Pullback is Normal Thus Far
Current Market Outlook
A batch of disappointing earnings reports combined with the 2015 overhead resistance areas (around 2,080 to 2,140 on the S&P 500 and 5,000 to 5,200 on the Nasdaq) to bring out the sellers last week, especially in some big, old tech stocks, which drove the Nasdaq below its 50-day line. However, the other indexes are in good shape, and while a few stocks have cracked on earnings, most are holding up just fine. The bottom line is that, to this point, not much has changed—the market still doesn’t have the leadership we’d like to see, but the trend is up and the broad market is in good shape. Thus, you should be holding your top performers (though booking some partial profits here and there is always smart) and using normal retreats in strong stocks as buying opportunities.
This week’s list is a hodgepodge of stocks from all over the map, including some growth, commodities and turnarounds. Our Top Pick is Teck Resources (TCK), a giant turnaround play in the commodity space—the firm remained profitable throughout the bust, and after a great quarterly report, earnings are expected to boom in the quarters ahead.
| Stock Name | Price | ||
|---|---|---|---|
| United States Steel Corporation (X) | 0.00 | ||
| VCA Inc. (WOOF) | 0.00 | ||
| Teck Resources Limited (TCK) | 0.00 | ||
| Square, Inc. (SQ) | 91.04 | ||
| Monster Beverage Corporation (MNST) | 0.00 | ||
| Core Laboratories (CLB) | 0.00 | ||
| Boardwalk Pipeline Partners (BWP) | 0.00 | ||
| Boston Scientific (BSX) | 0.00 | ||
| Banc of California (BANC) | 0.00 | ||
| Amazon.com (AMZN) | 2.00 |
United States Steel Corporation (X)
Why the Strength
Steel producers are not typically featured often in Cabot Top Ten Trader, but the industry is currently enjoying two advantages in the U.S. First, the steadily improving economic picture has increased demand for both flat and tubular steel products in industries ranging from housing to automotive to consumer goods. Second, the imposition of massive punitive tariffs on Chinese steel (in retaliation for alleged dumping of products) and smaller imports on steel from other countries has given a leg up to U.S. producers. In a follow-up to the tariff story, the news that China would scrap its export subsidies on steel (and other products) also sent investors in search of U.S. steel shares. And lastly, the rising price of steel is increasing the price of iron ore, of which U.S. Steel has significant holdings. Selling iron ore to China at increased prices is a welcome boost to U.S. Steel, as heavy fixed costs send the increased revenue straight to the bottom line. U.S. Steel has booked five consecutive quarters of losses, and projections are for a loss of $2.54 per share in 2016. But that loss falls to just sixteen cents per share in 2017, boosted by favorable macroeconomic currents and improved efficiency and cost cutting. Plus, given the revent shift in industry fundamentals, those estimates are likely too low. The company’s dividend yields 1% annually and analysts see more upside for the stock.
Technical Analysis
From 46 in September 2014 to as low as six in January 2016, got a value bounce in February, but really caught fire in early March, running to 14 on massive volume. That blastoff kept the stock moving higher until it flattened in early April. There was a little pullback ahead of earnings on April 27, but the stock reacted well, and is sitting just below 20, which is its highest level since August 2015. X is buyable right here, but a little patience might get you in closer to 19. A moderately tight stop between 17 and 18 is prudent.
X Weekly Chart
X Daily Chart
VCA Inc. (WOOF)
Why the Strength
Human beings aren’t the only ones driving the healthcare industry right now. Animal hospitals are also seeing significant increases in demand, and that’s been good news for VCA—they own 703 animal hospitals and 60 diagnostic labs in 41 states and Canada. The North American animal healthcare market reached $11.3 billion in sales last year, and is expected to keep growing to $14.3 billion by 2020. Better research and medicine is allowing vets to treat diseases in dogs, cats and other animals that were previously deemed untreatable. VCA’s sales are growing consistently as a result, and the company reported another solid quarter last week with 13% revenue growth and a 32% earnings increase. The company acquired 24 new hospitals during the quarter, which certainly helped; it brought in $84 million in extra revenue. Said CFO Tom Fuller during the call, “Simply, we are just in a great business and the whole industry is thriving.” It’s not changing the world, but VCA’s business is good today.
Technical Analysis
Despite its place atop a “thriving” industry, WOOF’s stock hadn’t budged much until recently. After peaking at 61 last August, the stock spent the rest of 2015 consolidating, then broke to the low side this January, sliding all the way 45. It didn’t really start to get going again until mid-February, but WOOF has been on a steady upwards push ever since. In late March, it broke above six-month resistance at 56, pushed above 60 by tax day, then jumped to 64 last week on the strength of its solid earnings results. It has pulled back slightly to 63, but while pullbacks have been brief and shallow during WOOF’s current three-month rally, this isn’t a go-go stock. Thus, we advise looking for dips of a point or two before entering. You can set a stop below 58.
WOOF Weekly Chart
WOOF Daily Chart
Teck Resources Limited (TCK)
Why the Strength
Teck Resources calls itself “Canada’s largest diversified resource company,” and it has been getting a boost from the global rebound in demand for mined resources. Teck has major operations in mining copper, steelmaking coal, zinc and energy. The company has been under pressure from slumping demand since the beginning of 2011, including a major hit from lowered prices for crude oil that undercut its oil sands operations. Management has responded by guiding the company toward long-life assets in stable jurisdictions and focusing on sustainability, and the better-than-hoped quarterly earnings report on April 28 confirmed that the strategy is sound; the report beat profit forecasts as cost cuts helped the bottom line. The company estimates that it has coal resources to last 100 years, copper enough to produce for 30 years, zinc to last 15 years and energy resources sufficient for 50 years. Teck is getting a boost from a number of directions, including the weaker Canadian dollar that reduces the price of its products and increasing prices for steel that will lift prices for its metallurgical coal. The downward cycle of zinc prices is the longest on record (five years) and the downward cycle in copper is within a year of the longest duration on record, so the upside potential is significant. Teck Resources has remained consistently profitable despite four years of gradually declining revenues, and global economic trends support a rosy outlook for its future, including a 476% jump in earnings per share in 2016. A small dividend (0.6% annual yield) is a small plus.
Technical Analysis
TCK made a monster run in 2009 as the world emerged from the Great Recession. But after that sprint from 2.2 in March 2009 to 56 at the beginning of 2011, TCK began a five-year correction that took it within a fraction of a point of its 2009 low. The rebound began in the middle of January and the stock regained its 25- and 50-day moving averages in February and its 200-day in March. TCK is now up from 2.6 in the middle of January to over 12. It looks buyable anywhere under 12 with a loose stop below 10, to accommodate the stock’s volatility.
TCK Weekly Chart
TCK Daily Chart
Square, Inc. (SQ)
Why the Strength
Square is strong today because it’s a new issue with all the potential in the world as it attempts to revolutionize payment processing for small- and mid-sized businesses. The firm’s free software app (usually used with its swiper attachment for tablets and smartphones) allows smaller merchants to skip the more popular but expensive systems, and it’s proven to be a huge hit—gross payment volume was $10.2 billion in the fourth quarter alone, up 47% from the year before, while revenues were up 49%. (Transaction revenue averages just under 3% of total payment volume.) And this business has a very long runway of growth, especially as Square innovates (it has a new swipeless card reader for methods like Apple Pay that had 350,000 pre-orders as of February) and as there are tens of millions of small businesses that are new potential customers. But what’s just as exciting is Square’s move into ancillary financial services for its merchants—Square Capital provides cash advances for sellers ($150 million advanced in the fourth quarter), Instant Deposit (600,000 deposits in the last five months of 2015) and more. All told, these services produced $22 million of revenue in the fourth quarter, up from $15 million the prior quarter; eventually, Square believes these various businesses will make up a quarter of all revenues. The next big update is will come on Thursday (May 5), when the company reports first quarter results. Long-term, if management executes, the potential is enormous.
Technical Analysis
SQ is set-up very well into earnings. The stock plunged earlier this year, falling from around 13 to 8, but then immediately snapped back, hitting new highs just south of 16 in late-March. SQ pulled back after that, but found good support near its 10-week line last week, even as the market was selling off. Our advised range is appropriate if you want to nibble (small positions only!) ahead of earnings; if you’d rather wait until after the report, a push above 16.5 looks buyable with a loose stop near 13.5.
SQ Weekly Chart
SQ Daily Chart
Monster Beverage Corporation (MNST)
Why the Strength
Monster Beverage is starting to reap the rewards of a 2015 deal with the world’s largest soft drink company. Under the agreement, Coca-Cola bought a 16.7% stake in Monster for a cool $2.15 billion in cash in exchange for Monster’s non-energy drinks including Hansen’s Natural Sodas and Peace Tea. In addition to the cash, Monster gained ownership of Coca-Cola’s global energy drinks business—featuring brands such as Relentless and Burn—and more importantly, access to Coca-Cola’s distribution network. Monster’s sales were already consistently in the high-single-digit and low-double-digit range prior to the Coca-Cola deal, and have held steady since. The Coca-Cola buyout also allowed Monster to turn around and make a purchase of its own, acquiring its main flavor supplier American Fruits and Flavors in a deal that was finalized on April 1. The company also announced a $2 billion share repurchase program during its first-quarter earnings call last week. The results were strong too; sales and EPS were well above analyst estimates, as Monster’s expanding international distribution reach offset continued strength in the U.S. dollar. The company is about to spread its wings even further: thanks to its Coca-Cola agreement, Monster Energy drinks will hit shelves in Australia and New Zealand later this month. Suffice to say, Monster is delivering rapid overseas growth and stock buybacks—two things investors love to see.
Technical Analysis
MNST had a very strong 12 months from August 2014 to August 2015, rocketing from 65 to 155. The stock came back to earth a bit last fall, dipping as low as 128 in October, before re-testing 155 in December. The January and early February market collapse took the stock down even further, to as low as 116, and after a brief move up to 136, MNST was back down to 123 as recently as last week. Then came the first-quarter earnings beat, prompting a huge gap up. You may want to wait for the stock to pull back a bit to get a better entry point. Sell on any move back below its March highs.
MNST Weekly Chart
MNST Daily Chart
Core Laboratories (CLB)
Why the Strength
Core Laboratories is another company benefiting from the rebound in oil and gas prices. Based in the Netherlands, Core Labs provides production enhancement, reservoir description and reservoir management services to oil and gas companies in over 50 countries. Though recent improvements in energy prices didn’t help Core Labs much last quarter—a 21% year-over-year decline in the global rig count caused both sales and EPS to slip by double digits—the tone of its earnings report last month was decidedly optimistic. CEO David Demshur said Core Labs’ top- and bottom-line growth should improve in the near future thanks to a “V-shaped recovery” in crude oil prices followed by “increased industry activity levels worldwide” in the second half of 2016. Demshur believes that global crude oil supply peaked in the second half of 2015 and is now on a steady decline, while worldwide energy consumption continues to rise. First and foremost, that should translate to real growth for Core Labs next year, as sales are expected to improve 14%, with a 50% increase in EPS, in 2017. In the nearer term, Demshur’s words have captured investors’ attention as one of the more bullish outlooks in an increasingly cynical energy sector. Absent actual growth—the company expects sales and earnings to bottom out in the current quarter—it’s at least enough to convince energy investors and bargain hunters to buy what Demshur’s selling.
Technical Analysis
CLB got hit hard these last two years along with many of the oil and gas producers it sells to. After a big run-up in 2013, the stock peaked at 214 in April 2014. The free fall in crude oil prices took the stock down to 92 in early 2015, and it chopped around much of last year, meeting resistance in the low 130s and finding support in the low- to mid-90s. Now it’s back at the very top of that range. You can buy on pullbacks into the 120s with a stop around 114.
CLB Weekly Chart
CLB Daily Chart
Boardwalk Pipeline Partners (BWP)
Why the Strength
Boardwalk Pipeline Partners is the second MLP we’ve written about in Top Ten in as many weeks. The company owns and operates 14,525 miles of natural gas and liquids pipelines and storage facilities mostly in Texas, Louisiana and Kentucky. The firm actually took an unusual path, cutting its dividend way back in February 2014, not because business was slowing, but because it wanted the capital to build out $1.6 billion in new projects. The first of those projects will be completed later this year, with the last starting operations in 2018. Moreover, Boardwalk’s current and future projects are predominantly backed by firm contracts (about 90% of revenues are from take-or-pay, fixed-fee deals), so based on contracts already inked, the company has some built-in growth during the next few years. And longer term, Boardwalk’s pipelines seem well positioned to take advantage of any rebound in production (especially natural gas output) and to benefit from the upcoming boom in LNG shipping, with a ton of contracts already in place for terminals under construction. Encouragingly, the firm’s sponsor is owned by the diversified giant Loews Corporation, which has deep pockets and should support Boardwalk’s growth in the years ahead. The dividend is relatively small for a MLP (2.5% annually), but that should eventually rise significantly as growth spending eases and because the payout ratio is very low (just about 25%). The quarterly report was released this morning, and it confirmed all the good tidings to come.
Technical Analysis
BWP has a rocky history—its dividend cut in February 2014 caused the stock to implode, and while it rebounded right after, it then fell apart with the MLP bear market, dropping from 20 in mid-2014 to 9 at its nadir in February. Since then, though, the stock has been in a persistent uptrend, and this morning’s earnings report did nothing to change that. Dips toward 15.5 look buyable with a stop near the rising 50-day line.
BWP Weekly Chart
BWP Daily Chart
Boston Scientific (BSX)
Why the Strength
A decade ago, Boston Scientific, a medical device maker, bought pacemaker manufacturer Guidant Corp. for $27 billion. Within a year, Fortune Magazine had dubbed the Boston Scientific-Guidant deal the worst merger since AOL bought Time Warner in 2000. Almost from the time the deal was announced, Guidant has been the subject of lawsuits and government investigations into its faulty pacemakers, forcing Boston Scientific to take close to $9 billon in write-downs. Those weighed heavily on profits, as the company’s earnings declined every year from 2009 through 2012. Now Boston Scientific’s Guidant wounds are almost fully healed, and the company is coming off one of its best quarters in years; the company posted double-digit sales and EPS growth simultaneously for the first time in nearly a decade. It also boosted its full-year sales and earnings guidance above Wall Street expectations. Last summer’s $1.6 billion acquisition of American Medical Systems has helped, improving its cancer-treatment technology to position it as more of a leader in the urology business. All in all, growth isn’t rapid (the firm expects a 8% to 10% revenue increase this year), but some now-successful acquisitions, margin improvements and positive trends in its MedSurg business should keep earnings expanding at a solid clip.
Technical Analysis
BSX had a good run from late-2014 (near 11) to the middle of last year (near 19), but like the market itself, the stock spent the next many months consolidating. It tried to get going late in the year, but January’s market dip halted that. Now, though, the buyers are finally in control—BSX has rallied 11 of the past 12 weeks, including last week’s big-volume earnings gap to multi-year highs. Minor dips are buyable with a stop near 20.
BSX Weekly Chart
BSX Daily Chart
Banc of California (BANC)
Why the Strength
Banc of California is a small (market cap is $780 million) regional bank that serves primarily the Los Angeles, Orange and San Diego counties area with 35 full-service branch banks and over 100 total locations in California and the West. But the bank is also changing, including its name from First PacTrust Bancorp in July 2013. The bank has loan production offices outside California in Arizona, Oregon, Virginia, Indiana, Colorado, Idaho and Nevada, which is a good sign of its aggressive growth strategy. With $8.2 billion in assets and a loan portfolio of over $7 billion (90% of loans are to California borrowers), the bank expects to loan $1 for every $1 of deposits. The bank also offers a huge menu of services, including savings, checking, money markets and demand accounts, commercial and industrial loans, commercial real estate loans, business lines of credit and private banking services. From triple-digit percentage gains in 2012 and 2013, revenue growth slowed to 46% in 2015, but after-tax profit margins improved to over 14% in the two most recent quarters. The stock is strong right now because of two quarterly reports, one on January 28 and one on April 28, both of which crushed expectations and kicked off high-volume rallies. Earnings are forecast to increase 22% in 2016 and 21% in 2017, and the bank’s stock pays a nice 2.4% dividend.
Technical Analysis
BANC made a run from 10 to 14 in the first half of 2015, then corrected to 12 as the market collapsed in July and August. The stock put in a flat basing structure from August through October, then climbed to 15 in November. After two more months of base-building, BANC caught a real updraft in late January following a great earnings report, and got another burst of energy in late April. We think BANC is buyable on any weakness of a point or so, with a stop near the 50-day line.
BANC Weekly Chart
BANC Daily Chart
Amazon.com (AMZN)
Why the Strength
Amazon is back as one of the market’s strongest stocks following its first-quarter report last Thursday. While there were many highlights, the simple fact is that Amazon is strong because the firm’s long stretch of heavy investments (especially distribution centers) and new lines of businesses (its Fire tablets and Kindle e-readers, video, original content, etc.) are now paying off, resulting in not just strong sales (up 28% in Q1) but also earnings ($1.04 per share, up from a loss last year), as customers both in the U.S. and internationally beat a path to their door. Of course, it’s not just e-commerce these days; Amazon Web Services (its cloud division) continues to hit it out of the park, with revenues up 64% from a year ago, and with the division accounting for a whopping 43% of Amazon’s total operating income. The bottom line is that from 2002 to 2014, earnings hovered between ($0.52) per share to $2.53 every year, even as revenues grew 25-fold (!). Now all that groundwork should lead to a massive expansion of earnings going forward—analysts see Amazon earning north of $5 per share this year and around $10 in 2017, with much greater earnings beyond that as margins expand. Importantly, the firm is able to crank out these earnings while still investing heavily in the business, so it’s not like Jeff Bezos is all of a sudden only concerned about this quarter’s profits. Between Prime (both domestically and internationally), its own products (Fire and Kindle), its cloud division and simply being the Wal-Mart of the Internet, Amazon’s best days are ahead of it.
Technical Analysis
AMZN had a big run during 2015, rallying from around 290 to nearly 700. Then, when the calendar flipped, the market bombed and AMZN went along for the ride, dropping as low as 474 (a 32% drop) before finding support. The recovery was just so-so after that, but the stock began picking up steam in April and then finished the month on a high, gapping up to within 5% of its old highs. We don’t expect a straight-up move from here, but we’re OK buying a position near here with a stop around 610.
AMZN Weekly Chart
AMZN 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.
