Excellent Snapback Bodes Well
Current Market Outlook
Our title last week was “What Happens from Here Will Tell the Tale.” And so the market’s impressive and immediate snapback from the two-day Brexit decline is a good sign that the bears just aren’t able to take control of this market, even when obvious bad news hits. That said, while the panic low from last Monday should hold, we can’t say the bulls are in control, either, as all the major indexes are still stuck below longtime resistance levels dating back to early 2015. Altogether, we’ll nudge our Market Monitor back up a notch, but what we’re really looking for is a decisive move to new highs before getting bullish. For now, you should hold your top performers, but keeping new buys relatively small and holding some cash is also prudent.
This week’s list has a bunch of mid-cap names that are showing excellent strength—they could be among your leaders if the bulls step up to the plate. Our Top Pick is Beacon Roofing (BECN), a growing play on housing and construction, which may actually get a boost as interest rates plunge.
| Stock Name | Price | ||
|---|---|---|---|
| TAL Education (XRS) | 0.00 | ||
| TransUnion (TRU) | 83.09 | ||
| NetEase, Inc. (NTES) | 0.00 | ||
| Newfield Exploration (NFX) | 0.00 | ||
| Dycom Industries (DY) | 0.00 | ||
| DOC (DOC) | 0.00 | ||
| Beacon Roofing (BECN) | 0.00 | ||
| Activision Blizzard, Inc. (ATVI) | 0.00 | ||
| AG (AG) | 0.00 | ||
| Abiomed (ABMD) | 0.00 |
TAL Education (XRS)
Why the Strength
Private education in China is big business as competition for admission to elite universities is fierce. TAL Education is a leader among Chinese education firms, offering after-school tutoring services for students from kindergarten all the way through high school. From its 2003 founding as a mathematics tutoring firm for primary students in Beijing, TAL now has 363 learning centers in 25 of China’s biggest cities, and delivers its services through small classes, one-on-one tutoring and online courses. The economic slowdown in China hasn’t affected TAL’s business, as revenue growth for the fiscal year that ended in February was a solid 43%. Earnings growth has been flat for a couple of quarters and estimates call for just 4% growth in fiscal 2017. But estimates for next year call for 43% growth in the bottom line. TAL Education acquired Firstleap Education in September 2015, which added to its all-subject tutoring resources and brought 20,000 students in 20 Chinese cities into the fold. All in all, TAL Education is a strong competitor in Chinese private education, one that has proven to be resistant to negative economic news. The company will report results for its latest quarter on July 26 before the market opens. Analysts are looking for revenue of $184 million and earnings of 25 cents per share.
Technical Analysis
XRS spent a year trading sideways from September 2014 to the market meltdown in August 2015. But it’s been in a general uptrend since, with a persistent rally through the middle of December, and then a choppy upmove through the middle of June. But XRS has been soaring the past couple of weeks on big volume, leaping to new highs. With XRS now above 63 (and its 25-day moving average back at 56), there’s always the possibility of a correction. Look for a pullback of a couple of points as an entry point and keep a loose stop around 57.
XRS Weekly Chart
XRS Daily Chart
TransUnion (TRU)
Why the Strength
TransUnion is about risk management. The company helps tens of thousands of businesses acquire customers, authenticate identities, cross-sell products and reduce loss from fraud, and millions of consumers manage financial information, protect identities, and more. Its more than one billion consumer files use an average of 90,000 data sources. Of course, TransUnion doesn’t have a lock on the market; Experian and Equifax are big global players as well. But TransUnion is thriving thanks to lots of proprietary data sets, newer products (it entered the auto insurance marketplace in May, while its unique CreditVision is the leading credit trend projection service) and selective acquisitions (it recently bought a firm that helps healthcare firms recover payments). The result is slow-but-steady sales growth, solid profit margins and excellent earnings growth as increased business falls to the bottom line. Analysts see the bottom line booming 35% this year, though 15% is more likely to be the long-term growth rate as TransUnion expands. It’s not changing the world, but there’s a high degree of dependency as demand for the company’s services rises regardless of the economic environment. That should lead more big investors to buy in—217 mutual funds now own shares, up from 116 funds nine months ago.
Technical Analysis
TRU has an excellent chart. It built a base for the first 10 months following its IPO last June, finally tightening up in April. Then came a breakout above 28 and a solid run to 34 in early June. TRU’s pullback during the Brexit selloff was modest, briefly dipping below its 50-day line before rebounding quickly back toward its high. Nibbling here or on dips looks like a good risk-reward trade.
TRU Weekly Chart
TRU Daily Chart
NetEase, Inc. (NTES)
Why the Strength
NetEase, a Chinese web portal that does enormous business in the online game business, has been featured often in Top Ten, racking up 16 appearances before today. The reason is simple: NetEase has a dominant position in Chinese online games, on both PCs and mobile devices, and it offers a huge lineup of games, both licensed (like World of Warcraft, which is exclusively licensed to NetEase from Blizzard Entertainment) and developed in house (like the hugely popular Fantasy Westward Journey). NetEase is also the largest free email provider in China, and that service, plus mobile apps, social interaction platforms and e-commerce services, gives the company a huge base for ad sales. Revenue growth has soared from 15% in 2013 to 90% in 2015, with more than three-quarters of 2015 revenue coming from online game services. NetEase’s Q1 results kept the ball rolling with 108% revenue growth and 79% earnings growth. Earnings are forecast to increase by 25% this year and 15% in 2017. Institutional ownership of NetEase stock has been on the rise, but shares still trade at a relatively restrained 18 P/E. NetEase also has $4.4 billion in cash and cash equivalents, which is important in the merger-and-stake-building atmosphere of China’s internet giants. NetEase stock also pays a useful 1.3% dividend yield. Q2 earnings are likely out the week of August 10.
Technical Analysis
NTES has been on the rise since late 2012, but it’s been subject to some big volatility, like the correction from 186 to 130 that ran from late December to mid-February. The stock moved to new all-time highs above 190 last week after a three-day spike on rising volume, but Friday brought a significant pullback that wiped out Thursday’s big gain. The stock should have support at 180, but the combination of last Friday’s pullback and earnings due within a month makes going slow a good idea. You can nibble anywhere under 185, with a stop at 170.
NTES Weekly Chart
NTES Daily Chart
Newfield Exploration (NFX)
Why the Strength
We’ve seen a few energy stocks that are focused in the Permian Basin make their way into Top Ten in recent months, but Newfield’s growth is coming from a different area. The company is the leading acreage holder in the Anadarko Basin (in Oklahoma and Northeast Texas), an area that’s seen total production up 75% since 2012 (compared to 83% for the Permian and just 2% for the Bakken). Newfield gets about half its total production from the Anadarko, and it’s been doubling down in the area via acquisition (it bought another 42,000 acres in May) and increased drilling activity. As usual with all the best basins, the key is in the returns—Newfield’s costs to drill have been falling, resulting in about a 45% net return on wells even at $50 oil. (If costs continue to fall or if oil prices rise, returns would increase dramatically.) The stock is strong today because the firm’s Anadarko acreage is performing better than expected—Newfield announced June 21 that it’s hiking its production guidance for the year, and expects Anadarko’s output to rise 6% from the prior quarter. Obviously, a lot depends on the prices for oil, liquids and gas going forward (even a $5 rise in prices can boost returns 10% or more), but there’s no question that Newfield has the characteristics (top-notch acreage, excellent well results, falling costs) to be a winner if energy stocks move higher.
Technical Analysis
NFX has an interesting long-term chart—shares fell as low as 22 during the first leg of the energy bear market, but then only fell as low as 21 earlier this year … a big double bottom of sorts. The stock exploded off that low and has been chugging along its 10-week line ever since, even holding that key support level during the Brexit pullback, before leaping to multi-month highs last week. If you want in, a small buy here or on dips should work.
NFX Weekly Chart
NFX Daily Chart
Dycom Industries (DY)
Why the Strength
The pressure on telecom providers to deliver more and more bandwidth is good news for Dycom Industries. Dycom is a specialty contractor focused on placing and splicing fiberoptic, copper and coaxial cables and counts the giants of telecom—AT&T, Comcast and Verizon—as its biggest customers. And as these companies build out new fiber networks to meet customer demand for faster broadband upload and download speeds and over-the-top video services, business is very good. In the company’s most-recent quarterly report (May 24), earnings per share soared by 86% on a 35% rise in revenues. While 86% is a great growth rate, it came after five quarters of triple-digit EPS gains. Revenue grew by 35%, the seventh consecutive quarter of growth-rate increases. Dycom has had an active acquisition program for years, taking over Hewitt Power & Communications last year and acquiring network deployment and wireline assets from Goodman Networks just last month. The company completed one round of share buybacks in April and immediately authorized another $100 million buyback program. As the buildout of high-speed internet into rural areas continues and previously existing networks need upgrading, Dycom is in a great position to profit.
Technical Analysis
DY was flat as a pancake in 2014, but bolted from 25 late that year to 91 in November 2015. A sharp correction to 47 during the market downturn that ended in February 2016 was followed by a strong rebound that got a big boost from a gap up following the May 24 earnings report. Since that high-volume leap, DY has been edging higher, gaining new all-time highs last week. With earnings not out until late August, DY looks like a good buy on any weakness with a stop at 80.
DY Weekly Chart
DY Daily Chart
(DOC)
Why the Strength
REITs are red hot thanks to the plunge in long-term interest rates, but we’re not anxious to buy some stodgy 3% dividend payer. In the REIT space, we look for underfollowed firms that have excellent growth (and hence, dividend growth) potential. And Physicians Realty has it! The company is a small but growing manager of medical office buildings and other healthcare facilities; it owned 167 properties in 27 states at the end of March. As with most REITs, acquisitions are a key part of the strategy, and Physician’s Realty is in the process of swallowing its biggest bite yet. The firm is buying 51 facilities from the Catholic Health Initiatives (the nation’s fifth largest non-profit hospital system, with revenues of $15 billion) for $719 million, and then lease them back on a triple-net basis (at an average 6% cap rate or so). The move will boost Physician’s Realty’s property count by 30% to 218 locations (in 30 states), 95% of which are currently leased, with an average remaining lease term of 8.7 years! Overall, analysts see the company’s cash flow per share growing 13% this year and another 19% in 2017, though faster growth is possible depending on the pace of acquisitions. The firm just went ex-dividend, but its quarterly payout is 22.5 cents per share, good for an annual yield of 4.3%.
Technical Analysis
DOC has been a solid performer since coming public in July 2013. It ground its way from 11 back then to 19 in early 2015, before pulling back during the market’s 2015 summer selloff, falling to 14. The trend has been up since then, though, with DOC generally riding its 10-week line higher, and recently, accelerating to the upside as interest rates plunge. You could buy a little here or (preferably) on dips, with a stop below 19.
DOC Weekly Chart
DOC Daily Chart
Beacon Roofing (BECN)
Why the Strength
The residential housing market and construction activity in general remains strong (new home sales recently hit a multi-year high, while commercial construction remains on a steady incline). That’s good news for Beacon Roofing Supply, which is the second largest supplier of roofing materials in the U.S., offering nearly 11,000 products through 369 branches in 45 states and much of Canada. (About half of business is from residential roofing, 35% from non-residential and 15% from other building products.) On its own, Beacon targets modest (5% to 10%) growth though an improving housing market and new branch openings. But a big piece of the growth story is acquisitions in this fragmented industry (there are over 1,500 players in the sector)—Beacon has executed 36 buyouts since coming public in 2004 (about three per year), and last October, it swallowed Roofing Supply Group for $1.1 billion, which brought with it a whopping 85 branches! Most purchases are far smaller (Woodfeathers, which the firm bought last month, had four branches), but when combined with solid organic growth (28% in the first quarter), Beacon is cranking out excellent results—the company made three cents in the seasonally slow first quarter, and analysts see full-year 2016 earnings rising 52% with another 18% lift in 2017. As long as the housing market remains in good shape, Beacon’s growth should continue.
Technical Analysis
BECN corrected sharply (43 to 23) from mid-2013 to early 2015 as earnings fell, but the stock motored back to its old highs by November of last year. Since then, BECN has formed a shallower, more proper base, which included some very tight trading during the past two months (see the weekly chart). And as soon as the Brexit pressures came off the market, BECN soared to new highs on good (not great) volume. You can buy a little here or on dips with a stop under 43.
BECN Weekly Chart
BECN Daily Chart
Activision Blizzard, Inc. (ATVI)
Why the Strength
Activision Blizzard is one of the kings of the videogame industry, and in the last year, it’s been busy! Coming into 2015, the company already had some of the leading game titles in the industry, including Call of Duty, World of Warcraft, Skylanders, StarCraft, Diablo, Hearthstone and Destiny. In August, the stock joined the S&P 500. In January, the company acquired little Major League Gaming, which is expected to spearhead the company’s move into sports games, for $46 million. And then in February, the company acquired King Digital Entertainment, maker of the massively popular casual game Candy Crush, for $5.9 billion. Thus, while the business previously relied heavily on first-person shooter games and other warlike fare, the future of the company will be far more balanced, with the shooting games balanced by casual games and sports games. Interestingly, the company is already balanced in one way; product sales account for 52% of revenues, while subscriptions and licensing account for 48%. The company is already huge; in the past year, its players have logged about 42 billion hours of time played and watched, a number that puts it in the league of the largest entertainment networks in the world, including Netflix and Facebook. And in the future, it’s only going to get bigger.
Technical Analysis
ATVI has been in a long-term uptrend for years, but some major corrections have made it difficult for growth-oriented investors to hold onto the stock. For example, after hitting 40 last December, ATVI corrected to 26.5 in March, a drop of 33%. More recently, the stock built a base centered on 38 over the past six weeks, and now it’s trying hard to break out to new highs. Try to buy as low as 38.
ATVI Weekly Chart
ATVI Daily Chart
(AG)
Why the Strength
First Majestic Silver is a very focused mining company. It mines only for silver and its six active mines are all in Mexico, where it is the second-largest mining company. The company has been attracting attention from investors as precious metals prices rise. When 2016 began, spot silver was trading just above $13.80 an ounce; it’s now approaching $20 per ounce. Last week alone, silver spiked from $17.75 per ounce to $19.79 per ounce. And the company’s CEO, Keith Neumeyer, has said that he believes that silver could appreciate to $140 per ounce in a few years as industrial uses grow. First Majestic’s six mines—La Encantada, La Parrilla, San Martin, Las Guitarra, Del Toro and the recently acquired Santa Elena—produced a little over three million ounces of silver at an all-in sustaining cost of $11.28 per ounce. Estimates for 2016 production are for between 12 to 13.3 million ounces of pure silver in 2016. First Majestic is an un-hedged pure silver producer that owns all its own mines and got 69% of its 2015 revenue from silver sales—the rest came from sales of gold 12%, lead 13% and zinc 6%—so rising silver prices will be reflected directly in the company’s bottom line. The company also has two advanced-stage silver projects in development. First Majestic is a solid way to get exposure to rising silver prices.
Technical Analysis
AG was trading at 24 in November 2012, then started a long-steady decline that finally bottomed at 2.4 on January 20. The rally that began in late January has had four pauses along the way, but only one significant correction. And last Friday’s jump showed real power. The stock has left its 25-day moderately far behind at 12.3, so a pullback is possible. But since AG is a pure play on the price of silver, that’s the indicator to watch. We think AG is buyable on any weakness, with a stop at its old resistance at 13.
AG Weekly Chart
AG Daily Chart
Abiomed (ABMD)
Why the Strength
Abiomed’s Impella heart pumps appear to be revolutionary, providing significant benefits to a select (but growing) patient population. Impella is the smallest heart pump in the world, it’s able to be implanted through a small incision in the leg and, depending on the version (there are five of them), can pump 2.5 to 5 liters of blood per minute. They’re used as temporary pumps (used for anywhere from a couple of hours to a few days) that “offload” the left ventricle’s function during and after certain surgeries. The pump was approved in March 2015 for higher-risk patients in coronary angioplasty procedures, and in April of this year, it was approved for use in certain cardiogenic shock victims. The pumps are quickly being adopted because they work great! In angioplasty, Impella users see a 29% reduction in bad outcomes (stroke, repeat heart attack or even death) after a couple of months compared to current treatments. Following cardiogenic shock, Impella boosts survival rates a whopping 20% after 30 days. Impella is also approved in Europe and Canada (the firm expects Japan approval later this year), but the U.S. is driving growth—U.S. Impella revenue made up 87% of total revenues in the first quarter, rising 42% from the year before. More than 1,000 hospitals now use at least one of the Impella devices. And that’s before the cardiogenic shock approval! Management believes it has just a small fraction of the total market, so if Impella becomes the new standard of care, growth should remain rapid for years to come. (Analysts see earnings up 33% this year and 57% in 2017.) It’s a big story.
Technical Analysis
ABMD looks like a leader. Shares topped last August after a huge run and dipped into what became a big, 40% deep, 46-week long consolidation, with a couple of big shakeouts in October and February. But since the low, it’s been acting under control, with a persistent advance through April, some normal wiggles in May and June, and a leap to its old high last week on solid volume. Expect volatility, but we’re OK with a small buy on dips and a stop near 100.
ABMD Weekly Chart
ABMD 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.
