January is Often Tricky
The evidence has gotten a bit worse during the past week, with more misses than hits among leading growth stocks, and with the major indexes sagging a few days in a row. That said, early January is often tricky, with lots of crosscurrents, profit taking, repositioning and so on, so we’re hesitant to change our stance for the moment unless we see a decisive show of strength or weakness. The good news is that we are seeing more proper set-ups from many names that rested during the past six to 10 weeks; if a bunch of them emerge, it would give us some newer, fresher leadership to sink our teeth into.
This week’s list includes a bunch of smaller and less-well-known ideas, which we view as a good thing; most of the “obvious” stocks are either chopping around or suffering through some selling. Our Top Pick this week is YY Inc. (YY), which has had a huge run, but isn’t overly pricey and just surged out of a multi-week tight area. It’s very volatile but the potential is big.
| Stock Name | Price | Buy Range | Loss Limit |
|---|---|---|---|
| YY Inc. (YY) | 0.00 | 54-58 | 49-50 |
| WisdomTree (WETF) | 0.00 | 16-17 | 14.5-15 |
| Western Digital Corporation (WDC) | 0.00 | 80-83 | 75-76 |
| Workday (WDAY) | 194.88 | 81.5-85.5 | 77-78 |
| Spirit AeroSystems (SPR) | 92.54 | 32.5-34 | 30.5-31 |
| NPS Pharmaceuticals (NPSP) | 0.00 | 30.5-32 | 26-27 |
| Jazz Pharmaceuticals (JAZZ) | 0.00 | 120-127 | 112-113 |
| Himax Technologies (HIMX) | 0.00 | 12.5-14 | 11.5-12 |
| E-House Holdings (EJ) | 0.00 | 13.5-14.5 | 11-12 |
| Canadian Solar (CSIQ) | 0.00 | 33-35 | 28-29 |
YY Inc. (YY)
Why the Strength
The rapid buildout of the Internet on mobile devices in China has created enormous opportunities for companies that can offer unique content and way to interact, and YY Inc. operates an online social platform that has proved wildly popular with young people there. YY is a very young company, incorporated just in 2011, but its three full years of revenue growth has been impressive (307% in 2010, 158% in 2011 and 159% in 2012). Revenue growth slowed a bit during the first three quarters of 2013, but still averaged 126%. 2013 earnings growth averaged 167% through Q3. YY Inc.’s most intriguing service is a real-time karaoke contest that lets users compete against one another, but it also has tie-ups with content providers such as provincial TV stations. Investors like the company’s strong growth and its innovative approach to acquiring and delivering content. The company makes its money via games, music and advertising, and its young, growing clientele is attractive to many retailers. Analysts have been raising their ratings and earnings estimates for YY Inc., making it a leader among Chinese Internet stocks.
Technical Analysis
YY came public in November 2012 at 10.5, and was trading at 55 by the middle of October 2013. The stock hadn’t had a major correction during its rocket ride, so when it met resistance at 55 twice in November, it marked the first real consolidation in the stock’s short history. YY slipped to 47 on low volume in the middle of December, then popped higher on heavy volume on January 2 and 3. Having cleared its 16-week base, YY is at all-time highs. The prudent buy would be on a dip of at least a point, but that may not happen. We will set the buy range from 54 to 58 and recommend a loose stop at the stock’s 25- and 50-day moving averages, which are locked together at 50.
YY Weekly Chart
YY Daily Chart
WisdomTree (WETF)
Why the Strength
WisdomTree is quickly becoming our favorite Bull Market stock because the company is the fastest-growing company in the industry’s fastest-growing niche—the firm is exclusively focused on exchange-traded funds, and it’s taking share within that expanding niche thanks to in-demand products and lots of recent launches (including a few funds that benefit from rising interest rates, launched in mid-December). The firm has more than 60 ETFs now, but its flagship fund is the Japan Hedged Equity fund (symbol DXJ), which has boomed during the past year, partly due to Japan’s huge bull market, but partly because it hedges out the movements of the Yen. WisdomTree’s other funds are also gaining traction, including its SmallCap Dividend fund, which recently surpassed $1 billion in assets. At the end of the third quarter, the firm had more than $31 billion in assets under management, but that’s just scratching the surface as ETFs continue to gain share from traditional mutual funds. WisdomTree’s sales and earnings growth has been superb, and analysts see 2014’s bottom line coming in at $0.53 per share, up 43%. Of course, a lasting downturn in the U.S. or Japanese market could cause assets to decline; that’s the nature of Bull Market stocks. But the long-term trend for ETFs looks great, and with global markets emerging from 13-plus year stagnant periods, the potential upside is significant.
Technical Analysis
WETF has some of the best price-volume action of any stock we’re following. Shares built a base from mid-May (when Japan’s market hit a pothole) through mid-October before surging to new highs. There was one more pullback after that, but upside volume has routinely arrived every couple of weeks to push shares to new highs. Pullbacks will come, but the buyers are clearly in control. Any dip below 17 looks buyable, with a dip toward 16 even better.
WETF Weekly Chart
WETF Daily Chart
Western Digital Corporation (WDC)
Why the Strength
Western Digital is Seagate Technology’s (written up last week) peer in the hard disk drive market. As we’ve explained before, historically, the drive market was cutthroat, with horrendous downturns caused by overcapacity and price wars. Now, though, Seagate and Western own around 85% to 90% of the market, and the Thai floods of just over two years ago reorganized the supply chain, with customers emphasizing guaranteed delivery rather than cheapest prices. Moreover, on the demand side, while PC sales have been poor, they are likely to stabilize in 2014 on the commercial side, and other storage demand remains robust thanks to both the expansion of Cloud computing (Western recently inked a deal with Baidu to offer a combined Cloud offering in China) and the move to solid state drives, which are found in all tablets and smartphones (the company bought Virident Systems in October, boosting its offerings in that area.) Last but not least, costs are likely to come down as a prior acquisition is integrated this year. Put together, you have elevated, sky-high earnings and cash flow that aren’t likely to head lower anytime soon. A decent dividend (1.4% yield) and share repurchase plan (buying back 1% to 2% of shares outstanding per quarter), along with a reasonable valuation, complete a nice package.
Technical Analysis
WDC remains in a long-term uptrend, with fits and starts along the way. The latest pause lasted nearly three months (mid-July to early-October) before the stock took off again. We’re impressed with WDC’s persistent advance since that low, a sign of steady buying pressures and few sellers. That said, the stock also has been running for three months since that low, so some digestion or pause is possible. You could nibble here, but we’d prefer to grab shares down toward the 25-day line, with a stop near the 50-day line.
WDC Weekly Chart
WDC Daily Chart
Workday (WDAY)
Why the Strength
Despite being started by the founder of PeopleSoft, Workday is not your traditional software developer. The company is one of the many potentially disruptive start-ups that offers Cloud-based enterprise software solutions. For its part, Workday is horning in on SAP’s and Oracle’s markets, focusing on applications for human capital management and financial functions, including payroll, time tracking, expense management, analytics and financial management. The company’s full suite of Cloud applications are extremely easy to use and are updated rapidly, on average, three times a year, providing great value to customers. In fact, Workday’s customer satisfaction rate is an impressive 97%. Many investors were initially concerned that Workday would be a one-trick pony in the human recources market, but the company laid those worries to rest during its third-quarter earnings report on Nov. 26. During the quarter, Workday added 10 financial customers, as well as 50 new enterprise software customers. What’s more, those buying financial services also signed on for the company’s core HR software offerings as well. The strong uptake resulted in a 76% jump in revenue for the quarter, and prompted Workday to boost its fourth-quarter guidance well above analyst expectations. With analysts projecting the total addressable market for Workday software (both financial and HR) in the billions, the company has compelling growth potential.
Technical Analysis
There is considerable buzz surrounding this young stock. After going public in October 2012, WDAY chopped around for a few months before beginning its current uptrend in April. Since then, shares have ridden support at their 10- and 25-week moving averages, taking out the 70 level in August and eclipsing 80 in September. WDAY had its first correction in October, with the stock falling to support near 70 and its 25-week moving average. A strong Q3 report reversed WDAY’s trend, sending shares soaring quickly back above 80. WDAY has spent the ensuing weeks digesting those gains, and, today, moved to new highs on good volume.
WDAY Weekly Chart
WDAY Daily Chart
Spirit AeroSystems (SPR)
Why the Strength
Spirit AeroSystems remains in a solid uptrend as investors anticipate years of strong sales and earnings from the aerospace boom. Like many in the industry, Spirit dominates its niche—the company is the largest independent supplier of aerostructures (fuselages, wings and propulsion systems, etc.), to both Boeing and Airbus. In fact, it manufactures aerostructures for every Boeing aircraft in production and is the largest supplier for the new 787; for Airbus, it’s a significant supplier for its A320 and newer A380 planes. In addition, a major upturn in the industry as a whole, as well as much, much better execution by the company (including a new CFO last year), and you’re seeing sales and earnings turn the corner, with more to come—analysts expect earnings per share this year of $2.66, five times what 2013 brought. And with a hard-to-comprehend backlog of $38 billion, there’s no reason the company can’t remain highly profitable for years to come. The risk here is that the restructuring by some of the new top brass goes awry, which could put Spirit back in the dumps. But with the tailwinds from the industry so strong (Boeing just reported a big 172 commercial aircraft deliveries in the fourth quarter), and with a new financial team in place, the odds strongly favor the firm’s bottom line improving markedly in the quarters ahead.
Technical Analysis
We had SPR as our Top Pick back in early November … but we didn’t get our price, as the stock refused to pull back at all. It’s still very resilient, though the advance has slowed a bit; SPR held its 25-day line twice in December before its latest pop to new highs on light volume. With the 50-day line already north of 31, we don’t see much risk in buying some around here, or on minor weakness, with a stop just below the 50-day.
SPR Weekly Chart
SPR Daily Chart
NPS Pharmaceuticals (NPSP)
Why the Strength
Making its debut it today’s Cabot Top Ten Trader, NPS Pharmaceuticals has been in business since 1986. The company’s lead product is a drug called Gattex, which is a treatment for short bowel syndrome, a potentially fatal condition that prevents the body from absorbing nutrients from food. The syndrome—which is rare—can lead to malnutrition, diarrhea and dehydration. But one Gattex pill per day can reduce the need for intravenous feeding in adults. The drug was approved by the FDA in late 2012, and began distribution in February 2013. As of late 2013, about 235 patients were receiving Gattex and a little over 450 prescriptions had been received. Investors jumped into the company based on the potential for Gattex and the company’s pipeline of candidate drugs that includes Natpara, a treatment for hypothyroidism that was submitted to the FDA in October 2013, and several drugs in earlier-stage trials. The company’s Q3 earnings report on November 6 appeared to meet analysts’ estimates, but investors reacted badly to the news. NPS Pharmaceuticals had been hit in early October by fears that reimbursement programs for orphan drugs might be threatened. But NPS weathered these challenges, and investors have resumed their interest in the stock. Gattex has been approved by the EU’s drug administration, and profits are expected to have appeared in Q4.
Technical Analysis
NPSP began a high-volume rally in February 2013 following the good news about Gattex’s approval, soaring from below 8 to as high as 36 in late September. The reimbursement fears and badly received quarterly report pulled the stock to as low as 22 in November, but the week of December 16 brought a new surge of buying and NPSP has rebounded to over 30 again. NPSP looks like a good buy anywhere under 32, or on a breakout above 35 on volume. A dip below the stock’s 25-day moving average (now at 27) would be a warning signal.
NPSP Weekly Chart
NPSP Daily Chart
Jazz Pharmaceuticals (JAZZ)
Why the Strength
Biotech was one of 2013’s hottest sectors, and 2014 also looks bright. As one of the most promising biotech companies in the market, Jazz Pharmaceuticals continues to impress Wall Street and investors alike. Organic growth continues to be the company’s biggest driver, with sales rising 32% in the last quarter, as earnings rose 38%. In fact, Jazz has averaged revenue growth of 78% during the past four quarters. The company’s biggest revenue driver is its blockbuster narcolepsy (Xyrem) and acute lymphoblastic leukemia (Erminaze) drugs, which account for roughly 84% of total sales. With revenue resting on the shoulders of just two drugs, Jazz has gone shopping during the past year, snapping up EUSA Pharma and, more recently, Gentium. With the purchases, Jazz is expanding its presence in hematology as it looks to diversify its product base. Speaking of acquisitions, there has been a recent consolidation binge in the biotechnology sector. Jazz has long been the target of takeover rumors, with competitors eyeing the company’s humongous operating and profit margins, and its recent purchase of Gentium and expansion into hematology could make it an even more attractive takeover target. Should a serious suitor emerge, it could prove to be quite a boon to Jazz investors.
Technical Analysis
It seems that every time we check in with JAZZ, the stock is trading in new all-time high territory. Back in August, shares had just topped the 80 mark, while in September we saw JAZZ trading just shy of the 90 region. The stock has come a long way since, surging more than 45% along support at its 10-day and 25-day moving averages to top 125. JAZZ eclipsed the century mark in early November, with a strong quarterly report driving the stock past 110 in short order. Then, following a period of consolidation below 120, shares drove higher in the wake of the company’s takeover of Gentium. JAZZ is once again consolidating, hovering just above support in the 125 region. With its 10-day trendline rising into the area, JAZZ looks buyable here, or on a dip of a point or two.
JAZZ Weekly Chart
JAZZ Daily Chart
Himax Technologies (HIMX)
Why the Strength
Himax Technologies, a fabless semiconductor company specializing in TFT-LCD displays and wafer-level optics, had quite a Cinderella story in 2013. While the uptake of Himax’s chip designs in smartphones was a major driver, no single deal made a bigger impact on Himax than its agreement with Google to supply LCOS (Liquid Crystal On Silicon) for the much anticipated Google Glass. As part of the deal, Google also acquired a 6.3% stake in the company, which allows the Internet giant the option to purchase an additional 8.5% stake. What’s more, the Google deal created a ripple effect for Himax, solidifying the company as one of the most sought after in terms of wearable technology and driving additional contracts with tech giants Microsoft and Baidu. Himax is expected to see sales ramp up significantly in 2014 (the year Google Glass launches), with earnings expected to jump 72% year-over-year, on revenue growth of nearly 29%. Volume is already picking up for Himax on other deals, with analysts citing higher than expected sales for partner MediaTek—a mobile chipset designer specializing in 4G technologies. Lastly, Himax paid an annual dividend of 25 cents per share in 2013. With sales expected to rise significantly in 2014, an increase to Himax’s annual dividend could be the icing on the cake.
Technical Analysis
From 2010 through 2012, HIMX shares were stuck in a rut in the sub-3 range, with the occasional trip toward the dollar area for support. That all changed in March 2013 as shares rode the bull market into the 5 region. Then the Google deal send HIMX shares soaring skyward, following a brief test of support at 5. In August, HIMX rebounded sharply off support at its 10- and 25-week trendlines, skipping past 10 in the process. Following another test of trendline support in November, HIMX has since surged to challenge the 15 region. With shares logging a head-snapping return of more than 400% in 2013, HIMX is a bit overheated at the moment. We recommend buying dips below 14.
HIMX Weekly Chart
HIMX Daily Chart
E-House Holdings (EJ)
Why the Strength
The Chinese housing market has been a battleground for government regulators for many years. Real estate is one of the only places for rich Chinese to put their money to work, and the constant demand has put enormous momentum behind housing projects and individual home prices, despite stringent requirements for new mortgages (30% cash down on a first home, 60% on a second one). E-House Holdings is the largest real-estate services provider in China, with over 8,000 real-estate sales staff in 130 cities. The company began by offering the equivalent of the Multiple Listing Service (MLS) in the U.S., but the company now provides a much broader stream of news, articles, reports, floor plans, architectural drawings, maps and other information. Most of the company’s current revenue comes from contracts with real estate developers to formulate and execute marketing and sales plans for new properties, receiving commissions based on sales. Revenue growth percentages were in the teens for 2010 through 2012, but averaged over 60% through the first three quarters of 2013. The company pays a small dividend (forward annual yield is 1.0%) and has announced that the proceeds from a secondary sale of stock to executives will be used this year to buy back ADR shares. E-House has found a profitable niche in the Chinese real estate market and is bouncing back strongly after years in the doldrums.
Technical Analysis
EJ made five appearances in Top Ten in 2009, but the stock began a long correction in October of that year that pulled it from 24 to between 4 and 6 from June 2012 through August 2013. The stock began to break out in August, trading on rising volume to above 8 in September while rebasing under resistance at 10 through the middle of November. Trading volume surged higher in the middle of November, and the stock roared past 14 in late December. EJ looks like a reasonable buy for an aggressive investor on any pullback toward 14. A dip below 12 would be bearish.
EJ Weekly Chart
EJ Daily Chart
Canadian Solar (CSIQ)
Why the Strength
Like all solar stocks, Ontario-based Canadian Solar, one of the largest solar power companies in the world, has been through some huge ups and downs in recent years. But the company, founded in 2001, had a monster year in 2013, partly in concert with the global recovery in solar and partly due to some big deals that are unique to Canadian Solar. The company specializes in building big power facilities that are sold to companies that will tie them into the local power grid. The most recent sale was a $57.4 million deal, announced on January 2, to sell the Mississippi Mills plant to TransCanada. Mississippi Mills is a 10 megawatt facility, and is the fourth of nine such facilities that will be sold to the same client. Just today, it was announced that the company’s 30 megawatt solar project in Xinjiang (Western China) had been completed and connected to the power grid. Successful construction and installation news is fairly routine for Canadian Solar and investors like the company for its vertical integration (everything from silicon ingots, cells and modules to giant power plants) and its global reach. Germany is still the company’s largest source of business, with the U.S., Japan, China, Canada and Spain filling out the list. The company’s 54 cents in earnings in Q3 came after eight quarters of losses, and investors are betting that the company has turned the corner to consistent profits (estimates are north of $2 per share in 2014) in a supportive environment for solar power.
Technical Analysis
CSIQ didn’t trade above 5 for the entire year of 2012 and put in a total of about 22 months in single digits from July 2011 through May 2013. But the rally that began April 2013 with the stock at 3, reached 33 in November. The stock took a breather for six weeks at that point, dipping to as low as 26 in December before tightening up at 30 to end the year. CSIQ is now trading at its highest price since 2008, and had huge volume support to accompany last week’s gains. If you like the solar story, you can buy CSIQ on any weakness of a half point or so. Use a stop at the 50-day moving average, now at 29, for protection.
CSIQ Weekly Chart
CSIQ 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.
