Scary but Acceptable
From July 7 through July 17, we saw a harrowing decline among individual stocks and many major indexes. There was enough damage to suggest selling off a couple of your weaker holdings and possibly taking partial profits in a couple of winners. However, the market found some support last Friday, few stocks have broken down and the indexes have generally held support (though small-cap indexes look sick). Because of that, we remain overall bullish—you shouldn’t push the envelope here, but holding your best performers and keeping your eyes open for new leaders (possibly via earnings gaps) makes sense.
This week’s list surprised us (in a good way) by including a bunch of top-notch growth stories. Our Top Pick this week is Fairchild Semiconductor (FCS), a turnaround in the chip sector with huge projected growth. The stock just enjoyed a huge-volume, earnings-induced surge.
| Stock Name | Price | ||
|---|---|---|---|
| Weatherford International plc (WFT) | 0.00 | ||
| Vertex Pharmaceuticals (VRTX) | 230.36 | ||
| Vipshop Holdings (VIPS) | 14.25 | ||
| Newfield Exploration (NFX) | 0.00 | ||
| Cheniere Energy (LNG) | 63.82 | ||
| Keurig Green Mountain (GMCR) | 0.00 | ||
| Fairchild Semiconductor (FCS) | 0.00 | ||
| Blackstone Group (BX) | 49.12 | ||
| Applied Materials (AMAT) | 0.00 | ||
| Akorn (AKRX) | 0.00 |
Weatherford International plc (WFT)
Why the Strength
After years of rapid expansion through acquisition, Weatherford International has decided to dial things back a bit. The oil and gas services company is in the midst of a massive restructuring, designed to cut costs, trim underperforming businesses and focus on the company’s core competencies. In the process of cutting the fat, Weatherford sold its pipeline specialty service business to Baker Hughes back in March, and sold its Russian ESP business for about $400 million before that. More recently, Weatherford sold its Russian and Venezuelan drilling rigs to Rosneft for $500 million. As a result of the Rosneft deal, Weatherford no longer has the largest international drilling fleet, but it may have one of the most productive. Furthermore, the money raised from the deal should help Weatherford improve its current operations, also boosting the potential value of the initial public offering for the company’s land rig business. This IPO is expected to take place in 2015, and could generate as much as $2 billion for Weatherford. As a result of these moves, Weatherford is expected to grow earnings by 80% in 2014 and 54% in 2015.
Technical Analysis
After a painful downturn saw the stock plunge to a bottom near 9 in November 2012, WFT has come roaring back. Recovering quickly from the low, the stock spent much of 2013 in rally mode, topping out just shy of 18 a year later. A correction forced shares to test the 13 level in January, but WFT once again rebounded with alacrity. In fact, WFT has since gained more than 70%, driven higher by support at its 10-week and 25-week moving averages. Currently, shares are consolidating these gains into support in the 22-23 region, providing an opportunity to buy a little ahead of earnings, which are likely out within a couple of weeks.
WFT Weekly Chart
WFT Daily Chart
Vertex Pharmaceuticals (VRTX)
Why the Strength
Vertex Pharmaceuticals is best known for Agenerase, an AIDS treatment, and Incivek, an anti-hepatitis C product. But Vertex has moved on from these treatments, focusing instead on becoming the world-leader in cystic fibrosis treatment. Vertex’s Kalydeco, a twice daily tablet for cystic fibrosis, has seen sales ramp up in recent quarters. But the big news for the company arrived in late June, when a combination treatment that uses the active ingredient in Kalydeco combined with anti-cystic fibrosis drug Lumacaftor delivered positive Phase III trial results; Vertex expects to file for FDA and European approval later this year. Additionally, the treatment has received a “Breakthrough” designation by the FDA, meaning that the new cystic fibrosis treatment could be on the market in the U.S. in the third quarter of next year. Currently, Vertex is estimating that if it can grow its Kalydeco treatment to 7,000 patients annually, it could rake in about $1.5 billion in revenue. Meanwhile, the company believes that the Kalydeco-Lumacaftor treatment could have an addressable market of 28,000 or more, hinting at potential revenue of more than $5 billion annually if Vertex can maintain its current pricing power in the market.
Technical Analysis
VRTX has been volatile since about mid-2012. Shares have a habit of skyrocketing on positive drug trial data, having vaulted higher on May 11, 2012, April 19, 2013, and again on June 24 this year. These spikes have been historically followed by periods of consolidation, with VRTX finding support before trekking higher once again. This time is a bit different, as the company is looking at potential revenue in excess of $5 billion from one treatment. Because of this strong outlook, we believe that VRTX will turn higher once the post-announcement euphoria wears off. For now, we recommend buying dips.
VRTX Weekly Chart
VRTX Daily Chart
Vipshop Holdings (VIPS)
Why the Strength
Vipshop Holdings, the fast-growing Chinese company that specializes in flash sales of branded merchandise, has been attracting investors with its strong revenue and earnings growth. Revenue growth has cooled off from over 1,000% in 2010 to a still-hot 145% in 2013. And earnings, which turned positive in 2013 with EPS of $1.12, are forecast to grow by 150% in 2014 and 70% in 2015. The key to Vipshop’s success as an online retailer has been its network of partnerships with about 8,700 Chinese and international brands that supply goods for sale at significant discounts on a limited-time basis. This flash sales strategy avoids the problem of warehousing huge inventories and keeps customers coming back to view the constantly changing lineup of goods. The company has opened seven warehouses in the Guangzhou area and one in Jianyang to move out clearance merchandise, but has no plans to develop a brick-and-mortar presence. One recent acquisition that has caught investors’ attention is the $132 million buy of a 75% interest in Lefeng.com, an online retailer of cosmetics and fashion products. Vipshop will get access to Lefeng’s Ovation cosmetics line and will sell other goods on its own site with progressive commissions based on sales volumes. The Chinese retail story is a big one, and investors who have been favoring Vipshop Holdings may be tempted by the Alibaba IPO, which has now been postponed until September. But for now, worries about that possibility haven’t shown up in the price of Vipshop’s stock.
Technical Analysis
VIPS didn’t really begin to trade on significant volume until a year after its March 2012 IPO. But once the stock got moving, it was a rocket, soaring from 24 in March 2013 to over 200 in recent trading. VIPS has taken a couple of rests along the way, including April–June 2013 and in March through May of this year. Some commentators see VIPS as having gone too long without a major correction, which makes them nervous. Despite that, short interest remains slight. VIPS looks buyable on a dip below 200 with a stop around its low from two weeks ago.
VIPS Weekly Chart
VIPS Daily Chart
Newfield Exploration (NFX)
Why the Strength
Newfield might be the leader in the entire energy exploration group. The company is a liquids-based, horizontal drilling firm that’s taking a bit of a different tack than many of its peers; instead of focusing its operations in just one area, it operates in four locations. Its biggest focus is the Anadarko Basin in Oklahoma (including the very promising SCOOP and STACK areas, which have wells that return 40% to 50% or more), where production should double this year. Newfield also does good business in the Uinta Basin in Utah, as well as the Williston Basin and Eagle Ford Shale, where production should grow north of 30% this year. Plus, Newfield is one of the few exploration firms that, thanks to some asset sales, generally spend within their cash flow. The reason for the stock’s pop last week was a spate of good news—the company’s acreage in the Anadarko Basin grew to 250,000 acres, and the firm upped its 2014 production guidance—it now expects total production to grow a solid 18%, but more important, oil and liquids output should grow 30% to 35% and make up the majority of overall production. Analysts see earnings up 32% both this year and next. The next earnings report is out the morning of July 30. It’s a good story.
Technical Analysis
NFX was the dog’s dinner for a couple of years prior to February 2014, but that changed when the company’s management laid out a bullish three-year growth plan, and as it’s begun to execute, the stock has done excellently—NFX has enjoyed a persistent advance since then, which included one stretch of 10 weeks up in a row (a sign of institutional accumulation). Last week, the stock looked to be headed for another test of its 10-week line, but the improved production guidance caused some big-volume buying on Thursday. With earnings out next Wednesday, you should keep any new purchases small and use a stop near the 50-day line.
NFX Weekly Chart
NFX Daily Chart
Cheniere Energy (LNG)
Why the Strength
Cheniere Energy has poured $20 billion into the construction of the Sabine Pass liquefied natural gas (LNG) plant, which is expected to be in service by the end of 2015. This enormous project, including two natural gas liquefaction plants (one of which will be online by the end of 2015) and four trains for the delivery of gas to export terminals, won’t be completed until 2018. But the opportunity created by the success of U.S. natural gas drilling and production improvements has interested investors for a long time. Cheniere’s first appearances as a Top Ten company back in 2004 were for its prospects as an import terminal for natural gas, but that has clearly changed. In the past couple of months, the company has announced four long-term sales contracts, including Gas Natural Fenosa, the largest seller of natural gas in Spain and Latin America, on June 2, Woodside Energy Trading Singapore, the largest Australian independent oil and gas company, on June 30, Pertamina, a Fortune 500 company in Indonesia on July 1 and EDF (Électricité de France), the largest electricity producer in Europe, on July 17. All of these contracts are contingent on the successful permitting and completion of construction on the various liquefaction, transport and delivery facilities that Cheniere is working on, but investors appear confident that everything is on track.
Technical Analysis
LNG has made plenty of progress since the last time it traded in single digits in December 2011. The stock spent April and May consolidating earlier gains under resistance at 60, but blasted off on huge volume on May 29 and 30 on news of the Woodside contract. The stock meandered through June, pushed to new all-time highs near 74 on July 1 and bounced off its 25-day moving average last Friday. LNG and its long-term prospects look like a reasonable buy on any weakness with a stop at the 50-day moving average at 66.
LNG Weekly Chart
LNG Daily Chart
Keurig Green Mountain (GMCR)
Why the Strength
Keurig Green Mountain is the dominant single-serve coffee company, with millions of its brewers in place all across the U.S. (including 1.8 million sold in the first quarter alone) that lead to a huge stream of recurring income via its K-Cup coffee packs (which made up 80% of revenues in the most recent quarter). Just 20% of U.S. households have a single-serve brewer, but growth has slowed in recent quarters for a couple of reasons. First, competition has arrived as some patents for K-Cups expired (hitting market share and prices), but second, many people are evidently holding off because they want larger brew sizes. The solution? The Keurig Bolt, a new and improved brewer that can brew 64 ounces in about two minutes; it’ll be available for sale within a few weeks. The other new initiative is Keurig Cold, which will be able to serve carbonated, sparkling and still beverages and will launch next year in partnership with Coca-Cola (which owns 16% of GMCR). The next few quarters should see decent growth (bolstered by a modest 0.9% dividend yield and a $1.2 billion share repurchase program during the next two years), but the focus is on a potential surge in growth due to the Bolt and especially the Cold. Earnings are due out August 6.
Technical Analysis
GMCR has been a jumpy stock during the past year, making good progress but with the gains generally coming in quick news-based surges. The last two huge rallies came from Keurig Cold-related news in February and May, but in recent weeks, GMCR has traded calmly and relatively tightly. Just last week, in fact, the stock tagged its 50-day line on very light volume (especially compared to the aforementioned buying waves) and has bounced a bit since, setting up a low-risk entry. We think you can start a position around here with a tight stop in the mid-110s.
GMCR Weekly Chart
GMCR Daily Chart
Fairchild Semiconductor (FCS)
Why the Strength
Among the longest lived semiconductor manufacturers, Fairchild Semiconductor makes chips and integrated circuits for literally tens of thousands of customers in the automotive, computer, consumer electronics, industrial, mobile and communications markets. Long a staple for semiconductor investors, Fairchild caught additional tailwinds in mid-May after acquiring Xsens, a Netherlands-based supplier of 3D motion tracking products for the industrial, health, fitness and entertainment markets. While the company’s move into a red-hot field was inspiring, Fairchild’s second-quarter earnings report provided even more fuel for the fire. Specifically, the chipmaker posted earnings well above Wall Street’s forecasts, with revenue driven by Fairchild’s largest sales gain in three years. What’s more, Fairchild sees the trend continuing into the third quarter, citing a modestly higher backlog and continued sales growth. Looking ahead, the company’s growth prospects are impressive, with Fairchild expected to see an 89% rise in earnings this year, followed by 88% growth in 2015. With the recovery gaining strength amid the current tech upgrade cycle, we like Fairchild’s diversity.
Technical Analysis
For the better part of the past two years, FCS has been trapped in a trading range between 12 and 16. What’s more, over the past year, that range narrowed further to between 12 and 14. Driven by reports of growing sales demand and tech-upgrade cycles, FCS has come to life in the past several weeks. Sparked by a mid-May acquisition, FCS tagged a fresh multi-year high above 16 last month. Now, drawing strength from strong Q2 earnings, the stock has its eye on the 17 level, above which FCS hasn’t traded since mid-2011. We do think near-term dips are likely, but the volume on last week’s rally tells us not to expect a huge dip.
FCS Weekly Chart
FCS Daily Chart
Blackstone Group (BX)
Why the Strength
Blackstone Group might be the ultimate Bull Market stock, but it’s also one of the most unique—it’s a leading investment and advisory firm for all kinds of assets. Because of some timely investments years ago and a willingness to ring the register recently as valuations have surged, Blackstone has sold $39 billion of investments during the past year. More important, its “economic net income” (which includes unrealized investment gains and smooths out results) in the first quarter surged 89% to $1.3 billion, which was miles ahead of estimates and led to a whopping 55 cent per share dividend (to shareholders as of July 24). All told, the company has assets under management of $279 billion (including $80 billion in real estate, $62 billion in credit, $53 billion in private equity, and another $50 billion in hedge funds). The stock’s path will follow the overall market—if the company’s assets are appreciating (especially via its BCP V private equity fund, which accounted for a quarter of all revenues), then its income, realizations and dividends should continue to soar. Of course, if the market and valuations tank, the stock will, too, but there’s no sign of that now. All in all, Blackstone is as leveraged as any firm to a bull market environment.
Technical Analysis
As you’d expect, BX has had a great run since the start of 2013 as the stock market and assets all across the spectrum have soared. This year, the stock got off to a good start, but then built a healthy 16-week, 22%-deep base, with a shakeout during the market dip two weeks ago. But BX found support and soared on five days in a row of big, increasing volume. There will be volatility, but the volume on the breakout is impressive—we think it’s buyable here with a stop just below 32.
BX Weekly Chart
BX Daily Chart
Applied Materials (AMAT)
Why the Strength
Last September, Applied Materials—already the biggest maker of semiconductor equipment in the world (by sales)—announced that it was merging with Tokyo Electron, the fourth-largest chip equipment maker. This all-stock deal, valued at more than $7 billion, will create a combined company with an enterprise value of around $29 billion. The combined company has also selected a new name and logo, dubbing itself Eteris. The deal is expected to close in the second half of the year. Profits in the chip equipment industry are driven primarily by shifts in chip technologies that demand new manufacturing equipment. And the transition of the chip industry to smaller circuit sizes (down to 12 nanometers) is going on right now. Applied/Tokyo/Eteris has also said that it will be an innovator in semiconductor and display manufacturing technology, and Eteris will certainly have the research resources to deliver on that promise. Applied Materials enjoyed 217% EPS growth in its fiscal Q4 2013, 283% in Q1 2014 and 75% in Q2. The company’s next quarterly report is expected around August 14. A tidy 1.8% annual dividend yield is also attractive.
Technical Analysis
AMAT has been in a strong uptrend since breaking out of a long consolidation phase in January 2013. Progress has been steady, with frequent corrections leading to strong volume returns to the upward trend line. A big volume spike in September 2013 marked the merger news, and similar high-volume days have shown up in May and June. AMAT hit resistance at 23 in late June and the stock has spent much of July trading flat at that price. With the 25-day moving average now at 22.75 and rising, any pullback below 23 looks like a reasonable buy. A drop below the 50-day moving average, now at 21.6, would be bearish.
AMAT Weekly Chart
AMAT Daily Chart
Akorn (AKRX)
Why the Strength
Illinois-based Akorn used to describe itself a “niche generic pharmaceutical” company, but recent acquisitions have removed the “generic” from that tag. Akorn is known primarily as a manufacturer of ophthalmic medications, injectables and non-sterile nasal sprays. But starting with the purchase of Hi-Tech Pharmacal in April, the company acquired a greatly expanded manufacturing capability in different dosage forms like nasal sprays, topical gels, creams, ointments and oral liquids. The $640 million cash deal was the largest Akorn has ever made. While Hi-Tech Pharmacal was a manufacturing coup, the company’s May purchase of VersaPharm for $440 million in cash brings with it an array of both approved and pipeline drugs for the treatment of dermatological ailments, tuberculosis and hemophilia. The acquisition is expected to add to earnings immediately, and management sees this as a key to rapid pay-down of debt. With a steady base in the sale of generics and an increasing presence in branded pharmaceuticals, Akorn has big projected earnings growth for the next couple of years. Quarterly results will be released on August 5 before the market opens.
Technical Analysis
AKRX completed one big run in July 2012 when it topped 16 briefly, but then took a year off, trading down to 12 and gradually working its way back to 16 in August 2013. A rally to 26 in November led to a few more months of up and down trade with the stock getting additional bursts of energy from the Hi-Tech Pharmacal buyout in April and the VersaPharm deal in May. The stock is now calming down after an intraday spike as high as 37 on July 1, settling down under 34 with its rapidly rising 25-day moving average moving up quickly at 32. A little patience should yield a buying opportunity under 33. Keep initial purchases small ahead of earnings and use a stop at the 50-day, now at 30.
AKRX Weekly Chart
AKRX 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.
