Support Holding Thus Far
Current Market Outlook
It’s been a frustrating past month in the market, with the major indexes chopping lower, the Nasdaq breaking its 50-day line, many stocks blowing up on earnings and most investors throwing up their hands in disgust. Yet, through it all, the evidence hasn’t deteriorated to a major degree—the intermediate-term uptrend hasn’t broken, and most strong, liquid stocks that weren’t maimed during earnings have held key support. Today was certainly encouraging, though it’s too soon to assume the pullback is over so we’ll keep our Market Monitor where it is today. However, the next few days should be telling—a decisive break lower from here will have us trimming our sails, but another good day or two would be a great sign that the post-February advance is resuming.
This week’s list is encouraging in that we see more true growth stories—or at least stocks with some major catalysts. Our Top Pick is Martin Marietta Materials (MLM), which is one of the big raw material suppliers for the construction industry. Buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| TransDigm (TDG) | 599.41 | ||
| NVIDIA Corporation (NVDA) | 242.42 | ||
| Newmont Mining (NEM) | 57.31 | ||
| Martin Marietta Materials (MLM) | 261.52 | ||
| Jacobs Engineering Group (JEC) | 89.83 | ||
| Electronic Arts (EA) | 0.00 | ||
| EBIX Inc. (EBIX) | 0.00 | ||
| Blue Buffalo Pet Products (BUFF) | 0.00 | ||
| B&G Foods (BGS) | 0.00 | ||
| Berry Global (BERY) | 64.22 |
TransDigm (TDG)
Why the Strength
As a company, TransDigm is invisible to consumers; the business is actually a collection of 23 separate companies that have been amassed over the past 20 years, all generally focused on making components for the aircraft industry. In the latest quarter, the company completed the acquisition of Breeze-Eastern (a maker of lifting and pulling devices, like hoists and winches and hooks, for both military and civilian aircraft). Airframe components account for 47% of TransDigm’s output, while power and control systems account for 49% (and a few percent are bought for non-aircraft uses). Parts include actuators, batteries, security systems, connectors, displays, valves, gauges, airbags, laminates, seat belts, audio systems, lighting controls, etc. Boeing, Airbus and the U.S. Dept. of Defense are all major customers. The company has been a very consistent grower of revenues and earnings in recent years, and the latest report, released was week, was especially good, featuring revenue growth of 29% and earnings growth of 36% (both figures were the best in many years). Additionally, the company (knowing a bargain when it saw one) repurchased 691,000 shares during the quarter, at an average price of 198. As a well-run company in a core industry, TDG is attractive.
Technical Analysis
TDG has appeared in Cabot Top Ten Trader four times since 2009 and every subsequent appearance has been at a higher price. If you had just bought at the first appearance (February 2009) and held on, you’d be up more than 600%! Still, if you missed that, there’s no time like the present. After a long, nine-month consolidation phase, TDG broke out to new highs on big volume last Tuesday and has traded tightly between 244 and 250 since. Technically, that looks like your entry point.
TDG Weekly Chart
TDG Daily Chart
NVIDIA Corporation (NVDA)
Why the Strength
When we enthuse over Facebook, a lot of it has to do with that company’s myriad areas of growth—not just Facebook itself, but Instagram, Messenger, WhatsApp and Oculus. It’s a similar story with Nvidia, a chipmaker that is leading the way in four high-potential businesses, each of which has the potential to grow manyfold in the years ahead. The company’s chips dominate the PC-gaming market, which is in the midst of a huge upgrade cycle (first-quarter sales from this segment were up 17% from a year ago, and they’re growing players in the auto market (sales up 47%), both for function-rich infotainment systems in mainstream cars and, eventually, autonomous driving; datacenter and artificial intelligence applications (sales up 63%); and virtual reality headsets and systems, which should begin to lift off later this year and into 2017. Nvidia still gets 13% of revenues from PC sales, which is a shrinking market (revenues there fell 21% from last year), but investors are focused on the growing areas, as well as the company’s expanding profit margins (20.2% in the first quarter vs. 16.2% a year ago) as it moves into these newer, exciting industries. Results last week blew away expectations, which is the reason the stock soared, and analysts see earnings up 25% this year … a figure that will likely prove conservative as demand remains strong. Lots of potential here!
Technical Analysis
NVDA broke out last October from a five-year base, ran from 24 to 34 by year-end, then built a new base while the market corrected. It broke out from that consolidation at 33 in March, ran to 37.5 in April and then pulled back to its 50-day line as the general market retreated. But then came the earnings report! NVDA soared 15% on six times average volume, closing at all-time highs. Nibbling on dips and using a stop near the 50-day line should work.
NVDA Weekly Chart
NVDA Daily Chart
Newmont Mining (NEM)
Why the Strength
Newmont is one of the few gold miners that managed to stay profitable as gold prices nosedived during the last few years. Now that gold prices are back on the rise, the company is anticipating big things; it expects earnings to increase 30% this year (with a 26% gain in 2017) on the strength of a second consecutive year of sales growth. One advantage Newmont has over other miners is its low production costs; at $898 an ounce, it’s much lower than the current price of gold around $1,274 an ounce. Every $100 gain in per-ounce gold prices equals adds a whopping $350 million to the company’s free cash flow, according to Newmont’s CEO Gary Goldberg. Thus, with gold prices rising by more than $200 since mid-December, Newmont’s annualized free cash flow has improved by more than $700 million in five months (about $1.30 per share)! The acquisition of Cripple Creek & Victor gold mine from AngloGold last summer should only help matters going forward; the company also plans to expand its Tanami operations in Australia. With all that extra cash suddenly flowing in, there could be more acquisitions or expansion plans in the works. And in terms of its appeal to investors, Newmont already has a leg up on most gold stocks as one of the sector’s few dividend payers (a tiny 0.3% yield), which could be hiked as cash flow surges.
Technical Analysis
We recommended NEM a little over a month ago when it was trading at 31; it has since shot up to 35. The stock hit 34 in late April, pulled back to the high 31s early last week, then pushed back to the high end of its range last Friday, which is where it stands now. NEM may now be on the brink of another breakout, although some more consolidation is also possible given the large run since February. Buy on the dips and sell if it falls below its 50-day moving average, something it hasn’t done since January.
NEM Weekly Chart
NEM Daily Chart
Martin Marietta Materials (MLM)
Why the Strength
Many “old world” stocks (transports, commodities, industrials) have pulled back sharply during the past three weeks, and some have broken down altogether. But we’re still seeing many construction-related stocks acting well, especially those involved in raw materials. Martin Marietta is a “cousin” stock to Vulcan Materials—it’s the second largest producer of construction aggregates (sand, gravel, crushed stone, etc.), which are the building blocks in all things construction, as well as a producer of cement and some other heavy materials. The big idea here is that after a very long dry spell, the industry has (a) decisively turned up, and yet (b) is still in the early stages of what will likely be a multi-year recovery. Thus, not only are sales, earnings, cash flow and profit margins booming today, but because demand for construction aggregates remains relatively low in the big picture, the next few years should be boom times for the industry. Martin Marietta’s first-quarter report confirmed that the trend is beginning to accelerate, with shipments up 13% from the year before and prices up 8%, which led management to nudge up estimates for 2016. Barring a wholesale economic collapse, there’s not much standing in the way of many quarters of growth ahead—analysts see earnings up 64% this year and 33% in 2017, and even those could prove conservative if things continue to fall into place.
Technical Analysis
MLM appeared to get going in February 2015, when the stock soared on earnings, breaking out of a long consolidation and getting as high as 146. The stock jaggedly advanced from there to 179, but then went off a cliff with fears of a global economic slowdown—MLM fell as low as 108 in February before buyers stepped in. It’s been all up from there, and the rise accelerated after the earnings report two weeks ago. We expect higher prices over time, though short-term, buying on dips is your best bet.
MLM Weekly Chart
MLM Daily Chart
Jacobs Engineering Group (JEC)
Why the Strength
Sales at this California-based provider of technical, professional and construction services have been slumping, but its cost-cutting efforts are starting to take hold and turn earnings up. In the company’s earnings call earlier this month, Jacobs CEO Steve Demetriou cited “continued successful cost reduction efforts” as a big reason why per-share earnings improved by 4% in the most recent quarter at a time when sales were down 4%. The cost cutting also helped the company improve its cash flow to $238 million after being in the red a year ago. The extra cash allowed Jacobs to repurchase 800,000 shares of its own stock last quarter. With the company targeting $240 to $270 million in annual savings due to all the cost cutting (that would equate to more than $2 per share annually), and with a record $18.2 billion backlog, more profits could be on the way even if sales continue to slip. For now, investors are giving Jacobs a pass on the revenue declines and instead focusing on all the good news from its recent earnings report, snatching up JEC shares as a play on increased industrialization around the globe.
Technical Analysis
JEC started to get going well before its latest earnings report. After bottoming at 35 in early February, the stock spent the next six weeks rallying, reaching as high as 44. Some April consolidation followed, with 41 acting as the new level of support. By May it was flirting with new highs, and the earnings beat gave JEC the extra nudge it needed to break above resistance at 44. It promptly shot up to 50, before pulling back slightly to 49. You can buy here or wait for the stock to pull back another point or so. Sell if it tumbles below 45.
JEC Weekly Chart
JEC Daily Chart
Electronic Arts (EA)
Why the Strength
Football and “Star Wars” are as popular as they’ve ever been in the U.S., and EA has tapped into that fervor. The video-game maker is coming off a stellar fiscal fourth quarter thanks to immense demand for its “Star Wars Battlefront” and “Madden 2016” games. It sold 14 million copies of the “Star Wars” game alone, helping expand its total user base by 15%. Spurred by sales of its Madden 2016 football game, the company’s EA Sports wing topped 54 million users in the fourth quarter—a 65% increase from a year ago. Overall, EA’s sales increased 10%, its first year-over-year improvement in four quarters, while earnings per share were up 28%. Things should only get better; the company unveiled its Madden 2017 game (featuring Rob Gronkowski on the cover) last Thursday, and there are plenty more Star Wars games to come, with at least one new game expected to launch in each of the next three to four years. Add in the company’s ongoing strides in its digital business—digital sales improved 18% last quarter, and now account for 55% of the company’s total revenues—and there’s a lot to like about EA, both now and on the horizon.
Technical Analysis
After years of huge returns, EA has been up and down in the past 12 months. The stock peaked at an all-time high of 76 last October before cratering in January and February, falling all the way to 55. Early last week, the stock was still in about the same place (64) as it was last May, and still below its 50- and 200-day moving averages. But the huge quarterly results sparked a major gap up, with the stock kiting from 64 to 73 in one day. Volume has slowed a bit in the days since, but EA continues to rise, and is knocking on the door of its October highs. Trading right at that 52-week resistance, it makes sense to start small and/or buy on the dips, aiming to add to your position if you develop a profit. Set a stop around the 200-day moving average.
EA Weekly Chart
EA Daily Chart
EBIX Inc. (EBIX)
Why the Strength
Cloud-based software companies aren’t in favor right now, but we have seen a couple that serve specific niches that are doing well. One of those is Ebix, whose focus is on the insurance industries (property & casualty, life, health, etc.), with its goal to be the world’s leading back-end provider (including exchanges for companies and, recently, for London as a whole) for insurance transactions. Though the firm is small ($273 million in revenue), it has a very broad reach—it has 40 offices around the globe and its exchanges power tens of millions of insurance policies and quotes per year on tens of billions of dollars of insurance premiums. Overall, the company says that more than 80% of its revenue is recurring and it sports a whopping 99% customer retention rate. Growth isn’t amazing (though acquisitions boost the total every now and then), but it’s very steady, and first-quarter results topped expectations, prompting analysts to hike estimates—they now see the bottom line growing 17% this year, which seems reasonable given the valuation (19 times trailing earnings). All told, you have a small company with a reliable business and very high profit margins (31% last quarter) and good opportunities for growth ahead. It’s not changing the world, but Ebix has a lot of qualities that big investors look for.
Technical Analysis
EBIX is thinly traded ($15 million of volume per day), which leads to some choppy action. The stock started its current advance near the beginning of 2015 near 18, running as high as 38 in May. Then came three corrections, each shallower than the prior. By April of this year, the stock was sitting at 36 and ready to move. EBIX surged to new highs in mid-April and has since consolidated between 45 and 50. We’re OK buying a small position here with a stop near 41.
EBIX Weekly Chart
EBIX Daily Chart
Blue Buffalo Pet Products (BUFF)
Why the Strength
Blue Buffalo is the fastest-growing major pet food company in the U.S., thanks to shelf space at chain stores PetSmart and Petco (which account for 70% of revenues) and marketing that focuses on the high quality of its products. With names like Freedom and Wilderness, and an emphasis on the fact that its dog and cat foods contain only the finest natural ingredients, the company has grown both revenues and earnings consistently over the past five years. As is typical for companies, as Blue Buffalo has grown, its growth has slowed, but it’s still rapid enough for growth investors to get excited. In the latest quarter, which was reported last week, revenues grew 12% to $280 million, while earnings grew 19% to $0.19 per share, beating analysts’ estimates of $0.18. Furthermore, after-tax profit margins hit 13.7%, the highest number in years and a sign of increasing efficiency. Commenting on the results, CEO Kurt Schmidt said, “We’re off to a great start for the year. I’m pleased with both our top-line and bottom-line performance for the first quarter, which was consistent with our expectations. More importantly, we continue to gain share and invest in our future. As a result of our strong year-to-date performance, we are raising the low end of our revenue and EPS guidance for the full year.” As a relatively young name with mass-market growth potential, Blue Buffalo could go far.
Technical Analysis
BUFF came public just last July, and pulled back soon after (with the market) to ultimately bottom at 15 in February. After clawing its way back to 20, the stock rallied sharply right after its fourth-quarter earnings beat, gapping up to 23. We featured it here soon after (giving it a buy range of 21.5 to 22.5), but the stock never fell into our buy range, though it did pull back to support at 23 twice. In the wake of last week’s excellent report, the stock tagged new highs. Buying a small position here or on dips is a low-risk proposition.
BUFF Weekly Chart
BUFF Daily Chart
B&G Foods (BGS)
Why the Strength
There’s no question B&G Foods is benefiting from the rush into defensive-type stocks. But there’s much more to the stock’s story than that. B&G just completed its first full quarter since its November buyout of General Mills’ canned and frozen vegetable brand Green Giant for $765 million. The early returns look good, but it’s what’s to come that has piqued investors’ interest. The newly expanded frozen foods and shelf-stable company raised full-year earnings guidance to a range of $2.05 to $2.15 per share, up from a $1.98-to-$2.09 range. At the high end of that range, B&G’s 2016 EPS would be nearly 40% higher than last year’s, which would mark the company’s biggest year-over-year earnings improvement since 2010. There’s good reason for the sudden optimism: the two quarters (one partial, one full) since B&G acquired Green Giant have been the company’s two best quarters in terms of sales ever, and were larger than most analysts anticipated. More importantly, a company that had seen its profits scarcely budge since 2011 is now forecasting 40% earnings growth this year. Add in a rather large (20%) dividend hike in late March (annual yield now 3.2%), and it’s easy to see why investors have been flocking to B&G Foods.
Technical Analysis
BGS has made two huge upward moves in the past nine months. The first came last September, when the stock gapped up from 30 to 36 after the dust from the August market collapse had settled. The second started late last month, when the first-quarter earnings beat propelled the stock from 33 to 41 overnight. It has continued to inch its way higher since on better-than-average volume, nearly reaching 44 at one point last week. BGS is due for a slight pullback, but remains well above its 25- and 50-day moving averages. Buy on dips and set a stop around that 25-day average.
BGS Weekly Chart
BGS Daily Chart
Berry Global (BERY)
Why the Strength
Berry Plastics operates a mundane business, but its excellent growth and cash flow is attracting institutional investors. The company makes all sorts of packaging and engineered materials that are selling well—45% of sales are from consumer packaging (containers, drink cups, bottles, prescription vials), 35% from health and hygiene products (diapers, medical gowns and masks, infection prevention wipes) and 20% from engineered materials (corrosion protection products, PVC films, tapes, can liners). Its customer base is a who’s who of giant companies, although it serves a whopping 13,000 customers in all. This isn’t a great growth business (revenue growth has been between +7% and -2% each of the past five years), but there are two catalysts right now. First, the company’s acquisition of Avintiv last October (for $2.45 billion in cash) has significantly bolstered Berry’s health and hygiene segment, creating cost efficiencies along the way; Avintiv was the main reason revenues surged 32% in each of the past two quarters. Second, Berry is making a ton of money—while the firm’s earnings look good (growth is accelerating and analysts see earnings up 25% this year and another 19% in 2017), free cash flow is even larger. Berry has cranked out $464 million in free cash flow during the past year—about $3.84 per share! And management expects even higher levels going forward. Thus, the stock is very cheap and business is both good and stable … a combination that’s attracting big investors right now.
Technical Analysis
BERY came public in October 2012 and jaggedly advanced from 15 to 37 by April 2015. Then came a long consolidation, with the stock remaining between 28 and 37 during the next year, and eventually tightening up beautifully just south of new highs. BERY’s earnings report two weeks ago kicked the stock to new highs on good volume, presenting a decent entry point; it’s buyable here (small position) with a stop near 35.
BERY Weekly Chart
BERY 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.
