First Dip is Probably Buyable
Trouble comes from where investors least expect it, so it’s not surprising to us that the Russia-Ukraine situation is making investors nervous. Is there a chance this is the event that capsizes the market? Of course there is—and that’s why you should watch your stops and risk. But after such a powerful rally for much of February among the major indexes and many stocks, the odds favor the first dip being buyable, at least among leading stocks. That doesn’t mean the pullback can’t last a few days (news-driven ups and downs are likely in the short-term), but with the overall uptrend intact, we remain optimistic.
This week’s list isn’t as growth-oriented as the past few weeks, but there are still more than a few good stories here. Our Top Pick is Avis Budget (CAR), a well-known firm with surprisingly solid earnings growth prospects as global travel increases.
Stock Name | Price | ||
---|---|---|---|
58.com (WUBA) | 0.00 | ||
Trimble Navigation (TRMB) | 0.00 | ||
Signet Jewelers (SIG) | 0.00 | ||
Spirit Airlines (SAVE) | 57.03 | ||
Regeneron Pharmaceuticals (REGN) | 512.96 | ||
Penn Virginia (PVA) | 0.00 | ||
Michael Kors Holdings Limited (KORS) | 73.22 | ||
Keurig Green Mountain (GMCR) | 0.00 | ||
Avis Budget Group (CAR) | 0.00 | ||
Basic Energy Services (BAS) | 0.00 |
58.com (WUBA)
Why the Strength
With Chinese stocks, it’s traditional to find a U.S. equivalent company to compare it with, and 58.com can be pretty accurately called “The craigslist of China.” The company is a leader in Chinese online classified advertising, giving local merchants and consumers a place to meet online. Top categories are housing, jobs, automobiles, second-hand goods, pets, tickets and yellow pages. With both a website (www.58.com) and mobile apps, the company operates in about 380 Chinese cities, and works to ensure that the information on its marketplace is relevant and accurate, guiding merchants via user reviews and customer feedback. The parallel with craigslist isn’t total, as 58.com is clearly aimed at giving merchants a place to provide information and sales pitches to consumers, not the C-to-C orientation of craigslist. But 58.com is a profitable business, that’s riding the wave of rapidly increasing mobile device usage in China. The company’s revenue increased 288% in 2011, 110% in 2012 and 67% in 2013, its first profitable year. After-tax profit margins swelled to 23.8% in Q4 and the company’s 13 cents per share profit reversed a year-ago loss. 58.com is part of the huge story of mobile phones revolutionizing the Chinese marketplace, enabling shoppers to widen their range of choices. This is a very young company, but it’s surfing a very large wave.
Technical Analysis
WUBA (which is a phonetic rendering of “58” in Chinese) came public on October 31 at 17 and finished its first trading day up 47%. The stock has already experienced three rallies, to 38 in November, to 46 in January and to 50 just last Friday. It’s also a volatile issue, with a couple of significant corrections, to 28 in December and to 32 in February. The good earnings report last week gapped the stock up from 42 to 50 on increased volume. Volatility is likely to remain elevated, but we think the stock can be bought right here, or on weakness of a point. The 25- and 50-day moving averages are virtually locked together just above 38, which is a little low for a stop. Set a mental stop at 42, but don’t let an intraday move shake you out.
WUBA Weekly Chart
WUBA Daily Chart
Trimble Navigation (TRMB)
Why the Strength
Trimble Navigation is a leading manufacturer of GPS systems that are prized by drivers and hikers the world over. Despite its popularity in the consumer market, Trimble’s real specialty is adapting GPS technology for specialized commercial interests for tasks ranging from surveying to mining to trucking to farming to utility work. All these applications require unique solutions, and Trimble is an expert at meeting them. The company recently posted blow-out fourth-quarter earnings and revenue, up 54% and 16%, respectively, and guided above Wall Street’s expectations for the first quarter. The company is seeing both residential and commercial activity rise due to continued growth in the construction industry, and Trimble’s Engineering and Construction division reported 23% revenue growth year over year. What’s more, Trimble said broader adoption of its technology across all markets prompted stronger-than-expected guidance heading into the first quarter of 2014. Lastly, partnerships like those with support service firm Aecom Technology and equipment maker Caterpillar support the company’s long-term view that technology modernization is becoming an industry-wide operating model, underscoring the potential for continued growth for Trimble.
Technical Analysis
TRMB has been in a solid uptrend for the past several years, a sign of a truly resilient growth stock. After enduring a rocky start to 2013, shares rebounded from a double-bottom at 25 in mid-August and have been chopping higher since. Shares pulled back to their 50-day in October before being propelled toward a multi-year high following a strong 3Q earnings report. The ensuing rally saw TRMB challenge the 35 region before pulling back once again heading into quarterly earnings in mid-February. The stock gapped up again and has now digested its post 4Q earnings gains. You can nibble here or on dips.
TRMB Weekly Chart
TRMB Daily Chart
Signet Jewelers (SIG)
Why the Strength
Signet Jewelers is the world’s largest jewelry retailer, operating some of the most recognizable names in jewelry, including Kay Jewelers and Jared Galleria. Signet is the largest U.K. jewelry retailer with about 500 stores under the H. Samuel, Ernest Jones and Leslie Davis names. In the U.S., Signet’s Sterling Jewelers unit is #1, with more than 1,300 stores, including 600-plus Kay and Jared locations. Last month, Signet made a move to increase its lead as the #1 jewelry retailer, agreeing to acquire leading competitor Zale Corp. in a deal valued at roughly $1.4 billion. The acquisition also adds more than 1,600 retail locations to Signet’s current 1,900 stores, increasing the company’s lead over Tiffany & Co. Following the buyout, Signet is expected to have annual revenue of about $6 billion. According to Signet’s CEO, the deal will allow Signet to have greater buying power, which will reduce costs. Signet is also expecting earnings to rise by a high single-digit percentage rate in the first full fiscal year following the acquisition. With jewelry seeing a resurgence during the past year, and with Signet and Zale seeing revenue rise 22% and 17%, respectively, during the past three years, we like the prospects for the combined company.
Technical Analysis
SIG has been on a tear since bottoming near 35 in 2011, rallying nearly 170% since then. Shares plateaued near 45 in mid-2012, but turned higher once again heading into the latter half of the year, reclaiming their 10-week and 25-week moving averages in the process. What’s more, since August 2012, SIG has closed only a handful of weeks below this trendline duo. More recently, shares fought a pitched battle with resistance near 80. This hurdle fell on February 19 in the wake of the Zale acquisition news. SIG is now pausing in the 95 region, providing investors with a decent entry point.
SIG Weekly Chart
SIG Daily Chart
Spirit Airlines (SAVE)
Why the Strength
The airline industry is in boom times, but Spirit Airlines is no behemoth that’s simply riding the industry’s ups and downs; it’s a real growth airline, taking advantage of flight cutbacks by the major players to profitably expand into more and more markets, while keeping costs (and ticket prices) low. Last year, for instance, Spirit launched service in 25 new markets; it now has 55 aircraft serving more than 125 non-stop markets. And that’s helped boost its capacity—historically, the firm has hiked available seat miles by about 15% to 20% per year (though it was north of 20% in January 2014), which, combined with strict cost controls and best-in-class levels of ancillary revenue (bag fees, etc.), has led to buoyant profit margins and surging cash flow. (Interestingly, the company has no debt and $531 million in cash, or about 13% of its market cap!) With just 1.4% of the total U.S. market, Spirit has tons of room to grow, and analysts believe it will; earnings are expected to grow 20% to 25% in each of the next three years, which is unheard of in the industry! Of course, any surge in oil prices or major hiccup in the economy will surely hurt the stock, but with huge margins and a cash cushion, Spirit looks like a rare winner in the airline industry.
Technical Analysis
SAVE has been in a major uptrend since March of last year, when it moved to new highs. There was one basing period from July through September last year, and more recently, a stagnant period as the stock couldn’t get out of its own way (it was no higher in mid-February than it was in early November). But the firm’s fourth-quarter earnings report helped the stock move out to new highs on four straight days of big volume, which should provide support on this market dip. If you’re game, you can buy some here, but use a loose stop around 50.
SAVE Weekly Chart
SAVE Daily Chart
Regeneron Pharmaceuticals (REGN)
Why the Strength
Regeneron is a big biopharmaceutical company that has a profitable roster of drugs on the market and a rich pipeline of candidate compounds in clinical trials. The drug that has stimulated the most interest from investors is EYLEA, an injected treatment for neovascular age-related macular degeneration and macular edema. The company also markets Zaltrap for metastatic colorectal cancer, and Arcalyst, which treats a very specific inflammatory condition. Regeneron’s pipeline includes two new drugs and one new use for EYLEA in Phase III trials. The company also has two drugs in Phase II trials and eight in Phase I! It’s worth noting that the Phase III drugs are targeted at rheumatoid arthritis and LDL cholesterol reduction, two potentially very lucrative conditions. Regeneron was a pioneer in using human antibodies against diseases and it still plows back a large percentage of its free cash flow into original clinical research. The company’s Q4 earnings report on February 11 was very strong, with earnings up 52% on a 47% increase in revenue. After-tax profit margins were also over 40% for the fifth consecutive quarter. Pharmaceutical stocks are news-driven, and Regeneron has been enjoying lots of good news.
Technical Analysis
REGN is a jumpy stock, with volatility that averages about twice that of the broad market. But since the end of 2011, when it was trading at 55, the stock has been on a roll, soaring to over 335 in recent trading. There have been a number of scary corrections during that big advance, but there’s no arguing with a six-bagger advance. The rally that followed the February 11 earnings report came after a four-month pause that pulled REGN from 320 to as low as 260, although the stock was back above 300 when results were released. In short, REGN looks like a good long-term choice for an investor with a tolerance for wild action. Try to get in on a pullback below 330 and use a loose stop 15% below that at around 280.
REGN Weekly Chart
REGN Daily Chart
Penn Virginia (PVA)
Why the Strength
Penn Virginia is one of a few energy stocks trying to morph into new leaders, and for that it has to thank its high-potential acreage in the Eagle Ford shale. Actually, the firm’s quarterly results missed official expectations because some well completions were delayed due to harsh weather, but big investors are focusing instead on its solid momentum in the Eagle Ford—on a per-frac-stage basis (the best way to measure well results), Penn’s Eagle Ford wells performed nearly 20% better than in just the prior quarter, and, impressively, are pumping out about 85% oil. Moreover, enough testing has been done to de-risk much of its acreage, and the company now sees 2014 production rising in the 35% to 40% range. Lastly, Penn is steadily adding to its acreage at attractive prices; it has around 80,000 contiguous acres in the Eagle Ford, representing 1,000 potential drilling locations, and those figures should grow further with more small-but-prudent acquisitions. Penn Virginia has other operations, but it was its big move into the Eagle Ford (via acquisition) that changed its outlook, and it’s reaping the benefits today. Earnings are expected to leap into the black this year and surge from there. This is a little-known oil play with big potential.
Technical Analysis
PVA was a dog until last September, when it began its current uptrend; the stock soared from 5 to 11 by December, before pulling back for four weeks. But early-January brought another wave of buying, and PVA has continued to advance, barely hesitating during the January correction and pushing to 15 in the wake of its fourth-quarter report. The odds favor strong support anywhere near the 50-day line, so you could buy a small amount on a dip of a point or so, with a stop in the 12 to 12.5 range.
PVA Weekly Chart
PVA Daily Chart
Michael Kors Holdings Limited (KORS)
Why the Strength
When a retail stock has been “blessed” by institutional investors, it can trend for a long, long time because these big investors see consistent, relatively predictable growth as far as the eye can see. The classic example is of a successful cookie cutter operation (think McDonalds, Starbucks or Home Depot in years past), but fashion apparel retailers such as Michael Kors can also fill the bill. Today, this company is one of the favorites of institutions because it continues to post rarely-before-seen growth numbers (in addition to stunning sales and earnings growth, Kors’ same-store sales growth was 28% last quarter), and its global luxury lifestyle brand is only becoming more popular in all corners of the world. It has nearly 400 stores worldwide, but sees at least 700 in its future, and that’s likely just the beginning. Moreover, Kors has a huge wholesale business (sales up 62% last quarter, making up 46% of total revenues), and it’s looking to take its e-commerce operation in-house in the months ahead, which should boost direct sales. In our view, only a massive global recession that cuts into luxury buying will hurt the firm, as the odds of a major fashion or expansion misstep seems remote given management’s history. Much like Coach grabbed market and mind share in the early 2000s, Kors is doing so today, but with a broader product line-up and plenty of irons in the fire for future growth. We like it.
Technical Analysis
KORS has been in a long-term uptrend since coming public in the early part of 2012, though it’s rarely been “hot,” and in fact, shares were muddling along unimpressively during the fourth quarter. But that all changed after the quarterly report, when the firm’s results crushed expectations and caused the stock to surge to new all-time highs. It followed through nicely after that, and the current shakeout looks normal and buyable to us. If you do buy, a stop just below the top of the earnings gap makes sense.
KORS Weekly Chart
KORS Daily Chart
Keurig Green Mountain (GMCR)
Why the Strength
Green Mountain Coffee Roasters has mastered the art of finding the next big thing to keep investors interested. Once a regional Vermont coffee roaster, the company expanded organically and via takeovers to carve a national niche in wholesale and retail bean sales. Then, when that business began to flatten, the company bought Keurig and its single-serve coffee brewer business, which created an enormous opportunity in supplying high-margin pods in a huge variety of flavors and beverage styles. The latest addition to Green Mountain’s lineup is a cold beverage machine called the Keurig Cold, and the company made a huge splash in February with its announcement of a deal with Coca-Cola to feature Coke’s brands in its Keurig Cold pods. As part of the deal, Coca-Cola took a 10% ownership position in Green Mountain (for $1.25 billion at 75 per share), and Green Mountain has announced that it will up its program of share buybacks to avoid any dilutive effects. The deal makes sense for Coca-Cola, which may be feeling a little pressure from negative stories about the health effects of soda consumption. But it’s also a potential game changer for Green Mountain, which can now piggyback on the Coke marketing juggernaut. Like any successful business, Green Mountain is keeping the reinvention process going. The company also announced its first dividend of 25 cents per share in January.
Technical Analysis
GMCR went through a big correction from 116 in September 2011 to 18 in July 2012. But after nearly seven months of re-basing, the stock came roaring back to 90 last August. Mediocre earnings keyed a three-month correction to below 60 in November, but the stock bounced again and traded flat in January until February 6, when the deal with Coke was announced, gapping the stock up from 81 to 102. GMCR soared as high as 124 before its current retreat. The stock is likely to remain jumpy, but looks good to buy on any dip below 110. Use a loose stop at the 50-day moving average, now at 90.
GMCR Weekly Chart
GMCR Daily Chart
Avis Budget Group (CAR)
Why the Strength
Whether you are looking for a high-end rental for cruising around on vacation, or a budget rental car for a family trip, Avis Budget Group has a car rental brand for you. The company’s Avis unit targets corporate and leisure travelers at the high end of the market via more than 5,750 locations in the Americas, Europe and the Asia/Pacific region. Meanwhile, its Budget unit targets budget-minded consumers, with some 3,150 locations in more than 120 countries. In 2011, Avis Budget Group acquired its formerly independent licensee, Avis Europe, boosting its worldwide presence to some 10,000 car and truck rental locations in about 175 countries worldwide. Last year, Avis Budget expanded into the hourly-rental market with the acquisition of ZipCar. The company has been hot with investors following the company’s strong showing during its fourth-quarter earnings report—earnings rose 46%, topping Wall Street’s estimates by three cents per share, as revenue jumped 9% year-over-year. Furthermore, citing increasing synergies with ZipCar, reduced operations costs and enhanced productivity via its Performance Excellence initiative, Avis Budget guided above expectations for fiscal 2014 revenue, which is expected to rise 24% this year.
Technical Analysis
In 2012, CAR zoomed higher as growth increased rapidly in the wake of Avis’ acquisition of Budget. The growth extended into mid-2013 following the ZipCar buyout. However, the latter half of 2013 saw CAR shares make a pit stop in the 30 region. The stock spent four months (July through October) forming a base near 30 before resuming its uptrend in early November. Bolstered by strong 3Q earnings, CAR rallied into the 40 region before taking another breather at the turn of 2014. With 4Q earnings refilling the tank, CAR appears poised to head higher once again.
CAR Weekly Chart
CAR Daily Chart
Basic Energy Services (BAS)
Why the Strength
Basic Energy Services is a Texas-based provider of well site services to oil and natural gas drillers and producers. From its 100 service points in 13 states, the company specializes in the nuts and bolts services that get oil and gas flowing and keep it flowing. From drilling initial wellbores to fracking and acidifying and from fluid transport and storage to pumping, maintenance and capping, Basic’s services are generally required for as long as the well continues to produce, generating a high level of recurring income. The company hasn’t been a revenue juggernaut in the past couple of years, as revenue growth decelerated from 71% in 2011 to 11% in 2012 and dipped by 8% in 2013. But the company’s Q4 earnings report on February 20 contained many surprises on the upside and management’s guidance for Q1 emphasized that oil & natural gas explorers and producers were increasing their capital expenditures at a quicker-than-anticipated rate, making for an improved outlook for 2014. After a loss of 68 cents per share in 2013, analysts see earnings of four cents per share in 2014. Basic is moving quickly to increase its fleet of fluid service trucks and disposal wells, increasing its competitive position and taking advantage of the bigger opportunities in the quarters ahead.
Technical Analysis
BAS corrected from 38 in mid-2011 to 9 in mid-2012, and has mostly bounced around in the teens since then. But the good Q4 earnings report and guidance on February 20 kicked the stock from 20 to 23 on more than triple average volume. And it has continued to hold above 23 in the six trading days since that breakout. If you like the story, you should look for a pullback to 23 as an entry point and use a stop just under the 20 area.
BAS Weekly Chart
BAS 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.