March 24, 2014
The major indexes still look OK, but there’s no doubt now that the sellers are in control of dozens of leading growth stocks, many of which have broken key support in the past few days. It’s enough for us to switch our Market Monitor to neutral, which means you should limit new buying, sell some laggards and hold some cash.
A Correction Under the Hood
Large-cap indexes like the S&P 500 continue to hang in there, but under the market’s hood, the selling in leading stocks that began three weeks ago has intensified, with many now showing abnormal action. Most fast-moving stocks are in a correction, and that’s enough for us to switch our Market Monitor to neutral, meaning you should limit new buying and raise some cash. That said, we’re not making any bold predictions; we’ve seen these rotations out of growth stocks before, and they often reverse themselves quickly. But right now, it’s best to pull in your horns and wait for leading stocks to find support.
Despite the carnage in certain sectors, we’re encouraged by this week’s list—there are many solid stories here, not just defensive or mega-cap names. Our Top Pick is Nabors Industries (NBR), one of a few energy stocks that are acting well.
|WhiteWave Foods (WWAV)||0.00|
|SanDisk Corp. (SNDK)||0.00|
|Nabors Industries (NBR)||0.00|
|Kate Spade & Company (KATE)||0.00|
|First Solar (FSLR)||83.74|
|E-Commerce China Dangdang (DANG)||0.00|
|Activision Blizzard, Inc. (ATVI)||0.00|
Why the Strength
Zulily is a young company that’s making its debut in today’s Top Ten. The company operates an online marketplace that offers merchandise for moms at an average 50% discount on a flash sale basis. That means that the 50 to 60 items that appear every day on the Zulily website are there for a limited amount of time, from one to three days or until the item sells out. Zulily has had great luck with its selection of children’s apparel, women’s apparel, toys, infant gear and home décor products. The company, which operates only in North America and Great Britain, cultivates relationships with quality brands to keep member interest high. The company had 3.2 million active customers at the end of 2013, an increase of over 100% from a year earlier. Revenue growth for the year was 110%, the company’s third consecutive year of triple-digit revenue growth. Zulily was founded just in 2009 and has been a publicly traded stock for less than five months. Investors love the flash sales model focused on a specific high-value demographic. They also see a company that would be an attractive takeover target for a large, hungry giant like Amazon. The valuation is huge, but so is the potential.
ZU came public at 22 on November 17 and finished its first day of trading up over 70%. The stock put in a three-month post-IPO base trading between 35 and 45, then blasted off on February 25 after a very strong earnings report. ZU soared from 43 to 73 in just three days, but has weakened with the market since then. Thus far, ZU hasn’t come close to filling its earning gap up, but today’s action did pull it below its 25-day moving average. There are risks here, including the fact that the stock is extremely volatile. But, all that said, ZU looks buyable right here, with a stop about halfway down its gap at 47.
ZU Weekly Chart
ZU Daily Chart
Why the Strength
Zillow is a Seattle, Washington-based company that’s taking the real-estate business online. Many homeowners become aware of Zillow by using its website to find estimates of the value of their own homes, whether they’re selling or not. But buyers are increasingly using Zillow to shop for houses, find real-estate agents and research mortgage rates, which means the company has the eager eyeballs of people who are looking to make the largest purchase of their lives. Zillow gets money from display advertising by businesses looking to attract homebuyers. But it gets a much larger proportion of its revenue from subscription fees paid by real-estate agents and companies in its Mortgage Marketplace. You can read the rising fortunes of Zillow (and the U.S. housing industry in general) by looking at annual revenue in the aftermath of the 2008 meltdown. From $17 million in 2009, revenue jumped to $30 million in 2010, $66 million in 2011, $117 million in 2012 and $198 million in 2013. The strength of Zillow is only reinforced by the fundamental strength of Trulia, a rival real-estate site, but Zillow is both bigger and stronger than Trulia, or any of its other competitors, for that matter. With housing confidence on the rise, Zillow’s prospects are excellent.
Z went on a monster run from November 2012 to September 2013, ripping from 23 to 103 in the process. But a three-month correction pulled the stock back to 70 in November. Since the beginning of 2014, Z has been very volatile, topping 90 twice and dipping below 80 three times before last week’s breakout rally briefly topped 100. Today’s action has pulled Z back to a decent-looking entry point, though the market’s weakness means you should handle this volatile stock with care. If you want in, keep the position small and use a stop near 85.
Z Weekly Chart
Z Daily Chart
WhiteWave Foods (WWAV)
Why the Strength
While every investor loves a company that’s set to quadruple earnings during the next year or two, most big investors also love to hunt for small companies with years of relatively consistent, forseeable growth ahead. Retail stocks often fill that criteria, and that’s why WhiteWave Foods is making its inaugural appearance in Top Ten. Like many in-favor food companies, WhiteWave produces a variety of popular organic food and drinks, including Silk, Land O’Lakes, Earthbound Farm (which it bought in January in a deal that will boost earnings this year) and Horizon Organic. With revenues approaching $3 billion, WhiteWave’s growth is moderate and steady. The long-term trend toward healthy eating should remain a wind at the company’s back—just 26% of U.S. households buy plant-based beverages like Silk, for instance, but that’s up from 16% in 2009. And organic packaged salad is now 23% of the total salad category, up from 14% in 2009. There’s nothing revolutionary here, but WhiteWave is a firm with leading organic brands and top-notch distribution in an industry that’s sure to grow in the years ahead. The valuation is elevated, but big investors (440 funds now own shares) are willing to pay up.
WWAV just came public in October 2012, but despite last year’s bull market, the stock didn’t make any progress from its opening week until after a shakeout in October 2013. Since then, shares have surged, buoyed by a bullish earnings report last month, and the stock’s action this month has been nice and tight before today’s drop. With the 50-day line below 27 and the market looking iffy, we believe buying dips toward that line is your best bet.
WWAV Weekly Chart
WWAV Daily Chart
SanDisk Corp. (SNDK)
Why the Strength
As makers of tech devices seek higher performance without adding bulk, SanDisk, a specialist in solid-state drives (SSDs), is going strong. The company’s devices go into smartphones, cameras and many other mobile devices and it sells solid-state memory drives under its own brand. The company is riding several trends at once, including a successful manufacturing efficiency campaign that has improved factory utilization and reduced costs. The company is also aggressively protecting its nearly 5,000 patents, having just won a $28.5 million infringement judgment against PNY Technologies and filed a new “misappropriation of trade secrets” suit against SK Hynix. These cases benefit SanDisk not just because of the compensation paid, but because they reinforce the willingness of other companies to pay licensing fees for the use of SanDisk patents. SanDisk is also a technology leader, and its new 1Y process technology will come into general availability during the second quarter. The company’s Q4 results were outstanding, with earnings growth at 63% (after two quarters of triple-digit EPS growth) and revenue up 12%. After-tax profit margins were above 20% for the third straight quarter. Computer memory of any kind is a highly cyclical business, but the cycle is now favoring SanDisk.
SNDK put in a nice 15-week base from the middle of February through early March with resistance around 70. The stock rallied to above 75 in late February, stalled for a couple of weeks, then blasted off on strong volume on March 18. This move may have received a boost from the stock’s inclusion in the Nasdaq Technology Dividend Index, a move that was announced on March 19. The surge has pushed the stock well above its 25-day moving average, so a little caution is advisable in picking a buy point. if you’re game, you can nibble near 78 on a pullback of at least a point and use a stop at the 50-day.
SNDK Weekly Chart
SNDK Daily Chart
Nabors Industries (NBR)
Why the Strength
When a cyclical industry turns up after a few years in the doldrums, the leading firms in the group can put on great shows for many months, if not years. That’s the attraction to Nabors Industries, which is benefiting from the perception that the land rig drilling market is improving. (It owns the largest collection of land rigs in the world.) But there’s more to it than just a new cycle upturn—the company has (after a couple years of slouching) moved some older rigs overseas, where they are earning higher dayrates, and it’s also streamlined and sold off some lagging operations. Even better, though, Nabors has a new rig that’s in huge demand here in the U.S.—known as PACE-X, it’s specifically made for so-called pad drilling (multiple wells drilled at the same time), which is all the rage in the various shale regions. With many more PACE-Xs set to hit the market this year, Nabors appears to have the leading technology and product just as the industry begins a new boom. Fourth-quarter earnings crushed expectations, and earnings for the next two or three years are expected to grow rapidly ($2 per share in 2015 isn’t out of the question). As cyclical stocks go, we like it.
Energy stocks are notorious for dancing to their own drummer, but NBR’s long period in the doghouse (it had been underperforming the market since the spring of 2011), followed by its monstrous-volume breakout to new highs on earnings (its breakout week saw the normally-quiet stock explode 21% on more than double average weekly volume) tells us the odds favor higher prices over time. More recently, the daily chart shows the stock ignoring the market’s weakness, pushing to new price highs after a brief pullback two weeks ago. We think any dips are buyable, with a loose stop near 20.
NBR Weekly Chart
NBR Daily Chart
Kate Spade & Company (KATE)
Why the Strength
Formerly known as Fifth & Pacific, Kate Spade is a success story in the realm of premium retail clothing and accessories. In a move to capitalize on its most successful brand, Fifth & Pacific changed its name to Kate Spade earlier this year after selling both the Juicy Couture and Lucky brands to private equity firms. The company’s consolidation behind Kate Spade was directed by management as a way to focus all of its resources into one brand to deliver high valuation and better opportunities for shareholders. With Kate Spade revenue growing an impressive 48% to $256 million during the recently released fourth-quarter report, the brand easily outstripped a 1.4% decline in net revenue for Lucky Brand on the quarter. (Juicy revenue was not reported.) Furthermore, the Kate Spade brand has rapidly expanded its direct-to-consumer business, which includes the highly successful E-commerce line, with revenue for the segment rising 30% in the fourth-quarter. Looking ahead, current earnings and revenue estimates should be taken with a grain of salt, with the company now down from three brands to one. That said, many analysts are targeting revenue of $1.26 billion for fiscal 2015, which is in line with what all three brands generated in 2013.
KATE has been in a steady uptrend since October 2011. Supported by their 10-week and 25-week moving averages, shares accelerated rapidly in 2013, more than doubling in value. In November, KATE tagged a high just shy of 35 and then entered a consolidation pattern with support in the upper-20s. With Kate Spade emerging from restructuring as a leaner more focused company, the stock is now poised to challenge resistance at 40 and return to trading at levels not seen since early 2007 (when it was a different company entirely).
KATE Weekly Chart
KATE Daily Chart
First Solar (FSLR)
Why the Strength
During a sour market, you want to keep your eyes open for well-traded stocks that have been out of favor, but that now, thanks to some positive news, have surged amid a vacuum of selling pressures. That’s First Solar in a nutshell; even in a generally positive environment for most solar stocks, First Solar had been struggling due to stagnant and lumpy business—while thought of as a growth stock, the company’s sales and earnings shrank last year, and are expected to sink like a stone in 2014! But the stock is hot today because, at its annual investor day, management significantly raised expectations for 2015 and beyond—it now expects earnings in the mid-$2s this year, but something in the $4.50 to $6 per share next year, well ahead of estimates. Just as important, management made the case that its solar technology has plenty of efficiency gains during the next couple of years, while some of the “standard” technology may be nearing its limits, and a recent partnership with GE to develop a better utility-scale solar design is paying dividends. Frankly, First Solar still isn’t the type of consistent, rapid-growth firm that institutional investors usually gravitate toward, but the recent upping of guidance caught big investors by surprise, which bodes well for the intermediate term.
FSLR bottomed in 2012 at 11 and rallied to 59 by May of last year, bolstered by a huge improvement in the overall solar sector. But after that, the stock basically went dead; after a big pullback following that May peak, the stock did rally to 66 in November, but then sagged again and was no higher than that May 2013 peak two weeks ago. The upped earnings guidance changed the playing field, though, with FSLR zooming 35% on more than triple average weekly volume. Extended to the upside? Yep. But given the volume signature, we’re not expecting major weakness. You can start with a small position on dips.
FSLR Weekly Chart
FSLR Daily Chart
Why the Strength
Finisar currently sports a significant share of the $6-billion-plus optical networking hardware market. Finisar fields key components such as 10G, 40G, and 100G transceivers, which are crucial to maintaining high-speed fiber optic networks. The company has been a major benefactor in the current cycle of data center upgrades and growing interest in backbone carrier telecom network infrastructure. According to a Fall 2013 report from Piper Jaffray, 35% of data center switches are 1G or less, indicating that the current upgrade cycle for data centers has plenty of room left to run. Additionally, analysts are forecasting that the demand for 100G telecom systems, those designed to keep up with current fiber technology, is picking up considerably on a global scale, particularly in Europe and parts of Asia. Currently, companies like Cisco Systems and Chinese networking giant Huawei account for more than 10% of revenue, giving Finisar a direct line to both telecom and data center growth. In fact, the company has posted triple-digit earnings growth and double-digit revenue growth during the past three quarters. Lastly, this break-neck pace is expected to continue through the current fiscal year, with analysts projecting revenue to rise 144% in 2014.
FNSR rallied sharply from the 13 region in May through 26 in October 2013. Following that peak, however, FNSR pulled back to test the 20 level and its 25-week moving average for support. The shares have since fought their way back, grinding higher along their 10-week and 25-week trendlines, while battling resistance at 25. This resistance finally gave way last week, with FNSR topping 27 for the first time since May 2011, and on good volume, too. That said, today’s drop was a bit ugly, but as long as FNSR holds above 25, the uptrend is intact.
FNSR Weekly Chart
FNSR Daily Chart
E-Commerce China Dangdang (DANG)
Why the Strength
Many Chinese companies are following in the footsteps of Western businesses and E-Commerce China Dangdang is following one of the biggest: Amazon. Like Amazon, Dangdang began its business by focusing on selling books. Also like Amazon, Dangdang is expanding its product offerings to include a broader selection of goods. And, like Amazon, the company has been more concerned with growing its market share than in boosting earnings. Dangdang now sells more than a billion dollars per year of general merchandise, including clothing, maternity, baby and children’s goods, cosmetics and home and lifestyle products. The company has also followed Amazon’s lead in setting up an online marketplace that gives third-party merchants space to sell their goods on the Dangdang website. With two million different items for sale, the company has shown plenty of growth. Investors are excited about Dangdang for two reasons. First, the company just formed a strategic partnership with Yhd.com, a business-to-consumer e-commerce platform for domestic and imported goods and beverages that is majority owned by Wal-Mart. Second, investors were pleased by the company’s February 27 earnings report that revealed a $0.07 per-share profit, when analysts had predicted a four-cent loss. The report also beat on revenue, with $326 million in sales where $318 million was forecast. E-commerce in China is booming, and E-Commerce China Dangdang is riding the wave.
DANG made a great run from May through September 2013, soaring from 4 to 12. The stock corrected to 8 in October, then put in a four-month rising base that tightened up around 10. When the good Q4 earnings news hit, DANG blasted to 19 in just seven trading days on big volume. In the two weeks since, the stock, partly due to widespread pressure on Chinese stocks, has pulled back below 15. If you want to nibble, you can on this pullback, but use a loose stop near the 50-day low at 12.
DANG Weekly Chart
DANG Daily Chart
Activision Blizzard, Inc. (ATVI)
Why the Strength
Video game maker Activision-Blizzard has an extremely hot hand at the moment, one that the company is looking to extend into fiscal 2014. The company makes some of the most popular video game franchises on the market, including Call of Duty, World of Warcraft, Skylanders, and Diablo. Driven by record sales of the latest Call of Duty game, Ghosts, and a unexpected rise in World of Warcraft subscribers, Activision surprised Wall Street analysts once again on March 13 by topping earnings and revenue expectations. Looking ahead, Activision has a strong lineup set for release in 2014, including key updates to Diablo, Skylanders, and another iteration in the Call of Duty (COD) series. The COD release will be an important test for Activision. The series has been criticized for a lack of quality and innovation recently, but Activision has brought on a third studio to handle the series’ regular release schedule. What’s more, Activision is set to release five new titles this year, including a recently released Blizzard title Hearthstone and the much anticipated Destiny, which analysts believe could generate at least $500 million in sales when it’s released this September. All in all, we like Activision’s strong stable of existing franchises and the growth potential for new titles coming this year.
After essentially flat-lining near 12 between 2009 and 2012, ATVI finally woke up last year. Shares kicked off a stair-step pattern in February, as holiday video game sales grew stronger than expected. The trend continued throughout 2013, with ATVI consolidating near 15 until an earnings report prompted another jump higher into the 17-18 region. The latest spike, on February 7, was once again driven by strong holiday sales. The stock popped to new highs two weeks ago, and while it’s pulled back with everything in recent days, the retreat looks normal.
ATVI Weekly Chart
ATVI 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 24, 2014|
|12/16/13||Advance Auto Parts||AAP||104-108||125|
|3/10/14||Alaska Air Group||ALK||87-90||91|
|3/3/14||Basic Energy Services||BAS||21.5-23||25|
|3/3/14||Keurig Green Mountain||GMCR||105-112||106|
|1/20/14||Palo Alto Networks||PANW||60-62.5||73|
|WAIT FOR BUY RANGE|
|3/17/14||GT Advanced Tech.||GTAT||16-17||18|
|DROPPED: Did not fall into suggested buy range within two weeks of recommendation.|
|None this week|