Back in the Soup
Current Market Outlook
Given the strong October run-up, we weren’t surprised to see the market retreat last week. However, the severity of the dip in both indexes and individual stocks was a yellow flag—many indexes dipped below their 50-day lines, lots of lagging stocks were crushed and even the leaders came under pressure on Friday and today. The action isn’t necessarily a death knell for the rally, but it does put it back on the fence; we’re switching our Market Monitor back into the neutral zone. It’s vital to get rid of losers, honor your stops and remember to book some partial profits in your winners. And as for new buying, it’s prudent to keep new positions small until we see the rally perk up again.
This week’s list has a broad mix of stocks and sectors—no unifying theme but a bunch of good charts and stories. Our Top Pick is Fleetmatics (FLTX), a unique software company with steady growth and a huge opportunity. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Tyler Technologies (TYL) | 0.00 | ||
| Charles Schwab (SCHW) | 0.00 | ||
| NetEase, Inc. (NTES) | 0.00 | ||
| Kite Pharma (KITE) | 0.00 | ||
| Global Payments Inc. (GPN) | 0.00 | ||
| Alphabet, Inc. (GOOGL) | 0.00 | ||
| Fleetmatics Group PLC (FLTX) | 0.00 | ||
| New Oriental Education (EDU) | 113.97 | ||
| A.O. SMITH (AOS) | 0.00 | ||
| Alkermes (ALKS) | 0.00 |
Tyler Technologies (TYL)
Why the Strength
Already the largest software provider in America that focuses solely on the public sector, Tyler Technologies just became a lot bigger. Last week the company completed a buyout of New World Systems, a leading provider of public safety and financial solutions for local governments, with more than 2,000 public sector customers. The New World acquisition is expected to add $134 million in revenue and $0.56 per share to Tyler’s top and bottom lines in 2016. As a result, Tyler is expecting a 24% EPS boost next year, and another 31% bump in 2017. Sales are expected to grow 28.5% in 2016. The company has also added new customers in Los Angeles, Washington state and Illinois in the past two months. But the New World buyout—Tyler’s largest ever at $670 million in cash and stock—is the headliner, and one that’s sending an already booming company to a whole new level of growth. Given the need for greater efficiencies in the public sector, and more flush budgets these days, Tyler is in the right place at the right time.
Technical Analysis
Early in the year, TYL was creeping higher at a very steady pace, advancing from 107 in January to 132 in late April. Three months of consolidation followed, setting up a breakout in July, as the stock quickly advanced to 143. August and September brought more base building, with 129 acting as the floor. But the New World acquisition has sent TYL to another level, the stock surging to as high as 176 late last month. Now another base is forming, with shares approaching a lower-risk entry point. If you do decide to give TYL a try, set your stops in the 150 area.
TYL Weekly Chart
TYL Daily Chart
Charles Schwab (SCHW)
Why the Strength
If there ever was a Bull Market stock—a stock whose fortunes rise and fall depending on the health of the financial markets—then Charles Schwab is it. The company is one of the top brokerage and wealth management services in the country, with 9.7 million active accounts, 1.5 million corporate retirement plan participants and one million banking accounts. Now, that size has slowed growth down a bunch; sales and earnings have crawled higher in the single digits during the past few quarters, and most other metrics (assets under management, client brokerage trades, new assets, ETF money flows) have done the same. But there are two potential catalysts that should kick sales and earnings into a higher gear: First, as with most financials, a rising rate environment should allow margins to expand through a variety of channels (higher interest margin, greater profits from money market funds, etc.). And second, greater market volatility (and a possible upward tilt in the overall market) should lead to greater trade volumes and, increasingly, a greater reliance on some of Schwab’s newer products, such as ETF baskets that are managed by the company on behalf of clients. Of course, if the market rally fails and the bears take control, all bets are off, but for now, analysts see revenues (up 16%) and earnings (up 33%) accelerating sharply in 2016. This is a big-cap that could run if the pieces fall into place.
Technical Analysis
SCHW actually was having a pretty solid 2015, rising from 25 in January to 36 in July even as the overall market struggled. Now the stock is in the midst of a good-looking base-building phase that started back in July at the market’s high—the base is of reasonable depth (26% from high to low) and length (14 weeks so far) and last week’s dip wasn’t abnormal given the recent run. If you’re game, you could nibble here with a stop just under 30, and then look to add shares if the market gets going and SCHW punches above 34.
SCHW Weekly Chart
SCHW Daily Chart
NetEase, Inc. (NTES)
Why the Strength
NetEase is a full-service Web portal that offers all of the usual services—news, email (the most popular in China), messaging, sports, weather and lots and lots of ads. In fact, it used to be known as “the Yahoo of China.” But while services like a fee-based corporate email service brings in a few bucks, the company makes the bulk of its money by offering online games. While all Chinese websites offer games, NetEase pulled away from the pack in 2009 when it cut a deal with Activision Blizzard to be the Chinese host of World of Warcraft. It still offers Warcraft, but an increasing number of its games are the product of its in-house game developers like Fantasy Westward Journey and Westward Journey Online, which are based on Chinese literature. NetEase has also been quick to jump on the overwhelming trend of Chinese Internet users gaining access through mobile devices. The company’s success is evident in last Thursday’s Q3 earnings report that showed a 107% leap in revenues and a 56% gain in earnings. After-tax profit margins were an impressive 30.7%. With a strong pipeline of new games (some with ties to movie franchises like Kung Fu Panda) and a business model that is eluding the weakness that’s afflicting many Chinese retail stocks, NetEase looks to be set for future success. A dividend that yields 1.6% annually is a nice bonus.
Technical Analysis
NTES made a sharp correction in February, falling from 116 to 95, but then blasted off in March at a much higher rate of advance. A gap up in May from 129 to 140 led to a few months of trading mostly under resistance at 150. Then, after an August free-fall to 102 and a few weeks of re-basing, NTES blasted off again in late September and hasn’t stopped since. The stock hit new all-time highs last Thursday, reaching 159 before the sharp pullback of Friday and today. You could nibble here and use a stop at 130.
NTES Weekly Chart
NTES Daily Chart
Kite Pharma (KITE)
Why the Strength
Biotech stocks as a whole are still struggling, but we are very intrigued that many showed up on our screens this week, including two that made the cut for Top Ten. Kite Pharma is a development stage firm that is valued at $3.5 billion because it’s one of a new wave of companies attempting to cure diseases by altering a patient’s DNA—Kite’s lead product candidate (known as KTE-C19) works by extracting T cells (a white blood cell that protects against disease) from a patient, genetically modifying them to attack lymphomas and leukemias, and then injecting them back into the body. Very early stage trials have been promising, with some patients exhibiting a total elimination of all signs of cancer! Other positive news: KTE-C19 has been designated orphan drug status for a certain type of lymphoma, and separately, Amgen inked a deal to help fund other drug candidates, which included a $60 million upfront payment and up to $525 million in milestone payments down the road. Kite hit a speed bump in August after one patient in its clinical trial died, but it was determined to have nothing to do with KTE-C19, and the clinical trial was resumed as scheduled. If all goes well, Kite aims to file a biologics license application by the end of 2016 with a potential launch in 2017. It’s obviously a speculative situation, but with a big potential product and a partner like Amgen, Kite is a stock to keep an eye on.
Technical Analysis
KITE came public in June 2014, formed a nice IPO base, broke out in early October and had a huge run, powering from 32 to 89 by January! Since then, the stock has been in a big, wide-and-loose consolidation, pulling back as far as 44 during the market’s August meltdown. But KITE has acted well since then, pushing all the way back above 80 on good volume, despite the market’s latest weakness. We don’t advise jumping in with both feet, but a small position on a dip into the mid-70s would be tempting.
KITE Weekly Chart
KITE Daily Chart
Global Payments Inc. (GPN)
Why the Strength
A Cabot Top Ten Trader mainstay since May, Global Payments makes yet another appearance this week, as the company’s momentum continues. A strong third-quarter earnings report was responsible for the latest push, with earnings per share jumping 25% from a year ago—the company’s second-best year-over-year improvement since 2012. The company also upped its 2016 guidance, expecting a 14%-17% EPS improvement over 2015. With more profits forecast, Global Payments tacked on a $103 million to its now $403 million share repurchase program. Looking at the company from a 10,000-foot view, it has increased revenue and earnings per share each of the last nine years, and expects that to continue through at least fiscal year 2017. That kind of sustained growth tends to garner some extra attention on Wall Street, especially with so many big investors believing the payment business has nowhere to go but up in the years ahead.
Technical Analysis
The early-October earnings report reinvigorated GPN after some base building in August and September. The stock gapped up from 57 to 66, and has continued to inch higher since. It appears to be bumping up against some mild resistance at 70, and volume has slowed a bit in November. But GPN hasn’t dipped below 63 since its big October jump, and has traded above its 50-day moving average since September. If you’ve missed out on all the previous GPN recommendations, you can nibble here and use a tight percentage stop in the low 60s, just below the 50-day line.
GPN Weekly Chart
GPN Daily Chart
Alphabet, Inc. (GOOGL)
Why the Strength
Google officially changed its name to “Alphabet,” mostly for the purpose of separating its search and advertising business from a growing number of other ventures (smartphones, a pharmaceutical company, a self-driving car). The name change gives Google a fresh feel, but the world’s largest search engine is still growing like an upstart, posting earnings increases of 17% and 18% in the last two quarters. Strength in its mobile search business has been the primary catalyst behind Google’s surge: paid clicks in the third quarter were up 23% from a year ago, outpacing the 18.6% improvement analysts were expecting. YouTube traffic was another major contributor to Google’s growth and should ride the rise in video advertising online. Also, Google Play, which provides apps on Android smartphones, topped one billion users during the recent quarter, giving Google six different products with more than one billion users. Meanwhile, the company announced a $5 billion stock buyback to help boost shares—a welcome change for a company that has been notoriously stingy with its $73 billion cash stockpile. Earnings are expected to rise a solid 18% in 2016.
Technical Analysis
GOOGL’s recent ascent began in early July, when the stock leapt from 541 to 699 in less than 10 days. It consolidated in August along with the rest of the market, pulling back to as low as 612. Then it spent all of September building a strong base, which led to another major breakout in October. Since then, GOOGL climbed as high as 765 before retreating along with most tech stocks. If you’re game, you can buy a small position here or on dips.
GOOGL Weekly Chart
GOOGL Daily Chart
Fleetmatics Group PLC (FLTX)
Why the Strength
Now here’s an easy-to-understand story with lots of potential. Fleetmatics is a leader in cloud-based software that aids with corporate fleet management, helping companies better manage fuel costs, vehicle wear and tear, and even wasteful idling, while also keeping an eye on unproductive worker behavior, unsafe driving, unauthorized vehicle use and excessive overtime. Simply put, Fleetmatics saves companies lots of money by cutting down on waste and increasing productivity; one example showed that a customer’s $640 investment ($40 per month, per vehicle) saved $4,200 per month! Plus, the company also offers field service management, improving communications, scheduling, and invoices. The fleet management and field service businesses are in their infancy; both have penetrated just 12% to 17% of the North American market (where 90% of its business comes from), so there’s years worth of growth potential left. Another big thing to like is the company’s subscription-only business model—like most cloud companies, clients sign up for initial terms (usually three years), pay monthly and renew at extremely high rates. Fleetmatics has about 90% of its revenues booked each quarter before the quarter even begins! There is some competition, but Fleetmatics is a leader, with 655,000 subscriptions at the end of Q3 producing consistent and fast growth in recent quarters. It’s a great story.
Technical Analysis
After a big correction and bottoming period left the stock at 28 in October 2014, FLTX has been a strong performer, but with three pauses/shakeouts along the way, the latest of which took the stock from 52 to 42 during the market’s August plunge. But it found support at that point (near its 40-week line) and has generally marched higher since, including an earnings-induced push two weeks ago. Last week’s dip was minor and came on light volume; thus, we’re OK with a small buy here and a stop just below the 50-day line near 52.
FLTX Weekly Chart
FLTX Daily Chart
New Oriental Education (EDU)
Why the Strength
New Oriental Education is a Chinese education provider, and it’s one of the market’s strongest stocks because it combines a solid long-term growth story with many defensive characteristics (i.e., business isn’t likely to slow no matter what China’s economy does). The firm operates 62 schools and 659 learning centers across China, offering an array of classes and subjects, though the company is best known for K-12 after-school tutoring and English language classes. Business has been solid for many years and that continues today, despite the China economic slowdown—sales and earnings perked up in the latest quarter, with total student enrollments up nearly 14%. And many ventures are growing much faster; K-12 tutoring revenues were up 29% (enrollment growth of 23%) while the newer online-only learning platform Koolearn.com saw revenues up 32%. Also encouraging was management’s commentary that, historically, education spending in China is far more resilient during rough economic periods, mainly because of the emphasis that culture puts on education (especially with the one-child policy, which was only recently nixed). Earnings estimates are somewhat muted (mid-teens expected growth in the year ahead), but those are probably a bit conservative given the company’s history of beating estimates.
Technical Analysis
Since topping at 35 in early 2014, EDU has dipped as low as 18 three times, most recently during the market’s August/September dip. But the character of EDU has now changed, with the stock rising eight weeks in a row on a big pickup in volume (average volume traded is up nearly 40% during the past six weeks!), reaching new multi-month price and RP highs in the process. Given the market’s position, we’re don’t advise chasing EDU here, but a dip of a point or two would be tempting.
EDU Weekly Chart
EDU Daily Chart
A.O. SMITH (AOS)
Why the Strength
The construction sector is as mixed as the overall market, with some stocks looking ugly while others have popped to new highs on the heels of great quarterly reports. A.O. Smith is one of the winners, and it has an interesting history—the company used to be heavily levered to auto components, but management deftly sold off most of that business in 2011 and focused on its water technology products (which included a big $418 million acquisition of Lochinvar); the company is now the #1 seller of water heaters (for both residential homes and commercial firms) in both the U.S. and China, and continues to expand its market share around the world thanks to expanded distribution. And organic sales are strong as aging water heaters are replaced with newer, more efficient technologies. All of that has resulted in solid growth—in the third quarter, total sales rose 7.5% (including an 11% gain in China), while the company’s continued focus on containing costs helped earnings rise 39%, and there’s likely more where that came from in 2016. Throw in a small dividend (1.0% annually) and share repurchase program (it bought back 1% of the company in the third quarter), and there are plenty of reasons the stock could continue to crank higher in the quarters ahead.
Technical Analysis
AOS has been in a longer-term uptrend since housing and construction-related stocks got going in late-2011, though there have been lots of pauses along the way. The latest consolidation started in June, but despite the market’s wild action, AOS has been relatively calm—it dipped less than 20% (on a closing basis) and nosed out to new price and RP highs two weeks ago before pulling back last week. Given the action, you could buy a small position here or on further dips, with a stop near 70.
AOS Weekly Chart
AOS Daily Chart
Alkermes (ALKS)
Why the Strength
FDA approval is like gold to clinical-stage biopharmaceutical companies, and Alkermes got a big pot of it last month. On October 6, the Food and Drug Administration approved Aristada, Alkermes’ treatment for schizophrenia. The FDA’s approval should allow Alkermes to capture a large chunk of the long-acting injectable (LAI) atypical antipsychotics market for schizophrenia treatment. New evidence shows that LAI drugs can be effective in reducing relapses in schizophrenia patients. Based in Ireland, Alkermes focuses on treating diseases of the central nervous system, such as depression, addiction and schizophrenia. Most of those diseases have very large patient bases—for example, one in 10 Americans over the age of 12 takes antidepressant medication. Though the company derives much of its revenue from royalty fees based on technology research partnerships, it is shifting toward developing its own proprietary products. Vivitrol was the first Alkermes drug to gain FDA approval, for alcohol dependence in 2006 and for opioid addiction in 2010. In addition to Aristada, Alkermes has several other drugs in the pipeline, including a treatment for major depressive disease that’s in Phase III clinical trials.
Technical Analysis
ALKS has had an up-and-down year, but it’s shown strength of late. Since the market bottom on September 29, ALKS has bounced from 55 to as high as 73. Volume has slowed since the big push in late October, but the stock still trades well above its 50-day moving average, and has been building a solid base between 71 and 73 for the past two weeks. It’s a speculative play, to be sure, but ALKS is setting up well for another big push if the market gets going again. If you decide to buy, set your stops near that 50-day average in the mid-60s.
ALKS Weekly Chart
ALKS 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.
