Simply Put, the Trend is Down
Current Market Outlook
The first week of the year was historically bad, with all the major indexes breaking lower and most individual stocks going along for the ride. With such dramatic action, we’re sure you’ll hear and read a variety of predictions, but we urge you to ignore the noise and focus on the facts—and the facts today are that the trends are down, so you should remain in a defensive posture, meaning lots of cash, little if any new buying, with the focus on building a watch list of future winners. Obviously, short-term, a bounce is overdue, and when it comes, it could be a great one. But the fact that the market has had trouble rallying even in the face of “oversold” conditions isn’t a good sign. It’s best to stay defensive until we see some sustained buying emerge.
This week’s list contains special situations, income securities, precious metals and even a couple of resilient growth stocks. Our Top Pick is Rovi Corp. (ROVI), a cheap technology stock that just exploded higher following two major license renewals. Nibbling on dips could work out.
| Stock Name | Price | ||
|---|---|---|---|
| 58.com (WUBA) | 0.00 | ||
| Ulta Beauty (ULTA) | 331.95 | ||
| Rovi Corp. (ROVI) | 0.00 | ||
| Children’s Place (PLCE) | 0.00 | ||
| National Storage (NSA) | 0.00 | ||
| FLSR (FLSR) | 0.00 | ||
| Equinix, Inc. (EQIX) | 547.73 | ||
| Athenahealth (ATHN) | 0.00 | ||
| Abercrombie & Fitch (ANF) | 15.37 | ||
| Agnico Eagle Mines (AEM) | 79.05 |
58.com (WUBA)
Why the Strength
While the Chinese online retail industry has a host of national companies with huge footprints, 58.com is succeeding by staying local. The company’s network includes about 380 Chinese cities, and allows local merchants to connect with local customers. There is a similarity to Craig’s List, in that the company’s sites include information on housing, jobs, second-hand goods, autos, pets, tickets, yellow pages and the like. 58.com has a massive database of information about both local businesses and local consumers, allowing buyers and sellers to meet up easily. The company also works hard to ensure the quality of its information, collecting reviews and feedback from customers and helping merchants to build websites and mobile apps that make commerce easier. A little over half of the company’s revenue comes from membership fees paid by local businesses. 58.com enjoyed 82% revenue growth in 2014 and quarterly growth has jumped from 81% in Q1 2015 to 196% in Q3. Earnings have been hit by the expense of buildouts of new sites like 58 Home and Guazi and the acquisition of a 70% stake in Leftbrain, a technology company, and other M&A expenses. Sponsorship by institutional investors, while still relatively low, increased steadily during 2015. While investors are skittish about China right now, 58.com (its stock symbol is pronounced “woo-bah,” Chinese for “fifty-eight”) has a strong position in online commerce and excellent prospects.
Technical Analysis
WUBA came public in October 2013 at 17, and traded as high as 59 in early 2014, before settling into a long consolidation in a tightening range. The stock got moving in early 2015 and blasted off in April to a high of 84 in May. That’s when the collapse of both the Chinese and U.S. stock markets began a correction that eventually pulled WUBA to 38 in September. WUBA has bounced back nicely from that low, touching 70 in December before an orderly correction over the past three weeks. It’s probably best to wait for evidence that investors are ready to get back on board, but a nibble here with a stop at 55 could pay off. Or simply add shares to your watch list.
WUBA Weekly Chart
WUBA Daily Chart
Ulta Beauty (ULTA)
Why the Strength
The number of true growth stocks that are holding within a few percent of their all-time highs is incredibly small; as we’ve seen in this issue, much of the strength is being seen in special situations, turnaround sectors and some precious metals. But Ulta has remained a port in the storm for three main reasons. First, of course, growth has been excellent—not only have sales and earnings cranked ahead, but all of the sub-metrics look great, too, with comparable store sales up 12.8%, e-commerce sales up a huge 56% and supporting business like salon services seeing sales up 20% in the latest quarter. Second, future growth looks very dependable, partially because of management’s top-notch reputation (CEO Mary Dillon is very highly regarded in the industry, and was actually just named to Starbucks’ Board of Directors) and partly because of the company’s breadth of products—it’s not dependent on just the high- or low-end, instead providing a one-stop shop for all things beauty. And third, Ulta’s growth is part of a longer-term trend, with more beauty sales happening in specialty stores instead of drug and department stores … and that trend is very likely to continue for years to come. The main risk here, stock-wise, is valuation—at 40 times trailing earnings, perception is already elevated, and if the market sinks further, big investors could pare back. But, so far, there’s no doubt Ulta remains one of the favorite growth stories among institutional investors.
Technical Analysis
After a mini-crash in late-2013, ULTA established a new uptrend in September 2014, so it’s not like the advance is incredibly long in the tooth—it’s not the first inning, but it’s not the most obvious stock, either (a good thing). More recently, the stock has been stair-stepping higher, with long sideways periods leading to short bursts to new highs. The latest pop higher was on earnings in early December, and ULTA has held those gains during the past five weeks, even with the market falling apart. We’re not opposed to nibbling here or on dips, with a stop near the 200-day line (currently around 164).
ULTA Weekly Chart
ULTA Daily Chart
Rovi Corp. (ROVI)
Why the Strength
Deals with Sony and AT&T have had investors flocking to this small-cap stock in recent weeks. The supplier of entertainment technology used in a variety of digital platforms, Rovi captured Wall Street’s attention by renewing patent licensing agreements with Sony and AT&T, two of its largest clients. The multi-year agreement with Sony will continue use of Rovi’s entertainment discovery platforms on all of that company’s consumer electronics devices worldwide. Those platforms include interactive program guides and multi-screen experiences used in personalized entertainment. The AT&T deal was a seven-year license agreement extension. The telecommunications giant plans to use Rovi’s program-guide technology on its new set-top boxes after the company acquired satellite TV broadcaster DirecTV last July. Rovi’s success as a company is built on its patents—it has more than 5,000 of them. Big companies such as AT&T and Sony re-upping their deals to use Rovi’s patents is good not only for the company’s sales, but also its Wall Street profile.
Technical Analysis
Last July, after losing a patent dispute with Netflix, ROVI fell from 17 to 9 and dipped as low as 8 in October. It hadn’t been higher than 11 since, until the AT&T and Sony deals were announced in rapid succession in late December, pushing ROVI shares all the way back up to 17 almost overnight. The stock has been cosolidating in the 16-to-17 range in the two weeks since, and is trading above its 200-day moving average for the first time in nearly a year. ROVI hasn’t seen that kind of stability in a while, and certainly not in a down market like this one. If the market gets going, perhaps the ROVI rally will extend to a second leg. Until then, it might be worth taking a small portion and selling if the stock retreats below 14.5.
ROVI Weekly Chart
ROVI Daily Chart
Children’s Place (PLCE)
Why the Strength
Abnormally warm weather resulted in a lighter-than-expected holiday shopping season for U.S. retailers this year, but Children’s Place performed better than most. The children’s apparel chain just raised same-store sales guidance in the fourth quarter to 6% to 7% year-over-year growth, and expects its best holiday-quarter earnings per share in years. That positive guidance comes on the heels of a fairly strong third quarter in which EPS improved by 6% over the previous year despite a 6% decline in sales, weighed down largely by foreign exchange rates. With margins improving to 8.7%, however, the company has launched a $250 million share repurchase program, amounting to roughly 20% of the company’s market capitalization at the time buybacks were announced in early December. So far, the buybacks are working, boosting the stock at a time when most retailers are struggling. The encouraging fourth-quarter guidance, announced just last week, has thrown a few more logs onto PLCE’s fire, extending the stock’s recent momentum. The Children’s Place is doing fine, but it looks particularly good to investors when compared to the otherwise slumping retail sector.
Technical Analysis
From May to November, PLCE was in a downward spiral, tumbling from 69 to 47. Then came the third-quarter earnings beat in early December, prompting a gap up from 48 to 55. The stock remained in a tight 53-55 range for the ensuing month, and then broke higher on the first day of the new trading year, topping its 200-day moving average for the first time since September. Now at 61 and having broken through all technical barriers, PLCE could continue to rise on higher-than-usual volume. If you went in, you could consider buying a little on dips and selling if it falls toward its 50-day moving average (53).
PLCE Weekly Chart
PLCE Daily Chart
National Storage (NSA)
www.nationalstorageaffiliates.com
Why the Strength
The self-storage industry is a very American invention driven by the four Ds: death, divorce, dislocation and downsizing. And National Storage Affiliates is a Real Estate Investment Trust (REIT) with a simple business plan; increase its footprint in this fragmented industry by acquiring and consolidating the operations of smaller local and regional storage businesses. This proven business model has enabled the biggest player in the industry, Public Storage (PSA), to command a valuation of $43 billion. But Public Storage is generally growing revenues at single-digit rates, while National Storage Affiliates, because it is still small (it’s sixth in the industry), is growing revenues much faster; its average growth rate over the past four quarters has been 99%! The advantage to the trust structure is that earnings from local and regional operators trickle into the trust and enable—in theory—steadily growing earnings and dividends. Right now, the dividend is $0.20 per quarter (it was increased from $0.19 in November), or $0.80 per year, for a yield of 4.5%. (PSA yields only 2.7%.) Plus, the way NSA is structured, owners of acquired companies are incentivized to stay on and provide regional acquisition expertise. In the third quarter, the company acquired 15 self-storage properties, and since October 1, the company has acquired 15 more operators, valued at about $68 million. Ideally, this pattern continues for a very long time, and both earnings and dividends will continue to grow.
Technical Analysis
NSA came public in April of 2015, so it’s still a young stock, and still being discovered by investors—which is one reason the buyers continue to overpower the sellers (profit-takers) of the stock. From an IPO at 13, the stock dipped calmly to a low of 11.5 at the market’s August bottom, and since then the trend has been up, interrupted by normal corrections. Last week, the stock hit a record high of 18—even while the broad market was taking a nosedive—and now it’s begun another normal correction. And how low might it go? The 50-day moving average is down at 16, so buying a little between here and there could work well.
NSA Weekly Chart
NSA Daily Chart
(FLSR)
Why the Strength
The fundamentals of the solar industry are well known to everybody. After a massive overbuild of production capacity years back, the industry consolidated and trimmed down. With lower costs and increased efficiency, solar power is close to parity with fossil fuels (although the slump in oil prices has temporarily tipped that balance). First Solar is a big, vertically-integrated solar manufacturer that can do everything from residential installations to grid-scale power plants. It has a global footprint, including over 10 gigawatts of installed generation capacity worldwide. The company got a big lift from a three-year extension of the solar investment tax credit (ITC) in December. And it also picked up an upgrade from Goldman Sachs that caused its stock to pop higher on January 7. Analysts like the company’s large cash stash ($1.8 billion) and its low debt (around 3%, which is down from 14% in 2012). They also find First Solar’s stock relatively cheap at 16 times projected earnings. Solar is a cyclical business, but has moved into the mainstream of electricity production solutions, and First Solar is a proven company whose earnings are solid.
Technical Analysis
FSLR was a skyrocket in 2007, when the robust global economy allowed a ton of economic incentives like feed-in tariffs and tax credits. From a high of 317 in May 2008, the stock collapsed in 2008, traded sideways for a few years, then slumped again in 2011 and 2012, falling to 24 in March 2013. After more ups and downs, FSLR began a rally at 41 in late September that has now pushed it to 66. FSLR has been trading sideways since it gapped up on December 16 on the ITC news, having given back the gains it got from the Goldman upgrade. If you want in, FSLR looks like a reasonable buy anywhere below 65. It’s a bit volatile, so keep any stop relatively loose.
FLSR Weekly Chart
FLSR Daily Chart
Equinix, Inc. (EQIX)
Why the Strength
Equinix has a couple of big things going for it, which is why its stock remains in favor (actually closing at new highs last week!). The company is a leading provider of interconnection services, co-location and other data center services around the world; basically, the company is a core partner for cloud service and big telecom providers, providing the space and infrastructure that literally allow those firms’ systems to work. That core position in many companies’ operations means nearly 95% of its revenues are recurring, with very low churn and total revenues increasing sequentially every quarter. Equinix was in a rapid growth mode for a few years, and it continues to build new and expand existing data centers and facilities at a steady rate as its current centers are filled up (cash flow should rise 24% for all of 2015; there have been no 2016 projections from management yet). But the big change a couple of years ago was the firm’s transition to a real estate investment trust—instead of being valued solely on earnings and growth, Equinix is now valued on cash flow and dividends (it pays a regular dividend that amounts to $6.76 per share for a 2.2% annual yield) and paid a big $10.95 special dividend in October. Long story short, with demand for its services likely to increase in almost any economic environment, and with interest rates remaining low, big investors are willing to pay up for Equinix’s stock today.
Technical Analysis
EQIX ran from 100 to 230 in 2011-2013 in anticipation of its REIT switch, but then sold off to 153 by the end of 2013. Since then, the stock has been in a steady-but-slow uptrend, making good progress over time but with long rest periods. The latest rest was relatively brief—shares chugged sideways around 300 for November and December—and resulted in a good-volume push to new highs last week. Buying breakouts in a bad market isn’t advised, so if you want to buy, keep it small and look for dips.
EQIX Weekly Chart
EQIX Daily Chart
Athenahealth (ATHN)
Why the Strength
Athenahealth is a Massachusetts-based technology company that helps medical practices by automating their billing, collections and medical records. The company’s cloud-based software also helps hospitals track patient care across settings, networks and different health information technology (HIT) systems. The 72,000 medical practices in the company’s network get faster payments, improved collections and automatic updates based on changing insurance reimbursement regulations. And patients get improved coordination of care and better attention to outcomes. The company has enjoyed years of double-digit revenue growth and recently reaffirmed its guidance for full-year 2015 and issued guidance for 2016 (which included a 20% revenue growth forecast, with earnings up about 50%). With customers all on a subscription basis, revenue is transparent, and the untapped market remains huge. Athenahealth is a proven winner.
Technical Analysis
One possible two-edged sword for ATHN is that short interest is unusually high, amounting to nearly 18 days of volume. And while that’s down from over 19 in November, it’s still high. That indicates a high level of skepticism about the stock’s 104 P/E ratio. But it also provides the fuel for a short-covering rally should ATHN continue the rally it’s been in since July 2015. ATHN has been consolidating its October gap up for over two months now, with support around 155 and resistance at 168. Earnings are due out on February 5 before the market opens, and the stock may just hang out until then. A small position at around 155 could work, and the company’s guidance affirmation reduces the risk substantially. Use a stop at the stock’s July–October resistance at 142 if you enter.
ATHN Weekly Chart
ATHN Daily Chart
Abercrombie & Fitch (ANF)
Why the Strength
Abercrombie & Fitch is a fashion company that sells clothes for younger customers at its Abercrombie & Fitch, Hollister and Abercrombie Kids outlets, in department stores and online. While the A&F brand is the marquee identity, the Hollister brand actually contributes more than half of the company’s revenue. The company also gets about 36% of its revenue from international sales, an area where expansion is ongoing. Of the 11 new store openings in Q3, four were international, including three in China. The company has been in the revenue doldrums for a couple of years as customers voted against the company’s designers’ choices. After a complete refresh of clothing lines and stores, earnings are expected to return to growth this year. The company’s stock just picked up an upgrade from an analyst and reviews of the firm’s new fashion lines has been positive, which is critical to plans for a turnaround in profitability. That shakeup of clothing designs and some sexy advertising keyed an earnings beat on November 20, which helped continue the momentum from the company’s August quarterly report. Young fashion is a perilous arena, but it looks like Abercrombie & Fitch is back on the right path.
Technical Analysis
ANF lost its momentum in late 2011, falling from 78 in July 2011 to as low as 15 last August. But after a couple of encouraging earnings beats, ANF has pushed back above 25, and, despite the headwind from the general market, is holding onto most of its November gap up gains. ANF is still above its rising 50-day moving average and sports a reasonably attractive 16 P/E. You can start a small position here, or wait for the stock to top its resistance at 28. If you buy here, use a tight stop around 23.
ANF Weekly Chart
ANF Daily Chart
Agnico Eagle Mines (AEM)
Why the Strength
Turmoil in financial markets, a possible hydrogen bomb test in North Korea, the usual mayhem in the Middle East and plunging commodity prices has pushed the price of gold up somewhat, which is helping gold miners like Agnico Eagle Mines catch a bid. Agnico is a good-sized ($2 billion in revenue during the past four quarters) explorer with a few lucrative gold mines (gold makes up 96% of the company’s revenues), mostly in North America. And, despite the bear market in gold prices since 2011, Agnico is cranking out solid results as it expands drilling operations. Costs have been kept in check, too. In the third quarter, total production was up 26%, and management sees 2015 production as a whole up 15% or so. Meanwhile, the firm’s all-in cost per ounce mined is expected to be $850 per ounce. Thus, what you have here is a well-managed company that, even in this low-price environment for gold (about $1,100 per ounce, versus $1,900 four-plus years ago), is able to crank out profits with decent margins (7.7% last quarter). Thus, if the price of gold can get some momentum, perception should improve in a hurry for Agnico, as its earnings will surge. Earnings are out February 10, though most of the action will be due to movement in gold prices.
Technical Analysis
AEM was up around 70 when the bear market in gold began, crashing below 25 in the middle of 2013. Since then, though, the stock has basically moved sideways, gyrating between 20 and 35 (though it did have a brief rally to 42 last year). Since the market’s meltdown last August, though, AEM has acted better, forming a firm bottom at 21, then building a base in the 25 to 30 range for 11 weeks, and finally lifting nicely last week despite the market’s dip. AEM is the type of stock that could do well even in a down market, so you can buy a small position here with a stop near 26.
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.
