More to Choose From
The market encountered a little wave of selling last week, with a big reversal on Tuesday and some follow-through selling on Thursday. But leading stocks held up well, and in fact, we continue to see more and more stocks joining the party. Sure, it’s not a wild bull market, and yes, there’s always the chance that post-Labor Day some big investors will sell into the recent rally. But there’s also the chance that this under-the-radar advance (most investors still believe the market is languishing) will gather steam! As always, it’s best to go with the evidence, and today, that evidence is bullish.
The expanding leadership can best be seen in our recent Top Tens, including this week’s list, which has all kinds of stocks and sectors. Our favorite of the week is Teradata (TDC), a leading play on the “big data” trend. The stock has stormed back this month and looks ready to assault new-high ground soon.
| Stock Name | Price | ||
|---|---|---|---|
| Chico’s FAS (CHS) | 0.00 | ||
| The Hain Celestial Group, Inc. (HAIN) | 0.00 | ||
| IACI (IACI) | 0.00 | ||
| JAH (JAH) | 0.00 | ||
| Mellanox Technologies (MLNX) | 92.00 | ||
| NetSuite, Inc. (N) | 0.00 | ||
| Sherwin-Williams (SHW) | 526.09 | ||
| SolarWinds (SWI) | 0.00 | ||
| Teradata Corporation (TDC) | 0.00 | ||
| TFM (TFM) | 0.00 |
Chico’s FAS (CHS)
Why the Strength
Retailers have been making waves in the market, and Chico’s FAS is another retailer that’s making its debut in today’s issue. Chico’s has more than 1,250 boutiques that sell through four divisions, each of which has its sights on a well-defined demographic. The more than 600 Chico’s stores (and 80 outlets) aim at women of moderate to high income who are 35 or older. White House/Black Market stores target moderate to high income women of 25 years or more in more than 365 stores and 25 outlets. Soma Intimates sell lingerie, loungewear and beauty products at 165 boutiques and 15 outlets. And recently acquired (September 2011) Boston Proper is a direct-to-consumer retailer that sells “daring, modern fashion with a sensual feel” through catalogs, direct mail and online. Chico’s reported calendar Q2 earnings on August 22, and the results hit revenue targets and beat earnings estimates. With 11% sales growth in fiscal 2011 and 15% in fiscal 2012, Chico’s (and its 1.4% forward annual dividend yield) appears to be nicely focused on its various demographic targets and getting great results.
Technical Analysis
CHS has been up and down over the past couple of years, hitting 16 in April 2010, July 2011 and again in April 2012. But these highs were undercut by lows at 8.5 in August 2010, 10 in November 2011 and 14 in June 2012. Despite this historical volatility, CHS has had a great 2012, gapping up in February, then trading sideways for five months until news of the Boston Proper acquisition sent it to new highs. With that uptrend already established, the good earnings news gapped CHS up from 17 to 18 on huge volume. CHS looks good on any dip below 18.
CHS Weekly Chart
CHS Daily Chart
The Hain Celestial Group, Inc. (HAIN)
Why the Strength
Many past market winners have had new retail concepts (either entire stores or new brands of clothing or food) that were adopted by the masses, pushed sales and earnings higher and attracted a wave of buyers to the stock. Hain Celestial could be the next in line, as its organic and natural foods and beverages are proving to be a big hit both in the U.S. and, thanks to some recent acquisitions, in the U.K. as well. (Brands include Health Valley, Earth’s Best, Farmhouse Fare, Sunripe, Garden of Eatin’ and many more). There’s nothing particularly unusual about Hain’s products or business model, but it’s succeeded at having terrific distribution for its products and has continued to make inroads into new venues, all of which have shown up in its bottom line. Sales have generally been cranking ahead at 20% to 30% clips, while earnings are growing faster, and in the latest quarterly report, management guided very bullishly for the coming 12 months—earnings are expected to rise 25%, though given the company’s history of beating estimates, even those positive numbers are likely conservative. It’s not changing the world, but Hain looks to have many years of growth ahead of it as demand for organic and healthier foods expands.
Technical Analysis
HAIN was a good-not-great performer in 2010 and 2011, but it has kicked into gear this year, really outperforming the market. The stock rose 12 weeks in a row into early May, when it effectively topped out for nearly four months; HAIN actually came under a decent amount of distribution even though the stock went sideways. But last week changed all that, with shares exploding higher on gargantuan volume (nearly eight times average!). If you’re game, try to buy some on a dip of a couple of points, with a stop in the low 60s.
HAIN Weekly Chart
HAIN Daily Chart
(IACI)
Why the Strength
Many of the leaders of this market advance have new, revolutionary products that are driving growth higher. But some, like IAC Corp., are simply good businesses with solid growth, management (in this case CEO Barry Diller) and prospects. The company is actually a conglomerate of many Internet businesses, ranging from online dating (it owns Match.com) to general search (Ask.com) to local search (like Citysearch) to information (Dictionary.com). Combined, the firm owns a few dozen properties that garner more than one billion visits per month, so IAC is no shrimp, and it’s growing all the time, both via organic growth (in the 10% to 15% range) and via acquisitions; the company just announced the acquisition of About.com, and the firm keeps plenty of cash on hand ($807 million at the end of the second quarter) to pounce on synergistic opportunities. The strategy has certainly been a success so far, with sales and earnings kiting higher (see table below) and analysts estimating the bottom line will grow in the 25% range both this year and next. As we said above, there’s not a single ruling reason to own IAC, but this solid company is executing on its plan, and its growth, reasonable valuation (20 times earnings) and a nice dividend (1.8% annual yield) should keep big investors interested.
Technical Analysis
IACI is something of a sleeper stock; shares have enjoyed an incredible run since the bear market bottom of 2009 but few have even heard of the company or the stock. Part of that is the firm’s business model, of course, but part of it is because IACI hasn’t had many huge, eye-opening rallies during that time—it’s been more of a steady climber. Right now, we think shares are at a great entry point, with the stock having pulled back calmly since a huge-volume earnings move in July.
IACI Weekly Chart
IACI Daily Chart
(JAH)
Why the Strength
When you think of strong stocks, you likely think of the big ideas behind them—cloud computing, big data, new networking technologies and the like. But Jarden is the exact opposite of that; it’s succeeding by selling many consumer basics (its brands include Crock-Pot, Sunbeam, Coleman and Mr. Coffee) and by watching its costs like a hawk. Sales, in fact, were flat during the second quarter, and top-line growth rarely gets out of the single digits. But with commodity prices fading and efficiencies increasing, profit margins are ramping up and cash flow is gushing; management is targeting $5 in earnings per share by 2014, up from $3.43 in 2011. And the top brass isn’t afraid to help out shareholders, either; the stock pays a small dividend (just 0.7% annually), but earlier this year the company bought back a whopping 12 million shares (13% of the company!) in one fell swoop! All in all, we view Jarden as something as a “defensive-plus” kind of stock; it has all the qualities of a firm whose business will succeed even in tough economic times ... but it also has a steady growth aspect to it, especially as some initiatives boost margins. It’s not going to be a big winner, but we see higher prices ahead.
Technical Analysis
JAH has a great chart. The stock built a two-year base below the 38 level, broke free from that earlier this year (after the huge share repurchase), then built a new two-month base in May and June before heading to higher highs. Today the stock has tightened up just south of 49, and while a dip of a point or two is possible, there doesn’t appear to be much will among sellers for a sustained selling wave. If you want in, buying between 47 and 49 makes sense, with a stop around 45.5.
JAH Weekly Chart
JAH Daily Chart
Mellanox Technologies (MLNX)
Why the Strength
Mellanox Technologies looks like the leading “glamour” stock of the current market cycle—it isn’t as institutional quality as some mega-cap leaders (like, say, Apple), but has tremendous growth and is under-owned by big investors. (It reminds us a lot of Crocs and First Solar in 2007—stocks that had new products that produced tremendous growth for a few quarters before the stocks topped out.) In Mellanox’s case, those products are best-in-class connectivity solutions (its InfiniBand adapter Connect-IB delivers over 100 gigabits/second of data) that are all of a sudden in gigantic demand in environments that are craving more speed and less latency for cloud computing, storage, Big Data and other high-performance applications; the company’s products seem to be a full generation ahead of any competitors. And that has caused a stampede of demand—a couple of quarters ago, analysts thought Mellanox might earn $1.50 or maybe $2 per share this year, but after back-to-back blowout quarterly reports, those estimates are pushing $4 per share! Who knows how high they’ll get! Of course, in this industry, where the product life cycles are short and innovation is constant, the company will probably meet with greater competition at some point. But for now, it looks like this firm is actually increasing its lead in a rapidly growing industry. It’s not a buy-and-hold-forever stock, but if the market’s advance continues, Mellanox should continue its huge upmove.
Technical Analysis
MLNX isn’t in the first inning of its overall advance—one glance at the chart will tell you that. Still, despite its big rise, we can’t say the stock is near a top, either. Shares have handled themselves very well after both of their huge, earnings-induced gaps higher this year (one in early May, the other in early August), including during the past few weeks, when the stock has refused to pull back more than a day or two before finding buyers. It’s hard to buy a big position at these levels, but our advice is to start small (maybe one-third to one-half of what you’d normally buy) and look to round out the position if MLNX continues to move up.
MLNX Weekly Chart
MLNX Daily Chart
NetSuite, Inc. (N)
Why the Strength
Cloud computing has made the transition from being the “Next Big Thing” to being simply the preferred way of doing business for most companies. NetSuite, a small San Mateo, California software company, is making great strides in providing customer relationship management (CRM), professional services automation (PSA) and e-commerce solutions in an integrated suite that integrates all of client’s functions. The company’s success is apparent in its annual revenue growth, which increased from 9% in 2009 to 16% in 2010 to 22% in 2011. Earnings growth was 100% in Q1 and 200% in Q2. Institutional ownership, another measure of the attractiveness of the company’s business proposition, has increased steadily since 2008, and has just reached 275. That’s not a huge number in institutional sponsors, so there’s plenty of room for support from the whales. With a forward P/E ratio of 254, N is not cheap. But cash flow is much larger than reported earnings (revenue is recognized over the life of a contract) and revenue that comes mostly from subscriptions and support (84%) paints a picture of future revenue that’s likely to build steadily. NetSuite is a strong business.
Technical Analysis
N has a very choppy chart, with big pullbacks in July and August 2011, and smaller ones in November and December 2011, and April 2012. But the general trend is higher. The stock gapped up on earnings on July 27, then ripped to a new high close of 58 on August 7. Since that high, the stock has been correcting in an orderly way, and got support from its rising 25-day moving average last Friday. With the rising 25-day providing lift, N looks like a good buy right here.
N Weekly Chart
N Daily Chart
Sherwin-Williams (SHW)
Why the Strength
Cleveland, Ohio-based Sherwin-Williams uses a logo that shows a can of red paint pouring onto a globe and the tagline “Cover the Earth.” The company’s paints and coatings certainly have global coverage, protecting houses (interiors, exteriors and decks), industrial and marine products, consumer goods, airliners and automobiles. Paint sales through the company’s retail Paint Stores group accounted for 55% of 2011 sales, and the company has plans to enlarge its chain of outlets in the U.S. and the Caribbean. Sales in the Global Finishes division are world-wide, and will benefit from any increase in the international economy. There isn’t much revolutionary about paint, although Sherwin-Williams is researching new formulations and delivery modalities all the time. The key to the company’s success has been strong sales through its own stores and via other outlets (like Lowes and Home Depot) that serve the U.S. consumer segment, where both maintenance and new construction paint sales have been strong. The company’s Q2 earnings report featured a 31% earnings increase on just a 9% gain in revenue, a result of the price increases that Sherwin-Williams pushed through, which fell right to the bottom line.
Technical Analysis
SHW has been in an uptrend since early 2009, but the stock began to increase its momentum in October 2011, advancing at a faster rate on increased volume. SHW has kept this higher rate of advance going since then, dipping to its 50-day moving average in December 2011 and again in May 2012. A seven-week consolidation from the second week of June through the fourth week of July reset the stock and it pushed out to new highs in late July. SHW has been digesting its gains since August 9, and looks like a good buy for a long-term investor near 140 with a stop at 130.
SHW Weekly Chart
SHW Daily Chart
SolarWinds (SWI)
Why the Strength
With four appearances in 2011 and five (so far) in 2012, SolarWinds is making quite a mark in Cabot Top Ten Trader. The company’s lineup of IT management software is very attractive to the people who manage corporate computer networks, reducing system downtime, increasing performance and monitoring patches, settings and memory storage. The company’s appeal shows up in its consecutive years of 30% revenue growth in 2010 and 2012 and its 40% revenue bump in Q2. The company’s after-tax profit margin of 38.7% in Q2 is just the latest of 14 quarters of margins greater than 30%. SolarWinds has more than 95,000 customers worldwide, ranging from Fortune 500 companies to small businesses. Customers are often attracted by the free downloads of the company’s software, then sign on for licenses (which accounted for 47% of 2011 revenues) and maintenance and other services that brought in the other 53%. And they stay signed on, leading to a stream of recurring revenue.
Technical Analysis
After a strong rush from the middle of 2010 to the middle of 2011, SWI started stair-stepping its way higher, with strong rallies punctuated by consolidations and corrections. A big gap up in late April gave way to a mild, three-month correction that didn’t fill the gap. A July 25 leap higher was followed by a couple of weeks of follow-on gains. SWI has been trading sideways between 54 and 56 for three weeks, and the stock’s 25-day moving average is just catching up. History says that SWI only makes big progress on earnings, so you can watch the stock and try to get in on a dip below 54, which will put you in good shape when the next quarterly results are released.
SWI Weekly Chart
SWI Daily Chart
Teradata Corporation (TDC)
Why the Strength
This data intelligence old-timer was founded in 1979, came public in 1986, and has at times been owned by both NCR and AT&T. But today it’s flying on its own, and flying very well, thanks to the never-ending growth of data and the need to find intelligence in it. Decades ago, the buzzwords were Parallel Processing; today, the buzzwords are Big Data. But the goal is the same, to store data, to process it, and to find meaning in it for big customers, which today include names like Barnes and Noble, Electronic Arts, GoDaddy, LinkedIn, Netflix, the State of Michigan, Telefonica Czech and the National Customs and Tax Administration of Peru. Revenues have grown every year of the past decade, with the exception of a slight hiccup in 2009 and earnings have grown every year since 2006. Business, as the list above suggests, is global, with 61% of revenues coming from the Americas, 23% from Europe, Middle East and Africa and 16% from Asia and Japan. Profit margins are fat, and the future is bright. The fact that this company can grow revenues at double-digit rates while most other technology companies born in 1979 are long forgotten tells us two things. First, it’s in the right business, and second, it’s very well managed, no doubt because management uses the company’s own products!
Technical Analysis
TDC’s main trend has been up for years, but it’s seldom been attractive enough to qualify for Cabot Top Ten Trader. Today, however, a few main points make it interesting. First is the high-volume breakout in early May that failed; the market then dragged the stock back down. Second is the early-July collapse that shook out all the weak hands; a month later a high-volume surge erased that loss and more, taking the stock within spitting distance of its April high. And since then there’s been a calm consolidation, suggesting the stage is being readied for a breakout to new highs.
TDC Weekly Chart
TDC Daily Chart
(TFM)
Why the Strength
A typical U.S. supermarket has an after-tax profit margin of about 1.5%—think Kroger, with $90 billion revenues last year, or Safeway, with $44 billion. Higher up the scale a bit are stores like Gelson’s, Natural Grocers and Weiss Markets (none of which tops a billion in sales), with profit margins averaging 3.5%. Above them is iconic Whole Foods Market, with $11 billion in sales and a profit margin of 4.3% in the latest quarter (in 2011 its average was 3.5%, so that’s a healthy jump). And at the top of the heap is The Fresh Market, with an after-tax profit margin of 5.9% in the latest quarter and an average in 2011 of 4.5%. The way to get high margins is simple; raise prices. The trick is in getting customers to return to pay those prices again and again, and here The Fresh Market’s strategy is to provide a shopping experience—more European than at most U.S. markets—that emphasizes fresh premium perishables and top-notch customer service. So far, it’s working, as the company has more than 115 stores in over 29 states and plans to blanket the country in time. Both the company and the stock are far less well known than Whole Foods, and thus offer an opportunity for investors. In fact, analysts are estimating that The Fresh Market will grow earnings 27% in 2013 and 24% in 2014. The next quarterly report is due out Wednesday morning.
Technical Analysis
TFM came public in November 2010 at 22, closed its first week at 32, and a year later it was at 41, on an uptrend that hasn’t stopped yet. The May 2012 breakout to 58 on big-volume was our wakeup call; TFM first appeared here in June, trading at 57, and it appeared again in July, at 56. Early August brought the expected breakout—to 62—and the consolidation since presents another entry point. TFM won’t be a rocket-shot, but everyone’s got to eat! You can buy a little ahead of earnings, and look to buy more if the reaction is positive.