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Top Ten Trader
Discover the Market’s Strongest Stocks

December 8, 2014

The market and most stocks remain in uptrends, and because of that, we’re keeping our Market Monitor in bullish territory. But after a few weeks of chopping around (and, recently, of some selling pressure), the next few days should be telling—many stocks are back toward support, so if all’s well, buyers should arrive on the scene soon.

Next Few Days Will be Telling

Market Gauge is 8

Current Market Outlook

After a relatively quiet week, the major indexes and most stocks remain in uptrends, and that’s why we’re keeping our Market Monitor in bullish territory. But there remain a growing list of yellow flags, and the fact is that the broad market is very split, with lots of crosscurrents pushing and pulling various stocks and sectors. So far, the gyrations are normal and, possibly, bullish, helping to shake the tree, as we wrote last week. But many stocks are now approaching support—the next few days will be telling, as buyers should arrive on the scene if the intermediate-term uptrend is intact. All told, we remain bullish, but we’re keeping a watchful eye on things.

This week’s list includes everything from big, old-world companies to high-flying new-age firms. Our Top Pick is AMAG Pharmaceuticals (AMAG). The firm has transformed itself thanks to a recent acquisition, and the stock has been acting great for the past few weeks.

Stock NamePriceBuy RangeLoss Limit
Valeant Pharmaceuticals (VRX) 0.00140-144133-135
Packaging Corp (PKG) 0.0076-77.570-72
Palo Alto Networks (PANW) 236.92113-118104-106
Old Dominion Freight Line Inc. (ODFL) 221.9177-7972-73
Infinera (INFN) 0.0013.5-14.512.5-13
Celgene (CELG) 0.00112-116104-105
Brunswick Corporation (BC) 0.0048-5046-46.5
Applied Materials (AMAT) 0.0023-24.522-22.5
AMAG Pharm. (AMAG) 0.0039-4135-36
Alliance Data Systems (ADS) 0.00273-284265-268

Valeant Pharmaceuticals (VRX)

Why the Strength

Pharmaceutical companies usually get their biggest boosts from stockholders when they either announce positive drug trial news or when they acquire competitors. Valeant Pharmaceuticals has plenty of branded drugs, both patented and generic, and a nice lineup of non-prescription drugs as well. The company has also been active in acquisitions, paying $8.7 billion for Bausch & Lomb in August 2013, $216 million for Solta Medical in December 2013 and $475 million for PreCision Dermatology in February 2014. But the biggest recent news on Valeant is the failure of its campaign to take over Allergan, a fight it lost to Actavis. The company’s acquisitions have produced great revenue growth—up 109% in 2011, 41% in 2012, 66% in 2013 and an average of 65% in the first three quarters of 2014—and estimate-beating EPS growth so far this year. Valeant has launched 15 new products in 2014, from new contact lenses to anesthetics to dermatological prescription drugs (4) and dental membranes. Valeant is a global pharmaceutical company with a solid base of products, an active pipeline of new drugs and management that has delivered strong growth. We like it.

Technical Analysis

VRX is another pharmaceutical stock that rallied strongly from the middle of 2012 through February 2014. The six-month correction that followed this rally pulled VRX from 153 to 106 in August. VRX has been volatile since that low, but has pushed back to within striking distance of its highs from earlier this year, bolstered by the news that it lost out on Allergan The stock reached 145 in late November and has been consolidating sideways for a couple of weeks. VRX looks buyable anywhere under 144, with a stop at 135.

VRX Weekly Chart

VRX Daily Chart

Packaging Corp (PKG)

Why the Strength

There’s nothing mysterious about Packaging Corporation of America or its products. The company is the fourth-largest containerboard maker in the U.S. by capacity and the third-largest producer of uncoated freesheet paper. Demand for corrugated cardboard is a pretty good proxy for the state of the U.S. economy, and Packaging Corp. also makes color retail packaging and containers for meats and other foodstuffs, but 85% of revenue still comes from producing cardboard boxes. The company leases cutting rights to large tracts of timber in Tennessee and Georgia, and produces its own wood pulp, which it turns into cardboard and paper. After a couple of years of single-digit revenue growth in 2011 and 2012, revenue spiked up by 29% in 2013. And the company’s takeover of Boise in 2013 has powered revenue growth by an average 85% growth through the first three quarters of 2014. Packaging Corp. is benefiting from having a high degree of vertical integration in its operations and from the growing trend of manufacturing jobs returning to the U.S. The company enjoys significant barriers to entry for potential competitors and isn’t forced to compete on price for its business. Packaging Corp. also pays an attractive 2.1% annual dividend yield.

Technical Analysis

PKG was a remarkably steady grower from the middle of 2012, when it traded at 25 through February 2014 when it peaked at 75. After that peak, PKG bounced lower through the middle of October, first digesting its huge rally, then falling with the broad market in September and October. But when PKG bounced, it rallied on huge volume, returning quickly to near its old highs after a great Q3 earnings report on October 21, then blasting to new highs in December. PKG has a long basing structure in place and has just pushed to new highs, so its trading free of overhead. Try to buy in on any weakness and put a stop in at 72.

PKG Weekly Chart

PKG Daily Chart

Palo Alto Networks (PANW)

Why the Strength

The boom in network security demand continues, and Palo Alto is the institutional-quality way to play it. The company remains one of the strongest stocks in the market thanks to a fantastic quarterly report just before Thanksgiving. Not only did sales and earnings growth remain strong (see table below), but the important sub-metrics also impressed—deferred revenue surged 69% to $471 million, recurring subscription revenue (Palo Alto sells security platforms by subscription, automatically updating them and, in turn, keeping clients on board for years) grew 76% to $43.7 million, and cash flow from operations came in about six times that of net income. And, excitingly, management stuck with its guidance that operating margins should more than double within two years, which should kick earnings into overdrive. Palo Alto appears to have the most complete, advanced solution on the market and we remain amazed at how many high-profile security breaches (last week’s Sony hack was huge) are gaining national attention. Palo Alto looks to be in the right place at the right time with the right products. We like it.

Technical Analysis

PANW wasn’t looking like a real leader of this advance for a while; it did snap back nicely after the mid-October low but didn’t find many buyers for most of November. That changed after the quarterly report, though, with shares spiking north of 120 before relaxing a bit last week. We’re not opposed to nibbling here, but with the 25-day (near 112) and 50-day line (approaching 107) a few percent away, more consolidation wouldn’t be unusual.

PANW Weekly Chart

PANW Daily Chart

Old Dominion Freight Line Inc. (ODFL)

Why the Strength

Old Dominion Freight Lines has a simple story. They deliver less-than-truckload consignments of goods throughout the U.S. and offer worldwide forwarding services. When Old Dominion was last featured in Top Ten in May 2013, the company’s fleet stood at 5,800 tractors, 22,000 trailers and 200 service centers. Now, the company has 6,400 tractors, more than 25,000 trailers and 224 service centers. Steady growth has always been Old Dominion’s way, pushing into new territories and acquiring competitors. Except for the Great Recession year of 2009, the company has posted revenue growth in double digits every year since 2002. Earnings growth is estimated to hit 26% this year and 19% in 2015, which is one of the strongest growth rates in the industry. Old Dominion’s after-tax profit margin reached 10.5% in Q2 and Q3, the highest in years. The company has come a long way from its roots as a local shipper in Virginia (nicknamed the Old Dominion State), and it looks likely to continue its steady growth for the foreseeable future. Aided by a strengthening U.S. and global economy, the company’s extension of shipping services to include China bodes well for the future.

Technical Analysis

ODFL is a steadily-advancing stock if ever there was one. Except for pullbacks from 27 to 18 in 2011 and from 33 to 26 in 2012, ODFL hasn’t endured a major correction since its current rally began in late 2009. ODFL corrected and recovered in September and October in a V that matched the broad market, but the stock also picked up volume support after a nice Q3 revenue and earnings beat and has continued to follow through to the upside. ODFL looks like a buy on a pullback of a point or so, with a stop at its 50-day moving average, now at 73.

ODFL Weekly Chart

ODFL Daily Chart

Infinera (INFN)

Why the Strength

We last visited with fiber optics network specialist Infinera early last month shortly after the company announced blowout third-quarter earnings. The company has benefited greatly from a renewed build-out in network infrastructure, as cable system operators, Internet service providers, and telecos such as Cox Communications, Deutsche Telekom, Global Crossing and Level 3 migrate their backbone networks toward faster fiber optic offerings. The resurgence of demand has been a considerable boon for Infinera, as revenue has been accelerating in recent quarters, while profit margins expand. While the company has been quiet since reporting earnings, analysts have released a string of price-target increases and positive commentary. The one bit of Infinera news that has caught headline attention is the company’s recent deal with Network Rail to deploy Infinera Intelligent Transport Network across the railway infrastructure in the U.K, a lucrative deal for Infinera. One last note: short interest could become a factor for INFN investors, with 15 million shares, or 12.2% of the stock’s total float, sold short, creating the potential for a squeeze play on INFN.

Technical Analysis

INFN has come down a bit since we last checked in. After topping out just shy of 15 in early November, INFN dipped below the 14 level, and bounced around the 13.50 area for the better part of the next month. Shares ultimately nosed their way back above their 10-day moving average last week, and, following the deal with Network Rail, popped back above 14. Further wiggles are possible but we think shares are buyable around here with a stop near the 50-day line.

INFN Weekly Chart

INFN Daily Chart

Celgene (CELG)

Why the Strength

If you’re an institutional growth investor managing a few billion dollars, you’re always on the lookout for reasonably valued stocks that trade a lot of volume, have great growth prospects and, importantly, have a lot of surety surrounding those prospects—i.e., the firm isn’t going to grow 50% this year and then shrink 25% the following year. That’s why Celgene is a leader today—the company’s current roster of drugs is selling very well, led by its flagship Revlimid product for myeloma as well as treatments for breast, lung and pancreatic cancer, bone marrow disorders and psoriasis. Those treatments have driven sales and earnings up consistently in recent quarters, and big investors continue to pile in, as management has forecast accelerating growth thanks to new drugs and new, expanded labels for some of its existing treatments. (Many analysts believe Celgene has the best pipeline in all of biotech, and that includes equity stakes in some young, hot peers.) Analysts see earnings growth picking up from around 23% this year to 32% and 29% the next two years, respectively, and while there are always risks (there is still a lingering court battle with Revlimid), the odds strongly favor Celgene achieving those numbers. It’s a good, reliable growth story.

Technical Analysis

CELG broke out from a five-year base in January 2013, had a great run into December of that year, and then effectively built a huge base that lasted through the market’s mid-October shakeout. Since then, though, CELG has soared to new price and RP peaks as investors look ahead toward many years of strong growth. The stock’s push to new highs today looks great; if you really want in, you could nibble here, but we do think it’s preferable to buy on weakness.

CELG Weekly Chart

CELG Daily Chart

Brunswick Corporation (BC)

Why the Strength

Brunswick is a global manufacturer of marine, recreation, and fitness products. The company’s largest unit, marine engines, consists of outboard, inboard, and stern drive engines, propellers and control systems. Brunswick also makes pleasure craft, sports fishing convertibles, offshore fishing boats and pontoons. The firm’s fitness unit makes treadmills, cross trainers, stair climbers, and stationary bicycles, under popular brands such as Life Fitness and Hammer Strength. Following a weak first half of 2014, which was due in large part to severe winter weather conditions, Brunswick has come roaring back, increasing production capacity and offering up sales growth of 13% in the third-quarter, topping expectations for 11% growth. The company has also introduced a number of larger, higher margin boats that should help drive strong sales and earnings through the fourth-quarter and beyond. Currently, Brunswick is forecasting full-year earnings of $2.30 to $2.35 per share, exceeding Wall Street’s expectations. Looking ahead, the company is expected to see earnings growth of 22% next year, which could be augmented by an improving jobs picture and rising consumer sentiment as boat sales continue to rebound from their 2010 doldrums.

Technical Analysis

After enjoying a steady run higher last year, BC shares hit a dead zone at the start of 2014. The stock entered the year capped by resistance in the 45-47 region, and, after two failed attempts, BC stock contented itself with bouncing along support at the 40 level. In fact, it wasn’t until late October, when investors reacted sharply to Brunswick’s strong third-quarter report, that shares got going. With firm results and positive guidance in the books, BC has rallied to eclipse the 50 level and remains above its 25-day line. You can nibble on dips.

BC Weekly Chart

BC Daily Chart

Applied Materials (AMAT)

Why the Strength

Applied Materials, the world’s largest maker of semiconductor production equipment, got even bigger earlier this year after acquiring Tokyo Electron for $2.6 billion. As a result, Applied now controls roughly 32% of the wafer manufacturing market, enjoying significant benefits of scale. Even before the buyout, Applied dominated the chip-making process across the globe, with equipment specializing in layering film on wafers, etching circuits, and semiconductor metrology and inspection equipment. Applied also has its hands in the solar power cell market, having acquired Applied Films last year. The company’s most recent bout of strength comes from strong economic factors, with the recent U.S. jobs report bolstering confidence in an already strong semiconductor sector. What’s more, the company has received plenty of positive attention from the brokerage community; according to Deutsche Bank, Applied is an “underappreciated technology leader” that will benefit from shifts in the technology landscape over the next two to three years, which analysts believe should drive spending on wafer manufacturing to $36 to $37 billion globally. We like Applied’s growth potential, and, given analyst expectations for wafer manufacturing, believe that earnings estimates may be on the low side.

Technical Analysis

Enthusiasm about the Tokyo Electron merger spurred AMAT to eclipse 20 by early April, before shares pulled back to support at its 25-week moving average. A mid-June rally saw AMAT tag a fresh multi-year high near 24, but shares ultimately pulled back to bounce along trendline support until a third-quarter selloff took AMAT into the teens by mid-October. The stock has been on fire ever since, however, with AMAT surging some 30% since its mid-October bottom. Shares pulled back today, but are buyable here or on weakness.

AMAT Weekly Chart

AMAT Daily Chart

AMAG Pharm. (AMAG)

Why the Strength

Some acquisitions leave a company pretty much unchanged, but AMAG Pharmaceutical’s takeover of Lumara Health’s maternal health business has transformed investors’ perceptions of AMAG. Before the acquisition, AMAG was a money-losing pharmaceutical concern with one approved drug on the market—a successful treatment for anemia in cancer patients that was marketed as Feraheme. (The company also owned the rights to MuGard, a mucoadhesive oral wound rinse used to treat mouth sores and ulcers that could result from cancer treatments or ill-fitting dentures or braces.) But the Lumara deal brought with it a drug called Makena, which is the only FDA-approved therapy for reducing the risk of preterm birth in women who have previously experienced a preterm birth. Makena sales have been increasing dramatically (up 72% over the prior year as of August 2014) and AMAG now has attractive growth prospects. The rapid changeover in the perception of AMAG Pharmaceuticals results from the explosion in earnings forecast for next year—$5 per share! When the Lumara acquisition was announced on September 29, AMAG Pharmaceuticals became a much more heavily traded stock. Annual revenues are projected to increase from 2013’s $81 million to around $350 million in 2015. That’s a transformative change.

Technical Analysis

AMAG bounced around between 12 and 19 in 2011 and 2012. That trading range improved in 2013 and 2014, but the stock was still trading at just 23 when the Lumara acquisition was announced. AMAG immediately spiked to 32 on huge volume. After a few weeks to digest that rally, AMAG got moving in November, gathering momentum that has continued into December. The stock is now trading around 41, with firm volume support. You can start a position on any weakness and add to it when the stock gives you a little profit cushion. Use a stop at 37.

AMAG Weekly Chart

AMAG Daily Chart

Alliance Data Systems (ADS)

Why the Strength

Alliance Data Systems is a behind-the-scenes company that has a great story and years of persistent growth. The firm is behind a ton of loyalty credit card rewards programs, private label retail credit cards and, because it collects mountains of user transaction data, a bunch of marketing services to clients as well. This is a global business, too; Alliance is behind the huge Air Miles program in Canada, for instance, in which more than two-thirds of that country’s households participate! And the reason more and more firms sign up with Alliance is because it works—studies have shown that customers using the rewards cards that Alliance services spend more than others. Organic growth here isn’t amazing—about 9% to 11% per year—but acquisitions help boost that figure, cash flow and margins are solid and the company isn’t shy about buying back its own stock (it’s bought back about 1.5% of its stock this year). Of course, if consumer spending tanks, business is likely to dry up, but earnings growth has been incredibly resilient for many years (including right through the 2008 bust), and analysts see 15% to 20% earnings growth for the next couple of years. It’s a good, easy to understand story.

Technical Analysis

ADS has had a humongous run in recent years, but this year’s action might have re-set the stock—it peaked with most growth stocks in March, and has since been range-bound between 230 and 300. However, the stock’s recent action bodes well—it spiked up from the mid-October lows on big volume, and has since traded tightly in the 275 to 285 area. We think the best way to handle ADS is to buy a small position here with a tight stop, and look to add shares on any powerful move above 290.

ADS Weekly Chart

ADS 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 8, 2014
11/10/14Allison TransmissionALSN31.5-33.533
12/1/14Bloomin’ BrandsBLMN21-2223
12/1/14D.R. HortonDHI
11/17/14Electronic ArtsEA40-4246
7/7/14Gilead SciencesGILD84-87106
9/2/14Hain CelestialHAIN94-98115
6/16/14Health NetHNT38.5-4050
8/25/14Home DepotHD
10/20/14Jack in the BoxJACK65-6875
11/17/14Leggett & PlattLEG39-4142
10/6/14Monster BeverageMNST88-92107
10/13/14Mylan LaboratoriesMYL50-5157
9/15/14Palo Alto NetworksPANW
11/17/14Sierra WirelessSWIR
11/10/14Spirit AirlinesSAVE73.5-7784
12/1/14Tableau SoftwareDATA81-8580
10/6/14Ulta SalonULTA113-117127
10/13/14United TherapeuticsUTHR120-124134
12/1/14Whole FoodsWFM46-4848
12/1/14KLA TencorKLAC66-6870
10/6/14Acuity BrandsAYI128-132138
DROPPED: Did not fall into suggested buy range within two weeks of recommendation.
None this week