Bulls Flexing Their Muscles
Current Market Outlook
Just a few days ago, the intermediate-term trend was looking iffy, but the past few days have shown very encouraging action—every major index has tagged new high ground, and we’re seeing more and more stocks react well to earnings and follow through to the upside afterwards. There are still a couple of yellow lights from some secondary measures (short-term sentiment is a bit complacent; small caps continue to lag), so near-term pullbacks wouldn’t be surprising. But there’s no question the trend of the market and most stocks is up, with many areas resuming their post-election advances. We’ll nudge up our Market Monitor to a level 8 (out of 10) to reflect the improved evidence.
This week’s list has a bunch of stocks that are showing excellent power in recent weeks; many have just gotten going after long sideways phases. Our Top Pick is Lumentum (LITE), a mid-sized player in the optical networking field that’s exploded out of a four-month base. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Box Inc. (BOX) | 0.00 | ||
| CDW Corporation (CDW) | 0.00 | ||
| Cleveland-Cliffs (CLF) | 0.00 | ||
| Lam Research (LRCX) | 268.47 | ||
| Louisiana-Pacific (LPX) | 0.00 | ||
| Lumentum (LITE) | 87.00 | ||
| Medicines Company (MDCO) | 56.98 | ||
| Morgan Stanley (MS) | 0.00 | ||
| Sanmina (SANM) | 0.00 | ||
| Weibo (WB) | 98.16 |
Box Inc. (BOX)
Why the Strength
Box is a small, rapidly growing company that’s taking advantage of the broad-based shift to the cloud. The company offers a unique enterprise-wide content collaboration platform—a “content hub” that allows users across a company to securely access and collaborate on a firm’s content from anywhere, on any device and using any work app (Office 365, Slack, Google, etc.). And it’s a huge hit! Box has a whopping 69,000 paying customers (including 63% of the Fortune 500), thanks to the increases in productivity, decreased infrastructure costs (no more separate storage needs) and lower risk (better compliance and security than having data located on hundreds of devices and servers) it provides. All told, the potential is enormous as more firms move to the cloud (Box’s management believes the potential is $45 billion annually). The worries here have always been competition and a lack of profits, but the company has made solid progress on both fronts, counting many blue chip players as partners (including Amazon, Microsoft and IBM), and financially, cash flow is set to turn positive as Box’s operating leverage surges from higher-margin sales to existing customers. Management is aiming for revenues to rise at least 25% annually through 2020 with free cash flow surging along the way. It’s an intriguing growth story.
Technical Analysis
BOX came public in early 2015 at 14, immediately rallied to 25, and then endured a grueling decline for the next year, falling to 9 in early 2016; the relative performance (RP) line didn’t bottom until July! But since then, the buyers have taken control—BOX rallied to 16.5 in October, then built a good-looking double bottom base. And since the calendar flipped to 2017, the stock has risen nicely, notching 18-month highs. Earnings are due out March 1, but we’re OK buying a small position on weakness.
BOX Weekly Chart
BOX Daily Chart
CDW Corporation (CDW)
Why the Strength
CDW jumped onto our radar after the company’s February 7 earnings release propelled shares 7% higher. In the days following the release, the stock continued to show strength, in part because analysts have increased price targets by around 30% (many to the 60 to 64 range). The big-picture story here is that CDW is a multi-brand technology solutions provider to businesses, government, education and healthcare customers. It offers over 100,000 different products and services, ranging from hardware (laptops, notebooks, printers, etc.) and software, to IT solutions. When businesses are investing in IT, as they are now, CDW tends to do especially well since it grows faster than the broader industry. Vendor partners include all the big names: Apple, Dell, Microsoft, Intel, Google, Aruba and so on. As CDW has grown its integrated solutions offerings, specifically around the cloud, security and mobility, the company’s financial performance has improved. That’s freed up capital to pursue acquisitions, increase the dividend (recently by 49% to $0.16), buy back shares and reduce leverage. Wall Street loves it all, especially since earnings are growing at about twice the rate of revenue. This is a story of steady, sustainable growth. We expect that annual revenue growth of around 5% and double-digit earnings growth will keep big investors interested.
Technical Analysis
CDW has been on a multi-year run since it returned as a public company in 2013 (it went private in 2007). The stock’s biggest retreat was in early 2016 due to the market, but it quickly got going again once the market did. Throughout 2016, shares grinded higher, then caught fire in early November when they moved from 44 to 55 in the span of five weeks. Shares then trended down to 50 through the end of January before a modest bump. Last week’s earnings release caused the stock to surge out of its consolidation on excellent volume. We think dips are buyable.
CDW Weekly Chart
CDW Daily Chart
Cleveland-Cliffs (CLF)
Why the Strength
Cliffs Natural Resources is the leading producer of iron ore (a key input to the making of steel), both in America (it’s the largest supplier of iron ore pellets in this part of the world) and overseas (its Australian iron ore complex serves many areas in Asia). The company has been through some extremely tough times during the past few years, as prices for iron ore plunged and it had to shut down some mines and battle with large customers to renegotiate contracts. But now a turnaround is in effect, thanks in part to CEO Lourenco Goncalves (who came on board in 2014), who has executed new contracts (it inked a major deal with ArcelorMittel last May), and implemented cost and debt reductions. Cliffs is now seeing prices firm as the global economy picks up steam. In the fourth quarter, Cliffs’ production soared 53% from a year ago and sales and earnings both easily topped estimates. More important, management said it expects a whopping $850 million in EBITDA in 2017, up from $374 million last year. The company also executed a huge share offering and debt refinancing initiative just last week; while the dilution isn’t ideal, Cliffs used the proceeds to cut debt expense and push out all meaningful debt maturities for a few years, in effect completing its financial turnaround and allowing future sales improvement to fall to the bottom line. Of course, if the steel sector keels over again, all bets are off, but we think Cliffs is a very attractive turnaround situation.
Technical Analysis
CLF fell all the way to 1.2 (down 99% from its high!) as bankruptcy concerns caused investors to flee. The rebound last year was large but wild, with the stock moving 40% to 50% every few weeks. But recently, it changed character—CLF formed a fairly tight structure in the 8.5 to 10 area for a couple of months and then exploded higher last week following earnings. Encouragingly, the stock held those gains after Friday’s big share offering and surged higher today. Keep positions small and use a loose stop.
CLF Weekly Chart
CLF Daily Chart
Lam Research (LRCX)
Why the Strength
The microchip industry is notoriously cyclical, but when it heats up, as it has recently, companies like Lam Research come into their own. Lam Research makes the machines that process the wafers that are made into the chips, so it’s pretty far upstream in the industry. Lam’s machines offer manufacturers the capability to pack devices with more and more features in smaller and smaller sizes, and just about every leading-edge integrated circuit made today has used the company’s equipment. Lam sells most of its etching and cleaning systems to Asian companies (88% go to Taiwan, Korea, China, Japan and Southeast Asia) and three customers accounted for 45% of revenue in the latest fiscal year. Revenue growth slowed from a robust 35% in 2013 to just 12% in the fiscal year that ended last June, but the company’s latest quarterly report featured a healthy 32% jump in revenue and a 43% gain in earnings. The company also increased its dividend on February 9, to 45 cents per share, payable on March 29 to holders of record on March 8. The chip cycle is giving Lam Research a strong boost.
Technical Analysis
LRCX was in a strong rally in 2013 and 2014, but stumbled badly in 2015, when it fell from 79 as the year began to 61 in late September. The rally that began in February 2016 at 63 has now lifted LRCX to 116. Even after this rally, LRCX isn’t especially extended, with its 25-day moving average just six points back at 110 and a reasonable 17 P/E ratio. The stock has been moving sideways for a couple of weeks following its stellar quarterly report. You can buy here or on dips with a stop in the upper 100s.
LRCX Weekly Chart
LRCX Daily Chart
Louisiana-Pacific (LPX)
Why the Strength
Louisiana Pacific is a global leader in engineered wood products, so its business is about as cyclical as it gets—the firm is dependent on both lumber prices and construction activity, both of which are fickle. Indeed, in the eight years from 2008 to 2015, the firm lost money six times due to soft demand. But that’s in the past, and the stock is strong today because the future looks very bright. Louisiana Pacific’s fourth-quarter report easily topped estimates (earnings of 23 cents per share topped expectations by four cents) and management said it expects continued improvement in the housing market in the years ahead. The company’s two largest segments—oriented strand board and siding, which make up a combined 80% of revenue—saw sales up 34% and 20% in the fourth quarter (respectively). And because so much of the firm’s costs are fixed, margins and cash flow are surging at much faster rates; EBITDA was up 150% in the fourth quarter, and analysts see 2017 earnings booming more than 70% (and further gains beyond that), which would be Louisiana Pacific’s largest bottom line since 2005! It’s also a plus that the firm is well managed, with a net cash position (total cash less total debt) of more than $300 million, or nearly 10% of the company’s market cap. The big risk here is a slowdown in the housing market, but recent reports from homebuilders have been encouraging, and an accelerating economy should keep wood demand strong.
Technical Analysis
LPX has a tasty long-term chart—it appears the stock is just breaking out from four-year consolidation! The stock topped at 22.5 back in 2013 and then spent the next few years between 12.5 and 21. But the recent action has been fantastic, with a shallow (20% deep) six-month base, tightness in recent weeks and last week’s explosion to multi-year price and relative performance (RP) highs on nearly triple LPX’s average weekly volume. We think dips are buyable.
LPX Weekly Chart
LPX Daily Chart
Lumentum (LITE)
Why the Strength
Lumentum is all about optical communications, both for telecom and datacom, both of which have been driving sales and earnings sharply higher as demand for greater bandwidth (thanks to the wholesale move to the cloud, data center upgrades and increases in streaming video and mobile services) and from newer applications (including 3D sensing for virtual reality and “smart” auto services) appears insatiable. There are plenty of players in the field, but Lumentum is a leader, with demand outstripping supply for some of its newer products (like its 100G data center transceivers, which made up 20% of total revenues and saw sales up 500% from a year ago!) even as some of its older, slower switching products saw softer sales. The real question here is how long and how fast growth will be going forward. Analysts see an earnings slowdown starting in a couple of quarters for Lumentum and some of its peers, and it’s worth remembering that these stocks are bit down the food chain (if a couple of big customers cut capital spending plans, these stocks would likely fall hard). But those are all potential issues. Right now, demand is far stronger than expected, Lumentum is showing gradually accelerating sales growth and analysts just bumped up their estimates a few percentage points. We think demand could remain bullish for another year or two if all goes well.
Technical Analysis
LITE was spun off from Viavi Solutions in August 2015, and got off to a slow start, with shares finally lifting above their post-IPO price last July. After a great run to 45, the stock entered a choppy basing period, gyrating between 33 and 45 for about four months. Last week looks like the kickoff to a new advance, as LITE soared 22% on gigantic volume (nearly twice as much volume as any week in its history!). We’re OK buying a small position on dips.
LITE Weekly Chart
LITE Daily Chart
Medicines Company (MDCO)
Why the Strength
The Medicines Company develops treatments for infectious disease care, cardiovascular surgery and care, and perioperative care. Generally speaking, the treatments are anticoagulants, blood pressure reducers and antibiotics. The company has been generating the bulk of revenue through royalties, and sold its non-core cardiovascular portfolio in mid-2016 for $360 million to focus on the pipeline. That is why revenue growth is negative, and why the stock will rise and fall on the pipeline. Medicines has a candidate for each of its three markets in development. Inclisiran (in Phase II) is a potential blockbuster for high cholesterol. Analysts have become bullish on its market potential as Regeneron/Sanofi’s treatment for high cholesterol could be removed from the market due to possible patent infringement (Amgen brought suit against the duo, and also appears to be marching toward approval for its own cholesterol treatment, Repatha). Medicines also has a urinary tract infection candidate, Carbavance, in Phase III, and will submit a New Drug Application (NDA) with the FDA early this year. This drug could bring in $300 million a year in revenue. Watch out for that filing, and for March 17, when the company will present the next round of data related to Inclisiran. This is biotech, so start slow and increase your position as the story unfolds.
Technical Analysis
MDCO had a choppy 2016, trading down to 28 in February. It then battled its way up to 42 by the end of September, then fell as a pipeline partner, Alnylam, pulled a drug out of development due to safety concerns. There was no impact on the drug Medicines has in development, but the event raised MDCO’s risk profile and shares traded sideways in the 32 to 38 range through January. Early February brought news that Amgen’s cholesterol candidate did well in Phase III, which stoked investor interest in Inclisiran, and helped send MDCO from 38 to 46 on February 3. Bullish sentiment has persisted and shares walked up to 50 last week.
MDCO Weekly Chart
MDCO Daily Chart
Morgan Stanley (MS)
Why the Strength
We don’t get many huge names in Top Ten, but with financial stocks resuming their post-election rally, many giants in the group are hitting new highs. One of the first to do so recently was Morgan Stanley ($38 billion in revenue), one of the best Bull Market stocks around. The company’s business is split between its Institutional Securities division (46% of fourth-quarter revenues), which is driven by sales and trading revenues from stocks and bonds; its Wealth Management division (40% of revenues), which includes asset management fees and interest income from its growing deposit base; and its Investment Management division, which makes up the rest. The big ideas here are simple: The higher the market goes, and the better sentiment improves, the more money Morgan’s Wealth Management division will earn, and should interest rates tick up, the firm’s net interest revenue has a chance of picking up meaningfully. The company’s earnings have surged during the past couple of years, and after trouncing fourth-quarter estimates, analysts see the bottom line up 17% this year and more in 2018. Frankly, we think those estimates are likely very conservative, especially if the overall market remains in a solid uptrend. Throw in a reasonable valuation (15 times trailing earnings) and a decent dividend (1.8% annual yield), and we think Morgan Stanley can be a large-cap leader of the advance.
Technical Analysis
MS fell from 41 to 21 during the market’s mini-bear market in 2015 and early 2016, and it was still at 23 last July. But since then, the trend has turned up, with the stock rallying to 33 before the U.S. election, then lifting to new multi-year highs in December. The tight, sideways action since then was constructive, and now MS is nosing out to new price and relative performance (RP) peaks. We’re OK buying here with a stop in the low 40s.
MS Weekly Chart
MS Daily Chart
Sanmina (SANM)
Why the Strength
Sanmina is a contract manufacturer of printed circuit boards, enclosures, cable assemblies and precision machine components whose Silicon Valley location puts the company at the heart of the tech world. The company works with customers to design, manufacture, install, service and control the supply chain for thousands of products. In Sanmina’s latest quarterly report on January 30, which featured a 12% increase in revenue and a 29% gain in earnings, sources of revenue came in at 45% industrial/medical/defense, 38% communication networks and 17% embedded computing and storage. It’s worth noting that revenue gains were strongest in the communications networks segment. Sanmina is a big operation, with 45,000 employees worldwide in 25 countries on six continents, and is a Fortune 500 company. It’s also a turnaround story, as revenue shrank slightly in fiscal 2012 and 2013 and has been positive but slowing down over the last three years. So the 12% revenue growth in the most recent quarter is a healthy sign and likely a result of the recent wave of upgrades of the global communication infrastructure. Sanmina trades at a reasonable 15 times earnings.
Technical Analysis
SANM, which was a high flyer during the Tech Bubble, traded under 20 for more than a decade until it broke through in April 2014. But after reaching a new high at 26 in November 2015, the stock bounced slowly down below 20 again, reaching 16 in January 2016. A powerful rally pushed SANM to 29 in July and (after a one-day correction to 24) kept going to 37 in late December. The stock corrected to 33 in January, but has since rallied to new highs on excellent volume, helped in part by its quarterly report. SAMN looks buyable on any weakness with a stop just below its 50-day line.
SANM Weekly Chart
SANM Daily Chart
Weibo (WB)
Why the Strength
Weibo, the Chinese social media platform that’s often called “the Twitter of China,” made headlines this week because its market cap just surpassed Twitter’s. But the bigger story is that Weibo’s count of monthly average users (MAU) is close to topping 300 million and its latest quarterly results showed a 42% jump in revenue and a whopping 140% pop in earnings. Weibo was spun off from Sina.com in 2014, with Sina retaining a stake of a little over 10% and e-commerce giant Alibaba gobbling up almost one-third of WB. Weibo gets the bulk of its revenue from ad sales and marketing, with a peculiar twist. Popular celebrities who have a big following on Weibo use their microblogs to send fans to their websites where they can buy merchandise and give virtual gifts. This lucrative activity keeps user engagement high and generates income from sales that benefit Alibaba as well. While Weibo’s reach is already huge, the partnership with Alibaba creates opportunities that Twitter can’t match, and Weibo’s users—heavily skewed toward access via mobile device—are also active online buyers. Weibo isn’t a big favorite among institutional investors because the Chinese government is always ready to blame the company if users express anti-regime views or otherwise offend. But the number of whales on board more than doubled from Q2 to Q3, so that may be changing. And with just 235 institutions now owning WB, there’s a ton of room for more buying.
Technical Analysis
With an 87 P/E ratio, WB isn’t cheap, but it’s a very fast grower. The stock jumped from 12 in February 2016 to 56 in October. A pullback to 41 in November and 40 in December turned up in January and WB is now within two points its October high. Quarterly results are likely due within a couple of weeks, so you might want to keep any initial buying a little lighter than usual. We think WB is buyable right here, with a stop around 49.
WB Weekly Chart
WB 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.
