The Evidence Continues to Improve
After two and a half months of a choppy-to-down environment, the bulls have done enough good things to turn the intermediate-term trend back up. And that means our Market Monitor is back in bullish territory and you should adopt a more positive market outlook. You shouldn’t buy hand over fist, though—it’s best to pick up shares of some strong, resilient stocks (preferably newer names most investors haven’t heard of) … and then watch closely to see if the market can hold (and build on) its gains in the days and weeks ahead. If it does, you can look to extend your line.
This week’s list again contains an array of stocks from a variety of industries. Our Top Pick is Cavium (CAVM), which looks like a new leader in the still-strong chip sector. It’s very volatile, so handle it with care, but we think you can start a position around here.
| Stock Name | Price | ||
|---|---|---|---|
| TripAdvisor (TRIP) | 55.14 | ||
| T-Mobile US (TMUS) | 0.00 | ||
| Synaptics (SYNA) | 0.00 | ||
| Sanchez Energy (SN) | 0.00 | ||
| Palo Alto Networks (PANW) | 236.92 | ||
| Nabors Industries (NBR) | 0.00 | ||
| Molina Healthcare (MOH) | 0.00 | ||
| Cavium (CAVM) | 0.00 | ||
| Baker Hughes (BHI) | 0.00 | ||
| Air Lease (AL) | 0.00 |
TripAdvisor (TRIP)
Why the Strength
TripAdvisor is the largest travel community in the world, with 260 million unique monthly visitors, who’ve created more than 150 million user reviews of more than four million accommodations, restaurants and attractions in 39 countries. The company was spun off from parent Expedia in 2011, and it’s thrived on its own, continuing to grow by acquiring complementary brands both domestically and internationally. Today its 22 other brands include Airfarewatchdog, BookingBuddy, Cruise Critic, GateGuru, Jetsetter, and VacationHomeRentals, as well as the leading travel site in China. Most content on the sites is provided by members at no cost to the company, and revenues come from advertisers. Today, half of revenues come from outside the U.S. Both revenues and earnings have grown unfailingly in recent years, and analysts are looking for earnings growth of 30% in 2014 and 29% in 2015. All in all, it’s a great long-term growth story.
Technical Analysis
TRIP came public in December 2011. It was first recommended by Cabot Top Ten Trader the following April at 37, and it’s been recommended here seven times since. And now it’s back again, as the stock’s 32% correction in March and April (along with most of the previous growth stock leaders) has set the stage for a renewed advanced. Already, the stock has regained nearly three-quarters of its loss, and it’s almost guaranteed to recover the remainder, particularly if the market continues to cooperate. But buying correctly could be important here, as the stock could easily correct into the 80s. We recommend buying on a dip of a point or more, with a stop under 90.
TRIP Weekly Chart
TRIP Daily Chart
T-Mobile US (TMUS)
Why the Strength
T-Mobile, the so-called “Un-Carrier,” may only be the No. 4 telecom wireless provider in the U.S., but, with little to lose, the company has set its sights on tearing into the subscriber bases of the upper three. The company’s tenacity has paid off, as its widely popular plan to pay up to $350 in early termination fees for subscribers switching from the nation’s three largest carriers immediately added more than 4.4 million customers to the rolls, with projections of millions more. T-Mobile also offers a $300 incentive toward the purchase of a new phone on the company’s network—a promotion that has helped the company take the No. 3 spot from Sprint in terms of smartphone sales. Speaking of Sprint, the much ballyhooed acquisition/merger between the No. 3 and No. 4 carriers took another step toward reality last week as Deutsche Telekom agreed to retain a minority stake in T-Mobile in the event of a Sprint buyout, thus reducing the overall equity layout for an acquisition. While terms of such a deal have yet to be written in stone, Softbank Chairman Masayoshi Son appears determined to push the deal forward. A Sprint-T-Mobile tie-up would give the combined company a subscriber base within earshot of Verizon’s market-leading position.
Technical Analysis
T-Mobile’s disruptive market practices and increasing rumors and details on a potential Sprint tie-up have helped TMUS be a strong performer since early 2013. But until recently, 2014 was quiet for TMUS. The stock took a few tumbles on speculation that the Sprint talks were off, but recent insight has pushed investors to reconsider TMUS. The stock’s current rally has seen it bounce off its 200-day moving average, eclipse its 50-day trendline and challenge resistance at 35. A period of consolidation is to be expected, but additional details on the Sprint deal could spark another rally from TMUS.
TMUS Weekly Chart
TMUS Daily Chart
Synaptics (SYNA)
Why the Strength
If you’ve ever used the touchpad at the bottom of a laptop, you’ve more than likely used one of Synaptics’ products. The company is a leading developer of human interface devices, and while its laptop-mounted ClickPad touchpads are among its most ubiquitous products, the Synapitcs ClearPad family of capacitive touchscreens has quickly ridden the smartphone and tablet wave to dominance. The company has scored design wins with many of the industry’s biggest smartphone manufacturers, with these popular devices accounting for more than half of total sales. In fact, the company’s products are in virtually every high-end smartphone at the moment, with the exception of Apple. That fact, however, may be about to change. According to a report in Reuters, Synaptics is currently in talks to acquire a controlling stake in Renesas SP Driver—the sole supplier of display driver chips for Apple’s iPhone. Given the massive popularity of the iPhone, sealing this acquisition would be a major win for Synaptics. From an earnings and revenue standpoint, Synaptics is already showing solid sales growth with positive earnings estimates. The addition of the iPhone to its customer lineup could prompt upward revisions for Synaptics’ outlook; and analysts are already forecasting 30% revenue growth for 2014.
Technical Analysis
After a stellar 2013 that saw SYNA gain nearly 66%, the stock hit a snag in the first half of 2014. Shares quickly accelerated into the 65 region by the end of January, but SYNA has seen little overall movement since. SYNA retreated to the 55-60 region by March, and, except for an attempted breakout in late April, has remained largely range-bound. But the stock came to life last week, reinvigorated by the acquisition news and the potential for adding Apple to its stable of customers. SYNA shares rallied back toward multi-year highs just shy of 70. Should the Renesas acquisition go through, SYNA could be poised to resume last year’s rally.
SYNA Weekly Chart
SYNA Daily Chart
Sanchez Energy (SN)
Why the Strength
One of the big winners in the U.S. shale oil boom, Sanchez Energy made a name for itself through breakneck growth and exploitation of the Eagle Ford Shale region in South Texas. The company’s growth plan is simple: identify and acquire adjacent, high-potential areas in the Eagle Ford and churn out as many low-cost wells as possible. The strategy has seen Sanchez tap nearly 60 wells so far this year, with another 80 planned for the latter half of 2014. In light of the company’s recent acquisition, however, growth expectations could be conservative. Specifically, Sanchez has snapped up the “Catarina Ranch” region in Eagle Ford from Royal Dutch Shell, an area encompassing some 104,000 net acres with about 60 million barrels of proved reserves. The deal, which set Sanchez back $639 million, is expected to double the company’s size when it closes at the end of June! Many on Wall Street are scrambling to reevaluate the company’s prospects in the wake of the Catarina Ranch purchase; the company itself is anticipating revenues well in excess of $1 billion next year. If the company continues its solid track record of keeping production costs low, even this forecast could prove to be conservative.
Technical Analysis
SN’s December 2011 IPO was greeted with very little fanfare. The stock took a quick trip to the 25 region, before retreating to a tight range near its IPO level. During the following months, SN strayed little from this trading range near 20, with 2012 and the first half of 2013 passing with little incident. The stock finally gained traction in mid-2013, riding support at its 10- and 25-week trendlines to eclipse 30 by the end of 2013. In 2014, SN flirted with pushing past 30 on several occasions, but it took the Catarina Ranch acquisition to push the shares solidly past that level. SN is very volatile, as investors digest the company’s latest purchase. But the recent blast-off looks exciting.
SN Weekly Chart
SN Daily Chart
Palo Alto Networks (PANW)
Why the Strength
The ruling reason for Palo Alto Networks’ strength is easy to understand—corporations and organizations big and small are realizing that cyber attacks are growing more frequent and more sophisticated, and are likely to continue that trend in the years ahead. And because of that, the legacy systems that many firms bought years ago and still employ simply don’t cut it. Palo Alto’s next-generation firewall and threat intelligence products are light- years better than standard equipment at detecting and preventing hacks and intrusions, and that’s led more than 17,000 customers to its door, leading to a consistent boom in the company’s results. In the March quarter reported last week, Palo Alto’s sales (up 49%) and earnings (up 57%) beat expectations, with cash flow much larger than earnings thanks to the firm’s burgeoning subscription business; recurring subscriptions and service revenue made up 44% of the total, and grew 64% from the year before. Just as important, the firm settled its ongoing lawsuit with Juniper Networks, agreeing to pay a total of $175 million in cash and stock, removing a big block of uncertainty. All in all, it’s a great growth story that should lead to many quarters of rapid growth.
Technical Analysis
PANW isn’t the easiest stock to handle—shares did little but go down from its IPO in July 2012 to November 2013. But then it embarked on a terrific upmove, doubling from 40 at its lows to a high just above 80 when the market correction set in. The base-building effort since then has been choppy and sharp (it fell 29% in eight weeks), but the rebound during the past three weeks—especially last week’s decisive upmove on huge volume—is bullish. There’s still resistance up to 80, but we think you can start small (a half-sized position) around here, use a loose stop, and consider adding if the stock and market cooperate.
PANW Weekly Chart
PANW Daily Chart
Nabors Industries (NBR)
Why the Strength
If you only look at the table below with Nabors’ sales and earnings, you’ll likely run away in horror; the company has seen earnings shrink in each of the past seven quarters, including huge declines of late. But the drilling industry is notoriously cyclical, and the cycle for Nabors’ land rigs has turned up. A lot of that has to do with stabilized natural gas prices (the huge dip in prices in recent years had many big explorers shuttering their natural gas operations) and the continued shale revolution here in the U.S. The company is also making hay internationally, where it’s relocating rigs to higher dayrate areas, boosting margins. As for company-specific bullishness, Nabors’ newer PACE-X rig, which is able to yank more oil and gas out of the ground than competing rigs, is selling very well and should provide an added boost as drilling activity heats up in some of the newer shales (like the Utica and SCOOP). The bottom line is that earnings are expected to begin soaring this quarter and continue for at least a couple of years as demand picks up and dayrates rebound. Throw in a reasonable valuation and a tiny dividend (0.6% annually), and we think this stock can do very well as long as energy prices remain in their current range.
Technical Analysis
NBR looks like it’s near a good buy point. The stock was dead money (or worse) for much of the past few years, but February’s enormous, earnings-induced upmove (the stock rose 21% on the week, on volume that was well over twice average) turned the tide. After making some upward progress, NBR began to chop around, and successfully tested its 10-week line for the first time three weeks ago. It’s bounced since, and looks primed to head higher. You can buy some here with a stop just below 25.
NBR Weekly Chart
NBR Daily Chart
Molina Healthcare (MOH)
Why the Strength
Founded by Dr. David Molina in 1980 and currently led by his son Dr. J. Mario Molina, Molina Healthcare provides managed healthcare services to more than 2.1 million members. From the beginning, the company has focused on the low-income market and government programs such as SCHIP (State Children’s Health Insurance Program) and Medicaid, but in 2006, it entered the Medicare market. Today, the company offers Medicaid health care programs in 15 states and Medicare health plan options in eight states. Looking ahead, the future is bright for Molina for two simple reasons. First, the company can expand by entering more states. And second, the company is likely to benefit as the government’s influence over healthcare grows. Recent trends have certainly been strong, with revenues growing at double-digit rates in each year of the past decade. Earnings growth has not been quite as steady, however, as the costs of expansion sometimes brings glitches. But analysts are projecting growth of 47% in 2014 and 38% in 2015, and the company could easily do even better.
Technical Analysis
MOH has been public since 2003. After a strong performance in its first year, it spent the next five years correcting, bottoming, like most stocks, in 2009. But since then, the main trend has been up, and we expect it will remain up. Most recently, the stock broke out—on big volume—above resistance at 40 that had constrained it since July 2013, and this breakout has launched a strong uptrend. There’s support at 41, so your best bet would be a buy on a pullback toward that level.
MOH Weekly Chart
MOH Daily Chart
Cavium (CAVM)
Why the Strength
Cavium designs integrated semiconductor processors for use in networking equipment such as routers, switches, security appliances, gateway devices and storage networking equipment. These specialized microprocessors range in performance from 100 Mbps to more than 100 Gbps, placing the company’s technology near the forefront of the current telecom and data center upgrade cycles. What’s more, Cavium keeps its overhead low by outsourcing manufacturing to Taiwan Semiconductor and United Microelectronics, among others. With more than two-thirds of Cavium’s revenue coming from outside the U.S., the company has been able to shield itself from sluggish domestic economic growth, with revenue rising an average of 27% per quarter and earnings soaring roughly 109% year-over-year during the past four reporting periods. The company’s current flagship technology is LiquidIO, a cloud-based server package that has seen rapid adoption by Amazon.com. Looking ahead, Cavium is set to unveil its latest server strategy, Thunder, which is based on lower power, lower-cost ARM processors. Analysts are already upping their forecasts in anticipation of Thunder, with Cavium revenue seen growing 38% this year and 28% into 2015.
Technical Analysis
Technically speaking, CAVM shares have ridden a steady wave of support higher over the past several years. Growth slowed a bit during 2013, with CAVM holding to a 10-point trading range between 30 and 40. After bouncing off support near 35 in January, shares ramped past 40 and entered a new basing pattern near 45. The stock went on to consolidate in the 40-45 region before breaking out on strong volume last week in the wake of quarterly earnings. The stock is now challenging overhead resistance in the 50 region as it digests post earnings gains. CAVM is buyable here or on dips of a point or two.
CAVM Weekly Chart
CAVM Daily Chart
Baker Hughes (BHI)
Why the Strength
If you want a stake in the uptrend in the oil sector but don’t want to take the risk of any single explorer, you’ll be hard-pressed to find a better option than Baker Hughes, one of the leading oil service firms in the world today. Not that this is some humongous, stodgy company; in fact, Baker Hughes sports double-digit revenue growth, and its earnings estimates (up 58% in 2014, up 29% more in 2015) are better than most growth stocks! There’s no one major growth driver here; the firm is seeing a broad uptick in demand in North America (where the number of land rigs is finally picking up and the Gulf of Mexico is making a great comeback), the Middle East and Asia (which is in true growth mode), while it’s working to cut costs and boost margins in still-challenging Latin America areas. But the bottom line is that, even as many oil majors are tightening purse strings to boost their own cash flow, energy exploration activity around the globe is picking up, especially for the technologically advanced solutions that Baker Hughes specializes in. Speaking of cash flow, Baker Hughes’ increased take has resulted in a minor dividend hike (the stock now yields 1.0% annually), and it has $1.4 billion left on its share repurchase plan (it bought back $200 million worth of stock in the first quarter). For a bigger, cyclical stock, BHI is impressive.
Technical Analysis
BHI changed character last October, when it soared on earnings; that pop didn’t lead anywhere, but it began the process of a new, proper basing structure. And since the start of the year, shares have been persistently advancing—BHI broke to new highs in early February and has been riding its 10-week line higher ever since. Shares have consolidated in a tight range around 70 for the past six weeks, setting the stage for another run higher. We think BHI is buyable here.
BHI Weekly Chart
BHI Daily Chart
Air Lease (AL)
Why the Strength
We’ve seen AerCap, a new leader in the airplane leasing sector, appear in Top Ten a couple of times, and now here’s Air Lease, a smaller up-and-comer making hay in the same industry. The company buys its own planes (its fleet just ramped past 200) using financing (lower rates have helped a lot) and then leases them to carriers around the world—79 customers in total, the vast majority of which are outside of the U.S. and Canada, with a focus on Europe and faster-growing areas like the Middle East and Asia. The recent first-quarter results were outstanding, with sales and earnings showing great growth and handily topping expectations; the firm’s average remaining lease term was seven years at the end of March, and customers are inquiring about 2017-2019 deliveries, much farther out than usual. The big-picture bullish background is that after years (decades?) of being a mess, the airline industry is in great health today, and that’s leading to a desire for newer, more efficient planes as carriers expand their fleets. The only snafu here is the gigantic debt load ($5.9 billion!), but it’s a cash flow game—as long as the airlines pay on their leases, Air Lease should grow steadily for years.
Technical Analysis
AL has been in a long-term uptrend for years; it’s somewhat thinly traded and shares regularly chop around for a month or two or three, but there’s been progress over time. The reason it’s made Top Ten this week is because of its excellent action since early February, when it bottomed at 30, and its recent earnings-induced push to new highs above 40 on good volume. AL isn’t a stock to chase higher, though, so we advise looking for a dip of a point or more, with a stop around 36.
AL Weekly Chart
AL 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.
