Some Breakouts—Some Set-Ups
Current Market Outlook
The divergence continues, with the broad market looking increasingly weak. Even the rally last week couldn’t lift many stocks off their bottoms. So what comes next? Optimists may claim that low interest rates mean there are no attractive alternatives to stocks, but pessimists will note that divergences such as these seldom end well. Thus our market monitor remains unchanged—in slightly positive territory. You can still make money in this market, but more than ever, skillful stock-picking, combined with proper entry timing, is critical. So we urge you to study numerous individual stocks carefully. Try to buy on normal pullbacks. And above all, keep losses small if a stock doesn’t do what you hired it to do. Today’s roster includes some strong breakouts and a handful of set-ups, and our Editor’s Choice is Vantiv (VNTV), which vaulted out to new highs last week on a positive earnings report and is riding a fine trend of long-term growth.
| Stock Name | Price | ||
|---|---|---|---|
| Zoës Kitchen (ZOES) | 0.00 | ||
| WisdomTree (WETF) | 0.00 | ||
| Vertex Pharmaceuticals (VRTX) | 230.36 | ||
| Vantiv (VNTV) | 0.00 | ||
| ServiceNow (NOW) | 341.86 | ||
| Masco (MAS) | 0.00 | ||
| ICON plc (ICLR) | 0.00 | ||
| Equinix, Inc. (EQIX) | 547.73 | ||
| Buffalo Wild Wings (BWLD) | 0.00 | ||
| Anacor Pharmaceuticals (ANAC) | 0.00 |
Zoës Kitchen (ZOES)
Why the Strength
There have been many new entrants into the fast-casual restaurant sector in recent months, but Zoës Kitchen is our favorite—its fresh (lots of fruits, vegetables, olive oil and lean proteins), naturally prepared Mediterranean cuisine (grilling and baking, no microwaves or fryers) has been a hit in the 16 states (mostly through the south) it currently operates in. There are many attractive investment characteristics to Zoës: First, with its top 20 restaurants spread out in seven different states, it’s clear this is a concept that has broad appeal. Second, the firm has had great success at existing locations (same store sales up 5.7% in the most recent quarter). Third, management is committed to rapid store expansion, boosting its store count (currently around 140) at 20%-plus rates for the next few years; long-term, the top brass thinks the U.S. can support 1,600 locations! Fourth, and underrated in our view, is that 70% of visits come from women and their families, with an average household income of more than $100,000—a deep-pocketed clientele that should continue coming back as long as the company keeps its menu and service up to date. Earnings have been near breakeven but are beginning to perk up, while sales growth should crank ahead 20% to 30% for many years. There’s a lot to like here, and we think the stock can do very well going forward.
Technical Analysis
ZOES formed a big post-IPO base and then rallied to new highs following earnings in early June. After a brief shakeout later that month when the CFO resigned, the stock tightened up and hit new highs two weeks ago before diving sharply on average volume down to its 10-week line. That was nerve-wracking (trading volume here is light, which leads to wild moves sometimes), but ZOES rebounded strongly last week as volume picked up. Expect volatility, but we think the stock is buyable around here or on dips, with a stop below 40.
ZOES Weekly Chart
ZOES Daily Chart
WisdomTree (WETF)
Why the Strength
WisdomTree Investments is the fifth-largest provider of Exchange Traded Funds (ETFs) in the U.S. as well as the largest publicly traded firm that makes ETFs its only focus. The firm sponsors 79 distinct ETFs that enable investors to diversify their investments among specific asset classes—and it expects to launch 8 to 10 new funds this year. (Check out WisdomTree Global Natural Resources Fund—GNAT—if you want to bet on the bottom in that sector.) But the biggest reason for the stock’s strength is the money that’s been pouring into two specific funds—WisdomTree Japan Hedged Equity Fund and WisdomTree Europe Hedged Fund—that let investors play European and Japanese stocks while avoiding the fluctuations of their currencies. The strong dollar has been such a tailwind for these funds that they now account for roughly 60% of the firm’s assets. Thus, this is what we call a bull market stock: one that does well when markets are attracting investors, but that may not do well when conditions change. In any case, the trend is up and the 1.5% annual dividend helps—a little.
Technical Analysis
WETF released an excellent earnings report last week that underlined the positive effect that current trends are having on the firm, and investors responded enthusiastically, gapping the stock up to new highs on Friday on big—but not huge—volume. And today it climbed higher still. So do you chase it here or do you wait for the stock to come back? That depends on your personality and your risk tolerance, but with the gap so fresh, odds are the stock has more room to run—possibly all the way to year-end—so we don’t advise waiting.
WETF Weekly Chart
WETF Daily Chart
Vertex Pharmaceuticals (VRTX)
Why the Strength
Companies like Vertex Pharmaceuticals are the reason that growth investors shouldn’t automatically screen out stocks with negative EPS. This pharmaceuticals giant hasn’t posted positive EPS since December 2012, but its stock has climbed almost 250% since then. It’s not that positive EPS is a specifically bullish or bearish sign, or that it doesn’t matter at all, but that it must be put into context. And that’s why when Vertex, a perennially low-EPS company, posts 2017 estimates at $4.39—an increase of $5.60 per share compared to the previous year’s estimates—we start to pay attention. Although Vertex posted another loss last Thursday, its revenues easily beat estimates—$160 million versus the expected $147 million, a 31.1% increase from the year-ago period—driven by Kalydeco, its flagship cystic fibrosis medicine. Kalydeco’s sales increased 37% in the second quarter, a sequential improvement of 18%, as a result of increased domestic and international adoption. Several countries in Europe approved Kalydeco for reimbursement, which will drive patient growth in the long run, and the FDA approved Orkambi, another cystic fibrosis treatment, early last month, with EU approval on the way. This widespread adoption indicates improved long-term growth for Vertex, and suggests that the huge 2017 EPS estimate might not be that far off.
Technical Analysis
Although investors bid VRTX up 7% after its earnings announcement on Thursday, the stock has remained essentially range-bound since March, etching a tight base between 124 and 134. This is not unusual for VRTX, which has made most of its gains over the last few years in large steps instead of a sustained uptrend. The earnings report could be a game-changer, however, so if VRTX gets to new highs we’re interested. Otherwise, keep a stop at the bottom of its old base, around 123.
VRTX Weekly Chart
VRTX Daily Chart
Vantiv (VNTV)
Why the Strength
Previously known as Fifth Third Processing Solutions (a nod to its partner Fifth Third Bank), Vantiv is one of the largest and most progressive companies in the payment processing industry, as well as the nation’s largest PIN debit acquirer. Headquartered in Cincinnati, Ohio, the company today has offices in Arizona, Colorado, Illinois, Kentucky, Massachusetts and Texas. Its client base includes nearly 400,000 locations. It has special relationships with big retailers Barnes & Noble, Dollar General, The Kroger Company, Walgreens, Kohl’s, Macy’s and T.J. Maxx, as well as restaurants In-N-Out Burger, T.G.I. Friday’s, Wendy’s International and Bob Evans. In recent years, the company has strengthened its technology and grown by acquisition: it’s now linked to more than 1,350 financial institutions, including more than 700 credit unions, and processes more than 15.7 billion transactions a year. Short-term, the stock is strong because the company released an excellent earnings report last week, but long-term, Vantiv looks like a fine bet on the continued growth of the cashless society.
Technical Analysis
VNTV came public in March 2012, and has been trending roughly higher since. Going into last week, the stock had found resistance at 41 many times over the previous ten weeks, but the earnings report triggered a high-volume gap up to 44, and since then the stock has been working on consolidating that gain. The buyers are in control here; there are few motivated sellers. Knowing that, we think it’s best to buy here.
VNTV Weekly Chart
VNTV Daily Chart
ServiceNow (NOW)
Why the Strength
ServiceNow, the California-based developer of cloud-based IT software, is no stranger to Cabot Top Ten Trader, having appeared here eight times since its 2012 IPO. The company’s software is designed to make a company’s IT more reliable, more transparent and easier to manage, with automated workflow and improved scalability in every department of a subscriber’s company. ServiceNow calls it a “lights-out, light-speed” experience through its enterprise cloud, with everything managed as a service. The company has enjoyed many years of strong revenue growth—74% in 2013 and 61% in 2014—and is expected to turn profitable in 2015, with EPS estimates for 2016 up 125%. It’s those projected earnings that are keeping investors interested, increasing institutional sponsorship to over 900 during the most recent quarter. Over 80% of ServiceNow’s revenue comes from subscriptions, with the rest coming mostly from professional services, resulting in an excellent follow-on revenue stream. With permanent profitability in its sights, ServiceNow is ready to deliver on its promise.
Technical Analysis
NOW went through a painful correction in the first half of 2014, falling from 72 to 44 from February to May. But the stock immediately got moving again, rallying to new all-time highs in January 2015. Despite a brief jump to 83 in April, NOW has mostly been trading in a range with support at 72 and resistance just below 81 since February. Even the good news from a strong earnings report last week didn’t lead to a breakout, although trading volume was well above average. The way to play NOW is to take a small position on a retreat to the stock’s 25- and 50-day moving averages, now twisted together at 77. Then you can increase your position once the stock breaks out above 81. A stop at the stock’s 200-day moving average, now at 73, should be defensive enough.
NOW Weekly Chart
NOW Daily Chart
Masco (MAS)
Why the Strength
Michigan-based Masco makes, distributes and installs home improvement and building products worldwide. The company’s portfolio of familiar brands includes, among others, KraftMaid and Merillat cabinets, Delta, Peerless and Hansgrohe plumbing fixtures, Kilz and Behr paints and Milgard windows. Masco markets to both the home improvement and new-build markets, so the news of the strongest U.S. existing-home sales in eight years and estimate-beating housing starts and building permits in July caught investors’ attention. The immediate cause of investors’ interest is the company’s Q2 earnings report on July 28, which beat expectations with a 3% gain in revenue and earnings well above estimates. The company also announced an increase in its annual dividend from 36 cents per share to 38 cents, starting in the fourth quarter, and issued optimistic guidance. Masco is a big story: a well-diversified mid-cap company in an improving industry, and executing well. Earnings are expected to increase by 15% in 2015 and by 25% in 2016.
Technical Analysis
MAS rallied strongly from late 2011 through 2013, then slowed its advance in 2014. The stock traded flat from February 2015 through late last month, but rocketed out of that long base, jumping from 23 on July 27 to 26 on July 28. The stock enjoyed a follow through to 26.5 last week, and is holding above 26. MAS looks like a good buy for an investor with a medium-term perspective, as the combination of a stock with a new burst of buying and a dividend that pays a 1.5% yield looks good right now. Try to sharp-shoot a buy below 26 and use a stop around 24.
MAS Weekly Chart
MAS Daily Chart
ICON plc (ICLR)
Why the Strength
ICON provides pharmaceutical and biotech companies and medical device makers a way to reduce development costs by outsourcing management and analysis for their clinical trials. Classified as a clinical research organization, it can handle every phase of drug development from Phase I through Phase IV clinical studies, including recruiting researchers and trials subjects, and combing through the data and communication services. This Dublin-based company has enjoyed three years of double-digit percentage revenue growth, with earnings growing from $1.00 per share in 2012 to $2.87 in 2014, with a 34% increase forecast for 2015. From its founding in 1990, the ICON team has grown from five to over 10,000 employees with 79 offices in 37 countries. While ICON’s stock has been a steady performer since late 2011, the company’s Q2 earnings report on July 28 was just what investors were looking for, with revenue up 3% and earnings up 48%. After-tax profit margins swelled to 15.1%, the highest ever, reflecting management’s cost-cutting efforts. Management also raised 2015 earnings guidance by 8%. All in all, ICON looks to be headed in the right direction to keep investors interested.
Technical Analysis
ICLR has been a real tractor stock, advancing steadily from 15 in late 2011 to over 80 in recent trading. The stock has never been among the strongest stocks in any given week, and has recently been trading sideways in a flat, five-month base with resistance at 72 and support at 64 since March. But the company’s earnings report on July 28 triggered a breakout on massive volume that vaulted ICLR to 76 in one day, with follow-on gains reaching 82 today. That kind of breakout from a flat set-up has the potential to keep fueling ICLR’s advance, although it may need a pause to catch its breath. Look for a pullback toward 80 as an entry point and keep a stop at the stock’s old resistance at 72.
ICLR Weekly Chart
ICLR Daily Chart
Equinix, Inc. (EQIX)
Why the Strength
It’s fashionable these days to say that the Internet lives in a cloud, but the hard truth is that the Internet depends on servers, and those servers are only useful if they remain powered up by a constant source of electricity, as well as cool, secure, and—critically—connected to the Internet. Equinix, which was last recommended here on May 4, is the market leader in that industry, with roughly 8% of the market. The company operates 105 data centers that cover the world, with 56% of revenue coming from the Americas, 26% from EMEA and 18% from Asia. Its nearly 5,000 customers include more than 1,000 different carriers and ISPs, and well-known names among them include Amazon, AT&T, Comcast, Electronic Arts, GAP, General Electric, Google, IBM, Microsoft, MSN, Sony, Sprint, Verizon, and Yahoo! The stock is strong today because the company released an excellent second quarter earnings report last week, beating analysts’ expectations and increasing projections for the quarters ahead. Interestingly, Equinix (which owns a fair amount of real estate) converted to a Real Estate Investment Trust (REIT) structure at the start of this year, and thus is committed to paying out a steady stream of dividends, which is both unusual and reassuring for a fast-growing technology company. Currently, the stock yields 2.4%.
Technical Analysis
EQIX is not a hot stock; it’s too established for that. But it has been outperforming the market for more than two years, as the combination of predictability and growth attracts an increasing number of institutional investors. The stock dipped below its 50-day moving average in June, but didn’t stay down long, and two weeks ago it broke out of a shallow cup formation to hit new highs. Last week’s report sparked buying that simply confirmed the uptrend, and your challenge, if you choose to buy, is finding the right buying opportunity. A dip to 275 would be nice.
EQIX Weekly Chart
EQIX Daily Chart
Buffalo Wild Wings (BWLD)
Why the Strength
Buffalo Wild Wings has made a name for itself over the years as a national sports bar—with dozens of varieties of wings, a pub-based menu, plenty of beer and free Wi-Fi (for all you fantasy football lovers). It’s grown in popularity as the company has steadily expanded its store base by 8% to 12% per year. The past few months, however, haven’t been ideal for the company—rising chicken wing prices (up 26% in the second quarter versus a year ago), labor (higher minimum wages in many states) and alcohol costs have eaten into profit margins, and the performance of franchised locations (which make up over half of the 1,100-ish total locations) has been so-so. So why is the stock strong today? Because investors are looking ahead toward a re-acceleration of growth thanks to some bullish changes ahead. First, the company is aiming to increase alcohol prices this month and increasing menu prices in November. Second, it’s acquiring 41 of its franchise restaurants in August, on top of 16 bought in the first half of the year, and given that same-store sales growth at company-owned restaurants consistently outpaces sales growth at franchised restaurants, this “buyback” program should boost sales going forward. Earnings estimates are OK for this year (up 14%) and accelerate in 2016 (up 24%). It’s a good long-term growth story.
Technical Analysis
BWLD has been in a very choppy longer-term uptrend for years, making good progress over time but with a ton of sharp corrections and long dead periods along the way. The latest correction began earlier this year and took the stock down 24% before shares found some support in early June. BWLD crawled higher from there, and then catapulted back to its old highs following the quarterly report. We think dips of a few points are buyable, with a stop in the mid 170s.
BWLD Weekly Chart
BWLD Daily Chart
Anacor Pharmaceuticals (ANAC)
Why the Strength
Two words: skin cream. Last month, Anacor said that its experimental skin ointment Crisaborole showed positive results in two late-stage clinical studies involving 750 test subjects. The topical cream treats the skin condition atopic dermatitis, commonly known as eczema, which affects between 18 million and 25 million people in the U.S. It’s also being tested as a treatment for psoriasis. Given the size of the eczema market, Crisaborole has a chance to be Anacor’s biggest product to date. If all goes well, the drug is on track to launch in 2017, and Barron’s estimates that it could produce $2 billion in additional sales for Anacor by 2020. For a company that did just $21 million in sales last year, that would be a complete game-changer—and Wall Street knows it. The stock shot up 60% in a day after the Crisaborole results were announced, prompting a round of analyst upgrades in the weeks since.
Technical Analysis
Few stocks have risen faster than ANAC this year. The stock started the year at a mere 31, more than doubled in the first three months to 68, then retreated briefly to 52 entering May. By early July ANAC was back up to 79 … then the real breakthrough came after the Crisaborole results were announced. In the three weeks since, the stock has nearly doubled again to 151, finishing last week at 149. The big move came in mid July—the stock has actually traded in a fairly tight range between 144 and 151 since July 17. Use 144 as the low end of your buying range; if momentum wanes, sell if it dips to the 120s.
ANAC Weekly Chart
ANAC 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.
