July 15, 2013
The market has done a complete 180 during the past month—all of the major indexes are in good shape and hundreds of stocks (especially growth-oriented stocks) are surging. Of course, there’s still risk out there—earnings season is getting underway, and as always, there’s sure to be a few potholes ahead, but the odds favor higher prices, so you should be working to get heavily invested. This week’s Cabot Top Ten Trader has a few newer names, but our favorite is a big winner from recent months that just exploded to new highs on huge volume.
Lots of Power!
What a difference a few weeks make! In late June the market was on its knees as fears of Fed tapering took hold. Today, though, those fears have given way to optimism, with all major indexes and hundreds of stocks surging to new highs. Yes, earnings season is getting underway, which always adds risk to the equation; we’re sure we’ll see a few potholes in the weeks ahead as some firms miss estimates. But the evidence has turned clearly bullish, and the path of least resistance is up. Thus, you should be working to get heavily invested in some of the strongest stocks in the market.
This week’s list has many familiar faces, as well as a broad representation among sectors. Our favorite of the week is Santarus (SNTS), which has enjoyed a huge run in recent months, but sales and earnings growth are huge, and the stock has exploded higher on big volume. Pullbacks are possible, but higher prices are likely over time.
|YY Inc. (YY)||0.00|
|The ExOne Company (XONE)||0.00|
|Tesla, Inc. (TSLA)||818.87|
|Nexstar Media Group (NXST)||105.68|
|Krispy Kreme Doughnuts (KKD)||0.00|
|Delphi Automotive (DLPH)||0.00|
|Conn’s Inc. (CONN)||0.00|
|Bloomin’ Brands (BLMN)||0.00|
YY Inc. (YY)
Why the Strength
Many Chinese stocks that get attention from Western investors can be described by comparing them to a U.S. company, like saying Baidu is “the Google of China.” But YY Inc. doesn’t have an exact equivalent; it operates an online social platform that gives users various choices. YY.com is the portal where users download YY Client (for PCs) and Mobile YY (for smartphones) that allow access to channels like Duowan.com, a site that offers access to (and information about) Web games. The main attraction of YY Inc.’s website is a karaoke popularity contest, where different users download their performance of a song and viewers rate which one they like better. Another channel allows users to interact in voice, text and video in real time without any downloads or installations, which allows group chats and educational tutorials on foreign languages and civil service exams. Most of the company’s revenue comes from the sale of ads and some game-related items, with additional money coming from memberships that give access to VIP avatars, emoticons and such. Chinese consumers spend a larger proportion of their time online, logging 47% of their media usage from the Web, as opposed to around 25% for U.S. consumers. So YY Inc.’s mix of entertainment, games and interaction has been making big headway, allowing triple-digit revenue growth for the last three years. The company turned profitable in 2011 and Q1 results showed continued triple-digit revenue growth (134%) and earnings growth (156%).
YY is a recent IPO, coming public in November 2012 at 10.5, and it’s been a real rocket. The stock has never traded below its IPO price and corrections have been relatively shallow. Volume picked up in May as institutional investors began nibbling at the stock below 20. The last couple of days have been huge as the stock surged above resistance at 30 that has been in place since May 22. Volume spiked above two million shares a day in July 9 and 11. The stock’s huge gains in the last few trading days create a challenge in buying in; the sprint from 30 to 36 has left the stock’s 25-day moving average far behind at 29. You can either take a small position or wait for a correction of a couple of points. A stop in the high 20s makes sense.
YY Weekly Chart
YY Daily Chart
Why the Strength
Yelp’s story is both incredibly lucrative and easy to grasp: The company is aiming to be the Yellow Pages of the mobile and Internet-connected world. (Indeed, the firm’s name came from shortening Yellow Pages.) Today the company’s 102 million monthly users (up 43% from a year ago) have written north of 39 million reviews (up 42%) on tens of thousands of restaurants and other attractions in dozens of markets in the U.S. and overseas. Much of the action is occurring in the mobile realm, with more than one-third of all local ads placed through Yelp’s mobile apps. Yet the firm is only scratching the surface of its potential—the old school Yellow Pages is still a $7 billion business, and it’s only a matter of time until most of that shifts online, most likely to Yelp! Of course, this isn’t just about helping consumers find great restaurants. It’s also a boon to local businesses, 45,000 of which now have active accounts with Yelp, because doing so has proven to help results. Because the company is still expanding into new markets, earnings are hovering just south of breakeven, but revenue growth is robust (63%, 65% and 68% the past three quarters) and the bottom line should jump into the black near year-end. Long-term, we think this is a huge story and, as Yelp is far and away the leader in the industry, results going forward seem predictable.
YELP is acting like a real leader. The stock broke out to new all-time highs after its earnings report in late-April, but with the market hitting resistance soon after, the stock etched a jagged seven-week zone. Now that the buyers are back in control of the market, YELP is zooming—it’s up seven weeks in a row and surged to new highs on big volume last week. Yes, it’s extended, and the ride is sure to be volatile, but we think you could start a small position below 38, and then see how earnings are received (likely in early August).
YELP Weekly Chart
YELP Daily Chart
The ExOne Company (XONE)
Why the Strength
The 3D printing industry has lots of competitors, including some big companies for whom the 3D business is just a promising sideline. But ExOne, along with Stratasys (SSYS) and 3D Systems (DDD), is a dedicated 3D company with huge potential. ExOne is small, with just over a 1% market share, but management expects that to grow to 3% in 2013. It’s not making money yet, but forecasts are for profitability to arrive by the end of the year. ExOne’s business plan differs from that of its biggest rivals, concentrating on sales of 3D printers (and consumables) rather than contract manufacturing. The company’s lineup of printers includes machines that will print in specialty silica sand (to make casts for metal parts) and metals in sizes that run up to 70 inches by 39 inches by 27 inches. It also makes a laser machining system that can do precise modeling on cast metal parts. ExOne has production service centers in the U.S., Germany and Japan that offer training, service and tech support for its machines. It also sells consumables and replacement parts. ExOne’s customers include aerospace, automotive, heavy equipment, energy/oil/gas and other industries. 3D printing is a revolutionary technology with the potential to disrupt manufacturing and the replacement parts industry, while saving huge transportation and warehousing costs. ExOne is the little brother in the industry, but it has big potential.
XONE has been a rocket since it came public at 18 in April. The stock hasn’t experienced a correction longer than three days during its short life, but since it tagged 75 briefly last Tuesday, it has slipped significantly lower. It’s still above its 25-day moving average at 58, so this may be a chance for late-comers to get in on the stock. The last time XONE appeared here, the buy range was 48 to 50. We’ll raise that to 60 to 62, but caution that a stock with this much upward momentum could experience a sizable turnaround. So if you buy here, keep a stop in the 53 to 54 area.
XONE Weekly Chart
XONE Daily Chart
Tesla, Inc. (TSLA)
Why the Strength
For a company that really hasn’t had much substantive news in recent weeks (its last big announcement was a huge expansion in its Supercharger network for Model S vehicles), Tesla has certainly been in the news a bunch, with just about every investor seeming to have an opinion on the stock. We’ll leave the super bullish and bearish predictions to everyone else and just stick with what we see—a very strong stock with the potential to revolutionize one of the biggest industries in the world. Of course, Tesla has a long way to go before it does that, but investors are looking at the success of the Model S and figuring that, if the company can launch a new electric vehicle every couple of years, there’s no reason it can’t see its revenues grow manyfold in the years ahead. The main risks here seem to be production issues in the short-term (any hiccup in output could take all the hot money out of the stock), as well as potential competition from bigger car makers in the long-term. Frankly, either is possible, but thus far, the company has executed well, and in terms of competition, it’s important to remember Tesla was built from the ground up to lead the electric vehicle market, while the big automakers have huge amounts of “old world” legacy costs and similar mindsets. There’s definitely risk, but the potential reward remains even bigger.
If TSLA wanted to pull back sharply, it had every opportunity to do so during the market’s correction. Instead, the stock fell a maximum of 23% (in late-May), and then etched a couple of higher lows as the market sold off. And now it’s hitting new highs again! Yes, TSLA is extremely volatile (the stock’s range averages five or six points per day), but it’s a rare story and the stock is showing rare strength. If you don’t own any, you could nibble here or on weakness, with a loose stop in the mid-100s.
TSLA Weekly Chart
TSLA Daily Chart
Why the Strength
Biopharmaceutical firm Santarus received a major vote of confidence last week, after an analyst at JPMorgan said that the market was underestimating the potential of the company’s latest drug. Specifically, Santarus is developing a medication called Ruconest designed to treat hereditary angioedema—an immune-system disorder that causes various parts of the body to swell. One of the strengths of Ruconest, noted the analyst, is that the drug is biological in nature, meaning that it will be harder to reproduce in generic form. After displaying impressive Phase III trial results, Ruconest was officially submitted to the FDA via a Biologics License Application on June 18, with most analysts expecting approval by early next year. The drug is already approved in Europe, and has been granted orphan drug status in the U.S., which should speed up the FDA approval process. While speculators wait on Ruconest, Santarus is already riding high off its most recent blockbuster medication, the bowel-disease drug Uceris. Despite just receiving approval in January, Uceris has prompted a surge in Santarus’ bottom line, with sales of the new medication pushing first-quarter revenue and earnings 73% and 167% higher, respectively. With Uceris still in the early stages of market acceptance, and Ruconest looming on the horizon, Santarus remains an outstanding investment in the biotechnology sector.
SNTS remains in a long-term uptrend that has seen the stock gain roughly 200% since early September 2012. September was important for SNTS, as the stock finally overtook its 50-day moving average following a rough August basing period. Shares have only shown one spot of weakness since, dipping below their 50-day briefly in late June. But SNTS recovered quickly in the wake of a positive analyst note, and shares have since broken out to a fresh all-time high above 25. We’d prefer to accumulate on a dip of about a point to near 24, but the huge upside volume tells us pullbacks should be limited.
SNTS Weekly Chart
SNTS Daily Chart
Nexstar Media Group (NXST)
Why the Strength
The U.S. television broadcasting industry is in the middle of a consolidation phase that has companies buying up independent stations and smaller networks. Nexstar, which began with a single TV station in Pennsylvania in 1996, has been a leader in this buyout surge, spending $650 million to acquire new stations in the past 24 months. Nexstar now has 72 stations in 41 different U.S. markets and has said that it is looking to spend another $650 million for acquisitions in the next two years! Nexstar turned profitable in 2012, largely as a result of CEO Perry Sook’s policy of raising retransmission fees to cable operators who take its content and air it. Growth will come from both new buyouts of existing stations and increased revenue from future hikes in retransmission charges. The company has also been the center of buyout rumors a couple of times in the past, and Sook has said that he would consider a sale if an offer included a substantial premium to the stock’s existing price. Nexstar always enjoys a big hike in advertising revenue during national election years, but Q1 results recorded the company’s best free cash flow ever for a non-political year. Nexstar has the money to keep on growing. Q2 results are due on August 7.
NXST traded sideways for more than two years from April 2010 through July 2012. But once the stock got moving in July 2012, it took just three months to more than double from 6 to 13. A three-month correction from 13 to 9 from October 2012 through December was marked by a big increase in trading volume, as NXST began to attract larger investors. The stock is still in the rally that began in December. It’s now trading at just below 40 and its RP line shows that it’s outpacing the broad market by a wide margin. A four-week consolidation in May and early June settled NXST down and it has been streaking higher since then. Such a long, uninterrupted rally has produced a 25-day moving average that’s streaking higher right along with the stock. NXST experiences an occasional down day, and a drop of at least half a point is a good buying opportunity. Use a stop at the 50-day (now at 31).
NXST Weekly Chart
NXST Daily Chart
Krispy Kreme Doughnuts (KKD)
Why the Strength
Krispy Kreme, making its debut in today’s Cabot Top Ten Trader, has come a long way since its first doughnuts floated off its mechanical production line in Winston-Salem, North Carolina, in the summer of 1937. The company’s doughnuts and coffee became a huge hit across the U.S. south, but have now gone global. Krispy Kreme now has 773 stores in 22 countries. The company’s signature product is produced on a fully automated production line that allows customers to watch the doughnuts cooking. And a special “Hot Doughnuts Now” sign is illuminated when a fresh batch in being made, encouraging impulse purchases. On the business side, Krispy Kreme runs a vertically integrated business that starts with a plant producing the proprietary mixes that go into the doughnuts and ends with automatic restocking in many grocery stores. The company went into a five-year growth slump in 2006 after a national expansion program ran into cash-flow problems and an embarrassing accounting scandal. But growth resumed in 2011 and the latest quarterly results showed 11% revenue growth and 43% earnings growth. In contrast to the helter-skelter expansion during the mid-2000s, Krispy Kreme is a model of responsible expansion. The company’s Q2 earnings announcement is scheduled for the week of August 19.
KKD spent just over two years trading in a narrowing range with support at 6 and resistance gradually declining from 10 to 9 to 8. The breakout came in November 2012, when a quarterly report torched analysts’ expectations. The latest surge in KKD came at the end of May, when another excellent earnings report kicked the stock from 14 to above 17 in a day. It took the stock just four weeks to digest that bounce, and KKD is now trading over 20 on calm volume. We will avoid the temptation to label KKD a sweet investment, but it looks like continuing international expansion will keep the stock hot for a while. A dip below 17 would be bearish.
KKD Weekly Chart
KKD Daily Chart
Delphi Automotive (DLPH)
Why the Strength
While automotive parts producer Delphi has a bit of a rough-and-tumble history, the company is making a serious comeback. After declaring bankruptcy in 2005, a new and improved Delphi emerged from a massive restructuring in 2011. The company derives 45% of its revenue from Europe, the Middle East and Africa, 31% from the U.S. and 15% from Asia. That said, growing strength in the U.S. automotive market and a rapidly growing demand for automobiles in China have been the biggest boons for Delphi. Bolstered by ultra-low rates in the U.S., improving consumer spending, and pent-up demand for new cars—the average age of new cars in the U.S. was 11 years in 2012—Delphi saw new bookings of 33% in North America in the first quarter. What’s more, the recovering American auto industry has prompted institutional investors to snap up Delphi shares as a way to take advantage of the sector’s growth potential. Elsewhere, the company sports an impressive after-tax profit margin of 8.3%, and appears to be a competitive bargain when comparing its P/E ratio with the rest of the sector. Lastly, Delphi recently initiated an attractive dividend, yielding 1.6%. We continue to believe that there is a lot to like about Delphi.
Since going public in November 2011, DLPH has gained more than 160%. Shares had a rather tame start, trending sideways through the end of 2011 before rallying into resistance 33 in January. The stock then pulled back to a low near 25 in July before reversing course. DLPH hasn’t looked back, rallying steadily along its 10-week moving average, and breaking out to fresh all-time highs near 55 last week. Shares are a bit overbought here, so you can buy on pullbacks of a point or two.
DLPH Weekly Chart
DLPH Daily Chart
Conn’s Inc. (CONN)
Why the Strength
Since going public nearly a decade ago, Conn’s, a plumbing company turned electronics and home goods retailer, has steadily expanded its reach and sales to rival many of the big box electronic retailers in the U.S. With growth centering around its HomePlus store concepts, the company has averaged quarterly revenue of more than $200 million during the past five years. What’s more, the most recent two quarters have seen Conn’s rake in revenue north of $250 million for the first time since 2008. The company continues to beat out larger competitors with its strong pricing power and expanding product line. Currently, Conn’s sells a wide variety of products, ranging from home appliances to furniture, with the company continually responding to consumer demand. In fact, mattresses and furniture have been big contributors this year, contributing to double-digit same-store sales growth. Conn’s biggest advantage is its flexible in-house credit, which allows the retailer to attract low income earners who would likely be turned away at Big Box retailers. The company’s growth formula is paying off, and with analysts projecting that Conn’s could see a quadrupling of its 70 stores in the next 10 years, we expect the company to continue to pay off big for investors.
It’s hard not to like a stock that has surged nearly 10-fold during the past two years. Sure, CONN kicked off 2013 with a nearly-month long consolidation period near 28, but shares have put that breather to good use, nearly doubling in value so far this year. CONN’s current rally has been underscored by its 10-, 25-, and 50-day trendlines, with the latter providing a key backstop on June 24. Following this test of trendline support, CONN has broken out to fresh all-time highs near 58. A period of consolidation may be in the cards following this run up, providing an excellent opportunity to buy into the rally or add to your position. You can buy on pullbacks of a point or two.
CONN Weekly Chart
CONN Daily Chart
Bloomin’ Brands (BLMN)
Why the Strength
Most investors focus solely on expected growth when evaluating a stock’s prospects ... and that’s a great place to start. However, we know for a fact that many institutional investors also weigh the dependability of earnings—a chip or software firm, for instance, could see its rapid growth upended by a competitor in short order. But a proven retail concept with solid name recognition, like Bloomin’ Brands, is much more likely to grow steadily for many years, which can attract dozens of fund managers over time. As we wrote two weeks ago, Bloomin’ is riding the success of Outback Steakhouse both here and abroad, though it also has enticing expansion plans for the years ahead; it’s aiming to move into the lunch market, which could be huge (the industry gets 30% of its business from lunch sales, versus just 7% for Bloomin’), and it’s remodeling and relocating hundreds of Outback locations with great success. Moreover, it’s expanding some of its secondary chains like Carrabba’s Italian Grill and Bonefish Grill, and boosting its overall international store count by about 10% this year alone. There’s nothing revolutionary here, but 20%-ish earnings growth for the next few years seems like a great bet, as long as management continues to pull the right levers.
BLMN got going in mid-April and hasn’t had a meaningful pullback yet—it’s only closed below its 25-day moving average once since then! That won’t continue forever, of course; in fact, we’ve noticed a dry-up in buying volume during the past few days as the stock has nosed to new highs before today’s retreat. Even so, that’s the very short-term—if you want in, we think this dip toward the 25-day line can be bought, with a stop below the 50-day line.
BLMN Weekly Chart
BLMN 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.
|First||Stock||Symbol||Top Pick||Original Buy Range||Price as of July 15, 2013|
|6/17/13||Delta Air Lines||DAL||18-19||19|
|3/18/13||Lion’s Gate Entertainment||LGF||21-22.5||33|
|5/28/13||Old Dominion Freight||ODFL||42-43||44|
|6/10/13||Pioneer Natural Resources||PXD||139-144||153|
|WAIT FOR BUY RANGE|
|4/8/13||Green Mountain Coffee||GMCR||53-55||73|
|DROPPED: Did not fall into suggested buy range within two weeks of recommendation.|
|7/1/13||American Axle & Mfg.||AXL||17.5-18.5||20|