On the Edge
Current Market Outlook
After many weeks of choppy action, the sellers sunk their teeth into many indexes and stocks last week. Friday’s rebound was encouraging, but by our measures, the intermediate-term trend is sideways-to-down, the broad market is weak and few stocks are making any sustained upside moves—i.e., there’s still no money being made out there. On the positive side, many stocks remain near the top of multi-month ranges, and if earnings season goes well, plenty of new leadership could emerge. But right now, the onus is on the bulls to prove that they can create a sustained uptrend in the market and individual stocks. We’re knocking our Market Monitor to neutral and will be watching the action closely.
This week’s list has many resilient stocks that could be part of that new leadership if the bulls step up their game. Our Top Pick is Mohawk Industries (MHK), which is one of a few very strong housing supply stocks and has a recent catalyst to boot.
| Stock Name | Price | ||
|---|---|---|---|
| United Therapeutics (UTHR) | 0.00 | ||
| Taser (TASR) | 0.00 | ||
| Royal Caribbean Cruises (RCL) | 0.00 | ||
| Pharmacyclics (PCYC) | 0.00 | ||
| Outerwall Inc, (OUTR) | 0.00 | ||
| NetEase, Inc. (NTES) | 0.00 | ||
| Mohawk Industries (MHK) | 0.00 | ||
| HDFC Bank Limited (HDB) | 0.00 | ||
| Celgene (CELG) | 0.00 | ||
| Acuity Brands (AYI) | 0.00 |
United Therapeutics (UTHR)
Why the Strength
United Therapeutics is still riding the momentum from its monster third quarter. After three quarters of negative earnings growth, United saw a 41% earnings-per-share improvement in Q3 of 2014. The $3.82 per share it earned was more than the previous three quarters combined. United’s new prescription drug Orenitram, used to treat pulmonary arterial hypertension, or high blood pressure in the lungs, had a lot to do with the company’s big quarter. Orenitram, whose name is derived from the backwards spelling of the name of the company’s founder and CEO Martine Rothblatt, hit shelves in mid-2014 after finally gaining FDA approval in late 2013. With no competition from generics until at least 2016, Orenitram’s sales should remain strong in 2015, and continue to help drive United’s EPS higher. Management expects the drug will produce $400 million of annual sales within two to three years, with an annual revenue run rate of $100 million in the first quarter of 2015. Meanwhile, the company is also in the midst of a $500 million, 12-month share repurchase program, initiated last June.
Technical Analysis
At 141, UTHR shares are trading at an all-time high, up nearly 9% year-to-date on the heels of its strong third quarter and share buyback program. After repeatedly meeting resistance in the 133-135 range from September through late December, the stock finally broke through last Thursday, topping 137 for the first time ever. On Friday, UTHR continued its ascent into uncharted territory. Just two trading days away from breaking through multi-month resistance, we expect that ascent to continue. Look to buy on any weakness of three or four points. Shares should continue to ride Q3 momentum, at least until the company’s next earnings report on February 23.
UTHR Weekly Chart
UTHR Daily Chart
Taser (TASR)
Why the Strength
A huge third quarter prompted us to recommend this stock in mid-November, and two months later, all signs are pointing to an even bigger fourth quarter. Law enforcement agencies across the country are snatching up Taser International’s conducted electroshock weapons, a.k.a. “stun guns.” Earlier this month, the Los Angeles Police Department bought more than 3,000 Tasers to outfit its front-line officers, the second-largest order by a police agency in Taser’s history. That order came on the heels of the LAPD’s December purchase of 860 of Taser’s Axon body cameras for its officers to wear. The department plans to equip all 7,000 of its officers with these cameras in 2015—which means more business for Taser. Combined with a new contract to supply the U.S. military, government organizations and other law enforcement agencies with new self-defense weapons, TASER’s fourth quarter is shaping up to be even stronger than its third quarter, when EPS grew 40% year over year. The company reports Q4 earnings on February 26.
Technical Analysis
TASR has been on a tear of late, rising 68.5% in the last three months. Shares have risen steadily since last July, save for a month-long hiccup that started in mid-September. The stock has pulled back slightly since topping 27 in late December, and shares could fall another dollar or so, but the stock hasn’t fallen more than three dollars since early October. If it falls more than that, it may be time to get out, but the looming fourth-quarter earnings in late February appear too enticing to ditch a stock with this much momentum.
TASR Weekly Chart
TASR Daily Chart
Royal Caribbean Cruises (RCL)
Why the Strength
The cruise industry appears to have fully recovered from the 2012 Costa Concordia disaster off the coast of Italy, as cruise lines are now raising prices in the midst of the global economic recovery. And President Obama gave the industry additional momentum last month when he softened America’s decades-long restrictions against travel to Cuba; the ability to travel to the largest island in the Caribbean should mean more business for cruise lines—as much as 10-20%, according to Credit Suisse analyst Joel Simkins. Royal Caribbean in particular could benefit from improved Cuban-American relations. In fact, the company’s fourth-quarter earnings estimates were recently upgraded by a penny to 41 cents, while its 2015 estimates went from $3.46 to $3.48. If Royal Caribbean’s Q4 earnings, due out January 26, come close to matching its last two quarterly outputs—in which earnings per share improved year over year by 340% and 29%, respectively—the company may be looking at its best quarter in years.
Technical Analysis
From January 2011 through mid-2012, RSL shares floundered, falling more than 50%. However, the improvement in the U.S. economy has lifted all boats—particularly cruise-line boats. RCL shares are up more than 120% in the last two years and 67% in the last year. Most of those gains have come since mid-October, with shares rising 50% from 55 to 82 in a matter of three months. Since pushing through resistance at 68 in early November, RCL has had scarcely a bump in its meteoric ascent. The dip from 84.5 to just over 82 in the last 10 days is one of its steeper recent drop-offs and it presents an ideal buying opportunity ahead of next week’s earnings. If earnings come up short and RCL drops below its 5-day moving average of 76.6, it may be a sign that the ride is over.
RCL Weekly Chart
RCL Daily Chart
Pharmacyclics (PCYC)
Why the Strength
Like the stocks of most moderately sized biopharmaceutical companies, PCYC is extremely news sensitive. The latest wave of interest from investors came last week when the company’s preliminary Q4 sales figures and 2015 guidance came in well above analysts’ estimates. Pharmacyclics’ single marketable product is Imbruvica, a treatment for leukemia. Imbruvica is expected to go on sale in Europe this year and to be approved for treatment of another condition in the U.S. this year. Pharmacyclics is still getting major milestone payments from Johnson & Johnson, which is partnering in the development, testing and marketing of Imbruvica for other conditions. The company’s revenue growth has been rapid, up over 100% in three of the last four quarters and over 4,000% in the other. That’s what one drug can do for a drug developer. With sales of Imbruvica forecast to more than double this year, the outlook for Pharmacyclics is strong.
Technical Analysis
PCYC hit its all-time highs in February 2014 at 154, but had corrected to 84 by early April. The stock took a few months to re-base, then began working its way higher in July. After a couple of rallies and corrections, PCYC was idling along with support at 120 when last Tuesday’s good preliminary results caused a high-volume gap up to over 150. PCYC is now consolidating calmly around 145, and looks buyable there if the Imbruvica story appeals to you. A buy on a pullback of a couple of points would improve your odds, and a stop at the stock’s 50-day moving average (now at 133) will provide protection.
PCYC Weekly Chart
PCYC Daily Chart
Outerwall Inc, (OUTR)
Why the Strength
Outerwall is a cash cow, and it’s using that cash to boost its stock in a big way. The company’s name reflects its various businesses that are placed near the outer wall of grocery stores and other high-traffic locations—its Coinstar machines (which take a 10% cut for turning change into dollars) and ecoATM kiosks (money for old cell phones) are profitable businesses, though the firm’s Redbox DVD rental machines make up the lion’s share of the firm’s revenue. After years of heavy investment and growth, management is now milking its businesses for all they’re worth—while revenues are projected to increase just 5% this year, earnings are starting to head significantly higher, mostly because of a massive share repurchase program; in the third quarter, the share count was down 31% from the year before! After that quarter’s earnings per share figure crushed expectations, the top brass said it continues to see share repurchases as attractive. All told, analysts see earnings of about $8 this year, partially due to a recent Redbox price hike; we think even that could be conservative if the share repurchases continue. It reminds us a bit of bigger-cap names like Northrop Grumman, which had a big run mostly on the back of a huge share buyback. Long-term, Outerwall’s businesses are likely to shrink, but the next few quarters could be great for the stock. Earnings are due out February 5.
Technical Analysis
OUTR has banged its head on the 70 to 75 level many times during the past few years, but the stock now looks like it’s ready to move. Shares have performed very well since the mid-October bottom, and after a shakeout toward the 10-week line two weeks ago, OUTR powered to new highs last week in spite of the shaky market environment! Given the market, we’ll look to enter on weakness, and use a stop in the upper 60s.
OUTR Weekly Chart
OUTR Daily Chart
NetEase, Inc. (NTES)
Why the Strength
The Internet has transformed Chinese society, and is continuing to do so. NetEase is a Chinese web portal that offers the same mix of news, weather, sports, entertainment, email, social media, commerce and ads that you find on Yahoo or any other full-service portal. What sets NetEase apart from its rivals is its emphasis on gaming, especially multiplayer games. The company has been active in mastering the transition from PC-based games to games played on mobile devices, which is where the Chinese web is heading. Investors are pleased that revenue growth increased from 21% in Q2 to 32% in Q3, with earnings growth climbing from 8% to 10%, respectively. NetEase recently announced a strategic partnership with Sinotrans, a Chinese logistics services provider, to speed delivery of goods that customers order from outside China, but the impact of that alliance won’t show up for a while. Analysts are looking for revenue of $518 million when NetEase reports Q4 results, with EPS of $1.53. NetEase also pays a dividend with an annual yield of 1.3%. The NetEase story has good scale and excellent prospects.
Technical Analysis
NTES has been in an uptrend since late 2012, but several large pullbacks have made it a hard stock to stick with. The latest uptrend began in April 2014 with the stock at 62. Despite a significant September correction, NTES hit 107 in November. After a multi-week retrenchment in December that pulled the stock as low as 95, NTES pushed out to new highs last week. As a Chinese stock, NTES will typically show more volatility than the market, but the power of the story makes NTES a good buy on any pullback of a couple of points. Use a stop at 98.
NTES Weekly Chart
NTES Daily Chart
Mohawk Industries (MHK)
Why the Strength
The general improvement in the U.S. economy has caused a parallel boost in the housing industry. While it’s possible to play that improvement directly through buying homebuilders, Georgia-based Mohawk Industries offers an opportunity to capture both new construction and remodeling projects. Mohawk specializes in floor coverings like carpets and rugs (including pads), ceramic, stone and porcelain tiles and laminates and hardwood flooring. Mohawk sells a huge array of products under multiple brands and in all kinds of stores, from independent distributors, mass merchandisers and online sales to contractors and commercial end users. Revenue grew 27% in 2013, following six years of negative or single-digit growth. And while revenue growth has slowed in the last couple of quarters, earnings have kept up their long string of double-digit increases that dates back to Q4 2011. Investors are responding well to the news that Mohawk has acquired IVC Group, a manufacturer of sheet vinyl, luxury vinyl tile and laminate with operations in Europe and the U.S. Management says it expects the deal to be accretive to EPS within the first 12 months.
Technical Analysis
MHK began a long correction in January 2014 after a multi-year rally that secured the stock four appearances in Top Ten in 2012 and 2013. MHK began the year at about 150, dipped to 124 in July, then to 120 in October, scrubbing off the entire rally to 150 in September. But MHK began to rally in earnest in late October, and hit new price highs in December. News of the IVC acquisition kicked MHK to as high as 170 last week, and it’s hanging just under that price now. The stock has been a little twitchy in this volatile market, so you should be able to sharpshoot a buy near 165. Use a stop at the 50-day, now just under 153.
MHK Weekly Chart
MHK Daily Chart
HDFC Bank Limited (HDB)
Why the Strength
The appearance of HDFC Bank in today’s Top Ten is largely due to the Reserve Bank of India’s surprise decision to lower the repo rate (the rate charged to commercial banks to borrow from the central bank) by a quarter percent. Investors’ interest in India got a big boost last year from the election of Narendra Modi as prime minister. Modi is widely regarded as a business-friendly official, and his ascent to power included majorities in both houses of India’s parliament. HDFC is a national bank, offering a full menu of services at its over 3,400 branches and 11,000 ATMs in nearly 2,200 cities and towns. The bank grew its customer base to over 28 million by adding three million in fiscal 2014. The combination of a broad base and a supportive business climate is proving attractive to emerging markets investors who are looking beyond China. And HDFC Bank’s two most recent quarters have shown double-digit growth in both revenue and earnings. The company hasn’t announced its release date for Q4 results, but Q3 numbers came out on October 21, so it could happen at any time. HDFC is benefiting from a supportive climate and a cut in interest rates that could kick off a nice run. We like it.
Technical Analysis
HDB made a nice V-shaped recovery from a September pullback, pushing from 46 in early October to new highs at 55 in late November. The December meltdown in the market pulled HDB briefly below 48, but the stock had been working its way higher when the rate-cut news ignited a two-day blastoff from 53 to 57. With the stock outrunning its 25-day moving average (now at 51) and earnings likely due soon, we advise taking small bites of HDB on pullbacks of a point or so. A stop at the 50-day, now at 52, seems prudent.
HDB Weekly Chart
HDB Daily Chart
Celgene (CELG)
Why the Strength
Celgene is probably the top big-cap growth stock in the market right now—institutional investors continue to gravitate to the stock thanks to another super-bullish long-term forecast at a well-attended healthcare conference last week. If you recall, two years ago the company initiated guidance of $7.50 earnings per share for 2017, and it’s sticking by that number (in fact, most analysts see it a bit higher than that). And now management believes it can drive the bottom line to $12.50 by 2020! Obviously, such a long-term forecast is unreliable, but Celgene has a solid history of delivering, mostly because the market size and competition for its various cancer treatments are known, and it can anticipate with accuracy when future drugs and label expansions are likely to come. Exact numbers aside, the big idea here is that Celgene is very likely to see consistent 25% to 30% bottom line growth for the next few years, and that growth isn’t dependent on oil prices or overseas economies. There are some risks—Revlimid, its flagship product, still has a patent challenge going on, though most analysts see a likely settlement later this year—but big investors are clearly comfortable with them.
Technical Analysis
CELG basically built a huge base from January through mid-October of last year, and then catapulted to new highs on big volume. There was some choppiness in December, including a harrowing shakeout below the 50-day line when the entire biotech sector got hit on pricing worries. But CELG quickly snapped back and actually pushed to new highs on good volume last week, thanks to the bullish 2020 forecast. We’re not opposed to a small position here or (preferably) on dips, with a stop in the high 100s.
CELG Weekly Chart
CELG Daily Chart
Acuity Brands (AYI)
Why the Strength
LED bulbs always seemed like the big idea that was going to take the lighting industry by storm, but the providers of that technology never quite hit it big (Cree is a good example), as competition ate into margins and prices. Instead, the sellers and outfitters of those LEDs—like Acuity Brands—have been the big beneficiaries. Acuity makes all sorts of lighting systems for any customer (residential, commercial and industrial), and is the only pure play on the long-term shift toward LED lighting solutions (which saves money over many years) in North America; it’s also thriving as a result of networked lighting solutions, where, say, a customer can dim the lights with his smartphone. Still, while the overall lighting industry is growing at a mid-single digit pace, LED sales are driving Acuity’s business—in the firm’s just-reported second quarter, total sales rose a decent 13%, but sales of LED luminaires were up about 75% from a year ago, and made up about 42% of total business. That’s obviously the growth driver, and it’s causing profit margins to expand (8.9% last quarter, up from 7.2% a year ago) and earnings growth to swell (it’s been accelerating during the past two quarters). It’s not revolutionary, but analysts see earnings growth remaining strong for the next couple of years as the LED revolution continues.
Technical Analysis
AYI began to accelerate higher in mid-2013, nearly doubling from 73 at that time to 146 at its peak last March. But like many growth-oriented issues, AYI has been range-bound since, falling as low as 105 in August of last year before rallying into November and building a new, tighter launching pad. That was the base that the stock lifted off from last week on earnings, and ATI has held its gains since. If you’re game, you can buy a little here with a stop in the high 130s.
AYI Weekly Chart
AYI 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.
