Still Plenty of Opportunites
Current Market Outlook
With the market beginning a long-overdue correction that has the potential to bring high-flying stocks down to earth, one very human temptation is to defer new buying until risk seems to be past. But if you always think that way, you’ll never invest. Instead, we recommend keeping it simple. Recognize that the market’s main trend today is clearly up, and focus on identifying strong stocks with logical entry points. The candidates for today’s Top Ten included many semiconductor stocks, medical technology stocks, basic chemical stocks, financial services stocks and REITs, and you’ll find the best of those, along with other attractive stocks.
Our Top Pick is NetEase (NTES), which gapped up to new highs on its earnings report in mid-February and has since pulled back to support at the low end of its recent range. (Note: Don’t let the high share price dissuade you; simply buy fewer shares.)
| Stock Name | Price | ||
|---|---|---|---|
| Bluebird Bio (BLUE) | 0.00 | ||
| Century Aluminum Co. (CENX) | 17.24 | ||
| Conduent (CNDT) | 0.00 | ||
| Copa Holdings (CPA) | 0.00 | ||
| NetEase, Inc. (NTES) | 0.00 | ||
| Pacira Biosiences (PCRX) | 54.85 | ||
| STMicroelectronics (STM) | 30.09 | ||
| Symantec Corporation (SYMC) | 0.00 | ||
| TAL Education (TAL) | 50.49 | ||
| United Rentals, Inc. (URI) | 0.00 |
Bluebird Bio (BLUE)
Why the Strength
Bluebird Bio develops orphan drugs for three rare genetic diseases; childhood cerebral adrenoleukodystrophy (CALD), transfusion-dependent beta-thalassemia and sickle cell disease. It has also partnered with Celgene for cancer treatments. The company’s lead CALD drug candidate, Lenti-D, could become the first one-time treatment for the disease (market opportunity of roughly $150 million). CALD is a fatal childhood disease caused by a defective gene, which leads to the accumulation of long fatty acids throughout the body. Lenti-D inserts a functional copy of the defective gene, forces the body to replicate the correct gene, and stops CALD (as well as the need for regular blood transfusions) in its tracks. The treatment is in a Phase 2/3 trial (Starbeam). Bluebird’s candidate for beta thalassemia and sickle cell disease is LentiGlobin, and represents a potential blockbuster drug. Phase III studies (Northstar 2 and Northstar 3) for beta thalassemia are current enrolling, as is a Phase 1/2 study for sickle cell disease. Chances of near-term success appear to be relatively low for these treatments given the complexity of the diseases. But Bluebird is working to improve treatment protocols and sees a massive opportunity that’s well worth the risks. Lastly, Bluebird’s bb2121 anti-BCMA CAR T therapy (partnered with Celgene), which targets multiple myeloma, is marching toward a Phase II trial. A secondary offering is in the rear-view mirror, and trial data will be forthcoming in 2017. Start slow, and add exposure if/as things progress.
Technical Analysis
BLUE looked like it was blasting off in September when it hit 75. But in mid-October, news that it would change the manufacturing process for its LentiGlobin trials prompted a few analyst downgrades and shares sold off to around 40 by the time Q3 results were released on November 2. Wall Street liked what it heard on the product development front and shares rallied up to 80 by early December. Trading volume eased and the stock pulled back to its 50-day moving average line just north of 60 by the beginning of 2017. Shares have since been trading above that trendline, and hit 95 last week. This two-day pullback looks buyable.
BLUE Weekly Chart
BLUE Daily Chart
Century Aluminum Co. (CENX)
Why the Strength
Century Aluminum operates three aluminum smelters in the U.S., in Kentucky and South Carolina, as well as one in Iceland. But it used to have five. Trouble is, Chinese competitors have pushed the price of aluminum down in recent years, to the extent that Century was forced to sell its original smelter in West Virginia. (Another factor was the high price of electricity in the area from a monopoly power utility.) The reduced costs should help the company return to profitability, but the bigger factor behind the stock’s recent rebound is the expectation that the U.S. Trade Representative’s formal complaint at the World Trade Organization against China for illegally subsidizing China-based aluminum smelters will lead to higher prices for the company’s goods—as well as less competition. The company reported earnings on February 24 and soundly beat analysts’ estimates, leading analysts to raise their estimates for both 2017 and 2018. Meanwhile, there’s increased hope that the Trump administration will be even more aggressive on the trade issue than Obama’s, which filed the original complaint.
Technical Analysis
CENX originally appeared here on February 6, after the post-complaint blastoff that took the stock to a high evolved into a basing formation at 15. In the month since, there has not been much action, but the base building has continued. The latest act saw the stock bounce off support at its 50-day moving average (now nearing 13), and this presents a low-risk entry opportunity.
CENX Weekly Chart
CENX Daily Chart
Conduent (CNDT)
Why the Strength
Conduent is the recently spun off business-processing unit of Xerox. Long-time Xerox investors may recognize it as a reincarnation of Affiliated Computer Services (which Xerox purchased in 2010). Today, the business is largely focused on systems that run parking lots, monitor traffic and collect tolls through the E-Z Pass system. The stock sold off after it began trading in early-December, but shares turned around a month later at 13.3 as analysts picked up coverage of the turnaround story with buy ratings based on eventual margin expansion. Consensus now is for EPS growth of 25% in 2018. Revenues most likely won’t grow until after 2018, though obviously a lot depends on what CEO Ashok Vemuri and CFO Brian Webb-Walsh decide to do. The stock enjoyed another positive jolt on February 22 when Q4 EPS came in $0.04 ahead of expectations of $0.29. Reported revenue of $1.5 billion missed by $130 million and was down 12.7%, but the market is likely looking past these figures as Q1 2017 will be the first quarter to represent Conduent as a standalone company. In 2017, investors should focus on key elements of the strategic plan: modernize platforms, refocus the innovation group and expand verticalization in core markets.
Technical Analysis
CNDT hit the market around 16 and immediately sold off. It hit 13.25 on January 13, which marked the turnaround point. From there, it advanced steadily to 15 by the end of January, then pulled back slightly to 14.25 by February 9. A modest rally brought shares back to 15 by the February 22 quarterly report, after which they spiked above 16.50 on high volume. That rally carried into the second day when shares almost hit 17.50. The stock has cooled off since, trading lower in six of the last seven sessions. We think it can be bought between 15 and 16 with a tight stop set just below the February 9 low.
CNDT Weekly Chart
CNDT Daily Chart
Copa Holdings (CPA)
Why the Strength
Copa Holdings is a Panamanian airline that carries passengers and freight throughout the Americas. The company is enjoying a major big bump in demand for air travel in Latin America that has caused an increase in revenue and earnings for the last two quarters after two years of declines. One analyst raised the rating and price target for Copa’s stock after a strong earnings report on February 15 that featured a 13% increase in revenue and a 48% gain in EPS that follows through on the 53% increase in Q3. The company’s recent success is a result of a few factors, the largest being the increase in demand for air travel. The company’s January load factor rose from 79.9% a year ago to 83.7% this year after traffic rose 9% in December. The company has also been through a program of cost-cutting that has fattened the bottom line and allowed an increase in the stock’s dividend after two quarters of decreases; the dividend now yields 1.9% annually. The third factor helping Copa is the persistently low price of fuel. Put all these together and you have an airline that’s riding a wave of good economic trends and good management.
Technical Analysis
CPA went over the falls from 160, where it started 2014 to 39 in October 2015. But despite a rally to 72 in March 2016, CPA had more turmoil in store that dropped it back to 49 in July 2016. Since then, however, CPA has been rallying with a consolidation from mid-October through the end of 2016 and a fresh burst of energy in February. CPA is buyable on any weakness of a couple of points, with a defensive stop at its 50-day MA, now at 97.
CPA Weekly Chart
CPA Daily Chart
NetEase, Inc. (NTES)
Why the Strength
NetEase keeps appearing in Cabot Top Ten Trader because the company has a very successful online gaming business in China, one of the biggest game markets in the world. Beijing-based NetEase was founded in 1997 and functioned primarily as a Web portal, with the usual menu of data and services. While NetEase always featured games, it was the 2009 licensing agreement for World of Warcraft that pushed the company into massively multiplayer online role-playing games (MMORPGs). A major commitment to in-house development and production of such games using Chinese themes and folklore pushed NetEase to the forefront of Chinese gaming, and it has never relinquished its lead. The company is also using its huge user base, including increasing access via mobile devices, to push into e-commerce and advertising. The company’s quarterly report on February 16 featured some impressive numbers, including a 57% jump in earnings on a 43% gain in revenue, with a healthy 327% after-tax profit margin. The company also announced a nearly 30% increase in its dividend. It isn’t the early innings for NetEase, of course, but the company is using its $5.3 billion in cash to finance continuing game development and lateral moves. We like it.
Technical Analysis
The rally in NTES has been going on since early 2013, and has always featured the higher volatility that characterizes all emerging market stocks. Significant pullbacks in August 2015 and the first quarter of 2016 have made it hard to hold in the long term. The stock moved out to new all-time highs a week ago, but that move came after a pullback from 270 in October 2016 to 210 in December. That makes the stock’s correction from last week’s high at 309 to today’s trading under 290 a good opportunity to buy well. A small buy here with a stop at 265 makes sense, with a plan to increase exposure if the stock hits new highs.
NTES Weekly Chart
NTES Daily Chart
Pacira Biosiences (PCRX)
Why the Strength
Pacira Pharmaceuticals develops non-opioid drugs for postsurgical pain control. The company says that one in 10 patients report dependence or addiction to opioids after surgery, and it is on a mission to change that. It uses a proprietary delivery technology it calls Depo-Foam to deliver its drugs. Depo-Foam encapsulates drugs without altering their chemistry, then releases them over a time period ranging from one to thirty days. The company’s sole commercialized drug is Exparel, a sustained release postsurgical analgesia that turns a patient’s pain signal off at the surgical site. It is administered as a shot, and generated $266 million in revenue in 2016 (up 11% over 2015). Exparel is also in a Phase 3 trial for nerve blocking, for postsurgical analgesia in Europe, and for pediatrics. Two new Depo-Foam products are also in development. Pacira has a lot on the table for 2017, including results for multiple Exparel studies (Phase 4 knee, Phase 4 spine, Phase 3 nerve block, Phase 4 spine), as well as initiation of new studies, and two new partnerships. Next up are results from Phase 4 knee, which is hoped to show that Exparel is superior to bupivacaine, which has been on the market for decades (and is cheap). Next comes data from the nerve block trial, which is important since the FDA requested a larger patient population than the previous study.
Technical Analysis
PCRX bounced around in the 30 to 38 range from October through the end of 2016. It picked up new analyst coverage late in the year (with around 30% estimated upside) and shares quickly rallied to 40. A little wobble in late January resulted in a quick trip to 36, but PCRX quickly bounced and broke out to 42 in early February, then marched confidently to close at over 45 prior to its Q4 report on March 1. Solid results and an outlook with multiple potential catalysts drove the stock to 59 the next day. It has moved back near 50 over the last few days. We think it can probe 60 again relatively soon upon positive trial results (consensus price target is 58).
PCRX Weekly Chart
PCRX Daily Chart
STMicroelectronics (STM)
Why the Strength
STMicroelectronics is one of the largest semiconductor companies in the world. Headquartered in Switzerland, the company has offices in 35 countries and 11 main manufacturing sites. But the company hasn’t had a big growth year since 2010, when revenues jumped 22%. Since then, erosion has been the word, with revenues in 2016 down 33% from that peak. In fact, the company pays a dividend of 1.3%, a sure sign that its best growth days are past. Still, the stock is strong today for two big reasons. First, the semiconductor sector as a whole is strong, in part because investors are thinking the cyclicality of the industry in the past may be history, thanks to more growth coming from end markets like data centers, automotive technology (autonomous vehicles), artificial intelligence (AI) and the Internet of Things (IoT) rather than PCs, smartphones and communications infrastructure. Second, there are growing expectations that STMicroelectronics will benefit heavily from its role in providing new sensors for the iPhone 8, due out in the second half of this year. The company’s fourth quarter earnings report, released on January 26, beat expectations, but it’s the future that matters now. Analysts are looking for earnings growth of 136% in 2017!
Technical Analysis
STM has been out of the limelight for a very long time; the stock’s all-time high was back in 2000. But since last July, the stock has been in a strong uptrend, driven first by bargain-hunters and now by trend-followers who see further upside opportunity. The buyers are definitely in control here. If you’re game, try to buy on a normal correction, which might be 5% off any high.
STM Weekly Chart
STM Daily Chart
Symantec Corporation (SYMC)
Why the Strength
News of businesses and consumers coming under attack by hackers makes headlines pretty much every day. Symantec, one of the first companies to offer cybersecurity programs, is still very much on the frontlines of internet and network security, offering both consumer and enterprise protection programs. Consumer services, which include online backup, anti-virus software and PC tools under the Norton and LifeLock brands, contributed 46% of 2016 revenue. Enterprise protection, which makes up the other 54% of revenue, is offered under the Symantec and Blue Coat brands. Symantec’s expansion in the security space has involved some serious acquisitions—LifeLock was acquired in November 2016 and Blue Coat in June 2016. While about 60% of revenue comes from the Americas, the business is global. Symantec ran into a slow patch in revenue growth, with revenue down for three straight years, including a serious 41% dip in fiscal 2015. But the two recent acquisitions have made an immediate difference, with revenue up 15% in the most recent quarter and earnings up 23%. Symantec is on its third new CEO since March 2014, but it looks like leadership is now stable and the company is moving forward with a more aggressive stance. A 1% dividend yield adds to the appeal.
Technical Analysis
SYMC dipped below 15 in January 2016, but got a nice kick higher from the Blue Coat acquisition, running to 26 in October. The stock traded sideways for a few months and ended the year trading at 24, when the market began another run. The stock topped 29 in mid-February and has been trading sideways for a few weeks as its 25-day moving average has caught up. SYMC is buyable anywhere under 29, with a stop around 26.
SYMC Weekly Chart
SYMC Daily Chart
TAL Education (TAL)
Why the Strength
Private education is big business in China, with students (and their parents) looking for any advantage that can improve access to the best colleges. TAL Education is one of the biggest education firms in China (2.6 million total students, up 75% from a year ago) and the company’s K–12 programs offer instruction and tutoring in math, English, Chinese, physics, chemistry and biology. The company’s courses are offered online, but the real money is made in small-class and one-on-one tutoring formats. TAL Education is a very steady company, including its growth from one learning center in Beijing in 2003 to its current 474 learning centers in 27 cities across China (up from 363 centers a year ago. The company’s third fiscal quarter earnings report on January 19 showed excellent revenue growth, partly from the company’s organic added teaching capacity and partly from the acquisition of Firstleap Education and its 52 learning centers. TAL Education’s earnings per share popped higher by 37% in that quarterly report. With demand remaining high and the company expanding via both acquisition and organic growth, TAL Education looks like a low-risk investment in Chinese growth.
Technical Analysis
TAL (the symbol was recently changed from XRS) has been a long-term winner since it began its current run in late 2014. After taking a year off from September 2014 through August 2015, the stock got moving again and roared to a bit of a climax top at 84 in late October 2016 before correcting to 66 on December 21. The stock’s normal rebound got a boost of energy from the January 19 earnings report and TAL is now trading over 90. TAL is buyable on weakness of a point, with a stop around 81.
TAL Weekly Chart
TAL Daily Chart
United Rentals, Inc. (URI)
Why the Strength
United Rentals is the largest equipment rental company in the world, with 887 rental locations in 49 states and every Canadian province. Catering to the construction industry, the building maintenance industry and the occasional industrious homeowner, the company offers a wide range of tools, from backhoes to skid-steer loaders to scissor lifts to heaters to forklifts to trenching equipment to welding equipment to plumbing equipment. United Rentals’ current equipment has a total original cost of $9 billion, but the company is always selling used equipment and buying new. In the latest year, 85% of revenues came from rentals while the remainder came from the sale of equipment. In most years, the company enjoys at least modest growth, but 2016 saw revenues shrink a bit (for the first time since 2009), as volumes grew but prices fell. Happily, capable management yielded good earnings growth, continuing a trend that dates back to 2010. Going forward, the big news is the acquisition of NES Rentals, a specialist in aerial equipment. The acquisition was announced on January 25, when the company released its fourth-quarter results, and just two weeks ago, the company announced an offering of $500 million in 10-year notes to fund it. The acquisition should close in early 2017 and be accretive to revenue, earnings, EBITDA and cash flow this year—though it will temporarily interrupt an existing share repurchase program. In short, the future is bright, for both 2017 and longer-term.
Technical Analysis
URI is part of the S&P 500, but that doesn’t mean it’s a stodgy stock. The company’s revenue slowdown in 2015-2016 saw the stock fall from a peak at 120 in 2014 to a low of 42 in 2016. But that’s history, as the acquisition announcement saw the stock gap up to record new highs on big volume. Since then, the stock has built a base between 125 and 130, and you can buy anywhere in that range—or on a breakout.
URI Weekly Chart
URI 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.
