Up, Down, Up, Down, Up ...
Current Market Outlook
The market remains all over the place, with nearly every day bringing another 1%-plus move in the major indexes; such wide-and-loose action isn’t usually a good thing after a big market advance. That said, our outlook isn’t negative here (we’re still more bullish than bearish), and we continue to see more and more stocks set-up to get going … if the bulls can create a real, sustained uptrend. For now, though, it’s best to hold your top performers, do a little buying (preferably on weakness) and hold some cash as we wait for the market to show its true colors.
This week’s list is encouraging, as we’re not having any trouble spotting stocks that have consolidated tightly or recently popped to new highs on good volume. Our Top Pick is the first big-cap growth stock to surge above resistance this week—Chipotle Mexican Grill (CMG), which remains a great cookie-cutter story.
| Stock Name | Price | ||
|---|---|---|---|
| Valeant Pharmaceuticals (VRX) | 0.00 | ||
| Rackspace (RAX) | 0.00 | ||
| Rackspace (RAX) | 0.00 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Leggett & Platt, Incorporated (LEG) | 49.79 | ||
| D. R. Horton (DHI) | 66.55 | ||
| Chipotle Mexican Grill (CMG) | 773.32 | ||
| CF Industries (CF) | 45.23 | ||
| Brunswick Corporation (BC) | 0.00 | ||
| Alkermes (ALKS) | 0.00 | ||
| Align Technology Inc. (ALGN) | 316.20 |
Valeant Pharmaceuticals (VRX)
Why the Strength
Valeant Pharmaceuticals provided an infusion of confidence for investors last week, when the company boosted its fourth-quarter and full-year 2015 earnings guidance. Formerly known as Biovail, Valeant is Canada’s largest publicly traded drug maker, providing specialty neurological and dermatological medications such as the genital herpes treatment Zovirax, the acne treatment Acanya and the antidepressant Wellbutrin XL. On Thursday, Valeant lifted its fourth-quarter guidance to $2.55 per share, instead of the expected $2.50. Valeant is expected to release its next quarterly report around February 26 (the date has yet to be officially announced). For fiscal 2015, the company set a target of $10.10 to $10.40 per share for earnings and sales of $9.2 billion to $9.3 billion, above or at the high end of Wall Street’s expectations. The news prompted a string of “buy” rating reiterations from the brokerage community, as well as a price-target increase to $179 from Barclays. Although larger aquisitions are difficult to predict, CEO Mike Pearson stated that a “steady flow” of small and medium size deals will remain a priority throughout 2015. Valeant reportedly has its eyes on more than 100 smaller potential acquisitions!
Technical Analysis
Following a blistering 2013 that saw VRX shares nearly double in value, 2014 was more subdued. Shares attempted to extend their breakneck pace into February, with VRX quickly soaring toward the 155 region. Despite this, market pressures forced VRX to an annual low of 106 in August. Shares have since rallied back, and last week’s news propelled VRX past its short-term resistance at 145. Shares are still a bit hot, but we believe VRX dips are buyable.
VRX Weekly Chart
VRX Daily Chart
Rackspace (RAX)
Why the Strength
Rackspace Hosting does precisly what the name says, hosting more than 100,000 business websites, IT platforms, and email and cloud computing activities on its more than 100,000 physical servers. The company’s nine data centers worldwide serve more than 120 countries, and Rackspace is recognized in North America and Europe as the leader in cloud-enabled managed hosting. A specialty in running hybrid cloud operations (a combination of public and private cloud) and enormous expertise in building large-scale operations gives Rackspace its core competency, and Rackspace bases its marketing on its “fanatical support” for customers’ sites and cloud activities, a claim the company takes so seriously that it trademarked the phrase. Revenue growth has slowed from the 60%+ in 2006 and 2007, and averaged 17% growth through the first three quarters of 2014. Rackspace’s 19 previous appearances in Cabot Top Ten Trader attest to the company’s long-term growth story. The company’s earnings report is estimated for the second week of February, but a small position now will allow time to get comfortable.
Technical Analysis
RAX was a rocket from 2009 through 2012, trading above 80 in January 2013. After its monster run, the stock experienced a major correction in February 2013 that eventually pulled it as low as 26 in May 2014. The stock’s rehabilitation began that same month, when a positive earnings report caused a one-week jump to 37. It took six months of volatile trading at that level, but RAX finally broke out to the upside in November 2014. RAX has now been trading sideways between 46 and 48 since early December. If the news from the company’s Q4 and 2014 earnings report is good, it will make a fine base for future gains. You can take a small position here, but keep it small and use a stop at 43.5.
RAX Weekly Chart
RAX Daily Chart
Lululemon Athletica (LULU)
Why the Strength
With 15 appearances in Top Ten, Lululemon is no stranger to growth investors. The Vancouver, British Columbia-based maker and retailer of high-end yoga and leisure wear has been consistently profitable and grew sales at a great rate for years before slowing to just 16% growth in fiscal 2014. Revenue growth has averaged around 11% for the last three quarters with earnings declining slightly during the last two quarters. Investors are interested in Lululemon because the company is still in “recovery mode” from a fall from grace caused by disappointing results and a couple of embarrassing product glitches (transparent yoga pants) that tarnished its reputation. Investors also noted that the company netted 19 new corporate-owned stores during the latest quarter, bringing its total to 289 stores. The final reason for investors’ enthusiasm is management’s boost to its Q4 estimates this morning based on strong holiday sales and improving sales currents. Q4 earnings predictions were raised from 65 to 69 cents to 71 to 73 cents per share, with estimates of same-store sales increases between 6% and 7%. It looks like Lululemon is back on track for strong growth.
Technical Analysis
LULU topped out in 2012 and 2013, then bumped downhill hard in 2014. But after putting in a solid bottom at 38 from June through October, the stock caught a strong updraft in late October and has had only one down week during its sprint from 39 on October 15 to 60 last week. LULU gapped up today when investors got news of the improved projections from management. With the 25-day moving average back just below 54, LULU will need a little time (and perhaps a bit of a pullback) to digest this gap up. Look to buy on a pullback toward 62, or at least some consolidation at this level. A stop at 54 will give the stock a little room while protecting your position.
LULU Weekly Chart
LULU Daily Chart
Leggett & Platt, Incorporated (LEG)
Why the Strength
Leggett & Platt is a home and office furniture maker, but not in the sense of having a factory with mattresses and sofas pouring out. Rather, the company produces furniture components, including mattress springs, pocketed coils, power foundations, bed frames, carpet cushion and the like. The company’s Industrial Materials division makes steel rod, wire and specialty products that go into automotive seating (and their own mattress springs) and other industries. The Commercial Fixturing & Components division makes retail display fixtures for major retailers, plus a variety of work furniture like office chairs. The Specialized Products division is a leader in quilting, sewing and manufacturing mattresses and seating for commercial vehicles. This integrated structure allows Leggett & Platt to supply its own materials while also selling to outside manufacturers. This is a steady growth business, and the company’s handsome 2.8% annual dividend yield is appropriate for a company that expects single-digit revenue growth. Investors are enthused about the company right now because its Q3 results included uncharacteristically strong 14% revenue growth with 31% earnings growth. Q4 results will be released on January 29.
Technical Analysis
LEG has traditionally been a pretty slow mover, with good progress over time but long stretches of corrective action. The rally that began in January 2014 pushed LEG from 29 to 36 in September before a market-wide correction pulled it down again. When LEG rebounded in October, a burst of energy from its Q3 earnings kicked it to 43 in late December, and after a couple of dips to the 50-day line, it’s has been a rocket in the past week. Buy LEG under 44, with a stop at 40.
LEG Weekly Chart
LEG Daily Chart
D. R. Horton (DHI)
Why the Strength
For the past 20 months, homebuilding stocks have done a whole lot of nothing, bobbing up and down as investors bet on the possibility of a new sustained trend in the housing market … either up or down. Now, though, it’s looking like a new uptrend could be getting underway, something we’ve long thought was likely—after a historic housing bust (housing starts fell 75% in just over three years!), the odds favored a long, slow recovery in the industry. Even now, housing starts are still near the low-end of the past 70 years. And with homebuilders like D.R. Horton (the largest in the country, closing 46% more homes than the next largest firm) having already cut costs to the bone, that upturn is likely to crank earnings higher for many years to come. In the September quarter, earnings growth was just so-so (up 12%), but the future looks bright—new orders that quarter rose a whopping 38% (the dollar value was up 41%), while backlog at the end of September was up 29% from a year ago. Just as important, the combination of sub-4% (and falling) mortgage rates, along with a pickup in the job market, creates something of a perfect environment for the group in the year ahead. All in all, we think D.R. Horton can do very well.
Technical Analysis
DHI has a simple but powerful chart. It rallied from 8 to 28 during 2012 and early 2013, and has since built a huge launching pad between 18 and 28 as the stock consolidated that move. And now DHI looks ready to run—the stock just etched a tight five-week base near its multi-year highs, and starting last Wednesday, began bolting higher on heavy volume. We think you can buy around here, with a stop a bit below 24 to keep risk in check.
DHI Weekly Chart
DHI Daily Chart
Chipotle Mexican Grill (CMG)
Why the Strength
Chipotle Mexican Grill is well known to most investors (and burrito fans) at this point. The stock has been a market leader since 2010 (with 2012 though mid-2013 a big exception) and the company appears to have all the makings of another huge restaurant winner—another McDonalds, so to speak. The firm’s Mexican fare tastes good, of course, but the vast majority of the beef, pork, and chicken it serves are from naturally raised animals, and its vegetables are generally organically grown too. Going forward, the plan is simple—continue to expand the store count from the current 1,724 (it’s aiming to open 190 to 205 new stores in 2015 and could more than double its store count in the long term), boost sales at currently open restaurants (it expects low- to mid-single-digit growth in already-open locations) and to keep margins buoyant, often offsetting some higher food costs with mild price hikes on its menu. Moreover, we’re intrigued by a couple of the firm’s young businesses—its ShopHouse and Pizzeria Locale operations have just a handful of restaurants each, but they take the fast-casual concept to Asian food and pizza, respectively, and have huge potential long-term. Throw in recent trends of accelerating sales and earnings growth, and there’s still a lot to like about Chipotle.
Technical Analysis
CMG looks positioned to be a big-cap leader of any growth stock advance from here. The stock etched what now looks like a base-on-base formation (one from November 2013 through July 2014, and another from August through December 2014), but last week saw shares explode to new highs on very good volume as soon as the market began to bounce. We’d prefer to see the relative performance (RP) line join the stock in new high ground, but given the volume on the breakout, we’re OK taking a position here. Earnings are due out February 3.
CMG Weekly Chart
CMG Daily Chart
CF Industries (CF)
Why the Strength
CF Industries is one of the larger players in the nitrogen fertilizer industry, a business that is cyclical in the short-term but expanding nicely (due to higher planting needs worldwide) over the long term. The industry trend has been down during the past year and a half, as prices softened and as capacity ran a bit ahead of supply—even so, it’s worth noting that this company remained extremely profitable, with profit margins generally north of 20% and huge free cash flow that management has used to pay a healthy dividend (2.0% annual yield) and buy back a bunch of shares (the Q3 share count was down 13% from a year ago, and a new $1 billion share buyback plan was announced in November). That’s all to the good, and now the stock is benefiting from the perception that declining inventories (down 54% in the U.S. last year to the lowest levels since October 2010!), a temporary shutdown of a gigantic Russian potash mine and a healthy corn planting season this year should help 2015 pricing, in effect stabilizing the industry’s slide since mid-2012. (Lower natural gas prices, which are a big cost to fertilizer makers, are also a big plus.) All told, analysts see earnings creeping higher next year, and if that holds true, CF should produce a torrent of cash during the next few quarters. Earnings are likely out in early-to-mid February.
Technical Analysis
Despite declining earnings (from $27.75 per share in 2012 to an estimated $18.82 last year), CF has performed decently during the since mid-2013. The stock, though, hit a wall in March of last year, and despite a brief foray to new highs in October, it hadn’t made any progress as of mid-December. But now the stock has changed character—it’s bolted to new price and RP highs on good volume as investors anticipate better times ahead. We think dips are buyable.
CF Weekly Chart
CF Daily Chart
Brunswick Corporation (BC)
Why the Strength
Brunswick has come a long way since it made its first pool table in 1854, but the company has never lost its focus on recreational equipment. The company’s main focus has shifted over the years to marine engines and boats, starting with its 1961 acquisition of Mercury Marine. Additional buyouts brought Bayliner, Boston Whaler, Maxum, Sea Ray and Trophy yacht and pleasure boat lines into the Brunswick fold. Brunswick now gets more than half of its revenue from selling boat engines, another quarter from selling boats, and the rest from sales of fitness equipment and its traditional bowling and billiards businesses. The excitement about Brunswick comes from the boat-building segment, where demand for larger yachts has led to expanded production at Sea Ray. A move toward larger, higher-margin boats is expected to drive stronger results for the company when Q4 results are announced on January 29 before the market opens. Management has built Brunswick into a diversified company with a unified focus on leisure and fitness, and the improving economy is expected to drive earnings toward $3 per share this year.
Technical Analysis
BC and its small dividend (0.9% annual yield) have been in a strong uptrend since its positive Q3 results came out just as the U.S. market was rebounding from its September/October correction. BC had already surged from 38 to 43, and the good quarterly results gave the stock a boost to 49 on November 12. The stock has been in an uptrend since then, but the advance has been punctuated by three pullbacks and subsequent recoveries to new highs. BC popped as high as 55 last Thursday, but has now relaxed back to around 53. If you like the story, you should be able to initiate a position on a pullback to below 53. A stop at 48 looks reasonable.
BC Weekly Chart
BC Daily Chart
Alkermes (ALKS)
Why the Strength
Formed in September 2011 by the merger of Alkermes and Elan Drug, the current incarnation of Alkermes uses its proprietary drug-delivery systems to create versions of drugs that require less frequent dosing. One such drug is Risperdal Consta, which is a long-acting version of Johnson & Johnson’s schizophrenia and biopolar medication Risperdal. Alkermes also manufactures Vivitrol for the treatment of alcohol dependence. The company has seen steady growth since the merger, but Alkermes caught fire recently due to positive Phase II data on its latest candidate, ALKS-3831. This drug is a combination of Eli Lilly’s schizophrenia drug Zyprexa and a product called samidorphan, which Alkermes had hoped would reduce weight gain—a common side effect of Zyprexa use. According to the Phase II trial data, patients using ALKS-3831 gained 37% less weight than those on Zyprexa alone. Since a quarter of adults and more than half of adolescents that take Zyprexa average a 15% gain in weight, ALKS-3831 could see significant sales once approved. Alkermes also released positive trial data on a second pipeline medication recently, when ALKS-5461, a major depression treatment, showed positive trial results for safety and tolerability. While 2015 should show some growth, 2016 is looking to be huge for Alkermes, and investors are discounting that now.
Technical Analysis
Last year was rocky for ALKS. Shares had several starts and stops, with the stock quickly jumping above 50 in early February before succumbing to selling pressure in March. Shares eventually settled between resistance at 50 and support at 40 before turning higher in late October. Heading into 2015, ALKS squeezed into resistance at the 60 region, but last week’s trial data provided the spark that propelled the stock past this hurdle. We recommend buying dips to avoid chasing the rally.
ALKS Weekly Chart
ALKS Daily Chart
Align Technology Inc. (ALGN)
Why the Strength
If Align Technology has its way, metal braces will eventually be a thing of the past. The company produces and sells the Invisalign system; a system of clear, removable dental aligners designed to move a patient’s teeth into the desired positions without the pain of metal wires, dental glue, or metal bands and brackets. The company also provides training and offers an online ClinCheck application that simulates tooth movement and suggests appropriate corrective Invisalign products. This is obviously a mass market, and Align experienced steady revenue growth of nearly 20% during the past four quarters, with earnings growth of 44% during the same period. Analysts are predicting 2015 earnings to rise 19%, and with Align now offering expanded Invisalign products for the treatment of more severe G3, G4 and G5 (deep bite malocclusions) patients, these forecasts may be too conservative. Align remains a strong player in the orthodontics industry, with Invisalign case volume growth across all channels, a strong balance sheet and healthy cash flow. Align has historically seen consistent growth in Invisalign treatment during summer, so pay close attention to the guidance at the company’s January 29 earnings announcement.
Technical Analysis
ALGN shares made great strides in 2013, more than doubling in value. 2014, however, was a quiet year for ALGN investors. The stock retreated from a perch north of 60 early in the year before settling into a trading pattern between 50 and 60. A brief correction in October saw ALGN plunge to the 43 region, but the stock quickly rebounded as buyers snapped up ALGN at bargain prices. Last week kicked shares north of 60 for the first time in a year, and on big volume, too. Try to buy on dips.
ALGN Weekly Chart
ALGN 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.
