Watch Your Step
With most major indexes still within 2% or 3% or their recent peaks, we can’t say the market is a horror show. But the evidence pointing toward a fatigued market continues to pile up, with last week’s waves of distribution (on Monday, Wednesday and Thursday) telling us sellers are gaining strength. We’re not predicting anything, but right now, making lots of money is very difficult; even the strong defensive sectors are choppy, and if you buy a stock at the wrong time, forget about it. Thus, we’re leaving our Market Monitor in neutral territory, and advise you to play things cautiously—keep positions small, keep your laggards on tight leashes and hold some cash.
Just as important, though, you should also keep your eyes open for a resumption of the uptrend. This week’s list has a few potential shooting stars, though there’s also a flavor of safety to some of the names. Our favorite of the week is First Solar (FSLR), which is dancing to its own drummer after a bullish near- and long-term earnings forecast a couple of weeks ago.
| Stock Name | Price | ||
|---|---|---|---|
| Santarus (SNTS) | 0.00 | ||
| Shutterfly (SFLY) | 94.71 | ||
| ONYX Pharmaceuticals (ONXX) | 0.00 | ||
| ServiceNow (NOW) | 341.86 | ||
| NetSuite, Inc. (N) | 0.00 | ||
| Medicines Company (MDCO) | 56.98 | ||
| Cheniere Energy (LNG) | 63.82 | ||
| Home Depot (HD) | 0.00 | ||
| First Solar (FSLR) | 83.74 | ||
| Actavis (ACT) | 0.00 |
Santarus (SNTS)
Why the Strength
Santarus is a specialty biopharmaceutical company with a stable full of successful treatments. The company’s Uceris, which just received FDA approval in mid-January, treats middle to moderate ulcerative colitis, while Zegerid is prescribed for upper GI conditions, and Fenoglide is used to treat high cholesterol. Santarus leapt onto traders’ radars in early March after the company posted a 167% increase in fourth-quarter earnings, as sales surged 65% year-over-year. The company benefited from market exclusivity for its Zegerid upper GI treatment, as its biggest competitor ceased shipping its product—a boon that is expected to carry over into the current quarter. More recently, however, Santarus announced that is has submitted an application with the FDA for approval of its newest drug, Ruconest. Ruconest is indicated to treat a genetic disorder called acute andioedemia, or the rapid swelling of various body parts. The drug is already approved in Europe, and has been granted orphan drug status in the U.S., which should speed up the FDA approval process. Santarus is slated to hold its first-quarter earnings conference call on May 6, and with continued exclusivity for Zegerid, Uceris hitting the market, and Ruconest on its way, it should be an eventful call for investors.
Technical Analysis
SNTS has been on fire for several months, with the stock soaring more than 200% since early September 2012. More recently, SNTS was propelled sharply higher following the company’s fourth-quarter earnings report in early March. The stock breached short-term resistance at 14 last month, and has since rallied to a fresh nine-year high above 18. You should expect the stock to consolidate over the short-term, as investors digest gains and prepare for first-quarter earnings. Any weakness at this point should be considered a buying opportunity, but keep it small.
SNTS Weekly Chart
SNTS Daily Chart
Shutterfly (SFLY)
Why the Strength
The explosion of digital photography has produced a tidal wave of images that people want to store and share. Shutterfly offers free, secure, unlimited storage for digital images, which it promises never to delete. And from those images, Shutterfly offers to produce photobooks, prints and more. The company’s Tiny Prints division uses those images to turn out greeting cards, stationery, invitations and announcements on paper. The Treat division makes personalized greeting cards from an iPhone or computer in minutes. And Wedding Paper Divas specializes in save-the-dates, invitations, thank-yous and other paper products centered on the wedding industry. Shutterfly has emerged as the big survivor from the shakeout of competing digital photo services, with revenue growth over the last three years—very seasonal—of 25% (2010), 54% (2011) and 35% (2012). The company will report Q1 earnings on May 1, while the market is open, with a conference call to discuss results scheduled for 2:00 Pacific Time.
Technical Analysis
SFLY blasted off on February 6, jumping from 33 to over 40 in one day. But except for a little rally to 45 in late February and early May, SFLY has basically traded sideways since. The stock has been trading in a range with support at 42 and resistance at 45 for seven weeks now. It’s pretty clear that investors are happy with the stock at this price range, and it will require good news on May 1 to get the stock off the dime. If you want to do a little accumulation ahead of earnings, you should be able to nibble on dips to 43, which is where the stock’s stalling 50-day moving average is, or below. Or you can watch the reaction to earnings and buy if the stock makes a breakout above 45. In either case, you’ll want to put a stop in around the 40 area.
SFLY Weekly Chart
SFLY Daily Chart
ONYX Pharmaceuticals (ONXX)
Why the Strength
Onyx Pharmaceuticals has a hot hand in the development of treatments for liver, kidney and stomach cancer. The company currently has a trio of franchise platform treatments: Kyprolis, which has been approved for treatment of relapsed and refractory multiple myeloma; Nexavar, which is used to treat kidney and liver cancers; and Stivarga—which was co-developed with Bayer—has been approved for the treatment of metastic colorectal cancer (mCRC). Stivarga has been Onyx’s headline treatment this year, winning expanded FDA approval for stomach cancer in February. The news helped ease the reception of Onyx’s disappointing fourth-quarter earnings, which saw revenue fall 46%. More recently, on March 25, Japan’s Ministry of Health, Labor, and Welfare approved Stivarga for treatment of mCRC. According to analysts, Stivarga could enable Onyx and Bayer to pocket as much as $1.3 billion annually! Looking further down the road, Onyx’s CEO has said that he wants to transition the company away from its roots as a royalty and drug development company into a full-fledged biopharmaceutical firm. With continued success surrounding Onyx’s current stable of drugs, the company is well on its way.
Technical Analysis
While ONXX was in a respectable uptrend prior to Stivarga’s approval, it really doesn’t compare to the stock’s performance since. The most recent upleg began in mid-February, with the shares rebounding from support at their 200-day moving average. ONXX is currently riding its 10-day and 25-day trendlines, as it makes a run at the psychologically important century mark. Shares have already tested the 100 level once this month, and are currently consolidating at the 95 level and their 10-day moving average. With earnings just ahead, ONXX shares are in a prime position to take advantage of any good news.
ONXX Weekly Chart
ONXX Daily Chart
ServiceNow (NOW)
Why the Strength
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 officers to see what’s working, see 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 like a customizable Salesforce.com 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 we 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 we think ServiceNow has the makings of a big winner. Earnings are out Wednesday evening.
Technical Analysis
If you’ve ever wondered what a picture-perfect cup-with-handle base looks like, NOW is it. The stock came public last June and ripped higher into September before a steep (but not unreasonable) 40% drop by the start of the year. It then rebounded on a big pickup in volume through February, before etching a five-week handle, which itself is a shallow, low-volume base. The wild card here is earnings—simply put, a big-volume push above 38.5 after earnings is buyable, with a stop around 34. If you want to nibble ahead of the report, that’s fine, but risk will be higher.
NOW Weekly Chart
NOW Daily Chart
NetSuite, Inc. (N)
Why the Strength
When it comes to Cloud-based computing, few names in the industry do it better than NetSuite. The company focuses on medium-sized businesses and divisions of larger corporations, delivering customer relationship management, professional services automation and e-commerce solutions in an integrated suite. NetSuite’s leadership has broadened its horizons on a global scale, and it shows in the company’s bottom line. Specifically, NetSuite has averaged year-over-year revenue growth of 31% during the past four quarters, with earnings rising at an average pace of 95% during the same time frame. What’s more, NetSuite has recently found a rapidly growing customer base in the manufacturing and mining sectors, including many larger firms, as NetSuite signs up some bigger fish. Lastly, investors should be aware that NetSuite is scheduled to release its fiscal first-quarter earnings report after the close of trading on Thursday, April 25. The company is expected to post a profit of about 14 cents per share, more than double year-ago earnings of 6 cents per share.
Technical Analysis
While N has rallied more than 35% since hitting a low near 55 in November, the stock has been considerably volatile throughout this uptrend. The first sharp move came in mid-December, when earnings drove N to break out above resistance at 60. The stock stutter-stepped higher throughout December, and battled resistance near 70 during January and February. N broke out once again in early March, paused briefly at 75, and went on to challenge fresh all-time highs near 80. The stock has spent all of April bouncing between support at 75 and resistance at 80, a positive considering the market’s wobbles. You could nibble here, or look for a push above 81 following earnings.
N Weekly Chart
N Daily Chart
Medicines Company (MDCO)
Why the Strength
With annual revenue of $559 million, Medicines Company now has four products approved for sale, led by Angiomax, an injectible anticoagulant to treat certain heart conditions and used during certain types of angioplasty. Other marketed products include Argatroban, an anticoagulant, Cleviprex, an injectible blood pressure treatment and Recothrom, a drug to control non-arterial bleeding during surgeries, which was acquired under license from Bristol-Myers Squibb in December 2012. Medicines Company’s development pipeline includes three drugs in Phase III trials, including Cangrelor, an IV antiplatelet agent that generated big headlines on January 8 when it reported a major improvement in reducing thrombosis during coronary interventions versus the current standard treatment. The Medicines Company has carved out a nice niche in the drug business, specializing in treatments for use in acute and intensive-care settings. This strategy has delivered double-digit revenue growth in six of the last seven years, and a 26.9% after-tax profit margin in the company’s Q4 earnings report. Q1 results will be revealed this Wednesday, April 24, before the market opens.
Technical Analysis
MDCO has come a long way since it put in a 14-month bottom in 2009–10 with support at 7. The stock’s advance has been steady since it popped up to 15 in Q3 2010, with only two major corrections along the way. The latest of those corrections was a dip from 27 last October to 20 in the middle of November. The stock bounced back quickly from that, with the big Cangrelor announcement in January providing a boost from 26 to 29 in one day. Progress since then has been slow, but steady, and MDCO is pushing out to new multi-year highs. You can buy a little right here, but waiting for the reaction to earnings on April 24 seems like a safer bet. Look for a push above 35 on heightened volume as a buy signal. If you buy here, use a stop at 30 to keep risk in check.
MDCO Weekly Chart
MDCO Daily Chart
Cheniere Energy (LNG)
Why the Strength
Cheniere Energy is a Houston-based company that owns and operates the Sabine Pass liquefied natural gas (LNG) terminal in Louisiana and the Creole Trail Pipeline that connects the Sabine Pass receiving terminal with downstream markets. The Sabine Pass facility, with its five enormous storage tanks, was originally developed as a terminal to import natural gas, back when it looked like U.S. supplies wouldn’t be enough to meet domestic needs. But the horizontal drilling and fracking revolution has caused U.S. production to balloon, and Cheniere is now reworking Sabine Pass as an export terminal, liquefying natural gas via cooling—which reduces its volume by a factor of 600—enabling natural gas to be sent via specialized LNG tankers to markets around the world. The big draw for investors is that sales in foreign markets are priced according to local demand. (The huge U.S. surplus has pulled U.S. prices down to about a quarter of the going rate in Europe and Asia.) Cheniere’s terminal is expected to be shipping 500 million cubic feet of natural gas every day when the facility opens in 2016, and the company has plans to build five more just like it in the three years after that. While there is significant opposition to a major export scheme from U.S. companies that want to keep the cheap gas here, the promise of this story has investors very interested in the stock despite flat sales and non-existent earnings as the conversion of Sabine Pass continues.
Technical Analysis
LNG has been about twice as volatile as the market, falling from 40 in 2007 to just above a buck in late 2008 as demand for imported natural gas disappeared. But the central trend from 1.8 in late 2009 to 26 in recent trading is unmistakable. LNG has actually calmed down a lot since it put in an eight-month consolidation centering on 16 last year. The rally that began just under 16 last November has shown tighter spreads and positive volume in up weeks. LNG corrected briefly in February and has spent April reflecting the ups and down of the U.S. markets before tightening up last week smack on the rising 25-day moving average. LNG looks like a good buy near 26 with a stop at 23.
LNG Weekly Chart
LNG Daily Chart
Home Depot (HD)
Why the Strength
Simply put, Home Depot is the institutional way to play the renewed housing boom. The stock remains strong for two big reasons. First, of course, the housing market continues to trend up, meaning both higher levels of new housing starts (at 1.0 million annualized starts, the figure reached a four-and-a-half-year high last month) and existing home sales; just about every home being built or bought ends up as a revenue stream for Home Depot. Indeed, the company’s revenue growth accelerated to 14% in the most recent quarter (including a huge 7% jump in comparable-store sales), and while that’s likely to slow in the coming quarters, it’s clear the near-doubling of housing starts in the past 18 months is boosting Home Depot’s results. The second reason the stock is strong is that Home Depot is aggressively returning cash to shareholders—when it last reported earnings in late-February, Home Depot boosted its dividend by a whopping 34% (now yielding 2.1% annually) and also committed to repurchasing $17 billion (or about 15.5% of the firm’s current market cap) within the next three years. Imagine! The bullish housing market, combined with the aggressive dividend and share buyback, is why investors are willing to pay 24 times earnings, despite projected growth in the mid-teens for the next couple of years. The stock isn’t going to make you rich, but as a conservative way to play the housing market, we like it.
Technical Analysis
HD ended 2011 around 36 but has been in a strong bull market ever since. (It actually had a streak of 18 weeks up in a row in early/mid-2011, a strong kick-off signal.) In recent months, the advance has been solid but choppy; shares tend to advance for a month or two before pulling back for a few weeks. HD, though, is showing impressive strength now; it’s pushed to new peaks on good volume even as the market struggles. If you’re game, we think you can buy some HD around here, but we advise using a very tight stop in the 70 to 71 area.
HD Weekly Chart
HD Daily Chart
First Solar (FSLR)
Why the Strength
First Solar, the Arizona-based manufacturer of solar modules, is a survivor in the long-running thinning-out of photovoltaic (PV) companies. The company’s strategy of using lower-cost, lower-efficiency cadmium telluride as a base for its solar arrays was a big factor in its success back when silicon was in short supply. First Solar rode its low cost structure to success in big, commercial arrays. When that era ended in 2008, the whole industry suffered, and many companies disappeared. Then the wheels came off as First Solar posted negative earnings in Q4 2011 and Q1 2012. But First Solar never stopped growing revenue, and investors moved into the stock as a long-term green play and a very cheap stock on a P/E basis. The most recent boost to First Solar came on April 9, when unexpectedly positive financial guidance from management caused an explosive leap in First Solar’s stock. Analysts are also pleased by First Solar’s purchase of TetraSun, a solar startup that has reportedly developed a low-cost way to manufacture high-efficiency modules that might open up the small consumer rooftop and constrained space installations. There’s still uncertainty in solar, but First Solar seems to be finding answers.
Technical Analysis
FSLR bottomed at 11 in May 2012, and had recovered to around 30 by the end of 2012, but sellers gapped it down to 27 in late February after a disappointing earnings report. The stock was trading sideways at 26 when positive guidance caused a 45% leap up to 39 in one day on April 9. Profit-taking claimed a couple of points the next day, but FSLR has found support at 36 and is holding firm. FSLR is still very cheap on a valuation basis with a current P/E of just 8. If you like the story, you can buy on any weakness of a half a point or so with a tight stop at 34.
FSLR Weekly Chart
FSLR Daily Chart
Actavis (ACT)
Why the Strength
In a bit of a fish-swallows-whale move, Watson Pharmaceuticals, a decent-sized generic drug firm, completed its nearly $6 billion acquisition of Swiss drug firm Actavis late last year and, in the process, took its name for a variety of marketing reasons. More important, the buyout has created the third-largest generic drug company in the world (it’s in 62 countries and has a top-10 position in 33 of them) that should see solid earnings growth in the years ahead. As generics take market share in various countries, especially here in the U.S., success will come from rolling out specialty brands for a variety of treatments (sometimes after a patent challenge or two), marketing them well, and then watching the cash roll in. Growth won’t be rapid, but management is committed to double-digit growth each year through at least 2018, and with cash flow strong and R&D in check, future share buybacks and dividends aren’t out of the question. All told, we don’t love this story—we prefer smaller companies with bigger growth prospects—but in this market environment, Actavis has the safe, high-quality attributes that institutional investors are paying up for. Earnings are due May 2.
Technical Analysis
ACT has been in a solid uptrend for years, but it’s rarely gotten overly hot. Last year was a good one for the stock, as it motored from around 60 in March to 91 in mid-December. Then the stock began a basing period; it tagged its long-term 40-week moving average in February, found support, and pushed to new highs three weeks ago. It looks extended here, but any shakeout of two or three points could be buyable, with a stop near 91.
ACT Weekly Chart
ACT 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.
