Holding the Gains
The market remains in good shape, with the major indexes hitting slightly higher highs and most stocks acting well. Granted, many growth stocks have been consolidating their strong mid-May to early-June advances, but we’re actually encouraged by that—despite strong run-ups back to (or somewhat above) their springtime highs, the sellers haven’t been able to make any headway. Sure, that could always change, but right now there’s no question that selling pressures are light and the buyers remain in control. Hence, it’s best to remain bullish and pick up shares of new leaders either on powerful breakouts or on dips toward support.
This week’s list has more solid growth ideas than we’ve seen in many weeks. Our favorite idea is GasLog (GLOG), which has gotten a boost from international events, but whose short- and long-term growth story is compelling. Last week, the stock blasted off on its heaviest volume ever.
| Stock Name | Price | ||
|---|---|---|---|
| TripAdvisor (TRIP) | 55.14 | ||
| SunPower (SPWR) | 12.26 | ||
| Royal Gold, Inc. (RGLD) | 129.66 | ||
| Palo Alto Networks (PANW) | 236.92 | ||
| Lithia Motors Inc. (LAD) | 146.30 | ||
| GasLog (GLOG) | 21.39 | ||
| Electronic Arts (EA) | 0.00 | ||
| Celgene (CELG) | 0.00 | ||
| Arris Group (ARRS) | 0.00 | ||
| Apple (AAPL) | 248.94 |
TripAdvisor (TRIP)
Why the Strength
TripAdvisor has all the makings of an emerging blue chip—it dominates a mass market industry, and after a couple of years of getting its ducks in a row, looks poised to grow sales and earnings at 20% to 30% rates for many years. The company is the hands-down leader in travel information, with listings for millions of hotels, B&Bs, inns, restaurants and attractions in 40 countries that attract more than 260 million unique visitors per month, 10% of the entire market. And these visitors don’t just window shop—they’ve written a whopping 150 million reviews! All those eyeballs lead to huge advertising dollars, which makes up 85% of all revenue, and we like that those ad dollars are not only growing steadily (revenues up between 20% and 26% the past six quarters) but growth is seen around the world (revenue up 20% in North America, 27% in Europe/Middle East/Africa, up 30% in Asia in the first quarter). Earnings are expected to rise north of 25% per year through 2018, and that could prove conservative if the firm’s already-large profit margins expand back to their levels of a couple of years ago.
Technical Analysis
TRIP has enjoyed a big run since the major late-2012 low, but since August of 2013, it hasn’t made much progress—shares peaked around 82 back then, and though the stock actually rose toward 110 in the spring of this year, it was back around 80 in late-May. That nine-month stretch of no upside progress may have “re-set” the stock; TRIP ramped back toward its old highs and has been unwilling to give up any of its gains. There’s still the old high near 110 to get through, but we think TRIP is buyable here or on dips, with a stop in the low 90s.
TRIP Weekly Chart
TRIP Daily Chart
SunPower (SPWR)
Why the Strength
For California-based SunPower, efficiency is the key to success. The company’s mix of small home installations and large utility grade installations hinges on the efficiency of its Maxeon solar cells that feature over 20% sun-to-power conversion rates. For home installations, the higher efficiency allows smaller arrays, while solar power plant operators appreciate the higher electrical yield. The solar industry has been on an upswing lately, driven by increasing demand from electrical grid operators and heightened environmental awareness in China. SunPower had been limited to single-digit revenue percentage gains in four of the last five years, but U.S. sanctions against Chinese manufacturers have boosted U.S. manufacturers. The company booked a 9% gain in revenue and a 123% jump in earnings in Q1 and after-tax profit margins have been in double figures in three of the last four quarters. The company is also enjoying a boost from the closing of $400 million in debt and the announcement of a $200 million loan program that will give residential borrowers up to $60,000 toward the installation of a SunPower solar system. All in all, the situation looks quite positive for solar power in general and SunPower in particular.
Technical Analysis
After a monster run from 4 in late 2012 to 35 in October 2013, SPWR traded sideways for more than seven months. An April correction to 26 was made up in just a couple of weeks. But it wasn’t until this month that SPWR really broke out above 36 with high-volume buying from June 12 through June 18. SPWR picked up a downgrade recently, but the stock has held up well, trading tightly around 40. Now at multi-year highs, SPWR looks buyable on any weakness of a point. A stop below support in the mid-30s makes sense.
SPWR Weekly Chart
SPWR Daily Chart
Royal Gold, Inc. (RGLD)
Why the Strength
The ups and downs of gold-mining companies are legendary, but Denver-based Royal Gold has a business model that takes some of the volatility out. As the name implies, the company both buys royalty interests in existing gold production and finances producing or developing mines in exchange for royalty interests. Royal’s interests now include 37 producing mines and 23 development-stage projects. At the end of 2013, the company controlled approximately 5.3 million ounces of gold and 824 million ounces of silver. The price of gold has been in a downtrend since October 2012, but looks to have bottomed in December 2013 and is now consolidating a modest rebound. Given Royal’s strategy of buying only royalty interests, it’s not surprising that the company’s stock has bounced back much more strongly than the price of gold itself. While Royal’s stock was unmoved by the company’s earnings report on May 1, investors reacted favorably when the stock was picked up by a new analyst on May 29 with a positive recommendation. The announcement of the company’s 21-cents-per-share third-quarter dividend on May 30 also produced a good reaction. (The ex-dividend date is July 3.) The appetite for gold shares comes and goes, but when it rises, as it has due to the geopolitical risk represented by Iraq and the general rise in demand, Royal Gold is a popular choice.
Technical Analysis
RGLD had a terrible time from October 2012 through June 2013, falling from over 100 to below 40. After a period of wild swings up and down, the stock settled down in April and May, building a base with support at 62. The rising price of gold in June and international tensions have pushed RGLD from 60 late last month to over 75 in recent trading. If having a little gold in your portfolio appeals to you, look to buy into RGLD on any weakness, as the stock is trading at its highest level since early 2013. Volatility is high, so a loose stop at 65 makes sense.
RGLD Weekly Chart
RGLD Daily Chart
Palo Alto Networks (PANW)
Why the Strength
Palo Alto Networks has made a name for itself by not only moving its security software to the Cloud, but also by creating a next-gen firewall that manages specific applications and people instead of the old school method of targeting network ports. Because of this, its software can distinguish between specific applications (Twitter, YouTube, LinkedIn, etc.), and then apply tailored security profiles to each. This unique approach has led to more than 17,000 customers and significant revenue growth. In fact, during the recently reported March quarter, Palo Alto’s sales rose 49% and earnings jumped 57%, both beating expectations. What’s more, cash flow showed significant improvement thanks to a burgeoning subscription business that has increased to 64% of total revenue from 44% just a year ago. Palo Alto has also taken a load off investors’ minds by settling its ongoing lawsuit with Juniper Networks, agreeing to pay a total of $175 million in cash and stock. With cyber-attacks growing more frequent and sophisticated every day, Palo Alto represents a growth story that should continue to benefit from its cutting edge technology.
Technical Analysis
While we were shaken out of PANW in the spring market correction—the stock fell about 25% from 80 to 60—we are revisiting the stock because its growth potential is just too good to pass up. After bouncing around in the 60-70 region for a couple of weeks, PANW has come surging back, recouping all of its spring losses. Bolstered by support from their 10-day moving average, shares are once again battling resistance at 80. PANW has logged four consecutive closes north of 80 in the past week, and building support could help propel the shares higher as investor confidence grows. You can buy here or on minor weakness, with a stop near 72.
PANW Weekly Chart
PANW Daily Chart
Lithia Motors Inc. (LAD)
Why the Strength
Lithia Motors is a major player in the U.S. auto market. The company is an automotive franchisee and seller of new and used vehicles, operating more than 85 stores in about 10 states. The company sells some 25 brands of new domestic and imported vehicles and all brands of used cars and trucks through its stores and online. Chairman and CEO Sidney DeBoer, whose father Walt founded the company in 1946, has helped build impressive growth at Lithia. The company has averaged 31% earnings growth year-over-year for the past four quarters, with revenue increasing at an average 20% clip during the same period. And now a deal to acquire DCH Auto Group for $363 million has vaulted Lithia into the investing spotlight. Control of DCH will give Lithia an additional 27 dealerships in California, New Jersey and New York, increasing the company’s total to 128 stores. The deal, which is expected to close in the fourth-quarter of 2014, is expected to deliver additional earnings of 12-14 cents for fiscal 2014, rising to 65-75 cents per share annually in 2015 and beyond! The move is just the latest in a long string of acquisitions for Lithia, which purchased two dealerships in Portland, Oregon, just days prior to the DCH deal.
Technical Analysis
LAD has been quite the growth story for investors in recent years. The stock has been in rally mode since 2010, with LAD’s 10- and 25-week moving averages providing support through early 2014. While this year got off to a rocky start—LAD breached trendline support in January, but found technical support at 60—shares have recovered nicely. In fact, the DCH deal helped to propel LAD past former resistance at 80, sending the stock to a fresh multi-year high north of 90. With all the excitement, LAD may be a bit overheated. We recommend buying dips of a point or two, with 90 being an ideal target.
LAD Weekly Chart
LAD Daily Chart
GasLog (GLOG)
Why the Strength
GasLog has an excellent story, one that is both powerful and easy to understand. The company is aiming to be a major player in the world of LNG shipping; it had just a handful of vessels a couple of years ago, but its on-the-water fleet now numbers 11 owned and six operated for other customers, with nine more on order. And that could be just the start, as the company will use its own financing activities, as well as its recently-public MLP (GasLog Partners), to help expand its fleet further. What we really like about the story is that long-term LNG demand is set to spike in the years ahead as new projects come on-line, and these vessels come with long-term charters, usually five years or longer. Put it together, and GasLog should see years of healthy growth. The company also offers a layer of income (1.6% annual dividend yield) and surety—just from contacts already inked, the company will see charter revenues rise from $145 million last year to $417 million in 2017 (up 30% per year), and that doesn’t even include new charters (for current or future ships) that are sure to be signed in the quarters ahead. In the short-term, Russia’s decisions about its natural gas flows to Europe could toss the stock around, but the major trend is definitely up.
Technical Analysis
GLOG was a modest performer before zooming in January, when investors caught on to the story. After running to 29 in April, the stock corrected and tightened up for eight weeks before coming under huge accumulation last week—the stock lifted to new price and RP peaks on its heaviest volume ever! In the short-term, we expect some pullbacks and shakeouts, but last week’s volume tells us higher prices are coming.
GLOG Weekly Chart
GLOG Daily Chart
Electronic Arts (EA)
Why the Strength
The digital revolution has taken the video game market by storm, and gaming giant Electronic Arts is taking full advantage of the movement. Responsible for some of the biggest software titles in the industry, including Battlefield, FIFA Soccer, Madden NFL, The Sims and Need for Speed, Electronic Arts is in the midst of a turnaround driven by CEO Andrew Wilson’s focus on digital gaming. In fact, digital revenue accounted for 45% of EA’s better-than-expected fourth-quarter sales, released on May 6. And, while overall revenue declined year-over-year, EA still exceeded the Street’s projections. The company plans to place additional emphasis on the increasingly lucrative digital marketplace, with more live services for its games in the works and increased projections for full-game downloads. Additionally, EA has had great success with the latest generation of consoles from Microsoft and Sony; it’s FIFA 14, Titanfall and Battlefield 4 were three of the top five best-selling titles across all platforms in North America and Europe. Lastly, at the recent E3 convention (held in LA on June 10-12), EA noted that it expects to see lift for its FIFA series due to the World Cup, and that its share of the first-person shooter (FPS) market should strengthen due to continued success with its Titanfall and Battlefield titles.
Technical Analysis
After spending much of last year in rally mode, EA shares hit a snag heading into the holiday shopping season. After peaking near 28 in August, EA retreated into the low 20s, where it held through early January. The shares sparked to life once again in early February, as holiday sales came in better than expected, but resistance at 30 failed to give in March. On May 7, however, EA jumped the most in 24 years, surging 21% as earnings indicated that a turnaround was in full swing. Shares then consolidated in the mid-30s for a month, and last week brought a push to new highs. You can buy here if you’re not yet in, with a stop around 32.
EA Weekly Chart
EA Daily Chart
Celgene (CELG)
Why the Strength
New Jersey-based Celgene is the kind of company that young biopharmaceuticals want to be when they grow up. Celgene uses its small-molecule technology to produce drugs to fight cancer and immune–inflammatory diseases. Its lead product is Revlimid, a treatment for multiple myeloma and related conditions that brought in 66% of the company’s 2013 revenue. With more than a decade of double-digit growth in annual revenue, the company has been a model of consistency. In addition to Revlimid, the company markets the cancer drugs Abraxane, Vidaza and Thalomid. The one big fact about Celgene is that the company also has more than 300 clinical trials underway, including both new compounds and new uses for compounds already approved for sale. While its healthy product line and robust development pipeline have been enough to interest investors, the news that kicked off the most-recent rally in Celgene’s stock was the announcement on June 20 that the stock would split two-for-one for holders of record as of June 18. With earnings forecast to increase from $5.96 per share in 2013 to $7.32 in 2014, $9.67 in 2015 and (according to management) $15 in 2017, Celgene is still growing rapidly.
Technical Analysis
CELG traded essentially sideways from late 2007 when it hit 74 through November 2012. The stock finally broke out past 80 in January 2013 and rallied strongly to top 170 in December 2013 and again in January 2014. The stock found support at 140 in April and pushed above 160 earlier this month before the split announcement kicked it above 170. Despite the company’s size and its high stock price, CELG is still very much a growth stock. Try to buy on a pullback of a few points and put a stop in at the 50-day moving average, now at 150.
CELG Weekly Chart
CELG Daily Chart
Arris Group (ARRS)
Why the Strength
Thanks to its huge acquisition of Motorola Home last year, Arris Group is the major beneficiary of the huge investment spree going on among cable TV providers that are racing to upgrade their offerings, including faster data services, DVRs with more storage and viewing options, more powerful bandwidth for video and audio or improved set-top boxes with more security. Granted, this spending spree won’t last forever—it’s an upgrade cycle of sorts—but after years of relatively little innovation, this cycle should last for at least a few quarters, especially with the next-generation HD (dubbed Ultra HD, or 4K) coming soon. (Arris booked its first Ultra HD set-top box award with a major telco in the first quarter.) Indeed, in the first quarter, not only did Arris’ sales (boosted by the Motorola acquisition) and earnings top expectations, but new orders outdid shipments by a whopping 37%, leaving the company with a $1 billion backlog at the end of the quarter. Analysts see earnings booming this year and continuing to rise solidly next year. With great industry fundamentals, big growth and a reasonable valuation (17 times trailing earnings), the potential is big.
Technical Analysis
ARRS broke out of a huge, five-year, first-stage base in November and ran to 31 by February. Then came a normal base-building process, and a fresh breakout in mid-May; Arris was one of the first growth stocks to hit new highs. But, like other recent breakouts, ARRS moved sideways during the past three weeks, readying for another run higher. We think it’s buyable in this area, with a stop down near 30.
ARRS Weekly Chart
ARRS Daily Chart
Apple (AAPL)
Why the Strength
Apple is big (market cap of $554 billion, one of the biggest in the world), liquid (trading about 71 million shares per day) and universally owned (institutional supporters near 4,500).And it’s still making headlines. Apple made its reputation with its computers, grew into a sensation with its iPods, then grew into a phenomenon with its iPhones and iPads. Revenue growth has been in single digits for the last four quarters, but earnings growth picked up in Q1 to 15%, the fastest growth since Q3 2012. There is a flurry of speculation about what Apple’s new product will be, with most commentators predicting a wearable device called an iWatch. And with the proven money winner of a new iPhone model (the iPhone 6) on the way, investors are betting that the old magic will come through again. Also supporting Apple’s stock are the June 9 seven-for-one split that lowered the price of one share from $646 per share to $94, and the humongous $90 billion share buyback plan to be completed by the end of 2015.
Technical Analysis
AAPL peaked at a split-adjusted 101 in September 2012, then corrected to a double bottom at 56 in April 2013 and 58 in July 2013. The stock rebounded strongly to top 80 in December 2013 before correcting for nearly five months. When the seven-for-one split was announced (along with Q1 results) on April 24, AAPL jumped from 74 to above 80 and it has kept on advancing, topping 94 on the split day. AAPL has relaxed back to 91 since that peak, but volume has been calm. If you like the looks of AAPL and its 2.1% dividend yield, this looks like a pretty good spot to buy, as the stock’s 25-day moving average has just caught up. Use a stop at 84.
AAPL Weekly Chart
AAPL 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.
