Still Tricky
Current Market Outlook
Today was a welcome day for leading growth stocks, with many bouncing nicely after nearly two weeks of sliding steadily (despite the Dow’s advance during that time). Overall, the situation remains mostly bullish, but tricky—the major indexes are in uptrends and many stocks are in good shape, but we’ve also seen quite a few breakdowns among Top Ten stocks during the past couple of weeks, while many stocks moving to new highs have quickly found selling pressure. All told, we’ll leave our Market Monitor in bullish territory because the majority of evidence remains on the positive side of the ledger, but we’ll be watching to see if today’s strength in leading stocks continues or the choppy conditions return.
This week’s Top Ten has a bunch of impressive charts (including some multi-year breakouts) from a variety of industries. Our Top Pick is GrubHub (GRUB), whose story has improved and whose stock has exploded out of a two and a half year consolidation. Try to buy on weakness.
| Stock Name | Price | ||
|---|---|---|---|
| Aaron’s (AAN) | 74.35 | ||
| Ameriprise Financial, Inc. (AMP) | 0.00 | ||
| Arista Networks (ANET) | 0.00 | ||
| Baidu (BIDU) | 0.00 | ||
| Baozun (BZUN) | 44.24 | ||
| GrubHub (GRUB) | 140.03 | ||
| Lumber Liquidators Holdings, Inc. (LL) | 0.00 | ||
| Rockwell Collins (COL) | 0.00 | ||
| Spirit AeroSystems (SPR) | 92.54 | ||
| WTW (WTW) | 100.47 |
Aaron’s (AAN)
Why the Strength
Retailers have been operating in a tough market with the advantages of scale, low price, and supply chain efficiencies favoring e-commerce goliath Amazon (AMZN). But a few retailers are doing things differently, and Aaron’s falls into this category given its strength with consumers with less than stellar credit. The Atlanta, Georgia-based company operates and franchises 1,860 electronics, appliance and furniture stores in North America. In addition to offering straight up purchases, Aaron’s also offers numerous lease-to-own options through its company- and franchise-operated stores (56% of revenue) and its virtual lease-to-own division, Progressive Leasing (38% of sales). The stock is doing well now because Aaron’s has beaten consensus estimates on both the top and bottom lines in the past two quarters. And after two quarters of year-over-year declines, revenue turned positive in Q2. Aaron’s 3.3% revenue growth (to $816 million) in Q2 won’t snap your head back. But EPS of $0.68 (beating by $0.10) means the company is on track for 11% earnings growth this year, with analysts looking for growth to accelerate to 16% in 2018. That implies a relatively cheap valuation (forward P/E of 15.7) for a company that should grow revenue in the 5% to 8% range. With a restructuring now behind it (underperforming stores were sold and cost-reduction initiatives implemented), and the recently announced acquisition of SEI, its largest and best performing franchisee, Aarons has earned a number of analyst upgrades, and we see more money flowing into the stock.
Technical Analysis
AAN ended 2016 on a high note near 34, but had retreated to 26 by the beginning of March. That correction ended when shares bounced off their 200-day line. Since then, the stock is up by 20 points, and has held above its 50-day line. Money has entered the name after the last two earnings reports, driving shares from 32 to 36 after the Q1 report, and 41 to 48 following the Q2 report. Over the last week, the stock has settled in to trade around 46. We think you can dip a toe in the 44 to 46 range.
AAN Weekly Chart
AAN Daily Chart
Ameriprise Financial, Inc. (AMP)
Why the Strength
Ameriprise is another Bull Market stock that’s showed great strength lately. Unlike brokerage houses like E*Trade and TD Ameritrade, which have recently appeared in Top Ten, Ameriprise is a giant diversified financial services outfit—the company has $835 billion in assets under management and offers a variety of services including advice and wealth management (its largest piece of the pie, making up nearly half of all revenues), asset management, annuities, insurance and more for clients. The company is doing a good job of getting more out of each advisor (9,640 of them!), and is known for its customer service, solid advice and a bunch of four- and five-star rated funds. But that’s been true for a while—what’s different now is that equities are headed higher (and bonds have done well, too), which is increasing inflows and performance. Earnings growth is now accelerating after a tough middle of last year, helped in part by share buybacks (the share count was down 7.5% in Q2 from the prior year) and expense controls (up just 1% from the prior year). The results easily topped expectations, and after falling last year, analysts see Ameriprise’s bottom line rising 33% this year and more in 2018. Throw in a solid dividend (2.3% annually) and reasonable valuation (13 times this year’s earnings) and, while it’s not going to set the world on fire, Ameriprise should continue to find buyers.
Technical Analysis
AMP is just emerging from a huge multi-year base. The stock topped in early 2015 near 138 and fell as low as 76 during last year’s market mayhem. It eventually rode in the post-election rally to 135, just shy of its old high, and went on to build another, tighter, more constructive launching pad. Mid-June marked a change in character, with AMP trending higher since then, including a pop to all-time highs on earnings in late July. We think dips are buyable.
AMP Weekly Chart
AMP Daily Chart
Arista Networks (ANET)
Why the Strength
Every few years, there’s usually a “next great networking stock” and Arista Networks is clearly that stock today. The company was built from the ground up for the cloud and virtualization environment, with next-generation, flexible switching hardware and (importantly) software products that are targeted at data centers and feature speeds of 100 gigabits per second. The firm has taken loads of market share from Cisco and others, leading to outstanding growth for many quarters. And that growth is now accelerating after the second-quarter report crushed estimates—sales rose 51% and topped estimates by 13%, while earnings more than doubled and beat expectations by a whopping 41%! Interestingly, Arista has had a legal battle going on with Cisco for the past few quarters, and it has recently been forced to alter its supply chain and it even got some bad patent news today. But management isn’t overly concerned (profit margins haven’t been affected yet) and, in fact, significantly hiked guidance going forward. Analysts followed their lead, boosting earning estimates in a big way, and even those are likely conservative given Arista’s beat-and-raise history. All told, there are some legal risks, but investors are focused on the insatiable demand for Arista’s best-in-class cloud-based switching.
Technical Analysis
We’ve survived many shakeouts this year, but ANET got us last week, tripping our stop (it was a very positive trade overall) early in the week before soaring Friday on earnings. It’s frustrating, but one key to successful investing is to have a short memory, and the fact is that ANET had a good run into June, built a nearly six-week base and has now exploded to the upside on its blowout earnings report. Most earnings gaps in recent weeks have led to some dips, so even if you got shaken out last week, we think it makes sense to go back in with a small position on weakness.
ANET Weekly Chart
ANET Daily Chart
Baidu (BIDU)
Why the Strength
With 28 previous appearances in Cabot Top Ten Trader, Baidu is certainly a familiar company. But this Chinese search giant—typically called “the Google of China”—hasn’t been featured here since 2014, and there’s a reason for that. Baidu was founded in 2000 by Robin Li, who believed that an intimate knowledge of the Chinese language and people would allow him to build a search engine that would give better results. When that proved to be true, the company blasted off, aided by Google’s withdrawal from China in a dispute over government restrictions. Baidu lost some of its edge when it was slow to recognize the rapidity of users’ shift from PCs to mobile devices, but has worked hard to regain its eminence. China now has over 730 million internet users and the company, which makes money from selling ads based on search terms, is looking strong again, with a host of services like an online encyclopedia, maps, video search and a query-based online community platform. Mobile search accounted for 72% of revenue in Q2, with revenue up 12% and earnings up 93%. That revenue growth looked good to investors after 2016’s 1% growth. Analysts see earnings up 23% in 2017 and 26% in 2018. It looks like Baidu has its mojo back.
Technical Analysis
The chart for BIDU is a remarkable one. After hitting an all-time high at 252 in November 2014, the stock traded down to 125 a year later, and spent more than two-and-a-half years trading in a gradually tightening range. BIDU hinted in May that it might be ready to break out, breaking its long string of lower highs, but the breakout didn’t come until July, when it soared above 200, then spiked higher on huge volume after a well-received earnings report on July 27. BIDU is trading sideways under resistance at 230, and looks buyable right here, with a stop around 207.
BIDU Weekly Chart
BIDU Daily Chart
Baozun (BZUN)
Why the Strength
The Chinese e-commerce sector is growing rapidly, with giants like Alibaba and JD.com making buying online an integral part of Chinese life. But the Chinese market can be a tough nut to crack for western companies, which is why many have turned to Baozun, which calls itself a brand partner. For mostly western companies like Nike, Levi’s, Fiat, Haagen Dazs, Johnson & Johnson, Pepsi, Micosoft and GoPro, partnering with Baozun meant a friendly introduction to Chinese consumers through website design and maintenance, customer service, digital marketing and warehousing and delivery. In short, Baozun puts its experience and familiarity with the Chinese market at the service of its partners, and gets almost two-thirds of its revenue from product sales and the rest from services. Revenue grew by 60% in 2015, 23% in 2016 and 13% in Q1 2017. Analysts project earnings growth of 112% in 2017 and 70% in 2018. Baozun is still a young company—incorporated in 2007—but it has grown its roster of brands from 95 at the end of 2015 to 136 at the end of Q1 2017. There’s no set date for the company’s Q2 earnings report, but it should be released sometime in the next couple of weeks. Analysts are expecting revenue of $130 million and earnings of one cent per share.
Technical Analysis
BZUN, which is making its debut in today’s Top Ten, came public in 2015 at 10 and went through a big post-IPO slump to 4 in late 2015 and 5 in 2016. But the stock roared to 19 in October 2016, corrected to 11 in December 2016 and traded sideways until its breakout to new highs in May 2017. After consolidating for seven weeks, BZUN took off higher in July, running to 34 before hitting a little chop late in the month. BZUN is volatile, so you should make a special effort to buy well, especially with earnings not firmly scheduled. A dip toward 32 would be ideal, with a stop around 29.
BZUN Weekly Chart
BZUN Daily Chart
GrubHub (GRUB)
Why the Strength
GrubHub has always had a great story—it’s the number one online and mobile food ordering company, a massive and rapidly growing market because it benefits both consumers (a wide array of restaurants to choose from on one website) and clients (restaurants get additional orders for no extra cost). The introduction of delivery services a few quarters ago has been a big hit, allowing GrubHub to partner with some larger chains (it now delivers for more than 1,000 Subway stores, and Q2 saw new deals with Qdoba, Wawa, Famous Dave’s, Papa Murphy’s, Jack in the Box and more). Speaking of Q2, results were good but not great (sales up 32%, but EBITDA rose just 12%), but investors are focused on the future and they like what they see. The stock is strong today because, first, the company’s underlying metrics (gross food sales up 20%, active diners up 25% and the third straight quarter of record net new restaurant additions) look great, so profits and cash flow should pick up down the road. And second, the competitive environment is easing in a big way, mostly through acquisition—GrubHub recently inked deals with Groupon and Yelp to purchase their Order Up and Eat24 (respectively) food ordering businesses, and in turn, becoming their preferred online food platform. After lots of worries about competition in recent years, these moves (along with the purchase of Foodler) solidify GrubHub as the leader in the sector and should significantly boost its reach in Tier 2 and Tier 3 markets. It’s still a great growth story.
Technical Analysis
GRUB appears to be breaking free from a giant 28-month consolidation that featured three bases—first was the drop from 48 to 18 in 2015 and early 2016, with a rally back to 45 last September. Then came a shallower double bottom base with a big thrust higher this April. And finally there was a tight, sideways range (41 to 48) during the past three months. Thus, last week’s big-volume liftoff to all-time highs is very encouraging, possibly kicking off a sustained advance. You can buy a little here or on dips.
GRUB Weekly Chart
GRUB Daily Chart
Lumber Liquidators Holdings, Inc. (LL)
Why the Strength
Lumber Liquidators is the largest specialty retailer of hardwood flooring in North America. It sells a wide variety of exotic and domestic hardwoods, engineered hardwoods, laminates, bamboo and cork flooring, at discounted prices. The stock has been one of the better performing names in retail lately, largely because the turnaround story seems to be gaining momentum. For those not familiar with the story, shares were hammered a couple of years ago after 60 Minutes reported that CBS investigators tested 31 samples of Chinese-made flooring, and only one was compliant with formaldehyde emission standards. That investigation, and the following lawsuits, made things very difficult for the flooring retailer. Sales dried up, and the stock fell hard. But as last Tuesday’s Q2 results show, Lumber Liquidators appears to have (mostly) moved on, and to have made many operational improvements (new products, better mix on display in stores, etc.). Earnings per share of $0.16 beat estimates by a whopping $0.23. Revenue was up double digits (10.4%), marking the retailer’s fourth consecutive quarter of positive growth. And same-store sales were up 8.8%, driven by a 5.3% increase in the number of customers. Investors and customers appear ready to forgive and forget, and there’s no doubt sentiment is improving. After going through the wringer, the trend of Lumber Liquidators’ business and stock has clearly turned up.
Technical Analysis
LL hit an all-time high of 120 in late 2013, but things fell apart, with shares eventually hitting a low of 10 in March 2016. Then the comeback began, albeit with lots of fits and starts. Shares mounted a stop-and-go rally that carried them to 20 by October 2016. A pullback to 16 set the stage for a fierce rally to 30 in May. Shares then pulled back and consolidated in the 24 to 26 range for six weeks prior to last Tuesday’s quarterly report. That event sent LL soaring to 34, and it’s added a couple of points over the last few trading sessions. You can nibble here or (preferably) on dips.
LL Weekly Chart
LL Daily Chart
Rockwell Collins (COL)
Why the Strength
Rockwell Collins, which is making its debut in today’s Cabot Top Ten Trader, specializes in military and commercial avionics and mission critical communication technology, but also supplies cabin interiors via its 2016 acquisition of B/E Aerospace. The company’s commercial avionics wind up in Airbus, Boeing and Bombardier airliners and business jets, and its information management solutions division supplies military communication, targeting, GPS and future combat systems equipment and technology. The company in its present form was created in 2001 when Rockwell International spun off its avionics division, which included the legacy of Collins Radio Company, which Rockwell had purchased in 1973. Rockwell Collins has grown via acquisition, buying Sony’s in-flight entertainment system and a slew of other smaller companies, climaxing with the 2017 acquisition of B/E Aerospace for $8.3 billion. The company has been consistently profitable, but hasn’t been a growth dynamo, with revenues generally advancing at single-digit rates and earnings moving ahead a bit faster then that. Its popularity with investors now is the result of rumors that United Technology might view Rockwell Collins as an acquisition target. The company’s 1.1% dividend yield sweetens the pot slightly.
Technical Analysis
COL has been a long-term advancer, but its relative performance (RP) line has been only in a mild uptrend since August 2016 after staying flat for years following its peak in early 2014. COL spiked higher on over four times its average trading volume on August 3. If you want to try to play COL’s attractiveness as a takeover target (and the money flows into the defense sector), look for a pullback of a few points and keep a tight stop in case the rumors turn out to be untrue.
COL Weekly Chart
COL Daily Chart
Spirit AeroSystems (SPR)
Why the Strength
Boeing has been a star performer among blue chips, but we’re seeing strength in a handful of other defense-related names, too. Spirit Aerosystems is a natural play on the aerospace boom. The company is one of the largest makers of aerostructures (fuselages propulsion systems, wing components, etc.) in the world—the firm’s structures are found on basically every aircraft made by either Boeing or Airbus (which are the company’s two biggest customers; both have long-term contracts), which, thanks to the boom in new orders, has resulted in a massive backlog ($46 billion!) at Spirit. Thus, the firm’s success is really about execution and keeping Boeing and Airbus happy. In the past, Spirit has had mixed results as delivery delays and cost overruns hampered the bottom line, but execution now looks to be improving—second-quarter earnings came in well above expectations and the top brass raised earnings and cash flow guidance for the rest of the year, and they also slapped on a $400 million increase in their share repurchase program (diluted shares were down 8.6% in the second quarter from a year ago), leaving nearly $800 million left on the program. It’s not a great growth story—earnings are expected to grow high single to low double digits in the quarters ahead—but the bullish long-term outlook, huge backlog and signs of better execution (not to mention a reasonable valuation) have buyers active.
Technical Analysis
SPR has been a tricky stock to handle in recent years. It topped at 58 in August 2015, dipped to 40 in early 2016, rallied back to 62 last December, and then chopped mostly sideways for another seven months—stuck between 52 and 63 all year. But after tightening up in July, SPR catapulted to new highs on earnings last Wednesday, rising 18% on seven times average volume. We think SPR is buyable here or on dips with a loose stop in the low 60s.
SPR Weekly Chart
SPR Daily Chart
(WTW)
Why the Strength
In October 2015 Oprah Winfrey began collaborating with weight control specialist Weight Watchers, and made a $43 million investment in the ailing company. Shares soared on expectations that she would pull in thousands of new customers to attend meetings (52% of revenue), buy digital subscriptions (29% of revenue) and purchase weight loss and other products (19% of revenue). Enthusiasm faded when quarterly revenue growth only picked up into the mid-single digits in late 2016. But last Thursday’s Q2 2017 results suggest the company has done more than just team up with the queen of daytime TV to build its business. In April of this year, Weight Watchers hired Mindy Grossman, who, as the previous CEO of Home Shopping Network (HSNI), was largely responsible for turning that company into a $4 billion direct-to-consumer content and commerce leader. Weight Watchers has also honed its focus on consumer insights and has a new technology platform and refreshed meeting experiences to aid in that effort. The result is that Q2 revenue was up 10% to $342 million (topping estimates by $10 million) and EPS of $0.67 was up by 46% (and beat analyst’s figures by $0.16). Adding to the bull case is a 20% increase in subscribers, to 3.5 million, including a 17% increase in online subscribers (to 2.1 million). Those results, along with a boost to forward guidance, were good enough to silence the naysayers and drive a wave of new money into the stock.
Technical Analysis
WTW was struggling until Oprah stepped into the picture in 2015; within a couple of months, the stock moved from 7 to 28! The rally faded in 2016 and shares bounced around in the 9.5 to 14 range for most of the year. They gained momentum in 2017, starting with a jump to 19 following Q4 results in late February. The results showed WTW was back on track and money flowed in. Shares walked steadily higher along their 25-day line before a shake to the 50-day line last week. Earnings have catapulted shares to fresh highs over the past two days so try to buy on dips.
WTW Weekly Chart
WTW 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.
