A Bit Hot and Heavy, but Buyers are Clearly in Control
Current Market Outlook
After a modest rise last week, the market’s story remains the same—the intermediate- and longer-term trends continue to point up, and leading stocks remain in favor, with a ton gapping up on earnings during the past three weeks. It’s not all good news, of course—the broad market has again turned iffy by a few measures, and the environment is a bit giddy right now as investors count their profits. Thus, we won’t rule out a healthy pullback in the major indexes or some rotation among various stocks and sectors. But at day’s end, we always go with the market’s primary evidence (trend, price/volume, etc.), and today that evidence is solidly bullish, so we are, too.
This week’s list is heavy on small- and mid-sized companies, though a variety of sectors are represented. Our Top Pick is Universal Display (OLED), a leading glamour stock that just soared on earnings after about five months of no progress. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Axcelis Technologies (ACLS) | 0.00 | ||
| Conn’s Inc. (CONN) | 0.00 | ||
| EPAM Systems (EPAM) | 188.24 | ||
| Insulet (PODD) | 175.69 | ||
| Neurocrine Biosciences (NBIX) | 123.40 | ||
| Old Dominion Freight Line Inc. (ODFL) | 221.91 | ||
| PBF Energy (PBF) | 38.93 | ||
| Trex Company (TREX) | 117.56 | ||
| TRI Pointe Group Inc. (TPH) | 0.00 | ||
| Universal Display (OLED) | 187.54 |
Axcelis Technologies (ACLS)
Why the Strength
For those waiting for more evidence that the semiconductor cycle remains strongly up, we present Axcelis Technologies. This relatively unknown small-cap company (market cap is $1.1 billion) makes capital equipment for the semiconductor industry, mainly consisting of ion implantation systems, a roughly $1 billion market where it holds around 27% market share. The company recently developed a new platform called Purion, which it launched in early 2016. According to Q3 results (released last Thursday), the equipment is selling like hotcakes! Growth is coming from the automotive, industrial and Internet of Things (IoT) industries, while memory customers are investing in 3D NAND and DRAM. Third-quarter revenue growth of 59% and EPS growth of 400% (to $0.35) gave management the confidence to increase full-year 2017 revenue guidance to $400 million. That represents 50% growth, which should drive a 250% increase in EPS (to $1.26) for full year 2017. Those are massive numbers, and based on management’s comments from the conference call, powerful tailwinds should push growth into 2018 too. We found it interesting that the company’s CEO compared the current chip cycle to that of the late 1990s, when she said millions of devices were being connected. Now, billions are being connected, which should keep demand for chips (and the equipment that makes them) strong for a long time to come.
Technical Analysis
ACLS enjoyed strong momentum in the first half of 2017 as the stock traded mostly above its 50-day line through early-June. That move mirrored the strength in the broader semiconductor index, as did ACLS’s mid-summer retreat and subsequent consolidation. Shares found support just above the 40-week line for much of August and then began a new advance that has been very powerful—ACLS rallied eight weeks in a row on increasing volume, and after a quick dip to its 25-day line, surged to new highs on earnings last week. Dips looks buyable.
ACLS Weekly Chart
ACLS Daily Chart
Conn’s Inc. (CONN)
Why the Strength
Conn’s is a small chain of furniture and appliance stores (around 116 locations) that sells home goods, electronics, mattresses, home office goods and appliances in 14 states across the southern tier of the U.S. The company specializes in selling premium brand large-ticket items to credit-constrained customers, with about 72% of customers getting financing through the company’s in-house financing program. The company has provided in-house credit for over 50 years, and weathered multiple business cycles and a deep recession. Conn’s customer base is consumers with FICO scores between 550 and 650, which is around 20% of the U.S. population. The company lost money in fiscal 2017, but earnings are expected to jump back into the black this year and rise 154% in 2018. Conn’s’ earnings report on September 7 featured a 750% jump in earnings, the second quarter in a row with big EPS gains. The company’s updated guidance on October 23, which detailed both the effect of lost selling days due to Hurricane Harvey and also the positive sales trends from rebuilding activities, proved reassuring to investors. Given the company’s success in dealing successfully with customers with low credit scores, management has identified payday loans and credit card issuance as possible growth areas. The company will report Q3 results in early December.
Technical Analysis
CONN has been in an uptrend since its bottom in April 2017. The stock got a burst of energy in early September, another in late September and another in late October following the guidance update. This looks like a successful niche business in the generally flabby retail sector. If you like the story, you can look for a dip below 31 as an entry point, with a stop below 27.5.
CONN Weekly Chart
CONN Daily Chart
EPAM Systems (EPAM)
Why the Strength
EPAM Systems is a very successful software and IT outsourcing company that does design, prototyping, testing and migration services for software vendors and technology companies. The company has a global footprint and has grown revenue by more than 25% every year but one (the Great Recession year of 2009) since 2007. There is no big secret here, just a record of successful projects leading to repeat business and growing expertise in multiple software fields. Earnings are expected to grow by 18% in 2017 and 21% in 2018. Debt is negligible and management delivered a substantial beat when it reported Q3 results last Thursday. Earnings came in at 92 cents per share, well over the estimated 72 to 79 cents. EPAM Systems is the strongest company in its industry, and the consistency and simplicity of its story makes it an attractive target for investment despite its slightly extended status right now.
Technical Analysis
EPAM peaked at 84 back in late 2015 and basically took 2016 off, falling to 55 in November 2016. The stock recovered to its old high in May 2017, then hacked around for a few months before the great earnings report on November 2. EPAM was trading sideways under resistance at 92 when earnings came out and gapped up to 99 in one high-volume day. EPAM is holding its gains, trading just under 100 on calm volume. With the 25-day moving average back at 92, you need to approach EPAM carefully, either taking a small position and averaging up or waiting for a pullback or stretch of sideways consolidation. Use a stop around its old high at 92.
EPAM Weekly Chart
EPAM Daily Chart
Insulet (PODD)
Why the Strength
We covered Insulet back in August after the diabetes treatment company reported a terrific Q2, and the story has only gained momentum since. Diabetes affects 365 million people globally, and treatments can be improved by reducing the inconvenience and cost of insulin injections. Insulet’s Omnipod system does both. It can be worn on the body, and injects insulin based on pre-set parameters. The company just reported Q3 results last Thursday that came in way ahead of expectations. Revenue was up 28.4% to $122 million (beating by $7.4 million) and the loss of $0.04 per share was actually six cents better than expectations. Results were particularly strong in Europe, where Insulet recently took over distribution and marketing for its Omnipod System. On the back of another strong quarter, analysts have increased 2018 revenue growth estimates to around 23%, which factors in nearly 50% growth in Europe! Also on the docket is an upcoming launch of the new Omnipod Dash device, which allows for Bluetooth communication between a pump and a locked Android smartphone. One final consideration: While we don’t like to invest on speculation, investors shouldn’t rule out a takeover by larger competitor Medtronic, which has struggled in this market of late.
Technical Analysis
PODD broke out of a three-month consolidation phase in late-June, and since been in a choppy uptrend, with three pullbacks toward the 50-day line during the past few months. Investor confidence picked up following Q2 results on August 4, and despite some rough seas for a few medical stocks, shares of PODD hit an all-time high just three weeks ago before pulling back. And now, the stock has taken off on earnings, gapping up on huge volume last week. Like most earnings gappers, buying on dips has been the best method, and that’s what we advise here.
PODD Weekly Chart
PODD Daily Chart
Neurocrine Biosciences (NBIX)
Why the Strength
Neurocrine Biosciences is an emerging biotech focused on neurologic-, psychiatric- and endocrine-related disorders. The stock is doing well because it just reported its first quarter of significant revenue ($45.8 million) after launching a 40mg capsule of its first commercial treatment, INGREZZZA, in May. INGREZZA is approved to treat Tardive Dyskinesia, which affects 500,000 people in the U.S. The FDA also recently approved an 80mg capsule, and INGREZZA has advanced into a Phase IIb study for the treatment of Tourette syndrome (top-line data for that study is expected in late 2018). Getting a drug to market does wonders for investor confidence, but Neurocrine isn’t stopping with just one drug, as its pipeline has a couple more potential hits in late-stage development. The company has submitted an NDA for Elagolix (partnered with AbbVie) for the management of endometriosis with associated pain (priority review, with a decision due in Q2 2018). Elagolix is also in a Phase III study for the treatment of uterine fibroids (top-line data expected by the end of the year). And then there’s Opicapone, which is a once-daily treatment candidate for Parkinson’s disease. As for the immediate future, analysts see revenues surging to $175 million next year (up 135%), though red ink should continue to flow for a while. It’s speculative, but Neurocrine is a unique biotech that has a product on the market and many more that could (and likely will) follow within the next few quarters.
Technical Analysis
NBIX has been choppy and volatile for many years, but the stock has acted more under control this year as its moved into the commercialization stage. The stock popped in April when INGREZZA was first approved, but quickly fell back, and the stock didn’t really get going until Q2 results in late-August impressed. Since then, NBIX has remained above its 50-day line, and last week’s giant-volume pop tells you that investor perception continues to improve. You could take a stab on a pullback of a couple of points with a stop in the mid-60s.
NBIX Weekly Chart
NBIX Daily Chart
Old Dominion Freight Line Inc. (ODFL)
Why the Strength
Old Dominion is a leading less-than-truckload (LTL) shipper (transportation of relatively small freight, an alternative to full truckload carriers or parcel carriers) and also provides logistics services and even household moving services. There’s nothing special about the industry, which is driven mostly by economic trends, but Old Dominion has a terrific long-term track record (earnings up from 90 cents per share in 2010 to an estimated $4.30 this year) as management has consistently boosted efficiencies and profit margins and earned a reputation for top-notch on-time deliveries and a low claims ratio. Right now, the stock is strong because the economy is picking up steam, spare trucking capacity is tightening and prices are rising. (Interestingly, the firm prides itself on not hiking prices as quickly as others, allowing it to gain market share.) Old Dominion’s recent Q3 report was its second straight earnings rise of more than 20%, driven by an 8.6% increase in tonnage shipped and a 3.6% hike in pricing. There’s nothing revolutionary or game-changing here, but investors think the earnings power of the group in general (and Old Dominion in particular) should rise nicely as the prospects for faster economic growth (and possibly corporate tax cuts) increase—analysts see Q4 earnings up 30%, with 2018 bringing a 15% bump.
Technical Analysis
ODFL isn’t a huge mover, but the stock looks to be early in a new upmove. The stock rallied to as high as 92 last December during the post-election rally that lifted most cyclical stocks. But in late-August, the stock was at 93, so there was little net progress over nine months. Since then, though, ODFL has been moving higher above its 25-day line, including a great two-day rally after earnings. Pullbacks look buyable, with a stop in the upper 100s.
ODFL Weekly Chart
ODFL Daily Chart
PBF Energy (PBF)
Why the Strength
PBF Energy is an easy story to tell. This New Jersey-based company operates five oil refineries—in Delaware, New Jersey, Ohio, Louisiana and California—that produce mostly gasoline and other high-value distillates along with the usual run of asphalt, lubricants, diesel fuel and petrochemicals. The company also owns an extensive network of pipelines and terminals for distribution. PBF enjoyed 21% revenue growth in 2016, but also experienced a loss for the year. Losses continued through the first two quarters of this year, but the Q3 earnings report on November 2 showed a surge back into the black and a 21% bump in revenue. The company no doubt benefited from the loss of refining capacity caused by Hurricane Harvey’s devastation of the Houston area. But investors also see PBF Energy as a relatively low-risk company whose stock pays a handsome 4.3% forward dividend yield. While the turnaround in the performance of the company’s Torrance, California refinery is definitely a plus, there aren’t really any secrets here, just the continuing need for gasoline and other products the PBF’s refineries produce and the rewards from significant capital expenditures on improvements in operations.
Technical Analysis
Except for a couple of runs into the low 40s, PBF spent the years from 2013 through May 2017 trading either sideways or down. The stock found support at 20 in late 2016 and again in 2017 after a run to 31 in December 2016. But the stock finally entered a sustained advance in late August and rallied strongly to 28 at the end of September. And after spending most of October trading under resistance at 28, PBF took off again in late October and has climbed to 31. This looks like a good investment with a substantial income aspect to it. Try to buy under 31 and use a stop around 28.
PBF Weekly Chart
PBF Daily Chart
Trex Company (TREX)
Why the Strength
Trex is the world’s largest and best-known manufacturer of high-performance wood-alternative decking and railing, which makes it another enticing play on the newly strong construction sector. The company is thriving now for a few reasons. First, of course, the industry is doing well—consumer confidence and repair/remodel activity is way up, and that plays right into Trex’s hands given that the vast majority of its sales are currently to residential customers. Second, long-term, Trex remains the clear top dog in composites (market share north of 40%), an industry that has plenty of potential gains ahead (more than five times as much wood is used as composites in construction; cheaper lifetime costs), especially as tariffs (averaging 20% or so) appear set to go into effect on Canadian lumber in the near future. And third, the firm’s recent acquisition of SC Company gives it a foothold in the commercial market, providing another good-sized sector to penetrate. All of this came together to produce an outstanding Q3 report—sales (up 32%) and earnings (up 42%) walloped estimates, helping the stock to soar to new highs. There’s always the risk of industry headwinds if the housing market softens, but recent signs point toward just the opposite. Trex has a good short- and long-term story.
Technical Analysis
TREX has had lots of ups and downs in recent years, including a rally from 25 to 57 in 2014-2015, a plunge back to 31 by early 2016, and a lumpy upmove that took shares to 72 last November. After that, TREX finally began to trade more in control, with the stock forming a relatively tight base through July of this year before buying pressures picked up. Shares hit new highs in September and then catapulted higher on earnings last week before pulling back normally over the past four sessions. We’re OK picking up some shares here or on dips, with a stop in the low 90s.
TREX Weekly Chart
TREX Daily Chart
TRI Pointe Group Inc. (TPH)
Why the Strength
Homebuilders hit a little air pocket last week on news that the mortgage interest deduction might be cut as part of any tax reform bill, but the selling pressure didn’t last as investors are focusing on cheap valuations and improving business momentum. Tri Pointe Group is a mid-sized ($2.45 billion in revenue) builder that operates under the Quadrant, Pardee, Tri Pointe, Maracay, Trendmaker and Winchester brands—all told, it sells in 130 communities in seven states, with a big presence in California (where half of all new orders are located), and its homes are high-end (average sales price of $584,000). Like its industry peers, Tri Pointe is strong today because business appears to be accelerating in a big way: In the third quarter, the company returned to growth, with home sales revenue up 12%, new orders rising 36% and the backlog surging 56% to $1.5 billion. (The average selling price in the backlog is way up at $654,000.) And, like all successful builders, Tri Pointe has a ton of land as inventory (about $3.3 billion worth over 28,000 lots) and, because of its low valuation (15 times trailing earnings even after the recent rally), management has been consistently buying back stock (the share count was down 5.6% in Q3 vs. a year ago). Yes, there are risks surrounding tax reform, but the underlying fundamentals and momentum look strong.
Technical Analysis
TPH has long been a dud in the homebuilding group, dipping from its IPO near 20 in early 2013 to a low of 9 in early 2016. There was a quick rebound to 14 that summer, but more than a year later, TPH was still hanging around the 12 to 14 area. Now, though, the buyers have finally arrived—TPH has exploded higher since early September, including a strong gap up on earnings two weeks ago. We think dips are buyable.
TPH Weekly Chart
TPH Daily Chart
Universal Display (OLED)
Why the Strength
Universal Display = OLEDs. That, in short, is why shares have had a big run this year and why the stock remains one of the strongest in the market. Organic light emitting diodes look to be early in a multi-year growth phase, as newer smartphones (including the iPhone X and Samsung’s Galaxy Note 8) and some TVs (LG and others) are incorporating the display technology, while going forward, lighting (including in autos) could prove to be another huge opportunity. All told, OLED panel demand is expected to more than quadruple between 2017 and 2022, and as the go-to supplier of materials and know-how (the firm has a whopping 4,200 issued and pending patents), Universal Display is beginning to rake in the money. Sales and earnings have begun to explode from both material sales and royalties, and while quarter-to-quarter numbers can be choppy, the long-term trend is clear—on the conference call, management went over a ton of bullish industry fundamentals, including Sony expecting to double its OLED TV production during the next two years, while LG’s OLED TV panels should grow from 1.7 million this year to 6.5 million in 2020. Earnings have been crushing estimates all year, with last week’s Q3 report easily topping expectations. There is risk here, including the fact that a royalty deal with Sumsung is set to expire (though management didn’t sound concerned on the call), but investors are focusing on the enormous potential.
Technical Analysis
OLED has made good progress this year, though generally in stair-step fashion. The stock surged after earnings in February, then went sideways for two months before exploding as high as 130 in June. Interestingly, that began a base-on-base formation, with the recent trading range (125-145) sitting on top of the prior zone (108-125). Translation: OLED has just lifted off after a five-month period of no progress. We think dips are buyable, with a loose stop in the 130s.
OLED Weekly Chart
OLED 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.
