March 21, 2016
This week’s Top Ten Trader still has a cyclical and industrial flavor to it, but every stock has very enticing earnings estimates, telling us there’s potential for plenty of upside from here. Our Top Pick is a little-known firm that might be the best way to play the general rebound in construction.
Same Story: Good Action, but Waiting for Growth Stocks
Current Market Outlook
Last week made it five weeks up in a row for the major indexes, which keeps the intermediate-term trend solidly up. Moreover, the broad market is now clearly healthy, with many stocks and sectors showing excellent accumulation. All of that is why we’re nudging up our Market Monitor another notch; you should probably be more invested than not, given the evidence. However, we’re going to stay in the upper reaches of neutral until we see growth stocks get going—many of them are set-up nicely, but until they actually break out (and until the market’s longer-term trend turns up, which it has yet to do), it’s best to keep some powder dry.
This week’s list has a strong flavor of industrial and cyclical stocks, though many have excellent earnings estimates so they aren’t pure turnarounds. Our Top Pick is HD Supply (HDS), which has surged higher after a big correction, and is likely to post humongous earnings and cash flow growth in the quarters ahead.
|Trex Company (TREX)||117.56|
|Reliance Steel & Aluminum Co. (RS)||117.45|
|HD Supply Holdings, Inc. (HDS)||0.00|
|Hawaiian Holdings Inc. (HA)||0.00|
|Dollar Tree (DLTR)||0.00|
|Communication Sales & Leasing (CSAL)||0.00|
|Cirrus Logic Inc. (CRUS)||0.00|
|Copa Holdings (CPA)||0.00|
|Adobe Inc. (ADBE)||315.23|
Why the Strength
Whirlpool might seem like too big and stodgy a company to show up in Top Ten, but the firm has been a solid mover as it’s taken advantage of the housing bull market and been deft at boosting efficiencies, all of which has allowed earnings to double from 2012 to this year. The stock is strong today because that combination looks to be on track for 2016—the fourth quarter saw currency-neutral sales up 4% (the strongest growth was in Asia at +15%, though it’s the smallest part of the business) and earnings up 16% thanks to acquisition synergies and continued cost control efforts. And management expects the bottom line to rise at least 15% this year (analysts see earnings up 17%) as margins expand. Free cash flow is expected to rise to about $750 million (nearly $10 per share) this year, which should continue to fund the dividend (2% annual yield) and a modest share buyback program (the share count was down about 1% year-over-year in the fourth quarter). Moreover, after a yearlong decline, the stock looks very cheap—it’s trading at just 14 times earnings, 12 times this year’s estimate and just over 10 times analysts’ 2017 earnings estimates. This type of firm may never trade at a nosebleed valuation, but the stock should be able to work its way higher as long as management continues to pull the right levers.
WHR rallied from 45 in 2011, when housing-related stocks started to move, to as high as 217 last year before finally suffering a big correction—the stock plunged to 124, a huge 43% haircut, even though earnings continued to advance and the outlook was positive. Now that the pressure on the general market has lifted, WHR is playing catch-up—the stock has rallied 21 of the past 25 trading days (coming into this week), recouping about 60% of its downturn in just a few weeks. A pause is likely after the recent run, but any dip should eventually lead to higher prices.
WHR Weekly Chart
WHR Daily Chart
Trex Company (TREX)
Why the Strength
Trex is getting a boost from the ongoing recovery in the housing market. The world’s largest manufacturer of non-wood alternative products for decking and railing in homes and commercial buildings, the company is coming off a record year for sales and earnings, punctuated by a 62% bump in earnings per share and 20% increase in sales in the fourth quarter. Strength in the housing industry is largely responsible for the sales growth; with unemployment at post-recession lows and oil prices at decade lows, current homeowners have a little more extra cash to use on home-improvement projects, and many of them are using it to build new decks and fences. Meanwhile, cost reduction has played a big role in Trex’s earnings growth. With its non-wood offerings, Trex occupies a unique niche in the housing industry, as demand for its recycled pellets, decking and fencing products is soaring. A $25 million national advertising campaign this year should help raise the company’s profile, and sales are expected to grow accordingly. This year, analysts are projecting another 9.7% increase in revenues and 16% improvement in earnings per share, though it’s likely those figures are conservative as the construction industry ramps up.
A rough 2015 took TREX shares down from 56 to 32, where they found support in September and re-tested again in January and February. Now the stock has broken to the high side in a big way, topping resistance at 43 earlier this month. Still well shy of its 52-week high (56) but having broken free of six-month resistance, TREX is in a good technical position, and seems to have found new support at 42. If you decide to buy, set a stop just below that new support level.
TREX Weekly Chart
TREX Daily Chart
Reliance Steel & Aluminum Co. (RS)
Why the Strength
Why is a company with dwindling sales and earnings suddenly a big hit with investors? For starters, Reliance’s fourth-quarter earnings, though down 14% year over year, still managed to beat analysts’ estimates. Also, the company is in the midst of erasing much of its debt; long-term debt declined 35% in the past 12 months. But perhaps the biggest reason for investor enthusiasm over a steel and aluminum producer at a time when steel prices are low is Reliance’s recent acquisition of Tubular Steel, a distributor and processor of stainless steel pipes, bars and tubes. Tubular Steel has a stock of 60,000 tons and ships more than two million lengths of pipe, tubing and bar products per year; it recorded net sales of $200 million in 2014. That should help improve Reliance’s sales after a year in which revenues declined 10.5%. It also strengthens Reliance’s position in the energy market, as many of Tubular’s pipes are used in home heating systems. A cheap multiple is one other feature that’s helping RS attract new investors: despite the declining earnings, the stock trades at just 13 times 2017 estimates, which could prove conservative if the steel sector turns up from here.
Bargain buying was likely a factor when Wall Street took notice of RS in January. After touching 75 in July 2014, the stock fell off a cliff, bottoming at 52 in January 2015. Despite a few fits and starts, the stock was testing that bottom again this January when the bulls swooped in and pushed RS back above 70. Having breached 52-week resistance at 66 earlier this month, the stock is no longer limited by technical barriers. If you want in, look to buy on further weakness, and use a stop just below 61.
RS Weekly Chart
RS Daily Chart
HD Supply Holdings, Inc. (HDS)
Why the Strength
HD Supply is probably the biggest and broadest way to play a rebound in the general construction and infrastructure industries. The company distributes more than a million individual products to more than half a million customers—we’re talking about stuff like kitchen and bath cabinets, window coverings, janitorial supplies, HVAC products, pipes, hydrants, water meters, wastewater systems, hand and power tools, rebar, ladders, safety equipment, fasteners and countless more. With such a large footprint (more than $7 billion in revenue) and wide reach, sales growth has been slow, but it’s also been steady, between 5% and 7% for the past year (faster than the industries it serves, but still tame). But the real story here is the leverage in its business model—in 2015, earnings and free cash flow grew a whopping 90%, allowing the company to slash debt levels. Best of all, management (which has pulled all the right levers since the firm came public in 2013) released a bullish forecast for 2016, expecting another 6% sales growth, which should lead to a 34% leap in free cash flow and a 44% boost in the bottom line. Bigger picture: as interest rates remain low and many government budgets (state and Federal) swell, there’s a good chance general transportation and infrastructure demand will head higher, which would be bullish for HD Supply. It’s not revolutionary, but this is a well-run company that looks like it’s in the right place at the right time.
HDS had a slow, choppy advance from its IPO near 18 in June 2013 to its high last July at 37. Then came the plunge, as the market (and worries over all things industrial) pulled the stock all the way down to 21 in February. But the stock has spiked back impressively, lifting to 30 earlier this month and then, last week, surging back above its 200-day line following its earnings report. As with many off-the-bottom stocks, HDS could be ready to rest a bit, so if you want in, look for a dip of a point or two.
HDS Weekly Chart
HDS Daily Chart
Hawaiian Holdings Inc. (HA)
Why the Strength
One of the most customer-friendly airlines is now a big hit with investors too. Hawaiian Airlines, which is owned by Hawaiian Holdings, is known for being extremely punctual—it recently won the award for the airline with the most on-time departures and arrivals for a 12th straight year. But what’s really making the Hawaiian-based airline stand out to investors is its stellar earnings growth; earnings per share ballooned 113% in its most recent quarter, and virtually doubled—from $1.55 to $3.09—in 2015. This year, the company expects EPS to increase another 52%. Sales haven’t pushed through the roof—total revenue only ticked up slightly in 2015—but low fuel costs have cut down on overhead. Strong demand across all of its routes has also helped Hawaiian. In addition to the Hawaiian islands, the airline travels to and from the U.S. mainland, Japan, South Korea, China, Australia, New Zealand, American Samoa and Tahiti. In February, passenger traffic across all its destinations improved 7.1% from the previous year, and is up 5.6% through the first two months of 2016. And despite the recent run-up in Hawaiian Holdings stock (more on that below), shares are still reasonably priced at less than 10 times this year’s earnings estimates. That’s why investors continue to buy the stock—and why HA has become a Cabot Top Ten regular in recent months.
After moving sideways for most of 2015, HA broke to the upside in a big way in October, jumping from 24 to 39 in a matter of weeks. It pulled back to 29 during the market downturn in January, and promptly formed another solid base, leading to another breakout in February, easily topping resistance around 40 and motoring as high as 46 last week. With the stock still trading near that high, nibble on any dip of a point or two, and use a stop just below 40.
HA Weekly Chart
HA Daily Chart
Dollar Tree (DLTR)
Why the Strength
Dollar Tree made headlines last year when it made an $8.5 billion cash-and-stock deal to acquire rival Family Dollar. The deal, which closed in July 2015, created the largest dollar-store retailer in North America, with more than 13,000 stores in 48 states and five Canadian provinces. It took a while for the effects of the big takeover to settle out, and Dollar Tree’s stock came under pressure in 2015 when revenue failed to meet analysts’ expectations in two consecutive quarterly reports. But despite a Q4 earnings report that missed consensus estimates, Dollar General’s stock staged a strong comeback. The earnings report showed a 13% dip in earnings, but investors may have been impressed with the acquisition-fueled 117% jump in revenue and the outlook for a big boost in the bottom line going forward. Investors are clearly banking on Dollar Tree’s increased size to yield improvements in cost-cutting and other economies of scale, as well as the earnings power of its Family Dollar holdings. Earnings are forecast to increase 56% this year and another 24% in 2017.
DLTR made a great run from October 2014 to March 2015, when it completed its rise from 54 to 84. But the stock weakened for a few months before going over the falls in August and September. DLTR put in the bottom of a cup formation in October and November, then rallied strongly in late November. The stock has been trading in a range with support in the 70s and resistance in the 80s since December. You could nibble here, or simply wait for a breakout above 83 to buy. Use a loss limit near 75 in either case.
DLTR Weekly Chart
DLTR Daily Chart
Communication Sales & Leasing (CSAL)
Why the Strength
Communications Sales & Leasing is a high-risk, but potentially high-reward, REIT. We’ll start with the potential reward—the company is aiming to be the first triple-net REIT to focus on owning all types of mission-critical communication infrastructure, which it then leases to telecom firms, producing a reliable, multi-year stream of revenue (much of which will be paid out in dividends). This plays into what many telecom firms want; these companies spend money on new, revenue-generating initiatives, and have less desire to own costly infrastructure if they can rent it. CSAL owns 3.6 million fiber strand miles and 231,000 copper route miles across 29 states, and it’s looking to expand, mostly via acquisition. On that front, the company announced a major buyout in January (which should close next month) of PEG, a company that has 300,000 fiber strand miles in the Northeast, Midwest and Southern U.S., and a big presence in provider fiber directly to wireless towers. All of that is positive, but it brings up the big risk—right now, CSAL is nearly a single tenant customer, as Windstream (which spun CSAL off in May 2015) makes up 86% (!) of its business, so if Windstream catches a cold, CSAL will be in bad shape. The main objective with the acquisition of PEG (and future purchases) is to diversify the business. As it stands, though, CSAL’s management expects plenty of cash flow this year, and a few more acquisitions to diversify the business and boost the already-lucrative dividend (60 cents per share, per quarter, for an annual yield of 11%). It’s an intriguing story that could work out very well.
CSAL was spun off near the market top, so it’s not surprising the stock proceeded to plunge about 50% from that point to its February low. But as the market has rebounded, so has CSAL, spiking back above all its moving averages before catching its breath in recent days. We’re OK with a buy around here and a stop just below 19.
CSAL Weekly Chart
CSAL Daily Chart
Cirrus Logic Inc. (CRUS)
Why the Strength
As rumors about Apple’s latest iPhone reach a boil, more investors keep pouring money into Cirrus Logic. Appearing in Cabot Top Ten Trader for the second time in as many months, Cirrus Logic is gaining strength for its position as a key Apple supplier. The company makes audio chips used in Apple’s iPhones, which are responsible for 70% of Cirrus’ revenue. Later this year—supposedly in September—Apple is expected to roll out the iPhone 7, and there are rumors that it (or the iPhone 7S, due out in 2017) could come equipped with noise-canceling headphones. Noise-canceling audio technology is one of Cirrus’ specialties, so that would make Cirrus’ audio chips more integral than ever. Cirrus has also developed decoding software that would allow iPhones to use a digital audio input instead of a headphone jack. Regardless, the fact that the company is projecting 15% sales growth and 28% earnings per share growth in fiscal 2017 (which begins next month) is a pretty good indication that it will play a major role in the next versions of the iPhone—noise-canceling technology or not. And Wall Street is buying into all the Cirrus Logic-iPhone rumors.
After a rough December took the stock down from 35 to 25, CRUS came out of the gate hot in 2016. Fueled by the iPhone 7 rumors, CRUS shot up from 25 to 34 in late January. A brief consolidation followed, with the stock finding support just below 32. Then it built up a new head of steam, overtaking nine-month resistance to poke its head above 36 earlier this month. That’s about where it is now, as the stock appears to be building another base. You can buy some around here or on weakness; a dip below 32.5 would be your sign to sell, but a breakout above 37 would be highly bullish.
CRUS Weekly Chart
CRUS Daily Chart
Copa Holdings (CPA)
Why the Strength
Copa Holdings is a Panamanian airline company that’s joining in the rally in South American airline travel. Copa, which was founded in 1947 as the national airline of Panama, has been steadily building its network of airline routes and now offers 355 daily scheduled flights to nearly 70 destinations in 30 countries across North, Central and South America. The company’s fleet of 98 aircraft includes 72 Boeing 737s and 26 Embraer 190, and has firm orders for 21 additional 737-Next Generation aircraft through 2019, with rights to purchase eight more. The company has also announced an order for 61 Boeing 737-Max 8 and 9 aircraft for delivery between 2018 and 2024. Copa Holdings is something of a turnaround story, as the company has come through six quarters of declining revenue and earnings. But a program of cost-cutting produced earnings of 73 cents per share in Q4, well above analysts’ expectations. Like all airlines, Copa has been enjoying the benefit of low fuel costs as well as an uptick in international travel. The company also reported a 4.7% jump in traffic in February. Copa is reasonably priced with a 14 P/E ratio and pays a dividend with an annual yield of 2.9%. Investors have been coming back to Copa since the beginning of February.
CPA went through two years of declines in 2014 and 2015, falling from a high of 163 at the beginning of 2014 to a low of 39 in late September 2015. The stock attempted to rally in early October, but gave back most of its October gains in the next five months, starting its new rally in late January 2016 at around 50. CPA has now rallied to near 70. The stock has cleared its overhead back to August 2015 and is buyable on any weakness of a couple of points. Use a stop below 61.
CPA Weekly Chart
CPA Daily Chart
Adobe Inc. (ADBE)
Why the Strength
Everybody knows Adobe Systems as the creator of Acrobat and Photoshop, but the company has transformed itself into a complete source for creative software. Adobe’s Creative Cloud includes Photoshop, Illustrator, InDesign and a host of imaging and publishing software for print, Web, mobile and media production along with the training, maintenance and tech support resources to maximize results. The company offers plans for individuals, photographers, educators, small businesses, enterprises, schools and universities, and governmental entities, all served through subscriptions and cloud access. This relatively new strategy has boosted revenue growth from an 8% decline in 2013 to a 2% gain in 2014 and a 16% jump in 2015. Earnings are estimated to increase 36% in 2016 and 34% in 2017, as the company’s subscription busines model produces continuing income. The company made headlines last Friday when its Q1 earnings report showed a 50% jump in earnings on a 25% gain in revenue, topped off with a 24% after-tax profit margin. The company’s stock took a big hit in early February—along with many other tech giants—when LinkedIn’s weak results soured investors on the sector. But the good news last week briefly pushed the stock to new all-time highs. Adobe’s cloud strategy is working well.
ADBE has been rallying since 2012, although increasing volatility since early 2014 has made it harder to hold onto. The stock’s fall from 96 in December to 71 in February was a high-volume shakeout, but the stock began its rebound almost immediately. ADBE ripped to 98 last Friday, but slid to 93 by the close. It’s likely that the stock will consolidate for a while at this level, giving you a chance to start a position at an advantageous price. We think ADBE is buyable anywhere under 93, with a stop around 85.
ADBE Weekly Chart
ADBE 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.
|First||Stock||Symbol||Top Pick||Original Buy Range||Price as of March 21, 2016|
|1/11/16||Agnico Eagle Mines||AEM||04/30/2016||28-29.5||38|
|3/14/16||Briggs and Stratton||BGG||04/23/2016||22-23.5||24|
|3/14/16||Las Vegas Sands||LVS||04/22/2016||50-52||53|
|2/29/16||Sprouts Farmers Markets||SFM||05/07/2016||26-27.5||29|
|2/8/16||Super Micro Computer||SMCI||04/21/2016||29-31||33|
|1/11/16||The Children’s Place||PLCE||05/14/2016||60-63||81|
|WAIT FOR BUY RANGE|
|3/14/16||Blue Buffalo Pet||BUFF||04/28/2016||21.5-22.5||25|
|None this week|
|DROPPED: Did not fall into suggested buy range within two weeks of recommendation|
|None this week|