Thrashing Around
Current Market Outlook
The major indexes found some decent support last week, rallying back to the top of their ranges, but overall they’re still thrashing around in the same range they’ve occupied since early August, keeping the intermediate-term trend sideways-to-down. The one thing that did change late last week was a bout of rotation, with money flowing into the beaten-down areas (financials, transports, energy, etc.); it’s something to keep an eye on, but we can’t say it’s a new trend quite yet. All in all, the market is showing us a lot of movement, but little net progress—and thus, our overall advice hasn’t changed. We’re keeping our Market Monitor at a level 5, meaning you should be choosy and keep things small on the buy side, while holding some cash and honoring stops and loss limits with your weaker performers.
The good news, as it has been all year, is that there remain many stocks that looks ready to enjoy meaningful upmoves if the market can get its act together. Our Top Pick is New Oriental Education (EDU), a rare China-related stock that’s making new highs on good volume.
| Stock Name | Price | ||
|---|---|---|---|
| Burlington Stores (BURL) | 193.95 | ||
| Jacobs Engineering Group (JEC) | 89.83 | ||
| Meritage Homes (MTH) | 102.20 | ||
| Neurocrine Biosciences (NBIX) | 123.40 | ||
| New Oriental Education (EDU) | 113.97 | ||
| Take-Two Interactive (TTWO) | 123.32 | ||
| Tandem Diabetes (TNDM) | 74.77 | ||
| Trex Company (TREX) | 117.56 | ||
| Twitter (TWTR) | 40.37 | ||
| Wheaton Precious Metals (WPM) | 34.43 |
Burlington Stores (BURL)
Why the Strength
Burlington Stores is a U.S. off-price retailer of high-quality, branded apparel and consumer goods. It’s never had the sexiest story out there, but management has done a great job of executing, providing investors with solid and steady revenue growth, higher margins, new store openings/remodels and share repurchases (share count is down 2.2% over the past year). The stock is strong today because the company reported a great second quarter earnings and revenue beat last week, leading management to raise full-year earnings guidance. The firm’s revenue growth accelerated for the second-straight quarter, while same-store sales were up 3.8% even as same-store inventory dropped 7%, a very encouraging sign. Higher margins and share buybacks allowed earnings to jump 18%, while analysts were expecting no growth. And, while it’s not the fastest-growing outfit, Burlington is expanding—it’s planning on opening 50 net stores this year, compared to 691 that were open at the end of July. Like we wrote above, it’s not sexy or changing the world, but brand merchandise at reasonable prices is the sweet spot in today’s retail world, and Burlington continues to pull the right levers to attract customers—and investors. Analysts see earnings up at double-digit rates both this year and next, though we think those figures could prove light given the bullish consumer spending backdrop.
Technical Analysis
BURL had a nice advance from early 2016 through the summer of last year, but like so many stocks, it then went on to build a big consolidation, with a low of 136 earlier this year and a ceiling in the 180-185 range. The Q2 report and corresponding full-year outlook hike launched BURL out of that range, with the stock surging 18% to new all-time highs on heavy volume last Thursday. Given the still-iffy market environment, we advise aiming for dips if you want in.
BURL Weekly Chart
BURL Daily Chart
Jacobs Engineering Group (JEC)
Why the Strength
Jacobs is a first-class global engineering and construction firm that delivers design, engineering, construction and technical services to clients around the world. It’s not a secret that infrastructure in the U.S. is crumbling, whether it be roads, buildings, bridges or water supply lines. But these issues aren’t just occurring here—with the global trends of urbanization, water scarcity, climate change and digitization there are tons of projects around the world where Jacobs can lend a hand. A few recent examples of projects include supporting NASA’s Artemis Moon Program through flight tests, building water filtration plants and smart meter systems in Singapore and constructing the largest shipyard in the Arabian Gulf. Loads of projects like these, combined with a solid balance sheet, stock buybacks, wise acquisitions and divestments, all of which have produced better-than-expected results, are why the stock is doing well. Jacobs reported Q3 fiscal 2019 results on August 5 and revenue was up 8.2% (to $3.2 billion) while adjusted EPS of $1.40 beat by $0.16. Management also hiked its growth outlook and flagged a high project win rate, and an 8% increase in backlog, as evidence of the company’s ongoing success. While a sizeable divestment will crimp topline growth this year, big investors like the higher margin future (and solid projected earnings growth) of a more nimble Jacobs Engineering.
Technical Analysis
JEC has had some huge ups and downs during the past couple of years, usually coinciding with market weakness (71 to 54 in early 2018, then 80 down to 55 during the late-year 2018 plunge), but the buyers have been in control this year. The stock did get hit early in August, but its action has been impressive since, having etched slightly higher highs three times, including late last week, which is a good sign JEC wants higher. We’re OK buying on dips.
JEC Weekly Chart
JEC Daily Chart
Meritage Homes (MTH)
Why the Strength
We continue to see more and more building-related stocks perk up, partly thanks to the rotation seen in the market, partly due to the plunge in interest/mortgage rates and partly due to the fact most have been out of favor for a while. Meritage Home isn’t one of the very biggest homebuilders (it’s the seventh largest in the country), but it looks like one of the leaders should money continue to rotate toward the group. The company focuses on first-time, first move-up and move-down buyers in faster-growing U.S. states; that focus should allow it to benefit from a boom in household formation by millennials and as the Baby Boomers trade down in the years ahead. That said, besides the above factors, the stock is strong today because Meritage’s business was expected to continue shrinking in the quarters ahead—but the firm’s Q2 report blew away expectations and pointed toward growth down the road. While the headline figures were blah (sales down 1%, earnings flat), new orders grew 14% in dollar terms (and 22% in unit terms) and earnings beat expectations by nearly 30%. The result: Analysts hiked this year’s earnings forecast from $4.76 per share to $5.40, and 2020’s from $5.20 to $6.10! Usually, one massive beat like this precedes another, and with the macro factors lining up, it’s likely even these raised estimates will prove conservative. Throw in a very reasonable valuation (12 times this year’s earnings) and big investors haven’t been interested in letting go of any shares during the market’s recent rough patch. We think there’s solid potential here.
Technical Analysis
When we last wrote up MTH at the end of July, it had just gapped out of an 18-month base following the blowout Q2 report. Then the market suffered huge twists and turns during August, but this stock didn’t budge—MTH pulled back a maximum of five points (66 to 61) early in the month before nosing back toward its highs as its 25-day line has caught up. All told it looks like a solid five-week rest to us; you can nibble here or on dips.
MTH Weekly Chart
MTH Daily Chart
Neurocrine Biosciences (NBIX)
Why the Strength
Neurocrine Biosciences is a young biotech outfit that’s transitioned to commercial stage operations, with big growth expected in the years ahead. The company focuses on neurological-, psychiatric- and endocrine-related disorders, with its first product (dubbed Ingrezza) being the first FDA-approved treatment for Tardive Dyskinesia, which is a side effect (severe jerking movements of the face, torso and limbs) of certain antipsychotic medications. Tardive affects about 500,000 people in the U.S., and Neurocrine’s one-daily capsule is easily taken and tolerated, so it’s no surprise it’s been a hit—in Q2 alone, more than 31,000 patients were using the treatment, which has driven sales and earnings up at a rapid clip (see table below). Beyond Ingrezza, Neurocrine has partnered with AbbVie on a drug called elagolix, which has been approved for treatment for severe menstrual pain, and AbbVie has just submitted an FDA application for the drug to treat uterine fibroids (noncancerous growth of the uterus that, in some cases, can lead to infertility). And Neurocrine has also licensed a drug from another firm that lessens symptoms of Parkinson’s Disease; that drug is now in front of the FDA and there should be a decision by April of next year. In the meantime, though, it’s Ingrezza that pulling the cart, and that’s a very good thing—analysts see sales surging 69% this year and another 37% next, with the bottom line leaping to $3.52 per share next year, and at least one analyst thinks $6 per share of earnings is possible in 2021. It’s a solid growth story.
Technical Analysis
NBIX broke out in November 2017 around 64 and basically doubled by September of last year before round-tripping that move last last year! There wasn’t much of a rebound after that, with shares flopping around through April, but NBIX has been sneakily gaining steam since—the stock marched higher nine weeks in a row, reacted well to earnings and consolidated tightly just shy of the century mark. You can nibble here and add should the buyers remain in control.
NBIX Weekly Chart
NBIX Daily Chart
New Oriental Education (EDU)
Why the Strength
China may have done away with the single-child policy in 2015, but the cultural pressure around education hasn’t faded just because there are a few more kids running around diluting their parents’ attention spans. Families still spare no expense seeking every advantage for their children and, in all likelihood, will continue to do so for the foreseeable future. And this often means parents paying for private education. New Oriental is one of the major players in this economically-resilient industry, providing K-12 language training and test prep courses to over 36 million students through 87 schools and 1,233 education centers. The stock is doing well because revenue growth is consistently above 20% and should accelerate to 28% in this fiscal year (2020). New Oriental is no slouch in the profitability department either. EPS was up 16% to $2.58 last year and is expected to rise 32% this year. Analysts are bullish on the company’s prospects because enrollment jumped 34% in Q4 fiscal 2019 (reported on June 23). With the company adding new facilities in more cities (both new and existing markets) and building out new programs (both online and offline), including after school tutoring programs, we think big investors will stay at the table.
Technical Analysis
EDU was a monster stock from 2016 through 2017, then suffered a big correction in the 2018. Shares came back with a vengeance in January, however, and they were bumping up against 100 at the end of June. Shares gapped up to their all-time high near 110 after earnings came out in July and, despite the market’s weakness and trade war shenanigans, EDU calmly etched a five-week range and leapt to new highs last week on excellent volume. Today’s pullback looks normal given the market.
EDU Weekly Chart
EDU Daily Chart
Take-Two Interactive (TTWO)
Why the Strength
The video game industry posted sales of $131 billion last year, and forecasts from GlobalIData estimate the industry’s revenues will more than double to $300 billion by 2025. Of course, within that figure is lots of ups and downs for individual companies based on new game releases and the like, but those factors are playing in favor Take-Two Interactive right now. The company has developed many popular titles, such as Grand Theft Auto (110 million copies sold since the franchise was launched in 2013) and Red Dead Redemption 2 (25 million copies sold in less than a year!), though a big part of the story is about a shift in the business model—in the recent quarter, 58% of revenue came from so-called recurring consumer spending (virtual currencies, in-game purchases and any other revenue that comes after the initial game sale), and that figure was up a strong 31% from a year ago. As for earnings, the Q2 result walloped analysts’ forecasts, earning $0.41 per share compared to estimates of just $0.03, thanks to a 39% rise in sales, year-over-year. That figure was still down from a year ago, but the back half of the year looks like a barnburner—earnings are expected to soar seven-fold in Q3 and more than double in 2019 as a whole, and management sees a bright future, having hiked its full-year bookings guidance by $100 million, to $2.6 billion to $2.7 billion. The quarter-to-quarter numbers will always be lumpy, but Take-Two has a strong long-term industry trend at its back and some catalysts for the quarters to come.
Technical Analysis
TTWO has been mostly up and down for the past couple of years, with a low in February at 84 marking its lowest point since mid 2017. But the uptrend since then has been not just strong but very persistent, with the stock riding above its 25-day line for all but one day during the move. And that one-day dip represented a big pre-earnings shakeout in early August, after which the stock gapped up! We’re OK starting small here with a stop in the low 120s.
TTWO Weekly Chart
TTWO Daily Chart
Tandem Diabetes (TNDM)
Why the Strength
Diabetes-related stocks have been showing strength and resilience in the recent environment; Insulet (PODD) definitely looks like a leader, while Dexcom (DXCM) has perked up again. Tandem Diabetes was a glamour leader last year, and after a five-month rest, could be ready to join the party. The company has been posting jaw-dropping growth for a while now, thanks mainly to its t:slim X2 insulin pump, which looks like one of the best in the industry thanks to its design (28% to 38% smaller than other pumps; larger touchscreen; lighter; automatically updated), CGM system (it uses Dexcom, so no finger sticks are necessary) and unique technology—the X2 has a predictive low glucose system called basal-IQ, and is awaiting FDA approval for control-IQ, which would automatically adjust insulin delivery. (One big study showed the time users had proper insulin levels rose 11 percentage points with control-IQ; pumps with this technology should launch in Q4.) While there’s competition, the entire industry is growing, with 25,000-plus people who inject themselves switching over to pumps each year. As mentioned above, Tandem’s growth has been out of this world, and it now has 96,000 users in the U.S. and, following an international launch about a year ago, shipped 12,800 pumps in Q2 alone. Management has significantly hiked guidance, even saying that its five-year guidance provided a year ago now looks outdated. Tandem is a one-product company, which has some risks, but the X2 looks like a real game changer that should produce years of growth.
Technical Analysis
TNDM rose from the ashes last year, booming to 52 last September and, after a deep late-year correction, surging to 75 in March. But since then the stock has finally calmed down—shares have etched a five-plus-month consolidation, with support just above its long-term 40-week line showing up three weeks ago, leading to a quick spike back toward its highs before today’s shakeout. We’re OK starting a small position here and adding if the stock breaks out.
TNDM Weekly Chart
TNDM Daily Chart
Trex Company (TREX)
Why the Strength
The shorts are paying for their bets against this manufacturer of composite decking made out of scrap wood and plastic. Assuming that Trex’s fortunes aligned with the ups and downs of the housing market, these naysayers accumulated a 15% short position in the stock and got caught unawares when the company (despite sour Q2 results) guided for solid growth in the third quarter. The company has been doing well for a while despite the slow housing market, and perception is on the rise as mortgage rates plunge. Back to the higher Q3 guidance that accounted for the stock’s latest push, it includes rising demand for the company’s high, medium, and low levels of its environmentally-friendly composite decking, as well as the potential for grabbing lots more market share. Importantly, much of that market share increase will come from its greatest competition, wood decking—more than 80% of decking is currently made from wood, leaving a massive opportunity for Trex, who already owns more than 50% of the non-wood decking market. The company’s products are more expensive up front, but over its estimated 25-year lifetime, composites are more cost-efficient than wood and require very little maintenance. Analysts have raised their estimates for the company, now forecasting growth of 19% this quarter, and 20%-plus annually for the next few years. That’s keeping big investors interested, as the number of funds owning shares has increased eight quarters in a row; 552 now own shares, up from 401 a year ago.
Technical Analysis
TREX is another name that’s near the top of a long (year-long) consolidation, which offers great potential if the buyers stay at it. The stock peaked last September near 91, plunged to 51 a few weeks later and then kicked around for many months; it was still sitting at 57.5 in May. But the action has improved since then, highlighted by the positive reaction to earnings in July and resilience during the market’s wobbles. If you want in, this dip to the 25-day line looks like a good opportunity.
TREX Weekly Chart
TREX Daily Chart
Twitter (TWTR)
Why the Strength
Twitter is arguably the world’s leading platform for distributing short-form content in real-time. The open distribution platform for short bursts of text, images, and video clips is readily available (perhaps too much so) with just a few quick keystrokes or phone taps. It has become a widely adopted means of communication by some world leaders, including President Trump. We won’t say Twitter owes its recent success to Trump, but we would also be remiss not to note that the stock’s upward trajectory did occur soon after his inauguration in January 2017. Coincidence? You decide. Today, Twitter has over 320 million users, including loads of famous celebrities, influencers and lots of average folk, too. The stock’s performance is entirely due a growing user base and improving fundamentals. Second quarter results showed average daily monetized users were up to 139 million, roughly 3.6 million more than expected. Ad engagements were up 20% as well. That growth has been helping drive revenues higher, which have been expanding in the double digits going back to the end of 2017; revenue should be up around 16% both this year and next. Twitter is also firmly in the black, with EPS set to continue steadily higher during the next few years. After a few years in the doghouse, the company’s business trends are pointed solidly up.
Technical Analysis
TWTR peaked near 48 last June before suffering a swift and painful correction that pulled the stock down and kept it in the 26 to 35 range until April of this year. The stock has been performing much better since then, though there are plenty of dips and drops on a weekly basis. Shares reacted well to earnings in April, and after a May pull back, leapt to higher highs at 43.5 in July. The four-week rest since then looks good, especially compared to the wild market. If you’re game, you could start here with a stop in the upper 30s.
TWTR Weekly Chart
TWTR Daily Chart
Wheaton Precious Metals (WPM)
Why the Strength
We’ll have to see if the overall environment changes, but the combination of plunging interest rates, slowing economic growth, tariffs and general uncertainty remains a boon for precious metals, with gold and silver stocks remaining in steep uptrends. Wheaton is a major player in the streaming sector—whereas a royalty gives a firm a percentage of sales, streaming allows a company to buy output at a set, low price in exchange for pre-funding portions of a mine. (Wheaton’s per-ounce cash costs in Q2 was $420 for gold and $5.14 for silver.) All told, Wheaton has streaming agreements with 19 mines in operation, as well as another nine in development, and in recent times, business has been mixed—Q2 saw an 11% bump in gold output and a 19% drop in silver output (mostly due to one streaming agreement being terminated), with overall sales and earnings falling sharply (see table). But investors see the writing on the wall here: Wheaton’s sales prices in Q2 averaged $1,320 for gold (13% below current spot prices) and nearly $15 for silver (18% below), so as those catch-up to reality and output picks up steam (production should increase from 690,000 this year to an average of 750,000 during the next five years), the company’s bottom line should jump. (Even with the hard times, Wheaton cranked out a 23%-plus profit margin in Q2, showing the power of the business model.) Analysts see earnings up 10% this year before a 30%-plus gain in 2020, but that could prove conservative if gold and silver remain in bull markets. The company will be hosting an analyst day on September 25.
Technical Analysis
Like most of its peers, WPM changed character in late May, when it began a steep, persistent uptrend. Granted, there have been a couple of pullbacks along the way, but buyers have generally stepped up to the plate near the stock’s 25-day line. Interestingly, WPM consolidated mostly between 26 and 28 for about four weeks before lifting to 30 toward the end of last month on good volume. Try to get in on dips toward the 25-day line.
WPM Weekly Chart
WPM 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.
