No Dip on Bad News Is Good News
Current Market Outlook
The S&P 500 and Nasdaq came into last week perched just under major resistance levels. But despite the prior run-up, weak opens on every day of the week and the poor jobs report on Friday, the market couldn’t pull back! Of course, the indexes still aren’t free and clear, and there are many uncertainties out there including the Fed’s next move and the upcoming EU vote in Britain, so we can’t rule out another retreat. But the market’s resilience thus far and the improved action from many leading stocks bodes well. We’re keeping our Market Monitor in bullish territory—a breakout on the upside (with many more stocks hitting new highs) would prompt us to lean toward a fully invested posture, while a dip of a few percent would have us paring back again.
This week’s list has many enticing selections, but we’ve selected an energy stock for our Top Pick. Continental Resources (CLR) has the acreage to crank out huge profits if oil prices creep higher, and the stock has tightened up nicely after a big run. Start with a small position and add to it as it rises.
| Stock Name | Price | ||
|---|---|---|---|
| Zendesk (ZEN) | 82.19 | ||
| Zillow (Z) | 76.64 | ||
| UnitedHealth Group Inc. (UNH) | 0.00 | ||
| Ulta Beauty (ULTA) | 331.95 | ||
| Tata Motors Limited (TTM) | 0.00 | ||
| Steel Dynamics (STLD) | 0.00 | ||
| Sanmina (SANM) | 0.00 | ||
| Continental Resources (CLR) | 66.19 | ||
| Big Lots (BIG) | 43.12 | ||
| Broadcom Limited (AVGO) | 266.26 |
Zendesk (ZEN)
Why the Strength
Zendesk is a young (incorporated in 2007) company that’s making a mark in the crowded software-as-a-service industry with its platform for tracking and improving communication with customers, including email, chat, voice, social media and websites, plus analytics and performance benchmarking to gauge success. The company’s customer relationship management (CRM) software has a reputation for simplicity and ease of use (that’s the Zen in the company’s name), and it has been enjoying strong revenue growth (76% in 2014 and 64% in 2015). Profitability hasn’t shown up yet, and isn’t expected for at least a couple of years, but the company is scoring gains in market share that should pay off eventually. Zendesk stock took a huge tumble on February 5 after ServiceNow, one of the emerging giants in the cloud software business, issued weak guidance, pulling ZEN down by about 15%. But the stock rebounded quickly, aided by a February quarterly report that showed big revenue growth and an aggressive goal of $1 billion in revenue by 2020, up five-fold from 2015. The company’s partnership with Microsoft to integrate its software with Microsoft Office 365 and its deal with Facebook to add Facebook Messenger to its application suite are good signs for the future. A report on June 1 that Zendesk enjoyed the highest revenue growth rate among the top 20 CRM vendors also attracted the attention of investors.
Technical Analysis
ZEN came public in May 2014 at 9, and traded up as high as 28 in October 2014 before it cooled off for a while. The stock fell to 18 during the August 2015 meltdown, and after bouncing back to near its all-time highs late in the year, fell sharply in January, a correction that was exacerbated by the discouraging ServiceNow guidance. ZEN’s rebound from a low of 15 in February has been marked by volume spikes in February, May and June. The stock is now within a couple of points of its all-time highs, and has a nice head of steam up. If you like the story, you should be able to snipe a buy under 26. A stop around 23.5 makes sense.
ZEN Weekly Chart
ZEN Daily Chart
Zillow (Z)
Why the Strength
Making its second Cabot Top Ten Trader appearance in a month, Zillow continues to gain strength from people shifting their housing searches to the web. As CEO Spencer Rascoff said during last month’s earnings call, more Americans search for the term “Zillow” online than the words “real estate” these days. Nearly two-thirds of all online home shoppers use Zillow, and its search traffic has been trending upward ever since the company bought out its biggest rival, Trulia, for $3.5 billion last April. That’s translated to better ad sales and more users of its Premier Agent websites, which allow real estate agents to advertise and post listings on the site for a monthly fee. The company still isn’t profitable, but profits are expected by the end of this year. The bigger concern is a lawsuit against the company by Move, the parent company of Realtor.com and a division of NewsCorp., which alleges that Move—not Zillow—would have merged with Trulia if some of its executives hadn’t jumped ship to Zillow in 2014 and facilitated the Trulia merger. A judge dismissed some, but not all, of Move’s claims, and the case goes to trial this week. Move is seeking $1.77 billion in damages. That’s something to keep an eye on, but for now, investors don’t seem too worried about it. They’re more focused on Zillow’s ballooning dominance in the online real estate market since the Trulia merger.
Technical Analysis
Zillow split into two stocks—ZG and Z—last August. After some early growing pains, Z has really gotten going in the last four months, bouncing from a low of 16 in February to 24 by early March. A mild pullback down to the 19-20 range in April followed, but the stock quickly recovered and was back up to 24 by month’s end, and a big earnings beat in May helped Z break through resistance. After consolidating the rest of the month, it poked its head above 30 this morning, registering multi-month highs. You can nibble here with a loose stop near 25.
Z Weekly Chart
Z Daily Chart
UnitedHealth Group Inc. (UNH)
Why the Strength
UnitedHealth, which is making its first appearance in today’s Cabot Top Ten Trader, traces its roots back to 1974, when a group of physicians banded together to expand health coverage options for consumers. Today, UnitedHealth is the largest health insurance company in the U.S. by revenue, and a global health care company that administers state Medicaid programs, employer health plans, Medicare and retirement health plans, military and veteran programs and provides medical benefits outside the U.S. for Brazil and more than 125 other countries. Like other companies in the healthcare industry, UnitedHealth has faced losses from its public exchange business under the Affordable Care Act, leading it to consider withdrawing from some public exchange business. But it has a big profit center in its Optum consulting, management and analytics division, which got a boost last year from a tie-up with MedExpress, an operator of urgent-care clinics with 141 locations in 11 states. MedExpress is in the middle of a major expansion with over 25 new clinics opened over the past year. The company’s OptumRx unit also continued its recent acquisition splurge by paying $600 million in cash for Catamaran in March 2015, a merger of the fourth- and third-largest pharmacy benefit managers in the U.S. Revenue growth surged from 7% in 2014 to 20% in 2015 and earnings are estimated to grow by 22% in 2016. UnitedHealth is a big, successful company with a taste for growing by acquisition. The company’s stock also pays a tidy 1.5% annual dividend.
Technical Analysis
UNH made a long run from 55 in March 2013 to 124 in April 2015. But resistance at that level was stubborn, and the stock traded sideways-to-down until it reached 108 in January 2016. At that point, good earnings reports got UNH moving, and it ran to 136 on April 20. A pullback to the 50-day moving average in May led to a new rally that ran to new all-time highs above 137 in recent trading. UNH has been gathering steam following its 2015 doldrums, and looks buyable on any weakness of a couple of points. Use a stop at 126.
UNH Weekly Chart
UNH Daily Chart
Ulta Beauty (ULTA)
Why the Strength
Some of the biggest winners in market history have been cookie-cutter retail stories that either (a) have an entirely new retail concept (think bulk discount retailers like Costco, or fast food chains like McDonald’s) or (b) are in the midst of a major shift within an already-existing concept. That second part is driving Ulta Beauty, which is really the only nationwide chain that carries all types of beauty products, from mass market to prestige brands, offering thousands of items in each store. The big shift concerns where these products are bought—drug and department stores used to have a lock on this market, but share is steadily shifting to specialty stores like Ulta. (Online sales are up, too, but Ulta has that covered—its e-commerce business is rising 40% annually.) This shift is still in the early innings, with some analysts thinking Ulta can triple its share in the years ahead thanks to a growing store count (up 11% in the latest quarter vs. a year ago, with many years of growth to come) and improved marketing (including a lucrative loyalty program). All told, management has continually executed in fantastic fashion and the most recent quarter was no different—sales and earnings topped expectations, same-store sales growth wowed investors (up 15%!) and the outlook for the rest of the year was hiked. Valuation here is admittedly stretched (44 times trailing earnings), but many of the best cookie-cutter concepts can trade at elevated valuations for years. As long as ULTA executes, the stock should do well.
Technical Analysis
ULTA pulled back from 188 to 147 during the December-February market downleg, but a great quarterly report got shares back in gear in March. ULTA rose steadily in April and May before the latest earnings report resulted in another gap higher. If you don’t own any, you could nibble right here, but we’re more inclined to advise buying on dips, thinking the stock will consolidate its recent gains.
ULTA Weekly Chart
ULTA Daily Chart
Tata Motors Limited (TTM)
Why the Strength
Tata Motors is the largest automotive company in India, with a lineup of vehicles that runs from micro, compact and mid-sized cars to light, medium and heavy trucks, military vehicles and luxury automobile brands. The company made headlines back in 2008 when it bought the Jaguar and Land Rover businesses from Ford, and again in 2009 with the introduction of the Tata Nano, “the world’s cheapest car,” with an initial price of around $2,000. While the Nano was never the blockbuster product that the headlines predicted, Jaguar and Land Rover sales in China proved to be a big boost to Tata’s revenue. The company’s quarterly report on May 30 featured a 12% jump in revenue (after four quarters of declines) and a 170% leap in earnings, largely due to strong sales gains in Jaguar and Land Rover in Europe and China. Luxury car sales are economically sensitive, and the reversal in the company’s stock price in 2015 was largely attributable to dips in luxury sales. With the strong quarterly results, Tata Motors may be signaling a boost in confidence in both regions. Estimates for Tata’s fiscal 2017 earnings call for a 110% jump, and that plus the stock’s reasonable 14 P/E ratio (forward P/E is just 7) make this a bargain-priced way to play the strength of the Indian economy and a possible rebound in Europe and China.
Technical Analysis
TTM rallied nicely through 2014, rising from 22 in September 2013 to 52 in February 2015. But the stock sprang a leak at that point, falling to 22 in October 2015 and after a rally to 32 in December, dipping to 20 in February 2016. The stock’s rebound to 32 in April wasn’t much help in identifying unusual strength, but that strength was confirmed by the stock’s gap up to 34 on May 31 on more than four times average volume. The stock has inched higher since that big gap, and is now trading just under 35. TTM is buyable on any weakness, although it may take a bit for the stock to consolidate its recent gains. If you have a taste for an emerging markets leader, try to buy in under 34 and put a loose stop at the bottom of its gap at 30.
TTM Weekly Chart
TTM Daily Chart
Steel Dynamics (STLD)
Why the Strength
Every steel stock did well from February through April, but since then, the market has become more selective—despite extreme tariffs from the U.S. (now more than 500% on Chinese cold-rolled steel!) that are boosting prices and helping the industry, the fact is that many players are still losing money hand over fist. Steel Dynamics, though, is a different breed; The company’s efficient mills, focus on the strongest end markets (automotive, construction, etc.) and some ancillary businesses (fabrication and metals recycling) allowed it to remain profitable through the industry’s recent bust, and now that imports are falling and prices are rising, the company is returning to growth—analysts see earnings surging 111% this year and another 21% in 2017. What’s more encouraging is that, even now, Steel Dynamics is spinning off a lot of cash—the firm produced $261 million of free cash flow in the first quarter (more than $1 per share, compared to 26 cents per share of reported earnings), allowing it to pay a solid dividend (2.2% annual yield), make selective acquisitions and strengthen its already-healthy balance sheet. And cash flow should explode as the industry recovers going forward. Of course, the trade battle between the U.S. and China will push-pull the sector in the weeks ahead, but there’s little doubt Steel Dynamics’ future is bright.
Technical Analysis
STLD is one of the few steel-related stocks that’s standing at multi-year peaks. The stock rallied as high as 25.5 in late-2014, then built a huge double-bottom base, with the ultimate low coming this January just above 15. Since then, the stock has acted excellently, with a powerful rally back to its prior highs in April followed by a tight, five-week base. With STLD threatening to hit new highs, we think you can buy some around here with a stop near 23.
STLD Weekly Chart
STLD Daily Chart
Sanmina (SANM)
Why the Strength
Sanmina is a good-sized contract manufacturer that serves a variety of end markets such as industrial, medical, defense, communications networks, embedded computing, automotive electronics and storage. This is a cylical business, but the stock is strong today for a couple of reasons. First, of course, is that the cycle is up for most of its end markets, leading to higher demand for Sanmina’s services. And second, the stock is cheap, partly because the company has cut to the bone in recent years, allowing small increases in demand to lead to excellent earnings and cash flow. The firm’s first-quarter results, in fact, showed the largest earnings per share in a decade, while free cash flow totaled a whopping $1.45 per share in the quarter (cash flow should decline slightly from that level but remain buoyant going forward). Management is using that cash to build the business (Sanmina acquired a Motorola production plant in Malaysia and a storage software company) and buy back stock on the cheap (the share count is down 9.6% from a year ago). There’s nothing revolutionary here, but what you have is a good business with solid prospects and a stock that’s been discounted beyond what’s reasonable. With its huge cash flow and cheap stock (11 times this year’s earnings), we think Sanmina can do well going forward.
Technical Analysis
SANM had a big rally to 25 in July 2014, but that basically marked the top—the stock eventually sagged as low as 16 this past January (it was seven times earnings at the time) before turning around. SANM went on to advance 11 weeks in a row, then paused for a month just south of its old highs. Then came first-quarter results in late-April, which kicked off another run that has taken shares to new highs. Any dip of a point or so looks buyable with a stop near 24.
SANM Weekly Chart
SANM Daily Chart
Continental Resources (CLR)
Why the Strength
Like many energy companies, Continental is a play on rising oil prices, but it’s much more than that. It’s a drilling company in the Bakken, one the most fertile shale oil and natural gas developments in the world, and as the largest leaseholder in the Bakken—it owns plenty of untapped wells there. Continental is already starting to ramp up production, and expects to produce between 205,000 and 215,000 barrels of oil equivalents per day this year, ahead of its previous estimate of 200,000. Last quarter, the company achieved record daily production of 230,800 barrels per day, thanks in large part to its STACK play in Oklahoma, which the company believes could add as much as 25% to its net resource potential. Continental has also managed to lower its drilling costs over the past 18 months, which, combined with rising oil prices, has allowed it to reduce debt and project positive cash flow for the year. That’s an encouraging sign for a company that hasn’t been profitable for more than a year, though losses were less than expected in the first quarter.
Technical Analysis
CLR nosedived along with every other energy stock from late 2014 to early this year. From a high of 80 in August 2014, CLR tumbled all the way to 17 in February. Then oil prices started to rise, buyers swooped in, and the stock has been climbing ever since, topping 40 in May. It’s been building a base in the 40 to 42 range for almost a month, which is constructive action following the prior advance. You can nibble here and add to your position if it lifts above 43. The 50-day moving average has acted as support since early March, so set a stop below the current average, around 37.
CLR Weekly Chart
CLR Daily Chart
Big Lots (BIG)
Why the Strength
While better-known, full-price retailers such as Target struggle to retain customers as Americans shift their shopping habits to the web, smaller discount retailers such as Big Lots continue to experience brick-and-mortar success. Big Lots’ recent earnings results were the latest evidence of that: the 34% EPS jump and 3% sales increase represented the company’s best quarterly results in years. Furniture is Big Lots’ bread and butter, and furniture is one thing people prefer to buy in person rather than online—especially discount furniture. The accelerating recovery in the housing market is also helping, as the influx of new homeowners is bringing myriad young couples through Big Lots’ doors in search of cheap couches, bedframes and mattresses. The company doesn’t plan to rely solely on in-store traffic forever; it’s aiming to establish an e-commerce presence in the coming year, which could provide an additional boost down the road. Like the products it sells, Big Lots’ stock is cheap, trading at less than 14 times next year’s earnings estimates. Add in the 1.6% dividend yield, and there’s a lot to like about BIG right now.
Technical Analysis
BIG has been chopping around for years, but was on a nice little run from February through April when it leaped from 36 to 45. Two months of consolidation followed, as BIG built a base between 43 and 47. It dipped below support in mid-May, briefly slipping to 41. But the late-May earnings beat sparked a breakout, as BIG gapped up to 52 and has since inched its way to 53. We like the huge volume on the gap (seven times average volume!), so we’re OK buying a little on dips and adding to your position as it advances. A stop near 47 makes sense.
BIG Weekly Chart
BIG Daily Chart
Broadcom Limited (AVGO)
Why the Strength
It was big news in 2015 when Singapore-based chipmaker Avago Technologies took over U.S. rival Broadcom in a $37 billion all-cash deal. The deal made sense because the two companies specialized in different kinds of chips: Avago was strong in wireless communication and corporate data storage while Broadcom makes Wi-Fi chips for tablets and smartphones. The combined company (which adopted the name Broadcom in February because it was more familiar to consumers than Avago) has the scale to challenge Intel and Qualcomm. Results from its first full quarter since the merger was completed (reported last week) were stellar—the $2.69 per share the company earned easily outpaced analyst expectations of $2.38, and sales improved 119% year over year. Perhaps the most promising thing about Broadcom’s first post-merger quarter is that it came despite a slowdown in demand for the company’s No. 1 customer, Apple. Demand for Broadcom’s network routing and switching chips, particularly among its cloud and service provider customers, carried the day. Being less dependent on Apple bodes well for the newly expanded company’s future growth. In the immediate future, Broadcom expects current-quarter EPS to increase 18% on a 90% sales improvement. Institutional investors are certainly convinced: no fewer than 20 analysts have raised their price targets for AVGO since the company reported second-quarter earnings last Thursday.
Technical Analysis
AVGO made a monster run from 32 in April 2013 to 151 in June 2015. But it would take the stock nine months to better that high, as the August 2015 market meltdown pulled it to as low as 100. AVGO flirted with 160 in April, but corrected all the way to 140 last month. By early last week, AVGO had managed to claw its way back to 154; then came the earnings beat, which helped the stock instantly break through 160 resistance and close the week at 162. The stock is buyable around here or on dips with a stop below 150.
AVGO Weekly Chart
AVGO 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.
