Approaching Key Levels
Current Market Outlook
The third week of September brought another bout of sharp rotation, with leading growth stocks trading lower while other areas of the market firmed up. To this point, the action has been acceptable given the big runs in so many stocks during the summer, but some indexes and many stocks are approaching key levels—if the buyers show up here, all could be well, and we wouldn’t be shocked to see another leg up develop. But if not, the odds that a deeper and longer retreat among leading stocks will increase. Today, we’ll keep our Market Monitor at a 7 (out of 10), and it’s good to see some new leaders emerge. But the next few days will likely be important for the intermediate-term outlook.
This week’s list is still heavy on growth ideas (though some are turnaround-type plays), but our Top Pick is Rowan Drilling (RDC), which is showing great strength by lifting out of a big bottoming area.
| Stock Name | Price | ||
|---|---|---|---|
| Aaron’s (AAN) | 74.35 | ||
| Atlassian (TEAM) | 182.16 | ||
| CF Industries (CF) | 45.23 | ||
| Dave & Buster’s (PLAY) | 57.01 | ||
| Omnicell (OMCL) | 81.03 | ||
| Pacira Biosiences (PCRX) | 54.85 | ||
| Paylocity (PCTY) | 97.34 | ||
| Rowan Drilling (RDC) | 15.52 | ||
| Wingstop (WING) | 121.52 | ||
| Yelp (YELP) | 41.30 |
Aaron’s (AAN)
Why the Strength
Aaron’s has a down-the-food-chain type of retail story—it’s one of the top lease-purchase providers in the U.S. owning the Aaron’s, Progressive Leasing and HELPcard brands and selling/leasing furniture, consumer electronics, home appliances and the like through around 1,700 stores. The target here is about 30% of the U.S. population (Aaron’s served 953,000 in Q2 alone) with lower credit scores (the company targets 10% to 12% bad debt expense) that makes up a market totaling $25 to $30 billion. And the stock is strong because business is strong and picking up steam—sales growth has accelerated during the past five quarters, earnings are expected to grow nicely this year (33%) and next (17%), though EBITDA growth is a bit slower than that. Progress on its e-commerce operations (just launched in 2015) is helping “direct-to-door” sales, too, but it appears the market is focusing on the fact that consumer confidence and expectations are at multi-decade highs, especially at the lower end of the income scale, which is likely to boost business going forward. It’s not changing the world, and the next economic hiccup will hurt perception of the stock, but right now the wind is at the company’s back.
Technical Analysis
AAN had an uneven rally to 41 in 2015 before plunging and taking a long time to repair the damage—it wasn’t until August last year that it popped to new highs. But that pop actually led to another long, tedious consolidation, this one not as deep (35 to 48). There was one final (and big) shakeout on earnings in late July, but since then it’s been straight up, including a big-volume pop late last week. Aim for dips of a couple of points to get started.
AAN Weekly Chart
AAN Daily Chart
Atlassian (TEAM)
Why the Strength
Atlassian is back in Top Ten because the stock is still acting well following a blastoff rally in late July. The backstory is that Atlassian is a software company that sells collaboration solutions for software developers, content management and project managers. The ticker symbol “TEAM” sums it up; Atlassian is all about helping teams work better together. It competes with both Microsoft and Slack in this space, though the recent divestment of two team communication assets (HipChat and Stride) to Slack, and a small equity investment in that company, suggests Atlassian and Slack are at least in the same dugout, if not wearing the same jerseys. Analysts loved the sale of those assets since Atlassian will now be able to go deeper and further into IT markets where it already has a strong brand that’s targeting 100 million individual users. The recent purchase of OpsGenie (IT incident response) for roughly $295 million is another strong step in that direction. Beyond the product strategy shift, the numbers are simply terrific. Revenue was up 41% last fiscal year (Q4 fiscal 2018 was reported in July) and is expected to be up around 32% this year. Plus, Atlassian is churning out chunky profit growth, with earnings expected to leap 57% (to $0.77) this year. We still think this is one of the more interesting mid-cap software stocks out there.
Technical Analysis
TEAM’s chart has looked good ever since it went public in late 2015, and the stock’s personality improved further after a big breakout move in October 2017. Since then, the stock’s pattern has been mostly higher highs and higher lows. TEAM rallied to 95 in the weeks following the Q4 fiscal 2018 release in late July. Over the past three weeks we’ve seen momentum ease as little, with a very reasonable pullback given the selloff in most growth stocks.
TEAM Weekly Chart
TEAM Daily Chart
CF Industries (CF)
Why the Strength
CF Industries is in the business of turning natural gas into nitrogen fertilizers, and after nine quarters of declining earnings or losses, the company has seen earnings boom 440% and 530% during the two most recent quarters. The company has 16 previous appearances in Top Ten Trader since its debut in 2007 because it’s one of the biggest producers of nitrogen-based fertilizers and other nitrogen compounds in the world, and because management has reacted smartly to changes in demand and the price of its feed stock. The company has nine manufacturing complexes and an extensive network of distribution centers and other logistics infrastructure that make it a reliable source for agricultural and industrial customers. The more immediate reason for the stock’s recent strength is the August 2 earnings report, which, in addition to a 16% jump in revenue and a 530% pop in EPS (partly thanks to the corporate tax cut) featured the company’s positive guidance for the rest of 2018. Nitrogen fertilizer prices are higher and the entire industry is in a cyclical recovery, boosted by strong corn planting plans. Some are even saying the boom in marijuana output as Canada heads toward nationwide legalization is boosting demand. Management declared a 30 cent per share dividend at the time of the report and is expected to continue to “return excess cash to shareholders.” CF Industries is enjoying both short- and longer-term supporting trends, and looks like a lower-risk choice with a 2.3% annual dividend yield.
Technical Analysis
CF’s massive decline from 70 in July 2015 to 20 in August 2016 was painful, but the stock has made a great comeback, reaching 37 in January 2017 and 45 in March 2018 and powering ahead after substantial corrections following each high. The stock has been in a clear uptrend since it bottomed at 36 in April, with the August 2 gap up after earnings providing more fuel. The stock traded at 54 last week, and should be buyable anywhere under 53, with a stop just under 47.
CF Weekly Chart
CF Daily Chart
Dave & Buster’s (PLAY)
Why the Strength
Dave & Buster’s has always had a neat retail story, with its combo dining/drinks/gaming locations (Eat, Drink, Play, Watch is its motto) providing some of the industry’s best per-location results ($11.6 million of revenue annually!) and store economics (50% payback of initial costs in year one). The stock had a nice (though choppy) run through last June, then hit potholes as earnings slowed, margins fell and same-store sales dipped sharply (4.9% in the quarter ending May). There are still some lingering worries (same-store sales fell 2.4% in the most recent quarter), but the stock has turned strong for a couple of reasons. First, the latest results were terrific—revenue growth of 14% was the fastest in a year, earnings crushed expectations, store growth was reaffirmed (13%-plus this year) and management hiked earnings estimates (which rose about a dime per share both this year and next after the report). Second, the top brass became more generous with shareholders, initiating a decent dividend (about a 1% annual yield) and buying back shares when they were down (the share count dipped 6% year-on-year in Q2). Just as important, the steadying of business trends is allowing investors to focus on the long-term potential of 240 locations in North America, vs. 117 today. This solid longer-term story looks to be back on track.
Technical Analysis
PLAY’s correction from last June (above 73) to this May (38) was a doozy, but it immediately snapped right back to 56 in just four weeks, which was the first sign that the stock’s character had improved. From there it built a solid launching pad through August before the recent quarterly report and shareholder-friendly news brought in the buyers. The path of least resistance is up, but try to buy on dips.
PLAY Weekly Chart
PLAY Daily Chart
Omnicell (OMCL)
Why the Strength
Omnicell is a medical equipment stock that’s focused on the automated delivery of medications and surgical supplies. Once a medication is received at a client’s healthcare facility, Omnicell’s systems store, package, bar code, order, issue and charge it. Its biggest services are medication dispensing, bedside automation, pharmacy storage and retrieval and physician order management, but the company is delving into other niche markets like automated IV solutions as well. The big picture trend behind the stock is that the strategic importance of pharmacies is growing within the health care system due to industry consolidation and the rapid rise in the cost of medications (pharmacy is the fastest-growing area of spend). One way to simultaneously improve care and control costs is to automate medication management. With customer retention pegged near 100%, growth in the business is being driven by upgrades of the existing installed base, competitive wins, and acquisitions. Those dynamics can make revenue growth a little lumpy, but the business appears strong and health care stocks are one of the stronger areas of the market. Omnicell should deliver 10% revenue growth (to $784 million) and 50% EPS growth (to $2.00) this year, with more on the way in 2019.
Technical Analysis
OMCL did well in 2017 but gave back a good portion of the year’s gain during a sharp retreat in January and February of this year. Shares found firm ground at 40 and hung out in the 42 to 45 range for most of the spring, before jumping back above 50 in June. The big breakout came in late July after Q2 2018 results were reported. Shares blasted off and rose to multi-year highs above 55, then steady buying pushed OMCL above 72 earlier this month. Shares have consolidated so far this month—you can nibble here or (preferably) on dips.
OMCL Weekly Chart
OMCL Daily Chart
Pacira Biosiences (PCRX)
Why the Strength
Pacira Pharmaceuticals’ strength has both a long-term source and a shorter-term source. The longer-term factor is the success of its EXPAREL treatment for the treatment of post-operative pain. EXPAREL uses Pacira’s proprietary DepoFoam delivery system to release nerve-blocking pain relief for weeks after a surgical procedure. The shorter-term factor is the opioid crisis, which is making practitioners increasingly wary of prescribing opioid pain medication and speeding the adoption of EXPAREL, which is also substantially cheaper than opioids. 99% of patients get opioids after surgery, with an average prescription of 85 pills, and sadly almost three million of those patients will become addicted. The company’s partnership with Johnson & Johnson is a huge help and is pushing EXPAREL’s adoption into spine and sports medicine applications, including hip fracture procedures; these factors led management to increase its full-year guidance for EXPAREL sales from $305 million to $323 million. With five additional Phase 4 trials studying expanded uses on tap in 2018, the catalysts for increased adoption of EXPAREL look strong. For a company with a single tentpole product, Pacira Pharmaceuticals looks like a strong choice.
Technical Analysis
PCRX fell from a high of 122 in February 2015 to a triple-bottom low in the low 30s in late 2016, October 2017 and a proper basing structure from February through June 2018. The stock soared from 30 in June to 48 in August and, with a digestion period in August and early September, popped above 50 on September 19. There may be some lingering overhead resistance in the 50s, but it was likely worn out by the basing earlier this year. PCRX looks like a strong pharmaceutical in the early stages of a news-based comeback. You can buy right here or (preferably) on weakness.
PCRX Weekly Chart
PCRX Daily Chart
Paylocity (PCTY)
Why the Strength
Paylocity is new to Top Ten and is a smaller player in the Human Capital Management (HCM) space. Its lineup of cloud-based solutions check all the usual boxes, including Payroll, HR, Benefits Administration, Talent Management and Time and Labor Tracking. Many names have done well in this space such as both Ultimate Software (ULTI) and Paycom (PAYC), and Paylocity is essentially a smaller version (market cap is around $4.3 billion). Paylocity focuses on the middle to smaller end of the market, and recent investments in sales reps will target companies with fewer than 50 employees, and in some cases fewer than 20 employees. The company’s mobile-first delivery model and cloud-based solutions are a good fit for this target market as smaller businesses are beginning to realize the benefits of simple and elegant subscription services to manage payroll and HR. It’s not a revolutionary story as HCM businesses are more about supporting the growth of large numbers of clients, and less about major change. But consistency pays well. Shares of Paylocity are on the rise because revenue from its 16,700 customers was up 26% to $378 million in fiscal 2018 (ended June 30th), 98% of which was recurring, and EPS jumped by 19% to $0.80. Momentum should carry into this fiscal year too as analysts project 20% revenue growth and 83% EPS growth.
Technical Analysis
PCTY was a nothing burger for most of the past couple of years, with no net progress from late 2015 through early 2017. But that changed this spring, when the stock hit new highs in March and, with plenty of volatility, began marching ahead. And the action has really picked up since the start of August, with PCTY surging from the mid 60s to the mid 80s before finally seeing some selling in recent days. You can start a position here or on dips.
PCTY Weekly Chart
PCTY Daily Chart
Rowan Drilling (RDC)
Why the Strength
Offshore oil drillers were the worst hit area during the energy bear market a couple of years ago, and they never really joined the current bull market. But many have built long bottoms and are showing some real signs of accumulation, including Rowan. The company is exclusively focused on offshore drilling, with 27 ships (23 harsh weather and high-specification jack-ups, four drillships), and company-wise, it has a lot going for it, including a joint venture with Saudi Aramco, which is the largest global user of jack-ups—Rowan has already leased some bareboat charters to Aramco, and is now pushing some of its ships into the joint venture. In 2019 and 2020, the firm expects a total of $170 million of EBITDA from the deal, and long-term it expects the deal to support 20 newbuilds, all on longer-term deals! The conservative balance sheet (cash on hand can pay all debt maturities through 2023!) is also a plus. But the stock is strong today because investors are anticipating a pickup in offshore drilling demand as supply has dried up in recent years, prices have come down (increasing demand) and oil prices remain firm. The numbers in the table below are a mess, but loss estimates have been shrinking and Q2’s EPS of -$0.60 was 34 cents better than expected. If an upturn in the industry arrives, Rowan should do very well.
Technical Analysis
RDC plunged from 45 to a new low of 9 last August, but since then the action looks proper. There was a rally to 17 in January and some nice base-building action after that—the initial pullback-and-recovery was too sharp, but the retreat from May through mid-August was more controlled, and now the buying pressures are really picking up, with three straight gains on big, accelerating volume. Starting small here or on minor weakness sounds good to us.
RDC Weekly Chart
RDC Daily Chart
Wingstop (WING)
Why the Strength
Wingstop has been one of the more unheralded retail/restaurant winners during the past year, as more big investors (386 owned shares at the end of up June, up from 313 a year ago) think it has the potential to get much bigger over time. The story can’t be any simpler—the firm serves (you guessed it) wings made three ways with around a dozen seasoning choices, along with the usual fare (fries, drinks) you’d expect from a wing joint. The valuation here isn’t for the faint of heart (81 times trailing earnings!), but the stock remains strong because management is thinking big—the firm ended Q2 with 1,188 locations (1,066 in the U.S.), up 12.5% from a year ago, with excellent economics (make back about half the initial investment in two years, better than nearly all restaurants) and management has a vision of being one of the top 10 global restaurant brands with many thousands of locations over time (including more than 1,000 potentially just in the dozen international markets it’s currently in). As for results, Wingstop has some of the best same-store sales growth in the entire restaurant sector (actually the best growth when looking at the last five years combined; last quarter was north of 4%) and has numerous initiatives just starting to take root (digital sales, national advertising campaigns, delivery). It’s a great cookie-cutter story.
Technical Analysis
WING originally broke out in November 2017, so it’s not in the first inning of its overall run. But it continues to show few signs of distribution—after a run to 56 in May, the stock consolidated tightly (48 to 56) for three months before Q2 earnings kicked off a new run that went as far as 71 before seeing some weakness this month. If you want in, look for dips of another point or two and use a stop just below 60.
WING Weekly Chart
WING Daily Chart
Yelp (YELP)
Why the Strength
For customers, Yelp is an online platform that helps them locate local businesses and read reviews from previous customers. For merchants, Yelp is a place to advertise, post menus and other materials and interact with customers on social media. There are tons of local businesses in the U.S., and Yelp has paying advertising accounts with 194,000 of them, one-third more than a year ago (the fastest growth rate in two years) and 31,000 more than at the start of the year. The company has made many changes to its business plan, including scrapping the requirement for an initial contract commitment for advertisers; this change has attracted many new ad clients, whose revenue will increase over time. The new system brought in ad revenue of over $75 million in Q2, up 30% from Q2 2017. The company booked a 33% increase in earnings in the quarter on a 12% bump in revenue and bought back $32 million of its shares. The company’s partnership with GrubHub accelerated food-ordering growth into the mid-30% range and the number of diners seated via Yelp Reservations and Nowait increased by 113% from a year ago. Analysts see revenue up by just 13% this year (due mostly to the switch from the up-front revenue of advertising contracts) and up 17% next, with earnings expected to rise more than 70% in 2019.
Technical Analysis
YELP was a monster in 2013, but dipped from its high at 102 in 2014 to 15 in February 2016. The stock recovered strongly, but traded mostly flat with a double top at 48 in December 2017 and May 2018. So the stock’s blastoff to 51 on 10 times its average volume on August 9 represents an eye opener. YELP has corrected back to 44 and rallied to 52 since that earnings leap, so there’s plenty of volatility to deal with. If you like the story, you should be able to sharp shoot a buy a point or two below 50, using a loss stop below 45.
YELP Weekly Chart
YELP 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.
