Key Levels Being Tested
Current Market Outlook
The selling pressure that appeared two weeks ago carried through to last week, with many leading stocks breaking down and others falling back into consolidations. That said, it’s not the end of the world—many major indexes are now testing their 50-day lines, and a bunch of stocks are in the same boat. There’s no question that the evidence has worsened lately, which is why our Market Monitor is back down to a reading of 6 (out of 10), but we’re most interested in what happens from here, which will probably go a long way toward determining the market’s next intermediate-term move. All told, you should still hold your strong, profitable stocks, but we also think it’s best to cool your heels a bit, keeping new buys small and holding some cash as we wait to see the market show its hand.
In the meantime, we’re using this brief period of market weakness to identify the stocks unaffected by the selling, as those will likely do the best when the market resumes its major advance. This week’s list has plenty to choose from, and our Top Pick is Wayfair (W), which is unusually strong—keep positions small and try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Five Below (FIVE) | 134.58 | ||
| Ligand Pharmaceuticals (LGND) | 267.14 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Oasis Petroleum (OAS) | 12.57 | ||
| Supernus Pharmaceuticals (SUPN) | 52.50 | ||
| Teladoc, Inc. (TDOC) | 127.95 | ||
| Ultragenyx Pharmaceutical Inc. (RARE) | 87.63 | ||
| Wayfair (W) | 167.03 | ||
| WellCare Health Plans, Inc. (WCG) | 271.83 | ||
| WPX Energy (WPX) | 0.00 |
Five Below (FIVE)
Why the Strength
Specialty retail stocks remain a bastion of resilience in the market, as big investors are paying up for many companies that likely have years of growth ahead of them. Five Below has long been our favorite cookie-cutter story for many reasons. First, the company’s products—teen and pre-teen goods, all selling for $5 or less, including party supplies, sports goods, snacks, games, beauty supplies and even some clothing—sell well in all environments. Indeed, the firm’s same-store sales have risen every year for more than a decade. That has led to jaw-dropping store economics; the average new store pays back its initial investment in less than one year! And that has led to a rapid store expansion program, with the top brass increasing Five Below’s store count about 20% annually and believes it can eventually quadruple its total (to 2,500, from 675 at year-end 2017). (Some analysts even think that 2,500 figure could be conservative.) The stock went nuts after earnings three weeks ago because big investors see not just years of 20%-plus growth, but see that growth being very reliable, too. It’s a great story that we think institutions will stand behind for a long time.
Technical Analysis
FIVE broke out from a five-year base last November, which was a big clue the trend had changed. But after running up nicely into the New Year, the stock then sputtered out—shares went up and down, but net-net, made no progress from early January through early June. That changed on earnings, with FIVE catapulting before (on an upgrade) and after the report. It’s since slid a bit, and could easily retreat a bit more, especially if the market remains choppy. We think dips are buyable.
FIVE Weekly Chart
FIVE Daily Chart
Ligand Pharmaceuticals (LGND)
Why the Strength
Biotech stocks remain a mixed bag, with most of the big, old firms in the sector struggling, but a bunch of less well-known companies with big stories acting well. Ligand, which has made three other appearances in Top Ten this year, is a unique story in the biotech world. The company is basically a licensing operation, as it conducts early-stage research and discovers potential drugs, but then licenses out those ideas to others, who design and pay for studies, take them through trials and decide which indications to pursue—and pays royalties to Ligand once the drugs hit the market. Ligand also provides research tools and platforms that companies sign up for, pay milestones for and, should a drug stemming from that platform hit the market, pay Ligand royalties. Right now, most royalties come from two drugs (one marketed by Amgen, the other by Novartis), but two others are beginning to crank out royalties and a bunch more will hit the market in the years ahead. In the short-term, the stock is strong because the firm just got a big $47 million milestone payment from Wuxi Pharmaceuticals as that company expanded its use of Ligand’s research platforms—that should push earnings north of $6 per share this year! The quarter-to-quarter results can be lumpy, but long-term, this is a great story.
Technical Analysis
The third time looks to be the charm for LGND, which tried to get going in both January and March, but each time was pulled down by the market. But the stock’s move to new highs in May stuck—shares basically marked time in the 185 to 200 area after that, and even as growth stocks have taken a hit, LGND has found buyers, popping to new highs last week. We’re OK buying here or (preferably) on pullbacks.
LGND Weekly Chart
LGND Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
At this point, with almost 50 appearances in Cabot Top Ten Trader since its debut in 2003, Netflix isn’t a surprise to anybody. Under the leadership of Reed Hastings, the company has morphed from a Blockbuster-killing DVD-by-mail-based business model to a power in streaming video and finally to a major force in the production of original content. And it’s the original content, provided without viewing limits, that has propelled the growth of the company’s subscriber list to over 125 million members in over 190 countries. The company expects to lay out between $7.5 billion and $8 billion in content expense in 2018 to keep the supply of new series, films, unscripted shows, documentaries, comedy specials and non-English language shows flowing. In Q1, the company debuted The End of the F***ing World and Altered Carbon, and returning seasons of Marvel’s Jessica Jones, Grace and Frankie, Santa Clarita Diet and A Series of Unfortunate Events. The bottom line of all that production was a 32% increase in revenue and a whopping 191% jump in earnings in 2017. There is no such thing as a can’t-miss company, but Netflix has proven more capable than most of its rivals at making the right decisions and producing great content. When the company releases its Q2 results on July 16 after the market closes, analysts are expecting revenue of $3.94 billion and earnings of 80 cents per share. Those numbers (and the reaction to them) will set the tone for the immediate future.
Technical Analysis
NFLX took a five-month break to end 2017, trading flat after a big July gap up. But 2018 has been a great year, with only a pullback from 331 in March to 275 at the start of April to spoil the fun. NFLX ran all the way to 423 on June 21 before a reasonable pullback toward its 25-day moving average. The dip at the start of Monday’s trading quickly evaporated and the stock looks buyable. You might want to keep new positions small with earnings in two weeks.
NFLX Weekly Chart
NFLX Daily Chart
Oasis Petroleum (OAS)
Why the Strength
After consolidating for five weeks following healthy advances in April and May, energy stocks are showing some life, and Oasis Petroleum looks like it wants to go higher once the uptrend resumes. The company has good-sized stakes in both the Williston Basin (where it has about 1,050 potential drilling locations) and the Delaware Basin (about 500 locations), though most production comes from the Willston. Obviously, the recent bump in oil prices is one reason the stock is strong, but Oasis has a couple of unique characteristics big investors like. First, unlike most peers, despite a solid production growth program (it has about six rigs operating and expects 15% to 20% production growth both this year and next), the firm is cash flow positive even after exploration and production spending. One reason for this: Oasis’ core Williston well locations are de-risked and have excellent returns of 75%-plus even at $55 oil! Another factor working in Oasis’ favor is the firm’s midstream arm, which just went public last September (symbol OMP)—it operates in the Williston, has about 75 miles of gathering lines, a ton of processing capacity, freshwater distribution and a bunch of storage; it’s aiming for 20% distribution and cash flow growth each of the next two years and already has a market cap of $500 million (Oasis owns two-thirds of the operation). It’s a solid energy story.
Technical Analysis
OAS fell from 17 in late 2016 to 7 last September, and after a rally, dipped back to that 7 level in February and March of this year. But the stock changed character in April—OAS rallied seven of eight weeks to nearly 14, including four in a row on big volume. It’s flopped around since then, but shown solid resilience, with the stock nosing to new highs last week before being yanked lower. You could nibble here, with the idea of adding shares if the stock and sector get going.
OAS Weekly Chart
OAS Daily Chart
Supernus Pharmaceuticals (SUPN)
Why the Strength
Maryland-based Supernus Pharmaceuticals is a drug company focused on central nervous system diseases with two marketable drugs and a pipeline with a couple of high-potential drugs. The company’s Trokendi XR, an extended-release treatment for migraines, and Oxtellar XR, an extended release treatment for epilepsy, both of which launched in 2013, have made the company solidly profitable, with revenue up 46% in 2016, 41% in 2017 and jumping 57% higher in Q1. The company has two important drugs in its pipeline: SPN-810, a treatment for Impulsive Aggression in ADHD (a condition for which there are no approved products), and SON 812, a treatment for ADHD, both of which are in Phase III trials. Also in Phase III trials is an additional indication for Oxtellar XR and SPN-809, a depression treatment that is in development and is Phase II ready. Supernus, which has made three previous appearances in Top Ten, is driven by news from clinical trials and by increases in the annual prescriptions written for Trokendi and Oxtellar, which have enjoyed a combined annual growth rate of 110% since their introduction in 2013. The combined target markets for the two drugs is $13.4 billion, with some analysts seeing a peak market share of 8% for the two drugs’ use against epilepsy and migraine and 5% for Oxtellar’s use against bipolar conditions. This is a healthy drug company with excellent upside potential.
Technical Analysis
SUPN was a steady advancer from early 2016 through much of 2017, but a big pullback in September led to an almost eight-month re-basing period that only ended with the good earnings news in May. SUPN has been consolidating its May 11 runup to 58, taking a couple of shots at resistance at 60 and staying in the neighborhood of its 25-day moving average. Today’s pullback looks buyable.
SUPN Weekly Chart
SUPN Daily Chart
Teladoc, Inc. (TDOC)
Why the Strength
We always like companies that are leaders in an entirely new industry—ones that didn’t exist a few years ago—and Teladoc is one of them. The company is the clear leader in the telemedicine (sometimes called virtual care) sector, which is transforming how people access health care. The company’s members (20.8 million as of Q1, up 41% from a year ago) can call or videoconference one of many thousands of doctors that are aligned with Teladoc in a variety of specialties (everything from behavior health to dermatology to HIV to normal colds or flus) to get prescriptions and treatment options. For big customers (more than 300 of the Fortune 1000 have signed up), that means less sick time for employees, who gain a clear benefit, too. (The firm has deals with most big health plans and more than 200 hospitals, so clients have access to everything they need.) Teladoc continues to expand its offerings and cement its #1 position in the sector, mostly via acquisition—the company recently announced the purchase of Advance Medical, for instance, which is the leading virtual care provider outside the U.S.! In the first quarter, total “visits” rose 57% to 606,000, while revenues (mostly from subscription fees, but also per-visit fees) boomed 109% and organic revenue (ex-acquisitions) lifted 47%. With everyone looking to cut health care costs (both time and money), virtual care should have a bright future, and Teladoc is the leader.
Technical Analysis
TDOC built a big base from last June through February of this year, when it broke out above 38. But the market wasn’t in good shape, which caused the stock to rest a while longer. But after a shakeout in early May following Q1 earnings, TDOC turned very strong, ripping higher seven weeks in a row to new highs near 64. The pullback since then has been sharp, but normal, with the stock finding some support near the 25-day line. You can nibble here or on dips.
TDOC Weekly Chart
TDOC Daily Chart
Ultragenyx Pharmaceutical Inc. (RARE)
Why the Strength
Ultragenyx Pharmaceuticals is a commercial-stage biotech company that specializes in gene-therapy treatments for serious, debilitating genetic diseases. It currently has two approved therapies and boasts a stacked pipeline with 13 additional candidates in various stages of development. The stock is making its debut in Top Ten this week because of compelling pipeline progress and broad strength in gene-therapy stocks after positive data from peer Sarepta Therapeutics a couple weeks ago. Ultragenyx’s Crysvita therapy was approved in April and is now available to adults and children with X-linked hypophosphatemia (XLH), a market estimated at 48,000 people. The second commercial treatment is Mepsevii, which was approved by the FDA in November 2017 for the treatment of children and adults with Mucopolysaccharidosis VII, an extremely rare and debilitating disease estimated to affect 400 people worldwide. Mepsevii is also one step closer to being approved in Europe after the CHMP adopted a positive opinion on Friday. These aren’t huge markets, but investors are looking forward to data readouts for pipeline drugs in the second half of this year which, when all added up, could generate a sizable amount of sales. Gene therapy is as cutting-edge as it gets and analysts expect Ultragenyx revenues of $43 million this year and nearly $100 million next, but that’s just the beginning—some see the company’s top-line rising to north of $1 billion by 2024! Encouragingly, big investors are believers, with 400 mutual funds owning shares.
Technical Analysis
RARE has been up and down over the years depending on pipeline progress, and shares traded near multi-year lows in early-2018 when there wasn’t a heck of a lot going on. But the stock began to shape up in April then began a steady advance after Q1 earnings in early-May beat by a mile, partially due to the sale of a priority review voucher (PRV). Impressively, RARE marched higher 10 weeks in a row on a big pickup in volume, and the recent market-induced pullback looks normal—you can buy a little around here.
RARE Weekly Chart
RARE Daily Chart
Wayfair (W)
Why the Strength
Wayfair was in lots of headlines recently as the loser in the Supreme Court’s decision to allow states to collect taxes on sales to its citizens regardless of whether a company had a physical presence in the state. The news that national retailers would be required to collect and distribute state sales taxes was thought to be bad news for retailers like Amazon and Wayfair, but investors don’t seem to care much. Wayfair, a furniture and furnishings giant that offers over eight million products from over 10,000 suppliers, is seen by many as a risky proposition; short sellers target it heavily and the company has yet to make a profit. But revenue growth, while down from 71% in 2015 to 40% in 2017 (and back up to 46% in Q1), is strong and sponsorship by institutional investors is now up to 439, up from 271 a year ago. Wayfair just added a new line of furniture and accessories for pets called Archie & Oscar, with more than 500 furnishings from aquariums to Murphy beds for dogs and cats. The company has added free delivery to its pitch in TV commercials. Investors are betting that the company will continue to increase sales, with earnings turning positive at some point. The company’s stock has been doing well since the May 2 earnings report that featured higher-than-expected revenue and, even more important, a jump in active users of 33% to 11.8 million in Q1. At this point, investors with optimistic ideas about Wayfair are beating the socks off the short sellers.
Technical Analysis
W has been a volatile performer since it came out of its long dormancy in the second quarter of 2017. Recent action has been dominated by reactions to earnings reports, with a big gap down from 96 to 74 on February 22 (and subsequent slide to 60 on April 30) and a big gap up after the good report on May 2. W pushed out to new highs near 120 last week, and has been resisting market pressure by holding much of those gains through today and we like the persistent upmove in recent weeks. Look for any normal pullback to get started and give the stock a loose leash.
W Weekly Chart
W Daily Chart
WellCare Health Plans, Inc. (WCG)
Why the Strength
Florida-based WellCare Health Plans is a niche player in the healthcare business, focusing exclusively on plans based on government-sponsored managed care services. The company serves about 4.3 million clients nationwide, providing Medicaid, Medicare Advantage and Medicare Prescription Drug Plans to a variety of groups. The company’s focus has produced a high level of expertise in navigating the changing waters of government health plans, and that has produced profitable growth for WellCare. After two years of single-digit revenue growth, the company reported 19% growth in 2017 and 18% growth in Q1. Analysts are forecasting 28% earnings growth in 2018 and 17% in 2019. Despite changes in government sponsored healthcare plans, WellCare continues to thrive by serving its target niche. The $800 million acquisition of Universal American Corp., which closed in April 2017, is expected to bring $25 million to $30 million in synergies to WellCare by 2019. The company will report its Q2 results on July 31 before the market opens.
Technical Analysis
WCG has enjoyed a great run that started with the stock trading below 70 in February 2016. The stock has taken several lengthy breaks during 2017 and 2018, but caught a strong updraft in the middle of April, soaring out of a very tight two-month bottom area between 190 and 200, reaching new all-time highs in late May and continuing to rally to 248 last week. WCG has made a big move, but isn’t especially extended (its 25-day moving average is at 236) and looks buyable on any pullback of a few points.
WCG Weekly Chart
WCG Daily Chart
WPX Energy (WPX)
Why the Strength
Few have heard of WPX Energy, but it has one of the best growth stories in the energy patch, and one of the strongest charts, too. Interestingly, like Oasis Petroleum (written about earlier in this issue), WPX also operates in both the Delaware Basin (131,000 net acres and a whopping 6,600 drilling locations) and the Williston Basin (85,000 acres, 465 locations), and it, too has a midstream operation (though it’s not publicly traded). The company’s numbers in the table below don’t look great, but that’s partially because the firm is selling its San Juan basin operations—the two other basins it’s active in are driving huge production growth (Delaware output in Q1 rose 149% from a year ago, while Williston output was up 34% despite weather-related delays), led by oil and liquids production (oil sales were up 126%, and 80% of all output will likely be oil or liquids going forward). Another plus: the company has been ahead of the game at securing sales of its output outside of the Permian Basin, where prices have fallen because production has spiked and pipeline capacity has fallen behind; the result for WPX is higher realized prices and cash flow (excluding drilling costs, cash flow rose triple digits in Q1). While production growth will surely slow from the recent breakneck pace, WPX’s top and bottom lines should surge in the quarters ahead. Earnings are due out August 2.
Technical Analysis
WPX ran up to long-time resistance around 16 in January, then built an 11-week base during the market correction. The breakout came in April (and lifted the stock to multi-year highs) before the energy sector again stagnated. But WPX held up well during the past seven weeks, holding mostly above its 50-day line and is within shouting distance of new highs. You could nibble here, or just wait for a breakout above 19.
WPX Weekly Chart
WPX 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.
