Many Stocks Holding Their Own
Current Market Outlook
Greece continues to dominate the headlines, and this weekend’s “No” vote hit the market and most stocks, though nothing as dramatic as what we saw last week. That said, you shouldn’t overreact to today’s action, just as it wasn’t smart to overreact to last Monday’s drubbing. Overall, we’re still neutral, as the main trend remains sideways, and we expect further volatility based on the news of the day. Our biggest piece of advice is to take things on a stock-by-stock basis—many stocks are acting well, and you should hold onto those, but don’t hesitate to dump shares of stocks if they break key support.
Encouragingly, this week’s list contains a lot of resilient, growth-oriented stocks … just the kind of potential leadership we like to see setting up. Our Top Pick is Horizon Pharmaceuticals (HZNP), which is acting like it wants to get going should the market hold together.
| Stock Name | Price | ||
|---|---|---|---|
| Wayfair (W) | 167.03 | ||
| Valero Energy (VLO) | 97.40 | ||
| Receptos (RCPT) | 0.00 | ||
| Ligand Pharmaceuticals (LGND) | 267.14 | ||
| Horizon Therapeutics (HZNP) | 49.89 | ||
| HealthEquity, Inc. (HQY) | 70.70 | ||
| The Hain Celestial Group, Inc. (HAIN) | 0.00 | ||
| Celanese (CE) | 0.00 | ||
| BioMarin Pharmaceutical (BMRN) | 0.00 | ||
| Acuity Brands (AYI) | 0.00 |
Wayfair (W)
Why the Strength
Co-founder Steve Conine started Wayfair out of his Boston home in 2002. This year the online retailer of home goods expects to bring in more than $2 billion in sales. That’s higher than the $1.87 billion analysts were expecting, a better than 50% improvement over last year, and nearly four times the company’s 2011 sales. The latest projection came from CEO Naraj Shah last month. Formerly known as CSN Stores, Wayfair offers more than seven million home items online including furniture, décor and housewares, under five separate e-commerce brands. It has a new website, which was perhaps partly responsible for the 58% increase in first-quarter order volume, though growth has been consistently rapid for many quarters. The company has spent heavily on advertising, recently partnering with country singer Ashley Monroe, and thus has yet to turn a profit. But the top-line growth has been attracting investors of late, and is a sign that those advertising dollars are being spent wisely.
Technical Analysis
W went public last October at 29 and finished its first day of trading at 37. Until last month, that was the stock’s high point. Shares tanked following W’s IPO, falling to 18 by mid-December. But the company’s huge sales improvements grabbed investors’ attention, pushing shares back up to 34 by April. W built a shallower base during the next two months, then broke out on good volume in mid-June and has held these gains. There is some old resistance to chew through, but grabbing a few shares on dips should work out well if the market holds together.
W Weekly Chart
W Daily Chart
Valero Energy (VLO)
Why the Strength
While many companies in the energy industry have recently been suffering through months of low oil prices, cheap crude has been a generally good thing for refiners, who enjoy low prices for their feedstock. Valero is the largest refiner in the western U.S. and has been buffeted by shifts in demand for gasoline and other refined products while low global oil prices have dampened exploration and production growth in U.S. shale deposits. Fortunately for the company, its refineries are able to produce quality fuels from less-expensive heavy “sour” crude oil. Valero boasts both 2.9 million barrels of refining capacity at its 15 petroleum refineries and a vast network of more than 7,400 retail outlets in 44 U.S. states, Canada, the U.K. and Ireland, as well as the Caribbean region. The company also owns 11 ethanol plants that can produce 1.3 billion gallons annually and a 50-megawatt wind farm to keep energy costs down. One attractive fundamental is Valero’s improving after-tax profit margins, which have improved from 1.9% in Q2 2014 to 4.5% in Q1 2015, the highest in years. With an attractive P/E ratio of just 9, Valero’s stock looks like a real bargain. With quarterly results due on July 30, investors have been moving into Valero as the combination of low crude prices and higher summer demand for gasoline point toward a positive report.
Technical Analysis
VLO has tended toward a surge-and-consolidate pattern, and the surge from 43 in January to 64 in March gave way to bottoms at 57 in April, May and June. The stock’s breakout began on June 30, and VLO has now topped 65, a new all-time high on elevated volume. In addition to its strong price action and low P/E ratio, VLO offers an attractive 2.6% annual dividend yield, making for a tidy package as an income stock with growth potential. VLO looks like a reasonable buy right here, although you might be able to pick some up on dips. Use a mental stop around 59 to avoid getting stopped out of this sound dividend payer.
VLO Weekly Chart
VLO Daily Chart
Receptos (RCPT)
Why the Strength
The multiple sclerosis market is $17 billion a year, and Receptos is on the cusp of entering it. Last month, the company unveiled the promising Phase II trial results for its oral MS drug candidate ozanimod, which reduced MS relapses by 53%. Now in Phase III, ozanimod is already drawing comparisons to Biogen’s Avonex, one of the best-selling MS drugs in the world. Avonex brought in $3 billion in sales in 2014, its 19th year on the market. If approved, ozanimod will potentially have a leg up on Avonex since it’s taken orally, while Avonex is injected. Due to the promise of ozanimod, Receptos is starting to scout out licensing deals that include up-front cash—a game changer for a company that brought in zero revenue during the last two quarters and has never been profitable. There’s also the possibility of a buyout. In mid-June, rumors were swirling that the company could be acquired for $348 per share, or more than double its share price at the time. Those acquisition rumors have added more fuel to investors’ fire for Receptos on the heels of the Phase II ozanimod results.
Technical Analysis
After the trial results were released in early June, RCPT shares jumped from 156 to 188 in just three trading days. It quickly dipped all the way back to 174, but got a second wind last week, shooting all the way up to 196 after the buyout rumors surfaced. RCPT has since pulled back a couple of points to 194, though that’s not much given its recent volatility. After a two-month consolidation, the trend has turned back up, and volume has been terrific during the latest advance. If you’re game, look to buy a small position on dips and use a loose stop.
RCPT Weekly Chart
RCPT Daily Chart
Ligand Pharmaceuticals (LGND)
Why the Strength
The more we read about Ligand Pharmaceuticals, the more unique the story appears. Ligand is a biotech company valued at nearly $2 billion, but it has just $63 million in revenue, just 18 employees (including a mere five scientists) and it uses low-cost labs in India and China to investigate new compounds! But Ligand has a lot more going for it than most firms in the industry—120 of the company’s treatments have been licensed to other companies, who will spend more than $1 billion this year developing them. The CEO calls these “shots on goal,” and believes at least 20 will eventually make it to market … and result in a huge, growing stream of royalty revenue for Ligand! Already, two of Ligand’s drugs are selling well (Amgen and Novartis are the partners), growing steadily and expected to generate much higher royalties in the years ahead (one just received an expanded indication from the FDA). Right now, about two-thirds of revenue comes from royalties (contributing to a whopping 47% profit margin last quarter), but that should expand in the quarters ahead; analysts see the bottom line leaping to nearly $3 per share this year (up 87%) and continuing to grow from there. Institutions are catching on—352 mutual funds now own shares, up from 283 a year ago. We like this story a lot.
Technical Analysis
LGND can be choppy on a day-to-day basis (it only trades about 430,000 shares per day), but it’s been in a solid uptrend since the tail end of February, when the stock got going on big volume. It’s since tested its 50-day line twice, finding buyers each time, and so far has held up very well despite the market’s Greece-related wobbles. It’s had a good run, so maybe it needs a rest (especially if the market remains under pressure), but we’re OK with a small buy on dips and a stop just below the 50-day line.
LGND Weekly Chart
LGND Daily Chart
Horizon Therapeutics (HZNP)
Why the Strength
A year ago, Horizon Pharma took a hit when Express Scripts and CVS removed two of Horizon’s flagship drugs from their preferred-formula lists, insisting the drugs were simply combinations of cheaper drugs sold separately elsewhere. Some thought the move would wreak havoc on Horizon’s sales. It hasn’t. Sales of the two drugs—Vimovo and Duexis—have held steady, while other new products have helped Horizon’s sales more than triple in the last four quarters. Meanwhile, as the company’s profit margins have improved, Horizon has used the extra cash to acquire several orphan drug businesses. Last year it bought Actimmune, which treats severe osteoporosis and chronic granulotamous disease, and two months ago, it paid $1.1 billion for orphan player Hyperion Therapeutics. The acquisitions have kept Horizon in the headlines, and potentially added future value should any of its new orphan drugs get picked up down the road. Horizon’s bottom-line growth is looking just as promising: the company earned $0.89 per share in 2014, up from a loss of $0.58 the previous year, and EPS is expected to increase to $1.22 this year and surge another 40% in 2016. At a time when biotechs are a hot commodity on Wall Street because of their potential, Horizon is actually fulfilling its potential.
Technical Analysis
HZNP has been on a steady climb for almost a year, but the stock really started to move in January, jumping from 12 to 17. April brought another huge leap, from 20 to 31, and after a brief pullback in May, shares have been slowly creeping up again, topping 34 last week. The 50-day moving average has scarcely been threatened all year, with support usually coming well ahead of the trend line. The current 50-day average is 31.3, so any dip below that line means momentum has waned and it’s time to get out.
HZNP Weekly Chart
HZNP Daily Chart
HealthEquity, Inc. (HQY)
Why the Strength
HealthEquity is a small company with a big story that’s taking advantage of the major changes going on in health insurance. The firm is a leading administrator of health savings accounts (HSAs), which are generally offered with high-deductible health insurance plans and offer a tax-free and portable way to save for healthcare expenses—the company offers an easy-to-use website and payment platform for customers. The number of HSAs is expected to grow from 17.4 million last year to a whopping 50 million by 2020 as more customers look to cut costs. Thanks to deals with 27,000 employers (34% of the market is covered by HealthEquity’s partners), the firm has 1.47 million members (up 46% from a year ago) that have combined assets in their HSAs of $2.54 billion (up 50%), and, impressively, retention rates are north of 98%; once a customer opens an HSA, he sticks around for years. The company collects money through account, custodial and card fees, all of which are growing strongly. Overall sales growth is accelerating, earnings are surging and profit margins have the potential to expand in a big way over time. Of course, many investors have high expectations here—the valuation is huge—but 187 mutual funds have already taken a position, a good sign that many big investors like what they see. So do we.
Technical Analysis
HQY came public last July, marched as high as 28 in December, and then went to work building a reasonable 32% deep, six-month basing structure. We like the tightness in May, and the explosive breakout last month. The only hitch here is that HQY is thinly traded (about $20 million per day), though the stock’s recent addition to the S&P 600 SmallCap Index could boost liquidity. All in all, we think you can buy a small amount (half or two-thirds of your normal position, dollar-wise) here, with a loose stop just below 28.
HQY Weekly Chart
HQY Daily Chart
The Hain Celestial Group, Inc. (HAIN)
Why the Strength
Organic foods and personal care products, once a niche industry confined to health food stores, have gone mainstream, led by big retailers like Whole Foods Markets, but also finding space on conventional supermarket shelves. Hain Celestial is a global marketer of organic foods and products that distributes through other retailers, avoiding the overhead of maintaining retail outlets. The company’s biggest retail segment is groceries, which accounted for 77% of net sales in 2014, up from 74% in 2013 and 69% in 2012. This increasing share of revenue is a result of the company’s aggressive acquisition of smaller organic brands. Most recently Hain acquired Rudi’s Organic Bakery, a gluten-free baker of breads and baked goods in the U.S. and Canada. The company also bought Tilda Legendary Rice, a basmati and specialty rice company whose operations in the U.K., the Middle East and North Africa will increase Hain’s global reach. Hain has enjoyed four years of 20%+ revenue growth and earnings are forecast to rise 18% in 2015 and 16% in 2016. Demand for organic foods and other products is likely to continue to grow, and Hain will continue to claim its share of that growth, plus the additional share it acquires in its takeover program.
Technical Analysis
HAIN has been a long-term grower, but can suffer through long corrections, like the one that pulled the stock from 49 in January 2014 to 42 in August. The stock split 2:1 in January 2015 and after a sizable correction got moving again quickly. The stock caught a strong updraft in the middle of June, running from 62 to 68 on good volume. HAIN has now corrected modestly and is bouncing back to 67. HAIN is a buy on any weakness, with a stop around 62.
HAIN Weekly Chart
HAIN Daily Chart
Celanese (CE)
Why the Strength
Celanese is a fairly large company ($11.5 billion market cap) in a pretty unexciting industry (chemicals) that recently became a favorite of growth investors. All it took was an unexpectedly solid quarterly earnings report in April that featured a 29% jump in earnings and the strongest after-tax profit margins (18.3%) in years. Celanese has been getting support from an improving global economy that has boosted demand for the company’s engineered polymers and other acetyl products. Nearly half of the company’s revenue comes from acetyl intermediates that are used as raw material for many plastics, while engineered materials supply higher-margin materials for automotive, medical, electronic and other applications. The company also makes food additives, resins, solvents and a host of other products. Investors have been tickled to see the company’s dividend increasing from its five-year average yield of 0.9% to its current yield of 1.6%. Celanese is a conservative stock, but investors have been enjoying both its dividend increases and recent better-than-expected results. Celanese will report Q2 results on July 16.
Technical Analysis
CE spent years performing like a good blue-chip income stock, drifting higher with occasional flat stretches. The latest rally came after the good earnings news in April ignited a gap up to 67 and a subsequent steady rally to near 74 last week. One analyst has (predictably) downgraded CE based on its relatively rich valuation, but it doesn’t seem to have discouraged investors. We think CE looks like a good, fairly conservative bet, but with quarterly results coming up a week from Thursday, you might want to keep any initial investment small and look for a pullback of at least a point to get started. A stop around the stock’s gap-up price of 67 makes sense.
CE Weekly Chart
CE Daily Chart
BioMarin Pharmaceutical (BMRN)
Why the Strength
BioMarin Pharmaceutical is a big fish, one of those global pharmaceutical companies that develops, produces and commercializes not only its own drugs, but those of other smaller firms as well. Its primary customers are specialty pharmacies and end-users, like foreign governments and hospitals. The stock’s gap up last month was the result of a single drug’s success: the revolutionary and controversial BRM-111. BRM-111 treats achondroplasia—commonly known as “Dwarfism”—a genetic mutation that results in severely shortened bones. Phase II clinical trials have been incredibly effective, resulting in 50% acceleration in bone growth with no serious adverse effect. Achondroplasia advocate groups such as Little People of America have expressed concern that the drug promotes an insensitive portrayal of people with Dwarfism, who do not always suffer the health issues that BRM-111 is supposed to treat. This is true, but BioMarin is confident that the treatment’s benefits are worth it. Industry analysts seem to agree: effective treatment for the estimated potential patient population of 24,000 would result in a $1.8 billion a year market; hypothetical sales estimates have come in between $1 and $2.5 billion. Even without BRM-111, BioMarin Pharmaceutical is a perennial global leader in the industry, and its historical success as both a producer and commercializing agent of drugs suggests great growth potential.
Technical Analysis
BMRN has been in a rock-solid uptrend for almost exactly a year. And there’s been very little selling pressure here: most consolidations after big buying periods tend to be light and short-lived, and it’s apparent that many investors treat dips as buying opportunities instead of warning signs. We think the current post-consolidation upmove indicates a good buying point. On the bear side, there’s some pretty clear support in the low 120s; if BMRN breaks that, it might be time to bail.
BMRN Weekly Chart
BMRN Daily Chart
Acuity Brands (AYI)
Why the Strength
Acuity Brands remains one of the market’s strongest stocks because it’s the best way to play the long-term boom in LED lighting demand. The company doesn’t actually make the LEDs, which is a good thing (LED prices are falling quickly as technology improves); instead, Acuity manufactures all kinds of lighting fixtures and those lower prices are boosting demand. Overall sales have been cranking ahead in the low- to mid-teens (13% each of the past three quarters), but LED sales are surging, rising 55% in the just-reported quarter and accounting for 45% of all sales (up from 43% and 42% in the prior two quarters). And those LED sales are boosting profit margins, which is helping earnings expand rapidly. Looking ahead, a major economic downturn could theoretically slow new construction, which could crimp demand. But we doubt any major slowdown is coming; the benefits of solid-state lighting, which uses about 80% less electricity and lasts years longer than traditional incandescent lights, have become more obvious, and as technology improves and prices fall, more consumers and businesses will make the switch. It’s a solid long-term growth story.
Technical Analysis
AYI had big run through March 2014, when it peaked at 146. It then built a nine-month base (a total correction of 28%), and broke out when it reported earnings in early January. AYI hasn’t made many dramatic upmoves since then, but it’s been riding its 50-day line for months. Having advanced for six months, there’s more risk that the stock might need a correction, but last week’s big-volume advance following the earnings report bodes well. If you’re game, you can buy some around here, but we advise using a tight stop near 176.
AYI Weekly Chart
AYI 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.
