The Evidence Says ... Up!
Current Market Outlook
We always strive to go with the evidence the market has presented. Right now, just about all of it is bullish: The intermediate- and longer term trends are up, the broad market is in terrific health (new highs are expanding while new lows are minuscule), we’ve seen some rare, powerful blastoff indicators flash (which almost always portend solid gains in the months ahead), leading stocks are perking up and many investors remain on the sideline. Obviously, a pullback could occur at any time, and earnings season is sure to create some potholes among individual stocks.
But overall, the path of least resistance is up, so we’re pushing our Market Monitor further into bullish territory. This week’s batch of stocks includes many that report earnings within a few days, which makes buying a bit tricky. For our Top Pick, we think a small position in Masco (MAS) can work—it’s shown great power, has buoyant earnings estimates and is part of the newly-strong housing group.
| Stock Name | Price | ||
|---|---|---|---|
| Zendesk (ZEN) | 82.19 | ||
| Tahoe Resources (TAHO) | 0.00 | ||
| Dave & Buster’s (PLAY) | 57.01 | ||
| Nucor Corporation (NUE) | 66.20 | ||
| Match (MTCH) | 0.00 | ||
| Mobileye N.V. (MBLY) | 0.00 | ||
| Masco (MAS) | 0.00 | ||
| EBIX Inc. (EBIX) | 0.00 | ||
| ServiceNow (NOW) | 341.86 | ||
| CBM (CBM) | 0.00 |
Zendesk (ZEN)
Why the Strength
When a company gets a customer, keeping that customer becomes a top priority. And Zendesk—a software-as-a-service help desk company whose products control communication with customers—is the choice of more and more companies to help them keep customers happy. Zendesk’s approach to customer relationship management (CRM) is based on software that tracks every message from a customer from any source (email, phone, chat, tweet, Facebook post) and allows one employee to stick with the problem until it’s solved. The software also lets management track and analyze every aspect of the interaction to keep customer satisfaction high. While the company isn’t profitable yet, revenue has been growing fast (64% in 2015 and 62% in Q1 2016) and 44% of revenue comes from outside the U.S. Investors are looking forward to the company’s Q2 earnings report on August 2 (after the close), and estimates call for revenue of $72.3 million (up 50% from a year ago) and a loss of eight cents per share. One big selling point for Zendesk is that its software can handle input from a huge number of sources, making the entire history of a help desk ticket visible to everyone. Zendesk is prospering by making a critical task simple.
Technical Analysis
ZEN has only been public since May 2014, and spent 16 months—September 2014 through the end of 2015—trading under resistance at 28. But after a steep correction in January and February (caused in part by weak guidance from another cloud software giant and partly by a bearish move in the broad market), ZEN caught fire, ripping from 14 in February to 29 in recent trading. ZEN has put in a few days of sideways trading around 29. With earnings out two weeks from tomorrow, jumping into ZEN with both feet isn’t prudent. But you can take a nibble on any weakness of a point and use a loose stop at the stock’s 50-day, now at 26.
ZEN Weekly Chart
ZEN Daily Chart
Tahoe Resources (TAHO)
Why the Strength
Tahoe Resources is another miner that’s thriving after many years in the doghouse. The firm is based in Nevada, but none of its operations are in the U.S. Tahoe is leveraged to both gold (via two mines in Peru and a couple in Ontario) and silver (from its Escobal mine in Guatemala, which is the third largest silver mine in the world). Obviously, the rise in gold and silver prices is the main reason for the stock’s strength these days, but there’s a decent growth story here as well—Tahoe’s four gold properties are expected to boost output from around 400,000 ounces of gold this year to more than 550,000 ounces by 2020. Combined with steady, high-margin silver production from Escobal (20 million ounces per year or so at a cost of less than $11 per ounce, with current silver prices above $20!), that should lead to a booming bottom line, especially if precious metal prices continue to ascend. Other positives: Tahoe is solidly profitable today, has more cash than debt and pays a decent dividend (two cents per share, per month for an annual yield of 1.5%). The combination of low costs, a healthy balance sheet and production growth should do wonders for the bottom line in a bull market for precious metals.
Technical Analysis
Like most gold and sliver stocks, TAHO had a terrible slide into mid-2015 (from 28 in mid-2014 to 7 in August 2015!), but then began a bottoming process—shares tested and held that 7 level numerous times, before one last shakeout in January (to 6.5) marked the bottom. Since then, the stock has soared, with just one small base (an eight-week launching pad in May and June) leading to new highs this month. We think you can buy a little here or on dips, with a stop near 13.
TAHO Weekly Chart
TAHO Daily Chart
Dave & Buster’s (PLAY)
Why the Strength
Continued solid job growth in the U.S., low interest and mortgage rates, and subdued energy prices are all bullish for the U.S. consumer, which, in turn, is bullish for U.S.-focused retail outfits of all stripes, including Dave & Buster’s. The company is a restaurant, but its unique concept (“Eat, Drink, Play, Watch”) involves fun for the whole family, whether it’s kids playing arcade and video games, parents getting food and drinks, and/or everyone watching the game. Interestingly, while food and beverages bring in about $5.5 million annually per store (much larger than Buffalo Wild Wings, Texas Roadhouse and Chili’s), games bring in another $6.3 million, making Dave & Buster’s average haul from each restaurant among the largest in the industry. (Store-level profit margins blow away the competition, too.) That’s allowed for some enticing store economics—during the past few years, new locations have paid back about 45% of the upfront cost in the first year alone, which has encouraged management to expand; the firm is aiming to boost its store count by 10% annually, eventually boosting the count from 85 today to more than 200 in North America. International is another huge opportunity, with Dave & Buster’s looking into joint venture or licensing opportunities. Growth has been excellent in recent quarters and years (see table), and analysts see more of the same going forward. We like it.
Technical Analysis
PLAY came public in October 2014 and had a great run from 16 to 43 by September 2015. Then the stock built a launching pad as the market corrected, breaking out powerfully in June on earnings. Since then, PLAY has acted well, with a tight pause for much of June, and then some strength post-Brexit. The recent pullback has been controlled, with shares still above their 25-day line—it looks buyable here with a stop in the low 40s.
PLAY Weekly Chart
PLAY Daily Chart
Nucor Corporation (NUE)
Why the Strength
A June 22 ruling was a big boost for Nucor and other U.S. steel producers. The International Trade Commission (ITC) ruled that cold-rolled steel products made in China, Japan and elsewhere were being sold below their fair market value in the U.S. To level the playing field, the ITC will allow the U.S. to impose countervailing and anti-dumping duties on all cold-rolled steel imports. That should be good for business at Nucor, which makes cold-finished steel bars, joist girders, fasteners and other steel products for the automotive, construction machinery and appliance industries. Combined with the recent rally in steel prices, which hit a 52-week high in June, Nucor is on the cusp of a sharp turnaround: after big sales and earnings declines in 2015, analysts anticipate a 55% EPS improvement this year and more in 2017. We’ll know very soon how realistic those projections are: Nucor reports second-quarter earnings this Thursday. Judging by the recent movement in the stock, investors have faith that Nucor will meet—or beat—its lofty expectations.
Technical Analysis
Like most steel producers, NUE was down in the doldrums for much of 2015, falling from 49 at the beginning of the year to 34 this January. But after bottoming at 34 in late January, the stock stair-stepped its way up to 50 in April, followed by a six-week basing period. Things picked up again in early June, with a brief break above 50, only to sink back to 46 late in the month. Since the ITC ruling, however, NUE has shot straight up, bursting above 51 on July 8 and continuing to soar. It probably won’t budge much before this Thursday’s earnings report, so you could start small here or wait until after the report to get in.
NUE Weekly Chart
NUE Daily Chart
Match (MTCH)
Why the Strength
We recommended this online dating giant last month, and the stock continues to act well. Match Group owns online dating properties Match.com, OkCupid and Tinder, which is its biggest growth driver—especially now that the company has started to monetize it. Tinder’s free dating app launched a subscription option late last year, and it already has more than a million users with plans to double that number by year’s end. A recent reduction in Google’s “App Store” fees should help Match Group’s profits improve, and a huge ramp-up in advertising is expected to attract more users and give sales a nice jolt going forward. After a few down quarters, earnings improved nicely last quarter at 22% growth, and that’s just the tip of the iceberg: for the year, analysts anticipate 68% EPS growth with another solid expansion next year. Looking at Match Group from the 10,000-foot level, it’s the biggest fish in an industry that 15% of Americans now say they use (up from 11% in 2013). Those are the types of fish investors love to catch.
Technical Analysis
MTCH came public at 14 last November, dipped to as low as 9 in February, then reclaimed 14 in May. After a month of consolidation, it spiked again in mid-June—just after we first recommended it—jumping to 16 with 14 acting as the new floor. Now MTCH is starting to move above 16 and looks ready to get going. You can nibble around here and add to your small position if the company delivers on its earnings promises when it releases second-quarter results next Tuesday, July 26.
MTCH Weekly Chart
MTCH Daily Chart
Mobileye N.V. (MBLY)
Why the Strength
The trend toward smarter cars that can warn drivers about obstacles, avoid collisions on their own and even (eventually) drive themselves has gathered steam over the past few years. And through the whole escalating process, Mobileye has been a leader. This Israel-based company makes the software and related camera-based technologies that power many advanced driver assistance systems. The company’s EyeQ 5 cameras and controls are already standard on over 20 auto brands worldwide, and Mobileye is partnering with giants like Intel and BMW to make a fully autonomous car that can be sold to consumers by 2021. There have been a few bumps along the way, of course; the Tesla that was involved in a fatal collision with a semi in May had Mobileye technology on board. But setbacks like that haven’t dampened investors’ enthusiasm. After a sizable correction in the second half of 2015 that was caused partly by disappointing earnings results and partly by market weakness, the company’s stock is back on track. Mobileye enjoyed 68% revenue growth in 2015 and 65% in Q1 2016, with after-tax profit margins well over 40%. Earnings growth is estimated at 44% in 2016 and 54% in 2017. The self-driving car stampede will involve lots of competition, but Mobileye is clearly in the leadership group.
Technical Analysis
MBLY has been on the roller coaster for years, with a big correction from 64 in August 2015 to 24 in February 2016 giving way to a powerful rally to 41 in April. After three months of consolidation at that level, MBLY gapped up on monster volume on June 30 after its Intel/BMW alliance was announced, and the stock has been trending higher since. Q2 earnings are scheduled for July 26 (a week from tomorrow), so big bets aren’t advised. We see MBLY as a long-term winner, so you can pick up a little MBLY anywhere under 48, (with a stop in the low 40s to keep risk within reasonable limits), then average up when you get a profit cushion.
MBLY Weekly Chart
MBLY Daily Chart
Masco (MAS)
Why the Strength
Americans are buying new homes and improving old ones at a significant clip these days, and Masco is uniquely diversified to benefit from both trends. Masco makes cabinets, spas, windows, paints and plumbing products for home improvement and new home construction. With new home sales topping 500,000 every month this year—and with more new homes on the market than at any point since September 2009—Masco’s diverse array of housing products have been in demand. Existing home sales have also played a large role in Masco’s resurgence. “Our portfolio is aligned to improving macro trends,” CEO Keith Allman said during the company’s first-quarter earnings call. “Existing home prices continue to appreciate, which is a driver for larger ticket items such as cabinets and windows. Housing turnover continues to accelerate, which is a leading indicator of repair and remodel spend and affordability remains well above historic averages. As a result of these trends, the consumer continues to gain confidence to reinvest in the home, and we are well positioned to benefit from that.” Accordingly, Masco’s sales increased 4% last quarter, while earnings per share swelled by a whopping 78%. For the year, analysts expect 4.3% sales growth and 29% EPS improvement, with another 20% bump coming in 2017. That’s solid growth in a booming industry, which are two things Wall Street loves.
Technical Analysis
MAS’s biggest move came in February, March and April, when the stock kited from a low of 23 to 32. Then came a 10-week double-bottom base that found support at its 40-week line. Since then, MAS has gone straight up, breaking above its 50-day moving average the first week of July then poking its head above 32 resistance last week. With earnings out next Tuesday (July 26), buy on dips and keep new positions small.
MAS Weekly Chart
MAS Daily Chart
EBIX Inc. (EBIX)
Why the Strength
Ebix is a software company whose products serve the global insurance industry, providing sales support, quote comparisons, claims handling and other related services such as business process outsourcing. The company’s revenue growth stalled at 3% in 2013 and 5% in 2014, but 2015 revenue jumped 24% and after-tax profit margins have topped 30% in the three most recent quarters. Ebix made one previous appearance in Top Ten after a strong quarterly report in May. But the company is back now because it’s struck a deal in June to acquire Patriot National, an insurance industry outsourcing firm that went public in early 2015 but whose stock has been languishing after big post-IPO stock sales by insiders and pre-IPO owners. Ebix will pay for the buyout with a mixture of stock and cash, and expects that the merger will prove immediately accretive to earnings. Ebix released a statement saying that the deal would make it “the world’s largest provider of straight through processing in the insurance services industry, offering on-demand-based front-end systems, back-end systems, exchanges, strategic consulting and risk compliance services all under one roof.” Many software-as-a-service companies are attracting investors these days, and Ebix gets about 80% of its revenue from recurring sources and enjoys a 99% customer retention rate. The company’s global ambition—its systems work in French, Portuguese, Spanish, Japanese, Chinese and English—and the Patriot National takeover are good evidence that it has what it takes.
Technical Analysis
EBIX ran up against resistance at 37 in May 2015, and it took until February 2016 for the stock to finally break out to new highs. EBIX has tended to make runs after earnings and then trade sideways, which is what happened in April 2016 when the stock rallied to near 50, then stalled there for 10 weeks. The stock caught an updraft on July 8, and followed through on July 11 and 12 to new highs above 50. EBIX has been consolidating for a few days around 54, and a dip of a couple of points would represent a good buying opportunity. Use a stop at 49.
EBIX Weekly Chart
EBIX Daily Chart
ServiceNow (NOW)
Why the Strength
NOW Inc. is one of the largest distributors to the energy industry (mainly under the DistributionNOW brand), providing more than 300,000 individual products (for drilling and production, safety and electrical, as well as valves, pipes, fittings and more) to customers in more than 90 countries. It supports pretty much all major land and offshore drilling activities for most of the key energy regions around the world. The firm has only been independent for a couple of years; prior to that, it was part of energy equipment giant National Oilwell Varco—so it’s been a key link between suppliers and customers for decades. While business has fallen off sharply due to the energy bust, the company is actually very profitable; reported earnings are in the red, but free cash flow totaled $313 million in 2015 and $88 million in the first quarter alone. Long-term, there’s reason to believe NOW has a bright future—not only will the recent lift in energy prices likely lead to increased drilling (and higher demand for NOW’s products), but the industry remains extremely fragmented, providing opportunities for NOW to grow via acquisition. (It gobbled up a whopping seven companies last year and completed another acquisition in early June.) With the bottom likely in for energy prices and (soon) for drilling, NOW is an intriguing turnaround situation. Earnings are due out August 3.
Technical Analysis
DNOW was spun off in May 2014, just as the oil crash was getting underway—the stock collapsed from 38 to 12 during the next year and a half! But the action since then has been solid, with shares rallying swiftly to 20 by March, then building a relatively tight, three-month base. DNOW has recently broken out on the upside on decent volume, part of persistent post-Brexit upmove. It’s buyable around here with a stop near 18.
NOW Weekly Chart
NOW Daily Chart
(CBM)
Why the Strength
This New Jersey-based biopharmaceutical company combines both financial and physical growth. A leading maker of pharmaceutical ingredients used in drug products, Cambrex just completed a new $50 million production facility in Charles City, Iowa to keep pace with strong demand for its small molecule Active Pharmaceutical Ingredients (APIs). Such a high-cost expansion project is possible because the company had a balance of $43 million in cash and zero debt on its books at the end of 2015. Cambrex’s facility expansion reflects the recent acceleration in its sales: its revenues have grown between 15% and 18% each of the last three years after reaching double-digit growth just once in the previous five years. Earnings per share growth has been even better, reaching 72% last quarter. Cambrex has benefitted from the recent global boom in the clinical development pipeline; many clinical-stage biotechs have opted for U.S. suppliers such as Cambrex, which does two-thirds of its business in Europe. Like the stocks of many of the clinical-stage biotechs it serves, CBM is garnering plenty of attention from investors.
Technical Analysis
CBM is in the midst of a five-year bull run, but it really got going in 2015, when it jumped from 22 to as high as 53. It got knocked all the way back to 31 this January and early February, but since finding that bottom, the stock has gone nowhere but up. CBM breached its 50-day moving average in early March and the average itself has been trending higher since late that month. It was still meeting resistance in the 52-53 range until breaking through earlier this month, and has continued to rise since. You can buy on the dips, but if you do, start small—the company reports earnings next Monday, July 25. If things go well, you can always add to your position.
CBM Weekly Chart
CBM 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.
