A Stick Save!
Just as it appeared the sellers were taking control, the market bounced back in impressive fashion last week, and encouragingly, we saw more than a few growth stocks pop on earnings. Is it a major new buy signal for the market? We can’t go that far, at least not yet—plenty of stocks are still stuck in the mud, and the market remains volatile as earnings season continues. Even so, we’ve seen enough strength to move our Market Monitor back to the bullish camp, so you can look to extend your line as opportunities arise.
More important these days than the market’s daily gyrations is the consistent stream of enticing ideas being produced by our screens. This week’s list has another batch of high-potential names (with no defensive-type stocks at all). Our favorite being ARM Holdings (ARMH), which roared back to life after a two-month rest thanks to a great quarterly report.
| Stock Name | Price | Buy Range | Loss Limit |
|---|---|---|---|
| Toyota Motor (TM) | 0.00 | 113-115 | 103-104 |
| Ryland (RYL) | 0.00 | 43-45 | 38-39 |
| RockTenn (RKT) | 0.00 | 95-97 | 90-92.5 |
| Pandora Media Inc. (P) | 0.00 | 13-14.5 | 12-12.5 |
| Netflix, Inc. (NFLX) | 423.92 | 210-220 | 188-192 |
| Keurig Green Mountain (GMCR) | 0.00 | 54-56 | 50-52 |
| Fifth & Pacific (FNP) | 0.00 | 20-21 | 18-18.5 |
| D. R. Horton (DHI) | 66.55 | 25-26.5 | 22.5-23 |
| ARM Holdings (ARMH) | 0.00 | 44.5-45.5 | 40-41 |
| ANGI Homeservices Inc. (ANGI) | 14.81 | 22.5-24 | 20-21 |
Toyota Motor (TM)
Why the Strength
Toyota is riding a wave of three positive trends that are catching investors’ attention right now. The first is a spruced-up lineup of cars that are attracting comparison shoppers. The second is growth of automotive demand from emerging market countries. And the third is the increasing strength of the Japanese economy. Some of these factors relate to the company’s reported loss of $3.12 per share in 2009 (its only annual loss in 71 years). That year saw reduced demand due to the Great Recession that swamped both developed and emerging markets. The Japanese economy is now recovering from both a decade-long recession and the aftermath of the Fukushima tsunami and nuclear plant breach. A stronger Japanese economy will support domestic sales that accounted for nearly 40% of 2012 revenue. And a weaker yen will boost the attractiveness of pricing in overseas markets. North American sales will benefit from both the attractive currency valuations and well-received design updates. Toyota, the largest automaker in the world by volume (2.43 million vehicles sold from January through March) is generally considered a blue-chip type income stock, but this confluence of short-term factors is creating an opportunity for growth investors.
Technical Analysis
TM has done an admirable job of maintaining its price within a relatively consistent range for many years. But the stock’s action since November 2012 has been atypical. From its usual perch in the high 70s, TM soared past 90 in December, spent February and March consolidating in the low 100s, then ripped higher again in April on big volume. TM is now enjoying another rally that has topped 115. There haven’t been any big pullbacks during this rally, although the stock did dip below its 50-day line in early April. We think TM is a buy on any weakness of a couple of points, with a stop at its old base at 102.
TM Weekly Chart
TM Daily Chart
Ryland (RYL)
Why the Strength
Ryland is the second homebuilder in this week’s Top Ten, and it’s benefiting from the same trends as the entire group. (See our write-up on D.R. Horton for more on the industry as a whole.) Like Horton, Ryland reported a much better than expected quarter last week—revenues exploded 74% from a year ago, helping earnings leap to 43 cents per share (about 15 cents above expectations!), up from a loss of a penny in the year-ago quarter. And it looks like those numbers will remain strong for many quarters to come; new orders leapt a huge 54% in units (75% in dollar terms!), while backlog was up 57% in units and 75% in dollars, rising to $907 million at quarter-end. Moreover, the cancellation rate was 15.4%, a high figure, but down from 18% a year ago. Thus, Ryland literally has every metric headed in the right direction—before the report, analysts see earnings doubling this year to about $2.30 per share (with another 33% gain in 2014), but even those estimates are likely to tick higher as more investors realize the earnings power of builders. Ryland is much smaller than some of its peers (about $1.5 billion in revenue, compared to $4 to $5 billion for Lennar, Pulte and Horton), but that’s allowing it to grow faster during this expansion.
Technical Analysis
RYL hit some turbulence in late-January, falling from 43 to 34 in just three weeks. The stock did motor back to 43 in March but then came back down to the mid-30s. Last week, though, showed a decisive change of character—RYL exploded to new highs on its biggest weekly volume since September following its blowout earnings report (and many other positive reports in the group). Given the still-choppy market, try to buy on a pullback. RYL is probably going to be faster-moving than DHI, both on the upside and downside.
RYL Weekly Chart
RYL Daily Chart
RockTenn (RKT)
Why the Strength
Packaging giant Rock-Tenn, which was our Editor’s Choice in the March 25 issue, reported earnings last Tuesday, and investors responded with a burst of enthusiasm. Rock-Tenn’s cash flow from sales of its corrugated boxes, paperboard, preprinted packages, merchandising displays and specialty paper products has been getting a boost from high containerboard and box pricing, and the integration of Smurfit-Stone Container (acquired in 2011) is now complete. The company reported earnings of $1.12 per share (up 15% from Q1 2012) on revenue of $2.32 billion (up 2%). That revenue number was slightly below the consensus estimate of $2.34 billion, but the earnings beat estimates by a dime a share. On Friday, Rock-Tenn announced a 33% increase in its dividend, bringing the annual dividend rate to $1.20 per share. The company also reaped the benefit of a favorable Internal Revenue Service review of Smurfit-Stone’s 2009 tax return, which allowed the release of a $254 million tax reserve. Rock-Tenn is primarily a good management story, with strict attention to costs, including the closure of underperforming plants, and supply chain controls that have minimized the effects of a constrained containerboard supply.
Technical Analysis
RKT had been heading sideways since late February, trading in a range with support at 85 and resistance at 90. The stock began a rally on Monday, April 22, on increased volume and broke out above 90 on Tuesday. Wednesday brought a spike over 100 on four times average volume, although the stock drifted back from its high and closed the session at just below 100. In the days since the earnings report, RKT has drifted a little lower, but volume has been under control. If you like the competent management, increased dividend and execution focus of RKT, you can buy on any dip below 97, with a stop at 92.5.
RKT Weekly Chart
RKT Daily Chart
Pandora Media Inc. (P)
Why the Strength
Pandora Media operates an Internet radio service that lets listeners access music on their computers, mobile phones and other devices. Users can create up to 100 personalized stations and listen to hours of free music and comedy. And if they are ready to spring for a small monthly payment, there’s Pandora One, a paid subscription service. Pandora’s listenership has been on the increase, with March’s figures reflecting a 40% jump in listener hours from year-ago levels. Active listeners numbered 69.5 million at the end of March, up 36%. Pandora’s earnings dipped to a four-cent loss per share in Q1, reflecting higher royalty costs for the music that it streams. Pandora’s advertising revenue hit $109 million, while subscription and other revenue came in just over $16 million. Revenue per thousand listener hours (RPM) increased by 22%. Investors have always been both intrigued and fearful of Pandora’s position as a competitor to Apple’s iTunes (as well as a potential new iRadio product). Pandora has its ambitious Music Genome Project that analyzes subscribers’ listening preferences and programs only music that they will like, though it’s not clear that this is a big selling point. But with 200 million registered users, Pandora has a big base to build on.
Technical Analysis
P has rebounded nicely from its November 2012 bottom at 7. Since its big gap up on volume on March 8, the stock has been consolidating in a tight pattern. The good news is that when the stock met its rising 50-day moving average in early April, it began riding that average higher. And early last week, the stock pushed from 13 to 14. You can either buy a little here or wait for a breakout above resistance at 14. It will be bearish if shares fall below their recent lows.
P Weekly Chart
P Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
Netflix is firmly on the comeback trail, as last week the company reported its second-straight terrific quarter. Sales growth of 18% isn’t jaw-dropping, but it’s the fastest rate of growth in five quarters, and it includes the legacy, shrinking DVD-by-mail segment. If you just look at streaming, paid subscribers totaled 34.2 million, up 40% from a year ago, while streaming revenue totaled $781 million, up 42%. The big draw this year looks to be Netflix’s move into original programming, which is creating buzz and attracting new subscribers (House of Cards was a hit, and even more people initially watched Hemlock Grove when it was “released” on April 19), as well as making the company less hungry for new content deals—management said it would be more discerning when it came to non-exclusive deals going ahead, which should help keep costs in check. The firm has more original programming on the way (Arrested Development is out May 26, with a few other series later this year), and with the company’s pricing issues firmly in the past, further rapid growth is highly likely. As for earnings, they’re ramping up quickly, too; the 31 cents a share it earned in the first quarter was miles above expectations, and even with higher spending on more original series next year, the bottom line should leap north of $1.30 per share this year and $3 in 2014.
Technical Analysis
NFLX has already had a huge run this year, and it’s always been a heavily shorted stock, so lots of volatility is almost assured. But the stock did have a multi-week pause and shakeout from late-February through early April, and last week’s big gap up on earnings (on volume that was more than triple normal) and the relatively tight trading since is a good sign that most sellers are worn out. You could buy a small position (maybe half of what you’d normally buy) around here, with a loose stop down near 190.
NFLX Weekly Chart
NFLX Daily Chart
Keurig Green Mountain (GMCR)
Why the Strength
If there were a Hall of Fame for stocks that have been covered in Cabot Top Ten Trader, Green Mountain Coffee would be a lock for entry, with 26 total appearances. The company’s management made all the right moves to gain national distribution for its roasted coffees, then made the big move to the Keurig K-Cup system of single cup brewers. Selling the brewers cheaply built a huge installed base, ensuring follow-on sales of coffee, tea and cocoa pods. The company finally fell out of favor with investors when it couldn’t maintain the pace of big revenue increases and accusations of accounting irregularities flew for a while. When the dust cleared, Green Mountain stock had fallen from its September 2011 high of 116 to a July 2012 low of 17. The turnaround for Green Mountain began immediately, as investors noticed that the expected waning of revenue following the expiration of K-Cup technology patents hadn’t occurred. The company also brought out a new line of Keurig Vue brewing machines that were more versatile and could vary brewing strength and volume. Green Mountain will release Q1 results around May 6, and good news could continue the already caffeinated resurgence of its stock. The company has been through both its Romance and Transition phases, and is now ready to trade on its earnings as a mature business.
Technical Analysis
GMCR has been trading sideways since the middle of March, using 55 as support while trading up or down a couple of points. It’s likely that investors are waiting for the earnings report on May 6 (estimated) that will set the stock’s course for the near future. After a big rebound from last July’s low, GMCR is now trading at a moderate P/E of 22. Expectations are for quarterly earnings of 73 cents per share and revenue of $1.02 billion. Many investors are betting against GMCR, and short interest is high. While this raises risk, it also adds to the potential upside should earnings prove strong, as a short-covering rally could be substantial. We don’t advise a big bet on the proposition, but a small position on a dip toward 56 could produce good results. Use a stop at 52 to control risk.
GMCR Weekly Chart
GMCR Daily Chart
Fifth & Pacific (FNP)
Why the Strength
While the company’s turnaround prospects and growth potential attracted us to Fifth & Pacific (formerly Liz Claiborne) in early April, speculation and earnings are currently dominating the headlines. As you might recall, Fifth operates higher-end apparel and accessory brands like Kate Spade, Lucky and Juicy Couture. The company lost money in each of the past four years, but has since turned to selling off some of its key brands in order to cut debt. With Liz Claiborne already long gone, there are reports that firms are interested in snatching up the underperforming Lucky and Juicy Couture brands. The brands are estimated to be worth at least $700 million, and Fifth has asked that first-round offers be submitted by the end of April, with the goal of a sale in July. Outside of this speculation, the Kate Spade brand remains a hot topic heading into Thursday’s first-quarter earnings report. Specifically, management believes the brand can grow revenue from $462 million last year to a whopping $1.2 billion by 2016. Same-store sales grew 27% for Kate Spade in the fourth-quarter, and new store openings are already planned, so investors will be keeping a close eye on this brand. Lastly, Fifth & Pacific posted a solid holiday quarter (sales and earnings up 9% and 20%, respectively), proving that while many retail names are struggling, this one continues to buck the trend.
Technical Analysis
After setting a bottom near 10 in the fourth-quarter of 2012, FNP shares have put together a solid and steady uptrend. In fact, the stock has nearly doubled during this timeframe, gaining steadily along support at its 25-day moving average. News that the company is looking to ditch its underperforming brands has pressured FNP higher since early April, sending the stock to fresh all-time highs near 22. With earnings on deck this Thursday, we don’t recommend diving in head first, but taking bites near 21 could provide a nice base position while you wait to see what the quarterly report brings.
FNP Weekly Chart
FNP Daily Chart
D. R. Horton (DHI)
Why the Strength
Many investors are wary of the uptick in the housing market during the past few months; to some it seems too sudden (we’ve read about bidding wars breaking out in the Boston area), or at risk of failing once mortgage rates tick up. But we’re big believers in the new boom because of history—the number of housing starts was so depressed, for so long, that even after a huge rebound during the past year, this figure remains about 50% below its 50-year average! That’s leading to some terrific results among all the major homebuilders, including D.R. Horton, which reported results last Friday morning. Not only did sales and earnings blow past estimates (earnings of 32 cents per share crushed estimates of 19 cents), but the future looks even brighter; new orders jumped 34% in the quarter (and 52% in dollars), while the firm’s backlog of homes to build increased 33% (76% in dollars), and importantly, the average price of homes sold in the first quarter was up 14%. Long-term, we see that Horton earned north of $4 per share in both 2005 and 2006; to be clear, we’re not anticipating another housing bubble, however, costs are much lower today, in terms of both inputs (gypsum, lumber, etc.) and overhead; the company was forced to cut to the bone during the multi-year bust. Earnings are expected to leap more than 50% this year and next, but even those figures could prove very conservative should the housing rebound continue. We like it.
Technical Analysis
Many homebuilders didn’t do much between mid-September and mid-April—there were some peaks and valleys, but net-net, not much progress was made. Last week, though, brought a new kick-off and DHI was among the strongest, exploding off its 40-week moving average on huge volume, ripping to new highs in the process. Often, these straight-up-from-the-bottom moves lead to short-term consolidation; you could nibble here, but we think you may be able to grab shares on weakness.
DHI Weekly Chart
DHI Daily Chart
ARM Holdings (ARMH)
Why the Strength
With last week’s first-quarter earnings report, ARM Holdings reinforced the idea that it’s fast becoming the Intel of the mobile computing age. Taking advantage of its dominance in the rapidly growing mobile computing market, ARM posted first-quarter revenue of $263.9 million, a 26% year-over-year rise. CEO Warren East, who announced his retirement last month, noted that ARM’s next-generation processors (big.LITTLE) and graphics designs (Mali) are seeing “strong uptake.” The most lucrative of ARM’s newest designs, big.LITTLE, is already appearing in numerous devices, including Samsung’s popular Galaxy S4. ARM is basically a licensing firm, coming up with the designs (which are generally smaller and use less power than the competition) and then collecting royalties as big chip firms adopt them. The company claims that its technology is present in 95% of the world’s mobile phones! While the company’s mobile growth is impressive, investors have been most excited by ARM’s inroads into the PC and server markets via its latest 64-bit architecture. It’s important to remember that lead times here are very long, with the first licensing revenues for those markets not likely to appear until late this year or early 2014. Still, ARM has found a way to reinvigorate a stagnate semiconductor market, and we think the company has plenty of room to run.
Technical Analysis
Following a strong bull run off the market bottom in 2009, ARM spent all of 2011 and early 2012 trapped in the doldrums between 25 and 30. The stock exited this range by dipping to a low of 21 this past July, but bargain hunters were quick to jump on shares. Early speculators were rewarded when ARM broke out above 30 on strong earnings in October. This run topped out just shy of 45, with ARMH consolidating at 40 ahead of last week’s earnings. Shares have since spiked to multi-year highs above 45 on strong volume. With the bulk of the earnings rally over, we expect a period of consolidation before ARMH resumes its uptrend. We recommend taking bites here or on controlled pullbacks to 45.
ARMH Weekly Chart
ARMH Daily Chart
ANGI Homeservices Inc. (ANGI)
Why the Strength
Angie’s List operates a customer-driven website where members can research, hire, rate, and review local professionals and services, including home remodeling, plumbing, roof repair, health care and automobile repair. The company went public in late 2011, but has only recently begun to create a considerable buzz after posting several quarters of solid revenue growth. Specifically, last week Angie’s List announced that first-quarter sales soared 68% year over year. During the past year, the company has averaged revenue growth of 71%. Angie’s List also forecast second-quarter earnings of $58.5 million to $59.5 million, well above the consensus estimate. On the conference call, co-founder and Chief Marketing Officer Angela Hicks Bowman told analysts that more new subscribers are being converted to paid annual memberships; the company added 275,000 subscribers last quarter, with membership standing at approximately 1.95 million. Angie’s List is also cutting subscriber acquisition costs, spending 12% less on acquisitions in the first quarter. It’s a good story with a unique offering.
Technical Analysis
ANGI was slow out of the gate following its IPO in November 2011, and once the post-IPO lock-up period ended, shares plunged into the single digits, bottoming near 9 in late August 2012. Undeterred, the stock formed a base in the 10 region, and slowly began building support along its 10-week moving average. ANGI edged past resistance at 12 in early January, with the stock breaking out above its 50-week trendline by February. Bolstered by stronger-than-expected fourth-quarter and first-quarter earnings reports, ANGI has soared more than 100% since the start of the year. Given the recent post-earnings pop, we recommend taking bites on pullbacks.
ANGI Weekly Chart
ANGI 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.
