First Signs of Selling Appear
Current Market Outlook
It looks as if the first “test” of the nascent uptrend has arrived; the major indexes have barely been dented, but under the market’s hood, we’re seeing something of a rolling correction, with a couple of sectors getting hit every day, and with a few stocks breaking down. The next few days will probably be where this rally’s rubber will meet the road—to this point, the selling has been normal (even expected) given the month-long rally from the mid-October lows. Thus, we remain bullish, but we’re also keeping a close eye on the action, both to judge the market’s health and to identify stocks that are setting up new entry points.
This week’s list has a nice array of stocks of varying sizes and from different sectors. We like many of them, but we’re going to go with Sierra Wireless (SWIR) as our Top Pick—it’s a bit speculative, but has a powerful chart and huge numbers, and any shakeout could create a nice buying opportunity.
| Stock Name | Price | ||
|---|---|---|---|
| Taser (TASR) | 0.00 | ||
| Sierra Wireless (SWIR) | 0.00 | ||
| NetSuite, Inc. (N) | 0.00 | ||
| Leggett & Platt, Incorporated (LEG) | 49.79 | ||
| Health Net (HNT) | 0.00 | ||
| Electronic Arts (EA) | 0.00 | ||
| Dexcom (DXCM) | 421.36 | ||
| CyberArk (CYBR) | 111.74 | ||
| Ambarella (AMBA) | 52.79 | ||
| Apple (AAPL) | 248.94 |
Taser (TASR)
Why the Strength
TASER is well known for its best-selling non-lethal stun guns. While most of TASER’s guns are geared toward law enforcement, corrections, or military applications, TASER stun guns have also become quite popular among private consumers. The company also offers AXON wearable video cameras for police officers as well as its online site Evidence.com that allows digital recordings to be viewed, shared and managed from a Web browser. The company’s recent bout of strength arose from better-than-expected third-quarter earnings, which jumped 40% to best the consensus estimate by 5 cents per share. What’s more, top-line growth was the biggest in seven quarters, with sales spiking 26% to $44.4 million. And the orders are continuing to roll in. In fact, TASER recently announced multiple bulk stun gun orders, including one from the Arizona Department of Public Safety for 168 Taser X2 Smart Weapons, and one for 259 X26s Smart Weapons with 20 TASER cam recorders from Virginia’s Langley Air Force Base. In all, TASER announced that more than 49 agencies have made purchases, adding to the 14 bulk orders for Evidence.com body-worn cameras from police departments earlier this month. With increased demand for personal cameras on police officers, TASER should continue to reap rewards going forward.
Technical Analysis
Following steady growth over the past two years, 2014 has been a rocky road for TASR. Shares entered the year bouncing between support at 15 and resistance at 20, but in early May, shares crashed through support following a poor quarterly report. TASR proceeded to test support just above 10 in August before rebounding back above 15 by mid-September. Driven by solid third-quarter earnings and an influx of bulk orders, TASR is now poised to offer a serious challenge to resistance in the 20 region. You can nibble here, if you’re game, or wait for a confirmation breakout above 20.
TASR Weekly Chart
TASR Daily Chart
Sierra Wireless (SWIR)
Why the Strength
In most bull moves, there is at least one up and coming networking firm that’s on the cutting edge of a major trend in technology. Sierra Wireless might be that firm in the current rally. The company is the leader in wireless machine-to-machine (M2M) connectivity products (gateways, routers and the like), which allow machines to talk to each other through the Internet. For example, a smartphone could lower your home’s thermostat, a city can turn off unneeded lights around town, or an ambulance device would relay patient information to the hospital so that the ER is up to speed when the patient arrives. Not only is the use of M2M communications expanding, but there’s a huge upgrade cycle going on from 2G to 3G and 4G, where Sierra dominates. Of course, in an industry like this, business can be lumpy, but things are coming Sierra’s way now—revenue growth is accelerating (partly due to some acquisitions), earnings are growing at triple-digit rates, and analysts see the bottom line up huge during the next year. If things go right it could go far.
Technical Analysis
SWIR is relatively thinly traded (~$30 million per day) and not well-owned (just 76 funds own shares), so it’s a riskier bet. But the chart is very powerful. After a big run into January of this year, shares built a big base and got going again in September—before the market correction pulled it back. But it then re-set itself and soared on earnings two weeks ago, and, importantly has continued higher on big volume since. We think buying dips is your best move.
SWIR Weekly Chart
SWIR Daily Chart
NetSuite, Inc. (N)
Why the Strength
NetSuite is a designer and seller of Cloud-based software that helps customers manage their customer relationships, plan enterprise resources and grow e-commerce operations. The company’s appearance in today’s Top Ten reinforces the strength of the enterprise cloud software sector, since Salesforce.com previously appeared here on November 3. NetSuite’s market cap is $8.3 billion (smaller than Salesforce.com’s $39.1 billion) and that jibes with the company’s target customer, which is small and medium sized businesses and divisions of larger ones. NetSuite has enjoyed great revenue growth in recent years, up 31% in 2012 and 34% in 2013. Revenue growth for the first three quarters of 2014 has held steady above 30%, with earnings growth calming from 50% in Q1 to 22% in Q3. Estimates for EPS growth are for 22% growth this year, strengthening to 42% in 2015. Much of NetSuite’s business comes from customers who are finally converting their pre-Internet records and communications into Cloud-based systems operations. With revenue improving every year since the end of the Great Recession in 2009, NetSuite is a strong grower.
Technical Analysis
N has been something of a tractor since 2010 when it was trading at 12. The stock soared to 120 in February 2014, then tumbled to 70 in May. But the stock has fought its way back above 100, and looks to be putting in the right side of a cup pattern. Since its big blastoff from 93 to 104 on October 24, N has pushed out to resistance at 110. The stock’s rising 25-day moving average is now at 102, so this consolidation may have longer to run. N is buyable on dips toward 108, with a stop at the top of its October 24 gap at 98.
N Weekly Chart
N Daily Chart
Leggett & Platt, Incorporated (LEG)
Why the Strength
Leggett & Platt is a U.S. manufacturer of metal parts that go into home furniture, office furnishings and automotive and aerospace seating. Its appeal to investors is clear, as it has no large competitors in the U.S. market, an annual dividend yield of 3.0% (and a history of 43 annual increases at 13% compound annual growth rate), and is using excess cash for stock buybacks. Leggett’s components go into mattress springs and foundations and auto seat suspensions and lumbar support systems. The company’s steel wires, rods and tubing are also in demand, especially titanium and nickel tubing for aerospace applications. The company recently announced that it would discontinue its commercial fixtures operations, a move that investors approved of, as margins in that line of business were quite low. Leggett also makes some private label finished furniture, but that’s a small line. With nearly three-quarters of revenue coming from the U.S., where increasing consumer confidence and home sales are growing demand for home furnishings, Leggett & Platt is well positioned to increase revenues this year. Q3 earnings came out on October 22, and earnings showed a strong 31% jump on a revenue increase of 14%. Earnings are forecast to increase 21% in 2014 and 15% in 2015. It’s also worth noting that the company’s executives have given up over $4 million in salary this year in exchange for stock options. That’s a very confident move.
Technical Analysis
LEG hasn’t been a fast mover in the past, but since the middle of October, when the broad market began its recovery, the stock has been on a tear. From 33 on October 15, LEG ran to 35 before Q3 results were announced, then blasted off on big volume on October 23, roaring to 37. Since that earnings report, LEG hasn’t slowed down, topping 41 last week. LEG likely needs to take a break to consolidate its gains, and any weakness looks buyable. A buy anywhere under 41 looks solid, with a stop at 37.
LEG Weekly Chart
LEG Daily Chart
Health Net (HNT)
Why the Strength
Health Net is a California-based company that offers managed health care services through group, individual, Medicare, Medicaid, Department of Defense (including TRICARE and Veterans Affairs) programs. The company gets almost 95% of its revenue from health plan premiums paid by its 5.9 million subscribers, with the other 5% coming from government contracts. The health-care story is a strong one, with the Managed Care Act giving more Americans than ever access to health benefits. The gathering tide of new subscribers pushed Health Net to 25% revenue growth in Q2 and 37% in Q3, which is the company’s strongest growth in years. Health Net’s Q3 earnings report on November 3 revealed a loss of 11 cents per share, which missed analysts’ expectations by a penny. But investors were cheered by news of a seven-year services contract with a subsidiary of Cognizant and by the company’s share buyback program, which totaled $69 million during Q3 and has $211 million remaining in its authorization. Health Net is enjoying healthy growth in an actively growing field.
Technical Analysis
HNT enjoyed a nice rally beginning in the middle of 2012, then stalled for much of 2013. But the stock caught a huge updraft in May of this year, breaking out of a six-month basing structure with a jump from 34 to 37 on huge volume. Since then, HNT has been stair-stepping higher, with weeks of flat trading punctuated by a few weeks of price appreciation. The stock traded under resistance at 48 from September through the second week of November, then took off on November 12 on slightly increased volume. HNT may trade sideways for a while before taking another step higher. We think it’s buyable around 50 with a fairly tight stop at 46.
HNT Weekly Chart
HNT Daily Chart
Electronic Arts (EA)
Why the Strength
Video game maker Electronic Arts has discovered the secret sauce that makes upstart competitors like Zynga and King so profitable—micro transactions, a mobile platform and digital content. And EA has a massive ace up its sleeve that these upstarts do not, AAA titles like Battlefield, FIFA Soccer, Madden NFL, The Sims and Need for Speed. While it has taken EA time to fully realize the potential of the mobile platform, the company has adapted extremely well, with revenue spiking 42% during the third-quarter, as earnings soared 121% to easily top consensus expectations. Furthermore, since it isn’t dependent on Facebook for its user base (as Zynga and King are), EA has had a much more successful and lucrative transition to mobile gaming. Specifically, EA saw digital purchases rise 6%, mobile sales add 11%, and in-console purchases soar 95%—thanks in large part to Xbox One’s EA Access community. EA has also bucked the overall decline in online and mobile user growth, reporting a 250% year-over-year growth in monthly active users in the third-quarter. As a result, the growth of in-game revenue that was the cornerstone of EA’s third-quarter report looks solid. Combine this growing market strength with the looming holiday shopping season, and EA’s growth potential becomes even more attractive.
Technical Analysis
While it hasn’t been a smooth uptrend, EA has continued higher since hitting bottom in 2012. The stock has trended higher along its 10-week and 25-week moving averages, with the stock’s 52-week trendline providing a key backstop. 2014 started off right for EA, with the stock rallying into the 30 region and then breaking out on strong earnings in early May. Shares then spent the next several months consolidating into the 35 region before taking a minor hit during the last month’s market correction. EA quickly got back on track, and, following a strong third-quarter report, has jumped to highs not seen since 2008. Shares appear to have settled down in recent weeks, and we believe EA is buyable here, or on dips of a point or two.
EA Weekly Chart
EA Daily Chart
Dexcom (DXCM)
Why the Strength
We’ve written up DexCom a couple of times in the past year, but the stock has kicked us out each time in market corrections. Now the stock looks ready to run, bolstered by its outstanding growth story; the company makes some of the best continuous glucose monitors (CGMs) in the industry. Its G4 Platinum device, which was just approved in June, is the smallest and lightest on the market, with a smaller needle and greater wireless range, too. (It also recently released a mobile communications add-on, so results can be sent to five smartphones.) Most important, the device is approaching fingerstick accuracy; the company’s long-term goal is to replace fingersticks entirely! The G4 has kept growth on the fast track (sales have generally been advancing at a 50% to 65% clip for many quarters), and growth should remain rapid for years as DexCom has made huge inroads into the pediatric market and is aiming to get broader payer coverage for those over 65. The valuation is huge, but with the best product in the market and a huge stream of recurring revenue (from the sensors on its CGMs), DexCom has a very big story.
Technical Analysis
DXCM had a very big run with the market from late-2012 through March of this year, and then it began a big basing period—the stock suffered a 44% drubbing during the spring decline, and then took many months to wear out the remaining weak hands. DXCM eventually formed a base-within-a-base, consolidating in a tighter range during September and October before the earnings report helped the stock surge to new highs. You could nibble here or on dips, but expect volatility.
DXCM Weekly Chart
DXCM Daily Chart
CyberArk (CYBR)
Why the Strength
The entire network security industry is booming, and CyberArk is a small, newly public company that looks to be the leading player in an important niche. CyberArk focuses on attacks that steal the credentials of high-level employees (so-called privileged accounts) to get inside a firm’s IT networks and navigate it, giving them a better understanding of the security architecture (and thus allowing larger-scale breaches in the future). CyberArk’s software aims to identify and eliminate these hackers by analyzing and protecting the privileged accounts, and it’s clearly doing a good job; it has more than 1,600 customers and revenues have been growing from zero in 2010 to north of $90 million this year, including a huge 66% jump in the just-reported third quarter. Of course, other investors are also excited about the potential here—CyberArk’s valuation is out of this world (15 times revenue!), so any slip could hit the stock hard. Still, the company does look to be in the right place at the right time, and there’s no reason to think it can’t grow rapidly for years. Consider it an interesting speculation.
Technical Analysis
CYBR came public on September 24, and the stock soared from its IPO price of 16 to close at 31 two days later—a significant early sign that big investors were interested. Shares then consolidated for a few weeks; it held up very well during the October market wipeout, which was the second clue that the big boys were picking up shares. And then last week, the stock soared to new highs following its better than expected earnings report. CYBR is extremely volatile, but if you’re game, buy a small amount on dips and use a loose stop.
CYBR Weekly Chart
CYBR Daily Chart
Ambarella (AMBA)
Why the Strength
Ambarella is currently known as the GoPro camera chip supplier, providing system-on-a-chip solutions for GoPro’s most popular camera lines. So far, being tied to GoPro has paid off in spades, with AMBA stock surging in the wake of GoPro’s better-than-expected quarterly report earlier this month. Roughly 25% of Ambarella’s revenue comes from GoPro, and the company’s announcement of new models and strong sales bodes well for Ambarella. GoPro even lifted its guidance well above the consensus estimate due to strong Hero4 camera sales, and Ambarella should be able to piggyback this added growth. The newer action cameras are shifting toward 4K HD video, which will shift demand from Ambarella’s older A5 chips to its newer, and more lucrative A7 video chips. In the 4K HD video realm, Ambarella’s competition is nearly three years behind in terms of technology, giving the company a massive edge. While GoPro supplier is a nice title, Ambarella is working hard at diversification, targeting the growing home monitor and professional security markets, as well as developing applications for car dashboards and rear-view mirrors. We like that the company is smartly reinvesting its GoPro revenue in diversification, and believe Ambarella remains a solid investment.
Technical Analysis
When we last looked at AMBA, the stock had just topped the 40 mark following speculation surrounding new GoPro models. AMBA shares bounced along in the 40 area until ramping up ahead of GoPro’s earnings report. Following the report, AMBA jumped north of 45 before testing support in the region and continuing higher. The stock tagged 50 shortly thereafter, and pulled back to support ahead of today’s third-quarter report. The company matched estimates, and the reaction has sent AMBA toward another confrontation with the 50 region. We don’t suggest chasing today’s earnings reaction, but recommend nibbling around the 47.5-48 region, if you’re game.
AMBA Weekly Chart
AMBA Daily Chart
Apple (AAPL)
Why the Strength
Many companies that make their reputations as innovators find it hard to keep coming up with new products to keep that reputation bright, but Apple makes it look easy. The juggernaut that Jobs built had $183 billion in sales in fiscal 2014 and continues to bring out new iPhones, new iPads and new iMacs and MacBooks that keep consumers coming back. Annual revenue growth during Apple’s fiscal year ended in September was just 7%, but earnings rose from $5.68 per share in 2013 to $6.45 in 2014. Estimates are for EPS of $7.68 in 2015 and $8.47 in 2016. Apple’s fortunes now depend on demand for its new-generation iPhones, the iPhone 6 and 6 Plus, whose larger screens are contesting the “phablet” market. China has been a huge target for Apple, with strong iPhone sales making a major contribution to Q3 results. In recent news, Apple announced that it had opened its App store in China—already its second-largest market for app downloads—to payments via UnionPay, a Chinese credit card with over 4.5 billion users. Apple is also innovating with Apple Pay, a touchless payment system. Investors seem comfortable with Tim Cook as the successor to Steve Jobs and Apple—and its 1.7% annual dividend yield—looks good to go for many more years.
Technical Analysis
AAPL split 7-for-1 back in June, reducing the price to 92. Since then, AAPL has soared to 103 in early September, corrected with the broad market to 92 in mid October and rallied strongly to reach 114 last Friday. The stock has been outperforming the market strongly since April, with an RP line that has steepened during the market’s recovery since mid-October. But with a forward P/E ratio of just 15, it’s hardly overvalued. Try to get in on a pullback of a couple of points and use a stop at the 50-day moving average, now at 103.
AAPL Weekly Chart
AAPL 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.
