Keep It Simple
Whenever the market acts extraordinarily (either on the upside or downside), investors tend to forget their discipline and act instead on emotion. But the best thing to do is to stick with your plan and keep it simple. In this environment, doing that has allowed us to ride many winners higher as the bull market has strengthened, as well as jump into plenty of names during temporary weakness. Overall, the market’s trend remains strongly up so we’re keeping our Market Monitor in bullish territory. While now likely isn’t a great time to buy a ton of extended stocks, there remain a good number of opportunities as the market continues to rotate into and out of various stocks and sectors.
This week’s list has stocks that are part of many of the recent leading themes—Japan, housing, young software firms, 3D printing and medical. Our favorite of the week is Realogy Holdings (RLGY), an interesting way to play the housing upturn. We’re intrigued with the volume expansion in the stock, as well as the company’s huge earnings estimates going forward.
| Stock Name | Price | ||
|---|---|---|---|
| The ExOne Company (XONE) | 0.00 | ||
| Workday (WDAY) | 194.88 | ||
| TripAdvisor (TRIP) | 55.14 | ||
| Toyota Motor (TM) | 0.00 | ||
| Splunk (SPLK) | 207.67 | ||
| Santarus (SNTS) | 0.00 | ||
| Realogy Holdings (RLGY) | 0.00 | ||
| PulteGroup (PHM) | 45.93 | ||
| Myriad Genetics (MYGN) | 0.00 | ||
| DIRECTV (DTV) | 0.00 |
The ExOne Company (XONE)
Why the Strength
Three-dimensional printing is a hot industry right now, and ExOne, a Pennsylvania-based 3-D printing company that’s been around since 2005, has joined Stratasys and 3D Systems in the competition for investors’ capital. But where Stratasys and 3D Systems are focusing on selling their machines to end users, ExOne is making the majority of its money by offering manufacturing services for parts in sand (for casting molds), metal and glass, plus laser machining of manufactured parts. The advantages to clients are clear: precision parts on an on-demand basis, eliminating the need for warehousing inventory. The company’s specialization in non-plastic materials also sets it apart. While not consistently profitable yet (Q4 2012 was the first profitable quarter), ExOne has booked three quarters with triple-digit revenue growth, indicating that demand is ramping up quickly. The company’s earnings report on May 15 was a disappointment, with a larger-than-expected loss of 14 cents per share and slightly reduced revenue, both of which were blamed on lower demand from Europe. On the plus side, management reiterated its fiscal 2013 guidance of $48 to $52 million. ExOne’s 3D printing machines are more expensive than those offered by Stratasys or 3D Systems, but they also print in very different media, giving them an advantage, albeit in a smaller potential sector. ExOne represents a new wrinkle in 3D printing.
Technical Analysis
XONE came public at 18 in early February, and after some post-IPO fireworks, pulled back to 24 before beginning a steady advance. The stock soared above 49 just before earnings, then dipped to its 25-day moving average at 38 on the disappointing results. But investors have not been daunted; XONE has pushed back above 42 as investors take the company’s optimistic guidance (and the promise of the industry) to heart. We think XONE is buyable anywhere under 42, with a fairly tight stop at the 50-day moving average, now at 35.
XONE Weekly Chart
XONE Daily Chart
Workday (WDAY)
Why the Strength
Workday has emerged as the leader in providing Cloud-based management software for human resources and finance departments. It was founded by two former high-level employees of PeopleSoft, so they know a thing or two about the industry. Workday’s intuitive interface (it looks like a regular consumer website so most users pick it up quickly, without lots of training), frequent and automatic updates (including three major ones last year alone) and customizability are attracting many big players; in the fourth quarter alone, Workday added such names as Nissan Motor, Del Monte and SunTrust. That’s led to rapid sales growth (see table below), large deferred revenue ($285 million at the end of last year) and, despite the accounting losses, slightly positive cash flow, with expectations of more to come—the stock is now valued north of $11 billion (!) despite revenue of just $274 million last year! Clearly, investors are betting that the former PeopleSoft top brass will duplicate their success here, and if that’s true, the stock has lots of upside. That said, there’s still risk with earnings, which are set to be released Wednesday evening.
Technical Analysis
WDAY came public last October and spiked to 57 within a few days, but then it took many months to consolidate. The stock hit new highs earlier this year, but as of April, it was back in the mid-50s, making it six months of no progress. Since that point, it’s moved to new highs in the upper 60s with all eyes on Wednesday’s quarterly report. There should be good support in the 62 to 64 area, so if you want in, you can buy a small position around here, and look to fill out your position if the stock holds its own post-earnings.
WDAY Weekly Chart
WDAY Daily Chart
TripAdvisor (TRIP)
Why the Strength
When we last checked in with TripAdvisor, the world’s largest online travel company, the stock was reeling from a poorly received quarterly earnings report. Since then, the company has righted its ship, posting a solid first quarter that beat Wall Street’s earnings and revenue expectations. Driving TripAdvisor’s growth was a 24% annual rise in click-based revenue and a 51% year-over-year spike in subscription, transaction and additional online revenue (which includes vacation rentals). With more than 20 million members worldwide, TripAdvisor has focused heavily on snapping up smaller, largely regional, competitors. Most recently, the company snapped up Spanish vacation rental site Niumba.com. Vacation rentals have become a key part of TripAdvisor’s portfolio, with more than 300,000 properties listed worldwide. The great thing about the company’s increased interest in vacation properties is that the market is ripe for consolidation, while offering little conflict with the likes of Priceline, Marriott, or Expedia. Finally, a recent TripAdvisor poll of 1,200 respondents reveals that 30% are planning to travel this Memorial Day weekend, with 86% planning a summer vacation. With the company banking an after-tax profit margin of 31.8%, TripAdvisor is well positioned to help investors upgrade their own vacation plans.
Technical Analysis
Since hitting a bottom near 30 in November 2012, TRIP has trended steadily higher along key support at its 10-day, 25-day, and 50-day moving averages. Shares experienced a bit of a shock in February, after a poorly received quarterly report forced a breach of the stock’s 50-day trendline. But TRIP slowly recovered, reclaiming support by mid-March. TRIP proceeded to bounce between support near 50 and resistance at 55, but last week’s earnings report proved to be the catalyst for a breakout, sending TRIP soaring. It’s tempting to chase it here, but more prudent to wait for a pullback.
TRIP Weekly Chart
TRIP Daily Chart
Toyota Motor (TM)
Why the Strength
Toyota, Japan’s sleeping-giant of a carmaker, continues to find favor with investors as the global economy improves and Japan’s long-stagnant economy gathers momentum. Toyota’s stock has long been a quintessential income stock, relying on a stable price and a consistent dividend (1.4% forward annual yield) to hang on to investors. But a resurgent Japan (where Toyota sells about 40% of its vehicles) and a relatively weak yen (which lowers the price of Toyotas to overseas buyers) have put a spring in Toyota’s step. The weak yen makes Camrys (the top-selling car in the U.S.), Priuses and Lexuses less expensive. The immediate cause for enthusiasm is the company’s 127% jump in earnings in the first quarter, with a healthy 5.4% after-tax profit margin. Toyota made its debut in Cabot Top Ten Trader in April, and it continues to impress with its combination of stability and strength springing from positive macroeconomic forces. This is Toyota’s moment to shine, although it’s likely to return to its stolid reliability eventually.
Technical Analysis
TM has now soared from 74 last October to 129 in recent trading. But even after a big rally like that, TM still sports a relatively sedate trailing P/E ratio of just 17. A two-month pause between 100 and 105 in February and March helped to reset the stock. But since the beginning of May, TM has just run away, ripping from 113 to 129 without so much as a two-day correction. The 25-day moving average is back below 118, which isn’t bad, but it will still be advisable to look for a pullback of at least a couple of points to reduce your initial risk. Use a soft stop at 110 as a warning signal.
TM Weekly Chart
TM Daily Chart
Splunk (SPLK)
Why the Strength
We continue to think Splunk is the next big thing in Big Data; the company’s proprietary machine data engine helps firms glean insights from their various operations. There was a great article recently that talked about one start-up medical device company that uses Splunk to sift through usage data for 100,000 patients who wear a heart irregularity-detecting device. And that medical company was so impressed that it expanded its use of Splunk’s software to monitor, record and study data from its supply chain. This has been a typical pattern for Splunk—firms start off using one or two of its modules but expand as the payback becomes evident. We especially like that the firm’s software excels at handling data produced automatically (from servers, networks, computers, etc.), something that’s needed in today’s e-commerce world. As we’ve written a few times, the big risk with any of these software companies is that somebody else (whether it’s a big competitor or some newfangled start-up) will come up with a better mousetrap, but right now it’s Splunk that is taking market share; one analyst believes its share gains are accelerating. Sales growth has slowed a bit, but should remain rapid for many quarters to come. The next big event will be earnings, which are due out May 30.
Technical Analysis
From a technical perspective, what impresses us about SPLK (besides its strength) is the stock’s relatively smooth advance despite its newness and somewhat tame trading volume (about $70 million of volume per day); that’s usually a sign the stock is “under control” by big institutions. Also telling is the fact the stock hasn’t suffered a decent-volume weekly selloff since December. SPLK has been riding its 25-day moving average higher for months, and we think a pullback of a point or so could be bought, though we advise keeping any new position small ahead of earnings.
SPLK Weekly Chart
SPLK Daily Chart
Santarus (SNTS)
Why the Strength
Specialty biopharmaceutical company Santarus has made a name for itself by dealing in areas that the larger biopharmaceuticals don’t. The company’s leading drugs include ulcerative colitis treatment Uceris, which just received FDA approval in mid-January, acid reflux drug Zegerid, and Fenoglidem, which is used to treat high cholesterol. The company is also pushing its newest addition, Ruconest, which is indicated to treat a genetic disorder called acute andioedemia, or the rapid swelling of various body parts. The drug is already approved in Europe, and has been granted orphan drug status in the U.S., which should speed up the FDA approval process. Santarus’ recent strength can be attributed to the company’s impressive first-quarter earnings report, which was released on May 6 after the close. Specifically, the company’s quarterly revenue soared 73% as earnings spiked 167%. Even more impressive, Santarus has averaged revenue growth of 80% year-over-year during the past four quarters, on earnings growth of 390% during the same period! The company’s newest drug, Uceris, is off to a blazing start, racking up revenue of $6.6 million in its short period of availability. What’s more, Santarus boosted its full-year outlook to net income of $1.03 to $1.15 per share on $330 million to $340 million in revenue. With more data for Ruconest on its way later this year, we believe that Santarus still has plenty of room for additional growth.
Technical Analysis
After bottoming near 6 in September 2012, SNTS turned sharply higher and hasn’t looked back since. In fact, the stock has added more than 250% during this timeframe, breaking out to fresh all-time highs in the process. Throughout this uptrend, SNTS enjoyed the stalwart support of its 10-day and 25-day moving averages, which allowed only a handful of breaches since November 2012. Last week, SNTS sold off as the company initiated a secondary common stock offering. However, the shares bounced back, and SNTS is now pushing past short-term resistance in the 22 area. Chasing a rising stock can be risky, so we recommend taking bites on pullbacks, with the 21 area a prime region for acquisition.
SNTS Weekly Chart
SNTS Daily Chart
Realogy Holdings (RLGY)
Why the Strength
We’ve noted in recent issues the strength of the housing sector, mostly represented by homebuilders. Realogy Holdings (known as Domus Holdings until a September 2012 name change) is a leader in real estate franchising that owns Better Homes and Gardens Real Estate, CENTURY 21, Coldwell Banker, Coldwell Banker Commercial, Corcoran Group, ERA, Sotheby’s International and other brands. All told, the company’s franchise system includes about 13,600 offices with nearly 240,000 agents in 102 countries around the world. The company also owns NRT LLC, which owns and operates residential real estate brokerages in the U.S., Cartus Corporation, which helps companies to relocate employees and Title Resource Group, which specializes in title search and settlement services. During 2012, Realogy’s franchise business brought in 53% of business, with owned brokerage operations contributing 25%, relocation services 16% and title services 6%. Realogy has experienced several years of losses due to the housing slump in the U.S. and around the world, but analysts project a healthy profit in 2013. The company has two large shareholders—Apollo (which bought the company out in 2007, just as the housing bubble was starting to unravel) with 45% and Paulson with 10%—whose shares might represent a drag on price if they were liquidated quickly. But with a strong rebound in the U.S. residential housing market, Realogy has excellent prospects for growth and profitability as it deleverages its debt.
Technical Analysis
RLGY came public as a restructured company in October 2012. The timing was advantageous, as house-buying activity was strong that year. The stock came public at 27, but has never traded lower than 32. RLGY met resistance at 50 in March, corrected to 44 in April, and has rallied strongly since early April, nudging to near 54 last week. We think it’s buyable on a dip of a point. A dip below 48 would be bearish.
RLGY Weekly Chart
RLGY Daily Chart
PulteGroup (PHM)
Why the Strength
As the largest U.S. homebuilder (by revenue), PulteGroup stands to reap considerable rewards from the continued rebound in the housing market. The company revealed as much when it released better-than-expected first-quarter earnings last month. Overall, revenue rose 32% in the first quarter, extending Pulte’s streak of double-digit sales growth to four consecutive quarters. Elsewhere, despite a weak April housing starts report, where starts fell 17% from the prior month, single-family home sales rose 21% year-over year in April, pointing toward continued growth for homebuilders like Pulte. What’s more, building permits were up 14% to 1.02 million on the month, topping the million mark for the first time in five years. Still, the overall weakness in starts reveals that even small fluctuations in mortgage rates—which were blamed for most of the weakness—can play spoiler for homebuilders. That said, Pulte CEO Richard Dugas has stated to investors that “Volume is not the focus for the company,” noting that Pulte’s focus has shifted toward pricing power and better returns, a move that should help insulate the company against periods of market weakness. The move is paying off, as first-quarter gross margins improved despite order growth underperforming Pulte’s peers. With home pricing control shifting back toward builders, Pulte remains a solid investment if you’re looking to get in on the housing sector’s recovery.
Technical Analysis
The road has been rocky for PHM, but the stock has maintained the long-term uptrend it began in October 2011. During this timeframe, the stock more than tripled in value while logging only three breaches of support at its 10-week and 25-week moving averages. The most recent breach of this duo in late April following the housing starts report was contained near 18 by PHM’s rising 200-day trendline. Shares are currently hovering just shy of 24 after a run-up above former resistance at 22. PHM appears to be consolidating into its rising 10-day moving average, digesting the recent run. This pause in action is your opportunity to jump in ahead of the next leg higher.
PHM Weekly Chart
PHM Daily Chart
Myriad Genetics (MYGN)
Why the Strength
We’ve never been accused of celebrity-worship; in fact, we’re happy to avoid it in our daily work. But when Angelina Jolie announces she’s had both breasts removed as a prophylactic defense against breast cancer, and the company that did her testing qualifies (on its own merits) for inclusion in Cabot Top Ten Trader, well, it’s hard to ignore the connection. The facts are that Myriad Genetics gets most of its revenue from genetic tests aimed at assessing the risk of customers/patients developing cancers of the breast (74% of revenues), colon, uterus, ovaries or melanoma. Myriad released an excellent first-quarter earnings report back on May 7, revealing that revenue growth is strong and earnings growth is accelerating, and management increased guidance going forward. Also notable were the facts that the $3,000 BRACAnalysis test (used by Ms. Jolie) is covered by insurance for 95% of patients, who typically have a co-pay of $100. Finally, the company noted that the BRACAnalysis test is classified as a preventative service under the Affordable Care Act, ensuring that women with a qualifying family history be tested with no out-of-pocket cost (for all non-grandfathered private insurance plans—which includes more than half of all private insurance plans). Then last Tuesday, Angelina Jolie told her story to the world. In short, the company was doing fine without her involvement, and is likely to do even better with the boost she’s provided. How much better remains to be seen.
Technical Analysis
Myriad Genetics appeared in Cabot Top Ten Trader nine times from July 2008 to March 2009, as it climbed from 58 to a high of 90. That’s when the stock split 2-for 1, and that’s when the ascent ended. The stock bottomed a year later, and has been climbing since, roughly mirroring the broad market’s moves. The earnings report kicked off a wave of buying, which ended after Ms. Jolie’s announcement. The pullback since provides your buying opportunity.
MYGN Weekly Chart
MYGN Daily Chart
DIRECTV (DTV)
Why the Strength
DIRECTV is a satellite-based digital television company that competes directly with Comcast (wired service) and DISH Network (also satellite-based) to provide television entertainment and DVR services. Cable operators like Comcast provide about 55% of U.S. television service, with satellite providers (mostly DIRECTV and DISH) accounting for 33%. Telephone companies provide the other 12%. While their market share is still high, cable TV providers are getting significant competition from Amazon, Hulu and Netflix, which can bring lots of movies and TV shows to consumers. But it takes a major provider like DIRECTV to offer the sports some consumers crave, and many of them are installing dishes and cutting their cable connections. DIRECTV is also expanding rapidly in Latin America, a region that can be served using the company’s existing network of six geosynchronous satellites. DIRECTV has generated major amounts of free cashflow, enabling the company to repurchase nearly $22 billion of its shares since 2006, and it has a current $6 billion buyback authorization. Investors are also interested in the rumors that DIRECTV might be ready to launch a bid for all or part of Hulu, a move that would increase its appeal among those looking to leave cable behind. The most immediate reason for DIRECTV’s appeal is that the company’s earnings report on May 7 nailed revenue expectations and crushed expectations on earnings, delivering $1.43 per share when estimates were for $1.10.
Technical Analysis
DTV enjoyed a major run from 2009 through the middle of 2011. But after hitting 58 in July 2011, DTV didn’t advance above 56 for another 21 months. The May 7 earnings report kicked off a strong rally that lifted the stock from 58 to 62 in one day, and DTV has kept up the advance since, soaring to 65 before today brought a little pullback. We think DTV has a strong story, and looks buyable anywhere under 64. A stop at 58 makes sense.
DTV Weekly Chart
DTV 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.
