Still Plenty of Strength
Volatility has increased and minor divergences are beginning to appear, but the market’s major trend remains clearly up. Thus our Market Monitor remains in bullish territory, and we continue to advise heavy participation. However, with some small cracks beginning to appear, we remind you that cutting losses short is critical, and that buying smart—ideally on high-potential set-ups—is the best way to avoid having to take a quick loss.
Among sectors that are attractive today, we find quite a few in the medical industry, where the Affordable Care Act is beginning to affect the marketplace; in addition to drug companies, health care REITs are strong! Energy remains robust. Retail is very healthy. And numerous Internet-centric firms are thriving, from the leading consumer photography site, to the leading business networking and employment site to a leading provider of fuel cards and related services for commercial vehicle fleets. Our Editor’s Choice today, though, is benefiting from the wholesale shift in mortgage servicing from big banks to smaller, specialized companies. It’s not Nationstar’s (NSM) first appearance here, and it’s probably not the last.
Stock Name | Price | ||
---|---|---|---|
Zillow (Z) | 76.64 | ||
Shutterfly (SFLY) | 94.71 | ||
Omega Healthcare Investors (OHI) | 0.00 | ||
Nationstar Mortgage (NSM) | 0.00 | ||
LinkedIn Corporation (LNKD) | 0.00 | ||
FleetCor Technologies (FLT) | 0.00 | ||
Five Below (FIVE) | 134.58 | ||
BioMarin Pharmaceutical (BMRN) | 0.00 | ||
Bonanza Creek Energy (BCEI) | 0.00 | ||
HomeAway, Inc. (AWAY) | 0.00 |
Zillow (Z)
Why the Strength
Seven year-old Zillow is already the largest real-estate information supplier for both online and mobile information seekers. The company’s Zillow Mortgage marketplace lets borrowers connect with lenders, Zillow Digs offers design tips and local cost estimates and Zillow Rentals gets renters together with rental professionals. The company gets revenue from both ad sales on its website and from premium web-based products like Premier Agent service, and growth has been impressive, up 74% in 2010, 117% in 2011 (the year the company turned profitable) and 77% in 2012. As the U.S. housing sector gains strength, Zillow is positioned to be a valuable tool for both consumers and professionals. The company’s CEO points out that there is enormous room for growth, as the company is now used by only 25–30,000 of the 1.8 million licensed real estate agents in the U.S. He also expects that the rental sector (which is still in the investment phase) and the mortgage sector (in which the company took a bigger stake when it acquired Mortech in December 2012) will provide big future growth. Most consumers come to Zillow’s website to see maps that give price “Zestimates” of houses in their neighborhood. But when they want to buy, sell or rent, the habit of heading to Zillow becomes a valuable asset for the company.
Technical Analysis
Z came public at 20 in July 2011 and immediately popped as high as 60. But that led to a sharp correction that took the stock back to 21 by December of that year. After working its way back to 47 in September 2012, Z crashed and burned in November, slumping to 23 again. But this prolonged consolidation and shakeout phase finally gave way to a healthy uptrend in December, and the stock is now trading near 47. Z looks like a buy anywhere under 46, with a loose stop at 41.
Z Weekly Chart
Z Daily Chart
Shutterfly (SFLY)
Why the Strength
The advent of digital cameras heralded the end of developing rolls of film, but it did not end people’s desire for printed pictures. In 1999, Shutterfly realized this need, and filled the void. Since its founding, the company has become a major player in the photo-personalization and custom printing market, while expanding into online photo storage and sharing. Despite its upstart status, Shutterfly has outlasted and outperformed many big technology names, including Yahoo!, Sony, HP, Kodak, Cannon, AOL, Microsoft and Apple, to name a few. What’s more, the company’s recent blowout fourth-quarter earnings report showed that not only is Shutterfly still a dominant force, its stock is now one of the strongest in the market. Specifically, in the most recent quarter, Shuttterfly’s bottom line came in at $1.40 per share, blowing away the consensus estimate. Meanwhile, cash flow soared 40% as revenue rose 30% to $4.2 million—Shutterfly’s 48th straight quarter of year-over-year revenue growth. Given the sheer market potential for digital photography, the company still has plenty of room for organic growth. Looking ahead, Shutterfly is moving into enterprise sales, which mainly consists of printing for direct marketing products. Sales in this budding market totaled just $27 million last year, up more than 100%. AT&T, Dell and UnitedHealth are all customers, and we see huge potential, especially as the economy picks up.
Technical Analysis
SFLY was strong throughout early 2011, but the stock ran into resistance near 66 in April, forcing a double-top and ultimate retreat in July. The stock ultimately bottomed at 21 in January 2012, and spent most of the year bouncing between 23 and 35. The stock was once again challenging resistance near 35 when Shutterfly released its impressive fourth-quarter earnings results. The resulting investor buying spree propelled SFLY to a fresh 52-week high above 40. Shares are now consolidating into rising support at their 10-day and 25-day moving averages near 44, providing a potential entry point for a long position ahead of the stock’s next upleg.
SFLY Weekly Chart
SFLY Daily Chart
Omega Healthcare Investors (OHI)
Why the Strength
Omega Healthcare Investors is a U.S. company that operates as a real estate investment trust (REIT), investing in healthcare facilities, with an emphasis on skilled nursing facilities. At the end of last year, the company owned or held mortgages on 476 skilled nursing facilities, assisted living facilities and other specialty hospitals. All told, the company controls a little over 55,000 beds in 33 states that are operated by 46 third-party companies. Omega goes out of its way to make it clear that it’s not in the healthcare business; it’s a REIT that seeks quality long-term investments in healthcare properties that will provide favorable risk/reward ratios to its investors. REITs avoid paying federal income taxes by returning at least 90% of their taxable income to investors, and in Omega’s case, that translates to a forward annual dividend yield of 6.4%. The company’s Q4 earnings report met expectations with a 16% increase in quarterly earnings on a 25% gain in revenues. The after-tax profit margin on 35.7% was also the fourth consecutive quarter above 30%. The dividend rate was raised in January, building on a similar increase last October. With an aging cohort of Baby Boomers close to turning 70, the outlook for a well-run healthcare REIT like Omega is bright.
Technical Analysis
OHI finished a significant correction in August 2011, and has been in a general uptrend since. The stock has had three major consolidations during this rally, with the latest lasting from the end of July 2012 until the end of December. OHI caught the market’s January updraft, then broke out in February on good earnings news and has been trading sideways since February 13, inching higher at the end of last week. OHI looks like a good choice for both long-term investors seeking strong dividends and growth investors who appreciate a stock in a price uptrend with a reasonable P/E ratio of just 12. Try to buy on a dip toward 27.5.
OHI Weekly Chart
OHI Daily Chart
Nationstar Mortgage (NSM)
Why the Strength
We’ve written about Nationstar a few times in recent months (including just two weeks ago), so we won’t rehash the basics again; the company’s mortgage servicing business has grown exponentially in recent years, with its mammoth $200-billion-plus purchase of servicing rights from Bank of America doubling Nationstar’s book size. So today we’ll look at the bigger picture; while more asset purchases are likely going forward as big banks dump non-core assets because of regulations (though any further purchases should be bite-sized), Nationstar isn’t going to be just a mortgage servicer. It has a healthy origination business, much of it refinancings these days, and also gets new originations through a deal with KB Home, and its recent small acquisition from Equifax allows it to offer many closing services (appraisals, title work, etc.). In sum, a big chunk of the mortgage business is undergoing a dramatic change, and Nationstar is positioning itself to be one of the big players in that field ... something that should lead to persistent high levels of cash flow for years ahead. Throw in a recovering housing market, and all the pieces are in place for the stock to be a winner. Any bullish update on the company’s quarterly report (out March 7) could light a fire under shares.
Technical Analysis
NSM is not very well sponsored (private equity firm Fortress Investment Group owns more than half the float), which means the stock can move around a bunch. Just this year, NSM leaped to new highs above 40 on the BofA purchase in early January, pulled back 17% to 34, ripped to new highs in early February above 42 and then retreated to its 50-day line near 36 during the market’s weakness! Chart-wise, we think the stock is a good buy here, but with earnings coming up, we recommend that you keep any new position small.
NSM Weekly Chart
NSM Daily Chart
LinkedIn Corporation (LNKD)
Why the Strength
If you evaluate LinkedIn’s stock in a traditional way—discounted cash flows, P/E ratios, etc.—you’ll never be able to understand how the stock could be a winner. But when you look at it from a supply/demand perspective (which is often more meaningful when looking at young growth companies), it’s easy to see why the stock has turned red hot—there simply aren’t many stocks that sport the combination of sales and earnings growth (see table below), expected earnings growth (up 51% and 54% this year and next), liquidity (the stock trades about $400 million of volume per day) and the outstanding growth story that LinkedIn has, as it’s effectively become the standard tool used by recruiters at big firms. Looking ahead, while the company will always be focused on businesses, we’re intrigued with its success at making its site more of a social networking platform; more and more users are going there to see what their business relationships are up to, as well as read some topical business write-ups and news. Thus, while the firm’s marketing business is just one quarter of the total, it did grow a healthy 68% in the fourth quarter, providing a second lucrative growth avenue. All in all, LinkedIn continues to look like the flag-bearer for growth stocks in this bull move.
Technical Analysis
In the short-term, LNKD is going to have a sharp pullback at some point; shares are stretched above their 50-day line (now just north of 130) and the stock’s had a huge move since earnings. That said, we’re impressed by how shares handled themselves during the recent market shakeout, retreating for a few days before exploding to new highs on big volume. And, longer-term, LNKD has only just broken out from nearly a two-year base, arguing for higher prices. Put it all together, and you should sit tight if you own some, and try to buy a little on any weakness (with a looser 20-point loss limit) if you don’t.
LNKD Weekly Chart
LNKD Daily Chart
FleetCor Technologies (FLT)
Why the Strength
FleetCor Technologies, making its debut in today’s Top Ten, provides specialized payment products to fleet vehicle operators, with fuel and other payment cards that allow fleet owners to control costs, combat fraud, track location and performance and lower overall operating costs. This is a global business with commercial accounts in North America, Europe and Latin America, with eight closed-loop data networks that connect to participating fuel vendors and deliver information to clients. Cards may also be used to provide food and lodging. The main value to clients is a stream of data that can be used to track expenses, allowing better analysis and better control. The idea is a strong one, leading to 36% revenue growth in 2012 (up from 20% in 2011). The company’s earnings report on February 8 delivered better than expected results and its optimistic outlook put a cherry on top. FleetCor delivered 46% quarterly earnings growth on 45% revenue growth. And the after-tax profit margin of 35% continued a string of quarters of 34% or better that dates back to Q3 2010. With its technology base already in place, every new client makes a big contribution to the bottom line.
Technical Analysis
FLT came public in Q4 2010 at 23 and has never traded under that price. The current strong uptrend dates back to August 2012, when the stock finished a three-month correction from 41 to 34. The stock moved out to new all-time highs in September and hasn’t had as much as a two-week correction since. The stock gapped up on big volume from 59 to 66 on February 8 (earnings) and has since moved out to top 70. With such consistent momentum, finding a buy point could be tricky; the last time the stock touched its 25-day moving average was in mid-December. At this point, any dip of a point or two looks buyable.
FLT Weekly Chart
FLT Daily Chart
Five Below (FIVE)
Why the Strength
Specialty retailer Five Below offers a wide range of clothing products and accessories targeting teens and pre-teens. As the company’s name implies, most of these offerings are priced at $5 and below. Because of Five Below’s low-cost business model, the company has built most of its stores in the vicinity of Target and Gap’s Old Navy stores, as it effectively splits the difference between Target’s low cost and Old Navy’s trendy appeal. The plan is paying off in spades for Five Below, with the company averaging year-over-year quarterly revenue growth of 46% and earnings growth of 95% during the past four quarters. What’s more, based on fourth-quarter guidance, Five Below is well on its way to hitting analysts’ estimates for net sales of $169–$172 million on adjusted earnings of 36 to 38 cents per share. Since Five Below is a relative newcomer, store expansion is the company’s biggest path toward revenue growth. Current market leader Gap sports more than 1,000 retail locations. If Five Below follows its current strategy of opening stores near these competing stores, the company could rapidly build out from its current 250 locations. Lastly, this rapid expansion brings up a caveat for Five Below, as the company’s gross margins are low. That said, we like Five Below’s growth opportunities.
Technical Analysis
Since going public in June 2012, FIVE shares have soared more than 50%. The road higher hasn’t been without its rough patches, however; after peaking near 40 in October, FIVE proceeded to plunge back toward its IPO following a particularly poorly received quarterly earnings report. But FIVE eventually bottomed and formed a base near 28 heading into the close of 2012. In 2013, shares have rediscovered their original fire. Bolstered by support at their 10-day and 25-day trendlines, the stock has finally eclipsed former resistance at 40, with FIVE holding its ground near 41 at last check. The stock is a little hot right now, so buying dips may be the best strategy.
FIVE Weekly Chart
FIVE Daily Chart
BioMarin Pharmaceutical (BMRN)
Why the Strength
BioMarin Pharmaceutical is a California-based biopharmaceutical company with three approved products (Naglazyme, Kuvan, Aldurazyme) on the U.S. market, and one (Firdapse) that is only licensed in the EU. The company’s products are all based on enzyme replacement therapies to treat genetic diseases. While getting four products developed and commercialized since 1997 is a pretty good track record and sales growth has been in double digits for the past four years, the company hasn’t had a positive earnings quarter since Q4 2010. But investors are willing to overlook that because of BioMarin’s pipeline of drugs in clinical trials. This group includes a drug called Vimizin aimed at treating Morquio A Syndrome that’s in Phase III trials. These trials have gone very well, and the company expects to file for approval to go to market early this year. Another candidate drug, BMN-701, which is targeted at Pompe disease, is in Phase I/II trials. In addition to a promising pipeline, the company lived up to analysts’ expectations on revenue when it released results on February 21. The 43 cents per share loss for the quarter didn’t live up to predictions, but with annual revenue topping $500 million for the first time, investors are willing to wait for earnings.
Technical Analysis
BMRN has been in a long-term uptrend since March 2009. It hasn’t been a monster, and pullbacks like the dip from 44 to 36 in late October would have been hard to hold through. But the stock has stairstepped higher since its big gap up on November 5 returned it to its trend line. BMRN traded sideways under resistance at 56 through most of February, but the good revenue news in its earnings report kicked off a rally that has pushed the stock to new all-time highs. Look to get in on a pullback of a couple of points.
BMRN Weekly Chart
BMRN Daily Chart
Bonanza Creek Energy (BCEI)
Why the Strength
Bonanza Creek Energy is another energy company that’s growing like mad thanks to an aggressive drilling program, elevated oil prices and some lucrative acreage. Interestingly, the company doesn’t operate in any of the well-known shale plays (Marcellus, Eagle Ford, or the Bakken), but instead is making hay in the Wattenberg Field in Colorado. (It’s also doing good business in southern Arkansas, but 80% of its drilling in 2013 will occur in Colorado, so you know where management sees the best possible returns.) Like many other energy stock winners, Bonanza is ramping up production (more than 100% last year, and at least another 50% in 2013), with proved reserves compounding at a 50% annual rate since 2007! But perhaps more impressive is that the top brass is drilling not only quickly but intelligently; with more than 80% of revenues from oil, earnings and cash flow are booming, yet the company is one of the most un-levered firms in the industry, and management isn’t afraid to hedge more than 50% of upcoming production (40% of 2013 output is already booked). The next big event is Thursday, March 14, when the company reports fourth quarter results, though with all of its 2013 goals and costs already announced, the key will be any new well results in Colorado.
Technical Analysis
BCEI is a bit thinner than we’d prefer (it only trades an average of $22 million per day), but it’s been in a solid uptrend since last summer, running from 14 to a recent high of 35 with just one hairy correction (during early November when the entire market was tanking) during that time. More recently, the stock’s been noisy on a day-to-day basis, but we’re impressed that BCEI has remained perched near its peak despite some weakness in oil stocks and, of course, lots of choppiness from the overall market. If you’re game, you could buy a little on a dip of a point or two, and then see what the quarterly report brings.
BCEI Weekly Chart
BCEI Daily Chart
HomeAway, Inc. (AWAY)
Why the Strength
With more than 720,000 paid vacation rental home listings in 168 countries, HomeAway is the world’s leading online marketplace of vacation rentals. These listings can be found via the company’s eponymous website, as well as HomeAway’s other websites VacationRentals.com, VRBO.com and BedandBreakfast.com. The company specializes in connecting tourists with property owners looking to rent, providing rental owners and property managers a simple way to manage online bookings. HomeAway also assists in advertizing and marketing these properties via its network of websites. Business has been brisk for HomeAway, with the company growing earnings by an average of 10% and sales by at least 20% during the past six quarters. During HomeAway’s recent fourth-quarter earnings report, the company said it delivered 22% revenue growth in 2012, with a 32% increase in free cash flow. CEO Brian Sharpels attributed the growth to the company’s significant strides in implementing its long-term strategy. Looking ahead, HomeAway is zeroing in on the continued rollout of its e-commerce capabilities, including a pay-per-booking pricing model and distribution of value-added services.
Technical Analysis
After opening at 27 following its initial public offering a year ago, AWAY found little buying support and ultimately succumbed to selling pressure. The stock plunged to a low near 19 by July, where bargain hunters stepped in and helped usher AWAY toward recovery. The ensuing rally ended in November when the company provided weak earnings guidance. The 20 level provided a firm backstop for AWAY, however, and, following a basing period during the fourth quarter of 2012, AWAY was once again headed skyward. Riding support at its 10-day and 25-day moving averages, the stock was poised to challenge its IPO heading into February, and finally eclipsed this technical hurdle in the wake of a strong fourth-quarter performance. AWAY is now trading just shy of 30, where it may enter a period of consolidation as it digests recent gains. We recommend buying on weakness and placing a stop loss near 27 to limit potential losses.
AWAY Weekly Chart
AWAY 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.