July 28, 2014
The market remains a bit wobbly, with the major indexes chopping up and down for most of the month, while small-cap indexes are actually a few percent off their highs, nearing correction lows! Even so, the main trend remains up, and while earnings season is producing its usual collection of winners and losers, few leaders have broken down. Thus, while our antennae are up, we continue to lean bullish, giving our strong stocks a chance to keep running and keeping our eyes open for new leaders to emerge.
Still an Uptrend
There are a decent number of warts on this market, including some lackluster action from the broad market, the fact that big-cap indexes have been chopping up and down for the past few weeks, and that small-cap indexes look sick. However, the major trends of the indexes remain up, and most leading stocks, while not tearing up the charts, are still in decent shape. (The many earnings reports last week brought a mixed bag of gaps up and down.) We have our antennae up, especially as more earnings reports push stocks this way and that, but right here the evidence continues to tell us to lean bullish and give our top performers a chance to keep rising.
This week’s list has a bunch of recent earnings winners; if the market is going to continue trending higher, most of these names should do well. Our Top Pick is Steel Dynamics (STLD). We’re usually not big fans of highly-cyclical steel stocks, but STLD just had a big quarter and an even bigger acquisition, with huge earnings forecasts for the next 18 months.
|Under Armour (UA)||0.00|
|Steel Dynamics (STLD)||0.00|
|Silver Wheaton (SLW)||0.00|
|Royal Caribbean Cruises (RCL)||0.00|
|Patterson-UTI Energy (PTEN)||0.00|
|Polaris Industries (PII)||0.00|
|HCA Healthcare (HCA)||137.60|
|Canadian Pacific Railway (CP)||0.00|
Under Armour (UA)
Why the Strength
Sports clothier and equipment maker Under Armour has become quite the disruptive force, shaking up a market that has long been dominated by the likes of Nike and Adidas. With growth driven by the company’s incorporation of technology into sportswear, Under Armour has seen revenue grow at an average clip of 33% per quarter during the past year. In fact, the firm’s most recent quarterly report has sparked yet another round of buying from investors, with Under Armour hitting the ball out of the park once again. Both revenue and earnings for the second quarter topped estimates, leading Under Armour to boost its full-year outlook. Operating and income margins fell, owing to the company’s investment in marketing, development and sponsorships—all of which are positive investments for Under Armour. Meanwhile, the company has achieved this growth while barely tapping the international market. That said, Under Armour has its sights squarely set on non-domestic sales, which grew by 80% to account for 8% of total revenue in Q2—it sponsored Brazil in the recent World Cup. Overall, Under Armour has proven to be scrappy and tenacious when dealing with the big boys in the market, and we like the company’s spunk and growth potential.
UA stock surged more than 15% following last week’s earnings announcement, with volume spiking to a three-month high. Unlike more established names like Nike, UA is more sensitive to broader market moves, leading to a 25% correction between March and May this year (compared to Nike’s 10% dip) as jittery investors ran for cover. That said, UA has considerably more growth potential than its bigger rivals. Look for UA to consolidate in the 70 region while investors digest earnings, with buying opportunities emerging on dips of a point or two.
UA Weekly Chart
UA Daily Chart
Steel Dynamics (STLD)
Why the Strength
We don’t normally see steel producers in Top Ten, but Steel Dynamics looks like a special situation that can go far. Founded in 1993, the company is one of the largest domestic steel makers and metals recyclers in the U.S., with five steel mills, six steel processing facilities, a couple of iron production facilities and more than 90 recycling facilities. And, relative to its peers, Steel Dynamics has done very well—the firm’s had only a couple of unprofitable quarters in the past decade, though growth has been stagnant with the overall industry. That looks like it’s about to change, though. Demand is picking up with the economy, especially in the automotive and energy fields, which led to a great first-quarter report. And its recent $1.6 billion acquisition of a mini-mill in Mississippi from a Russian company will be immediately accretive to cash flow and earnings, expand Steel Dynamics’ shipping capacity by 40% while resulting in $30 million of savings each year! Analysts now see earnings up a huge 53% this year and another 49% in 2015; with a solid 2.1% dividend yield, the stock looks like a good deal. The economy will clearly have an impact, but it looks like the next couple of years could be huge for Steel Dynamics.
STLD has a terrific chart. Shares have been etching a huge three-and-a-half-year base, and more recently, you can see the very shallow cup-shaped base between 17 and 19 since mid-April. But the character of the stock has changed for the better, with STLD launching last week on the earnings and acquisition news, rallying to new multi-year highs on its heaviest weekly volume since 2010. (The actual breakout day saw the stock up more than 11% on more than six times average volume.) Dips are obviously possible, but we don’t expect major weakness after that blast-off.
STLD Weekly Chart
STLD Daily Chart
Silver Wheaton (SLW)
Why the Strength
Precious metals are a volatile commodity, with prices gyrating cyclically and the fortunes of individual explorers and miners varying according to their recent production. Silver Wheaton is a silver company that doesn’t mine an ounce of metal itself, but it’s probably the best way to participate in the metals market. Silver Wheaton is known as a precious metals streaming company, meaning that it pays upfront fees to miners and mining development projects, mostly those in the gold business. In exchange for the investment, Silver Wheaton is granted rights to a portion of the miner’s silver production (and some gold) at a heavily discounted price. Since gold miners generally regard silver as an inferior byproduct of mining operations, the arrangement is mutually beneficial. Silver Wheaton gets the right to buy silver at a little over $4 per ounce (while the spot silver price is now near $20.60 per ounce) and some gold at $386 per ounce (spot gold is now at around $1,305 per ounce), making for a huge built-in profit margin. Silver Wheaton’s Q1 earnings report featured a 48.3% after tax profit margin! The company forecasts that it will own the production of about 36 million silver equivalent ounces in 2014 (which includes 155,000 ounces of gold), with that number expected to rise to 48 million silver equivalent ounces by 2018. With a 1.1% annual dividend yield, Silver Wheaton is a very rational way to play the precious metals game. The company will report Q2 results on August 13 after the close.
SLW has been in a long-term downtrend since 2011, but has put in a series of higher lows, from 17.5 in June 2013 to 19 in December 2013 to 20 in May 2014. The stock has been in a strong uptrend since that May low, soaring to 26 by the end of June and topping 27 a few weeks ago. SLW has been trading sideways with support at 26 as investors await the August 13 results. The stock’s fast-rising 25-day moving average has just topped 26, and the stock looks buyable on any weakness. Look for a dip to 26 as an entry point and use the 50-day moving average—now at 24—as a stop loss.
SLW Weekly Chart
SLW Daily Chart
Royal Caribbean Cruises (RCL)
Why the Strength
When the global economy is solid, Royal Caribbean can make a ton of money as much of the money it takes in falls to the bottom line. And that’s the situation that’s going on now; despite sales growth generally in the low single digits, the company’s earnings are booming, including a blowout report last week, thanks mainly to cruises in Europe and Asia (the Caribbean market is undergoing cutthroat pricing right now). There’s also a good amount of excitement surrounding the company’s new Quantum of the Seas ship, which will be launched in November and features bumper cars, roller skating and sky diving (!); management said it’s having the best early-bookings of any ship it’s ever launched. And the firm is planning to double its Chinese ship capacity from a small 6% of its total rooms today, with that market showing some of its highest returns. There’s nothing revolutionary here (though the Quantum launch should boost results), just a strong business that’s in the sweet spot of the cycle—analysts see earnings up 40% this year and another 27% in 2015.
RCL has been in a solid uptrend since mid-2012, though it’s had a couple of multi-month consolidations during that time. The latest of those occurred from February though mid-July of this year, with the stock making little progress as some investors wondered whether the U.S. and global economy was set to succumb to international tensions. But instead, the better-than-expected quarterly report caused the stock to explode higher last Thursday and Friday on huge volume. RCL should do well going forward, but we don’t expect a straight-up advance from here, so try to buy on dips.
RCL Weekly Chart
RCL Daily Chart
Patterson-UTI Energy (PTEN)
Why the Strength
When Patterson-UTI Energy Energy made its most-recent appearance in Cabot Top Ten Trader in May, the company’s fleet of drilling rigs in service had just expanded from 183 in Q4 to 199. Today, Patterson’s active rig count has grown to 210, led by its technologically advanced Apex rigs that feature faster drilling, higher efficiency and safer operation. As an onshore contract drilling company, Patterson focuses on the oil and natural gas producing areas of the continental U.S., Alaska and western and northern Canada. The company’s Universal Pressure Pumping and Universal Well Services subsidiaries focus on hydraulic fracturing and other specialized services, mostly in Texas and the Appalachian region. Patterson-UTI reported its Q2 results last Thursday and its 15% revenue growth (to $757 million) and 32% jump in earnings (to $0.37 per share) were well above expectations. The strong performance was based on high demand for the company’s high-tech drilling rigs. The strong earnings news led to two upgrades from analysts and a strong surge for Patterson-UTI stock. As a pure drilling specialist, the company is offering explorer-producers a very timely service.
PTEN ended a long decline in 2012, rallying strongly from 12.5 in June to 25 in March 2013. A five-month correction to 19 in September was followed by a rally that is still going on today. PTEN has tended to advance in short rallies followed by consolidations of a month or two. The stock topped 36 in early July and corrected to 34 on July 15, when it bounced off the 50-day moving average. A five-day rally that began on July 21 pushed the stock over 38 intraday on big volume. After the earnings report last Thursday, the stock is holding up well. A buy anywhere under 37 looks reasonable, with a stop at 34.
PTEN Weekly Chart
PTEN Daily Chart
Polaris Industries (PII)
Why the Strength
Polaris Industries is best known for its line of all-terrain vehicles (ATVs) and side-by-side RANGER-brand utility vehicles, but the company also manufactures snowmobiles and on-road vehicles such its Victory brand of motorcycles. Last, but not least, the company is responsible for reviving the Indian Motorcycle brand name after acquiring the business in 2011. Polaris has seen strong revenue growth during the past 12 quarters, with sales rising an average of 20% year-over-year. During its recently released second-quarter report, Polaris noted that ATV sales were up a stronger-than-expected 13%. However, it was Indian Motorcycle sales that sparked investor interest; sales zoomed 107% as Polaris added retailers and increased awareness of the Indian brand among the motorcycle community. As a result, Polaris lifted its full-year earnings and revenue outlooks. The resurgence of the Indian brand paralleled declining demand for Harley Davidson, which recently lowered its full-year sales outlook. As the Indian brand gains additional exposure, it should mean further growth for Polaris.
PII took off significantly in late 2013, after shares topped the psychologically significant century mark, with the stock topping out near 147 in January. But PII was unable to hold this perch, and a bout of market weakness forced the stock into a choppy trading pattern. By mid-May this pattern had stabilized, with PII entering a tight trading range between 130 and 135. PII finally broke out of this range last week following Q2 earnings, and the stock is now establishing a foothold just shy of 150. With PII still in the grip of earnings euphoria, we recommend buying dips, with a target near 145.
PII Weekly Chart
PII Daily Chart
HCA Healthcare (HCA)
Why the Strength
HCA Holdings is in the hospital business in a big way. The company is the leading provider of healthcare services through its 165 hospitals and 115 freestanding surgery centers in 20 states and England. In its history, HCA Holdings has been much larger (before its 1999 spin-offs of LifePoint and Triad hospital groups) and has been taken private three times over the years. As presently constituted, the company focuses on communities where it is the leading provider of hospital services. The two major trends that are buoying HCA are the growing number of citizens who are over 65 and the major influx of patients who are covered via the Affordable Care Act, some of whom would have previously been given health care without reimbursement to the hospital. The company has never been a growth monster, but its steady string of single-digit percentage gains in revenue (broken only by a 3% decline in 2011 and an 11% gain in 2012) has been impressive. And earnings, which were $3.41 per share in 2013, are forecast to grow to $3.70 in 2014 and $4.46 (up 21%) in 2015. HCA will release its Q2 results tomorrow, Tuesday, July 29, before the open, but the company’s announcement of preliminary results on July 16 has already given the stock a huge boost. HCA doesn’t pay a regularly scheduled dividend, but during its big-growth year of 2012, it paid three. If results continue to be strong, that’s always a possibility.
HCA had a big post-IPO correction a few months after its March 2011 re-entry into the market, but has been in a long-term uptrend since then. The stock traded sideways from mid-January through the middle of May, but kept pushing out to higher highs, then broke out in late May. June began more sideways trading until the company’s July 16 pre-announcement triggered a gap up from 55 to 61 on huge volume. The stock has continued to climb during the lead-up to earnings tomorrow morning. If the reaction to the news is good, you can jump on the bandwagon or wait for a pause in the action. A stop near the middle of the July 16 gap is prudent.
HCA Weekly Chart
HCA Daily Chart
Canadian Pacific Railway (CP)
Why the Strength
Canadian Pacific Railway is a major freight hauler with operations that stretch from Montreal in Canada’s east to Vancouver in the west and south into the U.S. midwest and northeast. The company ships pretty much anything that will fit in intermodal containers, with grains, coal and crude oil making up the bulk of materials hauled. While the company operates roughly 14,700 miles of track, the network is dominated by a 4,700 mile high-density main line that stretches from Vancouver to Toronto. Canadian Pacific’s most recent burst of strength has come due to a strong second-quarter earnings report and improved full-year guidance. Despite missing earnings estimates by a penny per share, the company impressed the Street by posting a 46% jump in earnings and an 11% gain in revenue. A surge in oil shipments by rail was a significant factor, rising 18% and keeping the company on track to hit 210,000 carloads a year of crude by 2015. Meanwhile, grain shipments rose 32% due to a record 2013 grain harvest and government transportation regulations regarding backlogged grain transportation. Looking ahead, earnings are seen rising 23% in 2014, with a 26% rise expected in 2015. Overall, Canadian Pacific remains a low-risk growth stock.
CP has seen two periods of months-long consolidation during the past two years, but the trend is firmly up now. After rallying to the 140 area by April 2013, CP retreated to a trading range in the 135 before awakening once again in late October to challenge the 150 region. CP traded in a range near 150 until shares embarked higher once again in May. With Canadian legislation driving gains in grain shipment, CP appears to have settled into a steady uptrend—the recent earnings-induced jump notwithstanding. The stock is currently pulling back from the 200 region, providing a potential entry point for a long position.
CP Weekly Chart
CP Daily Chart
Why the Strength
Cameron is a leading provider of flow products to the oil, gas and processing industries, including things like sub-sea trees (which monitor and control the production of underwater wells) and blowout preventers (in big demand after the Macondo incident), which makes it a play on the growth in deepwater drilling, but it also does a fair business in surface wellheads and trees and unconventional wells. After a few years of lackluster performance, the stock is strong today because of a pickup in business, improved margins and a very aggressive share buyback program. The first quarter saw 20% sales and 30% earnings growth, a modest pickup in orders, a still-huge backlog (north of $11 billion!) and another 2% of the company bought back—in fact, shares outstanding in the second quarter were down 17% from a year ago! Moreover, on the conference call, management said that it expects orders for sub-sea products to accelerate again during the next 18 months and that it continues to look to return free cash flow to shareholders. Thus, there’s no one ruling reason Cameron is doing well, but a confluence of events (and a willingness to take a major chunk of its own shares off the market) that look poised to drive the stock higher.
CAM was one of the first oil service stocks to hit new all-time highs in 2011 (recouping its entire 2008 wipeout), but then it spent more than three years wandering in the wilderness; it was no higher at the end of May 2014 than it was in February 2011. But shares meandered to new highs in recent months, and then leapt strongly last week on good volume after its better-than-expected earnings report. CAM, though, has rarely been a gap-and-run stock, and volume last week wasn’t overwhelming. Thus, if you want in, try to get in on dips, with a stop in the 67 area.
CAM Weekly Chart
CAM Daily Chart
Why the Strength
As the largest company in the world (by market capitalization) and the maker of one of the most visible sets of products and services in the world (iPods, iPads, iMacs, iPhones, MacBooks, iTunes and the App Store), Apple needs no introduction. Any new development or speculation about Apple makes headlines, and investors have followed the company’s fortunes with special intensity following the ascent of Tim Cook to Steve Jobs’ position at the helm. The big product story of recent months has been the success of the iPhone in China, results that made the company’s earnings report on July 23 a blowout success. Apple started paying a dividend in 2012 and has a $130 billion stock buyback program underway. Even with that buyback and its 2.1% annual dividend yield, Apple has increased its cash hoard to $141 billion. The company recently used some of its cash to buy BookLamp for between $10 million and $15 million, and is said to be spending $30 million to acquire Swell, a new radio and podcast app. Apple said in last week’s conference call that it had bought 29 companies since the end of September. With a still-reasonable P/E ratio of just 16, Apple looks like a megacap stock with plenty of room to grow.
AAPL peaked at a split-adjusted 97 in September 2012 when it just couldn’t get any more popular. After a seven-month double bottom at 53 in April 2013 and 54 in June, AAPL came roaring back, topping 80 in late 2013 before a five-month consolidation. The stock blasted off again in April, gapping up from 75 to 81 on big volume and has seen only a couple of corrections before hitting all-time highs today. AAPL does go through periodic corrections, so buying on a dip of at least a point makes sense. Use a stop at 90, which was the stock’s June correction low.
AAPL Weekly Chart
AAPL 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.
|First||Stock||Symbol||Top Pick||Original Buy Range||Price as of July 28, 2014|
|6/30/14||Agnico Eagle Mines||AEM||35-37||42|
|6/30/14||Buffalo Wild Wings||BWLD||160-165||165|
|5/12/14||Carrizo Oil & Gas||CRZO||53.5-55.5||64|
|5/12/14||Extra Space Storage||EXR||49-51||53|
|6/16/14||Keurig Green Mountain||GMCR||115-121||120|
|5/5/14||Level 3 Communications||LVLT||42-43||45|
|WAIT FOR BUY RANGE|
|DROPPED: Did not fall into suggested buy range within two weeks of recommendation.|
|None this week|
|* Indicates split-adjusted price|