Very Impressive
Current Market Outlook
The market’s immediate post-election action was divergent and confusing, with some stocks soaring and others plunging, and most indexes still confined to sideways trends. But that’s changing—by our measures, the intermediate-term trend has turned up, joining the longer-term trend in positive territory. And we’re now seeing more solid set-ups (and a few breakouts) in growth stocks, which are joining many Old World stocks and sectors at new high ground. Even the S&P 500 and Nasdaq are getting in on the fun, as both tested virgin turf today. It’s not all peaches and cream, but after nudging up our Market Monitor one notch last week (to level 5), we’re pushing it up two more slots this week (to level 7), reflecting the more positive environment.
This week’s list goes along with the strength we’re seeing in the market, as financial, gaming construction/metals, biotech, cybersecurity and transportation stocks are all represented. Our Top Pick is MGM Resorts (MGM), a big-cap name that’s showing excellent power since its earnings report two weeks ago.
| Stock Name | Price | ||
|---|---|---|---|
| Charles Schwab (SCHW) | 0.00 | ||
| Commercial Metals (CMC) | 0.00 | ||
| Exelixis (EXEL) | 27.35 | ||
| Granite Construction (GVA) | 0.00 | ||
| Inphi (IPHI) | 120.16 | ||
| MGM Resorts (MGM) | 0.00 | ||
| Micron Technology, Inc. (MU) | 43.31 | ||
| Palo Alto Networks (PANW) | 236.92 | ||
| Terex (TEX) | 0.00 | ||
| United Continental Holdings (UAL) | 96.76 |
Charles Schwab (SCHW)
Why the Strength
The Charles Schwab Corporation is a familiar name among traders given that it provides wealth management, brokerage, money management, banking and financial advisory services. It’s been a well-respected firm for years, despite the stock’s poor performance in 2015 amid a tough industry backdrop. Analysts have generally been positive on the company’s long-term growth prospects. That enthusiasm began to boil to the surface this summer as Schwab surpassed 10 million active brokerage accounts (these are real accounts, not like the ones at rival Wells Fargo). It also became evident that Schwab would complete a fifth consecutive year of landing $100 billion in net new assets. Management was already out on the road talking about how it planned to keep up double digit revenue growth when interest rates crept higher, and speculation of a more accommodative regulatory environment post-election has only helped them to sell that message. Speculation has also been rising that Schwab is looking to buy small cap LPL Financial (LPLA), which has valuable financial and strategic assets that could be incredibly attractive to a larger acquirer with scale. We don’t have a strong opinion on the acquisition potential but would note that Schwab, with a market cap of $50 billion, is a solid play with or without LPL Financial.
Technical Analysis
SCHW’s action mirrored the financial sector in 2016—it fell early in the year, then staged a failed rally that endured from mid-February to June, before evaporating in a few short days. July kicked off with the stock at 24, and that was the turnaround point. A steady rise carried the stock above 30 by the end of August, then momentum slowed but the stock continued to trade above its upward-sloping 50-day moving average. November has been a blast-off month with the stock rocketing from 31 to 37. Buy on a dip and set a stop in the low 30s.
SCHW Weekly Chart
SCHW Daily Chart
Commercial Metals (CMC)
Why the Strength
We featured large-cap steel manufacturer Nucor in last week’s Cabot Top Ten Trader to capitalize on the strength in “Old World” stocks following Trump’s victory. We move down market this week to feature Commercial Metals (CMC), a small-cap company that produces, recycles and markets steel for the construction, manufacturing and fabricating industries. The same three positive market catalysts that are helping Nucor apply to Commercial Metals as well. First, the U.S. Commerce Department is investigating Chinese steel products manufactured in Vietnam, believing they are circumventing U.S. trade laws. Second, Trump won, and that’s potentially bullish for U.S. steel fundamentals and tighter enforcement of U.S. trade laws. And third, a surge in raw material prices caught the market off guard. Commercial Metals fiscal Q4 earnings (released October 27) were uninspiring, with revenue down 15% and EPS of $0.01 a significant miss from the $0.29 analysts expected. On the bright side, infrastructure spending was already on the table. And a trade case for rebar was filed against Japan, Taiwan and Turkey, which could help increase the company’s production volumes, while simultaneously improving its gross margin (lower fixed costs per volume produced). Analysts anticipate a solid earnings turnaround starting soon, and that could be conservative if support for infrastructure spending grows in the U.S. House and Senate.
Technical Analysis
CMC spent the first quarter of 2016 trading in the 12.5 to 14.5 range, then rallied as high as 18 by the end of April. The stock’s trading range then grew wider as shares chopped their way back down to 14.5 by early September. A move to 17 preceded the election, then Trump’s victory ignited a high-volume buying spree that sent shares north of 20. They began to consolidate last week, and we suggest buying on a dip below 20.5.
CMC Weekly Chart
CMC Daily Chart
Exelixis (EXEL)
Why the Strength
Exelixis is a biopharmaceutical company developing small molecule cancer treatments. The stock is rallying because it has new drugs hitting the market, and its drugs in development are progressing closer to approval. The main attraction is Cabozantinib, an FDA-approved drug (also approved in the E.U. in September with partner Ipsen) for advanced renal cell carcinoma and thyroid cancer that just completed its first full quarter as a revenue-generating product. The drug generated $42.7 million in Q3, which, when added to $19.5 million in royalty and license revenue, resulted in revenue growth of 528%. It’s fair to say this has the likelihood of becoming a blockbuster drug as it is already well on its way toward achieving dominant market share. The company is now advancing toward being cash-flow and earnings positive, and has nearly $380 million in cash available to invest in R&D and/or acquisitions. Analysts are looking for revenue to grow by 387% this year, while losses shrink. Top line growth is expected to moderate to “only” 70% in 2017, but earnings power will kick in as EPS shoots up to near break-even. It’s biotech, so expect the stock to move based on a mix of reported numbers and trial results.
Technical Analysis
EXEL has been on a tear in 2016. The stock bounced along near 4 through April, then mounted a steady rally that carried shares to 15.5 by late September. That 300% advance ended abruptly on September 28 when the entire biotech sub-sector began a five-week retreat. EXEL’s pullback carried it 35% lower, to 10, before the election and positive fundamentals lit another fire under the stock, carrying it to a 52-week high above 16.5. You can buy on minor weakness with a loose stop near 13.
EXEL Weekly Chart
EXEL Daily Chart
Granite Construction (GVA)
Why the Strength
Granite Construction is a big infrastructure player in the U.S., providing construction services to public and private clients, though from the looks of it, most business comes from local, state and Federal projects. It makes its hay dealing with large projects (major highways, bridges and even mines), other construction projects (solar plant installation, sewer system rehabilitation, airport runways, etc.) and even some construction materials (aggregates, asphalt). The company has done an admirable job of growing as states and localities have picked up their infrastructure spending (revenues have been perking up 4% to 7% in recent quarters, with earnings growing at a quicker clip thanks to increasing margins), and the firm’s big $3.8 billion backlog (up 22% from a year ago) is a sign that more business is coming down the pike. What we like about this story is that funding for last year’s Federal transportation bill is just starting to make its way to the agencies, and that in and of itself should lead to a pickup in growth—not only does Granite Construction anticipate bidding on more than $17 billion of large projects during the next couple of years, business it’s already booked should lead to accelerating sales (up 13%) and earnings (up 63%) growth in 2017, according to analysts. And that says nothing about the potential surge in infrastructure investment depending on what the new administration does. But no matter what the details of new legislation, it looks like Granite Construction has a great couple of years on tap.
Technical Analysis
GVA has made decent progress in recent years but it’s been hard to hold onto. The stock based out from March 2014 through November 2015, then began a choppy uptrend—GVA formed three launching pads this year, though the stock’s recent power (first on earnings, and then post-election) tells us the stock has changed character. We’re OK with buying some around here or (preferably) on dips of a couple of points, with a stop in the low 50s.
GVA Weekly Chart
GVA Daily Chart
Inphi (IPHI)
Why the Strength
Inphi is a fabless (doesn’t do any manufacturing itself) chip company that specializes in speeding signal transmission by eliminating bottlenecks and providing a high-speed interface between analog and digital information. The company licenses its chip designs to companies who manufacture them for use in enterprise networks, datacenters, test and measurement equipment and military systems. While you won’t find Inphi-designed chips in your consumer goods, the company makes the information infrastructure work better for everyone. Inphi is making its fourth appearance in Cabot Top Ten Trader in 2016, which is a strong recommendation on its own. But the immediate reason for investors’ interest is Inphi’s Q3 report on November 1, which featured a 49% increase in revenue, a whopping 142% gain in earnings per share—and a record high after-tax profit margin of 28.7%. The company also announced on November 1 that it would pay $275 million in cash (and debt assumption) to acquire ClariPhy Communications, a maker of ultra-high-speed systems-on-a-chip (SoCs) for multi-terabit data, long haul and metro networking markets. As Inphi’s CEO, Fred Tamer, explained it, “With the acquisition of ClariPhy, we are completing our product portfolio as the leading component and platform supplier for optical networking customers.” With an ongoing cycle of upgrading to the global optical data infrastructure, Inphi is both leading and growing. It’s a good story.
Technical Analysis
IPHI has been in an uptrend since the start of 2013, but its advance has been punctuated with several significant pullbacks and flat spots. After gapping up in early August from 36 to 42, the stock drifted lower for three full months, winding up at 38, when the good quarterly report and acquisition news got it moving again. But the fact is that IPHI was trading at 7.5 in late 2012 and is now above 45, and institutional ownership has been increasing steadily. The stock has pulled back by a point since it tagged 47 last week, which represents a decent buying opportunity. Use a stop at 42.
IPHI Weekly Chart
IPHI Daily Chart
MGM Resorts (MGM)
Why the Strength
MGM Resorts is a globally diversified hospitality and casino company with multiple properties in Las Vegas and several other U.S. states, one casino in Macau, China and several other properties under development. The company is distinguished from other casino companies by its large portfolio of hospitality properties and a 76% interest in a real estate investment trust. The company got 37% of last year’s revenue from its casinos, 25% from rooms, 21% from food and beverage and the rest from entertainment, retail and other. MGM Resorts’ lower dependence on gambling revenue, especially in Macau, where government regulatory actions have taken a toll over the last couple of years, has protected it somewhat from the downturn in the gambling industry that hit competitors like Wynn Resorts so hard. MGM’s Las Vegas revenue has remained relatively steady since 2011, but the uptrend in Macau gambling just in the past few months has definitely given the company a boost. When the company released its Q3 numbers on November 7, revenue was up 10% (after seven quarters of declines) and earnings jumped by an impressive 314% after a couple of years of spotty performance. Macau’s recovery remains the biggest story in the sector, but MGM Resorts is thriving thanks to Vegas (domestic EBITDA was up 39% in Q3), and represents a slightly less risky bet on the global hospitality and casino business.
Technical Analysis
MGM went through a long meandering correction from just under 29 in March 2014 through a bottom at 16 in February 2016. But the stock’s comeback from that bottom has been very energetic, with the November 7 earnings beat giving the stock a new high-volume burst of energy. MGM even gapped up slightly today, climbing back above 29. We think MGM is at least as attractive as Las Vegas Sands (LVS) and Melco Crown (MPEL), which were featured here earlier this month. Look to buy on a pullback of a half a point or so and put a mental stop in below 26.
MGM Weekly Chart
MGM Daily Chart
Micron Technology, Inc. (MU)
Why the Strength
Idaho-based Micron Technology is a chip manufacturer whose flash memory chips and image sensors end up in computers, consumer devices, enterprise servers, storage devices, automotive applications and industrial products. Micron has just booked seven quarters in a row of declining earnings (including three quarters of losses) and six quarters of declining revenue. But investors are considering the company’s leadership position in the memory chip business and the current uptrend in its cyclical industry and are looking for a massive rebound in both revenue and earnings. After making just six cents per share in earnings in fiscal 2016 (for the year ended in August), estimates are for earnings of $1.17 per share in 2017 and $1.75 in 2018. Micron’s management has announced price increases for its products, a cost-cutting program in its manufacturing facilities and an increase in R&D spending. Investors can see clear evidence of a turnaround in the chip cycle and they’re buying the Micron story.
Technical Analysis
MU topped out at 37 in late 2014 after a two-year run and skidded lower in 2015, falling to a multiple bottom at 9 in the first five months of 2016. The bounce began in the middle of May when the stock registered 11 straight days of advances. The rally cooled in October after the stock tagged 18, then popped to new rally highs last week with a run that has come on some enticing volume. MU has put a little distance between itself and its 25-day moving average, so you can either wait for a little weakness or take a small position here and average up. A loose stop at 17.5 will give you some wiggle room while giving protection.
MU Weekly Chart
MU Daily Chart
Palo Alto Networks (PANW)
Why the Strength
As we said last week about Proofpoint, cybersecurity is one of the few growth sectors that has shown excellent action since the election. Part of the reason: The group already had a big bear market earlier this year, and after months of bottoming action, the leaders in the sector look ready to push higher. Palo Alto Networks is quickly becoming the blue-chip player among the “new age” of cybersecurity players; it’s not as big as older peers like Cisco or Checkpoint, but its platform addresses the needs of today and tomorrow, allowing it to grab tons of market share. The company’s well-rounded platform sets it apart, combining next-generation firewalls with advanced endpoint protection and other capabilities that result in much larger revenue per customer ($40,500, or 5.5 times as large!) Palo Alto ended July with a whopping 34,000 customers (up about 30% from a year ago), and because it gets most of its money via subscription, the company is producing a mind-boggling amount of cash—for the prior 12 months, Palo Alto cranked out $586 million of free cash flow (a 43% margin) equal to more than $6 per share. With demand for cybersecurity increasing as everything moves to the cloud and more business is done via mobile devices, sales, earnings and cash flow should continue to surge for a long time. The question is how to handle the stock, which is set to report earnings tonight (November 21).
Technical Analysis
As mentioned above, PANW already went through the wringer after a big 2014-2015 run, falling from 201 in July 2015 to 111 in February 2016. The stock retested that low (at 115) after Brexit and then had a decent run north of 160, where it began its current base. Our take is simple: After the big decline and bottoming effort, a positive earnings reaction should be buyable, Thus, we’ll place our buy range above the current range, and advise using a 10%-ish loss limit.
PANW Weekly Chart
PANW Daily Chart
Terex (TEX)
Why the Strength
Terex is another construction stock that’s had a terrible string of results lately, but investors are betting that will change should economic growth pick up. The company does big business in industrial cranes and aerial work platforms, but demand for these has been sliding in recent quarters, especially in North America (the oil bust and accompanying cut in CapEx spending didn’t help). That’s led the company to slash costs and sell off some businesses (including an international crane and port solutions segment for more than $1 billion; the sale should be completed early next year), which has allowed the firm to stay profitable despite tough times—even this year, management expects free cash flow north of $1.50 per share and has been buying back a little stock. The hope here, of course, is that some sort of bipartisan infrastructure bill passes next year, which, combined with faster economic growth, could quickly increase demand for Terex’s products. Even before the election, analysts saw earnings next year rising more than 30% as conditions improve and, because of Terex’s cost cuts, most business falls to the bottom line. A lot will depend on what happens in Washington, D.C. next year, but Terex is highly cyclical, and is poised to earn a ton of money should conditions improve. We consider it an interesting speculation for a cyclical stock.
Technical Analysis
Like many of today’s strong stocks, TEX already had its own bear phase from early 2014 (when the stock was north of 45) to January of this year (when it fell below 14). It quickly spiked up from that low, but went on to build a seven-month consolidation (mostly above its 200-day line), before breaking out powerfully (and following through nicely on the upside) after the election. If you’re game, you could buy a little on dips with a stop below 25.
TEX Weekly Chart
TEX Daily Chart
United Continental Holdings (UAL)
ir.unitedcontinentalholdings.com
Why the Strength
United Continental needs no introduction—it’s one of the largest air carriers in the world with north of $35 billion in annual revenue. It and other airline stocks had big runs into 2015 as earnings boomed. Thanks to industry consolidation, competition has declined meaningfully (10 years ago, 12 carries controlled 60% of the market in the U.S.; today, just four carriers control 90% of the market!), allowing prices to remain firm for tickets and extras like bags, drinks and the like. That said, profits began to sag, which took the stocks down for about 18 months, but now the tide has turned for UAL for a couple of reasons. First and foremost, the stock is cheap, trading at just 11 times next year’s earnings, and the company is throwing off a ton of cash (free cash flow has totaled $2.6 billion in the first nine months of the year; the next three years is expected see free cash flow north of $9 billion, compared to a current market cap of $21 billion!). Second, the company isn’t resting on its laurels, announcing at its Investor Day last week plenty of efficiency initiatives that could lead to another few billion dollars of profit in the years ahead. All of that is probably a big reason why Berkshire Hathaway just took a stake in UAL (along with other big players)! Analysts see earnings falling to $6.26 per share next year, though that could prove conservative if the economy picks up steam. It’s obviously not a major growth story, but with Buffett giving the thumbs up to the stock, we think UAL could see surprising upside, especially as transportation stocks have taken flight.
Technical Analysis
UAL peaked at 75 in January 2015 and fell as low as 37 during the post-Brexit panic in June of this year. But the stock has been strong since—UAL trended higher during the past few months along its 50-day line, reaching the upper 50s before the election. And it’s taken off during the past two weeks, first on the boom in transport stocks, and then on the Berkshire news. We think it will head higher over time, but believe it’s best to buy on dips of a few points.
UAL Weekly Chart
UAL 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.
