Ready and Waiting
Current Market Outlook
The market backed off late last week, but the overall picture hasn’t changed much—following a successful retest of the February lows, the major indexes are in a solid rally attempt, but that rally has yet to turn the intermediate-term trend up, either for the indexes or for the majority of leading stocks. There are many encouraging signs, and if the market rallies from here, the trend could turn up later this week; we’re ready and waiting for an all-clear signal should it come. But we learned long ago not to anticipate signals—right now, the trend is mostly sideways, few stocks are running away on the upside (most that have perked up fall back quickly) and most companies are set to report earnings over the next three weeks. Thus, we advise sticking with a cautious stance, which means holding some cash and keeping new positions on the small side.
This week’s list has a wide variety of stocks and sectors, all of which have shown great relative strength. Our Top Pick is Cheniere Energy (LNG), which has a unique story and a stock that’s built a great-looking base. Earnings are out soon, so start small.
| Stock Name | Price | ||
|---|---|---|---|
| Abercrombie & Fitch (ANF) | 15.37 | ||
| Autohome (ATHM) | 98.65 | ||
| Cheniere Energy (LNG) | 63.82 | ||
| E*Trade Financial (ETFC) | 0.00 | ||
| First Solar (FSLR) | 83.74 | ||
| InterXion (INXN) | 0.00 | ||
| Loxo Oncology (LOXO) | 186.59 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Pioneer Natural Resources (PXD) | 0.00 | ||
| TransUnion (TRU) | 83.09 |
Abercrombie & Fitch (ANF)
Why the Strength
Abercrombie & Fitch is a youth-oriented fashion company that sells clothes and accessories through its Abercrombie and Hollister divisions. Like the retail sector as a whole, the company has been through the wringer as online competition has siphoned off business from brick-and-mortar locations. But also like the retail sector, Abercrombie has engineered a big comeback, closing a bunch of underperforming stores, opening new locations, sprucing up its product line and polishing its online presence. In fiscal Q3 2017, the company reversed a long string of quarters with lower revenue and earnings, returning to profitability in Q4 and growing revenue by 5% in Q4 and 15% in Q1 2018. Even more important, the company’s Q4 earnings report on March 7 showed a 5% year-over-year increase in comparable sales for the Abercrombie brand, the first time that’s happened in more than a year. While the company’s overall store count declined by 21 in Q4, the company opened an Abercrombie Kids store and two Hollister stores in the U.S. and an A&F store in Hong Kong. Analysts are looking for earnings to rise by 22% this year as management continues to adjust its mix of stores and strengthen its direct-to-consumer sales record. Abercrombie & Fitch’s stock is also getting a boost from speculation that Amazon might be coveting the company for its global infrastructure and young demographic. A near-3% dividend yields adds a nice bow to the package.
Technical Analysis
ANF pulled out of its years-long decline in August 2017 after hitting bottom at 9 in July, and that advance has accelerated in recent months, with a bunch of gap up gains along the way. The stock rose as high as 29 two weeks ago before pulling in, and finished last week with three days of declines. Even so, it’s still trading above its rising 25-day moving average and this pullback looks orderly. If you’re game, you can start a position around here with a stop around the 50-day line.
ANF Weekly Chart
ANF Daily Chart
Autohome (ATHM)
Why the Strength
When Chinese car shoppers want information about cars and features, dealers and prices or registration and insurance, their first stop is usually Autohome, the leading source of information on the entire car-owning process in China. Autohome was initially set up as a place for car dealers to make their pitch to consumers using professionally produced and user-generated content. But its popularity made it a favorite with manufacturers and a natural spot for any supplier of auto-related goods and services to advertise, which produced years of huge revenue growth. Sales grew by over 70% in 2013 and 2014, by 59% in 2015, 62% in 2016, only to slow to 5% in 2017 as the company transitioned away from its direct auto sales business. While exiting the direct sales business slowed revenue growth, it boosted the company’s margins: Quarterly earnings growth accelerated beautifully in 2017, coming in at 15% in Q1, 39% in Q2, 58% in Q3 and 82% in Q4, with Q2 and Q3 featuring after-tax profit margins above 30% and Q4 reaching a sky-high 44.3%. Analysts expect Autohome for grow earnings by a tamer 23% in 2018 and 22% in 2019 (both likely conservative) and institutional ownership of the company’s stock has been steadily on the rise since during the past few quarters. It’s a good story.
Technical Analysis
ATHM ran into resistance in the mid 50s in 2015, then corrected all the way to 19 in July 2016, just after the installation of a new CEO. The stock advanced steadily from that low, then caught a strong updraft in August 2017 that kicked it to new all-time highs above 66. But that move led to another base-building effort, this one four months long, before the breakout near year-end. Shares have done well since, etching higher highs and lows during the market’s correction, including a burst to 101 last week. We’re OK nibbling on dips.
ATHM Weekly Chart
ATHM Daily Chart
Cheniere Energy (LNG)
Why the Strength
The recent rise in energy prices has lifted stocks in the sector, including Cheniere Energy, a pure-play liquified natural gas (LNG) company that operates the Sabine Pass LNG terminal and Corpus Christie liquefaction facility. Cheniere has first-mover advantage in exporting LNG out of North America, and with eight liquification trains (with the potential to expand to 11), long-term take-or-pay contracts for 85% of capacity, and cheap transportation costs to Europe, the company offers investors a compelling mix of growth and (eventually) capital returns through dividends and stock buybacks. Analysts are increasingly bullish on Cheniere’s potential after management raised its 2018 outlook due to higher LNG prices, larger-than-expected shipping volumes and a $200 million boost to net present value due to tax reform. The next checkpoint will be May 4 when Cheniere reports Q1 2018 results; analysts currently expect 2018 revenue growth of 8.3% and earnings of $0.47 per share. And as new trains come on-line, including train three at Sabine Pass, which reached substantial completion five months ahead of schedule, analysts anticipate revenue jumping 28% in 2019, and EPS surging to $1.64, though we feel both of those figures are likely conservative. With impressive operating execution and growing Chinese offtake agreements, the story is getting better and better, and big investors are taking notice.
Technical Analysis
LNG enjoyed a run following the 2016 election, but topped out around 51 three times in 2017, in January, May and November. The stock finally punched through resistance in mid-December when it walked up to 60 before losing steam due to the market. Over the last three months shares have rebased with support around 52 and, recently, shares creeping back toward their multi-year highs on three straight weeks of above-average volume. We like the look of this base, so you can dip a toe in ahead of earnings, or just wait to see if LNG can decisively break out above 60.
LNG Weekly Chart
LNG Daily Chart
E*Trade Financial (ETFC)
Why the Strength
The overall market hasn’t yet kicked into gear, but E*Trade looks like a Bull Market stock that’s ready to run. The stock has been resilient during the past three months, and popped last week after a blowout earnings report—not only did sales (up 27%) and earnings growth (up 83%) accelerate from prior quarters and top expectations, but a slew of sub-metrics also impressed. Average daily trades per day boomed 49%, customer margin balances lifted 44%, total customer assets rose 17% (to $393 billion) and interest-earning assets totaled nearly $60 billion. Numbers aside, E*Trade is attracting buyers because they believe a handful of various factors are likely to push earnings up going forward: Higher short-term interest rates will continue to drive interest income higher, the corporate tax cut will lead to a step-function rise in the bottom line (analysts now see earnings up 59% this year!) and an active stock market will drive trading activity higher. (Moreover, because last year’s commission cuts occurred early in the year, year-over-year comparisons will get easier starting in Q2.) Of course, the fly in the ointment is the market itself; a major leg down from here could change investor perception about the company’s growth. Still, the odds strongly favor that the overall bull market is still intact, and E*Trade just showed that business can do very well even in the choppy first-quarter environment.
Technical Analysis
ETFC has been chugging higher since the middle of last year, though the advance has seen numerous multi-week pauses along the way. The recent rest was even longer—ETFC built a six-week base in January and February, and after eking out new highs in March, consolidated for another month. And then, late last week, shares decisively lifted to new highs on good volume despite the wobbly market. If you’re game, you can buy a little on dips.
ETFC Weekly Chart
ETFC Daily Chart
First Solar (FSLR)
Why the Strength
First Solar is one of the better-known names in the clean techology space and has been gracing the pages of Top Ten for years because of its compelling growth profile. Despite the potential, the stock has been range bound for years, and is still sitting below its 2014 high. But that could change in the near future given the rising cost of energy, increasing demand for solar panels, and the huge leap First Solar has brewing with its next-generation Series 6 modules. These modules will generate 440 watts, versus 120 watts for the Series 4 modules, and their potential to drive down the price per watt by 40% should further secure First Solar’s status as a preferred vendor for big power grid and corporate installations. Analysts see a 14% decrease in revenue and a 36% decline in EPS this year, but those estimates reflect old contracts and a huge CapEx cycle to retool manufacturing lines for the Series 6, which will launch in a couple of quarters. With CapEx winding down, production of modules ramping up from a target of 3 GW in 2018 to 5 GW in 2019, and roughly three-quarters of production capacity contracted (with non-cancelable, fixed price contracts), revenue and earnings should jump by 19% and 98%, respectively, in 2019, though even those numbers are probably light. First quarter 2018 earnings are on tap for Thursday, so we don’t have long to wait for the next update.
Technical Analysis
FSLR bottomed out at 26 last April before turning around, eventually reaching 77 in January of this year. But like most stocks, the market’s correction pulled the stock down, though the damage wasn’t great—shares found support at 60 for most of February before beginning to rebound. After a five-week run took the stock to 75, FSLR tightened up and then broke out on the upside last week. Not surprisingly, with the market still iffy, shares have since backed off, but if you’re game, you can nibble here and see what earnings brings.
FSLR Weekly Chart
FSLR Daily Chart
InterXion (INXN)
Why the Strength
As somebody pointed out, the Cloud is just “somebody else’s computers,” and for much of Europe that somebody else is InterXion, a Netherlands-based provider of carrier-neutral data centers and services. The company’s more than 1,600 customers use its data centers (which are spread around in 11 countries), relying on its centrally located centers (with excellent power availability and connectivity) to collocate their IT infrastructure. In 2017, InterXion opened four new data centers, expanded operations in seven countries and increased revenue generating space by 14% from the prior year, leading to a 21% increase in revenue. Earnings growth accelerated during the year, expanding from a flat first quarter to 14% growth in Q2, 38% growth in Q3 and 43% in Q4. The beauty of this business is the recurring revenue (once companies place their technology, they rarely remove it), and on that front, InterXion grew its recurring revenue by 19% in 2017, with 95% of total revenue in the recurring category. Management has been selective in which clients it selects, concentrating on higher-margin business, which leads analysts to expect earnings to increase by 31% in 2018. InterXion has scheduled its Q1 earnings report for May 3, before the market opens. Analysts’ estimates are looking for $163 million in revenue and 21 cents per share in earnings.
Technical Analysis
INXN, which is making its debut in today’s Top Ten, has been in a general uptrend since its IPO in 2011. But the stock really changed character in 2017, breaking out of a consolidation that kept it pinned under resistance at 39 for the last six months of 2016. INXN rallied strongly all year and touched 64 at the end of January 2018. A four-week correction in February pulled the stock back to 55, but it bounced back to the low 60s in March, traded sideways for a month and then ripped to new all-time highs over the last couple of weeks. We don’t advise going whole hog on INXN this close to earnings, but a small position on a pullback to below 65 could do well.
INXN Weekly Chart
INXN Daily Chart
Loxo Oncology (LOXO)
Why the Strength
Loxo Oncology is a biopharmaceutical company developing highly selective treatments for patients with genetically-defined cancers. That’s a mouthful, but the explanation is simpler: These cancers are caused by abnormalities in specific genes, which result in abnormal proteins that drive cancer cell growth and Loxo uses genetic testing to develop targeted, personalized treatments that block these cancers from spreading. The stock is doing well because it has two candidates marching toward FDA approval. The most advanced is larotrectinib, which achieved a 76% objective response rate in trials targeting tropomyosin receptor kinase (TRK) fusion associated cancers. Loxo submitted a New Drug Application (NDA) for larotrectinib to the FDA in March, and partner Bayer (which bought in for $400 million in November) will submit a marketing authorization application to European regulators later this year. The second drug in the pipeline is LOXO-292, which targets cancers that harbor abnormalities in the rearranged during transfection (RET) kinase. This includes 2% of non-small-cell lung cancers, 10% to 20% of papillary thyroid cancers and a subset of colon and other cancers. The early-stage candidate is seen as having a competitive advantage in terms of safety and efficacy, and with the next data readout due in June, there’s a catalyst right around the corner. With the potential for over $550 million in sales from the two drug candidates by 2024, institutions are accumulating shares now. We like the story and the setup, just be sure to average in.
Technical Analysis
LOXO got off to a great start in 2017, then gapped up on heavy volume in June when the good news about larotrectinib was released. From June to mid-January it traded in the 70 to 95 range, then attempted to breakout in late-January. Shares slumped back to 85 during the market’s meltdown, but got going again in February, when they topped out near 135. A pullback in March found support at 110. Then news of the potential positive competitive positioning of LOXO-292 lifted analyst expectations and pushed shares back near their 52-week high. It’s volatile, but you can buy a little here or on minor weakness.
LOXO Weekly Chart
LOXO Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
Some of the mega-cap leading growth stocks of the past couple of years are acting funky, but Netflix remains in great shape as the firm’s combination of rapid growth, exploding earnings and still-giant potential is catnip to institutional investors. The stock is perched near all-time highs after first-quarter results proved fantastic—sales (up 40%) not only topped expectations but grew at their fastest pace in years, while earnings (up 60%) matched estimates. Possibly more important was the continued boom in paying subscribers, rising nearly 8.3 million from the prior quarter to about 119 million; as has been the case recently, most of that growth came from international markets, where subscribers rose 42% from the prior year and whose revenue (up 70% from last year) nearly matched U.S. streaming revenue. Of course, Netflix is also spending a ton, too—this year, nearly $8 billion worth on original content and even more on marketing, which means free cash flow is solidly in the red. But investors are more focused on earnings (projected to rise 126% this year), revenue and subscriber growth (management sees them rising 44% and 26%, respectively, in Q2), where the company’s momentum is strong. Obviously, Netflix isn’t a new story and the valuation is up there, but it remains one of the market’s liquid growth leaders and should do well if the market can get going.
Technical Analysis
One thing about NFLX’s chart that few mention is that the stock did nothing for the second half of last year, which provided a firm base to build on. Sure enough, the stock has been a great performer so far this year. Last week’s earnings-induced rise pushed NFLX back toward the top of a six-week base; given the market environment, keeping new positions small.
NFLX Weekly Chart
NFLX Daily Chart
Pioneer Natural Resources (PXD)
Why the Strength
With energy stocks gaining strength, Pioneer Natural Resources looks like a big-cap leader in the group, especially if investors buy in to the firm’s gigantic longer-term outlook. After it completes a handful of divestitures this year (including a recent sale of its Eagle Ford properties for north of $100 million), Pioneer will have transformed itself into a Permian pure play, with the largest acreage position in the Midland Basin (it has triple the production in that area than the next closest peer) with about 750,000 acres and more than 20,000 drilling locations. The company’s costs are near the floor (just $19 per barrel!), allowing it to fully fund an aggressive drilling program—Pioneer plans on using 20 rigs in the Permian this year to spud more than 250 wells, which should boost oil and total production in the low-20% range. But that’s just the beginning! Management has a very ambitious eight-year plan based on its healthy balance sheet, huge acreage and increasing cash flow—it’s aiming to grow total production by 18% annually through 2026 (oil output should expand at a slightly faster pace), which would result in cash flow of a whopping $11 billion that year! Obviously, we don’t advise putting all your faith in an eight-year projection in a cyclical industry like this. But there’s no question that Pioneer’s current and long-term outlook is special, and if things go right, you could be looking at a blue-chip energy explorer a few years out. Earnings are out May 2.
Technical Analysis
PXD has followed the path of most energy stocks during the past couple of years, with a peak early last year (near 200), a plunge through the middle of 2017 (down to 125) and then a rebound back toward its highs early this year (to 190). Shares then built a base with firm support in the 165 area, but the buyers have returned over the past two weeks—PXD has romped to new yearly highs in a straight line in solid volume. We’re OK nibbling on dips ahead of earnings.
PXD Weekly Chart
PXD Daily Chart
TransUnion (TRU)
Why the Strength
TransUnion is all about risk management, with access to 200 million credit files (basically every credit-worthy customer in the U.S.) and tens of thousands of data files to help businesses in a slew of fields (mortgage, auto lending, collections, healthcare, government, insurance and more) better target customer acquisition, project credit trends and cash flow among its current customers and, thus, minimize risk and help to avoid fraud. A big competitive differentiator for TransUnion seems to be its CreditVision suite, which uses enriched data and analytics to provide a more in-depth and predictive view of a person’s credit. All of this has led to steady, predictable growth, with acquisitions boosting results and expanding the company’s addressable market. The stock has turned strong after a great Q1 report—sales (up 18%) and earnings (up 36%) easily topped expectations, and TransUnion announced the $1.4 billion purchase of Callcredit, the second largest consumer credit bureau in the U.K., giving it access to a large market it hadn’t been active in. (The purchase should be neutral to earnings this year and accretive after that.) For 2018, management lifted guidance, expecting another year of solid, steady, predictable results—revenues up 12% to 13%, EBITDA up a bit faster than that and earnings up 27% (thanks in part to the corporate tax cut). Big investors are certainly believers, with 593 now owning shares, up from 365 a year ago and 211 two years ago.
Technical Analysis
TRU began its current run back in February 2017, and, except for a sharp shakeout last September, advanced smoothly until late January. Then, along with the market, it consolidated for nearly three months—TRU never fell more than 14% off its high and showed many big-volume up weeks during the base, a positive sign. Last week, shares soared to new highs following earnings on very good volume. Dips should provide a solid entry point.
TRU Weekly Chart
TRU 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.
