Heavier and Heavier
Current Market Outlook
Officially, the major indexes are still in no-man’s land, gyrating within their two-month ranges. But the action is definitely feeling heavier. While a few stocks have emerged during earnings season (including a few in today’s issue), every market rally of a day or two has led to quick selling pressure; the broad market can’t get its act together and most stocks that poke into new high ground quickly retreat. We’re still not willing to make any bold predictions here—the environment remains more choppy than bearish—but the bottom line is that no money is being made. Thus we are knocking our Market Monitor down a notch (though it’s still in neutral territory) due to the recent deterioration.
The silver lining is that our screens are still picking up on a good number of resilient stocks, including more than a few earnings winners. Our Top Pick this week is Harman International (HAR), which has come to life after a yearlong rest. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Pacira Biosiences (PCRX) | 54.85 | ||
| ServiceNow (NOW) | 341.86 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Lowe’s Companies (LOW) | 98.15 | ||
| Harman International Industries, Inc. (HAR) | 0.00 | ||
| Freescale Semiconductor (FSL) | 0.00 | ||
| Blackstone Group (BX) | 49.12 | ||
| Burlington Stores (BURL) | 193.95 | ||
| Biogen (BIIB) | 0.00 | ||
| Boeing (BA) | 432.22 |
Pacira Biosiences (PCRX)
Why the Strength
In its third year since being commercially launched, sales of Pacira Pharmaceuticals’ signature drug are soaring. EXPAREL, a single-dose anesthetic used by hospitals in post-surgery to control patients’ pain, is expected to bring in $188.5 million in sales in 2014, a 147% increase over the $76.2 million in revenue the drug did in 2013. Pacira Pharmaceuticals won’t report fourth-quarter and full-year 2014 financials until later this month, but these sales expectations are merely a continuation of the company’s recent growth. Pacira’s sales rose 119% and 149% the previous two years, and improved 124% in the third quarter. The skyrocketing sales have helped the company swing to a profit in each of the last two quarters—the first two quarters of positive earnings per share since Pacira went public in 2011. What distinguishes EXPAREL from other anesthetics is its delivery method. Using a technology called DepoFoam, a single dose of EXPAREL delivers bupivacaine—a local anesthetic that blocks the nerves—over time to help reduce pain for an extended period.
Technical Analysis
PCRX enjoyed a huge run over the past couple of years, but for the past six months it has been on a roller coaster ride—the stock went from 110 to 90 to 112 to 85 to 97 to 82, all from early September through the end of December! This year, PCRX has gotten its act together, pushing back toward its old highs on good volume thanks to the bullish sales figures. Shares are very volatile, but if you’re game, you could nibble on dips with a loose stop in the mid 90s.
PCRX Weekly Chart
PCRX Daily Chart
ServiceNow (NOW)
Why the Strength
We believe ServiceNow is destined to become a blue-chip enterprise software firm. The company’s software platform helps big companies get far more efficient. It started out by helping IT departments better deal with requests for service in an orderly fashion (as well as cataloging such requests), and has now applied that process to a variety of functions within an enterprise (service management, business management, operations management, etc.). You’re not going to talk about the software at a cocktail party, but there’s almost no up-to-date competition and proof of the value ServiceNow’s platform provides is in the numbers—it has 2,725 clients in total (up 211 in the fourth quarter alone), with about 35% of them expanding their usage (the number of clients spending more than $1 million per year is 129, up from 67 a year ago) and an almost unbelievable 97% renewing every year. That’s led to the consistent 60%-ish revenue growth (see table below), though earnings are near breakeven because the company is correctly investing in sales and R&D. The valuation is huge, but with management guiding toward $1 billion in revenues this year (it usually lowballs its outlooks) and with the firm’s deferred revenue and backlog totaling a combined $1.4 billion, the company is going to get much, much bigger in the years ahead. We like it.
Technical Analysis
NOW had a great run into March of last year before it faded along with most glamour stocks. But its correction was reasonable (38% deep), and shares then spent months slowly repairing the damage. Last week’s reaction to earnings helped the stock push to new price highs despite the weak market, though the RP line is still shy of virgin turf. We don’t advise jumping in with both feet, but a small buy around here with a stop around 66 could work.
NOW Weekly Chart
NOW Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
A great investor said that there’s usually a cheap entertainment stock that helps lead every bull market cycle, and Netflix has certainly led the market since it was crushed in 2011. (That was when the firm split its delivery methods and uncertainty about the future was high.) The big draw over the past couple of years has not been just the company’s never-ending library of TV shows and movies, but its original programming, a few of which (Orange is the New Black, House of Cards, etc.) have become extremely popular. In time, Netflix could morph into the HBO of the Internet TV era, allowing viewers to watch the shows they want, when they want to, and without annoying commercials. The stock is strong today because subscriber additions were super-strong in the fourth quarter, especially overseas—Netflix added a total of 4.3 million new members, and 2.3 million of those were international, where revenues grew 75%! (U.S. streaming revenue was up a solid 24%.) While earnings are expected to be flat this year due to increased spending (partly on international expansion, and partly on original programming), revenues should continue to kite higher and long-term, the bottom line should soar. This remains a big story.
Technical Analysis
NFLX has had a huge run in recent years, but its action since its February 2014 top may have “re-set” the stock by wearing out all the weak hands—the stock has had two 35% corrections since then, including a three-month stretch where NFLX lived below its long-term 40-week line. But the recent reaction to earnings catapulted shares back toward their old highs on many days of big volume. Nibbling on dips is an idea, or just keep the stock on your watch list.
NFLX Weekly Chart
NFLX Daily Chart
Lowe’s Companies (LOW)
Why the Strength
Companies like Lowes—a seller of all kinds of home building materials like kitchen cabinets and appliances, lumber, tools and hardware, fashion fixtures, plumbing, lawn and garden and paint—aren’t glamorous. But with the growing strength of the North American economy and the gradual recovery of the U.S. housing market, things are looking up for the building products industry. A typical Lowes store stocks around 36,000 items, and there are more than 1,835 stores. The company idled along with 3% revenue growth in 2011 and 2012, but fell to 1% growth in 2013, so the 6% growth in 2014 is actually a big deal. The company is opening three new stores in Canada, and is hiring 30,000 temporary workers in anticipation of the spring season. Lowes will be reporting its latest quarterly results on February 25 before the market opens. With a 1.4% annual dividend yield, an extensive roster of over 1,000 institutional sponsors and an after-tax profit margin of over 22.2%—its highest in years—Lowes is enjoying the improving market environment.
Technical Analysis
LOW traded sideways from late August through October 2014, reacting only mildly to the big correction that swamped mnay other stocks. From its October low at 50, the stock advanced quickly to new all-time highs and ran all the way to 70 in January. LOW has traded under resistance at 70 for a few weeks, and has just pulled back to its 25-day moving average. You can buy a little of this institutional-grade stock anywhere under 68, with a loose stop at 62.
LOW Weekly Chart
LOW Daily Chart
Harman International Industries, Inc. (HAR)
Why the Strength
It might be a little fanciful to ascribe Harman International’s recent surge to low gas prices, but there’s some truth there. Harman makes top-of-the-line audio gear like speakers, CD players, amps and the like for all kinds of installations. But the auto segment has been the biggest driver of growth, as the company’s relationships with BMW, Audi and other high-end marques give it great exposure in the auto biz, and low gas prices are certainly encouraging consumers to shop higher on the food chain than they ordinarily would. Whatever the reason, Harman’s fiscal Q2 report last Thursday was across-the-board strong, with revenue up 19% and EPS up 64%, both well above analysts’ estimates, and the company’s 8% after-tax profit margin was also the highest in years. The company also got support from its home and professional products and services lines, but cars were the big story. Consumers are looking for Internet connected audio and entertainment options, and Harman does those very well. To complete the picture, Harman also raised its estimates for the remainder of its fiscal year through June—and there’s a dividend with a 1.0% annual yield.
Technical Analysis
HAR had a very strong 2013, but hit a plateau in 2014, trading in a tight range between 100 and 115 until the September/October market correction dropped it to 84. HAR returned quickly to its trading range, and was sitting right at 100 when the good earnings news powered it to new all-time highs at 126 in one day and it bullishly pushed through to higher prices after that. A small bet on HAR right here, with additional exposure after gaining a small profit, looks like the right way to play HAR. The alternative is to wait for the stock to pull back below 128. Either way, a stop at the previous high at 115 seems useful.
HAR Weekly Chart
HAR Daily Chart
Freescale Semiconductor (FSL)
Why the Strength
The huge gap up of Freescale Semiconductor’s stock from 26.4 to 31 between Tuesday and Wednesday is easy to explain. Freescale’s earnings report after the market closed on Tuesday was a beat on all counts, with revenue up just 2%, but with earnings of 42 cents per share, up 121% and well over the 33 cents analysts were expecting. This EPS news not only beat analysts’ expectations, but marked the sixth quarter in a row with at least triple-digit earnings growth. Following the earnings report, which also featured raised guidance from management for Q1 performance, the company’s stock also picked up an upgrade from Needham. Freescale isn’t thriving in isolation—the entire chip sector is doing well, and the company’s embedded processors are finding acceptance in a growing number of automotive, networking, industrial and consumer applications. The future looks especially bright in automotive apps, where the company’s chips control engines, stability, braking and battery and power management. With more than 6,000 patent families, Freescale has significant intellectual capital and its global workforce of around 17,000 people in more than 20 countries gives it scale as well. This is a strong story on all counts. With a resonable valuation and solid estimates, Freescale should do well.
Technical Analysis
FSL didn’t make much progress from its April 2011 IPO through the end of 2013. The stock jumped out of a year-long base in January 2014, climbing from 15 to 26 in just a few months. A long, bouncing correction pulled FSL back to 15 in October 2014, but that’s when the stock caught fire. FSL pushed back to resistance at 26 in December, then broke out on six times average volume last Wednesday. With fewer than 400 institutional sponsors, the stock has plenty of room to run. A buy on any weakness of a half point looks solid. Use a loose stop at 28 to avoid getting shaken out of this volatile issue.
FSL Weekly Chart
FSL Daily Chart
Blackstone Group (BX)
Why the Strength
Blackstone, the $22 billion private-equity giant, released its fourth-quarter earnings report last week, reporting earnings per share of $0.89 for the quarter on sales of just over $2 billion—numbers that were actually 14% and 25% shy, respectively, of the company’s year-ago totals. However, those numbers exceeded consensus analyst estimates, and were enough to give Blackstone its most profitable year since 2007. Additionally, total assets under management rose 9% to a record $290 billion, with the firm raising $19.1 billion of capital in the quarter. Blackstone’s big quarter is the product of investors’ recent rush to private-equity funds. In fact, investors have poured so much money into private-equity funds of late that, according to The Wall Street Journal, 55% of those funds have reached or surpassed their maximum target size. By comparison, only 43% of private-equity funds hit or exceeded their limits in 2013. As the largest private-equity firm in the world, Blackstone has been no exception. For example, the firm was able to guarantee only two-thirds of a $75 million investment from the New Mexico State Investment Council last quarter. More good news: Blackstone plans to return much of its excess cash to shareholders. The company is increasing its dividend by a whopping 77%, to $0.78 from $0.44, this month. The ex-dividend date is this Thursday, February 5.
Technical Analysis
BX topped last spring and built a long, mostly-flat base (although there was a sharp dip to 26 mid-October, but this year it looks like the uptrend is resuming. BX has been rising steadily since mid-January, so much of last week’s earnings beat was already baked in. The stock is up 11.5% since January 15, breaking through resistance at 34 and motoring higher into record territory above 37. BX hasn’t had a down day in 10 trading sessions; wait for that streak to break and the stock to pull back at least a point or two before buying.
BX Weekly Chart
BX Daily Chart
Burlington Stores (BURL)
Why the Strength
Winter is always a big money-maker for Burlington Stores. Commonly known by its store name, Burlington Coat Factory, the apparel chain always cashes in during the coldest months of the year on customers wanting to brave the harsh winter weather and this winter is no exception. The company recently raised its same-store sales guidance for the fourth quarter, which ended on January 31, to a range of 5% to 5.5% growth from its previous forecast of 3% to 4%. The anticipated strong fourth quarter has boosted full-year same-store sales guidance to 4.5%. After slipping in 2012, Burlington’s sales increased for eight consecutive quarters, and are now accelerating. As a result, its earnings per share have been in the black in three of the last four quarters and analysts see solid but unspectacular earnings to come. Swelling consumer confidence and plummeting gas prices have no doubt contributed to Burlington Stores’ recent resurgence. The company also managed to seamlessly replace CFO Todd Weyhrich, who is retiring after eight years on the job. Marc Katz, formerly VP of Merchandise Support and Information Technology, will fill Weyhrich’s slot—leaving no lingering questions about a search for a new CFO.
Technical Analysis
BURL has nearly tripled since going public at 17 in October 2013. After a huge post-IPO push, the stock struggled in the first half of 2014, falling from 32 to 24. BURL wasn’t able to recover those losses until last August, but has since risen 50% in six months. The stock has been very consistent in its ascent, following big pushes with brief pullbacks. BURL hasn’t fallen below its 50-day moving average since July despite a few close calls.
BURL Weekly Chart
BURL Daily Chart
Biogen (BIIB)
Why the Strength
Massachusetts-based Biogen Idec is a medium-sized biotech with a strong roster of nine marketable drugs and a pipeline of 16 drugs in clinical trials and four more in preclinical evaluation. The company has an especially effective family of drugs for the treatment of multiple sclerosis, a condition that affects around 800,000 patients. Biogen Idec’s Tysabri and Avonex are leading drugs for MS treatment, and have been prescribed to about 300,000 patients for a 38% market share. The company also has a strong position in the smaller but usually important hemophilia market. The most recent surge of interest in the company was keyed by a quarterly earnings report last Friday that blew away analysts’ projections on earnings: Revenue grew 34%, which matched forecasts, but earnings per share were up an impressive 75%—well above expectations. The company also issued full-year earnings guidance that exceeded expectations, and analysts see 20% to 25% bottom-line growth for at least the next couple of years. Biogen Idec is an institutional favorite that combines strong growth, a reasonable valuation, and a dependable vision for the next few years.
Technical Analysis
BIIB broke out of a decade-long trading range in 2011 and had a super year in 2013. But after hitting 359 in March 2014, the stock corrected to 272 in April and took months to work its way back to its March high. BIIB was trading under resistance at 360 when the good earnings news dropped, kicking it to a high of 397 last Friday before relaxing a little to close at 389. Today’s minor pullback offers a lower-risk entry point, although it’s possible the stock may give back a little more of its gap up if the market remains shaky. BIIB is a good buy on dips, with a stop below 350.
BIIB Weekly Chart
BIIB Daily Chart
Boeing (BA)
Why the Strength
It’s not often we see a blue-chip, mega-cap stock in Top Ten, so when it happens, we pay attention. Boeing has been one of two leaders in jet production (Europe’s Airbus is the other) for decades, and has ridden that position to huge sales and earnings over time. But what has investors’ attention now is the new wave of airplane orders—partly from the firm’s new Dreamliner, and partly from generally large orders from overseas and emerging markets—that should make 2015 a banner year. The company’s fourth-quarter results didn’t wow anyone (though what the firm calls “core” earnings did jump 23%), but management gave a bullish 2015 forecast and that’s made all the difference. Analysts see earnings of $8.60 per share this year, up more than 30% from a year ago, with an expected 750 or so jet deliveries driving growth. Moreover, the top brass is aiming to buy back about $12 billion of stock (just under 12% of the total market cap) during the next two to three years, to go along with its solid 2.7% dividend. And there’s a huge backlog ($502 billion!) and new orders ($152 billion last year) continue to roll in … and could accelerate as airlines find themselves flush with cash. It’s not revolutionary, but this is the type of big, liquid stock with a dependable growth story (it’s simply a matter of cranking up production) that institutions will gravitate to.
Technical Analysis
BA is unlikely to double or triple, but it has a near-perfect technical set-up. The stock was a solid winner in 2013, but topped last January and spent a year building a flat-ish base with lots of ups and downs, including a sharp dip in mid-December. But it crawled higher after that last dip, and surged to new highs on huge volume last week. The RP line isn’t yet out to new highs, but we’re placing more weight on the exceptional price and volume action. We think BA is buyable around here.
BA Weekly Chart
BA 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.
