Following Along
Current Market Outlook
Our job as investors isn’t to forecast where the market will be in two or three months, but to follow the current evidence and stay on the right side of the market’s trends. The intermediate-term trend turned positive last week for the first time in more than two months, so it’s time to take a couple of steps back into the market’s waters by purchasing some strong stocks with big potential. That said, it’s best to go slow, partly because the longer-term trend remains down, and partly because many stocks are still repairing the severe damage they suffered in recent months. Our Market Monitor remains in neutral territory, and we’ll be looking for more bullish action from leading stocks to tell us to shift to a more aggressive stance.
This week’s Top Ten has a bit more of a growth flavor, which we like to see, with many stocks expected to grow earnings nicely. Our Top Pick is Texas Roadhouse (TXRH), a full-service restaurant operation that should see its bottom line accelerate this year. Even better, the stock just exploded out of a multi-month base.
Stock Name | Price | ||
---|---|---|---|
WellCare Health Plans, Inc. (WCG) | 271.83 | ||
Texas Roadhouse (TXRH) | 0.00 | ||
Stamps.com (STMP) | 0.00 | ||
Sprouts Farmers Market (SFM) | 19.00 | ||
Motorola Solutions (MSI) | 0.00 | ||
Mellanox Technologies (MLNX) | 92.00 | ||
Lennox International (LII) | 270.56 | ||
First Solar (FSLR) | 83.74 | ||
Franco-Nevada (FNV) | 125.51 | ||
() | 0.00 |
WellCare Health Plans, Inc. (WCG)
Why the Strength
WellCare Health Plans made the most-recent of its six Top Ten appearances just two weeks ago after a quarterly earnings report that featured a 46% jump in earnings on just a 2% gain in revenue caught investors’ attention. WellCare focuses on managed-care services for subscribers whose medical plans are funded through Medicaid, Medicare Advantage and Medicare Prescription Drugs Plans, and its growth has been both organic and M&A driven. The company is back in Top Ten today because a February 22 report revealed that the government has proposed an increase in increase in payments to private insurers for Medicare coverage. The proposed 1.35% increase in 2017 will be finalized in April and will affect 13% of WellCare’s total enrollment. The announcement led to a ratings upgrade and target price increase from one analyst. WellCare continues to be the subject of takeover speculation within the healthcare industry, and the company’s new M&A team is part of a strategy to make itself a bigger player in the field. But whether the company is taken over or takes someone else over, earnings are expected to increase by 30% in 2016 and 26% in 2017, which is plenty of strength all on its own.
Technical Analysis
WCG broke out of a three-year flat spot in December 2014, and made a series of new highs that peaked at 99 in September 2015. That was followed by a five-month correction that bottomed at 69 earlier this month. But the improved perception from a good earnings report earlier this month was reinforced by the increased reimbursement numbers last week and WCG is now back to multi-month highs. There may be some overhead from investors who bought as high as 99 in September, but the stock’s momentum is strong. You can buy on any weakness with a stop at 83.
WCG Weekly Chart
WCG Daily Chart
Texas Roadhouse (TXRH)
Why the Strength
The new trend in the restaurant industry is fast-casual, but Texas Roadhouse is doing great business in the full-service arena, offering an assortment of steaks, ribs, chicken, pulled pork and the like, along with unlimited in-shell peanuts and yummy made-from-scratch rolls. The stock has been a long-term winner as earnings have cranked higher many years in a row, and is strong today as the fourth-quarter report topped expectations and most investors expect 2016 to show a marked acceleration in earnings growth (partly thanks to falling food costs). In the fourth quarter, margins rose 1.1% from the year before, while same-store sales growth rose more than 4%. And analysts see more where that came from: revenues are expected to rise 12%, but earnings are expected to rise 25% thanks to falling costs (1% to 2% food deflation) and a modest share buyback program. (The company also pays a decent 1.6% dividend, which has been raised for five straight years.) As for footprint, Texas Roadhouse has 485 restaurants open, and plans to add about 37 new locations and should have plenty of room for growth from there. It’s not the fastest growing cookie-cutter concept, but management has pulled the right levers for years and there’s no reason to think that will change.
Technical Analysis
TXRH has made good progress over time, but usually spends a year or more building huge bases along the way. The good news is that the stock appears to just be getting going after its most recent consolidation—the stock rose to 38 in February of last year, and was sitting at 37 at the end of last week. Then came the earnings report, and TXRH surged in response; TXRH gapped up 13% on six times average volume following the news, and continued higher after that. We think any dip of a point or two is buyable with a stop below 37.
TXRH Weekly Chart
TXRH Daily Chart
Stamps.com (STMP)
Why the Strength
Stamps.com is thriving by bringing all the functions of the U.S. Postal service right into small businesses, enterprises and home offices. The company’s services allow users to print shipping information onto packages, pay for postage and insurance, create customized stamps and design themed mailings. The company made huge strides in 2015, growing revenue by 45% and increasing earnings from $2.47 per share in 2014 to $4.43 in 2015. The company’s latest quarterly report on February 25 featured a whopping 118% boost in earnings on 67% revenue growth with a 40% after-tax profit margin. Investors heartily approved. But then, investors have been enthusiastically driving Stamps.com’s stock higher since October 2014. The concept of using a printer and an Internet connection to handle all mailing and shipping functions is clearly winning approval from both users and investors. Estimates are for the company to increase earnings by 10% in 2016 and 15% in 2017. The company also has a $20 million share buyback program that’s the equivalent of about 1.25% of its shares. This is a story with great fundamentals.
Technical Analysis
STMP came to life in 2011 after years of flatlining. But the current enthusiasm for the stock dates to the fourth quarter of 2014, when it began a series of quarterly-earnings-based rallies on positive volume. With major corrections in August and September 2015 and January and the first half of February 2016, the stock has been volatile. But the stock’s gap up from 96 to 117 last Friday came on twice average volume, and kicked the stock to its highest level since Tech Bubble days in 2000. STMP is holding onto all of last Friday’s gains, but a little patience should present an opportunity to get in on a dip of a few points. Use a fairly loose stop at 107 to allow for current volatility.
STMP Weekly Chart
STMP Daily Chart
Sprouts Farmers Market (SFM)
Why the Strength
Sprouts Farmers Market’s motto is “Healthy Living for Less,” and many consumers are signing on—the company is a relatively small (217 stores in 13 states at year-end) organic grocery store that offers reasonable prices and presents a unique layout concept that’s proven to be a hit. The stock is strong following a great fourth-quarter report that confirmed that the growth story is intact—sales rose 27% (bolstered by a solid 7.4% leap in comparable store sales—the 35th straight quarter of comp store growth), while earnings rose 50% and cash flow gained 25%. Importantly, cash flow margins stayed about the same, easing fears of price erosion. (In fact, Sprouts isn’t backing down from larger peers—the company jumped into Florida recently and is challenging giant Publix.) Thus, the near-term trends are encouraging, but big investors have been buying (Fidelity and T. Rowe Price own a combined 26.5 million shares, or 17% of the company) because of the big-picture possibilities—Sprouts is aiming for 14% annual store growth for many years, boosting its store count to 1,200 eventually from 217 today. (The long-term target is for about 16% annual earnings growth during its expansion.) Management thinks this is possible because half its customers are coming from traditional grocery stores, and new stores have historically returned 35% within three or four years. It’s not changing the world, but Sprouts has a proven concept that’s gaining traction, and has a huge amount of expansion potential. We like it.
Technical Analysis
SFM came public in August 2013, rose for a couple of months and then began a long downtrend as the valuation (99 times earnings at its peak!) contracted and as the organic store sector slid sharply. SFM bottomed last August at 16, though, and rebounded to 28 just after New Years before puling back with the market. It found support near 21 and has since surged back to multi-month highs on the heels of its earnings report. We think it’s buyable on dips with a stop in the low 20s.
SFM Weekly Chart
SFM Daily Chart
Motorola Solutions (MSI)
Why the Strength
Motorola Solutions has been in the communication business since 1928, and had its first big success with its car radios and public safety radio networks in the 1930s. The company made walkie talkies for the military in WWII and brought out the first commercial handheld cellular phone in 1980. Motorola Solutions is a result of a spinoff of Motorola’s cellular phone and cable video equipment divisions to Motorola Mobility. Motorola Solutions now focuses exclusively on mission-critical devices and networks for government and corporate clients. The core land mobile radio business (LMR) is used to keep first responders, public works organizations and companies with large fleets of vehicles in constant touch. Revenue has actually shrunk over the past three calendar years, but Motorola Solutions’ stock has done well based on three factors: 1) improving earnings (a result of a major cost-cutting campaign) reflected in the firm’s estimate-beating February 24 quarterly report, 2) the effects of a $2 billion stock buyback plan that is funded, in part, by a $1 billion investment from a private equity firm, and 3) recent upgrades by analysts. With continuing emphasis on military and first-responder communications via radio, Motorola Solutions has a strong niche to prosper in.
Technical Analysis
MSI has been in a slow-but-steady climb since the end of the Great Recession in 2009, with a series of higher highs despite 2015’s February-through-July pullback from 70 to 56. MSI rallied strongly after that correction and reached 73 in November 2013. The stock corrected again in December and January, but formed a W-shaped double bottom in January and February before breaking out to new highs last week. MSI is giving back a little of its big rally today, but that looks like a good buying opportunity for this sound stock whose dividend has a nice 2.2% annual yield. You can buy anywhere under 73, with a stop around the 50-day moving average, now at 66.
MSI Weekly Chart
MSI Daily Chart
Mellanox Technologies (MLNX)
Why the Strength
Israel-based Mellanox Technologies is a fabless integrated circuit designer that describes itself as “a leading supplier of end-to-end Ethernet and InfiniBand intelligent interconnect solutions and services for servers, storage, and hyper-converged infrastructure.” The company is thriving as the speed and capacity of its chip designs improve the performance of large networks, data centers and cloud installations in adapter, gateway and switch chips. The company’s stock was a hot issue back in early 2012, but cooled off as sales declined by 22% that year. Two recent events have rekindled interest in Mellanox, the first being a healthy Q4 earnings report on January 28 that featured 31% earnings growth on a 25% increase in revenue. The company also issued guidance for Q1 that was ahead of analysts’ views. The second positive event was the announcement on February 26 of Mellanox taking over a smaller competitor EZchip Semiconductor. Mellanox is locked in a battle with Intel over market share for business from Amazon, Facebook and other giant users, and investors see the EZchip acquisition as a way for the company to get bigger and reduce costs. Mellanox has booked three quarters with after-tax profit margins over 20%, which is miles ahead of its string of slack quarters in 2013 and early 2014. Mellanox is powering up well.
Technical Analysis
MLNX ripped from 32 to 120 in 2012, but gave it all back in 2013. The stock has been building a new base for well over two years, and finished a three-month correction from 48 to 38 in late January. That’s when the good earnings news gapped the stock up to 44 in one day. After a few weeks of consolidating near that level, the EZchip acquisition keyed a rally to its highest level since June 2015. With most of its overhead cleared out, you can buy MLNX right here, although there will likely be a pause soon as the stock consolidates its gains. Use a stop just below 46, which acted as resistance in October and earlier this month.
MLNX Weekly Chart
MLNX Daily Chart
Lennox International (LII)
Why the Strength
While many homebuilding stocks aren’t acting well, we’re seeing more and more launching pads being formed in housing-related supply companies. Lennox is a leading player in heating and air conditioner systems for residential (54% of revenues and 60% of profits), commercial (26% and 28%) and refrigeration systems (20% and 12%), and it’s seen slow, steady revenue growth in recent years (3% to 8% each of the past four years), which, thanks to margin expansion, has led to steady earnings growth ($2.25 per share to $5.14 per share during the same time) and cash flow growth. And the trends look solid for 2016, too—management is aiming for about 6% revenue growth while earnings gain 24% or so, and because management has done a great job of keeping costs under control, cash flow should be strong ($250 million, or about $5 per share), which the company is using to buyback stock ($200 million by mid-year), pay a dividend (1.1% yield) and possibly make some strategic acquisitions. And long-term, Lennox is targeting steady growth through 2018 with earnings possibly reaching $8 per share. It’s not changing the world, but Lennox is a solid company with steady growth ahead.
Technical Analysis
LII blasted out of seven-month correction in October 2014, eventually running from 73 to 139 by December of last year. Then the stock began a relatively sharp two-month pullback, dropping as low as 106 after it reported earnings. But that was the low—the stock reversed that day on big volume and has kited higher ever since, with the RP line hitting new highs. There’s still resistance to deal with up to 138, so if you want in, buy on dips with a tight stop near 120 (where the 50- and 200-day lines stand).
LII Weekly Chart
LII Daily Chart
First Solar (FSLR)
Why the Strength
First Solar marks its fourth Cabot Top Ten Trader appearance in little more than two months, as the solar industry continues to rebound despite oil prices hovering near 14-year lows. A fourth-quarter earnings beat is the latest catalyst driving First Solar. The maker of solar modules earned $1.60 per share, double consensus analyst estimates of $0.80 despite a 16% year-over-year decline. The company also announced plans to yet again improve the conversion efficiency of its fleet of generating facilities to 16.3% by the end of the current quarter and to 16.4% by the end of 2016. (Companies that build multi-crystalline panels typically get no more than 16% efficiency.) Long a cost-effective manufacturer, the buildout of even higher-efficiency facilities is expected to increase profit margins. So should its declining module cost per watt, which fell 15% in the past year. Plus, the company is still basking in the momentum of a December ruling by Congress to extend the solar investment tax credit another three years. It has all added up to a round of analyst upgrades: Oppenheimer to “Outperform,” Deutsche Bank and Stifel to “Buy.” That kind of confidence from industry experts is convincing other institutions to jump into the First Solar pool.
Technical Analysis
We recommended FSLR at 66 in late December. It’s now up to 73. The stock has had its ups and downs during that period, but has repeatedly found strong support at 61. If you passed on our previous recommendations and think now is the time to dip a toe in FSLR with the broad market improving, set a hard stop below that 61 support level.
FSLR Weekly Chart
FSLR Daily Chart
Franco-Nevada (FNV)
Why the Strength
Though the market has showed some positive signs of late, gold stocks are still attracting Chicken Little investors as a defense against financial collapse. After its recent acquisition of Glencore PLC, Franco-Nevada stands out among gold miners. The Toronto-based streaming company agreed to pay $500 million to Glencore, a Swiss precious metals miner, for production from its Antapaccay mine in Peru—one of the 20 most productive copper mines in the world. The mine also produces plenty of gold and silver, and Franco-Nevada expects to receive 60,000 to 70,000 gold equivalent ounces from the Antapaccay stream this year alone, and could rise as high as 80,000 ounces in each of the next five years. In exchange for the half-a-billion-dollar up-front payment, Franco-Nevada receives a percentage of the mine’s production of gold and silver at just 20% of those metals’ spot prices. The Glencore deal helps further expand Franco-Nevada’s global portfolio of streams; the company also has mines in Canada, the U.S., Mexico and Africa. Franco-Nevada no doubt hopes the deal will at least slow its dwindling profits; per-share earnings have declined in 10 of the last 11 quarters. For now at least, the Glencore deal has put Franco-Nevada squarely on the radar of investors looking to buy gold stocks as a safety play.
Technical Analysis
For all the difficulties that gold stocks have had in recent years, FNV has managed to avoid any crippling damages. Now that investors are jumping back into gold, FNV is thriving: the stock is up from 42 to 59 in the past month, touching 60 late last week. The stock made a similar move in September and October after the late-August market bottom, rising from 40 to 53 before pulling back to 42. It breached 53 resistance earlier this month, and has been steadily rising since. Now firmly above its 50- and 200-day moving averages for the first time since October, FNV is benefiting from better-than-average buying volume. Gold is still a fragile sector, so take a small position and keep the stock on a short leash if you do decide to buy.
FNV Weekly Chart
FNV Daily Chart
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Why the Strength
Technical Analysis
Weekly Chart
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.