Still Bouncing
Current Market Outlook
First, the good news: By last week’s end, the major indexes had extended their bounce, with many recouping about 45% or more of their December 29-January 20 meltdowns. And this bounce probably has further to run, especially as earnings season has helped a few stocks show excellent strength. All of that said, the onus remains on the bulls to prove this bounce can morph into a sustained rally—the intermediate- and longer-term trends are still pointed down for all indexes and the vast majority of stocks, and to this point, most of the “action” has been in defensive and interest rate-sensitive sectors (utilities, REITs, tobacco, etc.). That can always change, and we hope it does, but right now it’s best to remain defensive and allow the market to prove itself on the upside.
This week’s list contains some turnaround situations, but we’re encouraged to see some real growth stocks as well. And the Top Pick this week is the flag-bearer for all growth stocks—Facebook (FB) is well owned, but remains one of the best stories around, and last week’s earnings report revealed accelerating growth.
| Stock Name | Price | ||
|---|---|---|---|
| TAL Education (XRS) | 0.00 | ||
| Under Armour (UA) | 0.00 | ||
| T-Mobile US (TMUS) | 0.00 | ||
| SolarEdge Technologies Inc. (SEDG) | 124.37 | ||
| Facebook, Inc. (FB) | 0.00 | ||
| Diamondback Energy (FANG) | 0.00 | ||
| Dollar Tree (DLTR) | 0.00 | ||
| Cirrus Logic Inc. (CRUS) | 0.00 | ||
| Align Technology (ALGN) | 316.20 | ||
| Barrick Gold (ABX) | 0.00 |
TAL Education (XRS)
Why the Strength
Education is a big deal in China, with entry into top institutions of higher education regarded as the key to landing a good job and becoming successful. TAL Education is a leading provider of the kindergarten-through-12th grade tutoring and test preparation services that help students to excel and succeed. TAL has grown rapidly, from a single learning center in 2003 to 300 learning centers in 19 cities today. TAL Education made its debut in Cabot Top Ten Trader in December, and the company’s appearance today is a result of a very strong quarterly report on January 27. Analysts were expecting the company’s earnings to decline by 17% to 15 cents per share and revenue of just under $137 million. Instead, TAL reported $142 million in revenue and earnings flat at 19 cents per share, keying a rally on double the stock’s average volume. One thing that fascinates investors about TAL Education is the enormous size and extreme fragmentation of the Chinese tutoring services market. The top three players in this sector control less than 3.5% of the total market, which creates an opportunity for an ambitious company like TAL Education. The company took a big step toward increasing its scope by buying Firstleap Education and its 60 learning centers in September 2015. Despite the widely reported trouble with the Chinese economy, demand for TAL Education’s services remains strong.
Technical Analysis
XRS built a nice flat base in August and September after the August 24 washout on global markets. The stock blasted off in October, ripping higher from 31 on October 1 to 49 on December 21. A year-end correction found support at 42 in January and the stock had worked its way back to 45 when the good earnings news gave it a shot in the arm. The stock has moved back on top of its 25- and 50-day moving averages and is now back near its December all-time highs. If the broad market were more supportive, we would advise buying a little right here. But as things are, it’s probably best to wait for XRS to pull back toward its 25-day, now at 45. A dip below its January low at 42 would be bearish.
XRS Weekly Chart
XRS Daily Chart
Under Armour (UA)
Why the Strength
Under Armour is a global apparel company that specializes in performance clothing, footwear and accessories. The company has come a long way since its founding in 1996, following in the footsteps of Nike, the giant of the industry and the company Under Armour hopes eventually to challenge for leadership. Under Armour’s latest quarterly report on Wednesday was a solid one, with revenue growth at 31% and earnings up 20%, both measures coming in well ahead of analysts’ expectations. It’s worth noting that 10 years ago Under Armour sold no shoes at all, but now moves $700 million of footgear per year. The company has also diversified far beyond its trademark compression gear, deriving just 10% from that category. Under Armour is successful at riding the trend toward wearing athletic gear for everyday clothing, and is moving toward integration of digital information about workouts and other activities into a health and fitness program for life. Nike is an ambitious target, but Under Armour’s earnings are forecast at 16% in 2016 and 15% in 2017, so progress is being made.
Technical Analysis
UA has been a monster stock since the end of the Great Recession in March 2009, soaring from 3 to as high as 106 in September 2015. Disappointing results pulled UA into a major correction that started in late September and dropped the stock to 63 last month. The earnings breakout on January 28 came on nearly three-and-a-half times average volume and kicked UA from 69 to 84 in one day—and the stock has held those gains well. With U.S. markets still jumpy and a ton of overhead to chew through, UA isn’t a screaming buy, but its rebound represents a return to a long-term uptrend. It may be a good idea to wait for the stock to regain its 200-day moving average (now at 88) before buying in, or you can buy a dip to 83. In any case, start small and let the stock pull you along only after you get a profit cushion to work with. A stop at 76 will give the stock some room.
UA Weekly Chart
UA Daily Chart
T-Mobile US (TMUS)
Why the Strength
In the hyper-competitive landscape of wireless service, T-Mobile isn’t backing down from bigger rivals Verizon and AT&T. The company directly called out Verizon, questioning its claim to having the best wireless network in an ad titled “A better network as explained by colorful balls.” T-Mobile’s retort is a social media campaign CEO John Legere has dubbed the #BallBusterChallenge. In it, T-Mobile claims Verizon’s ad is based on a report that is 12 months old, and ignores his claim that T-Mobile’s LTE network has doubled in size during those 12 months. It also invites Verizon’s customers to measure T-Mobile’s network speed for calls, texting and data side-by-side with Verizon’s. T-Mobile is putting its money where its mouth is: the company is traveling across the country allowing people to test its service against Verizon’s. If Verizon beats its service two out of three times, the customer gets a $100 Visa Prepaid Card courtesy of T-Mobile. Here’s what Legere said: “Verizon is known for their network coverage ... so when they suddenly start spending tens of millions in ads to try and convince people their network’s better, it says a lot.” Oh, snap! Those are the kinds of bold words and action that grab investors’ attention. T-Mobile’s campaign may well backfire; but like Donald Trump, T-Mobile is earning plenty of constituents with its loud and blustery style.
Technical Analysis
In September, TMUS topped 43, a post-recession high. A significant consolidation phase followed, with the stock falling all the way back to 34 in early December. Now it’s on the uptick again, reaching 40 in early January, finding support at 37 after a brief pullback, and now gaining steam again to reach 39. Nibble on the dips but keep a close eye: TMUS has routinely fallen below its 50-day moving average in recent months, and 37 has only acted as support for the past six weeks. If you buy, keep your position size very small, and your loss limits tight.
TMUS Weekly Chart
TMUS Daily Chart
SolarEdge Technologies Inc. (SEDG)
Why the Strength
Most of the energy sector is cratering amid free-falling oil prices, but not solar-energy companies like SolarEdge. Sales at the Israeli alternative energy company improved 144% in its 2015 fiscal year, completed in June. Now that growth is spilling over into earnings; after struggling to turn a profit since its 2006 inception, SolarEdge’s per-share earnings have now been in the black for five quarters running. Its $0.36 EPS in its most recent quarter was a 414% improvement from the same quarter a year ago. Its partnership with Tesla Motors has helped. Last May, SolarEdge reached an agreement with the electric-car company to provide inverter solutions to allow grid and photovoltaic integration with Tesla’s home battery solution, the Powerwall. In lay terms, it will help Tesla customers store electricity generated from the sun during the day and use it in their homes. Goldman Sachs estimated that every 25,000 Tesla Powerwalls sold will generate $20 million in sales for SolarEdge. Throw in the added image boost that being in bed with Tesla (and Elon Musk) can provide a small company ($1.13 billion market cap) like SolarEdge, and it’s easy to see why investors are starting to take notice.
Technical Analysis
SEDG was a smash-hit after debuting on the Nasdaq last March, coming public at 20 and more than doubling to 42 by June. Then the bottom fell out—the stock fell for four straight months, bottoming at 15 in mid-November. The rollercoaster ride continues: the stock is back up to 28 after gapping up from 18 to 27 in December. SEDG’s 50-day moving average (currently just under 24) has acted as support for the past six weeks, though the stock hasn’t managed to break above resistance at 30 since last August. Nibble on the dips and sell on any move below 25.
SEDG Weekly Chart
SEDG Daily Chart
Facebook, Inc. (FB)
Why the Strength
The most exciting thing about Facebook is that there’s never been another company like it—whereas some compare it to some sort of equivalent of ABC, NBC, CBS and Fox combined in the old days, we actually think it’s far more than that. When you have more than one billion people using your website/app every day, and when you’re continually improving your advertising targeting ability, and when you have three other mass market services (Instagram with 400 million users, Messenger with 800 million and WhatsApp with nearly one billion!), only one of which has yet to be monetized to any real degree today (Instagram, which could have north of $1 billion in revenues in 2016) … the potential is truly mind-boggling. The firm’s fourth-quarter report last week was fantastic, with sales and earnings crushing expectations, and both showing accelerating growth for the second straight quarter despite economic worries and currency headwinds. Bigger picture, we think the evidence continues to build that (should management continue to make the right moves) Facebook is akin to “the next Apple”—a dominant company with an institutionally-owned stock that has all the pieces in place for years of 30%-plus annual growth. Indeed, analysts see the bottom line up 38% and 32% this year and next (respectively), but even that could prove conservative if the economy holds up. Facebook looks like the flag-bearer of any bull move that develops.
Technical Analysis
FB is thought of as a hot stock, but shares really didn’t do much from March 2014 through June 2015. Since then, it’s had ups and downs with the market, but its RP line has hit new highs every few weeks while the stock has generally held its 200-day line. Last week, on the heels of its earnings report, FB launched to new price and RP highs on its heaviest weekly volume since October 2014. We don’t expect a straight-up move given the market, but we’re OK with nibbling here or (preferably) on dips.
FB Weekly Chart
FB Daily Chart
Diamondback Energy (FANG)
Why the Strength
When evaluating an energy stock following the meltdown in oil and natural gas prices, you can throw out most traditional metrics; sales and earnings are going to be way down from where they were 12 to 18 months ago. Instead, what counts is liquidity (not just to survive, but to buy cheap acreage and equipment) and the underlying value of its acreage. On both fronts, Diamondback Energy thrives. For liquidity, big investors have shown a big hunger to take advantage of the stock’s lower prices; on January 13, Diamondback actually upsized a share offering (it sold four million shares) and has $529 million of liquidity available. (It also has some of the lowest debt ratios among its peers.) And fundamentally, the firm’s 85,000 net acres in the Midland Basin (in the Permian Basin in Texas) is actually fairly lucrative even in a low-price environment; at $35 to $45 oil, Diamondback has 700 economical drilling locations (some of them generating 30% to 70% lifetime returns even at $40 oil), with that figure rising to 1,250 locations at $45 to $55 oil (50% to 125% returns). Obviously, the company is playing things carefully given the current environment, but there’s no reason the firm’s cash flow can’t explode once the industry recovers. Diamondback is a good story and worthy of being on your watch list for when the energy tide turns.
Technical Analysis
Many oil stocks are down 50% to 75% from their 2014 peaks, but FANG has fared much better—while it did fall as much as 45% during the industry’s initial plunge, the stock has hit a couple of higher lows since, and at the end of last week, FANG was just 11% from its all-time high. Most impressive is the action so far this year; after an initial selloff with the market, the stock found support after a share offering and has exploded higher on three straight weeks of huge volume. There’s still overhead to deal with, so if you want in, keep it small and use a loose stop in the 64 area.
FANG Weekly Chart
FANG Daily Chart
Dollar Tree (DLTR)
Why the Strength
Last July, Dollar Tree completed a $9 billion purchase of fellow discount retailer Family Dollar. The acquisition is already making a difference in Dollar Tree’s top-line growth. The company brought in just a shade under $5 billion in revenues during its August-through-October quarter—a 136% improvement from the same quarter a year ago, and nearly $2 billion more than its previous record quarterly haul. Profitability has taken a hit since Family Dollar’s products carry lower margins, but the sales growth is a major boost for a company whose sales had improved no more than 16% annually (and typically between 6% and 12%) for the past decade. With the second full-quarter earnings since the Family Dollar acquisition due out later this month, institutions may be jumping on board early in anticipation of more monster sales. Analysts are expecting Dollar Tree’s sales growth to top 118% in the holiday quarter. Even if earnings per share are down, as expected, triple-digit sales growth tends to grab Wall Street’s attention.
Technical Analysis
DLTR’s big move came after the last round of earnings were released in mid-November. The stock jumped from 62 to 79 in less than a month, and has operated in a tight range between 75 and 80 for nearly two months, holding steady even as the market collapsed in December and early January. Last week brought a potential breakthrough, with the stock breaching overhead resistance to top 81 for the first time since last July. It’s still shy of its 52-week peak above 83, but the fact that DLTR held up so well while most stocks were crashing may be enough reason to take a small position on any signs of weakness.
DLTR Weekly Chart
DLTR Daily Chart
Cirrus Logic Inc. (CRUS)
Why the Strength
Some believe that Apple’s (AAPL) products have grown stale, but not as far as Cirrus Logic is concerned. The maker of audio chips is a key supplier for Apple’s iPhones, which are responsible for 70% of Cirrus’ revenues. With Apple’s latest creation, the iPhone 7, in the works, investors are showing interest in CRUS as a way to play that new product. One rumored iPhone 7 feature in particular is placing focus squarely on Cirrus: the phone may come equipped with noise-canceling headphones, which would make Cirrus’ audio chips more integral than ever to the iPhone’s quality and success. In fact, Cirrus has forecast 15% sales growth in fiscal 2017 (starting this March) due to the iPhone 7, tentatively scheduled for September release. In the meantime, Cirrus’ pre-iPhone 7 sales haven’t been too shabby. The company reported fiscal 2016 third-quarter earnings last week, and revenues improved 16% from the previous year. Though earnings per share declined 15%, it’s being compared to the 2014 holiday quarter, when the iPhone 6 and 6 Plus had just been released. The iPhone 7 release should spark a turnaround in the company’s profit growth: Cirrus is forecasting 28% EPS growth in fiscal 2017, which begins in April. For now, the consistent double-digit sales growth (five consecutive quarters) combined with the iPhone 7 headphone rumors have been more than enough to pique investors’ interest in CRUS.
Technical Analysis
Like most of the market, CRUS had a very bad December and early January, plummeting from a six-month high of 35 on December 4 to a 52-week low of 25 on January 13. Since then, the stock has dusted itself off, found some mid-20s support, and gapped up to 34 on the earnings beat and iPhone 7 rumors. It’s still shy of seven-month resistance in the 36 to 38 range, so nibble on the dips and see what happens if the market starts to stabilize.
CRUS Weekly Chart
CRUS Daily Chart
Align Technology (ALGN)
Why the Strength
Align Technology is a one-trick pony, but the trick is a good one. The company’s proprietary Invisalign technology uses a series of transparent aligners to treat malocclusions of teeth, doing the job of old metal braces without the discomfort and the metal-mouth look. The company also has a full complement of scanning, imaging, modeling and dental record hardware and software that serves the general dentistry market plus prosthodontists, periodontists and oral surgeons. The company’s quarterly report on January 28 topped expectations by a solid margin, with revenue of $230 million (where $227 million was forecast) and earnings of 60 cents per share (versus consensus forecasts of 53 cents). The report also featured after-tax profit margins of 21.2%, the strongest in two full years. The company’s guidance for the current quarter calls for revenue of about $234 million. Analysts see earnings rising 24% in 2016 and 28% in 2017 as the improving health of the U.S. economy supports elective dental services.
Technical Analysis
ALGN made a big run from 2009 through 2013, but formed a long, shallow cup pattern from January 2014 through July 2015, making three unsuccessful runs at resistance at 65 during that time. ALGN finally broke through to 68 last October, but traded flat through November and December before falling back to 58 in January. The earnings boost last Friday that came on more than triple average volume spiked the stock briefly over 69, but ALGN finished that day at 66, and is trading around 67 today. It remains to be seen whether this earnings bump will instill any lasting momentum, so it’s best to be cautious with the stock. You can nibble on a dip to 66, or wait for a convincing breakout above 68. The safest choice is to put ALGN on your watch list until the broad market makes a decisive move. If you buy around here, keep a stop at the stock’s 200-day moving average (now at 61.5) in place.
ALGN Weekly Chart
ALGN Daily Chart
Barrick Gold (ABX)
Why the Strength
We will never be anything close to gold bugs, but we are students of the market, and the fact is that since gold stocks as a whole topped back in 2011, the sector has fallen 81.5%. You read that right: 81.5% during the past four-plus years, even as gold bullion has lost “only” 46% during that time. At some point, the group is going to have a big run, and it could start soon—gold stocks have been etching a good bottom since August and, lately, are showing some spunk. Barrick Gold is one of the top dogs in the industry, with revenues of nearly $10 billion, and it’s been making steady fundamental progress in recent years despite the fall in gold prices—the firm has driven its all-in gold mining costs down to about $850 per ounce (down 16% since 2012), reduced its debt load by a whopping 24% just in the past year (most of its remaining debt doesn’t mature until 2032 and beyond), and is aiming for $2 billion of cash flow improvement through cost cuts and selling non-core mines (four of the 19 mines it operates are for sale). Moreover, nearly two-thirds of production comes from five core mines, with all-in costs of less than $725 per ounce, and it has a bunch of exploration projects at current mines that could easily boost production down the road. The bottom line is that Barrick is now in a position to be a huge beneficiary of any sustained rally in gold bullion.
Technical Analysis
ABX hit 56 in 2011 and fell below 6 last year, about a 90% decline for one of the world’s top gold miners. We think it’s safe to say the weak hands are out! But we’re interested in the recent strength—not only did the stock build a nice bottoming formation centered at 7.5 from October through mid-January, but ABX has come alive on big volume (biggest volume in six months last week) as it decisively penetrated its 200-day line for the first time since mid-2014. Gold stocks are always volatile, but we’re OK with a small position around here and a loose stop in the mid-8s.
ABX Weekly Chart
ABX 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.
