Here Comes Earnings Season
The market and many leading stocks finally hit some resistance today, but we can’t say that’s too surprising—the market has had a great run in recent weeks, there hasn’t been any real dip since mid-May and earnings season is just around the corner. We’re not shrugging off today’s selloff; if the evidence rapidly deteriorates, we’ll change our tune. And as we’ve written lately, booking partial profits in some winners makes sense ahead of earnings season. But just as one big day off the bottom doesn’t signify a new uptrend, we can’t say one bad day has changed the overall uptrend.
This week’s list is as growth-oriented as we’ve seen it in a long time, and it includes a few stocks that only recently broke out of bases. Our Top Pick is Baidu (BIDU), a blue-chip Chinese stock that has been acting very well in recent weeks. Earnings are due out July 24, so try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| 58.com (WUBA) | 0.00 | ||
| Nabors Industries (NBR) | 0.00 | ||
| Molina Healthcare (MOH) | 0.00 | ||
| Jazz Pharmaceuticals (JAZZ) | 0.00 | ||
| HDFC Bank Limited (HDB) | 0.00 | ||
| Gilead Sciences (GILD) | 75.10 | ||
| Bitauto Holdings (BITA) | 0.00 | ||
| Baidu (BIDU) | 0.00 | ||
| Bonanza Creek Energy (BCEI) | 0.00 | ||
| Arista Networks (ANET) | 0.00 |
58.com (WUBA)
Why the Strength
With the IPO of Alibaba now imminent, investors are enthusiastic about stocks that give them access to the fragmented Chinese consumer landscape, and 58.com has caught their eye. The company is an online marketplace that gives local merchants (China is virtually without big retail chains) a place to meet customers and customers a place to shop for (and get information on) housing, jobs, automobiles, second-hand goods, pets, tickets and yellow pages information. Beijing-based 58.com was founded in 2005 and has many similarities with Craig’s List and a few with eBay. But it’s really a unique hybrid, a Chinese response to a problem of getting merchants and consumers together. It’s worth noting that Tencent Holdings, a Chinese online giant, has grabbed a nearly 20% stake in 58.com in return for an investment of $736 million. This alliance will give 58.com potential access to Tencent’s hugely popular WeChat platform, which could substantially boost 58.com’s mobile device penetration. 58.com enjoyed 67% revenue growth in 2013 and has booked four profitable quarters in a row leading to EPS of 25 cents in 2013, which is forecast to rise to 46 cents per share in 2014. Add in the continuing rumors that 58.com is an attractive takeover candidate and you have a nicely positioned Chinese online commerce play.
Technical Analysis
WUBA (literally “five eight” in Chinese) came public in October 2013 at 17, but has never traded under 21. The stock advanced and corrected up to 58 in March, then began a nicely shaped cup correction that has likely ended with a handle at around 55 over the last week. News of the Tencent buy-in caused a high-volume spike in WUBA on June 26 and 27 and last week’s action represents a consolidation of those gains. WUBA looks like a good buy anywhere under 54. The stock’s 25-day moving average is at 46.5, and that’s a pretty good stop.
WUBA Weekly Chart
WUBA Daily Chart
Nabors Industries (NBR)
Why the Strength
Interestingly, while the stocks of many oil explorers have hit a bit of turbulence of late, the oil service stocks remain in firm uptrends. Nabors has been a leading stock since kicking off what looks like a new, longer-term uptrend in February. The reason: Investors perceive a powerful new uptrend in the land drilling cycle (both in the U.S. and internationally) has arrived, which will drive earnings significantly higher in the years ahead. However, the stock’s latest push higher was thanks to a new bullish development—it agreed to combine its Completion and Production services business with C&J Energy, creating one of the largest C&P firms in North America; with ties to Nabors, it will do good business around the world. And Nabors will own 53% of the combined company, and get $937 million cash to boot! It’s another move to unlock the value of Nabors’ varied businesses, and will allow both entities to focus on their core businesses. Earnings are due out July 22, though the big prize will be big earnings in 2015 and beyond.
Technical Analysis
NBR blasted off in February and has been trending higher since. Granted, the action hasn’t always been exciting, but a couple of tests of its 10-week line have led to support, and two weeks ago, the news of the merger with C&J Energy helped the stock pop to new highs on good volume—and it continued higher last week. With the 50-day line down below 27, we think grabbing shares on minor weakness is your best bet, especially with earnings coming up in a couple of weeks.
NBR Weekly Chart
NBR Daily Chart
Molina Healthcare (MOH)
Why the Strength
Molina Healthcare has been helping customers navigate the maze of government healthcare rules and regulations since 1980. Specializing in the low-income market, the company got its start with such government programs as SCHIP (State Children’s Health Insurance Program) and Medicaid before expanding into Medicare in 2006. Currently, Molina services more than 2.1 million members, offering Medicaid programs in 15 states and Medicare options in another eight. The stock’s recent strength has come as a result of speculation about Molina’s second-quarter earnings report, slated for release on July 30. Specifically, analyst estimates are rising heading into the report, with Molina most recently attracting a “buy” rating from analysts at Sterne Agee. Overall, the company has a history of strong revenue growth, with sales growing at double-digit rates in each year of the past decade. Furthermore, projections are pointing toward a rise of 48% this year, followed by 40% growth in 2015. The continued expansion of government influence in the healthcare market is a primary driver for Molina’s revenue. While such rapid expansion sometimes causes glitches in the system, we really like Molina’s potential for growth.
Technical Analysis
After consolidating for roughly the first four months of 2014, MOH has taken off. The stock bottomed near 33 in mid-April before rebounding sharply over the next month, ultimately pulling its 10-day and 50-day moving averages into a bullish cross. Following a rapid rise in early May, MOH has settled into a more gradual rally. In June, MOH met with resistance in the 45 region, which led to a successful test of support near the 25-day trendline. In fact, MOH bounced sharply from this trendline, on strong volume, and is now perched at an all-time high just north of 46. With earnings on the horizon, you can buy on pullbacks to if you are game.
MOH Weekly Chart
MOH Daily Chart
Jazz Pharmaceuticals (JAZZ)
Why the Strength
Biotech continues to be one of the hottest sectors on Wall Street, and Jazz Pharmaceuticals is helping to lead that trend. The company has a full stable of treatments, including drugs for neurology, oncology, and women’s health conditions. Overall, the company’s biggest revenue drivers are Xyrem, Jazz’s blockbuster narcolepsy drug, and Erminaze, for the treatment of acute lymphoblastic leukemia. This pair of drugs alone accounts for more than 80% of Jazz’s total sales. Looking to expand its core offerings, Jazz snapped up fellow biotech Gentium back in January, which is a big reason for the stock’s current strength. The deal includes the U.S. rights to defibrotide, a treatment for severe hepatic veno-occlusive disease (VOD) in patients over one month of age undergoing hematopoietic stem cell transplantation therapy. Jazz already has approval for defibrotide in the E.U., and is working with the FDA on a regulatory pathway, with a new drug application submission planned for early 2015. Analysts are projecting potential sales of about $210 million for defibrotide, potentially contributing 85 cents to Jazz’s earnings per share. With Wall Street already forecasting sales increases of 28% and 25% this year and next, respectively, there is little not to like about the defibrotide deal and Jazz’s future.
Technical Analysis
After soaring more than 150% last year, JAZZ has have cooled off considerably in 2014. The stock quickly rose to a peak near 176 in February, before succumbing to selling pressure and pulling back for a test of support near 120 in April and May. After bouncing off its 200-day trendline in May, JAZZ stabilized once again and embarked on a relief rally. Bolstered by their 10-day and 25-day moving averages, shares made a run at 150 in June. The defibrotide deal for U.S. rights prompted a significant spike in volume last week, pushing JAZZ to a four-month high above 160 before today’s sharp dip on moderate volume. You can nibble around here.
JAZZ Weekly Chart
JAZZ Daily Chart
HDFC Bank Limited (HDB)
Why the Strength
HDFC Bank, the largest private-sector bank in India by market cap, is enjoying the afterglow of the recent election of a pro-business Prime Minister. India has long suffered from a kind of democratic grid-lock that kept market reforms from happening and imposed a daunting burden of bureaucratic regulation on businesses. The Bharatiya Janata Party of Narendra Modi won an absolute majority in the Indian parliament, a situation that has not occurred since 1984. Investors have high hopes that single-party rule by a pro-business leader will give the Indian economy a much-needed boost. HDFC Bank, like its competitors, is focused on bringing banking services to rural India, much of which has never had such services. HDFC’s approach includes a Sustainable Livelihood initiative that helps the unbanked population to turn their skills and services into business opportunities. The company’s fortunes will likely remain focused on its usual services like savings and checking accounts, consumer and business loans, money management, mortgages and credit and debit card services. The Indian economy is growing at about twice the rate of the U.S.’s and the Mumbai Sensex, the Indian stock market index, is up 18% this year. HDFC Bank is enjoying a strong position in the middle of this strong growth.
Technical Analysis
HDB last appeared in Top Ten in April, when the stock was trading at 41. After a strong rally to 47 in May, HDB settled into a tight six-week consolidation under resistance at 47. The stock broke out of this consolidation on July 1, pushing out to new all-time highs last Tuesday, Wednesday and Thursday. The stock’s mild pullback today looks like a good entry point. A break below the 50-day moving average (which hasn’t happened since February) would be bearish. Use a stop around 44.
HDB Weekly Chart
HDB Daily Chart
Gilead Sciences (GILD)
Why the Strength
Gilead Sciences is a global biotech firm that has set its sights on a slew of dangerous infectious diseases, including hepatitis, HIV and additional infections related to AIDS. The company has several blockbuster medications on the market, including Truvada, Viread and Emtriva, for the treatment of AIDS. The company also has a co-branded AIDS treatment, Atripla, with Bristol-Myers Squibb. With a market cap in excess of $130 billion, Gilead doesn’t seem like much of a growth candidate. Indeed, until recently, the company appeared content to sit on its current (sizeable) revenue stream. This picture changed dramatically when Gilead branched out into treatment of hepatitis C. The company’s newest drug, Sovaldi, is a game changer for hep C patients. Unlike other treatments, Sovaldi is taken orally and cures 95% of patients in as little as 12 weeks! Currently, about 3% of the world’s population, 170 million, has hep C, according to the World Health Organization, creating significant market potential for the drug. In fact, during its first quarter of commercial existence, Sovaldi raked in more than $2 billion in sales—that’s almost as much revenue as all of Gilead’s other franchises combined. As a result, analysts are forecasting a 220% spike in second-quarter earnings, with full-year 2014 earnings seen soaring 208%.
Technical Analysis
After putting in what appeared to be a major top back in February, GILD pulled back for a test of long-term support at its 200-day moving average in mid-April. The stock’s successful test of this trendline resulted in GILD surging toward all-time high territory in the 80 region. With investors and analysts finally wrapping their heads around Sovaldi’s potential impact, GILD has taken off once again. With GILD in rally mode, buying breaks in the action is probably your best course of action if you want to get in ahead of the company’s quarterly report.
GILD Weekly Chart
GILD Daily Chart
Bitauto Holdings (BITA)
Why the Strength
Growth investors are always on the lookout for new companies with first-mover positions in growing markets, and BitAuto—a Chinese company that provides Internet content and marketing services for Chinese auto manufacturers and dealers—qualifies on all counts. Auto sales in China grew 13.9% in 2013, and while 2014 growth will likely slow to 10%, the market is so big that the opportunity is still enormous. BitAuto’s platform lets both automakers and auto dealers set up their own websites that deliver pricing, pictures and specifications to consumers along with advertising and promotions. The sites can also deliver customer feedback and reviews, letting dealers manage their relationships with customers. Used cars get their own sites, but the services are about the same. BitAuto grew revenue by 40% in 2013 (and 47% in Q1 2014) and earnings are forecast to rise from $1.03 per share in 2013 to $2.32 in 2015. The one possible barrier to BitAuto’s future growth is the Chinese government’s determination to reduce pollution from all causes, cars included. But most observers see any such programs as likely to target older, higher exhaust-producing cars, rather than new cars. Institutional ownership of BitAuto has been growing rapidly, and is up from 35 in May to 98, which is a good sign.
Technical Analysis
BITA came public at 12 in 2010 and sank to 3.5 in January and June 2012. The stock got moving in the middle of 2012 and has been rallying strongly ever since, with a little time off for consolidation and rebasing from November 2013 through April 2014, during which the stock kept to the 35 area. BITA got moving again in June and roared to new highs, touching 49 last week. We think BITA looks buyable on any weakness with a loose stop around 42 to accommodate its volatility.
BITA Weekly Chart
BITA Daily Chart
Baidu (BIDU)
Why the Strength
Most Westerners first heard of Baidu back in 2007 when it was using its superior understanding of the Chinese language to achieve better results on Web searches, enabling it to hand foreign competitors their heads. At that time, most Chinese still accessed the Internet via desktop PCs, a situation that has changed dramatically with the runaway popularity of smartphones. Baidu ran into some stern competition last year when upstart rival Qihoo 360 grabbed a big chunk of the mobile search market. And the rise of e-commerce monsters Alibaba and Tencent has created formidable competitors in terms of Web visibility. But Baidu has responded well, purchasing an app store (91 Wireless) to boost its mobile footprint, a video service (iQiyi) that has become China’s most popular video service and a majority stake in Renren’s group buying site, Nuomi. The company has a strong $2.4 billion in cash and equivalents on hand (plus $4.6 billion in short-term investments) to maintain its campaign of acquisitions. Baidu just announced that it will release its Q2 results on July 24, after the market closes, and analysts are looking for a hair under $1.93 billion in revenue and earnings of $1.31 per share. Baidu has made 23 appearances in Top Ten since its debut in late 2007, and its competitive position seems as strong as ever.
Technical Analysis
BIDU had a major correction from 160 in August 2011 to below 83 in April 2013. But investors moved back in strongly about a year ago, sending BIDU to 140 by early August. The stock then worked its way up to a double top at 180/185 in January and March, then spent April and May hacking around under resistance at 160. Buyers got busy again in May, and BIDU has been in a strong uptrend since, with only a couple of minor corrections. BIDU is now trading near the all-time highs it achieved last week. Look to buy on a dip of at least three points and keep an eye on reaction to the July 24 earnings report. A stop at 175 looks sensible.
BIDU Weekly Chart
BIDU Daily Chart
Bonanza Creek Energy (BCEI)
Why the Strength
Bonanza Creek is one of our favorite stories in the oil patch, partially because few investors know much about it. The company has some operations in Arkansas that are solidly cash flow positive, but the growth is all coming from the Wattenberg field in Colorado (which includes both the Niobrara and Codell fields), an oil- and liquids-rich area that has some of the highest well returns of any shale area in the country. (The company’s rates of return are generally in the 55% to 65% range at $90 oil.) Bonanza has been growing rapidly for years, but its acquisition in May of another 34,600 acres effectively doubles the firm’s total land and adds another 700 drilling locations to its backlog—that’s 25 years worth of drilling at current rates, though Bonanza is accelerating its drilling program to 140 wells this year in Colorado following the acquisition. We’re impressed that, despite a history of growth, the firm hasn’t had any dilutive share offerings in recent years, a sign of solid financial management. The company expects total output to grow 50% in 2014, and earnings growth looks rapid for the next few years. We like it.
Technical Analysis
In late-May, BCEI was seven months into a basing process and hadn’t made any net progress in 14 months. But its huge acquisition changed perception, and the stock blasted off on its heaviest weekly volume ever (and followed that up with big gains on its third-heaviest volume week), eventually pushing to new price highs. Now shares have pulled back on slightly elevated volume. But the main trend is up, and there should be good support in the low 50s. BCEI looks buyable here.
BCEI Weekly Chart
BCEI Daily Chart
Arista Networks (ANET)
Why the Strength
Arista Networks is a very young stock (just public June 6!), with $417 million in revenue during the past 12 months, and likely north of $700 million next year. The company is a provider of cloud network switching solutions, and what has Wall Street in a tizzy is that Arista, at long last, looks like a firm that could challenge Cisco Systems’ dominance (after Juniper, Brocade, Extreme and others that failed). Arista is already second in the market to Cisco in one of the most popular switching categories, and as legacy IT systems move to cloud infrastructures (especially in data centers), demand for Arista’s advanced products will grow. And the kicker: Arista’s senior management were the ones who developed Cisco’s platform, and who better to take down (or make major inroads into) Cisco than the people who built it up? Of course, there are risks—its overall market share is still small, the stock’s valuation is huge (more than 10 times sales) and Microsoft, which has been rapidly building out its data center capacity, represents about one-quarter of sales (though sales to others are growing rapidly, too). Thus, it’s a bit speculative, but if things go right, the potential is enormous.
Technical Analysis
ANET doesn’t have much of a chart to analyze, but we like the overall pattern. Shares went straight up following the IPO, then had an orderly pullback for a couple of weeks on decreasing volume. And then July 1 brought a whopping 22% surge on the heaviest volume day since the first day of trading. This isn’t a stock to put the rent money in, but nibbling on dips makes sense, with the idea of slowly adding shares if ANET works higher.
ANET Weekly Chart
ANET 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.
