Pick Your Spots
Current Market Outlook
Despite today’s rally, the major indexes have basically been in a sideways trend during the past few months—they’ve tried to get going on the upside twice during the past few weeks, but both times hit a wall and fell back. Now, a sideways trend isn’t a death knell for the market, but it does make it more difficult—it’s vital to pick your spots when buying, to book partial profits on the way up and to honor your stops should a stock break down. We’re going to knock down our Market Monitor a bit—we’re still more bullish than bearish, but given the environment, we want to lighten up on the gas pedal a bit.
This week’s list has a few dependable growers, not surprising given the market’s wobbles. Still, for our Top Pick, we’re going with a faster mover—Ctrip.com (CTRP) recently gapped up on earnings after 18 months out of the spotlight, thanks to a bullish forecast. We think you can start a position around here.
| Stock Name | Price | ||
|---|---|---|---|
| VeriSign (VRSN) | 190.71 | ||
| Twitter (TWTR) | 40.37 | ||
| Signet Jewelers (SIG) | 0.00 | ||
| ServiceMaster (SERV) | 0.00 | ||
| Red Hat (RHT) | 0.00 | ||
| Novo Nordisk (NVO) | 0.00 | ||
| Molina Healthcare (MOH) | 0.00 | ||
| Huntington Ingalls (HII) | 0.00 | ||
| Ctrip.com International Ltd. (CTRP) | 34.94 | ||
| Abiomed (ABMD) | 0.00 |
VeriSign (VRSN)
Why the Strength
There are two simple things that institutional investors—managers of billions of dollars who, unlike us, have to move gradually and over time—look for in a stock. The first, of course, is growth, the faster the better. But the second factor—often overlooked—is the surety that the growth will continue. For VeriSign, the second item is why 946 funds own shares (up from 873 a year ago), to go along with Berkshire Hathaway, which owns about 10% of the company. The surety stems from VeriSign’s position as a near-monopoly on the .com and .net registration business for websites, and it even operates two of the Internet’s 13 “root servers.” Translation: The Internet literally couldn’t function without VeriSign! And the business itself doesn’t require much investment and sports high renewal rates (72%), leading to giant profit margins (52.6% pre-tax margins last year!). Now, to be fair, growth has slowed; in the fourth quarter, the firm added about 590,000 new .com and .net domain names, bringing the total to 130.6 million, up just 2.7% from a year ago. But the company is a cash cow, and it’s buying back a ton of stock (its share count declined 10% last year alone) and a dividend probably isn’t too far off. Analysts see 15%-ish earnings growth for many years to come, which is what’s keeping big investors interested.
Technical Analysis
VRSN isn’t a go-go stock, but it’s just completing a long basing structure and looks poised for a good move should the market hold together. The stock topped in January 2014, formed a big, jagged base, and then kicked off a new uptrend following earnings in February. Since then, it’s acted very well, with a couple of tight weeks during the market’s recent wobbles, and then pushing to new highs last week. Try to buy on dips.
VRSN Weekly Chart
VRSN Daily Chart
Twitter (TWTR)
Why the Strength
During the past year, Twitter’s stock has been hamstrung by worries surrounding user growth, user engagement and the monetization of those users, similar to the early worries about Facebook (in that case, investors wondered about the firm’s mobile future). Now, however, big investors are coming around to the view that Twitter still has user growth potential, and that monetization is picking up steam—the firm’s timely and targeting ad capabilities are attracting more and more advertisers, in particular surrounding key events (Super Bowl, Academy Awards, etc.). As the firm’s ad-targeting capabilities improve, and as it rolls out new to-the-minute services (its latest rollout of Periscope, which lets users live stream video, could be huge), the sky’s the limit. Twitter’s monetization levels (dollars per user) are still far behind other online outfits, leaving plenty of headroom for growth. Of course, there are still risks, especially if user growth decelerates in the months ahead, but there aren’t many stocks that are super-liquid and have one-of-a-kind businesses with triple-digit earnings growth expectations. Those attributes are like catnip to institutional investors, so as long as the bull market is intact, Twitter is likely to do well.
Technical Analysis
TWTR’s chart has a bit of a good news/bad news story to it. The good news is that the prolonged washout (the stock was sitting 50% off its high in January, more than a year after its post-IPO high) wore out the weak hands, and the rally during the past couple of months looks great. The bad news is that because of that decline, the stock still has some resistance to chew through, especially in the 50-55 area. Our advice is to buy a small amount around here, use a stop below 45, and look to add more shares on a pop above 55.
TWTR Weekly Chart
TWTR Daily Chart
Signet Jewelers (SIG)
Why the Strength
Signet Jewelers is the largest specialty retail jeweler in the U.S., U.K. and Canada, operating the brands Kay Jewelers, Jared, Pagoda, Zales (which it purchased last May) and Earnst Jones—all told, Signet operates about 3,600 locations. The firm doesn’t offer anything revolutionary, but it’s a good business that has cranked out excellent results for years, and the recovering global economy and the acquisition of Zales (which should result in up to $175 million of synergies over three years) promise more good times ahead. In the quarter ended in January, total sales growth was mostly boosted from the acquisition, but same-store sales expanded 4.1% and strength was seen across all of its divisions. Earnings rose 21% and slightly topped expectations, and investors cheered the fact that management appears to be committed to returning a bunch of money to shareholders—the top brass expects to distribute 70% to 80% of its free cash flow via dividends (0.8% annual yield) and share buybacks (repurchasing about 1% to 1.5% of its shares this year). All in all, Signet has a solid business, operates leading brands and, barring a major economic downturn, should see growth continue for years to come; analysts see this year’s bottom line rising 22%, with another 18% bump in 2016.
Technical Analysis
SIG has been a tractor stock during the past couple of years, generally cranking higher over time (it’s up from 41 in mid-2012), though with multi-month consolidations along the way. The latest consolidation started in December, which led to a modest 13% correction that found support near its 40-week moving average earlier this month. But the stock has surged since then, nosing out to new highs on good volume last week. We think any minor weakness is buyable, with a stop in the mid-120s.
SIG Weekly Chart
SIG Daily Chart
ServiceMaster (SERV)
Why the Strength
Pest control might seem like an odd place to invest, but ServiceMaster has been expanding in recent years to become much more than just a moth-proofing company—which is what former minor league baseball player Marion Wade envisioned when he founded it in 1929. Today, Service Master does everything from home cleaning and restoration to home inspections to furniture repair to lawn fertilization. You’d probably recognize many of its brands: Terminix pest control, American Home Shield and ServiceMaster Clean. The former two brands are growing the fastest, and a recent acquisition of Home Security of America helped the company’s sales improve 7% year-over-year in 2014. Terminix just added two Canadian pest control companies to its portfolio, further expanding its reach and services. ServiceMaster’s diverse array of home-service offerings has helped it do a financial 180o. After failing to turn a profit in 2011-2012, the company’s earnings per share jumped to $1.25 in 2014—double the $0.62 it earned in 2013. ServiceMaster’s EPS is expected to grow another 26% this year as profit margins expand. The company just acknowledged it’s under investigation for using a dangerous chemical in St. John, U.S. Virgin Islands, which hit the stock. Still the odds favor this being a near-term issue, not something that changes the overall story.
Technical Analysis
SERV went public last June at 18 a share, and volatility soon followed. The stock rose to 25, fell back to 20.5, then vaulted to 26—all before Thanksgiving. But from November through January, SERV remained in a tight range between 25 and 27. The stock finally broke above 30 in February, and has been on a steady climb since, before the recent shakeout on the government investigation. SERV found support near its 50-day line today and could be bought here with a tight stop near 30.
SERV Weekly Chart
SERV Daily Chart
Red Hat (RHT)
Why the Strength
Cloud computing continues to be a red-hot industry, and few companies are hotter than Red Hat. A leading provider of open-source software solutions, the North Carolina-based company reported strong quarterly and full-year earnings results last week. Earnings per share in Red Hat’s 2015 fiscal fourth quarter were up 10% year over year, while sales increased 16%. For the year, Red Hat’s sales improved 17% from FY 2014. Red Hat Enterprise Linux, the company’s signature operating platform, was the main driver behind the strong sales. Along with Red Hat’s Enterprise Virtualization platform, the two products account for 74% of the company’s total revenue. Its burgeoning application development wing may help Red Hat sustain its current steady growth trajectory. Red Hat’s application development, which includes a new product called Docker, grew at a 43% clip last quarter. New products such as those are why Red Hat expects earnings per share to accelerate in the next two years. The company estimates EPS growth of 13% in FY 2016 and 19% in FY 2017. It’s not the fastest-growing story, but the open-source movement has legs and Red Hat is the leader.
Technical Analysis
RHT got off to a slow start this year, with shares essentially flat in 2015 heading into last week. The earnings beat was the perfect cure. Shares gapped up from 67 to 76 in one session as volume spiked to 10.8 million shares, seven times its average. Now at its highest point in more than a decade, RHT should do well if the market can hold together. A brief dip is likely as RHT’s volume settles, but the stock’s earnings-fueled leap has left months-long resistance around 70 in the dust.
RHT Weekly Chart
RHT Daily Chart
Novo Nordisk (NVO)
Why the Strength
A new insulin drug that could be huge for Novo Nordisk’s medium-term growth is getting closer to commercial approval, and that’s why the stock is one of the strongest in the market today. The Danish pharmaceutical firm plans to submit clinical trial data on its insulin drug Tresiba to U.S. regulators sometime in the next month. Previously rejected by the U.S. Food and Drug Administration for its potential to increase heart problems, Tresiba is being resubmitted after the company claims to have improved the insulin drug’s cardiovascular risks. If the drug gets approved for commercial sale in the U.S., it would make Novo Nordisk competitive in the world’s largest diabetes market. Novo Nordisk’s Levemir insulin has trailed rival Sanofi’s best-selling diabetes treatment, Lantus, in recent years: Sanofi’s drug generated nearly $7 billion in sales last year, more than triple the $2.1 billion Levemir brought in. Tresiba is supposed to be an improvement over Levemir, and Wall Street is viewing Novo Nordisk’s decision to go forward again with the drug as a major sign it will actually get approved this time, which would eventually be a huge boost to the bottom line.
Technical Analysis
Until last week, NVO had been in a year-long rut, never falling below 41 but repeatedly meeting resistance at 49. Then last Thursday the company announced plans to resubmit Tresiba for FDA approval, and the stock immediately broke through resistance, rising all the way above 54 and continued a bit higher since. Fresh off its two highest-volume trading days in nearly two years, momentum is clearly on NVO’s side. Yes, it’s a bit extended to the upside, but given the volume clues and the fact that NVO just lifted out of a big base, you could consider nibbling here or buying on dips of a point or two.
NVO Weekly Chart
NVO Daily Chart
Molina Healthcare (MOH)
Why the Strength
Molina Healthcare has been a steadily growing healthcare-services company for many years, managing double digit percentage revenue growth at least since 2008. But there’s no doubt that the Affordable Care Act has been a big boost to the company’s business, which specializes in providing care to families and individuals who qualify for public health insurance due to low income. Molina contracts with state governments to offer health plans for 3.4 million Medicare, Medicaid and Healthcare Exchange clients in California, Florida, Illinois, Michigan, Ohio, New Mexico, Texas, Utah, Washington and Wisconsin. Business gained momentum in 2014, with 30% growth in Q1, 44% in Q2, 47% in Q3 and 64% in Q4. Earnings also grew in the last two quarters, up 17% in Q3 and 182% in Q4. Molina got a big boost from its Q4 earnings report on February 10, beating estimates for both revenue and earnings mainly from its participation in Medicaid Long-Term Services and Supports (LTSS). As long as the Affordable Care Act continues to sign up additional participants, Molina Healthcare will likely thrive.
Technical Analysis
MOH has been in a long-term uptrend since late 2011, but the shot of energy the stock got from the company’s February 10 earnings report was extraordinary. That report powered the stock out of a 12-week base between 50 and 52, gapping MOH to 56 on huge volume. And MOH followed through on that gap up, soaring to 64 by the end of February. The stock corrected to 60 in early March, then moved out to new highs above 66 in recent trading. MOH is very near its recent highs, so a correction isn’t out of the question. Try to buy in on a pullback of at least a point and use a stop just below 60.
MOH Weekly Chart
MOH Daily Chart
Huntington Ingalls (HII)
Why the Strength
From its headquarters in Newport News, Virginia, defense contractor Huntington Ingalls is a ship designer, builder and repairer that gets nearly 90% of its revenue from its work for the U.S. government, primarily the Navy. Huntington Ingalls has expertise in building both nuclear aircraft carriers—the only U.S. contractor who can make such a ship—and submarines and non-nuclear ships like destroyers, amphibious assault and expeditionary warfare ships and cutters for the Coast Guard. The company has booked 2% revenue growth in each of the past three years, which ordinarily wouldn’t fire investors’ imaginations. But the company’s Q4 earnings report showed a 32% jump in earnings and revenues of $1.93 million, well above analyst’s expectations. And Huntington Ingalls’ $7.14 in 2014 earnings per share is expected to grow by 27% to $9.06 in 2015. When you combine its steady growth with an annual dividend yield of 1.2%, this defense contractor looks like a safe long-term investment that’s attracting a steadily growing number of institutional investors. It’s also helping that Congress appears set to loosen the purse strings on the Department of Defense after a few years of cuts.
Technical Analysis
HII rallied from a post-IPO low of 23 in late 2011 to over 100 in March 2014. The stock took a break at that point, spending eight months building a base before a new rally began in October 2014. The stock traded higher at an accelerating rate, with both price and volume increasing rapidly ahead of the company’s February 19 earnings report. That report gapped the stock up from 128 to 133, and subsequent buying pushed it to 143 at the beginning of March. HII has been trading sideways all month, with support at 137 and resistance at 143. A buy on a dip below 140 should do well, with a loose stop just below the 50-day line at 129.
HII Weekly Chart
HII Daily Chart
Ctrip.com International Ltd. (CTRP)
Why the Strength
Ctrip.com is a Chinese online travel agency that began as a simple consolidator of hotel accommodations, but has expanded to offer guided tours and travel management services for corporate clients. With 10 previous appearances, Ctrip.com is no stranger to Top Ten, but the company has fallen out of favor with investors, both as a Chinese stock and as a company whose earnings trends have been down for three quarters. There’s no doubt that Ctrip.com is the leader among Chinese travel companies. Building on its dominant position among Chinese hotel consolidators, the company has steadily diversified into airline ticketing services, packaged tours and corporate travel arrangements. Services now also include visa processing, car rental, Internet advertising, travel insurance, online check in and seat selection. The company’s March 19 Q4 earnings report reignited investor interest: while the company’s earnings dipped to an 11-cent loss for the quarter, it was still ahead of analysts’ estimates. The real grabber was management’s guidance for Q1, which forecast revenue gains of between 40% and 50%, the best results since 2010. The good news from Ctrip.com is reinforced by similar upbeat news from competitors. This is a nice turnaround story with the power of China behind it.
Technical Analysis
CTRP has been in a substantial correction since September 2014 that pulled the stock from 70 to as low as 41 in December. But CTRP bounced off that low and put in a second bottom at 43 earlier in March. The stock was trading at 46 when the good earnings report and outlook blasted it to 58 in one day. After hitting 61 last Tuesday, CTRP has been trading between 58 and 60 on calm volume. A buy on any dip below 58 looks like a good bet, with a relatively loose stop at 53.
CTRP Weekly Chart
CTRP Daily Chart
Abiomed (ABMD)
Why the Strength
Abiomed, a Massachusetts company that made the world’s first completely artificial heart, is making its debut in today’s Cabot Top Ten Trader on the basis of much smaller devices. Abiomed’s recent rally began last October, when its Q3 earnings came in way ahead of the street’s expectations, at which point, investors jumped on the stock and kept bidding it higher. The next big news for the company came on January 28, when a strong Q4 earnings report and outlook combined with a humanitarian exemption from the FDA for its Impella RP, a catheter-implanted pump that can be used for up to two weeks to support right heart function in patients with acute heart failure, caused buyers to rush in. (A humanitarian exemption clears the way for devices when there are no similar products on the market and the device treats a rare disease.) Then on March 24, the company received approval from the FDA for its Impella 2.5. Abiomed’s last two quarterly reports have shown excellent growth in per-share earnings—200% in Q3 and 173% in Q4—and Q4 after-tax margins soared to 20.4%, miles ahead of any previous margins. Abiomed has shared a trait with biopharmaceuticals for many years: Its fortunes are tied to approvals from the FDA. But the two most recent approvals may help the company to transition to a revenue and earnings story that will attract more institutional supporters.
Technical Analysis
ABMD fell out of bed in late 2012, then rallied strongly in 2013. Despite all the volatility, in October 2014 it was trading at the same level as in July 2012. The three good pieces of news—late October, late January and just last week—have vaulted ABMD from 25 to 72. But last week’s breakout came after the stock had traded flat as a pancake for five weeks in February and March, a small base that helped to reset the stock. The stock peaked intraday near 75 last Tuesday, then dipped to 69 on Thursday, so today’s price looks buyable, with a stop at 66. Because of the big run, though, you should consider keeping your position small.
ABMD Weekly Chart
ABMD 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.
