New Highs are Very Bullish
Current Market Outlook
Stocks notched another solid week, with most major indexes rising 1.5% or so and a bunch of stocks going along for the ride. We saw the S&P 500, S&P 400 Midcap, Nasdaq, NYSE Composites and the NYSE Advance-Decline line all hit new highs. That’s bullish! We’re also encouraged by the increasing number of powerful earnings reactions we’re seeing, with many stocks surging on their heaviest volume in over a year. Short-term, pullbacks and shakeouts are always possible, but looking at the big picture, we saw the market blast out of an 18-month trading range in November, consolidate tightly for two months through January, and now resume its uptrend, with more stocks and sectors participating. All told, we’ll bump our Market Monitor up another notch to level 9 (out of 10).
This week’s list has another crop of very strong stocks, most of which have either gapped up on earnings or are just emerging from consolidations. Our Top Pick is ON Semiconductor (ON), a chip firm that just blew away estimates and is expecting huge bottom-line growth thanks in part to its acquisition of Fairchild.
| Stock Name | Price | ||
|---|---|---|---|
| Arista Networks (ANET) | 0.00 | ||
| NetEase, Inc. (NTES) | 0.00 | ||
| ON Semiconductor (ON) | 24.07 | ||
| Paycom Software (PAYC) | 0.00 | ||
| Portola Pharmaceuticals (PTLA) | 0.00 | ||
| Shopify (SHOP) | 585.00 | ||
| TIM Participacoes (TSU) | 0.00 | ||
| TTM Technologies (TTMI) | 0.00 | ||
| United States Steel Corporation (X) | 0.00 | ||
| Wix.com (WIX) | 302.53 |
Arista Networks (ANET)
Why the Strength
Every few years, it seems like there’s a new networking company that takes advantage of a major shift in the industry, and today that new leader looks like Arista Networks. The firm was built from the ground up a few years ago to take advantage of the booming demand for cloud networking solutions in large data center environments. While we won’t claim to be experts on the technology, Arista’s switches dramatically improve performance at much lower cost thanks in part to its unique, easily programmable switching software and its reliance on lower-priced silicon. (Interestingly, Arista’s products were first used in high frequency trading applications due to their speed and reliability.) The result: Big cloud players have beaten a path to Arista’s door, allowing it to rapidly gain share from legacy players like Cisco (Cisco’s market share in the high speed data center switching industry is 53%, down from 71% three years ago). Looking ahead, as demand for 100G devices ramps, Arista is sure to continue gaining share. About the only blemish on the story is a continuing legal battle with Cisco, including worries about an import ban that could raise costs. But Arista’s fourth-quarter results were so strong that big investors are beginning to think any effects from negative rulings will be muted—Arista’s sales and earnings easily topped expectations, its first-quarter outlook was terrific and earnings estimates have been hiked. There’s risk given the uncertainty of the lawsuit, but there’s no question that Arista’s fundamentals are top-notch.
Technical Analysis
ANET has been in a decent uptrend since last June, and tagged new all-time price highs in December (finally taking out its post-IPO highs from late-2014). But then came a huge shakeout in mid-January after a surprise adverse ruling from an import board, but the buyers quickly stepped in, pushing ANET back toward its highs. And, last week, the stock went bananas, surging to new price and RP peaks on its heaviest volume ever! It’s extended, but the power is impressive—you can buy a small position here or on minor weakness.
ANET Weekly Chart
ANET Daily Chart
NetEase, Inc. (NTES)
Why the Strength
With 19 previous appearances in Cabot Top Ten Trader, NetEase is kind of a Top Ten All-Star. The company is a giant in the Chinese online gaming industry, which is one of the largest in the world. Starting back in 2009, when the company won the Chinese franchise for World of Warcraft, NetEase has forged ahead, building its in-house game creation staff and turning out massively multiplayer online role-playing games (MMORPGs) based on Chinese themes and traditions. Players pay for game time and for in-game purchases of items that enhance game play. NetEase enjoyed 58% revenue growth in 2016 and earnings soared from $8.86 per share in 2015 to $14.51 in 2016. Three quarters of revenue comes from game services, but the company also operates one of the biggest Chinese web portals, which brings in the remainder in advertising and other sources. NetEase appears to have mastered the process of producing fresh, compelling game content, and its revenue growth keeps investors interested. The company’s Q4 earnings results on February 15 blew away analysts’ estimates, with earnings coming in at $4.30 per share where $3.44 was expected. Revenue was similarly ahead, with $1.74 billion versus the expected $1.58 billion. The future looks bright and the 1.3% dividend, while not compelling, doesn’t hurt either.
Technical Analysis
NTES has been in a long-term uptrend since early 2013, and the rate of advance has steepened in recent years. The stock soared from a correction low of 129 in April 2016 to 271 last October. A seven-week correction to 211 in December set the stage for the latest rally, which booted the stock to 262 last Wednesday before the post-earnings rally that exploded NTES to 299 on Thursday. A little patience should present an opportunity for a buy below 295. A loose stop at 265 (near the bottom of its earnings gap) makes sense as volatility may be high.
NTES Weekly Chart
NTES Daily Chart
ON Semiconductor (ON)
Why the Strength
Wall Street loves a beat and raise. That’s what mid-cap ON Semiconductor delivered when it reported last Monday, and that’s why the stock rallied to a 52-week high. The headline numbers are fantastic. Revenue was up 50%, and EPS of $0.26 beat by $0.03. Those numbers were boosted by the company’s first quarter of contribution from Fairchild. That game-changing acquisition increased the size of the company by roughly 45%, and brought a number of complimentary product lines with it. Prior to the deal, ON Semi led in analog, imaging, low voltage power and small-signal semis, with automotive, industrial/medical and communications as its three biggest end markets. Fairchild filled gaps in high and medium voltage, and boosted the combined company’s exposure to industrial/appliance and auto, while also adding exposure to the mobile market. Now that one quarter (Q4 2016) as a combined company is in the books, its easier for analysts to look to the future. And they like what they see, as evidenced by upgrades. Consensus estimates of 30% revenue growth and 34% EPS growth in 2017 probably don’t represent all the revised figures just yet. But even so, it’s apparent that EPS should grow rapidly for at least another few quarters. With room for gross margins to move higher and a valuation that’s well below peers, ON Semi looks likely to keep rising.
Technical Analysis
ON’s upmove dates back to last July, when it finally pushed above its long-term 200-day line following 16 months of correcting and consolidating. Shares marched to 12.5 in September in anticipation of the Fairchild acquisition, though once the deal closed, ON moved sideways for the better part of three months. The buyers moved in once the calendar flipped, with the stock pushing to 14 ahead of earnings and then surging north of 15.5 after results. It looks buyable around here or on minor weakness.
ON Weekly Chart
ON Daily Chart
Paycom Software (PAYC)
Why the Strength
Many cloud-based software stocks were stuck in the mud for a couple of months after the U.S. election, but some have begun to perk up. And why shouldn’t they? Sales and earnings growth remain excellent as companies of all sizes switch from legacy systems. Paycom Software focuses on the human resources niche, with modules that help firms acquire and manage employees, manage payroll, help with tax and regulatory compliance and even manage the HR department itself, and it’s done all from a single database, which makes life easier. There are a few players in its field, but there’s no question that Paycom’s solution is catching on—sales grew 47% last year, it now serves 17,800 clients, its retention rate is a whopping 91% and management stated in the recent conference call that the trend of companies replacing many single-function HR software products (one for payroll, another for recruiting, another for employee management, etc.) with an all-in-one tool like Paycom will continue for many years. There could be a small hiccup if the Affordable Care Act is repealed, though any replacement plan will likely have its share of reporting requirements, too. All told, it’s safe to say Paycom has one of the best solutions in the HR space and should continue to grow for many years—management sees sales up another 29% this year with cash flow up 20%, but given the firm’s history of trashing estimates, those figures are likely conservative.
Technical Analysis
PAYC was creamed during the market’s mini-crash early last year (falling as low as 22!), had a long, persistent comeback to 52 by August, and then stalled out for a few months, with a couple of sharp selloffs (one in November, another in January). Still, the stock’s correction (26%) wasn’t overly deep, and now PAYC is trying to get going—the stock has rallied back to the top of its multi-month trading range on big volume. You could nibble here or on dips, and look to average up if the stock decisively breaks out.
PAYC Weekly Chart
PAYC Daily Chart
Portola Pharmaceuticals (PTLA)
Why the Strength
Developmental-stage Portola Pharmaceuticals benefited from a positive surprise on February 8 when the FDA announced that no Advisory Committee Meeting was necessary to review the company’s betrixaban application. The stock’s path of least resistance was to keep going higher, and we can see why. The drug candidate has the potential to become the first oral treatment approved for hospital-to-home prevention of VTE, a cardiovascular disease that includes both deep vein thrombosis (DVT) and pulmonary embolism (PE). Portola presented full data from a Phase 3 study in May, 2016 and submitted a New Drug Application (NDA) to the FDA in October. It has been granted Priority Review status (90% of drug candidates with such status over the past three years have been approved), and analysts see a roughly 70% chance of approval before the end of June. If approved, the product could ramp up to $300 million in annual revenue by the end of 2023. Another potential catalyst is the possible approval of anticoagulant candidate andexanet alfa by the end of the year. The candidate has had its ups and downs with the FDA, but Portola has submitted all necessary information and analysts are increasingly bullish on approval driving revenues beginning in 2018.
Technical Analysis
PTLA cratered at the beginning of 2016 as early data from its Phase 3 study for betrixaban looked iffy. The stock then suffered fits and starts as it reacted to seemingly positive and negative trial data for both betrixaban and andaxanet alfa. After hitting a low of 16 in November, a $50 million infusion of development capital for andaxanet alfa from Pfizer and Bristol-Myers on December 19, along with the FDA’s acceptance of betrixaban for priority review, drove shares from the mid-teens to 23 by the end of the year. Analyst see increasing odds that both drugs will gain approval by the end of 2017. This is biotech, so start with a small position.
PTLA Weekly Chart
PTLA Daily Chart
Shopify (SHOP)
Why the Strength
One new theme that’s begun to attract investors is companies that offer tools and systems to help entrepreneurs, small- and mid-sized businesses advance their e-commerce and e-marketing abilities. Shopify is one of the leaders (Wix.com also plays in this field—see page 11), offering a complete cloud-based platform that helps their customers sell through a variety of channels, handle payments, get short-term financing and obtain help with many back-end functions like inventory and order management. Shopify makes money in a variety of ways, including monthly payments for its services (from $30 to north of $300, depending on how much a customer needs), taking a cut of sales and extra dollars for its payment and back-end solutions. And Shopify’s fourth-quarter report last week confirmed that demand for its services remains robust. Not only did sales and earnings top estimates, but all sub-metrics also impressed—gross merchandise volume totaled $5.5 billion in the quarter, up 95%, the company’s monthly recurring revenue was $18.5 million, up 63%, payment volume through the firm’s software jumped 120% and more than 375,000 merchants were customers at year-end (up from more than 325,000 a quarter ago). Earnings are still around breakeven as the firm invests in the future; Shopify is trying to grab as much business as it can because customers tend to expand their usage in the future (eight of Shopify’s top 10 merchants over the Black Friday weekend were merchants that had upgraded from lower-priced plans). We think it’s a great growth story.
Technical Analysis
SHOP rallied 10 weeks in a row after the Brexit shakeout last June, but then settled into a choppy four-and-a-half month consolidation. Early January brought a huge-volume breakout (five and a half times average volume), and SHOP has kited higher ever since, including last week’s earnings surge. You could nibble here, though we’ll use a wide buy range, thinking a shakeout is possible (and, if it happens, buyable).
SHOP Weekly Chart
SHOP Daily Chart
TIM Participacoes (TSU)
Why the Strength
As one of the biggest telecommunications companies in Brazil, TIM Participacoes has been both hindered and helped by Brazil’s volatility. The country’s political and economic crisis in 2015 pulled TIM’s revenue lower by 40% and sent its stock into a tailspin. But the domestic situation is considerably calmer now, and investors see the potential in an integrated cellular communication company with licenses to operate nationwide. TIM is the leader in the prepaid segment of Brazilian wireless and has a 26% market share of the whole market. Brazil is a mature cellular market, so the company’s growth track is in moving customers from a pre-paid to a post-paid basis, increasing data transmission and upgrading service. TIM has budgeted R$12.5 billion to expand 4G and 3G coverage throughout Brazil. This is a turnaround story, as TIM’s stock took a bath from 24 in January 2015 to 7 in January 2016. The company’s earnings report on February 2 featured a 19% jump in revenue and a 9% after-tax profit margin (the highest in a year). At least one analyst has upgraded its rating of TIM. A 1.8% dividend yield sweetens the deal.
Technical Analysis
TSU caught a cold in the second half of 2014, then came down with pneumonia in 2016, presenting investors with a quality, undervalued stock. The rally that began in February 2016 advanced in three surges followed by three corrections. But the stock caught fire in late December and traded higher on increasing volume all the way to its gap up and volume spike on February 3. TSU traded sideways before that earnings gap up, but has only pushed higher since then. TSU is buyable on any weakness, with a stop near 14.
TSU Weekly Chart
TSU Daily Chart
TTM Technologies (TTMI)
Why the Strength
TTM Technologies is a California-based manufacturer of printed circuit boards (PCB) for the mobile handset, automobile, defense and medical imaging markets. Customers include the likes of Huawei, Apple, Boeing, Philips, IBM and Bosch. And TTM Tech offers each a one-stop shopping experience for a wide range of products and services, whether it’s a few prototypes or high volume production. The $1.8 billion market cap company isn’t well known, in part because PCB manufacturers aren’t exactly great “story” stocks. But the stock has posted stellar performance over the past 12 months as aerospace/defense and especially automotive drove 2016 revenue up 19%. Automotive is an exciting market for TTM, with PCB demand being driven by safety, autonomous driving, hybrid/electric, connectivity and infotainment. Management says it sees average PCB content per car growing from $55 in 2015 to $70 in 2020 (it’s already at $60). Analysts are generally bullish, though a downgrade to neutral from JP Morgan (citing valuation) last Friday did dent the stock’s recent strength. We think the stock can overcome this near-term headwind, due to its reasonable valuation (13 times earnings doesn’t seem expensive to us) and, more important, the likelihood that earnings estimates will move higher in the months ahead.
Technical Analysis
Shares of TTM jumped into action in late June, 2016 when they made a move off their 50-day moving average at 7. Over the next two months, they walked up to 11.3, then a better-than-expected third-quarter report inspired a gap up to 13.5. Aside for a couple of close calls in November and January, the stock then held above its 50-day moving average line and inched its way to 15.5 by its February 8 fourth-quarter report. Another better-than-expected result launched the stock up to 17. It reversed course just shy of 18 last Tuesday, then fell 4.4% to close at 16.7 on Friday. We think this is a buyable dip, and would look to be opportunistic buyers.
TTMI Weekly Chart
TTMI Daily Chart
United States Steel Corporation (X)
Why the Strength
Lots of commodity stocks are staging comebacks, and steel-making giant U.S. Steel is riding a wave of investor enthusiasm based on three positive influences. The first influence is anticipated infrastructure projects in the U.S. This is the same trend that has lifted some coal and transportation stocks. The second factor is the imposition of heavy tariffs on foreign steel in retaliation for alleged steel dumping by China and other countries. The third positive influence is the return to profitability of U.S. Steel itself. When the company reported its Q4 results on February 1, analysts had predicted earnings of one cent per share, so the actual result of 27 cents per share was a major beat. And while the actual revenue figure for the quarter was a hair below forecast, the 3% advance in revenue was the first gain in absolute terms after eight consecutive quarters of declines. The company also raised its guidance for 2017, saying that it expects EPS of $3.08, well above Wall Street’s estimate of $1.86. The other story behind U.S. Steel’s strength is the work that management has done for years to modernize and streamline operations; U.S. Steel now has its own supplies of iron ore and coking coal and its own railroad and barge transportation infrastructure. As long as demand for automobiles remains strong, positive infrastructure demand should keep U.S. Steel growing.
Technical Analysis
X went over the falls from 47 in September 2014 to 6.2 in January 2016. The stock’s recovery from that low hasn’t been steady, as two major corrections and one minor one have slowed progress, but a rally from 6 to 40 isn’t a minor event; the stock’s 314% gain for the calendar year made it one of the top performers of 2016. X came out of a moderate correction last November and soared from 17 to 39 in early December. The stock declined slowly to 31 as February began, then got a boost from the unexpectedly good earnings results. X is now trading under resistance at 40, and looks like a good buy on any weakness. A stop at 36 makes sense.
X Weekly Chart
X Daily Chart
Wix.com (WIX)
Why the Strength
Based in Israel, Wix.com is benefiting from the same general theme as Shopify, though its offerings mostly consist of helping entrepreneurs and small businesses build their web presence through great-looking websites. Users take advantage of Wix’s drag-and-drop functionality and tons of templates, and can do it for free! However those free sites come with lots of Wix-related ads, which entices users into premium plans, which are reasonably priced ($5 to $25 per month) and offer more storage, more bandwidth and vouchers for placing ads through Google. It’s a true mass market product, and Wix’s value proposition is attracting tons of business—the firm has a huge pool of 97.4 million registered users, of which 2.46 million have signed up for premium plans (up 39% from a year ago), which is driving revenues (up 48% in the fourth quarter) and deferred revenue (up 51%) much higher as users generally sign up for contracts of a year or longer. Moreover, there’s a lot of predictability in the business, as new premium plan customers tend to expand their usage over time. Even better, as a subscription-based business, cash flow is much larger than earnings—free cash flow totaled about 82 cents per share last year, and management believes 2017 will see revenues up more than 40% and free cash flow north of $1.50 per share. It’s a good bet Wix’s steady, rapid growth should continue for a long time, driving a huge increase in earnings and cash flow. Interestingly, T. Rowe Price and Fidelity, two smart growth shops, own a combined 9.1 million shares, or more than 20% of the company.
Technical Analysis
WIX got going in April 2016, breaking out from a huge IPO base in July and running to 49.5 in September. That started a herky-jerky period, where the stock didn’t make much progress for a while—WIX was still meandering near 51 two weeks ago. Shares then zoomed higher on earnings on their heaviest weekly volume since coming public. We think any dip of a couple of points is buyable, but use a loose stop given WIX’s volatility.
WIX Weekly Chart
WIX 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.
