected to grow another 22% this year.
Technical Analysis
For more than a year, TYL has been stair-stepping its way to record heights, all but doubling since May 2014. The stock entered 2015 at 109, gradually made its way to 120 by March, peaked at 132 in April and shot all the way up to 143 in July. It fell to 129 in late August, dipping well below its 50-day moving average. But as the market stabilized, TYL has risen to all new highs, popping to 151 last week and shattering two-month resistance around 143. We’re OK with a small buy on dips.
TYL Weekly Chart
TYL Daily Chart
T-Mobile US (TMUS)
Why the Strength
It’s not often that you can point to a failed merger as a positive turning point, but that’s exactly what has happened with T-Mobile. Last year, the company was the target of a takeover by Sprint and Japanese company Softbank that would have made Sprint a more substantial competitor for AT&T and Verizon. (This was the second big takeover effort centering on T-Mobile, which AT&T tried to gobble up in 2011, but couldn’t get regulatory approval.) But when the deal fell through in August 2014, T-Mobile put on its brass knuckles and began an assault on the big dogs in the cellular industry, poaching customers with innovative mobile Internet plans, no-contract services and offers to pay the contract buyout fees for those who wanted to switch. It was a gutsy move, and it changed the rules for U.S. cellular customers. The increased competition has accelerated the buildout of 4G service, pushed forward plans for 5G and forced most carriers to scrap their own contract requirements. For its part, T-Mobile has grabbed big subscriber gains—2.1 million net subscriber additions in Q2 and more than that already in Q3. That kind of growth has 2015 earnings estimates up 230%, with 2016 EPS growth projected at 113%. T-Mobile may still be the number four U.S. cellular provider, but it’s the tail that’s wagging the dog right now.
Technical Analysis
TMUS went into a tailspin in August 2014 after the Sprint merger fell through, but began a strong, protracted rebound in December 2014 after its disruptive tactics began to get traction. From its low of 24 last December, the stock has soared to 43 in recent trading. TMUS ripped off big rallies in May 2015, then again in late July, and finally pushed out to new price highs just last week. This most-recent rally looks like a resumption of the late-July move after the August market flame-out. We think TMUS is a speculative buy on weakness of a point, with a tight stop at 39.
TMUS Weekly Chart
TMUS Daily Chart
Sucampo Pharmaceuticals (SCMP)
Why the Strength
A lot of biotechs have taken it on the chin in the last month, but not Sucampo Pharmaceuticals. The Maryland-based drugmaker just shelled out $278 million to acquire R-Tech Ueno, a Japanese company that makes Amitiza, Sucampo’s flagship drug, intended to help with constipation. The R-Tech Ueno buyout should enhance Sucampo’s growing product pipeline, adding several drug candidates in various stages of development. Another Sucampo drug candidate, cobiprostone (for oral mucositis), was granted fast-track review status by the FDA in May. Cobiprostone could further strengthen Sucampo’s fast-growing top and bottom lines: sales have improved by no less than 250% in each of the last three quarters, while the company’s earnings per share are expected to increase 85% this year and another 62% in 2016. For a relatively small biotech with lots of drugs in the pipeline, Sucampo boasts a rare combination of profitability and proven sales growth to go along with its promising lineup of future products. In other words, the company is way ahead of the average speculative small-cap biopharmaceutical.
Technical Analysis
SCMP climbed rapidly in July and August, leaping from 16 to 28 in less than two months. September brought a consolidation phase that knocked the stock back down to 24, where it found some strong support. Now it’s testing new highs again: the stock was knocking on the door of 29 late last week before pulling back slightly. Given how SCMP has behaved over the last few months, it might be worth dipping a toe in, or at least adding it to your watch list. If you do decide to buy, set a hard stop at 24.
SCMP Weekly Chart
SCMP Daily Chart
Pandora Media Inc. (P)
Why the Strength
Pandora pioneered Internet radio a few years ago, utilizing its “music genome project” (an algorithm that figures out the type of music and artists you like) to attract tens of millions of users. But then the competition moved in, namely Apple, first via iTunes Radio and then via Apple Music—both of which stunted Pandora’s user growth and caused perception of the firm’s future to sink. However, Pandora remains the leader (79.4 million active listeners and 5.3 billion total listener hours in the second quarter), and it now appears the company’s monetization efforts are gaining traction—in the second quarter, revenues rose 30% mostly thanks to greater advertising revenue per use (which was up 25%). That’s because of the company’s investment in local ads via its auto channel—because it’s pre-installed on many new automobiles, Pandora has 12 million auto listeners, with auto ads (most of which are local) making up two-thirds of the company’s total. Long-term, the monetization ramp likely has years to run as ad money gets pulled from traditional radio to Internet radio; as it stands, analysts see sales and earnings up 23% and 116%, respectively, in 2016 supported by a bullish court ruling today that should keep royalty fees reasonable. Competition from Apple remains the big question, but Pandora’s been able to fend off competition a few times in the past and investors are starting to think it will happen again.
Technical Analysis
P had been left for dead in recent months—after rallying from 7 to 40 from late 2012 to early 2014, the stock was crushed, falling below 15 by February of this year as competitive worries reached a fever pitch. But the stock then began a bottoming process for a few months and has been acting great since its second-quarter report—the stock rallied to 20 in August, held firm during the mini-crash in the market and shot to new peaks today on the court ruling. We’re OK with a nibble here or on dips and using a loose stop.
P Weekly Chart
P Daily Chart
Masco (MAS)
Why the Strength
Masco is one of many housing supply companies that are doing well today (and should continue to do well in the quarters ahead) as the housing market remains resilient—the company’s diverse product line includes faucets (where it’s a leader in North America), vinyl windows, architectural coatings, cabinets and tools, all of which are meeting with higher demand. But the company is also benefiting from its recent spinoff of TopBuild (symbol BLD, which appeared in Top Ten a couple of weeks ago); it’s made the remaining company less dependent on new home construction, with 82% of business now coming from remodeling and restoration. The slightly slimmed down Masco expects solid growth (analysts see earnings up 16% this year and 24% next) and a bunch of free cash flow, much of which it’s aiming to return to shareholders—the company has authorized the repurchase of a whopping 50 million shares (nearly 15% of the company), and it bought back 3.8 million in the second quarter alone. The company is also bumping up the dividend, which now yields 1.3% annually. There’s nothing hugely special here, but as long as housing-related stocks are in favor, Masco should do well.
Technical Analysis
MAS tagged 24 in early February and then began a long sideways basing phase—shares were still at 22.5 when they tested their long-term 40-week line in mid-July. But since then the bulls have been in control—the stock shot ahead to new highs in late-July, held the 50-day line during August mini-crash and has pushed right back toward its August peaks. A small position on dips toward the 50-day line (now at 26) could work well.
MAS Weekly Chart
MAS Daily Chart
Expedia Group (EXPE)
Why the Strength
It’s not that easy for a company with a sizeable market cap and well over 1,100 institutional sponsors to nab a spot in Cabot Top Ten Trader, but Expedia has done it. The catalyst for Expedia, which provides comprehensive online travel research and booking services, was the regulatory approval of its $1.3 billion takeover of its online travel rival Orbitz Worldwide. Coming on the heels of Expedia’s analyst-beating quarterly report on July 31 and its sale of a majority stake in Chinese travel company eLong, its Orbitz takeover and a 33% increase in its September dividend gave Expedia four good pieces of good news in a row. The company is also getting support from the general good health of the travel industry that has gained a couple of cruise ship lines coverage in Top Ten in recent months. Expedia is a global company—just 53% of 2014 revenue came from the U.S.—and will benefit from any improvements in the European economy especially. This is a low-risk story with a strong grounding in good long-term trends.
Technical Analysis
EXPE stumbled badly in July 2013 and hit a flat patch in the second half of 2014, but its trend has been up since the market recovery began in early 2009. That long-term trend is important because EXPE can be quite jumpy in the short term, trading flat in June and July and following the market lower in August. But EXPE pushed out to new all-time highs on excellent volume last week after the Orbitz deal won approval. We think the stock looks like a good conservative buy around 125 with a loose stop around 112 (which was resistance in July) if you want to take a stab at it.
EXPE Weekly Chart
EXPE Daily Chart
Dexcom (DXCM)
Why the Strength
The DexCom story is an easy one to tell: The market for glucose monitoring systems for diabetic patients is enormous and DexCom’s G4 wireless monitoring technology is the best there is. Investors’ current excitement about DexCom springs from the company’s new G5 continuous glucose monitoring system that uses a mobile phone to give readings every five minutes. The company also has integrated software that helps with the management of diabetes, but it’s the state-of-the-art hardware that has pushed DexCom to 60% revenue growth in each of the past two years. With more than a quarter of cash flow going back into R&D, the company has yet to turn an annual profit. But the 2015 loss is forecast to reach just 12 cents per share—down from 31 cents per share in 2014—and profitability is expected in 2016, with EPS of 32 cents. It’s been a long road for DexCom from its founding in 1999, but it looks like a major landmark is in sight. With diabetes afflicting nearly one in 10 Americans (and over a quarter of those over 65), the addressable market is huge, and DexCom has superior products to offer.
Technical Analysis
DXCM has been a rocket since late 2011, climbing steadily with just one major correction (March–April 2014) along the way. The stock broke into double figures for good in June 2012 and has now topped 100 after an energetic rebound from the August slump. DXCM isn’t especially extended—its 25-day moving average is at 94—but a buy on weakness of a couple of points would give a little more margin of safety. If you want in, look to buy in the 98–99 area and use a stop around the stock’s rising 50-day (now around 90) for risk control.
DXCM Weekly Chart
DXCM Daily Chart
Activision Blizzard, Inc. (ATVI)
Why the Strength
This is a stock we recommended a few months ago, and it just keeps humming along. The latest bit of good news is that Activision’s newest game, Destiny: The Taken King, just set a record for the highest number of first-day downloads in the history of Sony PlayStation consoles. That’s important for Activision because it gives the company a worthy successor to Call of Duty, Skylanders and World of Warcraft, popular games Activision developed that no longer enjoy the same kind of sales growth they once did. Destiny’s record-breaking success should help Activision build on its second-quarter earnings momentum: earnings per share improved 117% year-over-year last quarter, and beat consensus analyst expectations on both the top and bottom lines. Two other new franchises that Activision created—Heroes of the Storm and Hearthstone—have helped spur the company’s recent growth. Along with the Destiny franchise (The Taken King is the franchise’s third installment), those three had a combined 70 million registered players at the end of the second quarter, generating $1.25 billion in non-GAAP revenue to date.
Technical Analysis
ATVI shares were barely affected by the recent market downturn. The stock started the year at 20, shot up to 23 in February, and after trading sideways for three months, inched up to 26 in early June. It met resistance there until the stellar second-quarter earnings were released in early August, prompting a jump all the way up to 29. It dipped back down to 26 during the late-August correction, but within a week was back up to 29. Last week’s record-setting news pushed ATVI to another new high at 31. You can buy a little on any weakness and set your losses at around 27, which is the current 50-day moving average.
ATVI Weekly Chart
ATVI Daily Chart
Athenahealth (ATHN)
Why the Strength
Athenahealth, based in Washington state, is a leader in helping more than 59,000 health care providers with their electronic health records (EHR), billing and revenue recovery. The company has been hugely successful in integrating EHR with its other financial functions, driving years of revenue growth in excess of 30% per year until 2014’s 26% broke the string. Using cloud-based technology, Athenahealth is perfectly situated to ride the continuing wave of health-care reform kicked off by ObamaCare. The company has enjoyed 15 appearances in Cabot Top Ten Trader since its debut in 2008, attesting to its continuing strength. The big news for Athenahealth is that it is planning to expand outside its usual focus on ambulatory medical practices and helping physicians. During its Q2 earnings report, it was announced that it would extend its RazorInsights business (acquired in January) into the acute care (hospital) market. While the RazorInsights brand will eventually disappear, the technology will be integrated with Athenahealth’s other services and offered first to smaller hospitals. When that offering has been tested and refined, the company will expand into larger hospitals. Athenahealth looks to have a profitable, growing base and excellent expansion plans.
Technical Analysis
ATHN was a hot issue in 2013, but took a dive from February through March 2014, dropping from 207 to as low as 97. The stock spent well over a year trading sideways with support at 110 (and a couple of failed breakout attempts) before a late July breakout kicked the stock from 115 to 140 on excellent volume. ATHN has now recovered from the market’s August freefall and has rallied strongly since September 2. You can nibble at ATHN right here, or wait for a correction below 140. Either way, a stop at the 50-day moving average, which provided support in August, looks prudent.
ATHN Weekly Chart
ATHN Daily Chart
Adaptive Biotechnologies Corporation (ADPT)
Why the Strength
Did you know that during the past two decades, the number of visits to the emergency room has grown about 45%, yet the number of hospitals even offering ER services has shrunk by 11%? (Hence the long wait times and, occasionally, crummy service.) That’s led to a huge opportunity for Adeptus Health, which is building out a network of freestanding ER facilities (under three different brands) in many states across the country—it had 70 at the end of the second quarter and plans to add about two dozen per year in 2015 and in the years ahead. Many of its facilities are operated independently or, increasingly, via deals with leading hospitals and health care operators in certain states—it’s teamed up with Dignity Health in Arizona, UC Health in Colorado and recently inked a deal with Ochsner Health to construct multiple facilities in Louisiana. Not only are these ERs new, they’re actually well-liked, ranking in the top 1% nationwide in customer satisfaction among competitors. All of this has led to triple-digit sales and earnings growth, and analysts see the bottom line continuing to boom for at least the next year. We like this story a lot!
Technical Analysis
ADPT came public in June 2014 at 22, and was still in the high 20s in January of this year. But then it went ballistic, rising to 124 in July! Since then, the stock has begun etching a new base—ideally, ADPT will take some time from here (a few weeks, if not longer) to digest that huge move. But that might not happen, as shares nearly poked into new high ground on Friday! All in all, you can nibble on dips or just keep ADPT near the top of your watch list.
ADPT Weekly Chart
ADPT 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.
