Follow the System
Current Market Outlook
Trend following is our preferred method of market timing for two major reasons: If you follow the system, you’re guaranteed never to remain heavily invested in serious downtrend, and you’re also guaranteed never to miss out on a major uptrend. We’ve seen that play out in recent months—our Market Monitor shifted to neutral in mid-November and to bearish at the start of January, and we continue to advise a defensive stance as the market remains under pressure. We do think stocks could snap back some in the short-term, partially because the broad market isn’t in nearly as bad shape as it was on January 20, when the indexes initially dipped to these levels. But, bounce or not, it’s best to stick with the system, which means remaining defensive until the intermediate-term trend turns up.
This week’s list is a hodgepodge of stocks and sectors, but we feel many can do well once the market finds its footing. Our Top Pick is Michael Kors (KORS), which, after a multi-month bottoming effort, reacted well to earnings last week as results weren’t as bad as feared. The stock is dirt cheap, too.
| Stock Name | Price | ||
|---|---|---|---|
| Vantiv (VNTV) | 0.00 | ||
| Vulcan Materials Company (VMC) | 137.10 | ||
| Super Micro Computer (SMCI) | 0.00 | ||
| PayPal (PYPL) | 147.00 | ||
| Universal Display (OLED) | 187.54 | ||
| Newmont Mining (NEM) | 57.31 | ||
| Mattel, Inc. (MAT) | 0.00 | ||
| Michael Kors Holdings Limited (KORS) | 73.22 | ||
| First Solar (FSLR) | 83.74 | ||
| Agnico Eagle Mines (AEM) | 79.05 |
Vantiv (VNTV)
Why the Strength
Digital payments are an area of the global economy that has not been negatively impacted by declining oil prices. Vantiv, an Ohio-based payment and credit card processing company, seems particularly immune. It has now posted double-digit earnings and revenue growth for the last seven quarters, including 23% EPS growth and 16% sales growth last quarter. Vantiv’s full-year 2015 results, reported last week, came to 23% sales growth and 20% EPS growth, with margins expanding to 15%. The improving U.S. unemployment rate and increases in discretionary spending have more people breaking out the plastic in recent years—especially online (witness the improving Cyber Monday sales results), where Vantiv has a strong foothold. And with cyber security threats swelling to scary levels, businesses want to make sure their customers’ credit card and personal information is secure. Vantiv’s 46 years in the payment-processing business likely appeals to merchants wanting to be in bed with a processor they can trust. Similarly, Vantiv’s steady top- and bottom-line growth is appealing to investors looking for secure places to invest their money.
Technical Analysis
Unlike most stocks, the second half of 2015 was a solid six months for VNTV, with shares jumping from 37 to a peak of 52 in early December before falling back a bit. The stock tumbled to 43 in mid-January, but has since been showing signs of life, or at least of a bottom. It popped to 48 last week before being yanked down by the market this morning. If you’re game, you could use that dip as an entry point, or at least add the stock to your watch list. If you decide to buy, keep your position size small and set a tight stop.
VNTV Weekly Chart
VNTV Daily Chart
Vulcan Materials Company (VMC)
Why the Strength
New housing construction is on the rise in the U.S., with December marking the ninth straight month that the annualized pace of housing starts have topped one million units—the longest stretch since before the 2008-09 recession. Combined with an equally healthy municipal and commercial construction backdrop, that’s good business for Vulcan Materials Company, a national provider of construction aggregates. As the U.S. housing sector has gotten well, so have Vulcan’s sales, reaching double-digit growth for a fifth straight quarter in December. In fact, 2015 was Vulcan’s best growth year since 2007: sales improved 14% from 2014, while earnings per share more than doubled. The bottom-line improvement has been particularly dramatic: from 2010 to 2012, Vulcan’s EPS slipped into negative territory, and was just a couple pennies in the black in 2013. In 2014, EPS rocketed to $0.94, and last year they reached $1.96. Per-share earnings are expected to increase another 68% this year. Construction materials are clearly in demand again. As a result, so is Vulcan Materials’ stock.
Technical Analysis
After two years of going nowhere, VMC started to budge in a big way beginning in late 2014. From October of that year to November of last year, the stock rallied from 55 to 105. The dip back to 82 in December and January looks pretty daunting on a chart, but the ensuing pop to 93 last week was an encouraging sign. With 81 looking like the potential area of support, today’s dip looks like a decent place to buy, if you’re feeling so bold. If you decide to nibble, keep the stock on a tight leash.
VMC Weekly Chart
VMC Daily Chart
Super Micro Computer (SMCI)
Why the Strength
Nothing like a big earnings beat to get a stock going. Per-share earnings at this San Jose-based server developer jumped 12% year over year, a vast improvement from the 30% decline of the previous quarter. Sales also jumped at a steady 27% clip, reaching a record $639 million and more than four times the industry’s growth average. Super Micro’s all-encompassing Complete System Solutions server product was the main driver of sales, accounting for 71% of the company’s total fiscal second-quarter revenue. The company also showed strength in its burgeoning cloud computing, data center and storage solutions businesses. Cloud computing is an especially high-growth area these days, and some of Super Micro’s biggest clients have started switching to the cloud. It’s one reason the company’s sales have accelerated in recent years, with 15% growth in fiscal 2013, 26% in 2014, and 36% in fiscal 2015, which ended in September. During that time, earnings per share have nearly tripled. That kind of high growth, featuring products in a hot sector, has made SMCI a more popular choice among institutional investors, who own 24 million shares of the company, compared to 19 million six months ago.
Technical Analysis
Despite increased interest in SMCI, 2015 was a rough year, with shares falling from a peak of 41 last February to 21 at the beginning of January. That appears to have been a major bottom. In the month since, the stock has bounced all the way to 32, topping its 50-day moving average for the first time since November and 200-moving average for the first time in more than six months. Meanwhile, volume in SMCI has nearly doubled from normal levels in the last two weeks, so momentum is clearly on its side. A dip below 31 could provide an opportunity if you want to dip a toe in.
SMCI Weekly Chart
SMCI Daily Chart
PayPal (PYPL)
Why the Strength
The movement away from paper payments to credit and debit cards has helped make MasterCard and Visa big long-term winners in the stock market. We think the long-term could be equally beneficial for PayPal as the trend toward digital (and mobile) payments accelerates—the company is a leading player in that sector, with a whopping 179 million active accounts, including 6.6 million new users in the fourth quarter alone, the largest quarterly figure in the company’s history. The firm’s other metrics also shone—while its “take rate” (the cut it gets on every transaction) has declined slowly as competition heats up, volume (up 29% in the quarter, excluding currency impacts) has more than made up for that, leading to 20%-ish currency-neutral revenue growth despite its large size (nearing $10 billion in annual revenue). Plus, average transactions per account grew 13%, a very positive “same-store sales growth” type of metric. Ever since the company was spun-off from eBay last year, PayPal’s management has made the right moves and consistently topped expectations; for the next few years, they think 15%-plus revenue growth and 20%-plus earnings growth is likely as the industry booms and as they take the lead in some adjacent areas. (For instance, Venmo, which the firm bought last year, allows friends to digitally split things like dinner bills and cab fare.) A just-announced $2 billion share buyback authorization is a nice cherry on top.
Technical Analysis
PYPL was spun off from eBay last July, and immediately headed south with the market, finally finding support at 30 in August. It tested that support in September, and again in January, before reacting well to earnings and pushing back toward resistance at 38. PYPL has taken a big hit in recent days with the market, but the overall bottoming formation is still intact. You could nibble here with a stop near 30, or simply keep the stock on your watch list.
PYPL Weekly Chart
PYPL Daily Chart
Universal Display (OLED)
Why the Strength
A Cabot Top Ten Trader favorite, Universal Display makes its sixth appearance on our weekly list in the past year. Why the strength this time? Mostly because of rumors that a future Apple iPhone will use Universal Display’s organic light-emitting diode (OLED…hence the ticker symbol) display screen technology. Business Korea reported last month that, according to “display industry sources,” Apple will purchase OLED display panels from either Samsung or LG Display to use in its iPhone 8, due out sometime in 2018. Samsung and LG Display just so happen to be Universal Display’s two largest clients. Apple has heretofore not used OLED technology in any of its iPhones (it instead uses LCD screens), but did use OLED in its recently released Apple Watch. In “light” of that recent development, it seems entirely logical that Apple would want to give Universal Display’s technology a whirl in one of its iPhones too—especially at a time when interest in Apple iPhones is waning, and consumers are desperate for new features that could give future versions a bit more sizzle. OLED screens are becoming known as superior alternatives to LCD screens, with brighter and more power-efficient displays; Samsung is planning on revamping its OLED display TVs in 2016 and beyond, thinking it will be the next big thing in TV viewing. Earnings are out February 25.
Technical Analysis
OLED made a big push from 32 to 55 in late October and November when the iPhone 8 rumors began swirling. Since then it’s cooled off, tumbling to 42 in January, bouncing decently, but then coming under pressure again in recent days as all technology stocks get whacked. Even so, there’s support in the upper 30s, and OLED’s overall basing pattern isn’t abnormal. Keep it on your watch list, or, if you want in, nibble here with a tight stop.
OLED Weekly Chart
OLED Daily Chart
Newmont Mining (NEM)
Why the Strength
Newmont Mining’s appearance in this week’s Top Ten marks the third instance of gold’s rebound (following Barrick Gold in the February 1 issue). The story of gold in recent years has been of a long advance from 2005 through September 2011, then a year of flat trading (through September 2012) followed by three years of steady declines. Newmont Mining is one of the biggest gold and silver miners in the world, and has maintained profitability despite shrinking revenues in 2012, 2013 and 2014. Revenue growth has recovered in the first three quarters of 2015, and Newmont, which will report its Q4 and 2015 results on February 17 after the market closes, is expected to book $1.82 billion in sales and earnings of 13 cents per share. But the bigger story on Newmont is that gloomy global growth projections and high market volatility is simply driving some investors back into gold as a protective reflex. If you want some gold as a diversifier or a hedge against volatility, Newmont, with a 26 trailing P/E and a 0.4% annual dividend yield is a fine way to do that.
Technical Analysis
NEM retreated from 67 in November 2011 to 15 in August and September 2015, paralleling the decline of gold. The stock traded over 20 in October and December, but was back at 16 in late January when the market developed a sudden yen for gold. NEM has climbed higher in 12 of the last 13 trading sessions, gapping up on high volume on February 4 and again today. We’re not wild about chasing NEM higher in this kind of emotional environment, but if your appetite for gold is whetted, just start small and keep a close eye on the reaction to earnings a week from Wednesday. A stop just under 23 makes sense.
NEM Weekly Chart
NEM Daily Chart
Mattel, Inc. (MAT)
Why the Strength
Mattel is one of the biggest game and toy companies in the world, with Fisher-Price and American Girl brands and popular product lines like Monster High, Barbie, Hot Wheels, Matchbox, Tyco, Little People and Dora the Explorer. The company employs nearly 30,000 people worldwide and sells products in more than 150 nations. But its stock hasn’t ever been strong enough to qualify for inclusion in Cabot Top Ten Trader—until now. Three factors have pushed Mattel to the forefront in recent weeks. First, its stock pays a substantial 4.8% annual dividend yield. That’s solid. Second, there has been a hot rumor, verified by one of the participants, that Mattel and Hasbro might be in merger talks. If that merger is really in the works (and could survive antitrust vetting), it would create a monster toy and game colossus. Third, Mattel just announced Q4 earnings on February 2 that scored a solid beat based on strong sales of Barbie dolls and toys in the Hot Wheels and Matchbox lines. With a solid lineup of positive catalysts, Mattel (and its generous dividend) is enjoying a nice boost from investors.
Technical Analysis
MAT was a steady advancer for years, but revenue declines in 2014 and 2015 yanked the stock from 48 at the end of 2013 to 19 last October. The stock’s recovery since then has formed a wide cup-shaped basing structure that was bolstered by the stock’s breakout on huge volume on February 2. The stock gapped up from 27 to 30 on that day and ran to as high as 34 before relaxing back to 32 on calmer volume. MAT has always offered a generous dividend, and the Hasbro merger rumors injected some pepper into the chart. You could take a tiny nibble here, but the merger talk is already priced in, so unless you’re ready to hold for the dividend, it’s probably best to wait for a pullback below 31. A return to the gap at 28–29 would be bearish.
MAT Weekly Chart
MAT Daily Chart
Michael Kors Holdings Limited (KORS)
Why the Strength
Michael Kors is strong today because of the expectations game. The company was growing like a weed back in 2013 and even 2014, with sales leaping at 40%-plus rates and earnings doing the same. Then came a drastic slowdown, with single-digit sales and earnings growth, leading many investors to believe the company had fallen behind the fashion curve and shrinkage was upcoming (similar to what was seen in Coach). But Kors dispelled those notions with its latest earnings report—while growth wasn’t exciting, the firm saw positive same-store sales growth (excluding currency impacts) and nearly 10% currency-neutral sales growth, and profit margin erosion generally wasn’t as bad as many feared. That leaves a situation where Kors had gotten way ahead of itself on the downside; even after the stock’s latest run, it trades at just 11 times earnings, and analysts see the bottom line relatively stable in the quarters ahead. The company is responding to these bargain prices by repurchasing a ton of stock, with the share count down by about 10% from the prior year. Thus, you have a quality company that’s very profitable and whose business is proving resilient, yet whose stock discounted a far worse future. Given the cheap valuation, Kors could make good progress once the market stabilizes.
Technical Analysis
KORS topped out at 101 in March 2014, and then trended consistently lower until it bottomed out at 37 during last August’s market plunge. KORS successfully retested that low in January, and then exploded higher on earnings last week; shares soared 24% on eight times normal volume. And, impressively, the stock has held those gains in the days since despite the market’s plunge. We think KORS has bottomed and can do decently once the market finds its footing.
KORS Weekly Chart
KORS Daily Chart
First Solar (FSLR)
Why the Strength
The solar industry continues to build strength despite the temporary drag of extremely low oil prices. The U.S. Congress’s three-year extension of the solar investment tax credit in December provided a big boost, but First Solar also has a spate of positive factors working in its favor. First Solar’s guidance call on December 9 called for a 20% increase in module production and an increase in the conversion efficiency of its entire fleet of generating facilities to 16.2%. The company’s proprietary thin-film technology has always made it a cost-efficient manufacturer, but the buildout of higher efficiency facilities is expected to increase profit margins. The company’s guidance also calls for an increase in its cash position to over $2.6 billion by the end of 2016, giving it the resources to take advantage of takeover opportunities as they arise. First Solar enjoys huge scale, with more than 10 gigawatts of installed capacity worldwide and a projected increase of over two gigawatts in 2016. The company got a noticeable lift on January 22 when it was announced that Barclays had designated First Solar its top energy pick and raised its price target to 90. And lastly, First Solar’s yieldco, 8point3 Energy Partners, will continue to generate cash flow and the potential for asset appreciation. Quarterly results are expected later in February, but the guidance is already out, so the risk is low.
Technical Analysis
FSLR has been a volatile issue during its rebound from its August/September lows, but it has been holding up very well during the market’s 2016 meltdown. FSLR has traded basically flat since the middle of December, gapping up in early January and pulling back to its 50-day moving average briefly before returning to its December levels. Today’s action has pulled the stock back to its 50-day, which looks like a reasonable spot to take a small position if you want it. Use a tight stop just below 58 if you decide to dip a toe in.
FSLR Weekly Chart
FSLR Daily Chart
Agnico Eagle Mines (AEM)
Why the Strength
Gold stocks haven’t been in favor for nearly five years, but the time may have finally arrived for the sector to thrive again. That’s not just because of the recent pop in gold bullion or that the group has been decimated (down more than 80% since the 2011 top), but because of what both of those have resulted in—every gold company has been forced to shape up, cutting costs to the bone and focusing on the highest return mines. Agnico is no exception, as it’s repaying debt ($204 million worth in the first nine months of 2015, leaving it with $1 billion of net debt with no major maturities until 2020), slashing costs (all-in costs of about $850 per ounce this year) and yet actually growing production (up about 15% expected for all of last year) by sticking with a handful of top-producing mines. Of course, the numbers in the table below are a total mess, but that’s the past—the market is focused on the future, and Agnico has remained solidly profitable during the past few years despite falling gold prices, so its bottom line should soar if bullion rebounds, especially given the cuts it’s enacted during that time. An added bonus could be the dividend—Agnico pays a modest (1.0%) dividend, but that could rise should the bottom line start to perk up. Earnings are due out February 11.
Technical Analysis
AEM is looking better and better, having basically started a bottoming process way back in October 2013 (when it hit 24), falling to slightly lower lows in late-2014 (22) and August of last year (21). Since then, though, the stock’s character has changed—AEM ramped up five weeks in a row, then built a proper flat base for 15 weeks. And last week, the stock surged to multi-month highs on big volume. There’s still overhead to deal with in the mid-30s, and gold stocks are notoriously choppy, so if you’re game, look to buy a little on dips of a point or two.
AEM Weekly Chart
AEM 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.
