Dead Neutral
The big news today is that last week’s market weakness turned our intermediate-term market-timing indicator negative. But no one indicator is perfect, and at Cabot, we use another indicator to measure the market’s long-term trend—and that indicator is still positive. Thus it’s a standoff, which means our Market Monitor is positioned at dead neutral. Short-term, we tend to think the market is ripe for more of a pullback, simply because it’s had such a great, long advance. But long-term, we remain optimistic that once the correction is complete, the main uptrend can continue, and this thinking, in part, is because there are so few investment alternatives! In any event, our goal is to continue presenting you with stock that are most prone to short-term strength, and this issue brings a nice mix of old and new. Read them all, choose your favorite story, and work to find a good entry point. Our favorite this week is Twitter (TWTR), which has a huge fundamental story and a decent technical setup.
| Stock Name | Price | ||
|---|---|---|---|
| Valeant Pharmaceuticals (VRX) | 0.00 | ||
| VeriSign (VRSN) | 190.71 | ||
| Vipshop Holdings (VIPS) | 14.25 | ||
| Twitter (TWTR) | 40.37 | ||
| Insulet (PODD) | 175.69 | ||
| Pandora Media Inc. (P) | 0.00 | ||
| Medivation (MDVN) | 0.00 | ||
| The Hain Celestial Group, Inc. (HAIN) | 0.00 | ||
| Gilead Sciences (GILD) | 75.10 | ||
| CalAmp (CAMP) | 0.00 |
Valeant Pharmaceuticals (VRX)
Why the Strength
Valeant Pharmaceuticals International is Canada’s largest publicly traded drug maker. The company, formerly known as Bioval, develops, manufactures and markets neurological and dermatological treatments, with a large portfolio of branded prescription, branded generic and OTC products. Among the more notable of Valeant’s drugs are genital herpes treatment Zovirax, acne treatment Acanya and antidepressant Wellbutrin XL. The company has been on a major buying spree during the past six years, snapping up more than 60 companies, including eye-care specialist Bausch & Lomb. More recently, Valeant received antitrust clearance to acquire Solta Medical. But the big news driving strength in Valeant stock recently is the company’s 2014, 2016 and 2018 earnings guidance. Specifically, the company projected annual revenue would grow 40% to $8.2 billion in 2014, with an ultimate goal of becoming one of the top five most valuable pharmaceutical companies (by market cap) by the end of 2016. Meeting this goal would ultimately boost Valeant’s market cap from $44.11 billion currently to more than $150 billion in roughly two years! And, adding icing to the cake for Valeant investors, the company also announced a $1.5 billion share buyback program. All in all, we see a lot to like about Valeant’s prospects.
Technical Analysis
VRX shares have been in a solid uptrend for the better part of the past 5 years. The stock took a bit of a breather in mid-2012, but VRX has not relented in its uptrend since. In 2013, the stock gained more than 90% along staunch support at its 10-week moving average, with VRX taking out the century mark in September. Shares are off to a strong start in 2014, too, with VRX gaining more than 15% and tagging a fresh all-time high above 140 last week. The stock has since retreated to support at 130, as it waits for its 10-week to catch up. VRX is a bit overheated at this point, so buying dips is recommended.
VRX Weekly Chart
VRX Daily Chart
VeriSign (VRSN)
Why the Strength
Navigating the Internet requires knowing a site’s name, and control of the infrastructure for every single site name that ends in .com or .net is the business of VeriSign. Founded in 1995, this Virginia-based company operates the Domain Registry Services and Network Intelligence & Availability businesses that let people search for who owns a site name and learn whether a name is available for registration. VeriSign’s portfolio also includes other top-level domain names like .tv, .edu, .gov. .jobs, .name, and .cc. The company also operates two of the world’s Internet root servers, which are considered national IT assets by the U.S. government. The company’s business is generally a model of consistency, booking double-digit revenue growth in 12 of the last 13 quarters (growth slipped to 9% in Q3, 2013) and steadily increasing EPS every year since 2009. VeriSign will release its Q4 and 2013 results on February 6 after the market closes. One reason for the company’s popularity with investors is the consistency of its growth and its high after-tax profit margins, 36.9% in Q3, which haven’t dipped below 30% since Q3 2010. The company also has a nice line of business in Internet security with products that protect against DDoS (distributed denial of service) attacks and its VeriSign iDefense security intelligence services. But mostly, it’s the consistent business of keeping the Internet’s names straight that makes VeriSign a consistent winner.
Technical Analysis
VRSN took a tumble from 38 to 27 in late 2011, then dipped from 50 to 33 in October and November 2012. But recovery was fairly quick in each case, and since a May/June 2013 pullback from 50 to 43, VRSN has been in a consistent uptrend, pushing the stock to its highest level since 2001. VRSN isn’t a rocket shot, but its consistency is very attractive to investors. The stock dipped from 62 to 60 during last week’s late meltdown. It’s now sitting right at its 25-day moving average and looks buyable right here.
VRSN Weekly Chart
VRSN Daily Chart
Vipshop Holdings (VIPS)
Why the Strength
Vipshop Holdings, which made its debut in Top Ten last July, was one of the top-performing stocks of 2013, booking an impressive 369% price appreciation. The reason is clear. China is huge and growing, with more consumers who have increasing amounts of money to spend. And Vipshop’s strategy of discounted online flash sales of fashionable merchandise has yielded great results. The company’s three full years of revenue growth has yielded increases of 1,059% (2010), 597% (2011) and 205% (2012). Growth through the first three quarters of 2013 has averaged 170%. One key to Vipshop Holdings’ success in Internet commerce is its broad variety of partnerships with nearly 6,000 Chinese and International brands that enable the site to offer fashionable, up-to-the-minute goods at discount prices. The company has been achieving steady improvement in its after-tax profit margins, from 0.4% in Q3 2012 (the company’s first profitable quarter) to 3.9% in Q3 2013. China has no national discount retail chains and very few factory outlets, so Vipshop Holdings has a privileged position in a market that generated total estimated retail sales of $3.8 trillion in 2013. While the recent shift in sentiment about China may prove to be an obstacle, Vipshop Holdings is one of the very few ways for Western investors to gain exposure to Chinese retail.
Technical Analysis
VIPS came public at 6.5 in March 2012 and built a five-month base before blasting off in August 2012. The stock dipped from 38 to 23 in May and June 2013 during a short-selling attack, but has been in an uptrend since, although high volatility has resulted in a few quick pullbacks and the stock idled from the middle of November through the second week of January. VIPS made another surge starting on January 14, and soared above 100 last week. The general market weakness on Thursday and Friday pulled the stock back a bit, but didn’t pull it beneath its 25-day moving average. There is no set date for the company’s Q4 earnings report, which will likely set the stock’s direction. We think a small investment on further weakness makes sense, with a stop at 82.
VIPS Weekly Chart
VIPS Daily Chart
Twitter (TWTR)
Why the Strength
Twitter has all of the characteristics of a big winning stock—a unique and revolutionary product that’s changing the way millions of people share information, triple-digit revenue growth and a big, liquid and new stock that institutions are gobbling up. The company’s product is unique because it’s truly real-time and conversational; it’s become one of the most popular places people go during breaking news events, and even on a day-to-day basis, it’s a hub for hundreds of millions of people to discover what’s going on that day, as well as share their own opinions on the subject. As advertising offerings expand, revenues are ramping, and all of the firm’s sub-metrics, like number of active users (232 million at the end of September, up from 167 million the year before) or timeline views (169 billion in the third quarter, up 44% from a year go), are heading in the right direction. Possibly the biggest question here is valuation; with a market cap in the $34 billion range, can Twitter stock really do well from here? Every case is different, but we do know that, historically, these highly valued stocks can do quite well if institutions believe rapid growth is likely for another five or six years. The firm’s first quarterly report as a public company is due February 5.
Technical Analysis
What impresses us most about TWTR is its action since coming public. It formed a nice IPO base, reached new highs above 50 and then soared into the mid-70s before its current pause. Interestingly, even as the market has weakened, TWTR has held up very well, something you wouldn’t expect from such an “overvalued” name. We also like that some big investors have already taken substantial positions (T. Rowe Price owns 14 million shares). You shouldn’t invest the rent money here, but a small position in the 58 to 62 area, with a loose stop in the low 50s, could work. Earnings are out February 5.
TWTR Weekly Chart
TWTR Daily Chart
Insulet (PODD)
Why the Strength
Medical device maker Insulet manufactures a unique insulin pump for people with insulin-dependent diabetes. Called the OmniPod Insulin Management System, or the Pod for short, the device is disposable, waterproof, weighs a mere 1.2 ounces and adheres directly to the patient’s skin. More traditional insulin pumps require belts, clips or harnesses, making them much less discreet. The Pod also includes a handheld device to wirelessly program insulin delivery instructions. Insulet and other companies in the diabetes management market have experienced solid growth during the past couple of years, as Type 1 diabetes diagnoses are on the rise, especially with younger demographics. It is this younger crowd, furthermore, that has proved a boon for Insulet, with patients under 19 making up 35% of the company’s total business. Banking on what he calls the “iPhone for diabetes patients,” CEO Duane DeSisto predicted last week that Insulet would finally turn a profit in 2014. The company is slated to release its full-year 2013 financials this week, with Insulet expecting 25% growth in new patients.
Technical Analysis
Driven in part by the new healthcare law and increased diabetes diagnoses, PODD shares have seen impressive growth since mid-2011. In fact, the stock has rallied more than 180% during this time frame. The uptrend began in earnest in 2013, with PODD acquiring key support at its 10-week and 25-week moving averages. Shares have not closed a week below this duo since February, with PODD pulling back from a high above 40 in early November to test its 25-week moving average. PODD has since rebounded sharply, eclipsing 40 following last week’s projections by CEO DeSisto. Given the recent surge higher, we recommend buying dips.
PODD Weekly Chart
PODD Daily Chart
Pandora Media Inc. (P)
Why the Strength
For a stock with a big valuation ($6.5 billion and more than 10 times annual revenue), Pandora is actually fairly controversial in investment circles. Many fear competitors, believing that a behemoth like Apple’s iRadio or a whippersnapper like Spotify or Grooveshark, will eat into Pandora’s listening totals, hurt ad pricing and crush the stock, or that content costs will soar and eat into any future profits. But the company continues to confound its critics by offering a great, (mostly) free product that most believe is better than the various competing products. At year-end, the company accounted for 8.6% of all radio listening time (up from 7.58% a year ago), yet its advertising revenue is still only beginning to ramp up. Moreover, management has been adapting to the new mobile reality, where it has one of the most popular apps for iOS or Android, and is expanding its reach by offering more channels (like comedy) as well as inking deals with two dozen car manufacturers. In fact, Pandora is set to launch in-car ads, opening up another potentially huge revenue stream. Revenue growth is consistently strong and earnings are just lifting off. Analysts see the bottom line surging to nearly 50 cents per share this year. Earnings are due February 5.
Technical Analysis
The fact that P has been advancing since November 2012—nearly quintupling during that time—was our big rub with the stock, but the market’s downdraft provides an opportunity to see just how strong the stock really is. So far, we’re very encouraged—P’s pullback has been modest and came on very light volume, despite its recent pop higher. Earnings are a risk, of course, so it’s fine to wait for the report before deciding whether to jump in. But we’re OK with a small position in the 33 area, with a stop just below the 50-day line.
P Weekly Chart
P Daily Chart
Medivation (MDVN)
Why the Strength
After just two weeks, we are checking back in with biotech company Medivation. The company, which acquires, develops, and sells biopharmaceuticals, targeting drug candidates for limited or unmet medical needs, continues to be a thorn in the side of several big-name competitors in the treatment of prostate cancer. As we noted last time, Medivation’s XTANDI, which was developed in partnership with Astellas, has seen strong and steady sales growth, with revenue rising 32% in the third quarter to $108 million. By comparison, Johnson & Johnson’s market leading prostate cancer treatment Zytiga saw quarter-over-quarter sales growth of only 3.4% in the fourth quarter. This marked the second consecutive quarter of single-digit sales growth for Zytiga, hinting that XTANDI is continuing to gain market share in the treatment of prostate cancer. And XTANDI poses another potentially major threat to Johnson & Johnson, as the drug could receive FDA approval for pre-chemotherapy treatment. With XTANDI continuing to gain market share at the expense of bigger players in the prostate cancer market, Medivation has plenty of room for growth. Medivation is set to release results on February 27.
Technical Analysis
After being stuck in a trading range near 10 for the better part of 2011, MDVN soared nearly 500% in the 12 months following the FDA’s approval of XTANDI in November 2011. The stock topped out near 60 in late 2012, and spent 2013 chopping around in a 20-point range between 40 and 60. News that XTANDI was gaining market share sent the stock skyward again three weeks ago, and shares are up nearly 20% year-to-date, with MDVN hitting a fresh all-time high just shy of 80 last week, despite weakness in the broader market. The stock is currently digesting these gains, as it consolidates support at its 10-day trendline in the 75 region.
MDVN Weekly Chart
MDVN Daily Chart
The Hain Celestial Group, Inc. (HAIN)
Why the Strength
Hain Celestial, a national manufacturer and retailer of natural and organic food and personal care products, has been enjoying a stretch of good news recently. Hain recently bought Tilda, a rice-growing company that specializes in basmati varieties, and will use its output to grow U.K. and Middle East sales. The acquisition will also help to exploit the currently hot gluten-free market. The addition of Tilda to the company’s already strong lineup of brands—Celestial Seasonings, Earth’s Best, Terra, Garden of Eatin,’ Arrowhead Mills and many others—will strengthen the company’s offerings in the resilient organic food industry. The dedication of healthy eaters has allowed Hain Celestial to grow revenue by more than 20% in each of the last three years, and earnings have soared from $1.01in fiscal 2010 to $2.50 in 2013. The company will report results from its fiscal second quarter on February 4 after the market closes. Analysts are expecting revenue of $538 million for the quarter and earnings per share of 87 cents. With support coming from both strong demand and an aggressive acquisition program, Hain Celestial looks set to keep on exceeding expectations.
Technical Analysis
HAIN has been a surge-and-consolidate stock since the beginning of 2013 when it was trading at 51 after a four-month correction. The stock completed a 10-month cup-with-handle pattern in July and has been stair-stepping higher since. The stock’s tendency to make big moves then flatten out was apparent in moves in October and December. And after the December rally from 80 to 90, HAIN put in three weeks tight at 90 before jumping to 98 on January 15. The market’s weakness last week hasn’t pulled the stock below its 25-day moving average and volume has been calm. HAIN looks like a good bargain on this recent pullback, with a tight stop at 85 for protection.
HAIN Weekly Chart
HAIN Daily Chart
Gilead Sciences (GILD)
Why the Strength
Gilead Sciences was a huge winner during the early 2000s thanks to a burgeoning HIV treatment franchise. And those various drugs (along with others) continue to sell very well, although growth has slowed. The big driver today is the firm’s Hepatitus C treatment, which it acquired when it purchased Pharmasset (which we wrote about a few times in Top Ten) in late 2011. At the time, Gilead’s $11 billion purchase was laughed at, with most believing it was ridiculously expensive … but it’s now looking like a bargain! Without getting into all the details, the treatment (dubbed Sovaldi)—that showed stunning results in trials (curing up to 90% of patients), is a pill and the treatment lasts just 12 weeks. Having launched in December, it’s enjoying jaw-dropping demand. Analysts were already estimating Sovaldi could bring in $2 billion or more in revenue during 2014, but one pundit last week said he believes results could come in closer to $5 billion, which would drive earnings through the roof! As it stands now, Gilead’s earnings are expected to reach $3.30 per share this year (up 66%) and north of $5 in 2015 as Sovaldi captures market share. We like it.
Technical Analysis
It’s not GILD’s first inning, as the stock has been motoring higher for a couple of years, but it remains under accumulation. The recent action saw the stock tighten up for nearly two months in the mid- 70s (notice all the tight closes in December and early January), then break out powerfully on the upside. Even as the market took a spill last week, GILD held relatively firm. A dip all the way back toward the mid-70s would tell you the latest rally has faltered, but we think you could start a position in this well-sponsored biotech around here with a stop in the 74 area.
GILD Weekly Chart
GILD Daily Chart
CalAmp (CAMP)
Why the Strength
California-based CalAmp is making its debut in today’s Top Ten, reflecting the robust growth of the wireless-equipment business. CalAmp (that’s short for California Amplifier) makes equipment that delivers data, voice and video content, primarily in the U.S. The company’s devices deliver cellular and GPS data, route telemetry and satellite transmissions, and even radio transmissions for the public safety sector. The hottest growth segment right now is machine-to-machine (M2M) communication and the movement of more and more data and software to the Cloud. CalAmp also supplies the software that converts data into meaningful information. With the number of connected devices projected to increase by 22% every year, demand is expected to remain robust. The company has been experiencing strong revenue growth (30% in 2013) and earnings doubled from 2012 to 2013. Institutional investors have been coming on board with increasing speed, up from 43 two years ago to 244 today. CalAmp was downgraded by an analyst on January 23 based on its high valuation. But that kind of downgrade just provides evidence that investors have been finding the stock attractive. As the Internet of Everything gets more devices in touch with one another and cell phones are boosted to 4G data levels, CalAmp is positioned to take advantage.
Technical Analysis
An interesting thing happened to CAMP in December. The stock took a quick 10% haircut on December 24 after the company’s Q4 earnings and guidance failed to meet analysts’ expectations. But CAMP got moving again almost immediately, and surpassed its December highs in the second week of January. CAMP pushed out to a new high above 33 on January 22, and has reacted to the market’s current weakness by falling to just 29. Volume during this three-day pullback has been falling and the stock is still right at its 250-day moving average. We think CAMP looks buyable right around here, with a stop at 25.
CAMP Weekly Chart
CAMP 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.
