New Buy Signal
The market has followed through on last week’s rebound rally and we’re seeing an increasing number of strong growth stocks with good setups. The big news is that the rally has lifted many of the indexes we follow above their 25- and 50-day moving averages, giving us a green light for new buying. We don’t advise jumping in with both feet—new buy signals do not guarantee a continued advance—but you should be taking a serious inventory of your watch list (and the stocks in this week’s issue) to select a few favorites for buying.
This week’s list includes several bigger names and a few recent IPOs, which indicates good breadth for the rally. Our favorite is SunPower (SPWR), which is making the turnaround in the solar industry look like a sound growth proposition.
| Stock Name | Price | ||
|---|---|---|---|
| SunPower (SPWR) | 12.26 | ||
| Splunk (SPLK) | 207.67 | ||
| Proto Labs (PRLB) | 0.00 | ||
| The Priceline Group Inc. (PCLN) | 0.00 | ||
| Illumina Inc. (ILMN) | 289.74 | ||
| Ciena (CIEN) | 44.25 | ||
| Bloomin’ Brands (BLMN) | 0.00 | ||
| Boeing (BA) | 432.22 | ||
| American Axle (AXL) | 0.00 | ||
| Actavis (ACT) | 0.00 |
SunPower (SPWR)
Why the Strength
SunPower is a strong contender in the race to normalize the solar industry, making the transition from a “green” company that requires subsidization to succeed, to a company that makes economic sense on its own merits. SunPower gets credit from analysts for the efficiency of its solar panels, the size of its distribution network and its mix of large-scale power-plant projects and residential installations. Analysts worry that the company’s bottom line may be vulnerable to low-ball competition. But SunPower just received Tenesol, a subsidiary of Total SA, for $165 million. Total SA is one of the six biggest oil companies in the world, and it received 18.6 million shares of SunPower stock as a part of the deal. This reveals a major interest in the solar industry on the part of Big Oil. It also marks a major increase in SunPower’s distribution network in Europe. The resurgence of investors’ interest in SunPower has been partly a value play, as the entire solar industry was badly oversold in 2011 and 2012. But it’s also a rational bet on the gradually improving pricing dynamics of solar versus the low price (but high carbon footprint) of coal. And those lingering rumors about SunPower being a takeover target add spice to the mix.
Technical Analysis
SPWR has been surging and consolidating since it bottomed below 4 in late 2012. The stock has made three big runs, with each rally followed by a month or more of consolidation. From its high at 24 in the middle of May, the stock drifted below 18 on June 24, but has worked its way back above its moving averages. There’s no predicting what might catalyze the next big surge, but SPWR looks like a good long-term bet right here, or on a pullback below 21. Use a stop at the 50-day moving average as a caution signal.
SPWR Weekly Chart
SPWR Daily Chart
Splunk (SPLK)
Why the Strength
Splunk is the company that put Hadoop clusters into the lexicon for stock investors. Hadoop clusters are high-capacity servers that use cheap hardware linked by open-source software to store enormous amounts of data. Splunk’s products help companies explore, visualize and analyze the data they collect, allowing them to extract useful information that can drive marketing and product development. In essence, Splunk extracts actionable information from Big Data without expensive custom software. Demand for Splunk’s products has driven huge revenue gains that have gradually decreased from 100% in 2009 to a still-torrid 64% in 2013. The company occasionally books a profitable quarter, but consistent profitability isn’t expected until 2015. Despite that, institutional sponsorship has been building steadily, up from around 300 funds during the company’s IPO quarter in 2012 to well over 430 in Q1. Splunk is also mentioned frequently as an attractive $5 billion-market cap takeover target.
Technical Analysis
SPLK gapped up big after its IPO at 17 in April 2012, then spent nine months digesting its gains. The stock has been in a strong uptrend for most of 2013, but began June with a pullback from 47 to 42. It took just a little over three weeks for SPLK to get moving again, and the stock has now pushed out to a new high above 47 after it picked up a new analyst with a positive recommendation. The stock may consolidate at 47 for a bit, and you can buy anywhere under 47, with a stop at 42.
SPLK Weekly Chart
SPLK Daily Chart
Proto Labs (PRLB)
Why the Strength
Many companies now use 3D computer aided design (CAD) software to develop part designs. And when they need a small run of those parts to test in prototypes, they often call Proto Labs. Proto will take the CAD file and produce a real part. If only one to ten parts are needed, Proto’s Firstcut process will produce them using CNC machining. If more parts are needed, Proto’s Protomold service will turn them out using injection molding. Customers negotiate with Proto via Internet, including getting a quotation and sending the design file, and parts can be turned around in as little as one day (or a maximum of three days for Firstcut and 15 days for Protomold). Proto boasts that it can ship completed parts to design engineers before they can even get a quote from a conventional supplier. Three-quarters of Proto’s business comes from Protomold sales, and the company is extending its reach globally with operations in Europe and Japan. Annual revenue growth slowed from a red-hot 52% in 2011 to a still-robust 27% in 2012. Q1 results showed a 24% gain in revenue with a 46% jump in earnings and a healthy 24% after-tax profit margin. Proto Labs is banking on its huge speed advantage to keep customers sending in their 3D CAD files. Q2 results are expected during the week of July 22.
Technical Analysis
PRLB has been public since February 2012. Since its IPO at 16, the stock has never traded below 25, and after a nine-month post-IPO basing period with support at 30 and resistance at 40, it began a new rally in December 2012. A positive earnings report in February caused a nice gap up in the stock’s price, but progress since then has been sporadic. A five-day rally beginning on June 13 pushed the stock to new highs, and last week’s action kicked it above 65. PRLB is a little extended (the stock’s 25-day moving average is back at 58), but a little consolidation trading should lead to a good buying opportunity under 65. Use a stop at the stock’s 50-day moving average at 56.
PRLB Weekly Chart
PRLB Daily Chart
The Priceline Group Inc. (PCLN)
Why the Strength
With the July 4th holiday just around the corner, summer travel is in full swing. What’s more, the current economic environment heavily favors discount travel booking firms like Priceline.com. In addition to the company’s improved outlook for summer travel, Priceline has been front and center for investors after acquiring red-hot competitor Kayak Software—an online booking firm that aggregates deals from other online travel websites into one set of search results. Priceline expects to create synergies with Kayak that will grow its international presence, while helping Kayak expand its reach in the U.S. Despite global economic pressures, Priceline’s bottom line has held firm. In fact, the company has increased its revenue and profit margin year-over-year since 2009. Priceline has also put up impressive numbers during the past year, with revenue growth averaging 21% on a year-over-year basis, while earnings have risen by an average of 32% on the same basis. Lastly, despite the stock’s lofty heights, Priceline is still relatively undervalued when compared to its peers. Priceline sports a P/E ratio of 28.93, roughly 20 points lower than its leading competitor Expedia. With wanderlust affecting quite a few travelers this summer, we believe Priceline is well positioned to lead investors higher.
Technical Analysis
While other stocks were sinking, PCLN held its ground in 2011, with shares finding firm support near 450 despite turmoil on Wall Street. In 2012, PCLN rallied sharply higher, topping out just shy of 800 by late April. But the stock was unable to hold its lofty perch, ultimately pulling back for a retest of support near 550 by mid-year. Undaunted, PCLN resumed its trek higher, gaining strength in early 2013 as the Kayak acquisition was approved. Now PCLN sits perched in all-time high territory around 840. You can nibble here, or take larger bites on pullbacks toward 800. A stop at the stock’s 50-day moving average near 779 makes sense.
PCLN Weekly Chart
PCLN Daily Chart
Illumina Inc. (ILMN)
Why the Strength
When we last zeroed in on medical device manufacturer Illumina, the company was attracting considerable attention in the wake of its strong first-quarter earnings report. Specifically, the biotechnology specialist revealed strong growth in HiSeq (gene sequencing) sales, with overall sales and earnings growth easily crushing Wall Street’s expectations. While Illumina is believed to have sold 65 systems last quarter—10 more than expected—the firm’s real bread and butter lies with disposable tools that are used with HiSeq; these pushed profit margins to 19% last quarter. The company’s current strength is underpinned by Illumina’s continued buying spree and its pending product launch throughout Europe. In the first quarter of 2013, Illumina snapped up Verinata Health for $350 million while nabbing a development-stage company for an undisclosed sum. More recently, Illumina entered into a research agreement with TrovaGene, with many analysts speculating that the deal could be an overture to a buyout down the road. Lastly, Illumina announced last week that its MiSeqDx Cystic Fibrosis System was CE certified, clearing a final regulatory hurdle before the product’s launch in Europe. With genetic research continuing to expand, and Illumina continuing to rebound from a few harsh quarters, this blue-chip biotech still has plenty of pleasant surprises up its sleeve.
Technical Analysis
While ILMN suffered its fair share of turmoil in 2011, the stock is finally bouncing back. After bottoming near 26 in late 2011, the shares rallied on strong volume back toward the 60 level before the end of the year. Resistance took hold near 60, forcing ILMN to grind sideways and base near 40 for much of 2012. Heading into 2013, ILMN tightened up nicely, edging higher along its 10-week moving average to break out to fresh multi-month highs. The shares appeared to bottom out near this trendline once again last week, with ILMN’s 50-day providing a second layer of support. As we noted in last week’s update, you can hold and watch ILMN here, or take bites on pullbacks of a point or two while keeping an eye on the 50-day.
ILMN Weekly Chart
ILMN Daily Chart
Ciena (CIEN)
Why the Strength
The next big thing in networking and internet infrastructure is beginning, and Ciena is well positioned to take advantage of this new revolution. The kick-off was Google’s new high-speed fiber optic network in its test city of Kansas City, with the Internet giant blowing past local cable and phone company competition in both speed and pricing. The move was so popular that Google is expanding its fiber network to more than 14 cities, and local cable and phone companies are scrambling to jump on the fiber bandwagon. This movement holds great promise for Ciena, which specializes in optical networking equipment, software and support services. The early effects of the fiber revolution were seen in Ciena’s second-quarter earnings report, with nearly all of the company’s product and service lines improving on a year-over year basis. In fact, Ciena bested both its top-line and bottom-line earnings and revenue expectations, and even boosted its revenue targets for the third-quarter. With fiber rollouts increasing across the country, we believe that Ciena should continue to see strong growth across the board.
Technical Analysis
The mini-plunge of 2011 hammered CIEN shares, forcing the stock toward a bottom near 10 by mid-year. But the stock refused to dip into single-digit territory, eventually rallying back to the 15 area by 2012. CIEN would spend the next several months chopping around 15, not straying more than a point or two. But the release of the company’s 2Q report in early June put an end to that. Driven by strong volume, CIEN broke out to the 20 region, and for the past three weeks, shares have been working to establish support in the area. Having shaken out the weaker hands, CIEN is now be poised to continue higher.
CIEN Weekly Chart
CIEN Daily Chart
Bloomin’ Brands (BLMN)
Why the Strength
Bloomin’ Brands operates a few popular restaurant chains—Outback Steakhouse makes up about 60% of revenues (53% in the U.S., the rest overseas), while Carrabba’s Italian Grill makes up 17%, Bonefish Grill 13% and Flemings Steakhouse 6%. Each operation is a leader in its restaurant niche and has produced solid (though unspectacular) same-store sales growth over many years. But what’s getting investors interested is the many growth drivers management has up its sleeve. First is a big move into lunch; right now, the industry gets about 30% of its business from lunch, but for Bloomin’s various brands, the figure is just 7%. There’s a lot of expansion potential there without much risk. Second is store remodeling and relocation—the company is remodeling 150 mostly Outback restaurants this year alone (on average, traffic lifts 3% after a remodel, so it pays for itself), as well as relocating up to 100 Outbacks in the years ahead to prime locations. So far, the relocations have led to a whopping 40% hike in traffic! Finally, you have good old fashioned store growth; in the U.S., the company believes it can open 120 new Bonefish Grills within five years (there are 180 operating today), along with 200 more Carrabba’s (235 today), though that expansion will be much slower. And internationally, Bloomin’ sees big potential; it had 208 stores there at the end of last year, but plans to open about 20 more this year alone, with more growth coming down the pike. There’s nothing revolutionary here, but with popular brands and many levers of growth, this looks like a solid conservative growth stock.
Technical Analysis
BLMN came public last August and has been in a choppy uptrend since. More recently, the stock has enjoyed smoother progress; it got going in early April around 18, and while there have been a few three- or four-day shakeouts, the stock has generally pushed steadily to 25. And it’s given up no ground at all during the market’s correction. If you want in, you could buy a little here with a tight stop near 23.
BLMN Weekly Chart
BLMN Daily Chart
Boeing (BA)
Why the Strength
Yes, it’s a Dow Industrials stock with a whopping $81 billion in revenue, but Boeing has a history of making big moves when the jet-buying cycle turns up, something that often coincides with a new jetliner from the company itself. That’s what is going on now, as production of Boeing’s new 787 Dreamliner is ramping up, and orders for all of its planes are looking healthy. (A just released 787-10, which Boeing says will be the most efficient jetliner ever made, already has 102 orders!) Looking at the very long-term, the company believes the market will support 35,000 new jets over the next 20 years, worth about $4.8 trillion. More important, though, are estimates for the next few years, and for that, we’re more interested in the current backlog (a ridiculous $390 billion at the end of the first quarter), recent orders ($20 billion in the first quarter alone) and the fact that management has talked about increasing production of its core jets by year-end to work off that enormous backlog. All of that should produce some mind-boggling free cash flow, and management has stated it wants to return 80% of it to shareholders during the next few years! One analyst believes that translates into about $14 billion of dividends (current yield is 1.9%, likely to head up) and share repurchases by the end of 2015! Obviously, the stock isn’t going to triple during the next year, but among conservative growth ideas, Boeing is one of our favorites.
Technical Analysis
BA broke out from a great-looking 22-month base in March and has been persistently pushing ahead since. We’re most impressed with its relative performance (RP) line—look at how it has glided higher nearly every week since that breakout. Recently, the stock dipped to its 50-day line, but it stormed back on solid volume, a sign that big investors added shares as soon as the pressure came off the overall market. There’s some old overhead in 105 area, which could cause more hesitation, but you could start a small position around 100, with a tight stop around 95.
BA Weekly Chart
BA Daily Chart
American Axle (AXL)
Why the Strength
While the sales and earnings figures in the table below won’t get the heart racing, Old World company American Axle & Manufacturing looks ready for a major turnaround. The company makes all sorts of auto parts and drivetrains for passenger cars, SUVs, commercial vehicles, you name it. While an improving auto market (following undue pessimism earlier in the year surrounding the group) is helping the stock, the firm has a surprising number of irons in the fire. It’s supporting several major product launches, including GM’s next-generation full-size pickup truck and SUV program and both of the 2014 model year RAM Heavy Duty pickup trucks. Management says it believes its current book of business will help the company grow 10% annually through 2015, twice the industry rate. And most of that growth will fall to the bottom line—management sees its margins increasing by a couple of points by the end of the year, and believes cash flow will be well over $500 million by 2015. Throw in better than expected auto sales, and analysts see the firm’s earnings growing from $1.20 last year to $2.70 per share in 2014! Is this a great growth story? Of course not. But the low valuation, improved industry trends and large and rising cash flow should keep the stock in favor.
Technical Analysis
12 in April of this year, representing a very long sideways period that wore out all but the true believers. But a great earnings report in early May kicked off a small buying stampede, with the stock surging to nearly 19 last month before the post-Federal Reserve market dip took it down. However, AXL found strong support near its 50-day line and recouped all of its gains on last week’s market bounce! It’s trading wildly of late, but you could either watch it, or nibble here with a stop at 16.
AXL Weekly Chart
AXL Daily Chart
Actavis (ACT)
Why the Strength
When you look at Actavis, now a New Jersey-based generic drug giant, what you’re seeing is the result of a $5.5 billion cash takeover of Switzerland-based Actavis by Watson Pharmaceuticals. Actavis was the fourth-largest U.S. generic manufacturer, and the combined company is the third-largest generic drug maker in the world. After the merger, which was completed last October, Watson decided to take the name Actavis for marketing purposes. While 75% of revenue comes from generic drug sales, Actavis also conducts its own development program for branded drugs, including both original compounds and what’s known as biosimilars, drugs that have the same chemical effect as patented drugs, but are dissimilar enough to avoid infringement suits. Actavis specializes in difficult-to-produce niche drugs that have come off patent, but markets over 750 products globally in over 60 countries. Revenue growth has been very steady, with 28% annual growth in 2010, and 29% in both 2011 and 2012. Actavis has been active in M&A, and news that the company was considering a potential merger with Warner Chilcott led to a big jump in the company’s stock on May 10.
Technical Analysis
ACT, which has been in a long-term uptrend, began 2013 in the middle of a six-month flat basing pattern. The breakout came at the end of March, when ACT gapped up to 97 and continued with another gap up in late April. The big explosion came on May 10, when merger rumors kicked the stock from 108 to 120 on big volume. ACT followed through from that big day with an eight-day step up to 133. But for the past five weeks, ACT has been heading sideways, trading with support at 120 and resistance at 127. ACT looks buyable anywhere under 127, but you can also wait for the stock to break out above 130 on volume. Either way, a stop at 110 makes sense.
ACT Weekly Chart
ACT 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.
