More and More Positives
Current Market Outlook
In the market, it’s the unexpected that you should pay closest attention to. Two weeks ago, the broad market was heading south and the major indexes broke down after a month of distributive action. But since then, the market has zoomed ahead like a rocket, with all the major indexes back above their 50-day lines and many stocks either hitting new highs or racing toward the top of multi-week launching pads. There are still some things to worry about, and we’ll probably get a truer read on things once the big boys come back from vacation next week. But overall, we’re leaning bullish, encouraged by what we’ve seen during the past two weeks.
This week’s list shows a bunch of stocks that have shown big-volume buying of late, a sure sign institutions are sniffing around. Our Top Pick this week isn’t a stock we think is going to double, but rather, one we feel strongly will head higher. It’s Home Depot (HD), the granddaddy of housing stocks, which just busted free from a 15-month base.
| Stock Name | Price | ||
|---|---|---|---|
| WPX Energy (WPX) | 0.00 | ||
| Sensata Technology (ST) | 0.00 | ||
| Regeneron Pharmaceuticals (REGN) | 512.96 | ||
| Royal Caribbean Cruises (RCL) | 0.00 | ||
| Home Depot (HD) | 0.00 | ||
| Keurig Green Mountain (GMCR) | 0.00 | ||
| F5 Networks, Inc. (FFIV) | 0.00 | ||
| Community Health Systems (CYH) | 0.00 | ||
| Canadian Solar (CSIQ) | 0.00 | ||
| Akorn (AKRX) | 0.00 |
WPX Energy (WPX)
Why the Strength
Wall Street has been gushing over WPX Energy Inc. since the company’s most recent quarterly report. Specifically, the independent oil and natural gas explorer topped the consensus’ second-quarter earnings and revenue estimates, with growth riding the wave of a 57% increase in domestic oil production. The report prompted the biggest jump in WPX shares since the company went public in December 2011. Looking ahead, WPX expects additional gains in production, lifting its full-year targets to an increase of 55% from prior forecasts for a 40% year-over-year rise. The company has made a couple of moves in the past month that could make even these increased forecasts seem light. For instance, WPX is in the process of selling its coalbed methane holdings in the Powder River Basin for $155 million in cash. At the same time, WPX is increasing its acreage in the San Juan Basin by more than 50% to a total 74,600 net acres. The company already has two rigs in the region, and plans to bring in a couple more to speed up development. WPX has seen excellent performance from its San Juan holdings, with the oil field yielding a 76% increase in production amid a 26% decrease in costs during the first half of 2014. With margins expected to improve considerably following the expansion in San Juan, WPX should continue to gain alongside its rising reputation on Wall Street.
Technical Analysis
WPX started trading publicly in December 2011 after being spun off from pipeline firm Williams Cos. Shares were quickly hammered lower following their IPO, and WPX would spend the next year-and-a-half bouncing around in the high teens. Shares stabilized in mid-2013, as solid quarterly results finally calmed skittish investors. WPX entered a tight trading range just below 20, before breaking out in April. Shares went on a run toward 25 in July before market jitters send WPX down for a test of support near 20. Strong earnings prompted an 11% spike in WPX in early August, sending shares higher once again. WPX is now establishing a foothold above 24, and appears poised to resume its trend higher. You can nibble here or buy on dips of a point or two, with a target near 24.
WPX Weekly Chart
WPX Daily Chart
Sensata Technology (ST)
Why the Strength
Sensata is a Netherlands-based manufacturer of pressure, temperature, speed, position and force sensors for the aircraft, auto and industrial markets. In the automotive market, it used to be that the kinds of sensors Sensata makes were found only on luxury cars. But competition has pushed luxury sensors into medium-priced and entry level cars, and now a proposed $1 billion takeover of Schrader International, the leader in tire pressure monitoring sensors, has given Sensata’s stock a shot of energy. The Schrader deal would transform Sensata into a global giant, with the opportunity to integrate tire-pressure sensing (a big deal because of tightening safety and mileage requirements) into a unified package, bringing big cost savings to the combined companies. The company’s revenue mix includes a little over a third of sales in the U.S., one third from the Asia-Pacific region and a little under a third from Europe, with China the presumed opportunity spot for rapid adoption of advanced controls into entry level cars. Sensata represents a stable business with a good catalyst for positive change.
Technical Analysis
After putting in a triple bottom at 26 in 2011 and 2012, ST began a slow advance that just kept up with the broad market. The stock caught an updraft in 2013, then traded flat from November through January. The uptrend resumed in February, and ST wound up at 49 in July, then corrected to 45 earlier this month. The news of the Schrader takeover caused a 3.5 million-share blastoff on August 18 and ST was in new-high territory in two days. The stock touched 50 last Thursday and has been hanging just under 50 since. ST looks buyable on a pullback toward 49 as the stock digests its gains. A stop at 45 makes sense.
ST Weekly Chart
ST Daily Chart
Regeneron Pharmaceuticals (REGN)
Why the Strength
Regeneron Pharmaceuticals develops protein-based drugs designed to treat a variety of diseases and conditions, including cancer, inflammatory ailments and eye diseases. Arcalyst was Regeneron’s first commercialized drug, designed to treat rare inflammatory diseases such as Muckle-Wells Syndrome. The company’s biggest blockbuster to date, however, has been Eylea—a drug used to treat neovascular age-related macular degeneration (also known as wet AMD). When we looked in on Regeneron in May 2013, Eylea had already helped quadruple the company’s quarterly earnings, prompting several upward revisions to full-year results. The drug has only gained momentum since, pushing Regeneron toward average quarterly revenue growth of 44% during the past year, with earnings rising 37% on average during the same period. During the most recent quarter, Eylea sales rose 26%, while international sales more than doubled to $67 million. Furthermore, the FDA has approved Eylea for the treatment of diabetic macular edema, opening up another potential area of growth for Regeneron. Lastly, the company has a strong pipeline, with three drugs for cholesterol, rheumatoid arthritis, and atopic dermatitis (Alirocumab, Sarilumab and Dupilumab, respectively) already showing positive late-stage trial results.
Technical Analysis
It took REGN several weeks to stabilize after breaking out above 200 in early 2013, but the stock ultimately found a foothold at its 25-week moving average. Since then, REGN has largely trended higher along this trendline, with the stock’s 50-week playing backstop. Heading into 2014, REGN was squeezed into overhead resistance in the 300 region, an area that has proven difficult for the stock to completely leave behind. In fact, REGN has spent most of 2014 bounding around 300, with the shares testing 350 as resistance. With momentum from the company’s recent quarterly report, REGN could break above 350, making the stock buyable here following its recent pullback.
REGN Weekly Chart
REGN Daily Chart
Royal Caribbean Cruises (RCL)
Why the Strength
Royal Caribbean is strong today because investors have been blown away by recent impressive results, as well as forecasts for much more growth ahead. The cruise ship industry, remember, is highly cyclical; booking on the mammoth ships can fall precipitously when rough economic waters arrive. But Royal Caribbean is thriving today not just because of a good economy (trends are very strong in China and Europe, as much of the growth in the sector is coming from overseas … though Caribbean cruises continue to see pricing pressure), but also because of a huge fleet modernization during the past couple of years, as well as the ills of Carnival, the largest firm in the industry. All in all, management is very bullish on the future, aiming to double its return on capital and earnings by 2017 via moderate capacity growth (averaging 5% annually during the next few years) and higher efficiencies, which should lead to higher dividends (current yield is 1.6%) and share buybacks. We’re not treating those forecasts as sure things—again, a global economic hiccup anytime during the next few years will surely affect business—but the main point is that business is thriving today, and there’s nothing standing in the way of another few very good quarters for the company, at least. Earnings are expected to rise 42% this year and 30% in 2015.
Technical Analysis
RCL broke out last October and has been having a good run since. We think it’s still a decent buy as shares formed another, second-stage base from mid-March through mid-July before busting loose on earnings. It took the recent market shakeout in stride, too, telling us big investors aren’t too eager to let go of their shares. We think buying on dips makes sense, possibly toward the 25-day line (now nearing 61.5).
RCL Weekly Chart
RCL Daily Chart
Home Depot (HD)
Why the Strength
Home Depot needs no introduction—it’s the granddaddy of housing stocks, selling more than $80 billion worth of construction, maintenance, outdoor and gardening goods every year. The stock has come to life after a 15-month rest period following a bullish second quarter earnings release; sales and earnings growth are now accelerating slightly, with earnings topping estimates and the company continuing to shovel a ton of money to shareholders. (It returned $2.8 billion last quarter (more than 2% of the current market cap) via share repurchases and dividends. Its current dividend yield is 2.1%.) Also helping the cause were upbeat outlooks from peer Lowe’s, confirming that the environment remains solid, as well as Wall Street’s satisfaction with the naming of the new CEO. More broadly, many housing stocks have been pausing for the past year and a half as the housing rebound has cooled and because of fears over higher mortgage rates. The fact that Home Depot keeps cranking out good results and sees more good times ahead is a good sign that the next major move in the sector is up. As for Home Depot itself, it’s not going to triple from here, but if the housing market does re-accelerate, upside surprises should continue.
Technical Analysis
HD rallied from 17 at its 2011 low to 81 by May of 2013. But then it chopped sideways for 15 long months as investors slowly pared back from the sector. Amazingly, though, the stock remained within a very tight range (72 to 83!) for that period of time, so there weren’t any major selling pressures. And then last week saw a classic breakout, with HD surging on its biggest weekly price gain and biggest weekly volume in over a year. Again, HD isn’t going to turn into a social media stock, but the path of least resistance has turned clearly up.
HD Weekly Chart
HD Daily Chart
Keurig Green Mountain (GMCR)
Why the Strength
Keurig Green Mountain is an interesting combination of a company that has a well-established business—it’s set to earn $3.80 per share this year while paying out $1 per share in dividends and buying back some stock—but also a big, enticing story for future growth. Namely, investors are looking ahead toward the impact of some new brewers; the Keurig Bolt and Keurig 2.0 brewers, which will extend patent protection for K-Cups and allow for larger brew sizes (up to 64 ounces!), while its Keurig Cold (released sometime next year) should allow for quick making of cold, carbonated beverages, thanks to a partnership with Coca-Cola (which also owns 16% of the company). And that’s not the only good news—the stock is strong today because Keurig inked a big licensing and distribution deal with Kraft last week for a variety of Kraft’s coffee brands; firms like this are seeing the writing on the wall for the new 2.0 and Bolt, deciding it’s better to partner with Keurig than try to go around them. All told, there are a lot of expectations built into the stock; it’s trading at 30 times earnings despite projected growth in the single digits. But investors are betting those estimates will prove conservative as the new brewers hit the market. We agree.
Technical Analysis
GMCR broke out last Friday from a big base-on-base formation. The first base began in May of last year and ended when the stock exploded higher in February after news broke that Coca-Cola was buying a big stake. But that led to the second base, which ran from February through last week. GMCR has a history of being hard to handle, so while we like the gap and volume on the breakout last Friday, you should expect ups and downs. You can buy some here but use a looser stop near 120.
GMCR Weekly Chart
GMCR Daily Chart
F5 Networks, Inc. (FFIV)
Why the Strength
F5 Networks used to be a frequent feature in Cabot Top Ten Trader, making nine appearances in 2009 and 2010, when the rising popularity of cloud computing made its network optimization, security and management products seem like the next big thing. But despite a rally in late 2011 and early 2012, the company’s stock has been in a long-term downtrend since April 2012 as earnings growth slowed. The company’s earnings report on July 24 confirmed that things are turning around, with revenue growth of 19% and earnings growth of 24% topping analysts’ expectations handily. The company also issued guidance that was well ahead of analysts’ views. The 23.8% after-tax profit margin was also attractive. The company’s CEO cited “strong product growth” and “increasing awareness and uptake of our security offerings” as the basis for the strong results. F5 Networks has had a long period of being away from investors’ attention, and it looks like strengthening results is bringing them back.
Technical Analysis
The long decline in FFIV from 139 in April 2012 to 68 in June 2013 was a thorough shakeout and left the stock with attractive valuation. Big rallies in July 2013 and January 2014 pulled the stock to near 115, and it put in a five-month base at that level with two months of very tight trading at the end. With such a healthy base, the stock was ready for the good earnings news on July 24 and the analyst’s upgrade on August 19 that keyed the high-volume breakout to multi-year highs near 124 last week. FFIV is consolidating near 122 today and looks like a good buy here, with a stop at 114.
FFIV Weekly Chart
FFIV Daily Chart
Community Health Systems (CYH)
Why the Strength
The healthcare sector should remain a hotbed for investors for some time to come, as the impact of the Affordable Care Act continues to bolster the number of paying patients. One of the best performers in this space has been Community Health Systems, which has been in the spotlight for a variety of reasons. For instance, Community Health has been mired in a DOJ lawsuit since 2011, alleging that the company incorrectly billed government healthcare plans, like Medicare and Medicaid. But the company has finally extricated itself from this lawsuit. Denying any wrongdoing, Community agreed to settle the suit by paying $88.26 million to resolve Federal claims and $892,500 to settle the states’ portion of the claims, less than the $102 million the company set aside to cover legal and settlement costs. That said, the company’s biggest driver so far has likely been its acquisition of Health Management Associates earlier this year. The move created the largest U.S. hospital company by number of hospitals, giving Community a strong position in Florida. The move paid off big, according to Community’s second-quarter earnings report, as revenue soared 50% while earnings reversed a 70% year-over-year decline in the first quarter to spike 95% in the second. With legal issues now in the rear view mirror, Community should once again establish itself as an investor favorite.
Technical Analysis
CYH was trading in the low teens as recently as mid-2011, but the stock has shown considerable resilience since then. After rallying for the better part of 2012 and 2013, CYH topped out near 50 in June 2013, the stock CYH entered 2014 attempting to claim a foothold near 40, but the acquisition of HMA created a stir that sent the stock searching for support near 35. Shares have since rebounded in fine fashion, rallying more than 45% along their 10-week moving average. Currently, CYH is basing just north of 50, as shares digest their recent gains. You can use this lull in the action to nibble on the stock.
CYH Weekly Chart
CYH Daily Chart
Canadian Solar (CSIQ)
Why the Strength
There are few secrets about the popularity of solar energy, either from the supply side or the demand side. On the supply side, the industry has been through a long period of consolidation as the companies that prospered during the period of silicon shortages have either flamed out or been taken over during a long string of takeovers and mergers and growing capacity has driven the per-watt cost of solar generation down near parity with fossil resources. On the demand side, pressure from global warming and pollution concerns has created plenty of market. Canadian Solar was a star of the rebound in interest after the Great Recession siphoned most subsidy programs dry. From late 2012 to the beginning of 2014, Canadian Solar’s stock gained more than 2,000%. But an earnings miss in March took the stock off at the knees, dropping it to 21 in May. Then a great earnings report on August 13, coupled with a string of sales of turn-key electricity generating plants—the company’s specialty these days—and an analysts’ upgrade brought investors back in droves. Analysts have been raising earnings estimates for Canadian Solar and the company looks quite strong as the logic of cheap, renewable solar continues to look compelling. Plus, thus far at least, the company hasn’t been hurt by the tariffs on Chinese solar cells and arrays imposed by the U.S. government.
Technical Analysis
Coming out of its March–May correction, CSIQ ran from 23 to 32 in June before correcting back to a double bottom in early August. The blastoff on August 13 after the great earnings report came on over five times average volume and kicked off a nine-day rally that has now pushed the stock above 36, its highest level since early March. CSIQ remains a very volatile stock (beta is over 3!) so it makes sense to buy well, preferably on a dip of a point or two. The stock’s 25- and 50-day moving averages are locked together at 29, so it’s a bit extended here. A little patience will pay off. Use a loose stop at 32.
CSIQ Weekly Chart
CSIQ Daily Chart
Akorn (AKRX)
Why the Strength
Pharmaceuticals manufacturer Akorn is enjoying the benefits of its transition from a “niche generic pharmaceutical” company to a full-on developer and manufacturer of its own patented drugs. The company’s combined acquisitions of Hi-Tech Pharmacal in April and VersaPharm in May cost over $1 billion, but they have completely changed the story. Where previous revenue growth gains came only as new drugs came off patent and Akorn got its generic versions approved, these two acquisitions brought with them a solid roster of approved drugs and a large pipeline of candidate drugs in clinical trials. The impact of the acquisitions showed up in Akorn’s Q4 report that featured a 96% jump in revenue and a 79% gain in earnings. Over $55 million of the reported revenue came from Hi-Tech Pharmacal. In the longer term, the company’s success is attributable to CEO Rajat Rai, who came on board in 2009 and began both its transition to patentable drug development and its acquisition strategy. Akorn will continue its generic and contract drug manufacturing and its line of non-prescription health-care products (at least for now), but it’s now a player in a higher-stakes game.
Technical Analysis
After a big run from 21 in April to a high-volume leap to 37 on the first of July, AKRX put in a six-week base under resistance at 35. The stock broke out of this base a couple of weeks ago and has been running to new highs since. AKRX has been cooling off a little, with trading volumes gradually diminishing from the August 5 spike. A buy on a pullback with a stop under 35 looks like a good risk-reward combination.
AKRX Weekly Chart
AKRX 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.
