January 20, 2020

Super-Strong

Current Market Outlook

The market remains extremely strong, as the combination of a new year and reduced anxiety about China trade has encouraged the bulls and calmed the bears. At the same time, a broad correction is increasingly overdue, as numerous stocks have grown increasingly stretched far above their moving averages. Thus, when you do buy, you need to do so with an eye not just to the potential upside but the potential downside as well.

The ideal buy for many of today’s stocks might be on a brief pullback that finds support. Stocks in this issue range from global giants like Morgan Stanley and Match to smaller, faster-growing technology companies like touch-screen expert Synaptics and chipmaker-for-Apple Cirrus Logic. Our Top Pick this week is iQiYi (IQ), a fast-growing Chinese media/technology company that has its tentacles in numerous fields and is succeeding at many of them.

Cirrus Logic Inc. (CRUS)

www.cirrus.com

Why the Strength

Cirrus Logic manufactures high-precision analog and digital signal integrated circuits and the associated software for audio and voice applications, dominating the industry as a leading supplier of the complete audio signal chain, from capture to playback, with over 3,370 pending and issued patents worldwide. The company benefits from strong sales of the iPhone 11, since Apple is Cirrus’s biggest customer, and new 5G technology is expected to drive future smartphone sales, with additional product demand coming from wired and wireless headsets. The signing of the Phase One U.S.-China trade agreement removes a lot of anxiety from investors regarding potential geopolitical business disruptions throughout the technology industry. It also helps investors visualize a stronger global economy, which would certainly help Cirrus Logic through increased smartphone sales and 5G adoption. Watch for third quarter 2020 results on the afternoon of January 29 (March year end), when Cirrus is expected to report $1.14 2020 EPS and $345.7 million revenue. Bigger picture, the company is solidly profitable, and revenue is expected to grow in the low single digits in fiscal 2020 and 2021, while fiscal 2020 is expected to produce a 29% surge in profits. Cirrus has a very healthy balance sheet, with high operating margins, strong cash flow and no long-term debt. No wonder Facebook was reported to have held talks about acquiring Cirrus in 2019.

Technical Analysis

CRUS has been trending up since the start of 2019, but it really caught on fire when second quarter results were released in late October, jumping 16% to a new all-time high, building a base there for five weeks, and then embarking on a strong and steady hike higher. The stock has now been trading between 82-85 for four weeks, and a quick shakeout below the 25-day moving average at 82.5 would provide a decent buying opportunity.

CRUS Weekly Chart

CRUS Daily Chart

iQIYI (IQ)

Why the Strength

Since progress has been made on U.S.-China tariffs, the outlook for China has become increasingly positive. Industrial output for December beat estimates, rising 6.9% from a year earlier, its best showing in nine months. The service sector is growing; e-commerce continues to outpace retail sales, and Chinese consumers are spending ever-increasing amounts to ‘upgrade’ their devices, travel experiences, healthcare, and education. And with expectations for more government stimulus, the outlook is very good. And that’s great news for IQ. The Chinese video streaming service just announced a strategic partnership with Astro, a leading Malaysian satellite television operator, to market its platform to Astro’s customer base. The company is not yet making a profit, but earnings have been revised upwards by three analysts in the past 30 days, as IQ is expanding globally. It started with its iQIYI Knowledge app, and it plans to provide local language support in six Southeast Asian countries, including Malaysia, Indonesia and Thailand, among others, as well as Greater China regions including Hong Kong, Macau and Taiwan. With that app, the company has developed partnerships with more than 1,800 partners including Linkedin, Nick Vujicic, Qingting FM, Liu Tianchi Performance Workshop and more. The App offers over 37,000 courses in 15 major subject areas, including foreign languages, literature, history, art, life, parents and children, and business. One of the company’s original drama series just received an award at the Seoul International Drama awards, and one of its films was shortlisted for the 76th Venice International Film Festival. IQ is growing exponentially, with a 31% increase in its subscriber base, now numbering 105.8 million.

Technical Analysis

Shares of IQ turned up in early October and haven’t looked back since, as any corrections have been short and well-contained, never taking the stock below its 25-day moving average. The current correction, in fact, which is now over a week old, has hardly seen the stock drop at all; it looks more like a base, telling us there’s plenty of appetite for stock at this level—and little selling pressure.

IQ Weekly Chart

IQ Daily Chart

Match (MTCH)

www.matchgroup.com

Why the Strength

If you’re looking for a date, chances are you’ve been on one of Match’s sites, including Match.com, Tinder, Match, PlentyOfFish, Meetic, OkCupid, OurTime, Pairs, and Hinge—for a total of 45 sites. The company offers its services in 42 languages across more than 190 countries; it owns four of the five top grossing dating apps in North America and 3 of top 5 worldwide. Match corrals 25% of the online dating market in North America, 33% worldwide, and is the number one matchmaker in worldwide sales. Last month, IAC/Interactive Corp (IAC) announced that it would separate Match and IAC into two independent companies. Analysts expect that the separation will mean increased liquidity, strategic flexibility and index eligibility for Match. The big boys on Wall Street seem to like this idea, as ten more hedge funds have piled into the stock in the past quarter, with 41 currently holding some interest in the shares. With new product launches, an efficient marketing strategy, and its star, Tinder, now about 40% of sales—and capturing an ever-increasing audience—growth prospects appear solid. Match will report earnings on February 5, and estimates are for $0.44 per share for the quarter.

Technical Analysis

MTCH peaked at 95 last August and bottomed at 62 in November, but the real blastoff didn’t come until mid-December, when the spinoff of Match was announced. Since then, institutional buyers have been rushing to get on board, and while there’s truly been no sign of a pullback yet, prudent investors know that buying at new highs brings added short-term risks.

MTCH Weekly Chart

MTCH Daily Chart

Morgan Stanley (MS)

morganstanley.com

Why the Strength

Global investment bank Morgan Stanley thrilled investors last week by delivering record profit and revenue numbers, beating Wall Street’s fourth quarter 2019 revenue and earnings estimates, and meeting or exceeding all of CEO Jim Gorman’s performance targets. Six Wall Street firms promptly raised their price targets to a range of 58-70. Revenue was $10.9 billion, trouncing the expected $9.7 billion, and beating all analysts’ estimates, while adjusted earnings per share of $1.20 blew away the $0.99 consensus estimate. The quarter featured strength in bond trading, underwriting and investment management. Additionally, Gorman’s longer-term goal of achieving much bigger and more dependable profits in the wealth management business has already come to fruition, though Gorman’s not finished there because he announced another boost in wealth management profit margin goals. Morgan Stanley is successfully stealing market share from rivals in securities trading. Gorman also raised the bar on future performance measures. After reaching an efficiency ratio goal of 73% or lower in 2019 – a measure of costs as a percentage of revenue – Gorman named a new target of 70-72% over the next two years, which in turn will help the company reach management’s new goal of 13-15% return on equity through 2022. Morgan Stanley has repurchased 18% of their outstanding shares over the last five years.

Technical Analysis

MS has been trending higher since early October, but the stock really got going just recently; in fact, the stock is up 13% in the last eight trading days, including a 6.6% jump on triple the normal trading volume upon last week’s earnings release. Additionally, for the first time in nearly two years, MS rose above its first quarter 2018 peak at 56. The stock may need some time to consolidate that gain, but investors can start building a position here, and buy more heavily on any pullback.

MS Weekly Chart

MS Daily Chart

Novocure (NVCR)

novocure.com

Why the Strength

Novocure’s story has always been excellent, producing great growth today with the promise of much larger things going forward. Novocure’s claim to fame is its Optune system that battles specific types of cancer. It uses what are known as tumor treating (electrical) fields that, through long, low doses of radiation (often along with chemo or other treatments), disrupt cancer cell growth and boost life expectancy; the longer it’s used, the better the results. It’s also portable and can be implemented anywhere, boosting quality of life. Today it’s still operating in relatively niche areas—it’s approved to be used in concert with chemo for glioblastoma (a bad brain tumor) and for mesothelioma (first approved treatment in 15 years for this cancer commonly associated with asbestos exposure) and those are driving solid growth. In Q4, revenues rose 42% while patients using Optune totaled 2,909 (up 22%), and the near-term should see more of that (analysts see sales up 29% in 2020 and earnings leaping into the black). But the future could be many-fold better than that; Novocure is working on trials with numerous cancers (brain, lung, pancreatic, etc.) that will produce a ton of key data readouts from the second half of 2020 through 2022. And that means it could be serving a market that’s 20 times as big just three years from now! This remains a big idea.

Technical Analysis

NVCR advanced 16 of 17 weeks to all-time highs from last April through August, and it would be unusual for a stock to top out following that longer-term momentum. That’s why we’ve kept an eye on it, and after three tedious corrections during the past five months, it’s looking like the buyers may be back in control; shares got clonked at the start of January, but the week after saw a higher-volume snapback, and last week saw another even better push higher on greater volume. We’re OK starting small here or on dips of a couple of points.

NVCR Weekly Chart

NVCR Daily Chart

Synaptics (SYNA)

synaptics.com

Why the Strength

We chose Synaptics as our Top Pick in December, noting its potential for a turnaround 1) after the company hired a new CEO and CFO, who are expected to focus on operating-expense control and operating leverage and 2) as rumors were swirling that SYNA was on the verge of an agreement with Apple to supply touch controller sockets for upcoming iPhones. The Street still believes both of these catalysts, as well as the 5G launch and the potential for growing demand for organic light-emitting diode (OLED) devices (with self-illumination pixels) will propel the stock higher. SYNA produces touch, display and biometrics offerings that are integrated into mobile, PC and automotive products. Its next foray, according to Chief Technology Officer Patrick Worfolk, is ‘ambient computing’, and the company is “doubling down on its investment in screens for cars and working on technology in television set-top boxes allowing TVs to “see” who is watching in order to make personalized recommendations for programs and advertising.” Exciting—and scary—stuff! Synaptics recently announced that it was divesting its Asia-based, mobile LCD TDDI (touch and display integration) business to Hua Capital for $120 million in cash, which should increase margins. Bottom line, as these markets expand with cutting-edge technology improvements, the future looks increasingly bright for Synaptics, so EPS estimates have been rising for the company. When SYNA reports on February 6, analysts are expecting EPS of $1.45 for the quarter and $4.12 for the full year, on $3.54 million and $1.28 billion, respectively, in revenues. If the company surprises, look for more momentum in the stock.

Technical Analysis

SYNA blasted off in early November and has stair-stepped higher since then, gaining 70% since the blastoff and remaining above its 25-day moving average the entire time. At it looks like there’s more upside ahead as there’s no sign of any selling pressure and analysts now have price targets as high as 80. Try to get on board on a normal correction.

SYNA Weekly Chart

SYNA Daily Chart

Teladoc, Inc. (TDOC)

www.teladoc.com

Why the Strength

Virtual care (or sometimes called telehealth) is becoming one of the next big things in the health care field. Because it allows customers to have access to licensed professionals in a variety of fields (for everything from a common antibiotic to mental health issues and more) via voice or videoconference, it’s an idea that makes too much sense not to hit the mainstream. Teladoc is one of the leaders of the market’s advance because the firm is solidifying its lead in this emerging sector, which should lead to many years of 20% to 30% organic growth in the future. Through deals with various health insurers, big companies and hospitals, the firm had 35 million paid members (paid via subscription) in the U.S. (up 55% from a year ago) while fee-only (pay-per-visit) membership was 19 million (up 101%), both thanks in part to a recent deal with United Health that onboarded about 15 million members. All told, Q3 saw revenues up 24%, including a 23% gain in subscription revenue and a 31% hike in visit fees. Now investors are looking ahead to even better times thanks to programs to boost utilization (lots of upside there among the new United members), and from the just-announced deal to buy InTouch Health, which provides telehealth services within a hospital (such as provider-to-provider consultations) and truly makes Teladoc a one-stop shop in the industry. If management continues to pull the right levers, this company looks like an emerging blue chip in the making.

Technical Analysis

TDOC topped with many stocks in the fall of 2018 and took a long time to set up properly. But the breakout came in late October, and after a quick run to the mid 80s, it rested for a few weeks. But the buyers were back last week after the InTouch buyout announcement, pushing it to new all-time highs on big volume. You could nibble here, though given TDOC’s normal volatility, a dip of a couple of points would likely provide a decent opportunity.

TDOC Weekly Chart

TDOC Daily Chart

Thor Industries (THO)

thorindustries.com

Why the Strength

Makers of recreational vehicles (RVs) are seldom glamour stocks, but with consumer spending red hot and expectations of an accelerating economy this year, cyclical plays like Thor—the largest manufacturer of RVs out there—are coming back into favor. In the last reported quarter, about 75% of the firm’s business came from North America (two-thirds of that was towables, with motorized RVs making up the rest), with the rest from Europe (thanks mainly due to its buyout of Erwin Hymer Group last February). Business was good for many years, but the past few quarters have been tough due to slackening demand; without the Hymer buyout, Q3 revenues would have been down 5%. Yet the stock has been rising for two reasons. First, there have been some real signs of a turnaround both from the industry as a whole (dealer inventories were down 23% in October from the year before) and from Thor itself (initiatives to streamline operations have boosted margins and excess cash flow has cut down on debt). And that means investors figure a bottom in industry-wide sales has been seen (or will be soon), with analysts seeing earnings turning up here and pushing nicely higher going forward. It’s not a true growth story, but the likely upturn in the industry and Thor’s valuation of 13 times current earnings (plus the 2.0% dividend yield) should keep the buyers in charge.

Technical Analysis

From 161 in early 2018 to 42 in July of last year, it was a rough downturn for THO, but the trend has been up over the past few months, with many weeks showing well above-average volume on the buy side. More recently, the stock pulled back in late December and early January, but the 50-day line brought in the bulls, with THO ripping to new recovery highs on five straight days of big volume. Expect volatility, but the path of least resistance here is up.

THO Weekly Chart

THO Daily Chart

Toll Brothers Inc. (TOL)

tollbrothers.com

Why the Strength

Shares of homebuilder Toll Brothers are riding the wave of a very strong U.S. economy. The company designs, builds and markets homes to a diversified audience seeking single-family attached and detached homes, apartment living and retirement communities in 23 states and the District of Columbia. Last week, the U.S. Commerce Department reported that housing starts rose an unexpectedly high 16.9% in December vs. November, reaching 1.61 million homes – a number that hasn’t been reached in the last 13 years. In addition, permits for future home construction surged to a 12-year high. Business is thriving at Toll Brothers because mortgage rates are low, employment is at record levels, wages are rising and the economy is booming. The one area where housing is suffering is California, where a drop in affluent Chinese buyers who are affected by the weak yuan has led Toll Brothers and competitors to lower average selling prices by about 7%. Overall, the company is expected to achieve record revenues of $7.3 billion and $7.6 billion in 2020 and 2021. Management uses excess cash flow to support the 1% dividend yield and ongoing share repurchases. And thanks to stock buybacks, the diluted share count is down 20% in the last five years.

Technical Analysis

After a show of strength back in September, TOL traded quietly in a tight range for four months, building a base between 39-41—and that set the stage for an early January breakout and run-up on big volume. The well-earned correction may have started last Friday, and if it continues, opportunistic buyers might be able to get on board the stock on a dip toward 42—but if last week’s big volume is any clue, the stock may not dip that far.

TOL Weekly Chart

TOL Daily Chart

Vertex Pharmaceuticals (VRTX)

www.vrtx.com

Why the Strength

Vertex Pharmaceuticals was a speculative money-losing outfit for a very long time, but it’s been making hay the past few years as it advances its leading treatments for cystic fibrosis (CF), and now the stock has morphed into a liquid leader as its new treatment for CF promises to bolster earnings for a long time to come. The firm had three CF drugs on the market, each of which targeted a specific sub-segment of CF (certain gene mutations, etc.), and all expanded Vertex’s addressable market and boosted results; sales have grown 150% during the past two years (2017-2019) while earnings have done even better. But investor perception finally took a major turn for the better late last year when Vertex’s new triple combination treatment (dubbed Trikafta for CF was approved by the FDA a few months ahead of expectations. Trikafta brings a higher price point and greatly expands the number of CF patients the firm can treat (estimated at 90% of the total as a couple more label expansions are likely to be approved this year and next). The end result: Analysts see earnings about doubling during the next two years (2019-2021), with generally strong growth persisting for at least the next five years. Vertex has other irons on the clinical fire, and its $4 billion (and growing) cash position should position it to make the investments (sales, R&D, etc.) it needs to succeed. We like it.

Technical Analysis

VRTX had a great first half of 2017, but then went mostly dead for the next two years—there were some modest new highs along the way, but net-net, the stock made no progress for a little over two years until Trikafta gained approval. Since then, though, the stock has completely changed character, soaring over 220 in early December, resting for a month, and now resuming its advance this year. We’re OK buying some here or (preferably) on dips.

VRTX Weekly Chart

VRTX 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.