Decision Time
It’s been nearly four weeks since the market’s correction and consolidation began, and overall, the damage hasn’t been that great—interest rate-sensitive names have been hammered, but many growth stocks remain in good shape. Now the question is whether buying power will return; holding up is all well and good, but we want to see evidence that institutional investors are adding shares of resilient stocks, even buying them as they reach new high ground. If we see that, we’ll switch the Market Monitor back into the green. But right now, we advise holding some cash and keeping new positions small.
Once again, we’re pleased to see many enticing names in this week’s list. Our favorite is one of the first stocks to hit new-high ground—Oasis Petroleum (OAS) is emerging from a gigantic base, and if the market gets going on the upside, it looks like a new leader.
| Stock Name | Price | ||
|---|---|---|---|
| Tenneco (TEN) | 0.00 | ||
| Shutterfly (SFLY) | 94.71 | ||
| Oasis Petroleum (OAS) | 12.57 | ||
| Northrop Grumman (NOC) | 0.00 | ||
| Morgan Stanley (MS) | 0.00 | ||
| 3D Systems (DDD) | 0.00 | ||
| Delta Air Lines (DAL) | 54.28 | ||
| Carter’s (CRI) | 0.00 | ||
| Celldex Therapeutics (CLDX) | 0.00 | ||
| CBOE Holdings (CBOE) | 0.00 |
Tenneco (TEN)
Why the Strength
The U.S. auto industry has come back from the grave, and its recovery has boosted not only the automakers, but also parts makers. Tenneco is an Illinois-based manufacturer of emissions control equipment (like catalytic converters) and ride-control equipment (like shock absorbers, struts and suspension systems). In 2012, after robust revenue gains of 28% and 21% in 2010 and 2011, respectively, the company sold $7.4 billion of parts, gaining just 2%. But Tenneco’s Q1 results beat expectations and guidance for 2013 was strong. Among all parts manufacturers, investors like Tenneco for its diversified client base. While GM accounts for 17% of sales and Ford for 15%, Germany and China made up a combined 20% of 2012 revenue, and total non-U.S. sales comprised 35%. The company also gets credit for a diversified product line that includes pollution control systems, which give it a leg up on the competition. The company’s contract to supply parts to after-market parts dealers like AutoZone is another plus. Tenneco is unlikely to be a long-term powerhouse, but strong demand for vehicles, especially commercial fleets, is making the company a good short-term proposition.
Technical Analysis
TEN hit a triple top at 46 in 2011 before a major correction pulled it to 22 in October of that year. An upswing in November 2012 pushed the stock to 38 in January. The current strong move began in late April; except for a short consolidation in early May, TEN has been surging since then. It may be that the stock’s triple run at resistance at 46 in 2011 is too long ago to exert much of an influence. Or maybe not. We think a buy of TEN on a push above 46 makes sense, as much of the good news about both the company and the industry has been priced in. A break of the stock’s March resistance at 40 would be bearish.
TEN Weekly Chart
TEN Daily Chart
Shutterfly (SFLY)
Why the Strength
The big worry about Shutterfly is that the company’s offerings—free digital photo storage and an array of photobooks, greeting cards, invitations, prints and other purchased products that can be made from them—could easily be duplicated by rivals or taken online by social sites like Facebook. But that doesn’t seem to be happening. The company’s quarterly results on February 6 (33% jump in revenue and earnings of $1.40 per share) keyed a big jump in its stock. And Q1 results—traditionally weak as holiday sales disappear—came in better than analysts had predicted. Shutterfly’s ability to compete successfully with other services like Snapfish and Webshots is attracting attention. And the company has grown via acquisition, recently buying photo-book publisher MyPublisher. It’s worth noting that there is a sizable population of investors selling Shutterfly short; short interest amounts to 6.25 million shares, or nearly 20% of the stock’s float. This isn’t unusual for a stock that has made big gains, but it also provides fuel for a short-covering rally if Shutterfly’s stock stays strong. Shutterfly isn’t cheap (forward P/E ratio is 159X), but its cash flow is huge and the future potential is huge.
Technical Analysis
After its big gap up from 32 to 40 on February 6, SFLY enjoyed follow-through gains to 44, but then went dead, building 10-week base around 44. The stock leapt to 48 in May on better-than-expected quarterly results and consolidated around 48 for four weeks. Another great day on June 7 pushed SFLY to new 52-week highs, and the stock is nosing around that level again after correcting to 50 last week. SFLY is very much in the public eye right now, with big bets being placed both short and long. Taking a position on a dip of a point or two could pay off. But with a fight going on between supporters and shorters, a relatively tight stop at 46 (just below its 50-day moving average) makes sense.
SFLY Weekly Chart
SFLY Daily Chart
Oasis Petroleum (OAS)
Why the Strength
There are many shale areas that are producing rapid growth for companies around the U.S. But the Bakken remains one of the biggest, and our favorite firm tapping it is Oasis Petroleum. The company owns 335,000 acres in the Williston Basin and Three Forks area, and it’s been drilling for years with great success—first-quarter production soared 71% from year-ago levels, and best of all, almost all of it is higher-priced oil. For 2013, the consensus expects output to leap 50% from a year ago, though we feel that could be very conservative; Oasis has a history of besting expectations. Like so many other explorers today, the company has years to go before its acreage is tapped out—a recent presentation highlighted that the firm has an expected 2,020 gross drilling locations, only 11% of which have been tapped to this point. Considering that the company drilled just three dozen wells in the first quarter, Oasis will be plenty busy drilling wells going forward. Just as important, the top brass has been excellent in cutting expenses; costs per well dropped to $8.8 million at the end of last year, and that could fall another 10% or so this year. As long as oil prices stay elevated, there’s no reason Oasis won’t see heady growth for years to come. Analysts see the bottom line increasing in the 30% range each of the next three years.
Technical Analysis
OAS has set up a massive launching pad and looks ready to get going. Shares came public in June 2010 and rallied into the spring of 2011. And then it gyrated for 18 months! It tightened up beautifully during the fourth-quarter of 2012, and had a few good weeks to start this year ... but it wasn’t ready yet! It then went on to build another 11-week base. Despite the soggy market, OAS has moved to new price highs on good volume in recent days. Now, the relative performance line isn’t out to new highs yet, but we think you could buy a small amount and then look to add more shares if the market and OAS move higher from here.
OAS Weekly Chart
OAS Daily Chart
Northrop Grumman (NOC)
Why the Strength
After a decade of conflict, the U.S. is cutting back on defense spending and generally pulling back from overseas commitments, with the much-ballyhooed sequester likely to cut orders for big defense firms for years to come. So why is giant Northrop Grumman one of the strongest stocks in the market right now? For three main reasons. First, the stock is dirt cheap, as investors had priced in their worst fears before the sequester took place—even today, after a decent upmove, shares trade at just 11 times earnings, and the firm pays a dividend of $2.44 annually (2.9% yield). Second, management has proven deft at boosting profit margins, so earnings are expected to stay north of $7 per share going forward. (Earnings totaled just $3 per share back in 2003.) Third and most important, management is using its gigantic cash flow to embark on an unbelievable share repurchase plan—it just added a whopping $4 billion to its share repurchase plan, and the top brass said it’s aiming to buy back 25% of the outstanding shares by the end of 2015. Imagine! That alone will keep earnings per share elevated, and could pave the way toward bigger dividends (less will need to be paid in total with fewer shares outstanding). It’s a bit like Seagate Technology or Western Digital—companies where investors perceive that earnings and cash flow are going to stay elevated for a while, and where managements are committed to boosting shareholding value. We don’t think Northrop is going to double, but we think it has a shot to trend steadily higher in the months ahead.
Technical Analysis
Not surprisingly, NOC was a do-nothing stock for months and years, but shares tightened up in March, and broke out powerfully in late April. Then shares got an added kick on May 17, when management announced its aggressive share buyback plan. Lastly, we like how the stock has etched slightly higher highs and higher lows since mid-May, even as the market has done the opposite. It’s a bit extended to the upside, but any dip into the low 80s is buyable, with a stop near the 50-day line.
NOC Weekly Chart
NOC Daily Chart
Morgan Stanley (MS)
Why the Strength
Financial services and investment management firm Morgan Stanley remains a hot topic in the financial sector. The company is currently waiting on federal approval in its bid to acquire the remaining portion of Citigroup’s Smith Barney retail brokerage. In 2009, Morgan Stanley signed what many called a sweetheart deal to acquire a 51% stake in Smith Barney, as owner Citigroup struggled to make headway in the depths of the financial crisis. Last year, Morgan Stanley agreed to a deal to acquire the rest of Smith Barney, but the deal has been held up by federal regulators. Should the buyout be approved, and most analysts believe that it will, Morgan Stanley expects its wealth management unit will achieve a pre-tax profit margin of 20% to 22% in fiscal 2015. You may remember that the company’s stake in Smith Barney helped drive Morgan Stanley’s revenue to impressive heights in the prior two quarters. Meanwhile, the company is still looking to rid itself of older businesses and positions, including its credit operations and its commodities business. According to CEO James Gorman, margins on the credit operations should improve by 5% to 15% over the next few years as Morgan Stanley refocuses on wealth management instead of risky trading and investment banking activities. With the firm already performing well, a leaner and more focused Morgan Stanley should be a boon to investors.
Technical Analysis
Despite the stock’s recent run higher, MS still trades at only about 8 times expected 2015 earnings—or about 11% below its peers. Technically speaking, MS has trended steadily higher since forming a bottom near 13 in July 2012. Throughout this rally, the stock has enjoyed solid support at its 10-week and 25-week moving averages. In fact, MS has not closed a week below this duo during this timeframe. Currently, shares are pulling back from a high near 27. But MS’ uptrend remains intact, so this controlled retreat looks buyable.
MS Weekly Chart
MS Daily Chart
3D Systems (DDD)
Why the Strength
The 3D printing revolution is underway, and 3D Systems is the leading player in the market. If you had any doubt about the staying power of the 3D printing market, this month’s coverage in the Wall Street Journal should have changed your mind, with details on how General Electric, Ford, and Mattel are implementing the technology. As for 3D Systems, the company continues to see impressive growth, with revenue rising 46%, on average, during the past year, and earnings growth coming in at 45% during the same timeframe. The firm has also been on the acquisition path, snapping up more than 20 competitors since 2009. 3D Systems recently made headlines with its more recent purchase, an 80% stake in Phenix Systems, a provider of direct metal selective laser sintering 3D printers. These metal printers specialize in printing with various alloys and super alloys to create parts for a variety of aerospace, automotive and medical device applications. 3D Systems expects the deal to close in July and for Phenix to be accretive to earnings in the first year following the buyout. Investors should be aware that the company’s main competitor, Stratasys, is in merger talks with Makerbot—a deal that could allow Stratasys to compete directly in the consumer printing market. That said, 3D Systems has first-mover status with consumers, giving it a significant advantage.
Technical Analysis
It’s been pretty much all uphill for DDD since shares went public in May 2011. In fact, the stock has surged nearly 260% during this period. While DDD stagnated for much of 2011, shares embarked on an impressive rally January 2012 that peaked near 48 roughly a year later. The stock has been volatile ever since, plunging to form a base near 30 in March and April, only to rocket higher in early May. Clearly there is ample volatility to be had, though there is growing technical support in the 45 region. If you can stomach the swings, we recommend taking bites on pullbacks.
DDD Weekly Chart
DDD Daily Chart
Delta Air Lines (DAL)
Why the Strength
What’s good for airlines isn’t necessarily good for passengers, but it may prove to be a good thing for investors. Delta Air Lines has been a big player in the consolidation of the airline industry: It bought Northwest Airlines in 2008 and took a 49% stake in Virgin Atlantic just to get better landing schedules at Heathrow Airport. Together with the other major mergers in the industry, these moves have increased airlines’ pricing power and allowed them to cut unprofitable routes. (Delta just announced that it would reduce flights to Memphis by a third.) The company is also retiring inefficient jets from its fleet, a move that will save on fuel prices. The bottom line is that the ongoing streamlining of the airline industry, together with projected reductions in fuel costs in 2013, is making a rosier outlook for the perpetually chaotic airline industry. Delta’s prospects are for a 45% jump in earnings to $2.65 per share in 2013. The company booked losses in the first quarters of 2010, 2011 and 2012, which makes its Q1 2013 earnings of $0.10 per share quite impressive. The stock’s attractive P/E of just 9 and its forward annual dividend yield of 1.3% make for an attractive package.
Technical Analysis
DAL slipped as low as 6.4 in August 2011, but worked its way back to 10 in December 2012, when it caught a major updraft. Except for a dip from 17 to 14 on volume in early April (when the sequester budget cuts threatened demand), the stock has been in an uptrend all of this year. DAL made up that dip by the end of the month, and has now put in a flat six-week base under resistance at 19. You can take a small position here, but the surer buy is one on a breakout from this base. Look for a decisive breakout above 19, preferably on increased volume. Use a stop at 16.5 to 17.
DAL Weekly Chart
DAL Daily Chart
Carter’s (CRI)
Why the Strength
Carter’s is the largest U.S. retailer exclusively focused on apparel for babies and young children. Such a focus has resulted in slow, steady growth for the company, thanks mainly to a solid wholesale business. However, the company is now shifting more to a retail model, through both increased store count and online, and that has investors very excited. In the first quarter, the firm opened 10 new Carter’s stores, bringing the total to 423. But that’s just the tip of the iceberg—management plans on opening between 50 and 60 new stores per year each of the next five years! And its e-commerce sales—another direct-to-consumer sales segment—are booming, up 59% in the first quarter and driving much of the company’s domestic growth. Another bullish factor is Carter’s move overseas; it recently inked a deal to take more control of its operations in Japan, which is helping both sales and margins. Overall, international sales rose a huge 30% in the quarter, and while they only make up 10% of the company’s overall business, that figure is sure to grow. Analysts see earnings up 17% this year and next, but those numbers are likely a bit conservative as Carter’s has been topping estimates of late. Combine the new expansion plans with a steady industry (there’s always demand for kids’ clothes) and a dominant market position, and we think the stock can continue to be a winner.
Technical Analysis
CRI isn’t going to set the world on fire, but after a couple of years of back-and-forth action from late-2009 to the fall of 2011, the stock had a great push into the spring of 2012, rising from 27 to 57 over just a few months. That was followed by another long sideways period, but CRI is now back in an uptrend—the stock gapped up on earnings in late-April and has continued to march higher since. Moreover, shares have held firm during the market’s recent weak spell. We think you can buy some here or on any weakness, with a stop near 67.
CRI Weekly Chart
CRI Daily Chart
Celldex Therapeutics (CLDX)
Why the Strength
Celldex Therapeutics is a promising biopharmaceutical with strong pipeline drugs specializing in cancer, autoimmune diseases and infections. The company currently has only one commercial product, rotavirus vaccine Rotarix, which is marketed worldwide by GlaxoSmithKline. Celldex is different from most other anti-cancer biotechs. Instead of focusing on treating the cancer, Celldex has turned its attention toward the body’s immune response and convincing the immune system to target cancer cells directly. Currently, Celldex’s leading candidate, Rindopepimut, is in phase 3 trials for the treatment of front-line glioblastoma and phase 2 trials for recurrent glioblastoma. The phase 2 trials improved three-year survival to 23%-33% from 6%-18%, while five-year survival rates increased to 15% from an expected 0% survival rate! Meanwhile the company has a potential blockbuster breast cancer treatment called CDX-011 which has shown impressive results in the phase 2 trials. While analysts believe that Celldex could see a bit of competition in treating the aforementioned cancers, the company’s proprietary APC receptor treatments can be adapted to nearly any cancer or potentially any other immunotherapy applications. It is important for investors to remember that while the company has averaged revenue growth of 21% over the past year, investing in Celldex is all about the firm’s potential for accelerated growth down the road.
Technical Analysis
Following a nearly two-year decline between 2009 and early 2011, CLDX finally formed a base near 3 and began to trek higher. Throughout 2011 and 2012, the stock stair-stepped higher along support at its 10-week and 25-week moving averages. In March, shares finally met up with prior resistance in the 9-10 region—an area that soundly rejected CLDX in May 2010. This time around, however, the stock blew past resistance on strong volume, breaking out to fresh multi-year highs in the 15-16 area. CLDX is currently pausing near 16, as the stock’s short-term run has left it a bit over-extended. You can nibble on pullbacks as CLDX levels off.
CLDX Weekly Chart
CLDX Daily Chart
CBOE Holdings (CBOE)
Why the Strength
Making its debut in today’s Cabot Top Ten Trader, CBOE Holdings operates the Chicago Board of Options Exchange, the largest U.S. options exchange (in both total contract volume and contract value), and offers equity, index and ETF options, including well-known products like the S&P 500 options (SPX) and the CBOE Volatility Index (VIX), which has become known as a widely-followed proxy for volatility in the S&P 500. The company offers options on the stocks of traded companies, on various market indexes and on baskets of assets packaged as exchange traded funds (ETFs). Business has been brisk, as institutional and individual traders seek both exposure to the performance of certain asset classes and hedges against negative results. Revenue growth was just 1% in 2012, but that followed a 16% jump in 2011. The company’s Q1 report featured an 18% jump in revenue and a sizable 35% growth in earnings. Most revenue (70%) comes from transaction fees, with 12% resulting from access fees, 6% from exchange services and smaller amounts from market data fees, regulatory fees and miscellaneous. After-tax profit margins were 31.2% in Q1, up from the high 20s in recent quarters. The company has commanded between 29% and 33% of all U.S. options trading over the past five years and has no long-term debt. Its annual dividend yield of 1.4% reflects management’s policy of returning excess cash flow to consumers. As more and more investors become familiar with options, the prospects for CBOE Holdings looks bright.
Technical Analysis
CBOE came public in June 2010 at 29, and slipped to 20 within a few months. The stock traded quietly under resistance at 30 for a little over 30 months, but reached an inflection point in December 2012. CBOE broke out above 30 in late December 2012 and has been rallying ever since, slowing from mid-February through the end of April, but never falling much below its rising 25-day moving average. A surge in early May and another in the first week of June has kept CBOE in a strong uptrend. With the stock above 43, well above its 25-day moving average just below 41, a consolidation is likely. Try to buy on a dip to 42. CBOE isn’t a very volatile stock, but you can use a stop at 37-38 to lower risk.
CBOE Weekly Chart
CBOE 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.
