According to Plan
In most cases, the market acts in a way that surprises the majority, but during the past couple of weeks, stocks have actually behaved as we expected—the major indexes have calmed down to digest their huge post-June 24 run, while volatility among individual stocks has increased as earnings season produces all sorts of big moves up and down. Overall, the bulls remain in control, and while you have to watch your step during earnings season, we’re seeing some new leadership emerge, which is a good sign.
This week’s list includes a few recent earnings winners; powerful gaps up on a firm’s quarterly report usually lead to higher prices. Our favorite of the week is Facebook (FB), which had a coming out party last week after blowing away expectations. It’s extended, but we think you can start small here and look to build a position should the stock advance.
| Stock Name | Price | ||
|---|---|---|---|
| Yandex (YNDX) | 0.00 | ||
| TripAdvisor (TRIP) | 55.14 | ||
| Pharmacyclics (PCYC) | 0.00 | ||
| ManpowerGroup (MAN) | 90.84 | ||
| Illumina Inc. (ILMN) | 289.74 | ||
| Finisar (FNSR) | 0.00 | ||
| Facebook, Inc. (FB) | 0.00 | ||
| E*Trade Financial (ETFC) | 0.00 | ||
| Dana Holding (DAN) | 0.00 | ||
| Celgene (CELG) | 0.00 |
Yandex (YNDX)
Why the Strength
It’s always handy when an emerging market stock has a handy nickname, and Yandex enjoys being called “the Google of Russia.” The moniker is an apt one, as Yandex offers customers in Russia (and a few in Ukraine, Kazakhstan, Belarus and Turkey) the same mix of Internet search, email and Web content as Google. And like Baidu (“the Google of China”), Yandex has a solid lead over Google in serving the needs of its native users. Yandex commands about 62% of the total search traffic in Russia and has the most popular website, which had over 45 million unique visitors in February 2013. Yandex makes money using Google’s advertising system, selling the rights to certain search terms to advertisers, which has led to years of double-digit revenue growth. Q2 results were announced last week and showed 47% earnings growth on 34% revenue growth. The after-tax profit margin was a healthy 33.2%. Russia is hardly the flavor-of-the-month for U.S. investors, but Yandex is easily the top pick in this politically risky country. The company recently announced the launch of a mobile search engine, thereby avoiding the potential ambush that sideswiped Baidu in China. Yandex is the pick of the litter of Russian stocks.
Technical Analysis
YNDX came public in May 2011, and is making its debut in today’s Top Ten Trader. After surging as high as 38 following its IPO at 25, YNDX endured a long skid to 17 in June 2012. The stock built a long basing structure from September 2012 through April 2013 with support at 21 and resistance at 26. A rally in April 2013 (on good Q1 earnings) got YNDX moving and the stock popped above 30 earlier this month. YNDX is a little extended (25-day moving average is at 29.5), but looks buyable on a dip toward 31. Use a stop at the 50-day moving average.
YNDX Weekly Chart
YNDX Daily Chart
TripAdvisor (TRIP)
Why the Strength
TripAdvisor is the largest online travel research company in the world. Its 220 million monthly users write approximately 70 reviews per minute on its various websites, which draw increasing traffic. And, of course, all of those eyeballs mean lots of advertising and transaction opportunities, which is what has investors excited—in the second quarter, total revenues rose 25%, thanks to a 20% gain in advertising and a huge 68% gain in the smaller subscription and transaction segement. Perhaps most impressive of all is the company’s profitability; after-tax profit margins were north of 30% for the second straight quarter, and the firm’s cash flow rose 45% to nearly $90 million. (It’s spinning off so much cash that it bought back 675,000 shares in the quarter.) Now, there are some details with the firm’s strategy that are helping, such as its elimination of pop-up ads, a new hotel meta-search feature for users and its first-ever TV campaign. But details aside, the bottom line is that TripAdvisor is the hands-down leader in the travel segment, and is bound to see its viewership and advertising business surge in the years ahead. That’s what investors are excited about.
Technical Analysis
TRIP has been in a nice uptrend since last December, though the ride has rarely been smooth—there have been a few false starts and sharp shakeouts along the way, including a sluggish bounce after the market’s low in late-June. (That was enough to shake us out a couple of weeks ago.) But earnings season can change the playing field for many stocks, and it certainly did that with TRIP; the stock rose from 61 to 74 on Thursday and Friday following the report, and on huge volume to boot. We don’t expect a straight-up move from here, but if you want in, start with a small position on a minor pullback, with stop near 63.
TRIP Weekly Chart
TRIP Daily Chart
Pharmacyclics (PCYC)
Why the Strength
Biopharmaceutical firm Pharmacyclics has garnered quite a following due to the buzz surrounding its promising oncology drug candidate Ibrutinib. Following positive trial data, the company is now seeking FDA approval for Ibrutinib for the treatment of mantle cell lymphoma (MCL) and chronic lymphocytic leukemia (CLL), two forms of blood cancer. Currently, Pharmacyclics is testing Ibrutinib in seven different studies, and, if the results in each are positive, analysts forecast that the drug could generate annual sales of $3.5 billion. Pharmacyclics is partnering with Johnson & Johnson in the development of Ibrutinib Pharmacyclics—a sweetheart deal in that Pharmacyclics is responsible for only 40% of the costs while receiving 50% of the profits. What’s more, Johnson & Johnson’s global distribution network bodes well for potential Ibrutinib sales once the drug is approved. Lastly, approval should arrive sooner rather than later, given that the drug has been granted breakthrough therapy designation by the FDA—a designation reserved for new treatments of serious or life-threatening diseases where initial data shows substantial potential for improvement. Earnings are due this Wednesday, but unless there is any news on Ibrutinib’s trial data or FDA acceptance, the report should have minimal impact.
Technical Analysis
While trial data concerns forced a bottom near 45 last November, PCYC rebounded sharply and has trended broadly higher ever since. Throughout much of this rally, PCYC has enjoyed support from its 10-week and 25-week moving averages. In February, another round of positive trial data sent PCYC soaring to 90, where shares began to build a new multi-month base. It burst to new highs after submitting Ibrutinib for FDA approval in mid-July. The stock is now hovering just north of 100. Since PCYC is a bit overextended, we recommend buying on dips toward 100.
PCYC Weekly Chart
PCYC Daily Chart
ManpowerGroup (MAN)
Why the Strength
ManpowerGroup is one of the larger staffing firms in the world, which hasn’t been a great industry for a few years. Whether it’s here in the U.S., where there’s been slow-but-steady job growth, or in Europe, which is battling through something not much better than a Depression, there haven’t been a ton of areas for growth. So why is the stock strong today? The main reason is good old-fashioned cost cutting; management implemented a restructuring a few months ago, and it’s ahead of schedule. That’s why earnings boomed 38% in the second quarter, miles ahead of estimates, despite flat-ish revenues. However, that flat-ish revenue was also better than expected, as demand in the U.S. and parts of Europe (including horror shows like Spain) held up better than expected. And all of that led the top brass to issue a bullish earnings outlook for the third quarter, too. Finally, while it’s not grabbing the headlines, we do think many investors are beginning to sniff out a legitimate recovery in Europe, which would boost ManpowerGroup in a big way. Overall, it’s not a great growth story, but with earnings expected to be up nearly 30% this year, we think the stock has upside.
Technical Analysis
MAN had a huge off-the-bottom rally starting last November, running from 35 up to 57 in March. From there the stock gyrated in a relatively tight area (basically 50 to 58) until this month, when a bullish market and the earnings report two weeks ago caused a huge-volume spike to new highs. There is some old resistance near 70 from early 2011 to deal with, but we think MAN can be bought on minor dips, with a stop in the low 60s.
MAN Weekly Chart
MAN Daily Chart
Illumina Inc. (ILMN)
Why the Strength
Fresh off a first-quarter buying spree and pending product launch in Europe, Illumina is once again grabbing headlines in the wake of its second-quarter earnings report. Illumina posted revenue of $346 million, up 23% from the same quarter last year. Breaking down the figures, services revenue, which includes the recently acquired Verinata Health, rose 50%, while core products revenue rose 21%. The company has now shown average year-over-year revenue growth of more than 20% during the past four quarters. What’s more, despite the company’s buying spree, second-quarter earnings still rose 8% year-over year. Illumina also raised its full-year forecasts for both sales and earnings, and is now projecting full-year revenue growth of 20% and earnings of $1.70. Turning to acquisitions, Illumina snapped up Verinata in the first quarter for $350 million while nabbing a development-stage company for an undisclosed sum. More recently, Illumina bought Advanced Liquid Logics for an undisclosed sum and entered a research agreement with TrovaGene that could lead to an eventual acquisition. All in all, Illumina may be a long-held blue-chip biotech, but the company still has more than a few tricks up its sleeves.
Technical Analysis
After spending much of the first quarter bouncing around support in the 50 region, ILMN showed signs of life in April, embarking on a steady rally along support at its 50-day moving average. Shares gapped north of 60 in late April following solid first-quarter earnings, and ILMN parlayed that strength into a rally that propelled it quickly to an all-time high just shy of 80 in early May. The stock consolidated after that, but last week’s report spurred ILMN higher, sending the stock north of 80 toward fresh all-time high territory. We expect a bit of consolidation in the wake of ILMN’s gap. As such, you can buy here, or take a larger position on pullbacks of a point or two.
ILMN Weekly Chart
ILMN Daily Chart
Finisar (FNSR)
Why the Strength
Finisar is a high-tech hardware maker whose transmitters, receivers, tranceivers and transponders connect LAN/WAN networks. The company’s fiber optic subsystems and components enable high-speed voice, video and data communication for telecoms, networking, storage, wireless and cable TV applications in the U.S., Malaysia, China and other markets, with companies like Cisco Systems and Huawei each accounting for more than 10% of revenues. The big driver of demand for this gear is the hunger for bandwidth caused by surging distribution and use of video, photos and digital information. With a wave of upgrading going on as companies increasingly migrate their data storage, software and other functions to the Cloud, Finisar is anticipating increased growth. The company’s earnings have been in decline for eight quarters, but its earnings report on June 20 beat analysts’ expectations, and EPS growth is forecast to resume growing during the third quarter. Finisar was a very hot company in 2010, but revenue growth stalled in fiscal 2012 and declined in fiscal 2013—the company’s fiscal year ends in April. So the estimate-beating results and positive guidance represent a return to form for this California-based company. And demand is expected to remain robust, while the company’s R&D program is close to delivering the next generation of products.
Technical Analysis
FNSR peaked above 45 in early 2011, then experienced a long, painful correction that bumped down to 11 in November 2012. A late-2012 rally peaked at 17 in February 2013, but the stock dropped back to 12.5 for much of April and May. The breakout came on June 20, when FNSR gapped up from 14.5 to 16.5 on big volume, following the second quarter earnings report. We think FNSR’s positive momentum makes it a good buy on weakness of a half point, with a stop at 16.5.
FNSR Weekly Chart
FNSR Daily Chart
Facebook, Inc. (FB)
Why the Strength
We always believed that Facebook’s stock would eventually morph into a powerful market leader—there simply aren’t many big, dominant, rapidly-growing firms whose stocks are liquid and whose prospects are excellent. That time appears to have come, as the stock had a coming out party after releasing a blow-out second quarter earnings report. Not only did sales growth accelerate in a big way (a $6 billion company growing at 53%!), but advertising revenue was up a whopping 61%, and mobile ads (which were basically non-existent a year ago) made up 41% of all ad revenue! That all caused earnings to crush estimates, and the other metrics wowed as well—average monthly users were 1.15 billion, up 21%, while mobile users averaged 819 million per month, up an incredible 51%. Analysts reacted by hiking their earnings outlooks in a big way, with the consensus now looking for 70 cents per share this year and 93 cents in 2014. However, barring a huge increase in investment spending, it’s a good bet those numbers are conservative; as the company monetizes its huge and still-growing user base, there’s no reason to think the firm’s bottom line won’t get much, much bigger going forward. We like it.
Technical Analysis
After its well-documented post-IPO droop, FB did show signs of life early this year, but questions about its mobile strategy (which seem almost silly now) caused the stock to sag after peaking at 32.5 in February. However, after a decline into early June, FB did bottom a couple weeks ahead of the market, meandered higher into last week, and then gapped up 30% on eight times its average volume following earnings. There are never any sure things in the market, but such a powerful, earnings-induced kick-off from a big, liquid stock usually occurs near the start of a move, not the end. We think you can start with a small position here and look to add shares if FB continues higher.
FB Weekly Chart
FB Daily Chart
E*Trade Financial (ETFC)
Why the Strength
E*TRADE Financial, which is making its Top Ten debut today, represents a different aspect of the financial industry from giants like Citigroup and Bank of America. E*TRADE is essentially an online brokerage, although it does operate 30 retail branches across the United States. As of the end of May, the company had three million brokerage accounts (up nearly 16,000 from April) and 4.6 million total accounts. During that month, the company’s new brokerage assets increased by $1 billion. The big news on E*TRADE is the company’s big July 25 beat on earnings. The company’s 21 cents in per-share earnings was a mile ahead of analysts’ consensus 13-cent forecast, reflecting higher revenues, improved expense control and higher credit quality. The company recently announced that it was exiting the market-making business to concentrate on retail brokerage. The company has also been actively de-leveraging at its E*TRADE Bank operations. All in all, E*TRADE represents a way to play increasing broad retail investor interest in the stock market in an environment with increasing volatility. This is a turnaround story as retail interest in equity investing has surged along with the major indexes, completing the recovery in the financial industry that began with the big banks. E*TRADE is actively focusing on the retail brokerage business and represents another way to play the strength of the market.
Technical Analysis
ETFC has been a not-much-happening stock for years, as after a substantial dip in 2011, the stock spent 2012 swinging between support at 7.5 and resistance at 11.5. A correction from 11.5 to 9.5 in February and March gave way to a nice rally in April, and ETFC has been in a solid uptrend ever since. The stock traded sideways at 13.5 for a couple of weeks before last week’s earnings beat kicked it into a new rally that now has the stock trading just under 15. This leaves ETFC a little extended above its 25-day moving average (now at 13.3), and it’s likely that some combination of profit-taking and general volatility will key a consolidation at around 15. ETFC is buyable on weakness of half a point. A stop at 13 makes sense.
ETFC Weekly Chart
ETFC Daily Chart
Dana Holding (DAN)
Why the Strength
Dana Holding is one of several companies making its debut in today’s Cabot Top Ten Trader. The company’s long history of manufacturing drive-train components for vehicle manufacturers stretches back to 1904, and it is now a player in the global market. Dana makes axles, driveshafts, differentials, steering shafts, suspensions, transmissions and heat management components for light vehicle, medium- and heavy-duty vehicles and offroad vehicles, plus the supporting and controls technologies they need. The company had a five-year string of negative earnings from 2005 through 2009, but roared back to profitability in 2010. Revenue comes largely from North America with 47% of 2012 revenue, with Europe kicking in 28%, South America 13% and the Asia-Pacific region 12%. Ford is the company’s biggest customer (17% of 2012 revenue), but contracts are literally worldwide. The company’s Q2 results on July 25 featured a nice beat on earnings despite an unexpected dip in revenue. Investors were pleased by the company’s announcement last Tuesday that it would pay a five-cents-per-share dividend to holders of its common stock as of August 9. Dana Holding is riding the wave of renewed growth in the automotive industry.
Technical Analysis
DAN was a rocket back in 2009–2010 when the company was re-emerging into profitability. But after years of up-and-down trading, the stock began its current rally in October 2012 when it was trading at 12. DAN had stiff corrections in April and June, but soared in late June after the company expanded its share-buyback program to $1 billion. The stock paused between 20.5 and 21 for a couple of weeks ahead of earnings, but popped up nicely on good volume on July 25 after the quarterly report. DAN looks buyable on any weakness, with a stop at its 50-day moving average (now at 19.5).
DAN Weekly Chart
DAN Daily Chart
Celgene (CELG)
Why the Strength
We continue to be impressed by biotechnology firm Celgene. The company sports a quintuplet of commercialized drugs—Revlimid, Vidaza, Abraxane, Thalomid, and Istodax—with more than 25 clinical trials for new drugs (or new uses for existing ones) in Phase III. Currently, the company’s biggest blockbuster is cancer treatment Revlimid. As the company announced last week, sales for the drug totaled $1.05 billion in the second quarter, accounting for about 67% of Celgene’s total revenue. What’s more, sales are still growing, with Revlimid revenue rising 13% year over year. But Celgene has seen steady growth in the rest of its lineup as well. Cancer drug Abraxane saw a 41% increase in sales in the second quarter, followed by a 5% jump for Vidaza despite Celgene losing a U.S. patent for the drug in 2011. Looking ahead, there is more potential growth on the horizon; even before last week’s quarterly report, Celgene was a hot topic after announcing positive Phase III results for Revlimid, in combination with dexamethasone, for multiple myeloma. Celgene plans to begin registration discussions with U.S. and Europe regulatory bodies for this new indication for Revlimid. Lastly, as a bonus, Celgene’s board recently approved a $3 billion share buyback program, which can only help the bottom line.
Technical Analysis
CELG has added an impressive 85% so far in 2013, but it was far from a smooth ride higher. The stock broke out big in early January in the wake of positive guidance, and eventually settled into a period of consolidating near 100, before breaking out once again in early March. CELG eventually topped out near 131 in mid-May, before entering into a period of choppy trade in the 115-120 region. The stock broke out of this consolidation period in mid-July following positive trial data, and rallied to fresh all-time highs above 140. The stock remains a great investment, and we think it’s buyable here as CELG consolidates its recent gains.
CELG Weekly Chart
CELG 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.
