Keep it Simple
Current Market Outlook
The market has had plenty of gyrations this year, even since it pushed out to new highs in February. But at no time since then has the intermediate-term trend turned down, and at no time have a bunch of Top Ten stocks showed abnormal action. Thus, we remained bullish, and that patience began paying off last week as the market’s uptrend resumed. There will surely be pullbacks and potholes among various sectors and indexes from time to time, but with the odds favoring higher prices in the weeks ahead, you should be holding your top performers and looking to add new leaders at good buy points.
This week’s list has a diverse mix of stocks, including a few new names. Our Top Pick is Ulta Beauty (ULTA), which is one of the market’s top retail stocks and cookie-cutter stories. A buy on dips is your best bet.
| Stock Name | Price | ||
|---|---|---|---|
| Western Refining (WNR) | 0.00 | ||
| Vipshop Holdings (VIPS) | 14.25 | ||
| Ulta Beauty (ULTA) | 331.95 | ||
| Ryland (RYL) | 0.00 | ||
| Regeneron Pharmaceuticals (REGN) | 512.96 | ||
| Universal Display (OLED) | 187.54 | ||
| Juno Therapeutics (JUNO) | 0.00 | ||
| JD.com (JD) | 39.58 | ||
| JetBlue Airways Corporation (JBLU) | 0.00 | ||
| Fortinet Inc. (FTNT) | 137.53 |
Western Refining (WNR)
Why the Strength
Many stocks in the energy industry have been suffering from the low price of oil. But that low price has been a huge advantage for refining companies like Western Refining. El Paso, Texas-based Western processes crude oil at its three refineries in El Paso and Gallup, New Mexico, and St. Paul Park, Minnesota, and distributes the results at its refined products terminals in Albuquerque and Bloomfield, New Mexico, and three asphalt terminals. The company also owns and operates a string of service stations, 261 retail stores in the Southwest and upper Midwest, a fleet of truck transports and 300 miles of pipeline and eight million barrels of storage capacity. Altogether, then, Western Refining is an integrated refining and retailing operation that is enjoying a big boost from cheap crude, as the company’s pipeline access to crude production from the Permian Basin in Texas, the Bakken formation in North Dakota and Montana and western Canada creates a huge cost advantage. Plus, the company’s El Paso and Gallup refineries were among the top four in the U.S. for gross margin per barrel of crude in 2014. Revenue jumped 50% in 2014 and earnings growth hit 424% in Q3 2014 and 98% in Q4. With an attractive dividend that yields 2.5% annually, a continuing environment of cheap oil and a dirt cheap P/E ratio of 12, Western Refining looks like a great buy.
Technical Analysis
WNR was a volatile issue in 2014, starting the year at around 39, then advancing to as high as 45 in September and 44 in October before dipping to 32 in January. But the stock caught fire at that point, and has skyrocketed to near 50 with only a calm two-week consolidation at 47 earlier this month. WNR may be at new all-time highs in price terms, but it’s still a relative bargain in P/E terms. A buy on any weakness with a stop at 45 looks like a good bet.
WNR Weekly Chart
WNR Daily Chart
Vipshop Holdings (VIPS)
Why the Strength
Vipshop Holdings is a Chinese online retailer with a distinctive strategy. The company offers stylish, name-brand merchandise at a discount via flash sales, which are offers of goods for a limited time or until they sell out. The flash sale feature keeps shoppers coming back because the goods on offer are constantly changing. And the company’s huge network of alliances with fashionable manufacturers allows the clothing, accessories and devices to be offered at a substantial discount, usually 30% to 70% off retail. Vipshop is one of the two largest online retailers in China, and its success has been phenomenal, with revenue growth “cooling off” to 122% in 2014. Vipshop turned profitable in Q3 2012, and has booked six consecutive quarters of earnings growth over 140%. The scale of the opportunity for online retail in China is difficult to comprehend, as Chinese online sales were nearly $450 billion in 2014, up 50% from 2013. Even though Vipshop Holdings has a market cap over $18 billion and $1.4 billion in cash on hand, the company is still mentioned as a takeover target for larger Internet firms, which also keeps the company’s stock attractive. But the big story is organic growth and a sales model that has high barriers to entry. Investors have been leery of Chinese stocks for a while, as uncertainty about the country’s slowdown in GDP growth to 7% has made for some nervous moments. But Vipshop Holdings’ growth is too attractive to ignore.
Technical Analysis
VIPS was one of the strongest stocks in the entire market in 2013, and it continued its price advance from January 2014 (when it was trading at 8.5) to August 2014 (when it peaked at 23). Although VIPS made a higher high at 25 in November, the stock was actually building a new base under resistance at 23 that lasted until last month when it finally broke out to 26. And last week’s high-volume action kicked VIPS to 28. With a long base to build on, VIPS looks like a good buy on any dip below 28, with a stop at 24.5.
VIPS Weekly Chart
VIPS Daily Chart
Ulta Beauty (ULTA)
Why the Strength
Ulta Beauty is strong today because it’s one of the market’s favorite cookie-cutter stories, and the latest quarterly report showed that the firm’s bullish longer-term plan might actually prove conservative. The company is becoming a national beauty chain, making its name with a giant inventory of low-, mid-, and high-end products (including many in-store “boutiques” of well-known brands like Clinique and Lancome), as well as a growing array of salon services delivered in-store. (Interestingly, while Ulta’s salon business grew a solid 20% in the fourth quarter, just 7% of its 15 million loyalty card members currently use salon services at Ulta, so it’s a huge growth opportunity moving forward.) And Ulta has grand plans on where it wants to go during the next few years, increasing its year-end store count of 774 by 100 per year for each of the next five years while enjoying healthy same-store sales growth (up 11% in the recent quarter). Throw in a burgeoning e-commerce business, which saw sales up a huge 55% in the quarter, and you can see there’s lots to like about Ulta. Yes, the valuation is a bit stretched, but the market has a very long history of paying up for these steady, resilient growth stories that have lots of expansion potential. We like it.
Technical Analysis
ULTA fell hard in late-2013 after its growth prospects were called into question. But after many months of bottoming, the trend turned back up in last September (the stock gapped up on 10 times its average volume) after a great earnings report, and it’s been marching higher at a slow-but-steady pace ever since. ULTA popped again two weeks ago on its fourth-quarter report, and traded tightly in the days since, a bullish sign. Still, this isn’t a “runaway” stock, so while you could nibble here, dips of a few points are likely to provide better entry points.
ULTA Weekly Chart
ULTA Daily Chart
Ryland (RYL)
Why the Strength
The off-the-bottom advance in homebuilders from late-2011 to mid-2013 was terrific, but after the deep and pervasive bust of the prior six years, it seemed likely that the recovery would have another leg higher eventually. The fundamentals for that next upleg are now in place; job growth has picked up (though wages are still just so-so), mortgage rates remain low, and many home-buyers are looking to “beat the rate hike” as the Fed looks to tighten. (Recent housing starts figures were soft, but that was mainly a weather-related issue; building permits remain healthy.) Ryland is one of a handful of leaders in the group with exposure to a wide range of houses (entry, trade up, etc.) and geographies (sales are evenly distributed between the north, southeast, Texas and the west). Business has been steadily cranking higher for the past few years—in the December quarter, home deliveries were up 14% and prices rose 8%, while profit margins expanded nicely. The backlog grew only 7%, but with the spring selling season on the way, demand is likely to rise, and it looks like most investors are betting on that. All in all, if the housing market picks up—and there remains a ton of pent-up demand out there—Ryland is almost certain to ride the trend.
Technical Analysis
RYL rallied from 9 at its bottom in 2011 to 50 at its top in May 2013. Then began its long consolidation—shares dipped as low as 30 last October, and had another shakeout to 35 in January. But the stock has acted well since then, rallying to the mid-40s, pausing in a very tight five-week range, and then pushing toward its multi-year highs last week on good volume. We think buying here or on dips makes sense, with a stop near 42.
RYL Weekly Chart
RYL Daily Chart
Regeneron Pharmaceuticals (REGN)
Why the Strength
Regeneron Pharmaceuticals has been a consistently strong stock for many years, as evidenced by its 15 total previous appearances in Top Ten since it debuted here in 2006. The company has a strong roster of marketable drugs, led by Eylea, a treatment for age-related macular degeneration, Zaltrap, which treats metastatic colorectal cancer and Arcalyst, for the treatment of cryopryrin-associated syndromes. While these drugs have kept revenue growing, this growth has slowed from 209% in 2012 to just 34% in 2014. So investors have been waiting for a new catalyst for price growth, expecting that it would come from the company’s strong lineup of drugs in clinical trials. And that’s exactly what happened on March 16, when a report found that the company’s Praluent (which is being developed in collaboration with Sanofi) had excellent results in lowering cholesterol and, more importantly, that it actually lowered the incidence of death and hospitalization from heart attacks and strokes. The report included a candidate drug from Amgen, but there was plenty of investor enthusiasm to go around. If Praluent (alirocumab) gains approval from the FDA, there will be a big effect on Regeneron’s bottom line.
Technical Analysis
REGN has been in a long-term uptrend, but when the good news hit last Monday, the stock had been trading sideways since early December. REGN peaked at 438 on December 8, then tightened into a range with resistance at 430 and support around 400. The breakout on March 16 kicked the stock to 452 on twice its average volume, and that momentum led to a sprint to over 490 last Friday. REGN has pulled back modestly today, as profit taking hit the group, and we think REGN looks like a good choice for longer-term investors around here, with a relatively loose stop at 440.
REGN Weekly Chart
REGN Daily Chart
Universal Display (OLED)
Why the Strength
As a developer of Organic Light Emitting Diode (OLED) technology, Universal Display is a key supplier for Apple. Universal’s OLED screens are used in Apple’s new Apple Watch, and are rumored to be part of Apple’s future wearable watch models as well as the future iPhone 7. Universal’s ties to Apple have grabbed Wall Street’s attention—the stock rose 13% in the lead-up to Apple’s March 9 Watch unveiling. Apple is far from Universal Display’s only client, however. Samsung Electronics and LG Display also use OLED technology for their plasma TVs and mobile devices. Both companies plan to ramp up their OLED usage—LG Display with increased production of its 4K TVs, and Samsung with increased smartphone production. Rising demand for Universal’s OLED technology among some very high-profile companies helped boost sales by 30% and earnings per share by 29% last year with plump profit margins to boot. Analysts expect EPS to grow 23% this year, and an additional 40% in 2016.
Technical Analysis
Stuck in a range between 25 and 29 from November through January, OLED broke through resistance in late January and has continued onward all the way to 44. Volume has picked up in March thanks to the Apple Watch event boosting the stock’s Wall Street profile. The new buyers carried OLED from 37 to 46 before the stock pulled back a couple points late last week before perking up again today. We think buying dips is your best bet.
OLED Weekly Chart
OLED Daily Chart
Juno Therapeutics (JUNO)
Why the Strength
In its first earnings report since going public on December 19, Juno Therapeutics vowed to bring 10 new products to clinical trial in the next 12 months. The expected growth has even prompted the company to seek out a newer, larger headquarters in Seattle. Spun off from cancer research nonprofit Fred Hutch, the clinical-stage biotech specializes in immunotherapy treatments that involve engineering a patient’s immune system to fight cancer cells. Immunotherapy is becoming a trendy and highly lucrative form of cancer treatment, with immunotherapeutic approaches expected to generate $35 billion in sales over the next decade. Juno Therapeutics’ 10 clinical trials will target cures for leukemia and lymphoma using something called CAR-10 therapies. Big pharma companies such as Novartis are starting to use CAR-10 therapies—a fact that could result in a financial windfall for Juno should any of its clinical trials prove successful. Though its first quarterly earnings disappointed last (the company didn’t report any revenue and said it’s likely to burn through $150 million in cash in 2015), the stock still popped 17% in a day thanks to the promise of its clinical trials. We view Juno as an interesting speculative story.
Technical Analysis
JUNO has been up and down since its December 19 IPO. After debuting at 39, the stock jumped all the way to 62 by January 12 before entering a downward spiral, with shares falling all the way back to 38. Now it’s on another major upswing, back in the low 60s in the wake of last week’s post-earnings push. It might make sense to wait for the next dip, given the stock’s volatile nature in its three months on the market, but now that investors actually have some encouraging information about the company, the latest rally could be more sustainable than its post-IPO push. If you buy, be sure to keep the position smaller than normal.
JUNO Weekly Chart
JUNO Daily Chart
JD.com (JD)
Why the Strength
Chinese stocks have been a tough sell for a while, as investors try to get a handle on what the country’s economy will be like with “only” 7% annual GDP growth. But the one sector that continues to find favor with investors is Chinese retail, especially online retail. JD.com is the largest e-commerce direct seller in China, and that’s helping investors to conquer their nervousness. In the third quarter of 2014, JD.com claimed 51.9% of the gross merchandise volume of Chinese online sales, partly as a result of its concentration on high-ticket electronic and home appliance products. This was probably one reason that Apple decided to pick JD.com as its main sales partner for the new Apple Watch, when it comes to market. JD.com’s P/E ratios are crazy high (364 trailing and 965 forward), but that’s because earnings are depressed by the firm’s investments in distribution. But the bottom line should soar from here—estimates of 2015 earnings growth are at 167%, and 2016 estimates are for 363% growth and JD.com has about $4.7 billion in total cash, which makes it both a strong player in the takeover business. It also supports the company’s program of speeding its delivery program with the strongest fulfillment infrastructure of any company in China.
Technical Analysis
JD came public at 19 in May 2014, and the stock has never traded below that. After soaring to 33 last August, the stock began a three-month correction that pulled it back to 22 at the beginning of December. And since that low, JD has rebounded to 29, tracing a nice right side to a cup formation. It would be all to the good if JD recovers to 33 and puts a handle on the cup, but that’s not vital. What we have now is a stock in an uptrend that has more than three months under its belt and is showing no signs of stalling. And it’s getting support from both the quality of the company and from a renewing investor interest in Chinese online retail stocks. We think a buy on a pullback toward 28, with a stop below 26 has a good risk/reward balance.
JD Weekly Chart
JD Daily Chart
JetBlue Airways Corporation (JBLU)
Why the Strength
The airline sector continues to enjoy something of a Goldilocks environment—not only do fuel costs remain low (they could be taking another leg down now), but the U.S. economy is picking up steam, leading to higher demand for both business and leisure travel. That should make 2015 a banner year for JetBlue and other airlines, with earnings moving through the roof. Though industry conditions are the biggest reason JetBlue is strong today, the company itself is outpacing the industry on some other metrics—in February, for instance, traffic was up 10% from a year ago, while capacity was up 7.4%, so it’s clear the firm is still expanding. Plus, for the first quarter as a whole, JetBlue now expects revenue per seat mile flown to rise 3% to 4%; that doesn’t sound like much, but on top of the healthy traffic increases, it should lead to a solid double-digit revenue increase in the first quarter, and possibly for the full year. Analysts now see earnings of about $1.70 this year and more in 2016, and even these figures are likely conservative, with some analysts believing $2 or more is possible this year. Of course, if the U.S. economy catches a cold, or if fuel prices rally for more than a couple of weeks, perception of the group could change. But right now, the buyers are clearly in control.
Technical Analysis
About the only thing that worries us with JBLU and most other airlines is that they’ve already had huge runs; JBLU was around 4 in mid-2012 and is up nearly five-fold since then. Thus, we don’t advise buying and holding, per se, but there’s no question this stock is one of the leaders of the sector move right now—it’s held its 50-day line during the recent consolidation, and as the group recently regained strength, JBLU quickly surged to new highs on decent volume. Buying on a dip of a point or so should work well.
JBLU Weekly Chart
JBLU Daily Chart
Fortinet Inc. (FTNT)
Why the Strength
The huge and increasing demand for cyber security continues to benefit the companies with the best products and technologies in the space. Cyber security is a $95 billion market that is expected to grow to $155 billion by 2019. Fortinet, a global leader in cyber security solutions, is one of the bigger names in that fast-expanding market. Fortinet’s sales have been growing steadily, improving by 25% in 2014. Similar growth is expected this year, aided in part by the company’s new “Easy 4” pricing model, a new bundled product sales strategy. The stock has caught the eye of many prominent investors of late. Jim Cramer recommended it on CNBC, and UBS and Oppenheimer have upgraded their price targets in recent weeks. Eight other hedge funds disclosed new stakes in the company during the fourth quarter—a sure sign of Wall Street’s interest in the cyber security industry, and Fortinet’s leading position within that industry. As for the numbers, sales growth should remain solid in the quarters ahead, and, more important, billings (up 35% in the fourth quarter) and deferred revenue (up 29%) are a sure sign that earnings growth will soon kick into gear.
Technical Analysis
After a bumpy start to the year, FTNT has been picking up steam since late January. The stock jumped from 29 to 34 in February, holding steady in that range until last week, when it broke through resistance and reached 35 for the first time ever. FTNT’s 50-day moving average has been a key support level since October. With that average up to 32.5, buying here and using a tight stop just below that line offers a nice risk-reward trade.
FTNT Weekly Chart
FTNT 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.
