Growth vs. Broad Market
Current Market Outlook
The past week saw yet another round of rotation, but this one was the sharpest and most violent we’ve seen all year, with many leading growth stocks getting crunched while other areas of the market (especially those benefiting from likely lower corporate taxes) surged. Our advice, as usual, is to follow the plan—some growth stocks look very toppy after long, uninterrupted runs, and for those, selling (or partial selling) makes sense. But other growth stocks are pulling back normally, and some new leadership is emerging. It makes sense to pull in your horns a bit, possibly holding some cash until the market settles down; we’ve nudged our Market Monitor down to reflect that. Right now, we advise taking things on a stock-by-stock basis, holding your resilient/advancing issues, while honoring your stops and selling names that break down.
This week’s list is heavier on cyclical, building and retail stocks, all of which have caught huge updrafts during the past few days. Our Top Pick is Warrior Met Coal (HCC), a big turnaround play in the coal sector. Buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Beacon Roofing (BECN) | 0.00 | ||
| CH Robinson (CHRW) | 0.00 | ||
| E*Trade Financial (ETFC) | 0.00 | ||
| Gardner Denver (GDI) | 0.00 | ||
| GrubHub (GRUB) | 140.03 | ||
| Michael Kors Holdings Limited (KORS) | 73.22 | ||
| Peabody Energy Corporation (BTU) | 43.32 | ||
| Tyson Foods (TSN) | 0.00 | ||
| USG Corp. (USG) | 0.00 | ||
| Warrior Met Coal (HCC) | 0.00 |
Beacon Roofing (BECN)
Why the Strength
Beacon Roofing is the second largest distributor of roofing materials in the U.S. and Canada (via 382 branches that offer more than 50,000 products), and like many building-related stocks, it’s turned very strong in recent weeks for both industry and company-specific reasons. Industry-wise, things are looking up as mortgage rates remains near their lows despite an accelerating economy, which has helped boost new home sales to their fastest sales pace in a decade. Beacon has been doing fine in this improving environment, with sales and earnings generally rising in the high single digits. But the real reason the stock is strong today is excitement over Beacon’s upcoming merger with Allied Building Products, which brings with it 208 branches, greatly enhancing the firm’s scale, opening up some new markets (like interior products) and, most important, leading to a ton of synergies ($50 to $60 million in year one and eventually $110 million per year) that will significantly boost earnings going forward. Combined with Beacon’s history of executing many large and small buyouts (it’s completed 43 buyouts since 2004, including an 85-branch purchase a year ago) and the chances for corporate tax cuts (Beacon paid a 38.2% tax rate during the past four quarters), investors are expecting good things going forward—analysts see earnings surging 41% during the next year, with another 24% gain in 2019.
Technical Analysis
BECN appeared in Top Ten in late October when the stock climbed to new highs after a year of choppy action. Shares did catch their breath over the next few weeks, finding support at their 25-day moving average before its quarterly report on November 20, and the rotation into building stocks caused shares to soar. BECN has decisively surged to new price and RP peaks on excellent volume; we think dips are buyable with a stop in the mid-50s.
BECN Weekly Chart
BECN Daily Chart
CH Robinson (CHRW)
Why the Strength
C.H. Robinson Worldwide calls itself a third-party logistics provider, which means that it gives its 113,000 customers around the world access to every shipping method available. Robinson Worldwide specializes in being a supply chain expediter and consultant. So whether the cargo is fresh fruit, truckloads (or partial truckloads) of manufactured goods or containers travelling an intermodal route, Robinson’s more than a century of experience will get it delivered via one or more of its 107,000 contract carriers and suppliers. After a string of five quarters of single-digit declines in revenue for Q3 2015 through Q3 2016, the company has booked five quarters of increasing revenue growth, peaking with 13% growth in Q3 2017. While earnings have been down in four of the last five quarters, analysts are looking for a 12% increase in earnings in 2018. (While the film has made some solid moves, Robinson expanded its global presence in August by acquiring Canadian freight forwarder Milgram & Company for around $50 million in cash and Australia/New Zealand freight forwarder and customs brokerage company APC Logistics for $255 million in cash.) The real reason for the stock’s strength is the rotation into transporation names in anticipation of an accelerating economyand lower taxes. The company’s stock dividend yields 2.1% annually.
Technical Analysis
CHRW traded sideways under resistance in the high 70s starting in early 2015 and ending with the breakout run last week. CHRW closed under 80 on November 27, then spiked higher on increasing volume on Tuesday, Wednesday and Thursday. After a flat close on Friday, CHRW showed more strength today. This flash rally has kicked the stock above its trading range of the last almost three years and left its 25-day moving average back at 81. A little patience should give you an opportunity to get in a point or so lower. A buy below 87 with a stop around 78 looks like a good risk/reward balance.
CHRW Weekly Chart
CHRW Daily Chart
E*Trade Financial (ETFC)
Why the Strength
Financial stocks have had a couple of false starts this year after 2016’s giant post-election breakout, but the sector kicked into gear last week thanks to the market’s rotation and hopes for tax cuts. E*Trade Financial has been the most resilient Bull Market stock (i.e., one whose business is heavily tied to the market itself) all year, and for good reason—the company’s results have been pushing consistently higher thanks to greater trading activity as the market moved higher (daily average trades rose 35% in the third quarter from a year ago), higher account balances (up 19% to $365 billion) and margin balances (up 25% to $8.5 billion) and higher short-term interest rates, which has boosted interest income (which makes up the majority of the firm’s revenue) in a big way (up 34% in Q3 vs. a year ago). The stock is strong today because investors are anticipating more of that to come, as the Fed is likely to raise rates again this month and the likelihood of a corporate tax cut could boost E*Trade’s bottom line in a big way (the firm paid a combined 36.6% tax rate this year, for instance). The company is also making a mini-splash with a $275 million purchase of Trust Company of America, which provides custody services and technology to about 7,000 registered investment advisers. Analysts see earnings up 15% next year, though that could prove conservative if the overall bull market continues.
Technical Analysis
ETFC has built a series of consolidations this year, with a 16% zone from February through June, a tighter one (7% deep) in August and September and another tight one (7%) for most of October and November. Thus, the stock has been coiling up for a while, and now it’s getting going—ETFC has lifted to new highs on six straight days of heavy volume. We’re OK buying some on dips, with a stop in the mid-50s.
ETFC Weekly Chart
ETFC Daily Chart
Gardner Denver (GDI)
Why the Strength
Gardner Denver is a mid-cap industrial company specializing in flow control and compression equipment (blowers, pumps, loading arms, fuels systems, etc.). It holds a top-three market position in its main end markets, which include slices of the industrial (56% of revenue), energy (32% of revenue) and medical (12% of revenue) segments. It’s geographically diversified, with 41% of revenue coming from the Americas, 41% from EMEA and 18% from APAC. The high-level pitch is that Gardner Denver should deliver growth that outpaces the overall economy due to a growing need for efficiency and cutting-edge technology in its end markets. Success in the energy market (orders up 48% in Q3) is the main driver recently as that sector rebounds and prices have stabilized and inched ahead. The company is a leading provider of mud pumps and frac pumps, and, since 2012, it has introduced a ton of new fluid end offerings and consumables for the energy market. Now, it has 85% coverage of all active land-based rigs in North America. But it’s not just an energy story. Industrial orders were up 14% in Q3, and medical orders were up 19%. The bottom line is that Q3 revenue was up 40% and EPS of $0.41 was up 173%! If you’re looking for an industrial growth story, look no further than Gardner Denver.
Technical Analysis
GDI went public in May at 20 and traded in a 20% range for the first four months. Shares gained momentum in mid-August after Q2 earnings came out, and they broke-out above 25 in mid-September. Shares were volatile after the release of Q3 earnings in late-October (first gapping up then giving up those gains), but GDI never broke below its 50-day line, and once the dust settled, the stock began climbing again. Dips toward the 25-day line would be intriguing.
GDI Weekly Chart
GDI Daily Chart
GrubHub (GRUB)
Why the Strength
Grubhub’s leadership position at the top of the online and mobile food ordering market appears to be even more solid after a terrific Q3 report and a wave of new partnerships and acquisitions. The company’s presence in over 80 markets is creating a powerful network effect, driving national chains to partner with it, widening the funnel of new customers and securing loyalty from existing ones. Major partnerships now include Cheesecake Factory, Red Robin, Boston Market, Famous Dave’s, Papa Murphy’s and, most recently, InterContinental Hotels Group, which is integrating Grubhub across the U.S. through IHG’s apps and website. The recently-completed acquisitions of Foodler/Order Up and Yelp’s Eat24 (15,000 restaurants) are also helping to expand Grubhub’s presence in tier 2 and tier 3 markets where population density is lower but long-term expansion potential is huge. The biggest takeaways from Q3 (revenue up 32%, EPS up 22%, active diners up 28%) is that Grubhub is firing on all cylinders, is keeping the competition at bay through accretive deal-making, and is poised to extend its leadership position even deeper into its $75 billion mass market. That’s why analysts increased price targets following the report, and why the stock remains resilient even after last week’s market wobbles.
Technical Analysis
GRUB jumped to all-time highs following both its Q2 report in early August and Q3 report on October 25. The high-volume advances suggest big buyers continue to see significant upside in the stock, which had wobbled earlier in the year on concerns of mounting competition. Shares rallied as high as 70 two weeks ago, and while GRUB did pull back last week, the retreat looks normal and buyable.
GRUB Weekly Chart
GRUB Daily Chart
Michael Kors Holdings Limited (KORS)
Why the Strength
Back in October we suggested investors keep an open mind with respect to retailers, which had been battered this year, and early indications from the sector suggest the holiday shopping season is off to a strong start. One can look at rising wages, upbeat consumer confidence and low unemployment as catalysts, but the clearest measure of investor enthusiasm is a 10% rally in retail stocks over the past three weeks! Michael Kors has been one of our preferred stocks to ride the wave. We recommended shares in October on mounting evidence that the specialty retailer’s return to exclusivity was paying off. Its turnaround plan, called Runway 2020, includes rationalizing its store fleet, cutting promotional pricing (this year’s Black Friday sale was just an additional 25% off clearance, versus a 25% to 30% whole-store promotion last year), and enhancing product offerings, most notably through the acquisition of Jimmy Choo (shoes, bags and accessories). The release of Q2 results on November 6 show the game plan is working. Revenue growth of 5.5% was slightly better than expected, but EPS of $1.33 crushed expectations by $0.50. Retail net sales growth of 8% was helped by 56 net new store openings and e-commerce growth in Europe and Asia. The company’s growth outlook is much brighter too, with revenue growth in the 3% to 6% range now expected in fiscal 2018 and 2019. Earnings are expected to be flat next year but our guess is that will prove very conservative.
Technical Analysis
KORS bottomed in 2017 as shares spent much of the early part of the year trading sideways in a three-point range. The breakout came in early August when the stock jumped from 37 to 46 after reporting fiscal Q1 results. Modest demand fueled a move to 50 in October, then shares broke out to a fresh high of 55 after Q2 results were released. Encouragingly, there’s been zero pullback since then, with the stock marching higher. If you’re game, look for modest weakness to grab shares.
KORS Weekly Chart
KORS Daily Chart
Peabody Energy Corporation (BTU)
Why the Strength
There probably wasn’t a worse performing sector in the market than coal stocks during the 2011-2015 period (the sector’s ETF fell 90%!), and even after a recovery during 2016, the group has sat out the bull market this year. Now, though, we’re seeing strength, as an accelerating economy and improving regulatory environment are boosting results in a big way. Peabody Energy is the world’s largest private-sector coal company, with exposure to both domestic and seaborne thermal and metallurgical coal, and it’s set up as a huge turnaround opportunity—the company came out of Chapter 11 this past April with a relatively healthy balance sheet, and now the firm is beginning to see real growth thanks to greater demand and pricing. In the third quarter, revenues rose 22%, earnings easily topped expectations and EBITDA more than tripled on the back of bullish output and margins in its Australian coal business. And the company is using this growth to continue cleaning up the balance sheet (it paid down another $300 of debt in the quarter reaching its 2017 deleveraging target a quarter ahead of time), buy back $69 million of stock (with another $400 million to come over the next two to three years) and sell some non-core assets. With the company having come through the wringer and cut costs to the bone, any continued improvement will fall right to the bottom line. It’s an interesting story.
Technical Analysis
BTU came out of Chapter 11 at near 32 in early April, and immediately headed south, with the stock bottoming out near 23 multiple times during the next couple of months. It then rallied back to 31 in August before meandering sideways through early October. But now the buyers are in control, with BTU pushing to new price and RP peaks on many days of big buying volume. You can buy some on dips with a stop near 30.
BTU Weekly Chart
BTU Daily Chart
Tyson Foods (TSN)
Why the Strength
Tyson Foods is food company that specializes in the protein that goes on the center of your dinner plate: chicken, beef, pork, turkey and prepared foods. It’s based in Arkansas but sells around the world. The company sells into grocery retailers, wholesalers, warehouse and club stores, military commissaries, food processors and restaurants. Except for an 11% dip in revenue in 2016, the company has been growing steadily, but not spectacularly, for years. The company’s fiscal Q4 earnings report on November 13 kicked off a persistent rally that’s still going on. That report also led to a spate of analysts’ upgrades and increased price targets have done wonders for Tyson’s stock, which still trades at a relative bargain 15 P/E. Investors also like that Tyson just pulled the plug on a proposed chicken-processing facility in Kansas and accepted the invitation of Humboldt, Tennessee to host a $300 million chicken production complex. Tyson stock pays a 1.5% annual dividend yield.
Technical Analysis
TSN reached 76 in September 2016, then started a longish cup-shaped formation that bottomed at 57 in May 2017.The stock worked its way higher and got a high-volume boost on September 29 followed by a flat re-basing all through October. The stock inched higher until the good earnings news on November 13, then started a rapid advance that has only had one minor correction day. TSN is now trading near 84 with trading volume still above average. Given the persistent run, TSN is a good buy on any weakness, as the stock has left its 25-day moving average behind at 77.
TSN Weekly Chart
TSN Daily Chart
USG Corp. (USG)
Why the Strength
USG Corp. (it used to stand for U.S. Gypsum) is the biggest maker of gypsum wallboard, construction plasters and ceiling tile and ceiling grid in North America. The company hasn’t strayed far from its base business of manufacturing drywall board. Its appearance in today’s Top Ten Trader (its 8th overall, but its first since 2014) comes from a rally that began with a well-received Q2 earnings report back in late July and speculation that the two big hurricanes (Henry and Irma) that hit the U.S. will increase demand for wallboard and other construction materials. USG Corp. hasn’t been a fast grower—revenue fell by 22% in 2015 and gained only 4% in 2016—but revised estimates of U.S. construction growth have analysts forecasting a 26% jump in earnings in 2018. In addition, the company just acquired Ceilings Plus in a $52 million cash transaction, which is expected to contribute more than $45 million to 2017 sales. The takeover gives USG Corp. a greater footprint in specialty ceilings and cross-selling access to the architectural specifications process. The company also voted a $250 million stock repurchase plan in February, and had bought back just $153 million through the third quarter.
Technical Analysis
USG finished a big move from 6 in late 2011 to 31 in February 2013, then traded sideways under resistance in the low to mid-30s for almost five years before breaking out into the high 30s in November. The turnaround put a charge into the stock’s RP line and featured several volume spikes on rally days. USG is now trading just under 39, and with its 25-day moving average back at 35, it makes sense to wait for a pullback of a point or so with a stop in the mid-30s.
USG Weekly Chart
USG Daily Chart
Warrior Met Coal (HCC)
Why the Strength
Warrior Met Coal is the second coal stock in this issue, and it looks like another turnaround story similar to Peabody Energy. The company was formed when Walter Energy, a major producer of metallurgical coal (which is used to make steel), entered Chapter 11 bankruptcy and then sold two of its mines in Alabama to its creditors. The new firm came public with a very clean balance sheet (liabilities are less than half of assets) and a low cost structure. And with demand picking up, production and pricing have both lifted nicely—revenues have grown at triple-digit rates during the past three quarters, while earnings and cash flow have been extremely strong. On the production front, the company’s goal is to move back to Walter’s historic output of about eight million tons per year (up another 25% from this year’s pace), and it’s interesting that all of the firm’s sales go outside the U.S. Pricing has gone nuts in recent quarters (up 80% in Q3!), though it’s reasonable to expect that to cool off, which is possibly one reason earnings are anticipated to fall off next year. Even so, at more than $3 in expected earnings in 2018, Warrior Met Coal trades around seven times earnings, and a small dividend (0.9% annual yield) doesn’t hurt, either. It’s not changing the world, of course, but Warrior could do very well if demand remains strong.
Technical Analysis
HCC came public as a fresh company in April of this year, but didn’t get off to a good start, pricing well below its range and falling below 10 in late-June. But then it began a great run that continues to this day—shares spiked to 17 in early September, built a tidy base during the next two and a half months, and after breaking out three weeks ago, has gone vertical! Look for modest weakness to grab a position and use a loose stop near the top of its prior consolidation.
HCC Weekly Chart
HCC 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.
