Bubbly but Strong
Current Market Outlook
Stocks had another great week, with the major indexes and most leading stocks levitating higher amidst a vacuum of selling pressure. There’s no question things are a bit bubbly here, with most things trading miles above support and moving averages, and as investor sentiment shifts toward greed. Still, more important to us are the intermediate-term trend (clearly up) and the fact that momentum like we’re seeing generally leads to higher prices down the road. Thus, overall, you should remain bullish, but (a) we still favor being choosy on the buy side, looking for pullbacks and shakeouts in stocks that have shown excellent strength and persistency, and (b) having a plan as we enter earnings season, including looking for new leadership that emerges.
This week’s list has something for everyone, from hot growth stocks to news-driven moves to some turnaround situations. Our Top Pick is Red Rock Resorts (RRR), which is part of the strong gaming group and has began to take a breather after a persistent advance.
| Stock Name | Price | ||
|---|---|---|---|
| Abercrombie & Fitch (ANF) | 15.37 | ||
| Arch Coal (ARCH) | 82.27 | ||
| Express Scripts Holding Company (ESRX) | 79.25 | ||
| Heron Therapeutics (HRTX) | 35.25 | ||
| Matador Resources Company (MTDR) | 27.89 | ||
| Nucor Corporation (NUE) | 66.20 | ||
| Red Rock Resorts (RRR) | 34.70 | ||
| Stifel Financial (SF) | 56.32 | ||
| Universal Display (OLED) | 187.54 | ||
| Wingstop (WING) | 121.52 |
Abercrombie & Fitch (ANF)
Why the Strength
Abercrombie & Fitch is a fashion company that sells clothes for younger customers through its Abercrombie (about 42% of sales) and Hollister (58%) divisions. The company has been through some tough times, as brick-and-mortar retail has been under huge pressure and the firm seemingly fell behind the fashion curve. Abercrombie’s revenue has declined for the last four years and earnings have been in the red in five of the last seven quarters! But what investors are seeing is a company that has closed a ton of underperforming stores to cut costs (with 60 additional U.S. stores targeted for closing) and plans to open six new stores globally and seven new Abercrombie prototype stores that are expected to continue the brands’ recovery. The company enjoyed a 5% increase in revenue in the latest quarter, which also featured a big rebound in earnings. The U.S. retail industry enjoyed a strong holiday shopping season, and analysts are forecasting 84 cents per share in earnings in Abercrombie’s Q4 results (quarter ends January 31, so the quarterly report likely isn’t out until late February). Investors may also be factoring in a slight chance that Abercrombie might be a target of Amazon’s continuing push into brick-and-mortar locations, although Target is a more likely … target. Looking out a bit, there’s also optimism surrounding the corporate tax cut, both in terms of direct benefit to Abercrombie and to possible higher consumer spending as some bonuses/raises are paid out.
Technical Analysis
ANF lost its momentum in late 2011, falling from 78 in July 2011 to as low as 9 last July. But the stock gapped up on big volume last August and again on November 17, and kept creeping higher to trade above 19 last Friday. Much will depend on the results of the company’s Q4 and full-year results, but the company’s new store strategy is also finding favor with investors. We like the fact that ANF hasn’t been able to pull back much since its November blastoff, and has support near the 25-day line. We’re OK grabbing some shares here or on weakness.
ANF Weekly Chart
ANF Daily Chart
Arch Coal (ARCH)
Why the Strength
Arch Coal is the third coal stock to appear in Top Ten in recent weeks. Arch produces both metallurgical coal (used to make steel) and thermal coal (for electricity)—it’s one of the biggest U.S. producers of one type of metallurgical coal (which is mostly shipped internationally for global steel production), and is the second largest thermal coal producer in the country as well. Demand and pricing for its coal has firmed nicely in recent quarters, with both segments accounting for about half of Arch’s cash flow. And the other part of the story here is that the company, like most of its peers, has come through a big restructuring (it came public as a new company in October 2016) that cleaned up the balance sheet (the firm had nearly $6 per share of net cash on the books at the end of September) and cut costs to the bone. The result is huge cash flow and earnings, which management is returning to shareholders via both a dividend (1.4% annual yield) and a big share buyback program—the share count dropped more than 10% in the year after Arch relisted its shares, and in December, the company swallowed up another 2.5% of shares in one fell swoop. Analysts see earnings dipping a bit this year but remaining near $9 per share, and given how the company has been trashing estimates, that guesstimate is probably low. If prices dip, there’s risk, but this looks like a cheap, powerful turnaround story.
Technical Analysis
ARCH rallied to 86 in the weeks following its relisting in 2016, but then built a year-long base; in November of last year, it was sitting around 80. Since then, the stock has changed character, trending persistently higher and easily clearing its old highs. ARCH might hit some round-number resistance near 100, but given the recent breakout and persistent advance, we think dips will mark solid entry points.
ARCH Weekly Chart
ARCH Daily Chart
Express Scripts Holding Company (ESRX)
Why the Strength
Express Scripts provides pharmacy benefit management (PBM) services (retail network pharmacy management, home delivery, etc.) to managed care organizations, employers and insurers. The stock struggled for most of 2017 as investors questioned the future of the company’s stand-alone PBM model (it’s the only one remaining), overhang from Anthem-related contributions, and the potential threat of Amazon entering the industry. But the potential for growth turned cautiousness into outright bullishness. Likely catalysts include potential M&A (Express Scripts recently expanded into total patient benefit management with the $3.6 billion acquisition of eviCore) as well as opportunities to vertically integrate with over 100 health plans and hundreds of direct payers to help them drive down costs. Industry analysts have also noted that the company could gain market share by winning business that’s up for rebid over the next two years (roughly $800 million in claims) and grabbing customers if conflicts of interest arise with the CVS/Aetna merger. While revenue will likely be flat in 2018, earnings are expected to rise 21% (thanks in part to the lower corporate tax rate) and organic growth should return down the road. Despite the recent rally, the stock trades at just 12 times trailing earnings and 10 times this year’s estimates, keeping value-oriented investors interested, too.
Technical Analysis
Shares of ESRX continued their long-term downtrend into the spring of 2017, when the stock dipped to 58 after a poor Q1 report. The stock retested that low in October, but since then, the stock’s character has clearly changed—shares rebounded off that October low and then exploded higher in early December, lifting above their long-term moving averages for the first time in months. Buyers have kept the pressure on the stock since, with last week’s jump above 80 marking a two-year high. Dips of a few points should provide good entry points.
ESRX Weekly Chart
ESRX Daily Chart
Heron Therapeutics (HRTX)
Why the Strength
Heron Therapeutics specializes in therapies for pain, inflammation and nausea. Shares are strong because the company shifted from R&D to commercialization in 2017, with revenue likely coming in around $29 million. And this year, revenues should be up an eye-popping 145% (to $71 million)! Driving the near-term growth are two treatments for chemotherapy-induced nausea and vomiting (CINV). Sustol (approved August 2016) is the market’s first extended-release, injectable 5-HT3 receptor antagonist, and is responsible for all sales to date. Over 100,000 units have been sold, and Q4 2017 revenue was up 16% over Q3. Cinvanti (just approved in November 2017) is an injectable NK1 receptor antagonist approved for both acute and delayed CINV. Heron says over one million people in the U.S. receive CINV therapy each year, and while competition exists, Heron’s superior treatments appear to be displacing older treatments rapidly. The company is also developing local anesthetics to better address pain for up to 72 hours after surgery, a solution that could be used for over 13 million procedures around the world (and, ideally, indirectly help the opioid crisis). Its candidate, HTX-011, has been granted fast track designation. Heron has completed enrollment in a Phase 3 pivotal trial. Data is due in the first half of 2018, and a potential NDA filing is likely later in the year.
Technical Analysis
HRTX fell from 42 in mid-2015 to 12 as 2017 began, and was still hanging around 13 mid-year when good news propelled shares as high as 18. But the stock wasn’t done building its bottom—it spent the next few months in a relatively tight (14 to 17.5) range before kicking into gear in mid-December. HRTX cleared resistance late in the year and extended those gains in 2018 as the firm presented at a major conference. This looks like a real breakout—dips should be buyable.
HRTX Weekly Chart
HRTX Daily Chart
Matador Resources Company (MTDR)
Why the Strength
Matador looks like a mid-cap ($3.6 billion market cap) leader of the new energy stock upturn, as shares have pushed to new highs this year. The company operates in three regions—the Delaware Basin (within the larger Permian Basin) in West Texas (accounts for 73% of total production), the Eagle Ford Shale in south Texas (14%) and the Haynesville/Cotton Valley area in Louisiana and east Texas (13%). (Of total output, about 56% is oil and 44% is gas, though the oil share is growing.) It’s apparent that the Delaware acreage is the big driver of growth here, with Matador quickly spudding new wells and selectively adding new acreage—in the third quarter, the firm’s Delaware output rose 66% from a year ago, while the usual belt tightening and efficiency gains have produced a whopping 52% decline in the average cost to drill a Delaware well since 2014 (though, to be fair, costs are perking up now that demand is rising for oil services). Depending on the area, $60 oil and $3 natural gas produces huge Delaware well returns in the 75% to 150% range. With production ramping, so is cash flow (EBITDA rose an estimated 93% last year), and investors clearly see more of that coming in 2018; analysts expect earnings to rise 59% this year, though that could easily prove conservative if the global economy and energy prices remain firm.
Technical Analysis
MTDR is one of many energy stocks busting free from a multi-year consolidation. The stock had a great run through mid-2014, hitting 30, but then suffered a couple of big dips (to 14 later in 2014 and to 11 during the early-2016 wipeout) before rallying back toward its highs early last year. But that led to another consolidation, and in mid-December, it was sitting at 27—three-plus years of zilch. Now the stock has perked to new highs, and while the RP line needs a little work, we’re OK buying a little on dips.
MTDR Weekly Chart
MTDR Daily Chart
Nucor Corporation (NUE)
Why the Strength
Nucor is a steel manufacturer that supplies the automotive, construction, machinery and appliances industries with cold-finished steel bars, sheet goods, joist girders and fasteners. It’s a low-cost operator with a variable cost structure and strong balance sheet, a combination that has historically given Nucor the flexibility to weather boom and bust cycles relatively well. The stock is doing well now because of the new 21% corporate tax rate (adds roughly $0.68 to estimated 2018 EPS), increasing raw material prices (benchmark hot rolled coil steel prices forecast to go up 11% in 2018), strength in end markets, and, critically, a potentially positive trade protection ruling. Analysts see the U.S. Commerce Department making a so-called Section 232 determination in the days ahead, then President Trump making a decision within 90 days of receiving the department’s recommendations. It’s believed Trump will target select countries to limit steel imports, as well as impose tariffs and/or quotas on some steel products. Unlikely, but possible, are quotas and/or tariffs (up to 20%) from all importing nations! Either way, Nucor is likely to benefit from higher prices and less competition. This is part of why analysts see revenue and EPS rising by 7% and 31%, respectively, in 2018. The combination of Washington action (tax cuts, trade protection) and an improving macro environment (higher prices, economic growth) are very bullish for Nucor.
Technical Analysis
NUE enjoyed a post-election surge to 66 in late 2016, then spent most of 2017 building a huge launching pad in the 54 to 62 range. The stock dipped from 60 to 54 following the release of Q3 results in late-October, but buyers pounced on the stock at that point and haven’t relented since. There could still be some resistance in the high 60s, but NUE’s trend has turned up. Like most strong stocks today, modest dips look buyable.
NUE Weekly Chart
NUE Daily Chart
Red Rock Resorts (RRR)
Why the Strength
Red Rock Resorts is still a relative newcomer to the casino scene (in operation since 1984, but incorporated just in 2015) but its combination of extensive Las Vegas operations and management of Native American casinos in northern California and Western Michigan is finding favor with investors. The company’s 10 major gaming and entertainment sites and 10 smaller casinos offer 20,300 slot machines, 350 game tables and 4,750 hotel rooms. The company is well positioned to expand if demand remains high, with master plans for expansion at current locations and seven development sites in Las Vegas and Reno. Red Rock Resorts made its Top Ten debut on November 20 after a Q3 earnings report caught investors’ attention with a fourth consecutive quarter of double digit revenue growth. The company has announced multiple ambitious renovation and expansion initiatives, like a $485 million makeover of the Palms casino, a $226 million refresh of the Palace Station and an upgrade to its slot machine management software that points to higher profitability over time. As long as Las Vegas’ gross gaming revenue trends remain positive, Red Rocks Resorts’ aggressive moves should keep it an investor favorite in the gaming sector. The recent corporate tax package is another positive factor, with favorable treatment for new investments (immediate, full expensing) likely to boost cash flow. Earnings are likely out in late February.
Technical Analysis
After coming public at 18 in April 2016, RRR climbed to 24 that August, where it ran into strong resistance that led to a very tight, very long trading range. With that coiling action in place, the stock caught fire starting in November, beginning a run that took the stock from 25 to 35 before the end of the year! RRR has since begun to catch its breath, dipping to its 25-day line a week ago before bouncing back. Shares might need more time, but we think this pause will prove buyable.
RRR Weekly Chart
RRR Daily Chart
Stifel Financial (SF)
Why the Strength
Stifel Financial is a diversified financial services company that’s riding several positive waves at once. While it’s still a relatively small investment house, its Stifel Nicolaus & Company subsidiary is getting great results from the persistent bull market and resulting increase in commissions from enthusiastic investors. The Fed’s program of interest rate increases is also increasing the value of the company’s assets, which stood at $20.5 billion in its Q3 earnings release. The company’s growth was augmented by its October 2017 takeover of B.C. Ziegler & Company, which added $4.8 billion in client assets to Stifel’s total. While the entire financial sector is enjoying positive effects from the same waves that are buoying Stifel, investors like that the company has more than twice the capital, as a percentage of assets, as the major investment banks. And the company’s aggressive M&A activity, of which the Ziegler takeover was just the latest example, is also a positive. Throw in the corporate tax cut, and analysts expect Stifel’s earnings to boom 44% in 2018, with a bigger gain possible if the bull market continues to heat up. A small (0.6% yield) dividend and a relatively tame 21 P/E adds to the attraction.
Technical Analysis
SF suffered a huge correction from 60 in June 2015 to 25 in February 2016. The stock fought back to 57 in March 2017, but then began a big base-building effort—shares dipped to 42 in June and had some fits and starts after that before finally tightening up in October and early November. The breakout came around Thanksgiving, and after taking a breather in December, SF has catapulted to new highs so far this year. The stock is thinly traded (around $25 million per day) and extended, so try to buy on dips.
SF Weekly Chart
SF Daily Chart
Universal Display (OLED)
Why the Strength
Like many of last year’s growth stock winners, Universal Display is beginning to perk up again as big investors look ahead toward further growth in the New Year. The company is the go-to play on the movement toward organic light emitting diode displays, which use less power and generally allow richer images than regular LEDs. The company’s business (material sales and royalties; Universal has more than 4,500 patents) is concentrated in just a few customers, including Samsung, whose exclusive deal with Universal expired at year-end. (Samsung is still a consistent customer and the two are reportedly working on a new contract.) A lot of focus has been on news/rumors of iPhone X demand, as that smartphone has an OLED screen (produced by Samsung), but Universal’s story is a lot bigger than just Apple—by square meters, OLED screen demand is expected to rise from 5.3 million last year to 15.1 million in 2021, and a lot of that is foreseeable due to some big investments by big players (like Panasonic and LG) in OLED production. Of course, there are risks here—customer concentration is one, and competition as some patents expire is another—but the potential remains giant as more smartphones, TVs, computers and even lights use OLEDs. It’s also a plus that the company is well managed, with no long-term debt and $380 million of cash available to invest. Analysts see earnings up 36% in 2018, though that could prove to be conservative if things go right.
Technical Analysis
OLED isn’t at the start of its advance, having originally broken out back in February 2017 at 70 and spiking to 131 in early June. Then the stock began a five-month base-on-base formation; net-net, the stock was still at 131 in late-October. Shares ramped from there to 193, before the growth stock weakness led to a dip to the 50-day line. After a six-week rest, OLED came alive last week, registering price (but not RP) highs. You can start small here or on dips.
OLED Weekly Chart
OLED Daily Chart
Wingstop (WING)
Why the Strength
Retail stocks have been all over the map lately, but Wingstop was one of the better actors, following through nicely on its powerful November breakout. To review, the company has a simple restaurant story (it offers wings three ways with 11 seasoning choices, as well as fries and some side dishes) but has a very long runway of growth—Wingstop ended 2017 with 1,133 restaurants worldwide (1,004 are franchised), up 13.5% from a year ago, and management has some very ambitious goals. It wants to become a top-10 global restaurant brand, which means gunning for thousands more locations in both the U.S. and overseas. (The firm already operates 106 restaurants in eight countries outside the U.S. and is entering another four countries this year; all told, it sees the potential for 1,035 locations in these countries alone.) The stock has gained strength recently due to an excellent early read on Q4 results—same-store sales rose 5.2%, well above expectations and capping off the 14th straight year of gains in that metric. System-wide sales rose 15.6% in the quarter, which should produce a solid cash flow figure when everything is tallied up. Thus, the overall growth story is on track, and numerous tailwinds (a national advertising campaign, more online/mobile ordering, more delivery offerings and lower wing prices) should boost results higher than expected this year. Longer-term, Wingstop looks like a winner. Earnings are likely out in early February.
Technical Analysis
WING formed a huge post-IPO base from August 2015 through October 2017 before busting loose on earnings in early November. Shares rallied as high as 43 but then hit some turbulence, pulling back to their 50-day line a couple of times late last year and early January. Then, last week, WING surged anew on heavy volume after the bullish Q4 preannouncement. Aim for modest dips for new buying.
WING Weekly Chart
WING 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.
