Just What You Want to See
Current Market Outlook
After a vacuum of selling pressures helped the S&P 500 and Nasdaq soar to new highs, last week’s generally tight, calm action was just what you want to see—despite the run, investors aren’t booking profits and the bears aren’t coming out of the woodwork. That’s not to say there won’t be pullbacks (possibly brief, sharp dips) or that every investor is rowing in the same direction—some groups are lagging and many major indexes are still shy of their September peaks. Thus, you shouldn’t buy with both fists, but there’s clearly enough evidence to be bullish and look to latch onto new leading stocks as they emerge.
This week’s list is chock-full of stocks with big stories and powerful charts. There are many we like, but for our Top Pick we’ll go with Medivation (MDVN), a well-traded (but little-known) biotech firm that has a blockbuster treatment for prostate cancer on its hands.
| Stock Name | Price | ||
|---|---|---|---|
| Wabtec (WAB) | 0.00 | ||
| Ulta Beauty (ULTA) | 331.95 | ||
| Textron (TXT) | 0.00 | ||
| Spirit Airlines (SAVE) | 57.03 | ||
| Receptos (RCPT) | 0.00 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| Medivation (MDVN) | 0.00 | ||
| Marriott International, Inc. (MAR) | 0.00 | ||
| Alibaba (BABA) | 254.81 | ||
| Allison Transmission (ALSN) | 51.79 |
Wabtec (WAB)
Why the Strength
Wabtec manufactures braking equipment and parts for locomotives, freight cars and passenger railcars. The company specializes in rail safety, with its main products consisting of air brake systems, draft gears, hand brakes, slack adjusters, heat exchanges, railroad electronics, and monitoring and control equipment. Some of Wabtec’s major customers include Trinity Industries, GE Transportation, Union Pacific and CSX Transportation. Wabtec has been a solid performer for some time, but the company’s most recent bout of strength comes from its stellar third-quarter report, in which Wabtec topped the consensus estimates and boosted fourth-quarter guidance. The company has benefited significantly from increased rail traffic, which is up 4% in 2014, and increased safety regulations within the U.S. In the conference call, CEO Ray Betler stated that the company expects to see continued global growth, with a UNIFE study projecting the worldwide adjustable rail market to exceed $100 billion with annual growth of more than 3%. Wabtec says that its customers are increasingly concerned about improving safety, productivity and efficiency—and the company expects to continue to play an important role in those efforts.
Technical Analysis
Since late 2011, WAB has enjoyed a steady uptrend along support at the 10-week and 25-week moving averages. These trendlines have only given way once, during the recent market correction, when WAB pulled back to key support at the 70 level and quickly rebounded, pushing the stock through tough resistance at 85 like it wasn’t even there. Like many stocks that have moved straight up during the past month, WAB could dip a couple of points, but the thrust higher bodes well for the weeks ahead.
WAB Weekly Chart
WAB Daily Chart
Ulta Beauty (ULTA)
Why the Strength
Ulta Salon, the largest beauty retailer in the country, is a classic cookie-cutter story that is strong today because of a combination of a positive quarterly report in September, and more importantly, a very bullish long-term plan from management. First, the quarterly results: sales (up 22%) and earnings (up 34%) both topped estimates in a big way, and investors were highly pleased with same-store sales growth of 9.6%, e-commerce comparable sales growth of 55% and 106 new store openings during the past year. All that is great, but investors were even more excited about the outlook for the next five years; Ulta is aiming very big as it wants to take lots of share in the highly-fragmented beauty industry. Management is going to open about 100 stores per year, raising its store count from 775 at the end of this year to north of 1,200 by 2019. And, after some initial investment costs the next two years, Ulta sees earnings rising in the low-20% range annually. Bottom line, the core business is strong as consumers love the firm’s huge product selection and, increasingly, salon services at hundreds of its locations. And now big investors are parking money in the stock, confident that the company has years of steady growth to come. It’s a good story.
Technical Analysis
ULTA was a huge winner from 2009 through 2012, but then it ran out of steam—yes, shares did notch new price highs late last year, but the relative performance (RP) line remained in a sideways phase, and the stock itself got clonked last December. Still, ULTA held up after that drop, tightened up in the fall and then soared in September after earnigns topped estimates and the long-term plan was unveiled; the stock gapped up 18% on 10 times average volume (!), and has acted well since, even during the market’s October decline. We think ULTA is buyable around here, with a stop in the 110 area.
ULTA Weekly Chart
ULTA Daily Chart
Textron (TXT)
Why the Strength
Textron is a diversified defense contractor that manufactures both fixed wing and rotor aircraft, fuel systems, armored vehicles and military aircraft engines, with a couple of non-defense lines like gold carts and power tools. The company was founded in 1923 as a textile manufacturer, but began diversifying outside of textiles in the 1950s. After the purchase of Bell Aerospace in 1960, the company continued to expand and diversify via acquisitions, moving into both civilian and military technologies as a way to grow during strong economic times and weather weaker ones. Its current roster of companies includes Bell, Cessna, Beechcraft, Hawker, Jacobsen, Kautex, Lycoming, E-Z-GO, Greenlee and Textron Systems. The company hasn’t always been a growth dynamo; revenue declined by one percent in 2013, but its last two earnings reports have featured earnings growth of 60% and 71% in Q2 and Q3 respectively, with revenue growth on 23% and 18% in the same quarters. Thanks to some prudent aquisitions (Beechcraft was bought in March) and greater cost control, Textron is a nicely diversified company that’s well positioned to benefit from a stronger global economy; earnings are forecast to rise 2% next year.
Technical Analysis
TXT made a strong move out of a rising base in October 2013, ultimately moving from 26 to 41 in the middle of 2014. The stock stepped down in June and July, then went into an accelerating tailspin in late August that worsened during the market’s September/October free-fall. But TXT recovered very strongly, gapping up on monster volume on October 17 and continuing to soar, reaching new all-time highs last week. We would expect the stock to consolidate above 41 for a while. It looks buyable on weakness of a point, with a stop around 37.5-38.5.
TXT Weekly Chart
TXT Daily Chart
Spirit Airlines (SAVE)
Why the Strength
Airlines have been doing very well, with the huge drop in fuel prices leading investors to anticipate another strong year for the group in 2015. Spirit Airlines should benefit from that, but there’s far more to the firm than that—while many big airlines are cutting capacity, Spirit is successfully expanding rapidly thanks to enjoying the lowest-cost structure in the industry, as well as its emphasis on non-ticket revenue (which makes up a whopping 40% of total revenue). In the third quarter, total available seat miles flown rose 14.7%, and for 2014 as a whole, should rise nearly 18%, and despite that expansion, the firm sports industry-best profit margins that are still expanding. We also like the fact that the company is managed conservatively; at the end of September, Spirit had $588 million in cash (about 10% of the total market cap) and no long-term debt, so any industry hiccup shouldn’t affect its ability to continue boosting its fleet. There’s nothing revolutionary here, but everything is playing into Spirit’s hands right now—big competitors cutting capacity, fuel prices coming down and more consumers than ever hunting for the cheapest flight they can find. We think it can help lead the sector’s new uptrend.
Technical Analysis
SAVE has been in a long-term uptrend since March 2013, so the advance isn’t in the first inning. But the huge September/October decline likely shook out most of the weak hands—SAVE plunged below its 40-week line for about a week, but then found monstrous-volume support (its largest-ever weekly volume total as the stock closed in the upper half of its weekly range) and has spurted to new price highs since. A pullback is likely in the near-term (possibly if gas prices bounce?), so try to buy on dips, but given the big volume on the advance, we’re not expecting a major retreat.
SAVE Weekly Chart
SAVE Daily Chart
Receptos (RCPT)
Why the Strength
Receptos is a biopharma company that has a potential blockbuster drug on its hands. RPC1063 is an oral treatment that’s being tested for relapsing multiple sclerosis (RMS) and ulcerative colitis (UC). Receptos is also working on several other drugs in its pipeline, including those to treat diabetes and eosinophilic esophagitis. But RPC1063 is the company’s potential blockbuster with strong Phase II results for RMS leading the American and European Committees for Treatment and Research in MS to call the drug potentially game changing. More recently, RPC1063 was the center of another Receptos news flash after the company announced strong mid-stage trial results in the treatment of UC! At the end of eight weeks, 58% of the patients on RPC1063 responded positively to the drug, while 16% were in clinical remission. Expectations for the UC treatment were extremely low within the analyst community, and the results sparked a buying panic. The estimated market potential for a UC indication for RPC1063 ranges from $1.5 billion to $2.4 billion, and a jaw-dropping $6.2 billion if you include RMS approval. With its oral administration, and biologic efficacy, analysts believe that RPC1063 will be the preferred therapy for UC patients.
Technical Analysis
RCPT has come a long way since going public in May 2013. Shares bounced around in the teens for most of 2013, before breaking out above 20 late in the year. 2014 saw the stock peak just shy of 60 early in April, before pulling back to 25 by mid-year. Early trial results for RMS provided a boost for RCPT in mid-October, lifting shares north of 60 for the first time. Then, as RCPT was digesting those gains and building a base near 60, the UC trial data sent RCPT more than 50% higher. Shares are now perched north of the century mark. RCPT is certainly a hot stock at this point, and chasing the rally can be a bit risky. Shares are certainly worth adding to your watch list, but, if you’re game, you can buy a small amount on dips, with a target near 105.
RCPT Weekly Chart
RCPT Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
MercadoLibre (the name means “free market” in Spanish) is traditionally called the eBay of Latin America. The Argentina-based online marketplace gets the largest share of its revenue from operations in Brazil, with Argentina and Mexico contributing all but 5% of the rest. The company has been enjoying strong revenue and earnings growth as Brazil’s economy has improved recently. And the re-election of Dilma Rousseff as that country’s president has eliminated one source of worry. The recent resurgence of interest in MercadoLibre, a company whose sensitivity to Latin America’s economic uncertainties is a matter of record, stems from two consecutive quarterly earnings beats, one on August 8 and the most recent on October 30. The Q3 report featured EPS of 76 cents per share, beating estimates by 11 cents. Revenue growth came in at $148 million, up 20% and well over analysts’ projections of $131 million. MercadoLibre, which operates its own online payment system, undoubtedly gets guidance and technical assistance from eBay, which owns an 18.4% stake in its Latin American competitor. MercadoLibre will continue to thrive along with a resurgent Latin America. A dividend with a 0.5% annual yield is a nice bonus.
Technical Analysis
MELI is a volatile issue, as it moves around nearly twice as much as the market. The stock hit 146 in October 2013, capping a hectic rise from 48 in October 2011. But a strong correction pulled the stock back to 80 in May 2013. A good earnings report in August powered a run from 93 to 117, where the stock traded sideways until Q3 results two weeks ago kicked off a gap up from 116 to over 135 on huge volume. MELI has held steady above 135 since that blastoff, and looks buyable right there. Use a stop at 124.
MELI Weekly Chart
MELI Daily Chart
Medivation (MDVN)
Why the Strength
Back in late-September we noted how Medivation’s new anti-prostate cancer drug Xtandi was about to take the company’s revenue to the next level. According to Medivation’s third-quarter report, Xtandi, which is currently approved to treat both pre- and post-chemotherapy patients, is already on track for blockbuster status. The pre-chemo designation was only handed out by the FDA on September 10, yet Xtandi was able to rake in $181 million in the U.S. in just half a quarter. With Xtandi leading the way, Medivation posted a blow-out third quarter, reporting earnings of 96 cents per share compared to expectations for 13 cents. Revenue rocketed 234% to $201 million, topping the consensus estimate by nearly $19 million. Looking ahead, Medivation said it expects Xtandi sales to arrive between $600 and $640 million in only its second full year on the market. Via its partnership with Astellas Pharma, Medivation expects net revenue of $300-$320 million for Xtandi, in addition to upfront and milestone payments of $279 million. What’s more, Medivation expects E.U. approval for pre-chemo by early 2015, though some analysts believe that approval could happen as soon as December, triggering a $45 million milestone payment. Lastly, Medivation is expected to release trial results comparing Xtandi to AstraZeneca’s Casodex early next year. Positive data here could solidify Xtandi as the market standard in anti-prostate cancer drugs.
Technical Analysis
The market correction created some nasty headwinds for MDVN, but the stock has emerged stronger than before. In September, MDVN was flirting with a breakout above 100, but heavy market selling forced the stock to test support in the 85 region. MDVN then rebounded decisively from oversold levels, with shares eclipsing the century mark before the end of October. Shares proceeded to consolidate their gains before jumping higher in the wake of blowout third-quarter earnings. You can start a position on today’s dip.
MDVN Weekly Chart
MDVN Daily Chart
Marriott International, Inc. (MAR)
Why the Strength
Marriott International is a global lodging company that operates more than 4,100 properties in 79 countries and territories. The company’s 18 brands includes Marriott Hotels, The Ritz-Carlton, Rennaisance, Gaylord Hotels, Courtyard, Fairfield Inn & Suites and Residence Inn. Most of the company’s revenue comes from North American operations, with just 12% of revenue from international lodging. Marriott, which made one other appearance in Top Ten back in 2012, is thriving as steady economic growth in the U.S. has encouraged more business and leisure travel. The company’s Q3 earnings report on October 29 featured earnings of 64 cents per share, three cents better than analysts’ estimates. Revenue came in at $3.46 billion, $60 million better than estimates. Investors approved of these results, as well as the company’s boost to full-year guidance. The company announced last Thursday that it would pay a 20-cents-per-share dividend to holders of record as of November 20. The dividend will be paid on December 26. During the company’s earnings call, Marriott’s CEO said that he believed the company’s strong growth was sustainable.
Technical Analysis
MAR endured a big skid in 2007 and 2008, falling from 48 to 11. But the market bottom was also a bottom for the stock, and it recovered to 40 in early 2011. After another strong correction, MAR spend much of 2012 putting in a rising base in the low to mid-40s, the kickoff coming in late 2013. MAR has been in a consistent uptrend since then, with a dip during the market’s September/October correction the only significant pullback. MAR began its recovery in mid-October and surged to new highs following its good earnings news. MAR is buyable around 75, with a stop at its 50-day moving average, now at 70.
MAR Weekly Chart
MAR Daily Chart
Alibaba (BABA)
Why the Strength
Alibaba is the world’s largest e-commerce company, and is based in China, which is the world’s fastest-growing e-commerce market. The company operates many separate divisions, each with its own website, and is constantly expanding into new lines of business. Taobao Marketplace is the company’s biggest site, a place for seven million merchants to sell everything in the world. Listing on Taobao is free, but sellers who want to stand out can buy ads to improve their visibility. Tmall is Alibaba’s third-party platform for top quality branded merchandise. Alibaba.com is a global wholesale platform that lets small manufacturers sell to foreign customers. Ali Express is a global retail marketplace aimed at shoppers outside China, offering direct sales from Chinese wholesalers and manufacturers. Alibaba also has Alipay, an online payment system similar to PayPal. Like Amazon, Alibaba has grown revenue quickly, with fiscal 2014 growth at 56%. Unlike Amazon, Alibaba has been consistently profitable, without a loss in years. EPS is forecast to grow from $1.83 in fiscal 2014 to an estimated $2.22 in 2015 and $3.02 in 2016. With a huge war chest from its stunning IPO, the company has the capital to expand in as many directions as it wants. In its first quarterly report since coming public, Alibaba revealed 53% revenue growth, with plenty of growth from mobile devices. At this point, Alibaba hasn’t put its foot wrong with investors and with Singles Day coming up tomorrow (the largest shopping day of the year in China), the future looks rosy.
Technical Analysis
BABA is still a young stock, but it put in a nice post-IPO base around 90, then scooted to 100 in October. After a four-day pause at 100, BABA broke out to the upside as November began and hasn’t stopped since. BABA is now trading at around 117, and doesn’t look tired. You can wait for the stock’s first correction, but demand seems consistent for this high-profile issue. The best strategy may be to take a small position and average up as you get a profit cushion, with a stop at 105.
BABA Weekly Chart
BABA Daily Chart
Allison Transmission (ALSN)
Why the Strength
We’ve seen a variety of auto-related stocks show extraordinary action since the market low in mid-October, and Allison Transmission—the largest maker of fully-automatic transmissions for commercial truckers, as well as hybrid systems for buses and other products—is one of them. The stock is strong today for three main reasons. First, of course, is the bullish outlook for the entire auto industry; with the economy picking up steam, demand is accelerating. Second is a longer-term factor: With demand up, trucking firms are finding it difficult to find drivers experienced with complicated standard transmissions in trucks. And third is that Allison has spent a bunch of money during the past couple of years to expand capacity; with its investments in the past, the firm’s increase in sales is creating a torrent of free cash flow, which management is starting to return to shareholders. The third-quarter report was fantastic, with sales up 19%—the fastest rate of growth since 2011—earnings up 39%, profit margins of 17.3% (!) and free cash flow that totaled more than twice reported earnings! Management is now giving that cash back to shareholders in a big way—it just bumped up its dividend (1.8% annual yield) and wants to buy back $500 million of stock (8.3% of all shares) within the next two years. We like it.
Technical Analysis
ALSN was basically an average stock during the past couple of years; while shares did make some progress, the relative performance (RP) line generally moved sideways. But after a big shakeout to 26 in mid-October, ALSN has soared on huge volume, first rebounding to its 200-day line, then gapping up on earnings, and then continuing to new price highs during the past two weeks. You could nibble here, though a pullback of a point or two is likely in the near future.
ALSN Weekly Chart
ALSN 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.
