Shorter-Term Neutral, Longer-Term Bullish
Current Market Outlook
The action of the past couple of days indicates that the market’s recent pullback likely isn’t through yet—while the Nasdaq hit new highs last week, no other index did, and that divergence (and negativity surrounding Deutsche Bank) brought out more sellers. In the short-term, then, the trend is mainly neutral, as most indexes haven’t made much progress during the past two months and are gyrating around their 50-day lines. Longer-term, though, we remain optimistic: Growth stocks and indexes are generally outperforming, the broad market is healthy and investor skepticism remains elevated (all good things). We’re going to leave our Market Monitor at level 7, meaning you should hold your strong stocks but also hold some cash on the sideline until the buyers retake control.
This week’s list has a good collection of stocks, mostly on the growth side. Our Top Pick, though, is a special situation—Tech Data (TECD) just announced a transformative acquisition that catapulted the stock to new highs. We think it’s buyable around here.
| Stock Name | Price | ||
|---|---|---|---|
| Adobe Inc. (ADBE) | 315.23 | ||
| CoLucid Pharmaceuticals Inc (CLCD) | 0.00 | ||
| Eagle Pharmaceuticals Inc. (EGRX) | 0.00 | ||
| Etsy (ETSY) | 112.97 | ||
| Match (MTCH) | 0.00 | ||
| Penske Automotive Group (PAG) | 0.00 | ||
| Penumbra Inc. (PEN) | 173.25 | ||
| TECD (TECD) | 0.00 | ||
| Twilio (TWLO) | 183.39 | ||
| ZELTIQ Aesthetics Inc (ZLTQ) | 0.00 |
Adobe Inc. (ADBE)
Why the Strength
Adobe has retaken its place among the market’s well-traded growth stock leaders thanks to a better-than-expected quarterly report last week. The big story here is two-fold—first, the company’s move to a cloud-based business model (lower-priced monthly subscriptions, constantly updated software), and second, the firm’s software is at or near the top of the industry for content creation (makes up about two-thirds of revenue) and digital marketing (about one-third). All of this has led to steadily increasing sales, earnings and subscriptions to the firm’s various offerings—in the second quarter, the firm’s sales and (especially) earnings topped expectations, thanks to both creative content (up 39% from the prior year) and a surprising reacceleration of digital marketing revenues (up 30%). Moreover, the firm’s annual recurring revenue from its creative content subscriptions rose to $3.26 billion (up 8.6% from the prior quarter), and cash flow surged to $518 million in the quarter, allowing for a healthy pace of share buybacks. From here, the potential remains huge as digital content creation (including anyone from a corporate marketing professional to a hobbyist) explodes and demand for online marketing services grows—analysts see earnings rising another 30% in 2017 and 25% in 2018. It’s a good story.
Technical Analysis
ADBE hadn’t been doing anything “wrong” in recent months, but it wasn’t really a leader, either—after hitting 96 late last year, the stock couldn’t get going in a big way this year, hitting resistance in the 98 to 102 area for months while its relative performance (RP) line went sideways. But last week’s solid reaction to earnings (ADBE hit new price and RP peaks) is a good sign that the buyers are back. We’re OK with a purchase around here and a stop just below 100.
ADBE Weekly Chart
ADBE Daily Chart
CoLucid Pharmaceuticals Inc (CLCD)
Why the Strength
CoLucid is serious about waging war on migraine headaches—so serious that it has named the three legs of its Phase 3 FDA clinical trial Samurai, Spartan and Gladiator. CoLucid is a clinical-stage biotech developing oral tablets for the treatment of acute migraines in adults. Earlier this month, the company reached both its primary and secondary endpoints in its Samurai study—the drug reduced migraine headaches in patients two hours after they took it, and also reduced secondary symptoms such as nausea and sensitivity to light and sound. Spartan and Gladiator are its two other ongoing Phase 3 trials, and last week at a conference in Glasgow, CoLucid provided an interim update on its Gladiator trial. To date, the long-term safety study has been tested on 1,155 of 2,580 patients, with a retention rate of 74%, which the company termed “very good for such a comprehensive long-term study.” So far, the drug has been “well tolerated,” according to Dr. Uwe Reuter, a doctor in charge of the study. It was just an interim update, but Wall Street reacted well to the news, especially coming on the heels of its successful Samurai study. CoLucid has no revenue or earnings yet, but the opportunity is immense should its drug be approved—migraines affect 12% of the U.S. population, and is the leading cause of disability among neurological disorders.
Technical Analysis
There’s not much mystery behind when and why CLCD started to take off. Since coming public at 8 in May 2015, the stock had never traded higher than 9, dipping as low as 3 last fall. Then the Samurai results were released in early September, and the stock gapped up to 23 overnight, and has continued to climb on volume that’s more than twice the previous average. It reached 34 last week on the interim Gladiator results, but has since dipped a bit. Like most clinical-stage biotechs, this is a speculative play, so wait for the stock to dip a bit more before opening a small position.
CLCD Weekly Chart
CLCD Daily Chart
Eagle Pharmaceuticals Inc. (EGRX)
Why the Strength
Eagle Pharmaceuticals is one of many biotech stocks enjoying a resurgence after the sector was slaughtered in late 2015–early 2016. But this is more than a sector play right now. The $1 billion market cap company specializes in injectable products to treat blood clots and hematologic cancers. It has five products on the market (and another four in the pipeline), the biggest of which—leukemia drug Bendeka—was launched in January and is sold through Teva (EGRX gets a 20% royalty). Shares have been rallying on news that Bendeka is selling like crazy, contributing $31.3 million of last quarter’s total revenue of $40.9 million. Overall, revenue was up 582% last quarter, and Bendeka already has 80% market share. The good news doesn’t end there. The FDA has also said that no additional testing is needed for Eagle’s malignant hyperthermia drug, Ryanodex, to be expanded for treatment of exertional heat stroke (EHS), a $400 million global market. If all goes well, sales for EHS could begin next year. Growth is off the charts; revenue exploded by 245% in 2015 and should grow by 180% in 2016. Analysts predict EPS will surge from $0.16 last year to $3.21 this year. If that scenario continues to play out (Q2 EPS was $0.80), there’s no reason the stock can’t see significantly higher prices going forward.
Technical Analysis
EGRX was crushed early in the year on a biotech selloff. FDA rejection of a new drug in March caused more pain (despite positive progress on other drugs). Shares formed a bottom around 35 in April–May, tested it in June, then clawed their way back above 60 in relatively steady fashion. Last week, the stock broke out of its 57–63 consolidation range on normal volume. Institutional buying is likely given the stock’s September inclusion in the S&P 600 Small Cap Index. This looks like a buyable breakout to us, and we’d be quick to pounce, with a tight stop around the 58 level.
EGRX Weekly Chart
EGRX Daily Chart
Etsy (ETSY)
Why the Strength
Etsy operates a global marketplace of handmade and other goods, and even though the firm just got its start a few years ago, the growth has been impressive—its marketplaces have more than 40 million unique items for sale (from 1.7 million sellers) and more than 26 million different buyers. There are three keys to company’s growth. First is the merchandise itself: Despite competition big and small (including Amazon), Etsy’s products are unique and difficult to find anywhere else. Second, Etsy’s web technology is second to none—its websites update more than 50 times per day, about one-third of the company’s employees are engineers, and it even has language translation for its websites and message boards so buyers from one country can shop at websites of another. (The CEO used to be the company’s CTO and worked in Silicon Valley for more than 10 years.) And third is scale—30% of Etsy’s revenues are international already, with the firm claiming to sell products in most countries around the world. Sales have been ramping up in the 40% range for the past few quarters, and while earnings are just in the red, cash flow is positive. Interestingly, two smart growth outfits (T.Rowe Price and Fidelity) own meaningful positions in the stock (12 million and four million shares, respectively). All told, it’s a solid growth story.
Technical Analysis
ETSY came public in April 2015, rallied as high as 35, and then crashed as low as 6 during the worst of the market’s retreat. The stock then effectively built a bottom for a few months before blasting off on earnings in early August. ETSY chopped sideways for the next few weeks before coming alive again last week—shares leapt to new highs on three straight days of heavy buying volume. You can buy some here or (preferably) on dips with a stop near the 50-day line.
ETSY Weekly Chart
ETSY Daily Chart
Match (MTCH)
Why the Strength
Tinder was already the fastest-growing mobile dating app; now it has partnered with one of the fastest-growing music apps. Last week, Tinder announced a partnership with Spotify, thus pairing two of the five highest-grossing apps in the world. The deal will allow users to add music to their profile pages—in essence, enabling Tinder users to choose a single track that tells their story and connect prospective daters based on music tastes. The new feature will debut in all 59 markets where Spotify is available. The Spotify deal keeps the momentum going for Match Group, which in addition to Tinder owns the dating sites Match.com, OkCupid and 42 other brands in more than 190 countries. The company beat consensus sales and earnings estimates in the second quarter, which was the second consecutive quarter it has grown its top and bottom lines by at least 20%. A new subscription option for Tinder, reductions in “App Store” fees and a big ramp-up in advertising have all contributed to Match Group’s growth. Perhaps most importantly, Match Group is the dominant player in an industry that 15% of Americans use, up from 11% just three years ago.
Technical Analysis
After a big run-up from 9 to 16 from February through July, MTCH seesawed back and forth for a couple of months, finding support in the upper 14s and topping out in the upper 16s. The Spotify announcement helped the stock break through that overhead resistance, pushing it above 17 for the first time ever. You can buy some around here or on minor weakness, with a stop down near the 50-day line.
MTCH Weekly Chart
MTCH Daily Chart
Penske Automotive Group (PAG)
Why the Strength
Penske Automotive Group calls itself an “international transportation services company.” In practice, that translates to a company with auto dealerships that sell at least 16 different brands, with luxury brands like BMW/Mini, Audi and Mercedes Benz leading in revenue production in the latest quarter. Penske is the second-largest new car dealership group in the world and gets just over half of its annual revenue from new car sales, with luxury brands supplying about three-quarters of that total. Founder Roger Penske, a former race car driver, has steadily expanded his company, buying new dealerships, moving into commercial vehicle sales, and taking over a network of commercial vehicles, engines and parts/services in Australia and New Zealand. Penske Automotive isn’t a fast grower—Q2 results on July 29 featured just 7% growth in both revenue and earnings. But the company has booked four years of double-digit revenue growth, is forecast to grow earnings by 6% this year and 8% in 2017, and pays a solid 2.3% dividend yield (which was just raised in August). For those who pay attention to insider transactions, Roger Penske bought 50,000 shares earlier this month, a move that was credited with giving the company’s stock a boost. Penske Automotive Group is a well-managed company with a steady track record.
Technical Analysis
PAG made a tremendous run after the Great Recession, but rolled over in the last quarter of 2015, falling from 54 in July to 29 at the market’s February 2016 bottom. The stock recovered quickly and spent three months in a range with support in the high 30s and resistance at 41 before the Brexit vote (the company does significant business in the U.K.) dropped it to 29 on July 5. Since then, PAG has been a rocket, getting fuel from a well-received quarterly report and news of insider buying to tag 50 on September 16. You can buy on this dip and use a stop in the mid-40s.
PAG Weekly Chart
PAG Daily Chart
Penumbra Inc. (PEN)
Why the Strength
Making its second appearance in today’s Top Ten, Penumbra is a California-based medical device maker that specializes in unclogging arteries and veins and plugging hemorrhagic strokes in the brain. Penumbra’s catheters can be inserted into the body (usually through a vein in the leg) and travel anywhere, including fingers and toes and (through a hole in the skull) the brain. The company’s highly proprietary devices can insert tiny coils into aneurisms, blocking further ballooning, selectively block blood flow to an area to deprive cancers of nutrition and vacuum up blood clots. The company’s revenue growth rate has been accelerating for three years, jumping from 21% in 2013 to 41% in 2014 and 48% in 2015. That trend continued in the first two quarters of 2016, with growth of 49% and 54%, respectively. One positive feature of the company’s Q2 report was a one cent positive earnings per share, when the consensus estimate was for a loss of seven cents. About 70% of the company’s revenue comes from the U.S., with Japan supplying about 10%. The outlook for global growth is positive. Although Penumbra’s stock has only been public since September 2015, it already has 200 institutional sponsors. This is a small company with big potential.
Technical Analysis
PEN came public about a year ago at 30, but has never traded below 35. The stock has tended to make strong runs, then consolidate for a month or so, which is what happened after the positive Q2 earnings report on August 9. PEN jumped from 67 to 77 on the news, then corrected slowly to its 50-day moving average (at 67) before taking off on a new rally that reached new high ground. This pullback looks like a good entry point, although the stock’s history suggests that with a little patience, you might be able to sharp-shoot PEN a point or two lower. Use a stop at the 50-day, now at 70.
PEN Weekly Chart
PEN Daily Chart
(TECD)
Why the Strength
Shares of technology distributor Tech Data rallied over 25% last week upon news it’s acquiring the Technology Solutions business from its (struggling) main competitor, Avnet. Tech Data is a hardware and software middleman handling logistics between manufacturers (including Apple, Cisco and Microsoft) and the IT resellers selling to end consumers. Cramer calls it an “IT supermarket.” Historically, it focused on computers and printing products, but more recently the company has increased sales of data center products (now 30% of total). By purchasing the data center and networking assets from Avnet, TECD significantly grows its presence in that increasingly important market, and gains access to 14 new countries, including several in Asia. The deal should boost revenue by roughly 35%, increase its high-margin data center mix to 45% of total sales, add to earnings and save around $100 million in annualized costs. In other words, the $2.6 billion acquisition looks highly opportunistic. Wall Street certainly thinks so as analysts have moved price targets significantly higher; many now think the stock is worth 100 to 105 (around 17% above Friday’s close). This is a transformative deal for the $3 billion market cap company, and carries some execution risk, as well as an estimated six-month timeline to close.
Technical Analysis
TECD has had an up and down year, trading in a range of 60 to 83 (prior to last week’s breakout). Shares traded in the 80–82.5 range heading into its August 25 quarterly report, but lackluster results sent it down below 70 by mid-September. But news of the AVT acquisition triggered a gigantic-volume gap up that (nearly nine times average volume) could carry it nicely higher over time. Look for a modest pullback and enter with a stop just below the 50-day line.
TECD Weekly Chart
TECD Daily Chart
Twilio (TWLO)
Why the Strength
Twilio remains one of the market’s strongest stocks for many reasons. First, having just come public in June, big investors are still trying to build positions, which takes time. Second, the firm is growing rapidly, with revenues ramping 70% last quarter and, while that may slow, 40%-plus growth seems likely for a long time to come. And third, Twilio’s story is gigantic—its communications platform allows companies large (like Uber, Airbnb, Zillow and EMC) and small (Cabot!) to easily send or route customized voice, video and text messages to employees, clients and consumers. Twilio already has nearly 31,000 active customers despite opening for business just three years ago, but we think that’s just the tip of the iceberg as more and more companies use messaging of one form or another to communicate with customers. And Twilio isn’t standing still, recently introducing new capabilities to boost its offerings in call monitoring, as well as a new plan for enterprises, hoping to snare more big fish as customers. Best of all, because Twilio’s business model is generally usage-based, its top line should mushroom as its offerings become a more integral part of firms’ communications plans. Of course, the valuation is huge (market cap is more than 20 times revenue!), but if Twilio’s hyper-growth continues, buyers should remain interested.
Technical Analysis
TWLO broke out from a brief IPO base in early-August, and it went bananas over a few days, lifting from 45 to 66. But that began a new consolidation, with the stock falling just below 50 before finding support. Encouragingly, the stock then hit a higher low during the market’s recent shakeout (around 53) and, last week, exploded higher on big volume. TWLO does have some resistance near 67, but we’re OK buying a small position here with a loose stop below the 25-day line.
TWLO Weekly Chart
TWLO Daily Chart
ZELTIQ Aesthetics Inc (ZLTQ)
Why the Strength
Zeltiq Aesthetics, which made its Top Ten debut last month, is in the business of getting rid of bulging waistlines and double chins. To accomplish this, the company’s CoolSculpting procedure freezes fat in targeted areas, killing fat cells that are then carted off and eliminated naturally by the body. Zeltiq promotes its procedures as “the only FDA-cleared, non-surgical fat-reduction treatment to eliminate stubborn fat.” Treatments are said to be painless, to produce no scars and to be safe for nerves and surrounding tissues. To judge by the company’s revenue growth, there is significant demand for CoolSculpting, as annual growth over the past three years has been 47% (2013), 56% (2014) and 46% (2015). The past couple of quarters have seen negative EPS, which is apparently the result of increased sales and marketing expenses (up 56% in the recent quarter). Estimates call for a loss of 13 cents per share this year, with the payoff expected in 2017, when earnings are expected to soar to 44 cents per share. One change to note from Zeltiq’s first appearance is that short interest in the company’s stock, which dipped from 23 days in short volume in July to six days in August, is now back up to 18 days.
Technical Analysis
ZLTQ was on a good run a year ago, rallying to all-time highs near 38 in August and September 2015. The January/February market meltdown dropped ZLTQ to 18, but the stock has been strong since then, including a nice recovery from a May speedbump. ZLTQ ran to new all-time highs at 41 on September 16, and has been consolidating in the 39–40 area since then. We think the stock is buyable right here, but with short interest spiking again, you should keep a close eye on it; a stop at 36 (just below the 50-day line) makes sense.
ZLTQ Weekly Chart
ZLTQ 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.
