Follow the System
Current Market Outlook
If you haven’t stuck with a proven system in 2015, chances are you’ve been chopped to pieces by the market’s never-ending ups and downs. Today was another headline-driven selloff (Chinese stocks are seeing renewed weakness), but it doesn’t change the market’s condition—the intermediate-term trend is still sideways, with some stocks acting fine and others looking like it’s 2008. The plan remains the same—be selective on the buy side, honor all stops and hold some cash, but also give your most resilient stocks a chance to hold up and resume their advances. If leading stocks decisively break down, then we’ll change our tune, but so far focusing on the strongest stocks has been fruitful.
This week’s list features a few recent earnings winners, as well as a few that are set up well heading into their earnings reports. Our Top Pick is Valeant Pharmaceuticals (VRX), a big-cap growth stock that remains in a firm uptrend following a better-than-expected report.
| Stock Name | Price | Buy Range | Loss Limit |
|---|---|---|---|
| Valeant Pharmaceuticals (VRX) | 0.00 | 248-256 | 230-232 |
| Netflix, Inc. (NFLX) | 423.92 | 101-106 | 93-94.5 |
| Infinera (INFN) | 0.00 | 22.5-23.5 | 20-21 |
| IACI (IACI) | 0.00 | 78.5-81 | 75-76 |
| GoPro, Inc. (GPRO) | 0.00 | 59-62 | 54-55 |
| Criteo (CRTO) | 0.00 | 51-53 | 48-49 |
| Chipotle Mexican Grill (CMG) | 773.32 | 705-720 | 660-665 |
| Cempra (CEMP) | 0.00 | 42-44 | 37-38 |
| China Biologic Products (CBPO) | 0.00 | 112-117 | 105-106 |
| Amazon.com (AMZN) | 2.00 | 515-530 | 470-475 |
Valeant Pharmaceuticals (VRX)
Why the Strength
Valeant was already one of the largest pharmaceutical companies in Canada before it acquired Salix Pharmaceuticals for $11.1 billion earlier this year. Now it’s the largest company in Canada period, at least by market value. The latest bump came courtesy of last week’s second-quarter earnings beat; earnings and revenue each improved 34% from a year ago, prompting the company to raise its full-year guidance. Salix, its new acquisition, will account for some of that growth—about $1.2 billion of Valeant’s anticipated $11 billion in 2015 sales. But Valeant’s organic growth has been equally impressive. Not including acquisitions, Valeant’s revenues expanded 19% last quarter, fueled largely by the company’s contact lens, dermatology and dental business. Now Valeant is bringing two more acquisitions into the fold: on July 17, the company announced it was buying Egypt’s largest drug maker for $800 million, and Commonwealth Laboratories of Salem, Massachusetts, said Valeant is purchasing its U.S. and Canada operations for an undisclosed amount. The recent flurry of acquisitions shows that Valeant is flush with cash and not afraid to spend it—two attributes that make investors swoon.
Technical Analysis
VRX has been climbing steadily for almost a year now. Last August, the stock had dipped to 106. It’s now up to 251! The first big leap came in January and February, when the stock jumped from 140 to 202. Shares traded sideways for the next two months but got a jolt of energy in late April, shooting up to 241 by the end of May. A six-week consolidation phase followed, but now VRX is on the upswing again. The stock has risen from 223 to as high as 253 in the last two weeks. We think it’s buyable around here with a stop below the 50-day line, near 230.
VRX Weekly Chart
VRX Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
Netflix has been a frequent subject of Cabot Top Ten Trader, both during its original 2010–2011 run and then during its monster 2013 run that peaked in February 2014. Netflix is notable among mid-cap stocks for the its ability (guided by ace CEO Reed Hastings) to re-invent itself once it has mined a market niche. The company made its name by renting movie DVDs by mail, a business that eventually killed Blockbuster. Netflix then undercut its own primary revenue source (monthly subscriptions to DVDs) by offering unlimited streaming of all kinds of content, including movies and TV shows. While that transition was tough, it eventually stabilized the company’s revenues and grew its subscriber base. Once that revolution was over, Netflix began producing and offering its own content, starting with the hit series House of Cards. Now, Netflix is going full bore overseas; in the second quarter, international subscribers grew 67%, and management believes the third quarter will be great on that front as well. Overall, the company added 3.27 million new subscribers in the quarter, bringing the total to 65.6 million. Recent news includes a deal with Angelina Jolie to direct a Netflix-original movie—just the kind of continuing innovation that’s keeping Netflix at the top of investors’ minds.
Technical Analysis
NFLX went through a rebasing period from March 2014 through January 2015, trading in a wide range, but finished that rebase down from 65 to 45. But a series of strong earnings reports this year—January 21, April 16 and July 16—blasted the stock out of that range and well over 100 on huge volume. NFLX has pulled back from its post-report high of 118 last Monday to around 109 at week’s end. For a stock as attractive as NFLX, which has well over 1,000 institutional supporters, that’s a pretty good entry point, although a little patience might get you in a few points lower. Try to buy in around 105 and use a stop at 94.5.
NFLX Weekly Chart
NFLX Daily Chart
Infinera (INFN)
Why the Strength
Investors love to buy Infinera’s earnings. Infinera hit new highs in January on an earnings beat, and last Thursday it gapped up again, this time with the additional benefit of improved guidance. There are definitely buyers out there ready to get on board when the company performs, and it’s no surprise why: Infinera provides the fastest, most efficient and most manageable optical transmission product in the telecommunication network equipment market—it’s the company that makes the technology for your Internet service provider. It’s not the oldest firm in the market, or the largest, but it is, by all accounts, the most innovative. Infinera has filed over 500 unchallenged bandwidth technology patents, many of which pertain to its revolutionary Phototonic Integrated Circuits (PIC) solution—a hybrid circuitry component that gives engineers an unprecedented amount of control over bandwidth allocation, lowering energy consumption and increasing operating efficiency. Even if we ignore the qualitative appeal of Infinera’s product, its numbers could make the case themselves: Infinera’s sales and earnings growth have been strong for many quarters, and analysts see that continuing for another few quarters at least. It’s the leading player in a high potential business with a unique, revolutionary product. What’s not to love?
Technical Analysis
Again, recent earnings reports have been mostly kind to INFN. The earnings beat in January propelled the stock 18% to a seven-year high, and it has maintained a slight, long-term uptrend ever since. Despite a good first-quarter report, INFN was caught in the spring “chop-fest,” and remained more or less range-bound until a small breakout in late May. The latest high-volume earnings gap is definitely a good sign, and the stock appears to be consolidating around 23 at the moment. You could buy here or on slight dips, with a stop around the 50-day line.
INFN Weekly Chart
INFN Daily Chart
(IACI)
Why the Strength
IAC/InterActiveCorp is a media/website company that operates in four segments, Search & Applications, The Match Group, Media and ecommerce. But a quicker description would just be to list the big names the company owns: Match.com, Ask.com, About.com, Chemistry, OKCupid, Tinder, Dictionary.com, Princeton Review, Vimeo, The Daily Beast and CollegeHumor.com, and many others. Historically, the company has developed and spun off many successful businesses, including Expedia, TripAdvisor, HSN, Tree and LiveNation (under the name Ticketmaster). Thus, the company’s revenue and earnings history may look a little spotty as spinoffs occur. IAC/InterActiveCorp grew revenue by 36% in 2012, but just 8% in 2013 and 3% in 2014. But earnings are forecast to grow 16% in 2015 and 40% in 2016. The company is always actively investing in startups, acquiring companies (like French dating site Meetic, which was acquired in 2011) and spinning them off when conditions are right. IAC/InterActiveCorp will report its Q2 earnings after the market closes tomorrow (Tuesday, July 28) with a conference call at 8:30 am on Wednesday. Analysts are looking for revenue of $776 million and earnings of 59 cents per share. As usual, we don’t advise taking a full position just ahead of earnings, but a positive reaction to earnings, especially one with big volume support, can lead to continuing appreciation.
Technical Analysis
IACI went through a significant correction from its high of 81 in March 2014 to a low of 59 in October 2014. But after a fake-out rally and a return to 59 in February 2015, IACI has been in a steady uptrend ever since, pushing out to new all-time highs earlier this month. The stock looks to be trading gradually lower as investors take a little profit ahead of earnings. Look to buy in if IACI rallies after its earnings report. A stop at 76 will provide protection.
IACI Weekly Chart
IACI Daily Chart
GoPro, Inc. (GPRO)
Why the Strength
GoPro has our continuing attention for one major reason—it’s leading what has become an entirely new industry (action cameras), which is a characteristic of many big winners of years past. While there’s sure to be competition, GoPro’s collection of cameras (including five new cameras in the past 10 months) is by far the most popular in the industry; the company shipped a whopping 1.6 million cameras in the second quarter alone, accounting for four of the five top-selling digital cameras, and its cameras are now found in 40,000 stores worldwide. For the next year or two, sales are expected to remain brisk, but most investors are wondering whether GoPro will be able to branch out into other lucrative areas. The evidence of that is improving—the company has made inroads into virtual reality, has announced a drone to be launched in the first half of next year and (most important to us) has unveiled a content licensing business, where professionals can search, sort and request a license to use content from GoPro’s huge video library. In the near term, though, the camera business is the main driver; analysts see earnings up 29% this year and 24% in 2016, but given that the company has trounced estimates in each of the past few quarters, those figures are likely very conservative. It’s a big story.
Technical Analysis
Hot new issues often experience a brief pause, a huge run for a couple of months, and then a punishing decline as reality takes hold. That’s exactly what GPRO did, doubling from August to October last year before falling a whopping 62% by March. But the trend has since turned up—we got knocked out of the stock during the Greece/China dip, but GPRO then came on strong, lifting out of its first real basing structure in many months. It’s sure to be volatile, and there’s still old overhead to chew through, but we’re OK buying a small position on this dip and using a stop in the mid-50s.
GPRO Weekly Chart
GPRO Daily Chart
Criteo (CRTO)
Why the Strength
You know those digital ads that appear on certain websites that are targeted specifically to your tastes? Criteo is responsible for many of them, embedding “cookies”—small text files stored in a user’s computer or hard drive to help websites recognize you and track your preferences—on nearly half of the top 100 travel and retail sites. Only Google has a larger digital ad presence. Now there’s speculation that Criteo has landed one of its biggest customers to date: Chinese e-commerce giant Alibaba. Though Criteo hasn’t confirmed any deal, its cookies have been showing up on some of Alibaba’s non-China websites, leading some to think it’s only a matter of time before the company lands Alibaba’s lucrative China business. With global e-commerce sales expected to reach $1.77 trillion this year, and top $2 trillion next year, Criteo has carved out a significant swath of a major growth industry. Sales and earnings reflect that growth: Criteo’s earnings per share have improved 10-fold in the last two years, from $0.10 in 2012 to $1.01 last year, while sales have nearly tripled, from $354 million in 2012 to $964 million last year. Both numbers are expected to climb substantially again this year. An Alibaba deal would only accelerate that growth.
Technical Analysis
CRTO came public in October 2013 at 35, shot up to 58 in March of 2014, then quickly crashed back to earth the following month, plummeting all the way to 27. After several fits and starts last year, the stock has been on a steady climb this year, breaking through resistance at 40 in January, topping 50 in June, and threatening to take down new record highs last week. CRTO nearly touched 57 before pulling back with the market during the past few days. Still, the dip could only bring the stock down to its 25-day line before finding support. Expect volatility, but buying in the low 50s, with a stop around 48.5, should work out.
CRTO Weekly Chart
CRTO Daily Chart
Chipotle Mexican Grill (CMG)
Why the Strength
Chipotle Mexican Grill has been one of the market’s favorite cookie-cutter stories for many years, and for good reason—the company’s (mostly) all-natural, fast casual Mexican food concept has been a hit. Healthy growth from existing locations, combined with steady store growth (now 1,878 stores, up 97 from six months ago), has led to a rapid, steady increase in the bottom line; earnings are expected to reach $17.35 per share this year, about twice what the firm earned in 2012 and four and a half times as much as 2009. The reason for the stock’s strength today is that, after a prolonged rest period, big investors are looking ahead toward a re-acceleration of growth in a quarter or two—after same-store sales rose just 4.3% in the second quarter, management indicated that traffic was up thus far in the third quarter and recent price hikes should further boost margins (and offset the move toward higher minimum wages). The company also has some intriguing irons in the fire—it’s beginning to move into Britain (now seven restaurants) and its Pizzeria Locale (quick, tasty pizzas) and ShopHouse (an Asian food version of Chipotle) restaurants could grow handsomely in the years ahead. Of course, the valuation is high, and the company is getting big ($4.4 billion in revenue during the last 12 months), so growth won’t be as rapid as it was a few years back. But given that McDonalds has six times more revenue (not to mention other fast-food chains), there’s still plenty of room for growth.
Technical Analysis
Like many growth stocks, CMG hit a meaningful top in March 2014; when the stock tagged 623 in June of this year, 15 months later, the stock was meandering around 600. That long trendless period probably wore out many weak hands and set the stage for the recent rebound; CMG began rallying well before its quarterly report, and then lifted off last week following the conference call. We don’t expect a straight-up move, but buying dips should work out over time. And remember, ignore the stock price—just buy fewer shares.
CMG Weekly Chart
CMG Daily Chart
Cempra (CEMP)
Why the Strength
Community-acquired bacterial pneumonia (CABP) is the No. 1 cause of death from infection, and Cempra thinks it may have a way to treat it—earlier this month, the Chapel Hill-based drug developer enrolled a clinical trial to test it. The company expects to have data from the trial available later this year, and is on track to file a new drug application with the Food and Drug Administration in 2016. It doesn’t seem like much to go on, but every time Cempra presents any positive news, investors flock. That’s probably due to the sheer size of the pneumonia market: there are between five million and 10 million cases of CABP every year. Like many clinical-stage biotechs, Cempra hasn’t generated much revenue yet. But that’s beginning to change—sales nearly doubled last year and improved 353% in the first quarter. The company is scheduled to report second-quarter financials results this Wednesday, but the main story here will revolve around any updates to the long-term potential of the firm’s experimental treatment.
Technical Analysis
CEMP came public in February 2012 at 6 per share, and after two and a half relatively uneventful years, the stock had only risen to 9. Things changed dramatically last September, when the stock began to skyrocket, eventually reaching 40 per share by March of this year. Not surprisingly, a correction followed, but the stock held support at 31 despite testing it numerous occasions over the past few months. Resistance also held firm at 40 … until two weeks ago when CEMP broke to 41 and kept on rising to 45 entering this morning. With the 50-day moving average down near 37, shares are a bit extended even after today’s dip, but if you’re game, nibbling here with stop near 37 should work out well if the market holds up.
CEMP Weekly Chart
CEMP Daily Chart
China Biologic Products (CBPO)
Why the Strength
China Biologic Products is a Beijing-based niche medical company that specializes in products derived from blood plasma. The company collects the plasma at 12 centers and processes it at two wholly owned subsidiaries. The plasma is processed into albumin, immunoglobulin and clotting factor products. Albumin is used to replace lost fluids and prevent shock in accident and burn victims, while immunoglobulin can be tailored to prevent or treat conditions such as hepatitis B, tetanus and rabies. Clotting factors treat hemophilia and other blood coagulation conditions. China Biologic has enjoyed five years of double-digit percentage revenue growth, including a 20% jump in 2014 and a 25% gain in Q1 2015. The company also has several new products in its development pipeline, including a preventative treatment for measles and contagious hepatitis that already has a production application filed and a fibrinogen product in Phase III clinical trials. China Biologic’s stock hasn’t been immune to the dramatic moves in the Chinese stock market, but it has performed much better than most Chinese stocks. China Biologic will report its Q2 results after the market closes on Wednesday, August 5, and that will likely be the key to the stock’s immediate future. This is a narrowly focused, vertically integrated business—it controls production of raw materials, processing and manufacture and distribution—in a Chinese sector with strong demand.
Technical Analysis
CBPO is a thinly traded stock, averaging less than 200,000 shares traded per day, but the appetite for shares is sufficient to ensure liquidity. We also note that the number of institutional investors holding the stock has been on the rise for more than a year, topping 100 earlier this year. With the Chinese stock market in flux and the company reporting quarterly results in a couple of weeks, it’s not a time to jump into CBPO with abandon. But CBPO has made three runs at resistance at 120, two in June and one earlier this month, and it remained resilient even durning today’s selloff in Chinese stocks. If the stock can break out above 120, especially if that happens after earnings, it will be a bullish sign. Until then, keep any new position small ahead of the report.
CBPO Weekly Chart
CBPO Daily Chart
Amazon.com (AMZN)
Why the Strength
Amazon needs no introduction—it’s the 21st century’s Wal-Mart, dominating e-commerce in a way few investors thought possible 15 years ago. However, CEO Jeff Bezos has always been a big believer in investment (new offerings, new distribution centers, etc.), which has kept earnings bottled up for many years. The stock has done OK during this time but with a ton of fits and starts. However, thanks to solid growth in its core business and new, exciting details about the performance of the firm’s cloud computing division ($1.8 billion in revenue in Q2, up a whopping 82% from a year ago, and highly profitable, too), profits seem to finally be coming on-line; the second quarter saw a small earnings gain instead of a forecasted loss, and management’s comments on the conference call also hinted that further profit margin gains were in store. Impressively, analysts responded by significantly boosting their estimates; they’re now looking for $1.17 per share this year (up from 47 cents pre-report), $4.19 next year (up from $2.88) and north of $8 in 2017. Throw in a bullish backdrop for retail stocks as a whole—lower gas prices and relatively buoyant consumer sentiment—and that’s why Amazon is under strong accumulation. Bottom line, the stock looks like one of a few big-cap growth stocks that should do well if the market holds together.
Technical Analysis
AMZN has been stair stepping higher all year, gapping up on earnings and then trading tightly for many weeks. What’s interesting about this latest move is that the stock held firm during the Greece/China mess and then broke out to new highs as soon as the pressure came off the market—it was already looking great even before last Friday’s earnings moonshot. AMZN has given up a chunk of its initial gains, but given the market’s action, the dip is reasonable. We think you can start a position around here with a stop in the 470s.
AMZN Weekly Chart
AMZN 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.
