Early January Shenanigans
Current Market Outlook
Beneath the market’s surface, there’s been lots of rotation and volatility, with buyers focusing on the laggards of late last year (especially the big-cap growth stocks), while the strong materials and transportation sectors continue to consolidate. (Even as the major indexes probe new high ground, the number of stocks hitting new highs is way down versus a few weeks ago.) That’s something to keep an eye on, but the trends of the major indexes and most stocks are still up, sellers have been unable to put much of a dent in the market despite the huge post-election run and few stocks have broken down. Until that changes, we’re keeping our Market Monitor in bullish territory, though it’s probably best to be a bit more discerning on the buy side, looking for tight setups and big volume breakouts.
Tonight’s list remains heavy on turnaround stocks, especially those in cyclical industries; the odds continue to favor higher prices as these stocks consolidate their strong post-election gains. Our Top Pick is AK Steel (AKS)—you can buy a little here and look to add shares on a powerful move to new highs.
| Stock Name | Price | ||
|---|---|---|---|
| AK Steel Holding (AKS) | 0.00 | ||
| Atwood Oceanics (ATW) | 0.00 | ||
| CF Industries (CF) | 45.23 | ||
| Clovis Oncology (CLVS) | 0.00 | ||
| Grand Canyon Education (LOPE) | 121.03 | ||
| Greenbrier (GBX) | 57.73 | ||
| Lions Gate Entertainment (LGF-A) | 0.00 | ||
| Oil States International (OIS) | 0.00 | ||
| Shopify (SHOP) | 585.00 | ||
| SVB Financial Group (SIVB) | 0.00 |
AK Steel Holding (AKS)
Why the Strength
The steel sector is about as cyclical as they come, with much of the sector’s success due to factors outside of its control. Today, those outside factors are lining up in the sector’s favor, which is why earnings appear to be poised for a huge turnaround and why so many stocks in the group are acting well. AK Steel is a lower-priced stock in the sector, but it’s no fly-by-night firm, with a market cap of $3.2 billion and sales of $6 billion. The company has four plants in Ohio, Indiana and Mexico, and during the multi-year bust, it cut costs to the bone and focused on higher-value materials (electric resistance welded carbon and stainless steels to the auto industry, for instance) that has helped. But the stock is strong today because of the industry’s rebound—thanks to decreased imports due to tariffs, strong demand from the auto sector and a rebound from energy firms, prices are heading higher. AK Steel has announced price increases on its carbon flat-rolled steel five times since late-October, with a separate increase on its stainless steel products! An accelerating economy and a protectionist-leaning U.S. administration should only help. Earnings have been positive in four of the past five quarters and analysts see the bottom line leaping toward $1 per share this year. It’s not a buy-and-hold stock, but AK Steel has big potential as long as the sector remains healthy.
Technical Analysis
AKS has a high-risk, but potentially high-reward chart. AKS fell below 2 at the market bottom in early 2016 (down from 11 in late 2014), and was sitting at around 5 at the time of the election. Then the stock went bananas, more than doubling to 11.4 within just six weeks. And since then, AKS has gone straight sideways on its chart, refusing to buckle much as it found support near its 25-day line. We think you could buy a little here or on a push above 11.5 with a loose stop near 9.5.
AKS Weekly Chart
AKS Daily Chart
Atwood Oceanics (ATW)
Why the Strength
A couple of weeks ago, we had Transocean in Top Ten, the first offshore driller that made the cut in more than two years. Today, we have little-known Atwood Oceanics, which has 11 advanced rigs (from jackups to deepwater) that average just over five years of age. The firm has been brutalized by the collapse of oil prices and the resulting evaporation in demand for offshore rigs—sales are plunging and earnings are expected to move firmly into the red this year and stay there for a few quarters. But as with many energy stocks, investors are anticipating a rebound due to resilient oil prices in the mid-$50 range, which is enticing some large explorers to open their wallets, as well as the industry’s big pickup in scrapping (destroying old rigs) in the industry, which is cutting supply. Atwood certainly has the right structure to take advantage of any rebound—its rigs remain active (more than 90% are on jobs, albeit at much lower pay than two years ago), management has slashed costs by 25% or more and the balance sheet is relatively strong (no debt maturities until 2019, while total debt is down 27% during the past year). Management believes that the combination of rising demand and falling supply will support a very healthy offshore drilling market by the end of next year, and investors are buying it. Atwood looks like an interesting speculation, as it has a ton of leverage to any recovery in offshore drilling.
Technical Analysis
ATW imploded from 60 in 2013 to a low of 5 last year, and even after the sector got off its duff, the stock was still sitting at just 7 in late November when news of the OPEC production cuts came out. That brought out the buyers in a big way—ATW soared into the 14 area on huge volume within a couple of weeks, and has since moved sideways on the chart as the 25-day line has caught up. If you’re game, you can buy a little here.
ATW Weekly Chart
ATW Daily Chart
CF Industries (CF)
Why the Strength
The renewed appetite of many investors for basic materials stocks has been a big driver of the current rally in the major indexes. CF Industries is one of the largest global producers of nitrogen fertilizers—urea ammonia nitrate, ammonia, granular urea and ammonium nitrate. Using natural gas as its feedstock, the company’s nine manufacturing complexes and industry-leading distribution and logistics capabilities serve agricultural and industrial customers, primarily in North America, but with increasing global distribution. CF Industries just put the finishing touches on a capacity expansion of its Port Neal, Iowa nitrogen complex, which, together with the previously completed Donaldson project, completes the company’s capacity expansion plans. The entire fertilizer industry has been through the mill as prices have been under pressure partially due to weak crop prices. But a dip in Chinese exports and lowering inventory volumes in North America are expected to support higher prices over the next year. CF Industries has endured three years of declining revenues, and 2016 is likely to book another down year. But CF expects a bounce in prices starting in 2018, and investors are buying into that idea. With its capital-intensive expansion out of the way and continuing low prices for its natural gas raw material, CF Industries should have a leg up on the competition. It’s not a story of world-changing innovation, but CF Industries is doing everything right in preparation for a major rebound. The company’s stock also pays an attractive 2.6% dividend yield.
Technical Analysis
CF capped a long rally when it topped 66 in July 2015. By August 2016, the stock had plummeted to 20, and after a bounce to 26, traded sideways until a post-election rally kicked it to 30 in November and then to 32 by the end of 2016. The stock has continued to rally and its long-term 200-day moving average is just starting to turn up. With its handsome dividend, CF looks like a good bet. You can buy anywhere under 33, with a stop at 30.
CF Weekly Chart
CF Daily Chart
Clovis Oncology (CLVS)
Why the Strength
Biotech company Clovis Oncology has a very encouraging candidate for tough-to-treat cancers. Clovis’ programs target specific forms of cancer and use personalized medicine, including companion diagnostics, to determine which therapies will be most effective. It’s ovarian cancer treatment, Rubraca, gained accelerated approval by the FDA on December 19, and could generate $60 million in U.S. sales in 2017, growing to well over $400 million within five years. Rubraca could also gain approval in the EU by early summer, essentially doubling sales potential from the second half of 2017 onward. And data suggests the treatment is effective against prostate cancer, which could represent an even larger market opportunity than ovarian cancer. Trials for prostate cancer will be ongoing in 2017, and as data trickles in, investors should expect the stock to react accordingly. To help fund the product’s launch and ongoing development, Clovis tapped the market for a $250 million equity raise last Tuesday. The market didn’t appear to mind the dilution, and bid up shares in the following days, most likely because analysts have been raising their outlook for Clovis based on Rubraca’s approval. Many see the company as a takeover target, too, as the firm’s assets are unique.
Technical Analysis
CLVS has been rebuilding since a disappointing lung cancer candidate failure in 2015. All eyes are now on Rubraca, and an FDA approval for priority review moved shares from a summer low of 12 up to 25 by the end of August 2016. Encouraging data then lifted the stock to 40 by the end of October, when a sector retreat cut most biotech stocks down a notch. Positive momentum returned when CLVS bounced off 25 in November, and FDA approval catapulted it above 45 in mid-December. We view this as a highly desirable oncology stock that should only falter if a last-minute issue with the drug pops up. Try to buy on dips, and keep positions small given the stock’s volatility.
CLVS Weekly Chart
CLVS Daily Chart
Grand Canyon Education (LOPE)
Why the Strength
It’s hard not to pitch for-profit education provider Grand Canyon as a winner because of Trump’s plans to deliver regulatory relief to the industry. So we’ll adhere to the principle of Occam’s razor, which states that the simplest theory is preferable to more complex ones. And one look at the chart reveals that, while Grand Canyon’s better-than-expected Q3 result on November 3 (revenue up by 8.8% and EPS of $0.67 beat estimates by seven cents) lifted shares to the top of their eight-month trading range, it was the November 8 election that set the stock on fire. Why? Congress will likely soon repeal two rules issued by the Department of Education that will give significant regulatory relief to Grand Canyon; (1) the Borrower Defense to Repayment Rule, and (2) the rule requiring State Authorization of Distance Education programs. Will repeal make it harder for students to get relief from for-profit colleges that misrepresented job placement rates? Yes! Will it make it harder for debt-laden students preyed upon by for-profit colleges to get loan forgiveness? Yes! Is this all good for Grand Canyon? You bet! Does that mean it is a horrible company? No. Actually, it has a reputation as one of the best in the industry (a low bar?). We think there’s still considerable upside if these rules are repealed, and analysts are generally positive on the stock.
Technical Analysis
LOPE wasn’t a strong performer before the election; for most of the year, it was range bound between 37.5 and 45. A November 3 earnings release could have propelled it above that range, but the election trumped earnings, and the stock gapped up to 48, then ran above 60 by the end of the year. It’s now consolidating between 57 and 62, and if and when the aforementioned rules are repealed, the buyers could easily return. You can buy around here and use a tight stop.
LOPE Weekly Chart
LOPE Daily Chart
Greenbrier (GBX)
Why the Strength
Greenbrier is another cyclical stock whose sales and earnings are sinking quickly, but investors have already discounted that and are now beginning to look ahead toward better times. This company is the second largest supplier of railcars and related services in the U.S. (it also owns a stake in a Brazilian railcar operation that’s the largest in South America), and up until the middle of last year, business remained very good—the firm’s sales and earnings were sky high as orders and deliveries were strong, often for oil-related uses. Now, however, orders are starting to fall (industry-wide orders are expected to drop from 59,000 last year to 39,000 this year and then slowly improve) and Greenbrier expects earnings to sink to about $3.50 this year. So why the strength? Mainly because earnings, which were reported last week, topped expectations, as did management’s outlook, making investors think the company’s eventual earnings trough won’t be as deep as most had feared. Throw in signs of an accelerating economy and an already-cheap valuation (14 times this year’s earnings estimate; dividend yield of 2.1%), and that’s enough for investors to place some bets on the long side. Cyclical stocks move mostly on anticipation of results, and right now, that’s working in Greenbrier’s favor.
Technical Analysis
GBX hit a high of 78 in September 2014 (more than a year before earnings topped out!) and bottomed at 20 last January. And, really, the stock has been slowly marching higher ever since, albeit with a couple of big shakeouts (including one after earnings in October) along the way. And now the stock is gaining steam, rallying to new recovery highs in November and December and surging last week following its quarterly results. You can buy a little around here with a stop in the low 40s.
GBX Weekly Chart
GBX Daily Chart
Lions Gate Entertainment (LGF-A)
Why the Strength
The entertainment industry is a tough business, with companies rising or falling based on the performance of the films and shows they produce. Lions Gate Entertainment made a run in 2014 based on the success of its Hunger Games series. But recent flops undercut the stock heavily in late 2015 and early 2016. The turnaround for Lions Gate has been the runaway success of its movie La La Land, which just won a record six Golden Globe awards, including Best Picture and both of its leading actors. Add in the unexpected success of movies like Hell or High Water and Hacksaw Ridge earlier this year, plus Oscar favorite Manchester by the Sea, the company is on a roll. TV series like Orange is the New Black also add to the company’s wins. The company just closed its $4.4 billion takeover of the Starz cable network, which will give it another outlet for its extensive (over 16,000 titles) library of movies and TV shows, and Lions Gate’s efforts to become a vertically integrated global content provider looks more credible. The success of the company’s current slate of films keyed a 34% jump in Q3 revenues and a 158% gain in earnings. And with investors looking ahead to a probable Oscar-fuelled bounce for La La Land, Lions Gate is hot. The company recently created a non-voting B share class, but our recommendation is to stick to the A class. The stock has paid a small dividend in the past, and good results may increase that.
Technical Analysis
LGFA took a steep dive from 41 in November 2015 to 16 in February 2016, then spent much of last year gyrating between support at 19 and resistance at 22 or so. A bounce began in early November and got another boost in early December, lifting the stock to 27 by the end of the year, which is about where it has been hanging since. At least part of the expected Oscar bounce has already been priced in, but there should still be fuel in the stock’s tank. We think a buy as close to 27 as possible, with a stop around the stock’s rising 50-day moving average (now at 24.4) looks like a decent speculative buy.
LGF-A Weekly Chart
LGF-A Daily Chart
Oil States International (OIS)
Why the Strength
There’s one simple reason why many positive things start to happen in the oil patch when the commodity trades for over $50 a barrel: drillers can make money again. And that means companies such as Oil States International can provide their completion and production services (34% of revenue) and sell their offshore production equipment (66% of revenue) once again. It’s a cyclical recovery trade that should benefit most oilfield services stocks, and Oil States will benefit from both onshore and offshore activity. Offshore activiy could be a bit slower to come back, so while many of the company’s products are consumable, it would still be wise to consider its exposure there. On the other hand, it should pay to keep an eye on the long-term view, which shows that the 2014 to 2016 downturn was arguably the worst in 30 years, and that a full recovery (in stocks, not just the industry) could extend for several years. Analysts see Oil States International recovering from a 37% decline in revenues in 2016 to 6% growth in 2017. EPS should improve from $-0.87 in 2016 to -$0.35 in 2017, then get back into the black in 2018, with around $0.70 expected. Price targets are all over the map, but the most recent upgrades suggest a price in the 44 to 53 range is where the stock should trade now.
Technical Analysis
OIS spent the early part of 2016 trading in the 22 to 28 range, but by the end of February, it was enjoying oil’s move off its bear market lows, and the stock reached a high of 36 in early June. It then chopped sideways for several months before falling back to 27 by mid-September. A subsequent rally was short-lived, and a better-than-expected Q3 result on October 27 was followed by a trip to 28. The tide turned after OPEC’s production cut announcement in November when shares moved rather steadily to over 40. A slight pullback to 37 brought in more buyers, who have kept shares trending higher over the past two weeks.
OIS Weekly Chart
OIS Daily Chart
Shopify (SHOP)
Why the Strength
Giant companies are often experts at e-commerce, and if they aren’t, they spend a bunch of money to hire people who are. But what about all the small- and mid-sized businesses where e-commerce (including online, social and email sales) is vital, as is access to payment solutions, analytics, short-term lending and many back-end solutions like inventory and order management? It’s a gigantic market, and that’s the big opportunity for Shopify, which offers a comprehensive cloud-based commerce platform that allows merchants to sell through a variety of platforms, offers all of the aforementioned services, and makes it easy to work with most social sites and systems, including Facebook Messenger and Apple Pay. The stock popped last week thanks in part to a new deal with Amazon. Shopify was chosen as the replacement for Amazon’s web store business, and now, its systems are integrated with Amazon, allowing merchants to easily set up and manage their own “Amazon stores.” That should only help growth, which has been rapid and consistent in recent quarters—revenues have grown between 89% and 99% for the past eight quarters, and while earnings are just south of breakeven as Shopify invests in its business, all of the sub-metrics are excellent (gross merchandise volume through its platform rose 100% in the third quarter; it now serves 325,000 businesses, up from 300,000 the prior quarter). There is competition, but Shopify looks like one of the leaders, and if management continues to pull the right levers, growth should remain rapid for years.
Technical Analysis
SHOP looks like it’s emerging from a normal 14-week consolidation following a big run up from February through August of last year. The consolidation was relatively calm (just 17% deep), and after SHOP tightened up a bit into year-end, it surged to new price and (marginal) new RP peaks on the Amazon integration news. Breakouts have been hit or miss lately, but we’re OK with a small buy here with a stop in the low 40s. You can look to average up as you develop a profit.
SHOP Weekly Chart
SHOP Daily Chart
SVB Financial Group (SIVB)
Why the Strength
SVB Financial Group’s name, which stands for “Silicon Valley Bank,” says a lot about the company’s business. SVB Financial used its Santa Clara, California location to begin investing in and lending to tech companies and it’s now an international operation, with offices in innovation centers in the U.S., Ireland and the U.K., Israel and China. The bank has $43 billion in assets, a loan portfolio valued at $19 billion and $82 billion in deposits and investments. The bank is getting a boost from the industry-wide rebound in banking stocks, but has a growthier profile than many of its competitors. It provides wealth management and payment services to high net-worth clients, but it’s the loan portfolio and development agreements in the software and Internet, hardware and infrastructure, life science and healthcare, private equity and venture capital, energy and resource innovation and even premium wine that are attracting investors. While revenue grew just 4% per year in 2014 and 2015, growth spiked to 19% in Q3 2016 and the bank is forecast to grow earnings by 19% in 2017. After-tax profit margins have topped 20% in nine of the 10 most recent quarters. Q4 and full-year results are expected later in January, and analysts are looking for revenue of $404 million and EPS of $1.81.
Technical Analysis
SIVB enjoyed a good first half of 2015, but fell sharply during the market’s August meltdown. SIVB dipped from its July 2015 high at 153 to a low of 78 in February 2016. The stock fought back to 128 in October 2016, then blasted off on heavy volume after the U.S. presidential election. SIVB has cooled off a bit after nudging 180 last week. A dip to 175 looks like a good entry point, although you might want to keep any new position small this close to earnings. A stop at 158 seems prudent.
SIVB Weekly Chart
SIVB 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.
