Turbulence Possible, but Main Trend is Up
We started to see the market shake and bake a bit last week, which isn’t unusual considering the heady run the indexes and dozens of growth stocks have had since the late-June low. Exactly what happens next is anyone’s guess; our feeling is simply that the next month will probably be more difficult than the last month, so you should expect a few potholes or sudden selloffs. But with the main trend still pointed up, we think higher prices are likely in the weeks and months ahead. Thus, while plunging into a bunch of stocks right now probably isn’t the best idea, we do think you should work to remain (or work toward becoming) heavily invested.
This week’s list has some old friends and a couple of new faces. There’s lots of strength to choose from, but our favorite is Michael Kors (KORS) a fashion house with ambitious growth plans.
| Stock Name | Price | ||
|---|---|---|---|
| Under Armour (UA) | 0.00 | ||
| Ocwen Financial (OCN) | 0.00 | ||
| LKQ Corp. (LKQ) | 0.00 | ||
| Michael Kors Holdings Limited (KORS) | 73.22 | ||
| Jazz Pharmaceuticals (JAZZ) | 0.00 | ||
| Harman International Industries, Inc. (HAR) | 0.00 | ||
| Facebook, Inc. (FB) | 0.00 | ||
| Cubist Pharmaceuticals (CBST) | 0.00 | ||
| Baidu (BIDU) | 0.00 | ||
| Activision Blizzard, Inc. (ATVI) | 0.00 |
Under Armour (UA)
Why the Strength
Under Armour has really made a name for itself during the past several quarters, and it’s doing it in a highly competitive athletic apparel market dominated by big names like Nike and Adidas. The company’s success has been built on specialty wares that incorporate the ?rm’s well-known wicking material (wicks perspiration away from the body, keeping the user cooler and drier), as well as other innovations like a four-way stretch fabric that improves mobility. While Under Armour has struggled with production costs and inventories, the company’s most recent earnings report proved that it has largely solved these issues. Specifically, Under Armour posted a 160% rise in second-quarter earnings on a 23% jump in sales for the quarter. It was the company’s 16th straight quarter of double-digit sales gains. Apparel revenue rose 23%, driven by new Heatgear and Baselayer products, while footwear revenue rose 21%—hinting that Under Armour is getting better at taking market share from Nike. Offering more proof that Under Armour’s innovation is resonating with customers, the company boosted its fiscal 2013 earnings and revenue targets well above analyst forecasts. With the fall sports season getting ready to kick off, Under Armour has plenty of room to improve upon what has already been a stellar season for the firm.
Technical Analysis
While UA’s rally has been choppy at times, the stock has trended mostly higher for the past several years. The stock’s surge in late 2011 brought it into contention with resistance at 30, and a double top at 40 in April and June preceded a dip toward support at 25 in August. But UA recovered quickly and chopped higher throughout 2012 to tag a high north of 60 by October. Shares began an orderly retreat in November, tightening up in the 45-50 region heading into 2013. Since the beginning of the year, UA has once again resumed its upward momentum, with the company’s recent quarterly report providing plenty of fuel for the fire. UA is currently extended following its recent post-earnings surge, so buying dips with a target near 70 is recommended.
UA Weekly Chart
UA Daily Chart
Ocwen Financial (OCN)
Why the Strength
Ocwen Financial is one of two main players (Nationstar Mortgage (NSM) is the other) that’s benefiting from the major shift going on in the mortgage servicing market. Whereas 90%-plus of the servicing market—the business of collecting the monthly payment, distributing it to the correct parties (those who own the loaned money, the tax authorities, insurance firms, etc.), and, especially, dealing with delinquent borrowers—used to belong to the mega-banks, those firms are now selling off billions of dollars worth of servicing rights. Ocwen specializes in this business and has a proven history of taking sub-par tranches of mortgages and cutting delinquencies, which in turn cuts costs and boosts margins. The company’s current book of business is north of $400 billion, and management sees another $400 billion of potential acquisitions in the months to come. And all of this is leading to huge sales and earnings growth, and, importantly, monstrous cash flow. That cash flow is so large that Ocwen is able to acquire these servicing rights without taking on debt or issuing new equity, and, in fact, management believes it could start buying back hundreds of millions of dollars of its own stock! This mortgage shift is probably in the middle innings, so Ocwen has huge potential during the next few years.
Technical Analysis
OCN was a giant winner through October of last year, but then entered what turned out to be a 10-month consolidation. There were some slightly higher highs during that time, but the RP line didn’t really get going until a couple of weeks ago, when the stock popped above 50 following the firm’s bullish quarterly report. It’s a bit extended now, but we think OCN is buyable around here, with a stop near 46.
OCN Weekly Chart
OCN Daily Chart
LKQ Corp. (LKQ)
Why the Strength
LKQ Corp., the modern version of what used to be known as a junkyard, is a great example of a tractor stock, a company that has a long history of slow, steady growth leading to a stock chart with few dramatic gaps either up or down. LKQ is a distributor of aftermarket replacement parts for use in collision repairs and in mechanics’ repair shops. The company gets over half its revenue from sales of aftermarket parts and a little less than a third from recycled parts, many of which are sold on a self-service basis from auto recycling centers (junkyards). LKQ is flying high right now after its Q2 earnings results—30% earnings growth on 24% revenue growth—were fortified by an increase in management’s guidance for the full year’s revenue growth and earnings. It’s worth noting that strong organic growth in Europe (37.8% vs. 13% in the U.S.) made a big contribution to results. The only caveat attached to this strong growth is that Europe is now in a recession, which always raises demand for car-repair materials as new-car sales slow. We note that LKQ Corp’s revenue growth surged to 69% in the U.S. during the Great Recession. So if Europe gets healthy again, it might take a bite out of LKQ’s revenue. But the company’s long history of growth in both bad years and good makes it a good bet for a long-term holding.
Technical Analysis
LKQ’s long-term chart is a model of upward progress, but in the short term, it shows plenty of volatility. A correction from 24 to 20 in February led to a six-week consolidation that ended with a late-April bounce to 26 by the middle of May. Another six-week session of flat trading centering on 26 gave way to a high-volume breakout on August 1 following the good Q2 news and improved 2013 guidance. LKQ surged to 30, then corrected mildly last week before taking off again. The stock is now trading up just under 31. It looks like a buy on any pullback toward 30, with a stop at its 25-day moving average, now at 27.
LKQ Weekly Chart
LKQ Daily Chart
Michael Kors Holdings Limited (KORS)
Why the Strength
We’ve been waiting months for Michael Kors to decisively get going, and that time has finally come. The stock is now one of the strongest in the market because, after yet another fantastic quarterly report, more big investors are convinced Kors is the next Coach. For the second quarter, sales ramped up 54% (including a huge 27% hike in same-store sales growth) and earnings surged 79%, both trampling expectations. While wholesale revenues remain a big piece of the pie (45% of revenues, growing at a rate of 59%), the retail side of the business has huge global potential. The firm owns and operates 328 stores and concessions today (with another 114 operated by licensing partners), and in the years ahead, it believes there’s room for another 150 in the U.S., 150 in Europe, possibly a couple hundred more in Japan and 400 more smaller shops focused on watches and jewelry! Combine that with the aforementioned huge growth in same-store sales, and it’s likely Kors’ sales and earnings can grow at rapid rates for many quarters to come. All told, Kors has developed into one of the hottest brand names in fashion, and as long as management continues to make the right moves, we think the stock will head higher over time.
Technical Analysis
KORS teased investors for more than a year, breaking out of bases a few times but falling back soon afterwards (often due to secondary offerings, the last one in September 2012). However, the stock etched a very tight, quiet seven-week base starting in May, and broke out on the upside at the end of July, and last week’s bullish earnings report helped the stock follow through to the upside. Yes, a pullback of two or three points is possible, but after such a long, tedious consolidation, most weak hands have likely sold out. You can buy some here.
KORS Weekly Chart
KORS Daily Chart
Jazz Pharmaceuticals (JAZZ)
Why the Strength
Jazz Pharmaceuticals specializes in the treatment of neurological, oncological and women’s health conditions. The company’s best-selling treatment is narcolepsy drug Xyrem, which has been a blockbuster for Jazz’s bottom line. The company also sells anxiety treatment Luvox CR, chronic pain medicine Prialt and cancer drug Erwinaze. Investors are currently jazzed about Jazz in the wake of the company’s second-quarter earnings report. While Jazz missed earnings expectations, sales came in ahead of forecasts at $208.3 million—up 68% year over year. During the past four reporting periods, the company has averaged revenue growth of 105% and earnings growth of 38%. What’s more, for the second consecutive quarter, Jazz boosted its fiscal 2013 earnings and revenue forecasts above Wall Street’s consensus estimates. The company cited strong sales of Xyrem for the increased forecast, with the treatment benefiting from a 14% price increase on the quarter. Meanwhile, Jazz helped to ease investor fears regarding generic competition for Xyrem. The company announced two new patents for Xyrem, a move that should help protect the drug from generic competition, including the pending lawsuit with Roxane Laboratories. Overall, we expect to see continued growth.
Technical Analysis
JAZZ has been a solid performer for quite some time. The stock began its current uptrend in late 2010, and has enjoyed the support of its 10-week, 25-week, and 50-week moving averages throughout this rally. Since 2012, JAZZ has edged higher in starts and stops, spending most of its time grinding grudgingly higher between support at 40 and resistance at 60. JAZZ finally broke out of this range in late May, with the shares surging past 65. The shares have since gone on to reach fresh all-time highs, breaking out above 80 last week following the company’s quarterly earnings report. Shares are a bit hot right now, so we recommend buying dips to minimize post-earnings gyrations.
JAZZ Weekly Chart
JAZZ Daily Chart
Harman International Industries, Inc. (HAR)
Why the Strength
Harman International Industries is in the business of sound. The company develops, manufactures and markets audio products under brands Crown, JBL, Infinity, Harman/Kardon, Digitec, and Mark Levinson, to name a few. The company took center stage last week after posting stronger-than-expected fourth-quarter earnings. Specifically, Harman saw revenue rise 8% year-over-year, as earnings jumped 36%. The company cited rising demand for car audio systems for the strong growth, with German carmakers accounting for 43% of Harman’s revenue. European car sales were responsible for another 20% of revenue. Overall, the company’s Infotainment unit saw new production programs with BMW, Mercedes, Chrysler/Fiat, Volkswagen, and Harley Davidson, while its Lifestyle unit received new business from Chrysler and Volvo. Looking ahead, analysts are signaling that the European car market might have finally bottomed out—a development that should bode well for Harman. Providing icing on the cake for Harman investors, the company announced last week that it is doubling its quarterly dividend from 15 cents to 30 cents per share, payable on August 30 to holders of record by August 16.
Technical Analysis
After spending the better part of the past two years chopping around between support at 40 and resistance near 50, HAR is finally breaking out. Bolstered by support from its 10-, 20- and 200-day moving averages, the stock powered through 50 in mid-May as investors cheered reports of a revival in global auto sales. Shares spent the next several weeks building a base before resuming their uptrend along their 10-day trendline. Last week, HAR tentatively pushed past 60 and was in the process of retreating from multi-year highs when the company’s fourth-quarter earnings report caught investors by surprise. HAR is now trading just north of 70, as the stock digests its post-earnings gains. You can nibble here, or take a more substantial position on dips of a point or two.
HAR Weekly Chart
HAR Daily Chart
Facebook, Inc. (FB)
Why the Strength
We recommended Facebook just two weeks ago, but it’s here again because the stock appears to have transformed into an institutional-quality must-own growth stock. And the reason is that there simply aren’t many big, well-traded stocks (the stock trades a couple billion dollars per day) that serve such a huge mass market, and also unquestionably dominate their field. We won’t review all the numbers from Facebook’s fantastic earnings report (the huge acceleration in sales growth this past quarter, even for a company with $6 billion in revenue, was shocking), but what impressed Wall Street most was that its total ad revenue expanded an amazing 61%, and of that piece, mobile ads accounted for a whopping 41%. That’s up from basically zero a year ago! Moreover, while many pessimists believe Facebook has tapped out its overall user growth, it turns out that monthly active users grew 21% in June to 1.15 billion; not only is the company just beginning to monetize its user base, that user base continues to grow, especially on mobile devices. Earnings estimates were hiked to 71 cents per share this year (up from 57 cents before the report) and 94 cents in 2014 (up from 77 cents)—we think both figures could prove conservative as advertising efforts expand.
Technical Analysis
There are really only two aspects of FB’s chart that matter at this point. The first is the long, tedious 14-month decline and bottoming period, which likely wore out most of the weak hands. And second, the two straight monstrous-volume up weeks when the stock came to life. Obviously, after such a huge pop, a 5% or 10% shakeout could happen at any time. But barring a major market downturn, we think big investors will be buying dips.
FB Weekly Chart
FB Daily Chart
Cubist Pharmaceuticals (CBST)
Why the Strength
Cubist Pharmaceuticals has always specialized in antibiotics, having made its reputation with Cubicin, an injected drug approved for use against nasty skin infections caused by multi-resistant bacteria. Sales of Cubicin grew by over 13% in Q2, bringing in $227 million. Cubist has also been co-promoting a drug called Dificid—a treatment for clostridium difficile-associated diarrhea—with Optimer Pharmaceuticals. But on July 31, Cubist announced that it was buying Optimer for $535 million. At the same time, Cubist announced that it would pay $707 million to buy another antibiotics maker, Trius Therapeutics. Both deals have been approved and will close later this year and are expected to prove accretive to earnings during the coming year. These acquisitions will make Cubist a dominant player in the antibiotic business, adding to already accelerating revenue growth that increased 23% in 2012. In addition to Cubicin and Dificid, Cubist has a promising pipeline, with three drugs in Phase III trials and two in Phase II. With fears about “superbugs” (multi-drug-resistant bacteria) causing increasing concern, Cubist Pharmaceuticals appears to have a leg up on the competition.
Technical Analysis
CBST has been in a long-term uptrend since 2002, but spent most of 2006 through March 2011 trading under resistance at 25. The breakout came in April 2011, when the stock blasted past resistance, hitting 39 by the end of May. Despite a couple of three-month pullbacks, the stock last traded under 40 late last year. 2013 has seen only stair-step rallies and consolidations. After a late-June dip below its 25- and 50-day moving averages, CBST has been rallying, including a gap up from 57 to 62 on July 31 on the acquisitions news. CBST traded as high as 66 on August 1, and has now relaxed back to 61 on calm volume. If you like the antibiotic story, you can buy CBST right here, or on a dip toward 60. Use a stop at the 50-day, now at 54.
CBST Weekly Chart
CBST Daily Chart
Baidu (BIDU)
Why the Strength
Baidu, “the Google of China” has been a frequent pick in Cabot Top Ten Trader for obvious reasons. Baidu is the dominant Internet search engine in China, a country that has more people online than the U.S. has people. Baidu’s share of Chinese Web search is about 80%, a margin it maintained despite a major challenge from Google several years back. The Internet search situation in China got much more interesting about a year ago when Qihoo 360 (which made the most recent of its seven appearances here on July 8) began offering search services on its popular mobile browser, replacing Baidu as its default search engine. The unexpected challenge from Qihoo 360 was a wake-up call for Baidu, which had been lagging in mobile search. But the company has plenty of cash on hand, and just announced that it would spend $1.9 billion to acquire 91 Wireless Websoft, the second-largest mobile application distributor in China, which will bring a boatload of mobile traffic with it. Baidu is also taking on Youku Tudou in the Chinese online video space, using its cash reserves to snap up smaller rivals. Baidu’s numbers are hard to argue with; revenue growth the last three years has come in at 81% (2010), 92% (2011) and 57% (2012). Baidu makes money by the now-familiar strategy of selling ad words. The company’s Q2 earnings report featured 43% revenue growth and flat earnings of $1.26 per share with an after-tax profit margin of 36.1%. Chinese stocks in general have reclaimed some of the enthusiasm they enjoyed through 2010, and Baidu, with over 1,000 institutional owners, is a great choice as a core China holding.
Technical Analysis
BIDU made a monumental run from 2009 through the first half of 2011. But general concerns about Chinese stocks (and the specific challenge from Qihoo 360) undercut support and the stock dropped from a high of 166 in July 2011 to 83 in April 2013. The stock took a while to put in a bottom structure, then bounced big on July 16 when news of the 91 Wireless acquisition broke and even bigger on July 24 after positive earnings and an analyst’s upgrade. BIDU just ticked 140 on August 2 and dipped below 135 on August 5. The stock has been working its way back toward 140 for the last five days. We think BIDU is buyable on any dip of a couple of points, with a stop at 120.
BIDU Weekly Chart
BIDU Daily Chart
Activision Blizzard, Inc. (ATVI)
Why the Strength
Quite a bit has happened with Activision Blizzard since we last checked in with the company back in June. As you may already know, Activision designs and distributes video games for game consoles, mobile devices and computers. The company is responsible for some of the most popular titles in gaming, including World of Warcraft and Call of Duty, while some of the company’s newest titles, like Skylanders (a video game with a toy tie-in component), are setting new industry standards. The biggest gaming industry news of the past year is likely Activision’s $8 billion share buyback deal, with the company reclaiming most of parent company Vivendi’s stake. The move was seen as vitally important to Activision’s future, with CEO Bobby Kotick stating that “It makes it a lot easier to manage the business when you have one independent view and you don’t have to consider the issues of the majority shareholder.” The move should give the company the leeway to directly address the issue of declining revenue—Activision saw a 42% year-over-year decline in sales in the second quarter due to a contracting video game market. Historically, the company has averaged 12% sales growth and a 66% rise in earnings during the past four quarters. But the company’s August 1 report held a key bright spot; Activision boosted its full-year earnings and revenue outlook, citing the rollout of a new generation of gaming consoles.
Technical Analysis
Admittedly, ATVI’s price action hasn’t been very exciting during the past couple of years. The stock essentially traded flat from the middle of 2009 through February of this year. ATVI showed signs of life in February, gapping from 12 to 13.5 on excellent volume, and riding the influx of buyers all the way to 16 by the end of May. A poor reaction to earnings sent ATVI plunging below former support at 14, but shares rebounded near their 25-week moving average. Then, in late June, ATVI surged to a multi-year high near 18 after the company bought back $8 billion in stock from Vivendi. Now cruising under its own power, ATVI has renewed potential. Following its recent retreat from 18 and consolidating into 17, the stock is buyable here.
ATVI Weekly Chart
ATVI 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.
