May 23, 2016
This week’s Cabot Top Ten Trader list again has a solid growth feel to it. Given the uncertain times, our Top Pick this week is a very steady fundamental performer whose stock is both strong (gapping up on earnings three weeks ago) and tight (held those gains since).
On One Hand, On the Other Hand
Current Market Outlook
The market has turned mostly neutral, with the intermediate-term trend slightly negative, the longer-term trend slightly positive, and individual stocks a mixed bag. In the big picture, the pullback in the major indexes during the past month is reasonable given the February-April gains, and we’re encouraged by both the broad market’s resilience (few stocks or sectors are in disarray) and the dearth of bullish sentiment. Even so, it’s best to go with the market’s action first and foremost, and right now, it’s a mixed bag. Thus, we’re knocking our Market Monitor down another notch and will keep an open mind—a big-volume selloff from here would raise the odds of a deeper correction, but a surge back above the 50-day lines for the major indexes would likely signal the resumption of the post-February advance. Stay tuned.
This week’s list again has a solid growth feel to it, including a few stocks that recently reacted well to earnings. Our Top Pick is Fidelity Information Services (FIS), a steady fundamental performer that gapped up on earnings three weeks ago and has held firm since.
|Ultimate Software (ULTI)||0.00|
|Tallgrass Energy Partners (TEP)||0.00|
|NetEase, Inc. (NTES)||0.00|
|Fidelity National Information Services (FIS)||0.00|
|Emergent BioSolutions, Inc. (EBS)||0.00|
|Becton Dickinson (BDX)||0.00|
|Applied Materials (AMAT)||0.00|
Why the Strength
Weibo is the Twitter of China—with a much better stock. Spun off from Sina.com two years ago, Weibo is a social media platform that allows users to create and post their own content, play games and access news and weather. It now has 120 million daily active users, up 75% from a year ago, with mobile users accounting for most of that growth—in March, more than 91% of Weibo’s daily active users came from mobile devices. Like Facebook, Weibo gets its revenue from selling ads, and revenue grew by 43% in 2015 and 24% in the first quarter, well ahead of the 18% analyst estimates. That’s off from growth in previous years, but still huge, indicating that advertisers are hungry for ways to reach Chinese consumers. Weibo has turned a financial corner, booking its first profitable year in 2015, and earnings are forecast to grow 56% in 2016 and 68% in 2017. The most recent quarter portends even greater growth; Weibo’s EPS improved 600%! The other reason for Weibo’s stock strength is that rumors are swirling that Alibaba, the Chinese online giant, is ready to increase its ownership stake. If true, the tie-up would increase access to Alibaba’s even larger user base, which could provide a huge boost to revenues.
WB’s IPO in April 2014 led to five months of sideways action before starting a correction that pulled it down to 12 in early 2015. The stock has since made two runs at resistance at 21 and found support three times near 12 (the August 2015 market meltdown excepted). But after its latest dip to 12 in February, WB raced to 24 in April, finally topping its 2015 resistance around 21. WB has been consolidating nicely in the month since, with 21 now acting as support. You can buy here and hope for another break higher, with a stop below 21.
WB Weekly Chart
WB Daily Chart
Ultimate Software (ULTI)
Why the Strength
Unless you’re a big, dominant player in the cloud software field (like Salesforce.com, which has both breadth and quality of offerings), it’s hard to tell many of the competitors apart. But Ultimate Software, which competes in the payroll, benefits, recruiting and workforce management software sector, has certainly made a name for itself—the firm’s core UltiPro product helps mid- and large-sized employers manage an employee’s complete lifecycle. Ultimate is also beginning to make a name for itself when it comes to predictive analysis, which more and more HR departments are using to “model” which employees are likely to excel and which are most likely to leave, allowing the top brass to stay ahead of the curve. What really speaks to the company’s success is its results: Not only does Ultimate have one of the best sales growth records in the market (double-digit growth in each of the past 13 years, and growth has accelerated to 29% in recent quarters), but its customer retention rate has averaged 96% (!) during the past decade (and rose to 97% in the first quarter). As with most cloud firms, cash flow is much larger than reported earnings, but both are growing at mid-20% rates and analysts see that continuing for a long time to come. Yes, there’s competition, but there’s no question Ultimate is thriving in spite of it.
ULTI has been in a huge uptrend for many years, but like most growth stocks, it took a big rest period during the past two years—while shares did reach a peak of 216 last November, the ensuing correction wiped out the gains from all the way back to September 2013! ULTI has rallied back decently since and has set up a nice cup-with-handle base. If you want to play the breakout, wait for a push above 206 or so. But we’re OK with a small buy here and a tight stop, with the idea of adding more above 206.
ULTI Weekly Chart
ULTI Daily Chart
Why the Strength
One of the three largest consumer credit-reporting firms, along with Equifax and Experian, TransUnion’s growth has accelerated in recent years after the company diversified into risk management and analytics. Those additions have enhanced TransUnion’s consumer-credit reporting business—marriages, divorces, driver histories, court rulings and bankruptcies are now part of the personal data the company analyzes and reports to vendors. There’s plenty of demand for that data in the wake of the subprime mortgage crisis, especially now that people are spending money freely again; outstanding consumer credit has doubled in the last five years. Now the company is rolling out a new product called Prama Insights, a visual analytics software that allows corporations to analyze their business performance based on data from about 200 million consumers. It also just launched Quote Exchange, an online insurance marketplace where carriers buy and sell quotes in real time using TransUnion data that better aligns insurance providers with prospective customers. As TransUnion’s technology and product offerings expands, so have its sales—the company just reported its seventh straight quarter of double-digit revenue growth, while earnings per share doubled from the same quarter a year ago. For the year, TransUnion’s sales are expected to grow more than 10%, with a 35% EPS increase.
TRU didn’t come public until last June, when it debuted on the New York Stock Exchange at 24. It topped out at 28 in December before sinking to 21 this February. But within two weeks, it was back up to 26, and after some base building, the stock broke to 27 in late March then to 30 in late April. It’s been trickling higher since, touching 32 earlier this month before dipping slightly to 31 and trading around there for two weeks, which looks like a nice setup. You can buy a little here or on dips toward the 25-day line with a stop down around 28.5
TRU Weekly Chart
TRU Daily Chart
Tallgrass Energy Partners (TEP)
Why the Strength
Energy master limited partnerships (MLPs) continue to show improved action, and Tallgrass looks like one of the best in the group. While many MLPs are finding buyers because things aren’t getting worse, Tallgrass is growing nicely, with much of that growth coming from acquisitions. The company has more than 6,700 miles of natural gas pipelines and a 760-mile oil pipeline that serves the Bakken shale area and Rocky Mountain region in general. Oil transportation makes up the majority of its cash flow, thanks mainly to its Pony Express pipeline (runs from Wyoming down through Oklahoma), and overall, 95% of cash flow comes from firm, fee-based payments. Looking ahead, some recent acquisition news should keep distribution growth humming for a few years: It recently purchased another 31% of the Pony Express pipeline, bringing its stake to 98%, and it just bought a 25% stake in the Rockies Express Pipeline (from Sempra Energy), which stretches from Colorado and Wyoming all the way to Ohio. The end result is that Tallgrass’ management now sees distributions up nearly 30% this year, plus 20% in both 2017 and 2018! With the stock already yielding 5.7% annually (now $2.82 per share), investors have piled in, thinking the payout could total nearly $5 per share by 2018. As MLPs go, it’s a solid growth story.
TEP went over the falls with the sector from mid-2014 to the January 2016 bottom, but the action since the bottom that is noteworthy—TEP spiked from 26 to 40 within a month, consolidated tightly through April, and exploded higher since the Rockies Express buyout, rallying to within shouting distance of all-time highs! We don’t advise chasing TEP here, but we also don’t expect a major correction. You can start a position on dips into the upper 40s.
TEP Weekly Chart
TEP Daily Chart
NetEase, Inc. (NTES)
Why the Strength
NetEase first made a name for itself in the early 2000s as one of China’s leading internet portals, and it remains that today—it’s China’s largest email provider (860 million registered addresses), offers all the usual portal content and does good business (making up about one-quarter of total revenue) with internet advertising, e-commerce and email services. But the real growth driver here is games, as NetEase has become one of the leading PC and mobile game providers in China and even the world, with games both developed in-house and licensed. The company’s push recently is into mobile games (it has more than 90 of them, which combined, make up 63% of game revenue), and NetEase expects further growth as it releases new versions and expansion packs for successful titles like New Ghost and Fantasy Westward Journey. Worries about all things China-related had knocked the stock down this year, but the first-quarter report alleviated those fears—revenues grew 108% (bolstered by some acquisitions) while earnings soared 79%. Analysts see the bottom line up 20% this year, though we think that’s conservative because NetEase has a history of topping estimates and the game business tends to thrive on success. NetEase looks like a winner.
NTES had two good-sized corrections during the past year, with the end result that the stock made no progress for a full year. But after finding support around 130 repeatedly this year, NTES has come alive following earnings, surging from 140 to the mid-160s on excellent volume. The stock still has overhead to contend with, so you can either wait for a tighter setup or nibble on dips with a stop in the mid-140s.
NTES Weekly Chart
NTES Daily Chart
Fidelity National Information Services (FIS)
Why the Strength
Fidelity National Information Services was already one of the leading payment processing providers in the U.S. prior to its November acquisition of financial software company SunGard for a whopping $9.1 billion. Now it’s a fast-growing industry leader; in its first quarter since the SunGard buyout, Fidelity’s sales (+40%) and earnings per share (+22%) expanded more than they have in years. Organic revenue growth more than doubled to 4%, and operating margins also are on the rise. Taking the broader perspective, SunGard vastly improves Fidelity’s payment-processing capabilities, and creates opportunities for cross-selling its own products with SunGard’s existing client base. It’s also expected to improve Fidelity’s position in the burgeoning mobile banking industry; its mobile banking platform now supports more than 36 million users. Institutional investors seem to like where Fidelity is headed: Jefferies and Sterne Agee both upgraded FIS stock to Buy after the company’s recent earnings report, while Barclays raised its price target earlier in the month. It helps that the company is in the midst of a $2 billion share repurchase plan, which runs through the end of next year. Add it all up, and Fidelity is starting to separate itself from a crowded digital-payments field.
Fidelity has been growing steadily the last few years, and so has the stock. FIS has been climbing higher since late 2011, with the only real dips coming in the last year. The stock tumbled from 68 to 61 last summer, rallied to 73 in November, then sank all the way to 56 early this year. It found bottom in February, and has been kiting higher since. Now it’s knocking on the door of new highs, trading in a tight range between 70 and 73 all month. You can take out a small position here and add to it if FIS breaks above 73 resistance. Set a stop below the 50-day moving average.
FIS Weekly Chart
FIS Daily Chart
Emergent BioSolutions, Inc. (EBS)
Why the Strength
Bioterrorism and biowarfare are the threats that drive this company’s business. Its number one product (accounting for 82% of revenues) is BioThrax, an anthrax vaccine, and its number one customer—by a long shot—is the U.S. Center for Disease Control (CDC). The company’s current BioThrax procurement contract with the CDC is scheduled to expire on September 30, and there’s no follow-on contract in place yet. But the CDC has reaffirmed their intent to award a new contract, and the stock’s chart (which knows all) says that investors are not worried about that. As to the company’s other efforts, a big one is the upcoming spinoff of Aptevo Therapeutics, which is focused on cancer research and treatments. The cancer business accounted for 11% of revenues, but a much bigger payout may be in the cards when the spinoff is completed—possibly this summer. The company’s other two efforts, still small but with strong niche potential, are Emergard, which is a military-grade auto-injector device that has been selected by the U.S. Department of Defense as a platform for nerve agent antidote delivery, and Reactive Skin Decontamination Lotion (RSDL) for removal and neutralization of chemical warfare agents, which has been approved in Israel. Quarter-to-quarter trends here are not smooth, due to the ebbs and surges in the U.S. government’s buying. Still, the company’s first quarter results, released May 5, were impressive. Revenues jumped 74% to $111 million, and earnings were $0.16 a share, up from a loss of $0.50 a year ago. If you can survive the stock’s volatility, the long term looks bright here.
EBS came public in 2006 and has been trending higher since, but there have been three pullbacks of greater than 50% in that time, so this is not for the faint-hearted. Still, the volatility seems to be abating; the latest big pullback, which occupied most of 2014, took the stock down “only” 32%. Most recently, the May 5 earnings report kicked off an advance that took the stock above its old high of 41, so that resistance should now act as support. If you’re game, you can buy a little near here.
EBS Weekly Chart
EBS Daily Chart
Why the Strength
We’ve repeatedly referred to Salesforce.com as the Microsoft of the cloud era—the company is the hands-down leader in various business software categories, all of which are delivered online. It took the lead years ago and has held on and expanded that lead by offering a broad array of products and systems for mid-sized and enterprise businesses. If anything, growth has been accelerating in recent quarters, as more and more big businesses have been willing to go “all in” when it comes to the cloud. The company’s first-quarter report confirmed the trend—not only did sales (up 28% excluding currency movements) and earnings (up 50%) top expectations, but operating cash flow mushroomed 43% to north of $1 billion (about $1.46 per share), while deferred revenue rose 32% to just over $4 billion. Moreover, management hiked guidance going forward and, on the conference call, hinted that many bigger deals were being signed (including one nine-figure deal!), backing up the notion that mega-cap companies are now taking the plunge. Put it together and Salesforce is clearly an emerging blue chip company that’s likely to grow rapidly for years to come; analysts see earnings up 33% this year and another 30% next. We like it.
CRM has been a longer-term winner, but it hasn’t been easy to hold because of its choppy action. However, we think the stock will have a sustained upmove if the market gets going—CRM’s deep correction earlier this year brought it down to levels it first saw back in September 2013, wiping out many weak hands. Its recovery since then has been excellent, with big volume off the bottom and lots of tightness in recent weeks. And last week, CRM rose back to its old price high (though its RP line notched a new high). We’re OK with a small position here, with the idea of buying more if the market gets healthy.
CRM Weekly Chart
CRM Daily Chart
Becton Dickinson (BDX)
Why the Strength
Becton Dickinson makes and sells a wide variety of medical supplies, devices and instruments, including injection systems, infusion systems, surgery supplies, needles, catheters and reagents. Typically, when you see such a broad array of products, you expect to see a large, slow-growing company paying a fat dividend. Well, BDX pays a dividend of 1.6%, which is nice, but there’s nothing slow about this company at all! In fact, the company blew away analysts’ estimates with its May 5 fiscal second-quarter report; revenues swelled 50% to $3.07 billion, while earnings grew 35% to $2.18 per share. Looking forward, the company says 25% revenue growth is likely in the current quarter, but of course, that’s conservative. Every day, the company’s R&D teams are working on new and better (and more profitable) devices; some of the hot items coming online include new insulin infusion sets developed in collaboration with Medtronic, the FACSCelesta flow cytometer (a cell analyzer), and the MALDI biotyper, which identifies microorganisms using mass spectrometry. Analysts are looking for EPS growth of 20% this year and 10% next year, so the current P/E ratio of 20 looks quite reasonable.
BDX has been trending steadily higher for years, doing slightly better than the market on average, but this latest surge, which kicked off at the market’s February bottom, has been particularly strong, pushing it through the stock’s old high of 157.50 and all the way up to 169 before the current little correction began. The stock’s 50-day moving average is down at 158, and the stock might pull back to there, but we think you’re safe enough getting in here and setting a stop below 158.
BDX Weekly Chart
BDX Daily Chart
Applied Materials (AMAT)
Why the Strength
“One of the most bullish (conference) calls I’ve heard in years.” That’s how Jim Cramer described Applied Materials’ first-quarter earnings report last week. Strong demand for the company’s organic light-emitting diodes (OLED) and 3D flash memory businesses were the main catalysts behind the big quarter. OLEDs are becoming increasingly common in smartphones, as companies such as Apple are phasing out their outdated LCD display screens in favor of the superior OLED technology. Applied’s CEO Gary Dickerson estimates that the company’s OLED opportunity is three times larger than for traditional LCD. “I believe we’re still in the very early innings of OLED,” Dickerson said during the recent conference call, “but we’re already seeing a significant impact on our business.” That’s some of the bullish talk Cramer was referring to. Another catalyst for Applied Materials last quarter was China. At a time when most companies’ Chinese sales are slumping, Applied Materials saw record orders from China. Though overall sales were flat, the company’s earnings improved 17%, and are expected to jump 28% this year and 19% next year. Trading at just 12 times next year’s estimates, AMAT is the rare value play in the semiconductor space.
Since bottoming at 14 in September, AMAT has been stairstepping its way back to where it was a little over a year ago. The first run-up brought the stock to 19 in December, but the market knocked it back to 15 in January and February. Then came an even bigger run-up to 21, where the stock met resistance in April before retreating back to 19. Last week’s bullish earnings call was enough to break through that overhead resistance (and the 50-day moving average), as AMAT gapped up strongly on more than three times normal volume to close the week. You can buy a little here or (preferably) on dips with a stop near the 50-day line.
AMAT Weekly Chart
AMAT 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.
|First||Stock||Symbol||Top Pick||Original Buy Range||Price as of May 23, 2016|
|1/11/16||Agnico Eagle Mines||AEM||28-29.5||46|
|5/2/16||Banc of California||BANC||19-20||19|
|3/21/16||Comm Sales & Leasing||CSAL||20.5-21.5||24|
|4/25/16||Crescent Point Energy||CPG||15.5-16.5||17|
|4/25/16||New Oriental Education||EDU||37-39.5||42|
|WAIT FOR BUY RANGE|
|None this week|
|4/11/16||Ollie’s Bargain Outlet||OLLI||23-24.5||23|
|DROPPED: Did not fall into suggested buy range within two weeks of recommendation|