As Sideways as Sideways Can Be
Current Market Outlook
The market found some buying support after this morning’s gap lower, as some investors believe the Fed might stay on hold for longer considering job growth has slowed. That was good to see, but, daily wiggles aside, the intermediate-term trend remains sideways, which means staying selective, holding some cash and honoring your stops is paramount. There are still plenty of stocks working and a few set-up nicely, and that’s where your focus should be.
This week’s Top Ten presents a bunch of current winners; all have held up well during the market’s recent selloff. Our Top Pick is Carmax (KMX), which popped out of a nice, flat base on earnings last week.
| Stock Name | Price | ||
|---|---|---|---|
| 58.com (WUBA) | 0.00 | ||
| United Therapeutics (UTHR) | 0.00 | ||
| Medivation (MDVN) | 0.00 | ||
| CarMax (KMX) | 0.00 | ||
| Horizon Therapeutics (HZNP) | 49.89 | ||
| Humana Inc. (HUM) | 0.00 | ||
| Diamondback Energy (FANG) | 0.00 | ||
| E*Trade Financial (ETFC) | 0.00 | ||
| D. R. Horton (DHI) | 66.55 | ||
| Cirrus Logic Inc. (CRUS) | 0.00 |
58.com (WUBA)
Why the Strength
The Chinese online retail industry has plenty of contenders, from giants like Alibaba to smaller niche players like 58.com. 58.com has chosen to concentrate on offering local marketplaces where local businesses can advertise and communicate with customers about job openings, housing, automobiles, pets and other goods and services in over 380 Chinese cities. The company’s local orientation and diverse content has earned it the name “the Craigslist of China.” 58.com has a strong record of growth, booking 82% revenue growth in 2014, and its Q4 earnings report had lots of good news, including earnings of six cents per share, when analysts had predicted a 12-cent-per-share loss, as well as a 52.9% jump in the number of paying merchant members. Guidance for Q1 2015 was also well above forecasts. 58.com is involved in the deal-making scramble among the big online commerce players in China. Tencent Holding took a 20% stake in 58.com as part of its campaign to compete locally against Alibaba. And 58.com has taken a $34 million stake in a Chinese interior design firm called To8to. 58.com’s extensive list of local merchants and consumers makes it an attractive partner for e-commerce companies in China. And with Chinese stocks as a group making a strong move since the beginning of March, investors are noticing the potential here.
Technical Analysis
WUBA came public in October 2013 at 17, but has never traded under 21. The stock spiked above 58 in March 2014, then began a year-long consolidation with a couple of swings down to 35–36. Trading volume dipped to almost nothing in late 2014 and early 2015, but investors returned with energy in February and staged a rally on good volume in March. WUBA is now out to its highest price since August 2014 and has some good volume spikes to punctuate its up days. If you like the story, try to sharpshoot a buy on a dip to 50, and use a stop at the 25-day moving average, now at 46.
WUBA Weekly Chart
WUBA Daily Chart
United Therapeutics (UTHR)
Why the Strength
The pharmaceutical industry continues to produce winners, as positive clinical trial results and FDA approvals can have a huge effect on a stock’s price. And United Therapeutics does indeed have a strong roster of approved drugs, including Remodulin, a treatment for pulmonary arterial hypertension, and Orenitram, a high blood pressure medicine. But what’s attracting investors now is a certificate awarded by the FDA called a pediatric priority review voucher. This voucher will give priority, fast track review to any new drug United Therapeutics chooses. The FDA awarded it to United for its development of Unituxin, a drug for use against a very rare form of neuroblastoma that afflicts primarily infants and children. But the real kicker is that United can also sell the voucher—only the second ever issued—to another company. And the price could be high. Last year, BioMarin sold the first ever voucher for $67.5 million! United Therapeutics hasn’t announced which course it will take, but investors see the combination of a highly-profitable drug company and a high-value disposable asset as a good opportunity. The fundamentals are certainly sound, with the company producing 20% revenue growth in the latest quarter along with 12% growth in earnings and a 48.5% after-tax profit margin.
Technical Analysis
UTHR is continuing its breakout from the 15-week base it put in from September 24 to January 7 with support in the 120s and resistance in the 130s. The stock flew out of that base in January and galloped to over 180 a couple of weeks ago. The stock pulled back to its 25-day moving average on March 26, partly because of a series of valuation downgrades from analysts. But UTHR has recovered well, and is trading in the 170s. You can nibble here, or wait for a breakout above 180. Either way, a moderately loose stop at 162 looks prudent.
UTHR Weekly Chart
UTHR Daily Chart
Medivation (MDVN)
Why the Strength
Biopharmaceutical stocks have taken some hits, but Medivation is acting well. A developer of novel therapies for serious diseases, Medivation’s sales have improved greatly in recent years on the strength of its signature prostate cancer drug, Xtandi. The drug accounted for $230 million of Medivation’s $275 million in revenue in the fourth quarter, as sales improved 184% year over year, and earnings per share rose to $1.96 from a mere $0.03. The outlook for Xtandi should only improve as the company evaluates ways to use the drug to treat breast cancer; already its effects on prostate cancer have been profound. Midstage trials comparing Xtandi with rival AstroZeneca’s drug Casodex found that patients taking Xtandi have a much greater survival rate; those who take Xtandi live an average of 19.4 months, versus just 5.7 months for patients who take Casodex. Released last week, the results of the study gave Medivation additional momentum on the heels of its blowout Q4 earnings. Results like those should further enhance Xtandi’s profile, and by extension Medivation’s—especially on Wall Street.
Technical Analysis
After reaching a new record high above 115 in November, MDVN shares fell into an extended slump that lasted well into February. The stock found support at 98, but couldn’t break higher than 113 despite repeated attempts. Then came the earnings beat in late February, pushing the stock to new heights. MDVN reached as high as 141 on March 20, but has since pulled back. Still well above its 50-day moving average around 117, we think the five-point dip represents a lower-risk entry point.
MDVN Weekly Chart
MDVN Daily Chart
CarMax (KMX)
Why the Strength
CarMax provides the latest evidence of the rebound in the U.S. auto industry. Sales at America’s largest seller of used cars have been soaring of late, and the company’s quarterly topped analyst expectations again last week. Earnings per share improved 52% year over year, while sales jumped 14%. Falling oil prices and an improving economy certainly have played a major role in convincing more Americans to buy cars. Selling predominantly used cars, CarMax offers the cheapest option, which is helping it to gain market share (up about 5% in the 0-to-10-year-old-car market last year). It sold a record $2.9 billion in used cars last quarter alone. And the company is putting all its extra cash to good use. In the last 12 months, CarMax has spent $913 million repurchasing its own shares. It plans to spend another $2.4 billion on stock buybacks as part of its ongoing share repurchase program. That should provide additional buying power for the stock and boost earnings per share going forward.
Technical Analysis
After repeatedly meeting resistance at 68 since December, KMX finally broke through last week on the strength of its earnings beat. The stock gapped up from 68 to 74 last Thursday, setting a new record high. Buy on the next dip of a point or two now that KMX has broken through its four-month technical barrier. But keep a close eye on it—we’ve seen lots of failed breakouts lately, so a dip back into the high 60s would tell you the sellers are still hanging around.
KMX Weekly Chart
KMX Daily Chart
Horizon Therapeutics (HZNP)
Why the Strength
Horizon Pharma is a growing biotech that’s about to get a lot bigger. The specialty-drug company is buying out rival Hyperion Therapeutics for $1.1 billion. Announced last week, the deal gives Horizon access to Hyperion’s drug Ravicti, a treatment for rare urea cycle disorders (UCD) that can cause ammonia to build up in the body. Ravicti did $113.6 million in sales last year. Horizon’s Hyperion buyout now gives the company two UCD drugs (the other is called Buphenyl), making Horizon the dominant player in the space. The deal only adds to Horizon’s momentum. Last year the company swung to a profit for the first time ever, with sales nearly quadrupling. A savvy move to switch the company’s corporate address from Illinois to Dublin, Ireland, helped significantly lower Horizon’s tax bill, further enhancing the bottom line. Wall Street responded favorably to Horizon’s acquisition, boosting the stock 21% last week as earnings estimates are ratcheted upward.
Technical Analysis
The big gap up from 21 to 26 came on HZNP’s largest-volume trading day since last July. Shares were stuck in neutral for months, unable to break above resistance at 13 from September through December. Since the calendar flipped to 2015, HZNP has been on a tear, doubling since it broke through resistance with only a couple of brief dips. Volume has picked up considerably in the last two weeks, rising to 4.6 million shares per day from just under 3 million in the previous three months. It seems the bulls are fully on board with HZNP, as all technical barriers are well in the rear view mirror.
HZNP Weekly Chart
HZNP Daily Chart
Humana Inc. (HUM)
Why the Strength
With a market cap of $26.6 billion and annual revenue of $48.5 billion, Humana is both a giant in the managed healthcare services industry and a legitimate large-cap stock. Humana’s three divisions, retail, employer group and healthcare services, provide every kind of medical service to the nearly 14 million members in its medical benefit plans and nearly eight million in its specialty products. Humana is getting support from the increasing number of patients who now have medical insurance through ObamaCare; the number of U.S. citizens without health care is forecast to drop from 41 million in 2014 to 25–34 million in 2019. Humana is also making moves to focus on its core activities. It announced in March that it would sell Concentra—the occupational health and physical therapy business that it bought for $790 million in 2010—for about $1 billion. This will help maintain the company’s program of building relationships with physician practices, clinics and medical services organizations. Part of the money will probably go toward buying back its own stock. Humana just announced that it has completed $500 million of its planned $2 billion in share repurchases; the company has committed to completing $1 billion by June 2015. With a growing population of aging baby boomers on Medicare, and previously uninsured patients now covered under ObamaCare, plus the resources to grow both its operations and its insurance business, Humana is a leader with ambitions to grow larger yet.
Technical Analysis
HUM spent 17 months correcting from its RP peak in November 2011 through March 2013. Then it broke out on big-volume, and HUM has been a tractor ever since, advancing steadily with relatively brief corrections and one five-month flat spot. HUM hit an all-time high at 103 on March 23, and has been digesting its gains around 180. We think a buy on a dip of a couple of points makes good sense for a long-term position. Use a loose stop at 162 to avoid possible shakeouts in this low-risk stock.
HUM Weekly Chart
HUM Daily Chart
Diamondback Energy (FANG)
Why the Strength
We didn’t think we’d be seeing any energy explorers or drillers in Top Ten for a long time after the oil crash last year, but the group has been attempting to bottom out since mid-December. And if a new uptrend develops, Diamondback Energy looks like a leader for a few key reasons. First and foremost, the company is a low-cost producer of mainly oil (about 75% of its output) in Texas’ Midland Basin with 78,000 net acres and years worth of drilling inventory—some of its areas (like parts of the Spraberry trail) are so lucrative, and operating efficiencies are so high, that the wells sport returns between 50% and 100%—even at $50 oil! Of course, not all its wells are as lucrative, but most are still profitable (25%-ish returns) even at current prices, and management has pointed out that lower energy prices do help a lot on the cost side—the top brass thinks costs will drop 20% this year as equipment and service providers struggle to land business. Beyond that, there’s Diamondback’s 88% ownership in Viper Energy Partners (worth well over $1 billion), which owns the mineral rights to some of the same lucrative acreage that Diamondback operates, making it a highly profitable royalty vehicle. Even with a cutback in capital expenditures, Diamondback expects production to grow 40% this year. If oil prices take another leg down, all bets are off, but if and when the energy sector gets going, we expect this stock to do very well.
Technical Analysis
FANG came public in late-2012 and enjoyed an amazing run from 18 to 93. It then fell hard along with all of its peers as energy prices collapsed; shares sank as much as 45% in the second half of last year. But since then, FANG has shown great relative strength—it rallied seven weeks in a row, pulled back calmly in March, and actually pushed to higher highs last week. It’s a bit speculative given that the group is still on its knees, but we’re OK with buying a small position here or on dips.
FANG Weekly Chart
FANG Daily Chart
E*Trade Financial (ETFC)
Why the Strength
E*Trade Financial was the first online broker to execute a trade for an individual investor. That was over 30 years ago, and direct investing now constitutes 20% of the total brokerage industry, and it’s growing at a rate of 15% a year. E*Trade Financial’s online trading site offers investors a powerful set of tools for screening, research and analysis in equities, options, ETFs, futures and foreign exchange, bonds and mutual funds, and works on everything from PCs and tablets to mobile phones. Part of E*Trade Financial’s current success is attributable to the highest level of trading activity since 2009 in its 3.1 million brokerage accounts. And part comes from the company getting regulatory approval to separate its brokerage business from its E*Trade Bank activities. The brokerage had been moved under the bank to provide liquidity when the bank’s investments in mortgages and related securities took a hit in the 2008 meltdown. The newly separated brokerage division will still provide capital (from its $290 billion in customer assets) for the bank to manage, but it will benefit from its separation by the freeing up of $430 million of excess capital that may be distributed as a dividend later this year. E*Trade Financial has enjoyed several recent upgrades and price target raises from analysts. We like the story.
Technical Analysis
ETFC made a major run from 7 in July 2012 to 26 in March 2014. After a three-week correction to 20, the stock consolidated throughout 2014, ending only in January 2015 when news of the bank/brokerage separation keyed a high-volume rally that’s still going on. ETFC dipped to its 25-day moving average in March, but is back near its all-time highs. Look for a pullback of a point or so, or wait for the rising 25-day to supply some lift. A loose stop at 25 seems reasonable.
ETFC Weekly Chart
ETFC Daily Chart
D. R. Horton (DHI)
Why the Strength
Over the past few months, the pieces have come into place to support the next upleg of the housing recovery—job growth (even including Friday’s disappointing figure) has clearly picked up, mortgage rates have remained extremely low and, despite some uneven activity in the winter, results are beginning to perk up. New home sales hit a seven-year high in February (up 25% from the year before!), and analysts see single-family home sales growing a whopping 33% in 2015. That’s going to benefit D.R. Horton, which is the largest homebuilder in the U.S. by volume, with operations in 27 states, offering homes at all different price points. Earnings growth has recently decelerated as margins contracted (mainly from higher costs, though greater levels of discounting are a factor, too), but the company is expecting good things going forward; in the fourth quarter, new sales orders rose 40% and backlog increased 29%, which should help the bottom line re-accelerate later this year. Bigger picture, new home construction remains about 50% below the 60-year average in the U.S., so there’s plenty of upside potential as confidence returns to the sector. Earnings are due out April 22.
Technical Analysis
DHI rallied from 8 to 28 during the first leg of the housing bull market, and then spent about 20 months doing nothing, with lots of shakeouts and dead periods despite healthy sales and earnings. The final shakeout looks like it occurred in January, and since then, the action has been constructive, with DHI pushing to multi-year highs last week on decent volume. It’s not a powerful blast-off, but it appears the sellers have been worn out. Buy a little on dips, and then see how the stock reacts to earnings in two weeks.
DHI Weekly Chart
DHI Daily Chart
Cirrus Logic Inc. (CRUS)
Why the Strength
Cirrus Logic is strong today for one simple reason: Apple. Cirrus, which is known for its audio signal chips, gets the vast majority of its revenue from the giant (78% in the December quarter!), and investors are betting that big sales for iPhone 6 and other Apple devices could lead to a huge bottom line for Cirrus. Of course, the past few quarters have been nothing special (though even during this slow patch, Cirrus has posted impressive profit margins), and analysts are expecting the bottom line to shrink from here. But we’re not sure they’ll be correct; last quarter, the company’s 97-cent-per-share earnings result was 21 cents ahead of estimates, and with most analyst updates and supply chain updates hinting at big sales for Apple, investors are thinking Cirrus will post some superb results, too. Now, we’re not huge fans of these types of “down the food chain” stocks; if Apple sneezes (or decides to go with another supplier), Cirrus will catch the plague. But looking at the here and now, Cirrus is likely to have big earnings for the next few quarters, which, combined with a reasonable valuation (17 times this year’s conservative estimates), should keep buyers interested.
Technical Analysis
Chip stocks have taken a few bullets during the past two weeks, but CRUS has taken the selling in stride—after a huge, persistent rally starting in December that included 10 weeks up in a row, the stock has shaken out a bit during the past two weeks, but volume has been light and CRUS has steadied itself nicely after the initial selling wave. Earnings are likely out in a couple of weeks, but the recent action looks more like a shakeout than a major top. You can buy a small position here (maybe half or two-thirds of what you’d normally buy) with a stop near 30.
CRUS Weekly Chart
CRUS 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.
