Healthy as a Horse
Current Market Outlook
While most investors are either bearish, neutral or not paying attention at all, the market remains healthy as a horse—most major indexes reached all-time highs last week, which is music to our ears. And we saw improved action among individual growth stocks, too, with some super-hot names racing higher. As we’ve said repeatedly, pullbacks and shakeouts will occur at some point, and if you have a couple of stocks that are very extended to the upside, feel free to book partial profits. But our focus remains on the intermediate- to longer-term, and just about all the evidence on that front continues to point to higher prices in the weeks and months ahead. Thus, you should remain heavily invested.
This week’s list has a mid-cap focus to it, but our Top Pick is a big-cap stock that just emerged from months of base-building: Alibaba (BABA) has all the makings of a liquid leader, and we think it’s starting its first major advance. Details inside.
| Stock Name | Price | ||
|---|---|---|---|
| Twilio (TWLO) | 183.39 | ||
| Symantec Corporation (SYMC) | 0.00 | ||
| Nevro Corp. (NVRO) | 0.00 | ||
| MasTec, Inc. (MTZ) | 66.65 | ||
| Inphi (IPHI) | 120.16 | ||
| Etsy (ETSY) | 112.97 | ||
| Copa Holdings (CPA) | 0.00 | ||
| Callon Petroleum (CPE) | 0.00 | ||
| Alibaba (BABA) | 254.81 | ||
| Applied Materials (AMAT) | 0.00 |
Twilio (TWLO)
Why the Strength
Twilio is a hot recent IPO that’s high risk ($4.5 billion market cap, $219 million in revenue), but also very high potential reward. The company has a cloud-based communications platform that allows companies to easily send customized text, voice or video messages to clients or employees whenever needed, through any avenue (app, email, phone, etc.). The big potential here comes from the fact that Twilio (a) is by far the leader in the field, (b) has a ton of high-quality customers (WhatsApp, Hulu, EMC, Airbnb, Uber, and … even Cabot!), (c) has a usage-based business model (the more messages sent, the more revenue it collects) and (d) is pervasive, used by 30,700 firms (up 45% from a year ago). This service saves a ton of time and increases convenience for its clients (Uber uses Twilio to route messages and calls from drivers to passengers without exchanging phone numbers; EMC uses it to alert employees if an IT system is down, eliminating the need for emails; Trulia uses it to instantly text an online lead’s information to a real estate agent, etc.) and it’s often the cheaper solution. The risks here (besides the valuation) are customer concentration (WhatsApp makes up more than 10% of revenue) and the fact that Twilio is likely to be in the red for another few quarters. Still, this is the type of platform that is both unique and has nearly limitless applications, which is why the stock is so strong.
Technical Analysis
TWLO went public the day before Brexit, and it came out of the gate on fire—shares leaped from an open near 24 to 45 by mid-July. Then came a rare IPO base, with shares etching a 17% deep, three-week zone (note the tight weekly closes, which is often a sign of accumulation). And now we see the buyers stepping up to the plate, driving the stock to the moon on huge volume. TWLO is extremely volatile (it’s average daily range is about 7%!), but we think a nibble (no more than half your normal position size) on weakness and a loose stop could work out well.
TWLO Weekly Chart
TWLO Daily Chart
Symantec Corporation (SYMC)
Why the Strength
One of America’s largest cyber security companies just got much bigger. Symantec, maker of Norton antivirus software security systems, bought Blue Coat, a provider of hardware and software security, for $4.65 billion in June. The deal is a lifesaver for Symantec considering its sales have been cut nearly in half since 2013. Blue Coat did $600 million in sales last year, and thus instantly adds 16.7% back onto Symantec’s declining top line. More importantly, Blue Coat covers up a glaring hole for Symantec—the cloud. Symantec’s Norton antivirus software protects PCs, data centers and emails; Blue Coat’s products protect networks and cloud services. Now, Symantec is the “world’s largest pure play cyber security company,” in the words of CFO Thomas Siefert. He’s right—even before the Blue Coat acquisition, Symantec’s software was installed on 175 million consumer and corporate computers. The Blue Coat buyout should make a big difference right away—the company just revised its full-year sales guidance up to $4.12 billion (from $3.58 billion). Even before the Blue Coat deal fully took effect, Symantec’s recent quarterly earnings were better than expected. Left for dead a few months ago, institutional investors are pouring back into SYMC thanks to Blue Coat—as one analyst put it, sentiment toward the stock has flipped as the story has gone from “unhealthy to recovery.” Earnings estimates for 2017 are big!
Technical Analysis
You can see the recovery in SYMC’s chart. After peaking at 26 in January 2015, the stock spent the next year-plus in a downward spiral, finding bottom at 15. It was still only at 17 in June when the Blue Coat deal sparked a buying spree, taking the stock up to 21 in just a few days. This month’s earnings beat triggered the next phase of SYMC’s recovery, helping it break above 21 resistance. You can buy some here with a stop below the 50-day line, which has acted as new support since the big gap up in June.
SYMC Weekly Chart
SYMC Daily Chart
Nevro Corp. (NVRO)
Why the Strength
Except for Alibaba and Applied Materials, this week’s Top Ten Trader is full of smaller companies with less familiar names. Nevro has three previous appearances here to its credit, and its very strong position in a very small market niche makes it very attractive. Nevro is a medical device company focused exclusively on an improved neuromodulation treatment for chronic back and leg pain. Using small electrical jolts to the spinal column to block pain signals is a proven technology, but it can produce paresthesia, an unpleasant “pins and needles” sensation like having a limb “fall asleep.” Nevro’s Senza spinal cord stimulation (SCS) system uses its proprietary HF10 therapy system to deliver electrical stimulation at a much higher frequency. The result is better pain management without paresthesia. The SCS market in the U.S. is $1.5 billion, and Nevro is both penetrating the existing market and growing that market as clinical trials prove the efficacy of its technology and more insurers approve it for reimbursement. The company gets over a third of its revenue from the U.S. market, but has gained substantial share in Australia, Germany and the U.K., among other international markets. Investors like the three consecutive quarters with triple-digit percentage revenue growth and the estimates of more to come over the next couple of years. Nevro isn’t expected to be profitable until 2018, but investors are already climbing aboard.
Technical Analysis
NVRO came public in November 2014 and gyrated wildly for more than a year, bottoming out at 47 in January. Since then, it’s been a very steady performer, marching to 82 last week when Nevro’s great earnings report blasted NVRO to 95 on well over four times its average volume. The stock held its momentum through the end of the week and is now trading just under 98. It’s a little extended—the 25-day moving average is back at 84—so use a little patience to buy it on a dip of a couple of points. A stop in the mid-80s makes sense for this volatile issue.
NVRO Weekly Chart
NVRO Daily Chart
MasTec, Inc. (MTZ)
Why the Strength
MasTec is one of many firms benefiting from the U.S. construction boom. The company used to be 100% tied to the telecom and communication sectors (and it’s still the largest wireless construction services contractor in the U.S.), but today it’s also involved in the engineering, building and installation of pipelines and other energy facilities, wireless and fiber business for the telecom industry, electrical transmission infrastructure and other power generation activities. (AT&T is a huge customer at 32% of revenues, in part because of its purchase of DirecTV.) Simply put, MasTech’s business is very good even after the energy bust; second-quarter results blew away expectations, and management stated that it expects record revenues from oil and gas in the second half of 2016 as activity ramps (especially with long-haul pipelines). All told, MasTec has a huge $5.3 billion backlog (up 31% from a year ago), which has prompted the top brass to hike guidance (now expecting 19% revenue growth and a 42% leap in cash flow). As for the core communications segment, that is also expecting to perk back up in the quarters ahead as CapEx expands. MasTec is a “down the food chain” story—if some end-customers sneeze, MasTec catches the flu. But there’s no question business is good today and should remain so for at least a few quarters, which is why the stock is acting so well.
Technical Analysis
MTZ went through the wringer from the spring of 2014 (at 45) to February 2016 (at 12). Now the turnaround is in effect as earnings shoot higher—shares rose 10 of 11 weeks off its bottom, then ground higher for two months with just a brief Brexit-induced shakeout near the end of June. MTZ then tightened up beautifully in July before surging on earnings last week. Our advice is to aim to buy on dips and use a stop near 26.
MTZ Weekly Chart
MTZ Daily Chart
Inphi (IPHI)
Why the Strength
Inphi’s business model can be difficult to understand, but its recent growth is unmistakable. The Santa Clara-based semiconductor company designs analog multiplexers, encoders, amplifiers and memory buffers for servers, routers and storage equipment. In a nutshell, its products create more memory space and efficiency in the cloud. And major cloud operators like Amazon, Apple, Google and Facebook have been buying Inphi’s products to increase their online capacity. Inphi’s new ColorZ product—a 100-gigabit drone that can connect multiple data centers within a 50-mile radius—holds special appeal for those big-campus big-tech companies. That helped Inphi top earnings expectations in the second quarter, and it’s why the company issued third-quarter EPS guidance ($0.37 to $0.39) that came in ahead of analyst estimates ($0.33). Taking the wider view, Inphi’s sales more than doubled from 2013 to 2015, and are expected to increase another 7.5% this year, with 33% EPS growth. That kind of growth, in an industry such as the cloud, with customers like Apple, Google and Facebook are more than enough for investors to latch onto. Importantly, growth is expected to accelerate in 2017, with sales up 20% and earnings up another 30%.
Technical Analysis
IPHI got going in February, bouncing from 22 to 34 by the beginning of April. Some consolidation followed, with the stock finding support at 27 in May. Then came another false start to 34 in June before one last Brexit-related shakeout late that month knocked the stock ever so briefly back below 26. That move seemingly got rid of all the sellers, because IPHI has essentially gone nowhere but up since, touching 36 in late July then gapping up to 42 on big earnings-driven buying volume last week. Buy on dips of a point or two and use a stop back in the mid-30s.
IPHI Weekly Chart
IPHI Daily Chart
Etsy (ETSY)
Why the Strength
Etsy is an online marketplace where users can sell handmade crafts and other goods and users can buy products, such as art, that they can’t find anywhere else. Jim Cramer called it “the natural and organic Amazon” when it went public in April 2015, though it’s really more like eBay or Craigslist. Just like Amazon, Etsy hasn’t figured out how to turn a profit in the early going, but its sales growth has been steady. The company reported 39% revenue growth in the second quarter, its sixth straight quarter it’s between 35% and 45%. The number of active sellers on Etsy is rising too—it’s up 1.7 million, with 26.1 million active buyers—and the site’s mobile app now accounts for 64% of the site’s total traffic. The traffic bump resulted in a 22.6% increase in merchandise sold on Etsy’s site. Thanks to the stellar quarter, Etsy lifted its full-year sales guidance to 27% growth from a range of 20% to 25%. Expansion into the U.K., Australia, Canada, France and Germany has helped accelerate Etsy’s growth, and a tie-in with Apple Pay has made transactions more seamless. When you back out a $6.4 million foreign exchange hit and a $4.3 million tax provision, Etsy was actually $3.4 million in the black last quarter. For the year, analysts expect very narrow ($0.03 per share) losses, and anticipates a $0.21 per share gain in 2017.
Technical Analysis
ETSY had a rough start after its April 2015 IPO, falling from 30 to as low as 6 in less than a year. Since March, however, the stock has built a promising-looking base between 8 and 10, with a few high-volume spikes along the way. Another huge spike arrived when the company reported earnings earlier this month, and the five-times-higher-than-normal buying volume helped ETSY blast out of its five-month trading range, gapping up from 10 to 14 in a matter of days. Volume has subsided to normal levels, but the stock continues to inch higher. If you’re game, you can buy a little here and set a stop just below 12.
ETSY Weekly Chart
ETSY Daily Chart
Copa Holdings (CPA)
Why the Strength
Copa Holdings, the parent company of Copa Airlines and Copa Colombia, is riding high on a wave of positive factors for Latin American aviation. This Panamanian airline had a bad year in 2014 and a terrible 2015 (revenue was down 17% last year). But an industry-wide increase in air travel, a stringent program of cost-cutting and extremely low fuel prices put the company back into the bulls-eye for investors. The news started to improve in June, when United Airlines renewed its alliance with Copa for five years. Then came a great earnings report on August 3 that featured a huge beat on earnings—51 cents per share, versus an expected 32 cents—and a solid beat on revenue—$494 million against analysts’ estimates of $489 million. After the earnings report, Copa’s stock picked up an upgrade (to Buy) from Citi. Copa Holdings is still a turnaround story, and short interest in the stock remains high (short interest equals 13 days of average volume), which may add fuel to the rally. Copa is a substantial operation, with modern aircraft—Boeing 737-Next Generations and Embraer 190s, with 21 Boeing 737 NGs being added soon and 61 additional Boeing 737 MAX 8 and 9 aircraft to be delivered between 2018 and 2024. With its handsome 2.5% annual dividend yield, this looks like a good play on the economic rebound in Latin America.
Technical Analysis
CPA was trading at 163 in January 2014, but skidded progressively lower until it ended its free-fall at 39 in October 2015. The stock bounced to 72 in March 2016, then fell again after a disappointing earnings report in May. But after a two-month stretch of bottom building, CPA strengthened in July, then caught fire after the good earnings report on August 3. The stock hasn’t slowed down at all after its earnings gap up, so picking a buy point may be tricky. You can either wait for a dip of a couple of points or buy a small position (a half or a third of your usual position size), then average up as you get some profit cushion.
CPA Weekly Chart
CPA Daily Chart
Callon Petroleum (CPE)
Why the Strength
Energy explorers have acted encouragingly of late, with most holding firm despite a 20% dip in oil prices. And now we’re seeing some energy stocks resume their uptrends following earnings. Callon Petroleum is a new name (to us) in the sector, and not surprisingly, it’s a big player in the Permian Basin, where many current energy leaders have set up shop. Thanks to a recent acquisition, Callon now owns 34,000 acres spread across three areas in Midland Basin (which is within the larger Permian); it pumped out 13,400 barrels of energy per day (boe/d) in the second quarter (three quarters of it oil), but that’s just the beginning, as the firm estimates it has 1,700 potential horizontal drilling locations in its acreage. (For comparison, it placed 14 wells in production in the first half the year, and sees 25 to 50 years of drilling inventory depending how many rigs it has operating.) Like many of its Permian peers, Callon has decent returns even at low oil prices; when oil is $50 or so, it has a whopping 800 wells that should produce at least 25% rates of return. And costs have been slashed lately, down 24% from the prior year on a per-barrel basis. Throw in some decent hedges and a healthy balance sheet (no meaningful debt maturities until 2021), and Callon is flooring the accelerator—it sees third-quarter production up 22% sequentially (all of 2016 should be up 56% from 2015) and is aiming to add a third rig in January 2017 to further goose output. Importantly, the firm has been profitable throughout the bust.
Technical Analysis
CPE fell as low as 4 during the worst of this year’s decline, well off its all-time high north of 12. Shares rallied with the entire sector until mid-June, and then moved sideways in a two-point range for two months as oil prices capped the stock. But during the past few days, the buyers have piled in—CPE rose nine straight days (eight of them on above-average volume) coming into this week, pushing out to new price and RP highs in the process. You could buy a small position here or on dips, with a loose (percentage) stop just below 11.5.
CPE Weekly Chart
CPE Daily Chart
Alibaba (BABA)
Why the Strength
A lot of investors have been waiting a long time for Alibaba to start acting right. The company is the world’s largest e-commerce enterprise, with a market cap of $241 billion and revenue of $15.8 billion in fiscal 2016 (which ended in March), which makes it hard to ignore. But being located in China, which has some dicey regulatory risk, and with a stock that went over the falls after its 2014 IPO, Alibaba has been too scary for many investors to touch … until now. Alibaba reported its latest quarterly results last Thursday and it was an across-the-board triumph, with revenue up 48% and earnings up 25%. Analysts also loved management’s comments, which emphasized the company’s focus on mobile users and ramping up its cloud services. The company has coverage from 37 analysts, at least two of whom raised their ratings after the news, with several others raising their price targets. In addition to strong results from Taobao Marketplace (think of eBay’s online marketplace on steroids) and Tmall (high-end shopping), the company’s Alipay online payment system (like PayPal) and Ali Express (like a wholly-owned FedEx) performed well. Alibaba has a huge pot of cash to finance takeovers, joint ventures and speculative equity stakes, which makes it play even bigger than its market cap in the Chinese market. After a long period as a super-hot wallflower, Alibaba looks like it’s ready to dance.
Technical Analysis
After BABA’s post-IPO boom in September 2014 pushed it to 120 in November, the stock floundered down to a double bottom at 57 in August and September of 2015. Since that bottom, BABA has rebounded to 85 in early November, corrected to 76 then finally put in a convincing base between 75 and 80 from March through early July. The stock began to gather speed heading into the earnings report last Thursday and ripped from 85 on August 9 to 98 on August 12 on a 400% jump in trading volume. You can buy on any weakness of a couple of points, as the stock is trading free of overhead dating back to January 2015. Put a loose stop at 90, as volatility may be high.
BABA Weekly Chart
BABA Daily Chart
Applied Materials (AMAT)
Why the Strength
This semiconductor manufacturing equipment supplier continues to ride the shift in the smartphone industry toward organic light emitting diodes (OLED) display screens. Companies such as Samsung and Apple are phasing out their outdated LCD technology in favor of OLED screens, which are thinner and more energy efficient. Apple’s rumored move into OLEDs with its yet-to-debut iPhone 8 has prompted analysts to project big things from Applied Materials in the coming quarters, in large part due to a 483% jump in the company’s display screen orders in the first quarter. But OLEDs aren’t the only thing driving Applied Materials—its 10-nanometer memory technology has been a big seller as companies such as Intel, Micron and SanDisk transition to 3D NAND memory technology. Applied’s profit margins and earnings per share have been improving, and analysts are expecting 16% sales growth when the company reports third-quarter earnings this Thursday (August 18). If true, it would be the company’s best year-over-year sales improvement in more than two years.
Technical Analysis
This is a great-looking chart! AMAT has been stair-stepping higher all year, kiting from 15 to 21 in February and March, consolidating somewhat in April and early May before getting going again in late May, topping out at 24.5. It kept meeting resistance there until July brought another push higher, this time just shy of 27. It’s now poked its head above 27, and will probably stay right around there until Thursday’s earnings report. You can start small here if you want to play a possible earnings gap, and add to your position if it does break higher. Or you could simply wait to see which direction it goes after Thursday. Either way, set a stop at the 50-day line, which has acted as support since May.
AMAT Weekly Chart
AMAT 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.
