Some Hesitation in Leading Stocks
Current Market Outlook
The overall market continues to act just fine, the trends are pointed up for most indexes and stocks, and the broad market remains in great shape. That said, it’s not all peaches and cream—the last three days have seen some selling pressure in a few highflyers and money flows into defensive groups (like utilities and consumer staples). Moreover, this action comes after a few short-term signs of enthusiasm, including a huge number of new highs on Nasdaq last Wednesday. Don’t get us wrong: We’re still bullish, and you should hold your strong stocks and be heavily invested. But we’ll knock our Market Monitor back down a notch (to a level 8), and think being selective on the buy side and ditching losers and laggards makes sense.
This week’s list has a broader array of stocks than in recent weeks as money flows shift. Our Top Pick is Square (SQ), which looks like a new leading growth stock after galloping ahead on earnings last week. Keep positions small and try to get in on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Applied Optoelectronics (AAOI) | 0.00 | ||
| Autohome (ATHM) | 98.65 | ||
| HubSpot (HUBS) | 582.89 | ||
| Marriott Vacations (VAC) | 0.00 | ||
| Sage Therapeutics (SAGE) | 0.00 | ||
| Sinclair Broadcasting (SBGI) | 54.14 | ||
| Southwest Airlines (LUV) | 0.00 | ||
| Square, Inc. (SQ) | 91.04 | ||
| Univar (UNVR) | 0.00 | ||
| Universal Display (OLED) | 187.54 |
Applied Optoelectronics (AAOI)
Why the Strength
Applied Optoelectronics is a vertically integrated provider of fiber-optic networking solutions. Its three main markets are cable TV, fiber-to-the-home and internet data center. The stock has been performing well since last spring, and enjoyed a 23% rally last Friday after reporting better-than-expected Q4 results and giving guidance well above analyst forecasts. Revenue blasted 60% higher (to 84.9 million) while EPS of $0.84 beat by $0.09. Management guided for Q1 revenue of $89.5 million, which would represent nearly 80% growth. That’s better than the 50% revenue growth rate expected. Even better, Applied Optoelectronics sees its gross profit margin expanding from 33%–35% to 37%–40%. The reason is manufacturing efficiencies and a greater mix of higher margin 100G solutions for datacenters, which the industry is transitioning to (from 40G solutions). Those factors have inspired many analysts to upgrade price targets to above 50 and to forecast EPS growth of over 140% (to $3.39) this year. It’s worth noting that shares of Applied Optoelectronics have diverged from underperforming peers, which include Oclaro (OCLR) and Acacia Communications (ACIA).
Technical Analysis
AAOI hit a 2016 low of 8 in May after reporting uninspiring Q1 results. But shares clawed their way up to 12.5 ahead of the Q2 report in early August. And after surpassing expectations, shares of AAOI moved up to 24 by early-October. They pulled back to their 50-day moving average near 20 in November, then again around 22.5 in early January 2017. Management released preliminary Q4 results on January 11 that impressed the market and sent shares up to 30. They walked up to 37.5 over the last month and a half, then traded as high as 49 after last Thursday’s Q4 report. You can buy a little here or (preferably) on dips.
AAOI Weekly Chart
AAOI Daily Chart
Autohome (ATHM)
Why the Strength
Car ownership in China is more than 170 million, but despite the scale and growth of the auto market, China still lacks anything like the strings of auto dealerships that line streets in the U.S. Autohome provides Chinese consumers with an online source of information and gives auto dealers a place to advertise and communicate with potential customers. The site features both professionally produced and user-generated content, a library of information about cars and a list of dealers and their inventory as well as information for navigating the sales and registration process including insurance, financing, used car listings and aftermarket services. Revenue growth has been rapid for many years, and Autohome’s rival Bitauto (BITA) is enjoying similar expansion, which confirms the strength of the industry. Autohome will announce its Q4 and full-year 2016 results on Thursday, March 2, before the market opens. Analysts are predicting revenue for the quarter of $307 million and earnings of 38 cents per share. Full-year estimates call for revenue of $880 million and earnings of $1.62. We always council caution just ahead of earnings reports, as investors’ responses are unpredictable, even if a company beats its numbers. You can nibble a bit on Autohome if you like the story, then add to the position if investors show their approval.
Technical Analysis
ATHM went through a steep, bumpy decline from 57 in April 2015 to 19 in July 2016. The stock rebounded to 25 by the end of 2016, but its rally was interrupted by three significant pullbacks. The rally that started in January was much smoother, soaring to 35 on February 14 followed by a dip to the 25-day moving average. With ATHM trading at a reasonable 20 P/E, it’s a good buy, but you should still wait for Thursday’s earnings before loading up.
ATHM Weekly Chart
ATHM Daily Chart
HubSpot (HUBS)
Why the Strength
HubSpot is another young, successful technology company that’s thriving by making it easier for small- and mid-sized businesses to grow. HubSpot is focused on the marketing side of things, specifically with what’s known as inbound marketing. Whereas outbound marketing pushes content (cold calls, interruptive auto-play ads, spam, even many TV commercials) and is outdated and easily avoided (the majority of people don’t watch TV ads, are on do-not-call lists, etc.), inbound marketing pulls in users by providing helpful, timely content via blogs, social media and search engine optimization. HubSpot is an expert on the subject, providing its 23,000-plus customers with proven, measurable results when it comes to generating website traffic, clicks, conversions and orders. The market is gigantic ($30 billion annually for marketing alone; $45 billion including the firm’s sales suite), which the company addresses through a few different packages (ranging from $2,400 per year for the basic platform to $29,000 annually for enterprises). Revenues have been growing consistently and were up 44% in the fourth quarter thanks to more customers (up 28%) and greater revenue per customer (up 13%), and while the bottom line is in the red, cash flow from operations totaled more than 50 cents per share last year. (HubSpot expects to be free cash flow positive for all of 2017.) There’s competition, but this company is clearly one of the leaders in its field. It’s a good story.
Technical Analysis
HUBS came public in October 2014 and had a good first year, rallying as high as 60 by late-2015. But the stock went over the falls afterwards and has spent the past 14 months attempting to decisively take out those old highs. That breakout could finally be underway—HUBS has acted well since its low near 45 in December, including a recent surge higher on six days of excellent volume. It’s still battling with resistance near 60, but we’re OK with a small position here and looking to average up if it pops into the mid-60s.
HUBS Weekly Chart
HUBS Daily Chart
Marriott Vacations (VAC)
marriottvacationsworldwide.com
Why the Strength
We’ve started to see some leisure/vacation stocks show relative strength of late (cruise lines, for instance), and Marriott Vacation fits in that theme. The company is the exclusive worldwide developer, marketer and manager of vacation ownership properties (i.e., timeshares) under the brands Marriott Vacation Club and Grand Residences by Marriott, as well as the exclusive developer and seller for a couple of Ritz-Carlton brands. The company has over 60 properties in nine countries (though most of its business is in North America), and while it’s not a great growth business (revenues are just a few percent higher than they were three years ago), the firm has slashed costs and improved inventory management since it was spun-off from Marriott International in 2011, leading to great cash flow. In the fourth quarter, while sales grew just 4%, nearly all of the increase fell to the bottom line, with earnings up 65% and EBITDA up 29%. And that trend should continue—in 2017, the company expects more than $6 in free cash flow. And with it, Marriott Vacation is buying back a ton of shares (share count is down 11% from a year ago) while it pays a respectable 1.4% dividend. It’s not changing the world, but with the global economy in good shape, this company should continue to do good business.
Technical Analysis
Like many leisure stocks, VAC topped in mid-2015 and proceeded to get cut in half in six months on economic fears. The recovery from last year’s low has been very choppy, with a big pullback last April/May and another in September/October. But the post-election period has seen excellent action—VAC rallied back to its old highs of 90 in December, built a tidy two-month base, and then enjoyed an earnings-induced surge to new highs last week on great volume. We’re OK buying some here or on dips, with a stop in the highs 80s.
VAC Weekly Chart
VAC Daily Chart
Sage Therapeutics (SAGE)
Why the Strength
Sage Therapeutics, a clinical-stage biotech, currently has one compound, SAGE-547 (brexanolone), in Phase 3 trials for the treatment of both seizures (super-refractory status epilepticus) and postpartum depression (PPD). It also has SAGE-217 nearing Phase 2 trials for the treatment of PPD and major depressive disorder (MDD), and in Phase 2 trials for essential tremor and Parkinson’s disease (PD). The stock has been exciting to follow since last July, when SAGE-547 met its primary endpoint in a Phase 2 trial evaluating it for treatment of PPD. That event sent shares up over 40% in one day, largely because the market had been skeptical of the drug’s chances. Action hasn’t cooled down since. September brought a $150 million secondary offering, then SAGE-547 received priority designation in Europe in mid-November for the treatment of PPD. In December, Sage initiated a Phase 2 clinical trial for SAGE-217 for treatment of PD (topline data expected in the first half of 2017). And topline data from a Phase 2 trial assessing SAGE-217 for MDD looked good, with no adverse events reported. Then earlier this month, rumors began to swirl that Sage could be bought out. The company tried to stifle that discussion on February 17. But there was plenty to like from management’s business outlook from last Thursday’s Q4 earnings call, including eight data readouts in 2017 and a potential commercial launch in 2018.
Technical Analysis
SAGE traded down to 26.5 before last July’s readout on SAGE-547 data sent the stock up to almost 50. It pulled back to 35 by mid-August, but held around its 50-day moving average. From there, the stock embarked on a choppy uptrend, then traded in a wide channel between 56.5 and 44.5 from early November through early February. It dipped below its 50-day moving average in late January, but when takeover rumors surfaced on February 13, the stock exploded to hew highs. Even last week’s modest dip didn’t last long.
SAGE Weekly Chart
SAGE Daily Chart
Sinclair Broadcasting (SBGI)
Why the Strength
With 173 television stations offering 505 different channels in 82 U.S. markets, Sinclair Broadcast Group is one of the biggest broadcasters in the country. With affiliations to all the major networks, Sinclair provides local news, produces sports broadcasts and owns four radio stations and a cable network to boot. When Sinclair made its most recent appearance in Cabot Top Ten Trader, in November 2015, the company was enjoying a surge in revenue from increased automobile advertising. Today’s appearance is a result of the company’s revenue boost from the recent political campaign season. When Sinclair reported its Q4 earnings on February 22, revenue growth was 30%, the strongest growth since 2014, and earnings jumped 116%. The company also declared a dividend of 18 cents per share, resulting in an annual yield of 1.8%. There has been some discussion about how revenue might fare as the great political campaign bonanza recedes. But Sinclair is a solid company and investors have pushed its stock, which trades at an attractive 14 P/E, to new all-time highs, and we accept their judgment.
Technical Analysis
SBGI made a stunning run from the middle of 2012 to the end of 2013, soaring from 8 to 38 during that period. But the stock stalled at that point, trading in a range from the mid-20s to the mid-30s for three whole years until a rally that started in February finally kicked it out to new all-time highs, fuelled by the great Q4 numbers. SBGI has put some distance between itself and its 25-day moving average (now around 35) and may need to correct or consolidate soon. We think it’s a buy on any weakness of a point or two, with a stop at 36.5.
SBGI Weekly Chart
SBGI Daily Chart
Southwest Airlines (LUV)
Why the Strength
A few leading airline stocks are slowly shaping up, as the sector’s reasonable valuations and huge pricing power (most of the flights in the U.S. are now performed by just a handful of companies), combined with an accelerating economy, have investors putting money to work. Southwest Airlines is one of the top dogs in the industry, and probably the best run, too, as it’s cranked out annual profits for 44 straight years, which is amazing given the industry’s hard times over the decades. More recently, most believed Southwest’s (and other major airlines’) earnings would tail off after a huge multi-year run, but the stock is strong today because that point of view is reversing—Southwest’s fourth-quarter results did slip 17% from a year ago, but that was better than expected, and traffic trends (up 4.6% in January) remain solid. All told, analysts see earnings nosing higher this year and accelerating in 2018. (The company’s move to a single reservation platform in May should cut costs in a good-sized way.) Put all that together with a reasonable valuation (15 times earnings), a token dividend (0.7% annual yield) and a solid share buyback program (the share count is down 5.3% over the past year), and there’s good reason for big investors to accumulate shares.
Technical Analysis
LUV hit a top way back in early 2015 near 47 and didn’t make any progress for the next couple of years—it was at 49 in January of this year. But after a brief tight area just above 50, the fourth-quarter report kicked the stock to new highs—LUV popped 9% on nearly triple its average volume that day and has pushed into the high 50s since, with some good volume clues along the way. We think minor weakness is buyable.
LUV Weekly Chart
LUV Daily Chart
Square, Inc. (SQ)
Why the Strength
Square has become a growth stock leader in this market after the stock enjoyed an earnings-induced rip higher last week. The company is best known for its dongle that attaches to smartphones and tablets to allow small businesses (or even independent contractors) to easily accept payments from any debit or credit card and avoid paying for expensive point-of-sale machines. (Square also offers swipeless readers for services like Apple Pay and others.) That core transaction-based business remains strong, and the company is also having great success with its add-on services such as instant deposit, cash advances, invoicing, analytics, payroll and more. Both the transaction and add-on businesses are going gangbusters as Square grabs more customers. In the fourth quarter, adjusted revenue (which excludes transaction costs) totaled $192 million (up 43% from a year ago)—transaction revenues rose 35% while its add-on services grew 81%. Moreover, gross transaction volume was $13.7 billion (up 34%), and Square surprised analysts with a solid cash flow figure of $30 million, up from a loss a year ago. Better yet, the outlook for 2017 topped expectations, with cash flow expected to rise 133%. The valuation is big, but Square has beaten back competition in the small business market and should see rapid growth for many years, both for transactions and for things like cash advances. It’s a good story.
Technical Analysis
After a hectic first few months as a public company, SQ bottomed last July and began an advance that continues to this day. Shares built a base from August through September, and after a rally, built another launching pad during the past couple of months. Then, last week, SQ exploded to new highs on eight times average volume despite the market’s wobbles. We wouldn’t go in whole hog, but you could nibble around here with a loose stop in the low- to mid-15s.
SQ Weekly Chart
SQ Daily Chart
Univar (UNVR)
Why the Strength
Univar is a global specialty and commodity chemical supplier that’s riding the continuing rebound in the global economy. The company’s string of warehouses is at the core of its operation, allowing it to stock large amounts of chemicals and deliver them efficiently, often taking on the role of inventory management for customers. The company’s chemists, food technologists and petroleum engineers work with customers to meet specific needs in personal care, paints & coatings, household and industrial cleaning and oil & gas products. Partnering with customers has built a well-integrated network. Univar has been hot from early 2016 when the company achieved consistent profitability, with earnings growing by 422% in Q2 2016, 89% in Q3 and 1,450% in Q4. The number of institutional owners of UNVR grew steadily in 2016, attracted by the breadth of its product offerings and services, which are thought to insulate it from periodic weakness in any specific industry. Estimates call for 28% earnings growth in 2017 and 29% in 2018. The company recently announced that its innovative ChemCare waste management service had turned one billion pounds of chemical waste into usable fuel. The company’s debt-reduction program is also yielding good results, with its IPO proceeds dropping debt from over 1,500% of book value to just 374%. This is a volatile issue, but its momentum is super strong right now.
Technical Analysis
UNVR went through a big post-IPO droop from its IPO at 22 in June 2015 to its bottom at 11 in February 2016. But the stock’s rebound from that low was dramatic, with the stock back at 20 by the middle of the year. After a couple of months of consolidation, UNVR got moving again in September and rallied right through a new all-time high at 32 last Friday. With two high-volume buying days on February 21 and 22, UNVR looks to have plenty of gas left in its tank. You can buy on dips and put in a stop at around 29.
UNVR Weekly Chart
UNVR Daily Chart
Universal Display (OLED)
Why the Strength
Organic light emitting diodes (OLEDs) have become one of the hottest display technologies due to their thinness, efficiency and flexibility. They’re being used on Google’s Pixel phone, the Apple Watch, Oculus Rift and Samsung Galaxy Gear smartwatches. In fact, by 2022, it’s estimated that the market potential for display OLEDs will hit $35.4 billion, up 125% from $15.7 billion in 2016. Universal Display is right in the thick of the action, manufacturing OLED displays for smartphones, MP3 players, laptops, TVs and lighting products. The company has also been investing heavily in intellectual property. In 2016, it acquired OLED IP from BASF, and acquired Adesis, a privately-held contract research organization specializing in organic and organometallic synthetic R&D. The company had just 4% revenue growth in 2016, but sales growth accelerated to 20% in Q4, which was just reported last Wednesday. Reported revenue of $74.6 million beat by $6 million, and EPS of $0.55 beat by $0.13. Perhaps more important, the year ahead looks great for shareholders. Analysts expect revenue to grow by 23% in 2017 (and another 34% in 2018), and EPS to expand by 36%. Universal Display also declared its first-ever dividend as it looks to give some of its $343 million cash hoard back to shareholders.
Technical Analysis
OLED traded as high as 74 in August 2016 before it missed Q2 earnings expectations. After that event, it retreated back to 48 by mid-October. A better Q3 result in early November helped shares move up to 64, but the stock’s trading range narrowed and they retreated to the 50-day moving average line around 57 by January 23. They then moved up to 65 and traded in a tight range through early February before the stock became volatile. It traded between 65 and 73 in the six days prior to last week’s Q4 report. After that event, the stock has rallied on huge volume. Try to buy on dips.
OLED Weekly Chart
OLED 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.
