Sellers are in Control
Last week, our issue was titled “Decision Time,” and after the Federal Reserve’s disappointing report, the market made the decision to go down with force—not only have the major indexes broken their intermediate-term trend lines, but tons of stocks have been nailed as the selling pressures intensify. Yes, there are still many decent-looking names out there, but the market is the elephant in the room at this point; it’s best to hold plenty of cash and do little new buying until stocks find their footing.
The good news from a stock picker’s standpoint is that it’s easiest to spot strength in a weak market; if a stock is holding up well in this environment, it deserves some extra attention. This week’s list has many stocks that fill that bill; our favorite is Infoblox (BLOX), a young, rapidly-growing networking firm. Just be sure to keep any positions small if you decide to buy.
| Stock Name | Price | ||
|---|---|---|---|
| Yelp (YELP) | 41.30 | ||
| The ExOne Company (XONE) | 0.00 | ||
| Tesla, Inc. (TSLA) | 818.87 | ||
| SodaStream (SODA) | 142.91 | ||
| Charles Schwab (SCHW) | 0.00 | ||
| RH Inc. (RH) | 252.93 | ||
| Colfax (CFX) | 0.00 | ||
| Infoblox Inc. (BLOX) | 0.00 | ||
| ANGI Homeservices Inc. (ANGI) | 14.81 | ||
| ACADIA Pharmaceuticals (ACAD) | 47.84 |
Yelp (YELP)
Why the Strength
If a person is standing in the middle of a city with a cellphone looking for a restaurant (or any other kind of business), chances are good that Yelp is helping them find what they’re looking for. During the first quarter of this year, the company’s mobile app was used on about 10 million unique mobile devices and the company’s website had over 100 million unique visitors. A big part of the appeal of Yelp is that its users post reviews of their experiences with the businesses in question, including pictures and very frank comments. Shopping venues are the most reviewed businesses (23% of Q1 reviews), with restaurants (20%) close behind. Home and local services make up 11%, with beauty and fitness (9%), arts & entertainment (7%) and health (6%) making smaller contributions. Yelp gets revenue from businesses, who pay to be listed, and from brand advertising. The number of local businesses listed jumped from 27,300 in Q1 2012 to 44,700 in Q1 2013. Revenue growth has been above 60% in each of the last six quarters and analysts expect the company to achieve profitability in 2014. Yelp is an international business, with listed businesses in major metropolitan areas of the U.S., Canada, the U.K., all over Europe, Singapore, Turkey and New Zealand. Growth will come both from increasing participation from local businesses and from widening geographic coverage. This remains a good story.
Technical Analysis
YELP came public in February 2012 and experienced some wild swings for about eight months. But starting in November, the stock settled down into a relatively calm rally that began at 16 and pushed to near 33 in early May. YELP dipped to 27 in early June, but recovered to take another run at 33 last week. All told, the stock has now been trading sideways for seven weeks and its 25-day moving average has flattened out. But the rising 50-day is now at 29, and may provide some lift. Given the stock’s recent volatility, you should be able to snag a small position on a dip below 30, with a stop at 27.
YELP Weekly Chart
YELP Daily Chart
The ExOne Company (XONE)
Why the Strength
3D printing is developing into an interesting battleground, with strong competition in a young, but rapidly developing industry. Stratasys (SSYS) and 3D Systems (DDD) have combined for 10 appearances in Top Ten in the last couple of years, and a new competitor has shown up recently. The company is ExOne, a Pennsylvania-based supplier of 3D printing machines and consumables plus contract manufacturing services. This is not a company offering machines for hobbyists to make plastic bunnies. ExOne’s printers work with foundry-grade sand to make casting molds, and with metal (stainless steel, bronze and tool steel) and glass. The company is a global presence with five Production Service Centers providing custom manufacturing. Sales of printers have risen from five in 2011 to 13 in 2012. In the first quarter of 2013, sales amounted to five machines accounting for 59% of revenue, with the other 41% coming from sales of printed parts and sales of consumable materials and replacement parts. (Machines range from $100,000 to $1.4 million, depending on the size of the build chamber.) Management is working to expand the company’s network of production service centers (contract manufacturing facilities) to achieve wider geographic diversification. The company experienced 87% revenue growth in 2012 and projects earnings of one cent per share in 2013, the 56 cents per share in 2014. With a focus on the disruptive technology of parts manufacturing replacing supply chains and inventory, the 3D printing industry is a hot battleground, and ExOne looks like a worthy competitor.
Technical Analysis
XONE came public at 18 in April, but has never traded below 23.5. After surging to 34 after a couple of trading days, XONE dipped to 24 for a couple of days before beginning a rally that hasn’t really experienced a major correction. XONE pulled back to its 25-day moving average three times in its brief history, but resumed its uptrend quickly, soaring to as high as 53 last week. This two-week period of sideways trading is the first real consolidation the stock has experienced. The stock is now just around 50 and its rising 25-day moving average is just below 48. XONE looks like a reasonable way to play the rapidly developing 3D printer business, with a buy on a dip toward 49. Use a stop at 43.
XONE Weekly Chart
XONE Daily Chart
Tesla, Inc. (TSLA)
Why the Strength
At this point in the market’s correction, Tesla Motors remains the top glamour stock in the market. (By glamour stock, we generally refer to a rapidly growing, revolutionary firm that is quickly gaining sponsorship, but can’t yet be called an institutional favorite.) Usually with such a stock, there are plenty of doubters, and that remains the case with Tesla; the firm’s voluntary, small recall of 800 Model S vehicles produced in early June caused the naysayers to come out in full force, for instance. And even last week’s “news” of Tesla’s successful battery switch (swapping out a car’s battery with a fully-charged one), which should help alleviate range anxiety, was met with some jeers. But Tesla is clearly not one of the strongest stocks in the market because of the present; the company is likely to make only small profits this year as it delivers as many Model S sedans as it can. The idea here remains that Tesla has stepped so far out in front in the electric vehicle market that it should grow many-fold as its Model S, its upcoming Model X crossover (deliveries likely late next year) and, eventually, its lower-priced sedan hit the market in the years ahead. And investors are willing to pay up for that today. Obviously, there are risks, especially if Model S demand softens for some reason. But Tesla has all the makings of a big stock if management executes and things break its way.
Technical Analysis
As we wrote on page 1, it’s easiest to spot strength in a weak market, and TSLA has remained impressively resilient while the major indexes have hit the skids. On a weekly chart, we see that the stock has closed between 97 and 102 each of the past five weeks; considering the stock’s volatility, such action looks tight and is a good sign of accumulation. On the daily chart, we see that shares are still holding near their 25-day line and have been forming higher lows since the market’s mid-May peak, one of the few stocks in the market that can claim that! That said, with the market trending lower, we advise holding on if you own some, and trying to buy a small amount on dips with a loose stop in the mid-80s.
TSLA Weekly Chart
TSLA Daily Chart
SodaStream (SODA)
Why the Strength
Rapid sales and earnings growth? Check. Big earnings estimates? Check. Mass market product? Check. Recurring revenue? Check. SodaStream has many of the boxes checked that big winning stocks of the past have had. The firm’s home carbonation system has been popular in Europe for many years (SodaStream is based in Israel), but it just hit U.S. shores a couple of years ago, and it took time for many in the investment community to think of it as more than a fad. But today, big investors are coming around to the view that SodaStream is here to stay, which means it could sell tens of millions of its soda makers in the U.S., as well as ongoing CO2 refills and soda flavors (read: recurring revenue) in the years ahead. (It should be noted that one attraction of the soda kits are their environment and health impacts—no cans helps the environment, and its soda contains far less sugar than Coke or Pepsi.) In the first quarter, revenues in Europe were up a solid 17%, but they boomed 89% in the U.S. where they made up nearly half of total revenues. Soda maker, gas refill and syrup unit growth were 78%, 101% and 119%, respectively, in the U.S., and the potential remains enormous going forward; all told, the company sold about 3.5 million soda makers last year, and that figure could boom if uptake in the U.S. remains on track. Moreover, Whirlpool just inked a deal to sell SodaStream-powered units for the KitchenAid brand; they should hit shelves in the fourth quarter, in time for the holiday season. Management has a goal of $1 billion of revenue by 2016, and all the pieces are in place for SodaStream to get there and beyond.
Technical Analysis
SODA has been a hectic stock, with lots of ups and downs and not much sponsorship. Now, though, the stock appears to be “growing up;” average volume has nearly doubled since early May as the stock has ramped higher. Some of that boost came from a report that Pepsi was set to buy SODA for 90 or so, but Pepsi management denied that in very strong terms. Still, the stock has held up very well, pulling back reasonably in recent days with the market. More backing-and-filling is likely if the market remains in a downtrend. You can either watch it, or nibble around here, with a stop near 62.
SODA Weekly Chart
SODA Daily Chart
Charles Schwab (SCHW)
Why the Strength
Investment brokerage firms have been dealt a hot hand recently, as reports indicate that the investing public has become increasingly active. A long-time standout in the sector, Charles Schwab continues to perform quite well, announcing last month that daily average trades were up 17% year over year in May, and up 8% compared to the prior month. Furthermore, Schwab reported record total client assets of $2.11 trillion in May, up 20% from year-ago levels. Looking ahead, Schwab stands to further bolster earnings and revenue following news that the Fed is expected to rein in its bond buying which is boosting interest rates, something that is already increasing volatility and trading volumes. The recent news prompted the brokerage community to boost their ratings on several investment brokerage firms, including Schwab. Fundamentally, revenue remains consistant, with Schwab averaging revenue growth of 7% during the past four quarters. Elsewhere, the company has shown solid debt management, sporting a lean debt-to-equity ratio of 0.17%. It’s not a young buck, but Schawb could emerge as a leader if brokerage stocks remain resilient through this market correction.
Technical Analysis
SCHW was licking its wounds for much of 2011. The stock had been quickly beaten back from overhead resistance near 20, resulting in a basing phase in the 11-12 region. Early 2012 prompted a short-term breakout to 16, with SCHW returning to support at 12 after the rally failed. The current uptrend began in earnest at the turn of 2013, with SCHW reclaiming support at its 10-day, 25-day, and 50-day trendlines. The stock has since ridden these moving averages past former resistance at 20, perching SCHW at a fresh multi-year high. The stock is currently a bit over-extended. As such, if you want in, look to accumulate on dips.
SCHW Weekly Chart
SCHW Daily Chart
RH Inc. (RH)
Why the Strength
Restoration Hardware is a well-known name in higher-end furnishings, but the stock only recently came public again last November after operating as a private firm for a few years. What’s most interesting is that its success (and the stock’s tremendous strength) isn’t just because of good execution, the improving housing market or the company’s stylish designs and offerings. Even more important is that Restoration Hardware is dancing to its own drummer, which is making all the difference. Where many in the industry are going with smaller stores and a major online presence, Restoration Hardware has opened a handful of large Full Line Design Galleries in major markets with stunning results—demand has more than doubled in these areas and sales per square foot are out of this world, around $1500! Management is looking to open 50 or more of these in the years ahead as it transforms its entire sales strategy, providing a huge boost to the bottom line. In a similar vein, the firm is sending out huge catalogs (1,600 pages among a few “books”) with great success, and it’s expanding into complementary business lines—the firm’s antiques business (mostly online) will tap into a multi-billion dollar industry, and a contemporary art line is set to launch in the fall. Growth has been terrific, and earnings estimates were just raised significantly (analysts see earnings up 28% this year and 25% in 2014). It’s not cheap valuation-wise, but if management’s unique sales strategy pays off, the stock can do very well.
Technical Analysis
RH came public last November around 30, and it wasn’t much changed in early April. But since that point, it’s been a moonshot! And the driver of that upmove has been repeatedly good business results—the stock initially got going after a strong quarterly report in April, then surged further in mid-May when management hiked guidance. And two weeks ago, it gapped up again on another big quarterly report! It’s hard to advise chasing the stock up here, especially as RH is a bit thinly traded (about $30 million per day). Thus, you could start small at 71 or below, use a loose stop near 60 and look to add shares if the stock heads higher and the market turns healthy.
RH Weekly Chart
RH Daily Chart
Colfax (CFX)
Why the Strength
Colfax has been a successful international pump manufacturer for many years, selling pumps to move oil from wells to storage tanks and steam to drive turbines (its pumps were chosen for the Three Gorges Dam project in China). But Colfax’s business changed in December 2011 when it took over Charter International, a maker of air fluid handling and welding equipment, in a fish-swallows-whale move. The addition of Charter’s business bumped Colfax’s revenue from less than $700 million per year to $3.9 billion. The company’s product lines give it exposure to many growing industries, including energy, manufacturing, infrastructure and shipping. Colfax’s Q1 report on April 25 beat expectations on earnings, but fell slightly below analysts’ estimates on revenue. Colfax stock was given a boost by a secondary offering on May 8, kicking off a nice rally. Colfax has some debt left over from the Charter acquisition, but short interest in the stock has been declining steadily as management has shown that the integration of the two companies is proceeding smoothly and the secondary offering will provide capital for further moves.
Technical Analysis
CFX has been in an uptrend since 2009, advancing at a steady rate despite an occasional quarter-long correction. The last such correction was a dip from 38 in February 2012 to 24 in July 2012. The rally that began after that bottom hit 49 in March 2013, after which the stock dipped to 42 on mediocre volume. A surge after Q1 earnings and the high-volume blastoff after the secondary offering kicked CFX to above 53 last week before the bears worked the market over. CFX is now trading just below 50. If you like the story, this is a good buy point. If you’re more cautious, you can wait for the chart to test support at 49, then buy the bounce.
CFX Weekly Chart
CFX Daily Chart
Infoblox Inc. (BLOX)
Why the Strength
Infoblox is a software company whose products help corporations to monitor and control their networks. That’s the simple explanation of the company’s automated network controllers that manage IP addresses, configure devices, check compliance, discover networks, implement IT policies and more. Infoblox’s products are called “appliance-based solutions,” meaning that they combine both physical and virtual devices to keep networks safe and efficient, and they do their job automatically. Infoblox leads the industry in Automated Network Control, which takes fallible humans out of the loop. Infoblox’s products are recommended by Cisco, VMware, Microsoft and Riverbed to their customers. After years of spotty profitability, Infoblox has turned a corner; the last three quarters have featured average revenue growth of a little over 30% and earnings growth of 200%, 50% and 120% from fiscal Q4 to the latest quarter. The company’s quarterly report on May 24 topped expectations for both revenue and earnings, and management’s guidance for the coming quarter was much higher than expected. With virtually every company online these days, the move toward locating most vital information in the Cloud is creating huge demand for products that can increase the safety, efficiency and ease of network management. Infoblox is a rising star in that field, and it’s making its debut in today’s Cabot Top Ten Trader.
Technical Analysis
BLOX came public in April 2012 at 16, and traded as high as 24 last September before an October secondary stock offering knocked it down to 14. The stock rebounded in November, chugging back to 23 in February where it put in a 12-week consolidation before breaking out to new highs in May. BLOX has pretty much ignored the market’s recent hissy fit, pulling back less than two points from its June 20 high of 30. BLOX may need to cool off a little and wait for its 25-day moving average, now at 25.7, to catch up. You can buy the stock on a dip to 28 or wait for that 25-day to arrive to provide lift. A stop at the stock’s post-earnings gap support at 24 makes sense in this environment.
BLOX Weekly Chart
BLOX Daily Chart
ANGI Homeservices Inc. (ANGI)
Why the Strength
Angie’s List has seen considerable hoopla in the financial media since we zeroed in on the company back in late April. A scathing report by Citron Research pounded the company’s business model and harped on the fact that Angie’s has yet to realize positive cash flow. In a rebuttal to the report, CEO William Oesterle called 2013 “the year of transition” for the company. Specifically, with Angie’s spending increasingly less to acquire new paid customers for its review website, Oesterle expects cash flow to turn positive this year. Another contributor to Angie’s growing potential is the company’s move to allow service providers to offer deals and set up storefronts on its website. While Angie’s has been slow to implement such services in the past, concerned that its reputation could be at stake, the company is in the process of ramping up those efforts, in part by requiring storefront operators to maintain a customer review grade of “A” or “B”. The move appears to be working, especially in terms of Angie’s important reputation with customers. In fact, the company maintains an 80% renewal rate with paying subscribers. Furthermore, Angie’s is even cutting subscriber acquisition costs, down by 12% last quarter, as word-of-mouth and other social media have taken center stage in the company’s subscriber growth. As such, we remain firm believers that Angie’s has solid potential.
Technical Analysis
From a technical standpoint, ANGI has weathered the storm of bad financial press extremely well. The stock ground sideways along support in the 22 region for most of April and May, even testing its 50-day moving average in the process. Recent signs of life came despite the negative Citron report, as investors responded to CEO Oesterle’s “year of transition” affirmation. This month, ANGI eclipsed former resistance near 26 and broke out to tag all-time highs near 27. Given the market environment, you can either watch it or buy a small amount on dips.
ANGI Weekly Chart
ANGI Daily Chart
ACADIA Pharmaceuticals (ACAD)
Why the Strength
Biotechnology firm ACADIA Pharmaceuticals has staked out what promises to be a rather lucrative claim in the realm of treating central nervous system disorders. ACADIA has two clinical-stage drug candidates currently being developed for the treatment of chronic pain and glaucoma, but the company’s leading candidate, pimavanserin, is in clinical trials as a treatment for the psychosis that accompanies Parkinson’s disease. In fact, pimavanserin’s Phase III trial data has been driving much of ACADIA’s recent strength—the data has revealed that pimavanserin reduces Parkinson’s psychotic episodes without impacting patient motor function. Analysts believe that FDA approval could bring the drug to market by late 2014 or early 2015. Conservative estimates place the market valuation for pimavanserin between $300 and $400 million annually, but some analysts believe the market could be much higher, potentially topping $1 billion—if pimavanserin is approved to treat other psychotic disorders, including bi-polar and schizophrenia. Lastly, many investors recently jumped on the ACADIA bandwagon after leading bio-tech hedge fund Baker Brothers announced that it held a 22.6% stake in the company. While “follow the leader” is not really our style, ACADIA’s potential is worth examining.
Technical Analysis
Following a virtual dead-zone of activity between September 2009 and November 2012, ACAD finally came back to life. Spurred onward by priming Phase III trial data, ACAD has rocketed more than 250% higher since last November. The stock has enjoyed the support of its 10-week moving average throughout this rally, with pullbacks to this trendline often prompting volume spikes and buying sprees by bargain hunters. Currently, ACAD is fresh off a breakout above former resistance at 15, with the shares meeting fresh resistance near 20. A round of profit taking has resulted in a controlled pullback from 20; if you want in, you can nibble down to 16, but a drop below 14 would be bearish.
ACAD Weekly Chart
ACAD 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.
