The Sellers are Back in Control
Current Market Outlook
The broad market’s weakness has finally caught up with the major indexes. Last week we saw an end to the post-September market rally, with all major indexes (and most stocks) breaking down. We never got too bullish in recent weeks because of all the warts on the rally, and now it’s time to be cautious, selling your losers and laggards and holding plenty of cash. From here, we’re open to any scenario, ranging from yet another quick snapback to a prolonged downtrend after months of topping action. Just following the evidence, we’re moving our Market Monitor down to the lower end of neutral.
This week’s list reveals that despite the broad market implosion, there are still many resilient stocks; you could nibble on one or two or just add them to your watch list. Our Top Pick is TAL Education (XRS), a stock that looks to be in a bull market of its own.
| Stock Name | Price | ||
|---|---|---|---|
| TAL Education (XRS) | 0.00 | ||
| Wayfair (W) | 167.03 | ||
| Take-Two Interactive (TTWO) | 123.32 | ||
| NVIDIA Corporation (NVDA) | 242.42 | ||
| ServiceNow (NOW) | 341.86 | ||
| Integrated Device Technology (IDTI) | 0.00 | ||
| Five Prime Therapeutics (FPRX) | 0.00 | ||
| Eagle Pharmaceuticals Inc. (EGRX) | 0.00 | ||
| Acuity Brands (AYI) | 0.00 | ||
| Abercrombie & Fitch (ANF) | 15.37 |
TAL Education (XRS)
Why the Strength
Education in China is big business, as most families have just one child, and that frees up considerable resources for intensive tutoring and preparation. (The single-child policy was recently scrapped, and a wave of second children coming along in a few years could be a future factor in investors’ liking for educational stocks.) TAL Education, making its Top Ten debut today, offers services from kindergarten through high school, concentrating on core academic subjects, including math, English, Chinese, physics, chemistry and biology. Classes come in three tiers, with students learning in small classes, via personalized premium services and through online courses. Starting with one learning center in Beijing in 2003, TAL has expanded to 19 cities and 300 learning centers, and has grown revenue by 39% and 38% in the last two fiscal years. While most growth has been organic, TAL acquired rival Firstleap Education and its 60 learning centers in September 2015 for an undisclosed sum. Some investors like TAL Education’s aggressive expansion program, some like the strong results from the latest quarterly report on October 22—100% earnings growth on a 42% revenue increase—and some like the addition of the company to the MSCI Emerging Markets Index that was announced on November 12. There is plenty of economic logic to all three.
Technical Analysis
XRS came public in October 2010 and had a rough time of it until the middle of 2012, when it began a rally that gained momentum in 2013. 2014 brought a couple of three-month corrections followed by rallies to new highs, and that pattern repeated in 2015. But since late September, XRS has been on fire, rocketing from 30 to 45 with just one week of modest pullback. Volume has also increased significantly, including a major spike on November 30. XRS has pulled back slightly from last week’s high at 47. Try to get in under 45, and use a stop around 41.
XRS Weekly Chart
XRS Daily Chart
Wayfair (W)
Why the Strength
Wayfair is an increasingly successful online furniture seller (selling via five separate brands including Birch Lane and Joss & Main) that is seeing revenue growth accelerate and has attracted some smart institutional investors (like Fidelity OTC and Magellan Funds and Wasatch Core Growth Fund, all of which own decent-sized positions). Wayfair offers more than seven million products with over 7,000 suppliers, and the potential is huge—whereas just 7% of home goods were purchased online in 2013, that figure should grow to 15% to 30% by 2023. Wayfair is taking full advantage of that—in the third quarter, not only did revenue growth accelerate to 77%, but direct retail revenue mushroomed 91% and repeat customers placed 55% of all orders. (Active customers grew 61% to 4.6 million.) And that momentum continues, with the five-day shopping weekend (Thanksgiving through Cyber Monday) seeing sales up 130% from the year before. All of that is great … but many are not convinced, including one hedge fund that is short, claiming Wayfair’s lack of profitability and poor products (some products allegedly have too much formaldehyde) will crush the stock. We’re not going to get into that food fight, but we do think the stock’s growing sponsorship (225 mutual funds own 25 million shares) is a sign many big investors see opportunity.
Technical Analysis
W came public in October 2014, formed a huge IPO base during the next 10 months, and then broke out powerfully in August. But then things got interesting—one short-selling firm came out against W, and the market also fell apart, dragging W down. But shares found support at their 40-week moving average twice in the next three months, and now, even as the market weakens again, the stock is holding up near resistance around 47. It’s not for the faint of heart, but if you want in, a small position here with a stop just below 40 could work.
W Weekly Chart
W Daily Chart
Take-Two Interactive (TTWO)
Why the Strength
Take-Two makes some of the most popular video games on the market, and new versions of many of those games have helped fuel a sales boom. Grand Theft Auto 5, NBA 2K16 and WWE 2K16 have been among the biggest sellers, and fresh updates to the popular PlayStation and Xbox game consoles have also helped. The company has also gotten the hang of the switch to digital games, which don’t require a console and allow users to play games from their computers or smartphones. Digital revenues were up 57% last quarter, and now account for 39% of Take-Two’s total sales. All together, Take-Two’s sales have increased 119% and 175%, respectively, in the last two quarters. That’s a nice start to Take-Two’s 2016 fiscal year, which ends March 31, 2016, and an encouraging turnaround after the company’s sales slipped in four of the previous five quarters. The company’s top-line about-face has prompted hedge funds to get back into the fray—institutional ownership of Take-Two stock is up 9% since March.
Technical Analysis
As institutions have returned, TTWO has taken off. The stock bottomed at 27 in late September but has been stair-stepping higher since, topping a record-high 36 last week. Well clear of its 50-day moving average for two full months, TTWO hasn’t showed much weakness of late, still building its 25-day moving average even as the overall market plunges. Impressive! Given its resilience, we’re OK with a small buy around here, but we also advise a stop just under the 50-day line. Or you could just keep the stock on your watch list.
TTWO Weekly Chart
TTWO Daily Chart
NVIDIA Corporation (NVDA)
Why the Strength
Chip stocks were the dog’s dinner earlier this year, basically topping out in March (except for a one-day surge in June) and leading the way lower into the August mini-crash. Now, though, chip stocks are relatively resilient, and Nvidia is, in our view, the best of the bunch. The company is the hands-down leader in graphics chips, and those chips are finding their way into more and more next-generation products. The entire gaming device industry is in the early innings of a major upgrade cycle (most gamers are using devices that have less power than they should); gaming-related revenues were more than half of total revenues in the third quarter, up 44% from a year ago. Another big driver in the future is the automotive business, as higher-quality infotainment systems and semi- and (eventually) fully-autonomous driving require the more powerful chips that Nvidia provides. In the third quarter, auto-related revenues made up just 5% of business but were up 52% and have the potential to explode in the years ahead. Throw in some exposure to the data center boom, and it’s likely Nvidia’s position in newer, rapid-growth industries will cause growth to accelerate in the quarters ahead. Lastly, with cash flow improving and valuations reasonable, management is set to return $1 billion through share buybacks and dividends (1.4% annual yield), which is a lot compared to the current market cap of around $17.5 billion. The story has lots of potential.
Technical Analysis
NVDA broke out of a nice base on September 30, the second day off the bottom of the August-September market correction. And it’s been like smoke up a chimney since, never falling below its 25-day line and gapping up on earnings in November. Even last week, NVDA barely retreated. Obviously, if the market stays weak, all bets are off, but if you want to take a stab at the stock, nibble on dips to the 25-day line (nearing 32) with a stop around the 50-day line (just below 30).
NVDA Weekly Chart
NVDA Daily Chart
ServiceNow (NOW)
Why the Strength
Rapid sales growth, booming earnings, huge earnings estimates, top-notch sponsorship, plenty of trading volume and a unique product … ServiceNow might never be a household name, but it has all the characteristics of an emerging blue chip. At its heart, the company’s software platform helps many areas of an organization communicate more efficiently and streamline repetitive, administrative tasks. Instead of relying on emails back and forth (as the vast majority still do, even with supply chain partners) or handling routine processes manually (like organizing new employees’ computers and security clearances), ServiceNow’s various offerings streamline all the complexities that big companies run into every day. And, while we don’t pretend to be experts on its software, it gets rave reviews from customers, evidenced by a 97%-plus renewal rate. In total, the market for ServiceNow’s software is north of $40 billion, so the opportunity is massive; the firm will book $1 billion in revenue this year and management is on record forecasting $4 billion by 2020. As for competition, there is some, but ServiceNow’s sole focus and head start has it crushing others as it signs up more and more Fortune 2000 customers. The valuation is huge, but big investors don’t mind (Fidelity and T. Rowe Price own a combined 17% or so of the company). With years of fast growth still ahead, ServiceNow is worth watching.
Technical Analysis
NOW hit a major peak in March 2014 and made no net progress from that point until early October of this year—19 months of choppy ups and downs that wore out the non-believers. But then NOW got going, rising five weeks in a row to new price and relative performance (RP) peaks, eventually pushing above 90 before retreating sharply last week. The market remains the elephant in the room, of course, but if you want in, a small position here with a tight stop in the high 70s.
NOW Weekly Chart
NOW Daily Chart
Integrated Device Technology (IDTI)
Why the Strength
Integrated Device Technology (IDT) occupies a unique space within the mobile and wireless boom. It makes chargers for smartphones, tablets, digital cameras and other devices that allow you to charge them without having to find the nearest outlet. Wireless chargers are invaluable for anyone who is constantly on the move and even more frequently on their smartphone or iPad and needs to recharge every few hours. That’s why IDT’s sales increased 18% in 2015 and earnings per share expanded by 90%. Stock buybacks helped boost the latter number, and the company plans to ramp up buybacks even more after authorizing another $300 million share repurchase on top of the $231 million that was remaining. The company’s 32% after-tax margins—up from 15% two years ago—have made all the buybacks possible. They also allowed IDT to buy Zentrum Mikroelektronik Dresden AG, a German digital power chipmaker that serves the automotive and industrial markets, for $310 million. That acquisition should add to IDT’s growth: the company is expecting revenues to jump 18% in its current fiscal year (ending in March 2016), with a 44% EPS increase.
Technical Analysis
IDTI has been on a steady advance since the August 25 market bottom, jumping from 17 to as high as 28. The big push came in October; since topping 26 on October 28, the stock has been stuck in a range between 25 and 28. It currently trades right in the middle of that range, which is very impressive given the selling going on in the broad market. Any move below 25 could mean momentum has waned; a move above 28 could be the beginning of another big breakout to the high side.
IDTI Weekly Chart
IDTI Daily Chart
Five Prime Therapeutics (FPRX)
Why the Strength
As a clinical-stage biopharmaceutical company, Five Prime hasn’t ever made a dime in profit. But the company has a strong roster of strategic collaboration partners to provide funding and three candidate drugs in Phase 1 trials against different types of cancer and rheumatoid arthritis. Another immuno-oncology drug is in pre-clinical development. Five Prime’s competitive advantage is a library of more then 5,700 human proteins that include the difficult-to-reproduce 5 prime ends of their copied DNA. The company thus has a huge resource for the development of protein drugs that may mimic the success of previous blockbuster protein drugs like Lantus (insulin glargine), Herceptin (trastuzumab) and Humira (adalimumab). The production of functional proteins is a major roadblock to other companies pursuing the kind of cell-based screening system used by Five Prime, which accounts for the attention it’s getting from investors. The specific news generating excitement from investors was the October 15 announcement of a $1.7 billion deal with Bristol-Myers Squibb ($350 million immediately, plus up to $1.39 billion in development and regulatory milestone payments, plus double-digit royalties on any drugs that gain approval). Five Prime’s stock has been on a tear since then. This is similar news to last year’s announcement of a $124 million deal with GlaxoSmithKline that keyed a similar bout of investor enthusiasm. This is a speculative investment, but the support of Bristol-Myers Squibb has been enough for many investors.
Technical Analysis
FPRX is still fairly young, coming public in September 2013. The stock made a big run in late 2014, but gave back much of that rally in a sloppy downtrend that lasted until its big October blastoff. FPRX gapped up from 17 to 28 on October 15 and followed through to near 40 last week. If you like the story, you can buy a small amount right here, but be prepared to be patient, as the news stories that power rallies are not frequent. Also, keep your positions small and use a looser stop than usual.
FPRX Weekly Chart
FPRX Daily Chart
Eagle Pharmaceuticals Inc. (EGRX)
Why the Strength
A small, clinical-stage biotech based in Woodcliff Lake, New Jersey, Eagle Pharmaceuticals captured Wall Street’s attention last week when the Food and Drug Administration approved its new cancer drug, Bendeka. The injectable drug is intended to treat patients with chronic lymphocytic leukemia and indolent B-cell non-Hodgkin lymphoma. Each disease affects fewer than 200,000 people, which is why the FDA gave Bendeka “orphan drug” status—meaning the disease it’s treating is rare. Eagle developed the drug, but giant Teva Pharmaceuticals will market and distribute it. Per their licensing agreement, the FDA’s approval of Bendeka means Teva will pay Eagle $15 million as part of a $90 million, incentive-laden agreement. That qualifies as a financial windfall for a company with sales totaling less than $12 million in the last two quarters. Bendeka is expected to be available for commercial use sometime in 2016, and if Bendeka meets certain sales milestones, Teva will owe Eagle another $75 million. As a result of the drug’s approval, analysts are expecting Eagle’s per-share earnings to reach $6.46 next year after being mostly in the red since the company went public.
Technical Analysis
EGRX came public at 12 in February 2014, and for the rest of the year, the stock barely budged. Once the calendar flipped to 2015, things started happening: it ticked up to 18 at the beginning of the year, gapped up to 38 in February, then continued ascending all the way to 100 by August. A big crash came that month when the market collapsed, and biotechs especially took it on the chin; EGRX dipped as low as 58 on October 22. After hitting that bottom, however, the stock started rising fast again, and big volume buying on last week’s drug approval news pushed the stock from 81 back to 100, before pulling back. If you want to nibble, you could take out a small position here, and add to it if the stock breaches resistance at 100. Set a hard stop near 80, which has acted as support for the past month.
EGRX Weekly Chart
EGRX Daily Chart
Acuity Brands (AYI)
Why the Strength
Acuity Brands is a lighting manufacturer that’s doing big business as homes and businesses in North America switch from power-hungry incandescent lighting to more efficient LEDs (light-emitting diodes) for their illumination. The company is also enjoying lower costs due to the six-year decline in the price of copper, the material of choice for lighting installations. And lastly, Acuity is growing through acquisition, as one of its wholly-owned subsidiaries, Acuity Brands Lighting, bought Juno Lighting—a leading producer of downlighting and track lighting fixtures—for $385 million. Acuity has strung together 10 quarters of revenue growth between 11% and 15%, and earnings estimates for fiscal 2016 (fiscal year ends in August) call for 27% growth, with 23% in 2017. AYI has been featured in Top Ten four times previously in 2015, confirming the company’s unusually robust momentum among growth investors. With good news on the demand side, the materials side and the acquisition side, Acuity looks very strong. The company will announce its fiscal Q1 results on January 8.
Technical Analysis
AYI has had only one significant correction since it kicked off a new uptrend at the start of 2015. The stock pulled back from 212 in August to 168 in late September, but powered back to new all-time highs by the end of October. In short, AYI has been a real tractor. AYI pulled back from 234 to 224 in the first week of December, but has pushed out to new highs again. Given its persistent advance, you can buy on dips. Just remember that the company’s quarterly report is less than four weeks away—analysts are looking for $1.59 per share in earnings and $740.8 million in revenue—and trail a stop at 10% below its current price until you see how investors react to the news.
AYI Weekly Chart
AYI Daily Chart
Abercrombie & Fitch (ANF)
Why the Strength
It’s not exactly in tune with the holiday spirit, nor the Black Friday ethos of today, but Abercrombie & Fitch made more money than expected last quarter by offering fewer discounts. That prompted margins to more than triple from the previous quarter, and earnings per share to improve year over year for just the second time since early 2013. While sales slipped 4% from the fourth quarter in 2014, and same-store sales declined 1%, both those figures exceeded analyst expectations and marked the smallest drop-offs in nearly two years. Abercrombie has been losing customers in recent years due to increased competition in the teen retailer space and to the general shift to online retailers. But by limiting promotions in its October quarter, Abercrombie may have stopped the bleeding—at least for a little while. And with the earnings release coming out right before the holiday shopping season, the news was very well timed as far as Wall Street was concerned. It’s a decent-looking turnaround situation.
Technical Analysis
Down in the dumps for most of the year, ANF sprang to life after the November earnings release, vaulting from 18 to 26 in a week. It’s been building a base there in the three weeks since, never falling below 25. If it breaks out of that holding pattern, there’s a decent chance the next big move will be up now that the stock has been trading above its 50-day moving average for a full month. December is a good time to buy retail stocks, and few have more momentum than ANF right now. If you do buy, any break below the moving average (22.5 as of this writing) means it’s time to cut your losses.
ANF Weekly Chart
ANF 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.
