Improving But Not There Yet
During the past couple of weeks the market has shown some improvement—first, the big shakeout in the indexes on June 1 (following a disappointing jobs report) was quickly reversed, then the market and potential leaders consolidated amidst a rash of worrisome news, and now we’re seeing real buying appear—some stocks have already pushed to new high ground! That said, now’s a good time to keep your feet on the ground; by our measures the market remains in an intermediate-term downtrend, though that could change if the bulls continue making progress this week. Thus, while some small new buying here is fine, you shouldn’t put on your bullish hat until we see confirmation that the trend has turned up.
Whether you buy a little here or not, you should be sure to have your watch list in tip-top shape should an uptrend emerge. This week’s list has many great candidates, and our favorite of the week is Cerner (CERN), a leader in the IT healthcare segment, which features a couple of great-acting stocks. CERN lifted to new highs today on big volume.
| Stock Name | Price | ||
|---|---|---|---|
| Akorn (AKRX) | 0.00 | ||
| American Eagle (AEO) | 0.00 | ||
| AUXL (AUXL) | 0.00 | ||
| Biogen (BIIB) | 0.00 | ||
| Cerner Corporation (CERN) | 0.00 | ||
| Edwards Lifesciences (EW) | 228.06 | ||
| Equinix, Inc. (EQIX) | 547.73 | ||
| Skyworks Solutions (SWKS) | 0.00 | ||
| TripAdvisor (TRIP) | 55.14 | ||
| VeriSign (VRSN) | 190.71 |
Akorn (AKRX)
Why the Strength
Illinois-based Akorn calls itself a “niche generic pharmaceutical” company, and that says it all. With branded drugs constantly coming off patent protection, generic manufacturers can pick their product lines, and Akorn has specialized in ophthalmologic solutions, ointments, gels and injectables (50% of 2011 revenues), which includes diagnostic and therapeutic compounds. The company also distributes drugs and injectables to hospitals on a wholesale basis (40% of 2011 revenues) and operates a contract manufacturing segment (10%). Akorn is making its first appearance in Cabot Top Ten Trader, and much of the buzz about the company comes from the recent approval of its generic Vancocin, which was a big product for ViroPharma until its patent expired recently. Akorn is constantly acquiring drug licenses from competitors and the company has nearly 40 abbreviated new drug applications filed with the FDA and more on the way. A 58% jump in revenue in 2011 attests to the success of management’s expansion strategy. Akorn is a small company with only 300 institutional investors on board, leaving lots of room for growth.
Technical Analysis
AKRX has been on a long run since it bottomed at 73 cents per share in 2009. The stock finally popped above 10 in November 2011, then corrected back to near that level in March and April. The rally that began in mid-April is still going on, and AKRX has soared over 14. It’s worth noting that short interest in the stock is high, which may lead to a short-covering rally if the stock stays healthy... though it also tells you volatility is likely to be high. A small buy on weakness might work out, with a stop at 12.5.
AKRX Weekly Chart
AKRX Daily Chart
American Eagle (AEO)
Why the Strength
American Eagle Outfitters is primarily a U.S. specialty retailer that targets teens and young adults with 1,090 stores selling casual clothing. Consumers in the seven- to 24-year old demographic account for 35% of total apparel spending, and American Eagle has a nice foothold with that group. The company also sells intimate apparel in its aerie division and has a new 77kids line aimed at children between two and 10 years old. The company revealed on May 1 that its results would be good, and the report on May 23 confirmed that the company’s first quarter had been a good one. Revenue jumped 18% and earnings popped up 43%. The company opened 33 stores in 2011, and remodeled and refurbished 106 stores. In 2010, the company also opened its first store in Dubai, as well as Kuwait, Hong Kong, Russia and Shanghai. American Eagle will pay an 11 cents-per-share dividend in July; the ex-dividend date is June 27. American Eagle is one of the top brands in clothing for young people, and its earnings turnaround is why the stock is strong.
Technical Analysis
AEO has been cycling up and down for years, hitting resistance at 20 in 2009 and again in 2010, then slipping as low as 10 in September 2011. But since the beginning of 2012, AEO has soared from 12.5 to as high as 21 in early May. Since that May peak, AEO has been trading in a progressively tighter range, spending the last two weeks between 18.5 and 19.5. This looks like a great base, as the stock has found support at its 50-day moving average and is trading right on its 25-day. We think it’s buyable around here, or you could wait for a breakout above 20.5.
AEO Weekly Chart
AEO Daily Chart
(AUXL)
Why the Strength
Auxilium Pharmaceuticals made nine appearances in Cabot Top Ten Trader from 2006 through 2008, which is unusual for a company that has yet to book a profitable quarter. Part of the reason for Auxilium’s appeal is its seven years of revenue growth, of which its 2011 gain of 25% is the weakest. The company’s main product is Testim, a gel that treats low testosterone levels, a condition that can lead to low sex drive, reduced muscle mass and increased body fat. The target population is the 13 million men who have genuine hypogonadism (low or no testosterone), but a significant amount of “off-label” prescribing is likely. Auxilium also has an approved product called Xiaflex, which is used to treat a potentially crippling contraction of the tendons of the hand called DePuytrens Contracture. The other wild card here is the company’s positive results on the use of Xiaflex to treat Peyronie’s Disease and Adhesive Capsulitis. Like many not-yet-profitable pharmaceuticals, Auxilium is speculative, but the company projects a profitable year in 2013, and any news of additional uses for Xiaflex would be very bullish.
Technical Analysis
AUXL has been in a gradual correction since April 2010, dropping from 38 to as low as 14 in August 2011. But the good revenue news in the company’s June 4 quarterly report kicked off a rally on big volume that’s not over yet. The stock has soared from 19 to near 24, leaving its 25-day moving average behind at 20. There’s no doubt that good news on Xiaflex could have a big impact, but we’re a little skeptical about jumping in at this point. If you like the story, you’re better off waiting for a retreat of at least a point. If not, keep your initial buy much smaller than your usual dollar amount.
AUXL Weekly Chart
AUXL Daily Chart
Biogen (BIIB)
Why the Strength
As the company displayed at its recent analyst day presentations, biopharmaceutical firm Biogen Idec has an impressive pipeline. The firm is expanding its multiple sclerosis (MS) offerings, with BG-12, an oral treatment in Phase III trials, joining the company’s blockbuster AVONEX and TYSABRI. BG-12 was recently submitted for approval to the U.S. Food and Drug Administration and its equivalent in the E.U.—as well as several other geographies—so the drug is very close to entering the market. Due to the difference in administration and application of each treatment, Biogen is confident that it can manage all three in the same MS market with a high rate of success. Outside of the MS pipeline, dexpramipexole is a treatment for ALS, or Lou Gehrig’s disease, that has rocketed from obscurity in March last year to completing formal patent enrollment in record time. The drug is currently in Phase III trials and holds considerable promise for this terminal disease. With the company adhering to simple principals, such as “putting patients first” and “playing to win"—i.e, no dabbling so as to not waste resources—investors should continue to be rewarded.
Technical Analysis
Driven by a strong and growing pipeline of drugs, BIIB shares have enjoyed a stellar uptrend this year. What’s more, while broad-market headwinds forced BIIB to test support in the 125 region, the stock has rebounded nicely. In fact, the shares have retaken key support at their 50-day moving average, and have recently set a string of fresh multi-year highs. That said, BIIB’s recent rally may have left the shares a bit overextended. In other words, we recommend buying on weakness, with a stop-loss set near 132.50.
BIIB Weekly Chart
BIIB Daily Chart
Cerner Corporation (CERN)
Why the Strength
The “cloud” is coming to health care, and the world’s largest stand-alone maker of health IT systems, Cerner Corporation, is positioned to spearhead the revolution. Not only did the U.S. government include Health Information Technology for Economic & Clinical Health (HI TECH) as part of the 2009 stimulus, but it also earmarked $19 billion specifically for this effort to entice hospitals to go digital. Cerner has already shown signs of benefiting from the stimulus, with sales growing at an annualized rate of 9% and earnings rising 22% during the past five years. What’s more, it doesn’t matter what the Supreme Court does to the Patient Protection and Affordable Care Act (PPACA), there is very little potential for blowback on healthcare IT. Finally, with the healthcare IT market awash in cash, it takes innovation to stay on top and attract new customers. Cerner is certainly no slouch in this department, generating 32% of its income from new clients in 2011, 28% in 2010, and 24% in 2009. The bottom line is that Cerner provides investors with both growth and safety in a turbulent market.
Technical Analysis
CERN shares have been impressive since the 2008 bottom, successfully weathering several broad-market pullbacks. In fact, every patch of weakness during the past four years has found support at CERN’s rising 52-week moving average. Recently, shares held up remarkably well amid a major market correction. After tagging a fresh all-time high above 84 in early May, CERN consolidated into support at 75 and rebounded back above support at its 50-day moving average. And today the stock exploded to new highs! If you’re game, buy a little on weakness with a stop around 81.
CERN Weekly Chart
CERN Daily Chart
Edwards Lifesciences (EW)
Why the Strength
Edwards Lifesciences has $1.7 billion in annual revenue, as it does good business in some critical care products, as well as in heart valve-related businesses; it’s the biggest heart valve maker in the world, in fact. However, the reason Edwards stock is super-strong revolves around Sapien, the company’s newest heart valve that has been selling well in Europe in recent quarters. Sapien entered the U.S. market late last year on a limited basis (for inoperable patients only) and just last week received a big boost via an 11-0 recommendation from FDA advisers; the full FDA doesn’t have to follow the advice but usually does, which means Sapien should be approved for high-risk patients within a few months. Sapien is the first replacement for the aortic valve and can be threaded into place up through the leg ... a big advantage to those patients who aren’t healthy enough for open heart surgery. Such transcatheter valves represent a $2.5 billion market that’s growing every year. There was some concern about higher stroke risk with Sapien, but evidently the FDA advisors don’t see that as overly meaningful. After years of 10% to 15% growth, analysts see earnings rising 30% both this year and next as sales and profit margins expand. It’s a good story.
Technical Analysis
EW had a steady upmove into early 2011, as investors paid up for the company’s eventual Sapien approval. After its top, the stock fell sharply in the second half of last year with the market, and didn’t participate in the market’s early 2012 rally. That began to change in April, as shares began to ramp on good volume, and last week, the roof blew clean off after the FDA advisers’ recommendation, with EW pushing to new price and relative performance highs. We think weakness is buyable with a stop around 89.
EW Weekly Chart
EW Daily Chart
Equinix, Inc. (EQIX)
Why the Strength
While most investors are focused on the daily economic reports in the U.S. and China, the political happenings in Europe and any rumors of what the Fed or other central banks will do, big investors are seeking out companies whose business looks poised to grow regardless of how these uncertainties play out. That’s a big reason why Equinix remains one of the strongest stocks in the market; its interconnection and co-location services remain in big demand thanks to its broad and expanding data center footprint. (The firm just announced it’s expanding one of its data centers in Singapore, for instance). Of course, if the global economy really goes off the rails, it’s possible that business spending will dry up and damage Equinix ... however, 95% of the company’s revenues are recurring, and the churn (those who cancel services) is extremely low. That’s why the company has seen its revenues show sequential (quarter-over-quarter) growth for at least 18 quarters in a row! The company does have an analyst day on Wednesday, which could provide some bullish news; the real wild card here would be if management talks more about a potential conversion to a real estate investment trust (REIT) structure, which would help with taxes and potentially lead to large dividend payouts. An actual switch appears to be many months off, but further details would keep big investors interested. All told, we still think this story has legs.
Technical Analysis
EQIX ripped out of a two-year base in early January and marched higher nine weeks in a row on big volume—a clue that this was a new market leader. It’s headed higher since then, but possibly its most impressive action has been during the market’s downdraft—EQIX hit a low of 146 in mid-May, but could only fall to 154 when the market plunged to new lows on June 1. And now the stock has moved out to new-high ground! Buying at new highs is risky in this environment, but if you don’t own any, picking up some shares on weakness makes sense.
EQIX Weekly Chart
EQIX Daily Chart
Skyworks Solutions (SWKS)
Why the Strength
Skyworks Solutions makes semiconductors that make wireless connectivity work, which just happens to be the hottest area for chips right now. Massachusetts-based Skyworks has chips in some of the hottest cellphones, including phones by Samsung and Apple. The company’s chips also go into automotive, broadband, cellular infrastructure, energy management, industrial, medical and military applications, but it’s cellular handsets that are stirring the drink. Skyworks has booked two years of revenue growth of 34% (2010) and 32% (2011), and analysts are expecting a 7.8% increase when quarterly results come out in July. Skyworks announced in May that its 5G WiFi chips would triple download speeds for video with huge power savings. That’s the kind of innovation that has made the company a favorite of analysts. Excitement over Apple’s new iPhone 5, due out later this year, is also helping the stock’s cause.
Technical Analysis
After a big correction from 37 to 14 in 2011, SWKS rebounded strongly in late December. A three-month rally pushed the stock to 29 in March, and it has been trading under that level ever since, with a couple of dips to 23 along the way. The stock has set up in a tight range for the last couple of weeks, trading between 27 and 29 for the last nine sessions. This tightness indicates accumulation by institutional investors. You should look to buy as close to 27 as possible.
SWKS Weekly Chart
SWKS Daily Chart
TripAdvisor (TRIP)
Why the Strength
While you will occasionally see a big market winner coming from the biotech or specialized technology field, the vast majority are firms that not only are leaders in their field, but have a product or service that serves a mass market—something that is easily “touched and felt” by regular Joes (think Google, Apple, Crocs and the like). TripAdvisor fills that bill, which is one reason we remain high on its prospects—the company is the #1 travel information site on the Internet, with well over 50 million unique monthly visitors and 60 million reviews and opinions on hundreds of thousands hotels, B&Bs, inns, restaurants and other attractions. The firm’s service fills an obvious but unmet desire; it’s not just about being able to book rooms online or find the cheapest price, but being able to find unbiased advice from like-minded travelers. Because it’s the clear leader in the field, extending its lead all the time, it’s unlikely any competitor will make major inroads into its field. The company’s numbers in the table below are a bit skewed due to some adjustments to its website last year and because of its spin-off from Expedia (last December), but growth should be solid in the 25%-plus range for many quarters to come. We think TripAdvisor has great potential.
Technical Analysis
TRIP was doing well enough through April, but wasn’t one of the strongest stocks in the market; there were lingering uncertainties about its conversion to an independent company. Those worries were relieved after the early-May earnings report, and since then, TRIP has been acting excellently, building a consolidation between 40 and 46 for the most part. Now it’s near the top of its range and looks ready to break out ... if the market allows it. As it stands now, we think you could buy a small position around here with a stop near 40.
TRIP Weekly Chart
TRIP Daily Chart
VeriSign (VRSN)
Why the Strength
Operating two of the world’s 13 root nameservers, which assign Internet protocol (IP) addresses, VeriSign was a major player in the early days of the Dot-com boom. While other Dot-coms crashed and burned, VeriSign thrived due to the fact that it was, and still is, the only firm able to issue the .com and .net domain names, which are sold to users by companies such as Go Daddy and Register.com. With Internet Corporation for Assigned Names and Numbers (ICANN) unveiling its new generic Top Level Domain (gTLD) program, and potentially placing the company’s .com and .net dominance at risk, VeriSign has once again become a hotbed of interest for investors. The firm recently announced that it has submitted applications for 12 of the 14 new gTLDs, positioning VeriSign to extend its strong position in the backbone of the Internet. While the company doesn’t expect to realize any material revenue gains from the new gTLDs until 2013, the potential positive revenue impact in the coming years should draw investors looking to get in on the ground floor.
Technical Analysis
It’s been an interesting year for VRSN investors. The stock was skyward bound for the better part of the first quarter of 2012, with VRSN tagging a multi-year high above 40 in mid-April. The shares even enjoyed solid support from their 10-day and 25-day moving averages. But a correction in the broader market brought VRSN to its knees, sending the stock plunging for a test of support near 37.50. That said, the stock has quickly bounced back, reclaiming its 50-day trendline and the 40 level. VRSN is even positioned to challenge its 2012 highs, making a pullback a potentially good time to enter a long position.