Tenuous, but Still Positive
Current Market Outlook
Last week didn’t see much net change in the major indexes, but volatility has surged, with big swings up and down based on the news of the day. Overall, not much has changed—some stocks and sectors are acting well, but many others are chopping around and some (like MLPs) are literally crashing. By our measures, the market’s trends are still pointed up, but it’s close. All in all, we’re sticking with a relatively neutral stance, meaning we’re holding our top performers, but also holding some cash and being very selective on the buy side. And if something breaks down or trips its stop, it should be jettisoned quickly.
This week’s list continues with the bigger-cap, growth-oriented theme that’s been present for the past few weeks. Our Top Pick is Ulta Beauty (ULTA), which just gapped up to new highs after three months of rest following a great earnings report. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Weibo (WB) | 98.16 | ||
| Western Alliance (WAL) | 0.00 | ||
| Ulta Beauty (ULTA) | 331.95 | ||
| Palo Alto Networks (PANW) | 236.92 | ||
| Nevro Corp. (NVRO) | 0.00 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Southwest Airlines (LUV) | 0.00 | ||
| Jabil Inc. (JBL) | 41.50 | ||
| Alibaba (BABA) | 254.81 | ||
| Broadcom Limited (AVGO) | 266.26 |
Weibo (WB)
Why the Strength
Everything about the Internet in China is big, as the sheer numbers of users create enormous opportunities that pretty much parallel similar U.S. businesses. Sina.com, a popular Web portal, created its own social media app called Weibo, often called the Twitter of China, and spun it off as a separate business in early 2014. Weibo is now a social networking platform with 222 million monthly active users (MAUs), about 85% of whom access their accounts via mobile devices. When the company reported its Q3 results on November 18, analysts were impressed with the 33% year-over-year jump in MAUs and the 48% hike in revenue. The company’s earnings came in at 10 cents per share, up from a small loss in Q3 2014 and well ahead of analysts’ forecast of three cents. Weibo also offers ancillary services like Weibo Weather, Weibo Headlines and a payment service and makes its money by offering advertising and marketing, via in-game purchases and through other fee-based services. Analysts are looking for a 30% jump in earnings this year and a 97% leap in 2016 as the business matures and as advertising offerings improve. We like it.
Technical Analysis
WB came public at 17 in a slightly disappointing IPO in April 2014, and spent five months building a post-IPO base. But after a quick spike to 26 in September 2014, the stock heeled over into a correction that dropped it to 12 last February. A rally to 21 in June ran into the market correction that pushed the stock down to 9 in August. But since that free-fall, WB has been performing beautifully, advancing steadily with several good volume spikes. WB is now trading under resistance at 19, and looks buyable right here with a stop at 17.
WB Weekly Chart
WB Daily Chart
Western Alliance (WAL)
www.westernalliancebancorp.com
Why the Strength
This Phoenix-based bank is still riding the wave of a record third quarter. It earned $59 million, up 43% from the $40 million it brought in a year ago, its biggest revenue jump in years. Earnings per share shot up 26%, a nice turnaround from negative earnings growth in the previous quarter. The June buyout of Bridge Bank, a Bay Area bank with $1.85 billion in assets at the time the sale was completed, was the main catalyst, and it’s looking like a real game-changer for Western. After a mere 14.5% sales growth in 2014, the company is on track for 34% sales growth this year and 23% in 2016. Western’s loan, deposits and loan recoveries have also risen sharply, further adding to company’s top- and bottom-line growth. At a time when many banks are experiencing moderate to slow growth, Western’s recent expansion stands out.
Technical Analysis
Since the August 25 market bottom, WAL has soared. From a low of 28, the stock raced to 38 by early November, and has been building a nice-looking base there in the month since. Trading in a very narrow range between 37 and 38, it’s a safe play to buy anywhere in that range in case the breakout is to the high side. If it falls below 35, the current 50-day moving average, it’s a sign that the breakout is going in the wrong direction.
WAL Weekly Chart
WAL Daily Chart
Ulta Beauty (ULTA)
Why the Strength
Many retail stocks have been taken out and shot during the past few weeks as quarterly reports revealed softening traffic trends, weak comparable store sales and unexciting forecasts. But Ulta Beauty, which offers an incredibly broad selection of beauty products (everything from high-end to mass market) and salon services through 860 stores in the U.S., continues to buck that trend. In the third quarter, sales and earnings topped estimates, and investors liked that same-store sales boomed 12.8% (including a 56% jump in e-commerce revenue); even without the e-commerce boost, retail same-store sales were up nearly 11%. Another big boost comes from the firm’s loyalty program, now with a whopping 17 million active members. Beyond just the current quarter, it’s important to remember that Ulta is benefiting from the big movement of beauty product sales away from drug and department stores and to specialty retailers like itself—it’s taking advantage of the trend through its cookie-cutter plan of opening about 100 new stores a year through 2019 (in the third quarter, it opened 45 stores, with total square footage up 12% from the year before). Of course, Ulta isn’t changing the world, but most institutional investors see years of 20%-plus growth coming as the company opens new stores and takes advantage of the industry shift. It’s a good story.
Technical Analysis
ULTA is a “tractor” stock, similar to many cookie-cutter retail success stories—it’s not going to rise 35% in a month, but it makes good progress over time, though with multi-week (or month) pauses along the way. The recent pause lasted from August through last Thursday, when ULTA gapped up to new price and relative performance (RP) peaks on six times average volume. Near-term dips are possible, but we think the stock is a good buy around here with a stop near the 50-day line.
ULTA Weekly Chart
ULTA Daily Chart
Palo Alto Networks (PANW)
Why the Strength
Cybersecurity stocks were hot as a pistol earlier this year, but as usual, after a big run, the leaders have thinned—some pretenders have fallen by the wayside, but others are still in gear as the industry remains in a rapid growth mode. Palo Alto Networks looks like the leader of the bunch, with the most well-rounded and complete security systems out there; the company is consistently taking share from legacy technology players as big customers realize the need to upgrade their systems. Palo Alto’s stock is back in favor after a great quarterly report (and outlook) confirmed the trend toward the company’s technology—not only did sales (up 55%) and earnings (up 133%) top expectations, so did most of the sub-metrics, such as billings (up 61%), huge free cash flow ($1.43 per share) and recurring subscription revenue (up 69%). And big investors believe this kind of growth can continue for a long time to come—analysts see earnings more than doubling in the current fiscal year (ending in July) and rising another 50% next year, as Palo Alto still has relatively small market share compared to legacy players like Cisco and Checkpoint. This remains a big story that can go much farther over time.
Technical Analysis
PANW got going in September 2014, when the stock and relative performance (RP) line hit new highs, leading to a run from 100 to 200 in about 10 months. Then came a normal base-building effort during the market’s correction, with the stock correcting about 25% over a four-month period. Now PANW has come back to life following the quarterly report, which included a push higher on the biggest daily volume in a year. We’re OK with buying some around here or on pullbacks, with a stop in the low 170s.
PANW Weekly Chart
PANW Daily Chart
Nevro Corp. (NVRO)
Why the Strength
Nevro is a small company (just $46 million in revenue during the past 12 months) that has a potentially revolutionary technology in the spinal cord stimulation (SCS) market, used to reduce chronic pain. Nevro’s SCS product is called Senza, which delivers the company’s HF10 therapy—it delivers 10,000 electrical pulses per second, whereas traditional SCS therapies are usually low frequency. And the results are great! First, about 75% of those suffering back or leg pain respond to HF10, compared to 51% for traditional SCS. Just as important, patients don’t suffer from paresthesia, which is a tingling sensation common in many SCS treatments that masks the pain but can interfere with sleep and some daily activities. HF10 has been available overseas for a while, but just received FDA approval earlier this year, and the third quarter was the first full quarter of availability. There is competition from many big firms, but (a) less than 10% of patients who could benefit from SCS use it, so there’s room for everyone, and (b) Nevro effectively just won a patient challenge from Boston Scientific, which gave investors confidence that its technology was unique. Earnings are deep in the red, but revenue growth is rapid and accelerating; analysts see the top line up 120% next year as U.S. sales ramp up. It’s speculative, but it’s a good story.
Technical Analysis
NVRO came public last November and shot ahead from 25 to 59 by May. Then came the correction, which started mildly, but gained steam as the market weakened—NVRO fell as much as 38% from its peak by mid-October. But since then, the stock has roared back to life, rallying six weeks in a row and bursting to new highs on the favorable patent news last week. Our advice is to start small and try to buy on dips.
NVRO Weekly Chart
NVRO Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
It’s been another strong year for Netflix. Already wildly popular here in the U.S., the digital video behemoth keeps extending its global reach. Australia is the newest market to embrace Netflix: since launching in March, 2.5 million Aussies have already signed up for the service. That kind of overseas growth has helped the company churn out 20% to 27% sales increases each of the last 10 quarters. Growth in the U.S. has been strong too; more than 50% of Americans have watched Netflix in the past 12 months even as the company has raised prices twice in the past year and a half. Plus, the company has ramped up its original content in the face of increased competition from the likes of Amazon and Hulu; just last week it rolled out “A Very Murray Christmas,” a Christmas variety show starring actor Bill Murray. Other recent breakout hits have included “Unbreakable Kimmy Schmidt,” “Master of None,” “Narcos,” and new seasons of “Orange is the New Black” and “House of Cards.” Earnings have slipped in recent quarters, mostly due to the firm’s heavy investments in content and international expansion. But given the run-up in the stock this year, investors have clearly been focusing on the steady sales growth and earnings potential as its subscriber base soars.
Technical Analysis
After bottoming at 45 last December, NFLX started 2015 with a bang, zooming all the way to 126 in early August. An extended consolidation phase followed, with 94 acting as support and meeting resistance at 114. A major breakout came in mid-November, however; since breaking through resistance on November 17, NFLX has continued to march higher, topping 130 to close out last week. We’re OK with buying a little on dips and seeing how the stock goes from here. A stop back at prior resistance near 115 makes sense.
NFLX Weekly Chart
NFLX Daily Chart
Southwest Airlines (LUV)
Why the Strength
Dirt-cheap oil prices have been a major boost for airlines, and Southwest has been no different. With crude oil near seven-year lows, both profits and margins have soared: Southwest is on pace for 76% EPS growth this year, and after-tax margins are up to 11.7% after sinking as low as 3% in early 2014. That comes at a time when sales growth has been fairly modest (11% in the third quarter). Customer numbers aren’t skyrocketing in part because airlines haven’t lowered their prices despite fuel costs being less than half what they were a little over a year ago. But even minimal growth is enough to spur serious profit improvements in such a low oil-price environment. Southwest’s fuel costs in the third quarter were $300 million less than in the same quarter a year ago. Consistently rated as one of the most customer-friendly airlines—two free checked bags per passenger is a huge selling point at a time when most airlines charge $50 a bag—Southwest stands out not only to consumers, but also to investors—especially when airlines are a hot industry.
Technical Analysis
LUV has been a stock on the rise for more than three years now, vaulting from 9 in late 2012 to 46 in January of this year. It stubbed its toe in the first five months of 2015, dropping to as low as 32. Since July, however, the rally has been solid. LUV topped 40 in August, pulled back only a few ticks during the market collapse later that month, and lifted north of 45 after the third-quarter earnings beat in October. It spent all of November building a solid base there, operating in a tight range between 45 and 47. Last week it broke to the high side again. The stock has scarcely fallen below its 50-day moving average since July, so if you do decide to buy, use the current average (44) as your stop-loss.
LUV Weekly Chart
LUV Daily Chart
Jabil Inc. (JBL)
Why the Strength
When companies in the aerospace, automotive, computing, consumer, medical and telecom industries need outside design and manufacturing services, Jabil Circuit is likely to be on their list of candidates for the job. Jabil pops up in Cabot Top Ten Trader every few years when business is good, and right now, business is very good. Jabil’s headline client is Apple, a company that contributed 24% of revenue in fiscal year 2015, which ended in August. Investors assume—given Apple’s habit of secrecy, it’s just a guess—that Jabil’s design and manufacturing services have been aimed at the iPhone 6s. But whatever the product, Jabil’s fiscal Q4 report sparked a high-volume buying spree on September 25 as revenue, earnings and guidance all came in ahead of analysts’ expectations. A 15% gain in revenue leading to a 960% jump in earnings will have that effect, especially when the magic word Apple is thrown in. In many ways, Jabil Circuit is a value stock with unusual growth characteristics. The company’s stock trades at a low 12 P/E ratio and sports an annual dividend yield of 1.2%. So while business may vary from year to year, the stock is still attractively valued here. Jabil will report its fiscal Q1 results next week (December 16, after the market closes), and the response to that report will set the tone for the next few months; keep any investments on the small side until you see the reaction.
Technical Analysis
JBL recovered from its 2008 Great Recession swoon in 2011, reaching 20 after a low of 3 in 2009. But despite trading as high as 25 and as low as 15, the stock was still trading at 20 in the middle of September 2015. The big earnings report in late September gave the stock a burst of support that has pushed it back above 25 to its highest level since March 2012. Everything will depend on how investors feel about next week’s earnings report, but a small buy under 25 could pay off. Use a protective stop near 23.
JBL Weekly Chart
JBL Daily Chart
Alibaba (BABA)
Why the Strength
Everything about Alibaba, the world’s largest e-commerce company, is big. The company was founded in 1999 as a site for foreign merchants to access services from Chinese manufacturers. From that humble beginning, Alibaba has grown into a company with a market capitalization of well over $200 billion and annual sales of nearly $14 billion. The company’s four major divisions each approach online buying in different ways: Taobao Marketplace is the company’s biggest site, a place for seven million merchants to sell everything in the world. Listing on Taobao is free, but sellers who want to stand out can buy ads to improve their visibility. Tmall is Alibaba’s third-party platform for top quality branded merchandise. Alibaba.com is a global wholesale platform that lets small manufacturers sell to foreign customers. Ali Express is a global retail marketplace aimed at shoppers outside China, offering direct sales from Chinese wholesalers and manufacturers. Alibaba also has Alipay, an online payment system similar to PayPal. Like Amazon, Alibaba has grown revenue quickly, with fiscal 2014 growth at 56%. Alibaba’s nearly $8 billion in free cash flow over the last 12 months gives it an enormous war chest to expand into other businesses. Alibaba has been expanding its global operations to allow merchants outside China to sell into that market. The company has also taken positions in jet.com, a rival to Amazon, and the chat app Tango, as well as starting negotiations to buy the South China Morning Post’s publications business. Alibaba made headlines with its record breaking 2015 Singles Day sales of over $14 billion, and as long as Chinese consumers expand their buying, Alibaba will be an attractive investment.
Technical Analysis
After BABA’s massive IPO in September 2014, it scooted to 120 in November. Then came a long downtrend that ended with a double bottom at 57 in August and September of this year. Since that bottom, BABA has rebounded to 85 in early November, corrected to 76 and bounced back to 85 again. BABA looks like a reasonable bet right here, although a buy on any weakness will improve the odds. Use a stop below 77.
BABA Weekly Chart
BABA Daily Chart
Broadcom Limited (AVGO)
Why the Strength
Because of its partnership with Apple, Avago Technologies has long been a hot commodity on Wall Street. Last month’s announcement that the semiconductor giant will acquire rival chipmaker Broadcom (BRCM) for a record $37 billion turned the heat up a few more notches. Broadcom is the biggest manufacturer of Wi-Fi chips for short-range connections in mobile devices; by acquiring them, Avago Technologies becomes the sixth-largest chipmaker by revenue. In fact, Broadcom had larger sales than Avago in 2014, posting $8.4 billion in revenue compared to Avago’s $4.9 billion. The deal is expected to be finalized sometime in the first quarter of 2016. Meanwhile, the company beat fourth-quarter earnings estimates, completing its 2015 fiscal year with EPS up 83% from 2014 and sales up 60%. The Broadcom acquisition will only enhance the sales numbers, and rumors of an iPhone 7 in the works for 2017 could also add to Avago’s top-line growth since Avago is a key supplier of chips for Apple’s smartphones. At the very least, the rumors are adding to Avago’s sizzle in the minds of investors.
Technical Analysis
AVGO started the year on fire, rocketing from 100 to 148 in the first five months. A sharp downturn followed, with the stock bottoming at 108 on (when else?) August 25. There were some wild swings on the way to 117 in early November, but since then, the stock has shot all the way up to its May highs. A big post-earnings volume spike last Thursday prompted a gap up from 132 to 144, and it continued to tick up to 147 on Friday despite volume sinking back to relatively normal levels. The volatility over the last few months is a bit daunting, but the momentum over the past three weeks has been bullish. If you want in, try to buy on dips with a stop in the low 130s.
AVGO Weekly Chart
AVGO 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.
