Lots of Crosscurrents … but Trend Remains Up
Current Market Outlook
The market has been shaking and baking during the past three weeks on lots of headline (mainly currency-related) news, but while there has been some damage, the major indexes are holding key support and relatively few stocks have fallen apart. Of course the evidence can change at any time, and if the market really breaks down, we’ll turn cautious. But, despite the whippy day-to-day action, we’re sticking to our bullish stance, and believe holding your best performers, and even doing a little buying at opportune times, will prove fruitful.
This week’s list is once again heavy on the medical and retail sectors, though there are a few other tempting ideas out there, too. Our Top Pick is Urban Outfitters (URBN), which has come back to life after a long period out of the limelight.
| Stock Name | Price | ||
|---|---|---|---|
| WisdomTree (WETF) | 0.00 | ||
| Vulcan Materials Company (VMC) | 137.10 | ||
| United Therapeutics (UTHR) | 0.00 | ||
| Urban Outfitters (URBN) | 0.00 | ||
| SunEdison (SUNE) | 0.00 | ||
| IPG Photonics (IPGP) | 0.00 | ||
| Horizon Therapeutics (HZNP) | 49.89 | ||
| GrubHub (GRUB) | 140.03 | ||
| Foot Locker (FL) | 0.00 | ||
| American Eagle (AEO) | 0.00 |
WisdomTree (WETF)
Why the Strength
WisdomTree Investments, the brainchild of ex-hedge fund manager Michael Steinhardt, has been on a roll recently. The company’s financial products allow investors to buy exposure to asset classes via Exchange Traded Funds, and WisdomTree is the largest publicly traded firm that makes ETFs its only focus. WisdomTree just topped $50 billion in assets under management, primarily on the strength of a couple of hedged ETFs—WisdomTree Japan Hedged Equity Fund and WisdomTree Europe Hedged Fund—that let investors play European and Japanese stocks while avoiding the fluctnations of their currencies. The company is a specialized example of a bull market stock, one that does well when markets are attracting investors. By offering exposure that neutralizes currency fluctuations from the equation, WisdomTree is giving investors what they want right now. The combination of strong momentum and a 1.5% annual dividend yield is a comforting combination for nervous investors.
Technical Analysis
WETF is a volatile issue, as it moves about twice as much as the broad market. But the stock is coming off a triple bottom at 9.5 in May, August and October 2014, that gave way to a huge rally to 16 in October. After taking a couple of months to consolidate those gains, WETF broke out again in January (leading to its third appearance in Top Ten) and is now running again after a three-week rebasing period at 19. While the price action of WETF is attractive, its volatility makes it appropriate as a stock that needs a little room to move. Try to buy on a pullback below 21 and keep a loose stop near its February base at 19.
WETF Weekly Chart
WETF Daily Chart
Vulcan Materials Company (VMC)
Why the Strength
We prefer to examine the markets from a bottom-up (individual stocks) perspective, but one unloved sector we think can do very well in the months ahead is concrete and construction aggregates. After a couple of blah years that had most industry players cutting the fat, demand is picking up from residential, commercial and municipal sources, which should lead to huge earnings and cash flow growth in the quarters and even years ahead. Vulcan is the nation’s top producer of construction aggregates (crushed stone, sand and gravel) as well as a big maker of materials like asphalt and concrete. The fourth-quarter report (released in early February) was terrific, with sales growth accelerating and, most importantly, management hinting that 2015 will bring better demand and margins—indeed, analysts see the bottom line more than doubling this year and then soaring another 58% in 2016. So far, the dividend has been tiny (0.5% annual yield), but the top brass expects to further boost that and possibly engage in some share buybacks as business recovers. The big idea here is that the industry could be at the sweet spot of the cycle—the demand trend is clearly up, and yet overall demand is well below average levels compared to recent decades, so there’s a big runway of growth should the U.S. economy remain on an even keel.
Technical Analysis
VMC topped in March 2014 and formed a huge base, with bottoms formed in April, October (a huge shakeout) and December. But February brought an earnings-induced breakout, and we’re impressed with the straight-up follow through since that gap, with shares running from 70 to 86 without taking a breather. Now we’re starting to see a little consolidation, which we think will set up another entry point—try to buy on dips and use a stop in the low- to mid-70s.
VMC Weekly Chart
VMC Daily Chart
United Therapeutics (UTHR)
Why the Strength
United Therapeutics is no stranger to Top Ten, with 12 previous appearances, most recently in January 2015. The pharmaceutical industry has been producing lots of leaders in recent months, and United’s story is among the best. The company’s new treatment for high blood pressure, Orenitram, which was approved for sale in late 2013, made a huge contribution to the company’s January rally. And this month the good news is that United’s cancer drug, Unituxin, gained FDA approval for use against a very specific kind of cancer in children, and that the EU’s drug administration is reviewing it for the same indication. The company’s Remodulin treatment for pulmonary arterial hypertension remains its lead product. United Therapeutics hasn’t depended on quarterly results to drive investor interest. The 41% jump in earnings in the company’s Q3 report last October had little effect on its stock. And the Q4 report on February 24 (12% EPS growth on 20% revenue growth) also had almost no impact. Like many pharmaceuticals and biopharmas, the interest in United Therapeutics is driven by the progress of drugs in clinical trials and approvals by the FDA. United’s stock was flatter than a pancake from late September 2014 through early January. But the renewed interest investors are showing is a continuation of a long trend that dates back to 2012. A record of delivering on new products doesn’t guarantee future results, but it’s a pretty good indicator that the company can deliver.
Technical Analysis
UTHR spent 15 weeks (from September 24 to January 7) trading very flat under resistance at 136. But the rally that started on January 8 at 127 has now topped 170, including today’s 6% jump. Today’s leap up has left the stock’s 25-day moving average far behind at 157, so a pullback is likely at some time. A buy on a correction of at least a couple of points would lower the risk. And using a stop just below 160 will reduce it a bit more.
UTHR Weekly Chart
UTHR Daily Chart
Urban Outfitters (URBN)
Why the Strength
Until recently, Urban Outfitters had been in a transition phase as it tried to meet the demands of its increasingly younger customer base. Its latest quarter suggests the company is starting to adapt. Same-store sales improved 6% in the fourth quarter, the company’s first such increase in a year. Under the direction of new president Trish Donnelly, Urban Outfitters is trying to reclaim its “older” (college-aged and 20-somethings) demographic, appealing less to the 14- and 15-year-olds who don’t have as much cash to spend on embroidered rompers and Timberland boots. It seems Donnelly’s strategy is working. The company is introducing new clothes aimed directly at 18- to 28-year-olds. As a result, the company reported its first billion-dollar sales quarter and its highest earnings per share ($0.60) since before the recession. Investors have swooped in since Urban’s earnings were released last Monday, pushing shares up 14% in the four trading days since. A new stock buyback program of 20 million shares should only help sweeten the pot on Wall Street.
Technical Analysis
The earnings-driven gap up from 39 to 45 last week lifted URBN out of a six-month rut in which shares had fallen 30% since last September. Since falling all the way to 28 in November, URBN hadn’t managed to break higher than 38 until last week. Now it’s suddenly at a new all-time high. With momentum fully on its side and all technical barriers left in the dust, there’s nothing standing in the way of this stock going on an extended run. Buy on the dips and watch it push further into record territory.
URBN Weekly Chart
URBN Daily Chart
SunEdison (SUNE)
Why the Strength
2014 was the strongest year on record for solar energy as solar installations reached 6,201 megawatts, up 30% from 2013—the biggest year-to-year increase ever. That was 12 times the amount of solar megawatts installed just five years ago. As a result, solar energy is one of the hottest sectors on Wall Street. Few solar companies have captured institutional investors’ attention like SunEdison. Hedge funds piled into SunEdison in the fourth quarter, investing a combined $3.73 billion—up from $3.05 billion in the third quarter. Given that it’s the world’s leading developer of solar energy, that’s no surprise. But part of SunEdison’s appeal is its versatility. It’s the first renewable energy company to offer solar, wind and energy storage services. It’s also growing rapidly. SunEdison expects to build 220 to 250 megawatts of solar and wind energy projects this quarter, and aims to double its annual installations by year’s end. Toward that end, SunEdison recently acquired First Wind, giving it a huge foothold in the wind market, and its YieldCo Terraform Power provides SunEdison with plenty of access to capital to keep the new project pipeline strong.
Technical Analysis
After a big drop-off in November and December, SUNE struggled to regain its footing, pinballing between 18 and 20 for nearly three months. In mid-February the stock finally broke through, rising all the way to 23. In the month since, SUNE has again been up and down, but in a much tighter range, finding support at 22. It’s showing signs of breaking out of that range, rising to its highest point since July last week, just shy of 24. Considering the stock peaked as high as 88 in late 2007, and institutional investors are again piling into solar, look for SUNE to extend its six-week rally.
SUNE Weekly Chart
SUNE Daily Chart
IPG Photonics (IPGP)
Why the Strength
Massachusetts-based IPG Photonics is something of an anomaly, a tech company that doesn’t have anything to do with microchips. IPG Photonics designs and manufacturers specialized fiber lasers, fiber amplifiers and diode lasers that are used in telecom and medical applications, among others. While the demand is fairly constant for telecom applications, analysts see big upside potential for IPG Photonics in military applications and in specialized situations like the decommissioning of nuclear power plants, where lasers can cut up contaminated metal structures safely. The company’s research staff of more than 60 laser scientists continues to drive development of new uses and refinement of existing ones. IPG Photonics made a few appearances in Cabot Top Ten Trader back in 2011 and 2012 after a couple of years of revenue growth near 60%. But the company has been off the radar until recently, when an optimistic preview of good Q4 results on February 9, and the delivery of the official estimate-beating news on February 20 (53% earnings growth on 25% revenue growth with an after-tax profit margin of 27.2%) was met with enthusiastic buying. IPG Photonics has been in a virtual deep freeze for more than three years, but it’s staged a convincing breakout and looks to have considerable appeal for investors who see big potential in military and nuclear applications.
Technical Analysis
IPGP reached a peak at 79 in May 2011 after a strong rally, then dipped to 33 in December 2011. In total, the stock spent three years and nine months trading under its old high at 79, including 13 months of tight trading with resistance at 79 and support at 60 between December 2013 and January 2015. With such a long base, when IPGP finally broke out in February, it had plenty of fuel. The stock rallied from 75 to 87 in a week after the good forecast, then ripped to 98 when earnings were official. IPGP has now spent a couple of weeks trading under resistance at 99. You can either buy a little here or wait for the breakout above 100, but a little patience might present you with a pullback below 97, which would be ideal. Use a loose stop in the high 80s.
IPGP Weekly Chart
IPGP Daily Chart
Horizon Therapeutics (HZNP)
Why the Strength
In a red-hot biotech sector, few companies are growing sales faster than Horizon Pharma. Specializing in drugs that treat arthritis pain and inflammation, Horizon Pharma’s revenues have risen an average of 300% in each of the last two years and it’s expecting even bigger things this year. 2015 will be Year 2 that Horizon’s new arthritis and ulcer drug Vimovo has been on the market; it brought in $163 million last year, accounting for more than half the company’s total revenue. Also, Horizon acquired Vidara Therapeutics in September, allowing the company to not only relocate operations to low-tax Ireland but also to start selling Actimmune, a treatment for two rare diseases that has already brought in $25 million. Those new drugs helped boost Horizon’s full-year guidance to a range of $450 million to $475 million, with earnings per share expected to improve 38% to $1.23. Until last year, Horizon Pharma had never been profitable; now margins are in the 30% range. Having just expanded its product lineup from three to five, Horizon Pharma is starting to realize the fruits of its expanded portfolio.
Technical Analysis
HZNP really took off at the beginning of the year, popping from 12 to 17 in January. The stock really took off at the beginning of the year, popping from 12 to 17 in January. It dropped back to 15 in early February amidst a brief market correction, but has since been on an upward trajectory, reaching 22.74 last week before pulling back slightly. With no significant dips in the last six weeks, the momentum is powerful, so we suggest buying a small amount (maybe half your normal position) here or on minor dips.
HZNP Weekly Chart
HZNP Daily Chart
GrubHub (GRUB)
Why the Strength
We continue to think GrubHub is a mass market story with huge potential—by connecting local diners with take-out restaurants, the company is playing in the $70 billion annual take-out market, which, given the company’s average commission of around 14% on every sale, is a total addressable market near $10 billion. (Those commission rates have ticked up of late as the firm engages in competitive ad bidding like Google, where restaurant clients can pay for better search listings on the site.) GrubHub is the hands-down leader in the field (in the fourth quarter, the firm processed 203,000 orders per day and $1.8 billion of take-out orders during 2014), and while there is some competition (Yelp has a foothold), we think GrubHub will benefit from the network effect, much like eBay did; with the most restaurants and diners (five million active users), more restaurants will look to list on GrubHub, which will attract more diners, and so on. Right now the company is just scratching the surface, with a handful of cities accounting for most of its revenue. And, long-term, some recent acquisitions could lead to delivery services (it books the order and then picks up and delivers the food), which would expand its addressable market by many-fold. In the meantime, sales and earnings growth is strong, profit margins are plump and earnings estimates are big. We like it.
Technical Analysis
GRUB is near the top of a big IPO base and is showing signs that it wants to decisively break to the upside. The first clue that the stock was ready was the humongous-volume leap on earnings in early February, and since then it’s taken out a swing high near 42 and, last week, actually nosed toward new high ground despite the market weakness. You could nibble here or (preferably) on dips, with a stop near 39.
GRUB Weekly Chart
GRUB Daily Chart
Foot Locker (FL)
Why the Strength
Foot Locker is strong today because, as the leading seller of sneakers in the U.S. (especially basketball-related kicks, where it has a whopping 45% market share), it’s generating estimate-beating sales and earnings growth with the prospect of more to come. At the core of its positive results is the “athleisure” trend of the past few years, as sneakers and other athletic apparel have become popular for casual dress. Combined with its solid position in the market—Foot Locker makes up nearly one-fifth of Nike’s sales, allowing it to get exclusive products from the athletic behemoth—and a productivity push, Foot Locker has been able to generate fantastic same-store sales growth (over 10% in the fourth quarter) and earnings are expanding much faster than that. And management hasn’t been shy about spreading the wealth; the company recently approved a $1 billion share repurchase program and a 13% boost to its dividend (the annual yield is now 1.6%). With about 3,500 stores, Foot Locker isn’t a store-growth story anymore, but as long as the sneaker craze continues, so will this company’s solid results.
Technical Analysis
FL has been a solid winner in recent years, but its advance has been littered with long consolidations, like the seven-month pause in late-2011, the 15-month pause from late-2012 to early last year, and the recent five-month rest starting last September. The good news is that FL looks like it’s starting a new run here—following five months of sideways action, the stock popped to new highs on earnings two weeks ago and moved higher last week. You can buy some here or on dips, with a stop near 56.
FL Weekly Chart
FL Daily Chart
American Eagle (AEO)
Why the Strength
Retail is a tough business, and American Eagle Outfitters has seen both sides of the success equation in selling apparel and accessories to young people. Back in 2012, American Eagle and its American Eagle Outfitters, Aerie and AEO Factory stores were riding a wave of success at its more than 1,000 stores in the U.S., Canada, Mexico, China and Hong Kong and online sales. But the company, which had booked earnings of 93 cents per share in fiscal 2012 and $1.39 per share in 2013 saw earnings slump to 74 cents in 2014. The company’s fortunes began to turn around with its Q3 calendar 2014 earnings report that revealed better than expected earnings despite a dip in year-over-year revenue. Investors had been following the company’s turnaround efforts, and the good news on March 4, when the company reported robust results and gave strong guidance for the first quarter of 2015, was met with a wave of new buying. American Eagle Outfitters is an unusual retail clothing stock in that it offers a sizable dividend with a 2.9% annual yield. While the success of the company will always depend on how its merchandise appeals to young buyers, management has it on the right track.
Technical Analysis
AEO peaked at well over 20 back in 2012, then corrected all the way to 10 in July 2014. The rebound in the stock began in August 2014 with a jump to 13 on monster volume that kept running to 15 by the end of September. But that’s where AEO stalled for five months as investors awaited the next piece of good news. And they were patient, shaking off a dip to 12 in December and pushing AEO back to its new base at 15. That’s where AEO was sitting when the good earnings news gapped the stock up to 16 and provided the fuel for a follow-through rally to 17. AEO looks buyable on any weakness, with a stop in the middle of its gap at 15.5.
AEO Weekly Chart
AEO 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.
