Looking Better, but Need More Confirmation
Current Market Outlook
There’s no question the rally of the past four weeks has done the market a lot of good—the intermediate-term trend remains up, the broad market has returned to health and many stocks are setting up nicely. However, we’re sticking with a relatively neutral stance until we see the final pieces fall into place—many stocks lifting to new highs while the longer-term trend turns up. We’re optimistic that can happen soon (though possibly after a little digestion phase), but we want to actually see it occur before advising you to become heavily invested. For now, then, we’ll leave the Market Monitor where it is and will be watching the action of potential leaders closely for signs the buyers are stepping up in a big way.
This week’s list is another batch of high-potential stocks from a variety of industries. Our Top Pick is Blue Buffalo Pet (BUFF), a maker of organic pet food whose stock came public just last July. It addresses a huge market and is just beginning to attract institutional investors.
| Stock Name | Price | ||
|---|---|---|---|
| Ulta Beauty (ULTA) | 331.95 | ||
| Steel Dynamics (STLD) | 0.00 | ||
| Silver Wheaton (SLW) | 0.00 | ||
| Las Vegas Sands Corp. (LVS) | 0.00 | ||
| Hewlett Packard Enterprise (HPE) | 0.00 | ||
| Barrick Gold (GOLD) | 27.20 | ||
| Express (EXPR) | 0.00 | ||
| Ellie Mae (ELLI) | 0.00 | ||
| Blue Buffalo Pet Products (BUFF) | 0.00 | ||
| Briggs and Stratton (BGG) | 0.00 |
Ulta Beauty (ULTA)
Why the Strength
If we’ve written it once we’ve written it a thousand times—what really attracts big investors isn’t just a great growth story, but also a high degree of certainty that growth will continue. Retail stocks often lend themselves to this situation, as a proven cookie-cutter concept can continue to grow for many years, and Ulta Beauty (which offers a huge variety of beauty products and even salon services through its 874 stores in the U.S.) is one of the leading cookie-cutter growth plays today. Revenues have grown between 19% and 22% for each of the past eight quarters (with solid earnings growth during that time), and last Thursday’s quarterly report confirmed there’s more where that came from—management expects revenues to rise in the 15% to 18% range this year, with earnings up 20% or so as another 100 or so stores are opened. That even includes higher-than-expected capital spending to open “boutiques” within its stores for partners like Clinique, Lancome and Benefit. Beyond 2016, the big idea is that market share will continue to shift from the big drug and department stores to firms like Ulta, which should produce years of solid growth ahead. This remains a great growth story.
Technical Analysis
ULTA hasn’t been easy to hold onto—in fact, we were shaken out of our shares during the stock’s sharp, market-induced plunge lately from 188 to 147. That decline took shares down to where they were in March 2015, likely shaking out many investors. And that makes the stock’s recent pop buyable—ULTA rebounded to 160 or so after its low, and last Friday, soared to new highs on more than quadruple average volume. We don’t expect a straight-up move, but we think shares are buyable here or on dips.
ULTA Weekly Chart
ULTA Daily Chart
Steel Dynamics (STLD)
Why the Strength
The global steel market is improving. After years of declines, the industry is expected to edge back into growth in 2016; production is supposed to increase slightly after contracting 2.9% in 2015. That takes pressure off U.S. producers, including Steel Dynamics, which manufactures flat-roll, structural bar and rail steel out of Fort Wayne, Indiana. It also has a steel recycling business. Though the company’s sales and earnings have declined for three straight quarters, the $0.09 per share it earned last quarter was more than triple consensus analyst estimates of $0.03 per share. It could be the start of a turnaround; analysts expect 67% EPS growth this year, and a mere 5% drop in sales, which is modest compared to last year’s 13% year-over-year drop-off. And next year, sales are expected to improve by 9%. But the key is the global pickup in steel production and demand, which is lifting all steel producers’ boats on Wall Street.
Technical Analysis
After more than six months of steady decline, STLD found a bottom in January. Having fallen from 22 last June, the stock ran into support just below 16. It bounced to 18 in February, and after a few weeks of base building, it pushed above 20 earlier this month. Now firmly above its 50-day moving average (18), STLD is knocking on the door of 52-week highs above 22. If you’re game, you can dip a toe here and abandon ship if it dips back below that moving average.
STLD Weekly Chart
STLD Daily Chart
Silver Wheaton (SLW)
Why the Strength
Silver Wheaton is a Canadian-based silver company that doesn’t mine an ounce of metal itself. The company makes upfront payments to miners for the right to purchase, at a low, fixed price, some or all of their silver and gold production. The company has streaming agreements with 22 operating mines and seven development-stage mining projects, but has no ongoing capital or exploration costs. Historically, the company’s costs have been fixed at about $4 per ounce for silver and $400 per ounce for gold, locking in a strong profit margin and giving investors exposure to rising silver and gold prices. The company’s current agreements with miners give it attributable production of about 43.5 million ounces of silver and 230,000 ounces of gold. And estimates are that by 2019, attributable production will reach around 51 million ounces of silver and 325,000 ounces of gold. The company’s stakes are unhedged, but by buying rights to production at low prices, profit margins are large, well over 30% over the last four quarters and historically much higher when precious metal prices increase. Silver Wheaton has made 11 previous appearances in Top Ten, starting back in 2008, when spot silver was priced below $10. Silver is now just under $16 and has been on the rise since January. Silver Wheaton will report Q4 and full year results on Wednesday, March 16, after the close. The stock’s dividend has a 1.2% annual yield.
Technical Analysis
SLW has been in a downtrend since April 2011, when it was trading at 45. The stock traded below 10 on January 22, but has rebounded strongly as metal prices caught an updraft. SLW topped its 200-day moving average in February and has been riding its 25-day moving average for weeks. SLW has paused for a few days at around 17, and may trade quietly going into earnings on Wednesday. If you like the combination of rising metals prices, built-in margins and a small dividend, you can buy a little SLW anywhere under 17 and wait for the reaction to earnings. A stop at 15.5 will reduce risk.
SLW Weekly Chart
SLW Daily Chart
Las Vegas Sands Corp. (LVS)
Why the Strength
Las Vegas Sands is a Nevada-based company, but its fortunes are largely dictated by events half a world away in Macau. Macau is the only place in China where gambling is legal, and Las Vegas Sands, which is the world’s biggest casino company by revenue, has four locations there: Sands Macao, the Venetian Macao, Four Seasons Hotel Macao and Sands Cotai Central. That huge operation came under pressure in mid-2014 when the Chinese government began to crack down on gambling, especially by high rollers. With about 70% of 2014 revenue coming from Macau operations, Las Vegas Sands’ was caught in a major pinch. The company’s Las Vegas locations—The Venetian, The Palazzo and Sands Expo—were still doing well, as were its Marina Bay Sands casino in Singapore and its Sands Bethlehem casino in Pennsylvania. But the hit the company took in Macau hurt a lot, and the company’s stock took a 55% shearing. Fortunately for Las Vegas Sands, there has been a recovery in Macau operations (although not to earlier levels) and the company’s Q4 earnings report showed a 17.2% after-tax profit margin despite a 16% drop in revenue and a 33% dip in earnings. It seems that the company has weathered the worst of the China crackdown, and investors are predicting a brighter future (and enjoying the stock’s generous 5.6% dividend).
Technical Analysis
LVS fell a long way from its March 2014 peak, but it has also bounced nicely from its mid-January low, where it completed a double bottom at 36 and rallied strongly in late January. After an early February correction, the stock soared to 53 in early March. A small correction gave way to another rally last week, and LVS is sitting near its early March highs. Now trading at a reasonable 20 P/E ratio, LVS looks like a good buy on any weakness, with a loose stop around 47 to give this volatile issue a little wiggle room.
LVS Weekly Chart
LVS Daily Chart
Hewlett Packard Enterprise (HPE)
Why the Strength
In November, Hewlett Packard split into two companies—HP Inc. (HPQ) and Hewlett Packard Enterprise. As far as investors are concerned, the latter has been the clear beneficiary of the breakup. While HP Inc. sells printers and personal computers to consumers as the 77-year-old company has for decades, Hewlett Packard Enterprise peddles data center hardware and offers consulting services to businesses. It’s no surprise that Enterprise is the side that’s performed better; struggles in its printing and PC business were the very reason the company split into two in the first place. Sure enough, in its first quarter as an independent entity, Enterprise’s sales grew 2%, while HP Inc.’s declined 54%. Granted, 2% sales growth is far from earth shattering, but it looks a lot better when you consider that it was the first sales improvement for an HP-related business in years. Things are supposed to only get better from here: the company expects a 48% increase in earnings per share this year. It’s a small sample size, but it has been enough to convince investors to buy HPE—even as they continue to abandon HPQ.
Technical Analysis
After some early post-split growing pains, HPE is starting to gain traction on Wall Street. The stock traded at just under 16 out of the gates in early November, but tumbled to as low as 12 in January. That turned out to be the bottom: HPE started to make a move about a month ago, but the real breakthrough came in early March, when the stock kited from 13 to 16, which is where it opened Monday trading. There’s not a whole lot of history to go on here, but if you like the spinoff story, buy on the dips and see where HPE goes now that it’s entered uncharted territory. Because of the unknowns, keep it on a tight leash—as in nothing below 14.
HPE Weekly Chart
HPE Daily Chart
Barrick Gold (GOLD)
Why the Strength
Randgold Resources is a U.K. mining company with mining operations entirely in Africa. The company produced a record 1.2 million ounces of gold in 2015, up 6% from 2014. The fall of gold prices from a high over $1,800 per ounce in 2011 to $1,015 last December was a trial for gold enthusiasts, but Randgold Resources remained profitable even as gold cratered. With spot gold prices now just over $1,250 (down from $1,274 on March 10), Randgold appeals to gold investors for three reasons. First, the company’s cost-cutting efforts have improved its production costs to $632 per ounce. Second, Randgold’s active exploration and development efforts have resulted in at least five multi-million ounce mines since the year 2000. And lastly, the company has the resources ($214 million in cash) to finance its own exploration program. The rebound in gold prices may just have lost a little steam in March, but Randgold (and its 0.7% dividend yield) is a thriving company that offers pure exposure to any future gains in the price of gold. If gold is on your radar, Randgold Resources, which has made 14 previous appearances in Top Ten, is a good way to play it.
Technical Analysis
GOLD peaked at 125 in October 2012 and declined steeply from that point to near 60 in mid-2013. But GOLD found support at 60 again in late 2013, and bounced back quickly from drops below 60 in October 2014 and September 2015. The rebound in gold prices kicked off a rally in January that pushed GOLD from 60 on January 19 to 94 on February 24. GOLD has been trading sideways since early February and its rising 25-day moving average has just caught up with the stock. We will repeat the buy range and stop loss from GOLD’s appearance here on February 15.
GOLD Weekly Chart
GOLD Daily Chart
Express (EXPR)
Why the Strength
If consumer spending is down, Express didn’t get the memo. The men’s and women’s clothing and accessory chain just posted its fourth straight quarter of sales and earnings growth. The 5% year-over-year sales improvement was helped by a 4% increase in same-store sales. But the real engine fueling Express’ growth is not its brick and mortar operations but its burgeoning online presence. E-commerce sales improved 8% to $156.3 million, and now account for more than 20% of total sales. The earnings growth was even more impressive, up 37% on a per-share basis. Over the last four quarters, Express’ EPS has increased 57%, with another 21% improvement expected in its current (2017) fiscal year. Cutting costs—or, “expense discipline,” as CEO David Kornberg called it during last week’s earnings call—has helped Express become more profitable in the past year. So has an ongoing share repurchase program—the company spent $69 million buying back 3.8 million shares of its own stock last quarter. Add all those up, and Express stands out to investors in an otherwise sluggish retail sector.
Technical Analysis
EXPR’s biggest move came more than a year ago, when the stock opened 2015 with a bang, jumping from 12 to 20 in the first eight months. Consolidation followed during the August and September market collapse, and by January the stock had dipped all the way to 15. It found solid support there, and after a month-plus of base building, the stock is now testing new highs above 20. With volume picking up in the week since earnings were announced, now is a good time to buy on momentum. If it breaches 21 for the first time in more than two years, it could pick up even more steam. Sell on any drop to 18 or lower.
EXPR Weekly Chart
EXPR Daily Chart
Ellie Mae (ELLI)
Why the Strength
The greatest positive factor in the Ellie Mae story is that the company’s cloud software already processes roughly a quarter of all U.S. mortgage applications and is growing increasingly dominant as it acquires smaller competitors. The greatest negative factor in the company’s story is the fact that the U.S. housing market might slow down at any time, and the bigger they come, the harder they fall. But you don’t need to predict the future of the U.S. housing market to do well with an investment in ELLI; all you need do is get on board at a decent entry point and then follow proven techniques for minimizing losses and maximizing gains. In the meantime, other fundamental factors in the company’s favor are the fact that the company’s Encompass software saves mortgage originators time and money, that it helps lenders achieve compliance, and that return on equity at the company has been improving in recent quarters, from 15.0% in the fourth quarter of 2014 to 18.9% in the fourth quarter of 2015. Results for the first quarter of this year are expected in late April, and the action of the chart says they’ll be good!
Technical Analysis
ELLI has been public since 2011, and has had a good run in that time, punctuated by a long base that ran from September 2012 to September 2014, and a much shorter (so far) correction phase that has run from August 2015 until now. At the low of this correction, which ran from November through January, the stock bumped along at the 60 level, but it was an early leader of the market’s February surge higher, and in recent weeks it has not only broken out to a new high, it has succeeded in staying out! Also, volume on the breakout was big, while volume in the subsequent pullback has been light. All told, it adds up to a very positive technical picture, which supports the very positive fundamental fact our story opened with. The current correction offers a decent entry point.
ELLI Weekly Chart
ELLI Daily Chart
Blue Buffalo Pet Products (BUFF)
Why the Strength
The organic food movement for people is well entrenched, and now that trend is moving to encompassing dog and cat food. Blue Buffalo Pet Products is the leading provider of all-natural pet food, with whole meats, fruits and vegetables, along with other high-quality ingredients. The market is obviously huge—pet food sales totaled $26 billion in 2014 alone and are growing slowly but steadily—and Blue Buffalo is benefiting from a desire to treat Rover like part of the family. The firm has just 7% share of the market today, but owns more than a third of the fast-growing all-natural pet food segment. And judging by its recent results, its share gains are accelerating: Revenues gained more than 11% in the fourth quarter, while earnings and cash flow rose a big 35%. And management expects 2016 to be nearly as fruitful, with sales up double-digits and earnings up nearly 20%, even after the firm plans to spend heavily to expand manufacturing and R&D capacity. Obviously, many people will choose not to spend the extra money on all-natural pet food (it can be 25% to 50% more expensive), and competition is intense, including from current leader Purina. But there’s no doubt Blue Buffalo has developed a good name, and the top brass is pulling the right levers.
Technical Analysis
BUFF came public last July and closed its first day around 27. It then immediately entered the typical post-IPO droop, sinking to the 16-17 range in early October and generally chopping sideways (between 15 and 20) for the next five months. Last week, though, changed the stock’s outlook—BUFF soared to seven-month highs on nearly 10 times its average volume after earnings topped expectations. It’s a bit thin (about $25 million per day in volume), but we love the volume clue and think dips are buyable. Use a loose percentage stop if you get in.
BUFF Weekly Chart
BUFF Daily Chart
Briggs and Stratton (BGG)
Why the Strength
Americans may be spending less money on certain luxury items these days, but there will always be a need for lawnmowers and snowblowers. That’s what has kept Briggs & Stratton in business for more than a century. The maker of lawn mower parts and small engines used in lawnmowers, snowblowers, pressure washers and generators, Briggs & Stratton continues to chug along regardless of economic conditions. And by reducing costs, the company has become more profitable in recent years. Briggs & Stratton’s sales grew by a mere 1.9% in 2015, but per-share earnings increased a whopping 73%, including a decisive earnings beat ($0.31 in EPS, or 16 cents higher than consensus analyst estimates) in the fourth quarter. New products in the pipeline—including engines that claim to be 66% quieter than normal engines, smaller lawnmowers and easier-to-start lawnmowers—have investors (including Jim Cramer) optimistic that 2016 could be another good year for Briggs & Stratton. And the spring sales season—which bridges the first and second quarters—brings the company’s most fruitful quarters, which is perhaps another reason investors have been snatching up BGG shares in earnest.
Technical Analysis
It may never again reach its 2004 apex above 44, but BGG has managed to inch its way to a two-year high of 23. That’s no small feat considering the stock is just two months removed from hitting a four-year low of 15. Since that January 11 bottom, BGG has gone nowhere but up, zooming past its 50-day moving average (now just a shade under 20) in late January and continuing to rise from there, with little signs of resistance. With no obvious roadblocks in its way other than the law of averages, it might be worth dipping a toe and seeing how high BGG can kite. Set your stop-loss around 20.
BGG Weekly Chart
BGG 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.
