Disappointing, but not Broken
Current Market Outlook
A week ago, it looked like the market had finally left behind its up-and-down pattern, but earnings season had other ideas—the major indexes took on some water, and many individual stocks were hit hard after so-so quarterly reports. That said, it’s not the end of the world; most indexes are holding their 50-day lines and there are a bunch of stocks either holding their own, or still within multi-month launching pads. We are respecting last week’s selling by knocking our Market Monitor back down a notch, and we do think it’s best to be very selective when doing new buying. The real key will be the next few days and whether the market can hold important support levels.
In the meantime, we’re impressed that we’re still finding solid growth ideas from a variety of fields. Our Top Pick is Equinix (EQIX), a steadily-growing data center operation whose REIT status offers tax advantages and the prospect of big dividends.
| Stock Name | Price | ||
|---|---|---|---|
| Valeant Pharmaceuticals (VRX) | 0.00 | ||
| Oshkosh (OSK) | 95.04 | ||
| NetEase, Inc. (NTES) | 0.00 | ||
| JetBlue Airways Corporation (JBLU) | 0.00 | ||
| Incyte Corporation (INCY) | 76.98 | ||
| Equinix, Inc. (EQIX) | 547.73 | ||
| CyberArk (CYBR) | 111.74 | ||
| Ctrip.com International Ltd. (CTRP) | 34.94 | ||
| Bluebird Bio (BLUE) | 0.00 | ||
| Ambarella (AMBA) | 52.79 |
Valeant Pharmaceuticals (VRX)
Why the Strength
While many biotech stocks have hit the skids lately, medical stocks that are executing well and have upcoming positive catalysts are still finding buyers. Valeant Pharmaceuticals is one of the winners, with the stock quickly snapping back from a brief selloff last week after another excellent quarterly report. The big idea here is that Valeant is something of a roll-up story in the drug field—it has bought a ton of firms over the years, and has a pristine record of buying great assets and then cutting costs and growing the acquired business. Its latest acquisition earlier this year of Salix Pharmaceuticals (an emerging leader in gastroenterology) brought some hit products and a strong development pipeline, and Valeant believes significant accretion is likely from that deal in 2016. Meanwhile, last quarter was another great one for Valeant, with sales and earnings topping expectations (despite some currency headwinds), and management boosting guidance going forward. Analysts now see the company’s bottom line up 34% this year and another 39% next year, and while another huge acquisition is unlikely at this time, a small purchase or two would boost growth expectations further. In this choppy environment, the firm’s top-notch execution, big growth expectations and reasonable valuation make it a compelling investment.
Technical Analysis
VRX looks to be emerging from a brief, relatively tight consolidation following a bigger, deeper base for most of last year. That 2014 pause took the stock down 31% and lasted 11 months, but shares broke out on the upside in January and marched higher 11 weeks in a row. Then VRX went generally sideways for eight weeks before leaping to new highs on good volume following earnings last week. We think dips are buyable, with a stop near 200.
VRX Weekly Chart
VRX Daily Chart
Oshkosh (OSK)
Why the Strength
A solid earnings beat was enough to convince investors to buy Oshkosh in droves. Formerly Oshkosh Truck, Oshkosh reported better-than-expected fiscal second-quarter earnings last week. Though only a slight improvement over last year, Oshkosh’s $0.81 in EPS last quarter topped consensus analyst expectations of $0.76. Revenues actually declined 7% year-over-year, but that was nothing new; the company has made a habit of growing EPS despite declining sales for more than two years now. Oshkosh makes large tactical vehicles for the U.S. military, fire and rescue trucks, and other commercial vehicles. Cutbacks in military spending has had an impact on Oshkosh’s sales, though the company is currently producing a new PR-19 Replacement Aircraft Rescue Fire Fighting vehicle that will be used by the U.S. Marine Corps. It also just signed a $235 million technical support contract with United Arab Emirates, to which Oshkosh sold 750 mine-resistant ambush protected vehicles in 2013. The new contracts are contributing to the company’s expectations for continued profit growth: EPS is expected to rise another 21% in the current quarter, and 12% for full-year 2015.
Technical Analysis
Last week’s earnings beat put an end to months of sideways movement for OSK. Stuck between 46 and 49 since February, the stock finally burst through resistance last week and kept rising all the way to 54. Volume more than tripled, reaching its highest point since January. With the breakout just a few days old following months of no progress, momentum is clearly on OSK’s side. Buy on any sign of weakness, and cut your losses in the 48 to 50 range, which is just above the 50-day line.
OSK Weekly Chart
OSK Daily Chart
NetEase, Inc. (NTES)
Why the Strength
The major Chinese Internet portals—like NetEase, Sina.com and Sohu.com—all provide a wide range of services that include news, weather, sports, email, shopping, messaging, search and entertainment. But each portal also has a specialty that sets it apart from its competitors. So, while NetEase is the largest e-mail provider in China (over 740 million registered users) and has one of the most popular portals, including mobile offerings, its differentiating specialty is games. NetEase is the top developer of in-house-designed games in China, with popular titles like Fantasy Westward Journey II, Ghost II, Tianxia III and Heroes of Tang Dynasty Zero. The company is also the sole Chinese affiliate of Blizzard Entertainment, and has offered World of Warcraft and other Blizzard titles, since September 2009. By keeping content fresh, NetEase can make money from subscriptions and sales of in-game items. After a couple of years with just 15% growth, revenue accelerated to 26% in 2014. And estimates of earnings growth are for 14% in 2015 and 19% in 2016. NetEase, which pays a higher-than-usual dividend for a growth stock (forward yield is 1.3%), will be revealing its Q1 results on Wednesday, May 13, after the market closes. From the recent strength of its stock, investors appear to be expecting good news.
Technical Analysis
NTES has been in an uptrend since late 2012, but several large pullbacks—the latest was a dip from 118 in February to 94 in March—have made it tough to stick with it. The rally that kicked off in the middle of March has lifted NTES from 94 to nearly 130. Despite that rally to new price highs, NTES is trading at a reasonable trailing P/E of just 22. We think NTES is buyable on any pullback of a couple of points, although you should keep any buying small this close to earnings. A stop a bit below the rising 25-day moving average, now at 117, will provide protection.
NTES Weekly Chart
NTES Daily Chart
JetBlue Airways Corporation (JBLU)
Why the Strength
JetBlue is an unusual airline stock. Like others in the industry, it has benefited from the recent dip in fuel prices, but the regional passenger carrier service has something that many of its peers don’t: reliable fundamental strength. JetBlue may have taken a hit when oil was expensive, but it bounced back vigorously when oil began to fall, and now has put measures into place to minimize losses in the event of a sudden oil price increase. JBLU gapped up on strong earnings growth—a 10.4% increase in revenue passengers, a 3.4% increase in average fare, an additional $178 million in revenue—but that isn’t the whole story. Don’t let the nervous excitement of earning season muddle the issue: JBLU has been breaking long-term highs since 2013. It is the perennial favorite and industry leader in the ACSI Customer Satisfaction Index, and has enjoyed several analyst upgrades in 2015. Although the earnings gap is important and reminds us that JBLU still has some room to grow, the airline’s consistency and fundamental strength are what keep us interested.
Technical Analysis
2015 has been kind to JBLU. The stock began the year at a 10-year high, dipped a little bit in early January, and then powered into an uptrend that it has remained in place since. There have been moments of slower growth—it unsuccessfully pushed at its resistance around 20 for the better part of April—but for the most part, JBLU has been in a solid, even-paced uptrend since it broke long-term resistance in late 2013, and the ability to maintain a steady uptrend while confidently hitting new highs is exactly the kind of thing we like to see in Top Ten. It’s a nice buy on weakness toward 21, with a stop around 18.5-19.
JBLU Weekly Chart
JBLU Daily Chart
Incyte Corporation (INCY)
Why the Strength
Incyte is an interesting biotech company that has a big-selling product already on the market ($581 million in revenue during the past year), but also has a few irons in the fire in its clinical program. Most of the story here revolves around Jakafi, which, according to Incyte’s management, is becoming the standard of care for high-risk myelofibrosis, a bone marrow-related blood cancer. But Jakafi likely has another opportunity developing, as it recently won approval in Europe for uncontrolled polycythemia vera (the bone marrow makes too many red blood cells), and the top brass says initial uptake into that market is going according to plan. All told, Jakafi brought in $115 million of product revenue in the first quarter, up 66%, with royalties kicking in another $16 million, up 60%. Incyte has a ton of trials going on for new treatments, including a product aimed at the huge rheumatoid arthritis market that’s doing well in Phase III trials. Revenues have been ramping nicely in recent years thanks to Jakafi, and are expecting to surge to $1 billion in 2016. Profits have been slow to come, mainly because of high R&D costs, but big investors are thinking the bottom line could explode within a couple of years. As always, there’s risk here that clinical trials could disappoint and hit the stock, but right now most things are going Incyte’s way.
Technical Analysis
INCY has had a big overall move during the past couple of years, but it’s been a difficult stock to handle, with lots of sharp ups and downs, including a tedious 43% seven-month correction last year. INCY has been strong in recent months, though, including a nice push higher since mid-Feburary. Now the question is whether the recent dip, which has come on elevated volume (yet has held the 50-day line), is buyable. We think it is, but make sure to use a tight stop in case something goes awry.
INCY Weekly Chart
INCY Daily Chart
Equinix, Inc. (EQIX)
Why the Strength
Data is king in today’s Web-centric world, and Equinix is responsible for storing much of that data. The California-based company is the world’s largest provider of data centers and Internet exchanges, with over 100 data centers in 15 countries. And it’s becoming even larger. The company just announced plans to open up a new large-scale data center in Sydney, Australia, increasing its services in a country that is expecting its data market to grow by $1.7 billion a year until 2020. Equinix also recently opened new data centers in Toronto and London. The rapid expansion goes along with the company’s mushrooming profits; earnings per share increased 65% in the first quarter and cashflow is very healthy, too. For the year, the company is expecting an 81% EPS improvement. Equinix is benefiting from the shifts to cloud computing, mobile technology and social media, all of which necessitate more data—and more data centers. Most large companies don’t want to build their own data centers, and so they pay Equinix a handsome fee to do it for them. As more large companies move to the cloud, demand for new data centers should only increase—and so will Equinix’s global footprint. An added bonus is the firm’s REIT structure, which means generous dividends going forward (current yield is 2.6%).
Technical Analysis
After topping 230 last November, EQIX entered a fairly narrow range between 216 and 235. Last month it finally broke to the upside, and last week’s earnings beat sparked a gap up from 244 to 258. Wait for the next sign of weakness to buy in and monitor your position closely. EQIX has been up and down in recent months, and its REIT status means it will be more subject to interest rate changes than other growth stocks. Since breaking out of its trading range, the 50-day moving average hasn’t been breached, so any dip below that (currently 235) could be a red flag.
EQIX Weekly Chart
EQIX Daily Chart
CyberArk (CYBR)
Why the Strength
CyberArk is an Israel-based network security software company that specializes in detecting and preventing hacking attacks aimed at a company’s most privileged accounts, i.e., those of high-level officers and researchers and the company’s IT infrastructure, after an attacker has made it inside the company’s perimeter security. The computer security sector has been strong, with companies like Palo Alto Networks and FireEye making great gains, but CyberArk’s focus on protecting high-value accounts once the wolf is in the fold is unique. This approach has pushed revenue growth up quickly, from 30% in 2012 to 40% in 2013 and 56% in 2014. CyberArk will release its Q1 results on May 7 (this Thursday) after the market closes, and analysts are predicting earnings of five cents a share on revenue of $26.7 million. In the long run, CyberArk gets a boost every time a new report of a data breach reaches investors, but in the short run, everything depends on quarterly results. So don’t bet the ranch on CyberArk. You can, however, take a small position and be ready to average up if the reaction is bullish.
Technical Analysis
CYBR is still a very young stock (it came public in September 2014), but it’s had an eventful history. After coming public at 16, the stock closed its first day near 30. It gapped up in November and ran to 47, but a gradual two-month slide brought it back to 33 at the beginning of February. A renewed rally to 70 in February gave way to a March correction to 49 as the stock built a bottom for a cup formation. The right side of the cup appeared in April, along with a small handle. CYBR is vulnerable to a disappointing report on Thursday, but if you like the story a small position here could also pay off big. Use a loose stop at 58, just in case.
CYBR Weekly Chart
CYBR Daily Chart
Ctrip.com International Ltd. (CTRP)
Why the Strength
Ctrip remains a leader in the new advance among Chinese stocks, as it’s a pure play in the rapidly-growing travel industry in that country. Ctrip started as a consolidator of hotel rooms and expanded into airline ticket sales, and they’re still the drivers of the business. But the big idea here is that Ctrip is aiming to be the ticketing destination for nearly everything in China; one of the reasons the company lost money last quarter was a huge investment in new initiatives (train and bus ticketing, cruise reservations, car rentals, local attraction ticketing and more) that should continue to pay off in the quarters ahead. In the fourth quarter, accommodation reservation volume grew 53%, while transportation ticketing volume was up a huge 90%, and management believes there’s more where that came from—the company announced in February that it expects first quarter revenue growth to accelerate to 40% to 50%, and investors think big earnings are around the corner once investment spending levels off. Ctrip looks like an emerging blue chip stock in China with huge growth opportunities ahead of it. We like it.
Technical Analysis
CTRP has had a couple of major, prolonged advances in recent years, and the latest may have kicked off in March, when the company’s better-than-expected revenue forecast kicked the stock higher after 17 months of no net progress. There is some old overhead to deal with in the 65 to 70 area, but we think buying a few shares on this dip, and using a loose stop in the upper 50s, should work out over time.
CTRP Weekly Chart
CTRP Daily Chart
Bluebird Bio (BLUE)
Why the Strength
Gene therapy is a revolutionary new way of treating numerous crippling diseases, and Bluebird Bio is at the forefront of the gene therapy movement. The clinical-stage biotech is developing a gene therapy drug to treat sickle cell anemia that caught the attention of Wall Street—including Jim Cramer—in December when new data revealed that it had essentially cured several patients of the disease. The drug enabled four patients to start producing enough oxygen-rich hemoglobins on their own to eliminate the need for blood transfusions; two of the patients suddenly had hemoglobin levels of a healthy adult after just one infusion of Bluebird’s gene therapy drug. Imagine! Two months later, the drug was granted Breakthrough Therapy status by the FDA, given only to candidates believed to have the potential to treat serious or life-threatening diseases. With more data likely to be released later this year, investor momentum for Bluebird has been building steadily since the December data was released. The fervor for gene-therapy companies—has helped keep Bluebird in the public consciousness.
Technical Analysis
BLUE went public in June 2013, but was barely on investors’ radar until the sickle-cell data was released in December. Overnight, the stock more than doubled, and by mid-January it had leapt from 39 to 105. The December volume spike has yet to be replicated, but the stock has continued to march higher, touching 140 in late April before pulling back slightly. The 50-day moving average has routinely acted as support, and right now it’s in the 120 range. You can buy a small amount around here, with a stop around the 50-day line. A dip below the moving average means investor enthusiasm for BLUE is wavering, and might not return until new data is released.
BLUE Weekly Chart
BLUE Daily Chart
Ambarella (AMBA)
Why the Strength
Ambarella, a Santa Clara-based designer of system-on-a-chip processors, is a good illustration of the benefits of diversification. Ambarella has been grabbing investors’ attention because its low-power, high-definition (HD) and ultra HD chips provide the technological basis for the enormously popular GoPro lineup of wearable action cameras. But Ambarella has also been working on new designs for automotive video solutions, security and surveillance cameras and broadcast infrastructure cameras, and the potential for revenues from non-GoPro licensing agreements has allowed Ambarella’s stock to maintain its momentum while GoPro has suffered a five-month correction. Ambarella’s revenue growth was just 3% in fiscal 2012 (the company’s fiscal year ends in January), but ramped up to 24% in 2013, 30% in 2014 and 38% in 2015. The company’s lack of a factory keeps costs down, enabling after-tax profit margins approaching 35% in the latest quarter. With a solid GoPro base, and success in designing for other growing technologies, Ambarella has the best of both worlds.
Technical Analysis
AMBA has been in an uptrend since its IPO at 6 in October 2012. After a mild correction in January and February, AMBA gapped up from 63 to 67 on March 4 after the company’s quarterly results pleased investors. Since that report, AMBA motored as high as 77, and has traded sideways for a few weeks as investors wait for the next catalyst. (GoPro’s excellent quarterly results on April 29 apparently didn’t qualify.) AMBA looks like a good buy during this consolidation; you should be able to start a position at 74 or below. With earnings not due until the first week of June, AMBA should be fairly calm, so a loose stop at 68 should be sufficient.
AMBA Weekly Chart
AMBA 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.
