Ready to Rally?
Current Market Outlook
The market spent most of last week testing its late-January low, and the combination of some positive breadth divergences (about 1,200 stocks on the NYSE and Nasdaq hit new lows last Thursday, versus 2,300 on January 20) and Friday’s big upmove could mean it’s time for another rally attempt. We’ll be watching the 1,950 level on the S&P 500 and 4,650 level on the Nasdaq—pushes above both levels could turn the intermediate-term trend back up. But that’s looking far down the line; right now, the market’s major trends remain down, and while some stocks and sectors have shaped up, most are still in the mud. Thus, a defensive stance is advised, though we’ll be keeping a close eye on the action in the days ahead.
This week’s list has some enticing names, including a few that reacted well to earnings. Our Top Pick is Sabre (SABR), a behind-the-scenes player in air travel and hotel bookings that has steady growth, booming cash flow and a stock that showed unusual power following its recent quarterly report.
| Stock Name | Price | ||
|---|---|---|---|
| WellCare Health Plans, Inc. (WCG) | 271.83 | ||
| Sabre Corp. (SABR) | 0.00 | ||
| Rovi Corp. (ROVI) | 0.00 | ||
| O’Reilly Automotive (ORLY) | 0.00 | ||
| Nasdaq (NDAQ) | 0.00 | ||
| Vail Resorts (MTN) | 0.00 | ||
| Barrick Gold (GOLD) | 27.20 | ||
| Goldcorp (GG) | 0.00 | ||
| Ellie Mae (ELLI) | 0.00 | ||
| CH Robinson (CHRW) | 0.00 |
WellCare Health Plans, Inc. (WCG)
Why the Strength
WellCare Health Plans grew revenue by just 7% in 2015, breaking a string of double-digit percentage increases that peaked at 36% in 2014. But a positive earnings report a week ago lit a fire under WellCare’s stock when it revealed a 46% jump in earnings on just 2% revenue growth. WellCare’s business is providing managed-care services to a growing number of subscribers whose plans are funded through Medicaid, Medicare Advantage and Medicare Prescription Drugs Plans, and its Q4 results beat estimates by a wide margin. The company also got investors’ attention by announcing plans to double revenue within five years through acquisition of rivals and complementary businesses, competition for new Medicaid opportunities and expansion into new categories of managed Medicaid services. The company’s improved balance sheet and new $850 million credit facility (plus the creation of a dedicated team to drive both organic and M&A growth) signaled a new growth phase for WellCare. WellCare has frequently been named as a potential takeover target, and this speculation has sparked investors’ interest in the past. But it looks like management has decided to stop being a target and start hunting for opportunities on its own. Investors are buying the shift in strategy.
Technical Analysis
WCG tagged 99 in September 2015, but the stock rolled over at that point and began a steady decline that was exacerbated by a disappointing earnings report on November 4, 2015. The stock made a choppy attempt at a rally in January, but slipped again this month until the good report last Monday ignited a new rally. WCG has popped from 69 at its February 8 open to 82 at the end of last week. WCG has a good history of growth, and last week’s rebound may signal a new uptrend. If you want to buy in, look for a pullback of a couple of points and keep a stop in the low 70s.
WCG Weekly Chart
WCG Daily Chart
Sabre Corp. (SABR)
Why the Strength
When most investors think of ways to invest in the travel market, they think of airline stocks or aggregators (like Expedia). But Sabre, which is effectively “the guy behind the guy” when it comes to air and some hotel bookings, is our favorite story in the group. The company operates a massive reservation network that most of the major airlines and aggregators use (Priceline and Expedia are customers), not to mention travel agencies, which are still favored by corporate travel booking departments. Airlines and hotels listed on its network pay a fee, with the firm benefiting from an increase in bookings, and it also has a smaller but growing IT solutions segment for airline and hospitality companies. Best of all, competition is limited—Sabre has 37% share worldwide and is far and away the top dog in North America. And it’s aiming to be the big player in Asia, where the fastest growth in bookings is occurring; it recently acquired the operator of the leading reservation network in Asia! The numbers are excellent, with sales and earnings topping expectations and free cash flow booming 51% for all of 2015. Better yet, management’s outlook for 2016 was excellent, with 15%-ish revenue growth leading to a 30% jump in earnings and a whopping 60% gain in free cash flow, as capital expenditures stay relatively flat. Moreover, the top brass just boosted the dividend, which yields about 2% annually. There’s always risk that bookings decline if the economy tanks, but we think it’s far more likely Sabre grows steadily for many years to come. It’s a solid story.
Technical Analysis
SABR came public in April 2014, made no net progress through October of that year, but then rose steadily through last October, doubling (15 to 30) during that time. SABR then got yanked down with everything else, eventually sinking to 22 last Monday. But the great quarterly report caused buyers to rush back in and the stock closed Friday up on the week, on its heaviest weekly volume ever to boot! Odds favor SABR is done going down; we’re OK with a small buy here and a stop near the recent low.
SABR Weekly Chart
SABR Daily Chart
Rovi Corp. (ROVI)
Why the Strength
Digital content is king these days, and Rovi plays a key role in delivering that content. The company provides technology for interactive TV program guides and video-on-demand services licensed by AT&T, Comcast, Dish, Time Warner Cable and others. After a few rough quarters, Rovi bounced back nicely in the fourth quarter of 2015, with sales expanding 11% year-over-year and earnings per share growing 48%. Renewed licensing agreements with AT&T and Sony helped, especially since the AT&T deal now gives Rovi access to DirecTV (AT&T bought DirecTV last summer). The AT&T deal alone prompted Rovi’s service provider sales to jump 38%. That bodes well for the current quarter, as Rovi said it expects to sign similar renewal agreements with Comcast and Dish in the next two months. Considering Rovi’s intellectual property licensing revenue improved 25% last quarter, completing the Comcast and Dish deals should make for another strong quarter. It’s why analysts are forecasting 18% EPS improvement for Rovi in 2016 and a monstrous 2017 after a down 2015. Combine that with the cheapness of the stock—ROVI trades at just 10 times forward earnings—and it’s easy to see why investors are flocking back.
Technical Analysis
Stuck in neutral for the second half of 2015, ROVI shares sprang to life right around Christmas when the stock gapped up from 10 to 17 following the AT&T and Sony deals. It’s been steadily trickling higher ever since, pushing to 20 after last week’s earnings news. Now well above its 50-day moving average after months of trading below it, ROVI has solid momentum behond it. Buy on the dips and see if the rally continues, setting a stop below 17.
ROVI Weekly Chart
ROVI Daily Chart
O’Reilly Automotive (ORLY)
Why the Strength
U.S. auto sales continue their post-recession recovery, with more vehicles now being sold per month than at any time in the last decade. O’Reilly Automotive, one of the nation’s largest auto parts retailers, is benefiting from that recovery. The company has posted double-digit sales growth for the past four quarters, and earnings per share have improved at least 20% for seven consecutive quarters. Fourth-quarter results, reported last week, were right in line with the company’s recent growth: 10% sales increase, 24% EPS improvement. Its 2016 guidance came in above analyst estimates as well, in part because the company plans to expand its national footprint (currently 4,523 stores in 43 states) by adding 210 new locations. Store expansion and more cars being sold aren’t the only factors propping up O’Reilly Auto; low gas prices are helping too, as people are more willing to drive their cars—and the extra miles means extra repairs needed. Often, those repairs require buying new parts. For O’Reilly, it all adds up to consistent double-digit sales and earnings growth. It’s a reliable, steady growth story.
Technical Analysis
Unlike most stocks, 2015 was a good year for ORLY, as shares rose from 192 to a high of 276 in late October. Then the stock began to plummet, bottoming at 232 on January 15 and retesting those levels early last week. It was nothing a strong earnings report couldn’t fix: just four trading days later, ORLY is back up to 253, topping its 50-day moving average (248). The action implies that the stock has probably bottomed, so you could nibble here with a stop near its recent lows.
ORLY Weekly Chart
ORLY Daily Chart
Nasdaq (NDAQ)
Why the Strength
Like the S&P 500 and the Dow, the Nasdaq Composite index has been spiraling downward for months. Why, then, is Nasdaq stock surging? The most recent reason for Nasdaq’s strength is its buyout of news distribution service Marketwired, announced last week. Because Marketwired provides news and analytics directly to 8,500 corporate clients, some Forbes 2000 companies among them, it should bolster Nasdaq’s own corporate services division. Further back, a record 2015 fourth quarter also helped: the $0.89 in per-share earnings the company hauled in was an all-time high, and a 10% year-over-year improvement. It was also a testament to the company’s diverse business model: though market services are its largest division, it only accounts for 36% of total revenue. Not surprisingly, sales in that division declined last quarter—but a 13% increase in the company’s information services division, which accounts for 25% of total sales, was enough to counterbalance all the market losses. Last year’s acquisition of indexing strategies specialist Dorsey Wright & Associates contributed to the gains. Plus, it wasn’t all bad news for Nasdaq’s market-related businesses—while trading volumes were lower than normal in the fourth quarter, the company continued to dominate new equity listings, capturing 78% of all U.S. IPOs in the quarter and 73% of all 2015 listings. In other words, a diverse business model is not only saving Nasdaq from tanking along with the rest of the market—it’s helping it thrive.
Technical Analysis
NDAQ’s run began right around August 25, just as the market itself was bottoming. For the ensuing two months, the stock bounced from 48 to 59, then spent the next three months forming a solid base, with 54 acting as support. In late January, it finally broke through topside resistance, shooting up to 62. Now 59 looks like the new support level as the stock appears to be building another base. It might be worth taking out a small position on dips in case there’s another breakout to the high side.
NDAQ Weekly Chart
NDAQ Daily Chart
Vail Resorts (MTN)
Why the Strength
You might think that a company called Vail Resorts would be confined to Vail, the Colorado ski area populated by fashionable skiers and vacationers. But you’d be wrong. Vail Resorts does operate the Vail, Beaver Creek, Breckenridge and Keystone resorts in Colorado, Heavenly, Northstar and Kirkwood in the Tahoe region of California and Nevada, and Park City Mountain Resort and Canyons in Park City, Utah. But the company also operates Afton Alps in Minnesota and Mt. Brighton in Michigan and derives revenue from lift tickets, ski & snowboard schools, food, retail and rental businesses. The company also owns and/or operates a string of luxury hotels under its RockResorts brand and develops and sells real estate near its resort communities. The seasonality of the skiing business always results in two quarters of profits and two of losses each year, but annual growth has been strong, with earnings jumping from 77 cents per share in fiscal 2014 to $3.07 per-share in 2015. And estimates are for a 28% increase (to $3.94 per share) in 2016 and $4.50 in 2017. The company also continues its M&A activities, announcing its acquisition of Wisconsin’s Wilmot Mountain, part of its program to bring urban ski areas (Wilmot is located between Milwaukee and Chicago) into its portfolio. With an anchor in its high-end Rocky Mountain resorts, an aggressive expansion program and a tidy 2.1% dividend yield, Vail Resorts looks solid.
Technical Analysis
MTN began its current rally in the middle of 2012 when it was trading at about 40. The stock has shown a tendency to run and consolidate in the past few years. It rallied strongly in March 2015, running from 85 to 108 in just five weeks, then traded sideways from April through October 2015. The stock rallied strongly again starting at 100 in October, then topping 133 in December. The stock is now about 9% off those highs, and looks like a decent buy. A dip below its 200-day line would be bearish.
MTN Weekly Chart
MTN Daily Chart
Barrick Gold (GOLD)
Why the Strength
Randgold Resources is a mining company headquartered in the U.K., but with operations entirely in Africa. This is a big company (market cap is $8.4 billion) that produced a record 1.2 million ounces of gold in 2015, which is a 6% increase over 2014. The company also remained profitable during 2015 despite the cratering price of gold, although it’s clearly the rebound in gold prices that is piquing investors’ interest right now. Randgold has reduced its production costs to just $632 per ounce and boasts gold reserves of more than 24 million ounces. While much of the recent interest in Randgold is directly attributable to the upswing in the price of gold, the company has been a frequent pick in Cabot Top Ten Trader, with 13 total appearances since 2007. Investors like that the company’s exclusive focus on gold gives them undiluted exposure to gold prices. But they also like the company’s history of successful discovery of additional multi-million ounce deposits and conversion of those discoveries to profitable mines. A uniformly positive Q4 earnings report on February 8 (and the company’s history of raising dividends, now at 0.7% yield) cemented investors’ appreciation of Randgold as a way to participate in the gold bounce.
Technical Analysis
GOLD peaked at 125 in October 2012 and declined steeply from that point to near 60 in mid-2013. But GOLD started to put up a fight at that point, rallying to as high as 89 in July 2014. The stock made its most-recent low at 55 in September 2015, then blasted off on January 20 on a string of 18 days (with just three mild pullbacks) that ended with the stock at its highest point in three years. GOLD is a pure gold play, which is both good and bad, because any slip in gold sentiment will be reflected in the stock. But there’s no question the buyers are in control today. It’s a little extended right now, so try to buy on dips and use a stop in the mid-70s.
GOLD Weekly Chart
GOLD Daily Chart
Goldcorp (GG)
Why the Strength
Goldcorp is a good-sized gold miner that’s on the comeback trail. Like most of its peers, it operates around the world (though 67% of its gold production comes from Canada, Mexico and the U.S.) and has been focused like a laser on cutting costs (it’s all-in cost per ounce mind has dropped to $848 per ounce in the third quarter, compared to north of $1,000 per ounce in 2013). But Goldcorp also has a few unique attributes that could make it one of the sector’s top performers should we be entering a new bull market for gold. First off, the company is still in a growth mode—production has been steadily expanding for years, with output likely totaling about 3.5 million ounces last year (thanks to the opening of a couple of new mines), up from 2.4 million ounces in 2012. Moreover, costs are likely to fall further as the capital expenditures required to get those two new mines is over. All told, Goldcorp says that a $100 bump in the price of gold should boost its free cash flow by a whopping $267 million per year (31 cents per share annually)! Actually, the firm is already profitable (free cash flow totaled about 29 cents per share in the third quarter), and any growth from here could be used to accelerate production or be returned to shareholders—the company has been paying a small (two cents per share) monthly dividend for years, which could be boosted if cash flow booms. Earnings are due out February 25.
Technical Analysis
GG collapsed from an all-time high of 56 in 2011 to 12 in July of last year. From there, GG had a so-so bottoming effort for the next few months before shaking out to 9.5 in mid-January. Since then, though, GG has soared with the sector, overtaking its 200-day line last week on its heaviest volume since 2008! If you really want in you could nibble here, but it rarely pays to chase gold stocks. Thus, aim to grab shares on a shakeout of some sort.
GG Weekly Chart
GG Daily Chart
Ellie Mae (ELLI)
Why the Strength
Ellie Mae is another cloud-based software provider, but unlike the numerous firms that focus on human resources, sales productivity, customer relationships or payroll (all of those stocks have been crushed), Ellie Mae is focused on mortgage originators. The company’s Encompass software streamlines the mortgage process, creating an all-in-one platform that helps with sticky subjects like regulatory compliance, fraud detection and income verification, effectively saving originators time and money. Business has been growing nicely for many years as Ellie Mae’s solution takes hold—in the fourth quarter, revenues soared 39% as the number of active Encompass users grew 25% (to about 136,000), while revenue per user grew 10% to $475. Moreover, cash flow grew a healthy 34%, and management’s guidance for the first quarter was solid (revenues up 25%), though Ellie Mae has a history of trouncing estimates. Still, the risk here is the overall industry; if the housing market fades with the economy, fewer mortgage originations could crimp Ellie Mae’s growth. But there’s no question the long-term trends are favorable for the company, and eventually—once the housing market gets back to normal (which, believe it or not, would require a 50% jump in housing starts from today’s level)—Ellie Mae’s bottom line could grow even faster.
Technical Analysis
ELLI has had a humongous run in recent years, but the action of the past few months looks like a normal base-building effort; ELLI retreated from 83 in August to 60 in November, then bottomed out at that level through mid-January before spiking to 75. It quickly retreated back to 60 during the latest market swoon, but then spiked back into the lower 70s last Friday following its quarterly report, pushing its RP line back toward a new peak. If you want in, you could nibble here with a stop in the low 60s.
ELLI Weekly Chart
ELLI Daily Chart
CH Robinson (CHRW)
Why the Strength
The broad market may not like low oil prices, but CH Robinson certainly does. The largest freight brokerage firm in the U.S. reported a 14% improvement in fourth-quarter earnings earlier this month. Lower fuel costs were a big reason why. The company provides third-party access to more than 66,000 transportation providers worldwide, including contract motor carriers, railroads, air freight carriers and ocean carriers. CH Robinson pays its carriers a fee for providing that transportation, and with oil prices at decade-lows, those fees are lower than usual. Another factor helping the company of late was its acquisition of Freightquote.com, an online marketplace for freight loads, in early 2015. All told, CH Robinson posted 15% EPS growth in 2015 despite very modest revenue growth, and analysts see further growth ahead. Founded in 1905 and a public company since 1997, CH Robinson has been a reliable blue-chip stock for quite some time, with an impressive history of share price appreciation and dividend growth (current yield: 2.5%). Now it’s looking like a nice way to play a potential turnaround in the beaten-down transport sector.
Technical Analysis
Up and down for much of the past year, CHRW has made a strong push in the two weeks since fourth-quarter earnings were released. During that time, the stock made the leap from 63 to 70, topping its 50-day moving average for the first time since November. Even so, it’s still well below its 52-week high of 75, and there’s some overhead resistance above here. If you like the story and want to dip a toe, try to buy on dips and set your stop-loss around 63, which has acted as support for the past 18 months.
CHRW Weekly Chart
CHRW 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.
