Most of the Evidence Remains Bullish
Current Market Outlook
The broad market suffered some wobbles last week, mostly due to energy stocks taking some outsized hits. And we still want to see most of the major indexes lift out of their post-March 1 trading ranges as the Nasdaq is the only index to have achieved that. Even so, while those are factors to watch, the majority of evidence remains bullish—the long-term trend is up, many Top Ten stocks are performing well and the indexes are all at least a bit above their 50-day moving averages. All in all, then, we’re bullish, though it’s important to keep your feet on the ground by looking for solid entry points and taking some partial profits as your stocks advance.
This week’s list has many great stocks to choose from, most of which have recently reacted well to earnings. For our Top Pick, we’re going with a stock we’ve watched on and off for months that finally appears to be getting going—Zillow (Z) has come alive after a nine-month rest, and the story is as big as ever.
| Stock Name | Price | ||
|---|---|---|---|
| CoStar Group (CSGP) | 589.55 | ||
| MasTec, Inc. (MTZ) | 66.65 | ||
| Paycom Software (PAYC) | 0.00 | ||
| Sanderson Farms (SAFM) | 149.54 | ||
| SiteOne Landscape Supply (SITE) | 98.49 | ||
| Square, Inc. (SQ) | 91.04 | ||
| Summit Materials (SUM) | 0.00 | ||
| Universal Display (OLED) | 187.54 | ||
| WellCare Health Plans, Inc. (WCG) | 271.83 | ||
| Zillow (Z) | 76.64 |
CoStar Group (CSGP)
Why the Strength
CoStar Group sells information about commercial real estate to brokers, property developers, bankers and government agencies, including inventory listings and digital images. With 1.5 million verified listings and over 1,600 researchers, CoStar makes over 10,000 calls daily to commercial real estate specialists. The company is as central to commercial real estate as the Multiple Listing Service is to the residential sector. Anyone looking to buy, sell or rent commercial real estate in the U.S. will almost certainly use some of CoStar’s services. The company’s Q1 earnings report on April 26 showed earnings of $1.05 per share, well ahead of the 94 cents analysts had expected, while revenue for the quarter came in at $227 million, where the consensus was for $224 million. There is one other aspect of the CoStar story that’s fascinating. Commercial real estate is heating up along with economy. But while CoStar has been routinely profitable at least since 2002, and enjoyed a big rally in its stock price in 2012 and 2013, its stock hit a hard ceiling at around 220 in March 2014 and traded under firm resistance in the low 220s for more than three years until two weeks ago. This is a good story and it looks like institutional support is beginning to build again after years of stagnation.
Technical Analysis
CSGP soared from 24 in March 2009 to 218 in March 2014, when it ran into an iron ceiling. The stock reached 223 in July 2015, 225 in July and October 2016, but dipped to 134 in October 2014 and 147 in February 2016. Until the gap up on earnings to 237 on April 27, the stock’s net progress since March 2014 was zero. With a base like that, the stock has a good chance of enjoying some buying power. CSGP has roared to 253 since that gap up, so you should look for a pullback of at least five or 10 points to get started. A stop at 225 looks reasonable.
CSGP Weekly Chart
CSGP Daily Chart
MasTec, Inc. (MTZ)
Why the Strength
MasTec is an infrastructure stock, but it’s not about roads and bridges. It’s an electrical and engineering contractor that provides building, installation and maintenance services to communications (45% of revenue), oil and gas (39% of revenue) power generation (8% of revenue) and miscellaneous other markets. Its biggest projects include oil and gas pipelines, power lines, and water and sewer infrastructure. The stock has been doing well since the beginning of 2016 as quarterly revenues have grown in the 15% to 40% range. That’s rapid growth for an infrastructure stock, and MasTec kept the growth streak alive when it reported Q1 results last Thursday. Revenue was up 19% and EPS of $0.59 beat estimates by $0.08. The strongest segment was communications, which enjoyed 9% growth and drove the better-than-expected result. Oil and gas was up 56% from a depressed base as well, but that wasn’t a big surprise (though profit margins in that segment did surprise in a positive way). Management bumped 2017 guidance above consensus given that backlog is up 5% already this year. It now sees $5.7 billion in revenue (up 11%) and EPS of $2.45 ($0.10 above consensus) in 2017, and analysts have responded by bumping up their estimates this year and next. AT&T is a major customer, and on the conference call, management flagged the ramp up in 5G investments as a major, long-term growth catalyst. It sees 5G starting to contribute to revenue in about a year’s time.
Technical Analysis
MTZ had a tough couple of years during the 2015-2016 market downturn, but came back with fury from a 2016 low of 12.5 as revenue growth resumed and earnings quickly followed. By mid-2016, shares had doubled, and they jumped further in the weeks after the U.S. election. Like most infrastructure-related stocks, that post-election excitement led to a long basing period—MTZ gyrated between 34 and 42 from December through early April, before getting going, with last week’s earnings-induced strength resulting in new relative performance highs. If you’re game, you can buy some here or on dips, with a stop in the low 40s.
MTZ Weekly Chart
MTZ Daily Chart
Paycom Software (PAYC)
Why the Strength
Paycom is in the searing hot cloud software industry, making hay by offering a suite of human capital management (HCM) solutions. HCM software helps enterprises manage human resources, payroll, benefits and talent, while also helping employees stay organized. HCM is a big market and has been getting bigger as the labor force grows. Cloud solutions are where it’s at, as evidenced by Paycom’s annual revenue growth of over 40% in each the past four years. The stock accelerated higher last week thanks to first quarter results that crushed expectations, which is causing analysts to raise price targets and earnings estimates. While top line growth in 2017 most likely won’t hit 40% as in years past (the revenue base is much larger now), last week’s report of 32.6% revenue growth was 4.1% faster than expected. Earnings per share of $0.47 beat by $0.06 as well, while EBITDA (up 42%) also topped expectations. Management sees the company’s sales teams becoming even more productive selling the HCM suite, and the addition of new offices should supplement growth in mature markets. Friday’s employment report revealed another round of healthy job growth and a low unemployment rate, and we see Paycom as one way to play strength in the trend.
Technical Analysis
PAYC gave investors a minor heart attack in the beginning of November when the stock dropped from 53 to 39 after what appeared to be solid Q3 result. It began recovering quickly and reached 51 a week before Q4 results came out in early February. Shaky hands drove the stock down to 44 before the report, but a good result launched it back to 52. From there, it was off to the races—with the exception of a small wobble in late March, the stock has been trending higher since the February blastoff, and after a brief pause above 60, blasted ahead again following earnings last week. The path of least resistance is up, though try to grab shares on a dip of a point or two.
PAYC Weekly Chart
PAYC Daily Chart
Sanderson Farms (SAFM)
Why the Strength
Sanderson Farms is all about the chicken. Mississippi-based Sanderson raises, processes and sells raw chicken in bulk, whole and cut up in parts (with and without bones) and chilled, iced or frozen. The company, the third largest poultry producer in the U.S., sells to retailers, wholesalers, restaurants and exporters including plenty that’s sold under its own name. Most distribution heads for the southeastern, southwestern, northeastern and western U.S. Sanderson went through a flat patch in growth starting with a 3% gain in 2014—down from 12% in 2013—that slowed to 1% in 2015 and zero percent in 2016. It’s in Top Ten Trader today because revenue growth revived to 16% in Q4 2016 and 14% in 2017 and investors got interested again. The immediate catalyst for the renewed interest is likely the boost to earnings caused by a decline in feed costs from 43 cents to 25 cents per processed pound. Demand for chicken remains steady and Sanderson is an efficient producer. The company’s token dividend (0.8% annual yield) and low valuation (13 times earnings) adds to the attraction.
Technical Analysis
SAFM topped 100 in July 2014, then slipped to 64 in August 2015. Despite a nice recovery, the stock couldn’t get past the high 90s through 2016. The 100 mark was breached in March 2017, when SAFM soared to 102 on good volume, paused for a couple of weeks at 103, then resumed its rally. SAFM is now trading at 114, having hit resistance at 115 in late April. SAFM looks buyable right here, with a stop at around 103.
SAFM Weekly Chart
SAFM Daily Chart
SiteOne Landscape Supply (SITE)
Why the Strength
We recommended SiteOne in late-March but the stock never pulled back into our buy range; we’re back at it again today, right ahead of the firm’s quarterly report, which is due out Wednesday (May 10) morning. To review, SiteOne is one of the best roll-up growth stories we can remember seeing—it’s the largest and only national distributor of landscape supplies (both residential and commercial) with four times as much market share as its next largest competitor. The industry is incredibly fragmented (SiteOne only has 10% of the total market), and SiteOne is the only national acquirer, so there should be years worth of growth simply from rolling up leading state and regional players, along with some modest organic growth. The company added about $230 million in annual revenue via four acquisitions in 2015, added another $150 million in revenues from six buyouts last year, and has already tacked on $85 million in annualized revenue from four purchases this year. Fourth-quarter results topped expectations, and management is looking for EBITDA growth of around 20% while earnings soar 55%. The firm recently had a big share offering (10 million shares out of 39.5 million outstanding!), but it was all from closely-held shares (no dilutive impact). Impressively, the stock has digested that offering nicely, which is a sign big investors swallowed up some shares. It’s a great story.
Technical Analysis
SITE rallied 12 weeks in a row through early April, including a surge to new price and relative performance (RP) peaks on earnings in mid-March. But since touching 50 at the start of April, SITE has etched a tight (8% deep) four-week consolidation, holding up despite the large share offering. With earnings due next week, you can either nibble here or just wait for earnings and look to buy on a move to new highs.
SITE Weekly Chart
SITE Daily Chart
Square, Inc. (SQ)
Why the Strength
Square is strong today because it’s riding a powerful market theme, where companies help small (including very small) and mid-sized businesses do business more efficiently. Payments still make up the majority of Square’s business, with its various solutions (including invoices, gift cards and point-of-sale systems, as well as its card readers) driving transaction-based revenue up 34% in the first quarter, thanks to a 33% lift in gross payment volume (to a huge $13.6 billion). Most of that still comes from small merchants (57% of volume comes from merchants doing less than $125,000 in annual business), but that’s down from 61% a year ago as some larger customers sign up. Just as exciting are the firm’s subscription and services-based businesses (marketing, cash advances, instant deposit, payroll, etc.), which doubled in the quarter and now make up nearly 15% of all revenues. Better yet, Square is doing all of this profitably, with earnings and EBITDA both topping expectations in the first quarter. From here, it’s a matter of keeping customers happy, grabbing more customers and expanding into new markets (Square just entered the U.K. with a full suite of products). Management now expects adjusted revenue to rise 31% this year, while EBITDA should mushroom 150%. The valuation (more than $7 billion market cap!) isn’t for the faint of heart, but there’s no question that Square is likely to grow rapidly for many years.
Technical Analysis
SQ has been stair-stepping its way higher since bottoming out last July. The latest pause started in early March (when the market topped out) and lasted eight weeks before the stock pushed above resistance near 18. The positive quarterly report pushed shares toward 20 on solid (three times average) volume. SQ doesn’t look extended to us, so we’re OK taking a position around here with a stop near the 50-day line.
SQ Weekly Chart
SQ Daily Chart
Summit Materials (SUM)
Why the Strength
While there’s an obsession about any piece of news relating to a possible infrastructure bill in Washington, D.C. this year, the fact is that construction activity is already strong around the country, and there’s no more basic way to play it than with concrete and aggregates. That’s the business Summit Materials is in, and demand appears to be picking up. It just reported that Q1 revenue was up 25%, though the bottom line was solidly in the red. However, red ink in the first quarter isn’t unusual for Summit, and we note that the company has been able (and should continue) to deliver positive earnings on an annual basis. Sales in all segments—aggregates, cement and products—were up. One of the themes in the industry is consolidation, and Summit is right in the mix; it’s acquired six companies year-to-date, says it has 20 more under review, and four more that are in late-stage due diligence. Summit has a good deal of exposure to public infrastructure (roughly 37% of revenue) so investors are right to think the stock could benefit from a pickup in both state and federal spending. Management has already highlighted infrastructure spending in Texas as a large opportunity, and it called out 65% growth in asphalt sales volume from public projects in the Texas and Kansas areas. The bottom line is that there appears to be support for infrastructure spending, and Summit should capture its fair share of projects.
Technical Analysis
SUM was trading sideways in the 17–22 range in late 2016 then broke out in early November during the post-election euphoria for many infrastructure stocks. The rally hit a wall pretty quickly, though, and shares were range-bound for the next six months, hovering between 23 and 25, with one pop to 26.5 (late January) and two dips near 22.5 (February and March). But the buyers have been active since mid-April, pushing the stock back to 26 two weeks ago, and then last week’s quarterly report lifted SUM to new highs. You can buy here or on dips, with a stop in the 25 area.
SUM Weekly Chart
SUM Daily Chart
Universal Display (OLED)
Why the Strength
Universal Display is the most direct way to play the expected growth in the use of organic light emitting diodes (OLEDs) in everything from smartphones (Samsung Galaxy 8 uses them; most believe the new iPhone will as well) to TVs (many manufacturers are investing billions of dollars in OLED display capacity) to wearables, computers, lighting and more. Why the demand? Because OLEDs offer more vivid colors and a better contrast ratio, lower costs, and are thinner and flexible. In all, total panel demand should grow from around four million square meters last year to more than 15 million in 2021. Universal Display has spent years of R&D waiting for OLEDs to hit the mainstream, and that is now starting to pay off—sales and earnings crushed expectations thanks to strong materials sales (though it also has a strong licensing business thanks to a deal with Samsung and its 4,200 issued and pending patents), and management upped guidance for the year, as more and more signs point toward a significant ramp in OLED usage during the next few years. Encouragingly, despite a long history of so-so performance, Universal is debt free and is sitting on about $7 per share in cash. There’s still risk that a cutback in orders from a big customer could tank the stock, but after last week’s quarterly report, it looks like just the opposite is happening. Analysts see earnings rising 63% this year and another 50% in 2018.
Technical Analysis
OLED broke out powerfully after reporting a great fourth quarter in late-February. But that came just as the market began its two-month pause, which kept the stock in check; shares bobbed between 80 and 90 during that time. But OLED began to perk up two weeks go, nosed to new highs last week, and then exploded to new highs on six times average volume following earnings last Friday. It looks like a buyable gap, so you can buy a small position here and use a loose stop in the mid-90s.
OLED Weekly Chart
OLED Daily Chart
WellCare Health Plans, Inc. (WCG)
Why the Strength
WellCare Health specializes in providing government-sponsored managed care services, mostly through Medicaid, Medicare Advantage and Medicare Prescription Drug Plans. The company has over four million members nationwide. Much of the company’s growth comes from a selective buyout process: Late last year, the company acquired an Arizona managed care operation from Care1st Health Plan, and just announced the completion of the acquisition of Universal American Corp, which will add about 119,000 Medicare Advantage members to its rolls. The Universal American takeover is expected to add 60 to 70 cents to earnings in the first year. While WellCare isn’t likely to repeat its big revenue growth numbers from 2013 and 2014, its efficiency has produced a string of very healthy quarterly earnings numbers dating back to Q2 2015. The Q1 results that were announced on May 3 brought a surge of buying interest for WellCare stock that more than doubled its trading volume. WCG is generally a fairly low-volume trader, averaging just 375,000 shares traded per day, and May 3 volume was close to 900,000 shares. Some analysts believe that any meaningful repeal or modification of Obamacare would be a positive for WellCare, but the chart shows a nice uptick in interest right now.
Technical Analysis
WCG caught a strong updraft in February 2016, ripping from 69 to 152 in February 2017. The stock corrected in a controlled manner for a couple of months, and got back to booking new all-time highs in late April. The stock began May in rally mode and got a high-volume boost on May 3, when it gapped up from 159 to 166. Now trading just below 170, WCG is certainly ahead of its 25-day moving average, which is back at 152. If you like the story, look for a pullback of at least a couple of points to get started and use a stop around 153.
WCG Weekly Chart
WCG Daily Chart
Zillow (Z)
Why the Strength
Zillow has always had a great story—it’s the hands-down leader in online real estate thanks to its various brands (including Zillow, Trulia, StreetEasy, Naked Apartments and more), which attracted 180 million unique users in March and had total visits of 1.5 billion in the first quarter, all to view more than 110 million homes in the firm’s database. (The term “Zillow” is searched for more often than “real estate” on Google.) And as Zillow has grown, it’s become the destination for real estate agents and property managers to advertise (for either purchases or rentals), as well as a mortgage marketplace. Premier agent advertising and lead generation tools make up about 70% of revenues, while mortgages make up 8% and other advertising services make up the rest. The opportunity is huge, with more than $15 billion spent on advertising among agents, property managers, home-related services and mortgage outfits. And Zillow is strong today because it’s making steady progress at grabbing market share—in the first quarter, revenues rose 32%, led by larger agent advertisers (the number of agents spending at least $5,000 per month grew 98% from a year ago; sales to agents that have been customers for more than a year grew 54%), while EBITDA soared to $55 million, above estimates. Management is now looking for sales and EBITDA to rise 25% and 50%, respectively, with many years of growth beyond that. We like it.
Technical Analysis
Z had a big run from its low early last year through July, including a stretch of 13 weeks up in a row, which usually leads to higher prices over time. But Z took its time to consolidate that move—the stock spent nine months base-building between 31 and 40, including a shakeout below its 40-week line in late March. But since then, Z has come alive, surging back to 40 and then leaping to new highs last week after earnings. Try to buy on dips.
Z Weekly Chart
Z 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.
