Just What We Want to See
Current Market Outlook
For the past three months, the market has been on the cusp of breaking out a few times, only to fail as selling pressures grew. The past couple of weeks, however, have brought a change of character—many stocks surged on earnings, and then held and even built on those gains. And of course, the major indexes have kissed new high ground. That doesn’t guarantee higher prices—you’ll often see major indexes “fake out” above obvious resistance before pulling back—but we’re putting more emphasis on the increasingly positive action of individual stocks. Our Market Monitor is back into bullish territory, and we’re looking to put money to work as opportunities arise.
This week’s list has a broad array of stocks and sectors, a sign the buying pressures have broadened. Our Top Pick is LinkedIn (LNKD), which gapped out of a huge base on earnings two weeks ago—it looks like a liquid leader and should do very well if the market can continue higher.
| Stock Name | Price | ||
|---|---|---|---|
| Twitter (TWTR) | 40.37 | ||
| Skechers (SKX) | 0.00 | ||
| Sealed Air (SEE) | 0.00 | ||
| Ryland (RYL) | 0.00 | ||
| Pharmacyclics (PCYC) | 0.00 | ||
| Martin Marietta Materials (MLM) | 261.52 | ||
| LinkedIn Corporation (LNKD) | 0.00 | ||
| CyberArk (CYBR) | 111.74 | ||
| Charter Communications (CHTR) | 0.00 | ||
| Apple (AAPL) | 248.94 |
Twitter (TWTR)
Why the Strength
Twitter is a one-of-a-kind company with a one-of-a-kind service that’s producing rapid (nearly triple-digit) revenue growth and skyrocketing earnings as the firm monetizes its base of 288 million users. Throw in tremendous trading volume, which allows institutional investors to buy and sell freely, and that’s why Twitter has surged recently—stocks with all of these sterling characteristics don’t grow on trees. The company’s fourth-quarter report was very strong: timeline views grew a solid 23% from the prior year (to 182 billion!), and thanks to myriad new and innovative advertising products and initiatives, ad sales per timeline view surged 60%. The only remaining worry here is whether Twitter’s user base has topped out (it actually fell a few million from the prior quarter), which would obviously limit future growth. But management said the December drop in users was mainly from an update in Apple’s software (i.e., a one-time event) and that user growth should resume in the quarters to come. Yes, the valuation is high, but the top brass has already guided to a huge 2015 (revenues up 65%, and even that is likely conservative), and despite the recent growth, Twitter’s users are being monetized significantly less than users on Facebook and other social media, so there’s plenty of room for growth. It’s a big story and a potential liquid leader.
Technical Analysis
The only hitch with TWTR is the chart. While there’s been a lot of strength recently thanks to the well-received quarterly report (the stock surged 16% on five times average volume), there’s also plenty of overhead resistance from last October (in the 50 to 55 area) and last January (way up near 70). Our advice: Start small with a half-sized position around here or on dips, use a loose stop near 42, and look to buy more should TWTR march higher from here.
TWTR Weekly Chart
TWTR Daily Chart
Skechers (SKX)
Why the Strength
Niche shoe company Skechers is firing on all cylinders. The company’s casual footwear is popular among 40- to 60-year-olds not only in the U.S., but globally. Last week, the company reported fourth-quarter earnings per share of $0.48, a 71% improvement from the same quarter a year ago, on revenue of $570 million, up 26% from a year ago. Skechers’ international sales were especially impressive, up 38% from a year ago. For a company that derives more than a third of its revenue from overseas sales, that’s significant. The year ahead for Skechers looks even brighter. Based on strong backlogs, the company expects first-quarter 2015 revenue in the range of $690 million to $710 million and EPS to exceed $0.95, well ahead of estimates. And the entire year should be a good one, too—the company’s backlog was up 60% at year-end, the firm’s store base is expected to expand 25% (from 1,000 to 2,500), and its overseas sales should remain strong. Skechers’ rapid growth has even caught the attention of Jim Cramer, who praised the company on “Mad Money” last Thursday for its global expansion and its strong hold with an older demographic.
Technical Analysis
SKS enters the week at a new record high, as last week’s strong quarterly report helped the stock break above resistance around 63. It was a big move for a stock that had been bouncing back and forth for six months, from as low as 49 to as high as 64. For much of December and January, SKX did tighten up somewhat, meandering between 54 and 62, which set the stage for last week’s breakout. It’s not the most powerful breakout we’ve ever seen, but if you’re game, you could buy some around here or on dips, with a stop near 58.
SKX Weekly Chart
SKX Daily Chart
Sealed Air (SEE)
Why the Strength
Sealed Air packages much of the produce you buy at the grocery store and provides the bubble wrap that encases the dinner plates you order from Williams Sonoma—and it’s one of many companies benefiting from cheap oil prices. Sealed Air ships its packaging products all over the world, and those shipping costs are less of a drag on earnings with oil at $55 a barrel. That was reflected in the company’s fourth-quarter earnings, released last week. Despite a mild dip in sales year over year, Sealed Air’s earnings per share increased 51% from a year ago. The company expects more of the same this year, forecasting earnings growth of 15% in 2015. Lower input costs driven by cheap oil aren’t the only thing fueling Sealed Air’s profit growth. Its EPS grew 33% in 2014 thanks in part to a company-wide restructuring program that includes moving its entire campus from New Jersey to North Carolina and cost reductions across all of its product lines. The company expects those restructuring maneuvers to result in annualized cost savings of $80 million to $85 million by the end of 2018. It’s not changing the world, but the wind is at Sealed Air’s back for the next few quarters.
Technical Analysis
SEE broke out of a huge base in November, as a great quarterly report (and a rocketing stock market) helped the stock eclipse resistance near 38 on big volume. It followed through nicely on the upside, but the hesitant overall market eventually caused the stock to shake out below its 50-day line in mid-January. It crawled higher from there, though, and last week’s earnings-induced rally pushed the stock to all-time highs. Pullbacks look buyable on this continuation move higher.
SEE Weekly Chart
SEE Daily Chart
Ryland (RYL)
Why the Strength
The sixth-largest homebuilder in the U.S., Ryland Group’s ongoing expansion amid the post-recession housing recovery has grabbed the attention of one of its largest stakeholders. The hedge fund Citadel Advisors increased its long-term position to 5% in the stock last month after Ryland reported stellar fourth-quarter earnings. Following three quarters of declining earnings growth, Ryland’s EPS increased 54% in Q4 on the company’s highest sales numbers in seven years. New orders surged 8.3% to 1,547 units in the fourth quarter. More growth should follow, as Ryland plans to build several new communities and projects this year in the northern, southern and western U.S. Ryland’s turnaround in the last three years has been dramatic. From 2008-2011, the company lost money every year. Since 2012, profits have been back in the black, with 2014 EPS coming in at $3.09 and pre-tax profit margins rising to more than 10% for the first time since 2006. The company expects EPS to grow another 15% in 2015. Looking at the big picture, we think the combination of still-low mortgage rates and accelerating job growth could help.
Technical Analysis
Ryland Group shares had been in a long-term downtrend since May 2013. In October, however, the stock found consistent support at 35, meeting resistance in the 39-40 range before breaking through earlier this month. Since that breakthrough, RYL has shot higher almost without interruption, almost back to where it was a year ago. There is some old overhead resistance from early 2014 and mid 2013, but after such a long, tedious decline, the weak hands are likely out and the path of least resistance is up.
RYL Weekly Chart
RYL Daily Chart
Pharmacyclics (PCYC)
Why the Strength
Pharmacyclics is a developer and marketer of small-molecule drugs to treat cancer and other diseases. The company has one marketable product called Imbruvica, which has been approved by the FDA for use against chronic lymphocytic leukemia in patients who have received at least one prior therapy and those with 17p depletion, and the drug is also sold to treat Waldenstrom’s macroglobulinemia and mantle cell lymphoma. The company has Imbruvica in a Phase III trial to treat diffuse large B-cell lymphoma and in Phase II trials against three other indications. The pipeline also includes two additional compounds in Phase II trials and another in Phase I trials. The company has enjoyed three profitable years, as revenue grew 81% in 2011, 164% in 2012 and 260% in 2013. When Pharmacyclics reports its Q4 and full-year results on Wednesday (February 18) after the market closes, analysts are expecting revenue for the quarter to come in at $267.5 million, with EPS at 76 cents per share. Full-year estimates are for revenue of $708.3 million and earnings of $1.03 per share. Pharmacyclics gave out guidance on January 13 that forecast blockbuster status for Imbruvica in 2015 (it’s estimating about $1 billion in revenue this year), so some optimism is already priced into its stock. But good news—if that’s how it’s seen—will still likely be welcomed by investors later this week.
Technical Analysis
PCYC had a huge run through early 2014, then, like many growth and glamour stocks, corrected hard and took months to put the finishing touches on a new launching pad. The breakout came in early January after management released its bullish Imbruvica forecast, rocketing as high as 172 on big volume. Now the stock has paused for two weeks on declining volume. There’s still some earnings-related risk, but we’re OK buying a small position around here, and using a loose stop below 150.
PCYC Weekly Chart
PCYC Daily Chart
Martin Marietta Materials (MLM)
Why the Strength
Last week our Top Pick was Vulcan Materials, the largest producer of construction aggregates like crushed stone, gravel and sand in the U.S.—so far, it’s been so strong that it hasn’t traded in our buy range. This week might provide similar opportunity, however. Martin Marietta Materials is another big player in the same industry, with operations in 32 states, Canada and the Caribbean. As with Vulcan, Martin’s business and profit margins are picking up thanks to improved demand from private businesses, states and municipalities; in the fourth quarter, the firm’s aggregate volume rose 19%, while prices were up 7%, and synergies from its Texas Industries acquisition last August look to be large ($100 million annually by the end of 2016). Interestingly, even though Martin does good business in Texas, the company made it a point to say its energy-related aggregate sales are expected to remain strong. And looking at 2015, management expects shipments to rise 11% and prices to be up more than 5%, leading to another solid year. One last kicker: Martin approved a 20-million-share repurchase program that it expects to complete during the next three years, representing a whopping 30% of all shares outstanding! Throw in big earnings estimates for both this year and next (nearly 40% in each year), and the stock could do very well.
Technical Analysis
MLM has generally been a market performer for the past few years, with some good and bad stretches during that time. But now it looks like it’s beginning a major advance—MLM topped out around 136 last June and declined into the mid-100s three times (October, December and most of January), wearing out all the weak hands. Now the stock has exploded to new highs on big volume on the heels of its great quarterly report. Dips are possible, but we’re not expecting a major retreat anytime soon.
MLM Weekly Chart
MLM Daily Chart
LinkedIn Corporation (LNKD)
Why the Strength
When LinkedIn was growing up in the last decade, it seemed to be just a business-oriented version of Facebook, a place for professionals to connect without a compelling reason to do so. But the company’s monetization thesis for its networking platform included a premium service that companies could use to recruit talent and job seekers could use to seek out employers. And that “talent solutions” business is now the main driver of the company’s revenue. When LinkedIn reported quarterly results on February 6, investors got a picture of a company that enjoyed 45% revenue growth for the year (44% for Q4) and earnings growth of 56%. Analysts also point to the enormous potential for expansion outside North America as a potential driver of future growth. And it’s not just recruiting-related activities that are booming; LinkedIn’s advertising segment (the firm has made a big effort to boost content during the past year) expanded 56% and made up one-quarter of all revenues, while premium subscriptions grew 38% and made up one-fifth of the total. Four analysts raised their price targets for LinkedIn after the strong earnings report. By bringing the power of networking to the Internet, LinkedIn has tapped a rich vein.
Technical Analysis
LNKD took a while to get going after its much-heralded 2011 IPO, but after its debut at 45, the stock eventually climbed to 258 by September 2013. That was followed by a nine-month correction to 136 in May 2014. The stock rebounded strongly in July and August, then spent five months trading sideways between 200 and 240. The gap up that followed the February 6 earnings report had great volume support, and the stock has held onto every point since then, even adding a couple of points last week. LNKD is a volatile issue, but it has a nice long base to build on. We think a buy around here or on dips is reasonable, with a stop just below 240.
LNKD Weekly Chart
LNKD Daily Chart
CyberArk (CYBR)
Why the Strength
The network security space remains red hot, with near-weekly breaches making up-to-date firewalls and protections a must-have for nearly every mid-sized and (especially) large firm. Even Uncle Sam is getting into the act, signing executive orders and talking about “cyber-terrorism.” CyberArk is a niche player in the industry, but it’s a very important niche—hackers have been making headway by getting control of so-called privileged accounts (accounts of company big-wigs), which allows them to poke around the network and look for vulnerabilities—eventually making a full breach more likely. CyberArk’s software helps identify suspicious activity on these privileged accounts, and demand for that is huge—sales growth is accelerating in a big way, earnings are booming, and management gave a good (not amazing) outlook for 2015 (though the company’s been crushing estimates so the top brass may be just lowballing the outlook). The risk here is mainly CyberArk’s size, in terms of both the company (just $103 million in revenue), which means competition could appear, and the stock (only 31 funds owned shares at the end of the year, which means few strong hands are invested). Still, the growth is solid; If you buy, just keep positions small.
Technical Analysis
CYBR rose from 30 at the close of its first trading day in mid-September to 47 in late November. But the stock traded down during the market’s sideways chop, falling 30% over a couple of months. Those losses were erased when the stock zoomed higher early in the week and then exploded on Friday following blowout earnings. The straight-up-from-the-bottom price action usually doesn’t make for great buy points, thus, we think aiming for pullbacks (and keeping new buys small) makes the most sense.
CYBR Weekly Chart
CYBR Daily Chart
Charter Communications (CHTR)
Why the Strength
Charter Communications, the third-largest cable provider in the U.S., offers the usual mix of basic and premium channels, on-demand and pay-per-view, high-def and digital video recorders. It also provides Internet access, email and phone services. The company is big, with more than six million customers in 29 states, and has been a Fortune 500 company since 2001. Investors have been scrutinizing Charter for the last year or so in anticipation of the merger between Comcast and Time Warner, a merger whose anti-trust implications are expected to lead to some mandatory customer spin-offs, making lots of new subscribers available for Charter. Charter hasn’t been profitable for years on an accounting basis (depreciation is a huge “cost”), but cash flow is strong and getting stronger, and 2015 estimates call for EPS of 47 cents per share, rising by over 500% to a healthy $2.86 per share in 2016. The company’s Q4 and full-year earnings report, released February 5, impressed investors with its 12% jump in annual revenues, but it’s the prospect of future growth that’s keeping interest in the stock high.
Technical Analysis
CHTR reached 167 at the end of July 2014, then traded sideways for six months through January. The stock began to rally a few days before its earnings report, and broke out to new all-time highs after the actual release. After hitting 176 on February 5, CHTR took a two-day rest, then climbed higher, closing last Friday at 178. CHTR looks buyable on any weakness, with a stop around 168.
CHTR Weekly Chart
CHTR Daily Chart
Apple (AAPL)
Why the Strength
It’s unusual for a popular mega-cap company to earn a spot in Cabot Top Ten Trader. But Apple, the largest company in the world by market capitalization (now over $740 billion), is unusual in lots of ways. Under the leadership of Steve Jobs, the company transformed the whole design language of the personal computer with its iMacs. Then it did the same thing for music players (with the iPod), music stores (iTunes), mobile phones (iPhone) and tablets (iPad). While there’s a cottage industry in predicting that Apple, under the leadership of Tim Cook, will finally lose its mojo and stop growing, it hasn’t happened yet. For the most recent quarter, Apple’s 30% revenue growth came courtesy of Chinese consumers’ hunger for iPhone 6s. As always, investors are fascinated by what the company’s next product might be, but there’s also intense interest about what the company will do with its $178 billion in “cash, cash equivalents and marketable securities.” Apple’s program to return cash to investors has increased to $130 billion, but that cash hoard just keeps growing. The release of iWatch, the acquisition of the Beats brand for $3 billion, and reports that Apple is dabbling in electric cars are likely to keep the company in the headlines. The potential 1.5% annual dividend increase is also a subject of speculation. It’s been many years since it made sense to bet against Apple.
Technical Analysis
AAPL doesn’t correct often—the latest major pullback came when the stock dipped from over 100 in late September 2012 to 55 in April 2013. The stock recovered the 100 level in August 2014 hit 120 in November, and broke out to new all-time highs in February. Right now, AAPL has the characteristics of both a hot growth stock and a long-term income stock, with a reasonable 17 P/E and a 1.5% dividend yield. We think it’s buyable on dips of a couple of points, with a stop at its December resistance at 114.
AAPL Weekly Chart
AAPL 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.
