Shakeout and Recovery Adds to the Bull Case
Current Market Outlook
We think last week’s action could prove to be a turning point for the market, not just in the short-term (recovering from a four-plus week retreat) but longer-term, too (as some indexes attack key resistance levels). There are still flies in the ointment (we’d like to see more stocks hitting new highs), so we’re not fully bullish, but the combination of a healthy broad market, the intermediate- and longer-term trends of the market pointing sideways-to-up, and pervasive negative sentiment (nobody believes the market will rise significantly going forward), all bode well going forward. After a trip into neutral territory, we’re bullish again, though we’re still holding some cash in reserve as we wait for more individual stocks to kick into gear.
This week’s list has many great looking charts combined with solid growth stories. Our Top Pick is more aggressive than we’ve had in recent weeks—Veeva Systems (VEEV) has a great growth story and it catapulted higher on earnings, marking what could be a coming out party for the stock. Keep new positions small to start.
|Veeva Systems (VEEV)||180.23|
|Universal Display (OLED)||187.54|
|Jack in the Box (JACK)||0.00|
|Dycom Industries (DY)||0.00|
|Dollar Tree (DLTR)||0.00|
|Boston Scientific (BSX)||0.00|
Veeva Systems (VEEV)
Why the Strength
California-based Veeva Systems, which specializes in cloud software and data solutions for life sciences companies worldwide, is making its debut in today’s Top Ten. The company’s products help biotechnology and pharmaceutical companies manage the tricky process (and regulatory requirements) of marketing and selling to the medical community, including doctors and medical organizations. Veeva’s software gives biotechs and pharmas control over customer relationship management (CRM), including in-person, email and online contacts, data and data services, analytics, system management and training. This is a pretty new company, incorporated in 2007, and got its first revenue in 2011. 77% of revenue comes from subscription services, with CRM accounting for three-quarters of subscription revenue. Revenue growth is robust, cooling to a still-hot 31% in the fiscal year that ended in January. After-tax margin percentages have been consistently in the teens, and the quarterly report last Friday featured estimate-beating results in earnings—15 cents per share vs. expectations of 11 cents—and guidance for Q2 and the full year that were way ahead of analysts’ estimates. With the company branching out into additional services for subscribers, like clinical development and quality management, investors see good potential for Veeva Systems’ future.
VEEV came public in Q3 2013 at 20, but soared as high as 49 during its first week of trading. The stock started a post-IPO correction within eight weeks, and plunged to 17 in May 2014. After a rebound to near 34 in November 2014, VEEV traded slowly down for over a year, finally hitting bottom at 20 last February. The stock bounced nicely at that point, but only broke above its 2015 resistance at 29 in last week’s run-up to earnings. The earnings blastoff came on heavy volume and the stock is holding last Friday’s gains today. It’s worth noting that short interest in VEEV is heavy, amounting to nearly 13 days of average trading volume, so volatility is potentially high. A buy under 33 seems like a reasonable speculation, with a loose stop at 29.
VEEV Weekly Chart
VEEV Daily Chart
Why the Strength
ONEOK Partners is one of the larger energy MLPs, with a whopping 37,000 miles of natural gas and liquids pipelines, as well as a handful of gathering and processing facilities, mostly in Texas, Oklahoma and Kansas, though stretching well into Wyoming, North Dakota and even Canada. ONEOK is doing well despite the lower energy price environment for three reasons, the first of which is the great reach of its network—its pipelines and facilities connect to the Permian Basin, Williston Basin and Powder River Basin among others, with many of these areas seeing strong drilling activity even now due to superior well returns. The second reason: Some newly-opened facilities are boosting revenue, including a new plant in the Williston Basin that’s capturing previously flared natural gas, and it’s benefiting from more connections to its pipelines in general. Third, ONEOK’s business is heavily fee-based; this year, about 85% of earnings will be fee-based, providing insulation from swings in energy prices. All told, management sees cash flow up 22% this year; it’s unlikely to boost the already-solid dividend (8.1% annually) as it works to fund its stable of growth projects even as it cuts capital expenditures. (ONEOK doesn’t anticipate needing to raise equity or debt until well into 2017.) Plus, if energy prices continue to bounce, there are a ton of wells (especially in the Williston Basin) that are drilled but not completed—if those come online, ONEOK’s own projections will likely prove conservative.
OKS fell from 60 to 22 during the MLP bear market, but now it’s on the comeback trail—it’s already recovered about half of its decline and is trading near 52-week highs, which is far better than the group as a whole. Recently, OKS has been kiting higher above its 25-day line in a two-steps-forward, one-step-back type of advance; we think dips of a point or so are buyable with a stop just below 34.
OKS Weekly Chart
OKS Daily Chart
Universal Display (OLED)
Why the Strength
It seems that every day Apple’s iPhone 8 gets closer to hitting shelves, more investors pile into one of its biggest rumored suppliers. Universal Display’s organic light-emitting diode (OLED) technology, which offers richer colors, thinner screens and lower power consumption, will supposedly be a major component for a future version of the iPhone as Apple attempts to improve its lagging display screen technology. It’s more than just rumor: according to the South Korean news site Yonhap News, Apple paid Samsung $2.59 billion for at least three years worth of their 5.5-inch OLED display screens. Samsung happens to be Universal Display’s largest customer, using the company’s OLED technology for all Samsung Galaxy display screens. OLED screens are becoming known as superior alternatives to LCD screens, with brighter, more power-efficient displays. The iPhone 8 is slated for release sometime next year; perhaps not coincidentally, Universal Display’s 2017 sales are expected to improve by nearly 26% over the current year, with 46% earnings growth. Goldman Sachs analyst Brian Lee says the iPhone 8 could add $0.08 per share to Universal Display’s bottom line next year and $0.41 in 2018. Universal is already growing nicely, with double-digit earnings increases in each of the last three quarters. But the iPhone 8 rumors and the overall potential for OLEDs are what’s keeping Universal Display in investors’ sights. And it’s why the stock is making its fourth Cabot Top Ten appearance already this year.
OLED made a big push from 32 to 55 last October and November when the iPhone 8 rumors began swirling. Then it cooled off, tumbling to 41 in February. By April, it was back up to new highs in the low 60s, and we recommended the stock when it hit 62, where it met repeated resistance. We eventually got shaken out as the stock dipped to 52 earlier this month (below our suggested loss limit), but it gained a full head of steam after last week’s first-quarter earnings beat, blowing past that 62 resistance level to close the week at 67. Start small on the next dip of a point or two, and add to your position if it kites higher than 68.
OLED Weekly Chart
OLED Daily Chart
Why the Strength
Making its first appearance in today’s Top Ten, Masimo is a medical technology company specializing in noninvasive monitoring technologies, including devices that track blood pulse oxygen levels and brain activity more accurately than rival technologies. Masimo’s systems for monitoring critical patient conditions have been enjoying steady growth, and the company’s efficiency has produced attractive increases in earnings. 95% of revenue comes from sales of equipment, with the added attraction of ongoing demand for renewables providing a steady revenue stream. The quarterly report on May 4 featured a 29% jump in earnings on an 11% revenue increase. Estimates call for a 33% increase in earnings in 2016. The company’s ongoing technological improvements to its products have led to recent upgrades from analysts. The relatively narrow addressable market for Masimo’s products is a limiting factor, but the company has proved adept at defending and increasing its market share. Masimo has excellent momentum behind it right now.
MASI spent years after its 2007 IPO trading up and down in a wide trading range. But the stock began a run in October 2014 that finally pushed it out of that range and into new-high territory in the middle of 2015, hitting 46 in August of that year. A bumpy correction to 33 in February 2016 was followed by a steady move higher that got new energy from the May 5 earnings gap up on more than triple its average trading volume. (The runup to earnings was the only time MASI has dropped below its 25-day moving average since February.) That gap up put the stock back on its trading channel and MASI has been chugging higher since. The stock has been trading under short-term resistance at 50 since Tuesday of last week, which offers an opportunity to grab shares on a pullback under 49. Use a stop just below 45.
MASI Weekly Chart
MASI Daily Chart
Jack in the Box (JACK)
Why the Strength
Franchising is all the rage in the fast food industry, and last week Jack in the Box became the latest to join the fray. Franchising shifts many of the restaurant chain’s expenses to its local independent owners, including supply costs, among other cost-saving benefits. By franchising 90% to 95% of its 2,910 restaurants (only 82% are franchised at present), and cutting down on general spending, Jack in the Box is forecasting 19% earnings growth this year and next. In addition to franchising, the company is also expanding—it plans to open four more Jack in the Box locations this year and as many as 30 more Qdobas, its burgeoning Tex-Mex restaurant chain that has been picking up steam in the wake of last year’s E. coli outbreak at Chipotle Mexican Grills across the country. Qdoba’s better-than-expected growth was largely responsible for Jack in the Box’s fiscal second-quarter earnings beat; same-store sales at Qdoba’s improved 2.1% year over year, while they were flat at Jack in the Boxes. As Qdoba becomes a bigger piece of the Jack in the Box pie—there are currently just 683 Qdoba locations, versus 2,251 Jack in the Boxes—its growth could start to have an even larger impact on the company’s top- and bottom-line improvements.
JACK has been a strong performer for years, rising from 21 in early 2012 to as high as 99 in early 2015. After an extended basing period, the stock was flirting with that 99 ceiling again last August before the bottom fell out. For nearly eight straight months, the stock tumbled, finally finding support at 62 in late March. Now it’s back with a vengeance: JACK gapped above its 200-day moving average earlier this month and hasn’t slowed since, closing at 84 last week. Buy on the dips and set a stop in the mid-70s.
JACK Weekly Chart
JACK Daily Chart
Dycom Industries (DY)
Why the Strength
Dycom has recently been upgrading its one-gigabyte wireline networks for major customers, and that upgrade paid off in the form of a big fiscal third quarter. The company beat consensus analyst earnings estimates by 46% and sales estimates by 11%. Dycom provides engineering, construction, maintenance and installation services to telecommunications companies, and the recent upgrades (designed to increase bandwidth) have been attracting bigger contracts as Dycom’s sales improved 35% year over year and its backlog continues to expand. Its $5.7 billion backlog at the end of April was roughly $600,000 more than it was three months prior, and the company expects to complete $2.2 billion of that backlog in the next 12 months. AT&T, Comcast and Verizon are among Dycom’s biggest customers, and all of them have upped their business with Dycom by at least 47% in the last year. Meanwhile, the company repurchased 1.56 million of its own shares last quarter for $100 million, reducing overall share count by 4.7%, and it plans to spend another $100 million on buybacks over the next 17 months. All of those numbers point to strong growth, and investors like what they’re seeing from Dycom Industries.
After a major run in 2015 (from 35 to as high as 88), DY coughed up a lot of those gains in December, January and early February, finding bottom at 48. It quickly rebounded to the low 60s, and inched its way to 71 by late April before settling into a nice holding pattern between 71 and 67. Last week’s big earnings beat brought a huge break to the upside on more than three times its normal trading volume. DY reached as high as 85 before pulling to 83 to close the week. You could buy here or wait for the stock to dip another point or two before dipping a toe. You can add to your position if the stock breaks higher than 85.
DY Weekly Chart
DY Daily Chart
Dollar Tree (DLTR)
Why the Strength
Thanks in part to its mega-merger with Family Dollar last year, Dollar Tree is the largest player in the dollar store industry with just shy of 14,000 stores. While its size means top-line growth has slowed (sales growth of 134% in the first quarter was mainly due to the addition of Family Dollar; same-store sales growth was just 2.2%), the big idea here is 1) the continued so-so economic environment is driving more and more consumers to look for deals on everyday items, 2) the integration of Family Dollar should lead to both major cost savings (management is aiming for $75 million this year, and eventually, at least $300 million on an annual basis—about $1.25 per share) and 3) improved sales opportunities as some of the company’s smaller brand stores are converted into Dollar Tree or Family Dollar brand stores (210 Deals stores were converted to Dollar Tree stores in recent quarters, for instance). The first quarter appeared to be a coming out party for the newly combined entity, with sales and earnings topping expectations and earnings estimates nudged higher. Analysts now see earnings booming 58% this year and another 23% in 2017. It’s not an amazing growth story, but Dollar Tree looks like a conservative liquid leading stock for the months ahead.
DLTR topped in early 2015 at 84, slipped to 60 last September, and then rebounded to the mid-80s this spring. However, the stock then lost steam, and two weeks ago, actually briefly dipped below its 200-day moving average. (We sold a couple of weeks before that because the stock’s uptrend had stalled.) However, that was the low, and DLTR surged on earnings to new all-time highs last week on more than five times average volume. We think buying in the upper 80s will work out.
DLTR Weekly Chart
DLTR Daily Chart
Why the Strength
Car accidents generally aren’t good for anybody … except this Dallas-based company. Copart auctions salvaged vehicles for insurance companies, dealerships and banks, selling wrecked cars to dismantlers, rebuilders and other dealers. Business has been good for Copart because, as company executive Will Franklin said during last week’s fiscal third-quarter earnings call, “accident frequency is up” due to more cars on the road thanks to higher employment rates and lower gas prices. “Salvage frequency”—the rate at which cars involved in accidents are totaled and sent to salvage instead of being repaired—is also on the rise, Franklin noted. The average age of cars on the road rose to 11.5 years in 2015, and when old cars are badly damaged in an accident, owners tend to buy new cars rather than pay for expensive repairs on outdated cars. Copart is benefiting from those industry trends, as third-quarter sales improved 17% year over year while earnings per share jumped 45%. For the year (which for Copart ends in July), the company expects 20% EPS improvement on a 9% increase in sales. To accommodate the increasing demand, Copart opened five new salvage yards last quarter and plans to open another 15 in the coming 12 months. Copart’s big quarter got at least one institutional investor’s attention: Jefferies upped its price target for the stock last Friday.
Like most stocks, CPRT started to get going in mid-February, bouncing off two-month support at 33 and advancing to 41 by the middle of March. Another basing period followed, with 43 acting as new resistance and 40 as new support. Last week’s big earnings beat triggered a breakout, and the stock gapped all the way to 48 to close out the week. Buy on the dips and set a stop near the 50-day moving average—CPRT hasn’t fallen below it since February.
CPRT Weekly Chart
CPRT Daily Chart
Boston Scientific (BSX)
Why the Strength
Boston Scientific continues to feel the combined effects of 1) finally settling the Guidant pacemaker suits (almost $9 billion in write-downs over the years), 2) full integration of last year’s $1.6 billion American Medical Systems acquisition, 3) a great quarterly report on April 27 (including consensus-beating guidance for 2016) and 4) a nice rebound in the broad market over the past couple of weeks. Sales of Boston Scientific’s lineup of medical devices dipped slightly from 2011 through 2013, and managed only 3% growth in 2014 and 1% in 2015. But the latest quarterly results showed 11% revenue growth and 33% growth in earnings, the strongest quarterly increases in EPS since Q4 2012. The 19.2% after-tax profit margin was also the strongest in at least five years. Boston Scientific picked up a downgrade from an analyst on May 23, probably because the rising price of its stock has made it too rich for P/E-based fundamentalists. But the good news and good prospects continue to attract investors.
BSX bottomed from its long Guidant-fueled dive at 5 in 2013 and began recovering in 2013. The stock traded flat from early 2015 through early 2016, but broke out to new multi-year highs in March and blasted off on volume in late May, fueled by the great earnings/guidance report. BSX has continued to inch higher since that report, and is now trading just under 23. We will raise the buy range and loss limit by a half point from the stock’s previous appearance on May 2.
BSX Weekly Chart
BSX Daily Chart
Why the Strength
Abiomed is a small medical company with a revolutionary product that should take the company far. The firm is growing rapidly thanks to its Impella heart pump—it’s the smallest heart pump in the world (some versions smaller than the width of a pencil), is able to be implanted through a small incision in the leg and, depending on the version, will pump 2.5 to 5 liters of blood per minute. The pump has a couple of indications—first, for high-risk patients who are having heart procedures (of up to six hours), Impella effectively “off loads” the pumping function, allowing surgeons to do a more complete surgery with less risk of complications. Second, the pump was recently approved for short-term use (less than four days) of treatment following cardiogenic shock, especially after surgery. In both cases, studies have shown Impella has dramatically reduced bad outcomes, and surgeons and hospitals are taking notice, with more than 1,000 sites now using Impella, yet that’s still just 5% or so of the total available market. Abiomed’s sales growth is rapid (management is forecasting 30% to 35% for the next four quarters), and while earnings have recently taken a dip due to higher taxes, analysts see the bottom line up 33% this year and another 57% next year. If management continues to pull the right levers, we think Abiomed could go very far.
ABMD had a huge run from October 2014 (near 25) to last August (to 111). Such a huge run needed time to digest, and indeed, the stock eventually fell 40% by October, and retested that low as the market was tanking in February. However, the stock has acted nicely since—shares advanced persistently through mid-April, and have spent the past five weeks building a shallow (11% deep) consolidation. If you’re game, you could buy a little here with a tight stop, with the idea of buying a little more on a big-volume push above 104.
ABMD Weekly Chart
ABMD 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 31, 2016|
|1/11/16||Agnico Eagle Mines||AEM||28-29.5||45|
|5/2/16||Banc of California||BANC||19-20||20|
|3/21/16||Comm Sales & Leasing||CSAL||20.5-21.5||25|
|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|
|DROPPED: Did not fall into suggested buy range within two weeks of recommendation|
|None this week|