Still Choppy, but Fewer Sellers Sticking Around
Current Market Outlook
Last Friday saw a big, broad selloff in the market, not unlike what we’ve seen a few times so far this year. But, interestingly, while those other selloffs lasted a few days, this one might not—the market snapped back vigorously today. All of this is short-term stuff, of course; the overall trend is still generally sideways and few stocks are running away on the upside, so we’re not suggesting it’s time to become fully invested. But we’re seeing evidence that selling pressures are fading, which, if earnings season goes well, could launch a sustained advance.
This week’s list has a nice mix of charts; some are super-strong, some are tight after prior advances. Our Top Pick is MobilEye (MBLY), a company with as big a growth story as you’ll find and a chart that’s showing strength after a long decline. Stick with a small position and expect volatility.
| Stock Name | Price | ||
|---|---|---|---|
| WABCO Holdings (WBC) | 0.00 | ||
| Qunar (QUNR) | 0.00 | ||
| Universal Display (OLED) | 187.54 | ||
| Newfield Exploration (NFX) | 0.00 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Mobileye N.V. (MBLY) | 0.00 | ||
| First Solar (FSLR) | 83.74 | ||
| Esperion Therapeutics (ESPR) | 0.00 | ||
| Depomed (DEPO) | 0.00 | ||
| Builders FirstSource (BLDR) | 44.12 |
WABCO Holdings (WBC)
Why the Strength
A leading global supplier of technologies that improve the safety and efficiency of commercial vehicles, WABCO has scheduled a record $1.1 billion in new business contracts over the past four quarters. All the new contracts are at least partly a reflection of the improving U.S. auto industry. U.S. auto sales are expected to rise to a record 17 million units this year. Many of those cars will feature WABCO’s security technologies, including cruise control and anti-lock braking systems. The continued auto recovery bodes well for WABCO’s next four quarters: the company is expecting an 11% increase in earnings per share this year, on the heels of a 10% EPS improvement in 2014. A new state-of-the-art manufacturing facility in Charleston, South Carolina should help WABCO keep pace with escalating demand. The company also recently reached an agreement with Hendrickson Trailer Commercial Vehicle Systems to provide air disc brakes for trailers all over North America. The steady stream of new business has captured Wall Street’s attention: WABCO’s stock has been hitting record highs since February.
Technical Analysis
An early February earnings beat helped WBC break through long-term resistance at 105, as the stock surged from 95 to 119 in just a few weeks. Since then, the stock has continued to trend upward, advancing into uncharted territory at 126 late last week. The gains have been followed by brief dips, typically of just a few points, so buy on the next dip and expect WBC to push to even greater heights. If the stock approaches its 50-day moving average (116) for the first time since early February, it might be a sign that momentum is dwindling.
WBC Weekly Chart
WBC Daily Chart
Qunar (QUNR)
Why the Strength
While Chinese online travel agencies aren’t exactly strangers to Cabot Top Ten Trader—Ctrip.com has made 11 total appearances, including one last month—Qunar is making its debut today. Qunar (pronounced choo-nar, which is Chinese for “where are you going?) isn’t profitable, yet, but investors like the company’s revenue growth (122% in 2011, 91% in 2012, 74% in 2013 and 104% in 2014). And the company’s Q4 earnings report on March 16 was an across-the-board success, with revenue beating expectations by $4 million (and growing 102%) and a loss of 40 cents per share, which was still four cents better than analysts predicted. Qunar is majority owned by Chinese search giant Baidu, which has been a huge help in building web traffic. But organic traffic from mobile searches is growing fast—mobile revenue is now half of the total, compared to just 40% a quarter ago. Qunar isn’t projected to turn profitable until around the middle of 2016, but gaining market share in the Chinese market, and especially market share in the quickly growing mobile sector, is the order of the day. And Qunar, which gets most of its revenue via pay-for-performance payments from travel and lodging providers, is doing just that.
Technical Analysis
QUNR is still a relatively young stock, coming public in October 2013. The stock gapped up big at its IPO, but then started a nearly 17-month string of sideways trading in a range that tightened to 27–30 since late December. QUNR thus had a long base when its March 16 earnings report kicked off a high-volume rally that sent shares from 29 to 46. The rally’s angle of attack has slowed somewhat, and a correction is always possible. We recommend looking for a pullback of a point or two and using a stop at the stock’s fast-rising 25-day moving average, now at 40.
QUNR Weekly Chart
QUNR Daily Chart
Universal Display (OLED)
Why the Strength
Samsung Electronics just released its Galaxy S6 and Galaxy S6 Edge smartphones, and the global response is already setting records. Samsung is expected to sell 10 million units of the two devices by early May—the quickest a Galaxy S phone has reached such a milestone. Booming Galaxy S6 sales are good news for Universal Display Corp. Samsung is Universal Display’s single largest customer, using its organic light-emitting diode (OLED) technology—a thin film of organic molecules that generates light with the use of electricity—for brighter, crisper displays on its electronic devices, including smartphones. As a key supplier to Samsung, Universal Display’s revenues depend heavily on the success of Samsung’s mobile devices. Thus, when Samsung’s Galaxy S5 phone received a lukewarm response from customers after its launch last year, Universal Display’s sales slipped. Universal’s earnings per share were actually down year over year in the last two quarters. That should change in the next two quarters now that the Galaxy S6 phones are on pace for record sales. A new commercial OLED TV, due for wide release this year, should further boost Universal’s profits.
Technical Analysis
OLED gapped up in late January and has been kiting higher ever since as investors anticipate big earnings over the next few quarters. OLED hasn’t closed below its 25-day line since the kickoff, a rare display of strength in this environment; even last Friday’s big market dump didn’t phase the stock. You can buy a little on minor weakness and use a stop in the low 40s.
OLED Weekly Chart
OLED Daily Chart
Newfield Exploration (NFX)
Why the Strength
Energy stocks continue to act constructively; they began bottoming out in mid-December, tested the lows a couple of times and have been performing relatively well since mid-March. Newfield Exploration is the third explorer to show up in Top Ten in the past three weeks; the firm has top-producing wells spread around the Anadarko Basin (about 40% of this year’s estimated output), the Uinta Basin in Utah (15%), Williston Basin (12%) and elsewhere. Anadarko has been and will remain the growth driver here (especially the STACK and SCOOP areas of the basin); production there is expected to leap about 45% this year, and even at current low energy prices, the wells are producing 30% to 40% rates of return. The quality of the wells is why, despite a cutback in CapEx, Newfield sees this year’s total production up 18% from last year. And if energy prices rebound in a big way, this company is sure to benefit, as it has an almost unheard of 14,000 potential drilling locations on its acreage. There’s nothing revolutionary here, and if energy prices have another leg lower, all bets are off. Newfield should do well if the energy rebound continues.
Technical Analysis
The good thing about a sector that’s been decimated is that it’s easy to spot the truly strong names. NFX was cut in half in the second part of last year but after bottoming at 22 in January, it’s risen 10 of 13 weeks and made up 70% of those losses. Shorter-term, volume on the upside has been light during the past few weeks, and NFX’s 50-day line is down below 34. We think buying dips and using a stop around 34 is your best bet.
NFX Weekly Chart
NFX Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
Netflix has become what we call a Cabot Top Ten All Star—a resilient stock that can push through choppy markets and disappointing earnings to new highs, again, and again, and again. This is the 33rd time Netflix has been on Top Ten; the 32nd was just two months ago. It’s also the second consecutive quarter that Netflix has gapped up on earnings, and both analysts and consumers are taking notice. Revenue grew 24% since the year before, the number of new subscribers, projected to be around four million, came in at an unprecedented 4.9 million, to 62.3 million total globally. The buzz preceding earnings likely contributed to Netflix’s spike as well: an unusually high number of analysts raised their price target for the streaming service company, including one ambitious analyst who believes that it could hit 900! Netflix does have competition, however—Hulu, Amazon, HBO, and even Apple have either entered the market or are threatening to. It will have to continue to produce high-quality content to remain dominant, but the company has taken steps to do this, increasing expenditure on original content with great success. The competition for original content could eventually be a real problem for Netflix, but for consumers, it’s possible that streaming services behave more like complements than substitutes in the future: cord-cutters may buy subscriptions to multiple services to make up for the loss of cable.
Technical Analysis
Despite its gap up after fourth-quarter earnings, NFLX spent the first quarter of 2015 unable to break through its March 2014 resistance of around 483, although it found support at 415, building a small base for itself. Last week’s earnings breakout is a good sign, pushing shares out of a 13-month zone. If you’re interested, we’d recommend buying on a pullback to around 560, with a stop around 500.
NFLX Weekly Chart
NFLX Daily Chart
Mobileye N.V. (MBLY)
Why the Strength
MobilEye, based in Israel, has a nosebleed valuation—it trades well above 100 times earnings and nearly 70 times revenue!—but once you dig into the story you realize why. This company is the hands-down leader in advanced driver assistance systems (ADAS); that includes things that are just hitting the market like adaptive cruise control, lane departure warnings, pre-collision warnings and pedestrian warnings. MobilEye is the clear leader in the field, as it’s currently the vision algorithm supplier for 22 of the top 25 OEMs in the world (accounting for half the world’s production) and its systems will be on 244 vehicle models by 2016. Most analysts are coming around to the view that, by 2020, 70% to 90% of all automobiles in the U.S., Japan and Europe will have these systems due to regulations and consumer demand. The result should be gigantic growth for MobilEye, with expected annual revenue growth of 50% for several years to come! Beyond ADAS, the company is developing semi-autonomous and, eventually, fully autonomous tools that could hit the market in the early 2020s, but even without that, this company should have a banner next few years. With the sky-high valuation, there’s obviously risk, but if MobilEye executes well, this sounds like a future blue-chip to us. We like it.
Technical Analysis
MBLY came public last August and soared into early October before its post-IPO droop—the stock fell from 60 to 32 over a five-month span. However, since the start of March, it’s been under major accumulation; shares soared 11 days in a row (all on big, above-average volume) to 45, pulled back a few points, and then spiked again last week on a pickup in volume. There’s still overhead resistance to chew through, but we think buying shares on dips could work very well. If you buy, keep the position small and expect volatility.
MBLY Weekly Chart
MBLY Daily Chart
First Solar (FSLR)
Why the Strength
First Solar was one of our biggest winners ever back in 2007 to 2008, but honestly, we’ve never found much to get excited about from the company in recent years—earnings have been very erratic, mainly because the firm’s focus on utility-scale solar projects lends itself to big (but one-time) payoffs once they complete a deal. Now, First Solar, along with many other solar players, is thinking bigger—the big news of late is that the company is partnering with SunPower to form 8point3, a new yieldco (not yet public) that will own and operate many of the plants that both companies construct. At the outset, 8point3 will operate 432 megawatts of solar assets (mostly utility scale plants) and the “drop down” pipeline should be huge. Thus, while initial revenue will be far less, First Solar’s meaningful ownership stake in 8point3 should result in recurring revenues for years to come; the average duration for contracts of 8point3’s plants is 21 years! Moreover, First Solar is rolling out its own new service to operate, monitor and maintain powerplants for other companies; it’s starting with 40 megawatts but that should grow markedly in the years ahead. Sales and earnings are still lumpy, but the focus on new, recurring-revenue operations and operations may change the company’s business in a big way. We’re intrigued.
Technical Analysis
FSLR had a big run from mid-2012 through March 2014, but then it tumbled downhill, getting cut in half before finally bottoming in January of this year. The initial bounce off the bottom was nothing great, but since the yieldco announcement in February, FSLR has changed character—shares surged back above their 200-day line on big volume, tightened up nicely, and then briefly pushed to new recovery highs last week before the weak market pulled shares lower. We still think the set-up looks good, so you could nibble here, or wait for renewed strength to add shares.
FSLR Weekly Chart
FSLR Daily Chart
Esperion Therapeutics (ESPR)
Why the Strength
The story of Esperion Therapeutics, a developmental stage company that making its debut in today’s Cabot Top Ten Trader, is really the story of one candidate drug. ETC-1002 is a small molecule drug, taken orally once a day, that lowers low-density cholesterol (LDL-C) without the side effects that make existing statin drugs difficult for many patients to tolerate. ETC-1002 is in Phase 2b clinical trials and has shown significant reductions in LDL-C levels. The company has two other drugs in pre-clinical development that will address diabetes, obesity and atherosclerosis, but ETC-1002 is the big dog as far as investors are concerned. The development schedule calls for completion of Phase 2b trials by the end of 2015, and Esperion has funding through the Phase 3 trials. The LDL-C reduction market in the U.S. alone is valued at $14 billion, and the population of U.S. patients who can’t tolerate statins is somewhere between two and 11 million patients. Esperion has no revenue, but it does have 122 institutional investors on board and its stock trades at volume levels that ensure liquidity. Yes, it’s a hit-or-miss proposition, but investor sentiment is on Esperion’s side and the upside is considerable.
Technical Analysis
ESPR came public at 14 in June 2013, and after trading as high as 20 and as low as 11, it settled down in a tight 14–16 range through August 2014. The stock broke out in September 2014 on positive clinical trial results, and rallied strongly through March, when it touched 119 on huge volume following more good trials news. ESPR corrected to as low as 84 after that high, and is now trading pancake flat with support at 100. Its rising 25-day moving average is just catching up, but it will likely take more good news to kick the stock higher. ESPR looks like a reasonable speculative buy right here. If you decide to buy, keep it small and use a stop near 90.
ESPR Weekly Chart
ESPR Daily Chart
Depomed (DEPO)
Why the Strength
Depomed, which develops treatments for pain and diseases that affect the central nervous system, is strong today because of its $1.05 billion acquisition of the NUCYNTA franchise from Janssen Pharmaceuticals earlier this month. NUCYNTA products include three drugs aimed at managing pain associated with diabetic peripheral neuropathy, all of which instantly became Depomed’s flagship assets in its portfolio of neurology drugs. Even prior to the NUCYNTA acquisition, Depomed was coming off its best year ever. Sales nearly tripled in 2014 and advanced 379% in the fourth quarter. Meanwhile, after a couple of years of weak profits, earnings per share shot up from $0.08 in 2013 to $0.26 last year on the strength of the monster fourth quarter. Depomed’s 2014 growth was primarily driven by its December 2013 acquisition of migraine drug Cambia, which brought in $21.7 million in revenue. Sales of Gralise, which treats postherpetic neuralgia (or after-shingles pain), improved 67% from the previous year. With NUCYNTA now further expanding Depomed’s product offerings, earnings per share are expected to swell by another 165% this year.
Technical Analysis
After trading sideways for much of 2014, DEPO has taken off since the calendar flipped to 2015. The stock broke through resistance in the 15-16 range in early January, rising as high as 20 before falling back to 17 in early February. The blowout fourth-quarter earnings pushed DEPO to even greater heights, with shares topping 25 in mid-March. Another dip followed, but the stock found support at just under 22 before popping even higher, to 27. DEPO hasn’t dipped below its 50-day moving average since December, so you can look to buy dips and use a stop near the 50-day.
DEPO Weekly Chart
DEPO Daily Chart
Builders FirstSource (BLDR)
Why the Strength
The story on Builders FirstSource’s debut in today’s Cabot Top Ten Trader is a simple one. Builders FirstSource was founded in 1998 with the express intention of growing into a national supplier of homebuilding supplies through a campaign of acquisition. This campaign has built a chain of 56 distribution centers and 56 manufacturing facilities in nine states supplying lumber, windows and doors and other building supplies to builders of residential homes. Investors have always been moderately enthusiastic about the company, but interest (and the company’s stock price) took a huge leap up on April 13 when it was announced that, in a fish-swallows-whale move, Builders FirstSource would acquire ProBuild Holdings for $1.63 billion in cash. ProBuild had about $4.5 billion in revenue in 2014 and operates in 40 states, and the combined company will be the largest supplier of building materials in the world and (investors assume) great opportunities for economies of scale. The merger announcement brought upgrades from one analyst and enthusiastic buying from investors. With the U.S. construction industry still in a recovery phase following its post-2008 funk, the Builders FirstSource giant should continue to do great business.
Technical Analysis
BLDR corrected from 9.4 to 5 in the middle of 2014, then traded in a range between 6 and 7 from November 2014 through March 2015. When the acquisition news hit on April 13, BLDR gapped up to 12 on gargantuan volume and followed through with a peak briefly above 14 on April 14. BLDR is now starting to quiet down near 13. If you like the story, just keep your initial buy small and wait for a breakout above 14 to fill out your position. Be sure to use a loose stop.
BLDR Weekly Chart
BLDR 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.
