Improvement, but Earnings will be Key
Current Market Outlook
Last week’s rally was very encouraging. Some major indexes and a handful of leading growth stocks hit new highs, and many others set up well. Coming after a six-week consolidation, it’s enough to put some sidelined cash to work, and we’re bumping our Market Monitor up a notch in response. That said, be sure to keep your feet on the ground and pick your spots, as the rally has come on extremely light volume (not the end of the world, but it does show a lack of conviction), the Nasdaq is still shy of new highs, and earnings season, which is now underway, is sure to have a big impact on individual stocks into early August.
This week’s list has a broad array of stocks from various sectors that attracted buyers as soon as the pressure came off the market. Our Top Pick is Western Digital (WDC), which lifted to new highs on good volume last week and has already preannounced solid results.
| Stock Name | Price | ||
|---|---|---|---|
| Applied Optoelectronics (AAOI) | 0.00 | ||
| CoStar Group (CSGP) | 589.55 | ||
| Dana Holding (DAN) | 0.00 | ||
| E*Trade Financial (ETFC) | 0.00 | ||
| Facebook, Inc. (FB) | 0.00 | ||
| IPG Photonics (IPGP) | 0.00 | ||
| Kite Pharma (KITE) | 0.00 | ||
| New Relic (NEWR) | 103.70 | ||
| Ryanair DAC (RYAAY) | 0.00 | ||
| Western Digital Corporation (WDC) | 0.00 |
Applied Optoelectronics (AAOI)
Why the Strength
Applied Optoelectronics specializes in fiber-optic networking products that serve the cable TV, fiber-to-the-home and internet datacenter markets. This relatively small (market cap of $1.6 billion) company based in Sugar Land, Texas is reaping the rewards of a product line that caters to the industry upgrade from 40G (40 gigabit-per-second) data speeds to the current 100G standard. Applied’s quality and capacity has resulted in new contracts from Amazon, Microsoft and Facebook, which have had a great effect on the bottom line as demand continues to outstrip supply. As a result, the stock has been attracting investors with a series of strong revenue and earnings results that came in well ahead of analysts’ expectations. Q4 2016 numbers featured a 60% jump in revenue and a powerful 282% hike in earnings. That was followed by a Q1 2017 report with 91% revenue growth and a 2,850% gain in earnings (up from a four cent loss in Q1 2016). And the trend looks like it will continue, as the company pre-announced on July 13 that it would beat analysts’ expectations on both revenue and earnings. Applied Optoelectronics will officially release its Q2 results on August 3 after the market closes, though much of the expected earnings beat is probably already priced in, so the key will come from the outlook going forward.
Technical Analysis
AAOI has been in rally mode since the middle of 2016, and the stock has already soared from 8 in May 2016 to above 83 in recent trading. The stock hit resistance at 60 in March 2017, and despite trading as low as 40 in April and as high as 76 in early June, was right back at 60 earlier this month before it began a breakout rally that sent it to new all-time highs last week after the pre-announcement of the earnings beat. AAOI enjoyed a couple of high-volume trading days at the end of last week, and looks buyable on any weakness.
AAOI Weekly Chart
AAOI Daily Chart
CoStar Group (CSGP)
Why the Strength
What Zillow or the Multiple Listing Service are to the residential real-estate market, CoStar Group is to the commercial real estate business. The company provides information, analytics and online marketplaces for the U.S., the U.K. and parts of Canada, Spain, Germany and France that allow potential buyers to locate and analyze specific properties that will meet their needs. Clients pay for access to CoStar’s extensive database, which is generated by CoStar’s 3,200 professional researchers on property values, market conditions and current availabilities. The company’s LoopNet commercial real estate marketplace has nearly 11 million registered members and its other sites serve apartment hunters and apartment owners, property developers, bankers, government agencies and other users. Earnings growth is estimated at just 3% in 2017, but is expected to jump to 49% in 2018. The company reported 13% revenue growth and 11% earnings growth in Q1. The company’s stock got a huge boost from that Q1 earnings report on April 27, and when Q2 results are announced (no date yet, but should be in late July), analysts are expecting revenue of $235 million and earnings of 63 cents per share. CoStar Group is a play on the gradual progress of U.S. and global corporate expansion, which seems like a reasonable bet, as institutional support continues to grow.
Technical Analysis
CSGP hit 218 in March 2014 and spent years trading under resistance in the 220s. The stock made runs in 2012 and 2014 that earned its previous two appearances in Cabot Top Ten Trader, but it took that late-April earnings beat to finally kick CSGP to new highs. The stock topped 260 in late May and, after a June correction, powered ahead to 278 last week. CSGP has pulled back to 270, and looks buyable right here, with a relatively tight stop around 245.
CSGP Weekly Chart
CSGP Daily Chart
Dana Holding (DAN)
Why the Strength
Ohio-based Dana Inc. traces its history as a manufacturer of automotive components back to 1904. The company now has 27,000 employees in 34 countries on six continents and makes parts that go into passenger cars, commercial trucks and off-road vehicles, as well as industrial and fixed equipment. The company has been through five years of single-digit annual revenue declines, but investors are interested because Dana booked a 5% increase in revenue in Q4 and a 17% bump in Q1. Those revenue gains were reinforced by a Q4 earnings boost of 90% followed by an 85% jump in Q1. The global market for vehicles has been strengthening over that past year as economies gradually strengthen. In June, Dana began construction of a factory in Chongquing, China and the company’s stock picked up coverage from analysts at Guggenheim with a Buy rating. The company also demonstrated its status as an innovator by registering its 10,000th patent. This is pretty heady territory for a company that filed for bankruptcy in 2007. Dana will report its Q2 results on July 31, before the market opens. Analysts are expecting revenue of $1.68 billion and earnings of 51 cents per share. Dana’s stock also pays a dividend that yields one percent annually.
Technical Analysis
DAN corrected from May 2015 through July 2016, falling from 22 to 10. But since that low, DAN has advanced quickly, with a 10-week correction earlier this year giving way to a strong rally in April. DAN is now back near 24 and is trading at a bargain-basement 11 P/E, giving it a good combination of growth and value characteristics. You can buy on any weakness of a half a point or so, although you may want to keep any buy small with earnings just two weeks away. A stop at 21.5 makes sense.
DAN Weekly Chart
DAN Daily Chart
E*Trade Financial (ETFC)
Why the Strength
We’re seeing more and more Bull Market stocks (brokerages, exchanges, etc.) begin to kick into gear, and E*Trade looks like a leader as it nosed out to new highs last week. E*Trade, of course, is one of the leading brokerage houses in the country, with 5.3 million customer accounts that held $346 billion in assets as of the end of May. While commissions and other fees and service charges are a big part of business (bringing in about 42% of net revenue), the company actually makes more money on interest income (58% of the pie) off customer balances, similar to a bank. (Profit margins are very high, 25.2% after tax in the latest quarter.) Thus, the two mains reasons for the stock’s strength is higher interest rates (boosting interest income and margin) and the bull market itself, which is driving up trading volume among customers (up 23% in April and 42% in May from the year-ago months), which will lead to greater commissions despite the firm’s price cut earlier this year. Analysts see the company’s earnings up just 6% this year, but that’s probably conservative (first-quarter earnings topped estimates by 23%), especially if more investors begin to buy into the bull market. (Money flows have been surprisingly weak so far this year.) The next update will be out on Thursday, when E*Trade reports earnings. Short-term, anything is possible, but the odds favor accelerating growth ahead.
Technical Analysis
ETFC rallied strongly after the U.S. election last year, but hit a top shy of 39 in January after a poorly-received earnings report and then fears of an industry price war (everyone cut their prices in February and March). But ETFC ended up rounding out a nice, relatively shallow base, and the stock has perked up since early June, including a push to new highs last week. We like the potential here, but with earnings out this week, keep any positions on the small side.
ETFC Weekly Chart
ETFC Daily Chart
Facebook, Inc. (FB)
Why the Strength
Facebook needs no introduction, as the social media leader’s various platforms are used by billions of people around the world. The firm’s namesake service just surpassed two billion active users per month (including 1.28 billion per day), but that’s only the beginning, as Instagram has 700 million monthly users (including 400 million per day), Facebook Messenger and WhatsApp each have 1.2 billion users per month and Facebook’s Oculus subsidiary is poised to be a leader in the upcoming virtual reality boom. There are a few minor reasons for the stock’s strength in recent weeks, including its success battling competition from Snap, with Instagram copying many of that firm’s most popular offerings, and recent news that Oculus will release a $200 virtual reality headset that won’t need to be tethered to a smartphone or PC (unlike competitors’ products). But we think the biggest news came last week when Facebook announced that, after successful tests in a couple of countries, it will start rolling out ads on its Messenger platform globally—while we doubt initial revenue from Messenger will be large, long-term, this opens up another gigantic source of ad revenue for Facebook. As it stands, analysts see earnings rising 40% this year and 24% in 2018, though history tells us those figures are probably low as Facebook usually tops estimates. The next big event is earnings, which are due out next Wednesday (July 26).
Technical Analysis
FB didn’t make any net progress during the last 11 months of 2016, but the stock began trending higher as soon as the calendar flipped. More recently, the stock etched a shallow, 10-week “ascending base,” with three pullbacks (early May, early June, late June) forming higher highs and higher lows. Then, last week, as the market improved, FB shot ahead to new price and relative performance (RP) peaks on good volume. You could start small here or on dips and see what earnings brings.
FB Weekly Chart
FB Daily Chart
IPG Photonics (IPGP)
Why the Strength
Fiber laser specialist IPG Photonics was featured in Top Ten in mid-May, and the stock’s been rolling like a freight train since. Global manufacturers continue to replace traditional lasers with IPG’s fiber lasers due to their superior performance and productivity, greater reliability and lower total cost of ownership. These lasers are used in materials processing, which covers activities like metal cutting, welding, bracing, drilling and even 3D printing. The breadth of applications is massive, with IPG’s end markets (and customers) spanning automotive (Toyota, BMW, Volkswagen), aerospace (Boeing, Lockheed Martin), semiconductor (KLA-Tencor), heavy industry (Mitsubishi) and additive manufacturing (SLM Solutions). Following a Q2 earnings beat on May 2 (revenue was up 38% and EPS of $1.38 beat by $0.18), analyst upgrades have trickled in. Bullish trends include strength in China (IPG’s biggest market at 36% of revenue), a recovery in Japan (9% of revenue), and the $40 million acquisition of Innovative Laser Technologies (ILT). The addition of ILT will accelerate IPG’s push into the medical device market, which it says is part of an unaddressed $2.4 billion market opportunity (bringing its total addressable market up to $6 billion). All told, IPG is an exciting industrial technology story, and with revenue and EPS expected to grow around 23% this year, we see big investors remaining bullish. Earnings are likely out in early August.
Technical Analysis
IPGP had some wild swings in 2015 and 2016, but broke through resistance in January 2017 and has been trading much more under control since then. The stock rallied to 125 in February, then consolidated for nearly four months heading into the May 2 earnings release. A big beat drove shares up to 140, and while IPGP hesitated in the weeks that followed (partly due to market pressures), it remained above its 25-day line and, last week, pushed into new highs. If you’re game, you can look to buy on dips.
IPGP Weekly Chart
IPGP Daily Chart
Kite Pharma (KITE)
Why the Strength
We recently wrote in our free Wall Street’s Best Daily publication that monster winners often have one trait in common: triple-digit revenue growth. Kite Pharmaceuticals could soon have it (revenue was up 92% in Q1, should be up 90% this year, then soar over 350% next year!), and it ticks a few other boxes in the potential big winner column, too. It is progressing from a clinical-stage biotech stock to a commercial-stage company with life-saving treatments in the emerging field of cancer immunotherapy. It doesn’t have a drug on the market just yet (Q1 revenue was from collaborations and license agreements with Amgen and Daiichi Sankyo). But data show Kite’s most advanced candidate, axi-cel/KTE-C19, is a potential game-changing treatment for a range of blood cancers. It is a CAR-T cell therapy, meaning Kite takes a patient’s own white blood cells and genetically engineers them to recognize and destroy the cancer. Kite submitted a marketing application to the FDA earlier this year, plans to submit one to the EU in Q3, and expects to hear from the FDA in November. The company is prepping for a commercial rollout in the U.S. now, with a global rollout to follow. Suffice it to say, investors have a lot riding on the FDA’s PDUFA date on November 29. And based on recent price target increases, analysts see the probability of success going up.
Technical Analysis
KITE was up and down in 2016 then fell back to support around 40 in November. It recovered quickly, then traded in the 45-55 range until its Q4 earnings report on February 28 when it blasted up to 80 over three days. Shares traded in the 70-80 range for the next three months, but broke out again in early June after the company disclosed more positive clinical trial data. Impressively, after rallying to 107, KITE has remained relatively tight during the past two weeks, a positive sign. Volatility will be extreme, but if you’re game, you can nibble here or on dips with a loose stop below 90.
KITE Weekly Chart
KITE Daily Chart
New Relic (NEWR)
Why the Strength
New Relic is another cloud software company that’s growing rapidly by serving a new niche in the industry. That niche is application performance management (APM), which generally involves the monitoring and management of performance and availability of software applications. New Relic’s most popular software suite gives clients (which include 40% of the Fortune 100) visibility into the performance of their apps and IT infrastructure, and then produces real-time analytics (metrics, dashboards, alerts) that can help resolve issues and boost customers’ digital experiences. It’s certainly working, as all of New Relic’s metrics are pointing strongly up—the firm now has 15,200 clients, 1,700 of which are enterprises (greater than 1,000 employees), with 517 of those accounts bringing in at least $100,000 per year (up 41% from a year ago). Revenue growth has slowed some recently, but the top brass expects revenues to expand 30% this year and has laid out a plan to grow 28% annually for the next five years. As with most cloud software outfits, New Relic has a steady stream of recurring revenue (46% of which comes from its enterprise customers) and cash flow is much larger than reported earnings (the company should be free cash flow positive this fiscal year). It’s a good story, and some institutional investors agree—Fidelity owns more than 14% of the company, for instance. Earnings are due out August 3.
Technical Analysis
NEWR has a great short- and long-term chart. The stock came public in December 2014 and hit a high of 39 a few weeks later; it didn’t clear that level in a meaningful way until this year, when the stock rallied as high as 45 in May. Then came a pullback to 39 during the market’s June wobbles, but NEWR tightened up nicely near month’s end and, as the market rebounded, surged into new highs on good volume. You can buy some here or on dips.
NEWR Weekly Chart
NEWR Daily Chart
Ryanair DAC (RYAAY)
Why the Strength
Ryanair is like the Southwest Airlines of Europe, with a history of great customer service, cheap prices and, most importantly, profits and growth. Based in Ireland, Ryanair is the lowest fare (and cost) carrier in Europe, charging an average of just $47 per flight (though that’s the base rate with lots of add-ons from there), which has translated into the #1 spot in traffic (130 million passengers expected in the current fiscal year) and coverage (207 airports, 34 countries, 1,800 routes). Possibly most amazing is the firm’s load factor—in June, 96% of the airline’s seats were filled! The stock is strong today because investors see growth picking up after a couple of slow quarters, thanks in part to fading fuel prices, a modest share buyback program and Ryanair’s continued fleet expansion, which should rise 11.5% this year and another 5% next. Long-term, too, management is aiming very big, thinking it can increase its customer count to 200 million by 2024 (up 50% or so from this year) as it continually cuts costs and demand for air travel grows. Back to the present, May and June’s traffic results (up 11% and 12%, respectively, from a year ago) confirm that business is picking up, and analysts see earnings rising 24% this year and 16% next. It’s not changing the world, but Ryanair is a leader in its industry and the stock looks like one of the best picks in the strengthening airline sector. Earnings are due out next Monday, July 24.
Technical Analysis
RYAAY broke out from a 15-month consolidation in April and enjoyed a great, persistent advance to 110 by June. That was followed by a tight structure, as the stock hovered between 106 and 111 for five weeks—such tightness is a good sign that big investors are in no hurry to sell shares. And now RYAAY is perking up again, hitting new highs last week on solid volume. If you’re game, you can buy a small position here or on dips and see what earnings brings.
RYAAY Weekly Chart
RYAAY Daily Chart
Western Digital Corporation (WDC)
Why the Strength
We’ve been bullish on Western Digital for a while now and see the data storage giant continuing to enjoy strong revenue and EPS growth as demand for 3D NAND accelerates (especially for cloud, notebook and enterprise applications), while tight supply puts upward pressure on prices. Key to the bull case is Western Digital’s proven ability to maintain cost advantages in 3D NAND (as it did with 2D NAND), which is translating into fat margins and rapid EPS growth. The stock is strong today partly because of that backdrop, but also because of the firm’s recent pre-announcement of quarterly results: Management said revenue would be as expected, gross margins will be up, and EPS for the June quarter will be around $2.85 per share (topping estimates of $2.60), resulting in a P/E ratio of around 11. Analysts have noted that, at the end of its fiscal year, the majority of Western Digital’s shipments will be 3D NAND. Combine that with strong execution of merger synergies from the SanDisk acquisition (May 2016), market share gains in cloud hard disk drives and a valuation that leaves plenty of room for upside, and its clear analysts see the stock maintaining its upward trajectory. The biggest question remains what will happen with Western Digital’s joint venture in Toshiba’s $18 billion flash memory unit, which Toshiba is trying to sell (WDC is a bidder, and says Toshiba needs its approval to sell). But big investors are more focused on the firm’s sterling fundamentals today.
Technical Analysis
WDC has worked its way choppily higher this year. Shares gapped up following the January earnings release, then consolidated for a few months before regaining momentum heading into the April 27 earnings release. They popped to 90 after that, but, again, spent most of the next two months trading in a range. Recently, though, WDC has shown signs of kicking into gear, forming a higher low earlier this month and nosing to new highs last week. We’re game for buying a small position here and adding shares if the stock reacts well to earnings (likely out in two or three weeks).
WDC Weekly Chart
WDC 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.
