Still In No-Man’s Land
The market’s intermediate-term trend briefly turned positive last week, but the quick rejection of the indexes on Thursday and today’s battering clearly tell you that sellers are still lurking. That said, we would avoid any big-picture predictions—the weakness of last Thursday and today might mean the downtrend is resuming ... but the market could also be in a bottoming process, which often has many ups and downs as investors place (or take off) their bets. Either way, for an investor in leading stocks, there’s not much to do here; while some stocks have perked up, few have made any real progress, and to this point, most names that poke into new-high ground are quickly swarmed with sellers. Thus, our Market Monitor will remain neutral; some new buying here or there remains fine, but keep cash on the sideline and don’t get aggressive until the market kicks into gear.
This week’s list is a potpourri of differing sectors and stories, though there is a retail bent to the list. Our favorite of the week is Coinstar (CSTR), a company with a solid history of growth that might now have (another) new concept to keep the bottom line humming. The stock has built a solid base during the market’s correction.
| Stock Name | Price | ||
|---|---|---|---|
| CSTR (CSTR) | 0.00 | ||
| eBay Inc. (EBAY) | 0.00 | ||
| HTWR (HTWR) | 0.00 | ||
| MDC (MDC) | 0.00 | ||
| Medivation (MDVN) | 0.00 | ||
| NetSuite, Inc. (N) | 0.00 | ||
| PetSmart (PETM) | 0.00 | ||
| SolarWinds (SWI) | 0.00 | ||
| VSI (VSI) | 0.00 | ||
| Zumiez (ZUMZ) | 0.00 |
(CSTR)
Why the Strength
Coinstar started with its namesake coin-changing machines; people can bring their change to a Coinstar kiosk and get cash back, gift cards to popular retailers like Amazon.com, or even fund their PayPal account. Then came the firm’s move into DVD rentals with its Redbox kiosk, offering popular movies for just $1 per night; the company went from a few hundred locations to more than 20,000 in just a few years. That has been the main driver for the company’s tremendous sales and earnings growth (see table below) in recent quarters. At this point, analysts see earnings flattening out after 2011, as Redbox growth slows and as streaming video possibly takes a bite out of business. However, we’re not so sure—the company is aiming to be the King of Kiosks in a sense. The next avenue of growth could be coffee kiosks called Rubi. There will be 500 Rubi kiosks placed by the end of the year, offering Seattle Best coffee (a Starbucks brand) and other specialty drinks, starting for just a buck. Management eventually thinks it could have 15,000 of them around the U.S.! The company clearly has expertise in rolling out these kiosks, so if Rubi is a hit expect it to blanket the country in no time. Said another way, we think this growth story has legs.
Technical Analysis
CSTR has one of the cleaner, well-controlled bases in the market. The stock topped with the market in mid-April, falling from 68 to nearly 56 in mid-May. But since then shares have pushed back toward their highs-CSTR hit a higher low in early June (even as the indexes slid to new lows) and popped as high as 67 last week before easing back. If you’re game, you could buy a small amount in the mid 60s, with a tight stop around 61.
CSTR Weekly Chart
CSTR Daily Chart
eBay Inc. (EBAY)
Why the Strength
Many big-cap stocks have had multiple bull runs during the past decade as they ride new businesses higher (Apple first had the iPod, then the iPhone, and then the iPad; Netflix had DVDs by mail and then later led in streaming, etc.). We think eBay may be following in that path; it was a major leader from 2003 to 2005, but it languished for years as growth in its core online auction business slowed. However, the real growth driver at this point is PayPal, which already dominates the online payment realm, but management is looking to make it another MasterCard or Visa, being offered at thousands of major retailers around the U.S. Home Depot is already offering it at 2,000 locations, and Office Depot, J.C. Penney and another dozen firms are set to offer PayPal in stores by the end of the year. eBay also has a deal with VeriFone, the leading point-of-sale system maker, to integrate PayPal going forward. As it stands, PayPal makes up about 40% of eBay’s revenues, but it’s growing north of 30%, far faster than the larger legacy business. Throw in a reasonable valuation (P/E of 20) and we think eBay could be a top performer if the market gets going.
Technical Analysis
EBAY has been a resilient performer for months. The stock trended higher gradually in February and March, and then soared on earnings in mid-April. The market fell hard during the ensuing few weeks, but EBAY held firm, moving straight sideways between 38 and 42 until last week. Then, as the market showed a little life, the stock moved to new highs on big volume! It has pulled back since but remains in decent shape. If you buy, keep a tight stop around 39.5.
EBAY Weekly Chart
EBAY Daily Chart
(HTWR)
Why the Strength
Worldwide, there are more than 20 million people affected by heart failure, a degenerative, terminal disease. Of those, about one million have Class IV heart failure, which is the end stage. For these people, a heart transplant is the best treatment...but there are only about 3,000 replacement hearts available every year. For those who don’t get a replacement heart, heart pumps (technically Left Ventricular Assist Devices or LVADs) are a vital aid to staying alive while waiting. This kind of use for an LVAD is called “bridge-to-transplant” therapy. HeartWare’s system got a boost from an FDA advisory panel on May 23, raising the likelihood of the device’s approval for bridge-to-transplant use. HeartWare’s LVAD is smaller than its rivals and is implanted right next to the heart, eliminating the need for abdominal surgery. The company is also conducting a clinical trial to evaluate the device for so-called destination therapy in the U.S., which is a permanent installation. This will make it available for those for whom heart transplants are not possible. Good news on either the FDA approval front or the destination therapy trial will likely do wonders for HeartWare’s stock.
Technical Analysis
HTWR had a poor 2011, dipping from near 100 to below 55 in September. But the stock firmed up and, despite an eight-week correction from February through April, it resumed its upward trend with a high-volume gap up in April. As with many medical stocks, there’s a speculative element to HTWR; it’s as vulnerable to negative news as it is buoyed by positive news. But all in all, the positives and potential positives seem to outweigh the negatives. Look to buy on a dip toward 84.
HTWR Weekly Chart
HTWR Daily Chart
(MDC)
Why the Strength
While the market has been in a “risk-off” mood during the past couple of months, we’re impressed with the action of many housing stocks—some big, broad-based names like Home Depot and Sherwin-Williams are near their peaks, and some homebuilders, like MDC Holdings, are following suit. This company has operations all over the country, and it also provides mortgage financing and insurance and title services and it’s riding the same general theme as everyone else. The U.S. housing market continues to recover after a devastating six-year decline; starts have been north of 700,000 six of the past seven months, including a big 744,000 in April, the highest in three and a half years. MDC is taking advantage of that; in its quarter ending March 31, new orders and backlog were each up about 50% while notching its first pre-tax profit since 2006! We can’t say this company is the leader in the sector; it’s a bit of a thinner stock and its history isn’t as pristine as some of its peers. But a rising tide lifts all boats, and we think MDC Holdings’ bottom line has lots of upside.
Technical Analysis
MDC was a little late to the homebuilders’ party, as the stock didn’t get off its knees until January. Since then, the stock has advanced in a herky-jerky manner, with some sharp upmoves followed by up-and-down action. The latest consolidation began in early May, and suffered some high-volume selling in early June, but impressively, has rebounded back to its highs near 30 this month. If you want in, you could buy a little in this area, or look for a convincing, huge-volume breakout above 30 in the days or weeks ahead. On the downside, a stop around 26.5 makes sense.
MDC Weekly Chart
MDC Daily Chart
Medivation (MDVN)
Why the Strength
Medivation has several story lines that are of interest to investors. The first is the story of MDV3100, (enzalutamide), the prostate cancer treatment for which the company filed an approval application with the FDA on May 21. MDV3100 has shown great results against prostate cancer in both pre-chemotherapy patients and post-chemo patients. The company has been riding high as investors anticipate the drug’s approval. The second story is that the company has booked its first profitable quarter, scoring a penny of earnings per share in Q1. But this is all old news compared with the third story, which is that speculators have tagged Medivation as a likely takeover target, its $3.2 billion market cap just a comfortable mouthful for a pharmaceutical giant hungry for the long-term profits that a successful prostate cancer drug could bring. We think it makes little difference whether investors own a tiny high-potential pharma or a takeover target with a possible buyout premium. Medivation is an interesting proposition for an investor with a taste for speculation.
Technical Analysis
MDVN was in a consistent uptrend from the moment when it gapped up in October 2011 until the middle of May. At that point, the stock hit resistance at 90, and has been trading sideways in a gradually tightening pattern. Right now, it’s sitting just above its 50-day moving average near 84. We think that much of the stock’s potential reaction to an FDA approval for MDV3100 has already been priced in, but the potential takeover has not. If you enjoy this kind of speculation, you can buy right here or on minor weakness.
MDVN Weekly Chart
MDVN Daily Chart
NetSuite, Inc. (N)
Why the Strength
NetSuite provides cloud-based Financial and Enterprise Resource Planning (ERP) software for small-to-midsized companies. While the firm is on the smallish side compared to industry giants IBM and SAP, NetSuite’s cloud-based business model is primed to disrupt the traditional enterprise-software market. For instance, while the company sports a 20% share of the professional services automation market, it’s quickly making a name for itself outside of its target audience. Larger companies have begun to realize the cost-saving potential of cloud-based computing, with firms like Procter & Gamble, Land O’Lakes, and the Girl Scouts moving their infrastructure to NetSuite. This disruption of established markets is paying off big, with NetSuite realizing double-digit revenue growth during the past eight quarters. What’s more, the company saw earnings spike 100% during the most recent quarter. As NetSuite makes inroads into the IT departments of larger companies, the company’s growth should continue to accelerate.
Technical Analysis
After entering a steep decline throughout April and most of May, N has staged an impressive rebound in recent weeks. The stock ricocheted off support at its 200-day moving average on May 21, and has yet to look back. In fact, the momentum carried shares back toward former resistance at the 50 level—a showdown that propelled N to a fresh all-time high. On July 20, the stock bested its former high of 51.78, with volume spiking to nearly twice the stock’s average. Currently, N appears to be forming a base above 50, providing a potential entry point for a long position.
N Weekly Chart
N Daily Chart
PetSmart (PETM)
Why the Strength
While the recession saw consumer spending take a nosedive, it didn’t put a dent in demand for pet goods. In fact, with more than 70 million homes in the U.S. owning a pet, and a grudging economic recovery, leading pet goods firm PetSmart stands to benefit significantly. In fact, the company provided a glimpse of its financial wellbeing on May 23, reporting stronger-than-expected first-quarter earnings and lifting its fiscal 2012 outlook above the consensus estimate. Investors had been concerned about PetSmart, with pressure increasing from Amazon.com, which launched pet-supplies site Wag.com, and discount retailer Wal-Mart Stores. However, the company put those fears to rest by posting first-quarter same-store sales growth of 7.4%. PetSmart has positioned itself on moral high ground by endorsing pet adoptions and other charity efforts, giving the company a serious edge with animal loving consumers and helping to insulate it from growing competition. Finally, PetSmart recently hiked its dividend by 18% and unveiled a $525 million stock buyback program.
Technical Analysis
In early 2012, PETM trekked steadily higher along its 10-day and 25-day moving averages. The uptrend stalled near 60 in early March, forcing the shares into a sideways trend above support at 55. PETM’s fortune changed following the company’s first-quarter earnings report, as the stock surged above 60 to set a fresh all-time high. In the time since, PETM has set a string of fresh highs, with shares soaring to flirt with the 70 level. The stock is currently pulling into its 25-day trendline. If you buy here, place a stop at 62 to limit losses.
PETM Weekly Chart
PETM Daily Chart
SolarWinds (SWI)
Why the Strength
Companies’ computer networks are now one of their most essential assets, and SolarWinds designs, develops, sells and supports software tools that enable IT professionals to manage those networks. The key goal is to increase performance and eliminate down-time, and SolarWinds’ lets managers monitor networks, applications, storage and both physical and virtual servers, logging events and speeding performance. SolarWinds is increasing its product offerings via acquisitions in 2011, buying Hyper9 in January, TriGeo Network Security in July, DNS Enterprise in October, and picking up certain assets of DameWare Development in December. The company gets 70% of its revenue from U.S. sales, with software licensing accounting for 47% of the 2011 total and maintenance and other services kicking in 53%. Revenue growth has been very consistent, dipping only to 25% in 2009, and with two years of 31% growth in 2010 and 30% in 2011, it’s clear that SolarWinds has a compelling product offering.
Technical Analysis
SWI gapped up big in late April, soaring from 38 to 45 on big volume. Since that big jump, SWI has been trading mostly sideways, consolidating its gains with support at 43. The stock found support several times at its rising 50-day moving average, and is sitting right on that average now. Investors appear to be waiting for the next catalyst for SWI, which may mean more sideways trading until earnings come out. We think the stock looks like a reasonable buy at 44, with a stop at 41.
SWI Weekly Chart
SWI Daily Chart
(VSI)
Why the Strength
Vitamin Shoppe is riding the same wave of interest in a healthy lifestyle that has boosted GNC Holdings, Whole Foods and The Fresh Market. The 528 Vitamin Shoppe stores in 40 states, the District of Columbia and Puerto Rico, sell vitamins, minerals, herbs, supplements, sports nutrition and other health and wellness products. The big story here is customer loyalty. The company has experienced same-store revenue increases for 18 straight years, and has booked seven years of double-digit revenue growth. Investors have been a little rattled by government reports that call into question the usefulness of a specific supplement, but that hasn’t made much of an impression on the company’s customers. Revenue comes mostly from brick-and-mortar stores (89%), with online and mail order contributing the other 11%. Vitamin Shoppe makes a habit of beating analysts’ estimates, and it’s likely to do it again when it reports results in the fourth week of July.
Technical Analysis
VSI has been in a long-term uptrend that was interrupted by a three-month correction from July through September 2011. The stock re-based from October through the middle of December, then resumed its upward path. Great earnings fueled a blast off on May 8, and the stock is just completing the right side of a cup pattern. If VSI continues to tighten up for a few days, it will have a great technical base. You can either buy around here or wait for the breakout above 55. In either case, we advise a stop at 50.
VSI Weekly Chart
VSI Daily Chart
Zumiez (ZUMZ)
Why the Strength
One of the fastest growing specialty retailers, Zumiez has built a name for itself among action sports enthusiasts by offering trendy and stylish apparel, footwear, accessories and sports equipment. The retailer targets 12- to 24-year-olds who enjoy snowboarding, BMX biking, skateboarding, and surfing—a market niche that has proven considerably lucrative. In fact, Zumiez recently reported stronger-than-expected first-quarter earnings that more than doubled on a year-over-year basis. Revenue for the quarter also jumped 23%, marking the fourth straight period of double-digit revenue growth. Furthermore, as several analysts noted, Zumiez has managed to expand its market base even as its leading competitor, Pacific Sunwear of California, is shrinking its retail space footprint. More recently, the company made headlines after raising its second-quarter revenue outlook and announcing the acquisition of European sports retailer Blue Tomato. Following on the heels of strong U.S. expansion, this purchase marks a positive step onto the international stage for Zumiez.
Technical Analysis
Mirroring the company’s strong revenue growth, ZUMZ shares have enjoyed a solid uptrend in 2012. Technically, the stock has risen steadily along its 50-day moving average, with this long-term trendline providing key support on several occasions. ZUMZ’s only breach of this moving average—in the wake of poor second-quarter guidance—proved to be a shakeout. That said, the stock has slid sharply with the market during the past three days. If you want in, you could nibble here, but we advise a tight stop near 35.5.