Positive but Not Powerful
The major indexes remain in uptrends, there’s no doubt about that. And, despite some still-soggy action among many growth stocks, most of the broad market is trending higher, too. But not all uptrends are equal, and right now, we don’t see much power out there. That’s not a bad thing, per se, but it’s more of a two-steps-forward, one-step-back kind of advance, with lots of rotation still going on week to week. By all means, continue to do some buying in names you like, but we also advise holding some cash and picking your spots.
This week’s list has a slightly steadier feel to it than prior weeks, as money flows toward companies with dependable growth. There are also a few stocks that have popped on earnings and tightened up of late, including SanDisk (SNDK), which is our top pick. Shares are at a good risk-reward point here.
| Stock Name | Price | ||
|---|---|---|---|
| Waddell & Reed (WDR) | 0.00 | ||
| SanDisk Corp. (SNDK) | 0.00 | ||
| Salix Pharmaceuticals (SLXP) | 0.00 | ||
| US Silica Holdings, Inc. (SLCA) | 0.00 | ||
| Mohawk Industries (MHK) | 0.00 | ||
| Southwest Airlines (LUV) | 0.00 | ||
| Baker Hughes (BHI) | 0.00 | ||
| HomeAway, Inc. (AWAY) | 0.00 | ||
| Actavis (ACT) | 0.00 | ||
| ACI Worldwide (ACIW) | 0.00 |
Waddell & Reed (WDR)
Why the Strength
Waddell & Reed Financial is an asset-management company based in Overland Park, Kansas, that has $114 billion under management, up from $96.4 billion at the end of 2012. Waddell & Reed invests money and provides underwriting, distribution and shareholder services for mutual funds and institutional and separately managed accounts. The company, which has been around since 1937, is benefiting from the bull market in stocks in two ways. First, assets under management are increasing along with stock prices. Second, the positive investment environment is bringing increasing amounts of money (from bonds and bond funds and sidelined cash) into equities. When Waddell & Reed reported earnings on October 29, the results showed a strong 18% jump in revenues, a 25% increase in gross sales and a nearly 79% jump in net fund inflows. The company had beaten analysts’ estimates for three consecutive quarters, and the 80 cents per share in earnings in Q3 topped the consensus EPS estimate of 72 cents by a wide margin. There’s no secret sauce or business strategy to Waddell & Reed. It’s just a highly competent asset manager in a great environment for managing assets, and its debut in today’s Cabot Top Ten Trader reflects well on both the company and the bull market.
Technical Analysis
WDR will always have its ups and downs, but the rally that started September 2012 has proven durable. WDR broke out of a tight four-month base, consolidated for three months, then got moving in earnest. The stock has pulled back three times during its advance, but after tagging its 50-day in late August and early October—a consolidation that lasted two months—the stock has been in a strong uptrend. A buy on any pullback of a point should do well as long as the environment for stocks is strong. Use a stop at the 50-day moving average (near 57) for protection.
WDR Weekly Chart
WDR Daily Chart
SanDisk Corp. (SNDK)
Why the Strength
Flash memory producer SanDisk has been firing on all cylinders recently. The company has put together three solid quarters, with average revenue growth coming in at 27%, while average earnings have soared 247%. The company has cited growing demand for solid state drives (SSD), strength in its retail businesses, and favorable supply/demand metrics. In a recent earnings conference call, CEO Sanjay Mehrotra lauded SanDisk’s growth as “outstanding,” as SSDs, which accounted for approximately 50% of the company’s third-quarter revenue, “continue to gain momentum.” With semiconductor producers struggling to make meaningful gains in processing speed, device manufacturers are increasingly turning toward SSDs as an easy way to boost performance in mobile computing. A continuation of this trend certainly favors SanDisk, as the company has improved factory utilization to such a degree that it has been able to lower production costs faster than product pricing declines. What’s more, management believes that product pricing will improve going forward due to SSD revenue growth and a more favorable product mix—the company plans to shift its focus to the more profitable iNAND technology to drive its mobile-embedded product line. Looking ahead, SanDisk’s position remains strong, and the company’s recent acquisition of SMART Storage Systems should help expand the company’s enterprise offerings.
Technical Analysis
SNDK is once again trending higher along support at their 10-day and 25-day moving averages. On October 17, shares soared sharply higher on strong volume as investors cheered a solid Q3 earnings report, and have since consolidated those gains into the 70 region. Currently, SNDK is in the process of rebounding from its 25-day trendline and is threatening to break out above the 70 region. We believe you can buy here, or hold for confirmation of a breakout above 70.
SNDK Weekly Chart
SNDK Daily Chart
Salix Pharmaceuticals (SLXP)
Why the Strength
Salix Pharmaceuticals is a pharmaceutical company that’s thriving by specializing in drugs to treat gastrointestinal disorders, with Xifaxan as its lead product. Xifaxan is an antibiotic that has been approved for the treatment of traveler’s diarrhea (in its 200mg dose) and hepatic encephalopathy (in its 550 mg dose). The company has been profitable since its results were hit by the Great Recession in 2008 and 2009, but investors were concerned that an over-reliance on a single drug was a risky proposition. The company also has steady sales of pre-proctoscopy bowel cleansing preparations and a couple of other drugs for gastrointestinal ills, but Xifaxan contributed 70% of 2012 revenue. The news that Salix would take over Santarus Pharmaceutical for $2.16 billion in cash had a dramatic effect on the company’s stock, which gapped up on huge volume on November 8 when the news came out. The merger with Santarus would give Salix a strong presence in the diabetes market and reduce its dependence on Xifaxan. Investors like the deal, and analysts see 2014 earnings up 35%.
Technical Analysis
SLXP rallied from 38 in November 2012 to 76 at the beginning of August. But the stock went into a three-month consolidation at that point, slipping to support at 65 through August and September, then showing signs of nudging back toward 75 in October. When the Santarus news hit on November 8, SLXP gapped up to near 85, and has stepped higher since. The suddenness of this move has pushed the stock well ahead of its moving averages, but there are still chances to buy on a pullback of a point or two. Try to get in under 88. A pullback below 75 would be bearish.
SLXP Weekly Chart
SLXP Daily Chart
US Silica Holdings, Inc. (SLCA)
Why the Strength
We remain impressed with both the stock action and the fundamental outlook for U.S. Silica, which is one of the dominant suppliers of fracking sand (which is very specialized, with only a few players in the market) to the energy industry; not only does the company have the product but management has shown great ability to ink transportation deals with various railroads, giving U.S. Silica exposure to every major shale area in the U.S. The company still gets over a third of its revenues from sand used in industrial products like glass, but that segment is basically stagnant. By contrast, its oil & gas-related revenues make up two-thirds of revenues and rose 37% in the third quarter (prices were flat, but tons sold increased 36%), and more than half of those sales were delivered via its rail deals. As fracking activity continues to rise, even more exciting is that the amount of sand used per well is greatly increasing; many drillers are boosting results by increasing the number of fracking stages and sand usage per well. Management has a goal of doubling profits by 2016, but we think that could prove conservative as long as energy prices hold up. Combine the gradually accelerating sales and earnings growth (see table below), the buoyant earnings estimates ($2.17 per share next year, up 37%), the reasonable valuation (21 times trailing earnings) and the modest 1.5% dividend, and there’s a lot to like here.
Technical Analysis
When you see a stock break out from its first basing structure and rise 40% within three weeks, you should take notice; many big winners show that kind of initial thrust. SLCA did that in early October, and has since chopped around for about a month, even digesting a 10.5-million-share offering (non-dilutive). It’s very volatile, but if you don’t own any, we think you can start a small position here.
SLCA Weekly Chart
SLCA Daily Chart
Mohawk Industries (MHK)
Why the Strength
Housing-related stocks have come out of the public’s eye in recent months, as housing starts and other metrics have slowed, interest rates have ticked up and doubt crept back into many minds about the sustainability of the present housing recovery. Now, though, many names in the group are coming back to life, especially supply companies like Mohawk Industries, which is the world’s largest flooring manufacturer (wood, carpets and rugs, laminate, ceramic, etc). As with every other piece of the housing industry, business sagged for a few years (including a whopping 41% multi-year drop in carpet shipments), but that’s changing as home prices recover and new building activity picks up. The company bolstered its position this year with three acquisitions (including Marazzi, the leading ceramic tile producer in the U.S.), and that’s boosted growth, but its legacy business is still perking up, and management has done a great job of restraining costs and boosting margins in recent quarters. Add it all up, and earnings per share have actually increased steadily since 2009, and are expected to reach about $6.50 this year (up 72%, again thanks partly to the acquisitions) and $8.15 in 2014, up 26%. On a quarterly basis, we like the accelerating earnings growth during the past few quarters, too. There’s nothing revolutionary here, but Mohawk has a lot of leverage to the housing rebound, which could be picking up steam again.
Technical Analysis
Like many housing stocks, MHK had a great 2012 and early 2013, but it topped out in the spring and then went on to build a multi-month base-on-base formation—it consolidated first from mid-May through the end of July, before ripping to new highs. But that move was followed by another sideways period during August, September and October. Another great quarterly report kicked the stock to new highs, and now it’s following through on the upside. We don’t expect a runaway move, but after so much choppiness this year, most of the weak hands are likely gone. You can buy around here or, preferably, on weakness, with a stop just under 130.
MHK Weekly Chart
MHK Daily Chart
Southwest Airlines (LUV)
Why the Strength
While major U.S. airlines have been getting bigger, with Delta and Northwest merging in 2008, United and Continental in 2010 and American tying the knot with U.S. Airways this year, low-cost carriers (LCCs) have also been thriving and even doing some mergers of their own. Southwest Airlines, making its debut today in Cabot Top Ten Trader, is an LCC that ranks fourth in size in the U.S. market, providing low-price, point-to-point, short-haul, high frequency service. The company’s entire operation is built around cost controls, including its fleet composed entirely of Boeing 737s and its decision to avoid hub-and-spoke operations, which slow down turnaround times. Southwest’s acquisition of AirTran brought with it access to Atlanta, and the availability of access slots in New York’s LaGuardia and Washington, D.C.’s Reagan National (part of the divestments mandated for approval of the American/U.S. merger) will give access to more routes with heavy business traffic. Southwest has a low adjusted debt-to-capital ratio of just 29% and the company’s history includes 39 consecutive years of profits, which is unheard of in this industry. Southwest isn’t expected to add any more cities to its schedules in the coming year as it works to integrate the AirTran acquisition into its model. Analysts point to a possible savings from the expiration of some disadvantageous fuel hedges that Southwest established a few years ago when supplies were low. All in all, Southwest is a model LCC that’s reaping the rewards for a disciplined, savvy business plan, harmonious labor relations and effective cost controls.
Technical Analysis
LUV got moving in November 2012 after years of lackluster performance. From 9 in November 2012, the stock soared to 15 in May 2013, then took a three-month rest with support at 13. September brought a blastoff on good volume, and that rally has been going on ever since, with no pullbacks that lasted longer than two days. LUV is now trading above 18 and has outrun its 25-day moving average by a bit. Look for a pause or a pullback of half a point as a buying opportunity. A mental stop at the stock’s 50-day moving average (now at 16) is prudent.
LUV Weekly Chart
LUV Daily Chart
Baker Hughes (BHI)
Why the Strength
Halliburton has appeared in Top Ten a couple of times recently, and now we see Baker Hughes, another oil service behemoth ($21.8 billion in revenue), acting very well. As with Halliburton, the reason for the strength is that after a multi-quarter slowdown in sales and a few earnings declines, the bottom line is projected to leap starting in the fourth quarter, and remain strong for a long time to come. The company provides all sorts of oil equipment, machinery and systems, has operations all over the world (Asia and the Middle East are particularly strong now; the company’s Eastern Hemisphere revenues were up 20% last quarter) and is innovating fast to take advantage of shale and horizontal drilling activities—in the third quarter, for instance, the firm launched ProductionWave (a suite of products for unconventional wells), StayCool cutters (can drill faster and the drill bit lasts longer in difficult environments) and ClearStar (a synthetic fracturing fluid system, which delivers better flowback). The past quarter delivered Baker Hughes’ best sales, earnings and profit margins since the second quarter of 2012, and analysts think it’s just the beginning—earnings should leap north of $4.20 per share next year, up 37%, and continue to improve from there. With a modest valuation (just 14 times next year’s estimates) and a small 1.0% dividend, we think big investors will remain in accumulation mode.
Technical Analysis
BHI topped at 81 in 2011 and then spent more than a year bottoming and tightening up in the 40 to 50 area, wearing out all the weak hands. Then came the better-than-expected third-quarter report. BHI spiked 7% on the report, with volume nearly four times average, which is huge for a large-cap stock. Even better, the stock has traded tightly since, a sign of accumulation. It’s unlikely to triple, but we think the stock is a good buy right here and can do well over time.
BHI Weekly Chart
BHI Daily Chart
HomeAway, Inc. (AWAY)
Why the Strength
HomeAway operates websites that allow people with properties to connect with people looking for vacation rentals. The company’s international inventory of properties is now over 773,000 in 171 countries. The company operates many national websites for markets outside the U.S. and also operates BedandBreakfast.com. The company makes money by helping renters to list, advertise and manage bookings online, and its innovative pricing strategies allow property owners to pay more for enhanced listings and search options. There’s even a new pay-per-booking option that allows owners to pay only when their property is rented. The company’s Q3 earnings report on November 7 was a thorough triumph, featuring 36% earnings growth (to 19 cents per share) on a 23% jump in revenue (to 90.2 million), where analysts had been predicting EPS of 16 cents and revenue of $89 million. After-tax profit margins hit a record 18.6% for the quarter and free cash flow for the past year totaled more than $1 per share. Management also issued guidance for Q4 revenue that topped analysts’ estimates. The reaction to HomeAway’s earnings report was enthusiastic, gapping the company’s stock up 16% on volume that was nearly 600% of its daily average. All the ingredients are present for the company to continue to ride an improving global economy and a deepening database of vacation rentals to more good results.
Technical Analysis
AWAY came public at 27 in June 2011 and traded higher for a few months before coming down to earth by the end of that year, then spent 15 months trading under its IPO price. The stock popped back above 27 in February 2013, but traded under resistance at 34 until the good Q3 earnings news blew past that resistance on huge volume. The best news is that, after a two-day dip to 33, AWAY has been on the move on steadily rising volume. With AWAY now trading at new multi-year highs, it’s important to buy it well. You can either take a small position here, then average up when you get a 10% profit, or you can wait for the stock to pull back by a point. A stop at 32 will provide protection at AWAY’s early September resistance.
AWAY Weekly Chart
AWAY Daily Chart
Actavis (ACT)
Why the Strength
In its current form, Actavis came into being last October when Watson Pharmaceuticals completed a $5.5 billion cash takeover of Switzerland-based Actavis and decided to take the name Actavis for marketing purposes. Now based in New Jersy, the combined company is the third-largest generic drug maker in the world. The company expanded again in October of this year, closing an $8.5 billion deal for Warner Chilcott PLC. While 75% of revenue comes from generic drug sales, Actavis also conducts its own development program for branded drugs, including both original compounds and biosimilars. The rapid expansion has done wonders for Actavis’ bottom line, with sales growth improving from just 13% year over year three quarters ago to 57% in the most recent quarter. What’s more, earnings growth has improved from a 10% decline year over year to a 55% increase during the same period. Despite the strong growth, Actavis’ recent third-quarter earnings report arrived in line with Wall Street’s expectations. However, the company’s full-year 2013 and 2014 estimates arrived well above current Wall Street targets, and should alleviate some lingering fears concerning Actavis’ organic growth prospects—especially since management tends to issue conservative guidance. Earnings should leap above $12 per share in 2014.
Technical Analysis
While ACT has been in a long-term uptrend dating back to November 2008, the stock’s current bout of strength kicked off in the second quarter of 2013 following a six-month basing pattern. Shares broke out at the end of March, with a gap to 97 followed by another gap up in late April. Finally, shares rocketed higher on May 10, when merger rumors kicked the stock from 108 to 120 on big volume. The stock has since edged higher, trending along support at its 10-week moving average. Shares appear a bit over extended following a recent earnings-induced run, meaning that you should be buying dips, with a target near support at 160.
ACT Weekly Chart
ACT Daily Chart
ACI Worldwide (ACIW)
Why the Strength
ACI Worldwide develops e-payment and electronic funds transfer software for companies around the world. ACI’s software is used to process transactions from ATMs, credit and debit cards, online banking and payment processing, point-of-sale terminals, smart cards and wire transfers. The company also specializes in network integration software, and offers design, implementation and facilities management services. Proving that it has myriad opportunities outside the banking world, ACI recently signed a deal with Blue Cross & Blue Shield of Rhode Island to integrate its mobile, Web, IVR (interactive voice response), call center and eLockbox (consolidated remittances) payment options into one platform. As the Affordable Care Act’s mandate takes hold, more Americans will be looking to purchase health insurance, and ACI should benefit as healthcare companies look to provide more convenient payment options. ACI noted as much during its Q3 earnings conference call, citing success with its new Universal Payments strategy. Finally, ACI boosted its 2013 full-year guidance to account for its recent acquisition of Official Payments, with the move expected to add between $18 million and $20 million to the company’s bottom line.
Technical Analysis
Despite a few periods of consolidation, ACIW shares have been in a steady uptrend since 2009. The stock’s most recent upleg came after a six-month basing period that saw ACIW consolidate into support. Shares broke out of this lull on strong volume in mid-September, when ACIW finally cracked resistance at the 50 level. It proceeded to climb steadily along the 10-week line for the next several weeks before surging to fresh all-time highs in the wake of a solid Q3 earnings report. Given the stock’s recent rally, we recommend buying on dips, with a target near 60.
ACIW Weekly Chart
ACIW 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.
