Impressive Resilience
Current Market Outlook
The good news is that the general market has been whacked two or three times during the past couple of weeks, but each time has staged a strong rally, including today’s spirited advance. That said, despite the nice Friday/Monday rebound, the intermediate-term trend is still iffy (most indexes are sitting at or below their 50-day lines and below their highs from last week), so our overall stance hasn’t changed much—you should remain cautious, limiting new buying and holding some cash, though we’re also fine sticking with your strong, profitable names, giving them a chance to resume their uptrends down the road. The game plan from here is simple: If the market fades again, we’ll remain cautious, but should the recent strength continue, we’ll gradually turn more constructive and put money to work.
This week’s list (and the past couple of weeks) are great for getting your ducks in a row should the bulls decisively retake control. Our Top Pick is Appian (APPN), which looks like a new small/mid-cap leader following a massive breakout. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| ACADIA Pharmaceuticals (ACAD) | 47.84 | ||
| AngloGold Ashanti (AU) | 20.45 | ||
| Appian (APPN) | 46.48 | ||
| Dexcom (DXCM) | 421.36 | ||
| eHealth (EHTH) | 122.74 | ||
| Five9 (FIVN) | 78.35 | ||
| JD.com (JD) | 39.58 | ||
| KLA Corp. (KLAC) | 158.80 | ||
| Q2 Holdings (QTWO) | 80.81 | ||
| Universal Display (OLED) | 187.54 |
ACADIA Pharmaceuticals (ACAD)
Why the Strength
Acadia Pharmaceuticals is a small biotech company that focuses on central nervous system disorders. In recent quarters, the company has hit the commercialization stage thanks to Nuplazid, the first and only FDA-approved treatment for hallucinations associated with Parkinson’s disease psychosis. Right now, that drug accounts for all of Acadia’s revenues, and sales are growing briskly (see table), thanks in part to smaller tablets and an ad campaign, with management meaningfully hiking estimates ($325 million in sales now expected, vs $290 million before the Q2 report). But the compound behind Nuplazid is also in later-stage trials for numerous other conditions, including dementia-related psychosis (1.2 million diagnosed patients in U.S.; no FDA-approved treatment; intermediate results due later this year) and major depressive disorder (2.5 million potential patients; adjunctive treatment), both of which are in Phase III trials. Acadia is also working on treatments for schizophrenia in patients with negative symptoms, with results likely out around year-end, as well as for Rett syndrome (rare neurological disorder in girls), which will start Phase III trials in Q4. All told, Acadia should see solid growth from Nuplazid (sales up 46% this year and 39% next), with long-term upside from its pipeline.
Technical Analysis
ACAD trended lower from late 2017 through mid 2018, and even by year-end, was still sitting near its lows. The stock got up and going with the market after that, rallying to 29 in early April before starting a new consolidation. Some poor trial results in mid July caused shares to plunge to 21.5, but that turned out to be a huge shakeout—ACAD began rebounding immediately and surged to 16-month highs after earnings. We’re fine starting a position around here.
ACAD Weekly Chart
ACAD Daily Chart
AngloGold Ashanti (AU)
Why the Strength
Following a huge run in June and the first half of July, gold stocks have had a couple of sharp shakeouts, but that’s normal action and each one has found support so far. Anglogold is one of the strongest in the sector, though admittedly it’s harder to touch and feel than some other precious metal names—the company operates mines in South America, Africa and Australia, with one of its big growth projects (should begin producing gold later this year and eventually crank out 800,000 ounces per year when fully functional) located in Ghana of all places (though it does have a solid expansion project in Australia, too). The big story here remains the price of gold, of course, but also helping the cause is Anglogold’s mid-year report, which was solid, with all-in costs of improving to around $1,000 per ounce, while sales so far in the third quarter have brought in an average of $1,414. Production-wise, Q2 output was up 7% sequentially, and more of that should be on the way in the second half of the year as some of its mines outperform expectations. Throw in the prospects for continued belt tightening (CapEx should ease as the aforementioned growth projects move into production) and there’s no reason cash flow shouldn’t surge going forward if bullion stays elevated—analysts see earnings rising to $1.80 per share next year.
Technical Analysis
AU blasted off with the gold group in late May, surging past its recent high of 16 and nearly tagging 20 in mid July. Since then, there have been two brief, scary dips—one on July 31, and then after another push to new highs (near 22), an intraday wobble below 19. But both found support around the 10-week line, and AU has pushed back toward its highs. We’re OK nabbing some shares around here, but use a stop below the 50-day line.
AU Weekly Chart
AU Daily Chart
Appian (APPN)
Why the Strength
If you’re looking for a stock that’s 100% leveraged to the digital revolution, Appian is for you. The company has developed a low-code development platform that makes it quick, easy and inexpensive for businesses to create applications. If there’s one less-than-ideal factor here is that it’s not a pure-play subscription software company; roughly 40% of revenue still comes from professional services, which can be a little lumpy at times. But the stock has been racing higher because subscription revenue was up 41% in Q2 and subscription revenue retention is consistently high (117%), showing that existing customers continue to buy more of what Appian is selling. That means more and more enterprises are turning to the company to quickly turn ideas into applications. Appian has a guarantee that in just eight weeks it can create a customer’s first application for $150,000 and that anyone with technical skills can be up and running on the platform in just two weeks. This has companies from all sectors, including financial institutions, insurance brokers, oil refiners, and even hospitality and cruise operators flocking to its solutions. Appian is not yet profitable (EPS loss should be around -$0.52 this year) but we like the story and that revenue growth should accelerate (driven by subscription gains) going forward.
Technical Analysis
APPN has had some sharp ups and downs over the years, but net-net, the stock didn’t do anything from early 2018 until a couple of weeks ago. As part of that consolidation, shares began building a shallower, more proper base from February through July. Then came the quarterly report, and APPN has acted like a homesick angel ever since—the stock has blasted off on two straight weeks of giant volume. We’re not opposed to nibbling here, but we’ll set our buy range down a bit, looking to enter on weakness.
APPN Weekly Chart
APPN Daily Chart
Dexcom (DXCM)
Why the Strength
We’ve featured Dexcom several times in the past and are going back to the name again because the stock has just broken out on the upside and the big picture trend is undeniable. If you’ve missed our earlier commentary, DexCom helps people manage diabetes all around the world. Diabetes is a massive problem, affecting roughly 60 million people in the U.S. and EU, including roughly six million that are on intensive insulin therapy. DexCom’s continuous glucose monitoring (CGM) devices make life much easier. It started with a G5 CGM for Type 1 diabetes back in 2016, but the growth is now coming from DexCom’s G6 system, which is the first to send continuous blood-glucose data to compatible medical devices and electronic interfaces, including automatic insulin injection systems. The G6 sensor can stream uninterrupted data for 10 days before needing replacement. It also eliminates the need for twice-daily finger-sticks for calibration, which will be missed by nobody. The upcoming G7, to be released in 2020, will be even better, potentially cutting costs for patients while serving those with Type 2 diabetes (just about all of Dexcom’s patients today are Type 1). We like that Dexcom has alliances with Tandem Diabetes (TNDM) and Google’s healthcare incubator (Verily), has a technology advantage over the rest of the competition, and is set to grow revenue by 33% this year while delivering EPS of $0.93 (up over 130%).
Technical Analysis
DXCM began to change character back in March 2018, when the stock broke free of a base near 60; it proceeded to rally all the way to 149 by September! But that started a long, up-and-down consolidation, with shares bobbing between 105 and 160 for the next 11 months. A negative earnings reaction three weeks ago looked ominous, but DXCM steadied itself and has since pushed to new highs. It’s a very choppy stock, so start small if you want in.
DXCM Weekly Chart
DXCM Daily Chart
eHealth (EHTH)
Why the Strength
eHealth is one of a small group of companies disrupting the insurance brokerage business. In this case, the company has created a leading private online health insurance exchange. Individuals, families and small businesses can go to the company’s website, compare health insurance products from various insurers and then purchase and enroll in the plan of their choosing. The company is licensed to sell across the country and even has pharmacy-based tools to help Medicare beneficiaries figure out what plan is best for them. As a comparison-shopping tool eHealth derives 98% of revenue from commissions and doesn’t carry underwriting risk. The stock is doing well because the business is cranking and margins are expanding, both of which have meant higher confidence that this is a sustainable growth business. Management reported Q2 results on July 25, when it flagged that approved Medicare patients were up 78%, Medicare revenue was up 105%, total revenue was up 101% (to $65.8 million) and adjusted EPS jumped 125% to $0.10, beating by an impressive $0.46. Analysts upped their forecasts on the back of those strong results, now seeing revenue up 52% this year to $380 million, while EPS is expected to rise 92% to $1.92.
Technical Analysis
EHTH came public over a decade ago, but it took many years and a few CEOs for the company to get the business right. The current CEO came in in 2016 and the business, and the stock, have done quite well since. In early 2019 the stock jumped out above its previous all-time high (hit in 2014) and has made a series of higher highs and higher lows in recent months. Shares blasted off after the Q2 earnings report four weeks ago and, better yet, EHTH has held firm since. If you want in, you can buy some here or on modest pullbacks.
EHTH Weekly Chart
EHTH Daily Chart
Five9 (FIVN)
Why the Strength
Companies have finally realized that they need to make customer service interactions more dynamic if they are to earn and keep customers. In the digital age this means investing in cloud-based customer contact solutions to handle service, sales and marketing functions. Five9 is one of the leaders in the space and arguably has the best cloud contact center software in the business. With help from Google and artificial intelligence (AI) technologies, the company is cutting wait times and using big data to provide real-time analysis to customer service agents so they can provide tailored service right quick. The stock has turned strong in recent weeks following a terrific second-quarter earnings report. Revenue was up 27%, driven by strength in the Enterprise business (up 36%), but this is more than a one-quarter phenomenon—the reality is Five9 has been executing well for years. It’s just a steady, solid growth business, driven by sensible integrations (including Microsoft Teams), innovative product introductions and a rationale sales strategy. Analysts see both revenue and EPS up around 20% this year and next, give or take a few points. It’s one of those businesses that’s not super exciting to talk about (after all, it’s contact center software), but is likely to crank out excellent growth for many years.
Technical Analysis
FIVN has been trending mostly above its 200-day moving average line since late-2015. That’s an amazing accomplishment given the volatility in the market over the last four years. There was recently a five-month consolidation phase in which FIVN traded between 46 and 58. But, after a quick shakeout, FIVN broke out to fresh highs after reporting on July 31 and has continued higher despite the tricky market. We’re OK starting here or on dips.
FIVN Weekly Chart
FIVN Daily Chart
JD.com (JD)
Why the Strength
Chinese stocks have mostly remained the dog’s dinner of late, as slowing growth in that country, currency issues and the uncertainty of the U.S.-China trade battle have kept buyers at bay. But if the group gets going, JD.com—China’s largest e-commerce company—is in pole position to lead the way higher. The big story here is simple and powerful: China’s total retail market is giant (just 10% smaller than the U.S.) and growing steadily (10% compounded during the past few years), yet is highly fragmented (top 20 retailers make up just 18% of the market in China, vs. 49% in the U.S.) and online retail penetration in China is tame (nearly 20%) but growing fast (up from 15% in 2017). The stock is resilient today because Q2 earnings, reported last week, easily topped estimates despite all the headwinds mentioned above: Sales rose 23% in local currency, while U.S.$ earnings of 33 cents per share were up more than six-fold from a year ago thanks to profit margins picking up steam. Moreover, the sub-metrics looked good (active customer accounts were up 3.5% from the prior quarter; free cash flow is much larger than reported earnings) and the company continues to expand its best-in-class logistics network (600 warehouses and 15 million square meters). The top brass forecast more of the same for Q3, and analysts see 15% to 20% top-line growth and booming earnings going forward.
Technical Analysis
JD tanked with its peers last year, plunging from 51 to 19 before recovering to 32 by the end of March. Since then, shares have consolidated between 25 and 32 or so, dipping and recovering along with the market. But last week may have marked a character change—shares surged on earnings, rallying back toward their highs on more than double JD’s average weekly volume. If you’re game, you could start small here with a loose stop, and look to add more on continued strength.
JD Weekly Chart
JD Daily Chart
KLA Corp. (KLAC)
Why the Strength
Chip stocks appeared to be getting going in late July when the new China tariffs and overall market decline created a pothole for the group. But, while some look ugly, many are still holding well, and on the equipment side of things, KLA Corp. looks like it wants to lead the way higher if the sector kicks into gear. KLA, in fact, is one of the bigger semiconductor equipment makers out there, with semi process control equipment (measurement, inspection, etc.) making up 80% of revenues; the company’s always been a leader in the group, and its purchase of Orbatech has put its fingers into some other cookie jars (testing, repairing and even printed circuit boards and flat panel displays). Asian customers make up the vast majority of sales, so it’s not a surprise that the stock has been pushed/pulled by the U.S-China tussle (including the Huawei ban, which is a customer of KLA’s). Earnings have fallen off a bit the past two quarters, but the stock is strong today because analysts already see a turnaround coming—KLA’s Q2 sales and earnings nosed ahead of estimates, and while memory-related business is soft, foundry and logic areas are strong, leading big chip makers to invest in next-generation equipment and expand capacity. And that means the company’s earnings should stay afloat and even mostly rise from here—analysts see the bottom line up 10% in the year ahead, which, combined with a reasonable valuation (15 times estimates) and solid dividend yield (2.3%, with a history of annual increases), should keep big investors interested.
Technical Analysis
Like most of its peers, KLAC stopped outperforming the market in late 2017 and hit a price peak in early 2018 before going over the falls late last year (124 down to 81). But this year has been a different story, with two moves out to new highs (one in April and another in July), with each running into trouble after some trade war tensions emerged. However, KLAC’s latest dip to the 25-day line has found support, a good sign buyers are lurking.
KLAC Weekly Chart
KLAC Daily Chart
Q2 Holdings (QTWO)
Why the Strength
Q2 Holdings is a small cap fintech stock that has developed a cloud-native virtual banking platform for regional and community financial institutions (known as RCFIs). The software helps RCFIs cut complexity and reduce the cost of implementing and maintaining virtual banking solutions, which span deposits, money movement, lending, security and fraud. The stock’s doing well because growth is accelerating, profitability is slated to go up in 2020 (after management invested in growth initiatives this year) and because the company is helping banks find new revenue sources in a low interest rate environment, which crimps the spreads available on traditional lending. All of this has attracted more attention from analysts, who like the stability of the business. There are some ups and downs in billings from quarter to quarter because larger deals with bigger RCFIs take a while to implement. But the big-picture story is good, as are the numbers. The company reported second quarter results a couple weeks ago when management said revenue growth of 33% was driven by strength in digital banking, Cloud Lending and Q2 Open platforms. Analysts see revenue up almost 30% this year. EPS will get roughly cut in half, to around $0.12, as management has been investing for growth. But EPS should explode over 225% higher in 2020, to $0.41, and even that figure could prove conservative.
Technical Analysis
QTWO was in a strong uptrend for much of last year before getting yanked down by the market, but the stock ripped back to new highs by February. That started a stair-step advance, with plenty of sideways trading followed by pushes to new highs in April and June. More recently, the stock shook out to start August before exploding higher on earnings and carrying higher despite the soft market. If you want in, nibble on dips.
QTWO Weekly Chart
QTWO Daily Chart
Universal Display (OLED)
Why the Strength
Organic light emitting diodes (OLEDs) are the next big thing in display technologies, with smartphones, TVs, laptops and smartwatches, lighting and even autos all heading in that direction due to better colors, lower power consumption and various other advantages. And Universal Display is the straightforward way to play it, with materials, knowhow and intellectual property (5,000-plus global patents that lead to royalty/licensing revenue) that big customers like Samsung, Sony, LG and a few Chinese consumer electronic makers are gobbling up. The risk here has always been that Universal is a down-the-food-chain story (if one or two big customers cut back, the firm’s earnings go poof), which bit it in 2018. But there’s no question the long-term trends are in its favor, and the next couple of years at least look like homeruns for Universal—sales and earnings have boomed during the past two quarters (though some of Q2’s gains came from early ordering by Chinese firms due to trade tensions), and just as impressive are the numerous positive indications from its customers. Samsung, for instance, says that OLEDs now make up more than 70% of their panel displays and forecasts continued growth going forward; LG Display is bringing online a new OLED TV facility soon that will nearly double its capacity, and it’s spending another $2.6 billion to build another facility; while China has 10 new OLED facilities being built over the next three years by various players. Analysts see earnings up 120% this year and another 50% or so in 2020.
Technical Analysis
OLED has had a huge run since the start of the year, but that came on the heels of a massive (60%-ish) decline and bottoming process during the prior 12 months. The stock pulled back with the market in May, but impressively, bolted to new highs in June and July. And even after wobbling on earnings, OLED has held above its 50-day line during the market’s recent rough patch. We’re fine taking a position here, albeit with a stop near the recent low.
OLED Weekly Chart
OLED 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.
