The Trend Remains Up
Current Market Outlook
Early January is almost always a tricky time as big investors rotate and reposition their portfolios, leading to lots of crosscurrents and volatility. We saw some of that today and won’t be surprised to see more gyrations in the days ahead. Thus, we’re focusing mostly on the bigger picture, and on that front, the trend remains up, and we’re seeing a lot of pullback resumption set-ups (mostly from cyclical and financial stocks) and base-breakout set-ups (among some growth-oriented stocks). Now’s not the time to chase a stock’s every tick higher or lower, but you should remain bullish, and have a list of set-ups ready should the buying pressures resume after the modest late-December market retreat. We’re leaving our Market Monitor at a level 8 out of 10.
This week’s list has many stocks that have formed the aforementioned set-ups—should they resume their uptrends, many could have nice runs. For our Top Pick, we’re going with Micron Technology (MU), which gapped up strongly on earnings two weeks ago before pulling back. Dips look buyable to us.
| Stock Name | Price | ||
|---|---|---|---|
| Arista Networks (ANET) | 0.00 | ||
| Dave & Buster’s (PLAY) | 57.01 | ||
| HD Supply Holdings, Inc. (HDS) | 0.00 | ||
| Micron Technology, Inc. (MU) | 43.31 | ||
| Nabors Industries (NBR) | 0.00 | ||
| Oasis Petroleum (OAS) | 12.57 | ||
| Quanta Services (PWR) | 91.45 | ||
| Texas Capital Bancshares (TCBI) | 0.00 | ||
| United States Steel Corporation (X) | 0.00 | ||
| WellCare Health Plans, Inc. (WCG) | 271.83 |
Arista Networks (ANET)
Why the Strength
Arista Networks looks like the next major challenger to Cisco. The company was formed from the ground up a few years ago with products (both hardware and software) specifically tailored to high-speed data center applications, which is an entirely different market than the traditional enterprise IT sector and, not surprisingly, is where the growth is—with enterprise workloads moving to cloud environments, demand for these products are exploding. Arista is benefiting from that trend, as its faster/better/cheaper solutions (especially its unique, single operating system, which is purpose-built for the cloud) for a variety of clients (including the biggest cloud operators) are grabbing lots of share (14.9% in the first half of 2016, up from 6.7% in 2013) in the data center switching sector. The real risk here is litigation, mainly involving some patent disputes with Cisco and some trade-related issues as well. But the company has received a couple of positive pieces of news on that front lately (including a jury ruling that said Arista owed no damages on copyright infringement) and investors are thinking that fears of higher costs from import restrictions won’t be as bad as feared. Earnings estimates are muted for 2017 (just 11% growth), but that could easily be conservative based on the lifting of any import restrictions and Arista’s history of topping expectations. There’s risk, but lots of potential reward, too.
Technical Analysis
Not many traditional growth stocks are in uptrends, but ANET is one of them. The stock has trended higher since the Brexit low, and impressively, has had some solidly-bullish volume clues in recent weeks—first on earnings in early November, then on good news from a trade commission in late-November and also a couple of great buying days in December. With ANET hovering near new price and RP peaks, we’re OK buying some here, albeit with a stop near 92.
ANET Weekly Chart
ANET Daily Chart
Dave & Buster’s (PLAY)
Why the Strength
We’ve written about Dave & Buster’s unique retail concept before, and that’s the main long-term driver of the company’s earnings—it’s “Eat. Drink. Play. Watch.” concept makes it an attraction for a variety of people and families, with the adults able to grab some pub-like food, have a few beers and watch the ballgame, while the kids (and kids at heart) get to play a ton of arcade-like games and even collect prizes based on their success. Business-wise, the big idea here is that the company’s 91 locations are highly profitable, thanks mainly to the games (which bring in about half of all revenue), and thanks to a quick payback (new stores have been paying back nearly half the initial investment in the first year), management is aiming to boost its store count by about 10% annually for many years. (2016 saw 11 new store openings, topping expectations, and management sees an opportunity for more than 200 locations in the U.S alone.) The reason for the stock’s recent pop was third-quarter earnings—while the long-term target is for just 1% to 3% growth in same-store sales, the most recent report saw a 5.9% pop in that metric, driving a huge earnings beat. Analysts see next year’s bottom line rising 15%, though that’s likely conservative, and the company’s earnings estimates have been steadily rising all year. It’s not going to double overnight, but Dave & Buster’s is a unique retail operation that has a long runway of growth ahead.
Technical Analysis
The biggest part of PLAY’s chart was the big base-on-base formation it etched last year—it built a launching pad from September 2015 through May 2016 when it lifted on earnings. But that led to another, shallower, shorter base, which also led to an earnings-related breakout, this one very powerful (up 19% on nearly eight times average volume). PLAY has since held those gains nicely. You could buy a little here or on dips, use a loss limit in the low 50s and consider averaging up on a push above 58.5.
PLAY Weekly Chart
PLAY Daily Chart
HD Supply Holdings, Inc. (HDS)
Why the Strength
HD Supply (which was spun-off from Home Depot in 2013) is another play on expectations for a pickup in infrastructure spending, though this company’s focus is on distribution—it’s one of the largest industrial distributors in North America, serving more than half a million customers with around 800,000 individual products categorized in either facilities maintenance, waterworks or construction. This isn’t an amazing growth story (sales have risen between 1% and 7% each of the past seven quarters) but investors are buying shares because there’s lots of leverage in the business model—while sales rose just 3% in the third quarter, earnings leapt 28% and free cash flow rose 81%, which the company is using to rapidly pay down debt. (Recent transactions will save more than 30 cents per share annually in interest expense.) And expectations are that such steady growth and expanding margins will continue, which should keep cash flow and earnings (analysts see the bottom line rising 27% this year) revving up. All told, HD Supply is strong because it’s a relatively low risk way to play an accelerating economy—growth is slow but steady, and the firm is dominant in most of the product areas it’s involved in. Encouragingly, Fidelity’s various mutual funds owned about 21.5 million shares at the end of September (year-end quarterly holdings aren’t available yet), more than 10% of the company.
Technical Analysis
HDS topped at 37 in July 2015, bottomed at 21 last February and then rallied back to 37 last July. The stock ran into some trouble on earnings, but that was the start of a new, shallower launching pad. HDS wasn’t looking great in early November, but the election changed everything—shares have risen persistently to new price and RP peaks recently, and last week’s dip was modest. We think buying dips toward the 25-day line (near 41.5) makes sense, with a stop near the 50-day line.
HDS Weekly Chart
HDS Daily Chart
Micron Technology, Inc. (MU)
Why the Strength
We’ve featured Western Digital (WDC) twice over the last two months because of the enormous strength in data storage stocks. Micron is a play on the same theme. Micron specializes in DRAM (58% of revenue) and NAND memory (33% of revenue), and dabbles in NOR flash memory and image sensors as well. The Boise, Idaho-based company is distinguished by being the only U.S. -based DRAM manufacturer. But that’s not why we like it. The company finished 2016 with a bang when it reported better-than-expected fiscal Q1 results two weeks ago. Revenue growth of 18.5% (to $3.97 billion) beat by $20 million, while EPS growth of 10% (to $0.32) beat by $0.04. That result ended a six quarter streak of negative revenue growth, and a seven quarter streak of negative EPS growth, not to mention a three quarter streak of negative earnings. The fiscal 2017 outlook has analysts projecting 43% revenue growth and a massive EPS jump to $2.42 (from a meager $0.16 last year). Driving those headline numbers are impressive sales trends, including growth in 20nm, better DRAM pricing (PC DRAM prices are up over 50% over 18 months), success migrating customers to 3D NAND, and gross margin improvement, which hit 25% last quarter but could reach 35% by the end of the current fiscal year.
Technical Analysis
MU traded over 36 during the peak of the last cycle, which ended in 2014. At the bottom of the cycle in early 2016, it was down to 10. The recovery gained steam after the fiscal Q3 quarterly report on June 30, after which the stock embarked on a three-month rally from 12 to 18. A consolidation period lasted through early November, then shares ascended to 20.5. The December 21 earnings released drove a high-volume gap up to 23. Shares retreated during the last three trading days of 2016, affording what looks to us like a nice entry point.
MU Weekly Chart
MU Daily Chart
Nabors Industries (NBR)
Why the Strength
Nabors Industries boasts the world’s largest fleet of land-based drilling rigs, which puts it in the thick of the oil & gas industry. The company provides offshore platform workover and drilling rigs in the U.S. and many international markets, providing technology, equipment, directional drilling and oilfield services in some of the biggest markets in the world. After a protracted decline in energy prices, Nabors’ numbers don’t look great, including six quarters of declining earnings and seven quarters of declining revenue. But investors are betting that recent production accords from OPEC will boost energy prices (oil prices hit multi-month highs this morning) and Nabors will benefit. As Nabors itself puts it, “Our businesses depend … on the level of spending by oil and gas companies for exploration, development and production activities.” Nabors is vulnerable to anything that threatens the oil industry, but is also well positioned to benefit from a rebound. For energy optimists and those who believe that the global demand for oil will remain strong, Nabors is a good choice. The company’s stock also pays a dividend that yields 1.5% a year. Earnings are likely due out in late January.
Technical Analysis
NBR took a huge hit from the Great Recession of 2008–2009, when it traded above 50. After bottoming in the single digits in 2009, the stock rallied to 32 in 2011 and 30 in 2014, but was kneecapped by declining oil prices to below 5 in January 2016. The bounce from that low lifted NBR to near 18 in December, and the subsequent pullback of a point and a half and calm, sideways trading looks like a good entry point. A stop loss at 15 will provide protection.
NBR Weekly Chart
NBR Daily Chart
Oasis Petroleum (OAS)
Why the Strength
Oasis is an exploration and production company with assets in the Williston basin in North Dakota and Montana. The $4 billion market cap company had been profitable until 2016, when the economic realities of sub-$40 a barrel oil wreaked havoc on its income statement. But over the last year, Oasis has cut its well costs (down 50% since 2014), improved its balance sheet (through debt refinancing and a secondary stock offering) and put itself in position to acquire new assets. The most recent of these is 55,000 acres in the heart of the Williston Basin, which increases the company’s drilling inventory by 25%. This acquisition should add around 12 million barrels-of-oil-equivalent-per-day (MBoepd) to production, bringing total production up to 62 MBoepd. Management has indicated potential for up to 70 MBoepd by the end of 2017. Given that Oasis says its wells are economical when oil trades north of $40 a barrel, and the OPEC deal has driven the current price into the mid-50s, it appears that Oasis has a bright future. The investment thesis here is straightforward; improving operating metrics, coupled with production growth and a higher price for oil suggests shares of Oasis could make a significant run.
Technical Analysis
OAS has been in recovery mode since the beginning of 2016 when it was trading at 4. Shares got moving in March when they traded above 8, then made a run above 11 by early June. A retreat in the price of oil killed that rally and OAS was back to 7 by August. Since then, shares have been on choppy uptrend that has been characterized by periodic pullbacks to the 50-day moving average. The most recent of these was in late November and preceded the announcement of the OPEC deal. That event catalyzed a jump from 12 to 15, and shares have since been consolidating in the 14.5 to 16.5 range. We’re OK nibbling here or on dips with a stop near 13.
OAS Weekly Chart
OAS Daily Chart
Quanta Services (PWR)
Why the Strength
When most investors think about infrastructure, they think roads, bridges, airports and the possibility of a huge, $1 trillion bill in Congress next year. But possibly a larger (and less uncertain) infrastructure opportunity will be driven by the private sector, which will directly benefit Quanta Services. The company is the largest specialty infrastructure contractor in the electric power (65% of revenues; repair, replace and upgrading transmission and distribution infrastructure) and oil & gas (35% of revenue; midstream, LNG export and natural gas infrastructure) industries, both of which are beginning long-term buildout phases. The firm does everything from design to project management to installation to maintenance and replacement, which is a big competitive advantage as projects are generally getting larger and more complex. The stock is strong today because business is turning the corner after a few down quarters and should get much better in the years ahead. The third quarter marked a return to growth, and analysts see 2017 bringing a 33% improvement to the bottom line, thanks in part to a huge and growing backlog ($5.8 billion backlog that should be recognized over the next 12 months, up 10.7% from the end of 2015). Throw in a very strong cash flow profile and a large share buyback program (Quanta’s third quarter share count was down 18% from the prior year!) and there’s lots of reason to expect continued strength in the New Year.
Technical Analysis
PWR bottomed in February of last year, rallied for a few weeks, then made grudging progress through mid-September. Buying pressures picked up after that and then surged after the election, with the stock and RP line reaching two-year highs. PWR has backed off a few percent since early December and we think the recent pullback to the 25-day line is buyable, with a stop just under 32.
PWR Weekly Chart
PWR Daily Chart
Texas Capital Bancshares (TCBI)
Why the Strength
Texas Capital Bancshares is the holding company for Texas Capital Bank, a modestly sized banking network with a bunch of offices in Dallas and full-service locations in four other Texas metropolitan areas: Austin, Fort Worth, Houston and San Antonio. Texas Capital has been a steady grower for years in revenue terms, but was challenged (like all banks) by the persistent low interest rates in the U.S. and (like all Texas banks) by the pressure low oil prices exerted on its loan portfolio, as many local businesses are tied to the energy patch. But since the company’s stock bottomed in February 2016, Texas Capital has been on a roll, as the prospect of higher oil prices, rising interest rates and the presumption of a relaxed regulatory environment under the Trump administration have all increased the Bank’s attraction for investors. Not even a secondary offering of three million shares in late November has diminished investors’ appetite. Earnings are likely out later this month, but as long as oil prices stay stable or rise, Texas Capital Bancshares should do well.
Technical Analysis
TCBI was extremely volatile from its peak at 67 in March 2014 to its bottom at 29 last February. The stock rallied strongly all year and got a big boost after the U.S. election, hitting new-high territory two days after the polls closed. TCBI rambled as high as 81 as U.S. markets were put to bed in December and has pulled back only slightly. A buy under 79 should do well, with a stop near 72.
TCBI Weekly Chart
TCBI Daily Chart
United States Steel Corporation (X)
Why the Strength
U.S. Steel, the steel-making giant incorporated in 1901, has been through the mill over the years, but is making a run back toward profitability. The company is getting a boost from the twin stimuli of heavy tariffs on foreign steel (put in place in retaliation for alleged dumping by China and other countries) and the anticipation of increased infrastructure spending by the incoming Trump administration. U.S. Steel has also been through a program of downsizing and cost-cutting that is estimated to produce earnings of $1.36 per share in 2017 after an estimated $1.94 per share loss in 2016. U.S. Steel has built itself into a vertically integrated operation, with its own supplies of iron ore and coke and its own railroad and barge transportation. Beyond that, an improving U.S. economy (leading U.S. economic indicators are showing their fastest growth since 2010) is expected to maintain healthy demand for automobiles, a business that uses large amounts of U.S. Steel’s flat-rolled steel. Earnings are expected in late January. The company’s stock pays a small (0.6% annual yield) dividend.
Technical Analysis
X has been in a general downtrend since its post-2008 bounce fizzled out in 2010. The stock plummeted from 47 in late 2014 to just 6 a year ago, but rallied strongly in March and held its gains through some volatility until the U.S. Presidential election results kicked off a high-volume rally from 21 to 25 on November 9. X drove as high as 39 in early December, and settled back to 33 on the last trading day of 2016. This morning’s rebound could mark an end to this retreat—you can buy around here with a stop near 30.
X Weekly Chart
X Daily Chart
WellCare Health Plans, Inc. (WCG)
Why the Strength
WellCare provides government-sponsored managed healthcare services through Medicaid (65% of revenue) and Medicare (28% of revenue) to nearly four million members. It also has a stand-alone Medicare prescription drug plan (7% of revenue). Revenue growth last year was likely just 3%, but the real story here is earnings, which grew 58% (to $5.43) last year. Analysts see revenues accelerating by 10% in 2017, with 16% EPS growth should drive earnings to nearly $6.30. Those numbers are being helped by recent acquisitions, but don’t factor in acquisitions that have yet to close, so there is more upside revisions to come. WellCare just acquired an Arizona managed care operation from Care1st Health Plan in October, and recently announced it will acquired Universal American for $10 a share in November. Prospects for a repeal of Obamacare have also helped the stock since the November election, when it traded for 115 (it’s now north of 135). While it’s unclear what an alternative solution would be, consensus is that it would be more friendly to managed care providers, including WellCare.
Technical Analysis
WCG started 2016 at 70 then rallied above 95 after its Q4 earnings release in February. It then consolidated in the 85 to 97 range through most of May before jumping off its 50-day moving average line and ascending to 117 by mid-August. Another consolidation phase ensued (between 110 and 120) then the November election drove high volume, volatile trading in the 115 to 130 range as investors grappled with potential policy changes. Shares entered another consolidation phase in December (between 135 and 144), which looks like an attractive buy range to us.
WCG Weekly Chart
WCG 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.
