Improving Action as Big Investors Return
Current Market Outlook
It came on low volume and Independence Day made it just four days, but last week’s trading action was encouraging, with the major indexes generally holding key support early in the week and then bouncing nicely into the weekend. By our measures, the intermediate-term trend is still tilted up, and while there are fewer stocks hitting new highs than there were a few weeks back, there remain many stocks in good shape. With the improved evidence, we’re nudging our Market Monitor up a notch to 7; like we just wrote, last week was encouraging. But we also want to see how the indexes and leading stocks handle themselves now that big investors are back at their desks and earnings season gets underway.
This week’s list is again heavy on growth-oriented stocks, including a couple of newer names we haven’t seen before. Our Top Pick is Vertex Pharmaceuticals (VRTX), which has surged toward the top of an 11-month consolidation. We’re OK starting small and adding more if shares advance.
| Stock Name | Price | ||
|---|---|---|---|
| AeroVironment (AVAV) | 80.48 | ||
| Carrizo Oil & Gas (CRZO) | 24.03 | ||
| Dexcom (DXCM) | 421.36 | ||
| iRhythm Technologies (IRTC) | 51.15 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Novocure (NVCR) | 0.00 | ||
| Shake Shack (SHAK) | 92.08 | ||
| Twitter (TWTR) | 40.37 | ||
| Vertex Pharmaceuticals (VRTX) | 230.36 | ||
| Yext Inc. (YEXT) | 21.32 |
AeroVironment (AVAV)
Why the Strength
AeroVironment specializes in robotics, sensors, analytics and connectivity technologies. Its biggest business is making drones and tactical missile systems for the U.S. Department of Defense (DoD) and 45 international allied governments. This business has been drawing more attention given the perception of global threats and pattern of higher defense spending around the world. Customers rely on AeroVironment for equipment and services that provide situational awareness, remote sensing, multi-band communications and force protection. There are also commercial applications for AeroVironment’s Unmanned Aircraft Systems (UAS), including agriculture and telecommunications. The stock is doing well because revenue growth—which has historically been relatively slow—accelerated to 18% in 2017 and EPS in the just-reported fourth quarter of fiscal 2018 jumped by 129% to $0.85 (beating estimates by an impressive $0.31). This uptick in growth is a big position, but the really big development is the announcement that AeroVironment is selling its Efficient Energy Systems (EES) segment, which generated around 15% of revenue last year. Divesting this business means doubling down on AeroVironment’s core competencies of robotics, sensors, software analytics and connectivity solutions. And that has investors excited about expanded offerings and revenue growth in military, agriculture and telecommunications markets.
Technical Analysis
AVAV moved sideways in 2016 and the first half of last year, mostly trading in the 25 to 30 range. The stock then made a couple of big moves in the second half of 2017 that carried it to a high of 59 just before the New Year. Shares effectively went on to build another big launching pad, with support in te 45 to 50 area and resistance around 60. AVAV was trading right near its previous 52-week high two weeks ago, before a blastoff rally sent the stock to new highs above 70. You can buy a little on minor weakness.
AVAV Weekly Chart
AVAV Daily Chart
Carrizo Oil & Gas (CRZO)
Why the Strength
We’re seeing more and more solid setups in the energy patch, and Carrizo looks poised to join the parade should the group really get moving. The company used to operate all over the place, but through a big acquisition and divestiture program, its acreage is now split between the Eagle Ford Shale (79,000 acres, more than 700 undrilled locations) and Delaware Basin (39,000 acres, more than 1,000 undrilled locations). The Eagle Ford is seeing slow, steady production growth for Carrizo (5% to 10%) and is free cash flow positive. And that cash flow is being used in part to invest in the Delaware, which is the growth engine for the company—the firm’s output in this area is expected to more than double this year! (Total output should expand more than 30% this year, adjusted for divestitures.) Beyond production growth, Carrizo also sports a solid balance sheet (few debt maturities before 2022), a well-managed hedge book, has advantageous takeaway deals and sports excellent well returns in both the Delaware (60% to 90% returns at $60 oil) and Eagle Ford (north of 100% at $60 oil). Sales and earnings have been picking up steam, and analysts see the good times continuing at least through next year. We think shares will do well if oil prices remain elevated.
Technical Analysis
Most energy stocks bottomed in early 2016, but not CRZO, which fell to a new low at 11 last September (down from 70 in 2014!) and was still around 13.5 in early March of this year. But the stock has changed character since then, surging as high as 29 in May and, despite the sector’s wobbles, has held its 25-day line ever since and poked to a new high two weeks ago. We’re OK buying some here with a stop under the 50-day line (near 26).
CRZO Weekly Chart
CRZO Daily Chart
Dexcom (DXCM)
Why the Strength
Roughly 60 million people in the U.S. and European Union are affected by diabetes, and around six million of them are on intensive insulin therapy. DexCom helps these people manage their condition with continuous glucose monitoring (CGM) devices. The company’s G5 CGM was approved for Type 1 diabetes back in 2016. But the real excitement now surrounds DexCom’s G6 CGM system, which was extremely quick to receive FDA approval and is the first system of its kind 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 and it eliminates the need for twice-daily finger-sticks for calibration. The equipment began shipping in limited quantities earlier in 2018 and should just be entering full-scale distribution right around now. The receipt of the CE Mark last month means the device is also available in the U.K. and Ireland, with other European countries set to start shipping later in the year. DexCom’s growth was already impressive prior to the G6 CGM system approval, with revenue and EPS were both up around 25% in 2017. And while top-line growth is likely to moderate due to the larger customer base, investors should expect 20% revenue growth and continued progress toward profitability (losses are expected to steadily shrink going forward) to keep shares moving higher.
Technical Analysis
DXCM went on a huge, multi-year run from 2008 through late 2015 then stalled out for a couple of years as shares digested their gains. The stock then took a hit in 2017 as competitors caught up and received FDA approval for their own CGMs. But DXCM began to bounce back as news of the G6 system hit the wires and investor perception turned positive again. Over the last seven months shares have rallied back near their previous all-time high of 103. You can pick up a few shares in advance of the company’s Q2 2018 earnings report, which is due out on August 1.
DXCM Weekly Chart
DXCM Daily Chart
iRhythm Technologies (IRTC)
Why the Strength
Cardiac arrhythmias like atrial fibrillation are potentially life threatening, and physicians take them very seriously, often prescribing the use of monitors worn on the body. iRhythm is the developer of Zio, a monitor that needs no attached electrodes or attached recorders to record up to 14 days of uninterrupted data on heart rhythms. Zio can be worn during sleep, showers or exercise, so compliance is high and clinicians get a very accurate picture of the heart’s behavior. The medical community appears to be recognizing the superiority of Zio over the old Holter monitors that required multiple attached electrodes and a recorder that was worn around the neck or on the belt. The company’s Q1 results on May 2 showed a 43% jump in revenue (the 13th consecutive quarter with revenue growth over 40%) and cited clinical results showing a clear superiority of Zio monitoring in newly diagnosing atrial fibrillation versus routine care. The company isn’t expected to achieve profitability any time soon, but its superior technology and results all point toward improved fiscal results. The cardiac monitoring market in the U.S. is around $1.4 billion annually, so iRhythm has plenty of head room.
Technical Analysis
IRTC came public in October 2016 at 26, and has essentially been in an uptrend ever since, with a few pullbacks and pauses along the way. IRTC stagnated under resistance around 65 from January 2018 until the great May 2 earnings report got it moving again. The stock reached 85 on June 18, then dipped to 77 on June 25 before pushing out to new highs last week. This is still a fairly new story, and institutional support, although growing, numbers just 332. You can buy into the story on any normal weakness with a loose stop around 78.
IRTC Weekly Chart
IRTC Daily Chart
Lululemon Athletica (LULU)
Why the Strength
After five years of slowing growth, corporate snafus and no progress from the stock, Lululemon is once again a leader as management is making the right moves and the firm’s underlying business reaccelerates. The company, of course, was one of the pioneers in the athleisure apparel movement, and it’s always had a great brand, but competition and numerous missteps crimped earnings growth—from 2013 through 2017, earnings advanced a total of just 18%. But management has cleaned up the mistakes, focused on execution (after-tax profit margin at 11.6% in Q1, up from 8.5% a year ago) and broadened its product line (bras for women, athletic wear for men) and put an emphasis on its e-commerce capabilities (where sales rose a whopping 60% in Q1!). It’s also expanding omnichannel offerings, such as shipping an online product right from a store, and ordering online but picking up in a store, etc. The result was a coming out party in Q1, where sales and earnings growth of 25% and 72%, respectively, were the highest in years, and analysts tripped over themselves to boost their estimates going forward. Institutional investors are certainly believers that growth will continue to pick up—836 funds now own shares, up from 699 a year ago.
Technical Analysis
LULU went very tight the first three months of this year before gapping up on earnings near the end of March, notching a breakout from its five-year base. The action since then has been pristine, with a smooth advance through May, another gap up in June, and a nice, tight flat patch during the past month. With the stock finding support near its 25-day line last week, we’re OK buying around here with a stop below the 50-day line.
LULU Weekly Chart
LULU Daily Chart
Novocure (NVCR)
Why the Strength
NovoCure is a U.K.-based company that has developed a novel treatment for glioblastoma multiforme, a particular kind of brain cancer, and the treatment may prove to be of use against other solid tumors. NovoCure‘s Optune system uses Tumor Treating Fields, which are electric fields at specific frequencies alternating between 100,000 and 300,000 times per second to physically disrupt cancer cells, causing their death. Used in conjunction with temozolomide chemotherapy (and after surgery), Optune therapy has proven effective in increasing survival rates beyond the use of chemotherapy alone. But the real opportunity for NovoCure isn’t the 2,000 or so patients who have been treated so far. Rather, it’s the possible use against 17 other solid-tumor cancers that has investors paying attention. The company has its Optune Tumor Treating Fields in Phase III trials for the treatment of brain metastasis, non-small cell lung cancer and pancreatic cancer, and Phase II trials for ovarian cancer and mesothelioma, with pre-clinical research underway on 13 additional types of cancer. NovoCure isn’t expected to turn profitable until 2019, but has three years of triple-digit revenue growth, albeit from fairly small levels (just $52 million in Q1). NovoCure will report its latest quarterly results on July 26 before the market opens, but news from clinical trials will still be the biggest catalyst for movement in its stock.
Technical Analysis
NVCR came public at 15 in October 2015 and traded higher for a few months before keeling over into a prolonged correction that ended with a double bottom at 6 in November 2016 and February 2017. The stock caught fire in April 2017 and ran until it hit resistance in July 2017, where it built a long base before breaking out again on big volume on April 17. The stock rallied to resistance at 32 in May and just edged out to new highs has week. This is a speculative stock, but the story is unique, and has good potential for another clinical trial-fuelled run. You can nibble here with a stop around 30.
NVCR Weekly Chart
NVCR Daily Chart
Shake Shack (SHAK)
Why the Strength
As an old-fashioned burger joint that has a bit of a cult-like following (similar to Krispy Kreme back in the day, for those who remember), Shake Shack has always has a solid fundamental story. But the stock has turned strong during the past two months because big investors are coming around to the view that the firm’s rapid expansion plan will bear fruit going forward. The company had just 21 stores at the end of 2012, but that figure grew to 84 in 2015 and 159 at the end of last year! That breakneck pace of growth might seem unsustainable, but management isn’t slowing down—the firm expects to end this year with more than 210 locations, including 35-ish domestic openings and 15-ish international openings through licensed partnerships. Such a rapid growth path has kept revenues cranking ahead (27% to 31% for the past three quarters), and cash flow has been solid, too (EBITDA rose 32% in the first quarter). Earnings have been hit or miss, though that could be changing—the first quarter’s bottom line of 15 cents per share came in seven cents above expectations and were up 50% from a year ago. Analysts are still skeptical (they see earnings down a bit this year), but the action of the stock suggests institutional investors believe the firm has turned the corner. It’s a good story.
Technical Analysis
SHAK bottomed out around 30 numerous times from early 2016 through September 2017 before barreling ahead to 48 last December. Then came a great-looking base and a powerful breakout in May. And since then the stock has moved as high as 70 before pulling back toward its 10-week line. Most times, the first pullback to that line after an initial breakout is buyable, so we think grabbing shares of SHAK here makes sense.
SHAK Weekly Chart
SHAK Daily Chart
Twitter (TWTR)
Why the Strength
Twitter, which is making its eleventh appearance in today’s Cabot Top Ten Trader, has come in for a ton of criticism in the past few years about its failure to control fake accounts and fake news. In fact, the company’s stock took a hit today because of a Washington Post story reporting that Twitter is canceling more than a million fake accounts every day, double its October cancellation rate. On the other hand, with 336 million monthly average users (MAU) in its latest quarterly report, Twitter is still the largest global real-time platform for live messages of up to 280 characters and a vibrant source of both real news and social prattle. The company’s earnings have picked up after a slow patch in 2016 and 2017, with 73% EPS growth in Q4 2017 and 129% in Q1. Analysts are forecasting 68% EPA growth in 2018. Opinion is divided on whether the company’s efforts to “improve the quality of its conversation” (cleaning up the spam bots) will help or hurt its results in the long run. But there’s no question the underlying business has been picking up steam, and a mid-day note from the company said the current user count doesn’t include most of these “fake” accounts, which helped shares.
Technical Analysis
TWTR fell a long way from its post-IPO high at 75 at the end of 2013 to its emphatic double bottom at 14 in May 2016 and April 2017. TWTR has bounced back from those lows, and got nice blastoff action on big volume in February and June of this year. But since hitting resistance around 47 in June, TWTR has been trading sideways and took a big hit today. This could be a shakeout on obvious “bad” news, but the best policy is probably to keep any new investments in Twitter small until investors’ make their votes clear in the chart. A move above resistance at 47–48 would be highly bullish, but a continued sharp slide would be a bad sign.
TWTR Weekly Chart
TWTR Daily Chart
Vertex Pharmaceuticals (VRTX)
Why the Strength
Vertex Pharmaceuticals is all about cystic fibrosis (CF), with three of the industry’s most successful treatments on the market today: Kalydeco ($250M of revenue in Q1, up 34%), Orkambi ($354M of revenue, up 20%) and Symdecko ($34M of revenue, just approved in Q1 of this year) all address a specific sub-segment of the CF market (certain ages and certain gene mutations). There are about 34,000 patients eligible for these three treatments today, but that figure is set to rise rapidly thanks to label expansions for these products and eventual approval of a handful of new treatments today, including a couple of CF treatments that are ramping up Phase III trials now. The stock is set up well today for a few reasons. First, of course, business is good—while sales dipped in Q1, that was all about a drop in research revenues; CF-related sales rose 33% and management is guiding toward a 25% gain from these products for this year. Second, after years of losses, margins are finally surging, which is leading to excellent recent (85% in Q1) and projected (64% this year, 43% next) earnings growth. And third, recent clinical results from a competing CF treatment (Galapagos) fell flat, which cements Vertex’s position at the top of the CF industry. It’s a great story with upside ahead as label expansions and approvals roll in.
Technical Analysis
VRTX isn’t technically strong, but our screens this week picked up on (a) the stock’s huge base that began in July of last year and (b) the huge upside volume and price move that came two weeks ago, when Galapagos’ CF treatment failed to impress. VRTX built on those gains last week and approached the top of its base. We’re OK nibbling here, with the idea of adding shares on a push above 179 or so. Earnings are likely out in a couple of weeks.
VRTX Weekly Chart
VRTX Daily Chart
Yext Inc. (YEXT)
Why the Strength
Yext helps companies maintain control over their brand experiences across the digital universe of maps, apps, search engines and other solutions that consumers interact with daily, including Apple Maps, Bing, Facebook, Google and Siri. Its Digital Knowledge Management (DKM) platform is used by thousands of brands to manage all the public facts about their companies to boost consumer engagement, drive sales growth and increase foot traffic. It is the leader in a relatively new, $10 billion addressable market. And that, along with a recent sales push to grab more big enterprise customers, has the market excited about Yext’s future growth potential. That’s not to say that it hasn’t already delivered solid growth! Revenue was up 37% last year and 38% in the recently reported first quarter of fiscal 2019, when management also boosted full-year guidance due to sales force productivity (60 new enterprise logos were landed following 80 in the previous quarter) and penetration overseas (especially China and Japan). The company is also making progress on the bottom line as gross margins jumped 1.8% to 75% in Q1, and Yext was cash flow positive for the first time. While profitability is still a couple years off, analysts see the next wave of growth coming from larger customers, which should help Yext sustain 30%-plus revenue growth for at least the next two years.
Technical Analysis
YEXT went public at 11 last April, and while shares surged out of the gate, they never really got going; the stock oscillated between 12 and 15 for most of the next twelve months. Trading action became more constructive in May when a better-than-expected quarterly earnings result, and boost to forward guidance inspired a blastoff rally that carried YEXT above its previous all-time high of 15. Demand for the stock helped YEXT trade up above 19 in June. For the last three weeks the stock has been re-basing in the 18.5 to 20 area. It’s volatile, so keep positions small and aim for dips.
YEXT Weekly Chart
YEXT 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.
