Bounce Mode
Current Market Outlook
Last Wednesday appears as if it will mark a short-term low for stocks—there were many extremes in sentiment (fewest number of bullish investors in 10 years) and breadth (most stocks hitting new 52-week lows since 2008), which, combined with the big turnaround that day (and the big relief rally on Friday), increases the odds that we’re now in bounce mode. This bounce could continue for a while, so if you want to nibble on a couple of strong names (especially those that react well to earnings), that’s fine. But our bigger message remains the same: The market’s intermediate- and longer-term trends are clearly down, so it’s likely any bounce will eventually lead to a retest (or worse) of the recent lows.
The good news is that any bounce will allow us to separate the wheat from the chaff, and that process has already begun. This week’s list has a few intriguing growth stories to consider. Our Top Pick is Ligand Pharmaceuticals (LGND), a small, little-known biotech firm with a very unique business model. Put it near the top of your watch list.
| Stock Name | Price | ||
|---|---|---|---|
| Take-Two Interactive (TTWO) | 123.32 | ||
| STORE Capital (STOR) | 0.00 | ||
| Seaspan (SSW) | 0.00 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Ligand Pharmaceuticals (LGND) | 267.14 | ||
| First Republic Bank (FRC) | 0.00 | ||
| Edwards Lifesciences (EW) | 228.06 | ||
| Cree, Inc. (CREE) | 67.96 | ||
| CoreSite Realty (COR) | 0.00 | ||
| Burlington Stores (BURL) | 193.95 |
Take-Two Interactive (TTWO)
Why the Strength
Take-Two Interactive makes its second Top Ten appearance in as many months thanks to excitement over the upcoming release of its much-anticipated Mafia III video game. Since 2007, Take-Two, maker of other popular video game franchises such as Grand Theft Auto and 2k Sports, has released a hit game every year. Mafia III is expected to continue that trend, and should help keep the sales momentum going for a company that has posted revenue growth of 119% and 175% in the last two quarters. Profits have slipped considerably in recent quarters and margins have been all over the place, but the sales growth is a very good sign that the bottom line will eventually surge. Indeed, analysts see earnings up about 50% this year, and these figures often prove conservative.
Technical Analysis
TTWO is actually down slightly from where we recommended it at 35 six weeks ago. But most of those losses came in the first week of January. Since then, the stock has been holding firm between 32 and 33, and with earnings for the typically fruitful holiday quarter due out next week (February 3), it might be worth taking a flyer on a stock that is still operating well above its August and September lows (27). TTWO hasn’t dipped below 32 since October, so a move to 31 or lower would certainly be a bad omen. If you do decide to buy, keep the stock on a very tight leash, with a hard stop at anything less than 30.
TTWO Weekly Chart
TTWO Daily Chart
STORE Capital (STOR)
Why the Strength
STORE Capital is a good-sized real estate investment trust that focuses on single-tenant commercial real estate properties (hence the name), with 1,246 properties and 288 end customers, which represent 81 different industries. The stock is strong today not just because investors are looking for relative safety and income (helping many REITs), but because STORE itself has several enticing aspects: Management is highly experienced (35 years in the business with a history of successful investment funds), has a huge pipeline of potential acquisitions ($7.4 billion pipeline at the end of September—historically the firm closes 5% of that pipeline) and a generally high-quality customer base with solid net-lease contracts (99.8% occupancy). Long-term, the plan is simple: Organically, the firm believes it can hike its cash flow by 3% to 4% annually (driven by 1.7% average rent increases). Then it uses its low-cost access to capital (it has an investment-grade credit rating and a highly-rated debt conduit) and its expertise in identifying takeover opportunities to continue adding high-quality locations and tenants. Since coming public in November 2014, the firm’s cash flow has grown nicely (and is much larger than reported earnings); STORE currently pays 27 cents per quarter in dividends (4.7% annual yield), which is likely to rise gradually as cash flow (up 10% in the last quarter) expands.
Technical Analysis
Nobody is going to say STOR is super-strong, but since topping at 24 last spring, it’s etched a solid base—the stock fell below 20 during the market’s August maelstrom and rebounded back toward its highs in the months that followed. Then, after a shakeout to start the year, STOR has popped to multi-month highs on good volume. It’s not going to triple in price, but if you want in, you could buy a little on dips with a stop at 21.5.
STOR Weekly Chart
STOR Daily Chart
Seaspan (SSW)
Why the Strength
Seaspan is a major containership operator with 85 ships on the water, which amounts to 10% growth over last year. The company also has nine newbuild ships on the way, with five scheduled to deliver in 2016 and four in 2017. With the global economy in slow growth mode, some investors have seen a threat to the containership business, which now has about 5% of its fleet idle. With 14 of its Panamax ships up for contract renewal through the end of the year, Seaspan is potentially vulnerable to any decline in shipping rates. But the company also has lots of protection, as around 80% of its revenue comes from long-term, fixed-rate contracts. Seaspan also has a line of credit of around $1 billion that it negotiated with the Chinese Export/Import Bank, which will allow it to exploit any opportunities in the market. Investors were pleased by Seaspan’s Q3 report that featured earnings of 30 cents per share (analysts had expected 28 cents) and revenue of $213 million (consensus was $212). Earnings growth was 20% and revenue growth was 15%. Seaspan’s Q3 dividend was 37.5 cents per share, which represents a yield of a little over 9% annually. The company’s ability to keep paying that attractive dividend is a big draw for investors.
Technical Analysis
SSW traded up from 4 during the Great Recession to 25 in late 2013, but has been in a general downtrend as worries about global growth rates keep it under pressure. The stock has been selling off with most Chinese stocks, but found support at 14 in December and again this month. The great earnings report gave SSW a nice jolt, powering it from 14 to 16 in just a few days. Since the dividend is the big draw, SSW is buyable right here. And since it’s basically an income stock (with reasonable prospects for price appreciation if the economy picks up), you should set a loose stop.
SSW Weekly Chart
SSW Daily Chart
Lululemon Athletica (LULU)
Why the Strength
It’s too early to call it a trend, but Top Ten’s screens are picking up on more and more resilient retail stocks, which makes sense given (a) much of the sector was already hit hard late last year, and (b) fundamentals like solid job growth and cheap energy prices should help. Lululemon adds to those industry positives with its own turnaround story—the company was a humongous winner as its yoga-inspired workout and casual wear gained in popularity, but an increase in competition (Gap’s Athleta brand has gained share) and some of its own mishaps (see-through pants!) caused business to flatten out—earnings have been hovering at $1.85 or so for four years running. But now big investors are sniffing out a return to growth; Lululemon recently raised guidance for the holiday quarter, with sales topping estimates, earnings expected to rise a bit from a year ago, and importantly, margins expanding nicely, easing fears that competition was eating the firm’s lunch. And the top brass also spoke positively about continued rapid store expansion growth (up 20% last year) and e-commerce growth (up 25% or so). To some extent, the jury is still out—we’d like to see a quarter of solid earnings growth before assuming the firm has recaptured momentum—but there’s no question more and more good things are happening again at Lululemon.
Technical Analysis
LULU soared from about 8 in mid-2009 to 81 in May 2012. Since then, though, the stock had lots of dramatic moves (falling to 36 in mid-2014, rising back to 70 in the spring of 2015 and falling back to 43 last November), but hasn’t made any net progress in nearly four years. But the recent action has been encouraging, with LULU actually advancing during the past two months and looking to break back above its 200-day line. As with most recommendations this week, you could consider a small buy here, or just keep LULU on your watch list.
LULU Weekly Chart
LULU Daily Chart
Ligand Pharmaceuticals (LGND)
Why the Strength
Ligand is the kind of little known name with a unique growth story that could emerge as a big winner during the next sustained bull phase. Ligand is a biotech company, but it’s taken the opposite approach of most of its peers—instead of putting all its hopes into one or two drugs, the company has taken a “shots on goal” approach, developing some intriguing compounds and then licensing them to other companies, who take them through clinical trials. And if they hit the market, Ligand usually gets a small (4% or so) royalty on all sales. (It also gets revenue from milestone and license payment, as well as some use-of-technology payments.) The firm has deals with 83 partners covering more than 140 potential products; in 2016, these partners will spend a whopping $1.8 billion on developing these products, up from $1.1 billion last year. Eight products are on the market today, and management thinks that will rise to 24 by 2020, leading to a gusher of royalty revenue. But this isn’t just a future story—Ligand is extremely profitable today, and a couple of its on-the-market drugs (one marketed by Amgen) should show excellent growth for many years to come. The bottom line is that the company should see earnings of $3.50 to $4 this year, approach $5 in 2017, and accelerate higher from there. It’s not a big outfit, but because of its unique business model (it’s effectively just a licensing company, with just a couple dozen employees), the future looks very bright. Earnings are due February 10. We like it.
Technical Analysis
LGND has been a great performer during the past few years, running from 20 near the end of 2012 to 80 in February 2014, and eventually 112 by last July. It’s been building a base ever since, and while it did get whacked during the first few days of the month, LGND found support around its 200-day line a couple of times and then lifted last week on good volume. If you want to nibble here, use a stop near the recent lows of 91.5. We prefer to just keep an eye on it, looking for an eventual breakout above 112 in a healthy market.
LGND Weekly Chart
LGND Daily Chart
First Republic Bank (FRC)
Why the Strength
With the global economy showing signs of weakness (namely in China), bank earnings have been under the microscope this month. First Republic Bank’s delivered. The San Francisco-based bank reported record fourth-quarter and full-year 2015 profits earlier this month. The $0.72 in EPS marked a 26% improvement from the fourth quarter a year ago, while the $2.96 full-year EPS was up slightly from $2.93 in 2014. Sales are accelerating even faster, up 17% in the fourth quarter. First Republic’s wealth management division was the primary growth driver last year, with 20% sales growth. Total deposits also expanded by 29%. It’s a nice turnaround for a bank that saw a 5.5% decline in earnings per share in 2014. Though fourth-quarter profits were in line with analyst expectations, Wall Street is desperate for any encouraging signs from the financial sector, and First Republic Bank’s record-setting quarter and year was enough to breathe some life into the stock. Looking ahead, analysts see earnings up 24% this year, which could prove conservative if the market comes out of its funk.
Technical Analysis
A year ago, FRC traded at 47 after a down 2014. By August, it was up to 65, and made it as high as 69 in December before the broad market selloff knocked it back to 60. Now it’s showing signs of strength again, jumping to 66 in the last two weeks. Volume has doubled from normal levels during those two weeks, and hasn’t relented yet—a sign that some institutions believe shares have bottomed. If you buy, keep your position size small.
FRC Weekly Chart
FRC Daily Chart
Edwards Lifesciences (EW)
Why the Strength
Edwards Lifesciences, a medical equipment company that specializes in artificial heart valves, got good news last week when the Food and Drug Administration (FDA) approved a new phase of its Sapien 3 valve indication study. The Partner III trial is designed to evaluate the safety and efficacy of implanting the Sapien 3 heart valve in elderly patients suffering from severe, symptomatic aortic stenosis, a disease that occurs when a patient’s aortic valve narrows from its usual size. The third phase of the Sapien 3 trial will begin in the second quarter, with 1,300 patients suffering from severe aortic stenosis. If approved, the Sapien 3 valve would add to Edwards Lifesciences’ stable of transcatheter aortic valve replacement (TAVR) treatments, helping the company strengthen what is already a leading position in the TAVR market, said to be worth an estimated $5 billion by 2021. The company expects the Sapien 3 valve to be approved for commercial use by the end of 2016, which could further enhance top-line growth for a company whose sales likely rose 7% in 2015, with a 30% earnings per share improvement. At least one institution is excited about the Sapien 3’s potential impact: SunTrust Robinson Humphrey upgraded EW from “neutral” to “buy” last week.
Technical Analysis
The past year has been a roller coaster for EW, with big ups and downs between 62 and 78. Since September, however, the stock hasn’t dipped lower than 66, and it finally broke through 78 resistance in November, rising as high as 82. It slid back to 74 in the first few weeks of January amid the broad market tumble, but found momentum last week, vaulting back up to 78, on its biggest volume since late October. It might be worth dipping a toe on weakness and selling on any dip into the low 70s.
EW Weekly Chart
EW Daily Chart
Cree, Inc. (CREE)
Why the Strength
The revolution in efficient lighting has produced one big winner—Acuity Brands (AYI)—and may be about to give a second chance to Cree Inc. Cree used to be a maker of raw materials for microchips, but over the years has morphed into a major manufacturer of light emitting diodes (LEDs) for lighting applications. Cree’s LEDs are used in every conceivable situation, from outdoor streetlights to industrial and residential settings. The company still makes a wide range of power switches, silicon carbide and gallium nitride materials, microwave integrated circuits and other products, but it’s the LEDs that the company has been depending on for revenue growth, and a slowdown in the LED lighting industry—from 5% growth in 2015 to 2% in 2016—has taken a toll over the last year. Investors’ current excitement about Cree comes courtesy of a great fiscal Q2 earnings report on January 19 that featured earnings of 30 cents per share (vs. estimates of 24 cents) on revenue of $436 million (analysts expected $432 million). Long-term, competition is a worry in this industry, but after a tough couple of years, Cree is on the turnaround trail.
Technical Analysis
CREE has been through the wringer since reaching 76 back in 2013. The stock took hits from disappointing earnings and the slowdown in the industry, falling all the way to 23 in July 2015. But once that level was reached, CREE found support and began to build a big bottom with support at 22–24, and resistance at 27–29. The good earnings news on January 19 bumped the stock higher on three times its average trading volume and it ran to 29 on January 22. CREE still hasn’t broken out of its trading range, and it’s probably best to wait until it can break that barrier before buying in. If you want to nibble anyway, try to buy on a pullback toward 27 and use a stop at 24.5.
CREE Weekly Chart
CREE Daily Chart
CoreSite Realty (COR)
Why the Strength
A provider of data centers across North America, CoreSite is garnering investor attention now that all those data centers will be connected digitally. The company just rolled out a new dynamic interface that allows the diverse assortment of customers it serves to do business with one another across CoreSite’s 17 operational facilities in eight U.S. markets. Basically, it’s a virtual networking opportunity for CoreSite’s 900-plus customers. Throw in the consistently stellar sales and earnings growth—both top and bottom lines have expanded by double-digits in each of the last 12 quarters—and CoreSite tells a pretty good growth story. For fiscal year 2015, CoreSite’s earnings per share are expected to increase by nearly 20% and sales by 15.7%. Both numbers are actually supposed to accelerate in 2016, with EPS expected to increase by 30%. Structured as a real estate investment trust, CoreSite pays a dividend totaling 3.5% and with solid cash flow growth, the payout should rise over time.
Technical Analysis
The bulk of COR’s recent rally came in September, October and November, when the stock shot up from the late-August market bottom at 46 to 60. A two-month consolidation phase followed, as COR operated in a tight range between 55 and 59. Now the stock is back up testing resistance at 60 after last week’s new customer connectivity initiative was announced. Any break above 61 could mean that a new leg of this five-month rally in COR has commenced. If you’re game, you could pick up a few shares on dips but be wary of any decline below support at 54.
COR Weekly Chart
COR Daily Chart
Burlington Stores (BURL)
Why the Strength
Off-price retailing is a dog-eat-dog world, and Burlington Stores battles with competitors like TJX Companies and Ross Stores for market share, and with the economy and the weather for customers. The company is attracting investors right now for two reasons. First, following a weather-damped holiday season, the company’s guidance on January 11 did not warn on earnings, and investors are taking that as the equivalent of an earnings beat. Second, perhaps on the basis of that affirmed guidance, Burlington Stores’ stock was upgraded by two analysts last week, including an upgrade to Buy from Goldman. The company has announced that it will continue to work on execution, building on a successful program to keep excess inventory under control during the holiday season. While sales growth is mild, it’s steady, and Burlington’s efficiency measures are driving earnings nicely higher. As a cherry on top, the company increased its share buyback authorization by $200 million last year.
Technical Analysis
BURL was a monster from February 2014, when it was trading at 24, through March 2015 when it hit 62. But the stock corrected sharply in April and eventually bounced its way down to 39 in November. After retests of that level in December and January, the stock bounced on nearly triple its usual volume on January 12 and has now topped its higher (50-day) moving average. Off-price retail is always going to be a skinny-margin business, but BURL is enjoying some respect from investors who see it as a force in the sector. We think a small buy right here, or on a dip of a point or two, might pay off. Keep a tight stop, though.
BURL Weekly Chart
BURL 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.
