Next Step: Upside Follow Through
Current Market Outlook
The market had a relatively quiet week, with the major indexes slipping a fraction of a percent on light volume and most leading stocks marking time after solid advances the prior two weeks. So far, this action is totally acceptable, but the key will be what happens from here—a couple of large, high-volume selloffs would put a serious dent in the rally, but upside follow through in the indexes and many leading growth stocks would go a long way toward confirming that the January-May market correction is over. For now, we advise sticking with a “lean bullish” mentality; we’re OK doing some buying, but also picking your spots and holding some cash as we look for follow through. Our Market Monitor remains unchanged.
This week’s list has a ton of strong stocks in a variety of growth-oriented sectors. Our Top Pick is LPL Financial (LPLA), a mid-sized Bull Market stock that is acting very well and recently crushed earnings expectations.
| Stock Name | Price | ||
|---|---|---|---|
| 51job, Inc. (JOBS) | 0.00 | ||
| Baozun (BZUN) | 44.24 | ||
| Carvana (CVNA) | 82.90 | ||
| Illumina Inc. (ILMN) | 289.74 | ||
| Ligand Pharmaceuticals (LGND) | 267.14 | ||
| LPL Financial Holdings (LPLA) | 85.22 | ||
| Penn National Gaming (PENN) | 45.38 | ||
| SolarEdge Technologies Inc. (SEDG) | 124.37 | ||
| Supernus Pharmaceuticals (SUPN) | 52.50 | ||
| WildHorse Resource (WRD) | 0.00 |
51job, Inc. (JOBS)
Why the Strength
Making its debut in today’s Cabot Top Ten Trader, 51Job is a leader in connecting Chinese employers with job seekers. When the company incorporated in 1998, the Chinese job market was negotiated primarily via print ads in newspapers and on job boards. Today, the company still serves its huge client list with print ads, but also offers campus recruitment, executive search, training, assessment, HR outsourcing and salary surveys. The company has grown earnings every year except 2008 and revenue every year except 2009. The stock is hot today because the last two earnings reports (March 1 and May 3) were stronger than estimated, with revenue growing 33% in Q4 2017 and 46% in Q1 2018, while earnings were up 48% and 20%, respectively, in the same two quarters, with after-tax profit margins topping 30% in both. With the Chinese economy and job market growing at a steady pace and Chinese American Depositary Receipts (ADRs) finding favor with investors on U.S. exchanges, 51Job is a steady way to participate in that strength.
Technical Analysis
JOBS hit a high of 34 before the Great Recession, and despite strong advances in 2009 and 2013, it took about a decade to move past that old high. The stock was range bound from 2013 through 2016, and finally broke out in 2017 with a run from 34 to 62. And since the start of 2018, JOBS has been a rocket, gapping up on March 2 and May 4 and topping 100 last week. The Chinese job market is an immense story, especially with the global economy accelerating and talk that the U.S.-China trade spat could be easing, and JOBS looks like a great way to play the trend. Look to buy on any normal weakness and use a loose stop to accommodate the stock’s recent run and volatility.
JOBS Weekly Chart
JOBS Daily Chart
Baozun (BZUN)
Why the Strength
Since its founding in Shanghai in 2006, Baozun has built itself into an e-commerce colossus by partnering with (mostly) Western brands to build online sales in China. Baozun works for companies like Nike, Levi’s, Fiat, Haagen Dazs, Johnson & Johnson, Pepsi, Microsoft and GoPro, selling their goods directly online and easing their way onto the most popular Chinese online platforms like Alibaba’s Tmall, JD.com, social mobile shopping malls, official online stores and offline smart stores. Baozun works at every stage in a brand’s supply chain, and has achieved a dominant market advantage in China and an expanding global footprint. Baozun booked two years of 23% revenue growth in 2016 and 2017, and its Q1 results showed a 25% bump in revenue and a 29% jump in earnings. Analysts are expecting EPS to grow by 69% this year and 58% in 2019. The company’s stock has been lifted by three consecutive quarters of revenue and earnings beats, with the Q1 report last Thursday (May 17) exciting investors. The company’s guidance for the next quarter was also well ahead of analysts’ expectations, which brought in the buyers. Tariffs and trade talk aside, U.S. firms will be doing more business in China over time, and Baozun should be a key partner for many of them.
Technical Analysis
BZUN traded flat from July 2017 through February 2018, but that period also included the start of its current uptrend, which began with the company’s well-received earnings report in early December. That report lifted the stock from its low of 27 at the start of December to 37 in early March when the Q4 report kicked the stock to 48 in a day. BZUN traded sideways from that report until last Thursday’s report pushed it to new highs at 54. BZUN has pulled back by a point, which makes for a nice buying opportunity. Use a stop just below 48.
BZUN Weekly Chart
BZUN Daily Chart
Carvana (CVNA)
Why the Strength
Carvana is a rapidly growing outfit that could be on its way to revolutionizing the giant ($739 billion in the U.S. alone), fragmented (largest dealer network accounts for just 1.4% of sale) used car business. It starts with the firm’s procurement, as Carvana acquires used cars via customer trade-ins, cars coming off lease, old rentals and auctions. The firm puts all its cars through a rigorous inspection plan (including a guarantee that there’s no body damage and that the car has never been in an accident). Then comes the shopping experience, with 360-degree views of more than 11,000 vehicles, tons of photos and data and access to financing; even better, the buy can be completed just 10 minutes after a vehicle is selected and customers save an average of $1,000 over traditional dealers! As for fulfillment, Carvana offers quick delivery (days, sometimes next-day) thanks to an expanding logistics network, nine giant car-vending machines for those who want to pick up their cars, as well as a seven-day test-drive period. The concept has been a hit, and management is quickly moving to take advantage of it—the company is now in 56 markets in the U.S., up from 23 a year ago, with a target of 80 or so by year-end. Revenues are growing at triple-digit rates, along with car sales, which totaled nearly 18,500 in Q1, up from 8,300 a year ago. And, while the bottom line is still deep in the red, many sub-metrics (gross margin per car sale, etc.) are pointing up. It’s speculative, but there’s no question Carvana has humongous potential.
Technical Analysis
CVNA came public last April and has been all over the place since then; it’s still thinly traded and volatile. But the weekly chart looks enticing—shares built a big 10-month base before breaking out last month. A share offering and a tricky market pulled CVNA back down, but the stock has held its 50-day line and reacted decently to earnings. We’re OK picking up a few shares here.
CVNA Weekly Chart
CVNA Daily Chart
Illumina Inc. (ILMN)
Why the Strength
Illumina is the undisputed leader in genomic sequencing and has a long history of disrupting clinical diagnostic markets with its evolving technology, while sustaining revenue and EPS growth. The company’s market opportunity is likely more than $20 billion, and in light of a strong 2017, Illumina could well be at a major inflection point. After the company’s fourth quarter conference call in late March analysts have zeroed in on three key growth drivers. First is the potential for Illumina’s Next-Generation Sequencing (NGS) for the cancer and prenatal areas to become standard of care within two years as tests are standardized, reimbursement improves, and guidelines are revised. Second is the company’s massive growth in consumable sales for the consumer genomics market (microarray segment revenue was up 48% in Q1 2018). This is being driven by companies including 23andMe, Ancestry.com, and Helix, and resulted in over seven million consumer samples genotyped or sequenced last year. That’s more than Illumina did in the previous decade! Finally, gross margins in Q1 were roughly 2% above consensus, which has driven a wave of positive EPS estimate revisions. Analysts are currently looking for 15% revenue growth again this year, but 21% EPS growth. It’s not the young buck it was a few years ago, but if you want in on the genomic testing market, Illumina is your ticket.
Technical Analysis
ILMN has had a history of monster rallies, then giving up a good chunk of the gain before catching fire again. That said, those who hung with the stock have made tons of money! What’s notable about this pattern is that huge rallies often follow once the stock has broken above a previous high. That’s the setup right now. ILMN topped out at 242 in 2015, but just broke through that level earlier this year. Combine that with the stock’s recent pattern—it etched higher highs and lows during the market correction before breaking out on the upside—and we think ILMN likely sees higher prices.
ILMN Weekly Chart
ILMN Daily Chart
Ligand Pharmaceuticals (LGND)
Why the Strength
Ligand remains one of our favorite stories in all of biotech, though the stock has proven tough to handle (more on that below). Fundamentally, though, the growth story has always been pristine—Ligand is basically a research outfit, making money via royalties and milestone payments from other companies that are using either its research platforms or Ligand’s early-stage investigative new drugs. Right now, much of its royalties come from two drugs (one marketed by Amgen and the other by Novartis), but more are hitting the market, including a couple so far this year; all told, Ligand expects 24 drugs on the market by 2020, which should lead to a steadily growing stream of high-margin (after-tax profit margins are regularly north of 50%!) royalties. The quarter-to-quarter numbers can be very lumpy due to on-again, off-again milestone payments and research materials sales (which can jerk the stock around a bit), but Q1 results produced a blowout, with revenues surging 92% and earnings rising by 172%, and coming in 20% above expectations. For 2018, revenues are expected to rise about 30% with earnings booming to north of $5 per share, up more than 50% from last year, thanks to growth in royalties. Of course, if a partner’s drug trials go south, that could impact the outlook, but with such a broad, diversified pipeline, there’s every reason to expect plenty of growth ahead.
Technical Analysis
LGND looked like it was getting going from a huge base (which started in August 2016) a couple of times this year, including a dynamic push to new highs in January and another in March, both of which were snuffed out by the market correction. But now, after etching a double-bottom base, LGND looks ready for a sustained move—shares have exploded higher on excellent volume, with the RP line hitting all-time highs, too. Shares slipped sharply today, but we think it’s normal after the recent run. You can buy here or on further weakness.
LGND Weekly Chart
LGND Daily Chart
LPL Financial Holdings (LPLA)
Why the Strength
LPL Financial is the nation’s largest independent broker-dealer and a leading retail financial advisor, which makes as much of a Bull Market stock as you can find. The stock is strong today because the company is benefiting from the generally healthy environment and a major acquisition last year that meaningfully boosted business, all of which drove Q1 results sharply higher and has big investors expecting more in the quarters ahead. In the first quarter, revenues rose 20% from a year ago, continuing the accelerating growth trend (see table below), driven by a 40% gain in asset-based revenue, a 28% lift in advisory services and a 13% bump in commissions. Some of that growth came thanks to last year’s $325 million purchase of NPH, which brought with it 3,200 advisors and should eventually result in $90 million of annual cash flow accretion to LPL (about $1 per share). Even without NPH, though, total brokerage and advisory assets are growing steadily (up 9% in Q1 to $578 billion), and there should be more of that coming as the bull market progresses. There’s no secret sauce here (though management hinted at further, targeted M&A opportunities this year), just a well-managed company with the wind at its back. Analysts see earnings booming 78% this year (corporate tax cut helps) and more than 20% in 2019.
Technical Analysis
LPLA has had a nice run during the past year but it’s been hard to hold onto, with lots of corrections and rest periods along the way. But now looks like a good time to get in—after topping out at 67 in February, shares etched a reasonable base through early May, and then gapped nicely to new highs on earnings. More than that, LPLA followed through to the upside and has tightened up since, both signs that the path of least resistance is now up. Buying here or on weakness should work out.
LPLA Weekly Chart
LPLA Daily Chart
Penn National Gaming (PENN)
Why the Strength
Gaming stocks got a shot in the arm last Monday when the U.S. Supreme Court ruled that the Professional and Amateur Sports Protection Act (PASPA) was unconstitutional. That ruling opens the doors for individual states to regulate sports gambling with their own legislation, and industry insiders see several states moving quickly to open sports books within a few months. The prevailing wisdom is that this is terrific for Penn National Gaming, which is already the biggest domestic, non-Las Vegas gambling play out there. Including the recently acquired assets of Pinnacle Entertainment, the company has 41 properties in 20 jurisdictions, with a total of 53,500 slot machines, 1,300 tables and 8,300 hotel rooms. The truth is Penn was doing just fine without the PASPA ruling, but there’s no question it offers huge upside—some believe Penn could grab around 10% of the estimated $2 billion to $6 billion sports gambling market by 2025, with that revenue being the icing on the cake of what’s already a story of growth through steady and solid management. The latest batch of data highlighting management’s progress was the first quarter report on April 23; revenue of $816 million (up 5%) and EPS of $0.48 both beat expectations and top brass raised guidance.
Technical Analysis
PENN caught fire in March of last year and, other than a summer consolidation phase, rallied through the end of the year. Shares topped out around 33 in January, then slid back into the mid-20s in February. That healthy retreat, and subsequent base-building phase, set the stage for a pop to 30 after Q1 results came out in late-April. Demand for shares remained elevated in the days after the earnings report, and the jolt from the PASPA ruling sent PENN to an all-time high. You could nibble here, though further retrenchment wouldn’t surprise us.
PENN Weekly Chart
PENN Daily Chart
SolarEdge Technologies Inc. (SEDG)
Why the Strength
Everything seems to be working for SolarEdge, the Israel-based maker of equipment that maximizes power generation in photovoltaic (PV) systems. SolarEdge’s DC optimized inverter systems lower the cost of electricity produced by solar arrays. The company’s product line also includes home energy management solutions and a cloud-based monitoring platform. Taken together, these products can be used in any size of installation, from large commercial to small residential systems. SolarEdge is making its sixth appearance in Top Ten, with the impetus provided by a very strong quarterly earnings report on May 9. The report featured record revenues that grew 82% from a year ago and earnings of 87 cents per share, up 142%. The company also announced on May 9 that it was acquiring Gamatronic, a move that gives SolarEdge a foothold in the power storage and management industry. Combined with SolarEdge’s cloud-based virtual power plant management system, this acquisition will allow integration of all kinds of home energy devices, including Tesla’s Powerwall batteries. Investors also see California’s new law requiring advanced efficiency measures and rooftop solar installations in all new homes starting in 2020 as the vanguard of a deeper integration of solar into the global power grid. Institutions are on board, with SolarEdge’s stock now being held by over 300 whales, up from 136 a year ago.
Technical Analysis
SEDG has been in a general uptrend since it completed its post-IPO correction in early 2017. The stock bottomed at 11 in late 2016, but rolled to 28 in August 2017, then to 39 last November. A correction to 31 in February 2018 ended with a gap up in mid-February and SEDG ran to 59 in April before going flat as investors waited for earnings. The stock’s post-earnings leap to 65 on May 10 has been followed by a high at 71 and a pullback to 67 as the stock digests its gains. SEDG looks like a good bet under 67, with a loose stop around 60.
SEDG Weekly Chart
SEDG Daily Chart
Supernus Pharmaceuticals (SUPN)
Why the Strength
Supernus Pharmaceuticals is a commercial-stage biotech company focused on central nervous system diseases. We featured the stock last year but were kicked out after a shakeout by the stock in September. That dip looks like an overreaction in light of a blastoff move to all-time highs following the release of the first quarter results on May 8. What’s behind the move? First, Supernus is still enjoying brisk sales from its two marketed products. Revenue in 2017 was up 41%, with that growth accelerating to 57% in Q1 2018, and EPS is growing even faster (rising 158% in Q1 to $0.49). Topline revenue was driven by 68% growth in Trokendi XR and 29% growth in Oxtellar XR, two treatments for various types of epilepsy, seizures and migraines. Looking ahead, two Phase III trials for SPN-810 for impulsive aggression (IA) are now 86% and 71% enrolled, with a third starting enrollment in mid-2018. And four Phase III trials for SPN-812, a novel non-stimulant for the treatment of attention deficit hyperactivity disorder (ADHD), are 61% complete! Data from all these programs, which could easily be billion-dollar blockbuster treatments, should start rolling out in the first quarter of 2019. Thus, Supernus is a rarity in the biotech field—it sports rapid growth now (analysts see sales and earnings up 33% and 50%, respectively, this year) but also has plenty of potential home runs in the pipeline. That’s giving big investors a lot to like.
Technical Analysis
SUPN enjoyed a nice rally for most of 2017, but that ended when opaque early analysis of a Phase III trial for SPN-810 came out in September. The selling wave at 50 back then kicked off a long base-building effort, with multiple penetrations of the long-term 40-week line and some nice rallies, too. All told, the stock hovered between 35 and 50 for eight months. Now the trend is back up, as SUPN blasted through resistance after earnings came out on May 8 and didn’t cool down until they reached 59. You can buy shares here or on dips.
SUPN Weekly Chart
SUPN Daily Chart
WildHorse Resource (WRD)
Why the Strength
Energy stocks remain both strong and early-stage, and WildHorse Resource Development looks like a new leader in the group. The company is solely focused on the Eagle Ford shale in Texas—in fact, it owns the second largest position in that area, with just over 400,000 net acres that have 3,154 potential drilling locations. Like most successful explorers, WildHorse sports good returns (the company expects about a 60% return on new wells drilled, which looks conservative to us) and is ramping up production in a huge way, which, along with rising oil prices, is leading to a boom in cash flow. In the first quarter, the firm’s output nearly tripled from a year ago (oil and liquids accounted for 69% of production, and oil output itself actually rose 260%!) as it brought online 22 net wells, helping revenues to surge 303%. (It helps that WildHorse’s oil production is priced at premium Louisiana rates, unlike the negative differentials seen in much of the Permian.) For the year as a whole, management sees production up about 80% over last year’s levels, with plenty more growth down the road. Interestingly, WildHorse is owned by a bunch of big boys (including KKR and The Carlyle Group), one of which distributed a chunk of shares early last week. That caused the stock to sink, but there was no dilution and no indication of further sales going ahead. All told, we think WildHorse is a great, little known growth story in the oil patch.
Technical Analysis
WRD came public in December 2016 and didn’t show any signs of life until last November, when it ran from 14 to 21 in just over two months. The market’s correction resulted in another base-building effort (this one much shallower), which gave way to another big run, this one from 19 to 30. The aforementioned share sales briefly drove WRD down last Monday, but the stock has held in there since. We’re OK buying a little here or on dips, with a stop near 22.
WRD Weekly Chart
WRD 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.
