Follow the Plan
Current Market Outlook
From a top-down perspective, our bullish market stance has not changed—the small- and mid-cap indexes have now joined the large-cap S&P 500 in all-time high territory. Obviously, dips and shakeouts are possible, but to this point, we’ve seen a vacuum of selling pressure on the major indexes. Individual stocks have been a bit trickier, partly because of earnings season; more than a few stocks and sectors have been nailed as money hunts for the leaders of the advance. Overall, we remain bullish and advise you to stay heavily invested, but you should also follow the plan—book some partial profits on the way up and if a stock cracks through support or trips your stop, be sure to exit. Conversely, aim to let most of your winning positions run, as this is the kind of market that should produce many big winners over time.
This week’s list includes many recent earnings winners, including a couple of energy stocks. Our Top Pick is Parsley Energy (PE), which we think is probably the top stock in the sector. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| XPO Logistics (XPO) | 0.00 | ||
| Wright Medical (WMGI) | 0.00 | ||
| Wingstop (WING) | 121.52 | ||
| Trex Company (TREX) | 117.56 | ||
| Shopify (SHOP) | 585.00 | ||
| Rice Energy (RICE) | 0.00 | ||
| Parsley Energy (PE) | 0.00 | ||
| Paycom Software (PAYC) | 0.00 | ||
| Louisiana-Pacific (LPX) | 0.00 | ||
| Align Technology (ALGN) | 316.20 |
XPO Logistics (XPO)
Why the Strength
XPO Logistics’ story all starts with CEO Bradley Jacobs, who has a history of taking a small company, aquiring dozens of small fish in a fragmented industry, and selling the combined company for huge returns years later. He’s done it in energy brokerage, waste management and heavy equipment rentals. Now he’s up to his old tricks with XPO Logistics, a transportation logistics firm, in which he bought a majority stake in 2011. (XPO is a leader in freight brokerage, last-mile logistics, contract logistics, intermodal and more.) Since then, Jacobs has done a ton of buyouts, including a move into the trucking industry itself with a $3 billion purchase of Con-way last year. The firm’s constant expansion caused losses to grow; combined with the horrid market late last year, investors bailed out in a big way. But now, the stock is looking much better, thanks mainly to a blowout earnings report—in Jacobs’ words, the results “confirmed that we’re at a positive inflection point in the evolution of our business.” That mainly means that after years of gobbling up firms, XPO is now starting to crank out a ton of cash—in the second quarter, earnings leapt into the black and crushed estimates, free cash flow was solidly positive, and the company bumped up its guidance for the rest of the year. Analysts now see earnings of nearly $1.70 per share next year, and Jacobs has a 2018 target of at least $1.7 billion of EBITDA as he works on efficiency measures. Long-term, there’s not a ton of growth here; most of XPO’s businesses are growing organically in the single digits. But this story is about Jacob’s ability to morph the company into a big leader in the transportation field, and the second-quarter report says that he’s well on his way.
Technical Analysis
XPO fell from 51 to 21 from May through October of last year, then began a multi-month bottoming process—the stock did hit a new low in January, but it basically gyrated between 20 and 33 for 10 months. Then came last week’s blastoff, with XPO surging to one-year highs on explosive volume following earnings. If you’re game, try to buy on dips of a couple of points and use a looser stop in the lower 30s.
XPO Weekly Chart
XPO Daily Chart
Wright Medical (WMGI)
Why the Strength
Wright Medical develops joint replacement products and bone fixation devices, and just sold one of its largest joint businesses for a handsome fee. Last month, Wright sold its Tornier unit—a line of hip and knee implant systems used in hip and knee replacement surgeries performed all over the world—to Corin Holdings for $33 million. The deal gives Wright Medical, which isn’t profitable, some much needed cash, and allows it to focus more on its higher-growth extremities and biologics businesses, which according to CEO Bob Palmisano could transform the firm into a “mid-teens growth company.” The deal won’t officially close until later this year. In the meantime, Wright Medical’s losses are already narrowing—the company managed to cut its adjusted per share earnings losses in half in the second quarter. Though sales fell just shy of analysts’ expectations, they more than doubled for a third consecutive quarter. The other bit of good news for Wright Medical is that it’s close to resolving ongoing litigation with several insurance carriers involving its metal-on-metal hip replacement products. In other words, the clouds are starting to part for this medical device maker, and sales are really starting to take off.
Technical Analysis
WMGI has rebounded nicely from a rough 18-month stretch that began in October 2014. During that time, the stock lost roughly half its value, dipping to a low of 15 this February. After a few false starts, the stock was still down at 16 as recently as late June. That’s when bargain buyers swooped in, pushing WMGI well past 19 resistance to 21, where it built a base for about three weeks. Last week’s better-than-expected earnings results prompted another big breakout, and now the stock is hitting new 52-week highs above 24. Nibble on the dips and add to your position if it breaks to 25 or higher.
WMGI Weekly Chart
WMGI Daily Chart
Wingstop (WING)
Why the Strength
In the mood for some chicken wings? Apparently millennials are. They’re the people who are driving the tremendous growth at Wingstop, the fast casual chicken-wing restaurant franchise that derives 75% of its sales from takeout orders. Millennials—the generation loosely defined as anyone born between 1982 and 2000—love things that are fast and convenient, and there’s nothing more fast and convenient than a fast food joint that allows you to call and order takeout. “Our core customer is aimed at millennials,” Wingstop CEO Charlie Morrison told CNBC last week. With good reason—nearly half of the customers who flock to Wingstop’s 845 restaurants in 39 states and seven countries are millennials, higher than the average at other fast casual restaurants. And because three out of every four Wingstop customers order their food to go, it allows the company to keep its restaurants small, with an average size of just 1,700 square feet. That keeps costs low, as does the restaurant’s menu, which is limited to wings, fries and a few other sides. As a result, the company just reported yet another quarter of double-digit (36%) EPS growth, and is on track for earnings of $0.54 per share this year, which would be a 15% improvement over last year and more than double what it earned three years ago. Sales were also up big (18%) last quarter, thanks in large part to a record 41 new locations. Same-store sales increased 3.1%, which shows that Wingstop customers (millennials and otherwise) keep coming back for more.
Technical Analysis
Investors definitely liked what they saw in Wingstop’s second quarter—after reporting earnings last week, shares of WING gapped up from 26.3 to 29.8 on five times normal volume. The move to 29 was key, considering the stock had regularly bumped up against resistance at 28 during the previous couple of months. Despite plenty of choppiness, WING has made strong progress after starting the year at 22. There’s bound to be more consolidation after such a strong upward move, so buy on dips of a point or two with a stop around 25.
WING Weekly Chart
WING Daily Chart
Trex Company (TREX)
Why the Strength
Trex is another company benefiting from America’s construction resurgence. A maker of decking, fencing and railing made from a wood alternative that offers the appearance of wood without much maintenance, the Virginia-based company just reported its eighth straight quarter of double-digit earnings growth. Steady sales growth thanks to the recent run-up in home construction has been the biggest factor behind Trex’s bottom-line growth—sales increased 7% in the second quarter. Another factor, according to CEO Jim Cline, was the company’s “raw material cost advantage” stemming from its use of recycled plastic film—its imitation wood is made from a combination of waste wood fibers and reclaimed polyethylene. Increased marketing efforts also helped, as did Trex’s ongoing share repurchase program. More than 90% of Trex’s sales come from North America, which makes it heavily levered to America’s construction recovery. Investors clearly like Trex’s long-term growth trajectory and its unique position in the improving housing market. But the stock’s short-term strength comes from last week’s earnings beat, as both sales and earnings outpaced consensus analyst estimates.
Technical Analysis
TREX’s first big move came in February, when the stock jumped from 32 to 44. By mid-April, it was up to 50, and stayed there until the end of the month before pulling back to 41. It set up camp there for the next two months, with 40 acting as support. The bulls returned in late June and early July, when the stock kited back to 49 and built another base in the high 40s. Last week’s earnings beat brought the biggest move yet—TREX gapped up from 48 to 59 in a matter of a few trading sessions. With the stock at new highs, you can buy on dips with a stop in the low 50s.
TREX Weekly Chart
TREX Daily Chart
Shopify (SHOP)
Why the Strength
Shopify is a small company that has giant potential as e-commerce expands. The firm has set itself up as an “arms dealer” in the e-commerce war thanks to its cloud-based e-commerce platform, which can be used across multiple platforms (including brick-and-mortar locations) and ties in easily to social media. The target market is small- and mid-sized businesses, and most believe Shopify has the best product in a competitive market. Part of its advantage could be its systems’ easy tie-in to big players; it has deals with Facebook (lets shoppers buy from merchants’ Facebook pages), Amazon (allows clients to use Amazon’s payment services, and Shopify is Amazon’s chosen replacement for its Amazon Webstore business, which has shut down) and Twitter (merchants can sell products on that platform). Last quarter, Shopify announced its merchants will be able to take orders via Apple Pay and Android Pay. And it’s even teamed with Uber to allow for select same-day delivery service for its merchants! The total offering is clearly a major hit; Shopify counts more than 300,000 merchants as customers, and they pay monthly via subscription (starting at $30 per month) as well as through a payment solution (think of it as the firm’s own PayPal). Growth has been excellent, with revenues advancing between 90% and 100% each of the past seven quarters. Earnings are still in the red (mainly due to huge marketing expenses), but investors are paying up now for huge earnings in the future. Competition is intense, but we like the story.
Technical Analysis
SHOP came public in May 2015, right near the market top, and unsurprisingly, it got nailed in the months that followed—it fell from 42 to 18.5 near the bottom. It rallied back to 32 by the end of April, then built its first proper launching pad since coming public. After the Brexit shakeout, SHOP lifted to new recovery highs last month and popped higher on earnings last week. There is old overhead to deal with (near 40), so some hesitation is likely here. Try to buy on weakness.
SHOP Weekly Chart
SHOP Daily Chart
Rice Energy (RICE)
Why the Strength
The unexpected dip in oil prices that ran from June 9 to August 2 has given way to a new bounce over the last four trading sessions. But Rice Energy pretty much ignored the drop in oil prices, as investors stuck with the Pennsylvania-based explorer/producer through the whole episode. Investors like the company’s location in the Marcellus and Utica fields and its rigorous cost control program. The company’s Q2 earnings report on August 3 showed a 43% year-over-year increase in net production (and a 12% increase over Q1) while well costs were reduced by about 20%. The company’s Rice Midstream Holdings division operates major transportation pipelines in Ohio and Pennsylvania; the Ohio network is projected to grow its throughput capacity by 160% in 2016, and the Pennsylvania network is estimated at 40% growth. In the long run, while no energy company is immune from oil and gas prices, Rice Energy has shown that it can outperform most of its competitors and grow revenue in any environment. The company has $1.4 billion in total liquidity and increased its borrowing base by 17% (to $875 million), which is a testament to the value of its asset base. The company also has 89% of its 2016 production hedged against energy price declines and a good chunk hedged for 2017. Investors like Rice Energy now, and any improvement in energy prices should only increase that affection.
Technical Analysis
RICE has been in a strong rebound since it formed its triple bottom at 8 in December 2015 and January and February 2016. The stock’s gains have far outstripped increases in energy prices. From that triple bottom at 8, RICE soared to 23 in June, then corrected to its 50-day moving average just above 20 in July. Another rally beginning on July 26 brought the stock back to its June highs, where the good Q2 earning report kicked it to new recovery highs. This is one of the strongest stocks in the entire sector. RICE looks like a good buy on any dip to 25.
RICE Weekly Chart
RICE Daily Chart
Parsley Energy (PE)
Why the Strength
Parsley Energy looks like the No. 1 energy company in the market today based on its incredibly lucrative acreage, plunging costs, outstanding execution and the shrewd acquisitions it made during the industry’s down cycle. The stock is strong today because the firm’s second-quarter report confirmed that the company will gush cash if energy prices recover from here—production was up a whopping 60% from the prior year (including an 82% hike in oil output), while drilling and completion costs fell 26% and cash G&A expenses fell 28%. These figures easily hurdled estimates, and management hiked guidance for the rest of the year. Beyond those numbers, it looks like Parsley’s recent acquisition of 30,000 mineral acres and another 33,000 leasehold acres (for $814 million) was a big win. Combined with the aforementioned cost cuts, the company’s well returns have zoomed toward 90% in certain areas at $50 per barrel. (The firm’s wells also average a very healthy 70% return across its core Midland Basin acreage.) All told, Parsley’s top brass is thinking big for the next few years; in its quarterly slide deck, management said it’s aiming to boost production 30% (if it adds one more rig per year) to 60% (if it adds three rigs) annually from 2016 through 2018. That will obviously be dependent on prices and weather, but given the firm’s history, we’re not betting against it. This remains a very good story.
Technical Analysis
PE hit new multi-month highs in early March, a sure sign of its leadership qualities. And since then, the stock has chugged higher along its 10-week line, with brief dips to or slightly below it in April, May and June (during Brexit), but everytime, buyers arrived on the scene. Then PE tightened up nicely in July despite falling oil prices, and zoomed to new highs following earnings last week. Energy stocks are rarely go-go stocks, so we advise starting a position on a dip of a point or two.
PE Weekly Chart
PE Daily Chart
Paycom Software (PAYC)
Why the Strength
Paycom Software is an Oklahoma-based software designer that offers cloud-based human resource management (HRM) services for small- and medium-sized businesses. The company says that its software can handle “recruitment, retirement and everything in between.” That “everything” includes payroll, time and labor management, and traditional HR functions like benefits, compliance with regulations and Affordable Care Act management. The company has been getting excellent traction, with revenue increasing by 40% in 2013 and 2014 and 49% in 2015. And earnings are projected to increase by 75% in 2016 and 36% in 2017. With 98% of revenue coming from recurring fees, the company’s future is admirably transparent. Paycom began life as a payroll business, but quickly realized that offering a single-database application that could handle an increasing range of HRM functions was a natural for the internet. Paycom’s Q2 earnings report on August 2 was enthusiastically received by investors, who liked the second straight quarter of triple-digit earnings growth and the 16.8% after-tax profit margin. The company is growing fast and continuing to add services to its software. This looks good.
Technical Analysis
Since coming public in April 2014, PAYC stair-stepped higher from July 2014 through November 2015. From its high at 45, the stock then plummeted to 22 in February 2016, bottoming on huge volume. But when PAYC began its rebound, it left behind its rally-and-consolidate pattern and has been advancing steadily, with a high-volume surge higher following the August 2 earnings news. PAYC has inched higher in the three trading days following its blastoff, and may need to consolidate at some point. We think you can look for a pullback of a point to get started and use a stop near 47.
PAYC Weekly Chart
PAYC Daily Chart
Louisiana-Pacific (LPX)
Why the Strength
Louisiana-Pacific is the latest example of why it’s good to be a lumber company on Wall Street these days. The U.S. housing and construction recovery has lifted many boats, and as you may have noticed from some of our recommendations over the last few weeks, those that supply materials for housing and construction are getting a major boost. As a maker of oriented strand board, siding and engineered wood products for home construction, repair and remodeling, Louisiana-Pacific is getting that boost: second-quarter sales (reported last week) grew 18%, its biggest year-over-year jump since 2013, and the company is slowly returning to profitability after two straight years of losses. The 13% increase in single-family housing starts during the first half of the year was of particular benefit to Louisiana-Pacific, as most of its wood products are used on single-family homes. Demand for Louisiana-Pacific’s SmartSide and CanExel products were the primary catalysts last quarter, growing 22% and 24%, respectively. With three consecutive quarters of earnings growth under its belt, the company finished the second quarter with $495 million in cash, with which it plans to invest in new production facilities, lower costs at current facilities, explore acquisitions, repurchase shares and possibly even institute a dividend, according to CEO Curt Stevens.
Technical Analysis
After kiting from 13 to 16 in February, LPX was a bit choppy for the ensuing few months, finding support in the high 15s and meeting resistance in the mid-18s, which it tested on several occasions with no breakthroughs. In late June, the stock tested support at 16 when the bulls suddenly swooped in with a vengeance, pushing the stock immediately back to 18. On July 13, LPX finally poked its head above 19, and just kept on rising to 20, where it has been consolidating for the better part of a month. You can buy here with a stop below the 50-day moving average.
LPX Weekly Chart
LPX Daily Chart
Align Technology (ALGN)
Why the Strength
With 13 previous appearances in Cabot Top Ten Trader, Align Technology is no stranger to growth investors. The company’s entire business is based on its clear plastic aligners that straighten teeth like metal braces, but without the “metal-mouth” effect. The company’s products include a 3-D computer modeling system and other services, but 95% of revenue still comes from the aligners, which are changed every two weeks as teeth move toward their desired location. While shipments of Invisalign appliances to orthodontists have been leading the way in U.S. growth, the international market is the real growth driver; Align Technology’s Q2 report on July 29 showed 38% growth in shipments outside the U.S., compared to 15% growth inside the country. The company has also just kicked off consumer campaigns in China, Australia and New Zealand, and is continuing awareness campaigns in Hong Kong and Japan. Treatments for adults are another source of growth, with growth in adult cases outrunning teens by 35% to 19%. The company’s iTero Element scanner is also doing well, with revenue up 199% in Q2 and a record number of scanners shipped. Despite a highly competitive environment, Align Technology is continuing its strong growth, and projected earnings growth is 34% in 2016 and 26% in 2017. The strength of the company’s novel product line and the skill of management in growing internationally looks set to drive further growth at Invisalign.
Technical Analysis
From its low at 43 in October 2014, ALGN spent 16 months moving to new highs, but also throwing three significant corrections. But from the middle of February 2016, the stock’s advance changed character, rallying steadily, with mild corrections that lasted only a week. The Q2 earnings report gave the stock a new burst of energy on July 29, when it soared from 85 to 89 on huge volume. With the stock now trading around 92 and the 25-day moving average back at 85, it’s reasonable to expect some kind of consolidation or correction. Try to get in on a pullback of a couple of points and use a loose stop at the 50-day moving average, now at 82.
ALGN Weekly Chart
ALGN 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.
