Up, Up, Up ...
Current Market Outlook
The major indexes boomed again today, with three of the five we track (S&P 500, Nasdaq and NYSE Composite) all notching all-time highs. We would point out that today’s move came on obvious news (likelihood of corporate tax cuts), and that sentiment is getting hot and heavy, which increases the risk of a market pullback or a generally trickier environment (rotation, choppy trading, etc.). Thus, you want to keep your feet on the ground and be sure you’re looking for decent entry points and honoring your stops. But there’s no question the majority of evidence remains solidly positive, and until that changes, you should remain in a bullish frame of mind.
Not surprisingly, this week’s list has many strong charts in a bunch of different industries. Our Top Pick is Urban Outfitters (URBN), a solid turnaround situation in a newly leading sector. Try to buy on weakness.
| Stock Name | Price | ||
|---|---|---|---|
| Canada Goose Holdings (GOOS) | 46.21 | ||
| CF Industries (CF) | 45.23 | ||
| Cree, Inc. (CREE) | 67.96 | ||
| KB Home (KBH) | 36.05 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| PRA Health Sciences Inc. (PRAH) | 96.08 | ||
| Sage Therapeutics (SAGE) | 0.00 | ||
| SVB Financial Group (SIVB) | 0.00 | ||
| Urban Outfitters (URBN) | 0.00 |
Canada Goose Holdings (GOOS)
Why the Strength
We wrote about Canada Goose a month ago, but we missed our buy price as the stock kited higher after its big breakout. But we’re recommending it again because we feel the stock is an early-stage opportunity, and the company has a chance to be a great, high-end retail brand. To review, the company focuses on high-quality, high-priced (usually north of $500), functional outerwear, including snowsuits, vests, hoodies and jackets; it’s also introduced some spring outerwear, but the vast majority of its business remains winter attire. (You can see that in its results, as the vast majority of its revenue comes in the second half of the calendar year.) Most of the business is wholesale (nearly 90% of it), though direct-to-consumer is growing rapidly (up nearly four-fold in Q3) thanks to the launch of some new online and brick-and-mortar stores; interestingly, direct-to-consumer already makes up nearly one-fifth of gross profit. Of course, high-end retail is always a fickle business, but Goose has a pristine track record of growth, and the future looks as bright as ever—sales, earnings and cash flow all rose between 32% and 37% in the third quarter, and analysts expect the current holiday quarter to produce triple-digit earnings growth. The valuation is rich (60 times earnings!), but that’s not unusual for new issues with unique growth brands—it reminds us a bit of Michael Kors when it came public in 2011. We like it.
Technical Analysis
GOOS has very bullish chart. The stock came public in March, rallied to 24 in June but then had a typical post-IPO droop. But that retreat resulted in a beautiful base, with many solid up-weeks in good volume and a bunch of tight weeks in October. The breakout came in early November on earnings, with shares rallying to 29 before pulling back to their 25-day line last Friday. We think it’s buyable here or on dips.
GOOS Weekly Chart
GOOS Daily Chart
CF Industries (CF)
Why the Strength
CF Industries is the biggest producer of nitrogen in the world. The company has seven manufacturing plants and owns 24 distribution facilities and leases others. The nitrogen CF makes from natural gas feedstock is manufactured primarily as ammonia, and is used to make fertilizers—urea ammonium nitrate, granular urea and ammonium nitrate. The company’s revenue and earnings have been held down by low global ammonia prices caused by oversupply. But North America is still a net importer of ammonia byproducts and Chinese exports are shrinking, which has investors believing that higher prices are on the horizon. In Q3, the company reported a 28% increase in revenue, but also booked its ninth consecutive quarter of earnings declines. Despite the unimpressive numbers, CF Industry has repurchased $4.4 billion of its stock since 2012 and returned $1.3 billion to investors as dividends. So investors are looking ahead to 2018, when the company’s expenditures on distribution infrastructure will bear fruit in a rising price environment. The company is buying back $200 million of its high-interest senior notes, which will improve its bottom line. Earnings are expected to turn positive again in 2018 and the company’s generous 2.9% dividend yield and recovering stock price will make it even more attractive. It’s also a plus that natural gas prices have plummeted of late, which could cut costs next year.
Technical Analysis
CF capped a long rally when it tagged 70 in July 2015, then skidded below 20 in August 2016. A rally to 37 in January was followed by a correction to 25 in May, but the stock gathered steam from that point and is now trading at its highest point since December 2015. With positive momentum and a nice dividend, CF could easily continue its recent strength. You could buy here or (preferably) on dips.
CF Weekly Chart
CF Daily Chart
Cree, Inc. (CREE)
Why the Strength
Over the last three months, Cree has evolved from a consistent underperformer into a compelling semiconductor equipment turnaround story. The catalyst was the hiring of a new CEO, former Freescale Semiconductor CEO Gregg Lowe, in September. Mr. Lowe promised a full review of the business, which includes Wolfspeed (semiconductor solutions for power and radio-frequency applications (up 33% last quarter), LED lighting systems (down 19%) and LED bulbs (up 5%). Cree was working on the sale of Wolfspeed, but Mr. Lowe’s turnaround plan includes holding onto that business, which enjoys high market share and the fattest gross margins among the company’s segments (49% last quarter, versus less than 30% company-wide). Despite capacity constraints, Wolfspeed is growing quickly and Cree plans to invest $220 million to double capacity. It is also enjoying early success making chips for electric vehicles, including power and battery storage. Another page in this turnaround story flipped recently when two top executives left the ailing lighting division, spurring speculation that something significant is cooking. With the turnaround in its early innings, analysts see revenue shrinking 4% in fiscal 2018 (ending next June), and EPS of just $0.11. But looking out to 2019, 7% revenue growth and 355% EPS growth (to $0.50) should keep big investors interested.
Technical Analysis
CREE didn’t do much of anything for years, then the hiring of the new CEO in late-September kicked the stock into gear, with another big jump to 35 following the quarterly report on October 17. CREE then effectively took a breather, rallying as high as 37.5 but finding itself back at 34 and near its 50-day line early last week. But now the buyers are back, driving the stock to new highs on solid volume. It looks buyable here or on dips.
CREE Weekly Chart
CREE Daily Chart
KB Home (KBH)
Why the Strength
Few investors know it, but homebuilders have been one of the best-performing groups this year, and we’re impressed with the group’s tight recent trading despite the huge run. KB Home is a mid-cap leader in the group that we’ve written about before in Top Ten—the company is heavily focused on first-time (53% of customers) and first move-up (22%) customers mostly in the southeast, Texas, and (especially) California. All told, the firm operated in 234 communities at the end of August, though it’s announced numerous grand openings of new communities during the past couple of months. KB does have some unique aspects business-wise, including a build-to-order facet, but the stock is strong today for reasons similar to its peers: The housing market remains in good shape, new home sales are rising and corporate tax cuts look set to boost the bottom line. In the third quarter (ending in August), not only did sales and earnings top expectations, but new orders rose 15% (in dollar terms) while its backlog lifted 14%. Next year, analysts see earnings up 21%, though that could prove conservative given the likelihood of tax cuts; KB paid an average tax rate of around 37% during the past three quarters. Because the company’s fiscal year ends in November, the next quarterly report is due January 10—Wall Street sees revenues rising 14% and earnings booming 92%.
Technical Analysis
KBH had a smooth run from March through June, then fell in 10 of the next 11 weeks, though the decline was mild (just 15%). A late-September earnings report kicked off a new advance, and KBH has continued to trend up along its 25-day line since. Shares have tightened up a bit during the past couple of weeks, a positive sign. We’re OK taking a small position here or on dips.
KBH Weekly Chart
KBH Daily Chart
Lululemon Athletica (LULU)
Why the Strength
Lululemon is what we call a “Romance-Transition-Reality” situation. The firm’s Romance Phase, when the stock makes its biggest advance, played out from 2009 to 2011 as the company’s yoga-inspired wear became the poster child of the “athleisure” movement that gained popularity back then. But some company snafus and quality control issues (including see-through pants!), along with greater competition from the likes of Gap and others, made business tough—the stock has been moving sideways for the past four years (Transition Phase) as earnings have flat-lined. But now it appears Lululemon may be turning the corner (Reality Phase), and investors are responding—in the third quarter, sales (up 14%) and earnings growth (up 19%) both accelerated and topped expectations, and some other tidbits (like online revenues growing 25% and international growth) were very encouraging. Moreover, management sounded a very bullish tone for the holiday quarter, partially due to some new irons in the fire (opening up 22 seasonal stores, looking more at outerwear and jackets as growth opportunities). Analysts see earnings up 22% this quarter, and long-term, the top brass expects revenues to hit $4 billion by 2020 (up 17% annually during the next three years). It’s not the vibrant growth company it was a few years ago, but Lululemon appears to be back on a solid track.
Technical Analysis
LULU ran from 2 at the lows of the financial crisis to 81 in May 2012, and has now spent more than four years bobbing between 40 and 80 since then. More recently, the stock was in the doghouse, gapping down on earnings in March of this year and remaining on its back for a couple of months. But LULU rallied back to 64 in August, based out for another two months, and is now trading at 14-month highs after earnings. If you’re game, you can buy a little on modest weakness.
LULU Weekly Chart
LULU Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
MercadoLibre, the eBay of Latin America, is growing into an online marketplace with the reach and power to dominate ecommerce in the region. Brazil and Argentina are the main sources of revenue, but the company has operations in 18 countries and its MercadoPago online payment program is a huge plus in facilitating cross-border commerce. Investors panicked when Amazon announced that it would start selling electronics in Brazil, causing an 18% dip in MercadoLibre’s stock. But MercadoLibre’s secret weapon continues to be MercadoPago, which is its fastest-growing source of revenue, up 74% in Q3 in U.S. dollar terms. MercadoEnvios, the company’s delivery service, achieved an 80% jump in deliveries in Q3. The big source of growth for MercadoLibre is the continuing internet penetration of Latin America, mostly fuelled by cellular devices, and the gross merchandise value of mobile transactions reached 47% of total, with 50% likely within the next quarter. The company now has 106 million listings on its marketplace, the first time that number has topped 100 million. The company’s stock received a nice boost from its November 2 quarterly report and another on December 13 from an analyst’s upgrade.
Technical Analysis
MELI rallied strongly from 84 in February 2016 to 298 in May 2017 (with a sharp correction from 194 to 149 in the last three months of 2016 to January 2017 along the way). The stock hit a wall at that point, consolidating for seven months and only broke through the 300 barrier on December 13, when it gapped up from 295 to 319 on heavy volume. MELI isn’t cheap at a 92 P/E, but there aren’t many stocks with broad exposure to the growth of the internet in Latin America. We think MELI is buyable on any dip toward 320, with a stop around 290.
MELI Weekly Chart
MELI Daily Chart
PRA Health Sciences Inc. (PRAH)
Why the Strength
PRA Health is a North Carolina-based clinical research organization (CRO) that provides outsourced services to biotech and pharmaceutical companies, ranging from basic chemistry to clinical development, trial enrollment and design. The company is particularly strong in late-stage development services, where clients appreciate its ability to cut months off the timeline to drug approval. That can mean millions of extra dollars in revenue before drugs go off patent, which is part of why PRA Health’s growth is so robust. The company has delivered double-digit revenue growth in each of the past 10 quarters, has been profitable for years, and beat Q3 expectations when it reported 28% revenue growth and EPS of $0.88, up 38% from a year ago. Following the results, management raised guidance, partially to reflect the closing of the Symphony Health acquisition. Analysts currently forecast 22% revenue growth in 2018 and EPS growth of 21% (to $4.01). The Street likes that PRA Health has repeatedly landed lucrative strategic partnerships with large clients, and a recent win with Japan’s Takeda Pharmaceuticals to take over Takeda’s Pharmaceutical Data Services along with 60 employees, was just one more example. Analysts clearly like what they see, and recent initiations and institutional buying suggest the stock has more upside.
Technical Analysis
PRAH spent the first half of 2017 trending smoothly higher, then entered a three-month consolidation phase that lasted from July through September. The stock broke out above 80 in early-October, but that move didn’t go far, setting up another tight consolidation. But PRAH’s recent rally to new highs, which came on many days of excellent volume, looks for real. You can buy some here or on dips.
PRAH Weekly Chart
PRAH Daily Chart
Sage Therapeutics (SAGE)
Why the Strength
We touched on Sage Therapeutics back in late-February after the clinical-stage biotech company set the stage for a heavy dose of data readouts later in the year, and a possible commercial launch in 2018. The story has gotten a lot more intriguing over the last 10 months! To refresh your memory, Sage develops novel medicines to treat central nervous system (CNS) disorders, and two of its compounds, dubbed SAGE-547 and SAGE-217, are what’s causing all the excitement. First, SAGE-547 did fall flat in late-stage trials for super-refractory status epilepticus in September, but all was forgiven in November when the treatment (which is in multiple clinical trials for many diseases) scored big in two Phase 3 trials for the treatment of postpartum depression. That turned out to be just an appetizer, though, because two weeks ago, Phase 2 trial results for SAGE-217 for the treatment of major depressive disorder wowed investors—64% of patients responded to the drug within 15 days, nearly three times as much as the placebo. That caused the stock to go bananas, with investors thinking both drugs could end up being commercial successes. The stock’s action is obviously very lumpy and dependent on data releases, which is the risk of owning development-stage biotechs. But with one drug increasingly likely to treat several conditions, and a $345 million secondary offering out of the way, risk-tolerant investors are likely to continue to like Sage.
Technical Analysis
SAGE moved gradually higher in the first nine months of 2017, but since then, the moves have all come in response to data—first a big dump in September, then a strong gap to new highs near 100 in November, and then, two weeks ago, a gigantic liftoff of 70% after the SAGE-217 results. Obviously, it’s a speculation, but the fact that SAGE has held those big gains is impressive. If you’re game, we’re OK with a nibble here and a loose stop.
SAGE Weekly Chart
SAGE Daily Chart
SVB Financial Group (SIVB)
Why the Strength
We’ve had a couple of Bull Market stocks in Top Ten during the past two weeks, but all financials are acting well, and of the traditional banks, SVB is our favorite. Why? Because it’s one of the growthiest banks out there, lending money to innovative, high-growth areas, especially private equity and venture capital, which combined make up 40% of the firm’s loans. (Life sciences, healthcare and technology are also popular targets for its loans.) That emphasis does mean SVB’s business is a bit more cyclical than many others, but right now, business is excellent, with both sales growth and earnings growth accelerating over the past couple of quarters, with most of the company’s sub-metrics also looking good—total assets rose more than 17%, loans rose 16% and net interest margin lifted from 2.75% a year ago to 3.10% in Q3. Looking ahead, investors are growing increasingly bullish that 2018 will continue these excellent growth trends, as the economy picks up steam, interest rates rise (which bolsters the firms interest income) and, of course, that corporate tax cuts will give SVB’s bottom line a permanent lift (the company paid has paid a 36% combined tax rate in 2017 thus far). Analysts see Q4 earnings up 38% and 2018 up 22%, both of which could prove conservative. As far as banks go, we like it.
Technical Analysis
SVB also has one of the best-looking charts in the banking along with its peers from March through the summer and early fall, but then gapped up strongly to new highs following earnings in late October. After a quick pullback, SVB has marched higher and hit higher highs on good volume during the past couple of weeks, confirming its leadership position. A dip toward the rising 25-day line would mark a good entry point.
SIVB Weekly Chart
SIVB Daily Chart
Urban Outfitters (URBN)
Why the Strength
The rebound in retail stocks after they were pretty much given up for dead has been one of the biggest stories of the second half of 2017. Urban Outfitters, a Philadelphia-based apparel chain with 245 Urban Outfitters locations, 225 Anthropologie locations, 130 Free People stores and associated websites plus 12 restaurants. Free People wholesale also sells through about 1,900 department and specialty stores worldwide. The company is making its first appearance in Cabot Top Ten Trader today because its revenue trends—especially sales of Free People merchandise—are picking up steam after a weak few quarters. Q3 results showed a 4% increase in revenue and a 3% increase in earnings, but all three of the firm’s brands saw positive comp-store sales and earnings crushed expectations. The retail sector is in a strong recovery and Urban Outfitters has a good mix of brick-and-mortar, online and wholesale business. With two well-received quarterly earnings report in a row (August 16 and November 20), investors remain enthusiastic. The company also increased its share buyback authorization in its latest quarterly report by 20 million common shares (in addition to the 985 thousand shares remaining on its February 2015 authorization), and the firm looks likely to benefit from the coming corporate rate cut.
Technical Analysis
URBN has been an up-and-down proposition that has traded flat over the years. But the short-term situation is quite positive, with URBN up from 17 in the middle of August and with a three-day surge in volume during buying days from November 17 through November 21. URBN took a bit of a rest under resistance at 33 since December 4, so today’s pop above 34 is a positive sign. URBN looks like a good buy on normal weakness with a loose stop in the high 20s.
URBN Weekly Chart
URBN 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.
