Author: Raj Gupta

Raj Gupta is Director, Research Analyst. After joining the firm in 2002 as a research analyst, Raj was appointed senior equity analyst in 2006, and lead senior equity analyst in 2014—largely because of his ability to select outperforming stocks. He acts as an expert in the O’Neil Methodology and contributes to the direction of product and service line development. He recommends securities for addition to or removal from the U.S. Focus List, or USFL, and the associated alerts to clients. During his tenure, he was part of the leadership that developed the Global Focus List, which marked the firm’s successful expansion into international equity recommendations. He is also a lead on the IPO Rewind report and contributes to weekly summaries on the performance of the U.S. market. Much of his expertise is delivered as highly customized service to clients. RAj earned his Bachelor’s degree in Economics from the University of California, Santa Barbara. He began working at the firm directly out of college, driven by his passion for investing and stocks. An avid soccer player, he built and managed an adult league in the Los Angeles area, in which he still plays. He also enjoys international travel; he and his wife commit to at least one major adventure a year.

Global Health Care Sector— Medical Devices and Equipment

Posted on by Raj Gupta

Some highlights from the report:

U.S.

  • Given the U.S. market is currently in a Confirmed Uptrend and the iShares U.S. Medical Device ETF ( IHI ) has regained its 50- and 200-DMA, we now recommend buying fundamentally sound Medical Technology ideas that have recently emerged from first- and second-stage bases.
  • Multiple ideas have reset their base counts after a severe December selloff. Our recommendation is to buy quality ideas that have recovered the quickest with relative strength lines at or near new highs.
  • Fundamental profiles remain intact and valuation and growth remain in line with historical medians. The current 70 profitable companies above $500M in market cap within the Medical Product and Equipment industry groups have five-year EPS median growth of 13% and a five-year median (high-to-low) P/E ratio range of 17 to 46. Over the next year, consensus calls for similar growth and valuation. Next fiscal year’s EPS is expected to grow a median of 13% with a P/E ratio of 24x.
  • U.S. Focus List ideas: Dexcom ( DXCM ), Edwards Lifesciences ( EW ), Intuitive Surgical ( ISRG ), Medpace ( MEDP ), and Wright Medical ( WMGI ). U.S. Stocks of Interest: Abiomed ( ABMD ), Boston Scientific ( BSX ), Genomic Health ( GHDX ), Illumina ( ILMN ), Omnicell ( OMCL ), and Staar Surgical ( STAA ).

EMEA

  • Health Care remains a long-term leading sector, and ideas have begun to surface over the last month. We recommend buying quality ideas that are emerging from early-stage bases.
  • European Focus List ideas: AFXX.DE, VITR.SE. Stocks of Interest: ELKB.SE, SRT3X.DE, STMN.CH.

APAC

  • The APAC region is beginning to improve technically following major corrections in key markets over the last year. Most ideas remain more than 20% off highs and are not ready to buy. We recommend a selective and patient approach, waiting for technical profiles to improve in fundamentally sound ideas before buying.
  • APAC Focus List idea: AS@H.JP. Stocks of Interest: NAN.AU, OLYC.JP.

Market View

Posted on by Raj Gupta

Strategy View
U.S. indices found resistance this week at their respective 200-DMA. Given the rapidity of the market’s recent
ascent and the amount of overhead supply, it is not surprising the S&P 500 and Nasdaq paused when hitting
this moving average.
While a sideways move or small pullback from here would be normal action, we do not want to see a sharp
move downward accompanied by an increase in distribution days from the indices’ failure to move through the

200-DMA on this attempt. Importantly, we do not want to see a move below the low of the January 4 follow-
through day, as this would be a very bearish signal.

Overall, the market has been mixed the last two weeks. While technically stocks have acted better, both in terms
of price and breadth, and growth sectors have been leading, the fundamental earnings picture for U.S.
companies has continued to weaken. Forward earnings estimates have fallen to such a degree that the Street
now forecasts a roughly -1% earnings comparison y/y for Q1 2019. This is in marked contrast to consensus
expectations this past fall for +8% earnings growth in Q1 2019.
Presently, U.S. markets are in a Confirmed Uptrend according to our disciplined O’Neil Methodology, which
combines technical, quantitative, and fundamental aspects of analysis. However, whether this current move is
merely a tradeable rally within an overall negative market cycle or the beginning of a new bull run remains
unknown. We urge clients to remain alert to possible changes in the environment as we feel volatility will remain
high for the time being.
The U.S. market is in a Confirmed Uptrend. Indices pulled back this week after hitting resistance at the 200-
DMA. The distribution day count increased by one and stands at two days on the S&P 500 and one on the
Nasdaq. Despite the small rise in distribution, price action across leading stocks remains constructive. While
consolidating below the 200-DMA, we would need to see indices avoid a clustering of distribution days for us to
remain bullish on leading stocks.
Sectors: Leading sectors over the trailing four weeks include Capital Equipment (+6%), Technology (+6%),
and Transportation (5.7%), while Retail (0.2%), Energy (+0.3%), and Material (+1.4%) are lagging.
Industry Groups: Since the January 4 follow day, multiple groups have participated in the rally. Software
continues to lead with five groups ranked in the top 15, including the top three groups. Other leaders includes
Aerospace/Defense, Insurance Brokers, Computer-Tech Services, Telecom, Electronic Measuring, and Payment
Processors.
Ideas: Although indices are pulling back, leadership continues to exhibit constructive price action. Positive traits
of leading stocks include pulling back to price or moving average support on quiet volume or bucking the trend
and rallying higher on above average volume. Examples includes Coupa ( COUP ), Trandigm ( TDG ), Xilinx
( XLNX ) and Autodesk ( ADSK ).

Market View

Posted on by Raj Gupta

O’Neil Market Strategy: S&P 500 earnings are decelerating, but the S&P’s P/E ratio has also fallen significantly
given rising 10-year yields. Considering the Fed’s pause, if yields continue to come off highs, P/E ratios could
see moderate expansion once again.

A 6% gain since the January 4 follow-through day on the S&P 500 lines up with the average of second follow-
through days that have led to extended bull markets in the past. The S&P 500’s 7% gain in January was only the

fifth time since 1970 when a 7% monthly loss was followed by a 7% monthly gain.
The four (1974, 1987, 2002, 2009) other instances ended prior bear markets, and one (2011) ended a large
market correction. Historically, once this precedent is established, forward gains are well above average for the
next six months. An S&P 500 gain of >5% in January (nine prior instances since 1970) similarly leads to a well
above average for the next six months.
Technical setups are much improved, with all indices and sectors above their respective 50-DMA. Tests of the
200-DMA are looming for sectors, and a majority remain more than 10% off highs.

The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq rallied strongly this week and are now
sitting just below their respective 100-DMAs. We expect consolidation around current levels due to the sharp
rally into this next level of moving-average resistance. Look for major averages to avoid any clustering of
distribution and for leading ideas to remain technically intact.
Sectors: Since the follow-through day, six sectors have rallied more than 10%, with Transportation, Consumer
Cyclical, and Technology each rallying more than 13%. Though defensive sectors have lagged, Utility and
Consumer Staple have still rallied over 5% since the follow-through day.

IPO Rewind

Posted on by Raj Gupta
This report identifies a select group of IPOs or spin-offs that have priced in the last two years, giving them time to digest any initial volatility and release a few quarters of earnings. Our selected ideas display positive fundamental trends with strong top- and bottom-line consensus estimates, and IPO Rewind provides an efficient way to review these ideas that we believe warrant attention.

Stocks highlighted in this report: Adyen (ADYE.NL), Alteryx Inc (

), Docusign Inc (

), Livent Corporation (

), Twilio Inc (

), Yeti Holdings (

), Zscaler Inc (

).

Market View

Posted on by Raj Gupta

The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq held support along their respective 50-DMA early
this week, before pushing higher on Friday. Both indices are now testing resistance at January 18 intraday highs (S&P 500:
2,675; Nasdaq: 7,185) before a potential move to the 200-DMA. Overall action remains constructive with just one
distribution day on the S&P 500 and zero on the Nasdaq.

Since the follow-through day, five sectors have rallied more than 10%, including Transportation, Consumer Cyclical, and
Technology, which each have rallied more than 11%. Nine of 11 sectors remain above their respective 50-DMA, with only
Utility and Consumer Staple still trading below that level. The rally is broadening, led by industry groups across multiple
sectors including Apparel, Banks, Brokers, Computer Tech Services, Internet, Medical Products, Mortgage Services, Payment
Processors, Rails, Restaurants, Semiconductors, and Software, among others.

Market View

Posted on by Raj Gupta

The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq both regained their respective 50-DMA. We will look
for this level to act as support should the market pullback. The next level of major resistance is the 200-DMA (S&P 500:
2,741 (+2.6%); Nasdaq: 7,451 (+4.1%)). Action remains constructive with just one distribution day on the S&P 500 and
zero on the Nasdaq.

Since the follow-through day, five sectors have rallied more than 10%, including Transportation and Consumer Cyclical,
which each rallied more than 11%. Further, nine of 11 sectors regained their respective 50-DMA, with only Utility and
Consumer Staple still trading below that level. The rally has been broad, led by industry groups across multiple sectors
including Apparel, Banks, Biotech, Brokers, Computer Tech Services, Internet, Medical Products, Mortgage Services, Rails,
Software, and Trucks, among others.

Market View

Posted on by Raj Gupta

The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq made progress since last Friday’s follow-
through day, and are both now testing resistance at their respective 50-DMA (S&P 500: 2,628 (+1.2%);

Nasdaq: 6,988 ( +0.3% )). Though this is an obvious resistance level, we would still like to see the indices close
above this and consolidate for several sessions, which should lead to broader leadership.
Since the follow-through day, Consumer Cyclical, Transportation, Energy, and Technology are leading, each up
more than 7%. Further, Consumer Cyclical and Retail both regained their respective 50-DMA. We are seeing
better technical action, however, just like the major averages, most sectors are also set to hit moving average
resistance over the next several sessions. At the industry group level, Biotech, Computer Tech Services, Electronic
Measuring, Homebuilders, Internet, Medical Equipment, Payment Processors, Rails, Semiconductors, and
Software made notable moves higher.
The number of breakouts is increasing, but most ideas are still rounding out the right side of their respective
bases and have not reached risk-optimal entry points. Since the follow-through day, there were ~20 ideas with
a greater-than-$1B market cap that broke out from consolidation. We will look for more ideas to break out if the
market regains its 50-DMA in the coming days. Ideas we are watching include ADSK, CHGG, CYBR, DXCM,
EPAM, ETSY, FIVE, FIVN, GLOB, HUBS, ISRG, LULU, MEDP, NOW, PANW, RPD, SAVE, SPLK, TSLA, TWLO, ZEN,
and ZS, among others.
We continue to recommend a selective approach, gradually increasing risk in only fundamentally sound ideas
breaking out from consolidation. If the major averages can rise above their respective 50-DMA, there could be
another move higher to the 200-DMA. Should this occur, additional buy opportunities will emerge.
Stocks on our U.S. Focus List: Current Sentiment
Our USFL of 28 ideas gained 4.1% on average this week, outperforming the S&P 500 (+2.5%) and the Nasdaq
( +3.5%. )
Actionable Focus List ideas: Atlassian ( TEAM ), Dorman ( DORM ), Dr. Reddy’s Labs ( RDY ), Fabrinet ( FN ), Keysight
Technologies ( KEYS ), Paypal ( PYPL ), Planet Fitness ( PLNT ), Union Pacific ( UNP ), Veeva Systems ( VEEV ), Vertex
Pharma ( VRTX ), Wingstop ( WING ), Workday ( WDAY ), Wright Medical ( WMGI ), Xilinx ( XLNX ).

Market View

Posted on by Raj Gupta

The U.S. market has been upgraded to a Confirmed Uptrend. The S&P 500 staged a day seven follow-through
on Friday, rising 3.4%, on volume 15% greater than Thursday’s. The Nasdaq rose 4.3%, but volume was slightly

less than Thursday’s, despite coming in above the 50-day average. The next level of resistance is the downward-
trending 50-DMA, at 2,637 (+4%) on the S&P 500 and 7,012 (+3.9%) on the Nasdaq.

Growth ideas and industry groups rallied sharply higher, though most continue to repair technical damage from
the last few months. Eight of 11 O’Neil sectors rallied more than 3%, led by Technology and Consumer Cyclical,

both up more than 4%. At the industry group level, Software, Internet, Semiconductors, Payment Processors, Ma-
chinery, and Biotech led. Conversely, defensive sectors lagged, with Consumer Staple and Utility rising less than

2% each.
We believe in order for this follow-through day to develop into a new bull market, growth, not value, needs to

lead. Like the market, growth-oriented industry groups still have multiple resistance levels to regain. Our convic-
tion in this follow-through day will increase as the market rises through resistance, specifically at the 50-DMA.

Further, we need to see leadership broaden and growth ideas begin to break out from consolidation.

Our recommendation is to increase risk gradually, buying only high-quality growth ideas that have either recov-
ered quickly or held up well during this correction. Best-acting ideas on the U.S. Focus List include CIEN, PLNT,

PYPL, XLNX, VEEV, VRTX, and WMGI. Ideas we are watching include AYX, CHGG, DATA, ETSY, FIVN, SPLK,
TEAM, TWLO, WDAY, and ZS, among others. Future leading ideas tend to quickly move back into new highs
within the first three to four weeks of the market bottom.
We will begin adding ideas if the market progresses higher and leadership begins to broaden. As of today, the
majority of stocks are still forming new bases with very few at risk-optimal entry points. We will also monitor for
signs of a failed follow-through day, which include a clustering of distribution days shortly following the move,
coupled with failed breakouts in individual ideas.

Market View

Posted on by Raj Gupta

The U.S. market has been moved to a Rally Attempt. Indices are consolidating after Wednesday’s big move

( ~5% ) off lows followed by Thursday’s bullish reversal. We could upgrade the U.S market to a Confirmed Up-
trend as early as Monday should a new follow-through day occur. Currently, the inventory of high quality stocks

with risk optimal entry points is low given the severe technical damage that occurred prior to this week. If a new
follow-through day occurs, we want to see more leadership ideas emerging from constructive consolidations as

risk-on sectors/groups move above price- or moving-average resistance. We recommend waiting for a new fol-
low-through day before increasing risk.

Stocks on our U.S. Focus List: Current Sentiment
Our USFL of 24 ideas gained 3% on average this week, outperforming the S&P 500 (2.8%) but underperforming
the Nasdaq ( 4.0% ).
Actionable Focus List ideas: Ciena ( CIEN ), Dr. Reddy’s Labs ( RDY ), Fabrinet ( FN ), Xilinx ( XLNX )
By Sector

Along with the strong bounce off lows across the major indices, U.S Focus List performance was driven by Tech-
nology, Retail, Health Care, and Financial. In Technology, CIEN and FN regained their 50-DMA, while VEEV

and XLNX bounced off lows and are just below this key moving average. In Retail, WING is forming the right
side of a base after bouncing off its 200-DMA. Four Health Care ideas jumped 3.8% on average, led by ILMN,
but all continue to consolidate in a base. Financial ideas also remain in consolidation after a strong recovery off
lows this week, but PYPL is exhibiting constructive price action as it forms the right side of base, with a potential
aggressive entry at ~$90.

Market View

Posted on by Raj Gupta

The U.S. market is in a Downtrend. The S&P 500 and Nasdaq made new year-to-date lows this week in heavy volume. Both have become extended to the downside, trading more than 12% below their respective 200-DMA. Though there are signs of capitulation, we do not recommend increasing risk until we see a new follow-through day. Multiple levels of resistance remain and there are little-to-no growth ideas at proper pivot points. A strong rally off the lows will give us clues as to what could eventually lead, when and if the market has indeed bottomed. At this point, it is too early to tell as ideas are still resetting and will need time to form proper bases. We continue to recommend a cautious approach. Avoid new buys until a new follow through day occurs.