Lots of Potholes
Current Market Outlook
Pure and simple, last week was a bad one for the market—not only did the major indexes take hits, but many resilient stocks came under severe selling pressure. The fact that strong, Top Ten-type stocks took hits (leaving fewer stocks in good shape) has us lowering our Market Monitor by a notch, and it’s vital that the repeated waves of intense selling seen last week don’t continue. For now, though, the bigger picture hasn’t changed: The trading range environment and the vicious rotation from sector to sector remains the order of the day. Thus, the general game plan is the same: being selective on the buy side and holding some cash on the sideline—as we wait for the major indexes to show their hand.
This week’s list actually has quite a few solid growth stories, though there’s definitely a bigger-cap tilt to the list. Our Top Pick is one of them—Lockheed Martin (LMT) has just hit new highs and is under strong accumulation as business is set to pick up.
| Stock Name | Price | ||
|---|---|---|---|
| Ultimate Software (ULTI) | 0.00 | ||
| Tesoro (TSO) | 0.00 | ||
| Royal Caribbean Cruises (RCL) | 0.00 | ||
| Martin Marietta Materials (MLM) | 261.52 | ||
| Lockheed Martin (LMT) | 0.00 | ||
| Lennox International (LII) | 270.56 | ||
| Facebook, Inc. (FB) | 0.00 | ||
| BofI Holding (BOFI) | 42.93 | ||
| Activision Blizzard, Inc. (ATVI) | 0.00 | ||
| Arista Networks (ANET) | 0.00 |
Ultimate Software (ULTI)
Why the Strength
Human Capital Management is what happens when Human Resources meets Big Data. It’s the quantitative approach to HR, working off the assumption that better data equals better performance: more information means better hiring, more effective management and better employee performance. It’s not a new concept, but it’s gaining popularity, and Ultimate Software is right at the center of it. Ultimate Software designs and markets the software—payroll programs, competency management, human resource allocation, etc.—that makes HCM doable for huge companies. It’s not the biggest name in the business (Oracle and ADP have been around longer), but it’s the fastest growing. Ultimate Software has posted 13 straight quarters of at least 20% earnings and double-digit EPS growth, which it is expected to maintain through 2016. It’s not like Ultimate has any intention of slowing down, either. Scott Scherr, the visionary CEO who has overseen a yearly stock increase of 19%, wants the company’s sales—now $500 million—to reach $1 billion by 2018. For most companies, this goal would be aggressive, but many analysts think it’s possible for Ultimate. And considering the company’s growth history, we agree with them.
Technical Analysis
Investor interest in ULTI has grown almost as consistently as the company’s earnings. The stock languished for almost exactly a year in 2014, but resumed its uptrend in February, with a small shakeout in April. Then in late July, the stock once again broke out to new highs on earnings—another quarter of double-digit growth—and has held those gains since. There have been enough pullbacks and shakeouts along the way that you’d be okay buying some here or waiting for a pullback to 180. It’s a tough market, even for the best stocks; don’t be afraid to drop ULTI if it breaks through its 50-day line.
ULTI Weekly Chart
ULTI Daily Chart
Tesoro (TSO)
Why the Strength
For a company that refines and retails gasoline and other petroleum products, you would think that lower gasoline prices would be a negative. But even though Tesoro, a regional giant in the refining business in the Western U.S., reported a 26% dip in Q2 revenue, its earnings per share during the period jumped by 172%! The company pulled off that neat trick because its crude oil feed stock is well below $50 per barrel. Plus, the low price of oil helps to lower the cost of the energy used in refining. As further proof of the benefits of low crude prices, Tesoro boasted a 7.1% after-tax profit margin, by far its highest in year. With oil reserves worldwide at record levels, analysts are predicting that crude prices are likely to remain low for at least a year, which will continue the tailwind for Tesoro. The company also pays a tidy 1.7% annual dividend.
Technical Analysis
TSO has been a long-term winner, but its price has been quite volatile in the shorter run. TSO began a four-month consolidation in March with support around 82 as investors worried about the state of the global economy. July began a strong rally on elevated volume that punched to stock to 104 on July 16, but the stock drifted lower as investors took profits ahead of the company’s earnings report. After the strong August 5 report, TSO bolted higher, hitting a new all-time high today. With that four-month base to build on and a clear future, TSO is buyable on any weakness. The alternative is to take a small position right here and add to the position as the stock builds a profit cushion. A stop in the low 90s makes sense.
TSO Weekly Chart
TSO Daily Chart
Royal Caribbean Cruises (RCL)
Why the Strength
While many economically sensitive stocks (commodity, transportation, etc.) are getting crushed in the current market environment, many are not. One resilient group: Cruise liners, which have recently come to life thanks to estimate-beating results. The latest is Royal Caribbean (the second largest firm in the industry), which saw earnings rise 27% in the second quarter (84 cents per share, versus 73 cents expected) thanks mainly to lower fuel costs, but this isn’t just a cost-cutting story—the firm said that bookings for the second half were above 2014’s levels and that the Caribbean market and its expansion into China (a whopping 95% of the cruises there are already booked for the year!) is making up for weakness in the Mediterranean market. And Royal Caribbean is expected to be the first cruise liner to head to Cuba, which some believe could be a big deal during the next few years. All told, the company hiked estimates for this year, and analysts think the bottom line will reach $6 per share next year. It’s not revolutionary, but the wind is at the back of Royal Caribbean today.
Technical Analysis
Few investors realize that RCL has been a huge winner during the past couple of years, with the stock bottoming at 31 in mid-2013 and rising to 86 earlier this year. That run, though, led to a six-month digestion period, which included a major shakeout in April (RCL dove below its long-term 40-week moving average for a couple of weeks). The stock meandered higher from there and then reached new price and RP highs last week. If you’re game, you could buy a small amount here with a stop in the mid-80s.
RCL Weekly Chart
RCL Daily Chart
Martin Marietta Materials (MLM)
Why the Strength
In last week’s second quarter earnings report, Martin Marietta Materials—a leading provider of construction aggregates—missed sales and earnings expectations by a mile. So why is the stock so strong? Because the market is looking ahead and likes what it sees: All of that “miss” was due to record rainfall in Texas and elsewhere in the south (second wettest winter in decades), which delayed construction projects worth $100 million of net sales. But despite that, overall demand for (and pricing of) its aggregates rose in the high single digits and management sounded confident that the pent-up demand for residential, commercial and municipal construction projects should propel business well into the future. Indeed, despite a small downtick to 2015’s earnings estimates because of the second quarter miss, analysts actually nudged up their estimates for 2016 (now looking for 49% growth in the bottom line). It also helps that industry peer Vulcan Materials told a similarly bullish demand story on its own conference call last week. Throw in a small dividend (1.0% annual yield), a respectable share buyback program (it bought back about 1% of all shares in the second quarter) and continued good vibes from forward-looking U.S. economic indicators, and we think Martin Marietta can do well in the quarters ahead.
Technical Analysis
MLM has been tedious to hold onto during the past few months, but it looks ready to get going if the market holds together. Shares exploded higher in February, breaking free of a 33-week base, but failed to follow through, instead forming two more shallow bases (of 10 weeks and 8 weeks, respectively, that each took the stock down less than 10%) before hitting new highs in mid-July. Then, after earnings last week, the stock surged off its 50-day moving average on good volume. You can buy MLM here or on dips with a tight percentage stop.
MLM Weekly Chart
MLM Daily Chart
Lockheed Martin (LMT)
Why the Strength
The U.S. military is phasing out F-16 fighter jets in favor of new and improved F-35s, and that’s been good news for Lockheed Martin. The defense contractor built the new F-35s, and the Pentagon just took out its biggest order yet now that the jets have been deemed ready for combat. The Pentagon plans to buy 2,443 F-35s to replace the aging F-16s, and that should result in a huge financial windfall (tens of billions of dollars!) for Lockheed. The company isn’t wasting any time spending that money: last month, Lockheed bought out Black Hawk helicopter maker Sikorsky from United Technologies for $9 billion, the company’s largest acquisition since the mid-1990s. The deal gives Lockheed a foot in the door of the $30 billion-a-year military and commercial rotorcraft market. Lockheed plans to return a lot of its coming inflow of cash to shareholders by increasing its dividend, which already sits at a respectable 3% yield. The F-35 contracts and Sikorsky buyout are a much-needed shot in the arm for Lockheed, which has seen sales slip slightly amid a flurry of defense spending cuts brought on by sequestration and other belt-tightening measures by the U.S. government in recent years. Thanks to the F-35, the government is loosening its belts again.
Technical Analysis
LMT got off to a rough start this year, falling from 206 in February to 185 in late June. In the six weeks since, the stock has regained all those losses, breaking through 206 resistance in late July and rising to 209 last week. Given the strong, persisitent advance, we’re OK with buying some here, using a relatively tight stop below the 50-day line at 195.
LMT Weekly Chart
LMT Daily Chart
Lennox International (LII)
Why the Strength
Lennox International is a maker of climate control products for the heating, ventilation and air-conditioning (HVAC) industry, with operations in residential, commercial and refrigeration segments. Lennox makes a lot of air conditioners, and when the rate of new construction goes up in either the housing or commercial new-build sectors, the company does well. While single-digit revenue percentage growth is pretty much standard for Lennox, the company is adept at growing earnings much quicker. Estimates are for 23% EPS growth in 2015 and 20% in 2016. The company’s quarterly report on July 20 showed just 3% revenue growth (which would have been 6% had foreign exchange rates not taken a bite), but revenue, margin and profit in its residential segment all hit new record highs. Investors have been active in bidding Lennox up, attracted by the scale of the recovery in residential construction and the company’s 1.2% annual dividend. Lennox isn’t likely to be a skyrocket, but it’s a solid story, and the good earnings report has been a catalyst for investors’ interest.
Technical Analysis
LII was a real tractor from late 2011 through early 2014, advancing steadily with few significant corrections. That changed in March 2014, when LII began a nearly eight-month retreat from 93 to 72. But the stock snapped back with a vengeance in October 2014, rallying to 114 in April 2015. After a roller coaster down–up–down that left LII at 107, the July 20 earnings report blasted the stock off to new all-time highs on enormous volume. The stock cooled off a little the next day, but has been making its way higher, and hit another new high just today. We think LII is buyable on any weakness, with a stop around 110.
LII Weekly Chart
LII Daily Chart
Facebook, Inc. (FB)
Why the Strength
Facebook remains one of a handful of top, big-cap growth stocks in the market, with big investors slowly but surely looking ahead toward late-2015 and 2016, when the firm’s earnings growth should re-accelerate after a huge spending wave (CapEx should rise north of 50% this year). Even now, though, Facebook’s business remains very healthy—while revenue growth has decelerated in recent quarters, most of that is due to its payments business (only 5% of the business but it fell 8% year-over-year) and the strong dollar—foreign exchange-adjusted advertising revenues were up a huge 55% in the second quarter, thanks to continued mobile penetration and still-solid growth in total users (968 million daily active users, up 17% from a year ago). And analysts continue to think Instagram will begin ramping advertising revenues rapidly during the next couple of quarters. Beyond all of that, this is a super-liquid stock with a relatively dependable growth story in the near-term, and gigantic potential in the years ahead as properties like WhatsApp, Messenger and virtual reality subsidiary Oculus are monetized. Bottom line: This is still a leading stock with a big story.
Technical Analysis
FB was a very strong performer from July 2013 through July 2014, rising from 26 to 75 as institutional investors piled in. But then the stock began a long sideways phase (there were a couple of marginal new peaks but they were met with immediate selling) that lasted until late June of this year, when the stock finally leapt to new highs and it continued to push higher until a couple of weeks ago. FB has been choppy recently, but given the market’s action, we think the retreat is normal. If you don’t own any, buying here and using a tight stop sets up a nice risk-reward trade.
FB Weekly Chart
FB Daily Chart
BofI Holding (BOFI)
Why the Strength
As the Internet becomes more and more of a necessity in today’s world, the Bank of Internet (or BofI for short) continues to thrive. BofI Holding owns Bank of Internet USA, a federally chartered, full-service Internet bank that offers banking services entirely on the web. An increasing number of people are shunning brick-and-mortar banks in favor of the convenience of a bank that allows you to make all your deposits and withdrawals online. Deposits at BofI Holding were up 46% last quarter, while loan assets grew 42%. The result was a record quarter for the bank’s top and bottom lines—revenue and earnings were up 42% and 41%, respectively, in BofI’s fiscal fourth quarter. Full-year 2015 sales and earnings also reached record highs, extending a long trend of year-over-year increases. BofI’s sales have improved every year since 2007, while earnings per share have nearly tripled since 2011. Like most banks, BofI Holding has bounced back nicely since the recession, capitalizing on the improved economy and recovering housing market. But thanks to its unique Internet-only niche, BofI is growing much faster than most physical banks—and expects to keep doing so. Earnings per share are projected to grow another 24% in the year ahead.
Technical Analysis
BOFI shares have been on a steady climb since April, and the late-July earnings report only accelerated the stock’s ascent. From mid-April until late July, BOFI methodically made its way from 88 to 112, rarely dipping below its 50-day moving average. In the two weeks since, the stock has jumped all the way to 134, before dipping a few points. We advise buying dips and using a stop below 115.
BOFI Weekly Chart
BOFI Daily Chart
Activision Blizzard, Inc. (ATVI)
Why the Strength
The combination of massive revenue and earnings beats, an improved outlook for full-year 2015 sales and a 15% dividend hike were enough for Activision Blizzard to grab Wall Street’s attention last week. The company makes the extremely popular “Call of Duty,” “Destiny” and “Skylanders” video games, and is reviving the “Guitar Hero” franchise in October. Aside from its familiar brand names, what sets Activision apart from other gaming companies is the strides it’s making in its digital business. As the world shifts to mobile devices—especially kids who like to play video games—consumers are gravitating toward the convenience of purchasing games on their smartphones with a few simple clicks rather than going to the store and buying physical consoles. Last quarter, Activision’s digital business revenue rose 27%, and at $611 million accounted for more than three quarters of the company’s total revenue. The number of monthly active users was up 35% year-over-year—a sure sign that gamers are buying what Activision is selling.
Technical Analysis
After an up and down 2014, ATVI has turned things around nicely in 2015. The stock started the year by making the leap from 18 to 23 in January, then spent the next three months building a solid base. In May, it made another move higher, nearly touching 26 before pulling back to 24 at the end of June. The 26 level continued to act as resistance until last Tuesday, when the earnings beat prompted shares to gap up to 28. Now well above its 50-day moving average in the mid-25s, ATVI has broken through its technical barriers and is no longer contained by a three-month resistance line. You can buy some here and cut your losses if the stock gives up its earnings-induced gains.
ATVI Weekly Chart
ATVI Daily Chart
Arista Networks (ANET)
Why the Strength
The biggest shift in information technology over the last four or five years has been the migration of data and software from a company’s own computers and servers to remote servers, a move that puts all of a company’s information into “the cloud.” Arista Networks is thriving today because the company makes the hardware that connects the cloud servers and the software that makes everything accessible. Arista’s customers are large-scale Internet companies, cloud service providers and companies building their own data centers. The company has enjoyed excellent revenue growth, including an 87% gain in 2013 and 62% in 2014. In last Thursday’s quarterly report, Arista’s EPS was up 54% on an increase in revenue of 42%, and analysts noted that much of the revenue gain came from sales to big players in cloud hosting like Microsoft, Google and Amazon. Arista has a ton of intellectual capital that keeps it in the forefront of cloud technology hardware, and this is advantage is expected to continue to drive growth as the move to the cloud continues.
Technical Analysis
ANET is still a young stock, coming public at 43 in May 2014. The stock traded higher immediately, soaring to 95 in September, then rolling over into a steep correction that pulled it to 56 in February. Since that post-IPO correction, the stock has staged a couple of runs, including a May–June rally from 63 to 89. But after a June–July correction to around 77, the stock has been trading sideways, tightening up as its rising 50-day moving average has provided higher lows for a couple of weeks. ANET didn’t get a big boost from its positive earnings last Thursday, but a definite volume spike may be a tipoff move. If you’re game, you could nibble here and look to add shares on a move above 88, while keeping a loss limit in the mid-70s.
ANET Weekly Chart
ANET 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.
