More Improvement, but Lots of Bumps in the Road
Current Market Outlook
Last week brought another small improvement in the market, both for the major indexes (the S&P 500 and Nasdaq notched their fifth straight up week and are holding above some key longer-term moving averages) and for some leading stocks—more growth stocks with top-notch fundamentals have reacted well to earnings, offering some much-needed leadership for this rally. Of course, the flip side is also true, as a bunch of stocks have been crushed on earnings, and the broad market’s action is just decent. Overall, we’re a bit more constructive than we have been, so we’ll bump the Market Monitor up a notch, but it remains vital to be selective—buy what’s working, keep losses small and avoid or sell anything that breaks down.
This week’s list has an encouraging batch of growth stocks with good stories and numbers (not as many defensive-type stocks this week). Our Top Pick is LinkedIn (LNKD), a dynamic big-cap growth stock that’s come back to life after its quarterly report blew away expectations.
| Stock Name | Price | ||
|---|---|---|---|
| Ultimate Software (ULTI) | 0.00 | ||
| Lending Tree (TREE) | 411.51 | ||
| Royal Caribbean Cruises (RCL) | 0.00 | ||
| Proofpoint (PFPT) | 113.79 | ||
| The Priceline Group Inc. (PCLN) | 0.00 | ||
| LinkedIn Corporation (LNKD) | 0.00 | ||
| IntercontinentalExchange, Inc. (ICE) | 0.00 | ||
| Expedia Group (EXPE) | 0.00 | ||
| Ctrip.com International Ltd. (CTRP) | 34.94 | ||
| Boyd Gaming Corporation (BYD) | 0.00 |
Ultimate Software (ULTI)
Why the Strength
Many new-age, cloud-based software companies continue to crank out great growth, and Ultimate Software is one of the best—the firm specializes in human capital management software (payroll, human resources, recruiting, time management, etc.), and while the field is crowded (everyone from Oracle to Automatic Data Processing to Fidelity National), Ultimate has performed excellently and consistently for many years and growth is picking up as it expands its sales force and inks partnership deals. (One such deal is with Netsuite, a fast-growing ERP software provider that has agreed to integrate its product with Ultimate’s.) There’s nothing revolutionary here, but Ultimate is one of the best at updating and improving its products, which has led to a jaw-dropping customer retention rate of 96% and top ratings in customer satisfaction surveys. Revenue growth has consistently been in the low 20% range, with earnings growing a touch faster, and in the third-quarter report, management announced that it expects 2016 growth to pick up a bit as it lands some larger deals and renewal rates remain sky high. The valuation is huge, but big investors (532 mutual funds now own shares) seem comfortable that Ultimate will continue to crank out 20%-plus growth for many years to come. It’s a good story.
Technical Analysis
ULTI is in a firm longer-term uptrend, though it regularly has to work through multi-month corrections and consolidations along the way. The good news is that the stock looks like it’s emerging from one of those pauses now—ULTI topped at 183 in April of this year, and two weeks ago, it was sitting at the same level. Then the stock lifted to new price and relative performance (RP) peaks following earnings on quadruple average volume. We think it’s buyable here with a stop around 185.
ULTI Weekly Chart
ULTI Daily Chart
Lending Tree (TREE)
Why the Strength
LendingTree is a leading online marketplace for money, on pace to facilitate $17 billion of loans this year by allowing consumers and lenders to shop for each other. For consumers, it’s really not much different than shopping online for flights—you’re able to compare prices and terms from a few dozen different lenders (including some major ones like Citibank, Wells Fargo, Capital One and Quicken Loans). And for lenders, the marketplace provides a cost-effective and (because of its huge base of two million users, which is growing rapidly) dependable method of getting new customers. LendingTree takes a cut of the loans it facilitates, and thus, as its marketplace grows, so too does its bottom line. Historically, mortgages have been the huge growth driver—in the third quarter, mortgage-related revenue rose 38% and made up nearly two-thirds of the total. But non-mortgage revenue surged 175%, including a 325% leap in personal loans and a new credit card business that kicked in nearly $3 million. And long-term, things like student loans, auto loans and home equity loans could all become huge product lines. Sales and earnings growth are soaring, and while there are some potential macro concerns—if, say, rates rise, demand for loans could tumble—we think the bigger story is that more loans will be done online, and with one of the leading marketplaces, LendingTree is sure to benefit. It’s a big idea.
Technical Analysis
TREE has had a huge run, and that’s our big worry—it could need a few months to catch its breath. Indeed, the firm sold off today as the company offered shares. However, the overall picture is reasonable; after a sharp (nearly 40%) drop in August and September, TREE ripped back toward its highs following its earnings report last week on its biggest volume ever. If you’re game, start small on this pullback and use a loose stop to account for the stock’s big volatility.
TREE Weekly Chart
TREE Daily Chart
Royal Caribbean Cruises (RCL)
Why the Strength
Royal Caribbean is another example of the booming travel sector lifting all (pun intended) boats. The company’s sales haven’t exactly been soaring, up just 4% and 6% in the last two quarters. However, earnings per share have jumped 27% and 29%, respectively, and the company is using the extra cash to start a $500 million share buyback program. But what may have grabbed investors’ attention the most was the company’s recent strategic change. With sales in Latin America slumping during the last two years, Royal Caribbean has moved some of its cruises to China, where demand is much stronger. About 20% of the company’s business is now derived from the Asia-Pacific region, where cruising is a relatively new concept. Nine percent of that will come from China in 2016, up from 6% this year. Shifting its business to meet demand in a relatively untapped market is allowing Royal Caribbean to stay ahead of the curve and opening up a whole new avenue for growth in one of the world’s largest economies.
Technical Analysis
Like many travel stocks, RCL has a good-looking chart. The stock has been on a steady climb since May, starting at 66 and reaching 97 in late September. Dips in August, September and October found strong support in the mid-80s, and the recent decline was very short-lived. Since October 14, the stock has shot up from 87 to 99, and appears to be digesting its run in fine fashion, just as it has done several times during this six-month rally. It’s a decent set-up if you’re game; set your stops in the upper 80s support range.
RCL Weekly Chart
RCL Daily Chart
Proofpoint (PFPT)
Why the Strength
Acts of cyber terrorism seem to appear in the news every day, putting a premium on companies that try to combat all the hacking. Proofpoint is one of those companies, and its sales have grown at least 30% in each of the last eight quarters. But what’s really driving the stock in the last week or so is its new partnership with Intel Security, formerly known as McAfee, that allows the chip-making giant to use Proofpoint’s threat intelligence information. The Intel deal positions Proofpoint for even greater sales growth; several analysts believe it makes Proofpoint the leader in email protection, overtaking much larger competitors such as Microsoft, Hewlett-Packard and Symantec. Meanwhile, the $69.2 million in sales the company brought in last quarter exceeded consensus Wall Street estimates of $66 million. It’s losing money hand over foot (-$0.06 last quarter, on track for -$0.35 in 2015), but for now at least, investors seemed to be more focused on the positive sales growth and its new leading position in some of the industry’s fastest-growing areas.
Technical Analysis
PFPT has been stair-stepping higher for 18 months now, starting at 24 in April 2014 and touching 69 in July of this year. The dips along the way have consistently found support in the low 50s, and that was the case again in August and September, when the stock never fell below 54. PFPT rallied on big volume in late October after the earnings release, and the stock has shot up like a rocket ever since, reaching new closing highs last Friday. The odds favor the next pullback being buyable, so picking up shares in the high 60s and using a loss limit near 61 looks like a good bet.
PFPT Weekly Chart
PFPT Daily Chart
The Priceline Group Inc. (PCLN)
Why the Strength
With the global economy still on relatively solid footing, the travel sector is thriving. Americans spent 6.5% more on travel and tourism in the second quarter than they did during the same quarter in 2014, marking the third straight quarter of at least 2% growth for the sector. Many of those travelers are booking their flights, hotels and rental cars through The Priceline Group, owners of leading travel websites Priceline.com and Kayak, as well as Booking.com, which is huge in Europe. Priceline’s sales have really taken off in the three years since it bought out rival Kayak; revenues increased 60% in the last two years alone, and are on track to improve yet again in 2015. Profits have followed suit: Earnings per share are up 71% during that time, and have increased nearly 10-fold (!) since 2008. All that profitability has been good for cash flow, and Priceline keeps putting its $3.2 billion cash stockpile to good use—in September, it acquired online restaurant reservation company AS Digital. Used by thousands of restaurants in over 40 countries, AS Digital should further expand Priceline’s reach and diversify its travel offerings.
Technical Analysis
The big move from PCLN actually came in July, when the stock leapt from 1,116 to 1,247 in less than two weeks. The advance continued into early August, taking the stock all the way to 1,351. The late-August correction knocked PCLN lower, and the stock was still trading below 1,200 in late September. Since then it’s been rising with very little interruption, venturing well into the 1,400s before closing last Friday at 1,454. Dips in the stock over the last month-plus have been minor and short-lived, so you can look to enter on minor weakness and set your stops near 1,300.
PCLN Weekly Chart
PCLN Daily Chart
LinkedIn Corporation (LNKD)
Why the Strength
LinkedIn has long been known as the equivalent of Facebook with a suit and tie, a professional social network that has become the go-to way for employers to hire employees, even those that aren’t specifically looking for a new job. However, it hasn’t all been peaches and cream for the company—it’s had some issues transforming its Web properties into a true social network, and a salesforce realignment earlier this year produced a couple of mundane quarterly results. Still, the odds always favored the company figuring it out, and the third-quarter report confirmed that the future is very bright: Not only did sales and earnings growth top expectations, but most of the sub-metrics impressed as well, with cash flow looking great, newer ads like sponsored updates more than doubling from the year before and a big boost in the number of corporate customers. The company’s acquisition of learning and professional development firm Lynda.com has quickly paid dividends, contributing $41 million in revenue last quarter. All in all, most investors expected a major earnings re-acceleration in 2016, and last week’s report confirmed that those plans are on track—analysts see earnings up 41% next year, and those figures could prove conservative.
Technical Analysis
LNKD had a nice run in the first half of 2013, but it’s been a wobbly performer since, with a huge dip (258 to 136), big rally (back to 276) and then another dip (to 166) caused by sour earnings and the weak market this year. The question is whether LNKD is now back on track … to which we’ll say “probably.” The gap up on earnings last week was strong, with LNKD topping its 200-day line, though the stock still sits below resistance near 250. Our advice: Start with a small position here and a relatively loose stop, and look to add shares as the stock advances.
LNKD Weekly Chart
LNKD Daily Chart
IntercontinentalExchange, Inc. (ICE)
Why the Strength
Intercontinental Exchange, which has 12 previous appearances in Top Ten to its credit, owns and operates a global network of regulated securities markets, seven transaction clearing houses and 12 exchanges for trading energy, commodities and equity indexes. Founded in 2000 as a marketplace for energy trading, the company now offers trading and futures in every conceivable asset class. The company’s revenue grows organically when market activity increases, boosting the fees it charges for trading and clearing a range of securities and for information services based on prices and trading data. But Intercontinental Exchange’s primary growth strategy is via acquisition, including its blockbuster 2013 takeover of the NYSE Euronext exchange. (Euronext was subsequently spun off in 2014.) Since the NYSE deal, Intercontinental Exchange has gobbled up the Singapore Mercantile Exchange (February 2014) and SuperDerivatives (October 2014). The company also expands by offering new contracts, like the world cotton contract that’s being rolled out today. Intercontinental Exchange’s 146% jump in revenue in 2014 reflected mostly the NYSE takeover, but the 14% growth in Q3 (and 35% gain in earnings) is a good growth indicator. With increased trading in oil and natural gas futures likely to build revenue, Intercontinental Exchange’s future growth looks solid. A 1.2% annual dividend yield is a nice bonus.
Technical Analysis
In 2015, ICE traded flat from late January through early October, generally staying within a range from 220 to 240. But the stock rallied strongly in late October, breaking out to all-time highs ahead of earnings. The reaction to last Thursday’s earnings kicked ICE as high as 263, but Friday’s trading pulled it back to 252. Today’s action represents a bounce back from that profit-taking selloff. ICE is unlikely to be a skyrocket, but a buy under 255 presents a good risk/reward balance. A stop around the 50-day moving average at 235 will reduce risk.
ICE Weekly Chart
ICE Daily Chart
Expedia Group (EXPE)
Why the Strength
When you have a market cap well over $17 billion, growth doesn’t come easily unless you buy a competitor. And that’s what Expedia did with its $1.3 billion takeover of Orbitz, a deal that won regulatory approval in September. The merger of the second- and third-largest online travel agencies, coming on the heels of Expedia’s January acquisition of Travelocity for $280 million, is a good tipoff to the trend in online booking—bigger is better. The steady growth of travel activity has also provided organic growth for Expedia over the last year of so, with 2014 revenue booking a 21% gain, even before the M&A splurge. Expedia gets a little over half of its revenue from the U.S., with over 90% of bookings for leisure travel. Some analysts see the rise of Airbnb as a credible competitor for Expedia in the hotel booking business. But the consensus is that when Expedia combines its database with Orbitz’s database, the company will have a sufficient lead in useful information to keep it growing strongly. The company’s quarterly report on October 30 was given a warm reception by investors, aided by improved earnings guidance and a 21% increase in gross bookings. And efficiencies from the Orbitz deal should send earnings flying in 2016.
Technical Analysis
EXPE has been a long-term tractor, despite a rough patch in the first half of 2013. Recent action has been volatile, With a late-July gap up from 107 to 122 giving way to three months of wild swings, including a dip to 105 during the August market flop and a strong bout of profit taking after the September merger approval rally. Last Thursday’s good earnings news keyed a jump from 127 to 136 on excellent volume, and the stock is holding most of that gain today. If you like the story, look to get in on a dip of at least a couple of points and use a stop near 120.
EXPE Weekly Chart
EXPE Daily Chart
Ctrip.com International Ltd. (CTRP)
Why the Strength
Ctrip.com is often called the Expedia of China, so it’s interesting that it’s making its 13th appearance in today’s Top Ten, along with Expedia. The two companies have similar stories, offering online bookings for hotel rooms, travel tickets and tours. They are also similar in that each company has made a recent acquisition that’s winning approval from investors. In Ctrip.com’s case, the acquisition is Qunar Cayman (QUNR), an online travel company owned by Baidu. After a stock swap, that will leave Baidu with a 25% stake in Ctrip.com, and Ctrip.com with a 45% voting interest in Qunar. The deal values Qunar at about $7 billion. The Chinese online travel business is now a hotly contested battleground between Alibaba Group, Tencent Holdings and Baidu, and Qunar is the top seller of airline tickets with a 32% market share. Ctrip.com is the leader in hotel bookings with a 39% share, so the synergies are easy to see. The Chinese travel market is huge, as Chinese travelers booked over 100 million outbound trips in 2014, making it the global leader in tourism. Ctrip.com expects that cross selling and cost savings will drive future growth as the Qunar deal makes it the dominant tourism site in China. Analysts have responded by raising price targets and investors have pushed Ctrip.com’s stock higher. We like the scale of this story and the evidence we got in Alibaba’s quarterly report that Chinese citizens are not tightening their purse strings, which is good news for the travel industry.
Technical Analysis
CTRP netted flat from October 2013 through March 2015 as worries about the Chinese economy dogged investors. The rally that began in March lifted the stock from 43 to 88 in May, and CTRP held much of those gains despite a market-powered dip to 55 in August. The stock was already headed higher when the Qunar news hit, which blasted CTRP to well above 90 on colossal volume, and after a few days of consolidation below 90, the stock has popped back to the mid-90s. CTRP looks like a good buy anywhere under 95, with a loose stop at 85.
CTRP Weekly Chart
CTRP Daily Chart
Boyd Gaming Corporation (BYD)
Why the Strength
Consumer spending may be trending downward. But that hasn’t stopped people from gambling—at least at the casinos owned by Boyd Gaming. Based in (where else?) Nevada and with 22 gaming properties in eight states, Boyd is one of the largest and oldest (founded in 1975) casino operators in the country. Recently, people have been spending a lot of money at Boyd’s casinos. Sales have increased 65% in the last five years during America’s slow but steady recovery from the recession. Though sales were actually down 26% year over year in the third quarter, earnings per share surged to $0.27. Boyd Gaming failed to turn a profit in 2012 and 2013, and barely broke even last year. This year, the company has been in the black all three quarters, and is on pace for its most profitable year since 2008 (with even higher profits next year). Improvements in the Las Vegas jobs market have played a part in Boyd’s growth, as the area has added 20,000 jobs in the last 12 months. Elsewhere, the company has found ways to improve margins dramatically; the 5.6% after-tax margin last quarter is a far cry from the nonexistent margins that plagued the company from 2012 through 2014. Sales have slipped a bit in recent quarters, but the improved margins and EPS numbers are clearly grabbing Wall Street’s attention.
Technical Analysis
After a down 2014, BYD took off right from the get-go this year. The stock dipped to 10 last Christmas before embarking on a six-week rally that took it all the way to 14. A solid base-building phase followed, setting the stage for an even bigger rally that started in late April and lasted until late August, with the stock touching 18 before sliding along with the rest of the market. It found strong support at 15, and is now in the midst of yet another rally, entering the week at 20, its highest level since early 2008. We advise grabbing shares on dips, and setting a loss limit just above 17, which is the current 50-day moving average.
BYD Weekly Chart
BYD 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.
