Shaking the Tree
Current Market Outlook
After a quiet-but-good holiday week (except for the energy stocks, which have crashed), the sellers came out of the woodwork today, pulling down many stocks that have enjoyed good runs. Big picture though, while there remain a few yellow flags and divergences (including the small caps, which are again acting poorly), the major trend remains up for the indexes and the vast majority of stocks. Thus, our advice is to remain bullish, and to remain focused on what’s working—for many stocks, this pullback could go further, but the odds favor weakness leading to higher prices in the weeks ahead.
This week’s list has a slightly larger-cap tint to it, but all of the stocks have enjoyed huge-volume buying sometime during the past month. Our Top Pick is D.R. Horton (DHI), the nation’s largest homebuilder that’s participating in a powerful upmove for that group.
| Stock Name | Price | ||
|---|---|---|---|
| Whirlpool (WHR) | 0.00 | ||
| Whole Foods (WFM) | 0.00 | ||
| SolarWinds (SWI) | 0.00 | ||
| NetEase, Inc. (NTES) | 0.00 | ||
| KLA Corp. (KLAC) | 158.80 | ||
| Incyte Corporation (INCY) | 76.98 | ||
| Gentex Corp. (GNTX) | 0.00 | ||
| D. R. Horton (DHI) | 66.55 | ||
| Tableau Software (DATA) | 126.42 | ||
| Bloomin’ Brands (BLMN) | 0.00 |
Whirlpool (WHR)
Why the Strength
Whirlpool is a huge, global home appliance maker—the biggest in the world, in fact, with revenues of about $19 billion and a truckload of well-known brands. With a firm that huge, of course, growth is almost always going to be slow (sales growth is generally cranking along in the single digits), but Whirlpool is one of the strongest stocks in the market because investors are giving thumbs up to the firm’s cost cuts (after-tax profit margins were 5.0% last quarter, up from 4.7% a year ago) and, more recently, growth-oriented acquisitions, including a big one in Europe (a 97% stake in Indesit, a dominant Italian firm) and a majority stake in Hefei Sanyo, which has 30,000 outlets in China. All told, earnings have grown in the low double-digits in the last three quarters, but growth should accelerate next year as the economy accelerates (lower gas prices are helping nearly all consumer-related stocks); analysts see earnings up 24% next year, which, combined with a decent dividend (1.6% yield) and reasonable valuation (17 times trailing earnings, just 13 times 2015 estimates), is a recipe for higher prices. It’s not the most dynamic stock in the market, but Whirlpool is a big-cap name that has lots of earnings leverage and is a way to play what looks like a renewed uptrend in housing-related stocks, too.
Technical Analysis
WHR was a decent big-cap winner from mid-2012 through January 2014, but slowing earnings growth and other economic worries caused the stock to build a long (nine month), shallow (22% deep) base that persisted right through the market’s shakeout in mid-October. And then the stock began to explode higher, first with the market, then on earnings, and since early November, on hopes for a continued economic upmove. We think pullbacks are buyable.
WHR Weekly Chart
WHR Daily Chart
Whole Foods (WFM)
Why the Strength
The retail grocery business is a real dog-fight, with companies competing mostly on price, which yields low margins and glacial growth. Whole Foods Market has been the most successful grocery chain so far to compete on quality, with a wide selection of organic and local fruits, vegetables and meats, plus a store plan that includes beer and wine, food service and organic beauty products and clothing. Customers have been happy to pay higher prices for uncontaminated, non-genetically modified foodstuffs and other products. Meanwhile, the company has grown to over 360 stores by opening new stores, 38 in this fiscal year, including four acquired ones. The company has now achieved five straight years of double-digit revenue growth and continues to show strong performance, including a raising of its dividend by a penny a share and a stock buyback program that reached $578 million during the past 12 months. Analysts see continued steady revenue growth of over 10% per year. And as long as customers remain willing to pay higher prices for better food, that’s likely to continue.
Technical Analysis
WFM gapped down in May from 48 to 37 after a disappointing earnings report, then put in a six-month period of bottom-building, mostly under resistance at 40. The great earnings report on November 6 blasted the stock back to 48 in three trading days, followed by a three-day correction to 46. WFM regrouped quickly and has now pushed out to a seven-month high and looks healthy. Volume has returned to normal levels and the stock may need to consolidate at this level for a while. Look for a return to 48 as a constructive buy point and use a stop at 44.5.
WFM Weekly Chart
WFM Daily Chart
SolarWinds (SWI)
Why the Strength
Austin, Texas-based SolarWinds develops, sells and supports information technology (IT) management software that monitors and analyzes the availability and performance of network resources. The company has over 150,000 customers worldwide, from Fortune 500 companies to small businesses, and gets well over half of its revenue from maintenance and service to existing customers. Annual revenue growth has been remarkably steady, declining to a decade low of 25% during the Great Recession (2009). Revenue growth in 2014 is on track for 30%; the company’s Q3 report of 22% EPS growth on revenue growth of 28% was well ahead of analysts’ projections. SolarWinds has been on an acquisitions tear recently, swallowing up a dozen companies since 2011. In May 2013, the target was N-able Technologies, a remote monitoring and management business. In June 2014, the company acquired Pingdom, a Swedish specialist in IT as a service and IT in the Cloud. And in October, SolarWinds bought Confio, a database performance management business. Investors were a little concerned in 2013 about SolarWinds’ ability to manage and monetize this flurry of acquisitions, but those worries have been assuaged by the company’s continued steady growth.
Technical Analysis
SWI has previously been featured 11 times in Top Ten, but this is the first time since August 2012. The explanation is in the stock’s dip from 62 in March 2013 to 32 in November of that year. The stock rallied strongly through February 2014, but slipped again in March and couldn’t make a sustained move until that October 29 breakout following a great Q3 earnings report. Since that gap up on huge volume, SWI has been stepping higher, hitting 52 last Friday. SWI looks like a good buy on a pullback below 51. Use a stop at 47.
SWI Weekly Chart
SWI Daily Chart
NetEase, Inc. (NTES)
Why the Strength
All major Chinese Web portals offer a similar menu of services, including news, weather, sports, search, email, blogs, messaging, music, videos and so on. But NetEase has set itself apart by specializing in online multiplayer games, including the tremendously popular World of Warcraft and a slate of even more popular games that were developed in-house. As reflected in its Q3 results that came out on November 13, the company is also getting a boost from its online lottery business (which got a lift from the World Cup soccer tournament) and increased ad revenues from its website. The biggest challenge for NetEase has been the rapid transition of gamers from personal computers to mobile devices, and CEO William Ding has vowed to increase focus on mobile games. The company’s revenue growth was 18% in 2013, the sixth consecutive year of double-digit growth, and 32% in Q3, with an after-tax profit margin of 34.8%. Earnings growth is forecast at 13% this year and 17% in 2015. As long as NetEase can continue its success in shifting toward mobile games, its broad subscriber base will continue to deliver strong revenue growth. The company’s 1.4% dividend yield is a nice bonus.
Technical Analysis
NTES began the year with a pullback in January and February and a three-month base-building process from March through May. But the stock gained momentum in early June and (after a September correction) has been pushing out to new price highs since October 20. The stock got a boost from an analyst’s upgrade on November 20. NTES has been trading sideways for about six days, which has allowed its rising 25-day moving average to catch up a bit. The stock looks like a good buy at or below 103, with a stop at its November resistance level of 95.
NTES Weekly Chart
NTES Daily Chart
KLA Corp. (KLAC)
Why the Strength
Semiconductor process control equipment manufacturer KLA-Tencor is no stranger to Top Ten. The company is back in the spotlight again after lowering its fiscal second-quarter earnings estimates based on a leveraged recapitalization transaction. Ex-items earnings are now seen at between 37 and 61 cents per share, with Wall Street setting its target at 55 cents. Revenue and bookings remain unchanged, however, with bookings seen up 40% at $700 to $900 million and revenue expected to come in at between $620 and $700 million. Overall, the company remains in a strong position, with rebounding semiconductor manufacturing activity and the equipment upgrade cycle driving overall sales. A big reason for the recent strength was the firm’s huge $16.50 per share special dividend, along with a healthy share buyback program (it recently added $250 million to its repurchase authorization), as management aims to return more cash to shareholders. Combined with a healthy business outlook, that’s been enough to attract big investors.
Technical Analysis
Technically, despite a few stops and starts, KLAC has enjoyed a solid uptrend for the past two years. Recent market turmoil has plagued KLAC, however, with earnings revisions and recapitalization deals adding to the volatility. Still, the stock’s long-term uptrend remains intact, and the strength of KLAC’s upmove since October bodes well. Try to buy on dips.
KLAC Weekly Chart
KLAC Daily Chart
Incyte Corporation (INCY)
Why the Strength
Pharmaceutical companies can be divided into two groups: those that have a product on the market and those that don’t. Incyte joined the first group in November 2011, when the FDA approved Incyte’s ruxolitinib for treatment of myelofibrosis (MF), a form of blood cancer. In fact, the drug, which is marketed under the brand name Jakafi, is the only drug approved for MF! Incyte has yet to turn a profit, but investors are focusing on clinical trials for additional uses for Jakafi, including Phase III studies for use against polycythemia vera and pancreatic cancer. Earlier phase studies are underway for the use of Jakafi against advanced malignancies, non-small cell lung cancer, breast cancer and colorectal cancers. Incyte also has 10 other clinical trials underway for other drugs. Incyte posted a profit of 33 cents per share in Q3, and analysts see the company turning an annual profit in 2015. In the meantime, Incyte will remain a volatile issue, sensitive to news—either good or bad—from clinical trials. For now, however, investors are clearly bullish on the prospects for Jakafi.
Technical Analysis
INCY has come a long way from 12, which is where it was trading in 2011 when Jakafi was approved. The stock reached 71 in February 2014, then corrected sharply in March and April and spent six months building a new base between 45 and 55. The breakout above that range began on October 31 after a positive Q3 earnings report. INCY has followed through on its positive momentum, hitting 68 on the first trading day on November and climbing steadily to around 75, which is where it is now. INCY trades at a rich valuation, with a huge market cap of nearly $13 billion. But the prospect of more good news makes it an interesting speculation. We recommend buying on a pullback of at least a couple of points, with a stop at 67.
INCY Weekly Chart
INCY Daily Chart
Gentex Corp. (GNTX)
Why the Strength
Michigan-based Gentex manufactures devices for the automotive, aerospace and fire-protection industries. The company’s biggest products are auto-dimming rearview mirrors and camera-based driver-assist systems for the automotive market. Gentex operates worldwide; its customers include carmakers Toyota, General Motors and Volkswagen. The company also makes dimmable aircraft windows and fire protection products, including smoke detectors, fire alarms and signaling devices. The company owes its recent strength to an improved product mix, and lower overall purchasing costs. In late October, Gentex reported stronger-than-expected third-quarter earnings, with earnings rising 29% on revenue that improved 22% over the year prior. Top sellers so far this year include Gentex’s SmartBeam and driver assist camera systems, as well as the recently acquired Homelink system. Additionally, the company placed fourth-quarter guidance significantly above Wall Street’s expectations. While margins are currently near their historical highs, analysts believe there is room for upside, as Homelink grows beyond the automotive industry and into all terrain, off-road, agricultural and other vehicle types.
Technical Analysis
Following a strong performance in 2013, GNTX took a breather for the first three quarters of 2014; The stock hovered in a trading range just below 30 for the majority of the year. Market weakness forced GNTX to test support near 25 in October, but the company’s strong third-quarter report reinvigorated the stock, sending GNTX back toward annual highs in the 35 region. GNTX is now digesting its post earnings gains, establishing a base just above 35. You could nibble here or target a dip to 34 to buy.
GNTX Weekly Chart
GNTX Daily Chart
D. R. Horton (DHI)
Why the Strength
For many months, we’ve seen surprising strength in many housing and construction supply stocks, and since the market’s October low, the homebuilders have joined in the uptrend. As the largest homebuilder in the U.S. (it closed on 46% more homes during the past year than its closest competitor), D.R. Horton is benefiting from the positive perception; the combination of still-low mortgage rates, a pickup in the economy (the leading economic index has now had two huge up months in a row) and rock-bottom supply has investors thinking the industry’s growth should continue, or even accelerate. Horton is certainly seeing that—in the third quarter, earnings rose just 12%, but new orders leapt 38%, while backlog was up 21% in units and 29% in dollar value, as the price of new homes rose. From a big-picture standpoint, housing starts remain at just a one million per-year pace, which is one of the lowest readings of the past 55 years. If pent-up demand is released, there’s no reason that figure can’t grow at solid rates from here, and with homebuilders like Horton having already cut costs to the bone during the bust, earnings could easily surprise on the upside. Analysts see next year’s bottom line up 23%, though we think that will prove conservative.
Technical Analysis
Like most homebuilders, DHI had a great run from late-2011 through mid-2013, rallying from 8 to 27 during that time. Then it began a long, 17-month basing process, with a big decline in late-2013 and lots of choppy, tedious action this year. But since the market bottom in mid-October, DHI has acted very well, shooting straight up off its lows to multi-month highs. You could nibble here, though with the 25-day line just above 24, dips are likely.
DHI Weekly Chart
DHI Daily Chart
Tableau Software (DATA)
Why the Strength
Tableau Software is at the intersection of Big Data and Business Intelligence—the firm has made waves by developing software that easily and graphically depicts a firm’s data so that most employees (not just the few at the top) can get the most out of it. (It was spun out of Stanford a decade ago with VizQL, a technology that allows users to produce sophisticated graphs with just drag and drop functions.) Despite its average initial sale being in the $10,000 range (Tableau is trying to democratize data analytics), the company has been growing like mad; it serves 70% of the Fortune 500 and is even used to better understand the reams of data produced by other high-quality products like Splunk. While sales growth has been slowing some, it’s projected to grow in the 40% to 50% range for many quarters to come thanks to larger deals (more than 200 deals of more than $100,000 in the latest quarter alone); earnings should remain positive but fail to grow much because of heavy investments going forward (employee headcount in the third quarter was up 65% from the year before!). The main worries here are competition—IBM and Salesforce.com are jumping into the graphics analysis field—and the investment spree will keep the valuation at nosebleed levels. But Tableau looks to have a special product and rarely found growth that should keep big investors interested.
Technical Analysis
DATA came public in May 2013, built a beautiful base starting in September of that year and then launched to new highs in February. But then the glamour stocks got crushed, and the stock fell 49%, and spent months building a bottom before ramping up following the mid-October market bottom. Now it’s spent three calm weeks in the low 80s, setting up a decent entry point.
DATA Weekly Chart
DATA Daily Chart
Bloomin’ Brands (BLMN)
Why the Strength
If the name Bloomin’ Brands sounds familiar, it’s because the company operates the popular Outback Steakhouse chain of restaurants. While the company derives its name from the onion dish popular at Outback locations, Bloomin’ Brands also operates Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Steakhouse. Up until this week, Bloomin’ also operated the Roy’s Restaurant chain, which it recently sold to United Ohana, LLC. The casual dining market has been strong for Bloomin’, with all the company’s brands outperforming the casual-dining sector during the third-quarter. Overall, Outback and Fleming’s same-store sales rose 4.8%, with Bonefish sales up 2.6%. Strong international sales helped to drive third-quarter revenue 10.1% higher, bolstering management confidence heading into the end of the year. The company has also made moves to exit underperforming locations, with Bloomin’ closing all but two of its 36 restaurants in South Korea due to underperformance. While the closures cost Bloomin’ $5.4 million in severance and charges, the company believes the reorganization should allow it to focus on improving sales and marketing in other areas. While there is little sex appeal with Bloomin’, the company’s solid performance and reorganization has the makings of a wining conservative growth stock.
Technical Analysis
While BLMN showed solid growth in 2013, shares have had a rough go so far this year. Shares came into 2014 struggling with overhead resistance near 25. Stagnant growth wasn’t enough to send investors scurrying, but BLMN languished between support at 20 and resistance at 25. Weak Q2 sales unraveled support in early August, and BLMN hit a 52-week low near 15 as a result. But the stock recovered quickly, and BLMN appears to have shaken out all the weak hands. With strong Q3 earnings, BLMN has once again reclaimed support at 20, and should be headed higher once the details of the Roy’s sale are digested.
BLMN Weekly Chart
BLMN 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.
