Still On the Edge
Current Market Outlook
The market bounced back nicely last week, though the major indexes are still in no-man’s land, sitting in the middle of their two-month ranges, and with many stocks still hovering just south of new highs as earnings season gets underway. We have seen a couple of rays of light (growth stocks are showing a hint of outperformance this month, which is a good thing), but overall, the environment remains on the edge—decisive upmoves by the indexes and breakouts from leading stocks would be bullish, while a move below support and a bunch of downside earnings gaps would be bearish. For now, we’re keeping our Market Monitor neutral, but we’ll let you know if we see a sustained trend getting underway.
This week’s list contains a couple of recent earnings winners, as well as a couple of others that shot to new highs on big volume last week. Because of the market environment, our Top Pick will be a slower, but surer, play—Starbucks (SBUX) isn’t going to double, but it’s just the type of mega-cap name that institutions can pile into following a great quarterly report.
| Stock Name | Price | ||
|---|---|---|---|
| Zebra Technologies (ZBRA) | 154.94 | ||
| WisdomTree (WETF) | 0.00 | ||
| Ulta Beauty (ULTA) | 331.95 | ||
| United Continental Holdings (UAL) | 96.76 | ||
| Starbucks (SBUX) | 64.49 | ||
| Royal Gold, Inc. (RGLD) | 129.66 | ||
| Janus Capital (JNS) | 0.00 | ||
| Dexcom (DXCM) | 421.36 | ||
| Dollar Tree (DLTR) | 0.00 | ||
| Agrium (AGU) | 0.00 |
Zebra Technologies (ZBRA)
Why the Strength
Zebra Technologies used to be a quiet company that made thermal printers and radio frequency identification (RFID) equipment. That all changed in April 2014, when the company announced that it was buying the Enterprise business from Motorola. The two companies had RFID in common, but Enterprise brought mobile computing, scanning, software and wireless LAN technologies to the partnership, increasing Zebra’s penetration of the RFID market and creating a company that could offer retailers an end-to-end system for tracking merchandise, engaging consumers and facilitating both assisted and self-serve checkout and payment. Investors liked the idea of the combined companies’ capabilities, but Zebra ran into a downtrend in July, likely on profit taking. August’s strong Q2 report (including news that its RFID tags would be adopted by the National Football League for tracking players’ stats) couldn’t stem the tide. But Zebra bounced back in mid-October and is enjoying improved investor perception. The company will report Q4 results on February 26 before the market opens.
Technical Analysis
ZBRA was trading around 54 as 2014 began, but it ran higher quickly, hitting 86 at the end of June, with the merger news providing fuel starting in April. The correction that began in July was steep, and was reinforced by the major market correction in September and October. When the broad market turned up in October, ZBRA caught the updraft, and ZBRA is now sitting near its old June highs. Momentum is good, and with earnings a full month away, the stock looks buyable on any weakness of a point or so. A stop at the 50-day moving average at 77 makes sense.
ZBRA Weekly Chart
ZBRA Daily Chart
WisdomTree (WETF)
Why the Strength
WisdomTree Investments is a pure play on the popularity of exchange traded funds (ETFs), the securities that let investors trade exposure to particular countries, sectors, industries, indexes, currencies or other asset classes. The company launched its first ETF in June 2006, and now has 70 of them. The mix of ETFs it offers changes with conditions; in January, the company liquidated and closed its WisdomTree Euro Debt Fund, for instance, probably because losses in the asset class made it unpopular. The company booked 76% revenue growth in 2013 and while quarterly revenue growth in 2014 came in at 46% in Q1 and 18% and 19% in the subsequent quarters, investors see strong currents running in WisdomTree’s direction. The company’s hedged European Equity Fund (HEDJ) just surpassed $5 billion in assets in December, and it just added four ETFs to its Mexico listings. Other South American countries are also approving the company’s ETFs for investment by its citizens. The main risk here is that about one-third of the total assets came from just a single ETF (Japan), but the overall trend is certainly up for the business as a whole. WisdomTree pays a 1.8% annual dividend yield and will report its latest quarterly results on February 6 before the market opens.
Technical Analysis
WETF was in a strong correction from January through May 2014. But the stock bottomed around 9 in May, then made two runs above 12 in June and September that both wound up flopping back to support at 10. With that triple-bottom pattern to build on, WETF blasted off for good in late October, ripping back to 16 in just four weeks. After 10 weeks of basing between 15 and 16, WETF took off again in the middle of January and made new highs today. WETF is buyable on any weakness of a half point, with a stop at 16.5.
WETF Weekly Chart
WETF Daily Chart
Ulta Beauty (ULTA)
Why the Strength
Ulta Beauty is strong because it’s one of the market’s favorite cookie-cutter stories. The company is becoming one of the only national chains of beauty stores. Besides top-notch customer service and a successful loyalty program (80% of sales come from such members), the big attractions here are the tremendous selection (everything from high-end to low-end products in every category) and, increasingly, salon, skin-care and even brow-shaping services, all right in the store. This value proposition has led to solid growth for years, and big investors are enthusiastic about the long-term plan the company laid out last fall. Ulta had 765 stores open at the end of October, and is planning on expanding that by 100 per year for the next five years. Throw in 5% to 7% annual increases in same-store sales, and management believes it can crank out low-20%-ish earnings growth for many years to come (though some heavy investments will suppress growth a bit during the next few quarters). Ulta could also benefit from the recent plunge in energy prices, that it’s a U.S.-only story (no international exposure here), and there’s a high degree of certainty that growth will be achieved. We like it.
Technical Analysis
ULTA was off most investor’s radar screens last September, but then the stock exploded higher after the company’s long-term growth outlook was revealed. It crawled higher along its 50-day line in the weeks that followed, even tightening up between 125 and 135 after the start of December. Late last week, though, ULTA lifted to new price highs on good volume; while buying breakouts hasn’t been fruitful for the past two months, we’re OK with a small position here and a stop in the low 120s.
ULTA Weekly Chart
ULTA Daily Chart
United Continental Holdings (UAL)
ir.unitedcontinentalholdings.com
Why the Strength
Tumbling gas prices have been a boon to the airlines. With oil down 57% since June, airline profits are set up to explode. Fuel is a major drag on profits in the airline industry, often accounting for as much as a third of total operating expenses, so the bottom line looks a lot better with oil at $50 a barrel instead of $100. Meanwhile, industry consolidation has allowed the remaining carriers to keep ticket prices high despite fuel prices being slashed in half. United Continental (a company at the forefront of the industry’s consolidation) should be one of the largest beneficiaries of the lower fuel prices. The company estimates that lower fuel prices will help it save roughly $2 billion in costs this year! That will enable United Continental to pay down debt and return more cash to shareholders. The company spent $100 million on share repurchases last quarter alone—with more to come. As a result, earnings per share have increased 98% and 85% the last two quarters, with 89% growth expected in 2015 (to nearly $10 per share!).
Technical Analysis
Like most other airline stocks, UAL has gone up, up and away these last three months. For much of December and early January, the stock seesawed back and forth between 61 and 66. Last week, however, UAL shot up in a straight line from 63 to 73 after an encouraging fourth-quarter earnings report. Given that recent push, it’s prudent to wait for another pullback of at least two or three points before buying. But the momentum for airline stocks should continue to build the longer oil prices remain at a post-recession low.
UAL Weekly Chart
UAL Daily Chart
Starbucks (SBUX)
Why the Strength
Starbucks needs no introduction, as millions of people enjoy the company’s coffee, beverages and (increasingly) food at its 21,878 locations around the world (two-thirds of which are in the U.S.). Growth has mellowed in recent years as the company has grown (sales are now north of $17 billion), but sales are still generally cranking ahead at double-digit rates, thanks to solid same-store sales growth and a still-robust store expansion plan—the company is aiming to boost its store count by 7.5% this year. The reason for the stock’s strength was a great fourth-quarter report, which showed same-store sales rose 5%, sales and earnings generally met or slightly exceeded expectations, and some strong sub-metrics (the company gets more than seven million mobile orders per week!), indicating that Starbucks is innovating, not sitting on its hands. Most important, investors came away from the conference call with confidence that the company will continue to see 15% to 20% earnings growth (analysts see the bottom line up 18% and 17%, respectively, this year and next) as traffic patterns have improved and some of the firm’s holiday drink and food offerings proved to be hits. The valuation here is a bit elevated given the growth (~30 times earnings), but big investors are clearly comfortable with the long-term outlook. And the 1.5% dividend is a nice bonus.
Technical Analysis
SBUX topped at 83 in late-2013 and had a couple of long ups and downs after that, before building a tighter six-week zone in the 78 to 84 area since early December. But that recent, tight pause led to last week’s sizable earnings gap (up 6.6% on nearly quadruple average volume—a big move for a stock like SBUX), which, if the market gets going, should kick off a sustained uptrend. Shares won’t double during the next year, but the stock looks like a new mega-cap leader.
SBUX Weekly Chart
SBUX Daily Chart
Royal Gold, Inc. (RGLD)
Why the Strength
Royal Gold is a precious metal miner with plenty of exposure in Top Ten (17 previous appearances dating back to 2002). While we’re not enthusiastic advocates for investing in gold, Royal Gold has a long history of profits as a royalty investor, with 37 producing and 24 development-stage royalties or similar interests that have cranked out huge profit margins for years. The company has interests in 198 properties on six continents, with the bulk in Canada, Chile, Mexico and the U.S. The persistent decline in the price of gold, from over $1,800 an ounce in late 2011 to $1,280 in recent trading, certainly undercut Royal Gold’s stock price, which fell from over 100 in September 2012 to 39 in June 2013. But while the price of gold has continued to fall, investors have returned to Royal Gold as a profitable company that pays a dividend (annual yield is 1.2%) with a big upside if the price of gold rebounds. With a 76 P/E ratio, the stock isn’t exactly cheap, but investors clearly believe that gold isn’t going to fade away as an attractive investment, and Royal Gold is a trusted name in mining. The company will report its fiscal Q2 results this Thursday (January 29) before the market opens.
Technical Analysis
RGLD rebounded from its June 2013 low at 39 by soaring to 67 in August 2014, then making new highs at 72 in March 2014 and 82 in August. Since that high, RGLD has slipped below 60 in October and recovered to 73 in November. RGLD has now booked five consecutive weeks of advances, and is trading just above 74. If you’re seeking exposure to gold, RGLD looks like a reasonable way to get it. There’s plenty of volatility, so you should be able to get in a pullback of at least a point. Keep any buys small this close to earnings and use a protective stop at 67, which is where its 25- and 50-day moving averages have converged.
RGLD Weekly Chart
RGLD Daily Chart
Janus Capital (JNS)
Why the Strength
Janus, a Denver-based investment group, reported monster fourth-quarter earnings last week and one man was largely responsible for it: Bill Gross. America’s most high-profile bond investor—a CNBC regular and the former manager of Pacific Investment Management Company (PIMCO)—joined the Janus team in September, and was quite busy in his first full quarter with his new firm. Gross invested $700 million of his own money in Janus’ Global Unconstrained Bond Fund, which he now manages. Because Gross is essentially the Pied Piper of bond investing, many other investors followed: Janus’ fixed-income funds attracted $2.8 billion in the fourth quarter. It marked the first quarter of net deposits in more than five years for Janus, halting a streak of 21 straight quarters of withdrawals. According to Bloomberg, Janus’ Global Unconstrained Bond Fund swelled from a scant $13 million before Gross’ arrival to $1.38 billion as of December 31, 2014. For the quarter, Janus Capital reported earnings per share of 24 cents—20% higher than consensus analyst expectations and a 14% improvement from the fourth quarter a year ago. Call it “The Bill Gross Effect.”
Technical Analysis
Unsurprisingly, Bill Gross’s move has had a profound impact on JNS. The stock shot up 43% in one trading session on September 25, the day news of Gross’ arrival was announced. For the nearly four months that followed, JNS shares were up and down, wavering between 14 and 17. Last week’s Q4 earnings report, however, sent the stock soaring more than 12%, settling above 18 for the first time since August 2008. If the fallout from Janus’ big September run-up is any guide, expect shares to pull back a bit in the coming days. But the Bill Gross Effect is still in its honeymoon phase, so it’s unlikely the stock’s move is over.
JNS Weekly Chart
JNS Daily Chart
Dexcom (DXCM)
Why the Strength
With over 29 million people in the U.S. suffering from diabetes (over 9% of the population) and the condition ranking seventh among causes of death, the need for effective treatments is enormous. DexCom is a company devoted solely to the design and manufacture of continuous glucose monitoring systems that keep diabetes under control. The company has a wide array of monitoring systems, but the one that’s making headlines today is the G4 Platinum Continuous Glucose Monitoring System with Share. The DexCom Share system uses a wire-like sensor inserted just under the skin to collect data. That’s what many of the company’s devices do. But the Share system uses a patient’s mobile device to transmit that information to a facility that keeps track of glucose levels and other information. The G4 Platinum with Share system was just approved by the U.S. Food and Drug Administration, a move that will have a big impact on future revenue. DexCom released its preliminary Q4 revenue last Wednesday, predicting an increase of 64%, which is well above analysts’ estimates. The diabetes problem is going to be a worldwide issue for years, and DexCom is a technology leader in monitoring. There’s no set date for Q4 results, but investors are clearly optimistic. The company hasn’t made a profit yet, but 2015 losses are expected to be a scant $0.02, so profits are on the horizon.
Technical Analysis
DXCM has been a volatile issue, correcting from 50 to 28 last year, then settling in under resistance at 46 from early August through early November. But the stock has been following through to the upside since its November breakout on volume and the FDA announcement kicked off another strong rally today. DXCM is a strong long-term story, so we think a buy on any weakness has good prospects. Use a stop at the 50-day line (now at 55) for protection.
DXCM Weekly Chart
DXCM Daily Chart
Dollar Tree (DLTR)
Why the Strength
Already one of the bigger discount chains in the U.S., Dollar Tree is about to more than double in size. An $8.5 billion buyout of rival Family Dollar gives Dollar Tree more locations than any other retailer in the country—Wal-Mart included! More importantly, the deal more than doubles Dollar Tree’s annual sales, from just over $8 billion to roughly $18 billion. That suddenly puts Dollar Tree on equal footing with the dominant dollar-store chain, Dollar General, a company that did $17.5 billion in sales last year. The deal is expected to be accretive to Dollar Tree’s earnings per share within the first year. Even prior to its Family Dollar takeover, Dollar Tree’s earnings had been growing at a steady clip, with EPS more than tripling in the last five years, and analysts see 15%-ish growth in the year ahead. Its sales have doubled in the last seven years. Adding Family Dollar’s $10.5 billion in annual sales and $2.17 in EPS should further accelerate that growth. And it helps that all of this is happening amid a plunge in gas prices, which is likely to be a boom to this firm’s clientele.
Technical Analysis
Needless to say, the Family Dollar buyout is a game-changer for the stock. Prior to last week’s announcement, Dollar Tree shares had dipped below their 50-day moving average for the first time since October, breaking below support at 67 and dipping to a two-month low. But the Family Dollar deal pushed DLTR shares to new highs above 72 on a noticable pickup in volume. Given the 10% run-up in less than a week, it’s reasonable to expect a correction of two or three points. This is a new day for Dollar Tree, though. Shares shouldn’t stay down for long.
DLTR Weekly Chart
DLTR Daily Chart
Agrium (AGU)
Why the Strength
Agrium is the second fertilizer stock to show up in Top Ten this month (CF Industries was the other), which is a good sign for the industry as a whole. After a year or two of easing prices, demand and earnings for most of the players in the industry, business is set to pick up nicely during the next few quarters for Agrium’s nitrogen, potash and phosphate fertilizers, as well as its distribution network of 1,300 locations. The reason for the stock’s strength, however, was the firm’s dividend and share repurchase announcement last week. As Agrium looks ahead to the completion of two expansion projects this year, it’s increased its dividend target to 40% to 50% of its free cash flow (up from 25% to 35%); it appears that the current dividend of 78 cents per share (yield of 3.2%) could rise to $1.20 per share or so (4.8% yield) in the quarters to come. Moreover, the company has put in a “bid” to buy up to 5% of the shares outstanding during the next year (about 7.1 million shares), depending on the price of the stock. Of course, if demand plummets again, all bets are off—returning cash to shareholders is bullish but doesn’t overwhelm the fundamentals. Still, analysts see the bottom line surging 36% this year and another 16% in 2016, which, combined with a reasonable valuation, the buybacks and the dividend, should keep the stock in favor.
Technical Analysis
AGU has been flat-lining for a couple of years now, moving between 80 and 110 (give or take a couple of points) during that time. But, after a sharp selloff in mid-October, AGU rebounded strongly and built a short, tidy base; shares found support at their 40-week line and volume dried up nicely. And now the stock is surging to multi-month highs on three straight weeks of good volume, bolstered by the dividend and share buyback announcements. Nibbling here could work, with the idea of adding shares should AGU continue higher.
AGU Weekly Chart
AGU 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.
