Consolidation is Normal So Far
Current Market Outlook
After five straight weeks on the upside, the major indexes have retreated mildly in recent days, keeping the intermediate-term uptrend firmly intact. Going forward, the key will be how the market handles itself during any further weakness—if dips are modest and lead to renewed upside (especially with growth stocks beginning to hit new highs), then a legitimate bull phase will likely be in place. If the selling pressures intensify and the major indexes sink, that would obviously tell you the opposite. Right now, given the evidence, we remain optimistic, but not fully bullish, until the longer-term trend and growth stocks kick into gear. We’ll be watching for it.
This week’s list is again heavier on commodity and turnaround ideas than true growth stories. Our Top Pick is Wynn Resorts (WYNN), which has bottomed out and begun a new advance, bolstered in part by a new resort opening in Macau later this year.
|Wynn Resorts (WYNN)||121.08|
|Proto Labs (PRLB)||0.00|
|Parsley Energy (PE)||0.00|
|Nucor Corporation (NUE)||66.20|
|NCR Inc. (NCR)||0.00|
|Mellanox Technologies (MLNX)||92.00|
|Barrick Gold (GOLD)||27.20|
Wynn Resorts (WYNN)
Why the Strength
Sales at Wynn Resorts have steadily slipped in the last year and a half. But there were some bright spots in the latest earnings report. Excluding items, fourth-quarter earnings at the hotel and casino chain reached $1.03 per share, well ahead of $0.76 consensus estimates. Its Las Vegas resort carried the day, offsetting continued weakness in Wynn’s high-end Macau casino, where betting revenue was down 27% in the fourth quarter. That 27% decline, however, was the smallest year-over-year dropoff Wynn Resorts has seen in Macau in more than two years, fueling speculation that the market has finally bottomed. That has founder and CEO Steve Wynn optimistic about the company’s new Macau resort—the grandly named Wynn Palace, set to open in the third quarter. He’s putting his money where his mouth is: Wynn just spent $15 million acquiring 258,523 shares of his company’s stock, not two months after he purchased one million WYNN shares in December. Wall Street has taken Wynn’s lead, snatching up the stock in anticipation of the Wynn Palace opening, which is being viewed as a potential game-changer for the company. Morgan Stanley just upgraded WYNN to “Overweight,” and thinks the opening of Wynn Palace will increase the company’s Macau market share from 10% to 13%. A dividend yield of 2.6% is another plus for this turnaround story.
WYNN has been in a downward spiral since peaking at 246 in March 2014. Fifty-one was the low point, which WYNN touched in October and re-tested a little over a month ago. But the stock found solid support there, and the bargain buying began in earnest, pushing shares up to 67 by the end of January. Another dip, to 58, followed, but the market turnaround has convinced buyers to jump back in the WYNN pool in the past two months. You can buy on any sign of weakness and set a stop just below 80, which appears to be the new area of support.
WYNN Weekly Chart
WYNN Daily Chart
Proto Labs (PRLB)
Why the Strength
When companies need a prototype part or a small production run and don’t want to spend the time and money it would take to set up a production line, they turn to Proto Labs. Proto specializes in putting its expertise in 3D printing, CNC machining and injection molding to turn out custom prototypes in as little as one day. The company’s motto is “Real Parts, Really Fast,” and its speed and accuracy have made it a favorite for its broad and diversified customer base. Product developers who use 3D software for design are common customers, as Proto’s services can produce physical iterations during a product’s development process that speed things along. Proto Labs’ combination of technological expertise, customer experience and eight global manufacturing facilities creates a strong barrier to entry, too. This has led to 35% compound annual growth in revenue and 50% growth in adjusted net income since 2009. When Proto Labs made the last of its three appearances in Top Ten in 2013, we remarked that 3D printing might represent a challenge to its leadership in the fast prototyping business. What actually happened is that Proto smoothly integrated the new technology into its business model and its stock has outperformed Stratasys and other rivals who actually sell 3D printers to customers. The company’s stock got a boost in March following the announcement that it would be added to the S&P Small Cap 600 Index.
PRLB had a great year in 2013, ripping from 28 in late October 2012 to 90 in November 2013. But the stock made only one new high after that (a brief spike to 94 in June 2014) while trading generally sideways and down with support in the 50s. After dropping to 52 in early February, PRLB caught fire on February 4 after a great Q4 earnings report and gapped up again on March 4. There’s still some resistance to get past, but high-volume buying during its latest rally likely reflects institutional buying. We think the stock is buyable here or on a breakout above 78. A stop in the high 60s makes sense.
PRLB Weekly Chart
PRLB Daily Chart
Parsley Energy (PE)
Why the Strength
While energy stocks have improved lately, Parsley Energy is the first explorer to appear in Top Ten in many weeks. And after doing some research, we can understand why—Parsely is a small, oil-heavy (63% of output) operator in the Wolfcamp areas of the Midland Basin (part of the larger Permian Basin) in Texas, with nearly 90,000 acres in the Midland and at least 1,000 high-potential drilling locations in its core acreage. The company’s wells are some of the best in their area, which are some of the best in the Midland, which are some of the best in the entire Permian! As costs have come down (-31% drilling and completion costs on a per-well basis), Parsley’s wells are showing solid returns; even at $40 oil, the wells sports average returns near 35%, rising to 43% at $45 oil and 70% at $55 oil. Throw in a solid hedging program (nearly all of Parsley’s oil output is hedged this year and it has a good-sized hedge book for the first half of 2017), and the company is plowing ahead with its plan—2016 should see 35% more wells completed and total production up 43%, all while CapEx remains flat! Moreover, the firm has enjoyed some extremely positive results in the Delaware Basin (west of the Midland), which could add an entirely new leg to the growth story. We see a solid exploration company that should do well in a low-price environment … and the potential for massive gains if oil prices enter a new bull market.
Finding potential energy stock leaders is pretty easy these days—you just have to look for stocks that have been hitting higher lows for the past few months, even as the sector was sinking. PE fills that bill; after coming public in mid-2014, the stock did sink to 11 near the end of that year, but its lows in August/September 2015 (near 13) and January of this year (just south of 15) told you selling pressures were easing. And in recent weeks, PE has spiked to 18-month highs! If you want in, look for dips below 21, and use a stop in the mid-18s.
PE Weekly Chart
PE Daily Chart
Nucor Corporation (NUE)
Why the Strength
Nucor is another steelmaker in the midst of a huge upswing. A U.S. tariff on cold-rolled steel imports from a variety of countries, issued earlier this month and designed to prevent selling steel at unfairly low prices, has been a godsend for steel stocks, and Nucor—which makes steel products for the automotive, appliance and construction industries—has been no exception. Like most steelmakers these days, Nucor’s sales and earnings are in decline, but the company expects a turnaround this year, projecting 10% earnings per share growth and only a modest (4.6%) decline in sales after a major dropoff in 2015. In addition to the tariff, Nucor is benefiting from the ongoing recovery in the auto industry; its shipments to automotive customers increased 20% in the last year as demand for its sheet steel—used to make body panels, structural components and load-bearing areas in cars and trucks—climbed. That prompted Jim Cramer to call Nucor his top pick in the steel industry, Credit Suisse to initiate coverage on the stock, and Standpoint Research to upgrade NUE from a “hold” to a “buy”—all in the past month.
Though NUE shares have accelerated since the steel tariff was put in place, the stock actually started to move in January, bouncing off a four-year low at 34 after a year and a half of steady declines. It topped 40 in early February, and spent the ensuing month building a nice-looking base. It broke higher on the tariff news in March, and appears to be forming a second base in the 45-46 range. Given the strength in steel stocks, another break to the high side is very possible, though so is some consolidation in the near-term. NUE looks buyable on minor weakness with a stop in the low 40s.
NUE Weekly Chart
NUE Daily Chart
NCR Inc. (NCR)
Why the Strength
NCR Inc. is a global business technology leader, providing key hardware and software for ATMs, banking apps (it powers eight of the top 10 mobile banking apps), restaurants, stadium food stands, self-checkouts at the grocery store and much, much more. The firms’ systems process more than 6,000 transactions per second worldwide and its ATMs see $1.13 trillion pass through them each year! All told, about 43% of all revenues are recurring, providing a foreseeable stream of cash flow. Yet, for all of that, sales have been relatively stagnant (they were flat in the fourth quarter on a currency-neutral basis) and aren’t supposed to do much better for the next two years. So why is the stock so strong? Three reasons. First, the company is a cash cow—the firm anticipates about $450 million of free cash flow in 2016 (nearly $3.40 per share), $250 million of which it will use to buy back shares (about 6.5% of the company). This, by the way, comes after a huge $1 billion share buyback last year, along with lots of debt repayments. The second reason is that the stock is dirt cheap; NCR trades at about 8.5 times free cash flow and less than 10 times earnings, even though the firm dominates its industries and should see earnings tick up 5% to 10% going forward. And third, news-wise, management recently boosted its earnings guidance, which is always helpful. There’s nothing special here except a very solid company that’s spinning off tons of cash, with a very cheap stock.
NCR is emerging from a long-term decline. The stock ran as high as 42 in October 2013 (it was 15 times earnings at the time), then bumped downhill for a whopping 28 months, finally bottoming at 18 (seven times earnings) in February of this year. But since then, NCR has pushed persistently higher; shares have only dipped for a day or two along the way before hitting new recovery highs. Like many stocks, NCR is due for a breather, but with such a persistent advance following such a long decline, we think dips are buyable.
NCR Weekly Chart
NCR Daily Chart
Mellanox Technologies (MLNX)
Why the Strength
Based in Israel, Mellanox designs chips used in servers and data storage systems, and offers faster ethernet products at a discounted price. Last year, the company introduced a 100-gigabit ethernet switch, believed to be a first in the semiconductor industry. But two recent events have rekindled interest in Mellanox, the first being a healthy Q4 earnings report on January 28 that featured 31% earnings growth on a 25% increase in revenue, spurred by increased interest in adapters running at 25 gigabits or more. The company also issued guidance for Q1 that was ahead of analysts’ views. The second positive event was the announcement on February 26 of Mellanox buying out a smaller competitor, EZchip Semiconductor. Mellanox is locked in a battle with Intel over market share for business from Amazon, Facebook and other giant customers, and investors see the EZchip acquisition as a way for the company to get bigger and reduce costs. Mellanox has booked three quarters with after-tax profit margins over 20%, which is miles ahead of its string of slack quarters in 2013 and early 2014. Mellanox already had a leg up on the competition. The EZchip buyout gives it an extra edge—and the company has certainly captured Wall Street’s attention.
MLNX ripped from 32 to 120 in 2012, but gave it all back in 2013. The stock has been building a new base for well over two years, and finished a three-month correction from 48 to 38 in late January. That’s when the good earnings news gapped the stock up to 44 in one day. After a few weeks of consolidating near that level, the EZchip acquisition keyed a rally to its highest level since June 2015, prompting us to recommend the stock at 51 late last month. It has continued to inch higher since then, touching 55 last week before pulling back a bit. You can wait to see if it dips even further, or buy right here. Regardless, use a stop just below 48, which has acted as support in the last month.
MLNX Weekly Chart
MLNX Daily Chart
Why the Strength
Inphi is a chip company that specializes in speeding signal transmission by eliminating bottlenecks and providing a high-speed interface between analog and digital information. The company’s chips are used in telecom transport systems, data centers, enterprise servers and military systems, and are sold mostly to manufacturers. Inphi revenues grew 52% in 2014 and 58% in 2015, and its 20.7% after-tax profit margins in Q4 was its highest ever. The company enjoyed a burst of good news last week: 1) in partnership with Intel, Inphi announced a new 100 gigabyte capacity connector for data centers within 50 miles of one another, a huge gain versus the current industry standard of 10 gigabytes, and 2) IPHI received at least three increases in price targets from analysts. These announcements reinforced the shift in investors’ perception of Inphi after the company’s Q4 earnings report on February 4 missed estimates on revenue, keying a brief selloff. With the new Intel partnership, a killer piece of technology for its marquee product, and earnings estimates that see a 23% jump in 2016 and 29% in 2017, Inphi certainly has investors’ attention.
IPHI has been in an uptrend since the start of 2013, but it hasn’t been an easy stock to hold, with three significant pullbacks plus a nine-month flat spell from March 2014 through the end of that year. But after correcting from 32 as December began to 22 on February 9, IPHI has been a rocket, soaring five out of six weeks and gapping up to new all-time highs late last week. IPHI has a powerful head of momentum, so finding a lower-risk buy point will be difficult. If you want a piece of this breakout chip stock, try taking a small position or waiting for a pause or a pullback of a point. Use a loss limit about 8% to 10% below your buy price.
IPHI Weekly Chart
IPHI Daily Chart
Barrick Gold (GOLD)
Why the Strength
U.K.-based Randgold Resources is a good-sized gold mining company (market cap of $8.4 billion) with efficient operations and a great history of finding new gold deposits. Randgold has five major mining operations, including two in Mali, one in the Democratic Republic of the Congo, one in Cote d’Ivoire and one in Senegal. An active exploration program has been successful in replacing mined ounces with new reserves, and the company’s record 1.2 million ounces of gold mined in 2015 was up 6% from 2014. In the longer-term, the company’s cost-cutting program allowed it to remain profitable during the years-long decline in the price of gold. Gold prices have edged back down over the past month or so, falling from $1,274 on March 10 to $1,250 on March 14 and $1,218 at today’s open. But with Randgold’s production costs down to $632 per ounce, profitability is assured and the company’s dividend (0.7% annual yield) seems safe. There are no assurances on what may happen with the price of gold, but if you have a taste for the metal, Randgold Resources is an ideal way to gain exposure.
GOLD is trading right about where it was when the stock made its most recent appearance in Top Ten on March 14. It has now put in about four weeks trading under resistance at 92, as an attempted breakout above 96 on March 17 was turned back. GOLD is trading right at its flattening 25-day moving average and its rising 50-day MA is back at 82. This flat base is technically constructive, but GOLD’s sensitivity to the price of its underlying commodity undercuts that a little. We’ll leave the buy range and stop loss at the same levels they were two weeks ago.
GOLD Weekly Chart
GOLD Daily Chart
Why the Strength
A maker of transmitter, receivers and transponders, Finisar is gaining strength from increased demand in China for its fiber optic devices. China Mobile and other Chinese wireless firms are building out new networks, and Finisar’s 100-gigabit telco and datacom optics are a key part of that buildout. Boosted by China, Finisar issued current (fourth) quarter guidance of $0.22 to $0.28 per share, ahead of analyst expectations of $0.21 per share. Though last quarter’s sales and earnings were essentially in line with the previous year, they too exceeded analyst expectations, while gross margins (8.6%) hit their highest point in a year. And trading at just 15 times next year’s earnings estimates, the stock is pretty cheap for a fiber-optics maker. Still, there’s nothing about Finisar that stands out as overly remarkable at the moment, which means it’s probably benefiting most from general investor interest in the fiber optics sector, and the anticipation of a pickup in earnings after a few slow quarters.
Rock bottom for FNSR came in October, when the stock dipped to 10 just four months after topping out at 23. The stock finally found support, and quietly built a base for the remainder of 2015. It started to get going in February, creeping from 12 to 15. But the big breakout came on March 11, when it gapped up from 14 to 17 over night; it has since climbed to 19. Still well below 52-week highs, there’s room for FNSR to run, and volume has been picking up in the last two weeks. You can buy some on dips below 18 with a stop in the mid-15s.
FNSR Weekly Chart
FNSR Daily Chart
Why the Strength
FedEx is a big-cap, modest growth stock that went through the wringer during the past 18 months even as earnings continued to kite higher—and now the stock is playing catch-up. The main reason for the stock’s recent outperformance is its terrific quarterly report—FedEx’s numbers topped expectations across the board, with sales rising 8% (the fastest quarterly growth rate in at least three years) and earnings surging 24%, thanks to greater efficiencies (lower fuel costs have certainly helped) and an aggressive share buyback program. (The share count was down 4.1% in the fourth quarter versus the year before.) Most of all, though, investors are optimistic that any anticipated downturn in the U.S. and global economy isn’t coming, or if it does, it will be much milder than feared a couple of months ago—analysts see FedEx’s earnings up 13% in the coming fiscal year (starting in June of this year), though that’s almost surely conservative as the company regularly tops expectations. Obviously, FedEx isn’t going to double in a month, but this looks to us like the institutional way to play the turnaround in transport stocks, with top management, lots of cash flow and some long-term drivers (increasing e-commerce = more shipping demand) attracting big investors. It’s a solid, albeit conservative, growth idea.
FDX had a big rally that petered out in December 2014, when the stock reached 184. (It actually nosed to a new high in June 2015 before quickly heading south.) The decline took the stock from that high to a low of 120 in January, a big 35% decline that mirrored the 31% plunge in the Dow Transports during that time. But now the sector has turned up in a big way, and FDX is participating, leaping back above 160, including a huge 17% earnings gap on the stock’s heaviest daily volume in many years. We think modest price dips are buyable.
FDX Weekly Chart
FDX 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 28, 2016|
|1/11/16||Agnico Eagle Mines||AEM||04/30/2016||28-29.5||36|
|3/14/16||Briggs and Stratton||BGG||04/23/2016||22-23.5||23|
|3/21/16||Comm Sales & Leasing||CSAL||06/03/2016||20.5-21.5||22|
|3/14/16||Las Vegas Sands||LVS||04/22/2016||50-52||52|
|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|
|None this week|
|DROPPED: Did not fall into suggested buy range within two weeks of recommendation|
|3/14/16||Blue Buffalo Pet||BUFF||04/28/2016||21.5-22.5||25|