Buyers Remain in Control
Current Market Outlook
It’s been a great start to the year, with most areas and indexes shooting ahead on solid volume in recent days. We’re still seeing some wild moves (up and down), which is par for the course for early January and you can expect volatility among individual names to remain elevated in the near-term. Our focus is always on the intermediate- to longer-term, so while there remain some near-term yellow flags (with many stocks extended to the upside and with sentiment bubbly, you should pick your spots on the buy side), the positive price and volume action keeps us bullish.
This week’s list is about evenly split between growth stocks and industrial/commodity stocks, which tells you how broad the advance has been. Our Top Pick is Commercial Metals (CMC), a mid-sized steel-related outfit that just catapulted out of a huge base on earnings. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Alcoa (AA) | 0.00 | ||
| Autohome (ATHM) | 98.65 | ||
| Commercial Metals (CMC) | 0.00 | ||
| Dycom Industries (DY) | 0.00 | ||
| Lear Corp. (LEA) | 0.00 | ||
| Lennar (LEN) | 61.85 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Splunk (SPLK) | 207.67 | ||
| Steel Dynamics (STLD) | 0.00 | ||
| Twitter (TWTR) | 40.37 |
Alcoa (AA)
Why the Strength
The “new” Alcoa (which produces aluminum, alumina and bauxite; the old engineering business is now known as Arconic) looks like a leader in the recent upturn among industrial and commodity stocks. After a few bad years, 2017 was a breakout year for the company, with sales, earnings and cash flow kiting higher as demand for (and pricing of) its output rose nicely; in the third quarter, the realized price of its aluminum and alumina rose 19.4% and 26.6%, respectively. And while those kinds of hikes aren’t going to continue, the stock is strong today because more investors see the stock as cheap as they believe 2018 will bring further growth. Most believe aluminum prices should inch higher, with limited supply capacity coming online in China due to that country’s pollution controls. Combined with some select increases in output and a tightly run ship, that should lead to further earnings upside (analysts see the bottom line up 15% in 2018) and a boom in free cash flow—the company cranked out more than $1.50 per share in free cash flow in the third quarter alone, with more of that coming down the road. (One analyst thinks Alcoa could initiate a dividend this year, too.). It’s not changing the world, but if the global economy does accelerate, there’s plenty of reason to believe this could be a huge year for Alcoa. The next update will come when earnings are released on January 17.
Technical Analysis
AA has been an on-again, off-again stock since starting life as a separate entity in November 2016, alternating multi-month upmoves and downmoves during that time. For example, the stock rallied from 30 to 50 from June through October, before dipping to 40 and basing for a couple of months. Now AA is strong again, bursting to new price and RP highs in recent weeks and holding those gains. If you’re game, you can buy a little on dips ahead of earnings.
AA Weekly Chart
AA Daily Chart
Autohome (ATHM)
Why the Strength
Autohome operates the most successful online service devoted to the Chinese automobile industry. The company’s website is a virtual showroom that includes tons of information on new cars, dealers, financing, insurance and registration (a bigger deal in China than in the U.S.), warrantees and even a used car marketplace. The “Autohome Mall” provides car shoppers with specifications, photos, reviews, pricing information and access to financing. For their part, auto dealers, manufacturers, financers and analysts get exposure to a self-selected, highly motivated group of car buyers. Autohome makes money from its increasing slice of the automotive advertising pie, commissions for lead generation and fees for access to data. From a simple virtual showroom, the company has turned itself into what management calls “a fully-integrated automotive eco-platform.” The company’s lead generation has improved in quality, allowing Autohome to raise its advertising rates. Autohome picked up an upgrade from Citi last Friday and that, plus the general blastoff in Chinese stocks since New Years, has given the stock a burst of energy. Analysts expect 22% earnings growth in 2018, though that’s likely to prove conservative.
Technical Analysis
ATHM had a big rally starting in mid-2016, but stalled out after a huge spike higher on earnings last August. After peaking there, shares then formed a double-bottom base, with dips to 54 in late October and 52 in December, with a brief rally to 66 in between. A rebound in December pushed the stock back to 64 at the end of the year and a general rush toward Chinese stocks this year has kicked ATHM to 74, well above its previous highs. This is a big story, but you still need to be careful to buy well; a pullback of a couple of points would be an ideal place to get started.
ATHM Weekly Chart
ATHM Daily Chart
Commercial Metals (CMC)
Why the Strength
Commercial Metals is a small cap company that produces, recycles and markets steel for the construction, manufacturing and fabricating industries. Growth was elusive following the recession, but fiscal 2017 (ended August 31) was a turnaround year as sales gained 9%. Then the company trounced expectations when it reported fiscal Q1 2018 results last Wednesday. Revenue was up 25% and EPS of $0.30 came in $0.13 better than expected. Business was strong across both American and International mills (shipments up 27%), as well as American Recycling (shipments up 44%), driven in part by strong construction demand. One weak spot was in the American Fabrication segment, which delivered an operating loss due to its low-margin backlog. But the real headline, and the main reason the stock is strong now, is that the company announced a game-changing acquisition of four mini mills and 33 rebar fab facilities that, in total, will boost melt capacity by 77%! The price of $600 million is reported as a good deal by analysts, who see consolidation in the U.S. rebar market helping to give Commercial Metals pricing power. Consensus estimates for 9% revenue growth and EPS growth of 43% this year reflect improving fundamentals and market demand. It’s an Old World stock with New World profit potential.
Technical Analysis
Like most industrial stocks, CMC rallied hard after President Trump was elected in November 2016, but that upturn proved fleeting. Sellers emerged in the months after, and by mid-2017 CMC was back to 17, almost where it was before the election. The stock made a run to 22 in October, but sellers emerged yet again, forcing the stock back to the middle of its 2017 trading range. The breakout came following last Wednesday’s report, after which CMC exploded to a post-election high on many days of excellent volume. We’re OK buying some around here.
CMC Weekly Chart
CMC Daily Chart
Dycom Industries (DY)
Why the Strength
The environment for telecom infrastructure stocks has been extremely friendly given the massive upgrade and expansion cycle for wireline networks—Verizon, AT&T, CenturyLink, Comcast and more are all moving to multi-gigabit speed networks. And as one of the top providers of engineering, construction, maintenance and installation services in the industry, Dycom is a great way to play the trend. Aided partially by acquisitions, both revenue and EPS were up handsomely in fiscal 2017 (15% and 17%, respectfully; fiscal year-end was July), though the most recent quarterly report in November was just so-so. Still, investors are looking ahead to a new up-cycle, so they loved it when, on the conference call, management said 1 GB connections are in demand and that a significant number of fiber deployments for new wireless technologies should be coming soon and drive growth starting in mid-2018. Dycom ended the quarter with a backlog of $6.2 billion (up from $6 billion the previous quarter) and $758 million in contract revenues. Earnings are expected to slide for another couple of quarters (next report is likely out in late February), but analysts anticipate the bottom line rising 39% for the fiscal year starting in August. While shares can be volatile at times, we like the big picture infrastructure trend and see Dycom as the best way to play it.
Technical Analysis
DY had a huge run through 2015, peaking at 91 late that year. But that was a meaningful top—in mid-November 2017, the stock was at 90! But after management hinting at a turnaround going forward, DY has changed character, lifting to 100 after earnings and pushing higher above its 25-day line as high as 115 in recent trading. If you’re game, you can grab shares here with a stop near the 50-day line.
DY Weekly Chart
DY Daily Chart
Lear Corp. (LEA)
Why the Strength
Lear is an interesting mix of an old world auto supplier that’s also positioning itself for long-term growth by focusing on the future of the industry. Right now, Lear’s seating business is the main driver, making up more than three-quarters of revenue—it claims to have the most complete product portfolio of seats in the industry, with a 40% market share among luxury brands and the #1 share in India and Brazil (and #2 in China). The company believes it can increase its global market share to 30% in the seating segment in the years ahead, which, along with greater and higher-end content per vehicle (power, leather, heating and cooling features, etc.; Lear expects content per vehicle to rise to $750 in 2022, from $710 last year), should keep growth plowing ahead. There’s even more optimism about the company’s E-Systems segment, which includes many near-term (connectors, wire harnesses) and long-term (charging systems, wireless connectivity) opportunities as the industry transitions to hybrid and electric batteries and more connected cars. Combine all of that with a low-cost business structure and Lear has been cranking out excellent results for many quarters. There’s still some cyclicality, of course, but with the economy perking up, investors think 2018 will be another record (and estimate-beating) year. Earnings are due out January 26.
Technical Analysis
LEA broke out from a year-long base in December 2016, but the move stalled out, leading to another up and down consolidation through August. (Net-net, the stock didn’t make much progress from November 2015 through August 2017.) But the stock exploded higher in September on good volume, and after a tight pause for three months, has shot ahead again in 2018. It’s not the fastest horse, but we think LEA should head higher over time. Try to buy on dips.
LEA Weekly Chart
LEA Daily Chart
Lennar (LEN)
Why the Strength
Homebuilders have been very strong in recent months (really since early September) as investors look ahead toward rising prices and increasing home sales. Despite a solid long-term history, Lennar wasn’t really a leader of this move, but that seems to be changing thanks to better perception surrounding a game-changing acquisition—Lennar is buying CalAtlantic Group, forming what will be the largest homebuilder in the country with more than $17 billion in revenue, a top-three position in 24 of the 30 largest housing markets, industry-leading gross margins of 22% and more than 43,000 annual deliveries, or about a 7% share of all U.S. new home sales. Of course, bigger isn’t always better, but the deal should be immediately accretive to earnings, with $75 million of synergies this year and a whopping $250 million in 2019, boosting earnings by 50 cents per share. The deal should close in the current quarter, with some updated guidance coming in March. In the near-term, the company will report quarterly results on Wednesday morning, with analysts expecting revenue growth of 6% and earnings up 10%. But investors will be far more focused on the outlook—Wall Street sees earnings lifting 33% this year, and given the strength of the housing market and the possibility of huge synergies, investors are sniffing out much bigger earnings down the road.
Technical Analysis
LEN has generally followed the path of most homebuilders in recent months, but it wasn’t showing much power for most of 2017, making no net progress between March and October. But that’s changed since the CalAtlantic announcement—after initially selling off to 54, on the news the stock has powered ahead above its 25-day line, and last week, shot higher on good volume. With earnings due out in a couple of days, look to buy on dips before or (preferably) after the report.
LEN Weekly Chart
LEN Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
Netflix is one of the most famous companies on the market, one of the FANG (or FAANG) tech stocks that produced a significant chunk of the market’s 2017 gains. Netflix is a giant, with 104 million paying customers in 190 countries watching over 140 million hours of TV shows and movies every day. The company has proven to be a durable competitor, repeatedly re-inventing itself under the leadership of Reed Hastings as the media landscape changes. The company’s revolutionary DVDs-by-mail strategy was a major factor in the demise of Blockbuster video and when online streaming became the norm, the company moved into creating its own programming, which has kept subscriber growth high. Revenue growth has topped 30% over the latest five quarters (driven mostly by its burgeoning international business—in Q3, international streaming revenues rose 56% and subscribers were up 43%) and earnings growth has been in triple digits in three of the last four quarters. The company’s long tenure as a leading growth stock makes many investors nervous, and it’s true that the company’s stock has been through plenty of rough patches. But over the long run, it hasn’t paid to bet against Netflix. The company will reveal its latest results on January 22 after the close and analysts are expecting $3.28 billion in revenue and 42 cents per share in earnings. The response to the numbers (including subscriber additions) will likely set the course for Netflix’s stock for a while, so you should keep initial investments small ahead of earnings.
Technical Analysis
NFLX had a good year last year, but it wasn’t the smooth performance enjoyed by many of its big-cap technology peers—shares went sideways from February through April, hit new highs in May, pulled back in June, gapped up in July, retreated into August, rallied into October and then paused for two more months. Choppy! But after its latest rest, the stock has come to life on excellent volume, pushing to new price highs this year. If you want in, you can nibble on dips ahead of earnings.
NFLX Weekly Chart
NFLX Daily Chart
Splunk (SPLK)
Why the Strength
Splunk is the King of Big Data, with the leading platform for deciphering the ever-growing reams of machine data, which contains a huge (but unstructured) record of the activity and behavior of customers, users, transactions, servers and networks. The applications of all this are endless, from marketing to security to improving operations and customer satisfaction, and that’s kept demand for Splunk’s on-premise and newer cloud offerings growth in recent years. In fact, revenues cranked ahead 48% in 2015, 42% in 2016 and likely around 31% for 2017. The stock is strong today thanks to a blowout quarterly report in November (sales up 34% and earnings came in more than 20% above estimates) that convinced big investors that (a) the bottom line is likely to accelerate higher in the quarters to come, and (b) that management’s outlook for fiscal 2020 of $2 billion in revenue (up from $1.16 billion for the past four quarters) and operating margins of 12% to 14% (up from 8.5% in 2017) is more than achievable. There’s competition, of course, and the valuation is elevated, but Splunk is a clear leader in its field and should grow rapidly for years. We like it.
Technical Analysis
SPLK is a good example of how a company is not the stock, as the company was growing nicely for years but the stock went nowhere. But the stock’s character appeared to change in November, when it gapped to multi-year price highs on huge volume following earnings. It then built a reasonable consolidation as growth stocks rested in December, before shooting higher after the calendar flipped. You can buy here or, ideally, on dips to 85.
SPLK Weekly Chart
SPLK Daily Chart
Steel Dynamics (STLD)
Why the Strength
Indiana-based Steel Dynamics is a young, efficient steel maker that has shown it can survive and thrive in a highly cyclical industry. The company has an annual production capacity of 11 million tons of steel in a wide variety of forms, and gets additional income from metal recycling and steel fabrication. The U.S. steel industry in general has benefited from the imposition of punitive tariffs imposed on Chinese steel imports after Uncle Sam concluded that country was dumping (selling below cost) its products here. But Steel Dynamics’ vertically integrated structure, selective acquisitions and stringent cost controls are the big internal reasons for its popularity with investors. This isn’t really a classic growth story, but management has produced good results over the last couple of years: After revenue grew just 2% in 2016, revenue averaged 23% growth in the first three quarters of 2017. And investors were impressed with management’s increased Q4 and full-year guidance on December 15, which propelled the stock higher. Steel Dynamics will be releasing its latest results on January 22 after the market closes, but with guidance already priced in, the reaction could be muted. With steel stocks coming back to life, Steel Dynamics looks like one of the leaders.
Technical Analysis
STLD made a big run in the first half of 2016, running from 15 to 28. After a three-month consolidation to 23, the stock raced to 40 in December 2016, but that high was followed by a tedious, nine-month consolidation with support at 32 that didn’t end until the stock caught an updraft in October 2017. STLD continued its volatility until the guidance release in December finally pushed it past its old high from December 2016. Even trading at new highs, STLD is still a relative bargain with its 15 forward P/E. You can here or (preferably) on dips, with a stop in the low 40s.
STLD Weekly Chart
STLD Daily Chart
Twitter (TWTR)
Why the Strength
Twitter doesn’t need much of an introduction. If you didn’t know before, you’ve likely learned how the open distribution platform for short-form text, image, and video content works given that it’s President Trump’s favorite platform for communicating with the world! The stock’s mostly been in the dumps since going public in late 2013, despite being one of the world’s foremost platforms for real-time content distribution (over 300 million users). The issue is that higher spending on mobile and online video advertising hasn’t helped spur user growth and monetization. And given that roughly 90% of revenue comes from advertising, a robust and engaged user base is critical. That said, the stock came to life in late-October when Q3 results beat expectations, user growth expanded by 4%, and forward guidance inspired analysts to bump up their expectations—Wall Street now sees 2018 revenue growth of 6% and EPS growth of 12% (to $0.45). Potentially bullish signs include deeper engagement since Twitter allowed longer tweets (280 characters from 140), Bloomberg’s launching of 24-hour news network TicToc on Twitter, and live streaming of Thursday night NFL games. It’s far from a sure thing, but some recent analyst upgrades and the possibility of a meaningful upturn in earnings are attracting buyers. It’s an intriguing turnaround situation.
Technical Analysis
TWTR spent the majority of 2017 chopping around in the 14 to 20 range, with every dip bought, and every rally sold. That appears to have changed following the October earnings release when shares gapped up from their 200-day line at 17 and hit 22 within two days. A little selling followed, but buyers stepped back in just above 19 and the stock hasn’t dipped below its 50-day line since it got going. The peak of 25.5 was hit in mid-December. You can pick up some shares here or, better yet, on a dip to the 25-day line.
TWTR Weekly Chart
TWTR 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.
