By Michael Cintolo, Chief Analyst, Cabot Top Ten Trader and Cabot Market Letter
From Cabot Wealth Advisory 2/13/14 Sign up for Cabot Wealth Advisory—it's free!
My system tells me it’s fine to hold onto strong stocks, and the latest Tides buy signal says putting some of the sidelined cash to work is advisable. Remember, in our methodology, judgment is vital, but we try not to believe everything we think—we follow the system, which tells us to buy a couple of stocks.
But which stocks? Ones that are strong! I don’t have much interest in names that got killed, trying to play them for a bounce. Instead, I want to see which stocks held up well during the brief selling wave and are now perched at or near new highs.
One of those is ServiceNow (NOW), a stock that I’ve followed in both Cabot Market Letter and Cabot Top Ten Trader for many weeks. Here’s what I wrote about it in Top Ten this week:
“Large companies need help handling their IT infrastructure, and ServiceNow is emerging as a trusted partner in that area. The company’s Cloud-based software keeps work flowing, consolidates data, automates the administration of new computers and lets the IT department monitor activities. ServiceNow’s software is sold on a subscription basis and its number of subscribers topped 2,000 for the first time in Q4. It also boasts a subscription renewal rate of 96%, making for excellent recurring revenue. The company has been featured in Top Ten five times since it came public in June 2012, and today’s appearance comes courtesy of a Q4 earnings report that featured a 67% jump in revenue. The two cent loss in EPS was above the forecasted 1 cent, but investors don’t seem to mind. The quarterly report prompted positive notes from four different analysts who noted that the company’s estimates for Q1 and full-year 2014 revenue were well above analysts’ projections. The company’s expansion of its product offerings to include human resource automation also came in for positive comments. ServiceNow is taking market share away from big companies like CA Technologies, HP, IBM and BMC Software, and investors are taking note. Not even last Friday’s patent infringement accusations from HP have made a dent in investors’ opinion of ServiceNow.”
NOW broke out of a two and a half month pause in early January, pulled back with the market but then popped on earnings. It’s since been consolidating, and while I expect volatility to be high, I think NOW is buyable around here with a loose stop near 58 or so.
To learn more about additional stocks that I’m following in Cabot Market Letter, click here.
From Cabot Wealth Advisory 7/18/13 Sign up for free Cabot Wealth Advisory
in this Wealth Advisory I’m going to talk about a stock I haven’t mentioned for a few months, but which has most of the characteristics of potential big winners. And the stock has set up a huge launching pad, too.
The company is ServiceNow (NOW), and here’s what I wrote about it way back in April in Cabot Top Ten Trader:
“ServiceNow’s story can be a bit of an ice cream headache; the company says its software helps automate IT services (whatever that means) and serves as an ERP for IT. But how we think of it is far simpler—the firm’s software, which is delivered through the Cloud, serves as a company’s command center for all things information technology, allowing information officers to see what’s working, what’s not, prioritize and develop fixes and, of course, track progress and effectiveness over time. It sounds kind of simple, but it’s not; ServiceNow sells almost solely to large organizations, which have an incredible number of “events” to fix or check out (management said Citigroup, one of its clients, has thousands every week, most automatically produced by servers, networking equipment and the like). Think of it as a customizable Salesforce but for the IT department. It’s been a huge hit— sales growth has been rapid in recent years, and the firm’s renewal rate is a jaw-dropping 98%. In fact, at year-end, the company had a backlog of $549 million, more than twice its sales of last year. Profits are slowly coming on, but cash flow is already positive and growing quickly, and I see years of fast growth ahead. True, it’s a bit of a 1990s technology story, which isn’t in favor in this market environment, but I think ServiceNow has the makings of a big winner.”
At that point, the stock appeared to have broken out of a big base and was ready to move ... but it was not to be. But NOW has etched a new, tighter base, about 20% deep, since that point. All told, the stock has basically been base-building since mid-September of last year; shares did nose out to a new high last week but pulled back with most leaders this week.
Few investors have heard of the company, which makes me think that, as ServiceNow grows at rapid rates for many quarters to come, more and more mutual, pension and hedge funds will accumulate shares. Moreover, because the company has such a high renewal rate and huge potential market (management estimates it’s only penetrated less than 10% of its target market), there’s plenty of room for growth ahead.
Now, the stock is liquid enough (it trades $73 million of volume per day), but I wouldn’t say it’s one of the liquid leaders; it’s going to be choppier and more volatile than the bigger growth stocks out there.
Given all that, I think you could play this two ways. First, if you want in now, you could buy maybe one-third to one-half of what you’d normally buy (dollar-wise) here, with a mental stop around 39. Yes, maybe the stock gaps down below that stop on earnings, but that’s why you should only take a small position.
However, should the stock react well on earnings (or not do much of anything), you could add the rest of your position once you’re up 10% or so from your initial buy. The bottom line is that, after such a good-looking basing effort, and with such great growth, another positive reaction on earnings would make it likely the major trend has turned up.
If you want to be safer, you can just wait for the earnings report and buy if the stock gaps up, but taking a little risk (again, just a small position) ahead of the report could help you get a head start on a future big winner.
For an update and more insight on ServiceNow (NOW) and other stock recommendations, consider a risk-free subscription to Cabot Top Ten Trader. For details, click here.
4810 Eastgate Mall
San Diego, California 92121
|Index Membership: N/A
Industry: Information Technology Services
Full Time Employees: 1,269