Sellers Make a Stand
Current Market Outlook
After a big run last year and a moonshot during January, the sellers have finally come out of the woodwork, pushing the major indexes (and many leading stocks) sharply lower during the past six trading sessions, including a mini-crash today (the Dow was down 1,500 points at one point!). Looking at the evidence, the bull market (longer-term trend) is still intact, but the intermediate-term trend has turned negative and many leading stocks have come unglued. In the near-term, we certainly wouldn’t be shocked to see a snap back, but following a major extreme in price and sentiment two weeks ago and this abnormal selling, stocks probably need some time to wear out the weak hands and digest their recent gains. We’re moving our Market Monitor down to neutral to respect the change in the evidence—we don’t advise selling wholesale here, but you should honor your stops and loss limits, and on the buy side, be very choosy and keep new positions small until the market finds support.
This week’s list is a potpourri of stocks and sectors, most of which have recently reacted well to earnings. Our Top Pick is Pure Storage (PSTG), a fast-growing outfit that emerged from a base on big volume last month.
| Stock Name | Price | ||
|---|---|---|---|
| Autohome (ATHM) | 98.65 | ||
| BofI Holding (BOFI) | 42.93 | ||
| Harris Corp. (HRS) | 198.60 | ||
| Knight-Swift Transportation Holdings Inc. (KNX) | 40.61 | ||
| LPL Financial Holdings (LPLA) | 85.22 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| Meritor (MTOR) | 21.46 | ||
| MyoKardia (MYOK) | 108.56 | ||
| Pure Storage (PSTG) | 25.64 | ||
| Shutterfly (SFLY) | 94.71 |
Autohome (ATHM)
Why the Strength
China is the largest automobile market in the world and Autohome has the top online showroom that has morphed into a complete resource for auto shoppers and buyers. Autohome’s site features a complete convergence of the interests of automakers (selling cars), auto buyers (getting information on pricing, features, options and dealers) and related businesses (financing, insurance and service businesses). The richer the content, the more car shoppers will use Autohome’s site. And the more shoppers it attracts, the more attractive its advertising opportunities! The most recent development is that Autohome’s database of information about car buyers is becoming valuable in itself. The company’s revenue grew by 59% in 2015 and 62% in 2016. And while revenue growth was much lower through the first three quarters of 2017, earnings growth has powered up from 15% in Q1 to 39% in Q2 and 58% in Q3. There’s no firm date for Q4 and full-year results yet, but when it comes (probably in early March), analysts are expecting $271 million in revenue and 70 cents a share in earnings. But short-term performance aside, Autohome looks like a very big story: The top auto shopping site in the largest auto market in the world and a Chinese economy that’s growing at its fastest rate in years. There aren’t many giant auto-shopping areas in China, so Autohome is prime virtual real estate for the auto industry, and analysts are expecting 23% earnings growth in 2018.
Technical Analysis
ATHM has been in a general uptrend since July 2016, but took a four-and-a-half month breather from mid-August through the end of 2017. The stock blasted off from that base in January, running from 65 on January 2 to 87 on January 26. The stock’s pullback during the recent general market weakness has been sharp but not abnormal given its prior run. Keep an eye out for the company’s Q4 results and use a loose stop around 70.
ATHM Weekly Chart
ATHM Daily Chart
BofI Holding (BOFI)
Why the Strength
BofI is the holding company for Bank of the Internet, a nationwide bank that’s thriving partly because of its business model, and partly because of the improved environment for financial stocks. Because of its all-online presence, BofI has much lower costs than similarly sized banks; in fact, its non-interest expenses are a whopping 45% less than its competitors, while its net interest income is 13% higher (as a percent of total assets). Throw in a ton of digital marketing expertise, and the company clearly isn’t your run of the mill financial outfit. Combine with an accelerating economy and higher interest rates and you have the recipe for solid growth. Indeed, BofI’s fiscal second quarter report last week revealed accelerating earnings growth, driven by a 16% jump in its loan portfolio, a 10% gain in net interest income and the beginning of a share buyback program that’s likely to grow. Throw in the corporate tax cuts, and analysts see more acceleration in the quarters ahead—earnings are anticipated to grow 29% in the current quarter and 26% in the fiscal year that starts in July. BofI did have to fight through some fraud allegations a couple of years ago, but with 355 mutual funds owning shares and a string of positive results since then, investors don’t seem worried about it.
Technical Analysis
Those fraud attacks (along with a mini-bear market in stocks) drove BOFI down from 36 in October 2015 to a low of 13 in February 2016. Shares rallied back to 33 or so by March of last year, where it began a 46-week, 34% deep launching pad. BOFI changed character in December of last year and surged to all-time price highs last week on the heels of the earnings report. Aim for dips of a point or two to get started.
BOFI Weekly Chart
BOFI Daily Chart
Harris Corp. (HRS)
Why the Strength
Making its debut in today’s Cabot Top Ten Trader, Harris Corp. is a manufacturer of the nuts and bolts of the communication industry. The company serves government and commercial customers with its radio communication products, including airborne, handheld, satellite and vehicular systems. Harris also designs and makes electronic warfare, communications and avionics systems for the military and supports air traffic control, earth observation and undersea programs. The company’s appearance today comes courtesy of a strong quarterly report on January 30 that featured a 6% increase in revenue and a 21% jump in earnings. The story behind the performance was also positive, as revenue from the Department of Defense grew by 56% as the U.S. military focuses on readiness. The company reported a 21-cents-per-share benefit from tax reform and returned $143 million to shareholders, including $75 million in stock buybacks. The company is working on a big Army radio deal and expects to get contracts for production in the second quarter. Analysts are looking for earnings to grow 17% in fiscal 2018 (ends in June) and 19% in 2019. Harris’s stock pays a dividend that yields 1.5% annually.
Technical Analysis
HRS peaked at 79 in May 2014, then etched a two-year flat patch that finally ended in May 2016. A rally to above 100 came in late 2016, then HRS traded super-flat from February 2017 through July, breaking out of that base in August. A strong rally to 145 in November was followed by yet another two-month flat basing period that ended following the great earnings report and guidance. HRS soared to 160 on February 1 before pulling back during today’s market rant. HRS looks like a solid story, and a buy at 150 or lower could work if the market stabilizes.
HRS Weekly Chart
HRS Daily Chart
Knight-Swift Transportation Holdings Inc. (KNX)
Why the Strength
It’s hard to get overly excited about a trucking company, but Knight-Swift looks like a special situation. The company was formed when Knight and Swift combined operations last September, creating the largest full truckload carrier in the U.S. The improving economy is certainly helping—in the just-reported fourth quarter (the first of the new, combined company), the firm’s trucking and logistics revenues both rose about 6% on a like-for-like basis, leading to a solid earnings beat (and a return to earnings growth). While there is a driver shortage, management thinks contract rates are headed up in the high single/low double-digit range this year, and with the recent tax cuts, that should continue to boost the bottom line. Another big reason for the stock’s strength: Expected synergies from the merger should be huge! The company has already achieved $15 million of savings, but expects a total of $100 million by the end of this year and $150 million (more than 80 cents per share) by 2019! Clearly, this isn’t a revolutionary story, but there are a bunch of tailwinds for the company in the quarters ahead. Analysts see earnings booming 64% this year, which could prove conservative if the economy remains strong and management achieves synergies faster than expected.
Technical Analysis
KNX wasn’t looking great early last year, with earnings trending down and the stock below its 200-day line. But the merger announcement changed that, with the stock gapping up and entering a choppy uptrend for the next few months. KNX’s recent upmove began in November, with shares moving to new highs late last year and then gapping up last week after earnings. The market-induced dip since then looks normal, so we’re OK picking up shares around here.
KNX Weekly Chart
KNX Daily Chart
LPL Financial Holdings (LPLA)
Why the Strength
LPL is the U.S.’s largest independent broker/dealer and a custodian for registered investment advisors, providing proprietary technology, training, clearing and other services to 15,210 advisors and hundreds of institutions. In other words, LPL is a Bull Market stock and a direct play on the increasing appetite for stocks among investors. It’s also growing by acquisition as it rolls up a highly fragmented industry—the company purchased National Planning Holdings (NPH) last April, an independent broker-dealer network with 3,200 advisors, and it’s just begun to onboard those advisors (and their assets). In the fourth quarter, LPL took over $34.4 billion of assets from NPH, with another chunk coming this month. The benefits from that buyout and the overall bull market is keeping growth humming—total advisory and brokerage assets rose 21% from the prior year (including 14% prior to the NPH onboarding) in Q4, which helped revenue growth accelerate to 11% and earnings to soar 78%, easily topping expectations. And optimism over a continued bull market, more assets from the NPH acquisition and tax cuts has analysts thinking big—while revenues are expected to rise “only” 14% this year, a steady cost structure and lower taxes have analysts looking for a 42% earnings gain. Throw in a decent dividend (1.7% yield) and LPL has a nice story both short- and longer-term.
Technical Analysis
LPLA didn’t do much from 2014 through mid-2017, but the stock broke out of a base last July and has been trending higher since, albeit with a couple of sharp pullbacks (including one after Q3 earnings in October) along the way. More recently, shares hugged their 25-day line for most of January before popping to new highs last Friday after earnings, a strong sign given the market’s meltdown. If you’re game, you can nibble here or on dips.
LPLA Weekly Chart
LPLA Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
MercadoLibre has been a frequent target for Cabot Top Ten Trader, and it’s easy to see why. The company operates an online marketplace similar to eBay’s that services most of Latin America. Like eBay (which owns an 18% stake), MercadoLibre is an integrated service that offers auction listings, retail sites and listings, a secure payment system (MercadoPago) that works across national currencies and a delivery service (MercadoEnvios). The key to the company’s success in recent years has been the buildout of the mobile phone network through South and Central America, with every new region that gets cellular service widening the pool of potential customers. MercadoLibre enjoyed 30% revenue growth in 2016, and averaged 65% growth through the first three quarters of 2017. When the company reports its Q4 and annual results on February 22, analysts are expecting to see revenue of $404 million and earnings of 52 cents per share. Latin American politics can be hazardous for many stocks, but MercadoLibre’s reach over national boundaries lowers that risk a tick or two. So you should expect volatility, but also strong growth as more and more of the region starts doing business on-line. The company’s stock pays a small (0.16%) dividend yield, but it’s the broadening of MercadoLibre’s market (and the potential of its MercadoPago payment system) that will power expansion.
Technical Analysis
MELI’s trend has been clearly up since February 2016, when it put in the second leg of its double bottom at 84. The stock ripped to 194 in October 2016, corrected to 150 at the end of 2016, then stormed to near 300 in May 2017. A four-month correction to 217 in late October gave way to another rally that pushed the stock to 396 at the start of last week before sinking with the market today. We think MELI could be nibbled at on dips, with a protective stop around 315.
MELI Weekly Chart
MELI Daily Chart
Meritor (MTOR)
Why the Strength
Meritor is a Troy, Michigan-based provider of vehicle components for military suppliers, trucks and trailers. Investors like the company’s story because Meritor is expanding in the red hot automotive industry and has begun to deliver revenue growth after a few lean years. The company is particularly strong in rear axles and integrated brakes, and exposure to that segment recently led to extensions of long-term agreements with Daimler, Volvo and IVECO. Meritor is also expanding into off-highway, specialty businesses, electrification solutions, and international markets, which management believes will collectively help the company keep revenue and EPS growth trending up faster than the competition. Investor confidence is on the rise after Meritor beat fiscal Q1 estimates last Wednesday—it delivered revenue growth of 29% (to $903 million) and an EPS beat of $0.62, which was a whopping 18 cents above estimates. Even better, management lifted its full-year outlook above consensus. Revenue is now expected to come in around $3.85 billion, while the earnings outlook was boosted by $0.30 to a range of $2.50 to $2.70. With the stock trading with a forward P/E below 11, but sales projected to grow by 17% and EPS by almost 40%, big cyclical and value investors should be interested.
Technical Analysis
MTOR came into 2017 with the wind at its back then entered a healthy consolidation in the middle of the year. Momentum picked up again after a solid fiscal Q3 earnings report on August 2, then shares got another boost when it was announced the company would sell its WABCO unit on September 25. The stock began building a new base, with some tightness showing up near 24 in January before last week’s great quarterly report caused the buyers to return. We’re OK with grabbing some shares here with a stop in the mid 20s.
MTOR Weekly Chart
MTOR Daily Chart
MyoKardia (MYOK)
Why the Strength
MyoKardia develops targeted therapies for rare, genetically-driven cardiovascular diseases. The stock is doing well now because results were released that revealed its lead product, mavacamten, did well in its Phase 2 trial and the company is currently working with the FDA on the design of a Phase 3 trial, which should begin sooner than previously expected. Mavacamten is the primary driver of MyoKardia’s value, and targets hypertrophic cardiomyopathy (HCM), which affects roughly 630,000 people in the U.S. Pending final results of the company’s discussions with the FDA, first patient dosing should begin in the second quarter of 2018. There is also rising confidence that MyoKardia’s second asset, MYK-491, will advance into a Phase 2 study in the second half of 2018. MYK-491 targets dilated cardiomyopathy (DCM), which affects around 900,000 people in the U.S., and should this asset progress it could add considerable value to the company. Obviously, it’s speculative, but with multiple data readouts on tap in 2018, and a healthy cash balance ($227 million worth, due to a well-received secondary offering and a milestone payment from partner Sanofi), there’s a lot of upside potential.
Technical Analysis
MYOK spent most of 2017 trading in the 10 to 15 range then blasted off after Q2 results came out, the secondary offering was closed, and positive trial data was released. Shares gapped up from 17.5 to 32.5, then kept rising as the market grew more bullish. The stock pulled back into the mid-30s in November, but buyers stepped back in on and news that mavacamten will progress into a Phase 3 trial in 2018. The current tight area is a good sign—if you’re game, you can buy a small piece here.
MYOK Weekly Chart
MYOK Daily Chart
Pure Storage (PSTG)
Why the Strength
Pure Storage is way to invest in the fourth industrial revolution; artificial intelligence (AI), big data, the internet of things (IoT) and edge computing. The company offers next-generation flash-based data storage systems to mid- and large-sized organizations, and it has been stealing market share from bloated, legacy hardware providers like Hewlett Packard Enterprises and Dell because it has a simpler, more cost-effective storage strategy that’s better suited to today’s data markets. Pure offers modular and scalable all-flash array hardware, a cloud-based management platform and flash-optimized hardware. Shares are doing well now because growth is rapid, and consistent. Average quarterly revenue growth since the beginning of 2016 has been 65%, and in Q3 (reported November 28) the company beat on both the top and bottom line. Encouraging trends in customer count (up 54% to 4,000), cloud customers (25% of the business), repurchase rates (70% of business coming from existing customers), and leadership decisions (the new CEO came from Cisco) has prompted analysts to increase forward estimates and raise price targets. Look for 2018 revenue growth of 40% and the loss per share to shrink to 19 cents per share. Estimates will be refined after Q4 earnings come out (date not yet announced).
Technical Analysis
PSTG gained ground in 2017 as the new CEO got comfortable in his role and quarterly results consistently beat estimates. The key breakout came in late-September when shares jumped above resistance at 15. They then walked up to 19 by the end of November before constructing a new launching pad. The stock was meandering around 16 in early January when analyst upgrades helped fuel a big-volume surge to new highs. The recent market-induced dip looks buyable, with a stop below 18.
PSTG Weekly Chart
PSTG Daily Chart
Shutterfly (SFLY)
Why the Strength
Shutterfly is one of the go-to online digital photo services, allowing more than 10 million users (and an increasing number of businesses) to design photo albums, gifts, cards and stationary, and then have them printed and delivered in a timely fashion. (The business is highly seasonal, with nearly half of revenues coming in the holiday fourth quarter.) Frankly, top-line growth here hasn’t been great, as competition and market saturation has kept sales gains to single digits each of the past five quarters (though, to be fair, cash flow has been huge). So why is the stock so strong? Mostly it’s due to the company’s game-changing acquisition it just announced (along with earnings) last week—Shutterfly is buying Lifetouch for $825 million (debt financed), which dominates the school photograph industry; it had a 74% market share and produced $954 million in revenue last year (compared to $1.2 billion for Shutterfly). Investors think there will huge cross-selling opportunities and synergies, with management stating that the combined company can nearly double EBITDA from 2017 through 2020! There are obviously integration risks, but if management pulls the right levers, there’s plenty of reason to think Shutterfly can become a huge cash cow down the road. Analysts see earnings nearly doubling this year.
Technical Analysis
SFLY has an amazing chart, but mostly for its lack of movement—the stock bobbed and weaved between 35 and 60 since the start of 2013! But that’s all changed now, with the stock rallying steadily following a dip to 40 last November and then catapulting to all-time highs last week on gargantuan volume after Q4 earnings and the Lifetouch acquisition. Look for dips, but we’re not expecting a huge retreat given the volume behind the move.
SFLY Weekly Chart
SFLY 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.
