Here Comes Earnings Season
The evidence has generally improved during the past two weeks, with the major indexes remaining in solid uptrends and, most encouragingly, more growth-oriented stocks showing power and emerging from basing structures. All of that is to the good, but earnings season is ramping up, and we know that can change any stock’s or sector’s outlook in a hurry. Put it together, and we’re still sticking with our lean bullish stance—now’s probably not the time to buy five or six stocks at once, but there are many attractive names out there, and getting in at opportune times should pay off.
This week’s list is heavy on growth stocks, though there are a couple of cyclical and special situation ideas, too. Our favorite of the week is HomeAway (AWAY), a firm we remain keen on, and a stock that’s testing support for the first time since a powerful November breakout.
| Stock Name | Price | ||
|---|---|---|---|
| T-Mobile US (TMUS) | 0.00 | ||
| SolarCity (SCTY) | 0.00 | ||
| Altisource Residential (RESI) | 0.00 | ||
| Pacira Biosiences (PCRX) | 54.85 | ||
| Palo Alto Networks (PANW) | 236.92 | ||
| The Manitowoc Company (MTW) | 0.00 | ||
| Harman International Industries, Inc. (HAR) | 0.00 | ||
| Forest Labs (FRX) | 0.00 | ||
| HomeAway, Inc. (AWAY) | 0.00 | ||
| AOL, Inc. (AOL) | 0.00 |
T-Mobile US (TMUS)
Why the Strength
T-Mobile, the scrappy No. 4 telecom wireless provider in the U.S., is waging an increasingly escalated war for market share with industry leaders AT&T and Verizon. Last year, the company embarked on its “un-carrier” promotion, where it offered to pay up to $350 in early termination fees for subscribers switching from the nation’s three largest carriers. The move was so successful, with T-Mobile reportedly adding 4.4 million customers to bring its total to 45 million, that T-Mobile has upped the ante this year. The company is not only extending the “un-carrier” offer to all U.S. wireless subscribers, it is throwing in $300 toward a new phone on the company’s network. And the company has the coverage and spectrum to handle the influx, with its newly acquired 700 MHz spectrum and a 4G network that covers nearly two-thirds of the U.S. population. The biggest headline for T-Mobile, however, is the current merger/buyout talks with Sprint owner SoftBank Corp. The potential combination of the No. 3 and No. 4 U.S. wireless carriers has seen much speculation, and, given the sizeable breakup fee that AT&T was forced to pay in its botched takeover of T-Mobile, SoftBank has been understandably cautious. But recent reports indicate that at least two banks have stepped forward with proposals on how Sprint could finance a T-Mobile takeover, bringing a potential deal closer to reality.
Technical Analysis
TMUS was hit hard by the failure of the AT&T merger, with the stock plunging from a higher near 30 in May 2011 to an ultimate low near 7 by June 2012. Shares have since come roaring back, however, as T-Mobile’s disruptive and aggressive marketing strategy has pumped renewed life into the struggling wireless provider. Shares surged back to the 20 level by October 2012, built a multi-month base through April 2013 and then surged the rest of the year. Recent takeover speculation has pushed TMUS to multi-year highs just shy of the 35 region, leaving the stock a bit overheated. Buying dips is advised.
TMUS Weekly Chart
TMUS Daily Chart
SolarCity (SCTY)
Why the Strength
California-based SolarCity is making its debut in today’s Top Ten, joining a small pack of other solar companies that are attracting plenty of interest. SolarCity is a fairly young company (founded in 2006) that provides a fairly standard product—solar installations on residential and industrial buildings—with an innovative financing plan that eliminates installation costs for users. Instead of paying for their new solar installation, consumers sign a 20-year deal to make payments similar to their regular electric utility payments. The customer gets a bill with cheaper prices per kilowatt and Solar City gets a consistent 20-year income stream, with the chance to upsell additional services and equipment along the way. The company’s nominal contracted payments outstanding have grown by 117% annually since 2009. The company has installed nearly 300 MW of generating capacity and has an installation backlog of orders of nearly 200 MW. SolarCity arrays and installation are available at over 450 Home Depot stores and through SheaProperties. Pulte Homes and Toll Brothers are also channel partners, and Tesla has named SolarCity a preferred partner for EV chargers, which is hardly surprising, since Tesla Founder Elon Musk is also the chairman of SolarCity. With operations in just 14 states, SolarCity has plenty of room for expansion. A profitable quarter in Q3 was welcome, but estimates are for continuing losses through 2014. With its unique financing plan and its 32% market share in the residential solar business (no competitor is even close), SolarCity should continue to grow rapidly for years. Earnings won’t be out until March.
Technical Analysis
SCTY came public at 8 in late 2012, and it has been a volitile rocket ever since. The stock soared to 53 in May, corrected to 29 in early September, rallied to 65 in October, retreated to 41 and has now pushed out to 75 on rising volume. SCTY has a small, but growing, base of institutional investors on board. Buying on a pullback of at least a couple of points makes sense, with a loose stop at 64 to accommodate its volatility.
SCTY Weekly Chart
SCTY Daily Chart
Altisource Residential (RESI)
Why the Strength
Altisource Residential is a brainchild of William Erbey and the Ocwen Financial top brass. After the mortgage bust, Erbey and others believed that tighter mortgage requirements (higher credit standards, larger down payments, etc.), combined with a generally sluggish economy, would make house renting a big, big business in the years ahead. So they founded Altisource Residential (Erbey is the Chairman), which buys tranches of non-performing mortgages, then aims to work with borrowers to get current on their payments or help them refinance. But if that doesn’t happen, the company will eventually take the house, often renovating it and renting it! It’s still very early, as the firm just started operations a few quarters ago, but in the third quarter, it bought 2,647 non-performing loans, nearly all of which were at least 90 days past due; the properties had a current market value of $702 million, but Altisource paid only $474 million, or 68% of the value! Moreover, management has stated there are tons more bad loans that could be bought and, eventually, transitioned to company-owned properties. The valuation here is huge, though part of that is because of the firm’s REIT structure—it has to pay out its earnings, and the fourth quarter dividend amounted to a healthy 25 cents per share. There’s no certainty the dividend won’t gyrate, but if the company continues to expand, so should the payments.
Technical Analysis
RESI broke out of a beautiful base in September and has been kiting higher ever since. It appears in Top Ten today because, first, the stock has grown up a bit thanks to some recent share offerings (now trading $25 million or so of volume per day), but also, RESI tightened up for a few weeks starting in mid-December, touched its 10-week line for the first time since the breakout, and then surged higher again. We think you can buy a small position on weakness with a stop near the 50-day line.
RESI Weekly Chart
RESI Daily Chart
Pacira Biosiences (PCRX)
Why the Strength
New Jersey based Pacira Pharmaceuticals is making its debut in today’s Top Ten. The company has two drugs on the market: EXPAREL, a local analgesic that reduces the need for post-operative opioids, and DepoCyte, a treatment for lymphomatous meningitis, a life-threatening complication of lymphoma. Both products use Pacira’s DepoFoam product delivery platform, a technology that allows both immediate and sustained release of injected therapies that has significant licensing potential. Investors see big potential for Pacira as EXPAREL continues clinical trials for additional uses. Revenue has been trending strongly higher since Q4 2011, and the company, which gets about half of its revenue from product sales and about half from payments for collaborative drug developments, has been attracting a growing string of institutional investors every quarter since it came public in early 2011. Right now, the big driver of investor interest is a Phase 4 IMPROVE study showing that EXPAREL use after laparoscopic colectomy (removal of a section of large intestine) reduced both opioid use and length of hospital stays. Pacira is a high-potential biopharma.
Technical Analysis
PCRX came public in January 2011 at 7, and finished that year at 7 again. But once the stock got going, it has been a steady advancer with a typical biopharma’s pattern of occasional pullbacks and consolidations. The stock built a nice base under resistance at 55 from October through early January, then broke out on January 8 on the strength of the good Phase 4 IMPROVE study. PCRX has been tightening up around 65, not giving back any of its big gains. We think a small position can be started here, followed by increased exposure when the stock begins to advance again. Use a loose stop at 55.
PCRX Weekly Chart
PCRX Daily Chart
Palo Alto Networks (PANW)
Why the Strength
Founded in 2005 and taken public in 2012, Palo Alto Networks has taken the security market by storm in recent months. Driven by a rash of high-profile cybersecurity breaches—i.e. Target and Neiman Marcus—investors have gone running to security firms. But Palo Alto holds a distinct advantage over its larger and more traditional peers; in addition to handling older IT-architecture, Palo Alto’s applications are Cloud-based and highly geared toward handling social media outlets and applications. What’s more, the company’s firewalls can handle nearly all source-code updates from the business end, requiring very little end-user involvement. The biggest difference between Palo Alto’s next-gen firewall and traditional operators is that Palo Alto manages specific applications and people, instead of targeting specific network ports. As such, the software can distinguish between specific applications (Twitter, YouTube, LinkedIn, etc.) and then apply security rules tailored to each. This unique approach is paying off big for Palo Alto; the company has averaged revenue growth of 56% during the past four quarters, on average earnings growth of 43%. With speculation that Healthcare.gov could be a target for hackers, the cybersecurity issue isn’t going away anytime soon, and that should bode well for Palo Alto Networks.
Technical Analysis
PANW was fast out of the blocks following its IPO in July 2012. Shares rocketed to a high near 72 in less than a month, but were unable to sustain that perch. The resulting year-long grind lower saw PANW hit bottom near 40 twice—once in July and again in November. Recent cyber-attacks have breathed new life into PANW, however, and the stock has rallied along support at its 10- and 25- day moving averages to trade in all-time high territory north of 60. Shares are currently a bit overbought, but a period of consolidation should provide ample opportunity to take a position ahead of PANW’s next upleg.
PANW Weekly Chart
PANW Daily Chart
The Manitowoc Company (MTW)
Why the Strength
Manitowoc is a bit of a hybrid company. It’s best known as a leading manufacturer of cranes, used in construction (especially non-residential construction) and one of the most levered businesses to the overall economy—if companies are opening up their wallets and building new structures, Manitowoc is sure to benefit. And, as you’d expect with the slow-but-steady economic recovery, crane sales have been improving slowly-but-steadily, up 10% in the third quarter, but orders and backlog were down from a year ago. The other side of the equation is the firm’s food-service business (ovens, kettles, steamers, cook tanks, etc.), where sales are up a bit but operating margins are declining. The reason the stock is strong today is because of a growing perception that the non-residential construction is finally likely to accelerate, and that, after years of putting off purchases, there’s pent-up demand for its food-service equipment. Not that this is 100% about a turnaround—thanks to cost controls and the slight uptick in sales, profits likely surged to $1.26 last year (up 62%), and analysts see another 20% gain in 2014. But, when Manitowoc’s business really picks up steam, it can surge, so those estimates could prove conservative. Throw in a reasonable valuation (21 times trailing earnings), and we think the stock can do well if the economy stays on track.
Technical Analysis
MTW recently emerged from a nine-month base, which itself was part of an even longer consolidation that dates back to April 2011! More recently, the stock has gathered steam this month, as some positive analyst commentary, along with improved perception of the economy, kicked the stock into high gear. MTW usually isn’t a name to chase, especially with earnings coming out (no set date yet, but likely within a couple of weeks), but you could nibble on dips if you’re game.
MTW Weekly Chart
MTW Daily Chart
Harman International Industries, Inc. (HAR)
Why the Strength
When we checked in with audiophile Harman International Industries on Aug. 11, the company had just wowed investors with an impressive fourth-quarter earnings report. Since then, the developer and manufacturer of Crown, JBL, Infinity, Harman/Kardon, Digitec, and Mark Levinson audio products has gone on to add yet another solid quarterly performance. Driven by increased demand for high-end car audio equipment for luxury car makers including Daimler AG, Ferrari and Audi, Harman posted a 20% spike in first-quarter earnings on Oct. 31, as revenue rose 17%, with both figures besting Wall Street’s consensus estimate. Looking ahead, the German economy and German automakers are firing on all cylinders, and with more than a third of Harman’s sales deriving from German auto and audio makers, the company could be poised for a third consecutive blow-out quarter; Harman will release its second-quarter results on January 30. Meanwhile, the company is looking to capitalize on its reputation as a top-notch audio equipment maker by opening its North American flagship retail store in the heart of New York City. Much like the Bose stores that popped up around the country, the new Harman store should help increase brand visibility and improve the company’s outreach with customers.
Technical Analysis
After spending 2011 and 2012 chopping around between 40 and 50, HAR shares finally broke out in 2013. Bolstered by support from its 10-, 25-, and 50-day moving averages, the stock powered through resistance at 50 in mid-May as investors cheered reports of a revival in global auto sales. Shares spent the next several weeks building a base before resuming their uptrend along their 50-day trendline. HAR has since stair-stepped its way higher, riding surges in volume in the wake of earnings reports, before consolidating those gains. Shares are currently hovering just above support in the 90 region. HAR looks buyable here or on dips.
HAR Weekly Chart
HAR Daily Chart
Forest Labs (FRX)
Why the Strength
With a market cap of nearly $18.5 billion and a slate of 11 principal marketed brands, Forest Labs is no speculative biopharma that’s trading up on clinical trial results. The company’s main strategy is to license new products from small, innovative companies that lack the resources to bring them to market. The company’s products address major ailments like depression, anxiety and Alzheimer’s, with Namenda, the company’s treatment for moderate to severe Alzheimer’s, supplying more than half of last year’s revenue. The big reason for investors’ interest right now doesn’t have anything to do with products. After losing its patent protection to its lucrative antidepressant Lexapro, and getting rejected by the FDA on its antipsychotic drug cariprazine, management had to take some major steps. The company announced a restructuring plan in December that included a $500 million program of cost-cutting and a $1 billion share buyback program. Also in December, the company bought exclusive rights to Saphris, a schizophrenia treatment developed by Merck. This month, the big news was the $2.9 billion deal to acquire Aptalis, a privately held specialty drugmaker with cystic fibrosis and gastrointestinal treatments. The deal should bring nearly $700 million to Forest’s annual revenues and will present opportunities for other economies. Forest Labs will announce its Fiscal 2014 Q3 results tomorrow (January 21), before the market opens, with a conference call beginning at 10:00 EST. Investors are clearly expecting the news to be good.
Technical Analysis
FRX was in a mild, long-term uptrend since bottoming at 19 in early 2009. But the stock’s current strength dates from October 2013, when the stock broke out above 45 on steadily increasing volume. Big-volume moves on December 2 and January 8 gave energy boosts to the stock’s advance. With earnings out tomorrow morning, you can watch the reaction to earnings and jump in if investors register their approval. With a big gap up on January 8, any disappointment is likely to draw a big reaction. Use a stop at 60 to lower your downside risk.
FRX Weekly Chart
FRX Daily Chart
HomeAway, Inc. (AWAY)
Why the Strength
HomeAway dominates the online vacation rental business, with many times the web traffic of the next largest competitor. And thanks to the network effect (more listings drives more customers, which drives more listings, etc.) it should stay that way. The company has always grown at a solid clip and is highly profitable (the firm’s free cash flow is about $1 per share, much higher than reported earnings), thanks to a high renewal rate (in the 75% range) from subscriptions—on average, people pay $400 or so to have their rental listed on one of HomeAway’s various sites, though the figure can vary depending on how much exposure the owner wants. What lit a fire under the stock was its new pay-per-booking feature, where the company will take 10% of any booking ... but nothing if the place doesn’t rent. That opens up an entirely new market for listings; it’s actually more expensive but also predictable, so it’s a big hit with property managers. Management expects the new feature to add hundreds of thousands of listings in the years ahead (compared with 700,000 or so today), which could in turn drive sales and earnings growth. Throw in a few select acquisitions as HomeAway expands abroad (it recently bought Australia’s leading online rental site), and we see big potential as vacation rentals move online.
Technical Analysis
AWAY blasted off in mid-November following a nice eight-month basing period, which itself was part of a much longer post-IPO consolidation (the stock came public in June 2011). It’s made decent progress since that breakout, advancing a few points and digesting a modest share offering in November. Now, AWAY is testing its 10-week line for the first time; the 50-day line, at 38.5, is also closing in. Usually, the first test of the line after a big breakout is buyable, so we think it’s OK to take a position here, with a stop in the 37 area.
AWAY Weekly Chart
AWAY Daily Chart
AOL, Inc. (AOL)
Why the Strength
AOL Inc. has a lot of history, from its days as pioneering dial-up Internet provider, to its merger with Time Warner. But the modern AOL, once again independent after its 2009 spinoff, has turned itself into a content-rich powerhouse that owns The Huffington Post, Patch, MapQuest, AOL Yellow Pages, Moviefone, Engadget and Cambio. The company has been on a five-quarter run of earnings growth that averaged nearly 80% per quarter. Last week, the company announced the sale of Patch, the online newspaper business dedicated to producing “hyper-local” news. Patch is still a money-losing enterprise, and news that AOL had sold a controlling interest to Hale Global caused a big jump in AOL Inc.’s stock. The company received an upgrade from CRT Capital after it unloaded Patch. Investors also like the deal the company struck last week with real-estate information service Zillow. The deal will give AOL access to more than a million real estate listings and data on homes. All of these moves are evidence of management’s strategy of improving the value of its advertising sales. The company still has a legacy dial-up Internet access business, but the focus is now on providing interesting content that will support ad sales. With revenue flat in 2012 and up only in single digits through the first three quarters of 2013, the strategy is working. AOL Inc. will announce earnings in early February.
Technical Analysis
AOL has made great progress since it bottomed at 9 in August 2011, making three appearances in Cabot Top Ten Trader in 2012 and 2013. After topping 42 in May 2013, the stock drifted lower for five months until a strong earnings rally on big volume in November 2013 pushed it to 47. A nine-week consolidation ended last Thursday when news of the Patch sale keyed a spike above 53. A little profit-taking has pulled the stock back by a couple of points. We think it’s a good buy at 50, with a stop at 45.
AOL Weekly Chart
AOL 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.
