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Top Ten Trader
Discover the Market’s Strongest Stocks

February 22, 2016

The intermediate-term trend is starting to turn up, so after many weeks in a defensive stance, it’s OK to loosen the purse strings and put some cash to work. Our Top Pick looks like it wants to help lead a new uptrend should the market gain steam.

The Evidence Continues to Improve

Market Gauge is 4

Current Market Outlook

The market continues to face many headwinds, the largest of which is the fact that the major indexes and the vast majority of individual stocks remain in longer-term downtrends. However, let’s give the market credit where it’s due—after a panic selloff on January 20, the major indexes chopped around, retested those lows during the following three weeks, and now, have nearly risen to their highest levels since early January. By our measures, the intermediate-term trend is starting to turn up, so after many weeks in a defensive stance, it’s OK to loosen the purse strings and put some cash to work—though we do advise going slow on the buy side and continuing to hold a good-sized cash position. Our Market Monitor will move up a couple of notches into neutral territory.

This week’s list is still a bit light on true growth stocks, but there are other interesting ideas to consider. Our Top Pick is TAL Education (XRS), a stock we’ve recommended before that’s now showing excellent relative strength.

Stock NamePriceBuy RangeLoss Limit
TAL Education (XRS) 0.0048-50.543.5-44
Wynn Resorts (WYNN) 121.0876-7969-70
The Priceline Group Inc. (PCLN) 0.001220-13001080-1100
NVIDIA Corporation (NVDA) 242.4230-3227-28
Hawaiian Holdings Inc. (HA) 0.0038-4034-35
Five Below (FIVE) 134.5835.5-37.532.5-33
CenturyLink (CTL) 22.8828-29.526.5-27
CyrusOne Inc (CONE) 0.0036.5-3834-34.5
Coherent, Inc. (COHR) 0.0078-8272-73
Burlington Stores (BURL) 193.9552-5447.5-48

TAL Education (XRS)

www.100tal.com

Why the Strength

One characteristic of leading growth stocks that sometimes gets overlooked is scale, the size of the potential market for a company’s goods and services. TAL Education is a private education company that provides pre-school through high-school classes, tutoring and test-preparation services in China. TAL Education (the name is said to stand for “Tomorrow Advancing Life”), has grown steadily to its present 300 learning centers in 19 Chinese cities. The company’s classes vary from personalized private tutoring to small classes for young learners to small-class math, science, English and Chinese classes to a large online learning site with over 350,000 registered students. TAL Education has scale, with lots of room for further expansion, either organically or via M&A, as the private education market in China is highly fragmented, with the top three players controlling less than 4% of the market. TAL Education acquired Firstleap Education (and its 60 learning centers and 20,000 students) in September 2015 and took a $30 million stake in Phoenix E-Learning Corp. in October. After two years of revenue growth of 39% and 38%, TAL Education has booked four quarters of revenue growth over 40%. Despite economic woes in China, consumers there appear eager to spend money on education, and TAL Education is a successful and growing player in that arena.

Technical Analysis

XRS blasted off in October, soaring from 31 on October 1 to 49 on December 21. After a correction to 42 in January, the stock popped back to 50 at the beginning of February, then fell victim to the general market weakness in early February, dipping to 43 on February 9. But the stock got hot again and roared higher on big volume last Tuesday and is now trading above 50 in new-high territory. A buy on any weakness looks solid, with a fairly loose stop at 44 to give this volatile issue some wiggle room.

XRS Weekly Chart

XRS Daily Chart

Wynn Resorts (WYNN)

www.wynnresorts.com

Why the Strength

Sales at Wynn Resorts have steadily slipped in the last year and a half. But there were some bright spots in the latest earnings report, which has boosted investor preception. Excluding items, fourth-quarter earnings at the hotel and casino chain reached $1.03 per share, well ahead of $0.76 consensus estimates. Its Las Vegas resort carried the day, offsetting continued weakness in Wynn’s high-end Macau casino, where betting revenue was down 27% in the fourth quarter. That 27% decline, however, was the smallest year-over-year dropoff Wynn Resorts has seen in Macau in more than two years, fueling speculation that the market has finally bottomed. That has founder and CEO Steve Wynn optimistic about the company’s new Macau resort—the grandly named Wynn Palace, set to open in June. He’s putting his money where his mouth is: Wynn just spent $15 million acquiring 258,523 shares of WYNN stock, not two months after he purchased one million shares in December. Wall Street has taken Wynn’s lead, snatching up the stock in anticipation of the Wynn Palace opening, which is being viewed as a potential game-changer for a beaten-down company. A dividend yield of 2.6% is another plus for this turnaround situation.

Technical Analysis

WYNN has been in a downward spiral since peaking at 246 in March 2014. Fifty-one was the low point, which WYNN touched in October and re-tested a little over a month ago. But the stock found solid support there, and the bargain buying began in earnest, pushing shares up to 67 by the end of January. Another dip, followed, but the market turnaround has convinced buyers to jump back in the WYNN pool in the past two weeks. Today, the stock topped 80 for the first time since August, and now trades well above its 50-day moving average. You can buy on a pullback and use a stop in the upper 60s.

WYNN Weekly Chart

WYNN Daily Chart

The Priceline Group Inc. (PCLN)

www.pricelinegroup.com

Why the Strength

Priceline has been one of the most amazing growth stories of all-time—the firm’s dominance in air and hotel bookings around the world (especially in Europe through its Bookings.com operation) has pushed earnings up from about $4 per share in 2007 to $58 per share last year—a 14-fold increase in eight years! Of course, no one should anticipate a repeat of that, but the stock has come back to life after last week’s earnings report confirmed that growth is reaccelerating. While sales and earnings growth was modest (9% and 16%, respectively), growth was much faster when adverse currency movements were stripped out; gross profit was up 23% while international travel bookings rose a very strong 29%. And management also anticipates a bang up first quarter, with gross profit up 23% and travel bookings up 22%. The bottom line here is that the mega-movement toward greater online air and hotel bookings around the world remains in place, and Priceline is leading the charge. Plus, after a period of slow growth due in part to currency headwinds, analysts now see a gradual reacceleration going forward—earnings are expected to rise 19% this year and 16% next, and Priceline has a history of topping expectations. It’s not the dynamic company it was a few years ago, but institutional investors are again seeing blue skies for Priceline.

Technical Analysis

PCLN was one of many growth stocks that topped out in March 2014, and it effectively went sideways from there for the next 18 months—shares did hit a marginal new high last October, but the RP line never came close, and shares imploded as 2016 began. However, the stock finally found some support two weeks ago and exploded higher following earnings last week. There’s still lots of resistance to chew through, but we’re OK with a small purchase here or on dips, with a stop below 1,100. Don’t worry about the high price, just buy fewer shares if you want in.

PCLN Weekly Chart

PCLN Daily Chart

NVIDIA Corporation (NVDA)

nvidia.com

Why the Strength

This fabless chip company specializes in designing microprocessors for graphics processing units (GPSs) that provide the fabulous visuals in computer games. And with the massive global game industry in the middle of an upgrade cycle, Nvidia is in the catbird seat. Co-founder and CEO Jen-Hsun Huang remarked after the Q4 earnings that the company’s strategy is “to create specialized accelerated computing platforms for large growth markets that demand the 10x boost in performance we offer.” That earnings report featured earnings of 52 cents per share (estimates were for 32 cents) on revenue of $1.4 billion (consensus was $1.31 billion). The company has strong footprints in enterprise graphics, datacenter operations and autonomous vehicle imaging, but gaming is still the main driver of its success. Nvidia’s guidance for next quarter calls for revenue of $1.26 billion, which is just slightly ahead of analysts’ estimates. Gaming is a huge industry, and Nvidia’s technological edge on the competition—it has increased its market share of PC add-in board unit sales versus AMD to 80%, up from 60% in 2010—is expected to keep franchises like Tomb Raider and Grand Theft Auto hugely popular, which will keep Nvidia profitable, while chips for self-driving cars and other platforms provide avenues for growth. The company is cash rich and has an aggressive share buyback program and pays a dividend with a tidy 1.5% yield.

Technical Analysis

NVDA rose steadily from October 2012 through August 2015, when a monster earnings report alerted investors about the company’s strength. The stock soared from 20 in early August to 28 in early November, when another great earnings report renewed the stock’s momentum. NVDA formed a double top at 34 in December, then corrected back to below 25 earlier this month. Once again a surprising earnings report blasted the stock higher and it’s now trading near 32 after a gap up on February 18. You can start a position here, or on a pullback of a point. Be sure to keep a loose stop at 28.

NVDA Weekly Chart

NVDA Daily Chart

Hawaiian Holdings Inc. (HA)

www.hawaiianair.com

Why the Strength

Hawaiian Holdings is the holding company for Hawaiian Airlines, an air carrier that’s been catching investors’ attention. While the airline has just won the award for highest on-time departures and arrivals (for its 12th consecutive year), investors are more impressed with the company’s 113% jump in Q4 earnings and its ambitious program of upgrading its air fleet and increasing the number of first-, business- and comfort-economy seats on all flights. The boom in earnings was a result of low fuel costs and strong demand across all of its routes. The company gets a quarter of its passenger revenue from travel within the Hawaiian islands, but with daily connections to 10 cities in the western U.S., Australia and Japan and scheduled service to Seoul, Beijing, Pago Pago, American Samoa, Tahiti and New Zealand, the company is also a player in Pacific Rim travel. It’s worth noting that revenue was flat in 2015, but earnings doubled as costs were less than expected. Estimates for 2016 earnings call for a 51% increase. The other major attraction of Hawaiian Holdings for investors is the valuation of its stock. HA is now trading at a 13 P/E ratio and its forward P/E is just 9. For an efficient airline with excellent geography and a young fleet, that’s cheap.

Technical Analysis

HA soared out of a long, tightening base in October in a rally that took it from 24 on October 1 to 40 in early December. The market dip in late December and early January pulled the stock back to 28 on January 20, before the excellent Q4 earnings report on January 27 blasted it back to 38. More market weakness produced a correction to 31 on February 8 that was followed by a string of gains that has kicked HA back near its December highs. You can nibble on any dip of a point or two. Use a stop at 35.

HA Weekly Chart

HA Daily Chart

Five Below (FIVE)

fivebelow.com

Why the Strength

Institutional investors (who are the folks pushing stocks higher or lower) will pile into a stock only if it has three characteristics—the company has a proven growth concept, there’s gigantic potential, and there’s a high degree of confidence that growth will be achieved. Five Below has all three characteristics, which is why the stock is strong, and why it could get a lot stronger going forward. The company is a newer dollar store, with merchandise aimed at teens and pre-teens (sports gear, tech gadgets, arts and crafts, candy, party supplies, decorations, etc.), and everything sells for $5 or less. The concept has been a hit—earnings have advanced steadily in recent years, from 39 cents per share in 2011 to an estimated $1.05 last year, driven by solid same-store sales growth (38 straight quarters of positive comparable store sales), a growing store count (434 stores at the end of October, up 19% from a year ago) and fantastic unit economics (payback of less than one year on new store openings). That growth should continue going forward; the holiday season was a good one for Five Below (total sales up 24% in November and December, with same-store sales up 4.1%). Long-term, management believes there’s room for more than 2,000 stores in the U.S., and that the company can grow sales and earnings at least 20% annually through 2020. It’s a solid retail cookie-cutter story that should play out for many years to come.

Technical Analysis

Despite the fundamental growth, FIVE hasn’t done anything since coming public in July 2012. But that could be changing, as the stock actually bottomed in November and has been pushing higher since, despite the market’s plunge. Last week, the stock hit new recovery highs (albeit on sub-par volume), with the RP line just shy of a 14-month high. There is overhead to deal with, and the stock can be a bit choppy, but we like the action and the story. You can buy a little here or (preferably) on weakness. Use a stop near 33.

FIVE Weekly Chart

FIVE Daily Chart

CenturyLink (CTL)

www.centurylink.com

Why the Strength

Sometimes on Wall Street, low expectations can be a blessing. That was the case with CenturyLink, a regional telecommunications company, as modest fourth-quarter earnings still managed to clear analysts’ low bar. CenturyLink’s sales improved 1% from the same quarter a year ago, just ahead of the Street’s estimates. Per-share earnings, on the other hand, were much improved, up 64% from the previous year. The company’s new Prism TV service—an interactive programming device advertised as an upgrade over cable and satellite television—was a big reason for CenturyLink’s stronger-than-expected quarter. Sales of its high-speed broadband Internet service were also strong. Also, the company shook up its board of directors last month—a move that demonstrates to investors that it’s willing to make drastic changes to avoid the uneven sales and earnings growth that have plagued the company in recent years. Even in an industry as competitive as telecom, CenturyLink stands out, and analysts see another year of strong earnings and cash flow growth in 2016.

Technical Analysis

A year ago, CTL was still hovering near 52-week highs around 40. Then the bottom fell out, and the stock fell for eight straight months, dipping to 24 in late September. A mini-bounce in October and November took the stock back up to 28, but the December and January market collapse brought new lows as CTL sank to 22. That appears to have been the bottom: since January 20, the stock has risen from 22 to as high as 30, dipping only slightly to 29 to close out last week. It’s now trading well above its 50-day moving average for the first time since November, with higher-than-normal volume. If you want in, you can buy on weakness and set your stops near 27.

CTL Weekly Chart

CTL Daily Chart

CyrusOne Inc (CONE)

www.cyrusone.com

Why the Strength

Most real estate investment trusts don’t fit our investment criteria as they usually move slowly and offer only defensive characteristics (dividends and stability) during market corrections. But some REITs have solid growth stories, and CyrusOne looks like one of them. The company offers data center properties (co-location) for corporate customers, a market that’s steadily expanding. At the end of the third quarter, the firm had about 1.5 million co-location square feet in 31 data centers (bolstered by a good-sized acquisition in the middle of last year). With 89% of its space leased and monthly churn well below 1%, there’s lots of steady recurring revenue in the business model. CyrusOne now has 929 total customers, including 169 in the Fortune 1000. With the e-commerce, mobile and cloud computing trends firmly in place, demand for the company’s services is only set to increase—it’s simply a matter of expanding its current facilities (just on that alone, the firm could boost its square footage by 59% over time), building new data centers on land it already owns (which could lead to a tripling of current capacity) and making selective acquisitions. There is competition, and CyrusOne does have a large debt load (interest costs totaled about 11% of revenue in the third quarter), but overall, the odds favor solid growth ahead. Analysts see cash flow rising 15% annually for many years, which should lead to higher dividends (currently 3.3% annual yield). Earnings are due out this Wednesday (February 24).

Technical Analysis

CONE has been in a choppy uptrend since the fall of 2013, when the stock bottomed at 17. As you’d expect with a REIT, shares have had lots of consolidations and some sharp selloffs when fears of higher interest rates bubble up. More recently, CONE shook out to its 200-day line twice during the market’s weakness, but both times the stock immediately snapped back toward its highs. It’s not going to set the world on fire, but you could buy on dips with a stop around 34.

CONE Weekly Chart

CONE Daily Chart

Coherent, Inc. (COHR)

www.coherent.com

Why the Strength

Recent profit growth from this maker of lasers, measurement instruments and precision optics for scientific, commercial and government is attracting buyers who think more growth is in store. Coherent just posted its fifth straight quarter of double-digit earnings growth even though sales slumped a bit in the holiday quarter, coming in 5% lower than a year ago. Margin improvements were the main reason why earnings per share increased 14% from a year ago. So really, sales growth has had less to do with Coherent’s recent strength than improved efficiency. The company’s sales have actually been stuck in neutral since 2013, but EPS has grown 9% during that time, with another 14% bump expected this year. Sales are expected to get a slight (5%) bump too this year due in part to escalating interest in Coherent’s Vyper Linebeam systems, used for thin film growth, micro drilling and other operations. Orders for the Vyper Linebeam contributed to record bookings in the December quarter, and the company anticipates another record in the current quarter. That has investors thinking the current earnings estimates (+14% for 2016) will prove conservative.

Technical Analysis

COHR started to show signs of life in October, when the stock bounced off 52-week lows at 52 to 68 by early December. Further consolidation followed, as COHR slumped back to 57 in January as the market tanked. But the late-January earnings beat sparked a huge gap up from 62 to 77, and the stock built a solid-looking base in the three weeks afterwards. The stock tagged new highs today, one of the few stocks in the entire market to do so. With no real resistance in sight, you can look to buy on weakness and keep a loss limit in the low 70s.

COHR Weekly Chart

COHR Daily Chart

Burlington Stores (BURL)

burlingtoninvestors.com

Why the Strength

We recommended this stock about a month ago, when it was trading at 51 on the heels of a very strong start to the year. Not much has happened to the company since…but the stock has continued to rise, taking on a few points since then. The reasons we listed a month ago have been enough to keep the rally in BURL going: Goldman Sachs and one other analyst upgraded the stock to “Buy” after the company issued upbeat holiday-quarter guidance (results aren’t due until next month). It’s also in the midst of a $200 million share buyback program, which is helping support the stock and boost earnings per share. Realistically, the turnaround in the broad market over the last couple of weeks has been the bigger factor in lifting the BURL boat; but in the big picture, Burlington Stores’ earnings (+93% in 2015) and sales (+8.7%) have been trending in the right direction of late, and analysts see reliable growth going forward so that’s undoubtedly another reason that investor enthusiasm has been building.

Technical Analysis

After a steady decline from March 2015 through the end of the year, during which time it fell from 61 to 41, BURL suddenly awakened in early January. The gap up from 41 to 48 was the big move; by February 1, it had pushed all the way to 54. It’s been meeting resistance there in the three weeks since, with 49 acting as the new support level. With the stock in the mid-50s now, it makes sense to buy on dips and see if the recent market rally can give BURL the extra nudge it needs to break through resistance. Set your loss limit around 48, which is the current 50-day moving average.

BURL Weekly Chart

BURL 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.

FirstStockSymbolTop PickOriginal Buy RangePrice as of February 22, 2016
HOLD
1/11/16Agnico Eagle MinesAEM04/30/201628-29.535
2/1/16Barrick GoldABX04/27/20169.5-1013
1/25/16Burlington StoresBURL03/17/201649-5155
2/15/16CH RobinsonCHRW04/27/201667.5-7070
2/1/16Cirrus LogicCRUS04/27/201633-3534
1/25/16Cree Inc.CREE04/19/201626-27.531
2/1/16Diamondback EnergyFANG05/16/201670-7474
2/15/16Ellie MaeELLI04/30/201669-7380
1/25/16Edwards LifesciencesEW05/02/201676-7987
2/1/16FacebookFB04/27/2016
icon-star-16.png
110-115107
1/18/16Five BelowFIVE03/25/201632-3438
2/15/16GoldcorpGG02/26/201614-1515
2/8/16MattelMAT04/16/201630-3132
2/8/16Michael KorsKORS05/27/2016
icon-star-16.png
47.5-50.555
2/15/16NasdaqNDAQ04/23/201658-6164
1/11/16National StorageNSA05/03/201616-17.517
2/8/16Newmont MiningNEM04/23/201623.5-2525
2/15/16O’Reilly AutomotiveORLY04/22/2016245-255260
2/8/16PayPalPYPL04/28/201632-3436
2/15/16RandgoldGOLD05/07/201684-8891
1/11/16Rovi Corp.ROVI05/11/201616-17.522
2/15/16Sabre Corp.SABR05/05/2016
icon-star-16.png
24.5-2628
1/25/16SeaspanSSW02/23/201615.5-16.517
1/4/16SolarEdgeSEDG05/03/201625.5-2724
1/25/16STORE CapitalSTOR02/23/201622.5-23.526
2/8/16Super Micro ComputerSMCI04/21/201629-3132
2/1/16TAL EducationXRS04/28/201645-4751
1/25/16Take-Two InteractiveTTWO05/03/201632-3435
1/11/16The Children’s PlacePLCE03/12/201660-6365
2/8/16Universal DisplayOLED02/25/201640-4349
2/15/16Vail ResortsMTN03/10/2016116-122127
2/8/16VantivVNTV04/30/201643.5-45.551
2/8/16Vulcan MaterialsVMC05/04/201686.5-9096
WAIT FOR BUY RANGE
2/15/16WellCare HealthWCG05/06/201678-8190
SELL RECOMMENDATIONS
10/6/14Ulta BeautyULTA03/12/2016
icon-star-16.png
113-117156
DROPPED: Did not fall into suggested buy range within two weeks of recommendation
None this week