Practice Patience
Current Market Outlook
After another week of major selling in the market (the S&P 500 is down 8% this month, while the Nasdaq is off 10.3%), there’s not much left to say except the obvious—the sellers remain in control of nearly every stock and sector, and thus we continue to advise a highly defensive stance. Of course, the market is also very oversold, and at some point there will be a snapback rally (likely to last more than just a few days) that will take the indexes and many stocks higher. But until we see some definitive signs of support, it’s best to stay mostly on the sideline and wait patiently for legitimate set-ups to occur.
This week’s list has a variety of resilient names; some are defensive, some have solid growth stories and others are special situations. Our Top Pick is Chuy’s Holdings (CHUY), a small (and thinly traded) cookie-cutter story whose stock has been amazingly resilient this month.
| Stock Name | Price | ||
|---|---|---|---|
| Ryanair DAC (RYAAY) | 0.00 | ||
| MACOM Technology Solutions (MTSI) | 0.00 | ||
| Intuitive Surgical, Inc. (ISRG) | 0.00 | ||
| Alphabet, Inc. (GOOGL) | 0.00 | ||
| Flir Systems (FLIR) | 0.00 | ||
| Five Below (FIVE) | 134.58 | ||
| DreamWorks (DWA) | 0.00 | ||
| CubeSmart (CUBE) | 0.00 | ||
| Chuy’s Holdings (CHUY) | 0.00 | ||
| Abiomed (ABMD) | 0.00 |
Ryanair DAC (RYAAY)
Why the Strength
Ryanair is an Irish airline (1,600 flights daily, 185 destinations) that was one of the pioneers in low-fare flights and remains one of the lowest-cost carriers in the world. (The company is notorious for charging extremely low rates for flights (an average of less than $52 per flight!), but charging extra for nearly everything else.) The stock is very resilient because, simply put, business is very good, with the firm steadily expanding capacity and customers filling up the flights—traffic has risen between 10% and 25% each of the past few months, while the load factor (percent of seats filled) has remained north of 90%. A strong dollar and British pound (versus the euro) is boosting demand, and low fuel costs (the company has locked in low fuel prices for many quarters to come) are helping to boost the bottom line and allowing the company to drop fares. And many of the larger European carriers are also pulling back from Ryanair’s traditional short-haul routes—another plus. There’s nothing revolutionary here, just a well-run company that has the wind at its back based on industry conditions. Obviously, if the global economy tanks, all bets are off, but more likely is that lower fuel prices will provide a cushion for any small slowdown in demand. Analysts see earnings up more than 20% for the fiscal year starting in March.
Technical Analysis
RYAAY has been in a long-term uptrend for a few years, but it did chop around from July 2013 through February 2015 (it rose only from 55 to 61 during that period, with a few big corrections along the way). Since then, the stock has been grinding higher, making few dramatic moves but advancing over time. RYAAY has sold off this year along with everything else, but the major pattern is higher highs (83-86-88) and lows (75-76-81) since September … a rarity in this environment. If you’re game, you could nibble here with a stop in the mid-70s. Or just keep the stock on your watch list.
RYAAY Weekly Chart
RYAAY Daily Chart
MACOM Technology Solutions (MTSI)
Why the Strength
Margins at this semiconductor maker have steadily improved in recent quarters, perhaps leading to the company’s sudden spending spree. A developer of radio, TV and microwave components based in Massachusetts (hence the “M/A”), M/A-Com Technology has made two key acquisitions in the past month. The first acquisition was FiBest, a Japanese component supplier of optical sub assemblies, for $60 million; the second was Aeroflex’s diode business, enabling the company to improve its already strong position in microwave diode manufacturing, for $38 million. Those acquisitions should further enhance M/A-Com’s already strong growth: the company has posted double-digit sales growth for five quarters running, and earnings per share growth of no less than 26% for four straight quarters. In fiscal year 2015, M/A-Com’s EPS expanded 41% on sales growth of 24%. More of the same is expected in 2016: analysts are forecasting 52% earnings growth on 26% sales growth.
Technical Analysis
MTSI has been in an upward trend since August, advancing from 26 to as high as 42 in late December before a recent pullback knocked the stock back to 35, where it has found consistent support since November. Most stocks have experienced similar declines since the calendar flipped to 2016, and the RP line remains within shooting distance of new highs. If support holds, this could be a solid entry point if and when the market stabilizes. Given the sharp decline of the last few weeks, start with a small position and add to it if the stock breaches 40 again. If it falls below 32, it could take a while for the stock to regain momentum, so it would be time to get out.
MTSI Weekly Chart
MTSI Daily Chart
Intuitive Surgical, Inc. (ISRG)
Why the Strength
Maker of the da Vinci Surgical System, which allows doctors to perform surgeries by controlling robotic arms, Intuitive Surgical’s sales have grown at a healthy clip during the last few quarters. But it’s the anticipation of fourth-quarter sales that has investors excited about ISRG right now. The company issued upbeat fourth-quarter guidance last week, saying it expects Q4 revenue to come in at about $677 million, 12% higher than the same quarter a year ago. It also exceeded consensus analyst expectations by $26 million. Of course, if projections for the rest of 2016 fall short of expectations, Wall Street’s fervor for ISRG could suddenly evaporate. We won’t be kept in suspense long: Q4 earnings will be released this Thursday. For the year, Intuitive’s sales are expected to rise 10.7%, while earnings are on track for 14% per-share growth—a sharp turnaround after earnings declined -18.8% and sales dipped -5.9% in 2014. Prior to that, Intuitive has been a reliable growth machine, with sales and earnings expanding every year since 2006. The recent guidance bump has Wall Street pundits such as Jim Cramer declaring Intuitive is officially “back.”
Technical Analysis
From 2009 to 2012, ISRG was a Wall Street darling, rocketing from 90 to 578. 2013 and the first half of 2014 were unforgiving, however, knocking the stock back to 353. Now ISRG is back near 2012 highs, trading at 557 after surging from 454 in October. There have been few significant dips during that three-month rally, and the stock has operated in a fairly tight range since 545 a month ago. The solid base that’s being formed could lead to another break higher, especially if Thursday’s earnings report (and outlook) impresses. You could buy a little on dips if you want in.
ISRG Weekly Chart
ISRG Daily Chart
Alphabet, Inc. (GOOGL)
Why the Strength
What’s one of the world’s largest companies doing on a list of growth stocks? While Google’s greatest period of growth may be behind it, the company continues to expand at a healthy rate by setting up shop in a number of red-hot growth industries. Google is much more than just the world’s largest search engine these days, having introduced products and services in industries such as self-driving cars, smart home electronics and virtual reality. That diversification has made Google less susceptible to slowdowns in any of its core businesses; but the company has managed to diversify without sacrificing much growth in its bread-and-butter areas. Its Androids still dominate the global smartphone landscape, with an 81% worldwide market share. And Google’s search engine has never been more dominant, owning two-thirds of the total search market. The two drivers going forward are likely to be mobile ads and its YouTube subsidiary, both of which are growing like mad. Revenues have advanced at double-digit rates for seven straight quarters, and earnings per share increased more in the third quarter (18%) than they have since the second quarter of 2014. (Fourth-quarter earnings are due out on February 1.)
Technical Analysis
GOOGL has been advancing steadily for years, but a big breakthrough came last July, when the stock jumped from 541 to 699 almost overnight. A consolidation phase followed, with the stock sagging back to 622; but another big push came when the market turned in late September. GOOGL advanced all the way to 793 by late December, before retreating with the market the past two weeks. Still, the dip is relatively tame compared to most growth stocks, and there’s support near 700. You could nibble here or just watch it. The stock is trading below its 50-day moving average, so keep your stops tight and your position size small.
GOOGL Weekly Chart
GOOGL Daily Chart
Flir Systems (FLIR)
Why the Strength
Flir Systems is a U.S. designer and manufacturer of thermal imaging and infrared camera systems for a wide range of customers. The company was growing revenue by over 30% per year back in 2007 and 2008, but growth slowed to 2% in 2014 and has stayed in low single digits in 2015. Part of the problem is that the company’s global operations are vulnerable to slowdowns in overseas markets, especially in Europe. But the company’s six divisions—Surveillance, Instruments, OEM and Emerging Markets, Maritime, Security and Detection—are nicely diversified, and the company’s status as a defense contractor provides a nice base. The buzz in Flir Systems right now is due to terrorist attacks like those launched by ISIS in Paris in November. Investors believe that these attacks will motivate governments to step up their spending on sophisticated thermal imaging, detection and surveillance equipment. And at least one analyst has recently issued an upgrade on Flir Systems for exactly that reason. The company’s stock has a 1.4% annual dividend yield and a reasonable valuation, and there is considerable upside potential reflected in the steadily rising number of institutions that have positions. Flir Systems will report quarterly and annual results in early February, and good news there could give extra energy to a solid story.
Technical Analysis
FLIR started a downtrend in the spring of 2014, falling from 37 in April 2014 to as low as 25 in late October. But the stock’s rally after the Paris attacks in November punched the stock from 26 to 29 in one day, and the rally continued until FLIR topped 31 on December 1. The stock corrected to below 28 in December, but perked up again on January 5 after it got an upgrade from Raymond James. It’s now trading above 31 and has enjoyed rising volume support during the two weeks since the upgrade. If you like the story, you can take a small position here, although we’d advise waiting until we see the reaction to the company’s quarterly report early next month. A stop at December support just below 28 looks logical.
FLIR Weekly Chart
FLIR Daily Chart
Five Below (FIVE)
Why the Strength
There’s no question that, while the crash in energy prices has many negative effects, it is putting more money in the average person’s pocket. But studies are showing any increased consumer spending has been focused on lower-priced outlets, which is boosting the outlook for Five Below. The company is a newcomer to the dollar store business, offering a variety of goods (fitness apparel, toys and games, technology accessories, beauty products, storage products, sports gear, party supplies and even candy—the focus is on teen and pre-teen customers) from $1 to $5 each. It’s a simple story to understand, and fundamentally, management has done a decent job of executing over the years—sales have generally risen in the mid-20% range, with earnings growing in the 30% range. Growth is likely to slow a bit going forward (mostly because Five Below is bigger), but business is definitely good today; management announced that sales for the last nine weeks of the year rose 24%, including a 4% jump in same-store sales. Moreover, management believes there’s huge potential going forward—it had 434 stores at the end of October, but sees room for 2,000 stores in the long term. During the next few years, Five Below is looking for 20% annual sales and earnings growth through 2020, which seems feasible even if the economy hits a rough spot. This is a good growth story.
Technical Analysis
Despite FIVE’s solid growth, the stock has gone nowhere for the past couple of years, mainly because of valuation (it traded at 77 times earnings at its peak in November 2013). Shares dipped to 29 last March and again last November, but since then, the stock has shown solid action—the stock has rallied back into the mid-30s on repeated volume spikes, while its RP line surged. This could be a big-picture double bottom for FIVE, so you could nibble here with a stop in the high 20s … or simply watch it, looking for a push above 36 as a green light.
FIVE Weekly Chart
FIVE Daily Chart
DreamWorks (DWA)
Why the Strength
DreamWorks Animation is a major developer of computer-animated feature films with 30 productions under its belt. The company boasts several major franchises, including How to Train Your Dragon, Shrek, The Croods, Puss in Boots and Kung Fu Panda. While the dynamics of the movie business are always unpredictable, investors have been encouraged by a couple of recent developments. First, DreamWorks has inked a deal with Netflix that will put its entire film library onto the streaming service worldwide. Since the film’s production costs are already fully amortized, the license fees for its catalog should head directly to DreamWorks’ bottom line. Second, the company has a new release in the Kung Fu Panda franchise in theaters now. The combination of theses two factors has led to a recent upgrade from one analyst, which gave the stock a little bump last Tuesday. While feature films contributed two-thirds of 2014 revenue, the company also gets revenue from TV series and specials, consumer products and new media. Plus, animated films do well outside the U.S., with over half of revenues being sourced from global markets. The prior success of the Kung Fu Panda series in China is another reason for optimism. The company will report Q4 and 2015 results on February 23.
Technical Analysis
DWA has been a volatile issue over the years, as its fortunes rise and fall on the success of its latest movies. DWA is now in a rally that began at 17 in September 2015. The stock touched 27 in late December, then fell to its 50-day moving average at 24 as 2016 began. The stock has been tracking that average higher, and got a boost from the analyst’s upgrade on January 12. You have to be nimble, but a small buy on a dip below 25 could do well in this stock that doesn’t correlate too closely with the broad market trends. Use a stop around 23.
DWA Weekly Chart
DWA Daily Chart
CubeSmart (CUBE)
Why the Strength
The U.S. housing industry continues its slow but steady recovery, and CubeSmart occupies an important niche within that recovery. Formerly known as U-Store-It, CubeSmart is a real estate investment trust (REIT) focusing on self-storage facilities. As the housing sector has rebounded in the wake of the subprime mortgage crisis, CubeSmart’s top and bottom lines have swelled. The company’s per-share funds from operations (FFO) have more than doubled in the last five years, and are expected to increase another 15% in 2015. Sales are also forecast to rise for a fifth straight year in 2015. Millennials have been a major contributor to CubeSmart’s burgeoning popularity; many young people are living in small apartments in big cities these days, and thus need a place to put all their excess stuff. Meanwhile, CubeSmart is finding a useful place for its excess cash on the heels of all its cash flow and sales growth: the company hiked its quarterly dividend by 31% this month, the sixth consecutive year of dividend growth. Multiple years of FFO, revenue and dividend growth are grabbing investors’ attention.
Technical Analysis
CUBE isn’t some speculative, volatile stock that’s had a few good weeks. It has been on the rise for more than four years, with only a few bumps in the road along the way. Trading at just over 8 in late 2011, the stock is now up to 30, having advanced from 24 since September. CUBE hasn’t dipped below its 50-day moving average since mid-September, and 27 has been a clear area of support. If you can stomach the market right now, buy on that momentum and cut your losses on any dip below 28.
CUBE Weekly Chart
CUBE Daily Chart
Chuy’s Holdings (CHUY)
Why the Strength
Chuy’s is another small but steadily-growing restaurant chain focusing on full-service dining, delivering fresh, authentic fare to hundreds of thousands of customers across the country. Chuy’s specialty is Mexican food, with a familiar focus on made-from-scratch, freshly prepared foods. The firm has differentiated itself, thanks to its unique store concepts (every store has its own décor and atmosphere), generous portions and relatively customizable menus, providing a strong value to customers (just seven of 49 menu items are priced above $10!). The concept has been a hit (21 straight quarters of comparable sales growth (4.2% last quarter), with some of the highest per-store sales in the sector), but the growth potential is huge—Chuy’s has just 65 restaurants in 14 states, and management is planning on doubling that figure within three to five years, including 11 to 13 new units opening in 2016. (The firm also has some of the best new-store economics in the sector, too.) Sales growth has been relatively steady, with earnings growth a bit lumpier based on input and new-store opening costs. Still, the year-over-year figures are solid, and this year’s earnings estimate (up 16%) is likely conservative given the fall in input (commodity) costs and the aggressive store-opening plan. It’s not changing the world, but Chuy’s is a solid cookie-cutter story that’s in the midst of a multi-year expansion. Eanrings are likely out in early February.
Technical Analysis
CHUY came public in July 2012, ran from 14 to 44 by the middle of 2014, and then broke badly as earnings flattened out. Since the start of 2015, though, the stock has been on the comeback trail, rallying back to 36 before building a fresh launching pad. And, despite the horrid market, CHUY actually broke out two weeks ago and built on those gains a bit last week! Of course, buying breakouts in this environment isn’t advised, but CHUY is showing outstanding relative strength. You could nibble here, or just keep it on your watch list.
CHUY Weekly Chart
CHUY Daily Chart
Abiomed (ABMD)
Why the Strength
Abiomed was the world’s first maker of a totally artificial heart, but that era is ancient history. The company’s main products now are a line of small heart pumps—the smallest in the world at about one one-hundredth the size of the heart—that are introduced through a vein or artery and increase the pumping capacity of a damaged heart by 2.5 to 5 liters per minute. These devices are inserted through a small incision and assist hearts damaged by acute heart failure, myocardial infarction, myocarditis and cardiogenic shock. Abiomed’s marquee products, the Impella series of heart pumps, are now being used by 17,000 patients worldwide. Abiomed appeared twice in Cabot Top Ten Trader in 2015, after a series of earnings beats that began to kick the stock higher in October 2014. The company has already released preliminary results for its fiscal Q3 report that will come out on February 4, and the projected numbers are nicely ahead of analysts’ estimates. Abiomed’s stock has been steadily increasing its roster of institutional supporters, and the company’s technological advantage over its competitors gives it great global growth potential.
Technical Analysis
ABMD broke out of a multi-year base in 2014, roaring from 22 in October to 111 in August 2015. The big August–October correction in U.S. markets, combined with disappointing earnings estimates on October 29 pulled the stock back to 68, but it immediately began another rally and is now sitting around 87, generally acting calmly this month in spite of the market . We expect the stock to dither around this level until quarterly results are released on February 4. If you like the story, you can nibble on a dip to 85, with a stop near 78, which was support in November and December.
ABMD Weekly Chart
ABMD 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.
