Short-Term Question Marks Still There
There’s no question that last Thursday’s and Friday’s show of support in the major indexes and many stocks (especially growth-oriented stocks) was a positive sign—it tells you big investors are still interested in buying on weakness at or near support levels. (Many stocks found support near their 50-day lines.) That continues to bode well for the intermediate- and longer-term uptrend. That said, there are still question marks in the short-term—there’s been lots of distribution since mid-May, especially in many defensive and interest rate-sensitive areas, and sentiment remains a bit complacent. By all means, you should hold onto your top performers, but for now, we continue to advise caution when it comes to new buying (keep positions small) and holding some cash.
Perhaps the most impressive thing we saw this weekend were our own screens—this week’s list has a ton of great-looking charts despite the market’s recent sloppiness. Our favorite of the week is Parexel (PRXL), which remains in a tight, controlled uptrend and has great growth prospects.
| Stock Name | Price | ||
|---|---|---|---|
| Salix Pharmaceuticals (SLXP) | 0.00 | ||
| Pioneer Natural Resources (PXD) | 0.00 | ||
| Parexel Corp. (PRXL) | 0.00 | ||
| OmniVision (OVTI) | 0.00 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| EQT Corporation (EQT) | 0.00 | ||
| Electronic Arts (EA) | 0.00 | ||
| Ctrip.com International Ltd. (CTRP) | 34.94 | ||
| Conn’s Inc. (CONN) | 0.00 | ||
| TD Ameritrade (AMTD) | 0.00 |
Salix Pharmaceuticals (SLXP)
Why the Strength
Salix Pharmaceuticals is a relatively small company that’s thriving by specializing in drugs to treat gastrointestinal disorders. The big dog in the company’s offerings is Xifaxan, an antibiotic that has been approved for the treatment of traveler’s diarrhea (in its 200mg dose) and hepatic encephalopathy (in its 550mg dose). Salix announced on May 30 that it had bought a patent and related intellectual property rights from Olon covering amorphous rifaximin (the drug contained in Xifaxan), which will help to secure exclusive rights to the drug for up to seven years. Sales of Xifaxan in 2012 amounted to nearly $515 million, which is about 70% of Salix’s total for the year, so nailing down the rights is a good thing. Salix has steady sales of its preparations for bowel cleansing for proctoscopy, a procedure that is expected to increase as Baby Boomers reach their years of maximum risk for colon and bowel cancers. The company’s Apriso treatment for ulcerative colitis and Relistor for opioid-induced constipation provide additional upside growth opportunities. Revenue grew by 36% in 2012, with earnings up from $2.82 in 2011 to $3.01 in 2012. Despite its sizable reliance on one product, Salix is growing well and has taken steps to safeguard its position.
Technical Analysis
SLXP topped 55 in June 2012, but gapped down in July, skidding to as low at 37 in November. But a surge in late December pushed the stock as high as 52 in April. With another burst of energy on May 17, shares began a climb to 62, which is where the stock has been resting under resistance for two weeks. The stock’s 25-day moving average is rising fast at just above 59, and the stock has ignored most of the recent turmoil in the markets. You can either buy SLXP on a dip toward the bottom of its current range (around 60) or you can wait and buy on a breakout above resistance at 62. A loose stop at 54 makes sense.
SLXP Weekly Chart
SLXP Daily Chart
Pioneer Natural Resources (PXD)
Why the Strength
Pioneer Natural Resources is yet another energy explorer that’s making hay in a handful of lucrative areas in the U.S. The firm is the leading operator in the Spraberry area in Texas, which is the second largest oilfield in the world; even after being drilled for years, there’s mountains more potential in the area, as horizontal drilling techniques have only begun to be used there. Pioneer owns 900,000 acres in the Spraberry play (which is 70% to 75% oil), and is accelerating its production there by adding rigs; it’s partly able to do that thanks to an innovative joint venture with Sinochem, the Chinese energy giant, which just paid $1.7 billion for a 40% stake in about 200,000 of those acres. Outside of Spraberry, the company is also growing fast in the lucrative Barnett and Eagle Ford shales, but Spraberry is likely to drive growth (and the stock) in the quarters ahead. Taking a step back, management revealed that the firm currently has about 1.1 billion barrels of energy equivalent of proved reserves right now, but believes it has a whopping 8 billion more potential reserves in its acreage! Thus, like many of the other exciting explorers out there, Pioneer appears to have many years worth of drilling inventory, and as it increases the number of rigs, production, profits and cash flow should mushroom. After a relatively flat spell, analysts see earnings up 30% this year and another 27% in 2014, and those figures are likely conservative if the new wells produce as many expect.
Technical Analysis
PXD has a great chart that looks ready to move ... if the market can stabilize. Like many oil and natural gas stocks, PXD spent most of the second half of 2011 and nearly all of 2012 gyrating in a huge range, effectively building a base after a good 2009-2011 run. Shares tightened up nicely at year-end and moved higher in January ... but the group wasn’t ready, and the stock fell back to support at 110 in April. Since then, though, the action has been pristine—shares zoomed following a great first-quarter report, and have traded calmly the last three weeks in spite of the market weakness. You could nibble here or on a bit of weakness, with a stop around 130.
PXD Weekly Chart
PXD Daily Chart
Parexel Corp. (PRXL)
Why the Strength
Parexel International has a great niche in the pharmaceutical industry. The company’s main service is outsourcing medical research and clinical trials of candidate drugs. Parexel can select and reimburse subjects, run the trial, analyze and write up the results and shepherd the drug through the regulatory process. Its one-stop-shopping approach to drug development and trials lets Parexel take over the work of an entire division, saving clients enormous amounts of expense. The company’s success is reflected in its steady revenue growth, which registered 7% growth even during the depths of the Great Recession, and that growth swelled to 14% in 2012. And Q1 results showed a fourth consecutive quarter of revenue growth over 25%. Parexel is a pretty simple story of a company that is making serious money—earnings per share has grown by an average of 58% over the last three quarters—by helping pharmaceutical giants save serious money. The company’s $200 million share repurchase plan (announced last August) has been boosted by a $50 million accelerated share repurchase program.
Technical Analysis
PRXL put in a 21-month consolidation from June 2010 through January 2012. But the stock shook itself off at that point and advanced at a moderate pace through the year, finishing with a gain from 20 to 29 after a late-December swoon. The stock began accelerating in 2013 (as evidenced by its three previous appearances in Top Ten in March, April and May) and hit 47 in the middle of May. A three-week correction to 44 pulled the stock below its 25-day moving average last week, but a rally on Thursday and Friday made up most of that pullback. PRXL looks like a good buy at 46 or below, with a stop at or below 42.
PRXL Weekly Chart
PRXL Daily Chart
OmniVision (OVTI)
Why the Strength
It’s been a while since we last visited fabless semiconductor firm OmniVision Technologies; since July 2010, to be precise. The company specializes in single-chip image technology; in other words, OmniVision can take that 8 megapixel camera you bought last year and place it on a single chip. This technology is perfect for smaller cameras, mobile phones, notebooks, webcams, tablets, surveillance equipment and medical imaging systems. OmniVision vaulted back into the investor spotlight last week when the company released an excellent fourth-quarter report posting revenue growth of 54%, and earnings growth of 55%. Growth was solid during the past year for OmniVision, with the company averaging revenue growth of 64% on a year-over-year basis. What’s more, the company’s focus on increasing volume and tightening its vendor relationships helped it ship more than 855 million image sensors during the year, leading to OmniVision’s first $1 billion revenue year. With innovative products on the horizon, like its low-cost camera-cube chip, and increasing market share in China—the world’s largest mobile phone market—OmniVision is back on track.
Technical Analysis
From the start of 2009 through June 2011, OVTI shares were on fire, with shares soaring from 6 to more than 37. However, smartphone market saturation, weak semiconductor prices, and a weak economy sent the stock plunging toward 10 by December 2011. Volatility dominated OVTI in 2012, with shares oscillating between 10 and 20, and they entered 2013 trading in a tighter range between 12 and 16. OVTI was fresh off a test of support at 12, rallying back toward 14, when a strong 4Q report sent shares soaring past 18. With this region now providing short-term support, consolidation in the area could provide a nice entry point for a long position as OVTI resumes its uptrend.
OVTI Weekly Chart
OVTI Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
MercadoLibre has made 16 appearances in Top Ten since its debut in December 2007, illustrating both its great promise and its outstanding performance. The company has brought the eBay model of online commerce and electronic payments to Latin America since its founding in 1999, with nearly half of its 2012 revenue coming from Brazil, about a quarter from Argentina, 15% from Venezuela and 7% from Mexico. The value of merchandise sold via the company’s services reached $1.6 billion in the first quarter, an increase of more than 20% from 2012. Since revenue comes from a cut of the value of goods sold—along with advertising, listing and electronic payment fees—the more goods sold the better. MercadoLibre operates in a region that’s sensitive to hemispheric economic conditions, and the gradual improvement in the U.S. economy has improved the atmosphere for South and Central America. Growth is also strong as the buildout of cellular communication networks increases regional access to online vendors. MercadoLibre has been rising in investors’ esteem recently; its market capitalization was $3.9 million on May 13, and now tops $5.1 billion.
Technical Analysis
MELI has been in a stair-stepping uptrend since late last November, making strong moves in early January, early March and late April, with flat consolidations in between. But the good earnings news on May 7 sparked an uncharacteristically explosive jump from 105 to 125 in just one day. In the five weeks since that gap up, MELI has meandered down to below 115, but is now near 118, cheek-by-jowl with its 25-day moving average. Given the stock’s habit of taking flat breaks after price surges, we think MELI is buyable here, although a dip of a couple of points is possible. Use a loose stop at 105.
MELI Weekly Chart
MELI Daily Chart
EQT Corporation (EQT)
Why the Strength
We admit that we’re not experts when it comes to all the minutiae of drilling wells and specific acreage locations. But it doesn’t take a know-it-all to realize that the Marcellus Shale in Pennsylvania is so lucrative that it’s altering much of the U.S.’s and (once exports begin in a couple of years) the world’s energy economy. EQT Corp. has operations outside the Marcellus (including an interesting midstream business with 11,000 pipeline miles), but it’s the company’s acreage in Pennsylvania and Northern West Virginia that is getting investors excited. EQT has well over 500,000 acres in the Marcellus, and plans to drill 157 wells there in 2013, driving more than 70% production growth from that area. In the first quarter, growth was even faster, up 103% in the Marcellus, which drove EQT’s total production up a huge 47%; and thanks to much of its acreage being in “wet” areas, its output of higher-priced natural gas liquids is expanding quickly, too. Like other operators in the region (Cabot Oil & Gas and Range Resources are two other favorites), EQT has years of drilling inventory ahead of it; the company’s recently released estimates show about 2,100 total drilling locations on its land, but as of the end of March, it had only tapped about 10% of that. As with all Marcellus plays, the price of natural gas will be key; it’s weakened of late to just south of the key $4 level and a big plunge would surely bring out the sellers. But right now, there’s no sign of that. Analysts see earnings up 77% this year and nearly 30% in 2014.
Technical Analysis
EQT was flying under the radar for the past couple of years as natural gas prices corrected and consolidated. But the stock tightened up nicely from November through February, broke out in March, and then soared in April following its blockbuster first-quarter earnings report. More important to us, the stock followed through on the upside after that earnings gap, and has held its ground during the market’s recent bout of weakness, including a nice snapback last Thursday and Friday. If you’re game, you could buy a small position around here with a stop near the 50-day line, which is just above 74.
EQT Weekly Chart
EQT Daily Chart
Electronic Arts (EA)
Why the Strength
When we last visited Electronic Arts a month ago, the company was riding high from a series of positive reports. The video game producer had acquired exclusive rights to the Star Wars franchise, renewed its licensing agreement with FIFA through 2022, posted better-than-expected fourth-quarter earnings, and guided above expectations for fiscal 2014. In the meantime, the company has been relatively quiet as it prepares for the industry’s biggest event of the year (outside of holiday sales, that is); the Electronic Entertainment Expo, or E3. This annual video game conference and show in downtown Los Angeles is always a huge event for publishers like EA, and this year the next generation of gaming consoles from Sony (PlayStation 4) and Microsoft (Xbox One) are taking center stage. Consoles are nothing without games, placing a significant spotlight on producers like EA. The company is set to hold an investor conference on June 12 regarding its E3 lineup. So far, the most anticipated games from EA center on the company’s core franchises Madden NFL and Battlefield, while much of the industry will be soaking up any new details on how the company will handle its Star Wars licensing deal. With analysts already estimating Battlefield sales of 13 million to 15 million units, EA appears to be well positioned heading into gaming’s biggest event of the year.
Technical Analysis
EA’s post-earnings gap in early May kicked off a resumed uptrend and shares continue to enjoy solid support at their 10-week and 25-week moving averages—trendlines EA has not closed a week below since November. Since the company’s well-received quarterly report, EA has advanced grudgingly despite the shaky market. The E3 conference could create volatility for EA, including sharp rallies. Still, we don’t recommend chasing shares at this point, especially since the stock remains overbought. As such, we suggest buying dips, with a stop near 20.
EA Weekly Chart
EA Daily Chart
Ctrip.com International Ltd. (CTRP)
Why the Strength
Back when Chinese stocks were first coming to the attention of Western investors, Ctrip.com was known as “the Expedia of China.” From its humble beginnings as an aggregator of unbooked hotel accommodations, the company has grown steadily into a full-service online travel agency, the largest in China. The company’s Q1 earnings report on May 8 showed a 29% year-over-year increase in revenue and an after-tax profit margin of 22.8%. For the first time in its history, the company’s revenue from airline ticketing topped sales of hotel rooms. Ctrip.com is thriving because China is thriving; it’s the fastest-growing large economy in the world. Ctrip.com is also gaining strength from its strong push into the mobile arena, taking advantage of the rapid adoption of smartphone technology across China. Ctrip.com has been featured in Cabot Top Ten Trader seven times, beginning in March 2008. That kind of history is reassuring, as it indicates both longevity and long-term success. The company’s Q1 earnings report on May 9 kicked off a nice run in the stock, but it also (inevitably) incurred a downgrade from Goldman, which considered the stock fairly valued and thus not worth buying any more. After a quick negative reaction, investors were smart enough to pay more attention to the success of the company and the potential of the Chinese market, and the stock has continued to do well.
Technical Analysis
CTRP dipped from 25 to 19 in January, but constructed an attractive base from February through April. So when the good earnings news hit on May 9, CTRP gapped up from 24 to 30 in one day. The Goldman downgrade keyed a dip to 28, but CTRP got moving immediately after climbing to 32 on May 20, then pausing under resistance for 11 days. A surge last Thursday and Friday kicked CTRP to 34, which is where it’s sitting now. CTRP is a bit ahead of its 25-day (now at 30.3), but isn’t especially extended. You should be able to sharpshoot a buy at around 32 with a little patience. Use a stop at 28 (just above the top of the stock’s May 9 gap).
CTRP Weekly Chart
CTRP Daily Chart
Conn’s Inc. (CONN)
Why the Strength
If you had told us a few years ago that a plumbing and heating company founded in 1934 would eventually rise up and give Best Buy a run for its money in the consumer electronics market, we’d have probably had a good laugh. But the only ones laughing now are Conn’s Inc. investors. The retailer has taken the South by storm in recent years, expanding to 70-plus stores in Texas, Louisiana, Oklahoma, New Mexico and Arizona. Conn’s sells a wide variety of products, ranging from home appliances to furniture, with the company continuing to add products according to consumer demand. The feature that separates Conn’s from its competitors is the company’s flexible in-house credit, which allows the retailer to attract low income earners who would likely be turned away at big box retailers. The strategy is paying off big, with Conn’s posting a 75% spike in first-quarter earnings on a 25% rise in sales. The company also boosted its revenue and earnings targets for this year. On average, Conn’s has seen revenue rise 14% and earnings soar 508%, year-over-year, during the past four quarters. And there’s plenty of room for additional growth. According to CEO Theodore Wright, “Consumers with credit scores below 650 still represent a higher percentage of the population than before the recession … There are more individuals who would fit our core customer profile.” With the economy playing to Conn’s strengths, we expect great things for the company.
Technical Analysis
While CONN took longer than most stocks to find a bottom after the 2008 crash, settling near 4 in early 2011, the late-blooming shares have proven to be considerably strong. In fact, CONN has rocketed more than 10-fold during the past two years, hitting a fresh all-time high above 50 after last week’s impressive Q1 report. CONN’s current rally has been bolstered by support at its 10-day and 25-day trendlines, with former resistance at 50 providing a cap prior to the stock’s earnings-induced rally. The 50 area should now provide support, as shares digest their recent surge. With CONN a bit overextended, we recommend taking bites on pullbacks.
CONN Weekly Chart
CONN Daily Chart
TD Ameritrade (AMTD)
Why the Strength
While there’s been plenty of worrisome action underneath the market’s hood during the past couple of weeks, one of the encouraging signs has been the action of brokerage stocks like TD Ameritrade. The company is about as pure a Bull Market stock as you’re going to find, as its revenues are linked to commissions, market fee-based revenue and assets under management. On that last front, management has been effective in getting more and more assets under its umbrella; during the last five years, TD Ameritrade has actually brought in $170 billion of net new client assets, helping the firm cross the $500 billion mark earlier this year. And with more than half of revenue now based in some way on assets (as opposed to just commissions), it’s a good indication that growth should pick up steam in the quarters ahead. In the latest monthly report for May, the firm’s clients executed 417,000 trades, up 13% from a year ago, while client assets rose to $531 billion, up 23%. Looking at the table below, it’s clear that, to this point, these figures haven’t translated into much sales and earnings growth. But cash flow is strong, and our experience is that a Bull Market stock like this will show great growth a couple of quarters after the stock gets going. It’s usually best to respect a group move in names like this, and with TD Ameritrade and a few of its peers revving up, we think even higher prices are on the way.
Technical Analysis
Believe it or not, AMTD has been stuck in a wide range below 23 since 2006 (!), but that very long period of nothingness appears to be ending. Shares looked sick last summer, but bottomed out near 15 for a few months and then began to trend higher after the market’s November low. Shares leapt above 20, pulled back for six weeks during March and April, and have since pushed to multi-year highs on good volume, despite the market’s recent volatility. We don’t think AMTD is going to run away from you, so if you want in, try to buy on weakness with a stop near 21.
AMTD Weekly Chart
AMTD 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.
