Support Should Hold if All’s Well
Last week’s post-holiday action was suspicious and a bit abnormal; many stocks gave up two or three weeks of gains in just a day or two, and on big volume to boot. That said, very few stocks actually broke down (many fell down to their 50-day moving averages before bouncing), and the major indexes are in good shape, so we remain bullish. But our main thought is that, if last week was just a typical bull market shakeout (possibly some pre-earnings season jitters), most stocks should hold last week’s lows and resume their major uptrends. But in case the selling intensifies, you should have some stops in place for your weaker holdings.
The good news is we’re still seeing many good looking charts, including most of this week’s list. Our Top Pick is Adobe (ADBE), a software giant that’s enjoying new growth from its new focus on the cloud.
| Stock Name | Price | ||
|---|---|---|---|
| Zebra Technologies (ZBRA) | 154.94 | ||
| Synaptics (SYNA) | 0.00 | ||
| SunEdison (SUNE) | 0.00 | ||
| KLA Corp. (KLAC) | 158.80 | ||
| Health Net (HNT) | 0.00 | ||
| Barrick Gold (GOLD) | 27.20 | ||
| Freeport-McMoRan Inc. (FCX) | 13.78 | ||
| Concho Resources (CXO) | 0.00 | ||
| Bitauto Holdings (BITA) | 0.00 | ||
| Adobe Inc. (ADBE) | 315.23 |
Zebra Technologies (ZBRA)
Why the Strength
Zebra Technologies is a giant in the business of knowing where assets are, primarily through its lineup of bar code and QR code printers that allow its customers to track goods in retail settings, factories and medical facilities. Zebra has the largest installed base of bar code printers in the world, and it has moved aggressively into RFID (radio frequency identification) and UWB (ultra wideband) tracking technologies. Along the way, the company has moved from an engineering company making printers to an integrated business intelligence provider whose products make sure the right meds get to the right patients and that products are where they should be in the supply chain. The company’s latest move in this transformation was the acquisition of Motorola Solutions’ enterprise business, making Zebra an instant force in mobile enterprise computing, data capture and RFID with a strong services component and significant scale in procurement, manufacturing and logistics. Zebra provides services to 95% of the world’s Fortune 500 companies, and the Motorola acquisition opens the door to higher-margin services delivered through a global network. Zebra will release its latest quarterly results on August 5.
Technical Analysis
ZBRA spent years as a mediocre performer, occasionally delivering a stretch of a few good quarters, but mostly just matching the market. The stock got an energy boost when the company’s earnings report on February 19 kicked the stock from 57 to 65 on good volume. News of the Motorola acquisition caused a dip to 60 on high volume, but the stock quickly rebounded and began trading strongly higher. With ZBRA now near 84, consolidating its latest rally for a couple of weeks, the setup looks good. ZBRA is buyable on a pullback of a point with a stop at the 50-day moving average, now at 77.5.
ZBRA Weekly Chart
ZBRA Daily Chart
Synaptics (SYNA)
Why the Strength
When we last recommended Synaptics in early June, we mentioned that the touchpad developer was in talks to acquire Renesas SP Driver—the sole supplier of display driver chips for Apple’s iPhone. That deal finally came to pass on June 11, with Synaptics acquiring the company for a steal at $475 million. Over the past 12 months, Renesas SP Drivers has generated $650 million in revenue with a cash flow of $100 million. Additionally, Apple is expected to ship some 180 million iPhones in 2014, with every unit going through Renesas at $1 to $2 each. As a result of the deal, Synaptics boosted its fourth-quarter revenue guidance to $300 to $310 million, versus analyst expectations for $282 million. The deal not only scores Apple as a customer, but Synaptics also gains market share in the entry-level and mid-level touchscreen markets. Possibly the biggest bonus to the acquisition, however, is that Synaptics can utilize Renesas’ technology to more rapidly integrate fingerprint-scanning technology into touch displays. Such a move could lead to significant market opportunities, especially since Synaptics is now providing “munitions” for both sides of the escalating Apple/Samsung smartphone and tablet battle.
Technical Analysis
In early June, when we last checked in on the stock, SYNA was in the process of consolidating earnings-related gains just below long-term resistance in the 70 region. Shares had been largely contained to a trading range between 55 and 70. Following the Renesas acquisition, SYNA surged more than 25%, gapping above 70 and pushing to new all-time highs north of 90. The stock has spent the past several weeks digesting those gains, building support in the 90 region. Shares are now pulling back to their rising 25-day moving average, providing an opportunity to buy into the rally, or add to your current holdings.
SYNA Weekly Chart
SYNA Daily Chart
SunEdison (SUNE)
Why the Strength
SunEdison has gone through a couple of big changes in the past decade. The first was its 2006–2007 name change from MEMC Electronic Materials to SunEdison and a change in strategy from mostly manufacturing silicon for the semiconductor and solar industries to focusing solely on solar (thus the new name). The other big change came a couple of years ago when the company was being battered by low-cost solar panels from China. At that time, the company formed a wholly owned subsidiary that would access stock market financing for its solar projects, lowering its cost of capital. SunEdison has now turned around completely, and is bidding aggressively for large-scale solar projects worldwide. Earlier this month, the company closed on its acquisition of a $179 million stake in Silver Ridge Power and its 336 megawatts in solar-power capacity. And just last week, SunEdison announced a contract to install a 159 kilowatt micro-grid project in India. With India planning to commission 20,000 megawatts of solar generating capacity by 2022, this win raises the odds that some of that project will come SunEdison’s way, adding to its roster of global project wins. The company is expected to release Q2 results in early August.
Technical Analysis
SUNE has been one of the strongest stocks on any exchange since it bottomed at 1.4 in the middle of 2012. Yet it’s been fairly sensitive to news affecting the solar industry, with six significant corrections or consolidations during its climb from 1.4 to its current new high near 24. SUNE formed a four-month cup pattern from 22 in early March to 16 in April and May, then back to 22, where it formed a nice handle in late June. SUNE has been quite volatile, so it makes sense to look for a pullback of at least half a point as an entry. A stop at 21 will give SUNE some room to move.
SUNE Weekly Chart
SUNE Daily Chart
KLA Corp. (KLAC)
Why the Strength
KLA-Tencor is one of the world’s largest manufacturers of process control equipment for the semiconductor industry. In other words, KLA makes the machines that help other manufacturers make chips. While the semiconductor sector has been plagued by slow cyclical demand, industry reports indicate that production may be on the upswing once again. For instance, an early June report from industry association SEMI predicts that fabrication equipment spending will rise 14% to $35.7 billion in 2014, and by 11% to $39.5 billion in 2015. KLA has already seen the leading edge of this cycle creep into its earnings results, with revenue rising by 5% and 14% during the past two quarters. While the cycle is starting a bit too late to impact 2014 sales, which are forecast to slip 10%, fiscal 2015 sales are seen rising by 20%. Additionally, if SEMI predictions hold true, these forecasts for KLA revenue growth could be revised upward. For its part, KLA is already using its increased cash flow to reward investors, boosting its quarterly dividend by 11% and increasing its share buyback program by 13 million shares, or roughly $1 billion. With evidence of a strong balance sheet heading into the next cycle, there’s a lot to like about KLA’s prospects.
Technical Analysis
After experiencing choppy growth during 2011 and 2012, KLAC found its footing last year. With its uptrend stabilizing along support at its 10-week and 25-week moving averages, KLAC added nearly 30% in 2013, topping out just shy of 65. The stock entered 2014 flat before rallying sharply to tempt the 70 region. April weakness in the market sent KLAC down for a test of support near its 200-day moving average, from which shares have rebounded nicely. In fact, KLAC has bounced back more than 18%, eclipsing resistance at 70 to trade near 13-year highs just shy of 75. We believe the stock is buyable here, with a stop at 70.
KLAC Weekly Chart
KLAC Daily Chart
Health Net (HNT)
Why the Strength
Health Net is a California-based company that provides and administers health benefits to about 5.5 million people across the U.S., primarily through group, individual, Medicare, Medicaid, DoD, TRICARE and Veterans Affairs programs. Health Net has been consistently profitable for years, and the advent of the Affordable Care Act has created a wider target audience for its health plans. After four years of gradually declining annual revenue, the company’s earnings rebounded from a low of 31 cents per share in 2012 to $2.12 per share in 2013. Estimates for 2014 are for 10% EPS growth, but that soars to 35% growth in 2015. The most recent significant news for Health Net was its May 6 earnings report that disappointed slightly on both revenue and earnings, but included a forecast that it would acquire up to 120,000 new members from sign-ups under the Affordable Care Act. Investors also see great potential for the company to expand from its current emphasis on the Western region of the U.S. to a national force. Health Net will report Q2 results on August 6 before the market opens.
Technical Analysis
HNT built a 15-week base from January to May, trading in a range from 31 to 36 on stable volume. The May 6 blastoff on monster volume kicked the stock from 34 to 38 and led to a follow-up rally to 40 in mid-May. At that point, HNT traded in a remarkably tight range for almost six weeks, trading flat within a point of 40. The new breakout came in late June when the stock jumped to 43 in five trading days. HNT has now traded as high at 44, a multi-year high, but should be buyable on any dip below 43. HNT isn’t especially volatile, so a dip below 40 would be a bearish sign.
HNT Weekly Chart
HNT Daily Chart
Barrick Gold (GOLD)
Why the Strength
Gold stocks have come alive in recent weeks after what looks like a possible major bottom for the group. We’ve already written about a couple of new leaders in the group, and this week our focus is Randgold, which is technically located in Britain but has operations in central and (especially) eastern Africa. The firm hit it out of the park during the gold bull market; it ramped up production at some new mines and took advantage of higher gold prices, driving earnings from 54 cents per share in 2007 to $4.65 in 2012. The bottom line has backed off since, but with gold prices likely bottomed, Randgold is back on the growth track, with earnings possibly hitting a new high in 2015 as some relatively new mines boost production. And, just in case gold prices take a new leg lower, management recently stated that the firm would still be profitable at gold prices of just $1,000 per ounce. There’s no amazing growth story here, but a new bull market in gold stocks would result in a great run for Randgold.
Technical Analysis
GOLD basically topped out in late-2011 in the 120 area (though it did nose out to 127 during 2012) and then was cut in half by July 2013. But that began a bottoming process—shares successfully re-tested the 60 level in January, rallied for a bit, and then had one last pullback (to 72) into June. Since then, GOLD has soared toward 90 with hardly any pullbacks along the way. If you really want in, you could nibble here, but we’d prefer to buy on dips, as gold stocks often offer opportunities on weakness.
GOLD Weekly Chart
GOLD Daily Chart
Freeport-McMoRan Inc. (FCX)
Why the Strength
Formerly specializing in copper and gold, mining concern Freeport-McMoRan expanded into the oil and gas markets last year with acquisitions of Plains Exploration & Production and McMoRan Exploration in combined deals of roughly $9 billion. While the diversification is a bonus, Freeport still derives most of its income from copper and gold, which accounted for 64% and 14% of revenue in 2013. In fact, the company is the second largest copper producer in the world, and a major player in the gold and molybdenum markets, with mines in Indonesia, North America, South America and Africa. Freeport has long been a solid growth investment, but the company has shown a recent burst of strength due to rising metals and oil prices. Specifically, after hitting a low in June, gold and copper prices have rebounded about 8%, with growth in China driving increasing demand for copper. Additionally, while new regulations in Indonesia have snarled copper mining growth by 3.3% for Freeport, the company appears to be gaining support with the government, pointing toward a potentially positive resolution. In addition to diversifying into oil markets, Freeport has moved to divest underperforming assets, such as its Candelaria Mine in Chile, which was just purchased by Lundin Mining for roughly $2 billion. With management’s plan finally taking hold, we like Freeport’s growth prospects.
Technical Analysis
FCX has had a rough ride during the past couple of years. After peaking near 60 in early 2011, the stock went on a month-long grind lower, finally bottoming near 26 in late June 2013. The stock rebounded sharply from that low, tagged a peak near 38 in January, and settled into a basing pattern between 30 and 35 for most of 2014. Recently, however, FCX has come back to life. It’s eclipsed its January high and appears poised to extend those gains as volume remains strong. We like the shares here, with a target near 38.
FCX Weekly Chart
FCX Daily Chart
Concho Resources (CXO)
Why the Strength
Concho Resources continues to look like an institutional-quality leader in the oil patch, combining a huge acreage position in one of the fastest-growing shale areas (Permian Basin), an aggressive drilling program, an oil-heavy output and a history of executing on its plans. The firm’s latest presentation (it updates it every month or two) shows it has an almost unbelievable 22,000 drilling locations on its 605,000 net acres (for comparison, it drilled 127 wells in the first quarter), and it’s ramping up its drilling program—the first quarter saw production growth of 18% (64% of which was oil), but 2014 as a whole should be up 22% and growth will accelerate from here. In fact, Concho is aiming to double production by the end of 2016! Earnings growth is likely to be choppy in the short term as drilling-related expenses pick up, but the bottom line should increase 22% this year, 28% in 2015 and analysts see a 50% gain in 2016. Being in low-regulation Texas, we see little chance that Concho won’t execute on its growth plans, so as long as oil and liquids prices remain elevated, cash flow should surge in the quarters ahead.
Technical Analysis
CXO was a big winner from 2009 to 2011, but then entered a long, nearly three-year sideways period as results stagnated (it was heavy into natural gas back then). But the new horizontal drilling-heavy program sparked a new advance, with CXO lifting to new highs in heavy volume in April. While the stock hasn’t wowed since then, it’s made steady progress, including pushing to new highs on good volume last week. We think dips are buyable, with a stop near the 50-day line.
CXO Weekly Chart
CXO Daily Chart
Bitauto Holdings (BITA)
Why the Strength
With five appearances in Cabot Top Ten Trader in the past eight months, BitAuto is getting to be a familiar story. This Chinese company occupies an important position in the Chinese auto market, maintaining a website that gives consumers access to a huge amount of information about cars, including prices, specifications, dealerships, reviews from the automotive press and feedback from consumers. From the supply side, BitAuto’s site offers an opportunity to attract customers with online showrooms, advertising and a place to answer questions and establish a dialogue. Manufacturers can also build their own websites on the BitAuto site. Thus, BitAuto helps everyone involved. There is a similar service for used cars. BitAuto’s earnings are forecast to grow 50% in both 2014 and 2015. With revenue up 47% and earnings up 100% in the company’s Q1 report, that seems reasonable, as even the minor decline in the growth rate in China hasn’t dented the public’s appetite for buying cars. BitAuto will likely report its Q2 results in the first half of August.
Technical Analysis
BITA has been in a strong uptrend since it put in a double bottom at 3.5 in January and July 2012 after a long, painful post-IPO correction. BITA corrected from 46 to below 30 in March and April when Chinese stocks were out of favor as a group. But after a high-volume down day on June 3, BITA got moving quickly and topped 50 last Friday. Today’s action has it in new-high territory again. BITA is a volatile issue, and a little patience in picking an advantageous buy point will pay off. Look for a pullback of at least a point to get in and use a stop at 44.
BITA Weekly Chart
BITA Daily Chart
Adobe Inc. (ADBE)
Why the Strength
Adobe Systems is one of the largest software firms in the world, with popular design products like Acrobat, Flash and Photoshop. The firm fell on hard times in recent years, but it’s beginning a major turnaround as it focuses on the cloud—instead of getting larger (but one-time) upfront payments, it’s transitioning to a pay-per-month model, with customers having access to constantly updated versions of Adobe’s software (which it’s divided into two segments, the Creative Cloud and the Marketing Cloud). While the transition to a cloud model has damaged results in the short-term, institutional investors are focused on the firm’s big customer growth, driven by the lower initial price point and better overall value proposition. In the quarter ending in May, Adobe ended with 2.3 million Creative Cloud subscriptions, up 464,000 from the prior quarter; total recurring subscription-based revenue made up more than half of all revenue. And, pointing to the future, deferred revenue zoomed to a record of $929 million. The valuation is big, but growth should begin to soar next year, and a small share repurchase plan (it’s bought back nearly 2% of the company in the past two quarters) is a nice cherry on top. We like it.
Technical Analysis
ADBE has been doing well since the start of 2013, rising from around 38 to the low 70s today. There have been many bases and breathers along the way, including the recent 20% correction during the spring. But ADBE came back with the market, and broke out strongly on earnings in mid-June. The pullback since then has been mild, so far holding its 25-day moving average. Short-term wiggles are possible, but we think you can start a position here with a stop near 67.
ADBE Weekly Chart
ADBE 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.
