Keep Your Eyes on the Big Picture
Current Market Outlook
One thing that keeps coming up in our research is that the majority of investors think the market is ready for a pullback. Of course, a dip is certainly possible—the major indexes have had a great run over the past month and some short-term measures of sentiment are elevated. But we don’t expect a large market retreat, and besides, obsessing over the next week or two misses the big picture—that a new uptrend is likely underway, and many stocks and sectors are performing extremely well. You still want to find advantageous buy points and cut your losses when things go awry. But we continue to advise you to be heavily invested in strong stocks and let your winners run.
This week’s list has a great batch of high-potential stocks, many of which have excellent growth stories. Our Top Pick is Cirrus Logic (CRUS), a chip firm with great earnings estimates that just exploded out of a year-long base. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| United States Steel Corporation (X) | 0.00 | ||
| VCA Inc. (WOOF) | 0.00 | ||
| Wix.com (WIX) | 302.53 | ||
| Tempur Sealy (TPX) | 85.53 | ||
| Lumentum (LITE) | 87.00 | ||
| GrubHub (GRUB) | 140.03 | ||
| Cirrus Logic Inc. (CRUS) | 0.00 | ||
| Buenaventura (BVN) | 16.23 | ||
| B&G Foods (BGS) | 0.00 | ||
| Abiomed (ABMD) | 0.00 |
United States Steel Corporation (X)
Why the Strength
The U.S. Department of Commerce continues to go to bat for U.S. steelmakers. The department just levied anti-dumping and subsidy orders on five more countries just a few months after imposing massive punitive tariffs on China for its alleged dumping of products (selling below cost in order to gain market share). It’s the latest measure the U.S. government has taken to protect U.S. steelmakers, allowing American cold-rolled steel producers to compete on a level playing field. With steel prices on the rise and imports down, U.S. Steel’s losses have narrowed—the company reported last week that second-quarter losses dropped below $100 million for just the third time in the last 12 quarters. That might not seem like much, but it’s a start for a company that has seen its sales decline by more than 40% over the last five years. Once all but left for dead, the signs of life from U.S. steelmakers—U.S. Steel in particular—have convinced Wall Street to jump back in the pool. Deutsche Bank, Bank of America Merrill Lynch and Rosenblatt have all upgraded X stock since the China tariffs were imposed in late April.
Technical Analysis
X is perhaps the poster child for buying low. Having all but disintegrated from 45 to 6 in less than 18 months, X began to bounce back in a big way this February, shooting up to 20 by April. Another big dip followed in May, with X finding support at 13 before re-taking 18 in June. By July, it was back up to 20, and the stock had a modest breakout to 21 later in the month. But the real breakout came last week, when the stock kited as high as 27 after the earnings beat. It was back down to 26 today, which could be a nice entry point. You could buy here with a stop in the low 20s.
X Weekly Chart
X Daily Chart
VCA Inc. (WOOF)
Why the Strength
VCA (originally know as “Veterinary Centers of America”) owns and operates a string of over 700 animal hospitals in 41 U.S. states and three Canadian provinces. The company also operates 60 Antech Diagnostics laboratories that serve veterinarians’ practices in all 50 states and Sound, a digital imaging company focused on ultrasound and digital radiography for pets. VCA, like SiteOne Landscape and National Storage, is consolidating an industry that has traditionally been served by local entrepreneurs. VCA is actively acquiring locally run small-animal clinics, which has led to seven consecutive quarters of double-digit revenue growth. Earnings are forecast to increase by 23% in 2016 and 13% in 2017. The company’s Q2 earnings report on July 27 beat analysts’ expectations on both revenue and earnings. The relatively strong economy is working in VCA’s favor, as more households have disposable income that they are willing to spend to protect the health of their pets and treat them when they’re ill. The North American pet-care market is worth over $11 billion, and is estimated to grow to over $14 billion by 2020.VCA’s unified offering of traditional pet-care services combined with its robust diagnostic laboratory and imaging capabilities and an aggressive campaign of adding additional practices to its chain, is a good way to ride this trend.
Technical Analysis
WOOF rallied strongly from August 2012 through the end of 2014, but stalled badly in 2015, trading under resistance in the mid-50s for much of the year. But after the January 2016 meltdown, WOOF caught fire, topping resistance in March and heading into new high territory in May. The stock gapped up on huge volume on July 27, and is now consolidating at the top of its gap-up range. It looks buyable around here, with a loose stop at 66.
WOOF Weekly Chart
WOOF Daily Chart
Wix.com (WIX)
Why the Strength
Wix.com is an Israeli company that is solving a problem millions of entrepreneurs and small businesses face—building a decent-looking website without learning complicated code or hiring an expensive designer. The company’s software allows for drag-and-drop website development, has more than 500 templates and, most importantly, looks very professional. (The firm just launched a new design feature using artificial intelligence for even better results.) You can actually build a site for free (though that will include some Wix-related ads, which goes hand in hand with an affiliate advertising program), but more and more customers are signing up for premium plans, which allow for more storage, bandwidth, no ads and some other added features—the most popular plan is $13 per month, and even the most expensive plan is just $25 per month. There’s competition from some other small players, but there’s no question Wix is doing something right—revenues have been growing steadily quarter after quarter, as have premium subscriptions, which totaled 2.1 million at the end of the second quarter. And with more than 80 million registered users, there’s plenty of potential for further growth. Management sees revenues up 38% this year, and although earnings are in the red, the company is already free cash flow positive (nearly 25 cents per share in the second quarter). It’s a good story.
Technical Analysis
WIX came public in November 2013 (taken public by Goldman Sachs, often a good sign), but after a good run to 33 in February 2014, the stock fell apart and began a huge consolidation between 15 and 30. But WIX changed character in April—since then, the stock has been in a persistent advance, with only a brief Brexit shakeout to the 10-week line along the way. Then, last week, the stock surged on its better-than-expected earnings report, lifting to new all-time highs. Try to buy below 35 and use a loose stop near 31.
WIX Weekly Chart
WIX Daily Chart
Tempur Sealy (TPX)
Why the Strength
This mattress and pillow maker is another company benefiting from recent growth in U.S. housing construction. New home construction reached an eight-year high in June and was up 4.8% from the prior month, the biggest jump since February. As Tempur Sealy CEO Scott Thompson noted during last week’s second-quarter earnings call, “That usually becomes a time when mattress sales do a little bit better than they would otherwise.” Its new Tempur-Pedic Breeze mattress and Stearns & Foster line also helped boost sales. International sales continue to expand as well thanks to Asia’s growing middle class. Overall, the company’s sales increased a mild 5% for the quarter, but it was the 74% EPS improvement that really grabbed investors’ attention. And the company handily beat analysts’ expectations on both the top and bottom lines. Tempur Sealy also raised its full-year sales guidance; it now expects earnings per share to improve by 28% in 2016. That was enough to convince investors to jump back into the stock after a rough first half of the year.
Technical Analysis
It would be putting it nicely to say that TPX got off to a slow start in 2016—shares fell from 70 to 52 in January. They chopped around from there, never reaching higher than 63. By July, the stock was approaching its February low before stabilizing. It was bumping up against 63 resistance last week when the huge earnings beat sparked a major gap up, and by week’s end, TPX had not just broken through resistance—it shattered it, jumping from 63 to 75 in a day that saw more than 9 million shares change hands (TPX’s average three-month volume is 1.65 million shares). Buy on the dips and use a stop in the mid- to upper 60s.
TPX Weekly Chart
TPX Daily Chart
Lumentum (LITE)
Why the Strength
Lumentum is a fiber-optic parts maker, a newly independent company that was spun off by JDS Uniphase last year. Investors were originally attracted to the company because it looked like an ideal takeover target. But when no buyout occurred, Lumentum began trading on its own merits as a top manufacturer with a wide product offering in an industry that’s experiencing a growth surge as major networks are upgraded. The company’s products are also in demand in biotech, graphics, imaging and the commercial laser business. The company’s revenue grew just 2% in the fiscal year that ended in June, but earnings tripled over the same period. Estimates for next year call for 60% growth in earnings per share. A number of upgrades from analysts, including one who sees fiber-optics in a five year “mega cycle,” have raised interest in the company. And that, plus the company’s earnings report on July 25 that beat analysts’ expectations on both revenue and earnings, accounts for the enthusiastic reception the company has been enjoying. Lumentum serves a global market, with nearly half of sales coming from the Asia Pacific region. Institutional investors have been quick to buy into the company, with over 288 sponsors after just three quarters of trading.
Technical Analysis
LITE came public just about a year ago, and traded strongly for a few weeks before heeling over into a 10-week correction. LITE rallied strongly from that retreat to 14 in October, running to 28 in early April. A six-week correction and six weeks of re-basing over support at 23 set the stage for the stock’s four week surge that now has it trading around 30 after a July 25 gap up. LITE may need a little time to let its 25-day moving average (now just over 26) catch up. You can buy a small position on any dip below 30, with a loose stop at 26.
LITE Weekly Chart
LITE Daily Chart
GrubHub (GRUB)
Why the Strength
Last week we wrote about Yelp, which was a former highflier that crashed back to earth due mostly to competitive fears and shrinking margins (i.e., decelerating earnings growth), but is now on the comeback trail. It’s a very similar story with GrubHub, the leading online takeout ordering platform in the country. The firm ran into trouble as competition heated up (everyone from Amazon to Uber to even Yelp, via its Eat24 subsidiary), but business has been cranking along at a good clip, and last week’s quarterly report showed a nice acceleration in sales and earnings growth, a solid take-rate north of 16% (how much the company makes per dollar ordered through its website) and solid sub-metrics—active diners rose 24%, daily average orders rose 23% (25 million orders in total in the second quarter!) and gross food sales were up 29%. Moreover, management’s outlook was better than expected. A good part of the story here is the company’s move into food delivery (not just ordering); GrubHub now has more than 5,000 active drivers in its network, and the firm is planning on expanding to a total of 70 markets (from 50 today) by year-end. Of course, competition will remain intense, but the market for online food ordering is gigantic, and there’s no doubt GrubHub remains a leader in the field today.
Technical Analysis
As investors sniffed out a deceleration in earnings growth in the second half of 2015, the stock imploded, falling from 48 in May 2015 to 18 in January of this year. The recovery from there was decent, with a nice run in late-May and little volatility following Brexit. But the big event was last week’s earnings gap, where GRUB exploded 24% on six times average volume. You can look to buy a small amount on dips, but we don’t expect a major retreat given the volume surge.
GRUB Weekly Chart
GRUB Daily Chart
Cirrus Logic Inc. (CRUS)
Why the Strength
Cirrus Logic’s fate is largely tied to Apple’s iPhones, and right now that’s a good thing. Cirrus supplies audio chips for iPhones and iPads, and Apple accounts for 68% of the company’s total sales (Samsung is next, at 12%). The iPhone 7 is set to launch next month, and while Cirrus has been tight-lipped about its involvement in Apple’s newest smartphone, the company’s optimistic sales projections for the coming quarters suggest it will be quite significant. During last week’s fiscal first-quarter earnings call, Cirrus forecast current-quarter sales of between $380 million and $410 million, blowing analyst estimates of $322 million out of the water. Furthermore, after three straight years of profit declines (and two straight quarters of sales declines), Cirrus expects EPS to grow by 32% this year thanks in large part to the huge sales turnaround. Company CEO Jason Rhode didn’t mention Apple by name during the earnings call, but said that strong demand for “headsets and amplifiers” was the reason behind the stronger-than-expected projections. That seemed to all but confirm swirling rumors that the iPhone 7 will eliminate headphone jacks in favor of headset accessories of some kind—essentially a new way to connect headphones to smartphones. Consumers like new things, and investors do too. They like double-digit sales and earnings growth even better, which is why CRUS has lifted off.
Technical Analysis
After a big jump from 25 to 34 in January, CRUS was up and down for three months, dipping as low as 31 and reaching as high as 38. In mid-May, however, it started to build some upward momentum, and was knocking on the door of 41 by the end of June. Then came another pullback, this time to 35, before a full recovery back to 40. Last week’s rosy earnings outlook helped CRUS blow through that resistance—it rocketed from 41 to 49 in a day! You can buy a little around here and use a loose stop in the 43 area.
CRUS Weekly Chart
CRUS Daily Chart
Buenaventura (BVN)
Why the Strength
Peruvian miner Buenaventura explores, mines, smelts and commercializes gold and silver, along with other metals and minerals. The company’s appearance in today’s Cabot Top Ten Trader is just the latest manifestation of the remarkable resurgence in the price of gold since its bottom at $1,048 an ounce in late 2015. With spot gold prices now above $1,350, investors are actively seeking miners with the most efficient operations and the largest gold reserves. Buenaventura is sole operator of the Orcopampa, Uchucchacua, Julcani and Mallay y Breapampa mines in Peru and has a controlling interest in the La Zanja and Tantahuatay y El Brocal mines, including a 43.7% interest in Yanacocha, the biggest gold mine in Latin America, which is majority owned by Newmont Mining. The cost reductions that Buenventura instituted during the long bear market in gold are now bearing fruit. The company’s gold cost applicable to sales has been reduced from $771 per ounce in Q4 2015 to a projected $630 to $650 per ounce in 2016, which has produced big increases in earnings. EPS increased by 186% in Q1 2016 and 285% in Q2. Buenaventura is a solid, profitable company for anyone seeking greater exposure to precious metals.
Technical Analysis
BVN declined steeply in the second half of 2015, falling from 12.5 in May to 3.3 in January 2016. The stock’s remarkable rally has pushed it close to 15 after last week’s surge. The future of the gold rally is unpredictable, but BVN has plenty of momentum. We think it’s buyable on any weakness. A 10% loss limit would mandate a stop at 13.5.
BVN Weekly Chart
BVN Daily Chart
B&G Foods (BGS)
Why the Strength
Nine months after B&G Foods bought canned and frozen vegetable brand Green Giant from General Mills for $765 million, the food producer is getting the boost it hoped it would from the acquisition. B&G Foods CEO Bob Cantwell said as much during the company’s second-quarter earnings call last week: “The profitability of (Green Giant) continues to surpass our initial expectations.” The numbers back Cantwell up: In the two full quarters since B&G completed the Green Giant acquisition, its per-share earnings have increased 71% and 68% compared to average growth of just 7% in the two prior quarters. Things could get even better in the coming quarters, as further cost reduction efforts are underway and the company plans to introduce 15 new Green Giant vegetable products in September. As a result, the company raised its full-year 2016 earnings expectations to $2.12 from $2.05 per share. That shiny outlook, combined with two very profitable quarters since the Green Giant buyout, has investors flocking to B&G stock.
Technical Analysis
The big gap up for BGS came in late April and early May, when the stock made the quantum leap from 32 to 43 in a matter of weeks. Some basing followed, though the stock managed to stick its nose above 44 in early June and inched its way to 48 by month’s end. July was mostly about consolidation, and BGS dipped to 45 before last week’s earnings beat triggered a turnaround—in one day, the stock jumped from 45 to 51 on volume that was three times normal. You can buy while that momentum is still fresh, with a stop below the 50-day moving average, which has acted as support since the big gap up in early May.
BGS Weekly Chart
BGS Daily Chart
Abiomed (ABMD)
Why the Strength
More and more investors are coming around to the view that Abiomed’s Impella heart pumps have an extremely bright future as they take more and more market share. The second-quarter report, released last week, furthered that conclusion—sales and earnings both topped expectations by a mile, and management said it has just about 6% of the potential market today. Given that there’s little competition right now and that Impella pumps (used anywhere from a few hours in certain surgeries to a couple of days for patients with cardiogenic shock) have been shown to vastly improve outcomes, the odds favor Abiomed grabbing tons more of the market going forward. Management, in fact, has an ambitious five-year goal to grow revenues to $1.2 to $1.8 billion (wide range) within five years (30%-plus annual growth from here), along with a big operating margin. Many analysts are more cautious than that, but with many catalysts going forward (including the firm’s likely entry into Japan later this year, which is the second largest medical device market in the world) and a record of consistent execution, there’s no question that Abiomed is going to get much, much larger in the quarters to come. The valuation is big, but so is the opportunity.
Technical Analysis
ABMD had a big run though August of last year, then built a huge 40% deep, 10-month basing structure. Near the end, the stock tightened up, and after one bad day follow Brexit, ABMD took off, rallying to 120 before relaxing for a couple of weeks. Now, after another small shakeout following earnings last Thursday, the stock has shot back toward its highs. You can buy some around here or on minor dips with a stop around 108.
ABMD Weekly Chart
ABMD 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.
