February 9, 2015
The market improved last week, once again finding support after a bad few days. And we’re encouraged to see some resilient stocks (including a few earnings winners) not only hold most of their gains, but actually tack on a few points, which is a marked difference from what we’ve seen during the past few months.
Current Market Outlook
The market definitely showed some improvement last week—the major indexes bounced back decently, and importantly, many recent earnings winners not only held their gains but stretched higher, something we haven’t seen much of for a few months. Because of that, we’re pushing the Market Monitor up a bit, but we remain relatively neutral for one simple reason: the market (and most stocks) are still range-bound, and until that changes, it’s going to be hard for any stock to make persistent progress. We’re OK doing some new buying, especially in some recent earnings winners (preferably on dips), but holding cash and keeping risk in check is necessary in this environment.
The good news is that we continue to see a broadening array of stocks firming up. Our Top Pick for the week is Tesoro (TSO)—while most energy stocks are still struggling, refiners are surging, and TSO looks like the leader. Buy on dips.
|Stock Name||Price||Buy Range||Loss Limit|
|Vulcan Materials Company (VMC)||137.10||71.5-73.5||66-67|
|Sprouts Farmers Market (SFM)||19.00||34-36||31-32.5|
|Lear Corp. (LEA)||0.00||105-108||96-98|
|Integrated Device Technology (IDTI)||0.00||19-20||17-17.5|
|E*Trade Financial (ETFC)||0.00||24-25||22-22.5|
|Tableau Software (DATA)||126.42||91-95||85-86|
|Ashland Inc. (ASH)||0.00||122-125||114-115|
Vulcan Materials Company (VMC)
Why the Strength
Vulcan Materials is the nation’s largest producer of construction aggregates such as crushed stone, gravel and sand, as well as a major producer of construction materials like asphalt and concrete. Thus, the major theme here is simple—the more housing and general construction activity in the U.S. (including potential infrastructure spending from Uncle Sam and the states), the better for Vulcan, and because of the firm’s relatively high fixed costs, any hike in revenue basically falls to the bottom line. That’s exactly what’s been going on lately, and management sees more of the same in 2015—sales, earnings, shipments and margins all expanded nicely in the fourth quarter, and the top brass expects cash flow to expand north of 30% this year thanks to an 11% hike in shipments and an expected 6% leap in prices (combined with operating efficiencies). Even better, management hinted that, as earnings and cash flow surge, the company will aim to return more cash to shareholders; it currently has a token 0.3% dividend, but expects a boost to that, and possibly share repurchases, in the months ahead. Of course, the risk with Vulcan is the same as with any cyclical stock—that is, Europe or China could drag down the U.S. economy and crush demand for the company’s aggregates. But the higher-odds scenario is that, after a long period in the doldrums, Vulcan’s bottom line advances in a big way during the next couple of years.
VMC hit 129 during the commodity boom of 2007, plunged to 25 during the market’s mini-crash in 2011 and has been recovering since. The upmove, though, has been very uneven and hard to play as an investor, with lots of corrections and sideways periods. But it’s now presenting an interesting buy point—VMC built a huge 45-week, 22%-deep double-bottom base, rallied hard off its October bottom, and shot ahead to new highs last week after its quarterly report. If you’re game, you can start a position on pullbacks.
VMC Weekly Chart
VMC Daily Chart
Why the Strength
With most stocks in the oil patch suffering as the price of crude oil plummets, Tesoro, the largest gasoline supplier (six refineries and over 2,250 retail stations) in the western U.S., has been bucking the trend. Tesoro’s position as the top-performing energy stock of the past five years is the result of a program by management to insulate the company from volatile commodity prices. Tesoro’s strategic investments in rail cars to deliver low-cost Bakken oil to its Washington refinery, its purchase of a refinery in Los Angeles and its investments in pipeline companies gave it exposure beyond the refining industry. The company’s investments took a while to pay off, but Tesoro’s Q3 earnings report showed a whopping 595% jump in earnings and the strongest after-tax profit margins since 2011. Now, with a very reasonable 16 P/E ratio and a dividend that’s increased four times in the last couple of years (now yielding 1.4% annually), Tesoro is reaping the benefits of its diversification efforts. When the company reports its Q4 results on Wednesday (February 11) after the market closes, analysts expect revenue of $8.90 billion and earnings of $1.50 per share. Investors have been bidding the stock up, clearly expecting good news.
TSO has been on a roll since April 2014, when it roared out of a year-long basing structure that narrowed down to support at 50. The stock has shown some volatility since then, including a correction from 79 to 64 in December and the first half of January. But a rally that featured gains in 14 of 15 consecutive trading sessions powered TSO to new highs in the mid-80s during the run-up to earnings in two days. We think a small position is reasonable ahead of earnings, but keep a sharp eye on the reaction and use a mental stop at 77 in case results disappoint.
TSO Weekly Chart
TSO Daily Chart
Sprouts Farmers Market (SFM)
Why the Strength
The organic food movement, led by Whole Foods Market, has given a growing number of U.S. consumers access to high-quality food, beverages and other products. With a sales mix of about half perishables and half non-perishables, Phoenix-based Sprouts provides a product mix similar to other organic chains, with fresh produce, bulk foods, vitamins and supplements, bakery, dairy, beer and wine, meat and seafood, body care and household items. The company now has more than 190 stores in 11 states. The company’s success in building its chain of stores and booking growing profits shows that there is room in the organic food business for more than just Whole Foods. The company opened 24 new stores in the first three quarters of 2014, and expects to continue rapid growth, especially in the southern and southwestern U.S. Sprouts will release its Q4 and full-year results on Wednesday, February 25, after the market closes. Analysts are looking for revenue of $722 million and earnings of $0.09 per share for the quarter, and $2.96 billion in revenues and EPS of $0.69 for the year.
SFM is still a relatively young stock, coming public in August 2013. The stock made a big run after its debut, soaring from 18 to as high as 49, but fell hard to 26 in May 2014. The stock began its most recent rally in December, coming out of a nearly six-month base and building on a big-volume bump on January 21. While analysts are predicting good growth for SFM in its February 25 earnings report, we don’t recommend taking a full position this close to the date. If you like the story, you can take a small position on any weakness toward 36, and use a stop around 32.5.
SFM Weekly Chart
SFM Daily Chart
Lear Corp. (LEA)
Why the Strength
Mick McGuire, a prominent activist-investor, is urging this auto parts maker to split into two companies, and belief that Lear will listen is fueling Wall Street excitement. McGuire, who runs the hedge fund Marcato Capital, which is Lear’s fourth-largest shareholder, wrote a letter to Lear CEO Matt Simoncini imploring him to divide the company’s car-seat and electrical-parts businesses into two separate entities. Lear’s car-seat business accounts for more than three-quarters of its total revenue, and McGuire believes it could operate as its own entity. Splitting into two public companies could value the two at a combined 145 a share, McGuire estimates—a 34% premium to Lear’s current share price. It appears that Lear is listening to McGuire’s request. The company issued a response saying that it is “open to the views of its shareholders” and will review Marcato’s suggestions. McGuire’s request for a split comes on the heels of a strong fourth quarter for Lear, in which earnings per share increased 46% from the previous year due largely to strong demand in North America. Lear counts General Motors and Ford among its biggest North American clients. It’s obviously a special situation, but if Lear decides to unlock its value, shares could do very well.
There’s a reason Marcato had grown frustrated with Lear: its stock has been underperforming since last summer. LEA plummeted in September and October, falling from 104 all the way to 75. It subsequently recovered, but couldn’t get back above the 100 threshold—until last week. Speculation over a possible split brought plenty of new buyers out of the woodwork, pushing LEA well into triple digits on excellent volume (quadruple its average). We’re intrigued, as these types of shareholder-friendly situations have produced a few bigger winners during the past year. Dips of a point or two are buyable, with a stop just below the recent breakout level.
LEA Weekly Chart
LEA Daily Chart
Integrated Device Technology (IDTI)
Why the Strength
This $3 billion, San Jose, California-based chip manufacturer has been on quite a tear. Integrated Device Technology has been expanding its array of low-power, high-performance mixed-signal semiconductor solutions used in the communications and computing industries—specifically, a new high-speed synthesizer that delivers ultra-low phase jitter for data communications. As a result, its sales and earnings have grown exponentially. Last week’s fiscal third-quarter earnings report was the latest evidence of that growth. The company reported earnings per share of $0.25 on sales of $151.2 million. Those figures surpassed consensus Wall Street estimates of $0.22 EPS and $143.3 million in sales, and also marked significant year-over-year improvements. It was the sixth straight quarter that Integrated Device Technology has increased its revenue and EPS. The company’s EPS have now more than tripled from a mere $0.07 in the June 2013 quarter, while sales have improved 29% during that span. And the future could be even brighter—while IDTI has benefited from the overall move toward high-performance computing and mobile communications, wireless power and charging could provide a boost to business in the year or two ahead. As it is, analysts see the coming year producing earnings growth of 21%, but that’s probably conservative.
After bottoming out around 12 during the market downturn in October, IDTI went on a steady two-month climb to reach a decade high above 20 a share. It pulled back in January as stocks hit another snag, but twice found support at 17. Now it’s on the upswing again, pushing out to new highs on the heels of its quarterly report. We do like the volume patterns in IDTI, but we can’t say the recent rally has been truly explosive (the stock is still just above its December highs, as is the RP line). Combined with the still-choppy market environment, we think small positions on dips make the most sense if you want in.
IDTI Weekly Chart
IDTI Daily Chart
Why the Strength
Now here’s a big, mass-market story with huge potential. GrubHub is the hands-down leader in online and mobile food ordering. In the company’s words, its job is to connect hungry diners with local takeout restaurants—which it does for more than 30,000 restaurants in more than 800 cities. It sounds like a simple concept, and it is—for consumers, there’s no charge to use the centralized site to look for restaurants and takeout places and pay for your order; for restaurants, any business through this site is a bonus. And that’s why restaurants have no problem paying GrubHub generous commissions (well north of 10% on every order). There’s some competition, but GrubHub is buying up some smaller firms (it announced two acquisitions last week), and thanks to the network effect, GrubHub looks destined to stay in front. In the just-reported fourth quarter, the company had just over five million active diners (up 47% from a year ago), took more than 200,000 orders per day (up 33%) and processed $508 million in food sales (up 37%). That helped sales and earnings continue their hot streak, and management forecast about 35% revenue and cash flow growth in 2015, which is probably conservative. Of course, the valuation is huge (13 times sales!) but we really like the already-solid profit margins (18% pre-tax margins last year), and, with U.S. takeout being a $32 billion annual business, there’s no reason why GrubHub can’t grow rapidly for many years. Long-term, we think this company can go far.
GRUB isn’t in a decisive uptrend yet, but it’s building a proper-looking base, and last week’s huge price and (especially) volume action makes us sit up and take notice. Shares came public last April, rallied to 46 and then pulled back 33% over four months before finding support. After trading on low volume for a few weeks, last week’s rally on out-of-this-world volume (the weekly tally was more than twice as big as any other week in its history!!) tells us big investors were plowing in. GRUB is very volatile, but we’re OK with a small position around here and a loose stop near 35.
GRUB Weekly Chart
GRUB Daily Chart
E*Trade Financial (ETFC)
Why the Strength
Regulations imposed on E*Trade during the financial crisis are being lifted, freeing the multi-faceted financial services company to return $430 million to its shareholders. During the financial crisis, regulators forced E*Trade to move its strong brokerage subsidiaries under its struggling bank branch, where those businesses have been subject to increased regulatory scrutiny. Last month, however, the company was granted permission to separate its brokerage and banking businesses again—thus freeing up significant excess capital. E*Trade plans to upstream $430 million from its broker-dealer subsidiaries to the parent company, which it will then use to pay a dividend later this quarter (the company currently doesn’t pay a dividend). The vote of confidence from regulators that E*Trade’s banking division is now stable enough to stand on its own two feet is also encouraging. Meanwhile, the company’s financials continue to improve: after-tax margins have been in the 14% to 17% range for a full year, and it just beat consensus earnings estimates for the fourth straight quarter. Overall, the company’s earnings per share increased 57% in 2014 to $1.07—E*Trade’s best full-year results since 2006. And, as a Bull Market stock, any upside from the market going forward should continue to help the company post solid results.
E*Trade shares were up and down until its recent breakout. From November through January, ETFC seesawed between 22 and 24. Seven times in those three months, the stock found support at or near 22 after getting knocked back. But it repeatedly met resistance at just over 24 a share. Finally, last week, it broke through resistance, rising above 25 for the first time since last March and tagging a 52-week high. Volume on the rally has been excellent, so we’re thinking a small position on dips should work.
ETFC Weekly Chart
ETFC Daily Chart
Tableau Software (DATA)
Why the Strength
Years ago, the “business intelligence” industry came to be, with software that helps a company get the most out of its data. Now, thanks to the Big Data revolution, that industry has become critical … but there hasn’t been much in the way of innovation. Until Tableau! Tableau’s software is able to take reams of company data and translate it into easy-to-read graphs—all with simple drag-and-drop functionality. The company likes to say that it’s “democratizing data analysis”—no longer do you need IT specialists to set-up reports to interpret data from your department. (We even use it here in the office.) In the long run, the huge goal is to replace Excel, which millions of workers use to graph data nowadays. The proof of Tableau’s offering is in the numbers—the fourth quarter (reported last week) saw sales up 75% to $143 million, earnings of 42 cents per share up 110%, and the company added 2,600 new customer accounts (and now has more than 25,000 clients in total). And these aren’t all small fries, as Tableau booked 304 transactions of at least $100,000 in the fourth quarter alone, up 70% from the year before. The biggest potential worry is that IBM, Salesforce.com and others could decide to compete in this area, but there’s no doubt Tableau is way ahead today. Long-term, DATA could be used by dozens of employees in nearly every large enterprise. It’s a big, big idea.
DATA was one of the glamour stocks that topped out in March 2014 and fell hard, 49% over three months! A drop that severe takes time to repair, and that’s just what the stock has done—it’s rallied back with lots of fits, starts and sideways action since May of last year. Now, though, it appears ready for a sustained run—notice how the stock traded in a small sideways range on light volume from November through January before soaring toward its old highs on big volume last week. Shares have seen a sharp dip in the two days since, but we think that’s as much a function of the choppy market as anything. A small position here with a stop in the mid-80s looks like a solid risk-reward trade.
DATA Weekly Chart
DATA Daily Chart
Ashland Inc. (ASH)
Why the Strength
Ashland, the Kentucky-based specialty chemicals company, has its fingers in many different pies. The company’s most recognizable brand is Valvoline motor oil, a brand that includes over 900 oil-change centers in the U.S. But it’s the specialty ingredients business—materials for pharmaceuticals, personal and home care products, food and beverages, paints and solvents and dozens of other industries—that produces the most revenue. A majority of sales come from North America, but Ashland’s footprint is global. The low price of crude oil, which is the feedstock for many of the company’s products, has given a boost to the bottom line. The company’s fiscal Q1 earnings report on January 26 showed earnings of $1.46 per share, a 30% improvement from a year ago, and well above the expected $1.43. The company’s board declared a quarterly cash dividend of 34 cents per share, payable on March 15 to holders of record on February 13. The board also began an accelerated share repurchase program of $270 million of its stock, part of a previously announced $1.35 billion buyback program. With a broad range of customers in different industries, Ashland is executing well right now.
ASH has been trending up for years, with periodic corrections along the way, including a pullback from 110 to 95 from last July through October. The most recent rally on earnings has come after the stock spent December and January trading mostly sideways under resistance at 120. The breakout to 125 last week was just a continuation of a long-term uptrend. ASH looks buyable right here, or on any weakness of a point or two. A stop at the stock’s December support at 114 seems prudent.
ASH Weekly Chart
ASH Daily Chart
Why the Strength
Seattle-based Amazon.com and its CEO Jeff Bezos are a bit of a puzzle to many Wall Streeters. Founded in 1994 as an online bookstore, the company has morphed into a hugely successful online seller of just about everything. Investors have shown some frustration that Bezos has no regard for the company’s bottom line, preferring to invest in and develop new products lines, like cloud computing services, rather than slow expansion and generate profits. But investors can’t argue that Amazon doesn’t generate revenue growth. The company’s report on January 29 featured full-year revenue of $89 billion, up 20% from 2013 (when foreign exchange losses are backed out). The company continues to generate huge amounts of cash flow from the Amazon Prime membership program, which showed 53% growth during the year. The company’s Kindle e-readers are rolling out globally and the company is moving strongly into media delivery, including original content. After losing 52 cents per share in 2014, analysts are estimating that Amazon will generate 38 cents per share in earnings in 2015 and a whopping $2.28 per share in 2016 (and much higher amounts in the years that follow). Amazon may require some patience from investors, but its current success and enormous potential future revenue growth is a powerful story.
AMZN finished off a long rally at 408 in January 2014, then dipped to 284 in May. The stock made a couple of big upward moves during 2014, but when the Q4 earnings report came out on January 29, the stock was still finishing a long period of range-bound trading. On the day of the earnings report, AMZN gapped up to 360 on 4 1⁄2 times average volume, and has now followed through to the upside. There have been many stops and starts before, but this upside power following a long bottoming period looks promising. We think you can buy a little around here, or on dips to 360.
AMZN Weekly Chart
AMZN 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.
|First||Stock||Symbol||Top Pick||Original Buy Range||Price as of February 9, 2015|
|12/15/14||Buffalo Wild Wings||BWLD||164-170||188|
|1/12/15||Chipotle Mexican Grill||CMG||695-720||648|
|10/20/14||Jack in the Box||JACK||65-68||85|
|1/5/15||Jones Lang LaSalle||JLL||145-149||157|
|11/17/14||Leggett & Platt||LEG||39-41||44|
|9/15/14||Palo Alto Networks||PANW||94-98||125|
|WAIT FOR BUY RANGE|
|12/8/14||Alliance Data Systems||ADS||273-284||273|
|DROPPED: Did not fall into suggested buy range within two weeks of recommendation|
|None this week|