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Top Ten Trader
Discover the Market’s Strongest Stocks

July 13, 2015

Tonight’s Cabot Top Ten Trader has a bunch of potential leaders should the market keep rallying, and our Top Pick is an old friend that’s recently emerged from a huge sideways phase.

Great Snapback, though Still News-Driven

Market Gauge is 6

Current Market Outlook

For the third straight Monday, Greece caused the market to gap sharply at the open, this time on the upside as a deal in Europe is coming into view. The snapback from last week’s panic has been excellent, and we’re especially pleased to see many resilient, growth-oriented stocks spike to (or close to) new highs. That said, even after the past two days, the major indexes are still hovering near their 50-day moving averages, and it’s obvious that news is driving the market on a day-to-day basis. Throw in the fact that earnings season is about to rev up, and we’re sticking with a relatively neutral stance—focusing on the strongest stocks makes sense, but so does holding some cash and ditching any broken stocks.

This week’s list has a group of names that should do well if the market’s recent strength develops into a sustained uptrend. Our Top Pick is old friend Illumina (ILMN), which is emerging from a very long sideways phase. Start small, and look to add shares if the stock reacts well to earnings next week.

Stock NamePriceBuy RangeLoss Limit
WhiteWave Foods (WWAV) 0.0048-5046-47
Ulta Beauty (ULTA) 331.95161-164153-154
Tyler Technologies (TYL) 0.00135-140125-127
Tesoro (TSO) 0.0095-9989-90
RH Inc. (RH) 252.9396-10092-93
Nordic American Tankers (NAT) 0.0014-1513-13.5
Neurocrine Biosciences (NBIX) 123.4047-5042-43
Meritage Homes (MTH) 102.2048-49.544-45
LifePoint Hospitals (LPNT) 0.0085-8777-78
Illumina Inc. (ILMN) 289.74215-220205-209

WhiteWave Foods (WWAV)

Why the Strength

WhiteWave Foods is an organic food company whose brands include Silk and So Delicious soy milk products, Alpro, a European brand offering plant-based alternatives to dairy products, Horizon Organic milk, yogurt, cheese and other dairy products, LAND O LAKES dairy products, Earthbound Farms organic salads, fruits and vegetables, plus other snacks and ready-to-eat foods. Investors are interested that the company just acquired British Columbia-based Vega, a maker of plant-based products like powdered protein shakes and snack bars, for $550 million in cash. Vega has a strong market position across Canada and the U.S. among wellness-seekers and athletes, and the takeover is expected to be accretive to WhiteWave’s earnings immediately after the sale closes in the third quarter. Strong demand in China for soy milk and other healthy beverages is also a driver of growth. WhiteWave’s revenue grew 11% in 2013 and ballooned 35% in 2014 thanks to its purchase of Earthbound Farms. The company’s stock was boosted by a record earnings report on May 8 that easily beat expectations and increased guidance for 2015. Lastly, WhiteWave’s stock is enjoying support from investors who see the company as a perfectly sized acquisition target; a market cap of under $9 billion and a product line that enjoys strong growth in unique product categories should interest a big food company. The company’s next quarterly report isn’t due until early August.

Technical Analysis

WWAV has had only one major correction since it came out of its post-IPO base in the middle of 2013. That relatively mild correction/consolidation pulled the stock from 38 to 32 and lasted from September 2014 through January 2015. February brought a strong rally to new highs and the stock has been in an uptrend ever since, with a small pullback ahead of its May 8 earnings report. A buy on any dip below 50 should do well, with a stop around 47.

WWAV Weekly Chart

WWAV Daily Chart

Ulta Beauty (ULTA)

Why the Strength

During most bull markets, there are a few cookie cutter stories (retail outfits that have a loyal customer base and grow steadily through new store openings) that become institutional favorites. Right now, Ulta Beauty is one of Wall Street’s favorites. The company is a leading national beauty chain, with huge stores offering something for everyone, from prestige brands right down through cheaper, mass-market products. It’s also been rolling out salon services in its stores and boosting its e-commerce presence, making it a one-stop shop for all things beauty. Ulta (and some peers like Sephora) is steadily taking share from drug and mall-based stores, while its e-commerce business (up a whopping 50% in the May quarter) adds an extra boost to existing store sales (up 11%). And, back to the cookie-cutter theme, Ulta has years of growth ahead of it—the firm had 797 stores open at the start of May, and expects to open 100 new stores a year for the next five years. Recent sales and earnings trends have been excellent, and when you combine the reliability of the business (management has a history of pulling the right levers, and beauty products aren’t sensitive to the economic cycle) with the multi-year growth prospects (earnings are expected to rise 20% annually for a while), we think the stock can do very well as institutions build positions.

Technical Analysis

ULTA had a huge run through early 2012, then suffered through lots of fits and starts until September of last year. That’s when management unveiled its five-year growth plan (100 new stores per year), which caused ULTA to soar on 10 times average volume. Since then, the trend has been up, with the last few months seeing the stock trade tightly just south of 160, before buyers pushed the stock to highs last week on good volume. It’s unlikely to run away on the upside, but buying on dips should pay off.

ULTA Weekly Chart

ULTA Daily Chart

Tyler Technologies (TYL)

Why the Strength

It might not be the most exciting story, but it’s certainly a big one. Tyler Technologies provides integrated information management solutions to local governments and other public sector groups all over the world. If you’re a city government employee, you’ve probably used Tyler’s products to automate project costing, citizen complaint tracking, ambulance billing or code enforcement. If you work in a school administration, you might have used its products to organize student information and transportation, and if you’re involved in the tax system, it’s possible that you use one of Tyler’s products for appraisal or assessment of properties or tax billing and collection. Tyler also provides subscription-based services for filing, professional IT installation and training to any and all law offices and courts in its jurisdiction. Tyler Technologies might quietly be one of the most ubiquitous providers of information management solutions in the country, but the key here is growth. Tyler Technologies has experienced double-digit earnings growth for the last three years, and analysts expect that that to continue into 2015 and 2016. Its dependability and far-reaching influence have kept big investors accumulating shares.

Technical Analysis

TYL’s persistent, measured growth makes it what we like to call a “tractor stock.” With the exception of the eight months the stock took to catch its breath in 2014, TYL has gained at least 40% each year since 2011, even doubling its share price in 2013. Since February, it has locked in a 20% gain from 105 to 139 (an all-time high), 10% of which came last month on the news that TYL had ousted yet another old-school management systems company, this time for appraisal services in North Carolina. The stock looks buyable here or on a dip to 137, with a stop in the mid-120s.

TYL Weekly Chart

TYL Daily Chart

Tesoro (TSO)

Why the Strength

Tesoro, a major player in petroleum refining and marketing in the western U.S., is enjoying the same advantages that put Valero Energy in Top Ten last week. San Antonio-based Tesoro is an oil refiner with its own string of 2,250 retail outlets in 17 states. While lower crude oil prices have taken a toll on many petroleum explorer/producers, refiner/distributors like Tesoro are enjoying lower prices for their feedstock and higher margins on their sales. Tesoro’s six refineries in the western U.S. have a capacity of 850,000 barrels per day, and its network of ARCO, Shell, Exxon, Mobil, USA Gasoline and Tesoro service stations also brings in revenue from food, drinks and other product sales. Tesoro gets nearly three-quarters of its revenue from refining activities, and refines a variety of products beyond gasoline, including jet fuel, heating oil, liquid petroleum gas and asphalt. In addition to its strong geographic advantage due to its proximity to oil fields in North Dakota, Alaska and Canada, the company also owns its own railroad cars for delivery. The company’s Q2 earnings report is scheduled for Thursday, August 6, before the market opens, and investors appear optimistic about the results. A 1.8% annual dividend yield sweetens the deal.

Technical Analysis

TSO is a long-term winner (as its 24 appearances in Top Ten since 2003 will attest), but it’s also sensitive to economic conditions. So, after surging in January from 66 to 82, then continuing to 94 in February, the stock started a four-month consolidation with support around 82 as investors worried about the state of the global economy. But July began a strong rally on elevated volume that punched to stock to new all-time highs at 98 last Friday. With earnings due in just two-and-a-half weeks, you should look to buy on dips. A loose stop at around 90 will give the stock some wiggle room.

TSO Weekly Chart

TSO Daily Chart

RH Inc. (RH)

Why the Strength

Restoration Hardware is usually thought of as another high-end retailer of home furnishings, but the stock is perched near all-time highs today because the story is far more enticing than that. The company has a one-of-a-kind business model, as it’s been closing its mall-based stores and instead focusing on (a) huge, 50,000-foot (or larger!) showrooms in key cities across the country that can display much of the company’s high-end products, (b) gigantic once-a-year catalogs (called source books) and (c) vast partnerships and relationships with leading global designers. Combine all of that with a new concept or two each year—Restoration Hardware just announced a new Modern line of products that should appeal to an entirely new category of customers (its current line is mostly classic); it’ll have a 300-page source book of its own and a 15,000 square foot store in Los Angeles—and there’s reason to believe the company should enjoy healthy growth for many years to come. Even in the midst of its transition to the huge-showroom strategy, sales, earnings and profit margins are doing great (see table below) and analysts see earnings up 32% this year, 25% next year, and more 20%-plus growth after that. It’s a unique retail story that has a lot to like.

Technical Analysis

RH’s chart is also unique and, we believe, has great potential. The stock rallied to 78 in July 2013, establishing the stock’s relative performance (RP) peak. Shares have since broken out on the upside a couple of times (including a big one last summer), but never developed much momentum, leading to tighter and tighter launching pads. Now RH is set up very nicely, still hovering near its highs even after the market’s recent wobbles. You could nibble here, and then look to add shares on a big-volume move above 102.

RH Weekly Chart

RH Daily Chart

Nordic American Tankers (NAT)

Why the Strength

When pundits list the beneficiaries of lower energy prices, you hear about firms like airlines or consumers that will save a few bucks at the pump … both true. But with lower energy prices comes greater demand, and that benefits shipping firms like Nordic American Tankers, which operates a couple of dozen tankers mainly on short-term or spot rates. Obviously, business can fluctuate quite a bit based on demand—sales and earnings soared into 2008 and then plunged through 2013—but lower oil prices are now leading to greater demand and higher charter rates. However, this is also more than just a cyclical play; Nordic American keeps costs low, which has allowed it to pay a dividend for 71 straight quarters, even as some of its peers have struggled and even gone bankrupt. (The first quarter dividend was 38 cents a share, and in a letter the CEO recently said the second quarter payout in August would likely be similar.) Add in some new tankers to be delivered in 2016 and 2017, and the next couple of years should be solid for the company. It’s not a buy-and-hold stock, but after many down years, the industry’s fundamentals have turned up, and Nordic American should do very well.

Technical Analysis

NAT reached 57 in 2005, was still holding at 42 during 2008, but then crashed all the way to 7 in 2013 and again last October. Since then, however, the buyers have clearly been in control—shares have more than doubled, and, interestingly, even as many shipping stocks got caught up in Greece’s recent woes, NAT never even pulled back to its 25-day line during the market’s dips and the stock tagged multi-year highs this morning. We think you can nibble on a dip of 50 cents or so, with a stop near the 50-day line just above 13.

NAT Weekly Chart

NAT Daily Chart

Neurocrine Biosciences (NBIX)

Why the Strength

Neurocrine Biosciences nearly turned a profit for the first time last quarter. And that was enough to blow analyst expectations out of the water. The company reported a net loss of -$0.01 per share in its fiscal first quarter, much better than the -$0.29 loss that was forecast. The earnings beat sent shares soaring, and prompted at least three hedge funds (Perceptive Advisors, Opaleye Management and Point State Capital) to increase their stakes in the company. Neurocrine Biosciences is a clinical-stage pharmaceutical company focused on treating neurological and endocrine based diseases. It currently has six drug candidates in its pipeline, two of which are in Phase III clinical trials, while another two have advanced to Phase II. Tourette syndrome and endometriosis—a painful disorder in which the tissue that normally lines a woman’s uterus suddenly grows outside the uterus—are among the diseases for which Neurocrine is developing treatments. The company also recently achieved breakthrough therapy designation for its NBI-98854 drug candidate, meant for the treatment of tardive dyskinesia—a neurological disorder characterized by involuntary movements of the face and jaw. With many promising products, Neurocrine has shown enough progress to stand out to investors in a crowded biotech space.

Technical Analysis

Climbing steadily for much of 2014, NBIX really took off once the calendar flipped to 2015. The stock more than doubled from January to March, leaping from 20 to 44. A consolidation phase followed, with NBIX finding support at 34 in late April. Now it’s headed higher again. For the past month, NBIX has ping-ponged between 45 and 50, which is constructive, and it pushed to new highs today. You can start a small position here with a stop in the low 40s. Expect volatility.

NBIX Weekly Chart

NBIX Daily Chart

Meritage Homes (MTH)

Why the Strength

As the U.S. housing recovery continues to gain steam, homebuilders such as Meritage Homes benefit. A national developer of single-family homes, Meritage has nearly doubled its revenues in the last two years and earnings per share have nearly tripled as demand for new homes has perked up. It should only get better. Home sale forecasts are at their highest level in nearly a decade, boosting the National Association of Home Builders’ confidence index to its highest reading since November 2005. Mergers and acquisitions among homebuilders are also picking up after a six-year, post-subprime mortgage crisis lull—the Ryland Group merged with Standard Pacific last month in the largest deal among homebuilders since 2009. More M&A activity is expected to follow, and though Meritage isn’t currently rumored to be a buyout target, its sales and EPS growth remain strong. Revenues improved 27% in the last quarter, roughly in line with the company’s expected full-year sales growth in 2015. Its EPS growth has slowed a bit, but is still on track for an 8% improvement over last year. Bottom line: homebuilders are a great way to play the ongoing housing recovery, and Meritage looks like a leader of the group.

Technical Analysis

After a choppy end to 2014, MTH bounced back in a big way this year. A January earnings beat got the ball rolling, launching a three-month rally that pushed the stock from 31 to 49. A two-month consolidation phase followed, taking MTH back down to 42 by mid-June. But the stock has regained momentum in the last month, jumping back up to 49 before dipping slightly. It’s worth taking another look at MTH; if the stock breaks above 50, it could have a nice run ahead of it.

MTH Weekly Chart

MTH Daily Chart

LifePoint Hospitals (LPNT)

Why the Strength

A Supreme Court ruling in late June to uphold tax subsidies for ObamaCare was huge news for LifePoint. The company operates general acute care hospitals in non-urban areas, and the Supreme Court ruling should help it (and other hospital companies) get paid as they fill more beds. The ruling basically ensures that more people will have health insurance coverage, providing an annual subsidy of $272 a month for nearly nine million people who signed up for coverage as a result of the Affordable Care Act. Prior to the ruling, roughly two-thirds of those eligible for the subsidy were at risk of losing aid because they live in states that didn’t set up their own online insurance exchanges. The expected nationwide increase in hospital patients comes as LifePoint is already demonstrating some solid growth: revenues were up 25% last quarter, while earnings per share improved 28%. Both figures have now increased for four straight quarters, and sales are expected to grow for a fifth straight year in 2015. The recent Supreme Court ruling should further enhance LifePoint’s sales, and that’s attracting buyers who see earnings kiting higher from here.

Technical Analysis

LPNT had been up and down for nearly a year prior to last month’s Supreme Court ruling. As recently as June 16, the stock was trading at 74, just a tick above the 73 level it touched last July. The day after the ruling came down, LPNT broke through resistance at 77 and has kept on rising, touching 87 early this month. The stock dipped a couple points in the days that followed as volume waned, but appears to be back on the upswing again. After almost a year of trading basically sideways, this rally in LPNT still feels fresh.

LPNT Weekly Chart

LPNT Daily Chart

Illumina Inc. (ILMN)

Why the Strength

Illumina has been featured in Cabot Top Ten Trader 27 times previously, a tribute to the company’s ability to maintain and capitalize on its leadership in large-scale DNA analysis. Illumina’s genetic analyzers are used in agriculture, reproductive and genetic health assays, oncology, and by industrial and consumer genomics companies, and they enjoy advantages in speed and throughput versus their main competitors. Illumina sells the hardware that actually does the gene sequencing, as well as the disposable elements that are needed for each new test. The company gets 86% of its revenue from products, with 56% coming from the sale of consumables. Illumina’s business is also global, with 54% of revenue coming from sales in the Americas, 27% from Europe, and 19% from the Asia-Pacific region. All in all, the company is nicely diversified across industries and continents. After a flat stretch 2012, revenue growth popped 24% in 2013 and 31% in 2014, with Q1 results featuring 28% revenue growth and 72% earnings growth and a healthy 25.1% after-tax profit margin. Earnings are expected to grow 26% in 2015 and 19% in 2016. With genetic information becoming increasingly useful in so many industries, and a big advantage in intellectual property, Illumina’s future looks bright.

Technical Analysis

ILMN made a strong, accelerating run from 48 in February 2013 to 182 in February 2014, then traded in a wide range under resistance at 180 before breaking out to new highs in October 2014. After that breakout, the stock traded in a narrow range for seven months before starting another energetic rally in May 2015 that booted it from 180 to around 220 near the end of June. That’s where ILMN is now, as it consolidates its gains. The stock’s rising 25-day moving average is now around 218, and ILMN may get a boost when it catches up. With Q2 results scheduled for release after the close on Tuesday, July 21, you should keep any new investments small. A stop at the stock’s 50-day, now at 209, will provide a little protection.

ILMN Weekly Chart

ILMN 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.

FirstStockSymbolTop PickOriginal Buy RangePrice as of July 13, 2015
5/18/15Activision BlizzardATVI24-25.526
1/19/15Acuity BrandsAYI145-150194
6/29/15Adobe SystemsADBE80-8281
5/11/15AMAG PharmaceuticalsAMAG58-6172
6/29/15Arista NetworksANET79-8279
6/29/15Avery DennisonAVY60-61.562
6/22/15Bank of the OzarksOZRK46-47.546
7/6/15BioMarin PharmaceuticalsBMRN137-139145
5/26/15Cal-Maine FoodsCALM
6/15/15Charles SchwabSCHW32-3333
6/29/15Community HealthCYH
6/1/15Dunkin’ BrandsDNKN52-5357
11/17/14Electronic ArtsEA40-4274
6/15/15Gilead SciencesGILD
5/11/15Global PaymentsGPN100-102106
7/6/15Hain CelestialHAIN64-6768
4/27/15HD SupplyHDS32-3435
3/16/15Horizon PharmaceuticalsHZNP
6/22/15Insys TherapeuticsINSY37.5-39.538
6/1/15Ligand PharmaceuticalsLGND
6/22/15Lions GateLGF35.5-3737
2/16/15Martin Marietta MaterialsMLM138-145153
4/27/15Men’s WearhouseMW55-5762
3/2/15Norwegian Cruise LinesNCLH47.5-49.559
9/15/14Palo Alto NetworksPANW
6/29/15Sealed AirSEE51-52.553
6/15/15Signature BankSBNY140-145149
6/29/15SVB Financial GroupSIVB141-145145
12/1/14Tableau SoftwareDATA81-85121
5/18/15Tesla MotorsTSLA237-244262
10/6/14Ulta BeautyULTA
12/8/14Valeant PharmaceuticalsVRX
7/6/15Valero EnergyVLO63-6567
3/9/15WhiteWave FoodsWWAV39.5-4150
5/18/15Zebra TechnologiesZBRA106-109111
6/8/15Zo?s KitchenZOES35.5-37.542
None this week
5/26/15AO SmithAOS69-70.568
5/4/15Bluebird BioBLUE134-140164
4/20/15Builders FirstSourceBLDR12.5-13.513
5/26/15CF IndustriesCF311-31862
DROPPED: Did not fall into suggested buy range within two weeks of recommendation
None this week