Buyers are in Control
Current Market Outlook
Along with heaps of snow in the Northeast, February has brought a marked change in character for the general market—the major indexes have moved into new high ground (led by the growth-oriented Nasdaq Composite), and individual stocks have done the same. In the short-term, we have seen a little giddiness take hold, which could easily lead to some potholes and shakeouts. But there’s no doubt that the intermediate-term evidence remains bullish, so we believe dips will present good buying opportunities.
This week’s list has an interesting mix of volatile glamour stocks and bigger-cap companies that are under accumulation. There are many attractive charts, but our Top Pick is CommScope (COMM), a telecom play that’s super-strong after a recent, game-changing acquisition.
| Stock Name | Price | ||
|---|---|---|---|
| Zillow (Z) | 76.64 | ||
| VeriSign (VRSN) | 190.71 | ||
| Vipshop Holdings (VIPS) | 14.25 | ||
| Ultimate Software (ULTI) | 0.00 | ||
| Sony Corp. (SNE) | 0.00 | ||
| Molina Healthcare (MOH) | 0.00 | ||
| Marathon Petroleum Corporation (MPC) | 0.00 | ||
| FireEye (FEYE) | 0.00 | ||
| CommScope (COMM) | 0.00 | ||
| Berry Global (BERY) | 64.22 |
Zillow (Z)
Why the Strength
Zillow is a familiar name to readers of Top Ten, having been featured here 10 times in the past, including three appearances in 2014. The company runs a real estate website that gives home buyers access to a mountain of information on 110 million U.S. homes for sale or for rent, as well as homes not on the market. Homeowners often cruise Zillow looking at the company’s “Zestimate” of their home’s value, but serious users can connect with real estate professionals, explore financing options and find leads for remodeling. Zillow’s primary revenue source is subscription fees from real estate professionals, with display advertising and marketplace revenue (from mortgage requests) making up the rest. Investors are enthusiastic about Zillow right now because the company just completed its takeover of Trulia, its main rival in the online real estate information field, in a $2.5 billion stock deal. It is expected that the merger will allow considerable cost cutting and solidify its lead in the industry. Zillow also reported record quarterly results on February 13, booking a 58% revenue gain and a 26% earnings jump. With a dominant market position, an improving housing market and lower costs, investors are looking for great results in the future.
Technical Analysis
Z finished off a great 2013–2014 rally by hitting 159 in July 2014. The stock began a significant correction in late August, falling below 100 in October then bouncing off support around 95 three times in January and February. Z got a little boost from its quarterly report on February 13, but it was the Trulia takeover news that produced the spike higher on monster volume on February 18. Z traded over 125 briefly last week, and is now holding above 120. This is a good long-term story, and a buy anywhere under 120, with a stop at 110, offers a good risk/reward opportunity.
Z Weekly Chart
Z Daily Chart
VeriSign (VRSN)
Why the Strength
VeriSign was a big Internet security company back in the 2000s, it sold off most of those businesses in 2010 to focus on a slow growth, but extremely profitable business—Internet domain registration and management. Today, VeriSign is a leader in the .com and .net registration industry (as well as a few niche domains like .cc and .tv) and hosts those domains at its servers. It also operates two of the Internet’s 13 “root servers” that basically make the Internet work! Said another way, the company is at the heart of what actually makes the Internet click, and with limited competition, the firm has become a massive cash cow. Total domain names are creeping higher (up 2.7% last year), but renewal rates are very strong (north of 70%) and VeriSign doesn’t have to spend much on its business (capital expenditures this year will be less than 5% of total revenues). The result: The company is a cash cow—free cash flow last year was $568 million, or about 8% of its market cap, which helps fund a big share buyback program (it bought back about 10% of shares last year). Plus, seeing how it operates as a near-monopoly, there’s little chance the plump profit margins (37%!) or free cash flow will subside. Maybe that’s why Berkshire Hathaway owns 11% of the stock! The growth isn’t great, but the stock is cheap, spinning off cash and should continue to do so for years. It’s an interesting, special situation-type stock.
Technical Analysis
VRSN had a good run into the start of 2014, but then fell apart, tagging a low of 46 (down 26% from the peak) in April. And then the stock began a long, choppy recovery, hitting slightly higher highs and higher lows during the next nine months. But, like many stocks, VRSN’s character has changed this year, surging on earnings three weeks ago and continuing higher since. You can buy some here or (preferably) on dips of a point or two, with a stop near 59.
VRSN Weekly Chart
VRSN Daily Chart
Vipshop Holdings (VIPS)
Why the Strength
While China lacks the kind of national chains that dominate the bricks-and-mortar retail world in the West, the rapid spread of Internet access has made it possible for a few Chinese firms to follow the Amazon model and sell online. Vipshop Holdings specializes in discount retailing of branded products, including mens’ and womens’ apparel, cosmetics, home goods and other lifestyle products. The company has developed a wealth of ties with fashionable brand manufacturers and gets discounted merchandise at attractive prices. This merchandise is then offered to shoppers using a flash sales model, in which an item is available either for a limited time or until supplies run out. This keeps fashionable young shoppers coming back often to browse the constantly changing offerings. Revenue growth has been explosive, with a gain of 145% in 2013 and 125% in 2014. The power of Vipshop’s growth earned the company five appearances in Top Ten Trader in 2014 (after two in 2013), indicating that investors were impressed with both the strategy and execution of the company’s business plan. The company’s Q4 earnings report on February 16 kicked off a big rally on three times average volume. Vipshop Holdings remains a leader in Chinese retail.
Technical Analysis
VIPS was a top stock in 2013 and 2014, rallying from a split-adjusted low of 0.49 in August 2012 to 25 in November 2014. (VIPS split 10:1 in November 2014.) After that huge run, the stock took a breather, correcting to 19 in December, then recovering to a five-week base with support a 21 in January and February. The gap up following earnings last Tuesday kicked the stock from 22 to 25 in one day, with subsequent gains pushing VIPS over 26. We think VIPS is buyable on weakness of a half a point or so. A loose stop just below 23.5 will give protection while letting you stay in this volatile issue.
VIPS Weekly Chart
VIPS Daily Chart
Ultimate Software (ULTI)
Why the Strength
Ultimate Software is another in a long line of cloud-based firms that are upending the traditional software sector. Ultimate focuses on workforce management software that helps firms manage payroll, benefits, recruiting, performance and more; the bread and butter customer is a big enterprise firm with more than 1,500 employees, though the company has begun selling to mid-market firms recently (between 500 and 1,500 employees) with good success. All told, it now has a whopping 19 million employee records in its system! As we often see with these small firms, the cloud delivery model is a big advantage over legacy systems, helping to keep Ultimate’s products up to date and ahead of the pack. (Renewal rates hit 96% in the fourth quarter!). All of this has led to consistent growth (see table below) and expectations for more of the same—the top brass sees revenue up 22% in 2015, which is likely conservative, while recurring revenues (which make up more than 80% of total revenues) should rise 23%. Throw in expanding margins and cash flow should be strong, too. The big question is not whether Ultimate can continue taking business from the legacy players, but how it does battle with other newer cloud firms (Workday comes to mind) in certain niches. Time will tell, but there’s no question Ultimate is doing very well today, and few firms are doing a better job of keeping their customers around year after year.
Technical Analysis
ULTI is a thinly traded stock (just 240,000 shares, or $40 million, per day), but that hasn’t stopped it from doing well—the stock rose from 35 at the start of 2010 to 172 in March 2014! But like most growth stocks, ULTI then sagged (falling 36% by May) and began building a big, choppy new base. It put the finishing touches on that base during the market’s November-January sideways phase, and then broke out earlier this month following its solid earnings report. We think dips are buyable.
ULTI Weekly Chart
ULTI Daily Chart
Sony Corp. (SNE)
Why the Strength
Why is a company that was the subject of a (alleged) North Korean cyber attack suddenly a “buy”? Because earlier this month, Sony reported its most profitable quarter in seven years, and last week, the company announced a three-year restructuring plan that CEO Kazuo Hirai expects will increase operating profits to a 20-year high. The Japanese electronics maker aims to grow its profitable camera sensors, entertainment and PlayStation video-gaming businesses, while reducing its TV and smartphone operations. The latter two sectors are increasingly competitive, and Sony has struggled to keep up with the likes of Apple, Samsung and cheaper Asian rivals. Sony also plans to spin off its audio and video business, a unit that has been a drag on results in recent years. Hirai believes his company’s restructuring plan will boost operating profits in a huge way during the next few years. If he’s right, it would be a welcome change for a company that has failed to turn a profit in five of the last six years, had to cancel its dividend, and took plenty of flak for pulling its highly anticipated movie The Interview from theaters (on Christmas Day, no less). Two months later, handwringing over Sony’s decision is starting to subside, and public outcry against the company has turned to optimism over its bold restructuring plan.
Technical Analysis
SNE shares were just starting to take off before the hacking debacle let the air out of the balloon in early December. The stock fell from an 18-month high above 22 back to 19. As the dust settled, investors jumped back in. SNE is up 25% in the last month, touching 28 last week before settling down a bit. Volume has doubled to 2.5 million since the beginning of February, a sign that big investors are buying into the turnaround plan. Look for that momentum to continue now that the headlines have turned much more positive.
SNE Weekly Chart
SNE Daily Chart
Molina Healthcare (MOH)
Why the Strength
California-based Molina Healthcare offers health care services to five million individuals and families in 15 states who receive their care through Medicaid, Medicare and other government-funded programs. The company’s business plan—offering coverage to low-income clients—has received a huge boost from the advent of the Affordable Care Act. The last time Molina was featured here (in July 2014), its roster of clients totaled a little over two million. The advent of Obamacare has been the primary driver of expansion, resulting in a 47% jump in revenue in 2014. By contrast, revenue grew just 11% in 2013. On the other hand, Molina has been growing steadily for over a decade, which increases investors’ confidence in the story. Investors see Molina as a well-run organization with a proven record of expanding profitably. The company’s quarterly report on February 9 featured revenue growth of 64% and a blockbuster 182% gain in earnings per share. With rapid expansion of health care coverage under government programs expected to continue, Molina Healthcare’s prospects are excellent.
Technical Analysis
MOH has been in a long-term uptrend since late 2011, but volatility has been high. The stock’s blastoff on February 10 came after an 11-week base-building period during which the stock traded tightly over support at 50. While the stock didn’t gap up after earnings, it jumped from 51 to 56 in a day on more than four times average volume, and has followed through on that leap by rising steadily over the next two weeks. MOH is now trading over 63 and volume has calmed down. We can’t predict when, or if, the stock will take some time to consolidate its gains. Accordingly, if you like the story, you can take a small position now, with a stop at 57, and add to the position when you get a profit cushion.
MOH Weekly Chart
MOH Daily Chart
Marathon Petroleum Corporation (MPC)
Why the Strength
Marathon Petroleum is the country’s fourth-largest refiner by capacity; its seven refineries can process a combined 1.7 million barrels per day (and its gasoline is sold through 5,400 retail outlets in 19 states), and that makes up the lion’s share (about 80%) of the company’s operating income. It also does a good business with its Speedway convenience store chain (~2,740 stores in 22 states), which makes up most of the rest of the income. The reason the stock is strong today (and why many oil refiners are strong) has all to do with the growing differential between the price of U.S.-based West Texas Intermediate crude oil, which is what Marathon pays for, and the price of internationally-based Brent crude oil, which is the price that determines what Marathon can sell many of its refined products for. Simply put: Its costs are going down, while the prices for its products are going up. With that spread widening (and likely to continue), Marathon’s bottom line should remain elevated in the quarters ahead. Of course, this isn’t a long-term growth story, but the prospect of big earnings, a cheap valuation, and a big share buyback and dividend (it returned about 10% of the current market cap to shareholders last year alone) should keep investors interested.
Technical Analysis
MPC might be a humongous company, but the stock is capable of making big moves. Just look at what it’s done since the start of the year! The stock fell hard during the first part of January, but that turned out to be the final shakeout within a huge 20-month base. Since then, MPC has gone straight up with hardly any breather. Short-term, that’s likely to lead to some backing-and-filling, but long-term, such a powerful move portends higher prices. Try to buy on dips.
MPC Weekly Chart
MPC Daily Chart
FireEye (FEYE)
Why the Strength
North Korea’s holiday hack of Sony Pictures was the latest evidence that cyber terrorism is perhaps the number one threat to America’s safety in today’s digital world. It also further emphasized the importance of the companies that protect against those cyber threats. FireEye is one of them, providing organizations with cyber security against malware, zero-day exploits and other online attacks. As these threats mount, cyber security companies are profiting like never before. Few have thrived more than FireEye. Staffed with former military and law-enforcement officials, FireEye has been hired to investigate a number of high-profile cyber attacks in the last year. Target, JPMorgan Chase, major health insurer Anthem—and, yes, Sony Pictures—all called FireEye when their systems were attacked. The company enhanced its profile last year by acquiring Mandiant, which specializes in tracing the source of cyber attacks. That buyout, as well as heavy spending on R&D and marketing, has prevented FireEye from becoming profitable yet. But billings growth has been superb, and FireEye’s respected status within the industry has made the company a prime takeover candidate in its own right, and fueled speculation that Cisco or IBM might be ready to swoop in.
Technical Analysis
FEYE shares were red-hot out of the gate after the company went public in September 2013, tripling from 33 in November of that year to just under 96 in March 2014. But by May, FEYE had plummeted all the way to 26 in the wake of disappointing earnings. After a very long bottoming formation, FEYE finally got going two weeks ago on huge volume. Shares are extremely volatile, but the big base and powerful breakout tells us buying on dips should work.
FEYE Weekly Chart
FEYE Daily Chart
CommScope (COMM)
Why the Strength
As the world becomes more connected via the Internet, companies such as CommScope are becoming increasingly essential. Based in North Carolina, CommScope is a global provider of connectivity and essential infrastructure solutions for wireless, business enterprise and residential broadband networks. That global footprint continues to expand, particularly in the Asia Pacific region, which now accounts for more than a quarter of CommScope’s sales. Though overall sales were down slightly in the fourth quarter, earnings per share (announced last week) continued their steady ascent, improving year-over-year for a 12th straight quarter as the company continued to drive down costs. And sales were up 10% for the full year 2014, thanks largely to improving wireless sales. The company benefited from 4G/LTE rollouts in developed markets and 3G coverage buildouts in emerging markets. A recent agreement to purchase TE Connectivity’s Telecom, Enterprise and Wireless businesses for $3 billion, expected to close later this year, will only enhance CommScope’s global network; 80% of TE’s sales are overseas, compared to just 45% for Commscope. It certainly captured Wall Street’s attention; volume hit an all-time high on the day the deal was announced late last month.
Technical Analysis
The TE Connectivity buyout news in late January sent COMM soaring to new heights. Stuck in a range between 20 and 23 since October, the stock surged all the way to 30 early this month, and inched further into record territory after last Friday’s earnings release. Having shattered resistance, COMM shares have risen almost in a straight line for the last month. The latest earnings beat is a positive sign, but we favor trying to buy on dips.
COMM Weekly Chart
COMM Daily Chart
Berry Global (BERY)
Why the Strength
Berry Plastics is an Indiana-based company that specializes in plastic consumer packaging and engineered materials for the food, beverage and healthcare industries. The company makes tons of drink cups, but also has a huge lineup of rigid open-top containers (like margarine tubs), rigid closed-top containers (like peanut butter jars) and engineered materials (like bags and shrink-wrap packaging) and flexible packaging (everything from bread bags to spray bottles). Berry is a big operation, with 98 manufacturing facilities in North America and over 16,000 employees. The company went through a revenue dip in 2013, but has now turned in five quarters of single-digit revenue growth. Earnings growth has been more varied, with three quarters of triple-digit growth in 2013 and healthy 28% growth in Q4. Investors’ interest in Berry surged in November 2014 when the company reported record fiscal Q4 revenues. Interest grew in January, when Berry’s patented Versalite hot-drink beverage cup was featured by a Dunkin Donuts executive as “our new cup.” With New York City set to ban Styrofoam cups and containers, the Versalite looks to be positioned to bag both Dunkin’s business and that of a flood of firms doing business in NYC.
Technical Analysis
BERY put in a long base from June 2013 through October 2014, trading sideways between resistance at 26 and support at 22. The stock broke out in November after its good earnings report and has finished lower only twice in the 14 subsequent weeks. With BERY at 35, a buy on any weakness looks like a good bet. Try to get in close to 34 and use a stop just below 31.
BERY Weekly Chart
BERY 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.
