Mid-October was the Shakeout
Current Market Outlook
We wrote a few weeks ago that a straight-up move from October’s vicious selloff would be highly unusual bullish action … and that’s just what we’ve seen! Now, to be clear, not everything is positive—many commodity-related sectors are still struggling, and earnings season has resulted in more than a few duds. Plus, having soared back to their highs, the indexes could easily take a breather in the short-term. That said, the snapback from the October lows has produced tons of stocks surging to (or close to) new highs, and the power of the move tells us to expect better times ahead. Following the evidence, we’ll move our Market Monitor up another couple of notches. There will be pullbacks, but the path of least resistance is up.
This week’s list focuses on a bunch of recent earnings winners, including some big-cap firms that big investors are gravitating toward. Our Top Pick is Visa (V), which is on the move after building a base for most of 2014.
| Stock Name | Price | ||
|---|---|---|---|
| Whirlpool (WHR) | 0.00 | ||
| Visa (V) | 0.00 | ||
| Ulta Beauty (ULTA) | 331.95 | ||
| Infinera (INFN) | 0.00 | ||
| Incyte Corporation (INCY) | 76.98 | ||
| Salesforce.com (CRM) | 0.00 | ||
| Centene (CNC) | 0.00 | ||
| Baidu (BIDU) | 0.00 | ||
| AbbVie Inc. (ABBV) | 93.53 | ||
| AmerisourceBergen (ABC) | 0.00 |
Whirlpool (WHR)
Why the Strength
Whirlpool needs no introduction—the company was founded back in 1898 and today is the world’s leading supplier of home appliances, with 69,000 employees (!) and revenues approaching $20 billion annually. It’s one of the strongest stocks today after a solid quarterly report and, possibly more important, general strength among many housing- and construction-supply stocks. For the third quarter, results were so-so; sales did increase 3%, driven by North America (where sales rose 7%), while continued cost controls (after-tax profit margins of 5.0% were the highest in years) and a small share buyback program (shares outstanding fell nearly 2% year-over-year) helped the bottom line grow 12%. Management is optimistic about continued North American growth, and investors are intrigued by Whirlpool’s acquisition activity to boost growth overseas—the company bought 51% of Hefei Sanyo, one of China’s leading home appliance firms, and gobbled up 67% of Italy’s Indesit, a big player in Europe. Both buyouts should help earnings and free cash flow next year. Obviously, there’s nothing revolutionary here, but the cheap valuation (16 times trailing earnings), nice dividend (1.8% annual yield) and attractive earnings growth next year (23%) should keep buyers interested.
Technical Analysis
WHR might be a large, old-world company, but we love the chart. The stock marched up to 160 by the end of last year, fell hard during the January market dip, and bobbed and weaved around its 40-week moving average for most of this year. But since the October shakeout to 140, WHR has exploded higher, bursting to new price highs on triple average volume following its earnings release. You don’t need to chase the stock; any dips look buyable.
WHR Weekly Chart
WHR Daily Chart
Visa (V)
Why the Strength
In the market, you want to pay attention to unusual action. Take Visa—for most of the past three years, the stock has done OK, but it’s been very slow and steady in its movements as the firm’s business outlook doesn’t surprise much. That’s why Visa appearing in Top Ten this week is an eye-opener—the stock exploded higher on humongous volume last week following a solid quarterly report. The numbers weren’t anything jaw-dropping—sales rose 9% (though dragged down a bit by the strong U.S. dollar) and earnings rose 18%, while profit margins were a mind-boggling 42%. But management’s bullish talk for 2015 (it expects low double-digit revenue growth), a new $5 billion share repurchase program, hopes for a general economic pick-up and general excitement about a variety of online and digital pay initiatives (including its own Visa Checkout, as well as things like Apple Pay) have big investors thinking the next couple of years could produce 20%-ish earnings growth. Long-term, of course, the movement toward credit and debit card payments, and away from cash and checks, has a long way to go around the world, which is another factor sure to keep big investors interested. All told, the path of least resistance is up.
Technical Analysis
V cranked ahead steadily from late-2011 through mid-January of this year, but that marked the top for many months—the stock corrected 17% (a pretty big dip for this stock) by April, and while it bounced during the summer, it never got going. That led to a re-test of support of 195 during the market’s wipeout last month, and then, last week, a monstrous earnings-induced breakout; V lifted 10% on more than quadruple average volume to new price peaks. Obviously, shares aren’t going to double in a month, but we’ve learned not to underestimate huge-volume breakouts from big, liquid, well-sponsored stocks. You can buy some here or on any weakness.
V Weekly Chart
V Daily Chart
Ulta Beauty (ULTA)
Why the Strength
Ulta Salon is a national chain of about 750 beauty stores in 47 states that’s following a cookie cutter strategy to open more than 100 new stores a year. Each 10,000-square foot store offers a huge selection of over 20,000 products including haircare and skincare products, cosmetics, styling tools and fragrances, in both brand-name and private-label formats. Each new store also has an in-store salon of about 950 square feet. The company has grown revenue at more than 20% per year for the last three years by offering one-stop service for every beauty need and excellent customer service, building strong customer loyalty. The company’s target customer is a “beauty enthusiast” who earns between $75,000 and $100,000 a year, and it has nearly 15 million members in its loyalty program. That kind of strong customer base coupled with an aggressive expansion strategy (and an improving U.S. economy) makes the future look bright. The company made nine appearances in Top Ten in 2011 and 2012, but it couldn’t keep up with inflated analysts’ expectations. Now, with more transparent growth plans, Ulta Salon is back in investors’ crosshairs. The company’s fiscal year ends in January, so earnings won’t be out until December 4.
Technical Analysis
ULTA scampered up the charts in 2010 and 2011, but ran into strong resistance just above 100 in 2012. An energetic run in 2013 ended in a free-fall correction in December 2013 that dropped ULTA from 130 to below 84 in just nine weeks. The stock built a double-bottom base in January and May, then took off in September on big volume. ULTA is still consolidating that big blastoff, trading just over 120 on calm volume. ULTA may hang around while investors await earnings in December. You can start a position on any dip below 120 with a loose stop around 105.
ULTA Weekly Chart
ULTA Daily Chart
Infinera (INFN)
Why the Strength
Infinera designs and produces photonic integrated circuits and related software and services for optical (fiber) networks. Customers include cable system operators, Internet service providers, and telecos such as Cox Communications, Deutsche Telekom, Global Crossing and Level 3. The continued rise in demand for network bandwidth has proven a significant boon for Infinera, with revenue growing 17.2% during the first half of 2014, while gross margins came in at 40.2%. The stock’s most recent bout of strength follows on the heels of yet another blowout quarterly report, which not only exceeded Wall Street expectations, but also included fourth-quarter revenue guidance well above the consensus estimate. Management cited rising demand for bandwidth and the growing importance of optical network architecture, which is necessary for expanding networks to 100gbps data rates. Also, Infinera sports a diverse customer base which management believes shields the company from the weak demand many of its competitors are seeing from legacy-based Tier 1 customers. With plenty of room for continued expansion within the 100gbps realm, and bandwidth demand showing no signs of slowing, we like Infinera’s potential for continued growth.
Technical Analysis
Technically, INFN appears to have finally gotten its feet under it. The stock endured a volatile 2013, with shares breaking out of a trading range in April, only to be capped by resistance at 12 for most of the summer. INFN eventually retreated, entering another trading range in the 8-10 region, and shares remained locked in this region until August, when a rally attempt fell short at the 12 level once again. However, an October 22 earnings report provided the spark INFN needed, sending the stock soaring past resistance at 12 toward multi-year highs above 14. INFN is still digesting its post-earnings gains, so buying dips, with a target near 14, will offer the best entry point at this time.
INFN Weekly Chart
INFN Daily Chart
Incyte Corporation (INCY)
Why the Strength
When Top Ten last visited biotechnology firm Incyte back in February, the company was making headlines after announcing a collaboration with Merck to test a pair of cancer drugs designed to enhance the body’s immune system. This time around, Incyte is hot following last week’s third-quarter earnings report. The company posted a 62.5% jump in revenue for the quarter, with the company’s first commercial product, Jakafi—the only FDA- approved treatment for myelofibrosis (a rare blood cancer)—driving the results. Jakafi is marketed in collaboration with Novartis in markets outside the U.S. The deal has led to a 427% year-over-year spike in contract revenue for Incyte, with Novartis paying milestone payments of $60 million for European sales and $25 million for Japanese sales. As part of its third-quarter report, Incyte’s pipeline update revealed that the FDA granted Priority Review for Jakafi in the treatment of patients with polycythemia vera who are resistant to or intolerant of hydroxyurea. A response is expected by December 5, 2014. Incyte is also evaluating Jakafi in advanced or metastatic pancreatic cancer patients, with results from two Phase III studies expected in 2016.
Technical Analysis
INCY was flying high just shy of 70 when we last checked on the stock, but that was before valuation concerns took hold. Following the September market correction, INCY formed a base near 45 before embarking on its current rally. After eclipsing 50, the stock pushed its way toward 60 near the end of the month. Then, after last week’s quarterly report, shares blew past 60 to trade just shy of fresh annual highs. While follow-through buying could push INCY back toward the 70 level, we don’t recommend chasing the post-earnings rally. If you’re game, we recommend buying dips, with a target near 65.
INCY Weekly Chart
INCY Daily Chart
Salesforce.com (CRM)
Why the Strength
We’ve long said we believe that Salesforce.com could be the Microsoft of the Cloud era, with the leading productivity software for businesses aiming to improve sales performance, customer service and marketing, among other functions. The firm has four main businesses today—Sales Cloud (contact and opportunity management, social media collaboration to find leads), Customer Service Cloud (faster, more personalized support through phone, email, social media and more), Marketing Cloud (combining and collecting data from multiple channels in real time) and Platform (customers build their own apps for themselves or their customers), and all are growing steadily—in fact, revenue growth has accelerated in recent quarters to the high-30% range, while cash flow (which is a far better measure than earnings, which understate income) is also humming higher by 30% each year. Investors are getting excited now that it looks like Salesforce may be done with its acquisition spree (most of which diluted the share count), allowing cash flow to soar, while the firm’s new Analytics business should provide another tailwind to growth in the quarters ahead. With productivity and sales efficiency always a big draw among big companies, there’s no reason Salesforce can’t grow rapidly for many years. We like it. Earnings are out November 19.
Technical Analysis
CRM has done OK since a major top in late-2010 (it’s up more than 50% since then), but with tons of choppy action and an RP line that hasn’t made much progress for a few years. Now, though, the stock might be ready to move—after peaking at 67 in March and falling to 48 in May, the stock bobbed and weaved all summer along its 40-week line. Then it shook down to 51 last month and has been soaring back toward its peak since. We think a dip following Friday’s gap up is likely, especially with earnings on the horizon.
CRM Weekly Chart
CRM Daily Chart
Centene (CNC)
Why the Strength
With many more U.S. citizens gaining health insurance thanks to the Affordable Care Act, many insurers are doing well, and that includes Centene. This Missouri-based company has two lines of healthcare programs aimed at under-insured and uninsured individuals, a Managed Care segment and a Specialty Services segment. The Managed Care division offers Medicare and Medicaid-related health plans, including those designed for children, those in long-term care, foster care and Medicare special needs plans. The company’s Specialty Services division provides behavioral healthcare, in-home services, vision coverage, telehealth services and pharmacy benefits management services. Specialized coverage also includes pharmacy services for complex diseases. From its inception in 1984 as a single health plan, Centene has grown steadily, even growing revenues during the Great Recession. The company’s earnings report on October 28 featured higher-than-expected revenue and earnings (largely due to successful enrollment of more Medicaid members) and a big boost in full-year profit guidance from $3.70–$3.90 to $4.35–$4.50 per share. With Medicaid providing the fuel, Centene’s prospects look great.
Technical Analysis
CNC has been on a roll since the middle of 2012, rising steadily with no corrections lasting more than a month and change. From 24 in June 2012, the stock has now pushed past 90, thanks to the momentum provided by a jump from 79 to 89 on October 28 after the solid earnings report. CNC has pushed higher since then on good volume. CNC looks like a good buy on any weakness of a point or two. Use a stop at its old resistance at 83.
CNC Weekly Chart
CNC Daily Chart
Baidu (BIDU)
Why the Strength
Baidu is traditionally described as the Google of China, a name that fits for a company that not only dominates the Chinese online search business, but also handed Google its head in direct competition there. While there aren’t many questions about Baidu— a company that has booked four straight quarters with revenue growth over 50%—analysts have been worried about the company’s progress in mobile search, the fastest growing segment of online search in China. Baidu’s earnings report on October 30 helped to calm those fears. The company’s mobile platform contributed 36% of revenue, up from 33% in the June quarter. After the report, at least seven analysts raised their price targets for the stock, and analysts now rate the stock a buy by a margin of 32 to 1. The hard thing to comprehend about Baidu is the sheer size of the Chinese market, which has brought a ton of new customers as more and more users switch from PCs to mobile devices. Baidu’s growth has been so fast that many investors doubted it was possible for it (or China) to continue at such a rate. But even after years of huge gains, Baidu still has enormous opportunities for revenue growth.
Technical Analysis
BIDU went through a long correction from the middle of 2011 to the middle of 2013, falling from 166 to 83 in the process. The recovery began with a high-volume blastoff in July 2013 on good news about the company’s mobile search offering. BIDU popped to new all-time highs by the end of 2013, and, after six months of consolidation, broke out again to new highs in July. After three months of rebasing under resistance at 230, the stock broke out last week after its earnings report. This looks like a good long-term buy for anyone who wants exposure to China. Try to buy on dips of five points or so, with a stop at 215.
BIDU Weekly Chart
BIDU Daily Chart
AbbVie Inc. (ABBV)
Why the Strength
Spun off from Abbott Labs in early 2013, AbbVie has seven facilities manufacturing drugs for more than 170 countries. The company’s leading products include arthritis and Crohn’s disease treatment Humira, pancreatic drug Creon, cholesterol treatment Niaspan, HIV drugs Kaletra and Norvir, and low testosterone treatment AndroGel. Humira is the company’s leading medication, accounting for roughly half of sales. AbbVie’s third quarter results, released last week, easily topped the consensus estimate, posting a 7.8% year-over-year increase in third-quarter earnings. Humira remained strong, with the blockbuster drug seeing sales rise 10% year-over-year to $3.26 billion. Pancreatic drug Creon was AbbVie’s fastest rising star, with sales jumping 48% to $148 million, well ahead of the Street’s estimate of $113 million. Looking ahead, AbbVie raised its full-year 2014 earnings guidance to $3.25 to $3.27 per share from $3.06 to $3.16 per share. Lastly, while AbbVie will lose exclusivity with Humira in 2016, analysts believe that the company could see as much as $4 billion in annual sales from its new hepatitis C drug, which the FDA is expected to approve next month.
Technical Analysis
Despite a sometimes rocky 2014, ABBV has enjoyed a largely positive uptrend since the stock began trading in late 2012. ABBV was punished during the recent market correction, with shares pulling back sharply from resistance at 60 in September, falling to support near their 200-day trendline. The stock rallied back, however, breaking above 60 two weeks ago and gapping up to touch 64 when the company’s third-quarter report hit the Street. You can start building a position here.
ABBV Weekly Chart
ABBV Daily Chart
AmerisourceBergen (ABC)
Why the Strength
Making its first appearance in Top Ten, AmerisourceBergen is a giant in healthcare supply chain management. Founded in 2001 when AmeriSource Health Corporation merged with Bergen Brunswig, the company is a leader in pharmaceutical sourcing and distribution services, forming partnerships with drug manufacturers, suppliers and pharmacies. The company now employs more than 13,000 associates in over 150 offices worldwide, and uses its 26 distribution centers in the U.S., four U.S. specialty distribution centers and two Canadian distribution centers to see that customers can source their generics and other drugs smoothly and efficiently. The company’s appearance in today’s Top Ten follows a great quarterly report on October 30 that featured 36% earnings growth on 29% revenue growth. AmerisourceBergen’s earnings growth was in single-digit percentages in 2013, but has accelerated dramatically in the past four quarters, driven by large amounts of new business and management’s cost controls. The company also announced today that it’s raising its dividend, which now has a forward annual yield of 1.10%. Pharmaceutical stocks have been hot recently, and AmerisourceBergen is showing strength on the distribution side.
Technical Analysis
ABC has been a steady, but not spectacular issue over the years, climbing from 27 in 2010 to the mid-30s in 2012 and making a run to 72 in 2013. The stock spent three months consolidating a gap up to 78 in July, then accelerated to 80 ahead of last Thursday’s earnings report. The stock gapped up to 85 on monster volume after the report and has climbed to 86 since. Volume remains elevated, so buying on a pullback will require some patience. If you like the story, it’s probably best to take a small position right here and average up as you get a little profit cushion. Use the stock’s old resistance at 78 as a stop.
ABC Weekly Chart
ABC 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.
