Bulls Remain in Control
Last week was a good one for the bulls, not because the indexes finished in the green but because after three poor weeks, the broad market finally found some support, with breadth improving and the number of stocks hitting new lows drying up. We wouldn’t say the broad market is completely out of the woods; another few days of positive action would be necessary to conclude that. But, overall, we’re optimistic—the intermediate- and longer-term trends are pointed up, most stocks outside of commodity sectors remain in good shape, and we’re even seeing some rotation into more growth-oriented groups, which is usually a good sign. We’ll keep our Market Monitor at a level 7 right now as we wait to see further confirmation from the broad market.
This week’s list is chock full of strong stocks with solid growth stories from a variety of industries. We’ll keep it simple with our Top Pick this week, going with Adobe Systems (ADBE), a liquid growth leader that just reported a strong quarter.
| Stock Name | Price | ||
|---|---|---|---|
| Adient (ADNT) | 0.00 | ||
| Adobe Inc. (ADBE) | 315.23 | ||
| Axalta Coating (AXTA) | 0.00 | ||
| Broadcom Limited (AVGO) | 266.26 | ||
| Children’s Place (PLCE) | 0.00 | ||
| Glaukos Corp. (GKOS) | 67.84 | ||
| KB Home (KBH) | 36.05 | ||
| Micron Technology, Inc. (MU) | 43.31 | ||
| Olin Corp. (OLN) | 0.00 | ||
| Veeva Systems (VEEV) | 180.23 |
Adient (ADNT)
Why the Strength
Adient is a major manufacturer of automotive seating and interiors. The company’s 75,000 workers in 230 factories in 33 countries produce and deliver seats for every class of vehicle and every major auto manufacturer. Until October 31, 2016, Adient was a division of Johnson Controls, which spun the seating business off to focus on its merger with Tyco International. Adient can deliver either completed seat assemblies or individual components and has a fully integrated just-in-time delivery infrastructure. The company’s best-known brand is Recaro, which makes race-car style seating for cars, planes, arenas, office chairs etc. The company’s fiscal Q1 earnings report on February 3 showed a 14% jump in earnings, while revenue continued to slide lower. But the company’s stock, which fell for three days after the report, picked up coverage and updates from analysts who saw the potential of the global increase in car buying and appreciated Adient’s strong position. And the company is working on seats with added features should driverless cars become a major industry segment. With just under 40% of business coming from North America and a new office just established in China, the Adient story is a big one. A bargain valuation (8 times 2017 estimates) helps.
Technical Analysis
ADNT came public on October 31, and finished its first trading day at 48. After just four days of selloff from that IPO, the stock got moving quickly, topping its first-day price in November and heading higher in January after a six-week consolidation. ADNT slid for a few days after its Q1 earnings report, but recovered quickly and gapped up on February 21 after Morgan Stanley initiated coverage with an Overweight rating. After tagging 76 last week, the slip over the last few days has left ADNT at a good buy point. You can buy here, with a loose stop at 65.
ADNT Weekly Chart
ADNT Daily Chart
Adobe Inc. (ADBE)
Why the Strength
Adobe Systems went through a major transition a few years ago, moving away from its CD-ROM and upgrade-centric business model to one focused on the cloud—while prices came down some, the automatic upgrades and monthly payments attracted tons of new users and boosted the lifetime value of subscribers. Just as important, the explosion of content creation in recent years has played right into the company’s hands, as its various software suites are best-of-breed in that area. The stock has been a good performer as business has been strong for a while, and last week’s quarterly report confirmed that growth remains strong—sales (up 22%) and earnings (up 42%) both topped expectations, thanks to strong demand and low levels of cancellations for its Creative Cloud suite of products (revenues up 29%), as well as for its marketing analytics business (up 27%). Importantly, cash flow from operations totaled $730 million, up 47% from a year ago and well above net income, as the subscription/cloud model pays off. Analysts applauded the results by raising their earnings estimates; they now see Adobe’s bottom line up 31% this year and another 26% next. With the best content creation tools in the business, there’s no reason to think Adobe won’t meet or exceed those figures.
Technical Analysis
ADBE has had a huge run during the past few years, so it’s not in the early innings of its overall advance, but the stock has found new life this year after a choppy, mediocre 2016. Since the calendar flipped, ADBE has been trending persistently higher, and then popped to new price and RP peaks on earnings last week. If you’re game, you can buy here or on weakness and use a stop in the upper 110s.
ADBE Weekly Chart
ADBE Daily Chart
Axalta Coating (AXTA)
Why the Strength
Until February 2013, Axalta was known as DuPont Performance Coatings, a business known in the paint world as “the founding father of the automotive paint business.” Axalta was bought by The Carlyle Group and is a major global supplier of paint for new vehicles, industrial finishes and powder coatings and specialty paints and coatings for luxury goods. The newly independent company has 35 plants and seven technology centers around the world, and is well-positioned to take advantage of growth in Brazil and China. Part of Axalta’s appeal is the thriving global automotive market, which keeps demand for spectacular auto finishes high. Axalta recently announced a $675 million stock repurchase program that will run with no expiration date. The company also announced on February 1 that it would acquire Century Industrial Coatings for an undisclosed sum. The move is expected to strengthen Axalta’s position in the industrial end of its line. The company’s latest quarterly report featured a 17% jump in earnings, a strong precursor to the estimated 26% earnings growth in 2017. Like Adient, an automotive seating specialist also featured in this issue, Axalta is a play on the global auto industry, but Axalta’s industrial coatings business is actually a bigger source of revenue, which tempers the risk of a dip in the auto industry.
Technical Analysis
AXTA came public in November 2014 at around 20, and climbed steadily to 37 in June 2015. A subsequent correction took the stock back to within a point of its IPO price in February 2016, which was followed by a long consolidation with support around 24 and resistance at 30. The current rally began in November 2016, with a six-week paused under resistance at 30 before the stock spiked higher on major volume on March 10. AXTA soared to 33 last week and has now pulled back by almost a point, which offers a reasonable buy point. A stop at 29 will give it a little breathing room.
AXTA Weekly Chart
AXTA Daily Chart
Broadcom Limited (AVGO)
Why the Strength
Broadcom is a nearly $90 billion market cap semiconductor giant that’s the result of several acquisitions and mergers. The most recent closed deal was the marriage of Broadcom and Avago in February 2016. Next up is the $5.9 billion acquisition of Brocade, which was announced in November, which should strengthen Broadcom’s enterprise storage and networking solutions business, one of the company’s four major end markets. Others include wired infrastructure, wireless communications, and industrial. The company’s analog and digital semiconductors are in just about everything and, yes, it does have substantial business coming from Apple (roughly 20% of revenue). In fiscal Q1 2017 (reported March 1), the company beat on both revenue and earnings. Revenue growth was an acquisition-inflated 134% (to $4.1 billion) while EPS of $3.63 beat by $0.17. Analysts moved the bar higher with price targets in the 250–260 range dominating. The pending Brocade acquisition (and related asset divestures) complicates the forward outlook a little, but consensus estimates suggest 29% revenue growth this year followed by 6% in 2018. Each share of stock should deliver enough earnings to take the family out for ice cream. A modest dividend (1.8% annual yield) is another plus.
Technical Analysis
AVGO’s ascent started around the fourth of July when it was trading at 145. By the beginning of September, it was at 177 before pausing for three months. It broke out from 170 to 180 after reporting Q4 results on December 8. A modest pullback to 172 set the stage for a fierce move to 205 by the end of January. From there, the stock began a steady ascent to 215, then Q1 earnings helped drive the stock to 227 last Monday. The last four days have set up what looks like a buyable pullback.
AVGO Weekly Chart
AVGO Daily Chart
Children’s Place (PLCE)
Why the Strength
Retail stocks have underperformed the market by a wide margin during the past few months, due to both sluggish industry-wide same-store sales and fears over a potential import tax from Washington, D.C. later this year. But we’re starting to see a couple of rays of light from the sector, and Children’s Place is one of them. The company is well known to parents and grandparents (I shudder to think of how much we’ve spent there in recent years) as a place for good kids’ apparel at reasonable prices. The stock is strong today because of a profitability initiative that’s paying off in a big way. The company has actually closed 142 stores since the start of 2013 (it currently has 1,039 stores), and is aiming to shut down another 60 or so this year and another couple dozen annually going forward, all of which has kept costs down. Despite that shrinkage, overall sales growth has been positive thanks to buoyant same-store sales (up 6.9% in the holiday quarter), which has led to excellent earnings growth. Children’s Place is also being aggressive returning cash to shareholders, recently doubling its dividend (annual yield is now 1.4%) and consistently buying back stock (share count was down 8% last quarter). The recent fourth-quarter report easily topped expectations, and analysts see earnings rising more than 20% this year, which has attracted buyers.
Technical Analysis
PLCE has been trending higher since it bottomed in November 2015, but it’s been mostly a stair step advance—it rallied to 85 last April, then went sideways until November before blasting off to 111. The stock then built a shallower, tighter consolidation (12 weeks, 16% deep) through early this month before surging on its fourth-quarter report on its heaviest weekly volume in years! Encouragingly, the action since the gap has been very tight—we think it’s buyable here.
PLCE Weekly Chart
PLCE Daily Chart
Glaukos Corp. (GKOS)
Why the Strength
We’re going back to the well with Glaukos because of the stock’s fantastic chart and solid fundamentals. Our last mention of the glaucoma specialist was on January 16 when the stock traded near 39. It’s up 25% since, and we see further upside. The backstory here is that glaucoma (a high-pressure condition in the eye resulting from lack of ocular fluid drainage) affects two million people in the U.S. and tens of millions worldwide. It can lead to blindness. But not if the afflicted receive one of Glaukos’ tiny stents (about as big as one letter on a penny) through the company’s proprietary iStent insert procedure (FDA approved in June, 2012). Revenue has been pouring in ever since, growing by 118% in 2014, 57% in 2015 and 60% in 2016, which was the company’s first profitable year (EPS of $0.12). When reporting Q4 2016 results on March 1, management guided for revenue growth of 42% in 2017, well ahead of expectations for 30% growth. Management also confirmed expectations that its two new glaucoma devices (iStent Inject, an injectable two-stent therapy, and iDose, a targeted injectable drug-delivery implant) are moving through trials as expected. Expect data from the iStent Inject 500-subject pivotal trial in mid-2017, and Phase 2b data from iDose later in the year. Several analysts upped price targets to around 54 (10% above Friday’s close) after earnings.
Technical Analysis
GKOS has been way down and then way back up in the 21 months since coming public. But we like the recent action a lot—the stock built a solid base from October through January, then decisively broke out above 40. The ensuing rally took the stock as high as 52 (during the post-earnings enthusiasm) before a quick shakeout to the 50-day line near 42. Now the buyers are coming back into the stock. It’s thin and choppy, so keep positions small and use a loose stop.
GKOS Weekly Chart
GKOS Daily Chart
KB Home (KBH)
Why the Strength
Last week, we featured two direct plays on residential housing (Pulte Group and Top Pick Builders Firstsource), and this week, KB Home has made the list. KB is about half the size of Pulte Group, with a focus mostly in the southern (Florida, South Carolina, Texas) and western U.S. (California, Colorado, Arizona, Nevada), as well as first-time and first-time-move-up buyers, which, combined, made up 76% of their customers last year. As we wrote with Pulte, homebuilders are strengthening thanks to still-reasonable mortgage rates, optimism about the economy going forward, and continued solid results from the industry. On the latter front, KB Home is doing its part—its latest quarter saw revenues rise 21% and deliveries increase 19%, while backlog increased to $1.5 billion, up 19% from a year ago and its highest year-end level since 2006, while new orders expanded a whopping 27%. Earnings took a dip because of some inventory charges, but analysts see the bottom line surging 35% this year and more in 2018. That said, the next big event is coming Thursday, when the company will report its latest quarterly results.
Technical Analysis
Despite decent growth numbers, KBH fell sharply from a high of 25 back in 2013 to a low of 9 last year. The stock did rebound to 17 by July 2016, but that kicked off a relatively tight (14 to 17) multi-month basing process—as off a month ago, KBH was still hovering around 16. But, as with most stocks in the group, the buyers are now in control, with KBH rising six weeks in a row, taking it to nearly 20 last Thursday. If you’re game, you could nibble here or on dips ahead of earnings, then look to add shares if the reaction is positive.
KBH Weekly Chart
KBH Daily Chart
Micron Technology, Inc. (MU)
Why the Strength
Micron keeps flashing green across our screen for the very simple reason that the data storage stock keeps going up. We last featured the name on January 20, after which shares dipped to their 50-day moving average line (above our suggested stop loss range), before resuming their northern march. The latest catalysts driving the DRAM (58% of revenue) and NAND memory (33% of revenue) specialist are earnings this Thursday, ongoing bullish comments from analysts, and speculation about sector M&A activity. Last quarter’s (fiscal Q1, 2017) 19% revenue growth and 10% EPS growth performance ended a dismal streak of contraction (on both measures) for this cyclical stock. And it paved the way for expectations of 47% revenue growth and a huge boom in earnings in 2017 (from six cents in 2016 to $2.96 per share)! That estimate is up $0.50 over the past month, which should give some indication of just how rapidly conditions are improving. The back story on fundamentals remains about the same as when we last commented; impressive sales trends, including growth in 20nm, better DRAM pricing trends, success migrating customers to 3D NAND, and gross margin improvement. Intel’s purchase of Mobileye is also helping to stoke investor interest in chip names.
Technical Analysis
MU still has 10 points to go before hitting its peak of 36 from the last cycle, which ended in 2014. Early 2016 saw this stock at 10. But the stock’s recovery began in earnest after the fiscal Q3 quarterly report on June 30, after which the stock rallied from 12 to 18 over three months. Shares regrouped in the 16–18 range through early November, then began rallying again. December 21 earnings drove a gap to 23. Two normal pullbacks in mid-January (to 21.5) and mid-February (to 22.5) have helped to round out a pattern of higher highs and higher lows over the past five months. It’s not the first inning of MU’s advance, but it looks to have gas left in the tank.
MU Weekly Chart
MU Daily Chart
Olin Corp. (OLN)
Why the Strength
Olin Corp. is a Missouri-based chemical company with a unique product mix. The company, which debuted last month in Top Ten Trader, has a history dating back to 1892 when the company made blasting powder. Over the years, the company acquired and sold off dozens of businesses. The company now operates in three segments: Chlor Alkali Products and Vinyls, which brought in about $3 billion in 2016; Epoxy, which had $1.8 billion in revenue; and Winchester, which brought in $729 million. Olin is now the #1 producer of chlor-alkali, membrane grade caustic soda, epoxy materials and chlorinated organics in the world. There have been a lot of Olin headlines in the news recently. First, the company’s January 31 earnings report featured earnings of 31 cents per share on revenue of $1.39 billion, which beat analysts’ expectations handily. Second, it was announced on February 8 that Iridian Asset Management was taking a nearly 6% position in Olin. Third, the company just completed a $500 million offer of senior notes that it will use to clear all of its term loans. The outlook for continuing global growth and a nice 2.4% forward annual dividend yield make for a solid future.
Technical Analysis
OLN has been in rally mode since September 2016, but paused under resistance at 27 in December and January. The stock blasted out of that two-month flat patch after the earnings news, gapping up from 26 to 29 on triple its average volume. The follow-through to that gap up kicked the stock to 32 in late February, and after a two-week consolidation at that level, OLN added another point last week. We think OLN presents a nice growth/dividend package that is buyable on any weakness of a point, with a stop at 30.
OLN Weekly Chart
OLN Daily Chart
Veeva Systems (VEEV)
Why the Strength
Veeva Systems isn’t well known by most investors, but it has the makings of an emerging blue chip. The company is the clear leader in cloud-based software solutions for the life sciences industry, offering software that boosts efficiencies for clients’ clinical, regulatory and quality control efforts. In a sense, it’s like a Salesforce.com for the life sciences industry; in fact, Salesforce and Veeva just expanded their existing partnership, with a couple of Veeva’s key packages integrated with Salesforce’s offerings. By itself, the life sciences industry should produce years of growth for Veeva, but there’s more to the story than that—the company is aiming to slowly expand into other industries with its quality control and content management systems (especially in highly-regulated industries like oil and gas, aerospace and chemicals), and has already inked some big customers. All told, revenue growth has been consistent in the 30% to 35% range, with earnings and cash flow growing faster than that. Of course, the valuation isn’t for the timid investor, but like most subscription-based companies, cash flow is much larger than earnings (free cash flow was 28% larger than net income last year) and is expected to grow much faster than earnings this year (up 24%) and next (up 30%). All in all, it’s a great growth story that likely has years of runway ahead of it—management has stated there’s an opportunity for Veeva to become a multi-billion dollar company in sales, and we believe it.
Technical Analysis
VEEV broke out last May and ran from around 30 to 43 by September. But then the stock built two bases, the first in October and November (36 to 43) and the second in December, January and February (41 to 48)—all told, VEEV made no progress during a six-month stretch. But that rest period is now over, with the stock ramping to new price highs last week on excellent volume. You can buy some here or (ideally) on dips, with a stop in the mid-40s.
VEEV Weekly Chart
VEEV 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.
