Leaders Look Great; Broad Market Doesn’t
Current Market Outlook
Last week was a great one for the major indexes and leading stocks, with many surging higher on big volume to notch new highs, a good sign that big investors are putting money to work in growth stocks. That said, it’s not all peaches and cream out there—hundreds of stocks are actually hitting new 52-week lows (mostly energy and interest rate-sensitive stocks, but others, too), and to this point, only the Nasdaq has reached new high ground; the intermediate-term trend for most indexes remains neutral. Reflecting the terrific action of Top Ten stocks, we’ll nudge our Market Monitor up a notch; if you see a good set-up, go ahead and take it. But we’re still advising holding some cash on the sideline and being selective on the buy side.
This week’s list has a hodgepodge of stocks, many of which haven’t been featured here for a long time. For our Top Pick, we’ll stick with the big-cap growth stock theme that’s working well—Celgene (CELG) just popped out of a four-month base on big volume last week following a major acquisition. It’s buyable around here.
| Stock Name | Price | Buy Range | Loss Limit |
|---|---|---|---|
| Intrexon (XON) | 0.00 | 55-57 | 49-50 |
| Take-Two Interactive (TTWO) | 123.32 | 29.5-31 | 27.5-28 |
| Progressive Corp. (PGR) | 0.00 | 30-31 | 27-28 |
| Blackhawk Network (HAWK) | 0.00 | 41-43 | 38-38.5 |
| Alphabet, Inc. (GOOGL) | 0.00 | 675-700 | 630-635 |
| Fitbit Inc. (FIT) | 0.00 | 42-46 | 37-38 |
| Domino’s Pizza (DPZ) | 339.47 | 128-134 | 117-118 |
| Celgene (CELG) | 0.00 | 130-135 | 119-121 |
| Barnes & Noble (BKS) | 0.00 | 27.5-29 | 24-25 |
| Alaska Air Group (ALK) | 0.00 | 72-74 | 66-67 |
| ACADIA Pharmaceuticals (ACAD) | 47.84 | 47-50 | 42-43 |
Intrexon (XON)
Why the Strength
The biotechnology industry continues to produce many top-performing stocks, and Intrexon, which debuted in Top Ten on June 22, has just found renewed interest from investors. Intrexon is a leader in synthetic biology, a technology that can build new cells and genetic systems from the ground up. The company’s capabilities allow researchers to engineer new organisms that can, for instance, convert natural gas to byproducts like fuel and lubricants, products that usually would require crude oil inputs. The food, energy, environmental sciences and healthcare industries are the natural focus of Intrexon’s collaborations, and the powering up of those joint efforts pushed the company’s 2014 revenue to a 203% increase. Along with partner Fibrocell Science, the company just announced the submission of an Investigational New Drug to the FDA, a treatment of recessive dystrophic epidermolysis bollosa. Intrexon’s bottom line hasn’t reached the black yet, but Q4 2014 and Q1 2015 did the trick, including Q1’s 525% jump in earnings on a 331% revenue increase. The company’s number of institutional sponsors has increased from 137 a year ago to 200 now. With a powerful technology that can create value in a broad range of industries, Intrexon has enormous promise.
Technical Analysis
XON conducted a successful IPO in August 2013, then hacked around for 14 months between a high of 37 and a low of 13. The stock finally broke out to new highs above 38 in February 2015, ultimately sprinting to 49, where it began a 15-week cup formation with a bottom at 38. The stock completed its cup in June and added a three-week handle down to 45 (including a tip-off day of positive gains on triple its average volume on July 6) before its new rally began on July 14. XON has now broken out to near 57 on good volume. We think it’s buyable on a pullback of a point or so, with a stop around its old resistance at 50.
XON Weekly Chart
XON Daily Chart
Take-Two Interactive (TTWO)
Why the Strength
According to a study conducted by the Entertainment Software Association, 59% of Americans play some kind of video game and 51% of households own a dedicated video gaming console. That’s a lot of screen time and a lot of people buying video games, so the success of the most popular software design companies in the industry is not surprising. And NYC-based Take-Two Software is popular. Take-Two and its subsidiaries are behind some of the biggest video games in the United States, including the infamously violent and wildly popular Grand Theft Auto series, 2K Sports, a sports simulation franchise, and Sid Meier’s Civilization, a strategy game. After a rough few quarters, sales are back up, rising 54% in Q2, beating the industry average of 7.4%, and although analysts expect a slight EPS contraction in 2016, EPS is expected to bounce 70% in 2017. (Results also have usually crushed estimates, so these figures are probably conservative.) Take-Two is no stranger to a comeback story, either—when CEO Strauss Zelnick took over in 2007, the company was operating at an annual loss of $184.9 million. Since then, Take-Two has generated $806 million in operating profit, been profitable for five years, and even holds $1.1 billion in cash. We like it.
Technical Analysis
TTWO’s gap up in May was encouraging at the time, but it turns out that that earnings beat was just the beginning. After holding up well as the market stumbled during the Greece- and China-dominated headlines, TTWO took off on the upside, flying all the way from 27 to 31—a 14% gain—in only six days. An all-time high on good volume is often a strong buy signal for us, but TTWO’s rise has been so rapid that we suggest waiting for a small pullback before jumping in. If the stock falls below the 50-day, though, you should move to cut the loss.
TTWO Weekly Chart
TTWO Daily Chart
Progressive Corp. (PGR)
Why the Strength
You might infer from that fact that Progressive Corp.’s single previous appearance in Cabot Top Ten Trader was in April 2003, that it’s not usually a growth stock. And you’d be right. Progressive is a big automobile insurance company—the fourth-largest auto insurer in the U.S. Progressive has enjoyed steady, single-digit percentage revenue growth for five years and pays an attractive 2.4% annual dividend, both characteristics of buy-and-hold income stocks. Progressive’s appearance today comes courtesy of the company’s acquisition earlier this year of ARX Holdings. The $875 million buy of a majority stake in ARX gave Progressive a foothold in the housing insurance market, holding out the promise of increasing business by bundling auto and home coverages. Investors liked the idea of broadening its base, and Progressive’s Q2 earnings report on July 17 was met with enthusiastic buying. That report showed a 27% jump in earnings on revenue of $5.25 billion. Progressive has been enjoying increased share of mind since 2008 because of Flo, its fictional pitch-woman in TV ads, who has become something of a cult figure in her own right. But whatever the source, Progressive has proven to be an increasing favorite with investors.
Technical Analysis
PGR has looked like a stable, slow-growth stock for years. Its December 2013 high provided the starting point for a year-long cup pattern that the stock completed in November 2014, with a handle correction down to 25 in February. The stock began a slow-but-sure advance in April and accelerated all the way through May and June, culminating in a July breakout on huge volume. PGR just got a downgrade from Deutsche on valuation, so shares may need to pause to consolidate its recent breakout, and a buy on any weakness of a point or so looks reasonable. Use a stop at the stock’s 50-day moving average, now at 28, as protection.
PGR Weekly Chart
PGR Daily Chart
Blackhawk Network (HAWK)
Why the Strength
Ever been in a grocery store and seen those kiosks that offer gift cards to hundreds of different companies? Those are powered by Blackhawk Network, which used to be part of grocery store giant Safeway (and which still accounts for about 12% of the firm’s business), but has been independent since April 2013 and has been cranking out strong growth ever since. The firm has been riding the increased use of gift cards (stores get a 6% of the face value for every card that’s “opened;” Blackhawk gets 3%, FYI), as well as a slew of acquisitions that’s broadening its business—the company is now a leader in offering employee rewards programs, consumer rebates and incentives and even some e-commerce based incentives and rewards. A big push overseas (it’s aiming to enter China by year’s end, with Poland, Indonesia and India also targeted for expansion) is also helping, as it’s in a unique arrangement where, because of some of the terms of its spin-off, it gets a whopping $27 million of tax benefits per year for the next 15 years! In the first quarter, sales and earnings grew strongly, and total dollar volume of transactions grew 42%. It’s not changing the world, but as the top player in its market, Blackhawk should grow nicely for many years to come.
Technical Analysis
HAWK hasn’t been a super-strong stock for its brief life—it came public in April 2013 at 23, and 13 months later, it was at the same price. It eventually motored up to 40 near the end of last year before building a new launching pad for the next few months. Now, the trend has turned up again, as HAWK has pushed to new highs on good volume, bolstered by a recent acquisition. If you’re game, you can buy some around here with a tight stop near 38.
HAWK Weekly Chart
HAWK Daily Chart
Alphabet, Inc. (GOOGL)
Why the Strength
Google isn’t the young, rapidly-growing company it was during the mid-2000s, and with a monstrous market cap of nearly $500 billion and revenues just south of $70 billion, growth has slowed in recent quarters. (A spending binge hasn’t helped, either, cutting into profit margins and earnings growth.) However, this is still a dominant company with a few major growth opportunities, and the company reported an outstanding second quarter—after taking out the effects of the rising U.S. dollar, revenues grew a strong 18% thanks to a big boost in search traffic, strengthening mobile ad pricing and the strength of YouTube (top advertiser spending on that channel is growing at 60% rates). Also of note, it appears Google’s spending spree is over; costs were controlled, allowing the firm’s already-huge profit margins to expand further, and management hinted that more is on the way. Earnings estimates were raised following the report, and while the 16% gain in 2016’s bottom line doesn’t get the blood pumping, our guess is that these figures are conservative.
Technical Analysis
One of our core trading rules is to never underestimate when a big, liquid growth stock gaps up huge on earnings to new highs. That’s exactly what GOOGL did last Friday, soaring 16% on seven times average volume, surging out of a base that’s been forming since March 2004. Sure, there’s a chance the stock could falter if the market does, but history tells us that such a huge move should carry the stock higher in the weeks and possibly months ahead. Lastly, yes, the price is high, but our advice is to simply buy fewer shares—pretend the stock is around 70, for instance, and just buy 1/10 as many shares.
GOOGL Weekly Chart
GOOGL Daily Chart
Fitbit Inc. (FIT)
Why the Strength
This company only went public a month ago, but what a month it’s been. A maker of wearable fitness-tracking devices that monitor your activity, exercise, food, weight and sleep, FIT ran up 48% in its first day of trading (on June 18) and has scarcely slowed since. The company is clearly capitalizing on investors’ thirst for wearable technology, but its astonishing growth is what has kept it hot since its smash debut. Fitbit’s revenues increased 175% in 2014, and were up another 209% in the first quarter of this year. Meanwhile, the company turned its first profit last year, and expects to do so again in each of the next two years. That kind of demonstrated growth in a red-hot industry always gets Wall Street’s attention; it’s why Deutsche Bank, Stifel and SunTrust Robinson Humphrey have all initiated coverage on the stock with buy ratings. The fitness band market is likely in its early stages and Fitbit holds a 67% market share, making it far and away the best pure play on the burgeoning industry. Next month’s earnings report will be the company’s first real litmus test since coming public. Until then, Fitbit’s honeymoon appears far from over.
Technical Analysis
FIT came public at 30, recovered nicely after its late-June dip to reach 44, and then pushed its way to the upper 40s. Shares pulled back today, but given the stock’s volatility, it didn’t damage the overall uptrend and shares closed well. If you’re game, you can buy a small position here and then see how FIT reacts to earnings on August 5. A loose stop in the low 40s makes sense.
FIT Weekly Chart
FIT Daily Chart
Domino’s Pizza (DPZ)
Why the Strength
Want to order pizza from your Apple Watch or Amazon Echo? Domino’s is making that possible. The global pizza giant has rolled out a new service that allows people with such wearable, voice-operated devices to place voice orders without having to pick up the phone. CEO Patrick Doyle says it’s too early to tell what impact Domino’s new high-tech ordering system might have on sales. What is clear is that the company’s sales are already booming: per-share earnings improved 27% in the fourth quarter of 2015, while revenues increased 15%. Perhaps most impressive: same-store sales jumped 10.7% year over year—no small feat for a chain with 11,700 locations worldwide. It’s still expanding too. Domino’s just opened its 1,000th store in India, making it the largest restaurant chain in the world’s fastest-growing nation. Here in the U.S., Domino’s offers three things consumers crave in 2016: it’s cheap, it’s fast and now, if you have an Apple Watch or Amazon Echo, it’s convenient. The technological advances, combined with six straight years of steady sales and earnings growth, are catching Wall Street’s eye in a big way right now.
Technical Analysis
DPZ started to make a move on February 10, after slipping from 114 to 105. By February 19, it had crept back to 112. Last Monday, it broke through topside resistance to reach 115; two days later came a major gap up, with the stock shooting from 117 to 132 in a day. With volume still double normal levels, it continues to creep higher at 134, and has completely left its 50-day moving average (111) in the dust. Buy on the dips and see how far the high buying volume can carry it.
DPZ Weekly Chart
DPZ Daily Chart
Celgene (CELG)
Why the Strength
Celgene remains a blue-chip biotech firm, but rather than solely relying on a handful of big-selling drugs (blood cancer drug Revlimid is its top seller), the firm also spends a ton of money on what is essentially a venture capital arm that acquires smaller firms and the rights to sell a few potential blockbusters. That’s the main reason the stock has reasserted itself in recent weeks—first, Celgene invested $1 billion in Juno Therapeutics, taking a 10% equity stake and getting international rights to Juno’s innovative cancer treatments that both firms expect will be approved in 2020. Then, last week, Celgene made a huge move, buying Receptos for $7.2 billion, which has an extremely promising drug called ozanimod (now in phase III trials) that should be approved in 2018 for ulcerative colitis and multiple sclerosis. Throw in the fact that management also pre-announced a better-than-expected second quarter, and nudged up its long-term earnings guidance (management now expects at least $13 of earnings per share in 2020, up from an estimated $4.75 this year), and big investors have more reasons to believe the company can grow at 20% to 30% rates for many years. This remains a big story.
Technical Analysis
CELG originally broke out at 40 way back in January 2013, and it’s obviously had a big run since then. However, the stock’s had a series of multi-month consolidations during that time, the most recent of which began in March of this year—shares pulled back 18% before finding support at its 40-week moving average a couple of times. And last week’s Receptos buyout and earnings pre-annoucement catapulted the stock to new highs on its heaviest weekly volume since October. We think CELG is buyable around here with a stop near 120.
CELG Weekly Chart
CELG Daily Chart
Barnes & Noble (BKS)
Why the Strength
Bookstores aren’t dead yet—or at least Barnes & Noble isn’t. Four years ago, when rival Borders shuttered its doors, many declared it was the beginning of the end for bookstores, driven away by Amazon.com and other online book-retailer behemoths. But Barnes & Noble has been resilient, booking its first full-year profit since 2010 in its recently completed 2015 fiscal year. Ironically, the bookstore chain has survived by becoming much more than a bookstore, branching into toys, games and electronics such as the Nook e-tablet. It’s also survived by strategically closing stores and handing Nook production duties over to Samsung, reducing operating losses from $500 million to $86 million in 2015. Better yet, the company expects earnings per share to increase a whopping 414% in 2016 and another 17% in 2017. But what has really gotten investors’ attention of late is the company’s plans to spin-off a separate college bookstore division this week. Wall Street loves a spinoff, and anticipation for Barnes & Noble’s split has been building for weeks. The company’s college unit has $2 billion in revenue, or about a third of the company’s total sales, but only sells to less than half of all U.S. colleges. With more schools outsourcing their bookstores, Barnes & Noble believes the unit has plenty of growth potential—or at least enough to necessitate a spinoff. The company also just resumed paying a dividend ($0.15 per quarter, good for a 3% yield) after a five-year hiatus.
Technical Analysis
BKS has been trending upward since announcing its 2015 fiscal year results in mid-May. The stock jumped from 22 to 26 in a month, pulled back slightly to 25 in late June and kited even higher this month, settling in the mid-28s last week. Volume has picked up since the beginning of June, and continues to grow along side the anticipation of the upcoming spinoff. You can buy now and set your stop loss near 25, the current 50-day moving average.
BKS Weekly Chart
BKS Daily Chart
Alaska Air Group (ALK)
Why the Strength
With 11 appearances in Cabot Top Ten Trader since 2008, Alaska Air has proven itself a survivor in the tough airline industry, managing the ups and downs of fuel, labor and airplane costs and price competition. From its hubs in Anchorage, Seattle, Portland and Los Angeles, Alaska Air’s traditional base on the West Coast of the U.S. has expanded to include service to several cities in the Midwest and the East Coast as well as the Hawaiian Islands. The company’s usual fleet of Boeing 737s is now integrating Bombardier Q400s for its regional routes, with fuel costs improving as a result. The company also has long-term labor agreements in place and is benefiting from the stable low prices for fuel. Management has used the company’s excellent free-cash flow to improve its dividend and for an aggressive share buyback program. While the airline industry traditionally self-destructs with excessive price competition, that’s not happening now. Companies are enjoying the increased demand for travel by raising fees and keeping ticket prices stable. It’s the cream of the airline crop at the moment, and investors will be watching the company’s Q2 earnings announcement this Thursday (July 23) closely to see if it can keep its string of earnings surprises going.
Technical Analysis
ALK has been appreciating rapidly since the fourth quarter of 2012, with quarter-long corrections punctuating the advance. The latest slowdown began after the stock hit new all-time highs at 71 in January 2014. ALK traded sideways for almost five months after that, with support at 62 and resistance at 68. The breakout came on July 10, when ALK broke out above 70 on strong volume, then followed up with gains to 75 last week. With earnings out this week, we don’t recommend taking a full position in ALK. But a small buy around or under 74 seems like a good risk/reward proposition. A tight stop near 66 makes sense.
ALK Weekly Chart
ALK Daily Chart
ACADIA Pharmaceuticals (ACAD)
Why the Strength
Want any further evidence that biotechs—and clinical-stage biopharmaceuticals in particular—are all the rage on Wall Street these days? Take a look at Acadia Pharmaceuticals, a company that has never turned a profit and brought in a mere $130,000 in sales in the last four quarters. Investors like Acadia’s promise—with good reason. The clinical-stage company has a pipeline of five drug candidates, four of which are nipping at the heels of gaining commercial approval. Nuplazid, which just completed phase III of clinical trials, is the closest to market. The Food and Drug Administration (FDA) granted Nuplazid Breakthrough Therapy designation last year, prompting the company to submit a new drug application. If approved, it would be the first drug in the U.S. aimed at treating psychosis related to Parkinson’s disease, occurring in about 40% of afflicted patients. Three more Acadia drug candidates—one for psychosis related to Alzheimer’s disease, one for Schizophrenia, one for chronic pain—are in phase II clinical trials. If any one of those drugs makes it to market, it would completely transform the company. Hence all the optimism.
Technical Analysis
Since a fairly steep drop in early March, ACAD has been on a steady climb. The stock closed out March at 30 a share and has since ascended to 50. There have been plenty of dips along the way, but ACAD hasn’t fallen below its 50-day moving average since late April. With volume picking up during the last two weeks, the stock made a major leap from 40 to 50. After such a powerful breakout, dips are likely, but we don’t expect a huge pullback.
ACAD Weekly Chart
ACAD 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.
