A Change in Character
The internal condition of the market began to weaken in mid-March, as defensive-type stocks and sectors led the way higher, while everything else stagnated or worse. And last week we saw some real selling pressures emerging; it’s not the end of the world, but it’s certainly a change in character for a market that’s been chugging relentlessly higher since the start of the year. We’re moving our Market Monitor to neutral and will be watching carefully—it’s possible this will be just another brief shakeout, with earnings season rescuing the bulls. But, as always, it’s best to go with the evidence, and right now, that means raising some cash, limiting new buying and building a watch list for when the bulls re-take control.
On the plus side, we’ve been pleased with the solid growth stories we’ve seen in our screens the past few weeks, despite the market. Our favorite this week is Fifth & Pacific (FNP), a turnaround and special situation play in the retail sector that’s set to ride one super-powerful brand.
| Stock Name | Price | ||
|---|---|---|---|
| Zillow (Z) | 76.64 | ||
| ValueClick (VCLK) | 0.00 | ||
| Safeway (SWY) | 0.00 | ||
| Splunk (SPLK) | 207.67 | ||
| Sony Corp. (SNE) | 0.00 | ||
| SanDisk Corp. (SNDK) | 0.00 | ||
| Parexel Corp. (PRXL) | 0.00 | ||
| Keurig Green Mountain (GMCR) | 0.00 | ||
| Gilead Sciences (GILD) | 75.10 | ||
| Fifth & Pacific (FNP) | 0.00 |
Zillow (Z)
Why the Strength
Zillow operates online sites that get potential mortgage borrowers together with mortgage lenders and connect potential home buyers with sellers, either directly or via real-estate professionals. The Zillow website is a rich source of real-estate information, featuring estimates of current home values, mortgage rate listings, lists of brokerages, home builders, insurance brokers and other consumer products and services companies. Revenue comes from subscriptions from real estate dealers and online ads. The growth of mobile online access and the strengthening U.S. real estate market has been lifting revenue growth, with 74% growth in 2010, 117% in 2011 and 77% in 2012. Zillow turned profitable in Q2 2011 and came public in July 2011. There are no secrets here, just an information-rich website—with a fascinating Zestimates program that estimates the value of your current house—supported by a resurgence of home buying. This is likely to be a continuing story with good growth characteristics.
Technical Analysis
Z came public in the middle of 2011 and made a nice run from 21 in December of that year to 47 in September 2012. But the wheels came off Z in one day in early November when a disappointing earnings report gapped the stock down from 35 to 28 in one day, with subsequent trading dropping it to 23. But Z rebounded quickly and surged to new post-IPO highs at 57.5 with a rally that began in late February. Z dipped below 50 during last week’s market weakness, but has already pushed back to 52, which is right at its 25-day moving average. We think it’s a good buy right here. A dip below the 50-day moving average, now at 45.7, would be a warning sign.
Z Weekly Chart
Z Daily Chart
ValueClick (VCLK)
Why the Strength
ValueClick is the world’s largest independent online ad network, with expertise in every facet of online advertising as well as the intelligence (and the dollars) to acquire valuable young competitors in the industry as they appear. The core of the business, bringing in 40% of revenues, involves placing ads in online media; ideally, the right ad placed adjacent to the right story induces the reader to click and to do what the advertiser wants. The reader/customer pays the advertiser, who pays the ad agency that placed the ad, who pays ValueClick, and everyone is happy. Advertising-centric websites—like Coupon Mountain and Investopedia—bring in 28% of revenue; affiliate marketing brings in 25% and fees for using ValueClick’s technology bring in 8%. Among the company’s properties, recent acquisition Dotomi is notable for its approach called Personal Media; basically, this technology delivers personalized ads to internet users by determining in real time what content to use and where and how to use it. Well used, Personal Media delivers more meaningful ads to consumers and companies enjoy higher returns on their advertising expense. And then there’s Greystripe, the largest brand-focused mobile advertising network in the U.S. by reach. Users include Best Buy, Disney, Expedia, Ford, Jamba Juice, MasterCard, Neiman Marcus and Pop Tarts. The stock is strong because analysts have recently upgraded their expectations for the company.
Technical Analysis
We like VCLK because it’s coming out of a long basing pattern that left the stock relatively undervalued while earnings climbed. The kickoff came in mid-February, jumping the stock from 22 to 25. By mid-March, the stock had reached 31, and in the three weeks since, it has pulled back quietly to the current level, where it is likely to find support from both prior price action and the 25-day moving average.
VCLK Weekly Chart
VCLK Daily Chart
Safeway (SWY)
Why the Strength
We’ve been writing about various yellow flags that the market has been waving, and the reappearance of Safeway in these pages probably qualifies as another. Safeway is a national grocer with over 1,600 stores nationally that feature all kinds of groceries, delis, bakeries, flower shops, pharmacies, Starbucks outlets and adjacent fueling centers. The company offers a mix of national brands and store brands and also operates under the Vons, Pavilions, Pak n Save and Dominick’s trademarks. The company operates in the U.S. and Canada and holds a 49% interest in Casa Ley in Western Mexico. Grocery chains typically grow slowly (Safeway’s 2012 revenue growth was 1%) and margins are held down by fierce price competition (Q4 after-tax profit margin was 1.6%). On the plus side for investors, Safeway stock pays a forward annual dividend yield of 2.8%, 2013 earnings are forecast to rise 5% and the stock trades at a reasonable 12 P/E ratio. The rise of a defensive stock like Safeway isn’t a great sign for the market, but it’s a good bet for a conservative portfolio. The big recent news is that Safeway is spinning off its Blackhawk Network Holdings, its gift-card provider, in a U.S. IPO that is expected to raise up to $220 million.
Technical Analysis
SWY traded as high as 38 in 2007, soon after its only previous appearance in Top Ten, but spent years in a downtrend punctuated by an occasional rally. The stock bottomed at 15 last August, then started a very gradual uptrend that brought it to 18 at the end of the year. January brought a spike on higher volume and February saw a genuine blastoff to 24 on big volume. Last week’s correction has pulled SWY back into contact with its 25-day moving average at 25. SWY looks good here as a longer-term investment for its dividend and its price momentum. A dip to 22 would be bearish.
SWY Weekly Chart
SWY Daily Chart
Splunk (SPLK)
Why the Strength
Splunk’s story is a little bit of an ice cream headache, but the big idea here is Big Data. The company’s software looks to be far better able than others’ to handle so-called machine data, which is any data produced automatically by IT systems and electronics devices about their status and activities, or from person-to-person interaction, such as click-through data on a website or call center data. The amount of this information is staggering and growing exponentially, and Splunk’s products allow firms to boost the efficiency of their IT operations, help with cyber security and let business professionals gain far more insight into customer wants and actions. As with most thriving software firms these days, Splunk’s product is Cloud-based, so it’s much easier to install, access and update, and Splunk also offers numerous apps that can be tailored for a specific client’s needs. Our only worry with a company like this is whether someone else will come up with a much better mousetrap, but judging by the results, that’s not a big deal—eight of the top 10 telecom operators, six of the top 10 banks and each of the five largest online retailers are Splunk customers, and on average, these big firms are buying more and more from the company as the years pass. In fact, existing customers routinely generate 70% of new bookings (!), and in 2012, the firm booked 171 orders of at least $100,000, vs. 94 such orders a year ago. Overall sales growth is strong (though slowing a bit), as is cash flow. We like it.
Technical Analysis
SPLK came public in April of last year and has basically been building a base since ... but its action during the past couple of months tell us big investors are buying in a big way. First, note that the stock itself has nosed out to new highs (though the relative performance line hasn’t yet). Second, look at all the tremendous bullish volume spikes on the weekly chart during the past few months. Third, and just as important, SPLK has barely noticed the market’s renewed volatility of late; the stock hasn’t fallen below its short-term 25-day moving average in months! It’s not the most liquid name ($60 million of volume per day), but we think there’s big potential—you could take a small position here, but be sure to adhere to a tight stop near 37.
SPLK Weekly Chart
SPLK Daily Chart
Sony Corp. (SNE)
Why the Strength
Sony Corp., the behemoth Japanese maker of electronics equipment, needs no introduction—whether it’s home audio systems, gaming consoles, cameras, other audio systems or various chips, Sony is there. But why is such a large firm ($81 billion in revenue!) in Cabot Top Ten Trader? Part of it has to do with the company’s upcoming launch of its PlayStation 4 console; a new console launch often provides a boost to earnings. (Analysts see the company earning $1.28 per share for the fiscal year ending next March, up from just 19 cents during the past four quarters.) But a bigger part of its growth outlook has to do with what looks like a new, dramatic bull market in Japan—the central bank in that country has instituted an extraordinarily large easing program that has the Nikkei and all Japanese stocks flying! We’re actually wondering whether the 20-plus year bear market in Japanese stocks might finally be over; the advance since mid-November is looking that powerful, with the latest easing move adding more fuel to the fire. Sony isn’t offering anything revolutionary, but it’s an institutional quality stock in Japan, and it’s acted very well since the Nikkei has taken off. If that market’s uptrend persists, we see no reason Sony won’t join in on the fun, especially if the PlayStation release comes in better than expected.
Technical Analysis
SNE is really a turnaround—the firm’s ADR was at 37 in early 2011 when the wheels came off. Shares trended lower until late last year, when the stock fell just below 10! Since then, however, all the action has been on the upside; notice how volume has exploded while the stock has doubled. Granted, SNE hasn’t reacted as powerfully as some other Japanese names in recent days, but it’s pullback toward its 50-day line looks buyable, with a loose stop around 15.
SNE Weekly Chart
SNE Daily Chart
SanDisk Corp. (SNDK)
Why the Strength
SanDisk operates in a highly cyclical, commoditized industry and, as you can see in the table below, had horrible sales and earnings performance in recent quarters. So it’s probably time to buy! The reason for the stock’s resilience is that prices for solid-state flash memory (as well solid state drives), which almost always decline, are actually firming up; supply is limited, competition has thinned out after many lean years and some industry consolidation, and demand is up (think of all the tablets and smartphones using solid state memory nowadays). Thus, while the company hasn’t done much during the past few years (earnings peaked in 2010 and have slowly meandered south ever since), the future is looking very bright—one analyst pounded the table last week, citing persistent resilience in flash prices and good tidings from peer Micron Technology, and raised his earnings outlook for SanDisk to $4.25 per this year and $5 in 2014. (Consensus estimates are for $3.83 this year and $4.30 next.) This could always be a false start—there have been a few false starts in the industry—but evidence is piling up indicating that the industry’s cycle is turning up. And given the stock’s resilience, big investors agree.
Technical Analysis
SNDK had a great run from the bear market low in 2009 to the middle of 2010, rising as high as 51 before beginning to chop around. And it kept chopping around through the end of last year. Now, though, SNDK’s character is changing; it’s been chugging steadily higher since mid-November, and has acted calm and under control both during the market’s late-February shakeout and last week’s maelstrom among growth stocks. Keep this one on your watch list; if you want to nibble, you can do so around here with a stop just above 50.
SNDK Weekly Chart
SNDK Daily Chart
Parexel Corp. (PRXL)
Why the Strength
Parexel is making hay by providing clinical research services to big pharmaceutical and biotech firms, while also offering consulting and communications services to those same firms. And business is good! Drug development is ramping up (especially as firms look to replace some older drugs that are coming off patent), and Parexel is benefiting. Sales and earnings growth has been excellent in recent quarters (though some of those good tidings is from a lower tax rate) and the firm is producing a ton of cash; in fact, a couple of weeks ago, Parexel announced a new $100 million share repurchase program (including $50 million of an accelerated buyback), a pretty big deal for a firm with a market cap of $2.3 billion or so. Back to the underlying business, Parexel booked a solid $445 billion of net new business in the December quarter, and finished the year with a long-term backlog of $4.5 billion. It certainly appears that the company will have at least a year or two of solid growth from here; analysts see earnings hitting $1.50 per share for the fiscal year ending this June, and rising another 24% in the year that follows. This is a low-margin business (the latest 5.1% profit margin was the highest since 2010), so any hiccup in research efforts, because of government regulations or economic weakness, could hit the stock. But, overall, we like the story and think there’s good potential here.
Technical Analysis
PRXL has been in a choppy long-term uptrend for a couple of years, and its advance has accelerated this year. It had a very good January, a calm, flat February and then a steep advance in March, bolstered by the accelerated share buyback announcement. It’s since pulled back a bit, but remains above its 25-day line. We think this retreat could go further, but PRXL does seem like the type of name (growth with some defensive characteristics) that could hold up well. Watch it, and if you’re game to buy, you could nibble near 38 with a stop around the 50-day line.
PRXL Weekly Chart
PRXL Daily Chart
Keurig Green Mountain (GMCR)
Why the Strength
Green Mountain Coffee made 24 appearances in Cabot Top Ten Trader from August 2007 through August 2011. The story of the Little Coffee Company That Could was a classic case of management taking a regional business national via organic expansion and buyouts of competitors. The story gained a huge element of interest after Green Mountain bought the rights to the Keurig system of single-cup brewing machines that use pre-measured pods to deliver varieties of coffee, teas, hot chocolate and other beverages. The strategy of selling the brewing machines cheap and making money on recurring sales of pods was a powerful one that propelled Green Mountain’s stock to huge gains. Investors finally tired of the story when it failed to live up to analysts’ expectations. Despite reporting 95% revenue growth in 2011, the company’s stock began to plummet in September 2011 and didn’t bottom until July 2012. With valuations turning attractive once again, investors noted that the company’s revenue base was nicely split between Keurig products (44%), specialty coffee (40%) and Canadian business (16%). With a more subdued P/E of 21 (down from 75 in August 2011), Green Mountain Coffee looks very sound right now.
Technical Analysis
GMCR’s freefall from 116 took just 10 months, and ended with the stock at 17 in early July 2012. The recovery began later that month and pushed GMCR back to 41 by the end of the year. The stock based at that level for seven weeks, then jumped to 45, where it spent another five weeks building a base-on-base. The rally that began on February 26 pushed to stock to 58 before last week’s general market weakness pulled it back to 55. In sum, GMCR has been through its Romance Phase and its Transition Phase, and looks to be ready for its Reality Phase, in which it will trade on a more rational assessment of its revenue and earnings potential. We think it looks good right here.
GMCR Weekly Chart
GMCR Daily Chart
Gilead Sciences (GILD)
Why the Strength
Biomedical stocks have been a bright spot in a market that has been treating some winning stocks and sectors badly. Gilead Sciences illustrates the appeal of pharmaceutical companies, as its HIV/AIDS drugs continue to sell well. The big catalyst for Gilead’s big run in 2012 was the introduction of Stribild, a combination therapy for HIV/AIDS that was made entirely from ingredients manufactured in-house. (Atripla, the previous leading combination therapy, used some components that were made by other companies.) Gilead has lots of other drugs on the market, including treatments for liver disease, pulmonary arterial hypertension, chronic angina, lung infections in cystic fibrosis patients, flu, fungal infections and other conditions. The company experienced a 16% jump in revenue in 2012 and has routinely booked after-tax profit margins of at least 30% for years. With eight drugs for various conditions in Phase III clinical trials and three that have been submitted for marketing approval in either the E.U. or the U.S., or both, Gilead isn’t standing still. The company’s treatments for HIV/AIDS are expected to contribute a high proportion of revenue for years to come, but another major drug approval, especially for hepatitis C, could give Gilead another winner.
Technical Analysis
GILD had a great year in 2012, starting at 21 and ending trading flat at 37. The stock resumed its rally in January, split two-for-one on January 28, and soared as high as 49 in late March. The stock has cooled off a bit, closing last week at 47. GILD has been remarkably consistent, dropping to its 50-day moving average once in November and once in late December. Right now, with its rising 25-day moving average at 46, GILD looks primed to get back on the upward path. Earnings are due out late this month. We think the stock is nicely set up here after last week’s controlled correction.
GILD Weekly Chart
GILD Daily Chart
Fifth & Pacific (FNP)
Why the Strength
Fifth & Pacific (formerly Liz Claiborne) owns a range of higher-end apparel and accessory brands like Kate Spade, Lucky and Juicy Couture. Despite the brand appeal, the company hasn’t been doing all that much right in recent years—in fact, it’s lost money each of the past four years, has sold off some of its brands (including Liz Claiborne itself) to cut debt, and 2013 should come in around breakeven! But the stock is strong today because a turnaround looks to be underway, mostly due to the big potential with the Kate Spade brand—management believes that brand can grow its revenues from $462 million last year to a whopping $1.2 billion in 2016, boosted by same-store sales growth (up a huge 27% in the fourth quarter) and new store openings. And even those bullish estimates are likely conservative! Moreover, management’s confidence in this outlook is displayed by rumors last week that it’s looking to sell its two other major brands and focus solely on Kate Spade. All told, analysts see earnings advancing to 37 cents per share next year, but we think all these estimates could be far too low; Fifth & Pacific actually had a solid holiday quarter (sales and earnings up 9% and 20%, respectively) and a narrowing of its focus could help the bottom line. Retail names in general aren’t strong right now, but this one is bucking the trend.
Technical Analysis
FNP was a loser until the major market bottom in mid-2011; shares raced from a low around 4 to as high as 15 in March of the following year … and then began to etch a long base. That base resolved itself on the upside as 2013 began, and FNP has been chugging higher since. Last week, the stock came under some pressure, but impressively, found huge-volume support near its 50-day line as rumors swirled that the company was selling off its non-Kate Spade brands. If you’re game, you could buy a small position here with a stop near last week’s low.
FNP Weekly Chart
FNP 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.
