It’s What Happens from Here that Will Tell the Tale
Current Market Outlook
Following the Brexit reaction, all of the major indexes are now decisively below their respective 50-day lines. Thus, we consider the intermediate-term trend to be down, which means it’s best to pare back. (We’ve knocked our Market Monitor down two notches this week.) It’s fine to hold your resilient, profitable performers (there are many stocks and sectors taking this selloff in stride), but you should honor all stops and loss limits and limit new buying to just small positions in strong stocks. The net result will be a higher cash position (around 50%, give or take, depending on what stocks you own and how you run your portfolio) and a handful of top performers in your portfolio. The next few days will be important—a quick snapback would be encouraging, but continued deterioration would have us advising an even more defensive posture. We’ll be watching.
This week’s list is a combination of defensive stocks, yield stocks, some precious metals and a couple of resilient growth ideas. Our Top Pick is Dollar Tree (DLTR), a defensive-type stock that should show excellent earnings growth thanks to last year’s game-changing buyout of Family Dollar.
| Stock Name | Price | ||
|---|---|---|---|
| Veeva Systems (VEEV) | 180.23 | ||
| Silver Wheaton (SLW) | 0.00 | ||
| SiteOne Landscape Supply (SITE) | 98.49 | ||
| Royal Gold, Inc. (RGLD) | 129.66 | ||
| Jack in the Box (JACK) | 0.00 | ||
| Gigamon (GIMO) | 0.00 | ||
| Dollar Tree (DLTR) | 0.00 | ||
| Communication Sales & Leasing (CSAL) | 0.00 | ||
| Boardwalk Pipeline Partners (BWP) | 0.00 | ||
| Align Technology (ALGN) | 316.20 |
Veeva Systems (VEEV)
Why the Strength
Veeva Systems, which made its Cabot Top Ten Trader debut on May 31, is in a familiar industry—cloud-based software for sales and marketing—but in a specialized area. Veeva’s customers are biotechnology and pharmaceutical companies who market and sell to doctors and other medical organizations. In addition to the usual customer relationship management (CRM) functions, Veeva’s software helps biotechnology and pharmaceutical companies negotiate the regulatory minefield of the life sciences industry while offering data services to store, access and manage client records and data. And the firm has just begun to sell its content management software to different industries, opening up huge new opportunities. Veeva has over 400 customers, from big biopharmaceutical companies to tiny biotech firms. While revenue growth has cooled off from its triple-digit gains in 2012 and 2013, the 31% growth in the most recent year and 33% growth in Q1 2016 are first rate. The company is continuing to roll out new products, with Veeva Vault Registrations and Veeva Vault Submissions Archive going live in December 2015. The company’s May 27 quarterly report came in well ahead of analysts’ expectations, and bullish guidance from management added to investors’ enthusiastic reception of the report. Veeva is a top player in a profitable niche of the cloud software industry, and is looking to expand into lucrative new areas as well.
Technical Analysis
VEEV, which traded as high as 49 after its October 2013 IPO, hacked around without any useful trend for more than two years, finally bottoming at 20 in January 2016. The stock broke through its long-term resistance at 29 after its great Q1 numbers, and used its momentum to top 35 earlier in June. VEEV has now spent three weeks consolidating that move, which is a strong performance in the face of the market’s post-Brexit woes. Given its buoyancy during last week’s market thrashing, we’re OK with a small buy here, and a stop near the 50-day line.
VEEV Weekly Chart
VEEV Daily Chart
Silver Wheaton (SLW)
Why the Strength
While Silver Wheaton trades in the precious metals sector, the company is very different from most gold and silver miners. Similar to Royal Gold, the company operates as more of a finance company for miners, offering operating cash up front in exchange for rights to buy a mine’s entire output at an advantageous price. It used to be that Silver Wheaton did most of its streaming business with gold miners, who regarded silver as a low-value byproduct. But the company recently shifted its focus to copper miners, for whom the gold they often encounter in their mines is similarly inconvenient. Last week’s vote in favor of Great Britain leaving the E.U. caused gold prices to spike to near two-year highs. And since Silver Wheaton owns streaming rights at a fixed price—about $4 per ounce for silver and $400 per ounce for gold—any increase in gold and silver prices falls right to the bottom line. The company gets about 60% of its revenue from the sale of silver and 40% from gold. With non-existent capital expenditures and exploration costs, Silver Wheaton is a low-risk way to gain access to the rebound in precious metals prices. The company also pays a small (0.9% annual yield) dividend.
Technical Analysis
The long decline in precious metal prices pulled SLW from a high of 48 in April 2011 to a low of 10 in January 2016. The stock’s rebound from that low was rapid, reaching 15 by the end of February and 21 by the end of April. The stock consolidated to support at its 50-day moving average in May, then popped higher again in early June. Over the past few weeks, SLW has been trading mostly sideways, with some strength in the past two trading sessions. Try to buy on dips of a half point or more; a drop below the 50-day moving average would be bearish.
SLW Weekly Chart
SLW Daily Chart
SiteOne Landscape Supply (SITE)
Why the Strength
SiteOne Landscape is aiming to do the same thing for residential and commercial landscape professionals that Home Depot and Lowe’s did for commercial contractors and do-it-yourselfers at home. SiteOne is the largest (and only national) wholesale distributor of landscape supplies, offering more than 100,000 different products (irrigation supplies, fertilizers, nursery products, landscape accessories, hardscapes like pavers and stones, outdoor lighting, etc.) via 466 stores in 45 states. The market is huge (about $16 billion year) and, as the only one-stop shop, SiteOne dominates it, with four times the market share of its nearest competitor—and yet the firm has just 9% of the overall market, leaving plenty of room for growth. Because of the fragmented market, acquisitions are a key part of growth, and SiteOne is the only industry consolidator right now. Combined with excellent internal growth, we see big potential—in the first quarter, sales rose 45% from the prior year, about half from acquisitions. (Its two buyouts this year gives it the #1 market share position in irrigation in Southern California and the top spot in the hardscapes market in the Carolinas.) Analysts see the top line growing 10% to 15% this year and next, and earnings booming, thanks to leverage in the business model. If management makes the right moves and continues on a steady acquisition spree, we think this story can go very far. We like it.
Technical Analysis
SITE just came public in May, so there’s not much of a chart to examine. It’s a positive that the stock opened well above its offering price, then formed a tight flat base for a month. And then, last week, SITE soared to new highs on a big increase in volume after earnings topped expectations. Being so new, the stock is thinly traded (about $15 to $20 million per day), but we see great potential here—a small position on dips with a stop below 29 could work.
SITE Weekly Chart
SITE Daily Chart
Royal Gold, Inc. (RGLD)
Why the Strength
Because it’s a royalty company instead of a gold miner, Royal Gold gets the benefits of a rally in gold prices without the downside risk of most miners. Royal Gold owns royalty interests in gold, copper and silver mines in 20 countries, including the U.S., Canada, Chile and Mexico. In essence, Royal Gold pays miners up front for the right to buy a portion of the gold, silver and copper they mine at a significantly reduced price. Thus, when gold prices plummeted the last few years, the falloff in Royal Gold’s sales and earnings wasn’t as dramatic as most mining companies’—2014 was the only year in the last decade that Royal Gold failed to grow either its top or bottom line. Now that gold prices are at two-year highs, Royal Gold’s sales are expanding again—sales growth for the 2016 fiscal year (which ends this month) is expected to top 36%, which would be its biggest year-over-year improvement since 2011. (Earnings per share are expected to decline 5%, but are due to expand by 47% next year.) Meanwhile, the company has increased its dividend for 15 straight years, and its 1.3% yield is larger than most of its peers.
Technical Analysis
Despite its reputation as a lower-risk gold company, RGLD fell off a cliff along with every other miner over the last few years, nose-diving from 99 in September 2012 to as low as 25 this January. Since then, it’s been six months of rallying: the stock breached its 50-day average on the upside in early February and its 200-day average in early March, and didn’t stop until it reached 62 in late April. Some consolidation followed, with 54 acting as the new floor. This month, RGLD took off again, kiting to 66 on June 9 and forming another base in the 65-67 range. Now it’s broken to the high side again, opening Monday trading at 70. Start small on the dips with a stop in the low 60s.
RGLD Weekly Chart
RGLD Daily Chart
Jack in the Box (JACK)
Why the Strength
Jack in the Box operates more than 2,900 namesake and Qdoba locations. It hasn’t been a great growth company (sales growth has ranged between -9% and +4% during the past four years), but investors are excited about the future after management decided to make a further shift toward franchising in the years ahead. Franchising shifts the costs to local owners, so the plan to eventually have 90% to 95% of its locations franchised (up from just over 80% today) will keep capital expenditures in check (topping out at $135 million or so in 2018 and leveling off from there) and help boost margins and keep earnings growth humming. The top brass believes earnings can increase 15% annually for the next few years, while return on capital rises to 25% (from 15%) and cash flow increases a total of 35% or so. This isn’t just a cost-cutting story, though—the firm is aiming to boost Qdoba locations about 11% annually starting in 2017 and believes same-store sales growth can come in the low- to mid-single digits for the company as a whole. Combined, analysts see the company’s earnings up 19% this year and 26% next as the strategy takes hold. As for Brexit, Jack in the Box looks to be one of many retail stories that should be relatively unaffected by what’s going on across the pond, which should keep big investors interested.
Technical Analysis
JACK topped out in March 2015 around 100 and fell all the way to 62 earlier this year. But after etching a bottom for about three months, the stock came alive in May after earnings crushed expectations and management’s announcement of its new franchising (and earnings) goals. Shares have refused to give back much of its run from 65 to 88, holding above even the 25-day line. We’re OK with a tiny purchase here or on weakness and a stop below 78.
JACK Weekly Chart
JACK Daily Chart
Gigamon (GIMO)
Why the Strength
Here’s another play on the escalating demand for cyber security. Gigamon’s products enhance visibility and control of hackers intent on committing cyber crimes. In 2014, cyber security products accounted for 36% of Gigamon’s sales; that number is “fast approaching” 60%, according to CEO Mark Kelleher. Last summer, the company launched GigaSecure, said to be the industry’s first security delivery platform. In essence, GigaSecure is a watchdog for the network, reporting what it sees to cyber security applications such as FireEye. Thus, Gigamon doesn’t actually compete with most of the large cyber security companies, but partners with them. So far, GigaSecure is doing quite well—25% of new customers bought the GigaSecure package last quarter, and it now accounts for 35% of new-customer sales. That has seeped into Gigamon’s top-and bottom-line growth: sales improved 43% last quarter, while EPS increased 69%. Institutional investors have taken notice of Gigamon’s accelerating growth: research firms Stifel and Northland Capital have initiated coverage on GIMO in the last three months. What they see is an emerging leader that occupies a unique position in a fast-growing industry.
Technical Analysis
Like most stocks, GIMO started to get going in early February, jumping from 21 to 31 in six weeks. Then it spent the better part of three months building a base between 28 and 32. The breakout started in early June, with GIMO inching its way to 33 before a much bigger breakout arrived last week, taking the stock all the way to 38 on more than twice normal volume. GIMO pulled back to 34 this morning due to the market mayhem, which could be a solid entry point. If you’re game, you can start small on dips, with a stop around 31.
GIMO Weekly Chart
GIMO Daily Chart
Dollar Tree (DLTR)
Why the Strength
Dollar Tree is strong today because it combines defensive qualities (its business shouldn’t be affected much by Brexit) with a strong catalyst for big earnings growth in the quarters ahead. Thanks to its merger with Family Dollar last year, Dollar Tree is the nation’s largest dollar store with about 14,000 stores across the U.S. Obviously, the continued slow economic expansion is driving more and more consumers to its locations, but that’s not producing much growth—in the first quarter, for instance, same-store sales were up just 2.2%. (The rest of the revenue growth came from the addition of Family Dollar.) But the acquisition is predicted to result in a huge amount of synergies—probably $75 million this year and, eventually, $300 million on an annual basis. That’s about $1.25 per share! Of course, management’s estimates are one thing, but investors fully bought into the combined entity after first-quarter results in May blew away expectations and the top brass sounded confident in hitting its synergy targets and its progress in other business ventures (such as its conversion of Family Dollar’s “Deals” stores into Dollar Tree stores). All in all, analysts see earnings up 60% this year and another 32% in 2017, and we think even those could be conservative if its core business picks up (if consumers increase their bargain shopping) following Brexit. It’s a good story.
Technical Analysis
DLTR built a huge base from March 2015 through May 2016, as investors hesitated given the major transition and uncertainties that would take place with the buyout of Family Dollar. But after a shakeout in May, DLTR came to life following first-quarter earnings, which confirmed the firm’s earnings potential in the next couple of years. And the stock has held steady during the Brexit mess, a bullish sign. We think you can buy a little on dips with a stop in the mid-80s.
DLTR Weekly Chart
DLTR Daily Chart
Communication Sales & Leasing (CSAL)
Why the Strength
Communications Sales & Leasing might have a clunky name, but it has a unique story—it’s the only REIT to own mission-critical communications infrastructure and then lease it to wireless and other clients (including AT&T, Verizon, Google, Facebook, Amazon, T-Mobile and American Tower), collecting a steady stream of “rental” revenue it then pays out in dividends, all with minimal CapEx. (CSAL’s annual dividend yield is currently 8.2%.) All told, the firm owns more than 3.9 million fiber strand miles, 231,000 route miles of copper, 85 wireless towers and a bunch of other communications facilities. As with many REITs, acquisitions are a key part of the strategy here, and the company has been busy on that front, acquiring PEG Bandwidth this year (316,000 fiber strand miles in the Northeast, Midwest and Southern U.S.) and, just a week ago, saying it would buy Tower Cloud (90,000 fiber strand miles in the southeastern U.S. and another 181,000 in development). The goal here isn’t just to grow the business, but also to diversify—the biggest risk is that Windstream (which spun off CSAL in May 2015) accounts for 82% of CSAL’s revenue, but that’s down from 97% two years ago. But the stock’s latest bout of strength is partly because Windstream is selling its remaining shares, removing a huge overhang and providing lots of liquidity to its largest customer. All in all, there’s risk, but there’s also lots of potential reward if management executes on its plan.
Technical Analysis
CSAL had a horrible first few months after it was spun off, falling from 30 to 15 by the time the market bottomed in February. But it quickly surged back to 23, then slowly grinded higher through May. This month the buying has accelerated, partly due to the Tower Cloud and Windstream share sale announcements, and partly due to the buoyancy in the REIT group as interest rates plunge. If you want in, you can buy a little here with a stop below its 50-day line.
CSAL Weekly Chart
CSAL Daily Chart
Boardwalk Pipeline Partners (BWP)
Why the Strength
Boardwalk Pipeline is a midstream MLP that’s taken an unusual road. While most of its peers have cut back on spending, raised lots of equity and generously guarded their dividend, Boardwalk made a decision way back in 2014 (before the sector went bust) to slash its dividend and use the money it saved to invest in some lucrative growth projects. Those projects, set to come online between now and 2018, will cost a total of $1.6 billion and are secured by long-term, take-or-pay contracts with a weighted contract life of 18 years. All told, in fact, more than 90% of Boardwalk’s business is based on firm contracts, and the vast majority of its clients are investment grade. The result is that, while most MLPs are seeing business stagnate or decline, Boardwalk’s cash flow is increasing (up 21% in the first quarter) and analysts see earnings up a big 25% this year and double digits each of the next two years. The dividend here isn’t as hefty as most MLPs (just 2.2% annually), but investors believe that will change in a big way during the next two or three years as cash flow increases and debt is paid down. One last positive: Boardwalk’s parent company is Loews, the giant conglomerate, which is likely to lend support if needed. As far as MLPs go, Boardwalk offers a good growth story.
Technical Analysis
From 33 in late-2013 to 9 in January of this year, BWP had a doozy of a decline. But since that low, the stock has been in a smooth uptrend, finding support near its 10-week moving average three times over the past couple of months—including a successful test two weeks ago. After such a solid rebound, a correction could come, but we like this as a lower-risk entry point; if you’re flexible, you could nibble around here with a stop just below 16.
BWP Weekly Chart
BWP Daily Chart
Align Technology (ALGN)
Why the Strength
Align Technology has built its business on its proprietary clear plastic aligners that mimic the effect of metal braces without the annoyance and discomfort of a mouth full of metal. Align’s Invisalign system includes the scanners, record-keeping software and software to design the aligners and create the aligners themselves, which contribute 92% of total revenue. The company’s products can be used on cases from simple realignment of teeth to complex malocclusions, but the most profitable program is Invisalign Teen that includes compliance indicators, accommodations for the eruption of new teeth and replacement aligners. Align has a strong competitor in the scanner business: Dentsply and Sirona merged last year to create Dentsply Sirona. But Align already had a deal with Sirona to allow data from its scanner to be used with the Invisalign system, and the competition is over a product line that supplies only a small fraction of Align’s revenue. Align Technology picked up coverage from a new analyst in May, and its business seems to be immune to the global economic case of the vapors caused by Brexit and its consequences. We also note that the company’s strength has powered it to 11 previous appearances in Top Ten dating back to 2007, which is a good testimonial in and of itself. Earnings should advance more than 25% annually for the next few years.
Technical Analysis
ALGN built a long cup-shaped structure from January 2014 to July 2015, with a handle corresponding to the market’s big summer meltdown that year. The stock broke out to new all-time highs in October 2015 and, after a correction in January and February, broke into a strong rally in late February that ran all the way to 82 last Thursday. A pullback last Friday and today has dropped the stock to near its 50-day moving average, which looks like a good entry point. We think starting a small position right here represents a good risk/reward situation, but in this kind of a market, you could consider waiting for the stock to bounce back to 80. Either way, a stop around 73 seems prudent.
ALGN Weekly Chart
ALGN 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.
