Indexes vs. Growth Stocks
Current Market Outlook
The major indexes continue to show improvement, putting together their second straight week and, for some, rising to their highest levels since late July; our own intermediate-term trend model, in fact, is close to turning positive! That’s a good thing, no doubt, but we don’t (usually) buy the indexes—we buy leading stocks. And the evidence on that front is actually worsening: Many leading growth titles have actually been flashing abnormal intermediate-term action, especially in the software and cybersecurity areas, and we advise taking action when need be. (We have a number of sells on page 12.) That said, many recently strong names, especially turnarounds and some more cyclical-oriented stocks, are acting just fine. All told, it’s a very mixed environment with lots of crosscurrents, so the goal is to ditch stocks that are acting abnormally, and on the buy side, being picky, looking for stocks showing recent power that are near decent entry points.
This week’s list reflects what we’re seeing in the market, with some fresher growth-oriented names as well as some turnarounds with big projected growth. Our Top Pick is ASML Inc. (ASML), which looks to be leading a group upmove in the chip equipment space.
| Stock Name | Price | ||
|---|---|---|---|
| Ambarella (AMBA) | 52.79 | ||
| ASML Holding (ASML) | 350.01 | ||
| DocuSign (DOCU) | 107.98 | ||
| Fastly (FSLY) | 39.31 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Medicines Company (MDCO) | 56.98 | ||
| Novocure (NVCR) | 0.00 | ||
| RH Inc. (RH) | 252.93 | ||
| Sanderson Farms (SAFM) | 149.54 | ||
| Western Digital Corporation (WDC) | 0.00 |
Ambarella (AMBA)
Why the Strength
Ambarella is a small-cap semiconductor company that specializes in system-on-a-chip solutions for cameras in auto, security, surveillance and wearables markets. It’s had plenty of ups and downs (mostly down since 2015) because it was tied to GoPro (GPRO), which accounted for a large portion of legacy sales. But Ambarella is transitioning from a video processing story to an embryonic AI and computer vision story, which is another game altogether. Applications abound in the automotive (20% of revenue), security (65% of revenue) and consumer markets, all of which management sees growing right now. Shares are doing well because the company just beat Q2 fiscal 2020 earnings expectations and gave plenty of reasons for investors to be bullish on the future. Revenue may be forecasted to decline 4% this year, but that should be a trough as shipments of the newest chips are now on their way to automotive markets, and trade disruptions could actually have a positive impact on the company’s legacy business. Growth isn’t likely to go bananas right away due to long design win cycles, but revenues are expected to rise in 13% in the current quarter and the long-term opportunities for computer vision across autonomous driving, driver assistance, drones and surveillance is huge. Analysts see earnings rising 26% next year, though the way these things go, Ambarella’s massive beat in Q2 hints that estimates are going to head meaningfully higher going forward.
Technical Analysis
AMBA bottomed near 30 late last year and had a nice accelerated advance to 52 in April 2019. There was a sharp correction after that, but net-net, the stock built a solid-looking consolidation into late August when earnings changed everything—AMBA gapped up 18% on the report and has continued to soar on massive volume ever since. After such a big move, some weakness is likely, but we’re not expecting a major retreat.
AMBA Weekly Chart
AMBA Daily Chart
ASML Holding (ASML)
Why the Strength
ASML Inc. has had a couple of false starts in recent months, but the bullish fundamental story seems to be winning out. The backstory here is that ASML makes lithography systems for fabricating integrated circuits—more specifically, to imprint microscopic circuitry onto wafers. It helps customers (logic and memory chip makers) with installation, customization and training. Logic spending is being driven by the move to 7nm wafers now and will continue to be driven by successive moves to 5nm and 3nm in the future. ASML’s next-generation extreme ultraviolet (EUV) lithography systems can help customers progress through these advancements and they seem to be stacking up. As with all chip equipment makers, the company’s business is cyclical, but it’s likely that 2019 will be a multi-year low point, with sales growth reaccelerating to 10% next year (up from just 2% this year) and with earnings expected to soar 34% to a new all-time high. The stock is doing so well right now because results, and commentary on the Q2 earnings call, backed up this reaccelerating viewpoint—orders are flowing in again (the broader semi market has been weak, but ASML reported orders up 45%!), which is seen by analysts as telegraphing a strong 2020. Importantly, management talked about strength in DRAM-related EUV orders, which represent the next wave of growth for ASML’s solutions, with likely correlation in stronger services revenue to boot. In short, the stock is strong as big investors anticipate ASML’s next leg of growth. We like it.
Technical Analysis
ASML broke out near 112 in 2017, ran to 216 early last year and then fell back to 145 at the market bottom. It got going with everything else after that, though it’s been choppy since the start of May, with two multi-week pullbacks. But as the market has improved of late, ASML has come alive, popping to new all-time highs last week on solid volume. We’re OK buying some on dips of a few points.
ASML Weekly Chart
ASML Daily Chart
DocuSign (DOCU)
Why the Strength
DocuSign has always had a great story, and after a very well received quarterly report last week, it’s back in pole position as a potential leader. The firm is the pioneer and leader in e-signatures, a simple but powerful solution for businesses to save time and money when agreeing to any kind of transaction imaginable (sales orders, registrations, policy changes, offer letters, incident reporting, licensing, you name it). There is competition from the likes of Adobe and others, but the market is estimated at $25 billion thanks to its major benefits to users (50% of uses are completed in just 15 minutes!), and DocuSign’s platform (which is integrated into many leading software offerings like Salesforce, Oracle and Workday) is best-in-class. And the company is moving into the broader “contract lifecycle management” business, too, with products for pre- and post-agreement (such as document preparation, etc.). As we wrote above, it’s a great story, and the company continues to execute very well—revenue growth is both rapid and consistent (95% comes from subscriptions, with an average remaining contract length of 19 months), and Q2’s billings growth (up 47%) was well ahead of estimates, prompting management to meaningfully hike its estimates for the rest of 2019. We think DocuSign has the makings of a company that can grow 20% to 40% for many years to come.
Technical Analysis
DOCU came public in April of last year, had a good first few months, then plunged with the market late last year and recovered decently into March. But then came some bad times; shares stair-stepped lower during the next few months as investors fretted about competition. However, after hitting 43 in early August, DOCU held support for a few weeks, and last Friday came to life after earnings. It’s still got overhead to chew through, so start small and try to get in on dips.
DOCU Weekly Chart
DOCU Daily Chart
Fastly (FSLY)
Why the Strength
Fastly is a recently public outfit that’s aiming to be one of the next big things in cloud networking. The idea centers around a simple idea: Consumers are demanding ever-faster online experiences, whether that’s getting up-to-the-second election results (New York Times), ordering tickets as soon as they’re available (Ticketmaster), streaming music or video (Spotify and others) and many other examples. But “old” (15 to 20 years) content delivery platforms and the like can’t keep up with today’s demands. Enter Fastly’s 45 terabit network that’s located on the “edge” of the internet (closest to the end user), providing clients the ability to offer their customers faster and more reliable digital experiences. In a nutshell, Fastly sounds like it has the latest, greatest mousetrap in the content delivery industry, and that’s led many big clients (like those mentioned above) to sign up. At the end of June, the firm had 262 enterprise customers (up 38% from a year ago; these big fish make up about 86% of revenue), while its same-customer revenue surged 32%. Moreover, the company’s revenues are generally usage-based, so as it lands more enterprises and as traffic grows, so too should Fastly’s business. The bottom line is drenched in red, but analysts see revenues up 30%-plus both this year and next.
Technical Analysis
FSLY came public in early May but basically chopped around for the first couple of months of its life, including a gap down on earnings in August (exacerbated by the market). But then the buyers went bananas, with the stock ripping from 14 to as high as 35 in just three weeks, and on massive volume! Of course, with that upside volatility comes downside potholes, and today was definitely one of them. But FSLY isn’t broken and should have support in the low/mid 20s. If you’re aggressive, you can nibble here.
FSLY Weekly Chart
FSLY Daily Chart
Lululemon Athletica (LULU)
Why the Strength
Although its IPO debuted during the recession in 2007, Lululemon, the maker of technical, high quality, and premium-priced athletic apparel, came out strong. Since then, it has faced major challenges, including its “see-through” pants snafu in 2013 and customer-protested price hikes in 2015. But despite those hurdles—as well as analysts often touting the shares as overvalued and the continuing death knell forecasts for bricks-and-mortar retail—Lululemon continues to prove the naysayers wrong. The stock is strong today because the company’s trounced estimates last week, with revenues up 22% and earnings up 35%. The sharp rise in same-store-sales (the key indicator of retail health), the unexpected spike in men’s apparel sales, and the 30% growth in its direct-to-consumer channel were all highlights that drove the beat. Its gross margins are healthy, and the company continues to open stores, boasting some 400 right now, including new-experience formats such as Lululemon’s new flagship store in Chicago which features workout classes and a juice bar, or its Mall of America (the largest mall in the U.S.) store, which offers meditation rooms, locker rooms, showers, and health food. And its new alliance with Barry’s Bootcamp for a line of high-intensity workout clothes has promise. But bigger picture, investors are excited about the newer product lines (women’s commuter wear, men’s athletic wear, self-care products) that are being well received, which will likely add years to Lululemon’s growth story.
Technical Analysis
LULU built a big base from October of last year through March of this year before breaking out on earnings. The progress since then, though, has been tedious, with multi-week pullbacks in May and again in August, both bringing the stock below its 50-day line, but last week’s earnings report gapped the stock out of its base. Today’s decline wasn’t pretty, but wasn’t totally out of character given what’s going on with growth stocks. We’re fine nabbing some shares on this or further weakness.
LULU Weekly Chart
LULU Daily Chart
Medicines Company (MDCO)
Why the Strength
Medicines Company is a speculative, development-stage biotech outfit that’s been losing money for years and, in recent quarters, hasn’t even brought in a dime of revenue. Yet the stock has a market cap of $3.7 billion, and there’s a good reason for that. The company uses a Nobel Prize-winning architecture called RNA interference (RNAi), which when successful instructs the body to stop building disease-causing proteins, allowing treatments to be highly specific (targeting a specific protein) and very long lasting. The excitement surrounding Medicines Company revolves around the firm’s RNAi treatment for bad (LDL) cholesterol, which is one of the leading causes of cardiovascular disease. Indeed, the stock is strong today after some jaw-dropping clinical results that were released earlier this month—the treatment, which is delivered via a 300 mg dose just twice per year (!), showed a sustained 50%-ish drop in LDL cholesterol levels starting just three months after treatment and staying at those levels for the entirety of the study (18-plus months so far)! Throw in solid safety data (not much different than placebo) and the potential looks huge—management claims that 80% of high-risk patients don’t reach recommended LDL guidelines, so the ease of use (twice yearly) and successful results could make this a favored treatment. Medicines plans on releasing some follow-up data later this quarter and likely apply for approval in Q4. As we wrote above, it’s speculative, but if all goes well, Medicines Company could have a blockbuster asset on its hands in the quarters to come.
Technical Analysis
MDCO has been a nothing burger for many years, mostly chopping sideways in a wide range with some big moves up and down based on data releases. However, the recent move looks different—first, the stock enjoyed a very persistent advance for months after its December 2018 low, which is a rarity for this name. And after a pullback in early August, MDCO has exploded higher on massive volume over the past couple of weeks. It’s going to be news driven, but if you’re game, you can nibble on pullbacks of a couple of points.
MDCO Weekly Chart
MDCO Daily Chart
Novocure (NVCR)
Why the Strength
Novocure has been one of the leading glamour stocks in the market, and after a big run, has pulled back toward what could be an area of support. The company’s claim to fame is its Optune System, which looks like a revolutionary way to treat certain types of cancer—it uses electrical fields to attack cancer cells non-invasively by disrupting cell division and growth. It’s even portable (weighs 2.7 pounds), so patients have as little disruption to their normal lives as possible. Optune has been approved for use in concert with chemo for glioblastoma, a type of brain tumor, and just in May for mesothelioma, which is often linked to asbestos, representing the first approved treatment for that condition in 15 years. Given it all, it’s no surprise that more and more patients are using it—at the end of June, 2,726 were using Optune (1,846 in the U.S.), up 26% from a year before, which drove a 41% gain in revenue and the firm’s first-ever positive quarter of operating income. Further growth is very likely in the quarters to come (analysts see the top line rising 35% in Q3 and 33% in 2020, with profits coming next year, too), and the firm has a ton of irons in the fire, with Phase III trials underway for Optune’s use in battling four more cancers, with varying data readouts on the way in 2020 and 2021—all told, the size of the addressable market would grow many-fold if results are good. It’s a great story.
Technical Analysis
NVCR was cut in half late last year, stormed all the way back to its highs in February, and then built a cooler, calmer consolidation in March, April and May. The breakout above 57 wasn’t explosive, but it didn’t take long for the buyers to show up—NVCR advanced persistently all the way to 99 early last month! Now the stock has retreated for three weeks, dipping just below its rising 50-day line. We’re not opposed to nibbling here, but we’d keep a relatively tight stop in place should the growth stock selling seen in the market continue.
NVCR Weekly Chart
NVCR Daily Chart
RH Inc. (RH)
Why the Strength
Formerly known as Restoration Hardware, RH serves the luxury lifestyle market, offering home furnishings that feature design, quality and value in North American retail galleries, source books and online showcases. Management here isn’t shy about thinking big, and its goal is for the firm to create “the most innovative new retail experience in the world.” Management is transforming the company’s retail platform—which currently showcases just 10% of their product line—with a new multi-tier strategy that includes new prototype galleries in the majority of their markets, expansion into additional U.S. markets, and a more capital-efficient real estate development model vs. the traditional lease model. The company expects this new approach to double retail sales and more than double earnings in each of its markets, longer-term. Of course, those are goals—in terms of results, things are still solid, with high single-digit revenue growth in recent quarters, but surging earnings growth thanks to inventory and cost controls and (importantly) a huge amount of shares buybacks. Possibly just as important, the company has stated that it’s not seeing much in the way of adverse effects from the Chinese tariffs; management stated last week that the newest round of tariffs will be offset by vendor price reductions and minor price increases, stating that “revenue growth and margin expansion remain strong.” More will be revealed tomorrow evening (September 10), when the firm will release quarterly results—analysts see sales up 9% and earnings of $2.70 per share.
Technical Analysis
RH is a trader’s dream—both bulls and bears—moving 50% or more during a six-month period at least 12 times since its IPO in 2012! However, what’s encouraging recently is that, after bottoming at 84 in May, not only has RH surged back toward all-time highs, but it showed solid power (it’s up 13 of the past 14 weeks) and, in August, traded relatively tightly in the 135 to 140 area. You could nibble here, though we’d prefer to see if the stock reacts well to earnings.
RH Weekly Chart
RH Daily Chart
Sanderson Farms (SAFM)
Why the Strength
Sanderson Farms is the third largest poultry producer in the U.S. An oversupply of chicken in 2018 depressed poultry prices, causing Sanderson Farms’ revenue to slip and profits to plummet. That situation has decidedly turned around with revenue expected to trend higher both this year and next, and EPS to rise to a whopping $9.25 in fiscal 2020. The reason stems from African Swine Fever (ASF), which is having a significant effect on global protein and soybean commodity markets. This rampant and deadly disease, which currently has no cure, is expected to destroy over 300 million hogs in China through year-end, representing one-fourth of the world’s hog population. That devastation will limit pork supplies, of course, which will have consumers in China and neighboring countries likely looking for other sources of meat protein. Chicken is expected to fill some of that void for several years to come, while ASF eventually runs its course and the hog industry slowly repopulates. The increase in demand for chicken should raise chicken prices, which will fall right to Sanderson Farms’ bottom line. Even better, there’s even more gross margin expansion in store for the company because soybean prices, a key feedstock for pigs and chickens, have been depressed due to a variety of factors. Obviously, Sanderson isn’t changing the world, but these special situations (especially the ASF mess) look like longer-term positives that should boost the company’s profitability in a big way.
Technical Analysis
SAFM bottomed out in the mid 90s for many months last year, then joined the market rally in 2019, pushing to 154 by the end of April. The correction after that wasn’t fun, but it was reasonable, finding support near its 40-week line in mid July. After some futzing around, SAFM has begun coming to life, surging to new recovery highs last week before pulling back today. If you want in, you can start a position here with a stop in the upper 130s.
SAFM Weekly Chart
SAFM Daily Chart
Western Digital Corporation (WDC)
Why the Strength
Western Digital is a global manufacturer of data storage devices, flash-based, embedded and wireless hard disk drives (HDDs) and solid state drives (SSDs) for desktop and notebook personal computers, mobile devices, security surveillance systems, gaming consoles and set top boxes. Its branded products are sold under the HGST, SanDisk, and WD brands to original equipment manufacturers, distributors, resellers, cloud infrastructure players, and retailers. As you can see in the table below, the firm has been through the wringer due to fading demand and selling prices, but as we’re seeing with many cyclical-type stocks these days, big investors are looking ahead and expecting much better things; analysts expect that the slump in memory chip prices is nearing an end, and forecast higher prices in the next few years. Driven by the rise in artificial intelligence and machine learning, the proliferation of the cloud, mobility, the Internet of Things, and connectivity, as well as the increasing penetration of smart devices, memory supply is being reduced, which bodes well for rising demand and prices. And Western Digital is on the forefront of the industry—in fact, the company recently introduced its highly-anticipated 18TB and 20TB hard disk drives (or HDDs). That’s some major memory! Western Digital is expected to report earnings on October 24, and investors are expecting some grudging improvement in results ahead of what should be a big rebound in earnings ($6.68 estimates, up from $2.93 this year) next year.
Technical Analysis
WDC imploded from 101 in March of last year to 33 last December, and retested that low (falling to 35) in June of this year. But since that time, the stock’s character has changed—WDC quickly pushed to multi-month highs above 55 in July and then consolidated sideways for a few weeks while the market got hit. And after testing its 50-day line, shares have ripped to new highs. We think the path of least resistance is up, so we’re fine buying here or on weakness.
WDC Weekly Chart
WDC 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.
