Back on the Fence
Current Market Outlook
The major indexes have been pulling back in recent days, and many are now back to their 50-day moving averages after a nice snapback for the second half of December. The question is whether the recent wobbles have more to do with year-end/start-of-year positioning (this portion of the calendar is notorious for crosscurrents creating volatility), or a renewed wave of selling that would basically be a continuation of what we saw in early December. We’re still optimistic, but we’re knocking our Market Monitor down a couple of notches today, and if all’s well, buyers should appear very soon as many stocks test support.
This week’s list has a larger-cap, steadier feel to it as the market favors “defensive growth” names most of all. Going along with that theme, our Top Pick is Whole Foods Market (WFM), whose stock is firmly in a turnaround phase.
| Stock Name | Price | ||
|---|---|---|---|
| Whole Foods (WFM) | 0.00 | ||
| Visa (V) | 0.00 | ||
| Virgin Airlines (VA) | 0.00 | ||
| PPG Industries (PPG) | 0.00 | ||
| O’Reilly Automotive (ORLY) | 0.00 | ||
| CarMax (KMX) | 0.00 | ||
| KLA Corp. (KLAC) | 158.80 | ||
| Jones Lang LaSalle (JLL) | 0.00 | ||
| Electronic Arts (EA) | 0.00 | ||
| Cirrus Logic Inc. (CRUS) | 0.00 |
Whole Foods (WFM)
Why the Strength
Whole Foods Market has been a frequent visitor to Cabot Top Ten Trader, making 12 appearances here since 2009. What sets this supermarket chain apart from its competition is that it has essentially de-commodified the organic foods that are its staple product. By avoiding the margin-slicing competition that undercuts most grocery chains, Whole Foods can turn the enthusiastic support of its health-conscious foodies into consistent profits. Whole Foods locations also offer beer and wine, meats, pre-cooked foods, a café, produce and health and beauty products. The company has booked five years of double-digit revenue growth by steadily expanding its number of locations. The company launched its first-ever national ad campaign in July, but it was the 13 new stores opened in the latest quarter—bringing its total to near 400—that really drove revenue growth. The company’s quarterly report on November 5 featured 9% growth in both revenue and earnings, blowing away analysts’ estimates. And the company’s 1.1% dividend yield makes a nice addition.
Technical Analysis
WFM finished a years-long rally in October 2013 when it reached 66. The correction that followed reached 49 in late April 2014, then went into free fall in May, plummeting to as low as 37. WFM took six months to put in a nice base between 37 and 40, then popped up in November after the strong quarterly report. WFM took just three days to rocket from 40 to 48, and has now followed through on that blastoff by hitting 51 last week. A little weakness late last week has pulled WFM below 50, but selling pressure is minimal. The stock looks buyable anywhere under 50, with a stop at 46.
WFM Weekly Chart
WFM Daily Chart
Visa (V)
Why the Strength
Visa’s major growth story is well known, but that doesn’t make it any less powerful—the world is moving more and more toward credit-based payments, and Visa is a leader in pushing that through. The reason the stock is strong is a combination of the market’s desire for dependable, big-cap growth stocks (Visa’s earnings growth consistency is among the best of all companies during the past three years), the still-bullish aftereffects of a great third-quarter report (sales and earnings topped expectations and management gave a bullish outlook for 2015) and enthusiasm toward the emerging digital payments field (Apple Pay is the big one, though Visa has a couple of offerings that make it easier and safer to buy things online). That last part of the puzzle could be the biggest—digital wallets and the like have had many hits and misses over the years, but the popularity of Apple Pay could help the concept go mainstream. All told, analysts see earnings up a solid 19% in 2015, though our guess is that will prove slightly conservative as the U.S. economy picks up steam and consumer spending (bolstered by collapsing energy prices) does the same. We like it.
Technical Analysis
V built a big, relatively flat base from January through October of last year, but the third-quarter earnings release resulted in a 10% rally on four and a half times average volume; that’s huge power from a mega-cap stock like V. Since then, the advance has continued, though it’s been slowed by the market’s repeated choppiness. We think shares are a good buy here, near the 25-day line, with a tight stop around 245.
V Weekly Chart
V Daily Chart
Virgin Airlines (VA)
Why the Strength
Virgin America is a newly-public, California-based regional airline (service to 21 airports, fleet of 53 aircraft) that looks set for big growth thanks to overall industry factors and its own unique offerings that have developed a loyal following. (Parent company Virgin Group owns 49% of the shares.) In terms of the overall industry, most of the bullish news is well known at this point—fuel prices have basically been cut in half during the past few months, and this is occurring while the U.S. economy and labor market are picking up steam ... a perfect storm (in a good way) for airlines that will likely see costs dip while traffic expands. Virgin, though, has more going for it than just macro factors—it’s differentiated itself by offering various levels of service on flights, unique loyalty programs, access to lounges in many airports plus travel discounts for 250 major companies and travel agents. That’s boosted costs a bit, but has increased customer loyalty (rare in the industry), resulting in the highest revenue per mile flown in many of its markets. Going forward, the company expects to continue expanding (it operates in just 15 of the 50 largest areas in the U.S.), with its fleet set to expand nearly 20% by the middle of 2016. It’s not revolutionary, but with analysts expecting earnings to double next year, there’s a lot to like.
Technical Analysis
VA came public on November 14 and soared from an offering price of 23 to a high near 40 within three days. Then it formed a brief IPO base, with the stock dipping 23% during the December market dip. But since then the buyers have been in control, with VA popping to new highs and following through to the upside before today’s dip. If you’re game, you can look to grab shares here.
VA Weekly Chart
VA Daily Chart
PPG Industries (PPG)
Why the Strength
PPG Industries is an old-world compnay that’s got a bright future. The red hot specialty coatings, paint, stains and sealants company spun off its commodity chemicals unit in 2013 and merged with Georgia Gulf as a way to streamline operations—a move that has paid off big for the company. Famous for brand names like Pittsburgh Paints, Lucite, Monarch and Olympic, PPG has benefited from falling oil prices, which lower the cost of materials for PPG coatings and paints. The company is also growing via acquisition, snapping up a number of businesses during the past year. Most recently, PPG announced that it is in negotiations to acquire automotive sealants and adhesives company REVOCOAT from French firm Axson Group. Overall, PPG has averaged earnings growth of 33% during the past four quarters, with revenue growth coming in at 10%, on average, during the same period. During the third-quarter, PPG saw considerable expansion across Europe, with earnings rising 17% despite mixed sales results. Analysts are forecasting earnings growth of 19% in 2015, though PPG usually tops estimates. PPG last reported earnings on October 15, and while an official date for the company’s fourth-quarter report has yet to be set, estimates place the date within the next two weeks.
Technical Analysis
PPG spent most of 2014 rising along its 10- and 25-week moving averages, eclipsing the 200 mark by mid-year. The October correction forced PPG to test support near 180, but shares quickly bounced back, driven by a solid third-quarter earnings report. PPG is now in a firm uptrend, and the current dip to the 25-day line looks buyable.
PPG Weekly Chart
PPG Daily Chart
O’Reilly Automotive (ORLY)
Why the Strength
Missouri-based O’Reilly Automotive is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories. The company has grown organically by catering to the needs of both people who want to work on their own cars and to professionals who do the heavier lifting in auto maintenance, mechanical work and body work. It has also grown by buying up smaller single-store and chain businesses. The O’Reilly network of stores has now reached 4,257 in 42 states. Revenue growth has been steady, but unspectacular, with 7% growth in both 2011 and 2012 and 8% in 2013. That steadiness has appealed to investors who like the transparency of O’Reilly’s revenue picture and the company’s long history of growing earnings more than twice as fast as revenue. Analysts are looking for revenue of $1.74 billion and EPS of $1.67 for the quarter and revenue of $7.19B and earnings of $7.26 per share for the year when the company reports on February 4 after the market closes. (That’s earnings growth of 15%, which is likely conservative.) The trend for consumers to hold onto their cars for longer and longer stretches is clearly working in O’Reilly’s favor.
Technical Analysis
ORLY has been a steady grower for years, but put in eight months of sideways trading starting in February 2014. ORLY began that stretch after jumping from 130 to 155 in February, and ended it just below 150 in mid-October when the broad market began its recovery. ORLY’s recent dip from 197 to 190 looks like a good buying opportunity, but you should keep any buying small with earnings just a month away. Use a stop in the high 170s.
ORLY Weekly Chart
ORLY Daily Chart
CarMax (KMX)
Why the Strength
If you take CarMax and O’Reilly Automotive (featured later in this issue) as evidence of a trend, the theme is that Americans are focused on buying used cars and keeping them running longer. CarMax, whose fiscal year ends in February, reported Q3 results from its string of 143 used car stores in 72 markets on December 19, and the results were well above analysts’ expectations. The company’s strong online presence and no-haggle pricing powered a 16% jump in revenue and a 28% hike in earnings per share. The company sells vehicles on both a retail and wholesale basis, and gets additional revenue from financing sales. With a huge inventory of foreign and domestic cars with up to 100,000 miles and prices from $12,000 to $34,000, the company gets over 80% of its revenue from used car sales, with the balance coming from wholesale sales and sales on new vehicles. The strong earnings report reinforced the strength of CarMax’s idea of making shopping online for a used car as easy as shopping for a new pair of shoes. The company has bought back $327 million of its own shares in the past year and still has over $2.5 billion in its repurchase program. CarMax is making good business out of used cars.
Technical Analysis
KMX soared from 25 in June 2012 to a double top at 52 in September and December 2013. A push to new highs in June 2014 gave way to a big correction when the broad market pulled back in September and October, then to a strong rally when the broad market recovered. KMX has been pushing out to new highs since late October and gapped up big to 68 on December 19 after the good earnings report. KMX is still digesting that gap up, and has relaxed back to around 65. If you like the used-car idea, KMX is a good buy near 64 with a stop at its old resistance at 59.
KMX Weekly Chart
KMX Daily Chart
KLA Corp. (KLAC)
Why the Strength
Despite their technical struggles, shares of semiconductor equipment manufacturer KLA-Tencor remain a top pick heading into the New Year. Overall, the semiconductor market has been among the hottest groups on Wall Street, with the Philadelphia Semiconductor Index rising 28% in 2014, outperforming all other technology groups. What’s more, KLA-Tencor should continue to benefit heading into 2015, as chip makers upgrade their production equipment to keep pace with several new emerging semiconductor technologies, including the low-power, high-output 14nm chip design that promises sizeable increases in smartphone capability. Furthermore, semiconductor stocks as a whole should continue to reap the benefits of a continuously expanding smartphone and mobile market, with KLA garnering additional orders as chip makers retool to keep up with demand. Speaking of demand, reports surfaced this morning that Taiwan Semiconductor Manufacturing has placed orders with KLA-Tencor and Applied Materials for $269 million in equipment. Looking ahead, earnings are forecast to contract for the next couple of quarters but then surge 42% in fiscal 2016. With industry-leading margins and cash flow, and a high priority on shareholder returns, we continue to like KLA-Tencor’s prospects.
Technical Analysis
KLAC has been acting well since a huge shakeout in October, when shares briefly dipped below their longer-term 40-week line. The trend is still clearly up, but the action has been more three-steps-forward, two-steps-back during the past few weeks, with a couple of tedious pullbacks since the start of December. Even so, the current retreat looks well-controlled and offers up a lower-risk entry—you can buy some KLAC around here, with a stop just below the prior low of 66.
KLAC Weekly Chart
KLAC Daily Chart
Jones Lang LaSalle (JLL)
Why the Strength
When the international real-estate development and services company Jones Lang Wootton merged with Texas-based LaSalle Partners in 1999, it was the largest international real estate industry merger to that time. Jones Lang LaSalle was a strong player in the business of buying, managing and servicing real properties, and grew rapidly by acquiring complementary businesses. Jones Lang LaSalle gets the bulk (43% in 2013) of its revenue from real estate services in the Americas, 30% from Europe, the Middle East and Africa, 21% from the Asia-Pacific region and 6% from investment management services. The company’s main businesses are managing properties, consulting on real estate developments, locating investment properties for investors and valuing and appraising properties. Jones Lang LaSalle has a history of long-term relationships with clients, reflecting its legendary client service. This history has contributed to four years of double-digit revenue growth since the global real estate market began to thaw again in 2010. EPS has jumped from $1.72 in 2009 to an estimated $8.18 last year.
Technical Analysis
JLL has been an uptrend since late 2011, but you couldn’t call it steady. The stock has taken several big corrections in stride during its run from 46 in November 2011 to just under 150 today. The volatility has been a result of sensitivity to news about the health of the global economy. The stock’s most recent run began in mid-October when the U.S. market began its recovery. JLL got a boost from its upgraded credit rating on December 16, which set off a three-day jump from 142 to 152. JLL has relaxed to 149 since that bounce. The rising 25-day moving average should provide some lift soon. JLL is a good buy here for longer-term investors. A stop just below the 50-day at 141 makes sense.
JLL Weekly Chart
JLL Daily Chart
Electronic Arts (EA)
Why the Strength
Wall Street continues to warm to video game maker Electronic Arts. In early December, EA earned a slew of price-target and ratings increases from the likes of Brean Capital, Bank of America, Zacks and Piper Jaffray. Encouraged by strong performance throughout the year, ratings groups appear to have finally bought into EA’s turnaround plan—after the company was named “worst company in the U.S.” two years in a row. Driving EA’s restructuring is a move toward mobile gaming, with mobile revenue growing 69% last quarter to account for 12% of total revenue. Meanwhile, EA has shunned its former strategy of pumping out as many titles as possible and diluting its best franchises (Battlefield, FIFA Soccer, Madden NFL, The Sims and Need for Speed). Instead, the company is slated to release just 10 titles this fiscal year, which is just one-third of the number it churned out in 2010. Despite this lower total, EA saw console revenue more than double in the most recent quarter, thanks in large part to Xbox One’s EA Access community. While the video game market remains highly volatile, EA’s plan to focus on mobile development and high quality games should reap considerable benefits going forward.
Technical Analysis
EA shares have been on a tear since the stock bottomed near 31 in mid-October. Shares surged back toward 40 before the end of October, pulling its 10-day and 25-day moving averages into a bullish cross as a result. Since then, EA has ridden support at its 10-day trendline, logging only a handful of daily closes beneath the moving average since October. Following a surge in analyst confidence in early December, EA shares have pulled back in an orderly fashion for the past few days. It’s buyable here with a stop under 44.
EA Weekly Chart
EA Daily Chart
Cirrus Logic Inc. (CRUS)
Why the Strength
Chip stocks like Cirrus Logic are highly cyclical, so you can’t pay too much attention to the numbers in the table below; sales and earnings figures have been a nightmare for the past few quarters, and most analysts expect earnings to continue shrinking for the next year. So why is the stock strong? Cirrus has long done a good business mainly by supplying audio chips to mobile devices, including Apple’s iPhones and iPads, though its share of revenue in Apple’s devices has been falling. That could be set to change, though—two analysts have recently opined that some new technology from Cirrus could increase its per-phone revenue by 50% or more thanks to greater capabilities (especially for Apple’s Siri), and it could also gain traction in some Android phones (including the Galaxy S6). Moreover, a recent acquisition should help alleviate Cirrus’ higher tax rate in the quarters ahead. All told, revenues should continue to tick higher by about 10% this year, and if the company grabs a new design win or two, those estimates could prove very conservative. Throw in the fact that the stock trades at just 14 times even next year’s low estimates, and there’s good upside should Cirrus catch a couple of breaks.
Technical Analysis
CRUS was a great winner in 2012 but shares sank from a high of 45.5 back then to a low of 17 a year later. Then came the long dead phase, with the stock gyrating between 17 and 25 for the next 18 months! But after re-testing 17 in early December, CRUS looks to have changed character—shares exploded 22% higher in mid-December on nearly eight times normal volume thanks to the bullish analyst comments. There’s still resistance near 24, so we think nibbling on dips makes the most sense.
CRUS Weekly Chart
CRUS 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.
