Be Selective
Current Market Outlook
Once again, nothing has changed in the market’s bigger picture health—the intermediate- and longer-term trends of all the major indexes are still up (though small-cap indexes are now testing their 50-day lines) and the broad market is healthy, with few stocks breaking down and even fewer hitting new lows. That said, we’re now entering the sixth week of no progress in most indexes, so it’s clear that the short-term trend is neutral, which has capped most stocks, too. We’re still overall optimistic, but we are going to nudge down our Market Monitor by one notch (to level 7 out of 10), so be sure to honor your stops, and be selective on the buy side or take smaller than normal positions until the bulls return. On the flip side, you should continue to give your strong stocks a chance to resume their rally.
The good news is that there are still many strong charts despite the market’s pause. Our Top Pick this week is Netflix (NFLX), which reacted well to earnings last week and looks like a big-cap leader if the market gets going from here.
| Stock Name | Price | ||
|---|---|---|---|
| ASML Holding (ASML) | 350.01 | ||
| Adient (ADNT) | 0.00 | ||
| Alcoa (AA) | 0.00 | ||
| Charter Communications (CHTR) | 0.00 | ||
| Hancock Holding (HBHC) | 0.00 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Southern Copper (SCCO) | 0.00 | ||
| T-Mobile US (TMUS) | 0.00 | ||
| TD Ameritrade (AMTD) | 0.00 | ||
| United Rentals, Inc. (URI) | 0.00 |
ASML Holding (ASML)
Why the Strength
Not many investors have heard of ASML Holding, but the company is a major player in the semiconductor equipment space—it’s based in the Netherlands but this is a global operation with more than 14,000 employees and offices in 16 countries. The company’s lithography systems are used to make memory and logic chips, and ASML has been able to keep up with Moore’s law for more than three decades thanks to a heavy R&D emphasis (more than $1 billion R&D spending per year and 5,000 R&D engineers!). This chip equipment space is a bit of a down-the-food-chain industry—if chip makers sneeze, the equipment makers catch a cold—but after a couple of flat years, investors are looking for a pickup in business, which is why the stock is strengthening. In fact, both sales and earnings growth are already accelerating, and last week’s fourth-quarter results came in miles ahead of estimates ($1.29 per share reported vs. $1.01 estimate). Even better, leading indicators of the future were both encouraging, with 1.58 billion euro in orders (up 12% from the prior quarter), while year-end backlog rose 14% sequentially to 3.96 billion euro. Because of that, analysts see earnings cranking ahead about 20% both this year and next, though that could prove conservative if demand for ASML’s newer systems remains strong. It’s not a revolutionary story, but after a couple of mundane years, the wind is now at ASML’s back.
Technical Analysis
ASML isn’t the kind of stock that’s likely to soar to the heavens, but we like its long-term chart. The stock peaked in mid-2015 at 114, corrected to 77 early last year and made it back to 112 in August. Then came another correction to 99 before the stock began to surge—ASML tagged new highs earlier this year and gapped up on earnings last week. We think dips are buyable, with a stop near 110.
ASML Weekly Chart
ASML Daily Chart
Adient (ADNT)
Why the Strength
If you drive a car, there’s a one in three chance that you sit on a car seat built by Adient, which supplied them for 25 million cars last year. And if you haven’t heard of Adient before, that’s because it’s a new company, spun off from Johnson Controls in October 2016. Johnson Controls spent 30 years building its seat and component line, acquiring many companies that had attractive technologies. The company is a mature business that makes its own foam, fabrics and frames. It’s also a global business, with 230 plants in 33 countries and makes other auto parts like dashboards and trim and boasts that it can deliver a shipment of seats within 90 minutes of receiving the order. The company’s historical financials are a mess, with a loss of $16.40 per share in 2016—all part of the spinoff—but analysts see the company making $9.16 per share in 2017 and over $10 in 2018. Adient’s management has expressed its eagerness to grow the non-seat segment of its business, which is a good idea because the auto seat business is mature. The company will report its latest quarterly report (its Q1 2017) on February 3, and analysts are looking for revenue of just under $4 billion and $2.06 in earnings per share.
Technical Analysis
ADNT came public on October 31, 2016 in the mid-40s, and after the briefest of post-IPO pullbacks (an intraday dip below 40 on November 8), moved briskly higher to 59 in mid-December, then corrected for four days to 52. But the stock bounced back immediately and has continued to rally right through last week. Despite having no P/E ratios or other valuation benchmarks to go by, we think ADNT looks like a winner. But we don’t advise taking a big position this close to earnings. You can nibble on a pullback of a couple of points, then add to the position if the stock reacts well. Volatility is likely to be high in such a young issue, so keep a fairly tight mental stop in place near the 50-day line.
ADNT Weekly Chart
ADNT Daily Chart
Alcoa (AA)
Why the Strength
In late October of 2016 Alcoa split into two companies. The legacy Alcoa mining and upstream business was spun out into a “new” company, but retained the name Alcoa. The “old” company became known as Arconic (ARNC). The pitch for the split was that the slower growth, commodity-driven legacy business (Alcoa) and the faster growing engineered products business (Arconic) would each do better on their own. Somewhat ironically, it’s Alcoa’s stock that has roared higher since the split. The company is now 100% focused on global production of bauxite, alumina and aluminum, operating energy assets (power production), and producing value-added cast and rolled products (it’s the leading can sheet supplier in North America). With global growth projections, inflation projections and bond yields all rising—and all positively correlated with commodity prices—Alcoa’s core markets look strong. We want to be clear that this is a recovery play, with a rationale that’s similar to those that led us to prior metals-related picks in Top Ten. But Alcoa has the added punch that comes with a newly spun out “pure play” that is no longer trying to do too many things at once. The story isn’t well understood given the spinout, but analysts are bullish on Alcoa’s future, in large part because earnings growth should rise by 247% (to $0.81) in 2017. Revenue growth should be in the single digits.
Technical Analysis
AA jumped out of the gate right after the split-up in October 2016, rallying from 20 to 32 in a matter of weeks. The stock then entered a two-month consolidation phase between 28 and 32 as the market digested the move amid some mixed news flow (reductions in certain aluminum smelting operations, U.S. launch of a WTO complaint against China over aluminum, etc.). Positive news regarding the restarting of smelting operations in Australia, and a fixed date for earnings (January 24) helped give the stock a lift above 35 last week. The earnings report—Alcoa’s first as a pure play—will be huge, so if you’re game, you could start with a small position, then consider buying more if there’s a positive reaction.
AA Weekly Chart
AA Daily Chart
Charter Communications (CHTR)
Why the Strength
2016 was a momentous year for Charter Communications, as it made two acquisitions during the year that vaulted it into profitability and placed it among the leaders in its industry with a market cap of $83.5 billion. Charter acquired Time Warner Cable and Bright House for a combined $67 billion after the proposed merger of TWC and Comcast fell through. And Charter is now realizing the benefits of scale, experiencing a 1,354% jump in earnings in Q2 2016 (on a 154% jump in revenue) and a 30% increase in EPS in Q3 on a 310% leap in revenue. After losing $2.43 per share in 2015, analysts predict that the company’s 2016 earnings will reach $3.72 per share in 2016 and $4.96 in 2017. Charter now reaches 49 million homes and businesses, including 279,000 added during the third quarter of 2016. While analysts seem to be okay with the massive amount of debt that Charter took on to swing its acquisitions, that’s not a universal opinion. And some analysts see a possible threat in the growing trend toward “cord cutting” from large cable companies. But Charter Communications has come out of 2016 with increased scale and newfound profitability, and with likely regulatory rollbacks from Washington D.C., investors are optimistic. The company will report its Q4 and full-year results on February 16 before the market opens.
Technical Analysis
CHTR traded flat from July 2014 through February 2016, but once it got moving in mid-February, it ran to new all-time highs in May. Except for pullbacks in June and October, CHTR has continued to motor higher, continuing its post-election rally. We note that there is a relatively high proportion of short interest in CHTR (almost 11 days of average volume). If you like the story, you can buy on any pullback of a few points, with a stop around 280.
CHTR Weekly Chart
CHTR Daily Chart
Hancock Holding (HBHC)
Why the Strength
Financial stocks have been on a tear as the promise of higher interest rates and lower regulations drove a wave of analyst upgrades and institutional buying in late 2016. One of the better-performing players has been Hancock Holding, which operates in Alabama, Florida, Louisiana, Missouri, Tennessee and Texas. The company’s history dates back to the late 1800s, and today it has over 200 banking locations and 267 ATMs operating under the Hancock Bank and Whitney Bank names. Bank stocks aren’t very exciting to talk about, but they can deliver exciting returns, especially when the wind is at their backs. In the recently reported fourth quarter, revenue was up 8% and earnings were up 237% (to $0.64). That capped off a year in which revenue rose by 7% and EPS rose by 8%. The story behind the headline is that net interest margin is creeping up slowly, and the bank’s exposure to energy loans has fallen to just 8.4% of total loans (from 12.4% at the end of 2014). Growth in mortgage-related fees and card fees, disciplined expense control, and the acquisition of nine branches from First NBC Bank set a trend for continued growth in revenue and EPS. Analysts see 8% revenue growth and 40% EPS growth in the year ahead, which gives us confidence that the stock will keep moving higher.
Technical Analysis
HBHC enjoyed a choppy uptrend in early 2016. That was followed by a steady rise that carried the stock from 24 to 32 between July 4 and November 1. After the election, which prompted immense optimism for financial stocks, shares rocketed higher, ultimately topping out at a 52-week high of 45.5 in early December. The stock’s basically gone sideways since, with the 50-day line catching up. You could buy some here, or wait for a push above 46.
HBHC Weekly Chart
HBHC Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
Netflix shares hit new all-time highs in recent days following another great quarterly report that not only revealed fantastic subscriber growth (especially internationally, which is now the big growth driver) but much better than expected profits, along with a bullish first-quarter forecast. In the December quarter, revenue growth accelerated again (to 32%), with international revenues (up 68%) leading the way. Subscriber growth was also bullish, with paid subscribers now totaling 95.3 million (up 35% from a year ago), again mostly thanks to its surging overseas business (international subscribers rose 65%). Possibly most important, while Netflix continues to invest heavily in original content, its rapidly-growing business is now cranking out solid earnings growth—earnings topped estimates by a couple of cents per share in the fourth quarter, and analysts have lifted their estimates, now anticipating the bottom line doubling both this year and next. (Management stated “from here, we will seek to steadily increase revenue and operating margin as we balance growth and profitability.”) To us, that’s the big difference today—Netflix has always been a one-of-a-kind franchise with huge recurring revenues and unique content, but now that it’s leading to a surge in the bottom line, big investors are willing to expand their positions. If it continues to execute, Netflix should prove to be a big-cap leader when the market resumes its uptrend.
Technical Analysis
Unlike many of its big-cap growth peers, NFLX topped back in late 2015 and spent more than a year building a huge new launching pad. Shares got a big lift in October after third-quarter earnings, then consolidated for a while before pushing out to new highs in 2017. Last week’s earnings move wasn’t humongous, but obviously kept the stock’s uptrend intact. We think you can pick up shares around here or on dips, with a stop near the 50-day line.
NFLX Weekly Chart
NFLX Daily Chart
Southern Copper (SCCO)
Why the Strength
Southern Copper, as the name suggests, is a copper miner with major operations in Mexico and Peru. The company’s open-pit Buenavista mine in Sonora, Mexico is one of the largest in the world. The company also mines molybdenum, silver and zinc, but it’s the price of copper that makes or breaks the company’s fortunes. Copper is an economically sensitive commodity, and after Southern Copper’s last previous appearance in Top Ten in late 2010, the price of copper went into a nose-dive that lasted for five years. Copper prices got a temporary boost in early 2016, but fell back, finishing the year down 10%. Despite the pressure on copper prices and four years of declining revenue, Southern Copper has remained steadfastly profitable, so when copper prices started to lift after the U.S. elections, Southern was ready to roll. The company’s Q3 results showed a solid 117% jump in earnings on a 24% jump in revenue, mostly as a result of increased productive capacity at the Buenavista mine. The market is still banking on an increase in infrastructure projects in the U.S., which is a huge plus for commodities like steel and copper. Southern Copper will likely report Q4 and full-year results in early February, so there’s possible volatility ahead. The stock pays a small (0.56% yield) dividend.
Technical Analysis
SCCO got killed in 2008, but bounced back in 2009 and 2010. But since 2011, the stock has been trading in a tightening range, and was locked between 25 and 27 from May 2016 through October 2016. SCCO popped to 34 after the U.S. election, but fell back to flat trading at 32 by the end of the year. SCCO has now resumed its advance, but with its 25-day moving average back at 33.5, a pause or pullback is likely. Try to get in below 36, and use a stop at 33.
SCCO Weekly Chart
SCCO Daily Chart
T-Mobile US (TMUS)
Why the Strength
T-Mobile has hung its hat on being the less expensive wireless carrier alternative to AT&T and Verizon, while offering more data, more lines and the fastest 4G LTE network in the U.S. And consumers are paying attention, helping to make T-Mobile the fastest growing wireless company in the country. It has added over one million new subscribers for 14 consecutive quarters, and added two million in the third quarter of 2016. It’s also lead the industry in branded postpaid phone net customer additions (these are normal customers that pay monthly) for 11 consecutive quarters, with 851,000 added in the last quarter as its ONE plans (unlimited calls, text and high-speed data) and launch of the iPhone 7 helped it grab market share. Customers have realized that T-Mobile is doing more to add coverage and features than its competitors (AT&T, Verizon and Sprint). And those carriers all are seeing service revenues shrink, whereas T-Mobile is consistently growing at over 10%. That’s an incredible outperformance, and it’s given analysts the confidence to project 10% revenue growth and 20% EPS growth in 2017. Takeover speculation is also swirling, with some analysts projecting a takeout price near 80 per share. We wouldn’t advocate buying solely on that premise, but the potential certainly doesn’t hurt the stock’s outlook.
Technical Analysis
TMUS has been climbing steadily over the past year. The most recent consolidation phase occurred between August and mid-October 2016, when the stock traded between 44 and 48. The Q3 earnings report on October 24 catalyzed a gap up to 51. After a brief pullback to 49, shares rallied and ended the year at 59. Takeover speculation began building (again) in early January, which helped push the stock above what looked like an emerging consolidation phase between 56 and 59. We suggest buying on dips.
TMUS Weekly Chart
TMUS Daily Chart
TD Ameritrade (AMTD)
Why the Strength
TD Ameritrade is very strong today for one reason—it’s a Bull Market Stock (the kind of company that directly benefits from a rising stock market), and investors are anticipating increased trading volumes, asset values and interest rates pushing the company’s bottom line higher in the quarters ahead. Granted, to this point, the headline growth figures have been relatively muted; last week’s third-quarter report saw sales and earnings up mid-single digits. But there are already signs that things are perking up—the fourth quarter saw $18.7 billion in net new client assets (up 24% from the prior quarter) and 487,000 trades per day (up 10%), all while profit margins remained huge (25.1% after tax). Management is somewhat cautious in its outlook for this year, and analysts are following that lead, seeing earnings up just 9% for 2017. But, really, it all depends how the year goes—Ameritrade’s earnings will rise a penny per share if its daily trades increase by 3,000, and earnings will rise eight to 10 cents per share for every quarter-point hike in interest rates! Thus, there’s easily the potential for more rapid growth if the bull market picks up steam and if the man on the street comes back to the stock market. A tidy dividend (1.6% annual yield) and a modest share buyback program (share count was down 1.9% from the year before) puts a nice bow on the package.
Technical Analysis
AMTD looks like a lot of financial stocks—a long period of no progress followed by a persistent and powerful advance since the election. The stock was sitting below 34 just before the election, the same level it was at back in early 2014, but since then, shares have kited higher with only a couple of small dips along the way. One of those dips occurred just after earnings, but we like how AMTD found big-volume support on the dip. We think you can buy some here with a tight stop near the 50-day line.
AMTD Weekly Chart
AMTD Daily Chart
United Rentals, Inc. (URI)
Why the Strength
United Rentals is a classic “Trump Trade” stock, but there’s more to the story than that. The company is a leading renter of construction and industrial equipment, an area that’s been growing for a while as many firms go the rental route to avoid huge capital expenditures. Business has been very good for many years, and the stock is strong today not just because of anticipation of an accelerating economy and greater infrastructure spending, but also because the stock is cheap (just 13 times earnings) and the company is spinning off a ton of cash—free cash flow for 2016 as a whole will likely come in north of $1 billion (more than 10% of the current market cap and up a few percent from last year), some of which is being used to repurchase its cheap stock. (The share count is down by 9.5% from the prior year.) Bigger picture, the stock fell sharply with most industrial stocks in 2015 as investors thought those lofty earnings would fade. But they haven’t, and now that the economy is picking up, investors are re-adjusting their expectations that United Rentals’ bottom line will remain elevated and even grow from here, especially as they use some of their cash for selective acquisitions. Thus, you have a company that’s spinning off lots of cash, with a cheap stock, and with great potential for earnings upside if the construction sector accelerates going forward. Earnings are due out this Thursday morning, January 26.
Technical Analysis
URI fell from 120 in 2014 to 42 in early 2016 despite level earnings, and then rebounded back to 71 right before the election. Then came the big rally, with URI surging on excellent volume during the market’s five-week rally. Now the stock has gone straight sideways for six weeks, finding support at its 10-week line ahead of earnings. You could nibble ahead of the quarterly report and look to buy more on a positive reaction.
URI Weekly Chart
URI 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.
