Remain Defensive
Current Market Outlook
The day-to-day (and sometimes hour-by-hour) action remains very volatile, with headlines (both company-specific and economic) coming at investors quickly. But taking a step back, not much has changed—the intermediate-term trend is pointed down and the vast majority of leading stocks are in the same boat, with a good amount of damage on their charts that will likely take time to repair. That doesn’t mean you should stick your head in the sand; odds favor earnings season allowing some names to grab pole position for the next market uptrend. But right now, it’s best to remain defensive as we wait for the market to find some strong support and more stocks to build launching pads. Our Market Monitor remains at a level 4 today.
This week’s list includes a broad mix of stocks and sectors, including one very new IPO and a couple of special situations. Our Top Pick, though, is Ciena (CIEN), the mid-sized networking outfit that looks ready for a sustained upturn once the pressure comes off the market.
| Stock Name | Price | ||
|---|---|---|---|
| Ciena (CIEN) | 44.25 | ||
| Dine Brands (DIN) | 93.05 | ||
| Eli Lilly (LLY) | 117.78 | ||
| GasLog (GLOG) | 21.39 | ||
| Guardant Health (GH) | 88.34 | ||
| Intelsat (I) | 25.46 | ||
| Ollie’s Bargain Outlet (OLLI) | 103.94 | ||
| Spirit Airlines (SAVE) | 57.03 | ||
| Tabula Rasa Healthcare (TRHC) | 76.14 | ||
| United Continental Holdings (UAL) | 96.76 |
Ciena (CIEN)
Why the Strength
Ciena is a telecommunications networking company that’s benefitting from all the big technology trends, including 5G, cloud, data center and Internet of Things (IoT). As demand for bandwidth and low latency goes up, telecom and cable service providers turn to Ciena for solutions to build out their network infrastructure. Verizon and AT&T each make up more than 10% of revenue, and analysts are becoming more bullish because a new webscale customer surpassed the 10% threshold in the most recent quarter. The company’s international footprint is also growing, as evidenced by overseas growth in India (over 10% of sales) and Japan (potential to surpass 10% of sales within two years). Sales of optical networking equipment are notoriously lumpy, but Ciena has become more competitive with better products at a time when carriers are investing heavily in their networks. Revenue is projected to expand just single digits during the next year, but that could be conservative (last quarter’s 12% bump was the fastest in three years) and earnings are expected to accelerate nicely as fiscal 2019 (which starts November 1) gets underway (34% earnings gain is foreseen). Shares are trading at just 17 times that 2019 forecast, too. The bottom line is that Ciena is a smallish networking stock (market cap is $4.4 billion) that’s diversifying its product lineup, growing internationally and exploiting a technology advantage when industry investment is high.
Technical Analysis
CIEN has been up and down over the last couple of years with 28 acting as a zone of staunch resistance and 19 as solid support. After trying to surpass 28 three times early in 2018, the breakout finally came at the end of August when CIEN beat Q3 expectations and the stock surged as high as 32. It held above 30 through September, then retested the 28 level two weeks ago. CIEN has since moved back up to 30, suggesting the old ceiling is now the floor. We’re OK nibbling here, with a tight stop below 28.
CIEN Weekly Chart
CIEN Daily Chart
Dine Brands (DIN)
Why the Strength
Dine Brands Global operates two well-known restaurant brands—IHOP, with more than 1,700 locations and north of $3 billion of system-wide sales, and Applebees, with around 1,900 restaurants and a bit over $4 billion in sales. Every location is franchised, which keeps costs in check, and each brand leads in its respective dining category (family and casual dining, respectively). The numbers in the table below are a horror show (part of that is voluntary restaurant closings as underperforming franchisees are weeded out), but the company is hugely profitable (EBITDA margins of 45%!), is spinning off plenty of free cash flow (nearly $6 per share worth this year) and has a solid plan for investments in its two brands (including marketing and technology) and an attractive, steady long-term growth outlook. Between now and 2022, Dine Brands sees revenues growing at a low double-digit pace, with earnings advancing to at least $10 per share (nearly double this year’s expected tally) and free cash flow reaching a similar range. The dividend already yields a healthy 3.0%, and management is committed to share repurchases as opportunities arise. Long story short, Dine Brands isn’t a great growth story, but it’s a unique, shareholder-friendly situation that should play out for years to come.
Technical Analysis
After a long time out of favor, DIN began a new uptrend in August of last year and trended up steadily until February, when the company’s Investor Day (and longer-term outlook) caused the stock to pop as high as 78. Since then, it’s been very choppy, with four multi-week pullbacks, including the latest one in September and early October. But DIN has rebounded nicely since then, and should have decent support below here. Watch it, and if you want in, start small on weakness.
DIN Weekly Chart
DIN Daily Chart
Eli Lilly (LLY)
Why the Strength
Eli Lilly is an international pharmaceutical company with a market cap of $120 billion, a ton of marketed products and a development pipeline that includes 21 drug candidates in Phase I clinical trials, 16 in Phase II, 18 in Phase III and three in regulatory review for final approval. In 2017, the company released nine new products—Trulicity, Cyramza, Taltz, Basaglar, Jardiance, Lartruvo, Olumiant, Verzenio and Portrazza—that accounted for 20% of the company’s total revenue. Lilly also has a subsidiary, Elanco Animal Health, that it has developed for a decade that is being considered for sale, merger, IPO or retention. With a company this big, positive news won’t light the kind of fire under the stock price that you might expect from a development-stage company. But Lilly’s massive pipeline and roster of successful new drugs has made the company a solid performer. And news of positive results from a Phase II trial for a novel diabetes treatment did give the stock a substantial boost. Lilly’s revenue growth is always in the single digits, but that digit has been 9% in three of the last four quarters, with earnings growth of 35% or more in the last two. Lilly’s stock also pays a dividend that yields 2% and will be payable on December 10 to holders of record on November 14. The company’s Q3 report is expected on November 6, with analysts looking for revenue of just over $6 billion and earnings of $1.35 per share.
Technical Analysis
LLY broke out of a three-year flat patch in July, then picked up momentum on July 24 after a well-received earnings report. The stock consolidated around 105 from mid-August through the end of September, but gapped up to 113 on October 4 after a stretch of rising volume. A three-day selloff pulled LLY back to its 25-day moving average, but the stock rebounded nicely. LLY may need more time to consolidate between 110 and 115 as earnings approach. If you like the solidity of the story, you can take a small position on any pullback toward 110.
LLY Weekly Chart
LLY Daily Chart
GasLog (GLOG)
Why the Strength
While most shipping sectors suffer from hugely cyclical swings in demand (and charter rates), the shipping of liquefied natural gas (LNG) is on a long-term upswing as demand for LNG booms from countries all over the globe. GasLog is the largest independent LNG shipper in the world, and the attractive part of the business is the long-term charters that big energy companies ink for use of its ships—including its MLP (called GasLog Partners), the company has 26 ships on the water today, 21 of which are on long-term contracts (mostly to Shell, but Total, Centrica and Cheniere are also customers; charters are generally five to 15 years in length), with another three set to begin operations in 2019 (two of those are on charters) and another five in 2020 (three already inked to charters). And even the ships operating on the spot market are helping out, as LNG supply comes online and pricing for short-term shipping deals surges, a trend that should accelerate in the years ahead. By 2022, management thinks it will more than double last year’s EBITDA thanks to these trends, and being able to dropdown some ships to its partnership helps provide access to capital. Obviously, a major economic downturn could delay some LNG plans, but the major trend is in place. A tidy dividend (2.8% annual yield) puts a nice bow on the package.
Technical Analysis
GLOG was crushed (falling from 32 to 5!) during the energy sector bear market of 2015-2016, then recovered to 18 by January of 2017. After that, shares dipped as low as 13 and rose as high as 23, but at the end of August 2018, were still meandering near 16. Since then, though, the action has been solid—GLOG rallied above near-term resistance around 20 last month, and actually pushed near multi-year highs last week despite the rough market. You can consider nibbling on dips toward the 25-day line.
GLOG Weekly Chart
GLOG Daily Chart
Guardant Health (GH)
Why the Strength
We don’t usually writeup new IPOs, but Guardant Health certainly looks like one to watch. The stock enjoyed a strong debut even though it went public right at the beginning of October when the broad market fell apart. The reasons for the strength are twofold. First, the story is powerful: Guardant develops blood tests that detect cancer in high-risk populations and those with previously removed tumors. Second, growth has been huge. Revenue was up 98% to $50 million last year (given the newness of the stock analysts don’t have forward estimates yet)! Guardant has two liquid biopsy tests, Guardant360 and GuardantOMNI. Guardant360 was launched in 2014 and provides comprehensive genomic results from a blood draw. Results take just one week, and the test covers the 73 genes most relevant to clinical care. It’s been used by over 5,000 oncologists and 40 biopharma partners to draw over 70,000 clinical samples. GuardantOMNI was launched last year and is used by biopharmaceutical customers as a comprehensive genomic profiling tool to help accelerate clinical development programs. It covers 500 genes. We wouldn’t suggest jumping in to Guardant with both feet given that the stock is so new to the market. But a starter position for risk-tolerant investors could make sense, or just keep it on your watch list for when a new market uptrend begins.
Technical Analysis
GH went public at 19 on October 4 and rallied almost 70% on its first day. It traded in the 30 to 34 range for a few sessions before soaring as 44 last week. And then it dropped 10% on Friday! Clearly, the stock is new, getting its sea legs and extremely volatile. Thus, if you want in, keep it very small to start, use a loose stop and, if it holds up, look to buy more once the market improves.
GH Weekly Chart
GH Daily Chart
Intelsat (I)
Why the Strength
Intelsat is one of a small group of stocks that’s gone up in October. Intelsat is a satellite communications company operating a fleet of over 50 satellites, plus teleports, that provide a communications network for media companies, telecom operators and the U.S. government. The company has a history of carrying a high debt load but has been getting its house in order by refinancing long-term debt and closing equity and convertible debt offerings. Beyond those fundamentals, though, the big story is that Intelsat is working with the FCC to establish a market-based framework to allow wireless operators to access 100 MHz of its C-Band downlink spectrum to speed the deployment of 5G services. 5G is a big FCC priority and could be worth north of $20 a share for Intelsat. The FCC just announced that the new filing window closes on October 31, two weeks later than expected, due to a high number of applications. It’s hard to know how things will shake out but if Intelsat can monetize the spectrum and improve its capital structure, the future looks a heck of a lot better than the recent past. The company also keeps inking deals around the world to provide broadband access to remote areas (the Amazon, sub-Sahara Africa, Asia, etc.). With 5G just beginning to be deployed, a speculative position in Intelsat could pay off.
Technical Analysis
Intelsat was a non-story until April when the company began to raise capital and it became clear the FCC was serious about monetizing the C-Band. Shares tightened up nicely in August and early September, and its huge-volume pop in late September put it on our radar. Impressively, the stock didn’t even touch its 25-day line during the market’s weakness, and shares have since moved to higher highs on excellent volume. Look for clarity on the C-Band after the FCC’s application window closes on October 31 (we don’t know when the FCC will speak on the matter) to drive trading action.
I Weekly Chart
I Daily Chart
Ollie’s Bargain Outlet (OLLI)
Why the Strength
Ollie’s has one of the market’s best cookie-cutter stories, which is probably why, despite a big advance in recent years, the stock is still holding up well in this environment. The company’s motto is “Good Stuff Cheap,” and that basically explains the business—the firm is a leading value retailer, offering goods of all sorts (housewares, food, bed and bath, floor coverings, electronics, toys and more) and creating a treasure hunt-type of atmosphere in its stores. As its scale has increased, so has its buying power, allowing it to get better deals, be it direct from vendors or for closeout merchandise. And that’s created a ton of customer loyalty; its “Ollie’s Army” customers has grown more than 25% annually for the past few years, which is vital as they spend 40% more than non-members. As for the growth potential, Ollie’s operated 282 stores at the end of July (each one pays back the initial investment in about two years), but that’s just scratching the surface—it’s western most store is in Louisiana, and management believes there’s ultimately room for 950 locations! In the second quarter, the store count was up 13% from a year ago, while same-store sales rose 4.4% (usually it’s a bit lower than that) while earnings boomed 48% (boosted by corporate tax cuts). The firm’s outlook for many years of 20%-ish earnings growth with a non-economically sensitive business is keeping a lot of big investors (and us) interested.
Technical Analysis
OLLI isn’t a stock we’ve been too interested in during the past few months because it’s clearly had a big run. But now that the market’s in a correction, every stock gets a fair shot—the longer OLLI can hold up relatively well, the greater the chance it has another leg up on the other end of this downturn. So far, the stock is holding its 50-day line; keep an eye on it, or if you want in, you can nibble here with a tight stop in the low 80s.
OLLI Weekly Chart
OLLI Daily Chart
Spirit Airlines (SAVE)
Why the Strength
Spirit Airlines lives in a tough neighborhood. Airlines are often at the mercy of fuel prices, the health of the economy and cutthroat competition. But Spirit operates in the ultra-low price end of the airline world, attracting passengers with low prices and increasing revenue via fees for extras like baggage checking, seating choice and refreshments. The company serves the U.S., Latin America and the Caribbean. Spirit issued guidance for its Q3 earnings report on October 10 that featured some excellent numbers, including a 5.5% jump in total revenue per available seat mile, which doubled the company’s previous guidance for that category. Spirit enjoyed a 14% increase in revenue in 2017, and the first two quarters of 2018 have seen 19% and 22% increases. When the company releases its Q3 numbers this Thursday (October 25), analysts are forecasting revenue of $897 million and earnings of $1.38 per share. With the company’s guidance already out, some of the good news is already baked into Spirit’s stock price. But the story is a good one, and Spirit has been a beaten-down stock for a long time and still sports a low 15 forward P/E.
Technical Analysis
SAVE soared from 16 to 85 in 2013 and 2014, but crashed back to 33 in late November 2015. Since then, the stock has traded in a range between 60 and 30 in 2017 and between 49 and 34 this year until the guidance-induced rally that started on October 10 kicked it above 50 on elevated volume. SAVE has put in four days trading roughly between 49 and 51, and it’s hard to tell how much effect an unexpected surprise might have. If you like the story, it’s probably best to wait for the reaction to earnings and nibble on any breakout to the upside.
SAVE Weekly Chart
SAVE Daily Chart
Tabula Rasa Healthcare (TRHC)
Why the Strength
With 39% of seniors in the U.S. on five or more medications, adverse drug events (ADEs)—deaths or illness resulting from drug interactions or incorrect dosing—results in 100,000 deaths and a million ER visits every year. Tabula Rasa Healthcare was incorporated in 2014 to address this specific problem. According to one study, the cost of dealing with ADEs even exceeds the total cost of the prescriptions themselves. Tabula Rasa’s software looks at a patient’s entire drug regimen and identifies possible adverse interactions. Clients report reductions of up to 50% in costs, reduced ADEs and improved outcomes for patients. Tabula Rasa was a first mover in this emerging category and enjoys 98% recurring revenue retention. The company also enjoys barriers to entry for competitors in the form of IP patents and proprietary science research. Revenue grew 45% in 2014, 34% in 2016, 43% in 2017 and 57% and 65% in Q1 and Q2, respectively. Analysts estimate earnings per share to grow by 148% in 2018 and 48% in 2019. With rising healthcare costs a persistent issue, Tabula Rasa is providing a concrete way to lower ADE costs and improve outcomes. It’s a good story.
Technical Analysis
TRHC came public in September 2016 and traded sideways for over 10 months. The breakout came in August 2017 when the stock lifted above 17 and built up a powerful head of steam. TRHC was trading at 28 by the end of 2017 and blasted to 70 in early July 2018. A pullback to 56 later in the month gave way to another powerful rally to 91 in September, with a well-received earnings report on August 7 adding fuel. TRHC corrected to 70 on October 8, and has held support since then. If you’re okay with the risk, you can take a small position on any normal pullback or just keep it on your watch list.
TRHC Weekly Chart
TRHC Daily Chart
United Continental Holdings (UAL)
ir.unitedcontinentalholdings.com
Why the Strength
Airline stocks have been a mixed bag, with some suffering due to flattening growth and higher costs, while others report better-than-expected results that are being rewarded by investors. United Continental is clearly one of the winners after releasing a great quarterly report last week—revenue growth accelerated again to 11% (passengers flown grew 9%, while revenue per available seat mile flown was up solidly both in the U.S. and overseas), and while fuel costs soared 42%, tight controls on other costs led to a 36% surge in earnings. Many investors are thinking growth could slow as global economics cool, but UAL management was having none of it; it raised its earnings outlook for 2018 for the third time this year and said it expects margins to resume their uptrend next year; analysts now see earnings up 25% this year and 17% next as the company balances expansion (capacity is up 5% or so this year) and profitability. While there’s no dividend, the company isn’t shy about buying back shares (Q3’s share count was down 9% from a year ago!), and the top brass has an aggressive earnings target of $11 to $13 per share in 2020. The bottom line is that United Continental is looking more like a cash cow that should continue to thrive, which is attracting big investors.
Technical Analysis
UAL basically topped out around 77 in late 2016 and bobbed and weaved for the next year and a half. But on the weekly chart, notice how the stock tightened up nicely this spring and summer, then started coming to life in July after Q2 earnings. Shares moved up to 91 before getting yanked down to 79 by the market, but last week’s Q3 report gapped the stock back above its 50-day line, and it’s held those gains despite the market’s late-week slide. You could buy a little on weakness if you want in.
UAL Weekly Chart
UAL 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.
