Back from the Beach
Current Market Outlook
After what was basically a straight-up move for the major indexes and many leading stocks during the past three weeks (including a few names that got out of trend on the upside), big investors came back from the beach today and took some profits. And short-term, further retrenchment is possible, so don’t be surprised to see a few potholes or rotation show up. But bigger picture, the trends of the indexes are pointed up, leading stocks are acting well and we’re pleased to see buying pressures broadening (more new highs) and selling pressure fading (relatively few new lows). It’s still a good idea to pick your spots and take a partial profit or two on the way up, but we remain bullish and see the odds favoring higher prices in the weeks ahead.
This week’s list has a wide mix of stocks and sectors, reflecting the broadening of the market’s advance. Our Top Pick is Semtech (SMTC), a smaller chip maker with a pretty chart and excellent growth.
| Stock Name | Price | ||
|---|---|---|---|
| Allison Transmission (ALSN) | 51.79 | ||
| Ciena (CIEN) | 44.25 | ||
| DSW Inc. (DSW) | 31.82 | ||
| Exact Sciences (EXAS) | 116.91 | ||
| HCA Healthcare (HCA) | 137.60 | ||
| iRobot (IRBT) | 103.17 | ||
| NVIDIA Corporation (NVDA) | 242.42 | ||
| Semtech (SMTC) | 51.09 | ||
| Veeva Systems (VEEV) | 180.23 | ||
| Wayfair (W) | 167.03 |
Allison Transmission (ALSN)
Why the Strength
Allison Transmission isn’t a well known name, but it’s a major player in the commercial auto industry—the company is the largest manufacturing of fully automatic transmissions for medium- and heavy-duty commercial vehicles (it estimates it has a 60% market share in that market) and a big player in hybrid systems for city buses, too, along with services and support for all its products. While the entire auto sector has lagged this year as investors fretted about auto tariffs (even this past week, potential auto tariffs on Canadian imports were bandied about), Allison has been doing just fine as it’s leveraged more to the trucking sector, which is red hot—one research piece said new orders for heavy-duty trucks are on pace to reach a 14-year high in 2018! As you can see in the table below, the company’s sales and earnings have kited nicely higher in recent quarters, and Q2’s results obliterated estimates, causing analysts to hike estimates in a big way (now $4.43 per share expected this year, up from $3.93 per share before the results). Of course, there is some worry that things will slow down in 2019, but big investors are focused on the here and now—fast growth, a cheap valuation (11 times this year’s earnings), a decent dividend (1.2% annual yield), huge free cash flow (25% of revenue during the past year, or about $4.10 per share) and a nice share buyback program (share count down 6.3% in the past year). It’s a cheap stock and a strong business.
Technical Analysis
ALSN rallied from a low of 21 in early 2016 to a high of 38 in February 2017. But, while it nosed out to some minor new highs after that, it fell back earlier this spring. The result: No net progress from February 2017 through July of this year. But ALSN’s gap on earnings on July 31 and push higher since then looks like a change in character, with the stock moving to all-time highs. If you’re game, dips to the 25-day line would be tempting, or you can buy around here.
ALSN Weekly Chart
ALSN Daily Chart
Ciena (CIEN)
Why the Strength
Ciena’s networking hardware and software has always been central to telecom and cable service providers’ operations, but slow revenue growth (7% in 2015, 6% in 2016 and 8% in 2017) has kept the company’s stock from making much of a mark. (Ciena has been featured in Top Ten eight times over the years, but the most recent was in June 2015.) But the company’s quarterly report on August 30 was a different matter. Revenue growth cracked double digits with a 12% jump and earnings soared by 37%. While U.S. sales constituted 57% of total revenue, management cited good results from the Asia-Pacific region and Europe as the major contributors to the estimate-beating performance and gave optimistic guidance about future results. Another thing helping the firm is its diversification away from the big telcos as customers—37% of Q3 revenue came from non-telecom firms, with so-called webscale (networking for massive cloud operators) demand going through the roof. The company also bought back 1.4 million shares of its stock during the quarter and reported free cash flow of $70 million. Networking stocks have been lagging for a while, but Ciena and some peers are beginning to perk up. With demand high, the future looks bright for Ciena.
Technical Analysis
Until last Thursday, CIEN had been range bound for seven years (!), with resistance in the high 20s and support in a rising range that hit 19 in late 2017. (There’s been plenty of movement over the years, including a run from 14 in October 2014 to 26.5 in July 2015, but no longer-term trend.) The stock’s jump from 27.5 on August 29 to 32 on August 31 put the stock at its highest price since May 2008. This breakout, as well as the strong guidance from management, bodes well for a sustained uptrend. CIEN looks buyable around here or (preferably) on dips, with a stop around 27.
CIEN Weekly Chart
CIEN Daily Chart
DSW Inc. (DSW)
Why the Strength
DSW Inc. is all about shoes, selling a big portfolio of shoes via a few different value-oriented brands including Shoe Company, Designer Shoe Warehouse, DSW Kids and Town Shoes, as well as selling through franchised international locations and through affiliates. And, really, the company has been sleepy for a few years—revenues have advanced 3% to 5% each of the past five years, while earnings have slipped a little bit, leading to a rough few years for the stock. But management has straightened the ship by launching a new rewards program, investing more in digital marketing, containing inventory and revamping DSW’s merchandise, and those efforts are paying off in a big way. In Q2, comparable store sales rose 10% (that metric’s strongest showing since 2011), with overall revenue showing a sharp acceleration (to 16%) and earnings (up 66%) crushing estimates. DSW is also expecting good things from its recent Canadian acquisition, which should be accretive this year and more so going forward. It’s not a great growth company, per se, but the stock is strong because Wall Street was caught off guard—DSW trades at a reasonable valuation (19 times estimates) and sports a solid 3.1% dividend yield, which, combined with Q2’s acceleration, has big investors putting money to work.
Technical Analysis
DSW was in the market’s doghouse for a while, falling from 48 in 2013 all the way to 15 in the middle of last year. It finally entered a mild uptrend in April of this year, rising to 28 in July before chopping sideways for a few weeks. Then came the earnings report, which caused a huge move for a relatively sleepy stock like DSW—shares catapulted higher by 20% on nearly nine times average volume, and it’s held those gains in the days since. Dips of a point or two look buyable, with a stop in the upper 20s.
DSW Weekly Chart
DSW Daily Chart
Exact Sciences (EXAS)
Why the Strength
Colorectal cancer is the fourth most common cancer in the U.S., resulting in more than 50,000 deaths per year, some of which can be avoided by effective early screening. In fact, nine out of ten people survive if the cancer is detected in stage 1 or 2, but only one out of ten survives if the cancer is detected in stage 4. The main reason for non-detection is non-compliance with screening protocols—because colonoscopies are inconvenient and uncomfortable. And that’s where Exact Sciences comes in. The company has the only FDA-approved non-invasive stool screening system that uses molecular diagnostics to effectively identify colorectal cancer at any stage. Basically, you get a package from the company, add your own stool sample, mail it back and wait for the results. The company is not yet profitable, but it has been growing fast (168% revenue growth in 2017), and that fast growth is certain to continue now that Pfizer is on board! On August 22, the company announced a collaboration with Pfizer (running through 2021) that will have Pfizer’s massive sales force promoting Exact Sciences’ Cologuard to both physicians and health systems, and also extending and deepening the Cologuard marketing campaign. Beyond that, Exact Health has a pipeline full of similar cancer-detection tests, aiming at breast, lung, liver, pancreatic and esophageal cancers. The potential is big!
Technical Analysis
EXAS has been in an uptrend since early 2016, but the chart has not been smooth; there have been substantial corrections as well as sharp advances. And that’s what we saw last on August 22, when the Pfizer news sparked buying that sent the stock gapping up from 50 to 65. Since then the stock has climbed even higher, with shares briefly pausing near 75 before leaping again today. Patient investors should wait for a pullback.
EXAS Weekly Chart
EXAS Daily Chart
HCA Healthcare (HCA)
Why the Strength
HCA Healthcare is a giant in the for-profit hospital game. The company’s 250,000 employees, including 38,000 physicians and 87,000 nurses, see more than 28 million patients per year at the company’s 178 hospitals, 119 surgery centers in 20 U.S. states and the U.K. The company isn’t a fast grower—revenue was up just 5% in both 2016 and 2017—but management is working to control costs, which has led to earnings growth of 34% in Q1 and 31% in Q2. Analysts see EPS growing by 35% this year before slowing to 8% growth in 2019. The company announced on August 31 that it will acquire all the assets of Mission Health, including seven facilities totaling nearly 1,000 beds across western North Carolina, for $1.5 billion. HCA Healthcare also has an active research program that has produced many innovations and improvements in care and hospital safety. The company’s Q2 earnings report on July 25 keyed a spike in the company’s stock, with increasing patient admissions (up 2.8% on a same-facility basis, the 17th straight quarter of same facility growth), a lower tax rate and $470 million in stock buybacks during the quarter making a nice package. Management still has $910 million in additional stock buyback authorization. There’s no big secret to HCA Healthcare’s success, just good execution, with a 1.4% annual dividend yield sweetening the deal.
Technical Analysis
HCA came out of a 29-month consolidation in late 2017, running from 75 in November to 106 in January 2018. Then came a six-month consolidation that ended when the stock vaulted from 108 on July 24 to 118 on July 25, beginning a rally that sent HCA to 132 last Thursday. And the Mission Health acquisition news of Friday tacked on another new high to 134. With a fairly tame 17 P/E ratio, HCA and its steady growth (and sizable stock buyback war chest) looks like a lower-risk candidate.
HCA Weekly Chart
HCA Daily Chart
iRobot (IRBT)
Why the Strength
While iRobot has used its MIT pedigree to create robots that explored the pyramids, the sea floor and outer space, its investment value is based on its dominance of its consumer-oriented robot business, with its Roomba robot vacuum cleaner (RVC) leading the charge. The company also sells the Braava automatic floor mopping robot, the Scooba floor washing robot, the Ava video collaboration robot and the Mirra pool cleaning robot—all told, over the last 25 years, the company has sold more than 20 million robots. Sales growth stalled to 7% in 2016, but rebounded to 34% in 2017, with the first two quarters of 2018 featuring 29% and 24% growth, respectively. The first two quarters have also enjoyed earnings growth of 27% in Q1 and 208% in Q2, which is the immediate cause for iRobot’s appearance in today’s Cabot Top Ten Trader. The company is thriving for a couple of reasons. First, innovations like Wi-Fi connections for its Roomba vacuums are increasing product attractiveness. Second, the company is gaining traction internationally, including a move into the Chinese market in 2016, launching four new offices in Japan in 2017 and the purchase of its largest European distributor. Roomba was also a featured product on U.S. Amazon Prime Day, with all robots selling out. iRobot completed a $50 million stock buyback program during Q2 and got a favorable patent infringement ruling from the International Trade Commission, which recommended an exclusion order of certain RVCs. Analysts see earnings up 38% this year and another 28% next as robots grab more share of the huge vacuum sector.
Technical Analysis
IRBT started a great run in January 2016, soaring from 35 to 110 in July 2017. That marked a meaningful top, though, with shares correcting to a double bottom in February and April 2018 before a well-received Q2 earnings report kicked off a strong rally that peaked at 119 early last week. IRBT has scrubbed off a few points, but is still fairly extended from its 25-day moving average (now around 96). We advise entering on weakness and using a loose stop.
IRBT Weekly Chart
IRBT Daily Chart
NVIDIA Corporation (NVDA)
Why the Strength
Nvidia needs no introduction—it’s been one of the market’s major mega-cap growth leaders of the past couple of years, with its chips going into many of the fastest-growing and cutting-edge industries out there, including data centers, high-end gaming, visualization and self-driving cars. And the company continues to push forward; its new family of gaming processors (using its Turing architecture) promise speeds up to 50% faster and real-time ray tracing, which has been a Holy Grail of sorts for the graphics sector. (Some analysts think pent-up demand for these Turing chips can lead to upside surprises in second half results.) The worry that’s going around is a slowdown in growth, as some growth drivers (like cryptocurrency mining) fade to basically zero; revenue growth is expected to slow markedly in the coming quarters. But big investors aren’t buying that, focusing on the strong core markets (data center revenue was up 83% in Q2; gaming revenue up 52%, visualization up 20% and likely to accelerate with Turing demand) as the stock (following a sharp post-earnings shakeout) has pushed to new highs. It’s not early in the story, of course, but Nvidia remains a leader.
Technical Analysis
NVDA hit 249 in January, and while it did hit higher highs in June, shares fell back again during the summer and, net-net, were still sitting in the mid 240s on the day after the firm reported earnings in mid August. Interestingly, the stock flashed a lot of tight trading during the summer, and after the post-earnings shakeout, rallied straight back to new highs on six straight days of very good volume. If you don’t own any, we’re OK buying around here or on dips.
NVDA Weekly Chart
NVDA Daily Chart
Semtech (SMTC)
Why the Strength
Chip stocks have been laggards since last November, but we’re beginning to see signs of a group turnaround, and we’re encouraged to see two chip stocks (Nvidia is the other) appear in this week’s issue. Semtech makes analog and mixed-signal chips and offers a nice mix of products selling to core markets (steady but not much growth) and emerging product lines (addressing data center, mobile and Internet of Things markets) that are driving sales, earnings and margins higher. One differentiator is the firm’s LoRa technology, which is a long range, low power wireless platform that’s becoming the de facto standard for Internet of Things networks around the world; a ton of big players are backers and Semtech expects dozens of countries will have LoRa-based networks in place by year-end. The stock is strong today because business is good—Q2 earnings easily topped estimates and guidance called for a nice pickup in growth going forward—and because management is sounding some longer-term bullish notes, thinking double-digit revenue growth and huge free cash flow (around 30% of revenue!) is likely in the years ahead as growth in its end markets boosts demand. Of course, with chip firms, you can never take long-term outlooks as a sure thing, but investors are thinking Semtech’s sales and margins are just starting an acceleration phase.
Technical Analysis
SMTC is thinly traded (around $25 million per day), but has a great-looking chart. After rallying to 41 last July, the stock then corrected and consolidated for months before finally getting going in May of this year. But that move didn’t last long, resulting in a tighter, more proper consolidation from mid June through late last month. And then last week’s earnings report brought in the buyers, with SMTC blasting to new highs on nearly nine times average volume. You can start a position here or (preferably) on dips.
SMTC Weekly Chart
SMTC Daily Chart
Veeva Systems (VEEV)
Why the Strength
Most big companies need help with customer relationship management (CRM), planning, regulatory compliance, R&D and sales and marketing. But Veeva Systems is prospering by offering those services in cloud-based software that is specifically tailored to the needs of the life sciences industry. Veeva’s services include data warehousing, a clinical suite to facilitate clinical trials, market-specific sales and marketing help, all deliverable to all kinds of devices. The company’s more than 650 customers are served by offices in North America, Europe, Asia and Latin America. Veeva made its most recent appearance in Top Ten in March, following a great earnings report in February. And this appearance is also due to a strong earnings report, this one on August 23. The report featured 25% revenue growth and an impressive 63% jump in earnings per share. The EPS jump is in line with analysts’ estimates of 57% EPS growth in fiscal 2019 (which ends next January). The report’s 29.3% after tax profit margin is also the highest ever for Veeva Systems. The quarter also featured a top 50 biopharmaceutical win for the Veeva Vault eTMF and a first top 20 pharmaceutical contract for Veeva Vault EDC. Investors also liked management’s continued plans (and early success) to expand its target audience beyond the life sciences universe, giving a big potential upside to its future sales.
Technical Analysis
VEEV pulled out of a long flat stretch in the middle of 2016, running from 20 to 68 by the middle of 2017. Another consolidation period lasted until February 2018, when the stock jumped to 78 after good earnings news. And after climbing to 90 on August 23, the stock cracked the 100 barrier in one day, with follow-on buying pushing it to near 105 in recent trading. The stock’s 25-day moving average is back at 89, so a stretch of sideways trading or a little pullback wouldn’t be surprising. As usual with such stocks, aim to buy on weakness.
VEEV Weekly Chart
VEEV Daily Chart
Wayfair (W)
Why the Strength
Wayfair has seemingly always been a controversial stock, with a large short interest (currently 9.2 million shares, or around 17% of the float) that thinks the firm is overvalued and will never turn profitable. But big investors (443 funds own shares, including a bunch of high-quality operations) are focused more on the firm’s outstanding revenue growth (which has actually accelerated in recent quarters) and the long-term potential as home furnishing sales move online—Wayfair sees this online market doubling during the next five year and doubling again in the five years after that! (While 34% of consumer electronics and 28% of apparel are bought online, just 12% of home furnishings are.) Wayfair is grabbing a big chunk of that growth thanks to its best-in-class website (very visual, can search with photos, with room planning ideas, personalization and idea boards) that helps it sell a variety of its own brands (Wayfair, Joss & Main, AllModern, Birch Lane and a ton of smaller home brands) that target the mid- to upper-end of the industry. The company is taking the Amazon approach to growth, investing in its systems, distribution and logistics, expanding its offerings (including a new design service offering for customers) and expanding into Germany, Britain and Canada. Wall Street approves, as EBITDA and free cash flow aren’t far from breakeven and key sub-metrics (number of active customers up 34% in Q2; repeat customers make up 66% of all orders) look great. It’s a big idea.
Technical Analysis
Wayfair stormed out of a 21-month base in May 2017 and has made good progress since, albeit with a couple of deep corrections (84 to 55, and 100 to 61) along the way. The action since May 2018, though, is what’s most bullish, with a very persistent advance into mid July, a successful test of the 50-day line before earnings, and now a renewed push to new highs on good (not great) volume. We’re OK grabbing some shares on normal weakness.
W Weekly Chart
W 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.
