A Constructive Week
Current Market Outlook
Last week began with a reaction to an attack on Saudi Arabia’s oil infrastructure, moved on to a confusing Fed statement concerning future rate moves and ended with fears that U.S.-China trade talks were breaking down. But despite all of that and a solid rally the week before, the major indexes held firm, which is a constructive sign and keeps the intermediate-term trend pointed up. Individual stocks remain mixed, with lots of crosscurrents among different sectors and themes, though we are seeing an increasing number of solid charts and set-ups. Overall, the evidence tells us this is still a bull market, which isn’t to be forgotten—you should be keeping your optimist’s hat on. But with individual stocks still a bit topsy-turvy, you should pick your spots (and stocks) carefully. We’ll leave our Market Monitor at a level 6, though a bit more positive action could push that up.
This week’s list includes many fresher names that money is now flowing into. Our Top Pick is Pinduoduo (PDD), which, after a big earnings-induced breakout and run higher, has pulled back in an orderly fashion.
| Stock Name | Price | ||
|---|---|---|---|
| Apollo Global Management (APO) | 39.69 | ||
| Boot Barn (BOOT) | 43.24 | ||
| GDS Holdings Limited (GDS) | 80.15 | ||
| Generac Holdings (GNRC) | 86.60 | ||
| HUYA (HUYA) | 21.51 | ||
| J.B. Hunt (JBHT) | 115.27 | ||
| KB Home (KBH) | 36.05 | ||
| KLA Corp. (KLAC) | 158.80 | ||
| Pinduoduo (PDD) | 87.53 | ||
| TopBuild (BLD) | 111.00 |
Apollo Global Management (APO)
Why the Strength
Apollo Global Management is an alternative asset manager led by CEO Leon Black, a famed Wall Street guru and Chairman of New York’s Museum of Modern Art. The company manages $319 billion of investors’ capital, dispersed among credit, private equity and real estate investments. Apollo is currently focused on taking public companies private, as depressed valuations in banking, insurance and energy are creating valuable longer-term profit opportunities for Apollo’s portfolio. Recent acquisitions include Aspen Insurance Holdings and Smart & Final Stores, with Hilton Grand Vacations rumored to be on Apollo’s target list. Overall, business is very good; in Q2, the firm’s fee-related earnings totaled 58 cents per share, up 35% from a year ago. Similar to larger peer Blackstone, one of the catalysts of late has been the company’s conversion from a publicly traded partnership (sloppy structure, K-1 tax form) to a C-corporation (1099 tax form and a structure that everyone can own). The conversion went into effect on September 5. Apollo’s potential investing audience could now grow substantially to include many institutional investors (pension funds, mutual funds, etc.) who were previously prohibited by their investment policy statements from investing in shares of partnerships. In addition, the stock is now eligible for inclusion in the MSCI index on November 7, with the company also hosting an Investor event on the same day. Throw in a solid yield (4.9%-ish) and an overall bull market in asset values and we think buyers will remain interested.
Technical Analysis
APO wasn’t doing a whole lot for the past couple of years, with a top in early 2018, a bottom late in the year and a choppy uptrend through August. But the combination of earnings, the C-Corp conversion and strength in the broad market has changed the stock’s character—APO has zoomed to new highs on a big pickup in volume since mid August, and the current two-plus-week rest looks normal to us.
APO Weekly Chart
APO Daily Chart
Boot Barn (BOOT)
Why the Strength
Boot Barn isn’t going to be the next Walmart or Amazon, but it’s the leader in a large and growing retail niche and management is executing as well as can be, all of which is keeping investors interested. The firm is a leader in western-style apparel and accessories, which includes clothing (about 40% of revenues and includes boots, denim, western shirts, cowboy hats and the like) and blue-collar work wear (60% of sales, including rugged footwear, outerwear and, our favorite, flame-resistant shirts and pants!). Long-term, the growing popularity of things like country music, agriculture and other western activities boosts demand, and nearer-term, the strength in the blue-collar job market (the fracking boom has surely helped) is also a plus. We also like that, because of the low fashion appeal, Boot Barn’s discounts are few and far between. Throw in top-notch execution and the company has been doing extremely well of late—sales growth has been in the mid-teens for the past five quarters, with earnings growing much faster than that, and analysts have been regularly boosting their forecasts ($1.99 per share for next year, up from an estimate of $1.82 three months ago) thanks to estimate-beating results. Boot Barn thinks it can double its store count over time, with solid store expansion in most years (should have 264 by the end of next March, up from 240 a year before). Throw in bullish same-store sales growth (9.4% in Q2!) and the pieces are in place for Boot Barn to be a solid winner.
Technical Analysis
BOOT got nailed late last year with the market and rebounded beautifully earlier this year with many stocks. But since then, it’s tried to get going a couple of times (once in April, and again in June), but the weak broad market got in the way. Now BOOT is giving it another go and it’s looking more promising—the relative performance (RP) line has nosed out to new peaks and the stock is at a new closing high. We’re OK starting small here or (preferably) on pullbacks of a couple of points.
BOOT Weekly Chart
BOOT Daily Chart
GDS Holdings Limited (GDS)
Why the Strength
GDS Holdings has always had a fantastic story, and after going through the wringer over the past year, it could be ready to finally lift to new highs. The company has all the makings of becoming the Equinix (or Digital Realty) of China—it’s the leading provider of large scale, high-performance, carrier-neutral data centers in that country, which big cloud service providers (which take up 73% of the firm’s square footage), large internet (14%) and other large operators (13%) are lining up for. The firm has 18 data centers that are “stabilized,” meaning basically fully up and running (these are 93% utilized), with 13 more that are ramping up (about 40% utilized but, with commitments from clients in hand, should be 87% full in the quarters to come). Business is great, with headline growth (local currency revenue up 55% in Q2) cranking ahead, cash flow strong (EBITDA up 85% in the quarter, with a margin of 44%!) and sub-metrics looking good (area committed up 54%, area utilized up 47%). A short-selling firm took a swing at GDS last July and sent the stock reeling, but the company has continued to execute and, while access to capital is always key for such a capital intensive business (it’s borrowing heavily to build the data centers, albeit with commitments from customers that they’ll fill most of them up), there hasn’t been any problems on that front. Indeed, Singapore’s sovereign wealth fund has inked a deal with GDS to build some data centers, offering a meaningful show of support. Big investors are signing up (341 funds own shares, up from 240 a year ago). Analysts see revenues up 43% this year and 41% next, with surging EBITDA as well.
Technical Analysis
GDS had a great run to 46 by July of last year when the short attack (and a weakening market for Chinese stocks) cut the stock off at the knees. It bottomed with the market in December and marched back to 41 by April. The stock built a decent base after that, and while U.S.-China headlines have pushed the stock around at times (including early August), GDS has continued to crawl higher, challenging its 2018 highs last week. We think starting a small position on pullbacks makes sense.
GDS Weekly Chart
GDS Daily Chart
Generac Holdings (GNRC)
Why the Strength
Generac is one of the only pure plays on power generation equipment. All told, business is split pretty evenly between residential buyers (standby generators, power washers, field mowers, log splitters, leaf vacuums, etc.) and commercial and industrial clients (larger stationary generators for backup; light towers, heaters and pumps). The company’s business and financial priorities are organic growth, followed by debt repayment, annual high-synergy acquisitions and share repurchases. Generac’s 2019 acquisitions took place in India, Canada and Maine, adding to a distribution network that spans 150 countries and consists of thousands of retailers, wholesalers, dealers and e-commerce outfits. The company has been delivering strong and consistent growth for many years, and while nobody roots for natural disasters, any serious power outage, such as a series of devastating California wildfires, could increase annual sales by as much as 5%. The products aren’t revolutionary, of course, but as individuals and businesses demand reliable power at all times, the company’s markets are growing nicely and have solid potential—just 4.5% of single-family homes have backup power, for instance, and Generac is a supplier for every tier 1 telecom firm and is the #1 player in backup power for telecom in Mexico. Second-quarter earnings of $1.20 per share topped expectations by 11 cents, and revenues also topped estimates, making it likely that the current view of Wall Street (earnings up 2% this year and 5% next) is probably too low. A reasonable valuation (16 times earnings) is another plus.
Technical Analysis
GNRC rose past nine-month price resistance at 60 in early June and ran to 70 by the start of July. The stock chopped around in July but has been trending higher above its 50-day line ever since. (There was a brief shakeout when Dorian didn’t make landfall but that was quickly bought up.) The current pullback looks like a solid risk-reward set-up.
GNRC Weekly Chart
GNRC Daily Chart
HUYA (HUYA)
Why the Strength
While few Chinese stocks are in solid uptrends (Pinduoduo, written about later in this issue, is one exception), we are seeing more and more that went through the wringer in 2018 and early 2019 but are now setting up solid launching pads, and Huya is one of them. The company’s story revolves around e-game live streaming, where (believe it or not) people watch a competitive video game “match” and this doesn’t necessarily mean people watching stuff on their computers holed up in their rooms—oftentimes hundreds of people buy tickets to sit in on live game playing! It’s a huge and growing market, which plays right into Huya’s hands—it has the leading e-game and e-sports live streaming platform in China, with 144 million average monthly active users at the end of June (up 57% from a year ago), more than a third of which access events from a mobile device (up 31%), while paying users totaled 4.9 million, up 47% from a year ago. And that’s led to rapid revenue growth (see table below) and consistent profits, too. Growth is expected to slow down some going forward (analysts see the top line rising 36% in 2020), but Huya has consistently topped expectations. It’s always had a solid growth story, and if Chinese stocks kick into gear, we think this stock could do very well.
Technical Analysis
HUYA had a massive post-IPO run in the middle of last year, but round-tripped that move by year-end. Shares bounced into the upper 20s by the end of February and then went on to consolidate for the next few months between 20 and 30. Recently, though, it looks like the sellers have left the building—HUYA rose on good volume in early August and again last week, approaching resistance near 30. You could nibble here, or simply wait for a decisive breakout.
HUYA Weekly Chart
HUYA Daily Chart
J.B. Hunt (JBHT)
Why the Strength
A slowing economy has kept a lid on transportation stocks for a very long time, but the renewed strength in the broad market and hopes for a pickup in economic growth (Fed rate cuts, etc.) has helped the sector find buyers, and J.B. Hunt Transport Services looks like it wants to head higher. The story isn’t anything amazing, as the firm has two primary shipping segments: Intermodal delivery (truck-to-rail, including the largest drayage fleet in North America) and dedicated trucking services (contracted to specific customers). Despite the aforementioned economic headwinds, JB has been doing pretty well fundamentally, with sales and earnings moving higher (analysts see the bottom line up 17% this year) and a second-quarter earnings beat in July helping the cause. Bottom line, demand is slowly increasing, the greatly-touted recession is failing to materialize and a litigation charge is already on the books. Profits are widely expected to rise 10% in 2020, and despite all the recent worry, J.B. Hunt looks to be in great position to benefit from any uptick in the economy and, stock-wise, from a continued rotation into beaten-down areas. A modest dividend (0.9% annual yield), which will likely be hiked in January, puts a nice bow on the package.
Technical Analysis
JBHT was hit hard during the last twelve months as an industry slump unfortunately coincided with two stock market corrections (fourth quarter 2018 and May 2019), leaving the stock 34% off its highs by the end of May. But Q2 results brought value investors back into the market, with shares spiking to 106 in July and, after a month-long pullback, pushing as high as 116 two weeks ago. We like the tightness shown since then; you can nibble here or on weakness.
JBHT Weekly Chart
JBHT Daily Chart
KB Home (KBH)
Why the Strength
KB Home builds single-family residential homes, townhomes, and condominiums, focusing on the West Coast, Southwest, Central, and Southeast. KB’s strategy is serving first-time, first move-up and active adult homebuyers—all markets where demand is heating up and supply is tight. Its major markets include Arizona, California, Colorado, Florida, Nevada, North Carolina, Texas, and Washington. As with many strong stocks these days, the industry’s trends are as important as the company’s and signs of an improving housing market (August’s new home starts and permits both leapt to long-time highs) are helping KB; last quarter, KB surpassed analysts’ EPS estimates by $0.11 cents, beating consensus earnings by 31% and revenues by 9%. And, in fact, the company has a habit of surprising analysts, beating earnings estimates in the last 14 quarters. Looking forward, the company is focused on growing its number of communities 10% to 15% in 2019, and decreasing mortgage rates and the resilient U.S. economy should support that strategy. The real key in the near-term will be the firm’s quarterly report, which is due out this Wednesday (September 25) after the closing bell—analysts see sales down 4% and earnings down 24% from the year before, but far more important will be signs of future demand such as the backlog (up 2% in units as of May 31) and new orders (up 15%). Any indication that next year’s earnings estimate (up 14%) is too conservative will bring in the buyers, especially given the low valuation (12 times earnings) and modest dividend (1.1% annual yield).
Technical Analysis
KBH peaked at 39 in January 2018, fell to 17 last November and rallied back to 28 in May. Then the stock built a nice, quiet and tight consolidation before the buyers took over in August—KBH has now rallied seven weeks in a row to a year-long high. If you’re aggressive, you could nibble here or on dips ahead of earnings, or just wait to see how the report is perceived.
KBH Weekly Chart
KBH Daily Chart
KLA Corp. (KLAC)
Why the Strength
KLA Corporation remains one of the better-looking chip equipment names out there, which is a space with a lot of peppy stocks. As we wrote a few weeks back, the company creates products to help chip manufacturers control their processes and increase their yields. The company designs chip and wafer manufacturing products such as defect inspection and review systems, metrology (to detect compliance design) solutions, in situ process monitoring products, computational lithography software, and data analytics systems. KLA also provides products for the semiconductor circuit, packaging, display, and data storage markets, partly thanks to its acquisition of Orbotech last February. The big story here, of course, is the sector—after a slowdown (earnings have slipped each of the past two quarters), investors are thinking the future is bright. Indeed, despite the slippage, KLA beat analysts’ earnings estimates by $0.05 last quarter, and it saw Products revenues (about 73% of the total revenues) rise by 9.2% and Services revenues (27% of total revenues) increase by 48.5%. The bigger recent news was that KLA hosted its Investor Day last week and the news was all to the good—the firm reiterated its sales and earnings guidance, boosted its current buyback program by $1 billion (that’s in addition to the $850 million that was remaining at the end of June) and boosted its dividend, too (new yield is around 2.2%). Moreover, one analyst believes KLA’s longer-term target of $15 in earnings per share in 2023 is achievable! We won’t look out that far, but right here, the company is in great shape.
Technical Analysis
KLAC went nowhere from early 2018 through May of this year, but since then it’s been a totally different animal, with a persistent, powerful advance. More recently, the stock ran to new highs on accelerating volume in early September and could only pull back a few points before ramping to another set of new highs on solid trade last week. We like the trend and think any shakeout or pullback will provide a solid opportunity.
KLAC Weekly Chart
KLAC Daily Chart
Pinduoduo (PDD)
Why the Strength
Most investors know of Alibaba, Tencent and JD.com, but Pinduoduo might be China’s next big e-commerce hit. It’s no small fry, either ($3 billion in revenue, and a market cap of nearly $40 billion, which is more than Baidu!), having grown at lightning speed thanks to its unique offering—the company offers a “social commerce” platform, which effectively encourages a team shopping format where customers can interact with their team via social networks while browsing for products, most of which are great bargains (off-season brand and other merchandise, all sold by merchants) if purchased by the team. (Customers can still buy individually as well.) There was some fear that users would only be ultra-bargain shoppers from smaller cities in China, but that is falling by the wayside; in Q2, nearly half of Pinduoduo’s gross merchandise volume came from Tier 1 and Tier 2 cities, up from 37% a year ago. And overall, there’s no doubt the concept has been a huge success—revenues are growing wildly and sub-metrics (gross merchandise value up 171% in Q2; active buyers up 41%; average spending per year per buyer up 92%) are jaw-dropping. Even better, analysts expect the company’s bottom line to leap into the black next year. There’s macro risk (U.S.-China trade negotiation headlines, etc.), but if management continues to execute, we think this could be a relatively new growth story that attracts a bunch more big investors (412 funds already own a position, up from 180 at the start of the year).
Technical Analysis
PDD went nowhere for 11 months after IPO’ing in July 2018, but picked up steam in mid July of this year, zoomed on earnings in mid August and ran all the way to 37 two weeks ago. Now it’s finally pulling back, but so far, even despite the trade negotiation snag on Friday, the dip has been normal. We’d be interested in starting a position on further weakness, with a loose-ish stop in the upper 20s.
PDD Weekly Chart
PDD Daily Chart
TopBuild (BLD)
Why the Strength
TopBuild was spun-off from Masco back in June 2015, and it’s doing great as a standalone operation, and the stock is strong today as the housing and construction industry perks up. The company is the leading provider of insulation and related accessories (both installing and distributing it) out there; that business makes up three-quarters of its total revenues, with things like rain gutters, paint, glass and windows making up the rest. All told, it has 200 branches and 8,000 installers that have helped it become the #1 or #2 insulation installer in the majority of its markets (its twice the size of its nearest competitor), and it estimates 40%-plus of new housing starts use its services and products! Thus, TopBuild is a direct play on an improving housing market, and combined with solid execution from the top brass, that’s the main reason why the stock is strong—sales and earnings have been plowing ahead in recent quarters (thanks in part to some add-on acquisitions), margins are improving and cash flow (up 33% in Q2) is strong. Moreover, investors think there’s ample room for improvement should housing starts pick up given that volume trends (up just 2.7% so far this year) have been lackluster. Obviously, a big drop in the economy or spike in mortgage rates would throw a monkey wrench into the story, but the odds favor next year’s earnings estimates (up 10%) will be pushed higher going forward.
Technical Analysis
BLD was cut in half late last year but then plowed right back toward its highs by May. A three-month sideways consolidation followed before earnings kicked the stock up and out of its range in early August. The progress since then has been slow but steady (especially given the market environment), a good sign buyers are in control. If you’re game you can buy some here or (preferably) on dips.
BLD Weekly Chart
BLD 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.
