Choppy but Positive
Current Market Outlook
The market has made a little upside push during the past week or two, but net-net, most indexes are up just a smidgen during the past seven weeks. That sideways trading has contained most stocks and sectors, too, as they chop around with a slight upward bias. Even so, the intermediate- and longer-term trends are up, so the odds continue to favor the next major move being up. And we’re encouraged by both the number of positive earnings reactions we’ve seen, as well as the action of those stocks after they gap up—most have traded constructively post-earnings with no selling pressures coming in even after they ramp. All told, we’re still mostly positive, but we’ll keep our Market Monitor at a level 7 (out of 10) until we see more than just the Nasdaq decisively push out of their recent trading ranges.
This week’s list has another batch of strong stocks, including many that have recently reacted well to earnings. Our Top Pick is a tough call, but we’ll go with Ally Financial (ALLY), which just exploded higher on earnings after years in the market’s doghouse. It looks to be just starting its run.
| Stock Name | Price | ||
|---|---|---|---|
| Ally Financial (ALLY) | 30.44 | ||
| Century Aluminum Co. (CENX) | 17.24 | ||
| Essent Group (ESNT) | 0.00 | ||
| Exelixis (EXEL) | 27.35 | ||
| Olin Corp. (OLN) | 0.00 | ||
| Symantec Corporation (SYMC) | 0.00 | ||
| Teradyne (TER) | 82.83 | ||
| Tesla, Inc. (TSLA) | 818.87 | ||
| Texas Capital Bancshares (TCBI) | 0.00 | ||
| Yandex (YNDX) | 0.00 |
Ally Financial (ALLY)
Why the Strength
Ally Financial is the old General Motors Acceptance Corp (GMAC), which came out from under the government’s thumb a few years ago (after the auto and financial bailout) and was spun-off in 2014. Today, the firm’s auto financing business still drives results (it made up about 75% of the firm’s pre-tax income in the fourth quarter), but management is working quickly to diversify its offerings to insurance (17% of pre-tax income), mortgage financing (4%), credit cards and some other areas as well. A big help is the growing popularity of Ally Bank, which is gaining in brand recognition (it was voted the best online bank by Kiplinger’s) and attracting a ton of low-cost deposits; Ally had $79 billion of deposits at year-end, up 20% from a year ago. The reason for the stock’s strength is simple: Ally is a dirt-cheap financial stock (10 times earnings), and management expects continued diversification efforts, as well as strong deposit growth and a resilient auto market, to drive earnings up 15% annually for the next three years (a bit slower this year, but accelerating into 2018 and beyond). Toss in a solid share buyback program (the share count is down 2% from a year ago) and dividend (annual yield of 1.4%) and there’s no reason to think Ally can’t have a solid run as more and more big investors jump onboard.
Technical Analysis
ALLY has been a total dog since coming public back in early 2014. It gradually slid from 25 to 14.5 by early last year, and then barely mustered a rally to 20 in August before moving sideways for another few months. But last week brought a game changer—ALLY exploded to 18-month highs on its second highest weekly volume ever. We don’t expect it to go straight up, but given last week’s upside volume, we’re not expecting a big retreat, either.
ALLY Weekly Chart
ALLY Daily Chart
Century Aluminum Co. (CENX)
Why the Strength
We’ve featured a number of steel, iron and aluminum producers over the past few of months. Most recently, it’s been the aluminum producers that have performed the best. This week we highlight Chicago-based Century Aluminum, which has a market cap of $1.34 billion. The company operates three aluminum smelters in the U.S. (Kentucky and South Carolina) as well as one in Iceland. The stock enjoyed a bump after the election but really started rallying in early January when the U.S. Trade Representative’s office announced it launched a formal complaint at the World Trade Organization against China for illegally subsidizing China-based aluminum smelters. Data shows that there were 18 smelters in the U.S. in 2001, when the U.S. produced 11% of global aluminum and China produced 12%. But the USTR alleges that subsidies helped China grow production to well over 50% of global supply today, as U.S. production fell to less than 2%. Now, Century is one of only five U.S. aluminum producers left, and has aligned itself with Trump’s administration to try to restore the global balance of power in aluminum production. The market will get a major update on February 23 when Century is set to release Q4 2016 results and speak about the future. Analysts see revenue growing by over 10% in 2017, when EPS is expected to surge to $0.28 (from -$0.79 last year).
Technical Analysis
CENX bounced around in the 5.6 to 9.4 range for most of 2016. It was trading at 6.5 just prior to the election, after which it rallied to 10.7 within two weeks. It then chopped downward until early 2017 when it hit 8.5. News of the USTR investigation sent shares rallying to 16.2 by January 24. Since then they’ve been consolidating in a tight range as the market awaits earnings. Try to buy on dips.
CENX Weekly Chart
CENX Daily Chart
Essent Group (ESNT)
Why the Strength
You won’t find a lot of excitement surrounding mortgage insurers these days (on loans to consumers that put less than 20% down and need PMI), as the scars of the financial crisis (when some went belly-up and others came close) still hurt. But there are good opportunities these days, thanks to a healthy housing market, industry consolidation (two of the largest players in the sector are merging), market share gains by private players like Essent and a major improvement in credit quality. At the end of September, the firm had $77.6 billion of mortgages insured (up 25% from a year ago), and 87% of those borrowers had credit scores north of 700 (just 5% below 680); all told just 0.41% of loans were in default at the time. Meanwhile, Essent has been consistently expanding its book of business, writing $10.3 billion of new insurance in the third quarter, up 35% from a year ago. The combination of it all has been higher premiums earned, low loss provisions and a booming bottom line. Analysts anticipate that growth slowing in 2017 (estimates are up 18% from last year), but Essent has regularly topped expectations, as has the housing market. The next quarterly report will be released Friday morning (February 10).
Technical Analysis
ESNT has been acting well since the market bottom in February 2016, though with a few multi-month pauses along the way. Shares lifted to new price and relative performance (RP) peaks in December, and then they tightened up nicely for the next six weeks as their 50-day line caught up. And now ESNT has begun to push ahead again, reaching new highs on good volume last week. You can either buy a small amount here, or wait to see how the stock reacts to earnings later this week.
ESNT Weekly Chart
ESNT Daily Chart
Exelixis (EXEL)
Why the Strength
We featured biotech Exelixis in late November but were knocked out by a quick drop in the stock. Since that event shares have regained strength and a couple of positive developments should keep shares heading higher. Recall that Exelixis develops small molecule cancer treatments. The current superstar continues to be Cabozantinib, an FDA-approved drug for advanced renal cell carcinoma and thyroid cancer. The drug was recently approved and generated $43 million in Q3 2016. The company also enjoyed $20 million in royalty and license revenue, which helped drive total revenue up 531%. Analysts see Cabozantinib becoming a blockbuster drug since it is already well on its way to achieving dominant market share. Exelixis also has nearly $380 million in cash (think R&D and/or acquisitions), and analysts are looking for revenue to grow by 70% in 2017, when EPS is expected to nose into the black. The stock enjoyed a boost in early January when Genentech dropped a claim, relieving Exelixis of $19 million in disputed costs. Another surge came in late January when Takeda Pharmaceutical purchased exclusive rights to Cabozantinib in Japan for up to $228 million.
Technical Analysis
EXEL bounced along near 4 through April, 2016, then rallied to 15.5 by late September. That 300% advance ended abruptly on September 28 when the entire biotech sub-sector began a five-week retreat. EXEL was trading back at 10 before the election, then positive fundamentals sent it to 18.3 by early December. Another pullback brought shares to 14.2 in early January. But news of Genentech’s dropped claim (January 9) sent shares above 19, and the Takeda deal (January 31) propelled them above 20. It’s a choppy actor, but a small position on dips should work out well.
EXEL Weekly Chart
EXEL Daily Chart
Olin Corp. (OLN)
Why the Strength
Olin Corp. is a Missouri-based chemical company that makes and distributes its products internationally. The company, which is making its debut in today’s Top Ten Trader, operates in three segments: Chlor Alkali Products and Vinyls, Epoxy and Winchester. The Chlor Alkali and Vinyls segment makes a bunch of basic industrial chemicals and brings in about 60% of revenue. The Expoxy segment, which yields about 15% of annual revenue, makes precursor chemicals and resins that go into everything from plastics, paints, coatings, flooring, electronics and wind turbines to water purification and pesticide applications. The Winchester segment makes ammunition for sporting guns, law enforcement and military weapons and industrial cartridges, bringing in about 25% of annual revenue. The company enjoyed a 94% jump in revenue following its 2015 acquisition of the chlorine business from Dow Chemical for $5 billion. The deal brought with it 50 manufacturing facilities in 12 locations around the world, while boosting Olin’s quarterly returns from Q4 2015 to Q3 2016 by an average of 160%. While Olin enjoyed strong returns and excellent stock performance in 2016, it took an estimate-beating Q4 earnings report on February 1—a 139% leap in earnings on a 9% increase in revenue—to produce a breakout on heavy volume. Olin’s exposure to many chemical lines makes it sensitive to growth in basic industries, and an accelerating global economy is ultimately powering the company.
Technical Analysis
OLN was in a long-term uptrend until April 2015, when it topped at 30 and began a correction that wouldn’t reach bottom until the stock was trading at 12 in February 2016. That set the stage for a renewed uptrend, though its been far from smooth. The stock tightened up with the market in January, and gapped up from 26 to 29 on nearly triple its average volume. With a low-risk story and paying a 2.6% annual dividend yield, OLN looks buyable anywhere under 30, with a stop around 27.
OLN Weekly Chart
OLN Daily Chart
Symantec Corporation (SYMC)
Why the Strength
Symantec not only pioneered the cybersecurity space but has grown into the largest pure-play cybersecurity company in the world. The company offers solutions for both enterprise (Symantec and Blue Coat) and consumer (Norton and LifeLock) customers, a strategy that it’s recently strengthened through acquisitions and divestitures. The two businesses are relatively close in size; over the last twelve months, enterprise products brought in an estimated $2.7 billion in revenue while consumer offerings brought in $2.3 billion. We say “estimated” because Blue Coat was acquired in June 2016, while LifeLock was acquired in November. As the company completes integration of the two companies we expect cross-selling opportunities will help drive revenue higher, while cost savings synergies should help drive EPS growth. Management recently announced $100 million of an estimated $550 million in projected cost savings from the Blue Coat acquisition already. Analysts see 12% revenue growth next year (to $4.6 billion) and 45% EPS growth (to $1.72). Much of the growth is likely to come from the enterprise division given that the consumer division was down 4% in the most recent quarter. We think Symantec is well on its way to transforming into a nimble cloud-based cybersecurity company with a wide variety of security solutions.
Technical Analysis
Shares of SYMC were trending sideways before the June, 2016 acquisition of Blue Coat was announced. That event drove shares up from 17 to 21 in a matter of days. They then trended sideways for a month, when better-than-expected earnings on August 4 ignited a two-month rally that lost momentum at 26. The stock then chopped sideways throughout the rest of the year. But a rally began again in early 2017 and has carried through last Wednesday’s earnings report. We think shares can be bought here with a stop set below the 50-day moving average line.
SYMC Weekly Chart
SYMC Daily Chart
Teradyne (TER)
Why the Strength
Teradyne makes test equipment used in the semiconductor industry and related businesses. As such, the company offers another way to play the upswing that the chip cycle has been enjoying. But Teradyne’s focus is increasingly on automation equipment for test and industrial applications, allowing customers to test not just semiconductors, but also wireless products, data storage and electronic systems, all with automated efficiency and lower costs. The company’s Collaborative Robots program—begun when Teradyne acquired Universal Robots in a $350 million deal in 2015—can increase quality and efficiency in all kinds of manufacturing, including testing of wireless devices. Semiconductor testing still accounts for about three-quarters of revenue, but the automation business offers greater opportunities for growth. Teradyne’s revenue stalled in 2015, but grew by 7% in 2016, and a strong Q4 earnings report on January 25 got investors’ attention. That report featured revenue growth of 19% and earnings growth of 146%. Estimates call for earnings growth of 10% in 2017 and 14% in 2018, but the new automation business offers the potential for significant improvements on those estimates. With a timely business and a small (1%) dividend yield, Teradyne is a good way to play the semiconductor industry’s strength with a relatively new bonus revenue source into the bargain.
Technical Analysis
TER traded virtually flat from the beginning of 2014 through July 2016, making occasional runs to 21 or 22, but never losing touch with its March 2011 high around 18. That changed decisively in late October when the stock gapped up on slightly elevated volume, beginning a rally that would get additional impetus in early December when the stock topped 26. A very tight consolidation through December and most of January gave way to a high-volume blastoff on January 25. You can buy TER on any weakness, with a stop around its 50-day moving average.
TER Weekly Chart
TER Daily Chart
Tesla, Inc. (TSLA)
Why the Strength
Tesla remains a controversial company, with a questionable acquisition last year (of SolarCity, which was also started by CEO Elon Musk) and a lack of profitability (analysts don’t see the firm entering the black until Q2 2018) fueling the doubters; there are a whopping 35 million shares currently short, or about 30% of the trading float! So why has the stock been one of the strongest in the market during the past couple of months? We think it’s very basic: Tesla has a couple of revolutionary products (the Model S and Model X) that are in huge demand; in the fourth quarter, net orders for the S and X, which were already at an all-time high in Q3, rose a whopping 24% sequentially. And Tesla is ramping production rapidly in an effort to meet that demand, which is boosting the top line in a big way; despite a few production snafus (mostly surrounding the inclusion of Autopilot software), the firm’s production rose 64% in 2016 as a whole. And that’s just the beginning, with the firm aiming to ramp total production (including the Model 3, which has at least 400,000 in pre-orders) to 500,000 vehicles in 2018, from just 84,000 last year! That might be too ambitious, but the point for investors is that mega-growth is coming, with potential upside in the quarters ahead from the firm’s SolarCity-related battery packs and other products. Yes, there’s execution risk, but there’s no question the S and X are in demand, and if the Model 3 turns into a success, the stock should do very well. We like it.
Technical Analysis
TSLA held support late last year around 180 for the fifth time since early 2014, then began a persistent advance that took the stock up eight weeks in a row before pausing last week. There’s still some overhead to overcome, and earnings (due out February 22) are still coming, but we think the stock may have entered what we call the Reality Phase, where it will be judged on real production, sales and earnings, all of which look set to improve nicely going forward. We’re OK with a small position around here with the idea of slowing adding to your position should TSLA push above 270 in the weeks ahead.
TSLA Weekly Chart
TSLA Daily Chart
Texas Capital Bancshares (TCBI)
Why the Strength
Texas Capital might be a bank, but it’s also a real growth company—its growth figures in the table below are better than those of many firms in far more exciting industries. The company specializes in loans for businesses and private clients, and it did a great job of riding Texas’ rapid growth during the early part of the decade. Then it did well by avoiding much of the energy downturn (and some related real estate weakness) and continuing to gain market share. (Provisions for credit losses peaked in Q1 2016 at $30 million, falling to just $9 million in Q4.) There’s no secret sauce here, just great execution—in the fourth quarter, total assets were up 15%, deposits rose 13%, shareholders equity was up an impressive 24% and loans held for investment (excluding mortgages) were up 11%. Besides the recent numbers, the stock is strong thanks to the prospects of higher interest rates (which could significantly boost margins and net interest income), an accelerating economy and the possibility of less regulation (and, hence, lower compliance costs and reserve needs), too. When combined with the firm’s steady expansion, such tailwinds could supercharge growth in the quarters ahead. As it stands, analysts expect the bottom line to rise a whopping 30% this year and another 20% in 2018. There’s no dividend here, but big investors are fine with that, focusing more on the firm’s build-out of its asset base (currently $21.7 billion). In short, Texas Capital has a legitimate growth story.
Technical Analysis
TCBI plunged to 30 early last year during the peak of the oil crisis, but has been trending higher ever since. Like most financials, the stock exploded higher post-election (TCBI leapt to new price peaks right after the election), rallied for a few weeks, and then tightened up as it consolidated its gains. Now it’s resuming its uptrend, helped in part by a great fourth-quarter report two weeks ago. It looks buyable here with a stop near the recent lows.
TCBI Weekly Chart
TCBI Daily Chart
Yandex (YNDX)
Why the Strength
Yandex represents a familiar business model in an unfamiliar place. The company runs a Google-like internet search engine in Russia and a few other countries in the former Soviet Union and Turkey. The slate of subscriber services includes news, maps, navigation, mail, cloud-based storage, weather, e-commerce, movies and TV, ticket services and various messaging services. While Yandex is headquartered in the Netherlands and offers its services in Ukraine, Belarus, Kazakhstan and Turkey, more than 90% of revenue comes from Russia, where it is the most popular search engine. Revenue comes primarily from advertising services. It’s hard to consider Yandex without including the vexed political relations between Russia and the western alliance, which has maintained a program of economic sanctions against Russia since its invasion of Ukraine. Those sanctions were a main cause of the company’s dip in revenue and earnings from Q4 2014 through Q4 2015. But revenue growth rebounded to 30% last quarter, with earnings up 6%. And when Q4 results are announced later this month, analysts expect to see revenue jump to $350 million (up 41% from a year ago), while earnings remain flat. If investors sniff out possible reductions or elimination of sanctions against Russia, Yandex could outpace all estimates. It’s a risk, but business is steady and the upside is big. The company has a growing roster of 482 institutional investors, up from 342 a year ago.
Technical Analysis
YNDX traded as high as 45 in January 2014, but went through a bumpy correction to as low as 10 in August 2015. The stock has surged twice and corrected twice since that bottom, with the latest correction to 17 in November 2016 giving way to a stair-step rally that has boosted the stock back above 23. No word yet on when Q4 numbers will come out, but since Q3 earnings were on October 27, it should be soon. YNDX has traded sideways for nine days at this point, and a small buy under 23 could pay off well if earnings are good. A relatively tight stop at 21 seems prudent.
YNDX Weekly Chart
YNDX 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.
