Volatility Picks Up
Overall, the main trends of most stocks, sectors and indexes remain firmly up; that’s why we’re leaving our Market Monitor in bullish territory. That said, we’re confident in saying that the next month will be more challenging than the straight-up action of the past month—more names are showing wide-and-loose action, which isn’t always abnormal but does make it harder to be patient and find low-risk entries. Remain bullish, but also stick to your plan and don’t be afraid to throw some losers or laggards overboard.
Once again, we’re pleased to see so many attractive, growth-oriented stocks in this week’s list, a sign that the buyers haven’t left the building. Our favorite of the week is Regeneron Pharmaceuticals (REGN), which is part of the strong biotech sector and has enjoyed an orderly pullback of late.
| Stock Name | Price | ||
|---|---|---|---|
| Western Digital Corporation (WDC) | 0.00 | ||
| Tesla, Inc. (TSLA) | 818.87 | ||
| Regeneron Pharmaceuticals (REGN) | 512.96 | ||
| Qihoo 360 (QIHU) | 0.00 | ||
| Pandora Media Inc. (P) | 0.00 | ||
| Old Dominion Freight Line Inc. (ODFL) | 221.91 | ||
| Hornbeck Offshore (HOS) | 0.00 | ||
| First Solar (FSLR) | 83.74 | ||
| 3D Systems (DDD) | 0.00 | ||
| American Axle (AXL) | 0.00 |
Western Digital Corporation (WDC)
Why the Strength
Along with hard disk drive peer Seagate Technology, Western Digital has morphed into a cash cow thanks to limited competition (it and Seagate make up nearly 90% of the market nowadays), a permanently-altered supply chain (due to the Thai floods of late 2011) and a pickup in demand for Cloud storage, which is offsetting the weakness in PC-related disk demand. This is not a growth situation, but investors had been expecting earnings to slide meaningfully this year or next as the industry recovered from the aforementioned Thai floods. Now, however, perception is coalescing around the idea that earnings will flatten out at new, elevated levels. For instance, Western Digital’s earnings have generally hovered between $1.50 and $3.50 per share (though they did reach $6 in 2010 before quickly falling back), but earnings totaled $8.61 last year, and are expected to come in around $8 both this year and in 2014! That’s allowed management to initiate a small dividend (currently 25 cents per share, per quarter) and steadily buy back shares (about 1% to 2% of the outstanding shares each quarter). And the longer cash flow remains robust, the greater the chance the dividend and share buyback plan are increased. As we wrote above, it’s not a major growth situation, but the low valuation and growing consensus that cash flow could remain strong for many years continue to attract big investors.
Technical Analysis
Chart-wise, the most intriguing thing about WDC is that the stock recently lifted out of a back-and-forth base that dates back to January 2010, and popped to new all-time highs, finally eclipsing its peak of 54 from 1997! We wouldn’t treat that 54 level as anything too meaningful, but the persistent uptrend since mid-April, even through last week’s market maelstrom is impressive. You can buy some around here, though a dip back to 60 could easily come if the market remains choppy.
WDC Weekly Chart
WDC Daily Chart
Tesla, Inc. (TSLA)
Why the Strength
Tesla Motors has been in the news so much that it’s hard to find any one story that can account for the stock’s remarkable popularity with investors. The company’s unexpected profit in Q1 is one possibility. Then there’s the announcement that its fourth car model (after the sporty Roadster, Model S sedan and next year’s Model X crossover) would be coming out in three or four years. Our favorite right now is the news that Tesla has repaid its $465 million loan from the U.S. Department of Energy in full. The loan, made in January 2010, had a 10-year repayment program, but Tesla’s robust cash flow allowed it to return the entire amount in just its second payment. (It’s the only U.S. carmaker to have paid off its loans in full.) Another contributor to Tesla’s popularity is founder Elon Musk, a man who has a magic touch in bringing difficult projects to a successful execution. Tesla has been so successful that short sellers were starting to multiply back in March, but recent stock advances have converted much of that short interest into covering rallies. It’s hard to say what the real threats to Tesla’s success are right now; it’s possible that over-popularity is the biggest stumbling block on the horizon. But careful buying (small positions) and judicious use of stops should keep the risk low.
Technical Analysis
TSLA remained in a mild uptrend for more than two years after its IPO in June 2010. But after a two-month consolidation in February and March, TSLA caught an updraft on April 1, popping above 40 on good volume and roaring past 60 in early May. That’s a strong uptrend, but it was nothing compared to the blastoff following the company’s Q1 earnings report on May 9, which keyed a four-day leap to 95. TSLA is now trading above 100, and the ideal scenario would have the stock trading sideways for a couple of weeks to lower the heat level. That may or may not happen, of course, but a small buy on dip of a few points could produce interesting results. At this point, 85 would be a reasonable stop.
TSLA Weekly Chart
TSLA Daily Chart
Regeneron Pharmaceuticals (REGN)
Why the Strength
When we last checked in with Regeneron Pharmaceuticals, about a year ago, the biotech specialist was riding high on its newly-released blockbuster eye drug, Eylea. Eylea is approved for neovascular age-related macular degeneration, and rides alongside Regeneron’s other major drug, Arcalyst, which is a treatment for rare inflammatory diseases. Eylea has proven to be a boon for Regeneron, helping to nearly quadruple the company’s first-quarter earnings to $1.78 per share. What’s more, the company has boosted its full-year sales forecast to $1.25 billion to $1.33 billion from $1.2 billion to $1.3 billion, largely due to better-than-expected Eylea sales. And, Regeneron may have another blockbuster treatment in the pipeline, if early reports play out as expected; specifically, a recent Phase II study of dupilumab, an asthma treatment jointly developed with Sanofi, revealed an 87% reduction in the incidence of asthma exacerbations. Furthermore, dupilumab also demonstrated significant improvement in lung function and other asthma control parameters. According to lead trial researcher Dr. Sally Wenzel, the dupilumab results are the “most exciting data we’ve seen in asthma in 20 years.” With Eylea exceeding expectations and dupilumab looking to follow suit, Regeneron investors are sitting pretty.
Technical Analysis
Bolstered by strong early sales of Eylea, REGN spent most of 2012 in rally mode, trending steadily higher along support at its 10-week and 25-week moving averages. Heading into 2013, however, REGN entered a period of consolidation. Despite a early pop toward 200 in January, REGN spent most of this year consolidating into the 150 region. Since April’s release of positive Eylea sales data and May’s strong earnings numbers and dupilumab trial results, REGN has rocketed sharply higher, taking out 200 and soaring toward all-time highs near 280. REGN is currently pulling back as investors take some profits off the table. However, with shares staging an orderly pullback to 250, you can buy some around here.
REGN Weekly Chart
REGN Daily Chart
Qihoo 360 (QIHU)
Why the Strength
Qihoo 360’s success in the Chinese market is based on the company’s popular browser for mobile devices. This browser, which had always been used as a way to advertise and deliver anti-virus and anti-theft software, became a much bigger asset when Qihoo 360 inaugurated a mobile search service that immediately grabbed a nearly 10% share of the mobile search market. Analysts now see the company’s share of the search market moving closer to its browser’s market share, which is about 25%. Increasing penetration in any area boosts the company’s mobile game sales and its advertising rates (which made up a vast majority of the company’s 2012 revenue). Qihoo 360 is ultimately battling Baidu for dominance in the Chinese search business, with Baidu dominating everyone in the PC sector. But Qihoo is an ambitious and active competitor in mobile, and isn’t expected to concede anything to Baidu in that battleground. Qihoo’s Q1 results on May 20 showed a 59% jump in revenue, but a 33% dip in earnings. But the news that impressed investors was the company’s 15% share of the mobile search market and its projected 97% jump in revenue for the first half of 2013. Investors like Qihoo 360’s chances of eating into Baidu’s mobile search market share, and that will do good things for all of Qihoo’s products and services.
Technical Analysis
QIHU took a three-month rest after rallying from 26 to 33 earlier this year. The current rally began in April, and QIHU has pushed from 28 to 44, with a nice gap up on volume following last week’s earnings report and strong guidance. QIHU represents a great opportunity for an aggressive investor who is looking for big potential. You can either buy on a pullback toward 42 or wait for the stock to break out above 44. A dip below 37 would be bearish.
QIHU Weekly Chart
QIHU Daily Chart
Pandora Media Inc. (P)
Why the Strength
Pandora has a lot of similarities to Netflix—a new company that’s attacking an old (but huge) industry with many other players also looking to get into the field. That’s led to a lot of skepticism (and a big short interest, more than 35 million shares at last count, or seven days of volume), but it hasn’t hurt the company itself. In fact, Pandora just reported another great quarter last Thursday evening, with management forecasting more good things to come. Not only did revenue top targets and grow north of 50% again, but all key metrics (listener hours and active users both +35%, paid subscribers +114%, mobile listener hours +47%, mobile revenues +101%) looked great. Moreover, it’s important to note that, right now, Pandora is the largest radio station in the country, accounting for 7.33% of all radio listening in the first quarter, up from 5.86% a year before. Perhaps most encouraging, as a percent of revenues, Pandora’s royalty costs declined nicely, which helps dampen fears that the firm will never exit the red. All of this isn’t to say there aren’t risks—Google recently announced a competing service, although it relies far more on paid subscriptions than Pandora. And there are endless rumors Apple will enter the market as well; either of these two gorillas could become an issue. But to this point, none of the many competitive threats have dented this company one bit.
Technical Analysis
P was crushed from its opening IPO price of 26 back in mid-2011 to its low of 7 at the market low of November last year. But since then, the buyers have been in control. Most recently, the stock etched a nice, tight eight-week zone before breaking out earlier this month and then gapping up after earnings last Friday, reaching as high as 19 ... before pulling back sharply to close down on the day. That’s not ideal action, but given the market environment, it’s not a major negative, either. If you’re game, you could buy some around here, or on further weakness, with a stop near 14.
P Weekly Chart
P Daily Chart
Old Dominion Freight Line Inc. (ODFL)
Why the Strength
Old Dominion Freight Line has expanded well beyond the South to service the lower 48 states and Hawaii, as well as Central and South America. The company operates a fleet of more than 5,800 tractors, 22,000 trailers, and more than 200 service centers. Old Dominion is also unique in the shipping industry, as less-than-truckload (LTL) shipments (i.e. consolidated truckloads from multiple shippers) account for about 90% of the company’s revenue. During the most recent quarter, the company posted earnings growth of 31% year-over-year as revenue rose 7%. The figures were largely in line with Old Dominion’s performance during the past four quarters, where the company averaged revenue growth of 10% on earnings growth of 21%. Quarterly results topped Wall Street’s expectations, as Old Dominion made up for weakness in the shipping market via stronger pricing power, an on-time delivery percentage above 99%, and a record low cargo claims ratio of 0.34%. Looking ahead, management believes that its yield and efficiency will dovetail with improving economic conditions to help power incremental operating profit into the 15%-20% range, figures that bode extremely well for Old Dominion investors.
Technical Analysis
ODFL has been a powerhouse during the past couple of years, with the shares enduring only two corrections since the market bottom in 2009: in August 2011 and in June-July 2012. Since the 2011 correction, ODFL has been bolstered by its 10-week, 25-week, and 50-week moving averages. In fact, the stock has not closed a week below this trio during this timeframe. The most recent upleg began in August, with the shares vaulting into prior resistance near 35. After testing support in early April, ODFL has powered past 35 and is now trading near all-time highs north of 40. Given the stock’s recent run higher, we recommend buying on pullbacks, with 42 an ideal target.
ODFL Weekly Chart
ODFL Daily Chart
Hornbeck Offshore (HOS)
Why the Strength
When the cycle turns up for oil service stocks, the stocks can go on monstrous runs, and that’s what we believe is driving Hornbeck Offshore, a smaller (just $540 million in revenue) provider of services through its fleet of offshore and mid-shore supply vessels, as well as tug and tank barges. Basically, as offshore drilling picks up so does demand for its vessels, which drives up dayrates. A big area to watch is the Gulf of Mexico, which continues a powerful rebound since the Macondo disaster in 2010 and where this company does most of its business. Hornbeck’s management believes the number of rigs drilling is now 37, up from 33 at the end of 2012. But that could grow to 42 this year, 54 in 2014 and possibly 65 by 2015! That huge increase is going to keep utilization basically maxed out (Hornbeck’s utilization of high-spec vessels was 99% in the first quarter) and keep dayrates elevated; management went out of its way in the conference call to say that despite more new vessels being built, there simply aren’t enough to keep up with demand for the next couple of years. That has helped the stock to go wild and has analysts tripping over themselves to boost forecasts—earnings are expected to rebound to about $2.40 per share this year (up 112% from last year) and $4.35 in 2014 as increased dayrates fall right to the bottom line. Of course, if oil prices really tank, all bets are off, but drilling operations are planned well in advance so there’s a strong likelihood that Hornbeck’s business will accelerate nicely in the quarters to come. We like it.
Technical Analysis
HOS is a bit thinly traded (less than $30 million of volume per day), but the chart looks excellent. The stock was a nothing performer for months, with lots of up-and-down action from February 2012 through March of this year. But the earnings report changed everything; HOS soared 15% on nearly five times average volume, and has traded in a relatively tight range since, even during last week’s market volatility. Further retrenchment can’t be ruled out, but we think the stock is buyable around here, with a stop in the 47 area.
HOS Weekly Chart
HOS Daily Chart
First Solar (FSLR)
Why the Strength
In a resurgence reminiscent of its 2007 heyday, the solar sector has come roaring back in recent weeks. During the last round of corporate earnings reports, many solar firms posted stronger-than-expected revenue and earnings growth, as demand for clean, efficient solar power surged—especially in the U.S. First Solar, an excellent stand-in for the sector as a whole, has once again piqued our interest. As we noted back in February, nearly half of First Solar’s sales now come from the strengthening U.S. market, eclipsing German sales, which previously dominated the industry. Since our last look, First Solar shocked many Wall Street analysts by projecting fiscal 2013 net sales of $3.8 billion to $4.0 billion on total module shipments of 1.6GW to 1.8GW. What’s more, the company placed 2014 net sales at $3.5 billion to $4 billion and 2015 net sales of $4.2 billion to $4.8 billion. And if that wasn’t enough, management expects gross margins to improve to between 20% and 22%. Ambitious targets indeed, but completely achievable if current trends continue. As investors know, solar stocks are notoriously volatile. However, First Solar offers a unique opportunity for stability, making it a prime investment candidate for those looking to take advantage of the red-hot solar sector.
Technical Analysis
FSLR suffered heavy losses during its decline in the 12 months from February 2011 to May 2012, plunging from around 175 to as low as 12. However, the stock has since recovered significantly, with FSLR nearly tripling off those lows. As is typical with solar stocks, this run higher was not without its volatility. In fact, February was a particularly rough month for FSLR, with shares dropping sharply to 25 and spending the better part of the next month digesting losses. But a flurry of strong earnings reports in the solar sector and news of strong solar panel demand in the U.S. shocked FLSR out of its doldrums in mid-April, sending the stock soaring past former resistance at 50. You can take bites here, or enter more substantial positions on dips below 50.
FSLR Weekly Chart
FSLR Daily Chart
3D Systems (DDD)
Why the Strength
3D Systems is a player in the red-hot 3-D printing business, selling the machines that actually do the printing, as well as supplies for those machines and printing services that supply custom parts to customers. In 2012, 3D Systems’ revenue split was balanced, with sales of printers accounting for 36%, printing services 35% and materials kicking in the remaining 29%. The momentum of the 3-D printing business is in high gear, as reflected in the company’s 42% revenue growth in 2010, 44% in 2011 and 53% in 2012. There is also significant consolidation going on, with 3D Systems taking over Kemo Modelmakerij in Octoboer 2011, Z Corporation and Vidar Systems in January 2012 and My Robot Nation and Paramount Industries in April 2012. Investors have also taken note that 3D Systems’ “Cube” printers (aimed at consumers) are now being stocked by the giant Staples chain of office supplies stores, indicating that the technology is hitting the mainstream. At this point, 3D Systems is both serving existing customers and creating new ones as this potentially disruptive technology gathers strength. The company’s increase in the number of shares offered from 120 million to 220 million should also raise its attractiveness to institutional investors.
Technical Analysis
DDD has been in an uptrend since it traded at 1.5 in early 2009. The stock traded flat in 2011, but soared from 10 when 2012 began to 48 in January 2013. A two-month pullback to 28 in mid-March was wiped out when the stock rallied strongly starting in late April. Several days of advances on very strong volume in May pushed the stock to new all-time highs a couple of weeks ago and the stock has been trading sideways since. With its 25-day moving average just below 43 and rising fast, DDD looks like a good aggressive buy anywhere under 47, with a loose stop near 40.
DDD Weekly Chart
DDD Daily Chart
American Axle (AXL)
Why the Strength
American Axle and Manufacturing Holding hasn’t been seen in Cabot Top Ten Trader since March 2007, which is a good illustration of the hazards of being a parts supplier to the automotive industry. American Axle specializes in designing and manufacturing drivetrain parts and modules like axles, driveshafts, transmission parts and other power transfer components. The company went through some dark times in 2008 and 2009, as the U.S. auto industry hit the skids. But U.S. sales are now just 54% of annual sales, which spreads the risk around, and the global automobile manufacturing business is healthy once again. The company achieved 13% revenue growth in 2011 and 2012 (after the 50% rebound in 2010) and the outlook for earnings in 2013 is $1.76 per share, up from $1.20 in 2012. The company’s Q1 results, announced on May 3, beat expectations for revenue and missed only slightly on earnings, a miss that was not unexpected. Investors are happy to see American Axle enjoying stable growth and they look forward to strengthening earnings during the year. The company’s forward P/E ratio is just 10, making the company a relative bargain now that people are buying more automobiles.
Technical Analysis
AXL was relegated to penny stock status during the dark days of 2009, but has battled its way back. The stock topped 15 in January 2011, but had corrected to 7 by October of that year. Since then, AXL has been volatile, but the trend has been clearly up. AXL had just corrected from 14 to 12 in early April when investors bid it up to 14 again just before earnings. The stock launched from 14 to 16 following the company’s Q1 earnings report, and pushed as high as 17 in calm trading in the succeeding weeks. AXL is a relative bargain as a way to play the recovery of global automotive sales. We think starting a position on a pullback toward 16 with a stop at 14 could prove profitable.
AXL Weekly Chart
AXL 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.
