The Rally’s First Test
After a few weeks of solid action that eased most worries, the latest shenanigans in Iraq have reminded investors that the market is a two-way street. Not that the damage has been severe—stocks have generally eased normally since Iraq grabbed the headlines last Thursday—but we’re viewing this as the rally’s first test. If dips in the indexes and individual stocks come on generally tame volume and find support, it will be highly bullish. If not … well, we’ll deal with that if we see it. Right now, the evidence remains clearly bullish, and while the bulls aren’t running wild, many stocks are making solid progress.
This week’s list has a bunch of great stories, as well as a nice mix of newer and older names. Our Top Pick is Restoration Hardware (RH), which is going about business in a unique way, leading to outstanding results. The stock is getting going after a multi-month rest.
| Stock Name | Price | Buy Range | Loss Limit |
|---|---|---|---|
| RH Inc. (RH) | 252.93 | 79-84 | 72-73 |
| VeriFone Systems, Inc. (PAY) | 0.00 | 35-36 | 32-33 |
| Netflix, Inc. (NFLX) | 423.92 | 410-430 | 370-380 |
| Health Net (HNT) | 0.00 | 38.5-40 | 35-36 |
| GT Advanced Technologies (GTAT) | 0.00 | 18-19 | 15-16 |
| Keurig Green Mountain (GMCR) | 0.00 | 115-121 | 105-107 |
| Eagle Materials Inc. (EXP) | 0.00 | 90-94 | 84-85 |
| Con-way (CNW) | 0.00 | 46.5-48.5 | 43.5-44 |
| Charter Communications (CHTR) | 0.00 | 144-147 | 134-135 |
| Baidu (BIDU) | 0.00 | 170-175 | 158-160 |
RH Inc. (RH)
Why the Strength
“Who is the home brand to the luxury customer? The Nieman, Saks, Barney’s, Bergdorf customer. We believe we are. [Restoration Hardware] has built the most comprehensive curated collection of luxury home furnishings in the world under one brand. Additionally, we have transformed our entire product platform. We have disintermediated the supply chain by eliminating the wholesale markup and inefficiencies that exist in the highly fragmented luxury market, allowing us to offer unmatched value.” That was CEO Gary Friedman on his firm’s conference call last week, and to us, that statement goes a long way toward explaining why Restoration Hardware is one of the strongest stocks in the market. The company is doing a ton of unique things, from eliminating “regular” retail stores and going with monstrous 40,000 square-foot showrooms, to cultivating long-term relationships with artisans around the world (RH is the largest importer of Thai silk and Belgian linen, for instance), to sending out a huge 3,300-page catalog, which has been a huge boost to its brand. The results, shown in the table below, have been outstanding (including last week’s report), and with Friedman saying that his company acts like a $1.6 billion startup, we expect more innovation and top-notch results ahead. It’s a great story.
Technical Analysis
RH came public again in October 2012 and had a huge run-up to 77 by the middle of last year. But that was followed by a very choppy, up-and-down pattern for 11 months. However, notice how the recent cup pattern (starting in late-March) was more controlled (just 22% deep), with last week’s huge-volume leap above 80 likely kicking off a new upleg. It’s sure to be volatile, but you could start a small position here and look to add if RH heads north.
RH Weekly Chart
RH Daily Chart
VeriFone Systems, Inc. (PAY)
Why the Strength
VeriFone is a leader in secure electronic payment solutions—in plain English, the credit and debit card swipe machines used by tens of thousands of merchants around the world, as well as other payment options. This was a huge growth business through 2011 or so, but things stagnated a bit after that, partly because of VeriFone’s own mismanagement. (On that front, the company is busy cutting excess staff and consolidating data centers to save at least $35 million per year.) But a new growth driver has emerged, and that’s security; while the U.S. accounts for just 27% of all card volume, it’s subject to about half of all global credit card fraud. So the firm is seeing merchants upgrade to new, higher-security payment solutions, a trend that is supporting business and likely has many quarters to run. Beyond that, the firm has a few irons in the fire, with next-generation wireless products and an intriguing payment-as-a-service initiative that could pay off. It’s not an amazing growth story, but after a couple of years in the wilderness, VeriFone looks to have its act together, and analysts see earnings re-accelerating next year (up 34%).
Technical Analysis
PAY topped out in early 2011 near 59, and after one more test of that level a year later, steadily bumped downhill until bottoming at 15 in June of last year. Since then, though, shares have not only advanced, but done so persistently, dipping below their 10-week moving average just a handful of times, and usually for just a few days at most. The latest action, which saw the stock emerge from a nice, tight 10-week base on good volume following earnings, looks very bullish to us. It won’t be a rocket shot, but we think buying some on dips toward 35 should work out.
PAY Weekly Chart
PAY Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
With more than 48 million customers around the globe, Netflix is the king of video delivery, regardless of the technology used—for the record, DVDs are old hat; streaming now dominates. But aside from an ongoing discussion about net neutrality, delivery is no longer the issue—the issue is content. Netflix is increasingly positioning itself as a content provider, and there, the biggest competitor is HBO, with 130 million subscribers. Netflix is best known for House of Cards and Orange is the New Black, but it has numerous lesser-known offerings, too, all of which will be quite profitable once production expenses are past. In fact, the cost-effectiveness of combining production with distribution is one reason analysts are looking for 97% earnings growth this year and 67% next year. The stock is already quite popular among the growth stock crowd, and we’re a little leery of buying a stock that’s so widely owned, but the technical set-up has high potential.
Technical Analysis
NFLX has been in a strong uptrend since late 2012, but from time to time, major corrections have tested shareholders. This year, the release of the fourth-quarter 2013 report sparked an early gap up from 335 to 380, setting off a run that took the stock to 458. But the spring correction dragged the stock all the way down 300, a correction of 35%. The rebound from there has now paused, with the stock establishing a tight trading range between 420 and 430, and we think the odds are good that this leads to a retest of that old high at 458—and eventually new highs.
Note: If you think NFLX’s stock price is too high, don’t. Just imagine it’s trading at 43 and buy one-tenth your regular number of shares.
NFLX Weekly Chart
NFLX Daily Chart
Health Net (HNT)
Why the Strength
Health Net is a managed care organization that provides and administers health care through health plans and government-sponsored plans. The company insures through groups, individual policies and several subsidiaries that serve government programs like Medicare, Medicaid, TRICARE and Veterans Affairs. The company also offers and administers behavioral health, substance abuse and employee assistance programs and other services. While the company offers many services and policies nationally, it gets a substantial portion of revenues from its Western region operations, doing business in Arizona, California, Oregon and Washington. While Health Net has been featured in Top Ten a couple of times (in 2009 and 2010), recent interest springs from the company’s quarterly report on May 7. The company’s results were slightly below expectations—revenue of $3.04 billion and EPS of 36 cents per share versus consensus estimates of $3.27 billion in revenue and EPS of 42 cents per share—but its forecast for future business resulting from increasing Medicaid enrollment caught investors’ attention. The company forecast up to 120,000 new members through the last nine months of 2014 under the Affordable Care Act. That has analysts expecting earnings to pick up meaningfully next year.
Technical Analysis
HNT dipped to 17 in July 2012, but has been working its way slowly higher since. The stock spent almost 15 weeks building a base under resistance at 35 from the middle of January through the first week of May. News from the May 7 forecast kicked the stock up 9% to above 37 and it climbed steadily to 40 in subsequent sessions. HNT has now been trading very tightly, sticking to 40 like glue. The 25-day moving average has just caught up with HNT, which may key the breakout above 40. You can buy a little here or wait for that breakout. Use a stop at 36.
HNT Weekly Chart
HNT Daily Chart
GT Advanced Technologies (GTAT)
Why the Strength
New Hampshire-based GT Advanced Technologies used to be known as GT Solar. The company’s current popularity with investors is based on the company’s determination to use its expertise in high-tech furnaces to produce materials that go beyond production of polysilicon crystals for solar cells. The blockbuster news in early April was that Apple had contracted with GT for $578 million to produce sapphire glass to be used in an unspecified future product. Apple has been using Gorilla Glass in many of its touch-screen devices, but the deal with GT held out the promise of sapphire screens in the expected iWatch and other existing devices. Further announcements revealed an increase in the projected number of sapphire furnaces from 950 to 1,700, a move that will more than double the total world production capacity for sapphire glass. In addition to the big Apple news, GT Advanced is still active in the polysilicon furnace business, announcing a big deal to supply Qatar with furnaces to make high-quality silicon ingots for very efficient (22%) solar cells. This is the biggest sale yet to a Middle Eastern nation. GT Advanced, which booked a loss of 31 cents per share in 2013 is expected to return to profitability in 2014, earning nine cents a share, then leap to 85 cents per share in 2015. If the company executes, even those figures could be conservative.
Technical Analysis
GTAT made a monster move in 2013, soaring from 2.6 in March to 19 just a year later. It corrected to 13 in May, but recovered immediately, topping 17 by the end of the month and pushing back to near resistance at 19 last week. The still-high short interest in the stock has the potential to trigger a short-covering rally and last week’s trading volume was well above average. A buy here would have big potential, but be fairly speculative. You can either take a small position now or wait for the push above 19. A stop at 16 will give this volatile issue a little room to move.
GTAT Weekly Chart
GTAT Daily Chart
Keurig Green Mountain (GMCR)
Why the Strength
Once upon a time, Green Mountain Coffee was a little coffee brewer in Vermont with a knack for growth. As such, its most likely fate was getting swallowed by coffee giant Starbucks. Instead, Green Mountain became a giant in its own growing niche by buying single-serving technology company Keurig in 2006, and it’s been doing deals ever since. 2011 saw it partner with rivals Starbucks and Dunkin Donuts, and just last week it convinced Subway to place Keurig brewers in all its shops. But the biggest deal came earlier this year, when Keurig Green Mountain announced it would partner with Coca-Cola to develop and market single-serving cold beverages. Since then, Coca-Cola has become Keurig’s biggest shareholder, with 16% of the stock. With U.S. carbonated soda sales falling, Coca-Cola needs the diversification into the caffeinated world, while Keurig benefits from Coke’s distribution, as well as its product development arm. Today, Keurig gets 73% of its revenue from selling portion packs of coffee and tea, which is great recurring revenue (it pays a dividend of 0.8%), but years from now, a large portion of that recurring income will come from other beverages. Management here is not to be underestimated!
Technical Analysis
When the Coca-Cola deal was announced in early February, GMCR gapped up from 80 to 100; two weeks later, it hit 124. The spring market correction brought the stock down to 90, which was painful for everyone who bought after the news. But the news that Coca-Cola had increased its stake revived the stock, and since then the stock has been banging its head on resistance at 124. Eventually, it should break through, so buying here is recommended. Keep a stop in the mid-100s.
GMCR Weekly Chart
GMCR Daily Chart
Eagle Materials Inc. (EXP)
Why the Strength
We’ve long believed that the late-2011 to mid-2013 upmove for the housing sector was not the end of the road; after a six-year bust, it’s likely the industry has further to run. So we’re pleased to see Eagle Materials, which has been a leader in the group since its bottom three years ago, appear in Top Ten once again. The company is a leading provider of wallboard and cement products, and demand (and prices) for both are headed higher—wallboard prices are picking up nicely, with Eagle raising prices for its own wallboard in May, and a consensus is building that cement consumption growth is likely to accelerate starting this year. Results during the past couple of years have been excellent even with so-so demand (though the first quarter saw slower growth, partially weather-related), and analysts see the boom times continuing, with earnings rising 55% for the current fiscal year (ending March) and another 43% in 2016. Of course, if the economy were to tank due to the overseas uncertainties, all bets are off, but you can say that about most stocks and sectors. As it stands, we think Eagle is in prime position to benefit from the continued rebound in the housing and construction sectors.
Technical Analysis
EXP shot ahead from a multi-year low of 15 in late-2011 to 78 last May. Since then, shares have gone on to build what looks like a long base-on-base formation—the stock appeared to break out in February, but the market correction resulted in another cup-like base during the past three months. Now, though, EXP is showing signs of getting going, popping to new price highs on big volume last week. We think it’s buyable here or (preferably) on dips, with a stop in the mid-80s.
EXP Weekly Chart
EXP Daily Chart
Con-way (CNW)
Why the Strength
Con-way is a trucking firm that is keeping up with changes in how the world does business. The company’s Con-way Freight business is a leader in less-than-truckload (LTL) shipping, boasting 8,700 tractors and 24,800 trailers and 300 service centers employing nearly 20,000 people. The Con-way Truckload division uses 2,600 tractors and 8,200 trailers to deliver full truck-load cargoes. And the Menlo Worldwide Logistics division has 160 warehouse locations worldwide. The company has been integrated into supply chain management for many of its customers and is expanding aggressively in both its traffic between Mexico and the U.S. and the fulfillment business. The company’s 2007 acquisitions of Singapore-based Cougar Holdings and Shanghai-based Chic gave its Menlo division a solid base for Asian operations. With the global economy slowly improving, the outlook for trucking and supply chain services is positive and the industry is experiencing a wave of takeovers as companies seek economies of scale. Con-way isn’t mentioned as either a target or an acquirer, but the consolidation is improving the tone of the industry. Earnings are expected to surge this year and next.
Technical Analysis
CNW made a nice run from 26 in late 2012 to 46 in July 2013. After another run at 46 in October 2013, the stock corrected slowly to 36 in February 2014. This base provided the foundation for a run to 42 in April and a breakout in early May that has pushed the stock out to new highs near 48. CNW isn’t likely to be a rocket stock, but it has solid momentum and pays a small dividend (forward annual yield is 0.8%). With its push into uncharted price territory, CNW looks buyable right here. A stop at the 50-day moving average (now at 44) makes sense.
CNW Weekly Chart
CNW Daily Chart
Charter Communications (CHTR)
Why the Strength
Charter Communications is one of the top dogs in the U.S. cable space, and business has been very solid—the company has more than 5.9 million subscribers in 29 states, and in the first quarter, Charter added 136,000 residential Internet customers, 52,000 residential voice customers and 18,000 residential video customers, all of which produced 7%-ish revenue and cash flow growth (excluding acquisitions). That’s all well and good, but the reason the stock is strong today involves, ironically, the merger between Comcast and Time Warner—because of some anti-trust worries, Comcast looks likely to transfer 1.4 million customers directly to Charter, and Charter will also have a 33% ownership stake in a new, publicly-traded cable firm that will have 2.5 million subscribers! Of course, with the politicians involved, anything is possible, but it appears that, unless the Comcast-Time Warner deal completely falls apart, Charter is going to be a big beneficiary of some sort of customer spin-off. Currently, analysts aren’t anticipating huge growth (12% revenue growth this year, 7% in 2015), but if the deal goes through, it should give Charter better pricing power and cash flow in its markets.
Technical Analysis
CHTR broke out in early 2013 and ran from 83 to 137 or so in August. But then shares moved mostly sideways for nine months and the relative performance (RP) line sagged. However, that sluggish period came to an end in April, when CHTR exploded higher on two big weeks of volume, and shares have continued to advance since. It’s unlikely to double, but we think CHTR can be bought on dips toward its 25-day line, currently near 144.
CHTR Weekly Chart
CHTR Daily Chart
Baidu (BIDU)
Why the Strength
Baidu is probably the best-known Chinese stock in the U.S., partly because of its snappy nickname, “The Google of China,” and partly because it has enjoyed some huge price appreciation in the past. Baidu is a provider of Chinese-language search services and the company legitimately vanquished Google in head-to-head competition in China. But Baidu makes money the same way Google does, by selling ad-words and general advertising access to users. Baidu has been challenged in recent years by the upstart Qihoo 360, a small company that grabbed a significant market share in mobile search services by leveraging its popular mobile browser. It took Baidu a while to respond, but the company has used its large cash reserves to develop its own mobile anti-virus products (to counter Qihoo 360’s foundation) and by acquiring 91 Wireless, a popular Chinese app store, in July 2013 for $1.9 billion. Baidu has been hit by the general unpopularity of Chinese stocks, but it has also emerged as a core holding for anyone interested in emerging markets investing. The company’s most-recent quarterly report showed a 59% increase in revenue (an acceleration from prior quarters) and a 25% jump in earnings, the biggest bump in EPS in over a year. Baidu looks to be back on track.
Technical Analysis
BIDU went into a correction in July 2011 and fell from 166 to the 80s in early 2013. But July 2013 brought a strong rebound that kicked to stock to above 180 in January 2014. Since that peak, BIDU spent a couple of months trading in a range with support in the 140–150 area before investors moved in again. BIDU is now back in the high 170s and is enjoying the improved climate for Chinese stocks in the U.S. BIDU looks like a good buy on any weakness, with a stop at 160.
BIDU Weekly Chart
BIDU 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.
