Stormy Seas, but the Trend Remains Up
Current Market Outlook
After a straight-up move in February, the market has hit some rough waters, with the major indexes and lots of growth stocks taking hits. There’s always the chance that the market is beginning a major correction after a strong but relatively brief (in this case, four weeks) advance, but we like to go with the evidence. So far, all of the indexes are holding above their 50-day lines, and very few stocks have shown any abnormal selling. Thus, while we’re not fully invested, we are sticking with a bullish outlook and believe holding your best performers, and even buying a little on this dip, makes sense.
This week’s list is again heavy on the chip and medical (mainly biotech) sectors, with a smattering of retail. Our Top Pick is Biogen (BIIB), a blue-chip leader of the biotech group. The stock lifted out of a 10-month base in January and has acted well since, and it’s now approaching a solid entry point after pulling back.
| Stock Name | Price | ||
|---|---|---|---|
| WhiteWave Foods (WWAV) | 0.00 | ||
| Tesoro (TSO) | 0.00 | ||
| Skyworks Solutions (SWKS) | 0.00 | ||
| NXP Semiconductors (NXPI) | 0.00 | ||
| Mallinckrodt (MNK) | 0.00 | ||
| Jack in the Box (JACK) | 0.00 | ||
| HDFC Bank Limited (HDB) | 0.00 | ||
| Centene (CNC) | 0.00 | ||
| Burlington Stores (BURL) | 193.95 | ||
| Biogen (BIIB) | 0.00 |
WhiteWave Foods (WWAV)
Why the Strength
WhiteWave Foods is an organic food company whose brands include Silk and So Delicious soy milk products, Horizon Organic milk, yogurt, cheese and other dairy products, Land O’Lakes dairy products and a variety of smaller brands of salads, snacks and ready-to-eat foods. In a sales environment that has seen declining sales of cereal, soft drinks and regular white milk, the big growth has come from refrigerated coffee beverages, organic packaged salad, plant-based beverages and non-dairy ice cream and novelties—and WhiteWave is a leader in all of these categories. This trend toward healthier eating, also seen in the success of Whole Foods Markets and Sprouts Farmers Markets, is creating big opportunities for companies that can certify the organic and “free from unhealthy compounds” status of their products. WhiteWave’s revenue growth popped from 11% in 2013 to 35% in 2014. Demand for healthier foods is strengthening, and sales in Europe (under the Alpro brand) and China (especially Silk soy milk) are driving global growth. WhiteWave is the fastest-growing food and beverage company in the U.S., and has been for the last four years. That’s impressive.
Technical Analysis
During the six months from the middle of September 2014 through the middle of February 2015, WWAV experienced its first major consolidation since it caught fire in July 2013. This consolidation kept WWAV pinned between resistance at 38 and support at 32. The stock finally began its breakout run on February 12 after a Q4 earnings report that beat expectations for the quarter and year. WWAV took just two days to break out above its old resistance and continued its momentum to as high as 43 last week. Now trading around 42, WWAV looks like a good buy on a pullback toward 41. A stop below the price highs will provide protection.
WWAV Weekly Chart
WWAV Daily Chart
Tesoro (TSO)
Why the Strength
Plummeting oil prices haven’t dragged down the entire energy sector. Just ask Tesoro. The San Antonio-based oil refinery is thriving, reporting record earnings in 2014. Earnings per share more than doubled from 2013 on sales that topped $40 billion for the first time. Low oil prices have actually helped Tesoro in recent months. Because it’s a refining and marketing company, with 2,250 retail stations in 17 states, Tesoro can buy oil at market prices—which have now fallen below $50 a barrel—and sell its refined end products like gasoline at much higher rates. In the meantime, cheaper gas has resulted in increased consumer demand—not only for $2.40 gas, but also for snacks, beer and other items Tesoro sells in its network of ARCO retail stores. The company reported record retail results in the fourth quarter, with $195 million in operating income. Tesoro is putting its record profits to good use, boosting its dividend by a whopping 40%. Starting this Friday, March 13, Tesoro’s quarterly payout will jump from $0.30 to $0.425 a share—good for a 2% yield, and a far cry from the measly 5-cents-a-share dividend the company paid in 2009. Bottom line: Tesoro is not only cashing in on this low-oil-price environment, but becoming more shareholder-friendly in the process.
Technical Analysis
Up and down for four months amid declining oil prices, TSO has taken off since mid-January. The stock rose 22% since January 13, jumping from 66 to 93 before settling back below 87 late last week. The recent mini-pullback is a buying opportunity. A month ago, TSO pulled back from 88 to 81 right before leaping all the way to 93 within a matter of two weeks. Expect buyers to again offer support to the stock around here, though a protective stop near 80 is prudent.
TSO Weekly Chart
TSO Daily Chart
Skyworks Solutions (SWKS)
Why the Strength
The smartphone market continues to expand, and Skyworks Solutions occupies an important niche in that expansion. Skyworks makes radio frequency chips and mobile communications systems used in Apple’s iPhone 6, Samsung’s Galaxy GS5 and other big-selling wireless devices. The chipmaker’s latest SkyOne product, called the SkyOne Ultra and intended for use in next-generation smartphones, can support a wider range of antenna configurations with a smaller footprint. The new product could further enhance Skyworks’ strong top- and bottom-line growth. Skyworks’ earnings improved 106% in its fiscal first quarter, the company’s biggest gain in years and ninth straight quarter of acceleration, while sales increased 59% for the quarter. Apple selling a record 74.5 million iPhones in the quarter had a lot to do with Skyworks’ growth. Momentum is expected to carry over into the current quarter; Skyworks revised its second-quarter EPS forecast from 90 cents to $1.03. With iPhone 6 sales still strong, and Samsung’s recent release of its Galaxy S6 and S6 Edge smartphones, Skyworks’ profits should continue their rapid growth.
Technical Analysis
SWKS has doubled since its big mid-October shakeout. Since blowing past its 50-day moving average that month, the stock has been unstoppable. SWKS hit a new record above 72 in January, rising all the way to 84 in late January, and it hasn’t fallen below 79 since. After meeting resistance at 82 for the better part of a month, SWKS is all the way up above 90 now. Pushing further into record territory with almost every passing week, there doesn’t appear to be much in the way of SWKS continuing its five-month ascent. Dips have been rare, so buy on the next mini-pullback with a stop near the 50-day line.
SWKS Weekly Chart
SWKS Daily Chart
NXP Semiconductors (NXPI)
Why the Strength
NXP’s recent buyout of smaller chipmaker Freescale has made the company a “true powerhouse,” according to CEO Rick Clemmer. The deal gives NXP an approximate value of $40 billion, nearly twice its current market cap of $24 billion, and makes NXP the industry leader in the auto and industrial semiconductors market. NXP manufactures semiconductor parts used in car braking systems and transmissions, industrial power tools, smartphones, medical devices and satellite TVs. The Netherlands company reported $5.7 billion in revenue last year, while Freescale’s 2013 net sales were $4.6 billion. The acquisition not only adds 80% more revenue to NXP’s books, but makes the company far more diversified and thus less vulnerable to certain product and industry cycles. Freescale has operations in 19 countries, with a large footprint in the automotive and industrial markets. It also builds chips for consumer products such as the Amazon Kindle e-reader. After the Freescale deal is finalized, NXP expects to grow 50% faster than the overall semiconductor market.
Technical Analysis
Wall Street swooned at the NXP-Freescale deal. NXPI popped 17% in one day, gapping up from 84 to 99 on March 2, and volume exploded from 1.7 million to 23.9 million. Shares have since ticked down slightly, but volume remains double what it was in February. With the Freescale deal not even finalized yet, more investors are likely to want to buy shares of the new “powerhouse” in the coming weeks and months. The tight trading since the gap is a positive; we’re OK with a small buy around here or on major weakness, and a loose stop in the upper 80s.
NXPI Weekly Chart
NXPI Daily Chart
Mallinckrodt (MNK)
Why the Strength
Few investors have ever heard of Mallinckrodt, and that’s partly because it was launched as a spin-off from Covidien a couple of years ago. But this is no small fry—thanks to some solid products and a bunch of acquisitions, the firm posted $2.5 billion in revenue last year, and the stock is a member of the S&P 500. The company has had its hands in a few pies, but it’s morphing into a specialty pharmaceutical firm (80% of sales should come from that segment this year), thanks mainly to both Ofirmev, which is acetaminophen delivered through an IV in a hospital, and Acthar Gel, the hugely profitable (and somewhat controversial) treatment for a variety of rare diseases like systemic lupus, MS relapses and infantile spasms. Acthar has been approved for nine indications, but management says just 3% or so of addressable patients use the drug (9,000 out of 300,000). The most recent reason for the stock’s strength came from last week’s $2.3 billion buyout of Ikaria, which produces INOMax (inhaled Nitric Oxide), which is used in some hospital critical care applications—it’ll add to Mallinckrodt’s debt load but should immediately boost earnings this year. All in all, management clearly has a vision and is executing it well, which should keep investors buying on dips.
Technical Analysis
MNK has had a big run since late 2013, so it’s not in the early innings of its overall advance. But there have been no signs of selling pressure lately, and the Ikaria purchase could add another growth leg to the story. Shares have been in a choppy uptrend since the start of the year, with a couple of sharp dips and equally sharp recoveries. Last week’s minor gap up on the acquisition doesn’t look like a kick-off, so we think buying dips of a few points is your best bet, with a stop near the 50-day line.
MNK Weekly Chart
MNK Daily Chart
Jack in the Box (JACK)
Why the Strength
Jack in the Box remains a very strong stock for many reasons. The company operates about 2,200 namesake restaurants (one of the largest burger chains in the U.S.), as well as about 600 Qdoba Mexican Grill locations, which are very similar to Chipotle though not quite as popular. And, simply put, business has been good—same-store sales were up 4.4% for the Jack in the Box stores last quarter, while Qdoba comparable-store sales rose a huge 14%; better yet, the company expects more strong growth (4% for Jack, 8.5% for Qdoba) this year. The firm is aiming to add just 10 to 15 new Jack stores this year, but boost its Qdoba store count by nearly 10% (50 to 60 new locations), which should keep growth humming. Another positive factor (after cutting expenses and transitioning its Jack stores into free cash flow machines): the top brass is returning a bunch of money to shareholders through a modest dividend (0.8% annually) and a huge share buyback plan (its share count is down 10% from last year). There’s nothing revolutionary here, but the pick-up in business and bullish share buyback should keep earnings growing in the 15% to 20% range for the next couple of years.
Technical Analysis
JACK has been a steady winner during the past couple of years, breaking out at 30 in February 2013 and more than tripling since. Shares did base again for much of last year before lifting off in September (near 62) and they’ve been riding their 10-week line higher since then. JACK popped higher on earnings a month ago, which seemed out of trend on the upside (something that often coincides with a meaningful top). However, the tight action since is very encouraging; we think dips toward the 25-day line (nearing 93) are buyable, with a tight stop around the 50-day line.
JACK Weekly Chart
JACK Daily Chart
HDFC Bank Limited (HDB)
Why the Strength
Investors have taken notice of recent announcements of estimated 2015 GDP growth that put India (estimated growth 7.4% to 7.6%) ahead of China (7.0% growth). There aren’t a lot of direct ways to play India’s accelerating economy, but HDFC Bank is a top choice. HDFC is a national bank with over 3,400 branches in 2,200 municipalities, which gives it great exposure to retail banking. It also gets nearly a third of its revenue from wholesale loans and an additional 11% from credit cards and personal loans. The expected improvement in the Indian business climate following the election of a business-friendly prime minister, Narendra Modi, looks like it finally arrived in the form of a new proposed budget for the country. That budget reduces corporate tax rates from 30% to 25% and boosts spending on transportation infrastructure. HDFC Bank’s stock took a small hit last Friday when an analyst lowered its price target to 19% below the stock’s current level. But that’s a micro influence that should be overpowered by the larger story of Indian growth and HDFC Bank’s healthy participation. The bank’s stock also pays a small dividend with an annual yield of 0.5%.
Technical Analysis
HDB built a nice base under resistance at 53 during November and December, then blasted off on January 15 with an eight-day run that peaked at 62. A late-January correction to 56 gave way to a February rally that pushed HDFC to new highs at 64 last week. The stock has pulled back to 61, probably because of the lowered price target, but that represents a good buying opportunity. We think a buy at 61 or lower stands a good chance of proving profitable. A stop at the 50-day moving average, now at 57, makes sense.
HDB Weekly Chart
HDB Daily Chart
Centene (CNC)
Why the Strength
When the healthcare exchanges authorized under Obamacare went live in late 2013, investors faced a new set of opportunities. One of them was Centene, a multi-line healthcare enterprise that provides programs and services to a number of under-insured and uninsured individuals. The company operates in two segments: Medicaid Managed Care and Specialty Services. Both segments work with local governmental agencies to administer healthcare delivery programs. Centene was growing rapidly well before Obamacare arrived. The company boasted 52% revenue growth in 2012, 34% in 2013 and 52% in 2014. But there has been a clear acceleration in revenue growth in 2014, with Q4 results showing a 61% increase in revenue with an accompanying 107% growth in earnings per share. The company’s stock also split two-for-one effective February 20. The roster of institutional investors holding Centene has been growing steadily, evidence of a growing taste among the whales for both the healthcare sector and Centene itself. And if you’re keeping a long-term calendar of earnings announcements, Centene has already scheduled its Q1 report for April 28.
Technical Analysis
CNC is a great example of a tractor stock, an issue that keeps advancing steadily for a long time. CNC has been in an uptrend since June 2012, with frequent, moderate corrections along the way. After a four-month consolidation under resistance at 40–42, CNC got a new burst of energy in October 2014, and the stock hasn’t taken much of a breather since. CNC throws an occasional down day into the mix, so you should be able to start a position close to 62. With low volatility, your defensive stop can be pretty tight, just below 58.
CNC Weekly Chart
CNC Daily Chart
Burlington Stores (BURL)
Why the Strength
Burlington Stores is a national off-price retailer of clothing, home and baby products, selling mostly branded good at savings of up to 60–70% below department store and specialty store prices. The company has 543 stores, mostly called Burlington Coat Factory, but it also uses the Cohoes Fashions, Super Baby Depot, MJM Designer Shoes and Burlington Shoes names. These stores, in 44 states and Puerto Rico, average 80,000 square feet, which is about twice as large as the stores of major competitors. Burlington Stores delivered 7% revenue growth in both 2013 and 2014, but growth increased to 8% in the company’s fiscal Q3 and 9% in Q4. And estimates for this year’s earnings are up 31%! Institutional investors have been piling into Burlington, even ignoring a January announcement of a secondary offering while bidding the stock up. There doesn’t appear to be any secret sauce to Burlington Stores’ business plan, just strong discount merchandising in a strengthening retail environment. The company expects to open about 25 new stores per year, with each store expected to have an average payback period of less than three years. Management’s plans seem to be working well.
Technical Analysis
BURL is still a relatively young stock, having come public at 17 in September 2013. The stock took about seven months to consolidate its initial pop to 26. But since BURL broke out above its post-IPO resistance at 33 last August, it hasn’t been through more than a token correction. The trajectory for BURL has been quite consistent, losing just over a point in the recent market weakness. With the rising 25-day moving average now at 53.5, BURL may take a little breather here. A buy under 56 looks solid, with a stop at the 50-day moving average, which the stock hasn’t touched since October.
BURL Weekly Chart
BURL Daily Chart
Biogen (BIIB)
Why the Strength
Biogen has emerged as one of the two liquid leaders (along with Celgene) in the biotech sector, a group that remains strong as the winners have a hard-to-beat combination of rapid and dependable growth, huge profit margins, reasonable valuations and big projected growth for years to come. In Biogen’s case, those fantastic growth characteristics stem from the firm’s multiple sclerosis (MS) franchise, especially Tecfidera, an oral treatment for MS that raked in a huge $916 million in revenue last quarter (nearly 35% of all revenue); all of its MS drugs together have a 38% market share for all U.S. MS patients. That alone should drive solid growth for another couple of years at least, though the company also has an emerging hemophilia franchise ($77 million of revenue last quarter, up from $47 million and $10 million the prior two quarters), and there’s an Alzheimer drug in development that looks extremely promising—the early clinical trial data was so good that they’re skipping Phase II trials and moving right to Phase III. All told, analysts see the bottom line increasing in the 20% range each of the next couple of years, with little chance of a major hiccup in growth, and that’s keeping big investors interested. We still favor Celgene in the group because of its faster growth profile, but that’s taking nothing away from Biogen, which is clearly a leading stock.
Technical Analysis
Despite a big pickup in growth last year, BIIB topped in March 2014 along with most growth stocks and meandered sideways until later in the year. Shares found some great buying in December (thanks to positive results from the Alzheimer drug) and then pushed to new highs following earnings in January. It’s acted well since, and looks buyable here on dips.
BIIB Weekly Chart
BIIB 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.
