July 8, 2013
As we wrote last week, the market has shown enough strength to begin to put money back to work. Of course, with interest rate fears prevalent and earnings season getting underway, volatility will be high. But the buyers are taking control of more and more stocks and indexes, which is what really counts. It’s not a time to be fully margined, but there have been plenty of growth stocks that have held up well since the mid-May market top, so picking up a few shares of a few names makes sense. This week’s Cabot Top Ten Trader is a bit more diverse than in recent weeks. Our favorite stock is a mass-market story with huge potential; it’s a choppy stock that we’ve written about before but shares seemed to have decisively turned a corner during the past couple of weeks.
Last week’s action was encouraging, from both the major indexes (most of which have pushed back above their 50-day lines) and growth stocks, which are definitely leading the way higher. With rising interest rates still a worry and earnings season coming up, it’s likely that volatility will remain elevated; you shouldn’t throw money at the market willy-nilly. But we’re very encouraged by the straight-up, smoke-up-a-chimney type of action by the market and many stocks since the panic low in late-June. Our Market Monitor remains in the bullish camp.
This week’s list is a bit more diverse than we’ve seen of late, with many quality prospects to consider. Our favorite of the week is Pandora (P), which is a very jumpy stock we were knocked out of a few weeks ago, but its recent, powerful action is intriguing. Try to buy on weakness.
|Thor Industries (THO)||104.76|
|Qihoo 360 (QIHU)||0.00|
|Pandora Media Inc. (P)||0.00|
|Chart Industries (GTLS)||72.05|
|Ford Motor Co. (F)||0.00|
|Electronic Arts (EA)||0.00|
|Cree, Inc. (CREE)||67.96|
Thor Industries (THO)
Why the Strength
Thor Industries, through its sole ownership of many subsidiaries, is the world’s largest maker of recreational vehicles (RVs) and a significant player in building commercial buses. Thor was incorporated in 1980, but you can trace the lineage of its marquee product back to 1929 when Wally Byam began building the recreational trailers that would grow into the Airstream brand. Thor bought Airstream in 1980, and has since added a host of other brands in three segments, towable RVs like Airstream, Classic, Sport, Flying Cloud and Eddy Bauer, motorized RVs like Four Winds, Hurricane, Windsport, Chateau, Daybreak, Challenger, Tuscany, Outlaw, Palzaao and A.C.E. and small and mid-size buses under the Aerolite, Aerotech, Escort, MST, Transmark, EZ Rider and other brands. During the last fiscal year, Thor sold over 95,000 RVs, with about three-quarters of revenue coming from the towable RV sector, 14% from bus sales and 12% from motorized RV sales. The company enjoys a 36% chunk of the entire RV market. While some analysts see the RV market coming under pressure from Asian and European competition, it’s hard to argue with Thor’s success. The company even managed to make a profit during the darkest days of the Great Recession in 2009. Thor Industries isn’t likely to be a rocket, but earnigns should lift more than 20% during the next year and the company pays a tidy 1.4% forward annual dividend yield. It’s a nice package.
THO has made three previous appearances in Top Ten, including two during the Big Bounce rally of 2009 and one last November. The stock slumped big during the first half of 2011, falling from 37 in January of that year to 17 in August. But a series of rallies pushed to stock to 44 in January 2013 and after a correction to 35 in April, THO has been on a tear, hitting new all-time highs above 50 in recent trading. This rally has pushed the stock well above its 25-day moving average (now at 41), and its pattern of big advances punctuated by sizable corrections may indicate that there’s a pullback in the offing. We suggest looking for a correction of at least a couple of points as a buying opportunity. A stop at 42 looks reasonable.
THO Weekly Chart
THO Daily Chart
Qihoo 360 (QIHU)
Why the Strength
Qihoo 360 is a good example of what can happen when a company figures out a new use for an existing asset. The company has been a fast-growing provider of anti-virus and anti-theft software to China’s rapidly growing population of smartphone users. But despite huge revenue growth (96% in 2012), the company’s runaway popularity with investors came only after the company, which had provided a popular mobile browser mostly as a way for customers to download software updates, began offering a search engine to browser users. Qihoo suddenly wound up with a 10% share of China’s mobile search traffic, which raised usage of its other games and online services, and consequently kicked its advertising rates to a new level. And search is now estimated to be up 15%, with many believing 20% to 25% is possible within a few months. Qihoo is still a relatively young company, but investors see its very popular mobile browser as a powerful weapon in its battle with bigger rivals like Baidu and Google. With many Chinese adopting smartphones as their primary means of emailing, messaging and surfing the Web, a nimble company like Qihoo 360 stands a good chance of leveraging its 457 million Web users and 275 million mobile security customers into a bigger share of the total online pie.
QIHU has been in a strong uptrend since the August 2012 announcement of its stunning grab of mobile search market share. From a low of 14, the stock rocketed to 25.5 in six weeks. The stock began 2013 digesting a big gain, slipping into a three-month rest that pulled it from 33 to 26. But April brought another strong rally that consolidated with five weeks of trading around 44 in May and June. June 24 kicked off another surge, and QIHU is now pushing to new all-time highs near 50. A buy on any weakness of a point or two looks like a good risk/reward bet. Use a stop at 42 (the May support level) for comfort.
QIHU Weekly Chart
QIHU Daily Chart
Pandora Media Inc. (P)
Why the Strength
Pandora has about as much risk and reward as any young growth stock out there. On the upside, the company’s leading position in online radio serves a true mass market; in May, for instance, a whopping 71 million people were active listeners (up 33% from a year ago), and they collectively listened to 1.35 billion hours of music, up 22%. And those gains came despite Pandora capping the amount of listener hours per month in an effort to keep royalty payments to record labels down. Currently, Pandora owns about 7.3% of the total U.S. radio market (up from 5.8% a year ago), making it the biggest radio station in the country! And that’s where the big potential lies—as more and more advertising dollars go from traditional radio to online, Pandora is likely to benefit in a huge way. One analyst opined that the company’s ad revenue could grow from about $300 million in 2013 to $1.8 billion in 2018, a six-fold increase that is sure to lead to humongous profits. So what could go wrong? Competition, especially from a big player like Apple, which is launching an iTunes radio service this fall. The question is whether Pandora’s lead and name recognition has grown large enough to fend off these kinds of threats; many short sellers think not (there are 33 million shares short out of 175 million!). But big investors think yes, or at least, that the market will be big enough for multiple players. All in all, we like it.
P is very choppy and volatile, and can be pushed up or down by news—reports that Apple was getting into the business pushed the stock lower in late-May, but positive comments from a couple of analysts have caused buyers to rush in during the past couple of weeks. We do like the power of this upmove, however, it’s usually been better to buy this stock on pullbacks, even during the healthiest of market environments. Thus, we’ll set our buy range down a bit and advise using a loose stop.
P Weekly Chart
P Daily Chart
Why the Strength
There has been quite a bit of activity on micro-electro-mechanical systems (MEMS) maker InvenSense in the past couple of months. The company, famous for the motion-sensing gyros used in Nintendo’s Wii gaming system, posted a blow-out fiscal 2013 fourth-quarter earnings report back in May—revenue surged 67%, while earnings per share doubled! Despite flagging sales on the Wii, InvenSense has moved on, taking the mobile computing market by storm. In fact, the company’s most recent strength has come from unofficial reports that InvenSense motion sensors will be used in the upcoming Apple iPhone 5S and new iterations of the iPad. Making this situation even more interesting is that Apple’s lead competitor, Samsung, already represents about 30% of InvenSense’s revenue. The upside to this for InvenSense is that, due to Samsung’s influence, a win with Apple should have considerably less impact on InvenSense’s margins—historically a problem for companies that have signed supply deals with Apple in the past. The only red flag for investors is that InvenSense has had trouble where guidance is concerned. For instance, during last quarter’s conference call the company guided below expectations and previous estimates, despite issuing glowing reviews of its product pipeline and hinting at a potential Apple deal. Despite this slipup, we still feel that the company has a wealth of growth potential in the mobile market.
INVN shares shot skyward shortly after going public in November 2011, but failed to hold onto their lofty perch. After tagging a high just north of 22 in March 2012, INVN plunged back below its IPO to a low near 9 in June. The stock then entered a period of choppy trading, with shares bouncing sharply between support near 9 and resistance in the 16 area. Zeroing in on the past couple of months, INVN has come back to life, with strong earnings and Apple rumors pushing the shares back above their 50-day and 200-day moving averages. With INVN once again challenging resistance near 16, a breakout here could bring more buyers to the table. You can nibble here, or take bigger bites on pullbacks.
INVN Weekly Chart
INVN Daily Chart
Why the Strength
One of the consequences of the rapid migration of so many companies to the Cloud is that ways have to be found to replace traditional paper documents with electronic files. Guidewire is doing exactly that, with a narrow focus on the insurance industry, a business that has traditionally generated warehouses full of paper policies and other documents. Guidewire has a comprehensive understanding of the entire insurance industry—property/casualty underwriting, policy administration, billing, claims and reinsurance management—and has helped more than 80 companies to put their paper days behind them, either by installing software on site or moving everything into the Cloud. This California company specializes in English-speaking countries, with 55% of revenue coming from the U.S., 15% from Canada, 8% from Australia and 7% from the U.K., but its expertise is universal, and 15% of revenue comes from elsewhere. The company announced in June that its software was selected by Hartford Mutual to take its business into the Cloud. Results from Guidewire’s fiscal third quarter (ending April 30) beat on both revenues and earnings. With its relatively narrow focus on a single industry, we don’t expect Guidewire to be a world-beater over the long term. But there’s plenty of potential as the huge insurance industry begins to modernize.
GWRE came public in January 2012 at 13 at leapt to 38 in March. Then came a few months of correction, during which the stock pulled back for a few months to support at 24, then an additional four months over support at 28. GWRE has been in an uptrend for most of 2013, with a couple of three- or four-week corrections along the way. GWRE pushed out to new all-time highs near 44 in April, but corrected to 38 in early June. A slightly jumpy rally has now pushed GWRE to further all-time highs. It’s likely that the stock will re-test its old resistance at 43, and that’s the place to buy it. A stop at 38 (early June support) makes sense.
GWRE Weekly Chart
GWRE Daily Chart
Chart Industries (GTLS)
Why the Strength
Whereas companies like Cabot Oil & Gas, EQT Corp. and Range Resources are all explorers benefiting from the shale gas boom in the U.S., Chart Industries is riding the same trend on the equipment side—it’s a leading maker of equipment such as heat exchangers and tanks to transport and store liquefied natural gas (LNG). It’s also a major player in equipment for LNG fueling stations, which are being used by firms such as Clean Energy and Royal Dutch Shell for the growing number of natural gas-powered trucks, as well as the actual fuel tanks for those trucks. And it has a top position in all of its LNG-related products! Moreover, this isn’t just a U.S. story; Chart does good business in China, highlighted by a couple of deals with PetroChina worth a combined $85 million. There are always risks, of course; if natural gas prices, which have weakened meaningfully of late, continue to slide, drilling activity could decelerate. And the future of exporting LNG is somewhat up in the air, with many politicians wanting to keep U.S. gas here in the States to keep prices low; if exports were crimped, demand for Chart’s products could ease. But overall, the trend toward more natural gas usage both in the U.S. and elsewhere has lots of momentum, and Chart should capitalize on it.
By our measures, GTLS just got going in May after a year-long pause, and it’s acted fairly well during the market’s choppiness of the past few weeks. GTLS ran up as high as 99 near the end of May and held firm for a couple of weeks, before finally getting dinged late last month. But as soon as the market began to bounce, so did this stock, and now it’s back up near its old highs! If you want in, you could nibble here with a stop around 90, and then look to add shares on a decisive move above 100.
GTLS Weekly Chart
GTLS Daily Chart
Ford Motor Co. (F)
Why the Strength
June auto sales figures were released last week, though you may have missed the numbers in your 4th of July revelry, and the blue oval was among the biggest winners. Ford impressed Wall Street on Friday when it said that overall June sales increased by 13%—the company’s best results since 2006. Breaking down the figures, Ford truck sales were up 20%, car sales rose 12%, and utilities sales rose 8%. Ford cited strong sales from its small car lineup, including the Fiesta, Focus, and the C-MAX, which collectively saw a 39% year-over-year increase in sales. Another big story for Ford is the company’s improving performance in China, now the largest automobile market in the world. Specifically, Ford saw a 47% increase in sales in China, with a record 407,000 vehicles sold during June. The company plans to build on this momentum as it attempts to close the gap with Volkswagen and General Motors in the country. Stressing the importance of the Chinese market, Ford executives told investors that they plan to expand Chinese sales to account for 40% of their total global sales, compared to just 11% today. With plenty of room for continued growth, especially in China, we feel that Ford has legs.
While the first half of 2012 was rough for F, the stock was finally able to put in a bottom near 9 in early August. Since then, shares haven’t looked back, rallying more than 60% along support at their 10-week and 25-week moving averages. In fact, F hasn’t closed a week below this duo since August 2012. More recently, the stock met with resistance near 16 in late May, forcing F to retreat to support at its 50-day trendline. Shares have since rebounded from this support, and surged past the 16 level in recent days. This breakout to new multi-year highs has left F a bit over-extended, but pullbacks to the 16 region should present an excellent opportunity to buy.
F Weekly Chart
F Daily Chart
Electronic Arts (EA)
Why the Strength
Video game powerhouse Electronic Arts is on a deal-signing binge this year. The company already scored exclusive rights to the much-sought-after Star Wars universe when it inked a deal with Walt Disney earlier this year. But, not content to rest on its laurels, EA went out and signed a four-year deal with board-game maker Hasbro to bring the company’s most popular games, such as Monopoly, Scrabble, Game of Life, Battleship, Boggle, Clue, Risk and Yahtzee, to the mobile market. Financial terms of the deal have not been disclosed, but the move is sure to be lucrative for EA given the popularity of these titles and their scarce representation in mobile. Elsewhere, EA also boosted the potential uptake of its newest FIFA soccer game by signing popular Mexican footballer Javier Hernández, or Chicharito. Meanwhile, EA continues to shift toward digital delivery of video games—a move wholly supported by the next generation of video game consoles. In an address to investors, the firm noted that digital content has risen from 20% of the market in 2005 to more than 70% today. While a majority of this digital market is represented by PC and mobile users, EA is banking heavily on next-gen console owners adopting the digital market. Such a move would bode extremely well for EA’s current business model.
EA shares have continued to grind sideways in the 22-23 region ever since the company’s post-earnings gap in early May. As a result, shares are no longer over-extended, making them ripe for buyers to once again push EA higher. The stock is currently trading above its 10-day, 25-day, and 50-day moving averages, providing a solid layer of support to help contain any weakness in the broader market. As we noted in last week’s Top Ten update, nibbling here could work, if you are looking to add to your position, or you could wait for EA to push past 24.
EA Weekly Chart
EA Daily Chart
Why the Strength
Moviegoers will be most familiar with DreamWorks Animation as the studio that produced this summer’s blockbuster hit, Despicable Me 2, which has been raking in the gross. Investors take a longer view, noting that the studio has a record of hit animated feature films that includes the Kung Fu Panda, Shrek, and Madagascar franchises, each of which has spawned a movie that grossed over $1 billion and one-offs like How to Train Your Dragon and Puss in Boots. The movie business isn’t the right place for someone seeking consistency; DreamWorks Animation lost 43 cents per share in 2012. But investors are intrigued by the earnings potential of the business, noting that 2013 earnings estimates are for 84 cents per share in earnings. And the company’s historical record with its 26 movies produced to date averages out to $430 million per movie. Investors are also excited about the company’s recent acquisition of YouTube’s teen network, AwesomenessTV, which adds a revenue channel for its back-catalog of hit movies. The company’s current schedule of five movies every two years will build a library of titles quickly and the company has been exploring expansion into TV production and wider distribution in China. There’s risk in DreamWorks, but there’s also big potential, especially after the company’s June 19 announcement that it would provide 300 hours of new TV shows to stream online via Netflix. Getting more revenue out of wider distribution in new channels is good news for DreamWorks.
DWA, which is making its Top Ten debut today, came public in October 2004, and hacked around for years, with a nice rally in 2009, but a long decline from 45 in early 2012 to 16 at the beginning of 2013. The stock spent a full year building a base with support at 16 and occasional excursions to as high as 23. But high-volume up-days on March 13 and May 1 signaled a change in perception that has led to a strong rally, pushing DWA to a new 52-week high last week. A buy of DWA on any weakness looks like a good bet. A dip below the 50-day moving average (now at 22.7) would be bearish.
DWA Weekly Chart
DWA Daily Chart
Cree, Inc. (CREE)
Why the Strength
Cree remains one of our favorite growth stories, as its LED lighting solutions for both commercial users (which make up about 80% of the market) and individual users are on the verge of mass adoption. For commercial and industrial customers, who generally have the lights on 10 to 12 hours per day, the payback for switching to LEDs is less than one year. And with Cree’s new household LED bulbs, which go for $10 for a 40-watt equivalent ($12 for a 60-watter), the payback is just under two years, assuming you’re replacing incandescent bulbs and use them three hours per day. And that payback doesn’t take into account that those bulbs are likely to last two decades! Those household bulbs are sold exclusively at Home Depot, and according to one analyst last week, channel checks indicate sales are going better than expected. Longer-term, the potential from sides of the market is gigantic—a Cree executive recently said that, in the U.S. alone, LEDs make up just 1% of all parking structure lighting, 2% of all street lighting and 0.1% of all ceiling lighting! Of course, there’s competition out there, but Cree is the leader and, besides, there’s clearly plenty of potential growth to go around. Analysts see earnings up 40% in the year ahead, but those estimates have been creeping up.
CREE is not in the first inning of its advance—the stock has been running since gapping up on earnings back in January. That means expectations (and risk) are a bit higher here than some other stocks that have built launching pads. With that said, if CREE wanted to head lower, it sure hasn’t shown it—the stock pulled back for a few days during the market’s late-June swoon, but stormed back to new highs on good volume as soon as the pressure came off the market. You could buy a small position here or on a dip of a couple of points, with a stop near 60.
CREE Weekly Chart
CREE 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 8, 2013|
|6/17/13||Delta Air Lines||DAL||18-19||19|
|4/8/13||Green Mountain Coffee||GMCR||53-55||74|
|3/18/13||Lion’s Gate Entertainment||LGF||21-22.5||31|
|5/28/13||Old Dominion Freight||ODFL||42-43||44|
|6/10/13||Pioneer Natural Resources||PXD||139-144||151|
|WAIT FOR BUY RANGE|
|7/1/13||American Axle & Mfg.||AXL||17.5-18.5||19|
|DROPPED: Did not fall into suggested buy range within two weeks of recommendation.|