August 19, 2013
Investors fear that rates will rise further, and that’s affecting all sectors. Numerous strong stocks in a variety of industries are holding up, but failing to hit new highs, so the big picture is one of growing weakness overall—reflected in the less bullish status of our Market Monitor. You can make money in this market but skillful stock picking, combined with proper entry timing, is critical. And above all, keep your losses small. Our Editor’s Choice today is a lower-risk selection with a good long-term growth story. A timely entry could work out very well.
In the month since the broad market began to weaken, the losers have been interest-rate sensitive securities; investors clearly fear that rates will rise further. But who are the winners? Interestingly, there is no one strong sector resisting the decline. Rather, numerous strong stocks in a variety of industries are being supported by investors. But more and more, these stocks are failing to hit new highs, so the big picture is one of growing weakness overall, and this is reflected in the less bullish status of our Market Monitor. You can still make money in this market, but more than ever, skillful stock-picking, combined with proper entry timing, is critical. So we urge you to study numerous individual stocks carefully. Try to buy on normal pullbacks. And above all, keep losses small if a stock doesn’t do what you hired it to do.
Our Editor’s Choice today, Lions Gate Entertainment, is a lower-risk selection with a good long-term growth story, and a timely entry could work out very well.
|Sealed Air (SEE)||0.00|
|Questcor Pharmaceuticals (QCOR)||0.00|
|Pandora Media Inc. (P)||0.00|
|LightInTheBox Holding Co., Ltd. (LITB)||0.00|
|Lions Gate Entertainment Corp. (LGF)||0.00|
|Ctrip.com International Ltd. (CTRP)||34.94|
|Cornerstone OnDemand (CSOD)||51.01|
|Celldex Therapeutics (CLDX)||0.00|
Why the Strength
Trulia is one of a few Internet 3.0 firms benefiting from the real estate upturn (Zillow being the other), but it has unique, content-based offering that’s leading to huge growth—in fact, Trulia has the largest database of real estate-related, user-generated content in the industry, with 1.1 million new contributions in the June quarter. That keeps traffic growth strong (monthly unique visitors rose 49% in the second quarter, to 34.9 million), which leads to a nice bump in media and advertising revenue (up 52% to $8.8 million). But the lion’s share of the business comes from real estate agents who pay for premium memberships, which allow them to target the ever-growing population of mobile users, as well as promote their listings on Trulia’s search results. That led so-called Marketplace revenue to grow 89% in the second quarter, driven by a 49% hike in total subscribers. Of course, if the real estate expansion falls flat, business could slow some, but we think the major story here is the shift of agents’ time and money spent from offline to online. Trulia is certainly a winner in that movement, which should keep growth brisk in the quarters to come.
TRLA just came public in September of last year, and it’s a very volatile name—the stock has seen numerous 25%-plus moves both up and down since then, though the main trend is undoubtedly up. Shares did tighten up some into late-June before spiking as high as 48 after a great earnings report, and have since chopped around in the mid-40s. Given the market’s recent pullback and the fact that TRLA is still extended to the upside, we advise starting with a smaller-than-normal position.
TRLA Weekly Chart
TRLA Daily Chart
Sealed Air (SEE)
Why the Strength
Shipping concern Sealed Air is best known for making one of the most popular packaging materials in the world: Bubble Wrap. In addition to Bubble Wrap, Sealed Air also makes Instapak foam, Jiffy mailers, and Fill-Air inflatable packaging systems, through its Protective Packing segment. The company’s largest segment, Food Packaging, makes Cryovac bags, trays and absorbent pads for use by food processors and supermarkets to protect meat and poultry. As shown in its recent second-quarter earnings report, Sealed Air is benefiting greatly from an improving economy and the company’s progress toward improving operational performance. Specifically, the company swung to a second-quarter profit on stronger sales and a lack of restructuring charges. Sealed Air continues to benefit from last year’s restructuring, including the sale of its Diversey Japan unit to private-equity firm Carlyle Group. The firm is also growing internationally, with solid growth in Latin America, where sales rose 12% last quarter, and in Asia, the Mid East, Africa and Turkey, where sales rose 11% collectively. As restructuring changes continue to take effect, and the economy continues to improve, we expect Sealed Air to remain a solid investment choice in this sector.
SEE rebounded surprisingly quickly off the 2009 bottom, rallying steadily during the next year-and-a-half toward a peak near 29 by January 2011. However, economic concerns and a slowdown in the recovery sent SEE plunging toward 15 by late 2011. The stock suffered even more in 2012, with shares ultimately tagging a low near 13.50 in August. Then management stepped in, and restructuring took hold. Since then, SEE has enjoyed a steady rally along its 10-week and 25-week moving averages. Shares stalled near 25 in March, but pushed past this hurdle in mid-July. SEE took out another resistance level in early August in the wake of Q2 earnings. The stock is now digesting those gains just above 29, and could be prepared to push past 30 in the coming weeks.
SEE Weekly Chart
SEE Daily Chart
Questcor Pharmaceuticals (QCOR)
Why the Strength
Questcor Pharmaceuticals = Acthar gel. That’s the basic story, for better or worse. Currently, the news is all good—Acthar is approved for 19 separate indications, including as a treatment for multiple sclerosis in adults and infantile spasms, and it’s gaining traction as a treatment for rheumatoid arthritis and lupus. In the second quarter, shipments of Acthar rose 50% to 7,050, helping sales and earnings rocket higher and top expectations by a wide margin. So what’s the risk? Mainly insurance companies that might choose not to cover the treatment; last September, Aetna did just that for almost all the drug’s uses (partly because of the tremendous cost north of $25,000 per treatment), which caused the stock to fall more than 50% in a blink of an eye. Hence, shares today trade for a reasonable valuation given the growth prospects (just 14 times this year’s earnings estimate, despite expected growth in 2014 of 23%), but clearly investors are still a bit gunshy given the potential for harm, but there’s no question demand for Acthar remains strong. We like the story, but feel Questcor is a high risk, high reward situation.
The Aetna move last September caused the stock to fall from 52 to 17 in just a week or so, but shares began recovering immediately. As you’d expect, it took months for QCOR to repair the damage from that crash, but it gapped up in early June, held firm during the worst of the market’s correction and then surged on earnings a couple of weeks ago. In a strong bull market, QCOR could probably be bought here, but given the market’s shakiness, we favor looking to buy on dips with a stop in the high 50s.
QCOR Weekly Chart
QCOR Daily Chart
Pandora Media Inc. (P)
Why the Strength
Internet radio firm Pandora is not only the biggest online radio station, it is also bigger than any terrestrial radio station in the country! Currently, Pandora owns about 7.3% of the total U.S. radio market (up from 5.8% a year ago), a market share that makes even the biggest traditional radio stations envious. The company currently sports about 71 million active listeners, streaming some 1.35 billion hours of music. This dominance of the “air waves” is Pandora’s biggest asset. While advertisers have been slow to transition online, the move is inevitable, leading analysts to project that Pandora could see ad revenue grow from about $300 million this year to $1.8 billion by 2018, a six-fold increase. Pandora’s biggest drawback is the list of big names that could move in to compete. Specifically, Apple is slated to release a competing iTunes radio service later this fall, while Spotify and Google Play’s Music All-Access offer compelling alternatives. While some investors are skeptical of Pandora—short sellers currently hold 26.2 million shares short—analysts have begun to come around. For instance, Goldman Sachs recently upgraded the stock to “buy” and lifted its earnings outlook for the company ahead of Pandora’s quarterly earnings report later due this week.
If P is going to give short sellers a run for their money, this earning report could very well be the catalyst. The stock has been choppy since going public in June 2011. After peaking above 25 following the IPO, shares struggled with resistance near 20, and eventually gave up. P wouldn’t finally hit bottom until tagging 7 in November 2012. Since then, however, the stock has been in a solid uptrend along support at its 10-week and 25-week moving averages, having not closed a week below this duo during this time frame. Ahead of this week’s quarterly report, P is once again challenging resistance in the 20 region. Shares were rebuffed at 20 in early July, their first visit since shortly after their IPO, but the stock’s staying power hints that investors may be ready to pounce if the company’s quarterly report meets expectations.
P Weekly Chart
P Daily Chart
LightInTheBox Holding Co., Ltd. (LITB)
Why the Strength
LightInTheBox is a young Chinese online retail company that’s making waves by using a genuinely innovative business model. The company has made alliances with thousands of Chinese manufacturers who offer over 220,000 different products for sale, with 14,000 new listing being added every month. LightInTheBox works with suppliers to streamline manufacturing and shipping, then offers the goods on its website, which features 22 different languages. The LightInTheBox website is available to 80% of Internet users worldwide. The company’s clothing, electronics, home goods and sports goods all sell at big discounts to standard retail, in part because there are no warehousing and shipping facilities to add overhead. A person who wants a wedding dress or evening dress (both big sellers) can have it custom made to individual measurements and with selected styles, colors, materials and trim. A wedding dress that might cost $2,000 in the U.S. may sell for as little as $200. Sales have been about half to European customers and a quarter to North American addresses, indicating that there is big potential in the U.S. and Canada. Revenue growth in the last four years has been 316% (2009), 125% (2010), 98% (2011) and 72% (2012). Revenue growth in Q1 was 87% and 99% in Q2. The company just booked its first quarter with positive EPS. LightInTheBox is a small company (market cap is less than $1 billion) with huge potential. It’s followed by only two analysts today.
LITB is a very young stock, coming public in early June at 9.5. The stock has never traded below 11, and popped above resistance at 18 earlier this month. It traded as high as 23 last week, and is now hanging around at 20. The trend is clearly up, but in a stock this young (it just got its 50-day moving average), volatility is likely to be elevated. We think LITB looks like a potentially strong, speculative stock that’s worth buying anywhere under 20 if you have a taste for volatility. Use a stop at 16 to give the stock some room to roam.
LITB Weekly Chart
LITB Daily Chart
Lions Gate Entertainment Corp. (LGF)
Why the Strength
Lions Gate Entertainment continues to thrive in competition with larger movie and TV studios via a couple of clever strategies. First, the company makes a passel of low-budget horror and thriller films (like the Saw series) on the cheap, then pulls out all the stops for its major franchises like the Hunger Games trilogy. (Hunger Games: Catching Fire is due out in just a few months). The second strategy is co-production of TV shows with other studios and networks. The big title right now is Orange is the New Black, which is the latest streaming-only series from Netflix. The company also co-produces Mad Men with AMC Networks, Nashville with Walt Disney and ABC, Anger Management with FX and 21st Century Fox and Nurse Jackie with Showtime. All of these shows provide steady income, augmenting the rental revenue flow from the company’s extensive library of films and TV shows. With Hunger Games: Catching Fire on the horizon, investors are signing on to get a piece of the pie. The company’s revenue growth, which was 0% in 2012 and generally in single digits for many years, hit 71% in 2013, an eye-catching turnaround that has continued this year; Q1 revenue growth was 22% and Q2 was 21%. Lions Gate has some very hot properties and is making all the right moves now.
LGF graduated out of single digit prices in early 2012, busting past 10 in January and hitting 14 in February. The stock consolidated for many months, and was trading at 16 when it began another big move in December 2012. LGF has doubled to more than 32 in 2013, and has spent the last five weeks trading first under resistance at 33 and now over support at 33. The rising 25-day moving average has just caught up with the stock, which may provide some lift. We think LGF looks like a reasonable buy (P/E is just 15) on any weakness. Volatility isn’t huge, but you should use a stop at 29 to give it room to move.
LGF Weekly Chart
LGF Daily Chart
Ctrip.com International Ltd. (CTRP)
Why the Strength
Ctrip.com is making its fourth appearance of 2013 in Cabot Top Ten Trader, confirming the company’s strength. True to its roots as an aggregator of unbooked hotel accommodations, the Chinese company has kept its focus on saving customers money on travel and lodging. The addition of guided tour packages has boosted the company into the class of Expedia, the U.S. company with which it’s most frequently compared. The company operates mostly in China, which might seem limiting until you realize that China has more people than Europe and North America combined. Ctrip.com just got a big boost from its Q2 earnings report on August 1, which featured a 50% bump in earnings on a 32% gain in revenue, with a healthy 25.8% after-tax profit margin. This unexpectedly strong report followed a similar earnings surprise in the Q1 earnings report on May 8. Investors are impressed that Ctrip.com has ridden China’s rapid move to mobile with ease. Many Chinese stocks are strong right now, reflecting that country’s growth, but also a lowering of sensitivities about transparency and reporting practices on the part of investors. Ctrip.com, which has been featured here often, is a good advertisement for Chinese stocks.
CTRP pulled out of a multi-year decline in August 2012, and has soared from 12.5 then to over 46 in recent trading. Each new multi-year high lifts the stock toward its all-time high of 53, which it reached in 2010. The big gap-ups on May 8 and August 1 have been followed by fairly steady increases in prices at lower volume. CTRP took a seven trading-day rest after its August 1 blast-off, slipping a couple of points to 42. But it’s now back in rally mode and has lifted above the trendline formed from its new highs dating back to August 2012. Accordingly, we’ll set the buy range a little lower than usual to keep initial risk low. A mental stop at the 25-day moving average (now just below 40) is a good idea on an issue this hot.
CTRP Weekly Chart
CTRP Daily Chart
Cornerstone OnDemand (CSOD)
Why the Strength
Cornerstone OnDemand is one of many niche Cloud software firms that’s hitting the ball out of the park. The company bills itself as a Cloud-based talent management firm, offering four core solutions—Recruiting Cloud, Learning Cloud (for training, etc.), Performance Cloud (compensation and performance tracking) and Extended Enterprise Cloud (to help manage customer and partner relationships). As you can see in the table below, business is outstanding, and that’s partially because of a dip in competition; many of Cornerstone’s direct competitors have been bought out by larger companies, but ironically, that hasn’t led to as many competing bids on various deals. Revenue growth here is generally accelerating, and bookings (up 55% last quarter), deferred revenue (up 57%) and renewal rates (north of 90%) all point toward continued growth. With software firms, there’s always the chance that someone will come out with a better product in the near future, but it seems clear that Cornerstone has a good-sized lead and management is pulling the right levers. We like it.
CSOD has been in an uptrend for months, though as a fairly thinly traded stock (under $25 million per day of volume), there have been plenty of ups and downs along the way. Shares ticked to new highs in March, based for two months, and have been hot since early May, even through the market’s correction. More recently, shares exploded higher in early August before pulling back slightly on calm volume last week. The retreat could go further, but we think you could nibble here or on weakness, with a stop in the mid-40s.
CSOD Weekly Chart
CSOD Daily Chart
Celldex Therapeutics (CLDX)
Why the Strength
Cancer and autoimmune disease specialist Celldex Therapeutics is grabbing headlines once again, following positive trial data on one of its most promising treatments. The biotechnology firm has only one commercial product, rotavirus vaccine Rotarix, but the company’s drug pipeline has investors taking note. Specifically, Celldex’s cancer drug Rindopepimut has attracted quite a bit of attention. The drug is currently in Phase 3 trials for the treatment of front-line glioblastoma and Phase 2 trials for recurrent glioblastoma. The Phase 2 trials have shown considerable promise, improving three-year survival to 23%-33% from 6-18%, with five-year survival rates increased to 15% from an expected 0% survival rate. More recently, Celldex announced that it is increasing the size of the Phase 2 trial following early evidence of anti-tumor activity, including tumor shrinkage. Elsewhere, Celldex has a potential blockbuster breast cancer treatment called CDX-011 which has shown impressive results in the EMERGE Phase 2 trial. The most promising aspect of Celldex’s pipeline is that the company should see little competition due to its proprietary APC receptor treatments. What’s more, these treatments can be adapted to nearly any cancer or potentially any other immunotherapy applications. Investors should note that while Celldex has averaged steady revenue growth over the past year, this investment is all about the firm’s potential.
CLDX has enjoyed a steady rally throughout the past couple of years. After forming a base near 3 in 2011, the stock rebounded and claimed support at its 10-week and 25-week moving averages. Shares began to tentatively move higher throughout 2012, riding trendline support. CLDX’s rally began to take off in earnest in 2013, with shares accelerating through resistance at 10 in March. Following a brief consolidation period, CLDX pushed higher once again, taking out 15 in early July and rocketing past 20. The stock has spent the past month digesting its gains, with support holding firm at 20. Now, CLDX’s 10-week moving average has caught up, hinting that the stock could be in for another breakout rally.
CLDX Weekly Chart
CLDX Daily Chart
Why the Strength
Baidu, which is making its 21st appearance in Cabot Top Ten Trader, qualifies as an Old Friend if any Chinese stock does. The story of Baidu’s dominance of the Chinese search engine business is well known, including how it kicked Google’s hind end by offering a better understanding of the Chinese language and giving better search results. The company has never relinquished that dominance in the PC world, but it took some time for it to respond to the challenge of search on mobile devices. The number of Chinese users on PCs has held steady, but many Chinese are now using mobile phones and tablets as their primary means of accessing the Internet. In August 2012, when Qihoo 360 began offering search on its popular mobile website (see the July 8 issue of Cabot Top Ten), investors saw a potential challenger to Baidu’s preeminent position as the Chinese search enging of choice. It took a while for Baidu to organize a response, but the announcement that it would pay $1.9 billion to acquire 91 Wireless, the second-largest mobile app store in China, was a great comfort to Baidu’s investors. The 91 Wireless acquisition will mean an immediate boost to Baidu’s wireless traffic, answering the Qihoo 360 challenge. Baidu has been a model of both revenue and earnings growth, with earnings forecast to increase from the $4.84 in 2012 to $5.05 this year and $6.27 in 2014. Baidu has earned its position as a core holding for investors in China.
BIDU has rebounded sharply from its low at 83 earlier this year. That low capped a major correction that began with the stock trading at 166 in July 2011. BIDU put in a convincing bottom structure from the middle of March through early May, then lifted off in May. A gap up on higher volume in July pushed the stock back above 100, and the great earnings report on July 24 keyed an even bigger gap up on monumental volume. BIDU jumped above 140 last week, then slipped below 135 later in the week. With BIDU still under 140 and its 25-day moving average streaking higher (now around 128), we think BIDU looks like a reasonable buy below 135, with a stop at 120.
BIDU Weekly Chart
BIDU 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.
|First||Stock||Symbol||Top Pick||Original Buy Range||Price as of August 19, 2013|
|7/15/13||Krispy Kreme Doughnuts||KKD||19-20||21|
|3/18/13||Lion’s Gate Entertainment||LGF||21-22.5||34|
|5/28/13||Old Dominion Freight||ODFL||42-43||44|
|6/10/13||Pioneer Natural Resources||PXD||139-144||166|
|WAIT FOR BUY RANGE|
|None this week|
|6/17/13||Delta Air Lines||DAL||18-19||19|
|DROPPED: Did not fall into suggested buy range within two weeks of recommendation.|