More Improvement
From the start of October through the tail end of November, growth stocks (and, more generally, high relative strength stocks) were the dog’s dinner, flailing around even as the major indexes advanced. Now, though, with many stocks having etched two-month launching pads, the tone has improved—money is slowly (emphasis on slowly) coming out of defensive names and into faster movers. A bit more improvement and we’ll shift our Market Monitor into bullish territory, but for now, we’ll stick with our general “lean bullish” stance.
Another good sign is that, in this week’s list, we see many stocks that have shown recent power and are trading relatively tightly, a good sign of accumulation. Our favorite of the week is Harman International (HAR), a well-situated audio firm with very solid sales and earnings growth. The stock looks like it’s at a good entry around here.
| Stock Name | Price | ||
|---|---|---|---|
| Perrigo (PRGO) | 0.00 | ||
| Las Vegas Sands Corp. (LVS) | 0.00 | ||
| Illumina Inc. (ILMN) | 289.74 | ||
| Harman International Industries, Inc. (HAR) | 0.00 | ||
| Financial Engines (FNGN) | 0.00 | ||
| Deckers Outdoor Corp. (DECK) | 141.68 | ||
| Conn’s Inc. (CONN) | 0.00 | ||
| Baidu (BIDU) | 0.00 | ||
| AOL, Inc. (AOL) | 0.00 | ||
| Ambarella (AMBA) | 52.79 |
Perrigo (PRGO)
Why the Strength
While you may not have heard of Perrigo, one of the world’s largest manufacturers of generic and private-label over-the-counter (OTC) pharmaceuticals, you have more than likely used one of its products. The company specializes in making generic and store-brand products with packaging similar to leading national brands. Perrigo makes more than 2,200 products, including pain relievers, cough and cold remedies, dietary supplements, infant nutrition and smoking cessation products. It also makes about 400 generic prescription products. The company caught investors’ attention in late October when it beat Wall Street’s first-quarter earnings and revenue projections, as sales rose 21% year-over-year to a record $933.4 million. Perrigo also banked a record adjusted gross profit, record operating margins and record first quarter adjusted diluted EPS. Looking ahead, the company lifted its fiscal 2014 and 2015 outlooks, with Perrigo’s acquisition of Elan expected to contribute 10 cents per share in 2014 and 70-80 cents per share in 2015. In an address to shareholders, CEO Joseph C. Papa cited three major trends that should continue to bolster Perrigo’s bottom line: a shift among consumers from national to store brand products, a trend toward switching prescription products to OTC status and the company’s continued introduction of new products. With a national shift toward more affordable healthcare, we believe that Perrigo can remain a major player in this field.
Technical Analysis
PRGO’s technical backdrop is impressive. The stock has been in a long-term uptrend since the market bottom in 2009. Throughout this rally, shares have trended steadily skyward along support at their 10- 25- and 50-week moving averages, with this trio containing nearly all of PRGO’s pullbacks during this timeframe. The one exception to this support was January 2013, when PRGO tested psychological support at the 100 level. Shares rebounded nicely from this region, and have recently powered ahead following third-quarter earnings. We like PRGO on dips, with a stop in the low 140s.
PRGO Weekly Chart
PRGO Daily Chart
Las Vegas Sands Corp. (LVS)
Why the Strength
Las Vegas Sands remains one of our favorite bigger-cap ideas in the market because it offers a unique combination of current growth, future growth, high barriers to entry and an aggressive campaign of returning cash to shareholders. We’ll start with current growth, which is great for both Sands itself (we like the accelerating revenue growth, as well as the booming cash flow in its Chinese and Singapore properties) and for the industry (Macau’s gaming revenues were up a very healthy 21% in November). Looking ahead, there are no signs that Macau is slowing down, and, intriguingly, Japan looks to be on its way toward approving casino gambling, which could open up a gigantic market for the industry as a whole. After surviving the 2008 bust and a major expansion program (including Singapore, which just opened in 2010), management is now using its huge cash flow to directly help shareholders; it’s approved a $2 billion share repurchase program (it used $350 million last quarter) and will pay out 50 cents per share, per quarter in dividends in 2014 (yield of 2.7% or so). And the top brass hasn’t ruled out special dividends or larger buybacks as business continues to improve. Lastly, institutional investors like the group because there aren’t a lot of players; you don’t just show up and open a casino next door. It’s not the young buck it was a few years ago, but we think Sands has a very bright future.
Technical Analysis
LVS lifted out of a huge three-year base in September, rose seven weeks in a row (a sign of persistent buying) and then moved straight sideways for six weeks as its 50-day line caught up. Last week, LVS was one of the first growth stocks to reach new highs, and volume was solid on the upmove, too. We’re not anticipating a super-fast move, but the buyers are clearly in control and big investors look to be building positions. You can buy some here or on any dips, with a stop near 68.
LVS Weekly Chart
LVS Daily Chart
Illumina Inc. (ILMN)
Why the Strength
Life science tools developer and manufacturer Illumina has shown solid growth during the past year, despite funding threats due to the government shutdown. Specifically, the company has averaged revenue growth of 23% during the past year, with earnings rising 17% on average during the same period. Helping to drive the company’s expansion, Illumina embarked on an aggressive buying spree this year, snapping up Verinata Health in February, Advanced Liquid Logic in July, and NextBio in October. While these acquisitions have tempoarily slowed Illumina’s earnings growth, the company was still able to top analyst third-quarter expectations by nearly 10%. Illumina has not neglected organic growth, announcing during its third-quarter earnings conference call that it increased R&D spending by nearly 35% to top $61 million. The company’s most recent bout of strength is a direct result of this R&D spending. On November 20, Illumina announced that that it received premarket clearance from the FDA for the MiSeqDx system: the MiSeqDx Cystic Fibrosis 139-Variant Assay, MiSeqDx Cystic Fibrosis Clinical Sequencing Assay and MiSeqDx Universal Kit. All three products are expected to be available for shipment before the end of 2013. This is the first high-throughput DNA sequencing analyzer to receive FDA clearance, and should help solidify Illumina’s leadership in the market.
Technical Analysis
While ILMN wasn’t much to look at in 2012, the stock came roaring back to life in 2013. After basing near 50 during the first quarter, ILMN reclaimed its 10-week moving average in April and broke through resistance at 60 later that month. Shares have since trended steadily higher along support at their 10-week moving average, stair-stepping past technical resistance at the 70, 80, and 90 levels along the way. Following the stock’s most recent breakout above 90 in late October, ILMN has advanced on the psychologically significant century mark. It’s buyable here or on dips with a stop near the 50-day line.
ILMN Weekly Chart
ILMN Daily Chart
Harman International Industries, Inc. (HAR)
Why the Strength
Harman International, a Connecticut audio company founded in 1980, has been raising its profile in the music business. Harman just opened a new brick-and-mortar store in New York City to showcase its complete lineup of infotainment systems for cars, plus mobile devices, high-end home systems and automotive sound systems. Harman’s speakers wind up in earbuds, noise-cancelling headphones, automotive audio systems, notebooks and PCs and even concert halls and sports stadiums. With a stable of brands like Harman/Kardon, JBL, Mark Levinson, Infinity and Becker, Harman gets a major portion of its revenue from sales to European car-makers like BMW, Audi/VW and Daimler. BMW alone contributed 18% of last year’s revenue, with Audi/VW kicking in 13% and Toyota 10%. All told, automotive infotainment sales—which include GPS nav systems, Bluetooth, voice activation, climate control, emergency braking and other safety systems—yielded 53% of revenue for the fiscal year that ended in June. The company’s Lifestyle division, which makes speakers and other audio systems for cars, homes and multimedia applications, made up 31% of sales. And the Professional segment, which makes high-end systems for audio professionals, concert halls, stadiums, airports, and the like, made up the last 16%. There is some risk in having a few big customers (like BMW) as the source of such a large portion of revenues, since there are no guarantees that beemers will continue to feature Harman systems. But for now, Harman is hitting on all cylinders with investors.
Technical Analysis
HAR broke out of a long trading range in July 2013, pushing past 53 (which had been the stock’s ceiling dating back to 2010) on average volume. The high-volume breakout came in early August, when the stock ripped from 58 to 70 in three days on a big spike in trading. It took 12 weeks for HAR to digest those gains, setting the stock up at 72 for its next big move, which came on October 31. Since that jump to over 80, HAR has been trading very tight under resistance at 82 with support at 80. The 25-day moving average has just topped 80, which may deliver a boost. HAR looks like a good buy on a dip toward 80, with a stop at 71 or so.
HAR Weekly Chart
HAR Daily Chart
Financial Engines (FNGN)
Why the Strength
Financial Engines is a Bull Market stock, but with a bigger longer-term growth story. The company inks deals with huge companies (about 150 of the Fortune 500 use its services) that allow it to offer online and even management services to 401(k) participants from these firms. Interestingly, the company doesn’t just peddle the usual advice; its founder, Bill Sharpe, who won a Nobel Prize in Economic Sciences, helped to develop a computerized system that helps lower risk and matches investment choices to each individual’s goals. The vast majority of revenues come from the amount of assets it has under management; at the end of the third quarter, Financial Engines was managing $82 billion. But that is just a fraction of the potential, as the company has deals with companies whose employees have a total of $752 billion in their 401(k) plans; as more employees approach retirement, the company likely has lots of “built in” expansion potential just among its current customers. As it is now, the company has three quarters in a row of very strong sales and earnings growth, and should the market continue to trend higher, interest in its offerings should increase, as will its assets under management. As Bull Market stocks go, we like it.
Technical Analysis
FNGN has been in a solid uptrend for about a year and a half, so it’s clearly well into its advance; it’s also not cheap by any measure, so investors are discounting great growth for many quarters to come. But, chart-wise, there’s no sign of any waning of buying pressure—in fact, FNGN remains within a well-defined uptrend. The stock reacted well to earnings in early-November, paused for a bit and then moved to new highs before stalling just south of 70. We think it’s buyable around here (or on minor weakness) with a loss limit near 60.
FNGN Weekly Chart
FNGN Daily Chart
Deckers Outdoor Corp. (DECK)
Why the Strength
Deckers Outdoor is a footwear company most famous for its distinctive UGG sheepskin shoes and boots. But even though the UGG Australia line contributed 84% of revenues for the first half of 2013, Deckers isn’t a one-trick pony. The company also has the Teva line of sandals (8% of revenue), Sanuk action sports footwear (7%), and emerging brands Mozo shoes for chefs, Ahnu performance footwear, Tsubo fashion footwear and Hoka running shoes. But it’s the company’s ability to keep UGGs in the spotlight that feeds the bulldog. Deckers has a string of 89 stores—61 concept stores and 28 outlet stores. The aim is to have at least 200 stores by 2015. The company expects growth to come from a major push to market UGGs to men and through a social media strategy that will cap an integrated marketing campaign. The four smaller brands are characterized as “emerging,” which makes them a high-potential focus for direct-to-customer and e-commerce sales. Deckers’ revenue growth slowed to 3% in 2012, but investors see big potential in the company’s campaign of new-store openings and new brand development. As long as UGG boots keep supplying the capital, Deckers Outdoors will have the fuel for growth. The company’s Q3 earnings report on October 24 beat its July targets, and management’s outlook guidance for the year was well above analysts’ expectations.
Technical Analysis
DECK has come a long way since it dipped to 29 a year ago, capping a painful correction from 119 November 2011. DECK roared to 60 in less than six months, then corrected to 47 in June. The rally that started in June hit 69 in early October, but investors pushed the stock down to 57 before Q3 earnings results came out. When those results proved positive, DECK jumped back to 70, and consolidated for only two weeks before heading higher again. DECK is now trading near 86, and has left its 25-day moving average behind at 78. DECK looks like a reasonable buy on any weakness of a couple of points. Using a loss limit at the 50-day moving average (now at 71) makes sense.
DECK Weekly Chart
DECK Daily Chart
Conn’s Inc. (CONN)
Why the Strength
Conns is a small, fast-growing retailer that sells consumer electronics, home appliances, furniture, mattresses and home office equipment. The difference between it and, say, Best Buy, seems to be its focus on low- to moderate-income people, and its corresponding efforts to offer financing terms that get them buying products. The strategy has produced awesome results—sales growth is accelerating wildly (see table below), thanks to a big move into furnishings and appliances in recent quarters, as well as new store growth; Conns has just over 70 stores in the U.S., but that includes the opening of 15 to 20 new stores this year. It all sounds good, and the quarterly report last week was outstanding (as was management’s update on November, which saw retail sales up 49% and same-store sales up 32%!). However, there’s little doubt the company is going to be boom or bust because of its customer base; even now, credit-related revenues make up nearly 15% of the total, yet 10% of the customers are delinquent on their borrowings. As long as the economy continues to chug ahead, no problem ... but if investors get a whiff of trouble, they’ll likely bail, anticipating a hit to earnings as bad debts rise. Right now, though, the quarterly report and outlook suggest management is very comfortable with the environment during the next few quarters.
Technical Analysis
CONN is certainly not in the first inning of its advance; it’s up from 5 in late-2011 to north of 70 after last week’s earnings gap. Plus, the recent consolidation wasn’t the best looking we’ve ever seen, with a sharp selloff three months ago, a middling bounce and then last week’s gap up. Still, the power last week was impressive, and the numbers are outstanding. We think starting a small position on weakness makes sense, with the idea of buying a little more if the stock heads higher.
CONN Weekly Chart
CONN Daily Chart
Baidu (BIDU)
Why the Strength
The position of richest man in China has just gone to Robin Li, the man who founded (and still runs) Baidu, often called “the Google of China.” Baidu dominates the world of Chinese Internet search, giving it an enormously profitable hold on the sale of ad words, which is how Li’s fortune now tops $12 billion. (Li is said never to have sold a single share of Baidu stock.) The Internet story in China has switched in recent years from a PC-based story to one that’s powered by the rapid adoption of smartphones that give users instant access from anywhere. Baidu’s revenue growth rate has slowed from the triple digits common from the early 2000s, but the last three years have seen growth of 81% (2010), 92% (2011) and 57% (2012). After-tax profit margins have also dipped from recent years, but have averaged around 36% for the past three quarters. Baidu continues to push into e-commerce via pacts with major Chinese e-retailers, and the company’s acquisition of 91 Wireless gives it a major footprint in the app distribution world, a necessity in courting mobile customers. Baidu gets five billion search requests every day, and reaches more than 90% of Internet users in China. The company has put together a strong response to the challenge from Qihoo 360 for search market share, and as the buildout of wireless networks brings more smartphone users into constant touch with Baidu’s search engine and the advertising it carries, the company is likely to go from strength to strength.
Technical Analysis
BIDU went into a major slump beginning in August 2011, eventually dropping from 166 to 83 in April 2013. But a strong rally beginning in July broke the stock out to 140 in early August. The stock traded sideways at that level for five weeks, but since early September, BIDU has been in a volatile, but steady, uptrend, that has now lifted it past its old 2011 highs. BIDU is considered a core holding for anyone interested in investing in China. BIDU has run past its buy range from its September 30 appearance in Cabot Top Ten Trader (its 22nd), so we’re lifting it by about 20 points. A buy near 165 would be ideal, with a stop at 145.
BIDU Weekly Chart
BIDU Daily Chart
AOL, Inc. (AOL)
Why the Strength
Known as America Online in the early ’90s, AOL made its name providing affordable dial-up Internet service and exclusive Web content to millions. But while the days of snap-hiss dial-up are long gone, AOL has persevered. In 2000, the company merged with Time Warner, only to be spun off again in May 2009. With Internet access and Web browsing habits shifting rapidly, AOL heeded the old adage that “content is king,” snapping up a slew of brands including The Huffington Post, Patch, MapQuest, AOL Yellow Pages, Moviefone, Engadget and Cambio. The strategy is starting to pay off, with AOL realizing a 14% jump in ad revenue during the third quarter. The difference-maker for AOL is the company’s splashy new electronic ad exchange, which includes higher-dollar video advertising. The new initiative has allowed AOL to command higher average ad prices at a time when rivals Yahoo! and Google saw 7% and 8% declines in ad pricing, respectively. Surprisingly, AOL still gets about 30% of revenue from dial-up subscriptions, but stronger ad revenue will more than compensate for this declining technology. Lastly, it’s worth noting that while AOL short interest declined by nearly 28% during the most recent reporting period, more than 11% of the stock’s total float, or shares available for public trading, remains sold short. Continued short covering could provide additional lift as AOL’s rally continues.
Technical Analysis
After logging an impressive rally from 14 in September 2011 to 38 in November 2012, AOL shares decided to take a long breather. The shares spent nearly the next year bouncing around between support near 30 and resistance at 40, as AOL failed to overcome technical resistance. That barrier was broken in early November, when, driven by strong ad sales data, investors pushed AOL shares to their highest perch since the Time Warner spin-off. Currently, AOL is consolidating its post-earnings gains above the 44 level. We think AOL is buyable here, with a loss limit around 40.
AOL Weekly Chart
AOL Daily Chart
Ambarella (AMBA)
Why the Strength
Ambarella is a system-on-a-chip (SoC) developer whose processing solutions go into devices that capture HD video for sharing and display. Thus far, the company’s SoCs have gone into 27 million cameras, including wearable sports cameras, automotive dash cameras, webcams, security cameras, digital still cameras, camcorders and pocket video cameras. The company’s combination of hardware, algorithms and software are said to lead the pack in performance, and more than 80% of its products go to Hong Kong, for distribution to Chinese manufacturers. The proliferation of video cameras has created huge demand for HD SoCs, leading to 24% revenue growth last year and an average of nearly 31% growth in the latest four quarters. The company’s after-tax profit margins came in at 23.8% in the most recent quarter, along with 24% earnings growth. Ambarella’s latest quarterly report on December 5 featured EPS of 37 cents, versus estimates of 29 cents, and revenue of $46 million, which was ahead of consensus estimates of $44 million. Ambarella is actively developing new technologies that will push the limits of existing capabilities, and that’s keeping investors interested.
Technical Analysis
AMBA came public in October 2012 at 6, and didn’t experience huge volatility. But AMBA got moving quickly, and has been a steady mover, with just two six-week corrections during its run up to 25. Volatility is high, but the trend is clearly up. With AMBA now trading near 25 and its 25-day moving average below 23, the stock isn’t hugely extended. And its 24 P/E ratio isn’t especially high for such a strong issue. If you like the story, the stock’s volatility will likely give you a chance to get in near 24, which would provide a good entry point. Use a stop at the 50-day (now at 21.5) for safety.
AMBA Weekly Chart
AMBA 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.
