Remain Cautious
Current Market Outlook
Last week had some promising moments, but by week’s end, the sellers had pushed the major indexes back down on the week. At this point, the bears are running wild, as most of the major indexes remain in wide trading ranges. At the very least, the intermediate-term trend is sideways-to-down, and the broad market is in poor health, with hundreds of stocks hitting new lows on a daily basis. It’s OK to hold some resilient performers, but we urge a cautious stance, with plenty of cash on the sideline and limiting new buying to just small positions of resilient stocks.
This week’s list has some solid ideas, though there are no broad trends apparent—mainly company-specific situations that have attracted some buyers. Our Top Pick is Alkermes (ALKS), a speculative biotech that could swim against the tide thanks to the FDA’s recent approval for one of its high-potential drugs.
| Stock Name | Price | ||
|---|---|---|---|
| Red Hat (RHT) | 0.00 | ||
| Pure Storage (PSTG) | 25.64 | ||
| NetEase, Inc. (NTES) | 0.00 | ||
| Ligand Pharmaceuticals (LGND) | 267.14 | ||
| Intra-Cellular Therapies (ITCI) | 0.00 | ||
| FLSR (FLSR) | 0.00 | ||
| Extra Space Storage (EXR) | 0.00 | ||
| Amazon.com (AMZN) | 2.00 | ||
| Alkermes (ALKS) | 0.00 | ||
| Adobe Inc. (ADBE) | 315.23 |
Red Hat (RHT)
Why the Strength
Red Hat is benefiting from a global trend toward open-source software and cloud computing. It’s the leading provider of open-source solutions in the world, and it’s coming off yet another strong quarter. Red Hat reported fourth-quarter results last week, with sales growing at 15% and earnings per share at 14%. For the year, the company’s sales improved 16.5% and EPS was up more than 7%. It marked the sixth straight year of top- and bottom-line growth for Red Hat, and the company is expecting more of the same next year, with even higher earnings growth (16%). A new strategic partnership with Microsoft has improved its position in the hybrid cloud business, allowing customers to manage applications across multiple infrastructures. Its standing in the ever-expanding cloud computing sector is helping fuel next year’s upbeat earnings guidance—as well as Red Hat’s image with investors.
Technical Analysis
RHT started to make a move in September after bottoming at 68 following the broad market selloff. The stock stair-stepped its way to 82 in early November, topping its July high of 80. The stock has been up and down since, meeting firm support at 77 but failing to top 82. Opening the week at 81, RHT is again threatening to break through that resistance. A push above 82 could move the stock into a new phase of its four-month rally. It’s OK to nibble around here, but keep a stop just below the stock’s December low—any dip below that would tell us last week’s earnings pop has failed.
RHT Weekly Chart
RHT Daily Chart
Pure Storage (PSTG)
Why the Strength
Every now and then you get a fast-growing industry that undergoes a huge shift, providing opportunity for a new entrant with the right technology. Cybersecurity is a good example, as next-generation firewalls and application protection systems replace outdated network security systems. And the massive data storage industry, which sees $24 billion spent each year on top-notch hardware and software, is undergoing a similar change—outdated disk-based systems are being replaced in favor of flash- and cloud-based storage solutions, which offer greater performance and lower complexity and costs. Pure Storage is leading the charge, with jaw-dropping results—one customer saved $8 million on server consolidation with just a $500,000 initial Pure Storage purchase, while another saved tens of millions of dollars as a result of a 10-fold increase in ERP analytics capability from the system. Revenue growth (see table below) tells much of the story, as does this amazing fact—for every $1 that Pure’s top 25 customers spent initially, they spent another $9 (!) in the 18 months that followed. Imagine! Customers include 12% of the Fortune 500 (1,350 clients in total now, up 250 last quarter alone). As for competition, there is some, but Pure’s solution looks far more efficient; and as for the older legacy providers, forget about it. Profits are far in the future as Pure invests heavily, and the valuation is large, but revenues should continue to kite higher and the market opportunity is gigantic. We like it.
Technical Analysis
PSTG just came public in early October, and after a quick pop to 21, the stock fell quickly (partly due to a poor earnings report from a peer) to 12. It looked like another failed IPO, but then the company’s own report blew away expectations, causing two weeks of big buying (note the huge-volume on the weekly chart as the stock rallied back). PSTG has pulled back a bit since then but is in decent shape. You could nibble here, or just keep PSTG on your watch list.
PSTG Weekly Chart
PSTG Daily Chart
NetEase, Inc. (NTES)
Why the Strength
NetEase is the most profitable of the three most popular Chinese Web portals, and it’s not because of advertising. The company’s site offers the usual mix of news, weather, sports, messaging, dating and shopping services. But the big differentiator for NetEase is its games. The company is the sole Chinese operator of the enormously popular World of Warcraft MMORPG. But even more importantly, NetEase has turned into a powerful game creation shop, turning out fantasy combat games based on Chinese lore and legends like Fantasy Westward Journey II and New Westward Journey Online II and many others, including many in 3D. Mobile gamers, a huge (and growing) segment in China, can enjoy in-house-developed titles like Battle to the West. The company’s success led to a 26% growth in revenue in 2014 and accelerating revenue growth through the first three quarters of 2015: 55%, 65% and 107%, respectively. Earnings grew 56% in Q3 and are forecast to reach 24% growth for the year, with 2016 EPS growth estimated at 21%. Online games—both fees and in-game purchases—comprise nearly 89% of NetEase’s revenue, and the company’s success in keeping both its licensed and in-house games fresh and compelling is good news for investors. A 1.2% dividend yield is a nice bonus.
Technical Analysis
NTES has been in an uptrend for years, but it began to gather strength in early 2013. Despite one long consolidation in the spring of 2015 and a stiff correction in July and August, NTES roared back with a rally from 116 on October 1 to over 180 last week. We like the whole package, but the chart is especially outstanding, as NTES has been rallying since September 25 with no corrections longer than two days along the way (and only two of those). With the stock around 180 and the 25-day back around 155, you should look for a pullback of at least a couple of points to get started. Use a stop at 162.
NTES Weekly Chart
NTES Daily Chart
Ligand Pharmaceuticals (LGND)
Why the Strength
Ligand Pharmaceuticals has a unique approach to new drug discovery and development. Using a very small group of employees, the company has acquired a large portfolio of assets with the potential to sustain profitability. The company doesn’t specialize, preferring to work on treatments for many conditions, including diabetes, hepatitis, muscle wasting, Alzheimer’s Disease, dyslipidemia, epilepsy, anemia, asthma and osteoporosis. Development is undertaken with development partners, who provide much of the manpower, although Ligand will also hire out development efforts and clinical trials. The company has over 125 fully funded partnered development programs, including 12 marketed drugs, two with new drug applications filed, four trials in Phase III, four in Phase II, seven in Phase I and nine in pre-clinical stages. Also, Ligand announced last week that it would acquire OMT, a leader in human antibody generation, for $178 million in cash and stock. All of this activity is forecast to bump Ligand’s earnings by 121% in 2015. And after disappointing Q1 results, the subsequent quarters have seen revenue up 74% and 18% and earnings up 654% and 56%, respectively. The company’s lean cost structure yields excellent after-tax margins. While it’s an unorthodox biopharma, we can’t argue with Ligand’s results.
Technical Analysis
LGND corrected through most of 2014 and began 2015 with a flat, four-month basing structure that led to a high-volume run from 55 to 72 in March. LGND ran to 112 in August, then plummeted in the August market collapse. The stock regained its momentum in October, climbing from 82 when the month began to well over 100 in recent trading. LGND is a bit thinly traded, which makes it volatile. But that means that a little patience will often be rewarded with a buy point on a pullback of a couple of points. If you’re game, nibble near the 25-day moving average, now at 106, and use a loose stop near 97.
LGND Weekly Chart
LGND Daily Chart
Intra-Cellular Therapies (ITCI)
www.intracellulartherapies.com
Why the Strength
Another promising clinical-stage biopharmaceutical specializing in schizophrenia, Intra-Cellular is getting a nice boost after presenting some positive data on its new drug candidate. The schizophrenia drug met primary endpoints in Phase III of its clinical trials, demonstrating statistical superiority over placebo treatments as measured by the Positive and Negative Syndrome Scale (PANSS). In lay terms, the drug proved more effective and safer than placebos in treating patients with schizophrenia. The encouraging test results have helped the company raise $327 million in additional capital, more than doubling its total cash on hand. Schizophrenia affects nearly 1% of the world’s population, but current treatments are either inadequate or come with some problematic side effects. If approved for commercial use, Intra-Cellular’s drug will tap into a market that’s estimated to be worth $6 billion in the U.S. and European Union alone. That potential has institutional investors licking their chops at ITCI as a high-reward candidate. Fortunately, Intra-Cellular has some backup options in case its schizophrenia drug falls through—the company is also conducting studies into treating bipolar disorder, dementia, depression and several other diseases.
Technical Analysis
ITCI came public almost two years ago, but didn’t really budge much from its 15 IPO price until last December. By this February, it was up to 28 and it was still in that vicinity in September, when the stock gapped up after its encouraging drug data was released in mid-September. The stock stubbed its toe again later that month, along with the rest of the market, tumbling back to 37. Since then, however, it has scratched and clawed back to 58 resistance. Currently trading at 54 after a recent dip, this looks like a decent entry point for a token position if you want to take out a small, speculative position.
ITCI Weekly Chart
ITCI Daily Chart
(FLSR)
Why the Strength
A meeting in Paris between representatives of 195 countries is what’s fueling First Solar. Actually, the results of that meeting—global climate talks in which a deal was signed to lower greenhouse gas emissions—are one reason investors flocked to First Solar and other solar stocks. The deal favors using alternative energy sources such as solar and wind power instead of coal, gas and oil as a means of reducing global emissions. The goal is to cut greenhouse gas emissions roughly in half in an effort to stave off, or at least reduce, global warming. The deal was signed on December 12. Another major catalyst: The renewal of a solar energy tax credit in the “omnibus” budget just passed by Congress, which should keep inventives in place to boost solar use. First Solar’s sales have grown 65% and 43%, respectively, in the last two quarters, pushing per-share earnings up in a big way. The $3.38 in EPS that First Solar reported in the third quarter was more than the company had earned in the previous five quarters combined. Improved perception of solar stocks on Wall Street is ostensibly what’s giving First Solar the momentum; but the impressive growth numbers are likely what’s separating First Solar in the eyes of the institutions.
Technical Analysis
Volume in FSLR has more than doubled in the nine days since the Paris climate deal was signed. During that time, the stock spiked from 53 to 65, breaking through yearlong resistance at 64. But FSLR was building momentum long before Paris: after the market bottom in late September, the stock jumped from 40 to 52, then surged to 59 in early November. FSLR did come tumbling back below its 50-day moving average briefly after that run-up, so be wary of sudden drops. Set a stop in the 56 to 58 area.
FLSR Weekly Chart
FLSR Daily Chart
Extra Space Storage (EXR)
Why the Strength
We can probably count on two hands the number of times a real estate investment trust (REIT) has made Top Ten in recent years. But Extra Space Storage is strong today not just because of its decent current yield (about 2.7% annually), but also because of its history of growth (cash flow per share is up from $1.23 in 2011 to about $3 this year) and excellent prospects for future growth (and, hence, dividend hikes). The company is a leader in the self storage industry, which was pioneered by Public Storage years ago. Despite greater competition, the industry has huge potential for bigger players—the industry remains incredibly fragmented, with 86% of all U.S. self storage facilities owned by non-REIT players. (Extra Space is #2 with 3.8% market share, behind Public Storage’s 5.6% share.) Thus, there will be a very long runaway of acquisition activity; on that front, Extra Space’s recent $1.4 billion acquisition of SmartStop, which brought 165 facilities either owned or managed. All told, the firm now has more than 1,330 facilities, with occupancy well above 90% and some of the best same-store sales growth figures in the industry. Analysts see cash flow per share up 22% in 2016, though given the firm’s history of topping estimates, that figure could prove conservative. As far as REITs go, this is a good, growth-oriented story.
Technical Analysis
EXR has been a steady climber for years—it has the occasional multi-month period of lackluster performance, but then ramps higher along with cash flow. Recently, the stock’s uptrend has accelerated, despite the choppy market and Fed tightening—shares found support during the market’s shakeouts in August and mid-November, and spiked higher during the past few weeks, reaching new highs last week. If you’re game, we advise buying on dips, as EXR isn’t a runaway type of stock, especially given the market environment.
EXR Weekly Chart
EXR Daily Chart
Amazon.com (AMZN)
Why the Strength
For all the bombs thrown at the market during the past few weeks, Amazon continues to hold up very well—in our view, it’s one of the top two or three big-cap growth stocks in the market. The big-picture reason for the stock’s strength is the same as it has been in recent months: After a multi-year investment spree that kept profits under wraps, spending is leveling off, which, combined with still-strong business trends, should catapult the bottom line toward $6 per share next year (and possibly $10 per share in 2017 according to early estimates). Looking into the details, there’s also plenty of recent news to get excited about. By all accounts, the Black Friday/Cyber Monday weekend was solid—ChannelAdvisor estimates that Amazon’s sales rose 24% from a year ago, and Amazon itself said that it sold three times as many Amazon products (Fire tablets, Fire TV stick, Kindle e-readers, etc.) as it did last year. And one analyst believes the company will see its Prime membership reach a whopping 70 million next year (up from about 50 million this year), while its booming cloud business could triple its revenues by 2018. There are risks here—whether it’s the resilience of the U.S. consumer, or for Amazon, the potential for price competition in the cloud business—but there’s no question the company has multiple winds at its back today.
Technical Analysis
AMZN has had a huge 2015, though these returns come after a long period of no returns (the stock was up a total of 10% from September 2012 through the end of 2014). That’s not to say AMZN is in the first inning of its overall advance, but we think there’s gas left in the tank … if the market can stabilize. So far, the stock continues to hold up extremely well, remaining above its 50-day line (and hitting a new RP peak on Friday) despite the market’s mayhem during the past month. If you’re game, you could buy a small position around here or on dips with a tight percentage stop around 620.
AMZN Weekly Chart
AMZN Daily Chart
Alkermes (ALKS)
Why the Strength
This is the second time in as many months that we’ve recommended Alkermes, as the stock is still prospering from an October Food and Drug Administration (FDA) approval of its schizophrenia drug candidate Aristada. The FDA’s approval should allow Alkermes to capture a large chunk of the long-acting injectable (LAI) atypical antipsychotics market for schizophrenia treatment. New evidence shows that LAI drugs can be effective in reducing relapses in schizophrenia patients. Since last month, the U.S. Patent and Trademark Office has issued a new patent for Aristada that covers the drug until 2033. Other developments since we last recommended Alkermes have helped the company build on its Aristada momentum: The company has achieved milestones in three of its other drug candidates, including positive clinical trial results on a drug to treat major depressive disorder. Some of those results will be revealed in the first quarter of 2016—a nice carrot to dangle in front of speculative investors.
Technical Analysis
ALKS started rolling in late September, jumping from 55 to 60, then gapped all the way up to 73 in early November on the Aristada news. A consolidation phase ensued for the following month, with the stock bouncing between 71 and 75 up until last week. It broke through that 75 resistance on Wednesday, topping 78 before pulling back to 76 to end the week. If you already own some, sit tight. But if you missed out on the stock when we recommended it a month ago, here’s another chance—you can buy a little here or on dips toward 75, with a stop below the 50-day line.
ALKS Weekly Chart
ALKS Daily Chart
Adobe Inc. (ADBE)
Why the Strength
Like a lot of software companies, Adobe used to sell its popular programs like PhotoShop and Acrobat Pro, then sell updates every year. But the advent of the cloud allows the company to offer its products by subscription, so customers are always using the latest versions. Subscribers get constantly updated products (and customer support) and Adobe gets a predictable, continuing revenue stream. A Creative Cloud membership, offering “everything you need to create everything,” is just $49.99 per month and a low-cost photography plan is just $9.99 per month. With Creative Cloud, Adobe’s revenue increased 16% in fiscal 2015 (which ended in November) and has been up over 20% in the two latest quarters. Earnings also jumped 93% and 59% in those two latest quarters. Adobe is more of a long-distance runner, than a sprinter, but it has a global footprint and is thriving with its cloud-based revenue model.
Technical Analysis
ADBE has been in a moderately steady uptrend since late 2012, when it started an accelerating run that soared from 33 to 71 in February 2014. The stock has been more volatile since that run, with four significant pullbacks (not counting the August 2015 meltdown), but snapped back each time. ADBE recovered from the August unpleasantness to reach new all-time highs in October. It got a fresh bump on December 11 after analysts increased its price target, but it has given most of that back. ADBE has now been trading sideways near 92 since November 5, and is sitting right on top of its 25-day moving average. If you want in, we’re not opposed to nibbling here with a tight stop in the mid-80s. Or you can just keep the stock on your watch list.
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.
