Step Aside
Current Market Outlook
The market began 2016 on a bearish note, with the major indexes plunging and even the market’s most resilient stocks getting hit very hard. The “reason” for the decline was supposedly a meltdown in China’s stock market overnight, but there’s no question the U.S. market’s underpinnings had been weak for a while (hence our cautious approach in recent weeks). From here, anything is possible—January is a notoriously volatile month full of crosscurrents, so yet another snapback is possible. But we’re moving our Market Monitor down a notch into bearish territory given the evidence; now’s the time to think more about capital preservation and work mostly on building a watch list, keeping new buys to very small positions.
This week’s list has many great ideas, stocks that should do well if the market does find strong support. Our Top Pick is SolarEdge (SEDG), which is aiming to be the Intel of the solar sector; the company and the sector as a whole are turning around after a big decline last year.
| Stock Name | Price | ||
|---|---|---|---|
| SolarEdge Technologies Inc. (SEDG) | 124.37 | ||
| Royal Caribbean Cruises (RCL) | 0.00 | ||
| Pacira Biosiences (PCRX) | 54.85 | ||
| Ophthotech (OPHT) | 0.00 | ||
| Universal Display (OLED) | 187.54 | ||
| Nevro Corp. (NVRO) | 0.00 | ||
| Neurocrine Biosciences (NBIX) | 123.40 | ||
| Dollar Tree (DLTR) | 0.00 | ||
| China Biologic Products (CBPO) | 0.00 | ||
| Acorda Therapeutics (ACOR) | 0.00 |
SolarEdge Technologies Inc. (SEDG)
Why the Strength
SolarEdge Technologies is a small company with huge potential—it’s aiming to be the Intel of the solar industry, with a new and potentially revolutionary solution that improves how photovoltaic systems harvest electricity. Basically, most solar systems still have one big inverter that connects to many modules within a system, resulting in inefficiencies (you can’t tell how each module is performing individually) and some design limitations. SolarEdge’s solution uses power optimizers on each module, which then feed into its own inverter combined with an online monitoring portal that reveals how each part of the system is performing. The technology dramatically boosts performance and actually cuts costs in a big way. The result: Most players in the solar industry have beaten a path to SolarEdge’s door, including SolarCity and Vivent (the two leading rooftop players), leading to rapidly growing sales and earnings. Of course, the health of the solar industry as a whole is still vital, so Congress’ recent extension of the solar tax credit boosted the perception that growth should continue for at least another two or three years. SolarEdge appears to be far ahead of the field, and we see no reason sales and earnings can’t continue to crank ahead for another few quarters, if not longer. It’s a good story.
Technical Analysis
SEDG came public at 18 in March of last year, ran all the way to 43 in June and then crashed with the solar sector, collapsing to 15 in November as many thought the industry’s growth would be cut dramatically. Still, business remained great, with a positive reaction to earnings in November helping perception, and then SEDG soared following the renewal of the solar tax credit last month—shares rose 35% for the week on its biggest weekly volume ever. If you want in, look for a dip of a couple of points and use a loss limit in the 21 area.
SEDG Weekly Chart
SEDG Daily Chart
Royal Caribbean Cruises (RCL)
Why the Strength
Royal Caribbean continues to be one of the market’s strongest stocks as the firm cranks out solid results, investors see steady capacity growth in the years ahead, and analysts see all that translating into a booming bottom line in 2016 and beyond. As the #2 cruise line operator with 44 ships on the water, the company has been benefiting from strong industry conditions, including buoyant vacation spending and plunging fuel costs. (In fact, the company’s cruise costs in the third quarter were down nearly 2% even without the impact of fuel.) Latin America as been a sore spot, but it hasn’t affected results thanks to pricing strength in the Caribbean and China, where Royal Caribbean is placing more emphasis (the firm’s capacity dedicated to China will rise to 9% this year from 6% in 2015). In total, management has 11 new ships on order, with total capacity set to rise between 3.4% and 6.6% annually through 2020—a steady expansion, but nothing crazy should the industry hiccup. The top brass also isn’t shy about sharing its money with shareholders; the dividend was raised 25% last year (now a 1.5% annual yield) and the company should complete its $500 million share buyback plan by year-end 2016 (including $200 million of buybacks by the end of January). Analysts see earnings up another 30% in 2016, giving big investors added enticement to accumulate. It is a cyclical industry, but there’s no question all systems are go today.
Technical Analysis
RCL has had a huge run since the middle of 2013, so the stock isn’t in the early stages of its overall advance. But the stock also hasn’t shown any classic topping signs, having remained in a longer-term uptrend with periodic multi-month rest periods. Shares have been choppy in recent months, mostly because of the market, yet it’s been able to hit higher highs (98-100-104) and higher lows (84-87-91) during the past few months, including a push to new highs last week. Today’s plunge isn’t pretty, but the stock is above its moving averages and so this could offer a lower-risk entry. If you’re game, you can nibble here with a stop just below support near 92.
RCL Weekly Chart
RCL Daily Chart
Pacira Biosiences (PCRX)
Why the Strength
Pacira Pharmaceuticals joins several other health-related stocks in today’s Top Ten, some speculative and some solidly profitable. Pacira is in the profitable group. The company focuses on pain management after surgery and has two marketed products: EXPAREL, a non-opioid local analgesic that’s injected into the surgical site, and DepoCyt(e) a treatment for lymphomatous meningitis. EXPAREL uses Pacira’s patented DepoFoam drug delivery system that extends the length of the drug’s effects. Wide adoption of EXPAREL has driven triple-digit revenue for the past three years, although that has slowed in the first three quarters of 2015. Pacira got a big shot in the arm in December when it resolved a problem with the labeling of EXPAREL that had resulted in the issuance of a warning letter from the FDA in September 2014. With that problem solved, Pacira was back on the road to increased sales for EXPAREL. With an addressable market of around 42 million surgical procedures every year in the U.S. and increasing caution about opioid pain control, Pacira estimates that an 8% market share would translate to an opportunity for $1 billion per year. It’s a good story.
Technical Analysis
PCRX had been in an uptrend for years before the FDA warning letter hit in September 2014 when the stock was up around 109. PCRX climbed as high as 120 in January, but tumbled to 36 in early October. The rebound from that October low has been powerful, fueled by positive quarterly results in late October and the mid-December settlement of the warning letter. There’s no reason to regard the stock’s 122 price in February as a target, but PCRX has a good history of appreciation. We think a position at around 75 looks reasonable, with a stop around 68, which was resistance in September and early December.
PCRX Weekly Chart
PCRX Daily Chart
Ophthotech (OPHT)
Why the Strength
The whole Ophthotech story is the battle against wet age-related macular degeneration (wet AMD), a condition whose treatments represent a $6 billion market. The standard treatment is a group of compounds called anti-vascular endothelial growth factor (anti-VEGF) drugs. Ophthotech is attracting attention because its novel wet AMD drug Fovista appears to increase the efficiency of anti-VEGF drugs significantly. Two drug companies—Roche in the U.S. and Novartis everywhere else—have a drug called Lucentis that is a standard treatment for wet-AMD, and they struck a deal with Ophthotech that will bring $200 million in cash and $800 million in milestone payments plus royalties in the mid-30% range on any sales outside the U.S. Having two major pharmaceuticals buying in on the future of Fovista has been a huge factor in boosting investors’ optimism about Ophthotech. The company has another candidate drug called Zimura that addresses the same market, but Fovista is pretty much the whole story right now. U.S. rights to Fovista haven’t been licensed yet, and that’s another possible source of income for Ophthotech, which is still losing money and expects to continue doing so until Fovista completes its Phase III trials and wins approval to go to market. But should the company retain those U.S. rights and Fovista starts selling, the revenue turnaround would be dramatic.
Technical Analysis
OPHT came public in September 2013, and has been in a general uptrend ever since, not counting the market-induced correction in August and September. The stock rallied to new highs in December and spent the last couple of weeks of 2015 trading under resistance at 79. Today’s pullback to the low 70s represents a good buying opportunity for anyone willing to take on the risk represented by a stock based on the fortunes of a single drug. A small position could pay off big, but care is needed. Try to buy near today’s low at 72 and keep a relatively tight stop on at 67.
OPHT Weekly Chart
OPHT Daily Chart
Universal Display (OLED)
Why the Strength
Universal Display is all about organic light emitting diodes (OLEDs), which look to be the next big thing in display technology (for mobile phones, TVs, tablets, automobiles and even traditional lighting), with less power consumption, lower costs (no backlights, color filters or liquid crystals) yet better image quality (more vivid colors and higher contrast ratios) than LCD displays. Universal Display has more than 3,500 pending and issued patents in OLEDs, and makes most of its money through material sales, while royalty sales make up the rest. The firm has a few key partners, but probably the biggest is Samsung Display; the licensing agreement with them resulted in about $60 million of revenue in 2015! That makes them a giant customer, which could backfire—Universal Display is a “down the food chain” stock, so if one or two big customers sneeze, the company will catch the plague. Even so, Universal Display is the clear leader in OLEDs, and there’s no question the display industry is heading their way; analysts see sales up 24% and earnings up 34% in 2016. Plus, we like that the company is conservatively managed, with no debt and more than $7 per share in cash. Consider it a high-risk, high-reward situation.
Technical Analysis
OLED appeared to be getting going in March 2015, when the stock ripped to new highs on four weeks in a row of big volume, eventually pushing the stock into the mid-50s. But a brief slowdown in business and the crummy market brought shares back down to 32 when the market was tanking in September. Then came a multi-week bottoming process and the latest rip higher, which took it back to its prior high. It’s very volatile, but we’re OK with a nibble here and a stop near 47.
OLED Weekly Chart
OLED Daily Chart
Nevro Corp. (NVRO)
Why the Strength
While some biotech stocks are holding up, most small, unprofitable biotechs are not where the action is. But that makes Nevro’s extremely strong action all the more noteworthy. The main reason for the strength is the company’s revolutionary system for the spinal cord stimulation (SCS) market, which is used to reduce or eliminate back, leg and other types of pain. The firm’s Senza system delivers 10,000 electrical pulses per second (far higher than low-frequency alternatives, which are the standard of treatment in the industry). And the results are fantastic, with an extra 25% of people responding to Senza compared to those other methods and, just as importantly, patients don’t suffer from parethesia, which is a tingling sensation common after many SCS treatments that is often just as bad as the pain. Senza has been doing good business in Europe for a while, and the FDA’s approval last year should open the floodgates to many quarters of ramping revenue. As for competition, the big recent news is that Nevro won a patent case against Boston Scientific, boosting investor perception that this is a real, unique and defendable alternative in the huge SCS market (where just 10% of patients who could benefit from treatments now get them). The valuation is huge, but so is the potential.
Technical Analysis
Chart-wise, there’s plenty to like about NVRO. After a big post-IPO run, the stock fell 38% over five months, likely kicking out all weak holders. But since then, shares have risen an incredible 10 weeks in a row (many on big volume), and just as impressively, traded relatively tightly during the past three weeks, a sign that few big investors are ringing the cash register. If you’re game, you can nibble near the rising 25-day line (now near 65) with a stop in the high 50s.
NVRO Weekly Chart
NVRO Daily Chart
Neurocrine Biosciences (NBIX)
Why the Strength
Neurocrine Biosciences has no earnings and minimal revenues, but it has a growing roster of institutional investors, thanks to a novel R&D platform aimed at developing drugs to treat diseases with high unmet medical needs, focusing on neurological and endocrine-based diseases and disorders. Also on the plus side of the ledger, the company has roughly $450 million in cash and no debt. On the negative side, the company, which was founded in 1992, has a history of raising investors’ hopes but failing to achieve its goals. Hopefully, this time is different, as the market currently values the company at $4.9 billion! In the latest quarterly report, Kevin Gorman, President and CEO, commented, “We have made significant progress over the past three months across our clinical programs, including the successful Kinect 3 Phase III study of NBI-98854 in tardive dyskinesia, our partner AbbVie reported positive results in the Phase IIb study of elagolix in uterine fibroids and is moving forward into Phase III development for uterine fibroids, and also the recent initiation of our Phase II study of NBI-98854 in adults with Tourette syndrome. We look forward to the readout from our Phase Ib study of NBI-98854 in children and adolescents with Tourette’s in December of this year.”
Technical Analysis
NBIX has been beating the market for the past two years, but volatility in the stock—as in most young biotechs—can be substantial. Most recently, we saw NBIX fall from 57 to 34 (40%) in the market’s August selloff, and then climb right back up to and beyond its old high, peaking at 58 in late November. Since then, the stock has been digesting that advance, with support down at 50 and the 50-day moving average approaching 53. One approach to the stock—if you like the story—would be to wait for a high-volume breakout above 58 as a buying signal. But right now, we advise trying to buy in the current trading range—the lower the better.
NBIX Weekly Chart
NBIX Daily Chart
Dollar Tree (DLTR)
Why the Strength
We see three main reasons why Dollar Tree has come back to life during the past few months. The first is the economic environment—a few million people have found jobs during the past year, but wages remain stagnant. Translation: Millions of people are still spending frugally, which plays into Dollar Tree’s hands. The second reason is the plunge in energy prices; evidence is beginning to pop up that consumers are spending money saved at low-end and mass market retailers. And third, you have Dollar Tree itself—the company merged with Family Dollar in the middle of last year ($8.5 billion cash and stock deal), not only making it the largest player in the industry (it’s now an effective duopoly with Dollar General the other big player) but also creating a ton of synergies; Dollar Tree’s management believes they can find $300 million in cost cuts by 2018 (well over $1 per share), and most analysts see that as conservative. The third quarter report was solid, with same-store sales up 2.1% and the integration proceeding on schedule. Earnings have dipped of late, mainly due to some transition costs and a slowdown in business, but analysts see this year’s figures booming toward $4 per year and growing steadily after that. It’s not sexy, but Dollar Tree has the catalysts in place to continue higher.
Technical Analysis
Despite the steady business, DLTR’s stock has had many ups and downs over the years. The latest correction started in March of last year and picked up steam when the market fell apart in August and September—shares eventually fell 28% over seven months before finding support in October. Then the buyers returned, with a positive earnings report pushing DLTR back above its 200-day line. And, importantly, the stock has held those gains during the past few weeks, chopping between 75 and 80. We’re OK with a small buy here, and a stop in the low 70s; a decisive move above 82 could be reason to buy a bit more.
DLTR Weekly Chart
DLTR Daily Chart
China Biologic Products (CBPO)
Why the Strength
China Biologic Products’ business is based on medical products made from plasma, which it collects in 12 donations centers. China Biologic processes the plasma into albumin, immunoglobulin and clotting factor products. Albumin is used to treat shock caused by blood loss or burns; immunoglobulin can prevent measles and hepatitis, treat rabies and aid in recovery from surgery. Clotting factors are used to treat both congenital and acquired clotting disorders. There is a much wider range of products and conditions, but that’s the core of the business. This base has been strong enough to power China Biologic to eight years of double-digit revenue growth and 11 quarters of positive earnings growth. After-tax profit margins have also topped 30% for the three most-recent quarters. The company has built a niche business using a vertically integrated model—it controls raw material collection, processing, production, marketing and distribution—in a growing market. There is no mass market to address, but the prospects for steady growth are excellent. Earnings for Q4 and 2015 will likely come out in early February.
Technical Analysis
CBPO has made a good recovery from its August–September correction from 128 to 81. The stock rebounded to 127 in November, then consolidated for a few weeks before powering out to new highs in mid-December. After reaching 142 last week, CBPO was down at today’s open because of the general weakness in Chinese stocks, but remains well above its rising 25-day moving average, now around 128. CBPO looks like a good buy anywhere under 140. A dip below 125 would be bearish.
CBPO Weekly Chart
CBPO Daily Chart
Acorda Therapeutics (ACOR)
Why the Strength
Acorda Therapeutics is a small biopharma specializing in treatments for neurological disorders. The company has eight marketed products, the most important being Ampyra, which improves walking speed in patients with multiple sclerosis, Zanaflex capsules, a short-acting drug for managing spasticity, and Qutenza, a patch used to manage post-shingles neuropathic pain. The company’s drug pipeline includes: Plumiaz, a nasal diazepam spray to treat epileptic seizure clusters that has completed Phase III trials and is in new trials requested by the FDA; two other drugs in early Phase III trials and three in Phase I trials. Acorda was boosted in August by a positive outcome in a patent case, in October by a revenue and earnings beat (and a surprise deal with Allergan over a patent dispute), and in December by a successful presentation to the American Epilepsy Society’s annual meeting. It’s worth noting that 23% of Acorda’s total stock float is now being shorted, so there’s the potential for a big short-covering rally if more good news raises the stock’s price. But the fundamental story of a successful company with a good product pipeline (including one drug that addresses migraines, which is a big market) stands on its own feet.
Technical Analysis
ACOR has been an up-and-down issue for years, finding resistance in the low 40s since 2010 and support in the high 20s since 2013. The stock’s current rally comes after the stock rebounded from its August–September correction lows and put in a flat base from late October through mid-December. Like most biopharma stocks, ACOR will only move on good news, but with strong short volume, the effect of any such news will be magnified. Picking up a small position as close to 40 as possible is a reasonable speculative bet. Just try to buy well and keep a tight stop around 38.
ACOR Weekly Chart
ACOR 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.
