Mixed Action
We’ve seen mixed action since the year began, which isn’t totally surprising given January’s normal wiggles. The major indexes are churning a bit up near their highs, something that can lead to short-term selling; at the very least, it’s telling you that buying pressures have eased as the calendar has flipped. On the other hand, we’re encouraged to see some growth stocks that had been sitting out the dance since early October begin to reassert themselves—so far this year, we’ve seen a handful of breakouts from legitimate bases, the first collection of breakouts since November, and most held well even in today’s selloff. All told, we continue to lean bullish, though we’re watching things closely.
This week’s list has a bunch of promising names, including a few with terrific growth stories. Our favorite of the week is Arris Group (ARRS), which, thanks to a huge acquisition last year, is a leading provider of next-generation set-top boxes. Try to buy on weakness.
| Stock Name | Price | ||
|---|---|---|---|
| Yelp (YELP) | 41.30 | ||
| United Therapeutics (UTHR) | 0.00 | ||
| United Continental Holdings (UAL) | 96.76 | ||
| Splunk (SPLK) | 207.67 | ||
| Pandora Media Inc. (P) | 0.00 | ||
| Medivation (MDVN) | 0.00 | ||
| JinkoSolar Holding (JKS) | 0.00 | ||
| FireEye (FEYE) | 0.00 | ||
| Broadcom Limited (AVGO) | 266.26 | ||
| Arris Group (ARRS) | 0.00 |
Yelp (YELP)
Why the Strength
Yelp has come back to life during the past couple of weeks, as investor perception of the company’s dominant local advertising platform improves. The firm’s website, which now covers more than 40 markets in 24 countries (the latest launch was in Portugal in December), connects buying-oriented consumers—Yelp users are very likely to buy something within a few days, if not immediately—with local businesses via user-generated content (47.3 million cumulative reviews at the end of September). Thus, it pays for businesses to take control of their accounts, and they are—active local business accounts totaled 57,200 in the third quarter, up 61% from a year ago, and a recent study by one analyst showed great advertising figures in a variety of industries in most of the markets Yelp serves. As we’ve written before, while the valuation here is huge (28 times revenues!), we believe institutions are attracted to the story because, not only is growth rapid (see table below), but it’s relatively predictable. Competition is muted (the network effect should keep Yelp in the lead going ahead), and most of its markets have enjoyed a similar growth trajectory in terms of number of reviews and eventually local advertising revenues, and even the cities it’s operated in the longest (starting back in 2005 and 2006) are still expanding rapidly. It’s not without risk, but Yelp’s story remains very big.
Technical Analysis
YELP had a huge run from November 2012 through September of last year, rising nearly five-fold during that time. A pause was needed, and that’s what the stock did, first in a very sloppy manner (notice the wide price swings each week in September and October), but then more calmly in recent weeks. And then last week, YELP ripped higher on a big pickup in volume, marking new price highs. It wasn’t the best basing process in the world, and today’s dip was a bit ugly. Still, YELP hasn’t done anything wrong, so it’s fine to take a small position here.
YELP Weekly Chart
YELP Daily Chart
United Therapeutics (UTHR)
Why the Strength
There is only one big story for United Therapeutics, and that’s its family of drugs for the treatment of pulmonary arterial hypertension (PAH), or high pressure in the arteries of the lungs. There about 300 new cases of PAH diagnosed every year, and the drugs that United Therapeutics makes to treat it are very expensive. One vial of Remodulin (for injection) costs about $12,500 and a year’s prescription for Tyvaso (for inhalation) runs north of $100,000. The company has also just scored a trifecta, gaining approval from the FDA for an oral form of its PAH treatment called Orenitram. The approval came three months early. While it won’t be available for about six months, Orenitram is expected to cost about $150,000 per year. And since United Therapeutics gets nearly 90% of its annual revenue from its family of PAH treatments, this news made a big impression on investors. It remains to be seen how large the approval’s impact on revenue will be, as many analysts think that the pill form of the drug will mostly take business away from its injectable or inhalable forms. United Thereapeutics also has a cancer drug in Phase III clinical trials, but Orenitram is the big story now.
Technical Analysis
UTHR has been in a bumpy uptrend since late 2011, but it wasn’t strong enough to earn an appearance here until UTHR gapped up on monster volume on December 23 following the Orenitram news, jumping from 85 to 115. The stock has now had 13 trading sessions to digest that gain, and it’s given back only a few points. Support looks firm around 110, so UTHR looks like a good buy here. A dip all the way to the stock’s 50-day moving average, now at 97, would be a warning sign.
UTHR Weekly Chart
UTHR Daily Chart
United Continental Holdings (UAL)
ir.unitedcontinentalholdings.com
Why the Strength
Three years ago, United Airlines and Continental Airlines merged, forming one of the world’s largest air carriers. With the biggest fleet of planes in the industry and more destinations than any competitor, United Continental has the scale to control costs and create efficiencies. That doesn’t mean that travelers love the airline, but investors are once again enthusiastic after an announcement on January 9 that the company’s revenue per seat mile had jumped 12.5% in December. Even though part of this improvement was due to the lateness of Thanksgiving and a high level of canceled flights in late December, United’s stock gapped up on the news. United Continental’s revenue growth was flat in 2012, as the airline continued to concentrate on integrating its combined operations. But the trend in 2013 has been up, with 1% gains in Q1 and Q2 and 3% in Q3. The company has said that it should have enough cash on hand to begin paying a dividend in 2015, a rarity for an airline. As the largest of the legacy carriers—the airlines that have been around long enough to have old unions and old infrastructure to deal with—United Continental is using its scale to fight off competition from younger, more nimble airlines. The company is expected to announce Q4 and 2013 results later this month, although the exact date hasn’t been set.
Technical Analysis
UAL has been in a bumpy uptrend since August 2012, when it finished a steep correction at 17. The stock rallied to 37 in July 2013, which was about in the middle of an eight-week consolidation that centered on 32. After forging ahead to 40 in October and November, UAL sagged a little in December. When the good news on December’s results came out, UAL jumped from 39 to 46 in just two days. The stock is now holding onto those gains, but will likely trade sideways as investors await quarterly and annual results. We think UAL has considerable upside potential, but recommend waiting until results are out to establish a position. A dip below 40 would be bearish.
UAL Weekly Chart
UAL Daily Chart
Splunk (SPLK)
Why the Strength
Lots of companies are collecting enormous amounts of information about their customers, yielding what some analysts call Big Data. San Francisco-based Splunk makes software that makes Big Data useful by collecting, managing and analyzing all that information. The company has booked just four profitable quarters over the past three years, but investors are more interested in the company’s revenue growth, which was over 80% in 2011 and 2012 and over 60% in 2013. Analysts have also been enthusiastic about Splunk, with UBS upgrading the company’s stock to buy just last week. Splunk is reaping the benefits of being a first mover in Big Data analytics, especially with Splunk Storm, a version of its basic software that operates in the Cloud. Splunk also offers services that will implement its software and optimize system health, plus reviews and workshops to get clients up to speed. The company announced in December that it had acquired Cloudmeter, a provider of network data capture technologies, which should strengthen its software’s ability to harvest network traffic. With dozens of industries trying to get a handle on all the information they’re collecting, Splunk is a very hot company.
Technical Analysis
SPLK came public in April 2012 at 17, but has never traded below 26. After a post-IPO base-building spell, the stock began a rally at 26 in November 2012 that’s still going on today. SPLK gapped up last September from 48 to 55, then built a rising base. Another gap up in late November led to a six-week consolidation with support at 68. SPLK bounced into new all-time high territory after last week’s upgrade, and has spent the last four sessions trading sideways. You can start a position on any weakness. Use a stop at 65, which was resistance in November.
SPLK Weekly Chart
SPLK Daily Chart
Pandora Media Inc. (P)
Why the Strength
Pandora is known as an Internet radio start-up, but in reality, the company is the largest radio station in the country—its service has the most radio listener hours in 12 of the top 15 markets in the U.S. (and is second place in two others, and third place in the other!). And what’s most amazing is that the firm is still just scratching the surface, with Internet radio as a whole making up just 11.5% of all radio listening (8.6% of which is owned by Pandora), with terrestrial radio still making up 80% of the total. As millions more smartphones and tablets are sold, along with autos equipped with Pandora (one-third of new U.S. autos were pre-equipped with Pandora), that share is sure to grow. The big risk has always been competition; Apple’s iRadio and other Internet radio products raised the risks that Pandora would lose share, but it hasn’t happened. With a dominant brand, the firm continues to steadily collect more users (totaling 6.2 million in December), while listener hours (13 million) and share of total hours of radio (8.6%) increase, leading to greater advertising and subscription revenue. (Ads make up about 80% of total revenues, with paid subscriptions making up the rest.) With the major trends in place, there’s no reason to think Pandora can’t get much, much bigger in the years ahead. Earnings are due February 5.
Technical Analysis
P has had a huge run since November 2012, rising nearly five-fold during that time. Clearly, the stock isn’t in the first inning of its advance, but the recent pullback (at its lows two weeks ago, the stock hadn’t made any progress for nearly four months) seems to have worn out most weak hands. And last week’s big rise came on the heaviest weekly volume since September, a sign that big investors were grabbing shares. P is usually very volatile, so we don’t advise diving in with both feet, but a small position here with a stop near 29 makes sense.
P Weekly Chart
P Daily Chart
Medivation (MDVN)
Why the Strength
Medivation is an up-and-coming biotech company whose new prostate treatment has big-name competitors like Johnson & Johnson worried. The company acquires, develops and sells biopharmaceuticals, targeting drug candidates for limited or unmet medical needs. Medivation’s potential blockbuster drug candidate, XTANDI, was approved by the FDA to treat specific types of prostate cancer in 2012. The drug was developed in partnership with Astellas. It has been a slow grind higher for XTANDI in the prostate cancer market, but the drug is finally gaining some serious traction. In fact, XTANDI sales rose 32% to $108 million in the third quarter (Medivation gets a portion of that revenue), easily outstripping a 3% quarter-over-quarter sales increase for Johnson & Johnson’s market-leading prostate cancer drug Zytiga. Additionally, XTANDI is poised to grab market share overseas, as well, with the drug now approved in 12 countries and applications for approval filed in 35 more countries. But the real threat to Zytiga is that XTANDI could receive FDA approval for pre-chemotherapy treatment, a development that would eliminate Johnson & Johnson’s exclusivity as a second-line treatment in the States. We like Medivation’s prospects, with XTANDI well positioned to continue to seize market share in prostate cancer treatment.
Technical Analysis
Following the FDA’s approval of XTANDI in November 2011, shares rocketed nearly 500% over the ensuing 12-month period, riding solid support at their 10-week moving average. MDVN topped out near 60 in late 2012, and spent 2013 chopping around in a 20-point range between 40 and 60. This volatile period now appears to have come to an end; following a quarterly report in November 2013, MDVN broke out above stiff resistance at 60. A dip back into the recent base would be worrisome, but right here looks like a decent entry point.
MDVN Weekly Chart
MDVN Daily Chart
JinkoSolar Holding (JKS)
Why the Strength
JinkoSolar is a Chinese solar company that’s taking part in the revived global interest in renewable energy. The company is a vertically integrated manufacturer, with about 1.5 gigawatts (GW) of capacity in silicon ingots, wafers and solar photovoltaic (PV) cells and 2.0 GW in capacity for PV modules. China is the company’s largest market, including ownership of PV generation projects that sell electricity that will reach an estimated 500 MW of installed capacity by the end of 2014. The government of China is expected to increase its commitment to clean energy, with urgency very high now given the appalling air pollution in many Chinese cities. JinkoSolar also gets about a quarter of its revenue from Germany and has marketing offices in Italy, Switzerland, San Francisco, Australia and other countries. The immediate sources of JinkoSolar’s fascination for investors are 1) the news that the company has negotiated a major deal with China Development Bank for the financing to build three solar generation projects and 2) news that JinkoSolar would take over the Hainan electrical production assets of Zhejiang Topoint Photovoltaic as part of Topoint’s reorganization in a deal that will add about 100 MW of capacity. The big story here is the global rise in demand for PV capacity, but JinkoSolar is also adding value with its growth and aggressive moves by management.
Technical Analysis
JKS went over the falls in 2011 and the first half of 2012, falling from a high of 42 in late 2010 to 2 in July 2012. After a big correction in early 2013, the stock broke out past 10 in July, past 20 in September and all the way to 35 in late November. A stiff correction in late November and early December pulled the stock back to 25, but it bounced back immediately and cleared 35 again last week. This is a high-volatility issue, and buying well is important. You can buy on the current dip, but use a stop in the upper 20s.
JKS Weekly Chart
JKS Daily Chart
FireEye (FEYE)
Why the Strength
FireEye is a new company that, thanks to its unique products and a blockbuster acquisition, has an outstanding growth story that could take it very, very far. The company (which was partly funded by the CIA’s venture capital arm!) is a leader in the network security market with a next-generation platform that can detect threats as they happen in a client’s web or email systems (competitors’ systems look backwards, guarding only against threats that have previously been detected). That has led to huge growth for FireEye, but the company doubled down last week, buying peer Mandiant for $1 billion in cash and (mostly) stock. Mandiant is a next-generation leader in incident response, investigation and remediation (it ID’d China in cyber espionage last February). Thus, the combined company looks to be the firm with, by far, the best security technology in the marketplace (with tons of cross-sell opportunities to each firm’s existing customers). The “new” FireEye guided investors to revenues of around $400 million in 2014 (up more than 50%), with bookings next year alone near $550 million; chances are those figures are conservative. Of course, as the firm invests in marketing, distribution and even better products, losses are likely for a while, but we think the stock could morph into an emerging blue-chip in the rapidly-growing network protection market. We like it.
Technical Analysis
FEYE just came public in September, and it didn’t do anything impressive, building a cup-shaped base on light volume. Then came the Mandiant acquisition, and that changed everything—the stock exploded 39% on 14 times average volume, and then marched even higher before pulling back late in the week. Obviously, after such a move, some bobbing and weaving is possible (and FEYE needs to offer a bunch of shares to pay for the purchase). Still, the nice base and humongous blast-off is intriguing; you could buy a small position here or on weakness, with a loose stop below 50.
FEYE Weekly Chart
FEYE Daily Chart
Broadcom Limited (AVGO)
Why the Strength
Avago Technologies is a designer and global supplier of analog semiconductor devices, including optoelectronics, radio-frequency and microwave components, power amplifiers and application-specific integrated circuits. While the company’s chips are used in more than 6,500 devices worldwide, Avago’s most prominent claim to fame is its long-term deal to supply power amplifiers and components for Apple’s iPhones and iPads. In fact, Foxconn (which manufactures Apple iPhones and iPads) accounts for roughly 17% of Avago’s sales. In addition to Apple, Avago supplies key components for Samsung, Huawei and LG. Going forward, Avago’s biggest potential revenue source is Small Cell BTS (base transceiver station) systems, which are key to managing LTE (4G) cellular networks. The company has seen strong growth for several years, but its most recent quarterly report sparked considerable investor interest. Specifically, the company saw third-quarter earnings soar 19% as revenue rose 16%, year-over-year. The company also placed fourth-quarter guidance well above the consensus estimate. But the biggest headline mover for Avago was its Dec. 17 announcement that it was buying competitor LSI Corp. for $6.6 billion. The move more than doubles Avago’s bottom line, with annual revenue expected to arrive near $5 billion, and is seen as accretive for the company.
Technical Analysis
AVGO spent two years starting in mid-2011 bouncing around between support at 30 and resistance near 40. This dry spell ended in mid-2013, as strong iPhone 5S and 5C sales helped boost AVGO out of the doldrums and past long-term resistance at 40. Bolstered by their 10-week and 25-week moving averages, shares rallied to a high north of 47 by mid-October. More recently, Avago’s buyout of LSI has provided additional rally fuel, prompting a significant spike in volume and lifting the shares north of 50. Surprisingly, AVGO is not heavily overbought, but we still recommend buying on dips to ensure a better entry price.
AVGO Weekly Chart
AVGO Daily Chart
Arris Group (ARRS)
Why the Strength
Broadband hardware maker Arris Enterprises is poised for a major growth surge in 2014 as demand for its products surge thanks to next-generation TV services. The company’s acquisition of Motorola Mobility’s Home business—which more than tripled the company’s size—has allowed Arris to become the leading video client provider (read that as set-top boxes), with more than 500 customers in 70 countries. Since the acquisition, Arris’ revenue has spiked from roughly $350 million in the first quarter of 2013 to more than $1 billion in each of the past two quarters! The company’s most recent coup is a deal with Comcast, the largest cable TV operator in the U.S. Specifically, Comcast is launching Arris’ XG1 gateway for its next-gen TV service. Furthermore, Comcast is deploying Arris’ E6000 Converged Edged Router to enable its converged cable access platform. Looking ahead to 2014, analysts are projecting sales growth of 31% for Arris, with a nationwide push toward IP TV seen providing a significant boost to the company’s bottom line. There is also the potential for a continued short-covering rally for Arris shares; while short interest has fallen off of late, there’s still 5.7 million shares short.
Technical Analysis
ARRS has had its fair share of starts and stops during the past five years, but the stock is now in a firm uptrend. In fact, the acquisition of Motorola Mobility’s Home business provided the catalyst to quickly propel ARRS to the 18 area by early March 2013. The stock ultimately succumbed to a round of profit taking, but quickly recovered, bouncing off support near former resistance at 15. Now, with volume rising steadily, ARRS has blown past the 20 level to trade at multi-year highs north of 24. Shares remain a bit overheated, so we recommend buying dips, with a target near 23.5.
ARRS Weekly Chart
ARRS 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.
