Big Picture Bullish, Short-Term Coin Flip
Current Market Outlook
There’s little question the overall market environment remains bullish—the intermediate- and longer-term trends are up, most stocks and sectors are in the same boat and we’re spotting more set-ups (either pullbacks or longer bases) out there. Short-term, though, nothing would surprise us—most major indexes haven’t made any progress since mid-December, we’re entering the thick of earnings season and some sentiment measures have gotten extended, indicating investor complacency. We’re not advising any drastic change in stance; our Market Monitor remains in bullish territory at a level 8 out of 10, and we’re looking to latch on to any new leadership that lifts off. But just be sure to have your plan in place, both on the buy side and sell side, as earnings season revs up.
This week’s list is a mixed bag and includes a few stocks that are reporting earnings within a couple of weeks. Our Top Pick is Coherent (COHR), a little-known laser company that’s benefiting from an uptick in OLED demand and from a major acquisition that’s just closed. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Alaska Air Group (ALK) | 0.00 | ||
| Charles Schwab (SCHW) | 0.00 | ||
| Coherent, Inc. (COHR) | 0.00 | ||
| Glaukos Corp. (GKOS) | 67.84 | ||
| HealthEquity, Inc. (HQY) | 70.70 | ||
| Incyte Corporation (INCY) | 76.98 | ||
| MSC Industrial (MSM) | 0.00 | ||
| Rio Tinto plc (RIO) | 57.05 | ||
| Tesaro (TSRO) | 0.00 | ||
| Univar (UNVR) | 0.00 |
Alaska Air Group (ALK)
Why the Strength
Alaska Air isn’t growing rapidly, but its stock is strong today for a couple of industry-wide and company-specific reasons. For the industry, the fact is that most investors believed airline earnings would fall off a cliff when the economy slowed, but that didn’t happen, with prices remaining elevated and cash flows remaining huge. Indeed, Alaska Air’s earnings likely ticked up by about 10% last year, with another 8% gain likely in 2017 as it added new markets (14 in 2016, eight planned this year). But there’s more here than just industry trends—Alaska Air made a big move late last year by acquiring Virgin America, which will position it as the fifth largest U.S. airline and the leading player to serve West Coast travelers (it will have 22% share in West Coast air travel), especially California. And Virgin’s low-cost structure fits well with Alaska Air; both have some of the highest profit margins in the industry despite offering fares that average 25% less than the huge legacy carriers. Throw in some solid acquisition synergies ($225 million worth when all is said and done) and an accelerating economy, and Alaska Air has the catalysts to keep earnings and cash flow growing. A 1.2% dividend yield and modest share buyback program puts a bow on the story.
Technical Analysis
ALK has been a huge winner in recent years, but it now looks to be emerging from an 18-month long consolidation. ALK bottomed out after the post-Brexit selloff, but the big buyers didn’t show up until after the election, taking the stock to new highs in December. A modest pause led to big-volume buying last week following a bullish monthly traffic report. Earnings are likely out soon, but we’re OK with a small position around here with a stop near the 50-day line.
ALK Weekly Chart
ALK Daily Chart
Charles Schwab (SCHW)
Why the Strength
It’s not defined as a sector, but we always keep an eye on what we call “bull market stocks”—stocks of companies whose fortunes are directly tied to a rising stock market and all that goes along with it (including higher levels of trading, M&A activity and IPO underwriting). Charles Schwab certainly qualifies as a bull market stock, as one of the largest full-service financial and trading firms in the country; at the end of September, the firm’s clients had a whopping $2.73 trillion of assets (about half of which receive ongoing advisory services) via 10.1 million brokerage accounts, 1.1 million bank accounts and 1.6 million retirement plan participants. Impressively, despite its size, Schwab has been growing at a fast clip—revenue growth is accelerating and came in at 20% last quarter, while earnings are growing even faster. Looking ahead, there are a couple of main reasons that growth should continue and even accelerate from here. First, as the major indexes rise, it pushes the value of Schwab’s client’s assets higher (and attracts more deposits), boosting fee and commission revenue. And second, Schwab has a massive $207 billion of interest-earning assets, so even a small rise in interest rates will boost the bottom line in a big way. Throw in a possible corporate tax cut, and even the +25% earnings estimates from analysts could prove conservative. Schwab is likely releasing its quarterly report on Wednesday, with analysts anticipating 24% earnings growth.
Technical Analysis
SCHW suffered through 15 months of sideways-to-down action (from August 2015 through early November 2016). But the stock has come to life since the election, blasting off on huge volume and continuing to hit new price (and marginal new RP) highs in recent weeks. The quarterly report is the only wild card—you might want to wait for the reaction, but we think minor weakness is buyable with a stop near 37.
SCHW Weekly Chart
SCHW Daily Chart
Coherent, Inc. (COHR)
Why the Strength
Coherent has emerged as one of the leading laser manufacturers in the world. Its solutions help manufacturers and researchers (especially those overseas—76% of revenues are international) in the biotech, medical imaging, flat panel display manufacturing, semiconductor testing and government/scientific research markets do their jobs faster, better and cheaper. The company was a nothing-burger between 2011 and 2015 (revenues were flat during that time), but the stock is strong today because it’s entered a new growth phase that investors believe can persist. The new growth driver: Organic light emitting diodes (OLEDs), with OLED-related bookings for its Linebeam systems pushing Coherent’s total bookings up nearly 70% in the fiscal first quarter. The stock has been supported by reports that Apple would likely use OLEDs in iPhones set for release in 2018. Analysts jumped on board Coherent, and in March, the company announced the $942 million acquisition of competitor Rofin-Sinar. A report in June 2016 that Samsung would spend $6.8 billion to boost OLED capacity added fuel to Coherent’s rally, as did better-than-expected results released in November. That same month the Rofin-Sinar acquisition closed, and with two consecutive quarters of 16% to 19% organic growth, analysts became even more bullish on the future. Consensus estimates now point to revenue growth of 73% in 2017 (bolstered by the acquisition), with EPS soaring by 65%. This is a little-known company that has great potential.
Technical Analysis
COHR was range-bound for five years before growth in its OLED-related business ignited a furious rally starting in January. A pattern of higher highs and higher lows then emerged until October, when shares retreated to 100 ahead of earnings and the election. But the earnings release re-ignited buying pressures and it’s been climbing steadily ever since, reaching a 52-week high of 146 last Friday. We see more upside, supported by recent analyst price target hikes (to between 160 and 170). Try to buy on weakness.
COHR Weekly Chart
COHR Daily Chart
Glaukos Corp. (GKOS)
Why the Strength
Glaukos is all about glaucoma, a malady that affects two million people in the U.S. and tens of millions worldwide. Glaucoma is a group of eye diseases in which ocular fluid doesn’t drain as quickly as it is produced, causing pressure to build in the eye. The effects can be severe, sometimes even leading to blindness. Fixing glaucoma is Glaukos’ bread and butter. The company developed a tiny stent (about as big as one letter on a penny!) and insert procedure, called the iStent Procedure, in which its proprietary iStent device (FDA approved in June 2012) is implanted in the eye during cataract surgery to help fluid drain properly. The company began generating revenue in 2013, after which sales grew by 118% (2014), 57% (2015) and an estimated 55% in 2016. Sales should grow by another 30% in 2017. The company also became profitable in the first quarter of 2016, and should deliver EPS of 12 cents in 2016 and 22 cents in 2017 (up 83%). In addition to enviable growth and profitability for a small cap, Glaukos has two new glaucoma devices (iStent Inject, an injectable two-stent therapy, and iDose, a targeted injectable drug-delivery implant) moving through the pipeline with increasing odds of approval. Expect data from the iStent Inject pivotal trial in mid-2017, and Phase 2b data from iDose later in the year. Both will move the stock, as will the firm’s bottom-line results.
Technical Analysis
GKOS was on a gradual uptrend in early 2016, rising from 14 to 20 by the time the company reported results in early May. After that event, shares catapulted more than 25% as the company crushed expectations. Optimism fueled a rally to 36, then less exciting (but still very good) Q2 results prompted a retreat to 28 by late August. Shares then rallied to 40 in September. Another retreat (to 30) set the stock up for an end-of-year-rally to 36. Analyst upgrades and progress on new products recently fueled the jump to 40. Shares are bumping up against resistance here, so expect some hesitation. A stop in the mid-30s makes sense.
GKOS Weekly Chart
GKOS Daily Chart
HealthEquity, Inc. (HQY)
Why the Strength
HealthEquity is one of the largest non-bank custodians of health savings accounts (HSAs), and the stock has surged to new highs as investors are thinking use of HSAs will accelerate following any health care reform that’s signed into law. Not that HealthEquity is completely dependent on what happens in Washington, D.C.—the company’s sales and earnings have been growing rapidly for the past few years (see table below), and there’s more of that on the way. At a conference last week, management announced that its number of network partners (big health plans and employers that use HealthEquity’s platform for its customers and employees) grew by more than 30%, and the top brass also said it thinks the market could double by the end of 2018 and, eventually grow six-fold or more. The company makes money a few different ways (mostly fees paid by its network partners and customers who invest and withdraw money from their HSAs), but it’s all tied to the number of total members (2.4 million at the end of October, up 48% from a year ago) and the assets held in its HSAs ($4.3 billion, up 59%), both of which are expanding steadily and rapidly. Analysts see earnings ratcheting up 35% next year, but that could easily prove conservative depending on any loosening regulations (allowing more high-deductible health insurance plans that use HSAs) that come out of Washington. The valuation is big, but so is the story.
Technical Analysis
HQY has been in an uptrend for about a year, though it’s had a lot of starts and stops along the way. For instance, it fell from 39 to 32 just ahead of the election before soaring to new highs, only to back off again and tighten up just north of 40 for six weeks. But last week, the buyers rushed in, driving HQY to all-time highs on heavy volume. We don’t expect a major pullback, so if you want to buy a little here you can. If you can get it down a couple of points, all the better.
HQY Weekly Chart
HQY Daily Chart
Incyte Corporation (INCY)
Why the Strength
We last featured cancer specialist Incyte on December 19 when the stock was trading near 100. It makes the cut again this week after the company increased sales guidance on its commercial drug, Jakafi, and revealed positive developments from its pipeline. The combination of good news has lifted the stock 15% since we last featured it, and given the huge growth profile, the uptrend should continue. Incyte’s Jakafi is the standard-of-care drug in myelofibrosis, and is also approved for patients with polycythemia vera, a condition in which the bone marrow makes too many red blood cells. Most analysts previously thought peak annual sales for Jakafi would be around $1.5 billion, but management said recently that they see up to $2 billion in sales after a competing candidate from Gilead hit a roadblock, and as Jakafi trials targeting other treatments advance. The company also announced that another treatment in its pipeline is moving into Phase 3 studies for four new indications (non-small cell lung cancer, renal cell carcinoma, bladder cancer and squamous cell carcinoma). Data from these studies should be presented in June at the annual ASCO meeting. To sum things up, Incyte’s pole position in myelofibrosis is becoming more dominant, Jakafi’s chances of working on other cancers is growing, and the company’s pipeline is pushing drugs closer to approval. Analysts see earnings more than doubling this year with much more growth beyond that.
Technical Analysis
INCY began climbing off 60 in March 2016. From that price, shares mounted a stop-and-go rally, with higher highs and higher lows. But the stock appeared to have changed character in November after its earnings report—INCY surged on the news, then formed a nice shelf just over 100 that lasted through early January 2017. The latest bout of good news added 15% and began to push the stock through the overhead resistance that formed in 2015. We suggest setting a stop near the century mark.
INCY Weekly Chart
INCY Daily Chart
MSC Industrial (MSM)
Why the Strength
Here’s a company whose name describes its business to a T. MSC Industrial Direct is a leading North American distributor of metalworking and MRO products (basically anything that aids in the maintenance and repair of a manufacturing plant) to the industrial sector, as well as offering inventory management and machining productivity solutions. The industry is huge ($500 billion annually) but highly fragmented (150,000 distributors); MSC is one of the leaders with more than one million individual products and 3,000 suppliers. Growth has been glacial in recent years; in fact, sales have dipped four of the past five quarters (including the just-reported fiscal first quarter). But the stock is strong for a couple of reasons. First, of course, is the economy, as leading economic indicators reach their highest levels in years, making it likely demand will pick up. (MSC’s management indicated as much, saying demand was better than expected in November and a return to growth in December.) Second, despite the slow growth, MSC is a cash flow machine, with $63 million in free cash flow last quarter alone (north of $1 per share), which it’s using to fund a solid dividend (1.8% annual yield) and buy back shares (the share count is down 8% from the prior year, mainly due to a big repurchase last summer). There’s nothing revolutionary here, and if the economy hits a pothole, business will ease. But right now, the trends are pointed up and likely accelerating, which has investors picking up shares.
Technical Analysis
MSM fell from 97 in mid-2014 to a low of 54 last January before rallying to 78 a few months later. The stock then built a base, with shares trading in a tightening range in the low 70s before the election. The post-election kickoff was spectacular, and after a month-long rest, MSM roared ahead last week on good volume, tagging all-time highs following its better-than-expected quarterly report. We think dips are buyable with a stop near 90.
MSM Weekly Chart
MSM Daily Chart
Rio Tinto plc (RIO)
Why the Strength
U.K.-based Rio Tinto is a global giant in the metals and minerals mining business. Like many commodities businesses, Rio Tinto is celebrating a great rebound of investor interest in 2016 after two years in the weeds. The company has booked 10 consecutive quarters of declining revenue and eight quarters of dropping earnings, but investors started to sense a pickup in the global economy in January 2016 and reasoned that Rio Tinto’s iron ore, bauxite, aluminum, mined copper and hard coking coal and semi-soft and thermal coal would be in increasing demand in the future. The company’s Q3 results showed production gains in all categories except semi-soft and thermal coal, with bauxite, aluminum, mined copper and hard coking coal boasting double-digit percentage gains. Institutional ownership of the company’s stock has been increasing since Q4 2015 and the stock pays a variable dividend that currently yields 2.1%. Rio Tinto is a big (market cap is over $77 billion) miner and is thus sensitive to perceptions about economic activity. So with an emerging consensus that the global economy is on the rise and that the U.S. is about to experience a sizable increase in steel- and copper-hungry infrastructure projects, Rio Tinto is a logical target for investors.
Technical Analysis
RIO was trading near 61 in early 2014, but lost momentum during the rest of the year and went over the falls in late 2015, falling to 22 in January 2016. After making a strong rebound early in the year, the stock took a break from mid-July through mid-October, then zipped to 40 on big volume after the U.S. election and spiked again to 43 in December after an analysts upgrade. The stock pulled back to support at 38 in December, but popped to near 43 again last week. RIO looks like a solid buy anywhere under 42, with a protective stop at 38.
RIO Weekly Chart
RIO Daily Chart
Tesaro (TSRO)
Why the Strength
Tesaro, a Massachusetts biopharmaceutical company that made its initial appearance in Top Ten last Halloween, specializes in cancer treatments. The company has one approved product, a treatment for chemotherapy-induced nausea called Varubi. Investors have also been keeping track of Tesaro’s candidate drug Niraparib, which is intended to treat recurrent ovarian cancer and reported excellent clinical trials results on June 29. The most recent news that’s caught investors’ attention is a letter from the FDA requesting further information on Rolapitant IV, an intravenous form of Varubi that has completed its clinical trials. The FDA is asking for details about the comparability of the new manufacturers for Rolapitant IV, and investors have taken the letter in stride. Tesaro isn’t profitable, and doesn’t expect to achieve profitability at least through 2017. But the company has a product that meets a significant unmet need—the problem of nausea and vomiting during chemotherapy treatment—and investors can see the potential. The company’s Q4 earnings results aren’t expected until February, but news from clinical trials and the company’s response to the FDA letter will be a much bigger deals.
Technical Analysis
TSRO floundered around for the first half of 2016, then blasted off in late June on huge volume on the Niraparib news. Since then, TSRO has been in a steady uptrend, punctuated with a couple of corrections and a couple of surges higher. The stock’s reaction to the FDA letter was admirably calm, and TSRO is now trading at all-time highs above 156. As a stock that outperformed both the broad market and its biopharma industry group in 2016, TSRO is more than twice as volatile as the broad market. This will continue to be a speculative, news-driven stock. Accordingly, try to get in on a pullback of at least three points, and use a stop around 137.
TSRO Weekly Chart
TSRO Daily Chart
Univar (UNVR)
Why the Strength
Making its debut in today’s Cabot Top Ten Trader, Univar is an Illinois-based specialty and commodity chemical supplier that distributes worldwide, and is the largest chemical distributor in the U.S. and the second-largest in Europe. The company focuses on a variety of industries including agriculture, coatings & adhesives, environmental sciences, food ingredients, household & industrial cleaning, mining, oil & gas, personal care, pharmaceutical ingredients and water treatment. Currently, 60% of sales come from the U.S., 15% from Canada and the bulk of the rest from Europe, the Middle East and Africa, but China and India are expected to drive future growth. Univar’s exposure to trends in agriculture, mining and oil & gas exploration make it somewhat sensitive to trends in those industries. In the past year, a good growing season in Canada was offset slightly by fears about the effects of Brexit on European economic growth. Although Univar was founded in 1924, it has only been publicly traded since June 2015, and proceeds from its IPO were used to pay down debt and reduce leverage. Investors are buying Univar because its huge global distribution network allows it to serve whichever industries are growing. It’s a volatile issue, but its potential is high in a world where the U.S. and global economy is likely to accelerate. Earnings surged last year and analysts see another 36% rise in 2017.
Technical Analysis
UNVR came public at 22 in June 2015 and immediately headed for the basement. The stock plunged steadily, finally bottoming at 11 in February 2016. The stock’s rebound was every bit as emphatic as its decline, and UNVR rocketed higher in February, then settled into a steadier rally. After a couple of months of consolidation under resistance at 19, UNVR got moving again in September and rallied right through the end of 2016, finishing the year at 28. After pulling back by a point, UNVR is right back near its all-time high just under 29. A buy on any weakness with a stop just under 26 looks reasonable.
UNVR Weekly Chart
UNVR 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.
