A Change in Character
Ever since the market suffered a wave of nasty distribution two weeks ago, it’s been tough to make much money; strength has attracted sellers, interest rate-sensitive groups have been crushed, the broad market has weakened and, today, growth stocks were battered. Now, the long-term trend is still up, and many stocks remain in uptrends, but the market has changed character. Thus, we’re moving our Market Monitor into neutral territory—maybe this retreat will find support soon, and if it does, we’ll be happy to quickly switch back to an aggressive stance. But for now, we believe it’s best to play things a little cautiously and hold some cash.
This week’s list does have a good crop of candidates if you want to nibble on weakness, including a few bigger-cap issues that have great stories. Our favorite is one of those bigger names—Boeing (BA), which, despite its image as a slow-moving behemoth, has a history of sustained moves when the aerospace industry turns up, as it has today.
| Stock Name | Price | ||
|---|---|---|---|
| Valeant Pharmaceuticals (VRX) | 0.00 | ||
| SunPower (SPWR) | 12.26 | ||
| Sohu.com (SOHU) | 0.00 | ||
| SodaStream (SODA) | 142.91 | ||
| Ocwen Financial (OCN) | 0.00 | ||
| Jazz Pharmaceuticals (JAZZ) | 0.00 | ||
| Illumina Inc. (ILMN) | 289.74 | ||
| Chart Industries (GTLS) | 72.05 | ||
| General Motors Company (GM) | 0.00 | ||
| Boeing (BA) | 432.22 |
Valeant Pharmaceuticals (VRX)
Why the Strength
Ontario-based Valeant Pharmaceuticals has long been known as a consistently profitable company with a large book of approved drugs in dermatology (Zovirax and the Restylane family of products and many others), antidepressants like Wellbutrin and a host of others. The company’s stock has also been consistently strong, with eight write-ups in Top Ten over the years. Right now, the big news about Valeant is the company’s takeover of Bausch+Lomb Holdings, an eye-care giant that has been around for 150 years. The $8.7 billion deal includes $4.3 billion to pay off B+L’s debt. The takeover gives Valeant an immediate significant share of the contact lens and ophthalmic drug market, diversifying itself beyond dermatology. While the deal seems like a good fit, some analysts are worried about the combined debt that will result, noting that Valeant hasn’t paid its once-regular dividend since November 2010. At this point, however, the optimists outnumber the pessimists, probably aided by the company’s long-term record of profitable operation. Investors’ reaction to the takeover news was solidly positive.
Technical Analysis
VRX has been in a broad uptrend since late 2008, but the stock was tossed in the surf from April 2011 through December 2012, trading mostly sideways and unable to top resistance at 60 until January 2013. But lows kept rising, and the stock’s current rally can be seen to have begun last November when VRX was trading at 55. The stock had marched to the mid-70s earlier this month when the B+L news rocketed it above 90 on May 24 on very high volume. VRX has been using 90 as support since then. It looks buyable on any dip below 90, although any market weakness might lead to a pullback of a couple of points. Picking your spots might pay off here. A dip back to 80 would be bearish.
VRX Weekly Chart
VRX Daily Chart
SunPower (SPWR)
Why the Strength
San Jose-based SunPower is a leader in the rebound of the global solar-cell industry. Solar was very hot in 2007, with government clean-energy mandates and subsidies for solar arrays that (especially in Europe) offered cash back for sending excess energy from individual arrays back to the power grid. The Great Recession put an end to subsidies, and excess production capacity and the Chinese solar industry undercut prices. Now, however, consolidation and bankruptcies have thinned the solar herd and the high cost of fossil fuel (in both monetary and environmental terms) has industries and governments looking at solar again. China (which has acute environmental needs for clean power) has doubled its solar subsidies to $1.1 billion and Middle East countries are reported to have $6.8 billion in projects in progress. SunPower made six appearances in Top Ten in 2007, so today represents a major turnaround for the company, which specializes in large-scale designs and installations of its highly efficient panel arrays that feature 21.5% efficiency. SunPower is also getting a boost from rumors that giant conglomerate GE may have its sights on First Solar, the largest U.S. solar company in the U.S., as a takeover target. At this point, several turnaround trends are favoring SunPower and the entire solar industry.
Technical Analysis
SPWR spiked as high as 164 in 2007, but spent much of 2012 trading under 5 as the solar industry appeared moribund. But SPWR nosed above 5 in December, gapped up to 9 in January and pushed out to 14 in February. After a two-month consolidation, SPWR blew past resistance at 14 in early May, soaring to 23 on May 20. A two-day correction dropped the stock to 18 on May 23, but it has worked its way back above 20. Clearly, there’s both high interest in SPWR and significant nervousness. A small position around here, with a loose stop at 15 stands a chance of success. You can add to the position on any breakout above 22.
SPWR Weekly Chart
SPWR Daily Chart
Sohu.com (SOHU)
Why the Strength
Investors have known for a long time that the Chinese Internet story is huge. There are way more people online in China than there are people in the U.S., and Internet penetration is still just 54%! But figuring out how to play the story has been tough, as Chinese stocks have been out of favor and mistrust of corporate reporting has been high. Sohu.com has a couple of advantages, since it has been a responsible corporate citizen that made its Top Ten debut more than 10 years ago and its business model has been consistent. Sohu.com’s base is its extremely popular Web portal that offers a wealth of free news, weather, sports, entertainment, stock quotes, email, chat, e-commerce, maps, mobile services, shopping and games. Amid all the free services that keep users coming back, games are the biggest contributor to revenue, with $167 million of the company’s $308 million Q1 revenue coming from games. Online games range from casual games to a 2.5D massively multiplayer game called Tien Long Ba Bu, a frequently updated game based on a Chinese novel. Analysts note that mobile gaming is on the rise, and the company has a new game in beta testing. Also, Sohu.com has just shy of $1 billion in cash on hand to fund either development or a strategic acquisition. Q1 results showed an impressive 36% jump in revenue, well above both guidance and consensus estimates. Sohu.com is a potential powerhouse with good management and a substantial war chest.
Technical Analysis
SOHU started a big correction in the middle of 2011, and eventually fell from 109 to 34 in June 2012. A surge late in the year pushed SOHU above 50 in January, but it took 13 weeks for the stock to consolidate those gains and engineer a breakout above 50. The breakout rally that began in early May eventually touched 68 before SOHU settled in at 64 to digest its gains. A little patience might offer a chance to grab the stock on a dip to 61, but it actually looks like a pretty good buy anywhere under 64. A dip to the 50-day moving average (now at 54) would be bearish.
SOHU Weekly Chart
SOHU Daily Chart
SodaStream (SODA)
Why the Strength
SodaStream, which is making its seventh appearance in Cabot Top Ten Trader in just over two years, is becoming a familiar story. The company’s counter-top carbonation machines turn ordinary tap water into sparkling beverages that mimic either seltzer or carbonated soft drinks. The product appeals to consumers on several levels, including environmental consciousness (fewer disposable bottles), price and health (soft drinks can be made with organic flavors). The company had its best revenue growth year ever in 2012, expanding sales by 51%. SodaStream management likes to portray its market opportunity by pointing out that carbonated soft drink sales worldwide amount to $264 billion in 2012, and SodaStream has only 1% of the action. Sales of new soda machines climbed 29% in 2012, with sales of CO2 refills climbing 24% and flavorings up 49%. The company also reports that 70% of U.S. buyers are still using the machines after one year, which is good news. Sales are strong in Europe, and management is making a strong play to expand in the U.S. market. Q1 saw 24% earnings growth on a 34% gain in revenues, likely indicating that the strategy is working.
Technical Analysis
SODA had a big surge after its late 2010 IPO, but took a steep dive (from near 80 to 35) in August 2011. The recovery since then has been an up-and-down affair, but SODA put in a nice 14-week base beginning in January, then rocketed higher on big volume in May. With SODA over 67 and its 25-day moving average moving up fast at around 60, the stock isn’t terribly extended. It’s likely that you can pick up some SODA on a dip toward 65. A stop at 57 looks prudent, although the natural support level would be 55.
SODA Weekly Chart
SODA Daily Chart
Ocwen Financial (OCN)
Why the Strength
We continue to think Ocwen Financial is one of the more underappreciated growth stories in the market, mainly because it’s more of a special situation—it’s not closely tied to the housing market, or the financial sector, but instead, is a play on the multi-year shift of mortgage servicing rights from a handful of mega-banks to a few smaller (but growing) companies. The main reason for the shift is the simple; the cost of servicing sub-standard loans is high and it takes specialized talent. Combine that with onerous capital regulations for the big banks, and they want out. Of course, they’re not giving these rights away; they’re selling them for billions of dollars. But for a firm like Ocwen, which has the lowest costs and best history of cutting delinquency rates in the industry, the prices paid represent huge bargains that are leading to mammoth cash flows. In fact, management went out of its way on the last conference call to talk about its very conservative accounting and huge cash flows; its current book of business (north of $400 billion of mortgage balances) should result in well over $7 billion of cash flow during the next decade, and the firm believes its pipeline is big enough to grow that current book by 50% or more during the next year or two. Moreover, some sort of share repurchase arrangement is likely in the months ahead as the top brass begins returning some to shareholders. All in all, Ocwen has huge potential; not only is it cheap but, more important, it still has plenty of room for growth. Any major new servicing deal or share repurchase agreement should help the stock continue to perk up.
Technical Analysis
OCN had a huge run through September, and then effectively took seven months off, consolidating that huge move. Then the stock began to show some real power, bolting from 36 to 44 on huge volume, before the market’s recent gyrations caused the stock to back-and-fill. The relative performance (RP) line still hasn’t hit a new peak, so more basing could be in order, but we think the next big move is up. OCN looks buyable around here with a stop in the 37 area.
OCN Weekly Chart
OCN Daily Chart
Jazz Pharmaceuticals (JAZZ)
Why the Strength
Jazz Pharmaceuticals has a portfolio of drugs designed to treat neurological, oncology and women’s health conditions. Among the company’s top selling treatments are narcolepsy drug Xyrem, anxiety treatment Luvox CR, and chronic pain medicine Prialt. Jazz also sells cancer drugs including Erwinaze for leukemia, and has license and supply agreements with Abbott Laboratories and Elan Pharmaceuticals for Luvox CR. Investors are excited about Jazz Pharmaceuticals right now for one reason: growth. Specifically, Jazz continues to post impressive revenue and sales growth figures. In its first-quarter earnings report on May 8, Jazz reported a 91% year-over-year spike in revenue alongside a 54% jump in earnings. What’s more, during the past four reporting periods, the company has averaged revenue growth of 111% and earnings growth of 39%. The company also boosted its fiscal 2013 earnings and revenue forecasts significantly above Wall Street’s consensus estimates. There have been some concerns about competition, specifically for Xyrem, with Jazz acknowledging a potential generic risk in a SEC filing. However, there is no implication that the arrival of a generic drug is imminent, and Jazz still has plenty of time to settle its lawsuit with Roxane Laboratories (the company looking to make generic Xyrem).
Technical Analysis
Investors believe that the hype surrounding generic Xyrem competition is overblown, as JAZZ recently broke out to fresh all-time highs. From a long-term perspective, JAZZ has maintained a solid uptrend along support at its 10-week, 25-week, and 50-week moving averages since late 2010. This orderly rally stalled in September when JAZZ met with resistance near 60. The stock spent the ensuing months bouncing between trendline support and overhead resistance at 60. JAZZ finally broke out of this range last week, with the shares surging past 65. We recommend buying dips for a better entry.
JAZZ Weekly Chart
JAZZ Daily Chart
Illumina Inc. (ILMN)
Why the Strength
Illumina has always had a great long-term growth story, and while the company isn’t the young, fast-growing firm it once was, there’s still plenty of potential in its high-tech gene sequencing systems. The company has had its ups and downs during the past couple of years, but the stock is strong today mainly because the company’s first quarter report showed a resurgence in HiSeq (gene sequencing) related sales—overall sales and earnings growth were solid and crushed expectations, with one analyst believing Illumina sold 65 systems in the quarter, 10 more than expected. Of course, like most medical device companies, the real money is in the disposable tools that are used with HiSeq, which has allowed profit margins to stay elevated (19% last quarter). It also doesn’t hurt that there’s been plenty of merger activity in the space; Illumina itself has been linked to talks in the past, though the market cap of nearly $9 billion no doubt looks high to many potential buyers. All in all, after a few lousy quarters, this firm’s business looks set to reaccelerate, and as genetic research continues to expand, we think more positive surprises are ahead.
Technical Analysis
ILMN topped in mid-2011 and was crushed during that year’s mini-crash, falling from 79 to 26 in just a few months. It did rebound to 55 in early 2012, but then began to etch a base, which lasted for more than a year. Eventually, the stock tightened up nicely, forming a smaller, four-month base through April. And that’s when first quarter earnings launched a new uptrend—ILMN gapped up and ran into the low 70s before pausing nicely during the past couple of weeks. We think the stock is buyable in the upper 60s, with a stop around 64.
ILMN Weekly Chart
ILMN Daily Chart
Chart Industries (GTLS)
Why the Strength
Chart Industries bills itself as “a leading independent global manufacturer of highly engineered equipment used in the production, storage and end-use of hydrocarbon and industrial gases.” What a mouthful! But the reason the stock is strong is much easier to understand—the company is a big player in building the infrastructure for the coming liquefied natural gas (LNG) boom. The recent $45 million deal with PetroChina for LNG storage tanks and trailers, fueling stations and other equipment is a good example of China’s dedication to using LNG. But the big action should be here in North America, where low-cost natural gas is compelling many trucking firms to switch to natural gas. To be sure, Chart Industries still does good business in general petrochemical areas as well as some others; all told, the firm booked more than $240 million of orders in the first quarter, ending with a $544 million backlog, and neither of those figures includes the PetroChina deal. Overall, whether the U.S. keeps most of the natural gas onshore, or becomes a major exporter, Chart should see solid growth for a few years as the infrastructure builds out. Sales and earnings have been advancing nicely, and earnings are expected to expand 27% this year and accelerate to 36% in 2014. It’s not a household name, and one or two big orders (or order cancellations) could make a big difference. But, long-term, we like the story.
Technical Analysis
Since the major 2009 market low, GTLS has had two major rally phases, followed by two prolonged consolidations. The latest pause started in April 2011. The stock tried to get going in early 2012, but it chopped around from April 2012 until just a few weeks ago. Now, after a powerful earnings-induced blast-off and solid upmove since, GTLS may be ready for a sustained upmove. It’s a bit thinly traded, but we think you could buy a small position here or on any weakness, with the idea of averaging up should the stock head higher.
GTLS Weekly Chart
GTLS Daily Chart
General Motors Company (GM)
Why the Strength
The last time we visited with General Motors in Top Ten the company was fresh off its strongest December monthly sales report in five years; up a respectable 5%. And the slow, steady comeback has continued, with May sales up 3% year-over-year, the best month of total sales since September 2008. Furthermore, the stock itself remains cheap given GM’s potential for sales and earnings growth. New car sales for the industry as a whole grew double digits last year, lending additional credence to GM’s recovery and potential. And now, GM is revamping its lineup, redesigning the Malibu and the Impala, and launching more competitive (i.e. lower fuel consumption) vehicles in the North American market. But GM is also looking outside the U.S., and is pressing its position as the largest U.S. car company (by market share) in China to boost exports into emerging markets by 70% this year. Looking ahead, analysts believe that the company’s estimated $37 billion in liquidity should insulate the auto giant from any potential hiccups in the economy. Finally, GM is considered a strong candidate for inclusion in the S&P 500, and any news on this front should create additional demand.
Technical Analysis
When GM began trading once again in November 2010—at 34— the stock’s reception on Wall Street was chilly at best. After treading water for a few weeks, the bottom fell out and the stock plunged to 19 by October 2011. And it was at the same level in July 2012! But shares have since stabilized, embarking upon a stable uptrend along support at their 10-week and 25-week moving averages. In fact, GM has not closed a week below this duo since August 2012. Shares have seen a recent influx of strength, with buyers jumping on board after GM bested resistance at 30 in late April and now hovering just below their next technical hurdle at 35. Given the stock’s recent run, we don’t advise chasing it, but taking small bits on short-term weakness could put you in fine position to take advantage of GM’s next upleg.
GM Weekly Chart
GM Daily Chart
Boeing (BA)
Why the Strength
Boeing seems like the antithesis of a Top Ten stock; it’s a huge company ($81 billion in sales) in an old industry (aerospace), it’s a member of the stodgy Dow Industrials and pays a nice dividend. But, believe it or not, Boeing has a history of making big moves over many years, and they usually involve a new jetliner that is gobbled up by the industry, or simply a new jet-buying phase in general. Both factors apply today, with Boeing’s new 787 starting to be delivered en masse (despite numerous delays and mishaps) and the backlog for most of its commercial planes is picking up (there have been 428 net new jet orders this year alone, resulting in a ridiculous backlog of 4,400 jets). All of that is playing into expectations for about 30% earnings growth this year, which, along with a healthy dividend (2.0% annual yield) and share repurchase plan ($1.5 billion to $2 billion this year) is attracting big buyers. However, we believe this may be just the tip of the iceberg—Boeing’s CEO said recently that the company is considering boosting its plane output, and with most of its plane development costs in the past, free cash flow should soar in the years to come. And the company is going to return much of it to shareholders—80% of it, in fact, through share repurchases and increased dividends. The risks here are some sort of global economic slowdown (leading to a slew of cancellations) or a new, major delay of 787 deliveries. But there’s no sign of that now. As conservative growth stories go, Boeing is one of our favorites.
Technical Analysis
BA rallied from its 2009 low of 29 to 76 by mid-2010, but then the stock stalled out as delays and issues caused earnings to flatten out. However, after more than two years of base-building, BA tightened up beautifully in January and February, broke out nicely in March and has been trending higher since. During the past couple of weeks, the stock has hit a little resistance around 100 as the market’s gyrated. Thus, we think it’s best to try to buy on a dip of a couple of points, with a stop near 90.
BA Weekly Chart
BA 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.
