January is Usually Tricky
Current Market Outlook
The calendar has flipped, but the market environment remains bullish, with the major trends of most indexes and leading stocks continuing to point up. Today saw some rotation back into a few of last year’s leading growth stocks, but we wouldn’t jump to conclusions quite yet—January is known for lots of volatility as big investors reposition their portfolios and, in a couple of weeks, as earnings season gets underway. You should keep your feet on the ground and honor your stops, but you shouldn’t get carried away with daily moves over the next few days; ideally, try to buy strong stocks on normal dips. For overall stance, you should remain bullish.
This week’s list has a nice mix of great stories and charts, ranging from a speculative biotech to a couple of strong energy stocks. Our Top Pick, though, is one of the largest copper miners in the world—Freeport McMoRan (FCX) appears to have blasted off and entered a sustained uptrend after forming a very long launching pad. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Adamas Pharmaceutical (ADMS) | 0.00 | ||
| American Woodmark (AMWD) | 0.00 | ||
| Burlington Stores (BURL) | 193.95 | ||
| Diamondback Energy (FANG) | 0.00 | ||
| Freeport-McMoRan Inc. (FCX) | 13.78 | ||
| Floor & Décor (FND) | 68.03 | ||
| Ollie’s Bargain Outlet (OLLI) | 103.94 | ||
| Penn National Gaming (PENN) | 45.38 | ||
| ProPetro (PUMP) | 23.30 | ||
| Warrior Met Coal (HCC) | 0.00 |
Adamas Pharmaceutical (ADMS)
Why the Strength
Shares of small-cap biotech Adamas Pharmaceutical have been on the move since early November when the company received FDA approval for its first marketable treatment. The backstory is that Adamas develops treatments for chronic neurologic disorders, and it has two pipeline candidates—ADS-5102 for patients with MS walking disorder and Parkinson’s disease (Phase 2 completed for both indications), and ADS-4101 for epilepsy (Phase 1 completed). But the real story is its approved treatments. NAMZARIC (licensed to Allergan) is a recently-approved drug for treating moderate to severe Alzheimer’s disease, and will begin generating royalties this year. And GOCOVRI (ADS-5102) recently gained FDA approval for treatment of dyskinesia in patents with Parkinson’s disease receiving levodopa-based therapy. It is the only approved medicine for this indication, has earned seven years of orphan drug exclusivity (through August 2024), and analysts have nearly doubled their annual list price estimates to around $28,500, which helped lift peak sales estimates to around $266 million (from $92 million previously). Critically, Adamas is well capitalized after receiving $65 million in funding from HealthCare Royalty Partners in Q4. It’s still a speculative situation (analysts see revenues of $27 million in 2018), but there’s clearly upside from approved treatments and future trial results.
Technical Analysis
ADMS moved sideways for most of 2017 then came to life in late August, when the FDA gave the company the green light for its GOCOVRI compound. But momentum didn’t really begin to build until after the company’s Q3 earnings call in early-November, which caused the stock to gap up and run to 38 by the end of November. Since then, ADMS has cooled off normally on light volume, and remains above its 50-day line. If you’re game, you can nibble around here.
ADMS Weekly Chart
ADMS Daily Chart
American Woodmark (AMWD)
Why the Strength
Cabinet and vanity maker American Woodmark has been doing good business in recent years, with revenues advancing in the 10% to 15% range and earnings growing faster than that as the construction and housing market has improved. But the stock made Top Ten this week because of its acquisition of kitchen and bath cabinet maker RSI Home Products for $1.08 billion (announced in December). The acquisition is a big one, boosting the company’s revenues by more than 50% (it adds roughly $560 million in annual revenue, compared to Woodmark’s $1.06 billion over the past year), and is expected to be immediately accretive to profit margins and EPS. RSI also expands American Woodmark’s footprint, as it currently serves the mid- to high end of the pre-stock cabinet industry, and the lower end of the semi-custom built market. RSI has a low-cost manufacturing platform and focuses on cost-conscious builders that are looking to attract first-time homebuyers. With RSI under its wing, American Woodmark’s biggest gap is the higher-end, semi-custom cabinet space, which it can address later. Analysts see earnings for the current year (ending in April) rising 12%, with a 15% bump in fiscal 2019, though we think those will prove conservative once RSI’s business is in the fold, especially with $30 to $40 million of synergies likely.
Technical Analysis
AMWD was a nothing burger from late 2015 (when it peaked at 90 after a multi-year run) through late November 2017 (when it was sitting at 96 and lagging the bull market badly). But the RSI acquisition changed everything—AMWD rose 28% on the news on more than eight times average volume, and just as important, the stock has held those gains. It looks like a game changing move; you can buy here or on dips.
AMWD Weekly Chart
AMWD Daily Chart
Burlington Stores (BURL)
Why the Strength
Burlington Stores is a New Jersey-based retailer that offers off-price brand-name clothing, shoes, accessories and home goods at 631 stores in 45 states and Puerto Rico. The company has a consistent record of revenue growth, including increases of 9%, 5%, 9% and 7%, respectively, in the most recent four quarters. Analysts expect earnings to jump 32% in 2018 and 15% in 2019. Burlington Stores’ stock was hit with the general aversion investors showed toward brick-and-mortar retail over the past year or so, but since its late-October guidance update, the stock has been in a strong rally. A solid revenue and earnings beat and raised guidance for full-year 2017 in its November 21 quarterly report kept the good news coming. There’s no secret sauce here, just a well managed mix of quality apparel and other goods, aggressive discounting and a focus on a younger (averaging 39 years old) clientele. Management has worked to reduce inventories by doing minimal pre-season buying and offering shallow and broad assortments, which keeps shoppers coming back often. Inventory over 90 days old has been reduced from $551 million in fiscal 2008 to $85 million in fiscal 2016. Management sees the potential for the number of stores to increase to around 1,000, with new stores achieving payback in less than three years. Investors have warmed up to retail again, and Burlington Stores, with eight previous appearances in Cabot Top Ten Trader is a strong member of that group.
Technical Analysis
Despite popping above 100 in May 2017, BURL made no net progress from its high in September 2016 to the middle of last October. After building a tight, flat base from June through October, the stock caught an updraft last Halloween that is still going strong. BURL is a standout in the retail space. Look for a pullback of a few points to get started and use a stop around 108.
BURL Weekly Chart
BURL Daily Chart
Diamondback Energy (FANG)
Why the Strength
Energy (especially natural gas) stocks have come to life during the past couple of weeks, and we think Diamondback Energy is set up to be the liquid leader of any group move that develops. The company has possibly the most lucrative set of acreage in the U.S., with 191,000 net acres in the Permian Basin (including about 105,000 acres in the Delaware Basin and 86,000 in the Midland Basin), thanks to the wells themselves and some dramatic cost reductions on a per-well basis since the 2014 top. The top brass believes the company has a whopping 4,300 wells that are economical to drill at $50 oil (compared to 120 or so drilled and completed this year). Because of that, Diamondback has been expanding rapidly despite meandering oil prices; in 2017, the firm’s production likely rose about 80%, and while management hasn’t released its 2018 outlook, there’s no reason output won’t continue to ramp at a quick pace. The company also owns a majority share in a public subsidiary (Viper Energy Partners, worth $2.7 billion) that owns the mineral rights to much of its acreage. Cash flow exploded last year, and analysts see earnings up another 25% or so in 2018, which could prove conservative if the recent lift in oil prices sticks. We see great potential here as the energy sector kicks into gear.
Technical Analysis
FANG’s most bullish chart aspect is its relative strength—while energy stocks as a whole are still more than 50% off all-time highs, this stock has lifted to virgin turf in recent days as the sector has powered ahead. Even better, FANG’s move came after a year-long base-building effort, and during November and early December, tightened up after a string of nine weeks up in a row (a sign of institutional accumulation). We think FANG is buyable here, with a stop around 110.
FANG Weekly Chart
FANG Daily Chart
Freeport-McMoRan Inc. (FCX)
Why the Strength
Copper prices ended 2017 with a rally that took three-month futures prices on the London Metals Exchange to just under $7,300 a ton, a fresh four-year high. That December rally pushed Freeport McMoRan, which calls itself the “world’s premier publicly traded copper company,” into a strong rally. Freeport is a global metals explorer/developer with big reserves of copper, gold and molybdenum, including the Grasberg minerals district in Indonesia. When the company reported its Q3 results on October 25, investors noted the 11% revenue growth, but were even more impressed with the company’s fifth consecutive quarter of triple-digit earnings growth and 11.2% after-tax profit margin. The good news in the report included productivity improvements at the Grasberg site and continued progress in the company’s deleveraging plan. The outlook for the future was also positive, with Chinese demand for copper higher than expected, European growth continuing and solid U.S. demand. While there are supply-side issues like an absence of major new projects and declining production from existing mines, those issues are much less important than the upward trend in the price of copper. And electric vehicles, which are increasing in popularity, use three to four times more copper than conventional vehicles. The Freeport McMoRan story is only as good as the price of copper, but right now, that’s a good story. Analysts see earnings continuing to surge this year.
Technical Analysis
FCX pulled out of a major correction in early 2016, soaring from 4 in January 2016 to 14 in April 2016. At that point, FCX hit the wall, and traded under resistance between 14 and 17 for the next 19 months, until the December copper rally lit a fire under it. FCX has now blasted to near 20, leaving its 25-day moving average far behind at just over 16. Look for any weakness to get in.
FCX Weekly Chart
FCX Daily Chart
Floor & Décor (FND)
Why the Strength
We’ve highlighted a bunch of great cookie-cutter retail stories in recent weeks as that group has found buyers. Floor & Decor is a new stock (public near the end of April 2017), though not a new company (began operations in 2000), and it’s thriving by being a category killer in the flooring business—the company’s stores offer 1,600 different products in-store (compared to 500 for Home Depot and Lowe’s and 50 or less for specialty retailers), including tile, wood, laminate and stone flooring, decorative items and installation materials, making it in the only firm that can sell the whole product to customers, a huge advantage to contractors and even do-it-yourselfers. The stock is strong today because business is very good thanks to its own business model and the increase in both home sales and remodel work—sales have grown at a 25%-plus rate for the past few quarters, same-store sales rose 13.5% in Q3 (would have been higher except for the hurricanes) and earnings are expected to rise 30% next year. And long-term, the potential is giant—Floor & Decor has just 80 warehouse-type stores (70,000 square feet!) in operation today, but believes it has the opportunity for 400 stores or so in the U.S. The store count was up 20% in Q3, with a similar growth rate likely for at least another couple of years. Interesting, the CEO was an early employee at Home Depot, ending as a VP of Merchandising after 23 years. The valuation is big (69 times trailing earnings), but so is the potential.
Technical Analysis
Like so many newly-public stocks, FND rallied nicely for the first few weeks of its life before settling in to a multi-month consolidation—shares dipped 30% from high to low and then meandered in the 36 to 42 range for a couple of months before the buyers arrived on the scene. FND doesn’t have super-strong momentum, but the stock just emerged from an IPO base that could mark the beginning of a sustained move. You can start small on the latest dip.
FND Weekly Chart
FND Daily Chart
Ollie’s Bargain Outlet (OLLI)
Why the Strength
From a purely fundamental perspective, Ollie’s Bargain Outlook has one of the more attractive growth stories out there. The company’s motto is “Good Stuff Cheap” and that tells most of the story. Ollie’s 265 stores (mostly in the east and southeast) offer a range of brand name, closeout merchandise (13% food, 13% merchandise, 12% books and stationary, 10% bed and bath, etc.) that the company’s buyers are able to acquire; the tough times for some mall-based retailers has actually helped Ollie’s buy more attractive items at bargain prices. It’s a simple model, but it’s been working for years, with 1% to 3% same-store sales growth, excellent store economics (about a two-year payback period on a cash flow basis), expanding margins and 20%-ish annual earnings growth. Long-term, management believes it has an enormous runway of growth, too, seeing the potential for about 950 stores in the U.S. (3.5 times the current store base), with 2018 likely to bring another year of 10%-plus increase in the store count. (Encouragingly, the firm’s current two distribution centers should be able to support 375 to 400 stores, so there’s no need for huge CapEx in the near-term.) Analysts see earnings up about 20% next year, and more and more big investors are buying in—423 funds owned shares as of September (the most recent data), up from 260 a year before. Ollie’s looks like a great, sustainable growth story.
Technical Analysis
OLLI has been in an uptrend for over a year, though it has never really been a hot stock, with shares regularly going sideways for a few months before resuming their advance. The good news is that right now appears to be early in one of those resumptions—OLLI made no net progress from the end of May through mid-November, but then spiked to new highs on earnings last month and has continued higher (partially due to the tax cut, which should help the bottom line). Dips look buyable.
OLLI Weekly Chart
OLLI Daily Chart
Penn National Gaming (PENN)
Why the Strength
Penn National Gaming is the biggest non-Las Vegas, non-Macau gambling story around. Penn Central’s holdings (all but one in the U.S.) include 26 locations that operate a total of 31,000 gaming machines, 800 table games and 3,000 hotel rooms, plus five horse- or dog-racing facilities. Penn’s management has been focusing in increasing margins, and its Q3 numbers included a 4.8% after-tax profit margin (up from 2.1% in Q2). Management also pulled off a big acquisition last month, agreeing to buy Pinnacle Entertainment in a $2.8 billion cash and stock deal. The deal is expected to close in the second half of 2018, and will bring Penn National’s holdings to 41 properties in 20 jurisdictions in North America. Penn’s management expects to realize about $100 million in annual run-rate cost synergies when the deal closes (or around $1 per share). While Penn National does own one Las Vegas casino (the Tropicana), its real strength is in regional casinos. And with the U.S. economy doing well, the outlook for those is positive.
Technical Analysis
PENN got going with the market rally in January 2017, and caught fire in March. The stock followed its March blastoff with a slow, steady rise over the next two months, tagging 22 in June. A mild shakeout from 22 in June to 20 in the middle of August gave way to a strengthening rally in October that hasn’t quit yet. PENN is trading in new-high territory, and looks buyable on any pullback toward 31 with a defensive stop below 28.
PENN Weekly Chart
PENN Daily Chart
ProPetro (PUMP)
Why the Strength
The recent bump in energy stocks has mostly been focused on explorers, but a few oil service companies have caught the attention of buyers. One that looks like a leader is ProPetro, which operates 16 fracking crews (including two new-build fleets deployed in Q2, three in Q3 and 17th coming online in Q1 2018) that are solely focused on the Permian Basin and serve well-established customers like Parsley Energy, Diamondback Energy, Callon Petroleum and Pioneer Natural Resources. When the energy bust occurred, business got hit (revenues plunged 23% in 2016, for instance), but with drilling activity heating up, demand is rising (91% of its fleet is operational 24/7!). Combined with tight supply as the weak players were swept away by the bust, and ProPetro’s business is going through the roof—revenues have grown at triple-digit rates each of the past two quarters, while earnings have begun to lift off. And that should continue because the company has lots of growth potential just within its current customer base and because the firm has a fully-booked calendar well into 2018. (The new frac crew beginning work this quarter is already under a multi-year contract and marks the firm’s first operation in the Delaware Basin.) Of course, there’s plenty of risk here should oil prices collapse, but it’s more likely that ProPetro is starting a sustained wave of growth. We like it.
Technical Analysis
PUMP came public in March of this year, and built a nice, tidy IPO base through October, even as business was improving, but since then, PUMP has been in a solid uptrend. Day-to-day volatility is elevated, but to this point, the stock has kited higher along its 25-day line. Dips toward that moving average will mark solid entry points, with a stop a bit below the 50-day line.
PUMP Weekly Chart
PUMP Daily Chart
Warrior Met Coal (HCC)
Why the Strength
Warrior Met Coal was in Top Ten in early December, and the story hasn’t lost any of its luster over the last month. To refresh your memory, Warrior is a turnaround story. The company emerged as a fresh issue in April 2017 after the old Walter Energy went bankrupt. Since going public, Warrior has benefited from a clean balance sheet (debt-to-asset ratio is a mere 0.49), rising demand from China, robust pricing (up 80% in Q3), and growing production of metallurgical coal from its two Alabama mines (Q3 production up 180% to 1.6 million short tons). The punchline is massive revenue growth of 256%, 297% and 490% in Q1, Q2 and Q3, respectively. Management is intent on expanding production back to historical levels of roughly eight million tons annually, but it’s not quite there yet, as 2017 likely produced 6.2 to 6.5 million tons of output. Pricing can be volatile in this industry and historical financial statement analysis is essentially worthless given Warrior’s rebirth last year. But what is clear is that this story is gaining momentum, the company is the only publicly traded pure-play met coal producer in the U.S., and shares are currently in as high demand as Warrior’s coal. Analysts see earnings remaining very healthy (well above $3 per share) this year.
Technical Analysis
HCC went public below its intended range in April 2017 and was trading below 10 in late-June, but the turnaround from there has been swift. By September, the stock was trading at 17. A healthy pullback and consolidation in the 14 to 15 range in September and October was followed by a few weeks bumping up against resistance at 17 in late fall. But then shares broke out on rising volume, and the stock has since rallied above 25, though it has cooled off a bit over the past three weeks. You can buy a little here or on dips and use a loose stop.
HCC Weekly Chart
HCC 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.
