Consolidation Looks Normal
Current Market Outlook
All eyes are on Janet Yellen this week, who is set to speak Friday morning, and whether she’ll offer hints to the Fed’s next move. As always, we’ll let others slice and dice the comments; we’ll stick with the market’s action itself. And on that front, things look solid—the market’s consolidation of the past few days has been normal thus far, and while a short-term shakeout of some sort wouldn’t surprise us, the odds continue to point toward higher prices down the road. We continue to advise you to remain heavily invested, though be sure to honor your stops for any stocks that break support.
This week’s list includes a nice array of stocks and sectors, including a few recent earnings winners. Our Top Pick is Gigamon (GIMO), a hot stock that’s recently taken a few weeks to catch its breath. Further dips are possible but buying here with a tight stop makes for a good risk-reward opportunity.
| Stock Name | Price | ||
|---|---|---|---|
| Yelp (YELP) | 41.30 | ||
| US Silica Holdings, Inc. (SLCA) | 0.00 | ||
| Royal Gold, Inc. (RGLD) | 129.66 | ||
| Pioneer Natural Resources (PXD) | 0.00 | ||
| Insulet (PODD) | 175.69 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| Line Corporation (LN) | 0.00 | ||
| Gigamon (GIMO) | 0.00 | ||
| Dicks’s Sporting Goods (DKS) | 0.00 | ||
| Acuity Brands (AYI) | 0.00 |
Yelp (YELP)
Why the Strength
We’re seeing a lot of what we call “turnaround growth stocks”—stocks that topped sometime in early to mid-2014 (when many growth stocks reached their peaks) then had huge drops due to fears of competition, heavy investment that slowed earnings growth and a horrid market environment. Now, investors are getting over those fears and looking forward to rapid growth for many quarters or years. Yelp is one of those stocks that has a bright future—the firm connects local businesses to local consumers via its online review service. While competition in the local ad space is intense, Yelp is one of the leaders in the field (108 million cumulative reviews and the best mobile reach in the industry) and the second-quarter report showed that business is actually accelerating. Local ad revenues grew 41% in the quarter (up from 40% and 35% growth over the prior two quarters), while user engagement, revenue per advertiser and earnings per share all topped expectations. Longer-term, there’s also great potential in Yelp’s transactional businesses; it had 5.7 million bookings in the second quarter (up 49%) in areas like takeout food delivery, quote requests for local businesses and restaurant reservations. Moreover, just a small fraction of local businesses advertise with Yelp (or other online platforms), so the long-term potential is enormous. If management continues to make the right moves, the firm will likely get much larger in the years ahead.
Technical Analysis
YELP has been acting well since the February bottom, and its last two earnings reports (early May and two weeks ago) have spurred major gaps higher. The latest gap was impressive, and the fact that the stock hasn’t given up any of the move is also a good sign. That said, if you want in, we think it’s prudent to buy on minor weakness and use a stop in the low 30s.
YELP Weekly Chart
YELP Daily Chart
US Silica Holdings, Inc. (SLCA)
Why the Strength
U.S. Silica is a leading supplier of specialty silica sand that is used by the oil and gas industry (for fracking) and also in the industrial sector for a variety of applications (paints and coatings, building products, glass, water filtration devices, etc.). While the industrial sector makes up about 44% of total revenues, it was the energy sector that drove business sky high a couple of years ago (it made $2.41 per share in 2014) and then led the way into the ditch recently, with earnings plunging into the red. But the stock is strong today for a couple of reasons. First, demand for the firm’s sand is stabilizing; while prices continue to fall, tons shipped in the second quarter were down just 1%. Second, U.S. Silica was very shrewd when it came to its balance sheet; the firm is sitting on $454 million in cash (it also has $490 million in long-term debt) and it’s using the cash to bolster its future during this downturn. U.S. Silica just completed an acquisition of a regional frac sand operator that gives it more exposure to the buoyant Permian Basin; it bought 327 acres in Ottawa to boost its sand reserves; and purchased a logistics firm that specializes in delivering proppant to the energy sector. All told, U.S. Silica expects these buyouts to boost 2017 earnings by 40 to 60 cents per share; with the expected upturn in drilling as energy prices recover, the next few quarters could be boom times. Consider it a speculative turnaround situation.
Technical Analysis
It was a long way down for SLCA, which fell from 73 in September 2014 to 13.5 in October 2015. The stock then retested that level in January and February and hasn’t looked back since—SLCA has roared higher in a persistent advance, with two tests of the 50-day line (late April and late July) and a recent acceleration to 20-month highs. If you want in, try to buy on dips and keep a stop near the 50-day line because a break of that will usher in a longer consolidation.
SLCA Weekly Chart
SLCA Daily Chart
Royal Gold, Inc. (RGLD)
Why the Strength
Royal Gold is a Denver-based precious metals company that offers an attractive mix of royalty and streaming revenue. When Royal makes the case for itself, it points out that it raised capital when gold was trading at over $1,700 per ounce, and did major buying of mines and gold interests in 2015 when gold prices were at their lows. The company emphasizes that 80 of the interests in its portfolio are in mines with a reserve life of more than 15 years. The company has also increased revenue for 15 consecutive years (despite the huge drop in the price of gold during that time), and the dividend’s compound annual growth rate since 2001 is 21%. Gold investments are attracting interest from investors right now based primarily on increases in the price of gold. But Royal Gold represents a sophisticated strategy of disciplined capital allocation to secure rights to future gold production and maximizing the longevity of its assets. The company’s 1.1% annual dividend yield is likely to rachet higher as the firm’s earnings surge. If you’re looking for a gold investment that’s less risky than physical miners, Royal Gold may be what you’re looking for.
Technical Analysis
RGLD’s chart shows a steep drop in value in 2015 leading to big drops in November 2015 and January 2016. But the stock’s rebound from its 25 January low has been dramatic. RGLD more than doubled to 52 in March, and kept climbing after a reasonable correction in May. The stock hit 88 in early August and has been correcting in an orderly way since then. RGLD looks buyable right here, or on any dip toward 81. Use a stop at 75.
RGLD Weekly Chart
RGLD Daily Chart
Pioneer Natural Resources (PXD)
Why the Strength
Pioneer Natural Resources is a good-sized (market cap north of $30 billion!) explorer that’s another beneficiary of the bullish economics found in the Permian Basin. The company has exposure to a couple of other basins, but it’s the firm’s acreage in the Spraberry and Wolfcamp areas of the Permian that make this story exciting. (Pioneer has the biggest position in those areas with more than 20,000 potential drilling locations!) Thanks to the stabilization in energy prices, cost cuts (production costs down 28% per barrel of output in the latest quarter) and solid hedges, Pioneer is boosting its rig count from 12 to 17 in those two areas in the second half of this year, which will help hike production in 2017 and beyond; management is now forecasting 15% annual output growth through 2020 (oil output should rise more than 20% annually). And, like many top explorers these days, Pioneer is taking advantage of a strong financial position to bolster its future—the firm is acquiring 28,000 acres in the Permian (from Devon Energy), more than half of which is near some of the company’s most productive wells. All told, Pioneer isn’t as fast growing as some other energy stocks because of its size, but it looks like a high-quality institutional play of the Permian.
Technical Analysis
PXD experienced a drop similar to most of its peers, falling from 234 in 2014 to a low of 106 in August 2015. It retested that low in January and February of this year, then had a smooth advance to 172 by April. Then came a tedious three-month base, but PXD found support above its 200-day line and has advanced steadily since then, reaching its highest levels in nearly two years last week. Today’s dip (sparked by a drop in the entire sector) looks buyable, with a stop in the mid-160s.
PXD Weekly Chart
PXD Daily Chart
Insulet (PODD)
Why the Strength
Nearly one in 10 Americans has diabetes, with 1.4 million new cases diagnosed every year. Lately, diabetes has become an epidemic, as poor diet and obesity—the two leading causes of diabetes, a disease caused by high blood sugar—are increasing problems in the U.S. Now the seventh-leading cause of death, it’s also a costly disease, racking up a $245 billion price tag in 2012 according to one study. Treatment is one of the biggest costs, and Insulet is one of the companies benefiting from the increased demand. Insulet makes and sells insulin infusion systems to people with diabetes who require regular insulin injections. The company’s OmniPod Insulin Management System is an easy-to-use handheld wireless device designed to manage insulin levels. OmniPod has been a big catalyst behind Insulet’s recent sales growth, which has been well into double digits in each of the last four quarters. Though the company isn’t profitable, its second-quarter losses were much narrower than analysts expected, while sales also exceeded expectations. Given the size of Insulet’s potential customer base, it’s no surprise that sales are expected to continue growing for the foreseeable future, with 17% growth forecast in 2017.
Technical Analysis
PODD has made two major upmoves in the last two months. In late June and the first three weeks of July, it kited from 28 to 34. After a brief shakeout down to its 25-day line, the stock made an even bigger jump at the beginning of this month, gapping up from 35 to 44 on huge buying volume following its quarterly report. It’s been building a base in the 42 to 44 range since. You could nibble here, though we’ll set our buy range down a bit, which would offer a great risk-reward entry point.
PODD Weekly Chart
PODD Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
MercadoLibre is an Argentina-based online commerce platform that spans much of Latin America. The company’s MercadoLibre Marketplace lets merchants and individuals offer goods and services online, while its MercadoPago payment service enables online payments, including currency conversion among different Latin American countries. Sales can take place via auctions or at fixed prices and can be offered via classified ads or in online stores. All in all, it’s a lot like eBay, which isn’t much of a coincidence given that the U.S. online giant owns a more than 18% stake in MercadoLibre. The company’s platforms are aimed at Argentina, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Mexico, Panama, Peru, Portugal, Uruguay and Venezuela and include real estate classifieds for areas of Florida. More than 80% of the company’s revenue comes from Brazil and Argentina. Revenue growth was 18% in 2014 and 17% in 2015, although Q2 results were considerably stronger at 29%. Estimates of earnings growth call for a small decline this year, but a 26% bump in 2017. Institutional sponsorship of the company is at its highest level in many years. MercadoPago is seeing strong adoption both on the platform and outside it, paralleling the growth pattern of PayPal in the U.S. The ease of payment and ease of shipping are expected to continue to drive growth for many years.
Technical Analysis
MELI has always been a volatile issue, but the stock’s rally since its low of 84 in February has been exceptionally strong. The stock gapped up to 174 on August 5, powered by an excellent earnings report. That gap up on heavy volume pushed the stock past resistance in the 145–150 area that has held it down since late 2013. MELI has been drifting lower since that earnings high, and is now trading around 165, which looks like a reasonable buy point. Or you could wait for MELI to find short-term support, which ought to happen when the rising 25-day moving average (now at 160) catches up. Use a stop at 150.
MELI Weekly Chart
MELI Daily Chart
Line Corporation (LN)
Why the Strength
Line Corporation is a Japanese networking platform that offers instant messaging (IM), voice and video calling and content distribution. The company’s website says that it was conceived in the wake of the Fukishima tsunami disaster, when it became clear that a new means of instant communication was necessary. Whether that’s true or not, the company’s IM and other services operate on iPhones and Android devices, on Macs and PCs. Line’s IM app distinguishes itself from competitors by offering an enormous set of 258,000 emoticons (which it calls stickers) and by its instant translation service that enables Japanese, Korean and Chinese chatting. 2015 revenue was $1.2 billion, up 40% from 2014. Line’s July 14 IPO in Tokyo and the NYSE raised a combined $1.14 billion, which was the largest public offering of the year. The company is benefiting from its Asian focus, and expects to use its large user base to offer other services like online payments and games. Institutional sponsorship of Line Corp. is building from zero, so there is a lot of potential if the company can repeat anything like its Q2 results of 400% earnings growth on 62% revenue growth. There haven’t been many tech IPOs this year (Twilio excepted), so Line Corp. is getting a lot of attention—and so far it’s delivering.
Technical Analysis
LN came public on July 14, and traded up by as much as 36% that day before finishing up “only” 25%. The stock immediately dipped to a double bottom at 36, but rebounded strongly in August, racing to as high as 48 before taking a breather last week. The stock probably needs to trade sideways for a while, but if you’re feeling adventurous, a small investment around 45 with a loose stop at 40 could pay off. Just be prepared for some volatility.
LN Weekly Chart
LN Daily Chart
Gigamon (GIMO)
Why the Strength
Gigamon offers software to companies that allows them to improve the visibility of their websites, track their web traffic through analytics and secure all their online data via a platform called GigaSecure. And now it’s entering the cloud, which it hopes will be another great growth driver. As it further diversifies, Gigamon is attracting bigger customers—15 of them paid Gigamon over $1 million for their variety of services last quarter, up from nine the previous quarter and six in the same quarter a year ago. Its new large customers include a national food retailer and an airline ticketing company, both of which sought Gigamon’s help in upgrading their online security systems. It also has clients in the healthcare and life sciences space. Many of those customers are putting all their data on the cloud, which is another potential big revenue stream for Gigamon. Sales are already looking pretty good, growing at least 30% in each of the last six quarters. Profit growth has been more consistent of late too, with a 46% increase expected this year. Put simply, Gigamon is a fast-growing web solutions company that could grow even faster now that it’s entering the cloud.
Technical Analysis
GIMO came public a little over three years ago, debuting at 26 in June 2013. It jumped as high as 45 later that year before falling flat in 2014, sinking as low as 10 that September. The turnaround was fairly swift, however—GIMO was back up to 34 by June 2015. Another pullback followed, but this time GIMO found support around 20, and this February it got going again, pushing to 32 in April, consolidating in May, and starting a multi-month advance that got it to new highs above 46 last month. It’s been moving sideways in the month since. You can buy a little here or (preferably) on dips with a hard stop below the 50-day line, which has acted as support since May.
GIMO Weekly Chart
GIMO Daily Chart
Dicks’s Sporting Goods (DKS)
Why the Strength
To the surprise of many, Dick’s reported very strong second-quarter earnings results last week. Why was it so surprising? Because one of Dick’s biggest rivals in the sporting goods and equipment space—Sports Authority—shuttered its remaining stores during the quarter, but not before hosting a massive going-out-of-business sale with deep discounts. Having Sports Authority out of the way going forward will almost certainly be a good thing for Dick’s, which is now the largest sports retailer in the U.S. with more than 500 locations. But because of Sports Authority’s month-long yard sale, analysts weren’t expecting much from Dick’s in the second quarter. Turns out those analysts underestimated Dick’s; earnings per share improved 6%, as opposed to the decline most analysts expected. Sales also outpaced estimates, increasing 8% from a year ago, including a 2.8% bump in same-store sales. Some former Sports Authority locations around the country will be converted to Dick’s Sporting Goods stores, instantly expanding the company’s footprint. It’s also diversifying through acquisition—Dick’s just bought Affinity Sports, a sports management technology company that serves youth sports leagues all over America, providing online registration and league websites, custom uniforms and access to donations and sponsorships. In short, Dick’s is becoming more deeply embedded in America’s sports culture and competitors are falling by the wayside—a bullish combination.
Technical Analysis
After more than five months of very little net movement, DKS got going in earnest in late June, jumping from 40 to 51 in a month and blowing past its moving averages. After taking a few trading sessions to catch its breath, the stock has pushed to even greater heights in August, gapping up from 54 to 58 following the surprise earnings beat. You can buy on the dips, with a stop in the low 50s.
DKS Weekly Chart
DKS Daily Chart
Acuity Brands (AYI)
Why the Strength
Acuity Brands continues to gain momentum from the tectonic shift toward LED lighting. The Atlanta-based company makes and sells lights for everything from parking garages to factories to swimming pools, and many of its commercial, industrial and residential customers are replacing their outdated and energy-inefficient fluorescent and incandescent lights with LEDs. As a result, Acuity’s sales have soared, growing 26% and 25%, respectively, in the last two quarters—the company’s fastest-growing quarters in over three years. For the year (which is over at the end of August), the company anticipates 22% sales growth, with 40% earnings growth. Acuity has been pouring all the extra cash into expanding its business, spending $614 million on acquisitions through its first three quarters this year. Between the acquisitions and the sales growth, Acuity now offers its customers three times as many lights as it did in 2008. Lighting isn’t necessarily an exciting industry, but Acuity’s accelerating growth is the kind of thing that makes investors stand up and pay attention and, big picture, the LED industry is still in the early innings of a multi-year growth wave.
Technical Analysis
We last recommended AYI in Top Ten on July 11, when it was trading at 268. It has since risen a few percent, with all of the growth coming in the last two weeks after bouncing off support around its 50-day moving average. On August 8, AYI breached 268 resistance; it’s been stair-stepping its way higher ever since. You can buy around here with a stop around the recent low of 257.
AYI Weekly Chart
AYI 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.
