Broad Market Pushes Higher
Current Market Outlook
Major indexes, including the S&P 500, Dow Industrials and Nasdaq Composite remain range bound, chopping sideways in very tight ranges during the past five to seven weeks. But the broad market is looking better and better—most small- and mid-cap indexes hit new highs last week, and we’ve seen some improved action among growth stocks. All told, we remain positive on the market and believe the path of least resistance remains up. Individual stocks have been a bit trickier, but many are acting well. We think it’s best to remain heavily invested.
This week’s list includes many smaller, rapidly growing companies, reinforcing the view that money is flowing toward growth ideas. Our Top Pick is Shopify (SHOP), which has enormous potential as e-commerce expands. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Wix.com (WIX) | 302.53 | ||
| Ubiquiti Networks (UBNT) | 170.11 | ||
| Shopify (SHOP) | 585.00 | ||
| Ingevity Corp. (NGVT) | 99.98 | ||
| Microsemi (MSCC) | 0.00 | ||
| LGI Homes (LGIH) | 86.04 | ||
| Green Plains Energy (GPRE) | 0.00 | ||
| Finisar (FNSR) | 0.00 | ||
| Exact Sciences (EXAS) | 116.91 | ||
| Autodesk (ADSK) | 229.00 |
Wix.com (WIX)
Why the Strength
Wix.com is in the same general sector as Shopify (also in this week’s issue), though its solution isn’t as broad and is targeted to websites. Wix, which is based in Israel, allows entrepreneurs and small businesses to build professional-looking websites with ease, using drag-and-drop functionality and a few hundred templates. Wix’s price actually starts out at zero, though that will include some Wix-related ads, but 2.1 million users have opted to pay for premium plans (up 41% from a year ago), which include more storage, bandwidth and a host of added features. (Prices are generally at $25 per month or less, so this is truly a mass market solution.) There is competition in the space, but Wix is definitely grabbing its share—revenue growth has come in between 37% and 43% in each of the past five quarters, and while earnings are in the red, free cash flow has been positive for a while now (more than $10 million in the second quarter, or well above 20 cents per share). From here, it’s just a matter of upselling current subscribers and continuing to attract new users, which doesn’t seem that big of a lift, especially with such a great recurring revenue stream. Analysts see revenues up 37% this year and 30% in 2017, both of which seem conservative to us. Interestingly, while the stock has just 124 mutual fund owners, the two biggest owners are T. Rowe Price and Fidelity, two smart growth houses. It’s a good story.
Technical Analysis
WIX is yet another growth stock that came public two or three years ago (November 2013), spent much of that time gyrating in a range, and is now lifting to all-time highs as the market improves. WIX has been on a huge run since its February bottom near 15, but it just hit new highs in July following a great quarterly report, and the stock has chugged higher since. After such a big move, we advise aiming to buy on dips with a stop near the 50-day line.
WIX Weekly Chart
WIX Daily Chart
Ubiquiti Networks (UBNT)
Why the Strength
Ubiquiti Networks has a portfolio of products that let internet service providers and enterprises build their own carrier-class infrastructure for fixed wireless broadband, wireless backhaul systems and routing. Translated into English, that means the Ubiquiti’s products can build comprehensive communication systems that include broadband internet, WiFi and local area networks. The company is still getting most of its revenue from its airMAX products, but is looking to its new UniFi lineup to drive revenue growth in the future. The company went through a rough patch in the second half of 2014 and the first half of 2015, when both revenue and earnings growth slowed, then shrank. But the last two quarters have featured revenue growth of 14% and earnings growth of 34% (Q1) and revenue up 28% and EPS up 38% (Q2). Ubiquiti’s products can put in an advanced network anywhere, and that is driving global growth—Europe, the Middle East and Africa provided 40% of revenue over the latest year. With internet service providers doing much of the selling, Ubiquiti’s after-tax profit margins have topped 30% for five straight quarters, and earnings are forecast to grow by 15% in fiscal 2017.
Technical Analysis
UBNT made one previous appearance in Top Ten in November 2013, but hit that flat patch in quarterly results soon after. From a high of 57 in March 2014, the stock retreated to 26 in January 2015, then returned to that level in January 2016 after a rally to 37 during 2015. The rally that began for UBNT after that January low has been dramatic, with a blastoff on February 8, a flat consolidation at 32 through April, then another big move in May leading to another consolidation before a rally in July and a gap up on earnings in August. With a current P/E of 22, UBNT isn’t especially extended, and we think you can buy on any dip toward 52, with a stop at 48.
UBNT Weekly Chart
UBNT Daily Chart
Shopify (SHOP)
Why the Strength
While giant companies like Amazon are experts at e-commerce, 99% of firms aren’t. Therein lies the massive opportunity for Shopify, which is a leading provider of solutions that help firms (especially small- and mid-sized firms) thrive online. The company’s cloud-based commerce platform allows its merchants to sell via a variety of avenues (online, brick-and-mortar, social, email, etc.) and helps handle payments (more than $1 billion of payments were processed by Shopify in the second quarter), provide financing, inventory and order management and a variety of other back-end functions. Importantly, Shopify has established key partnerships with Amazon (it’s the chosen replacement for Amazon’s web store business), Facebook, Twitter, Pinterest and even Uber (for select, rapid delivery). Plans start out at just $30 per month for the pioneering entrepreneur and run to $300 or more per month for enterprises; those subscriptions provide about half of revenue, the other half comes from merchant solutions (payments, merchandise sold, lending, etc.). All told, more than 300,000 merchants have signed up with Shopify, and growth has been outstanding—the company has seen revenues grow at least 90% in eight straight quarters, with gross merchandise volume up 106% (to $3.4 billion) in the second quarter. The only hitch here is the continued flow of red ink, but with growth remaining rapid, we think it’s just a matter of time before the bottom line surges higher. It’s a great story.
Technical Analysis
SHOP is very strong but looks to be relatively early in its overall advance. The stock built a 10-week base from April through June, then broke out nicely in early July on good volume. And then buyers really floored the accelerator—SHOP ended up rising 10 weeks in a row on huge, increasing volume before finally taking a small breather during the past two weeks. SHOP did have a good-sized share offering recently, which could put a damper on the shares, but long-term, the trend looks great. You could buy a position on dips, and use a stop in the mid-30s.
SHOP Weekly Chart
SHOP Daily Chart
Ingevity Corp. (NGVT)
Why the Strength
Ingevity is a specialty chemicals company that was spun off from its parent WestRock Company in May. Ingevity has a long history as a research and manufacturing subsidiary of paper and packaging companies, focusing on creating products from the carbon byproducts of pine pulp and paper processing. The company’s 1,500 employees turn out products that go into asphalt paving, oil exploration and production, agricultural chemicals and automobile components. One highly visible family of products is devoted to making asphalt pavement last longer. Another is focused on gasoline vapor emissions control. The company’s preparation for its IPO created a six quarter record of falling revenue and earnings, but estimates call for a 23% jump in earnings in 2017 and the company’s global operations should benefit when oil exploration picks up again. Ingevity’s August 4 earnings report featured handy outperformance of estimates (66 cents in EPS, vs. 51 cents consensus estimates) and gave the stock a nice boost. Such a big beat makes it likely the estimates for the quarters ahead are conservative.
Technical Analysis
NGVT came public on May 16 at 24.5 and the stock put in a scant eight-day post IPO base before starting a rally that hasn’t really stopped. There were a few weeks of consolidation at around 39 ahead of that August 4 earnings report. But after the report, investors gapped the stop up from 38 to 44. NGVT took a couple of weeks to digest that gain, but after tagging its 25-day moving average on August 22, the stock got moving again and is now trading near 45. NGVT looks buyable on any weakness, with a loose stop at its 50-day moving average, now around 40.
NGVT Weekly Chart
NGVT Daily Chart
Microsemi (MSCC)
Why the Strength
Microsemi is a California-based chip-maker whose portfolio of semiconductor technology is among the most comprehensive in the industry. Microsemi sets itself apart from most competitors by its specialization in high-performance and radiation-hardened integrated circuits, timing and synchronization devices and security technologies that include scalable anti-tamper products. Its principle markets are aerospace, communications, defense and security. Investors began to change their opinions on Microsemi in January, when the company merged with PMC-Sierra. PMC-Sierra is a Big Data company whose semiconductors and software are aimed at connecting, moving and storing Big Data. Investors also like the June announcement of Microsemi’s collaboration with Veracity Security Intelligence, a network security company. Microsemi is investing in Veracity and working with the company to develop enhanced security for Ethernet networks. Microsemi has been a steady grower, and estimates call for 11% growth this fiscal year (which ends in September) and 26% next year. With a reliable base in aerospace/defense, Microsemi’s move into network security and Big Data creates a powerful formula for growth.
Technical Analysis
MSCC made a big move in early 2015, but after March 2015 the stock traded in a range from 29 to 39 for almost 18 months before it finally broke out above 39 last month. MSCC ran to as high as 41 in August and has been consolidating around 40 for three weeks. MSCC sports an attractive P/E of 14 and with the rising 25-day moving average just about to arrive at the current price, the prospects for price appreciation are good. We think you can buy right here, with a stop at around 37.
MSCC Weekly Chart
MSCC Daily Chart
LGI Homes (LGIH)
Why the Strength
This builder of affordable single-family homes in high-growth markets closed more than 1,000 home sales last quarter for the first time in its history. It helped that the homebuilder, which has a presence in 10 U.S. states, opened 12 new developments in Colorado, Florida, the Carolinas, Arizona, Georgia and Washington, but growth in its existing Texas communities is what really drove sales—Texas alone accounted for 585 closings, or 52% of LGI’s total for the quarter. Things are looking up for the coming quarters too—the company has a backlog of 887 homes, up from 783 a year ago. With home prices rising (LGI saw a 3% bump in its average sales price in the second quarter) and the company expecting between 340 and 400 home sales per month for the rest of the year, LGI is forecasting 39% EPS growth on 34% sales growth, which would mark a fifth straight year of double- (or triple-) digit top- and bottom-line growth. There’s some risk with housing in general if rates rise quickly, but the odds of that appear low.
Technical Analysis
LGIH has been stair-stepping higher all year. After some market-related weakness in January and February, the stock kited from 19 to 29 in March and April. After a May shakeout, LGIH broke above 30 in June, and continued on to 38 with only a few minor speed bumps along the way. It gapped up from 35 to 38 in late August, so you may want to wait for the stock to dip another point or so before buying. Keep your stops around the 50-day moving line, which has acted as support since May.
LGIH Weekly Chart
LGIH Daily Chart
Green Plains Energy (GPRE)
Why the Strength
Green Plains Energy is a diversified commodity processer, but it’s best known as North America’s fourth-largest producer of ethanol, processing 12 million tons of corn annually. The stock is strong today because the demand environment for that product has improved markedly during the past few quarters. First of all, the plunge in gas prices is boosting demand here in the U.S.—more drivers are driving more miles in less fuel-efficient vehicles, which is in turn leading to more demand for gas and, hence, ethanol. (A new fuel standard called E15, calling for 15% ethanol and 85% gasoline, is gaining in popularity, and should also help demand.) And internationally, a combination of greater desire for less pollutants and a spike in sugar prices (which has hurt Brazil’s ethanol cost competitiveness) are positives. Moreover, Green Plains’ management is taking steps to expand, recently buying three ethanol plants (some were in Chapter 11) for a bit over $230 million in cash. Obviously, Green Plains is highly cyclical, as profit margins fluctuate wildly depending on the environment. But, looking ahead, there’s little doubt that earnings are set to improve in a big way after a tough couple of years—earnings crushed estimates last quarter, and analysts see the bottom line surging in 2017. We don’t see Green Plains as a long-term winner, but there’s no question the company has a lot of positive catalysts in the quarters ahead.
Technical Analysis
GPRE hasn’t made any net progress since it started trading in 2006, but it’s had many huge, multi-year swings. And it appears a major upmove could be starting now—after falling from 46 in 2014 to 12 in February of this year, GPRE has ridden its 50-day line higher in recent months (its latest shakeout was in early August), and recently reached its highest level in a year. If you want in, you can buy on minor weakness with a loss limit near 22.
GPRE Weekly Chart
GPRE Daily Chart
Finisar (FNSR)
Why the Strength
We’ve featured quite a few fiber optics companies in recent weeks, and Finisar is another leader in that space benefiting from the industry’s resurgence. Finisar makes transmitters, receivers, transceivers and transponders that connect LAN and WAN networks. It has a global presence, with sales in 37 countries, 35% of which come from China and Malaysia. The company has seen some solid growth of late, spurred by demand for its 40G and 100G transceivers for datacom applications. That was enough to offset weakness in the company’s telecommunications branch last quarter, resulting in flat sales but a 16% jump in earnings per share—Finisar’s best year-over-year EPS increase in two years. Both numbers outpaced analyst expectations, and the company’s expecting even bigger things going forward—it anticipates a 27% EPS bump in fiscal 2017. Finisar just completed the first quarter of its new fiscal year, and will report results this Thursday, September 8. Investors have been pouring into the stock ahead of earnings, which is an encouraging sign that business likely remains in great shape.
Technical Analysis
The first big move for FNSR came in March, when it gapped up from 14 to 17 overnight. It reached the mid-18s before retreating bit by bit over the next two months, settling at 15 in May. It made it back to 18 in June, twice re-testing overhead resistance before getting knocked back again. This time, however, FNSR found support in the high 16s and quickly bounced back. It’s been trending higher since then, gaining momentum in recent days as shares hit multi-month highs. Keep any position small ahead of earnings.
FNSR Weekly Chart
FNSR Daily Chart
Exact Sciences (EXAS)
Why the Strength
Exact Sciences got great news in June when the United States Preventive Services Task Force upgraded its colon cancer screening test. The biopharmaceutical company develops a DNA-based, non-invasive screen for colon cancer (dubbed Cologuard) that, prior to June, had been deemed a suitable “alternative” to other colon cancer screening options. Now the Preventive Services organization is fully convinced of the test’s merits, and has decided to put it on par with other colon cancer screens. And because it’s cheaper and less invasive (the test involves checking DNA samples in a patient’s stool), some analysts are convinced Cologuard could quickly become the No. 1 choice among colon cancer patients! Exact Sciences isn’t profitable thanks in large part to an aggressive marketing campaign for Cologuard, but sales are starting to soar—the company thinks it will do $90 million in sales this year, with that figure surging to $154 million in 2017. That kind of explosive sales growth—complete with a full endorsement of its bread-and-butter product from the U.S. government—is the kind of thing that makes investors swoon, and Wall Street has fully embraced EXAS since the favorable June ruling.
Technical Analysis
EXAS fell from grace in the second half of 2015, plummeting from a June high of 31 to as low as 4 this March. It was still only at 7 this June, but the upgrade of its screening test was a complete game-changer for the stock, sending shares soaring to 12 by the end of June. EXAS gapped up again in late July, jumping from 12 to 16 and marching as high as 21 before an orderly three-week pullback. This is a good place to nibble, with a stop near the 50-day line; the stock hasn’t fallen below it since its resurgence began in early June.
EXAS Weekly Chart
EXAS Daily Chart
Autodesk (ADSK)
Why the Strength
Autodesk is yet another company attracting Wall Street interest for making a move to the cloud. A pioneer and leader in the area of computer-aided design software applications used for things like 2D and 3D modeling, data management and digital media editing, Autodesk is building a cloud computing business that is becoming a much bigger revenue stream. Here’s Autodesk CEO Carl Bass commenting on the benefits of the switch (in a recent interview with Barron’s): “Increasingly, more and more will be delivered through a Web-based browser. Almost all of our products are connected in some way to true cloud-based services. … Simulations that used to run for three days on really powerful machines now come back in 30 minutes.” Bass expects his company’s new cloud products to not only attract new customers, but increase business among current ones who need a project completed faster than they have in the past. Towards that end, its new “as-needed” sales model replaces the company’s “perpetual licenses” model, which forced customers to sign long-term contracts. Similar to Adobe’s business transition, Autodesk’s new subscription model is expected to jumpstart sales growth and improve cash flows in the quarters ahead; the firm already has 2.82 million subscribers, and that’s rising 3% to 4% each quarter.
Technical Analysis
ADSK has been a volatile stock during the last couple of years, but has been trending upward since late June. That’s when the stock bounced off 50 support and climbed to 59 by the end of July. After a brief dip to 57, it got going again in August, reaching 63 before gapping up to 68 on strong second-quarter earnings late in the month. You can buy some around here with a stop near the 50-day moving average, which has acted as support for nearly two months.
ADSK Weekly Chart
ADSK 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.
