A Balancing Act
Current Market Outlook
Since our last issue, the market has rebounded nicely from its sharp one-week pullback in early November, which is obviously good to see. However, not that much has changed from a big picture point of view—the major indexes are in decent shape (the trends remain up), but the advance remains narrow, with a few dozen stocks doing well but many stocks and sectors simply chopping around or trending down. Bottom line, we’ll keep our Market Monitor where it is and stick to our game plan: you should hold your best performers (though taking some partial profits on the way up makes sense), but also hold some cash and be very selective on the buy side.
What’s encouraging is that our screens are finding more and more good growth stories, which is what we see this week. Our Top Pick is a big-cap stock that’s gathering strength as it transitions to the cloud—Autodesk (ADSK) leads its field, but the stock has come alive as big investors anticipate huge recurring revenue ahead.
| Stock Name | Price | ||
|---|---|---|---|
| Stamps.com (STMP) | 0.00 | ||
| PBF Energy (PBF) | 38.93 | ||
| Universal Display (OLED) | 187.54 | ||
| Monster Beverage Corporation (MNST) | 0.00 | ||
| Heartland Payment (HPY) | 0.00 | ||
| Home Depot (HD) | 0.00 | ||
| Hawaiian Holdings Inc. (HA) | 0.00 | ||
| General Motors Company (GM) | 0.00 | ||
| Ctrip.com International Ltd. (CTRP) | 34.94 | ||
| Autodesk (ADSK) | 229.00 |
Stamps.com (STMP)
Why the Strength
If you listen to sports talk radio, you’ve probably heard of this company. The Internet-based, at-home mailing and stamp-printing service is a major sponsor for seemingly every drive-time sports-talk blowhard out there. All that over-the-airwaves publicity is starting to pay off: the company shattered third-quarter earnings estimates earlier this month, with earnings per share of $1.14 blowing away the $0.85 that was expected. It marked a 61% improvement in EPS from a year ago on sales ($51.7 million) that were up 37%. It’s the fifth straight quarter that Stamps.com’s earnings and sales have each improved by double digits from the previous year. For the year, the company is expecting a 54% jump in EPS on 37% sales improvement. Like the rise in Cyber Monday sales, the success of Stamps.com is the latest evidence of U.S. consumers’ preference for the convenience of buying things on the Internet from the comfort of their homes. As Stamps.com’s ads remind us, visits to the post office are no fun, so why not do all your mailing and shipping without leaving the couch? Whether they’re listening to sports-talk radio or not, consumers are getting the message.
Technical Analysis
STMP gapped up from 75 to 104 after the early November earnings beat. Prior to that big move, the stock had stair-stepped its way up from 47 at the beginning of the year, with the only true dip coming in (when else?) August and September. STMP has spent most of the year above its 50-day moving average, and is now well clear of that mark (82). It’s not a bad idea to take a small position in the stock, but don’t wait for it to fall all the way to the 50-day average before bailing. Set your stops in the high 80s.
STMP Weekly Chart
STMP Daily Chart
PBF Energy (PBF)
Why the Strength
While the oil exploration and production business hasn’t had much good news since its early October rally (check out XOP for a picture of the industry’s weakness), the low price of crude has been a great thing for refiners. PBF Energy is making its debut in today’s Top Ten as the company is expanding from its Northeast and Midwest base to a national footprint. PBF’s ambitions were first seen when it announced on October 1 that it was buying a refinery in Torrance, California from ExxonMobil for $538 million. The deal won’t close until the refinery, idle since an explosion in February, returns to full capacity, probably in mid-2016. Then came the announcement earlier this month of PBF’s acquisition of Chalmette Refining for $322 million plus working capital, a New Orleans business that brings with it pipeline assets, storage facilities and a marine terminal. When both of these acquisitions are completed, PBF will be the fourth-largest independent refiner in the U.S., with new breadth in the south and west. Investors have also noted that PBF has priced $500 million in senior secured notes to finance these (and possible future) purchases. Investors like PBF Energy’s ambition and the supporting fundamentals of a cheap crude-price environment.
Technical Analysis
PBF is still a relatively young stock, coming public in late 2012, and it has spent most of its time trading in a very slowly rising trading range. But news of the two acquisitions has changed the chart’s character, including volume spikes on October 1 and 6 and on November 18. The stock has been trading at new all-time highs since November 18 and probably needs to slow down a bit while its 25-day moving average catches up. We like PBF (and its 2.9 % annual dividend yield) on any weakness of half a point or more. Use a loose stop at 37 to allow for volatility.
PBF Weekly Chart
PBF Daily Chart
Universal Display (OLED)
Why the Strength
A Cabot Top Ten Trader regular in the first half of the year, Universal Display has rebounded nicely after a summer swoon. The makers of display screens used in consumer electronics, Universal is gathering momentum on rumors that its products might be part of the next Apple iPhone. A Japanese news report claims that Apple will, for the first time, use organic light-emitting diode (OLED) technology for the iPhone 8 starting in 2018. That doesn’t necessarily mean it will select Universal Display as its supplier—Samsung and LG Display also make OLEDs—but the mere possibility would be a major game-changer for a company that did just $191 million in sales last year. Sales (20%) and earnings per share (89%) grew at a nice clip in the third quarter after a couple of down quarters, and the company is on pace for a sixth straight year of top- and bottom-line improvements in 2015. But the Apple rumors are the real driving force behind the stock right now.
Technical Analysis
June through September were ugly months for OLED. After a huge run-up during the first five months of the year, the stock came crashing back to earth, plummeting from a high of 55 to 33 by October 1. It has shot straight up in the two months since, reaching 53 this morning as volume has doubled in the past two weeks. Since topping 40 for the first time in three months in early November, OLED has been building a head of steam, with scarcely a dip the entire month. Buy on any sign of weakness, and see how far the Apple rumor mill can carry the stock. It’s a fairly speculative play, but one that’s backed by a very strong chart over the last six weeks.
OLED Weekly Chart
OLED Daily Chart
Monster Beverage Corporation (MNST)
Why the Strength
Back in 2012, Hansen’s Natural, a juice and natural soda company founded in the 1930s, finally faced reality and changed its name to Monster Beverage. The company’s energy drink division, led by the Monster brand, was producing 90% of the company’s revenue, and the name change made sense. Monster took another huge step in August 2012 when it inked a deal with the Coca-Cola Company, giving its legacy juice and natural soda business to Coke and getting Coke’s small energy drink line in return. Coke also took a 16% stake in Monster, a move that promised big synergies by giving Monster access to Coke’s global distribution network, and paid $2.15 billion to Monster. The company’s November 6 quarterly earnings report provided evidence that these moves are paying off, as revenue increased 19% and earnings were up 20%, soundly beating expectations. The increase in revenue reflected Monster’s first full quarter owning Coke’s energy drink brands and a surge of buying ahead of an announced price increase. Analysts are also looking ahead to Monster’s move into China and other global markets and to the transition of distribution to Coca-Cola’s network. Monster, which has nearly 1,400 institutional sponsors, is no secret, but it’s still making positive changes and enjoying early support from a $500 million stock buyback made possible by the company’s cash windfall from Coke.
Technical Analysis
MNST, which made a nice run from 64 in August 2014 to 144 in February 2015, had been trading sideways through much of 2015, rallying to 156 in August but pulling back below 130 in October. The stock gapped up to 150 after its November 6 quarterly report and finished last week at all-time highs (and completing a cup-shaped rally in the process). We think MNST looks like a buy on a pullback to 155 or so, with a protective stop around its 50-day moving average, now just above 140.
MNST Weekly Chart
MNST Daily Chart
Heartland Payment (HPY)
Why the Strength
Heartland Payment Systems provides end-to-end bankcard processing services in the U.S., including sharing information and funds between merchants and card issuers, selling and renting point-of-sale (POS) devices, processing student loans, all the way down to POS solutions for school cafeterias. Heartland specializes in providing services for small and mid-sized businesses, targeting specific types of businesses—like liquor stores or filling stations—with customized packages. The company also announced in late October that it had acquired a privately held company called Digital Dining that does payroll, market and loyalty programs for restaurants that combine iPad and iPhone support with traditional fixed terminals. This is just the latest in a campaign of Heartland acquisitions that includes XPIENT Solutions and LiquorPOS in 2014 and pcAmerica and Dinerware in February 2015. The company’s quarterly report on October 30 featured earnings of 79 cents per share, well ahead of analysts’ expectations of 75 cents. 17% revenue growth to $706 million also exceeded expectations. With growing momentum heading into the holiday shopping season, analysts are forecasting a 114% jump in earnings for Heartland in 2015. The company is building a solid niche in the payments business with both organic and acquisition-based growth.
Technical Analysis
HPY has been a steady grower since the U.S. came out of the Great Recession in early 2009. But it was the chart’s increased rate of advance since the August wipeout that gave HPY its first appearance in today’s Top Ten. The stock rebounded strongly from its August 24 low and gapped up on a strong volume spike on October 30 after its strong earnings report. HPY has kept its momentum from that gap up and has been making a series of new all-time highs. Look to buy on any weakness of a point and use a stop at 72.
HPY Weekly Chart
HPY Daily Chart
Home Depot (HD)
Why the Strength
Home Depot is one of those rare mega-cap, Dow Industrial stocks that, when the time is right, can still make a solid move. One of those moves looks to have started last week because of a solid quarterly report and outlook. Sales (up 6%) and earnings (up 18%) both topped estimates, which was good, but what really got big investors excited was the firm’s comparable-store sales, up 5.1% overall including a huge 7.3% in the U.S. (Remember, this comes at a time when most retailers are being dismantled after poor results in recent weeks.) Throw in still-solid readings from most housing-related reports (including a good quarterly report from peer Lowe’s), a solid dividend (1.8% annually) and a consistent share-buyback program (the share count is down 4.5% year-over-year) and big investors feel comfortable that the bottom line will continue to crank higher for many quarters to come—analysts see earnings up 16% next year, and given Home Depot’s history of topping expectations, that’s likely conservative. It’s not going to make you rich, but the odds strongly favor higher prices ahead.
Technical Analysis
HD has been in a major uptrend since 2011, but it’s had a couple of significant, wear-you-out sideways moves along the way. One of those was from May 2013 to August 2014 in the low 80s, and another happened this year—the stock hit 118 in February and was at the same level two weeks ago when the market dipped. Since reporting earnings, though, HD has surged to new highs on great volume. We think this is a low-risk entry point, though you should use a stop in the mid-120s in case something goes wrong.
HD Weekly Chart
HD Daily Chart
Hawaiian Holdings Inc. (HA)
Why the Strength
Flying to Hawaii is inherently a luxurious experience, but it’s even more so when you have your own bed. Passengers who fly Hawaiian Airlines, owned by parent company Hawaiian Holdings, will soon be able to purchase luxury seats that can be converted into beds. The company expects to have its new “Extra Comfort” seating option ready by year’s end. It’s a neat little attention-grabbing feature for a niche airline that has already been garnering attention on Wall Street by virtue of its superior growth. Through the first nine months of the year, Hawaiian Holdings’ earnings per share have more than doubled from the first three quarters of 2014. Low fuel prices and strong demand in the company’s primary destinations—which include not only Hawaii but Japan, Australia, New Zealand, South Korea, Tahiti and American Samoa—have boosted profits and helped margins increase five-fold in the past nine months. The company’s EPS should only improve in 2016, as a convertible debt note of $86.25 million issued in 2011 is due to expire in March, allowing shareholders to convert roughly 10.9 million shares—effectively reducing HA’s total share count. It’s a complicated bit of financial finagling; but all that institutional investors care about is that Hawaiian Holdings’ EPS is expected to increase 127% next year.
Technical Analysis
Inching its way up since February, HA took off after the market downturn in August, jumping from 21 to 25. Then, after the September re-test, bursting all the way to 38 in early November. The stock has been building a solid base ever since, correcting slightly to 36, thus setting up a nice entry point. If you want to dip a toe, set a hard stop at the 50-day moving average (31), which has acted as support since August.
HA Weekly Chart
HA Daily Chart
General Motors Company (GM)
Why the Strength
It doesn’t get more American than General Motors, but the Detroit-based auto-making giant owes its recent success in large part to China. A new tax break on smaller cars took effect in China on October 1, and no automaker capitalized on that break better than GM. A joint venture between GM and SAIC called Baojun, a brand of low-cost cars sold in China, delivered 119% year-over-year sales improvement in October. Baojun now accounts for roughly one-quarter of GM cars registered in China. Other factors are helping General Motors’ sales, and anticipated sales: the new Chevy Colorado is the fastest-selling pickup truck on the market, with more than 70,000 trucks sold in October; cheap oil prices are convincing more consumers to buy gas-guzzlers like many of the big trucks and SUVs GM sells; and Black Friday kicked off the always fruitful holiday shopping season for U.S. retailers. The company is also in the midst of a $5.5 billion cost-cutting plan that has boosted GM’s per-share earnings by 197%, 122% and 55% in the first three quarters of 2015.
Technical Analysis
After an inauspicious first eight months of the year, GM is climbing fast. Since tumbling from a high of 38 in March to 27 during the broad market collapse in late August, GM has nearly recovered all of those losses, jumping to 36 earlier this month and building a nice-looking base there over the past two holiday-abbreviated weeks. The stock has now traded above its 50-day moving average for two whole months, and hasn’t declined more than a point during that time. Volume has waned since the October and early November push, but the base-building that the stock is doing now could bode well for another breakout—especially if November sales are strong.
GM Weekly Chart
GM Daily Chart
Ctrip.com International Ltd. (CTRP)
Why the Strength
Ctrip has long had a great story—as the “Expedia of China,” the company has led that country’s online travel industry, doing huge business in both airline ticketing and hotel bookings. And business on that front remains great; revenue growth has remained rapid (up 44% in the recently-reported third quarter), and, after a few quarters of shrinking margins due to heavy competition, earnings boomed more than 500% as profit margins began to perk up. All of that is good, but there’s even bigger news: Ctrip (which has the top market share in hotel bookings) is set to merge with Qunar (which has the top market share in air ticketing), another major player in the field that happens to be majority-owned by Baidu. Once the deal is complete, the combined Ctrip will be about 25% owned by Baidu (it’s sure to put its marketing muscle behind it) and will control 70%-plus of the industry. And the industry is expected to triple by 2020! Some analysts believe the company’s profit margins can triple over a few years, too, thanks to tamer competitive pressures. Thus, the pieces are in place for earnings to soar in the quarters ahead and for the stock to follow suit. We like it.
Technical Analysis
CTRP has been hot recently, but this comes after a long dead period—shares hit 61 in October 2013 and two years later (just as the current market rally was beginning), it was at the same level. Since then, the buyers have taken control, with CTRP soaring both on the Qunar announcement on October 26, and again following earnings two weeks ago. The pullback since has been normal; it could go a bit further but we think you can buy a few shares around here with a loose stop in the high 80s.
CTRP Weekly Chart
CTRP Daily Chart
Autodesk (ADSK)
Why the Strength
Adobe Systems is a dominant player in its market, and its stock has enjoyed a huge run during the past couple of years thanks to a shift in its business model. Instead of selling one-time updates/new versions to customers, it’s moved to the cloud, with customers accessing its leading products online and getting automatic updates and improvements, all for a monthly subscription fee. What does this have to do with Autodesk? A lot! Autodesk looks like Adobe did two or three years ago; the firm is a big leader in the 3D design business for engineers, architects and the like. The firm is in the early stages of shifting to the cloud—in the short-term, such a move hurts sales and earnings because instead of getting lump-sum payments, Autodesk receives smaller payments. Long-term, though, the recurring revenue model brings in far more money as customers stay on board and have a better experience with automatic updates. Thus, big investors are focusing on subscription-related growth, which looks good—in the third quarter, Autodesk’s total subscriptions grew 80,000 to 2.47 million, while total annualized recurring revenue was $1.35 billion, up 15% from a year ago, and deferred revenue was up 20%. Even better, management reiterated their view that subscriptions and annualized recurring revenue should grow 20% to 25% annually through 2019. It’s not changing the world, but Autodesk should do well as it executes its new cloud-based plan.
Technical Analysis
At its lows during the market correction, ADSK hadn’t gone anywhere since early 2012, so only the true believers still own shares. But the company’s third-quarter report convinced many big investors that the business model shift is succeeding—ADSK rallied strongly off its early-October bottom, then gapped up to 64 on earnings in early November. Since then, shares have tightened up nicely and remained above their 25-day line. ADSK looks like a good buy in this range with a stop near 56.
ADSK Weekly Chart
ADSK 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.
