Not Ideal, but Still Mostly Good News
Current Market Outlook
We’ve begun to see a few worrisome developments when it comes to the market. Small-cap indexes have lagged badly and haven’t made any progress in three months. A few sectors (especially commodity-related) have broken down. And breadth in general has weakened, with the number of stocks hitting 52-week lows expanding in recent days. However, we see a lot of good news, too—the intermediate-term trend is still pointed up, lots of strong stocks have consolidated normally in recent days and we’ve even seen a few new leaders begin to emerge on big volume. Altogether, it’s fair to say that the evidence has weakened so we’re knocking down our Market Monitor back to a level 7 and will be watching events closely. But until the uptrend is cracked, you should remain mostly bullish, holding your strong performers and looking for new buys as opportunities arise.
This week’s list has a wide variety of stocks and sectors, including a few names we haven’t seen in a long time. Our Top Pick is Builders Firstsource (BLDR), a good-sized supplier of building products that just gapped up strongly on earnings after trashing earnings estimates.
| Stock Name | Price | ||
|---|---|---|---|
| Autohome (ATHM) | 98.65 | ||
| Builders FirstSource (BLDR) | 44.12 | ||
| Exelixis (EXEL) | 27.35 | ||
| Leucadia (LUK) | 0.00 | ||
| ON Semiconductor (ON) | 24.07 | ||
| PulteGroup (PHM) | 45.93 | ||
| Shopify (SHOP) | 585.00 | ||
| SVB Financial Group (SIVB) | 0.00 | ||
| Synopsys (SNPS) | 137.53 | ||
| Take-Two Interactive (TTWO) | 123.32 |
Autohome (ATHM)
Why the Strength
As China’s economic development continues, car ownership remains a growing national obsession. But the paperwork in buying a car is complicated and there are few traditional auto dealerships with acres of cars like those that provide U.S. car buyers with their information and shopping opportunities. Autohome is a Chinese provider of online content about cars whose website gives shoppers access to specifications and pictures. It’s also a major way for auto dealers to make contact with prospective buyers, helping them to set up virtual dealerships that offer shopping and financing information, used vehicles, plus a chance for consumers to make comments and communicate with sales and service departments. Autohome enjoyed 62% revenue growth in 2016 and 74% in the last quarter of the year. The company’s Q4 report on March 2 also included 28% earnings growth. Auto sales in China grew from 154 million in 2014 to 172 million in 2015, so Autohome’s sales of advertising space on its website have been a strong driver of revenue growth. As long as China’s economic growth—currently targeted at 7% per year—remains strong, Authome’s dominant position as the online dealership provider of choice should be secure.
Technical Analysis
ATHM went downhill for a year from 57 in the middle of 2015 to 19 in July 2016. The stock’s advance from that low has been bumpy, with three significant pullbacks until the start of 2017, when the volatility dialed back and the stock really got moving. ATHM started 2017 at 25 and soared to 35 on February 14. A three-week consolidation above support at 32 gave way to a new rally last week. ATHM is now trading at its highest level since late 2015. You can take a position right here, with a stop at 32.
ATHM Weekly Chart
ATHM Daily Chart
Builders FirstSource (BLDR)
Why the Strength
Investors looking for a way to play the rebound in construction with a faster growing alternative to Home Depot and Lowes need look no further than Builders FirstSource. The company is one of the country’s largest suppliers of building products for residential construction. End markets are single-family homes (68%), multi-family homes (7%) and repair/remodeling (25%). Its biggest product categories of lumber and sheet goods (34% of sales), windows, doors & millwork (20% of sales) and manufactured products (17% of sales) are also its fastest growing categories, up 17%, 18% and 7%, respectively, in 2016. The company competes in a fragmented industry with a number of much smaller competitors (and a few larger ones) facing off against Builders’ 400 locations across the U.S. Its most recent acquisition was ProBuild in July 2015, which yielded $100 million in cost savings and pushed revenue up 79% to $6.4 billion in 2016. Fourth-quarter results came in better than expected on February 28. The company reported Q4 revenue growth of 6.2% to $1.6 billion (beating by $50 million) and EPS of $0.16 (beating by $0.07). Earnings estimates are tame for this year before exploding higher in 2018, but given how this company usually trashes estimates, those figures are likely lowballed.
Technical Analysis
BLDR had a rocky 2016 market, with a high of 14 in late August and a low of 9 in early November. Investors came back to the stock after the election and a solid Q3 earnings report on November 3, after which shares walked steadily up to 12 by November 28. From there, it was up and down through the end of January with the stock yo-yoing between 10.5 and 12.5. Shares finally broke through resistance on February 9 and reached 13 before Q4 results came out on February 28. That event sent shares up to 14.5 the next day. In the two weeks since, shares have traded in the 14 to 15.5 range.
BLDR Weekly Chart
BLDR Daily Chart
Exelixis (EXEL)
Why the Strength
We were kicked out of $6 billion market cap biotech Exelixis after featuring the stock in November, but that didn’t stop us from returning to the stock in early February. Since then, the stock has continued to trend higher and looks to be building a new base above 21. You may remember that Exelixis develops small molecule cancer treatments. It generates revenue from recently approved Cabozantinib (advanced renal cell carcinoma), Cometriq (thyroid cancer) and from royalties and licenses overseas. Cabozantinib is a potential blockbuster that generated revenue $53 million in Q4 (results came out on February 26). Exelixis also generated $7 million from Cometriq and $26 million from royalties/licenses. The company’s overall growth rate is outstanding since Cabozantinib was just recently approved. Total Q4 revenue was $78 million, up 684% over Q4 2015, while full-year 2016 revenue of $192 million was up 415%. Analysts see Cabozantinib becoming a blockbuster drug since it is already well on its way to achieving dominant market share. Exelixis also finished the year with $480 million in cash, up 26% over the previous quarter. That cash can be used for R&D, acquisitions or (most likely) to pay down $205 million in debt. We see the stock moving higher given expectations of over 60% annual revenue growth for the next two years, and a surging bottom line both this year and next.
Technical Analysis
EXEL was stuck near 4 through April 2016, then rallied to 15.5 by late September. That 300% advance ended on September 28 when the biotech sub-sector began a five-week retreat. EXEL was trading back at 10 before the election, then advanced to 18.3 by early December. Another retreat to 14.2 occurred in early January. Then the stock raced above 19 (Genentech dropped a claim), followed by another move above 20 after a deal with Takeda for Cabozantinib in Japan was announced on January 21. The recent pause looks buyable, with a stop near the 50-day line.
EXEL Weekly Chart
EXEL Daily Chart
Leucadia (LUK)
Why the Strength
Leucadia National is a turnaround story, a diversified holding company whose two major businesses are financial (investment banking (Jefferies) and commercial banking) and beef (National Beef Packing). The company, which weathered the crisis of 2008 in good shape, got caught in the middle of a strategic reorganization in 2015 and 2016 as markets hiccupped. This, coupled with a downturn in the beef business (which is the source of over two-thirds of revenue), resulted in a terrible first quarter of 2016, including a loss of 60 cents per share. Both revenue and earnings have soared since then, and the company’s new strategic focus in the Jefferies entity (more client-centered investment banking and a lower risk profile) has paid off handsomely. The National Beef segment has been refocused on higher-value meat and hide products to gain traction against commodity beef competition. Jefferies, with contributes less than a quarter of revenue, is a global investment banking firm that has its own credit rating and is an SEC-reporting company. Leucadia has taken steps to lower its total risk profile, opting for stability and a steady dividend, which yields just under 1%. This rebound in Leucadia’s fortunes is a good medium-term opportunity.
Technical Analysis
LUK slid from 25 in July 2015 to 14 in February 2016. The stock’s rebound was choppy, but got a new burst of energy in November 2016 and LUK is now trading at its highest level since the first quarter of 2014, taking care of most of its overhead resistance. The stock’s flat patch from December through early February provided a good rebasing period, and shares have pushed into the 27 area recently. LUK can be bought anywhere under 27, with a stop below 25.
LUK Weekly Chart
LUK Daily Chart
ON Semiconductor (ON)
Why the Strength
ON Semiconductor was our Top Pick on February 20 after it delivered a terrific quarter. In the weeks since, it’s come back into our recommended buy range of 14.5–15.5. Recall that Q4 revenue was up 50% to $1.3 billion, and EPS of $0.26 beat by $0.03. Growth was helped by the company’s first quarter of contribution from Fairchild, an acquisition that increased the size of the company by roughly 45%, and brought a number of complimentary product lines with it. Fairchild boosted ON Semi’s already solid exposure to industrial, appliance and auto end markets, and added exposure to the mobile market. During its March 10 Investor Day presentation, management impressed the market, which is now looking for higher profit margins (40% gross margin), 31% revenue growth and 35% EPS growth in 2017. The company also recently purchased mmWave technology from IBM, which will increase its automotive image sensor product portfolio; this segment will make up around 20% of total revenue and grew by over 25% in 2016. Helping semiconductor stocks with auto sector exposure is more M&A speculation after Monday’s news that Intel will buy Mobileye for $15 billion, a 34% premium to last Friday’s close. ON Semi’s market cap of just $6.4 billion, rapid growth rate, and forward P/E of just 12 means its growing faster than peers (albeit partially from the Fairchild acquisition) but trading at a discount. That’s usually a recipe for higher prices ahead.
Technical Analysis
Shares of ON have nearly doubled over the last 12 months and have remained comfortably above their 200-day moving average since July 2016. Shares moved from 9.5 in mid-July to 12.5 by October as anticipation of closing the Fairchild acquisition drove bullish sentiment. Shares then weakened with the broader semiconductor group and were back to 11 by December. Sector upgrades drove December and January buying and pushed ON to 14 before its Q4 report on February 13. After that event, shares moved as high as 16 before a pullback into the 15 to 15.5 range, which has held since February 27.
ON Weekly Chart
ON Daily Chart
PulteGroup (PHM)
Why the Strength
With worries about higher interest rates in the air, you wouldn’t expect homebuilders to be coming to life. But that’s exactly what we’re seeing, and Pulte Group looks like one of the leaders. So why are Pulte and other builders newly strong? Four reasons. First, business is good and steadily improving, not only for Pulte (fourth-quarter sales up 21%, earnings up 18%, new orders up 22%, backlog up 20%) but for the industry as a whole, with housing starts and new home sales continuing to tick toward their multi-decade average. Second, while the Fed looks likely to hike rates soon, mortgage rates are still historically low (hanging around 4.25%) and have yet to take off on the upside. Third, leading economic indicators continue to point toward accelerating economic growth, which is more important than rates. And fourth, stocks like Pulte are dirt cheap—not only is the P/E ratio (14 times trailing earnings) low, but the firm is throwing off plenty of cash, paying a tidy dividend (1.6% annual yield) and buying back a ton of its own stock (share count is down nearly 7% year-over-year), with another $1 billion of share buybacks coming in 2017! Analysts see earnings up 33% this year and another 20% next year. It’s hard to love a cyclical group like homebuilders, but after a long rest, the next upleg may be starting. We expect Pulte to help lead the way.
Technical Analysis
After a big rally from late-2011 through mid-2013 (from a bear market bottom of 3 to a high above 24), PHM and other homebuilders have been contained in a wide trading range—PHM has gyrated between 14 and 24 for the past three and a half years! But the stock is changing character, with a solid rally on earnings in January, a tight area for a month, and now another push toward the top of the multi-year range. We think the odds favor a new uptrend has begun—you can buy here or on minor weakness.
PHM Weekly Chart
PHM Daily Chart
Shopify (SHOP)
Why the Strength
Shopify is one of the leaders of a new growth theme in the market—technology-centric companies that are helping small- and mid-sized businesses thrive online. Shopify’s specialty is its e-commerce platform, which allows small firms to do business through a variety of channels online, facilitates payments, ties into all the hottest social media platforms, and allows many critical back-end functions that a growing company needs. Importantly to us, Shopify is serving a very large market—there are probably 30 million businesses with fewer than 500 employees in the U.S. alone, nearly all of which could use Shopify’s help. And many are signing up! The company had more than 375,000 clients at year-end, up 50,000 from just one quarter before, which is boosting recurring revenue through monthly fees (up 63% in the fourth quarter) and gross merchandise volume sold through its platform (up 95%). Earnings are hovering around breakeven as the company invests in its product and grabs as many clients as it can. That seems smart to us because the product is very “sticky,” as once a company integrates with Shopify, it tends to stick around. Big investors agree, as they’re focusing more on overall revenue growth (up 86% last quarter) and the other key metrics mentioned above. It’s a big story.
Technical Analysis
SHOP looks like a new leader for 2017. The stock built what turned out to be a giant post-IPO base from mid-2015 (when it peaked at 42 soon after coming public) through the start of this year (it was at 43 in January), then it broke out on huge volume and ran up eight weeks in a row. After a modest dip, SHOP has run to new highs in recent days. Some further consolidation is possible, but the trend is clearly up. You can buy a little here on a dip toward the 25-day line.
SHOP Weekly Chart
SHOP Daily Chart
SVB Financial Group (SIVB)
Why the Strength
SVB Financial (short for Silicon Valley Bank) is a very good-sized lending outfit ($44.9 billion of assets, $84.7 billion of total client funds) that serves growth-oriented industries like technology, life sciences and healthcare. Because of that, SVB has a real growth story as demand for capital from these companies increases (both for loans and for some equity stakes), especially as the economy picks up—total loans rose to $19.9 billion at year-end, up 22% from the year before. And rising interest rates should have a huge effect as well—the firm’s net interest income grew 10% in the fourth quarter and should accelerate from here as rates rise and the firm’s loan book grows. Moreover, the company’s non-interest income (service charges, credit cards, lending fees, etc.) should continue to steadily increase as long as the economy remains on a good track. Management expects loan totals to rise in the high teens this year, with interest income advancing in the low teens; analysts see earnings up 17% this year and another 27% next year, both of which could prove conservative given the likelihood of a more aggressive Federal Reserve. It’s a simple story, but a good one.
Technical Analysis
SIVB blasted off in November, paused in late-December and most of January, and has pushed to new price and relative performance (RP) highs since then. Granted, the action isn’t overly dynamic, but there’s been little selling pressure even as financial stocks have pulled back. If you’re game, you could buy SIVB here and use a stop just below the 50-day line, where there’s lots of support.
SIVB Weekly Chart
SIVB Daily Chart
Synopsys (SNPS)
Why the Strength
The chip industry is enjoying boom times, and that means Synopsys is, too. The company is the leading provider of electronic design automation systems that help others design chips; all of the top 20 chip makers (and many systems makers) are customers. Synopsys is also the #2 player in chip intellectual property, which offers reusable building blocks for chip design. Its systems are used to design chips that are used in basically every end market out there. The company isn’t a fast grower, as sales tend to move along with the sector’s R&D spending. But Synopsys is highly dependable, a rarity in the chip sector, with long-term contracts that aren’t cancellable. The firm has grown revenues each of the past 11 years, with earnings growing 10 of those years. All told, the company had $3.5 billion of backlog at year-end, providing great visibility. Best of all, it appears that growth is picking up as the chip sector booms—fourth-quarter results not only topped expectations, but produced the fastest sales and earnings growth for Synopsys in years. Earnings estimates aren’t impressive, but they’re likely conservative. It’s a solid story.
Technical Analysis
SNPS isn’t a go-go stock, but there’s no question the longer-term trend is up and buyers are in control now—SNPS has shown great price and relative performance action during the past year, and after a recent four-month sideways phase, the stock hit new highs in February, gapped up on earnings, and traded tightly since. If you want in, you can buy a little here or on dips toward the 25-day line, with a stop in the mid-60s.
SNPS Weekly Chart
SNPS Daily Chart
Take-Two Interactive (TTWO)
Why the Strength
Video games are the second-largest export from the U.S. (after aerospace) and Take-Two Interactive is a leader in that industry. The company’s leading products are the Grand Theft Auto (GTA) and NBA 2K franchises, but it has 11 franchises that have sold five million units and more than 45 multi-million-unit-selling titles. Games are played on consoles, PCs and mobile devices and repeat buying of franchise updates is the rule. The video game business is selectively cyclical, meaning that quarters when new versions of GTA or NBA become available are significantly stronger. The good news is that the next two years should be busy ones—a strong calendar of releases has analysts expecting a 29% jump in earnings per share in 2017 and 40% in 2018. The company’s stock got a major boost from its quarterly report on February 7, which showed a 33 cents-per-share loss, but registered a stronger than expected 15% gain in revenue. Together with the good pipeline of new games and updates, investors are expecting good things in 2017.
Technical Analysis
TTWO has been in an uptrend since 2012, with plenty of bumps along the way. The stock soared from 35 to 51 in 2016 and topped 60 after its good earnings report on February 7. After pulling back to 57 in February, the stock is now trading sideways just under 60 and looks buyable right here, as its rising 25-day moving average is just behind at 58. Use a fairly loose stop around 54.
TTWO Weekly Chart
TTWO 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.
