Great Power ... If You’re in the Right Areas
The broad market has bounced in recent days, which is good to see; we’re even seeing a much-overdue relief rally in the interest rate-sensitive sectors. But the real action remains among growth stocks; the vast majority of our recent recommendations are acting well, including a bunch that have pushed to new highs! We still don’t think the market is 100% in the clear; we’ll leave the Market Monitor where it is (just shy of bullish), so holding some cash and keeping your feet on the ground makes sense. But the action among leaders is encouraging.
This week’s list has a nice variety of names to choose from, but for our favorite, we’re going with an institutional growth stock leader—Netflix (NFLX) has come out of the public’s eye of late, but shares have surged to new highs as the firm’s business continues to rebound. Try to buy on weakness.
| Stock Name | Price | ||
|---|---|---|---|
| Yandex (YNDX) | 0.00 | ||
| Yelp (YELP) | 41.30 | ||
| Stratasys (SSYS) | 0.00 | ||
| Polaris Industries (PII) | 0.00 | ||
| Oshkosh (OSK) | 95.04 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Melco Crown (MPEL) | 0.00 | ||
| Magna International Inc. (MGA) | 0.00 | ||
| Keurig Green Mountain (GMCR) | 0.00 | ||
| Cabot Oil & Gas (COG) | 0.00 |
Yandex (YNDX)
Why the Strength
We don’t blame anyone from crossing off Russian stocks from their buy list; the country’s history of turmoil and crony capitalism is anything but encouraging. But the fact is there have been more than a few big winners from that country; VimpelCom and Mobile Telesystems were leaders back in the 2003 bull market, and we think Yandex could be a winner in this cycle. The company is basically the Google of Russia, holding a commanding lead of the online search market in that country (about 62%, more than double Google, which is in second place). And business is very good—sales and earnings are steadily cranking higher (see table below), profit margins are huge, many of the sub-metrics look good (the number of advertisers rose 24% last quarter, while the revenue per advertiser also rose nicely), and cash flow is so strong that Yandex repurchased four million shares last quarter, part of their 12 million share buyback program. It’s not a new story, per se, but it’s one that big investors are familiar with, and that’s a big reason why 454 mutual funds currently own a total of 125 million shares in the company. As long as the global economy avoids any huge hiccups, we see no reason Yandex can’t grow for years; analysts currently see earnings rising about 30% this year and next.
Technical Analysis
YNDX rose as high as 41 when it first came public in mid-2011, but then the wheels came off, and it was still in the doghouse in April of this year, when it stood at 20. But it’s been mostly up since then; the stock surged to 30 by mid-May, then built a base during the market’s correction, before breaking out and rising into the mid-30s in recent weeks. We like the general tightness the stock has shown (seen better on its weekly chart) during the market’s latest weak spot, and think it’s buyable around here with a stop near 30.5. If you want to be safer, you could wait until the stock punches above 34.5 on big volume before buying.
YNDX Weekly Chart
YNDX Daily Chart
Yelp (YELP)
Why the Strength
Yelp remains one of our favorite growth stories, and more and more investors are thinking the same thing. The company is effectively an interactive, online version of the Yellow Pages; in the second quarter, an average of 108 million unique visitors used Yelp’s websites to look up information on a local business. And a recent study by Neilson showed that a whopping 89% of people that find a local business on Yelp make a purchase within a week. That’s leading to monstrous advertising opportunities, which is the company’s main source of revenue; Yelp is really the first firm to successfully apply the Internet’s social networking capabilities to local businesses. All of this has led to a quick ramp up in sales and, now, cash flow—revenue growth has been consistently cranking along in the 65%-ish range, while one measure of cash flow rose 400% in the second quarter. What’s even better, the company has shown that its growth in each market follows a predictable path; considering that many of its U.S. markets are only a few years old, and that international is just getting started (including its entry into Brazil last week), the odds strongly favor years of rapid growth ahead. We don’t think competition is meaningful, and the company is actually getting more “organic” traffic thanks to direct searches on its mobile apps (instead of from Google), which can only help. We think Yelp is going to get much, much bigger.
Technical Analysis
YELP’s chart can give some investors a nosebleed, but we think the stock is still early in its run. Shares just broke out from a huge IPO structure in late-June, and then proceeded to soar as high as 59 after a huge second-quarter report. It’s now three weeks into a digestion phase, and this pause could last another few weeks, possibly allowing the 10-week line (now in the mid-40s) to catch up. But, bigger picture, YELP only rallied six weeks from its breakout to its recent high, so, barring a market meltdown, we think another run is likely. You could start small around here, and use a loose stop in the low 40s.
YELP Weekly Chart
YELP Daily Chart
Stratasys (SSYS)
Why the Strength
Long on the fringes of mainstream technology, 3D printing is finally gaining considerable momentum. Nowhere is this more evident than in a recent earnings report by leading 3D printing specialist Stratasys. The company makes printers that use its patented Fused Deposition Modeling technique to build objects out of production-grade thermoplastic. Printing of metal goods is also possible, but Stratasys is still largely focused on plastics. The company is red hot on Wall Street at the moment, after reporting that second-quarter earnings rose 41% as revenue spiked 116% year-over-year. The company has been on an acquisition spree of late, snapping up large-object production firm Objet Ltd. and MakerBot during the past year. The successful integration of these firms is seen as key to ramping up growth for Stratasys, allowing the company to place full-year revenue guidance at $445 million to $480 million, well above the $441 million analysts were expecting. Finally, the company dropped a bombshell last week that could have a ripple effect throughout the 3D printing market: the company’s MakerBot unit announced a desktop 3D scanner that is now available for pre-order and will start shipping in mid-October.
Technical Analysis
While SSYS can be quite volatile at times, the stock has maintained an overall uptrend. After jumping out with a quick rally to 90 in late January, SSYS retreated quickly to the 60 level by the end of February. Shares have since been guided higher by support at their 10-, 25-, and 50-day moving averages. The most recent breakout saw SSYS plow through the century mark, with another pop higher today after some soothing analyst commentary. A period of consolidation is in order following the recent run; try to buy on a dip of a few points.
SSYS Weekly Chart
SSYS Daily Chart
Polaris Industries (PII)
Why the Strength
Polaris Industries is one of the world’s top makers of off-road vehicles. The company is best known for its line of all-terrain vehicles and side-by-side RANGER-brand utility vehicles. Polaris also manufactures snowmobiles and on-road vehicles such its Victory brand of motorcycles. In addition to Victory, Polaris is also on the verge of fully re-launching the iconic Indian Motorcycle—a brand that several companies have tried unsuccessfully to revive since the original company went bankrupt in 1953; Polaris may just have the savvy and wherewithal for the re-launch. The company has seen double-digit growth in both earnings and revenue for the past three years, mostly due to strong demand for its off-road vehicles and motorcycles in North America. In the most recent quarter, Polaris saw earnings rise 15% year-over-year, with sales advancing 12%—both figures besting Wall Street’s expectations. Furthermore, Polaris sees better-than-expected growth continuing through the end of the fiscal year, boosting its full-year outlook above the consensus estimates for the second time this year. Lastly, Polaris saw gross margins widen during the most recent quarter due to increased average selling prices and reduced product costs.
Technical Analysis
PII shares hit bottom with the rest of the market in March 2009, but after hitting a low near 9, the stock hasn’t looked back. In fact, PII has not closed a week below its 50-week moving average since July 2009! The stock has been relentless throughout its rally, more than doubling in value during the past two years. While PII got off to a slow start in 2013, shares broke out of a months-long consolidation in mid-May, pushing past resistance at 90. Two months later, PII bested the century mark, and has since gone on to test fresh multi-year highs above 110. The stock is currently firming up just below 115, as it consolidates into its rising 25-day trendline, with dips of a point or two offering the best entry points.
PII Weekly Chart
PII Daily Chart
Oshkosh (OSK)
Why the Strength
With its recent quarterly earnings report, Wisconsin-based heavy machinery manufacturer Oshkosh proved once again why it has been a winner for nearly a century. Despite threats of lower revenue due to sequestration in U.S. military spending—roughly 56% of Oshkosh’s revenue comes from the defense industry—the company not only reported higher-than-expected third-quarter results, it raised its earnings forecast for the full year. The results continued the company’s road to recovery as it deals with slow economic growth and shrinking government spending. During the past four quarters, Oshkosh has averaged earnings growth of 74%. What’s more, after three quarters of falling revenue, the company saw sales rise 2% in the third quarter. Providing the icing on the cake, Oshkosh lifted its full-year earnings forecast from $3.60 to $3.70 per share, well above analyst expectations for $3.13 per share. The company said it offset an 8% decline in defense revenue with a 16% jump in access equipment, an increase in sales of replacement equipment and recent price increases. As global economy recovery continues to creep along and with the worst of sequestration likely in the past, we believe that Oshkosh can do well going ahead.
Technical Analysis
After ending 2012 in fine form, OSK shares all but flatlined in 2013. The stock rallied sharply in January, topping out above former resistance at 40, but it was unable to hold that perch. OSK ultimately slipped into a trading range between 35 and 40, where it has spent the majority of the past several months. The stock showed signs of life in late July, edging north of 40 for the first time since early May. With buyers already engaged, the company’s Q3 earnings report provided all the catalyst OSK needed to break out to fresh multi-year highs. Shares have been in consolidation mode for the past several weeks, and we think you can buy in this area.
OSK Weekly Chart
OSK Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
Netflix is once again firing on all cylinders. The company is not only growing its subscriber base, but also focusing heavily on content acquisition and churning out Netflix Original Series. Marking a first for Internet streaming services, Netflix’s “House of Cards” received nine Emmy Award nominations, including best drama. Overall, Netflix received 14 Emmy nominations. More recently, the company announced that it now has 1.5 million paying subscribers in the U.K., with growth driven by the popularity of “House of Cards” and “Breaking Bad.” What’s more, the company’s recent content deals should help drive additional subscriber growth. Last week, Netflix announced deals with Scholastic (for children’s programming) and The Weinstein Company, including films such as Django Unchained and Silver Linings Playbook. According to Harvey Weinstein, the Netflix deal was “probably the biggest deal in the history of The Weinstein Company.” Netflix is back on top in terms of revenue and earnings growth as well. For the second quarter, the company reported a 20% jump in sales and a whopping 345% spike in earnings! While domestic subscriber growth appears to be slowing a bit—Netflix only added 630,000 new subscribers last quarter—the company is beginning to heat up overseas, especially in the U.K. With Emmy nominated series and plenty of fresh content on the way, we like Netflix’s prospects for continued growth.
Technical Analysis
NFLX has been on fire this year. The stock has largely stair-stepped higher, with periods of consolidation bounded by earnings-driven breakouts. It’s hard to talk about NFLX without mentioning the large short position (6.8 million shares, or 13% of the stock’s float). While some may see this as a concern, there is the potential for a squeeze situation and significant gains if these bears finally find it too painful to maintain their positions. We think the stock is buyable on any weakness.
NFLX Weekly Chart
NFLX Daily Chart
Melco Crown (MPEL)
Why the Strength
City of Dreams is the name of Melco’s flagship entertainment complex in Macau, featuring a 420,000 square-foot casino, 400 gaming tables, 1,200 gaming machines, four hotel towers and 1,400 guest rooms. The rooms, even running at 97% occupancy as they did in the second quarter, only account for 3% of revenues. But Melco plans to start building a fifth hotel tower by the end of 2013, because rooms are where the clients stay when they’re not in the casino—and the casino is the cash cow of the business, bringing in 93% of revenue! Melco also has two smaller properties in Macau, which bring in a third of the firm’s business, and it’s partnered with SM Group’s Belle Corporation to develop and operate a casino resort in Manila, the Philippines, which is expected to open mid-2014. So while today the bulk of revenues come from Chinese vacationers (which management categorizes as “premium mass-market”), in the future, the diversification into Southeast Asia will tap a new market, and thus enable continued growth. The second-quarter report in early August was excellent, featuring triple-digit earnings growth, and a record-high after-tax profit margin of 14.8%. That triggered a round of earnings revisions upward, and spurred buying in the stock that continues to this day. Institutional investors love the professionalism of management, the measurability of the firm’s business, and the very large prospects for growth beyond Macau. We like it.
Technical Analysis
Our previous holding of MPEL began with a buy at 14 in October 2012 and ended with a sell at 21 this June, as the stock succumbed to selling pressures on the broad market. But MPEL rebounded strongly in mid-July, breaking out to new highs in early August, building a short base around 26, and then continuing its ascent. This is a story of powerful institutional investor sponsorship, and we recommend getting on board on any normal pullback.
MPEL Weekly Chart
MPEL Daily Chart
Magna International Inc. (MGA)
Why the Strength
Magna International is riding the worldwide recovery in auto production. The company is a massive ($32.8 billion in annual revenue!) auto supplier, with more than 120,000 employees; its products include body, chassis, powertrain, closure, roof systems and much more. Thus, if the auto sector is ripping higher, Magna will do well, and that’s exactly what’s going on now. The firm’s second quarter report was another sparkler, with revenues up a solid 16% (compared to vehicle production gains for the industry of 7% in North America and -1% in Europe), and continued efficiency gains pushing earnings up 20%. And after the top brass indicated that the rest of the year looks good, analysts quickly hiked their earnings estimates (now $6.13 per share for this year, and $7.30 in 2014); that leaves the stock with a mild P/E ratio of 13 for this year, to go along with a decent 1.6% dividend yield. Clearly, Magna isn’t changing the world, but after years of sluggish sales, it’s possible the world economy accelerates and auto sales keep kiting higher, which will continue to boost Magna’s results. Investors are betting on it.
Technical Analysis
MGA has been in a beautiful, 45-degree uptrend during the past few months, cranking higher along its 25-day and 50-day moving averages. To be clear, the stock isn’t in the very early stages of its advance, however, this impressive upmove came after a 27-month consolidation, so we can’t say the end is necessarily nigh, either. The stock recently popped on earnings and has tightened up in recent days. Given its pattern, you could buy some shares here, but a dip toward the 25-day line (now at 78) would be a better entry.
MGA Weekly Chart
MGA Daily Chart
Keurig Green Mountain (GMCR)
Why the Strength
Green Mountain Coffee is a name known far and wide, first for its coffees and teas, and second for its Keurig single-cup brewers, a business the company acquired in 2006. That acquisition was a stroke of genius, because it gave Green Mountain a unique selling point that coffee alone (technically a commodity) couldn’t—and it drove revenues and earnings for years; the single-cup business now accounts for 90% of Green Mountain’s business. But the patents on Keurig’s K-cups expired in 2012, opening the door to a horde of competitors, and investors dumped the stock fearing the worst. But the worst didn’t come! Sure, sales and earnings growth slowed, but growth rates are still quite healthy. Furthermore, Green Mountain reported its highest after-tax margins in the first quarter of 2013 and its highest return on equity in the second quarter. And now comes Act Two, the introduction of the pot-sized pod brewing system. The new Keurig BOLT Carafe Brewing System, which will hit shelves in late autumn, will use a larger version of a K-Cup pod to make an eight-cup pot of coffee in about two minutes. The system is designed mainly for offices, where K-Cup penetration is still light (because it costs more than other technologies), but there’s no reason homeowners won’t buy it too, if they’re heavy coffee drinkers. The future is bright.
Technical Analysis
GMCR was a big winner from 2003 into 2011, when it hit 116. But fears of competitive single-serving cups sparked a wave of selling, which fed upon itself until it was exhausted more than a year later at the lowly price of 17. That was a decline of 85%, providing a valuable lesson to anyone who argued, “but it’s a good company.” At that point, buyers stepped in, and GMCR has been beating the market since. Most recently, the stock built a beautiful three-month base between 70 and 80, and then broke out last week, taking aim at its old high of 116. (That price is so old it should pose little resistance.) We think you can buy here.
GMCR Weekly Chart
GMCR Daily Chart
Cabot Oil & Gas (COG)
Why the Strength
We never use the word revolutionary when it comes to an energy explorer; there’s just too much uncertainty with the price of the underlying commodity to go there. But Cabot Oil & Gas is close; the wells it’s drilling in the Marcellus Shale in Pennsylvania are so lucrative (even at $3.50 natural gas, the company’s wells produce a 100%-plus return), and the firm’s acreage has so many targets (another 25 years of inventory!), that some analysts believe it can grow output 25% per year for the next decade. Imagine! In recent years, it’s been growing far faster than that, despite major infrastructure limitations in the area; production rose more than 40% in each of the past two years, and after second-quarter earnings, management upped its 2013 production forecast to 49%. With such a bright future, Cabot (no relation to us) has been inking long-term supply deals for some pipelines that will get up and running in coming years; the company has 615 MMcf per day in contracts for 2015, with more likely as time passes. Now, natural gas prices do remain a worry; they’ve slid a bunch in recent months and are hovering near $3.50; that said, Cabot is pretty well hedged for this year and next, and management didn’t seem too concerned about the price in the recent conference call. As long as prices don’t fall through the floor, Cabot has a very bright future.
Technical Analysis
COG hasn’t been a typical “hot” stock, but we like its pattern, and its relative performance line just moved into new high ground last week. Shares have effectively formed three tight consolidations, each one sitting on top of the prior one; the latest began after the stock popped to new highs in July following a bullish second quarter report. All during the pause, though, volume has remained light, and today, COG nosed out to new highs above 39. We think you can start a position here with a stop around 36, and look to add if the stock (and the market) show some upside power.
COG Weekly Chart
COG 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.
