Dog Days
Current Market Outlook
It’s the last week of August, and that means that many big investors (and more than a few small investors!) are at the beach and volume remains relatively light. Last week, though, was generally constructive for the market, but at this point, not much has really changed—the intermediate-term trend of the major indexes is sideways-to-down, the broad market is iffy and few stocks are pushing higher with any consistency. That’s not to say the bears are completely in control, either, but we continue to think a cautious stance makes sense—limiting new buying and holding some cash, but also giving your strong, profitable holdings a chance to catch their breath and resume their longer-term upmoves. We’re keeping the Market Monitor at a level 5 tonight.
Tonight’s list definitely has a more diverse feel to it, with a couple of materials stocks and some special situations. Our Top Pick is Alcoa (AA), which could morph into a leader if the recent strength in materials stocks is sustained. Shares just broke out from a nice base; try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| 58.com (WUBA) | 0.00 | ||
| Alcoa (AA) | 0.00 | ||
| Alexion (ALXN) | 0.00 | ||
| Autodesk (ADSK) | 229.00 | ||
| CyrusOne Inc (CONE) | 0.00 | ||
| Live Nation Entertainment, Inc. (LYV) | 0.00 | ||
| Southern Copper (SCCO) | 0.00 | ||
| Supernus Pharmaceuticals (SUPN) | 52.50 | ||
| Westlake Chemical Corp. (WLK) | 0.00 | ||
| Yelp (YELP) | 41.30 |
58.com (WUBA)
Why the Strength
The Chinese internet can be a harsh environment for any company wanting to compete with Alibaba and JD.com, but 58.com has dug out a nice niche for itself by concentrating on local merchants and consumers. The company’s website offers consumers in about 380 Chinese cities a huge amount of information on local housing, jobs, used goods, autos, pets, tickets, yellow pages and services. 58.com continually vets information for accuracy, and its success in keeping its website easy to use and up to date has allowed it to build a reputation that attracts both merchants and consumers. The company gets the bulk of its revenue from online advertising, with a substantial chunk coming from membership account dues paid by merchants. Revenue grew by 170% in 2015, 59% in 2016 and by 24% in Q1 and 31% in Q2. Earnings popped 126% higher in Q1 and 371% higher in Q2, and analysts are forecasting 54% EPS growth this year and 80% in 2018. 58.com boasts 130 million monthly unique visitors on its website and mobile apps. The company’s August 21 earnings report was a huge success, exceeding the high end of guidance, and investors took notice.
Technical Analysis
WUBA (which spells “58” in Chinese) has been on a roll since February, when it blasted off from a low of 28 following a multi-year correction. The stock reached 47 in May, took a break for a month, then pushed out to new highs in July and August. The reaction to the August 21 earnings report was a gap up from 53 to 64 on almost 800% of average volume. WUBA corrected by almost 5% today in profit-taking that followed its sprint to 68 last Friday. If you like the story, this pullback is a good buying opportunity. You can start small and average up as the stock makes new highs. A loose stop around 55 will give this volatile issue a chance to move.
WUBA Weekly Chart
WUBA Daily Chart
Alcoa (AA)
Why the Strength
After a lackluster performance for the first half of 2017, we’re starting to see more metals and mining stocks perk up, and Alcoa could be a big-cap leader of the group. Alcoa is a leading producer of aluminum and alumina (the engineering products arm was spun-off into what’s now known as Arconic), and business has perked up as the global economy has kept demand on the upswing. In the second quarter, the firm’s realized prices of aluminum and alumina were up 19% and 18%, respectively, from a year ago, which drove revenues up 23% and EBITDA up a solid 56%! And it’s looking like even higher prices are on the way, as production cuts in China (in an effort to curb pollution) pushed aluminum prices to nearly six-year highs last week, including a 20% rise just in recent weeks! Alcoa is aiming to step in where China’s supply falls off, as it’s taken steps to restart nearly two-thirds of one key smelter (restart to be complete in Q2 of 2018). Eventually, of course, enough smelters will be up and running to push prices back down some, but the stock is strong today because investors think that time is relatively far off. Plus, it’s worth noting that other metals (like copper) are also strengthening, so the accelerating global economy could be having more of an impact than many believe. Whatever the reason, the next year looks bright for Alcoa.
Technical Analysis
AA rose from 23 when it was spun off last November to 40 in February, before the “Trump trade” stocks faded. Shares dipped to 31 in March and banged on the 30 area three more times (April, May and June) before the buyers returned for good. The advance of the past two-plus months has been excellent and relatively persistent, including a good-volume move to new highs last week. Expect volatility, but we’re OK with a small purchase here or on dips, and a stop near 36.
AA Weekly Chart
AA Daily Chart
Alexion (ALXN)
Why the Strength
Alexion Pharmaceuticals develops treatments for ultra-rare, life-threatening diseases. In many cases, its therapies represent the only remaining hope for patients. The stock was one of the market leaders during the biotech rally from 2010 to 2015, largely because revenue and EPS surged by 380% and 430%, respectively! Both growth and the stock sloughed off in recent years, but shares are moving higher again after a Q2 beat and raise, indications of reaccelerating revenue and EPS growth and a strategic refocus (including a new CFO), which should lead to better discipline managing the pipeline, R&D spending and acquisitions. The company’s main drug is Soliris, which is approved for the treatment of paroxysmal nocturnal hemoglobinuria (PNH), an acquired disease that destroys red blood cells, and atypical hemolytic uremic syndrome (aHUS), a genetic disease caused by uncontrolled activation of part of the immune system. Soliris was also just approved in the E.U. for treatment of Refractory Generalized Myasthenia Gravis (gMG), a rare subset of patients with an autoimmune neuromuscular disorder. Marketing applications in the U.S. and Japan are also under review, and approvals appear likely. Analysts see revenue growth picking up from 18.4% last year to 21% this year, and 25% in 2018. Add in earnings growth of around 15% annually (up from -1% last year) and new patent protection on Soliris extending through 2027, and it’s easy to see why money is flowing in and price targets are going up.
Technical Analysis
After topping at 209 in July 2015, ALXN formed a pattern of lower highs and lower lows for the next couple of years. For the next two years, the pattern was lower highs and lower lows. The stock eventually found a bottom at 96 in May, shortly after reports surfaced that several executives were leaving. Buyers stepped in when analysts turned bullish, especially after Biogen’s CFO joined ALXN in mid-June. Shares were back to their May peak of 133 by late July, then blasted through that level following the release of second-quarter earnings. They’ve been consolidating in a tight range all month, a good sign. If you’re game, you could nibble here with a stop in the mid-120s.
ALXN Weekly Chart
ALXN Daily Chart
Autodesk (ADSK)
Why the Strength
Autodesk remains one of the market’s best growth stories that few investors have hard of. Part of that is probably because the reported numbers (see below) look terrible, but that’s due to the firm’s business model transition from perpetual licenses (which are reliant on upgrades and product cycles) to a cloud- and subscription-based model (which produces a higher lifetime customer value as churn is reduced, but in the near-term, hits the top line as revenue is recognized over time). The stock is strong today as the just-reported second quarter confirmed that the company is on the path to success—total subscriptions rose 4.6% from the prior quarter (to 3.44 million), driven by a big 20% quarter-over-quarter gain in so-called new model subscriptions. Similarly, the firm’s recurring revenue is spiking, reaching a $1.83 million annual rate in the quarter (up 23% from last year), driving by a 94% hike in new model recurring revenue. The real payoff, and what big investors are focused on, is the pay off in the years ahead: As the dominant player in the 3D design software field, it’s just a matter of continuing the transition and continuing to attract new customers, all while spending remains in check. Management is aiming for a whopping $6 per share of free cash flow in 2020, rising to $11 a couple of years later. Autodesk’s story reminds us a lot of Adobe’s a few years ago, when that stock was in the early innings of a big, sustained advance.
Technical Analysis
ADSK originally broke out last September, but it had a choppy advance through mid-April of this year, when it accelerated higher and then gapped up on earnings in May. Since that time, the stock has built a solid three-month base with resistance near 115, but now it looks ready to get going if the market allows it—ADSK lifted last Friday on good volume, though was yanked back into its base today, which isn’t unusual given the tepid market. We’re OK with a nibble here and a stop under 105.
ADSK Weekly Chart
ADSK Daily Chart
CyrusOne Inc (CONE)
Why the Strength
CyrusOne is a major data center REIT, and it remains on a firm growth track as technology’s major trends (to the cloud, mobile and data collection) require more data center capacity. Moreover, the business model is excellent, with tons of recurring revenue, built-in growth (as firms expand their usage; CyrusOne has nine of the 10 largest cloud providers as customers) and dependability (few customers leave once they sign up, and the average remaining lease term is now 57 months). The company’s stock is strong today for a couple of reasons. First and most importantly, business is good—CyrusOne’s second-quarter sales and cash flow topped expectations, and the firm had a great quarter in terms of new leases (451 new leases for $30 million of annualized revenue) with more on the way ($49 million of annual revenue on leases in the backlog). The company also nudged up its forecast, now looking for cash flow growth of 15% this year as it aims to meet growing demand through M&A and expansion of some current facilities. Beyond that, there’s been some movement toward dividend stocks in recent weeks, which has helped; CyrusOne and other data center REITs have usually been driven more by growth than income, but the stock’s 2.7% yield (sure to be hiked again next year) is a plus. It’s not going to set the world on fire, but this remains a solid long-term growth story.
Technical Analysis
CONE slipped from a high of 57 last August to a low of 39 in November before beginning to crawl back. The recovery has been slow, but relatively steady, and shares rallied to 59 by June. That began what ended up being an eight-week consolidation, which ended a couple of weeks ago when CONE rallied five straight days on big volume to new highs. We think dips are buyable with a stop in the upper 50s.
CONE Weekly Chart
CONE Daily Chart
Live Nation Entertainment, Inc. (LYV)
Why the Strength
We’re not exactly huge Shania Twain fans here at Cabot, but we recognize that the country music mega-star draws massive crowds. And that her upcoming 40-city tour is just one of many big entertainment events that are helping drive shares of tour producer Live Nation higher. Other reasons include another better-than-expected report in Q2 (the sixth in a row), expectations for a second consecutive year of double-digit revenue growth in 2017, and surging free cash flow (totaling nearly 85 cents per share in the first half of the year). Of course, the real headlines are all the artists that Live Nation is selling performances for right now, which include Green Day, Lady Gaga, JAY-Z, Coldplay, Katy Perry, Bruno Mars and Justin Bieber. All told, Live Nation operates almost 200 performing arts venues and it has promoted over 26,000 events for 3,200 artists over its history. Despite rumors that both Facebook and Amazon will get into the ticket sale business, the market appears confident in Live Nation’s continued success. The company’s scalable live platform allows it to generate revenue from concert promotion (roughly 80% of revenue), ticket sales (it owns Ticketmaster, which generates around 17% of sales), and sponsorship and advertising. The underlying trends all point toward Live Nation being the best in its business. It’s a neat story, and one of the more compelling entertainment stocks out there.
Technical Analysis
LYV chopped around in 2014 and 2015 and fell sharply with everything else into early 2016, but it’s been trending higher since. The stock rallied back to 28 last July, and while it eked out a couple of higher highs after that, it was still at 28 in March. But since then, the stock has changed character, lifting higher with just one dip to its 50-day line. Shares surged on earnings two weeks ago and have held those gains since—we’re OK with a small buy here, or just keep it on your watch list.
LYV Weekly Chart
LYV Daily Chart
Southern Copper (SCCO)
Why the Strength
Arizona-based Southern Copper mines, smelts and refines copper and other metals and minerals from mines in Central and South America. Despite the company’s significant production of molybdenum, silver, zinc and other metals, Southern Copper is a copper story and the company is doing well because copper prices are rebounding from their 2016 lows. Copper is an economically sensitive commodity, and prices have been getting support from the improving strength of the Chinese economy, which is one of the major markets for copper, as well as a global rise in demand. Southern Copper’s stock got a boost on July 25 after a quarterly earnings report that featured a 34% jump in earnings on a 15% gain in revenue, primarily due to a 22.5% jump in the price of copper. With rising copper prices boosting earnings, analysts expect EPS to grow by 63% this year. This issue of Cabot Top Ten Trader includes three commodity companies, all of which are getting support from an improving global economy. Copper prices fell from 2011 to 2016, but had a big rally after the U.S. election and, after a few months of base-building, have recently skirted to 30 month highs, which should keep the company’s earnings prospects bright.
Technical Analysis
SCCO hit a high of 46 in early 2011, but declined steadily to 22 at the start of 2016. The recovery got started in November 2016 and SCCO rose to 39.5 in February before a four-month consolidation that found support at 33. The good July earnings report kicked the stock to multi-year highs, and after a brief correction to 37 earlier this month, SCCO has pushed out to new highs, including a constructive volume spike on August 15. If the global economy holds up, SCCO (and its 1.4% dividend yield) should continue to do well. Look for a pullback to 41 as an entry point and keep a stop around 37.
SCCO Weekly Chart
SCCO Daily Chart
Supernus Pharmaceuticals (SUPN)
Why the Strength
Supernus Pharmaceuticals was spun out of Shire and became a pure-play company focused on treating central nervous system diseases. It currently has two treatments on the market (both approved in 2013): Oxtellar (22% of Q2 revenue) for epilepsy and migraine, and Trokendi (78% of Q2 revenue) for migraine. The company’s technology also forms the backbone of six other partnered treatments, including four with Shire (Carbatrol, Adderall, Equetro and Intuniv). Despite the partnerships, Supernus generated the bulk of its 46% revenue growth in 2016 (royalties only accounted for 2% of sales). Investors are increasingly confident in the current portfolio’s growth potential, as well as the pipeline. Trokendi’s April launch in migraines helped drive better-than-expected results in Q2 (revenue was up by 47%, to $75.8 million, while EPS rose by 78%, to $0.32). Supernus just won its second patent infringement case involving Oxtellar, which now appears protected until 2027. And its pipeline includes four candidates targeting Biopolar Disorder (Oxtellar), Impulsive Aggression (SPN-810), ADHD (SPN-812) and Depression (SPN-809). Both SPN-810 and SPN-812 are potential billion-dollar blockbuster treatments for the non-stimulant ADHD market. Phase III trials for both should be enrolling through early 2018, with potential data readouts later in the year. Even without those candidates, we think estimates for 34% annual revenue growth over the next two years will be enough to keep institutional investors interested.
Technical Analysis
SUPN typically trades with pops and drops of two to three points, with the occasional shakeout move extending 10 points down. The last one of those was late last year when the stock retreated from 27 to 17 in October. Since then, the trend has been more-or-less up with shares reliably bouncing off their 50-day line. The stock began a flat base in June, bobbing between 40 and 45, and tried to break out two weeks ago but the choppy market yanked it back down. Still, SPNS looks in good position if and when the market gets going.
SUPN Weekly Chart
SUPN Daily Chart
Westlake Chemical Corp. (WLK)
Why the Strength
Westlake Chemical is a manufacturer of basic chemicals, which isn’t usually a sector filled with growth stocks. But Westlake is thriving right now because crude oil prices, which peaked back in 2013/2014, bottomed in early 2016 and haven’t rebounded. Westlake makes PVC, caustic soda, polyethylene and other products using oil and natural gases, so low feedstock prices are good news. When Westlake reported quarterly results on August 3, revenue was up 82%, mostly as a result of the company’s $3.8 billion takeover of Axiall last year at this time after a multi-year battle. Earnings were down slightly, but investors see Westlake’s move as evidence of management’s aggressive expansion strategy. Investors were also pleased by management’s 10% increase in the dividend to 21 cents per share, which is an annual yield of about 1.1%. With an improving economy supporting increased demand and a bonus from low prices for raw materials, Westlake is a steady performer.
Technical Analysis
WLK is rebounding from a correction from 98 in September 2014 to 39 in June 2016. The stock turned around when the Axiall takeover succeeded and ran to 68 in March 2017, followed by a three-month consolidation. WLK rallied to 70 in July, and built a tight base there until the good revenue and dividend news kicked off the latest rally. Now trading around 74, WLK should be a steady performer. Buy anywhere under 74, with a stop in the high 60s.
WLK Weekly Chart
WLK Daily Chart
Yelp (YELP)
Why the Strength
Yelp has always had a compelling story, as its platform connected people with local businesses, and thus was able to tap the monstrous local advertising market (think Yellow Pages on steroids). But after a good few years, a bunch of bad press, competition (low barriers to entry in this business) and mission creep (like getting into the food delivery business, etc.) caused investor perception to fade and earnings to get hit. Now, though, through a focus on execution, better sales force productivity, a decrease in reliance on Google traffic (less than one-third now comes from Google) and some new ideas (like Request-A-Quote for many local businesses, which grew 50% sequentially in Q2!) are helping the bottom line and re-attracting some big investors. The stock is strong today after second-quarter earnings easily topped expectations, thanks to continued traffic growth (app visitors rose 22%, reviews lifted 24%), continued increases in local business clients (+24% to 3.75 million) and a deal to sell its Eat24 subsidiary to GrubHub (for $288 million, twice what it paid for it two years ago). Revenue growth has moderated, but should remain in the 20%-range going forward, while earnings and cash flow pick up steam. It’s not the young buck it once was, but Yelp has the makings of an interesting turnaround situation.
Technical Analysis
YELP fell from 102 in 2014 to 15 last February, recovered to 43 last October then slipped back to 27 in May. Shares recovered a bit over the next couple of months, but still were well below their highs and below their 200-day line. But the rally on second-quarter earnings (a two-day, 30% ramp on huge volume) and its action since (very tight, not giving up any of those gains despite the shaky market) has changed the outlook. There’s still some resistance near 43, but if you’re game, you can start small here or on dips.
YELP Weekly Chart
YELP 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.
