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Top Ten Trader
Discover the Market’s Strongest Stocks

December 15, 2014

After the strong rally off the mid-October lows, most stocks began chopping around in mid-November, and now we’re seeing some real distribution crop up in the major indexes and a variety of stocks. That’s reason enough to ease off the gas pedal; cutting back on new buying, selling your weakest stock or two and booking a couple of partial profits makes sense.

Taking our Foot off the Gas

Market Gauge is 6

Current Market Outlook

If we came down from another planet and looked at the state of the market, we would conclude that there are more things for the bulls to be excited about than not—few stocks have broken down, the indexes are above their 50-day lines and the major trends are still up.

But we’ve been around for the past month, and we know there’s clearly been an increase in distribution as investors fret over the reverberations of the oil price plunge. At the very least, not a lot of money has been made since mid-November. And that’s the reason we’re taking our foot off the gas; if the market and most stocks hold support, we’ll be quick to return to a more bullish stance, but for now, we think it’s best to do some watching and waiting, and possibly sell your weakest stock or two (and take partial profits in a winner or two).

This week’s list is more growth oriented than in recent weeks as investors abandon all things commodity-related. Our Top Pick is Restoration Hardware (RH) which has a great growth story and just broke out to new highs last week.

Stock NamePriceBuy RangeLoss Limit
United Continental Holdings (UAL) 96.7662.5-64.558-59
Sierra Wireless (SWIR) 0.0039-4137-38
RH Inc. (RH) 252.9391-9584-85
Outerwall Inc, (OUTR) 0.0070-7363-64
Lululemon Athletica (LULU) 304.6950-5245-47
Fiesta Restaurants (FRGI) 0.0061-6358-59
Dollar Tree (DLTR) 0.0066-6860-62
Centene (CNC) 0.0099-10290-92
Buffalo Wild Wings (BWLD) 0.00164-170152-154
Adobe Inc. (ADBE) 315.2373-7566-68

United Continental Holdings (UAL)

Why the Strength

Thanks to a massive merger deal, United Continental is one of the world’s largest air carriers, sporting the biggest fleet of planes in the industry with more destinations than any competitor. The company’s size allows it to create efficiencies that are not attainable for its smaller competitors. More recently, plunging fuel costs have led to an increasingly profitable air carrier market, with the Dow Jones U.S. Airline Index rising 76% year-to-date! What’s more, those gains are expected to continue well into 2015. Specifically, the International Air Transport Association said that while ticket prices may decline next year, airline profits will increase to $25 billion, exceeding the Association’s $19.9 billion forecast for this year. This confluence recently led analysts at Deutsche Bank to project that 2015 will be the most profitable year in United’s history. Overall, analysts are projecting earnings growth of 80% for United in fiscal 2014, with another 47% increase in 2015. While revenue has been flat for the past several quarters, we expect this situation to improve markedly given falling fuel prices and improving economic conditions. United’s next quarterly report is unofficially scheduled for the week of January 22.

Technical Analysis

This year has been turbulent for UAL, but shares have taken off quickly in recent weeks. The stock got off to a quick start in 2014, breaching the 40 region and making a run at 50 by mid-January. However, resistance at 50 proved too much, and UAL spent the next several months bouncing between support at 40 and overhead resistance. The break came in late October, when falling fuel costs helped propel UAL past 50. The breakout spurred heavy buying, and UAL was quickly propelled north of 60. Shares are now flirting with the 70 region, as UAL attempts to form a base of support. If you’re game, UAL is buyable on dips, with a target near 64.

UAL Weekly Chart

UAL Daily Chart

Sierra Wireless (SWIR)

Why the Strength

Sierra Wireless is a leader in designing modems and wireless devices that allow PCs, notebook computers, vehicles and other various machines to communicate wirelessly. Its products are used for Internet access, e-mail, database access, vehicle dispatch and a range of machine-to-machine (M2M) applications. With the rising popularity of M2M communications, Sierra’s products—AirPrime (embedded wireless modules), AirLink (intelligent gateways), and AirVantage (machine-to-machine cloud products)—are becoming increasingly popular. But while M2M is still in its infancy, Sierra’s bread-and-butter revenue is coming from the current wireless upgrade cycle, with devices migrating from 2G to 3G and 4G networks. In fact, the company has enjoyed triple-digit earnings growth for the past two quarters, and double-digit revenue growth for the past 10! During its third-quarter earnings report in mid-September, Sierra beat the Street’s revenue expectations and placed fourth-quarter guidance well above expectations. Looking ahead, the company is projected to see full-year 2014 earnings rise 165%, with 2015 earnings gaining 79%. With recent reports forecasting solid M2M growth in 25 countries, Sierra Wireless stands to reap considerable rewards if business trends hold true.

Technical Analysis

Technically speaking, SWIR shares are little changed since we last visited the stock in mid-November. Shares spent most of November bouncing around below resistance at 40, forming a base of support near 35. SWIR attempted a breakout above 40 last week, but mid-week jitters sent the stock down for a test of support at its 25-day moving average. Support held firm, however, and SWIR is once again looking to hold firm above 40, bolstered by its 10-day trendline, and we believe that buying dips should prove rewarding.

SWIR Weekly Chart

SWIR Daily Chart

RH Inc. (RH)

Why the Strength

On its surface, Restoration Hardware looks like a high-end home furnishings maker that will ride the general housing market recovery in the quarters ahead. But, when you dig into the story, you find the company is much more than that—it’s in the midst of a major transformation that, so far, has proven to dramatically boost sales, earnings and, just as important, Restoration Hardware’s image. The company has a few dozen “regular” stores today, like those you see in the mall, but the problem is that these stores are only able to display a fraction of the company’s high-quality merchandise. The solution? Huge, 50,000 square foot showrooms, which are just starting to open across the country. (A huge, once-a-year catalog also works as the primary marketing vehicle.) In effect, the firm is breaking down the barrier between the consumer and designer, offering specialty products and even design consultation that can’t be found elsewhere. It’s still very early in the story, as the firm has only opened a couple of its giant showrooms, and another dozen or two are coming down the pike, but results have been outstanding. Long-term, management believes it can get revenue up to $4 billion as these showrooms build the brand and make it “easier” for consumers to purchase Restoration’s products. It’s an interesting idea.

Technical Analysis

RH looks primed to get going, if the market cooperates. The stock began building a huge base in June 2013, and looked like it was lifting off when it blasted ahead on earnings in June of this year … but the market correction pulled it down again. Then it built another base, and broke free from that last week on big volume. The only flaw in the chart is that the RP line has yet to punch out to new highs, but overall, the evidence points toward higher prices.

RH Weekly Chart

RH Daily Chart

Outerwall Inc, (OUTR)

Why the Strength

Outerwall is the new name for Coinstar, the company that first made hay with its coin counting and changing machines (taking a 9%-ish cut but giving consumers something of value for their unwanted pennies and nickels), and then saw huge growth from its Redbox, $1.20-per-night DVD rental. (Redbox still makes up about 80% of total revenue.) And now it has another interesting business; the firm’s ecoATM takes old cell phones and offers the consumer money for the device. While Outerwall was never as revolutionary as Netflix, business has always been good, and now management is focused solely on driving profitability instead of expansion. That’s driven free cash flow much higher, and the start of this month brought a price hike for regular DVD rentals to $1.50 per night, while video games will go to $3 per night in January. All together, analysts see the bottom line surging to nearly $8 per share next year! And not only is the stock cheap, but management is using its mounds of cash flow to repurchase a ton of stock—it bought back about 5% of the company last quarter alone, and the share count in the third quarter was down 31%! Outerwall doesn’t have a revolutionary growth story, but the top brass is on record saying it wants to return 75% to 100% of free cash flow to shareholders, and the firm’s various business have proven to be cash cows if properly managed. Barring widespread rejection of the recent price hikes (not expected), we like it.

Technical Analysis

OUTR has been a very choppy performer for most of its history, as institutional investors were never quite enamored of the story (especially compared to Netflix). But since correcting this summer and hitting a double bottom near 51 in October, shares have been very strong, driven by optimism surrounding the price hike (on the news, OUTR spiked 12% on six times average volume) and the company’s monstrous share buybacks. Expect volatility, but we think you can buy a small position here with a stop near 64.

OUTR Weekly Chart

OUTR Daily Chart

Lululemon Athletica (LULU)

Why the Strength

Lululemon Athletica designs, makes and sells high-end exercise wear, with expensive yoga pants and tops as its signature products. The British Columbia-based apparel and accessories company was a frequent feature in Top Ten from 2010 through 2012, piling up a total of 11 appearances before a series of quarterly disappointments (and a product-quality issue with some of its pants) soured investors on the story. But the company never lost favor with buyers, and its string of double-digit revenue growth stretches back at least as far as 2006. Lululemon’s clothing escaped from the athletic gear channel pretty early in its expansion, as customers started wearing their “yoga pants” everywhere. And the company’s expansion outside the U.S. and Canada has been successful in keeping growth going. The company had 289 stores at last count, including 19 new ones opened during the last quarter, and the quarterly results that were announced on December 11 reflected strong results for holiday sales to date. Lululemon is something of a turnaround story, a company that stumbled after being a darling of investors for years. As such, there may be an opportunity in a stock trading at a relatively reasonable P/E of just 26.

Technical Analysis

LULU was trading at 83 in June 2013, but bumped downhill on negative volume spikes, finally hitting bottom at 36 in June 2014. After putting in a double bottom in July, the stock bounced strongly, gapping up to 45 on September 11, but the market’s big September/October correction dropped it back to 38. LULU participated fully in the V-shaped recovery, soaring to 49 in late November. After a dip to 45 in early December, the stock gapped up again on big volume, hitting 51 last Thursday and keeping its momentum to top 53 today. LULU will likely pull back by a point or two this week, and a buy around 52 looks sound. A protective stop at 47 seems reasonable.

LULU Weekly Chart

LULU Daily Chart

Fiesta Restaurants (FRGI)

Why the Strength

Spun off in 2012 by Carrols Restaurant Group, Fiesta Restaurant Group operates and franchises the Taco Cabana and Pollo Tropical brands, with more than 315 locations in the U.S., the Caribbean, Central America and South America. Taco Cabana, found mostly in Texas, offers quick-service Tex-Mex and traditional Mexican food. Pollo Tropical offers Caribbean fare in a fast casual setting, with locations mostly in South Florida and the Caribbean. The company’s performance since its spinoff has been just as spicy as its fare, with the company posting four straight quarters of earnings growth in excess of 60%. Management is very customer-centric, with large portions of shareholder presentations and conference calls focusing on what the company is doing for the customer. This customer-centric attitude and the increasing popularity of its dining offerings has led analysts to conclude that the company may be on the verge of rapid growth. Stern Agee recently started coverage on the company with a “buy” rating and a 67 price target. Fiesta is currently forecast to post a 56% gain in earnings for 2014, and 20% upside in 2015. The company’s next earnings report is unofficially set for release at the end of February.

Technical Analysis

FRGI finished its first week of trading in 2012 at 12.25. The stock is now trading just above 63.40—a more than 420% gain! With the exception of a few dips here and there, it’s been all upside for FRGI. Shares spent 2013 rallying steadily along support at their 10-week and 25-week moving averages, topping out just north of 50. The first half of 2014 saw FRGI suffer a few dips, as profit taking and growth concerns emerged. However, since bottoming near 35 in May, FRGI has been on fire. Recently, the stock has broken out to fresh all-time highs north of 60, driven by positive analyst coverage. FRGI is hot right now, following its breakout. We recommend buying dips.

FRGI Weekly Chart

FRGI Daily Chart

Dollar Tree (DLTR)

Why the Strength

With roughly 5,300 stores in 48 states and five Canadian provinces, Dollar Tree sells housewares, glassware, dinnerware, cleaning supplies, candy, snacks, food, health and beauty, toys, gifts and a host of other items, all for a dollar or less. The company has a long history of growth and profitability, but in the years following the Great Recession, revenue growth kicked into double digits as more locations opened (the company opened 117 stores in the quarter that ended on November 1) and economic distress among consumers made its low prices attractive. Today, investors are interested in Dollar Tree in part because of the 11% revenue growth and 19% earnings growth during the latest quarter—the strongest EPS growth since Q1 2013—and partly because the company has been negotiating a merger with Family Dollar Stores. The proposed $8.5 billion merger has been under review by Family Dollar’s investors, who may be hoping for a better offer from Dollar General, the other giant in the low-priced retailing business. The FTC has indicated that it would require Dollar General to sell more than 4,000 stores to win approval of its bid, and since Dollar Tree would likely buy many of those stores, it seems to be in a position to win, whichever way Family Dollar investors decide to jump.

Technical Analysis

DLTR corrected from 60 in November 2013 to 50 in January 2014, found support at 50 several times during the first half of the year, and recovered to 55 in June. Despite a huge spike in trading volume on July 28 (when the proposed Family Dollar takeover was announced), the stock continued to trade only slightly up, meeting resistance at 57 in September and October. The V-shaped recovery of U.S. markets in October finally got DLTR moving and it was trading around 62 in November when the good earnings report gapped it up. With DLTR now trading for more than a week under resistance at 69, it looks buyable on a dip toward 67. Use a stop at the stock’s 50-day moving average, now at 62.

DLTR Weekly Chart

DLTR Daily Chart

Centene (CNC)

Why the Strength

Centene specializes in locally-based healthcare programs that address the needs of low-income, under-insured and uninsured individuals. Its Managed Care division operates through low-income Medicaid, Children’s Health Insurance Program, long-term care, Foster Care and other government programs to bring health care services to seniors, young people and others, while its Specialty Services division provides care through state programs in correctional facilities, employer groups and other healthcare organizations, competing for contracts on a state-by-state basis. Revenue growth has been very strong, rising 52% in 2012 and 34% in 2013, with earnings forecast to rise 46% in 2014 and 16% in 2015. Most recently, investors have been impressed with Centene’s recent contract win to offer additional services in Indiana and with the company’s guidance for 2015 that included revenue between $20.3 and $20.8 million (up from between $15.3 and $15.8 million in 2014) and EPS between $5.05 and $5.35 (up from between $4.35 and $4.50 in 2014). Centene acquired U.S. Medical Management in January in a cash-and-stock deal, but most of the enthusiasm investors are showing for the company stems from the trend of states turning over care of Medicaid patients to managed-care firms. It’s a growth business.

Technical Analysis

CNC’s last big correction was in 2012, and the stock has been pretty much on a roll since, with no corrections that lasted more than a month or so. The stock got a boost from the great earnings report on October 28, jumping from 79 to 89 and rambled higher for six weeks after that. Then the company’s positive guidance announcement on December 12 gapped CNC above 100 on strong volume. CNC has good momentum and looks like a reasonable buy on any pullback of a couple of points. Use a stop at 92 for safety.

CNC Weekly Chart

CNC Daily Chart

Buffalo Wild Wings (BWLD)

Why the Strength

You don’t get any easier-to-understand stories than Buffalo Wild Wings; the company has become a national sports bar chain and a destination for sports fans across the country to watch big games, track fantasy football scores and eat some pub grub. The firm’s history has always been a bit spotty, mostly because of costs; every now and then food costs (especially chicken wing prices) take a bite out of the company’s bottom line. But long-term, the store concept is proven—Buffalo Wild Wings ended the third quarter with just over 1,040 restaurants (about half franchised and half owned), and management believes it can operate somewhere in the neighborhood of 1,700 in the U.S and Canada long-term (it’s set to open 95 for all of 2014), not including overseas expansion through franchising. The stock is strong today because the third quarter report topped estimates (same-store sales growth of 6% was particularly encouraging), there’s optimism about plunging gas prices (helping all retail names) and even some excitement about its new PizzaRev business line, where customers can get custom pizzas cooked for them in just a couple of minutes. (Chipotle has a stake in a similar chain.) All told, there’s no reason to think Buffalo Wild Wings won’t continue to crank out solid sales and earnings growth for many years.

Technical Analysis

BWLD has been in a very long-term uptrend for years, but with lots of multi-month pauses and corrections along the way. The most recent of those corrections lasted 11 months before the buyers returned—BWLD rallied seven weeks in a row to its old highs, and has now tightened up in the 165 to 170 area during the past couple of weeks. A shakeout from here wouldn’t be surprising, but we think dips are buyable, with a stop in the mid-150s.

BWLD Weekly Chart

BWLD Daily Chart

Adobe Inc. (ADBE)

Why the Strength

Adobe Systems is best known to consumers as the software company behind useful design and graphics programs like Acrobat, Flash and Photoshop. But Adobe is working quickly to adapt to the new world of cloud computing, focusing on a subscription strategy that offers customers constant access to updated versions of software, forgoing big one-time sales in favor of monthly fees. The shift away from high-ticket sales to a constant revenue flow took a toll on Adobe’s results for a while, but growth for the program Adobe calls the Creative Cloud has been impressive. Last Friday, the company announced that in its fiscal fourth quarter, ended November 28, it added 644,000 new subscriptions, which led to earnings growth of 13%, a big turnaround from the 13% drop in EPS in Q3. Also impressive was news of the company’s planned $800 million takeover of Fotolia, a stock photography program. The takeover will allow Adobe to integrate the royalty-free images into its design programs (at an increased subscription price), while letting Fotolia continue to operate as a separate entity. Analysts have raised their price and earnings targets for Adobe and investors are buying the cloud story as evidence of its success gathers.

Technical Analysis

ADBE made a great run from 23 in August 2011 to 75 in June 2014. That’s when the shift to the new revenue model daunted investors, causing ADBE to trade sideways for six months. But last Friday’s earnings report kicked the stock out to new all-time highs on more than six time average volume. ADBE has pulled back from its Friday close at 76 and traded down a few points on calm volume today. You can either buy a small position here or wait for ADBE to confirm its breakout by using 75 as support and making further headway. Either way, a stop around the 200-day moving average at 68 makes sense.

ADBE Weekly Chart

ADBE 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.

FirstStockSymbolTop PickOriginal Buy RangePrice as of December 15, 2014
12/8/14Alliance Data SystemsADS273-284283
11/10/14Allison TransmissionALSN31.5-33.534
12/8/14AMAG PharmaceuticalsAMAG
12/8/14Applied MaterialsAMAT23-24.523
12/1/14Bloomin’ BrandsBLMN21-2223
12/1/14D.R. HortonDHI
11/17/14Electronic ArtsEA40-4245
7/7/14Gilead SciencesGILD84-87103
9/2/14Hain CelestialHAIN94-98110
6/16/14Health NetHNT38.5-4051
8/25/14Home DepotHD
10/20/14Jack in the BoxJACK65-6878
12/1/14KLA TencorKLAC66-6867
11/17/14Leggett & PlattLEG39-4141
10/6/14Monster BeverageMNST88-92105
10/13/14Mylan LaboratoriesMYL50-5155
12/8/14Old DominioinODFL77-7977
12/8/14Packaging Corp.PKG76-77.576
9/15/14Palo Alto NetworksPANW
11/17/14Sierra WirelessSWIR
12/1/14Tableau SoftwareDATA81-8582
10/6/14Ulta SalonULTA113-117128
10/13/14United TherapeuticsUTHR120-124129
12/8/14Valeant PharmaceuticalsVRX140-144138
12/1/14Whole FoodsWFM46-4849
None this week
11/10/14Spirit AirlinesSAVE73.5-7769
DROPPED: Did not fall into suggested buy range within two weeks of recommendation.