Wait For A Sustained Trend
Current Market Outlook
After nine straight down days and some signs of investor panic, the market enjoyed a much-needed rebound today (right off key support) ahead of tomorrow’s election. Ideally, the past two weeks were the final leg of the market’s two-plus-month correction and stocks kite higher into year-end; such a scenario is certainly possible. However, the fact is that all we’ve seen is one strong up day—all the major indexes remain below their intermediate-term moving averages, as do most stocks. Thus, on the sell side, you can consider letting go of any broken stocks you’ve been holding on to, and on the buy side, you should continue to keep new positions small until the market confirms a new, sustained uptrend. We’re keeping our Market Monitor at level 4 until that happens.
This week’s list has a bunch of resilient stocks, including another batch that’s recently reacted well to earnings. Our Top Pick is Gigamon (GIMO), which, after a quick shakeout, snapped right back on earnings and lifted to new highs today.
| Stock Name | Price | ||
|---|---|---|---|
| Archer Daniels (ADM) | 0.00 | ||
| AveXis (AVXS) | 0.00 | ||
| Clayton Williams Energy (CWEI) | 0.00 | ||
| Eagle Pharmaceuticals Inc. (EGRX) | 0.00 | ||
| Gigamon (GIMO) | 0.00 | ||
| Las Vegas Sands Corp. (LVS) | 0.00 | ||
| Martin Marietta Materials (MLM) | 261.52 | ||
| Melco Crown (MPEL) | 0.00 | ||
| Spirit AeroSystems (SPR) | 92.54 | ||
| Take-Two Interactive (TTWO) | 123.32 |
Archer Daniels (ADM)
Why the Strength
Archer Daniels Midland specializes in taking crops that farmers grow and transporting them, processing them and turning them into food ingredients, and it’s one of the largest companies in the world doing that job. The company’s 32,300 employees in over 160 countries take the grains, soybeans and other crops into the company’s 428 crop procurement centers, 280 ingredient manufacturing facilities and 39 innovation centers and turns them into food, animal feed and industrial and energy products. Despite 14 quarters of declining revenues and six quarters of lower earnings, Archer Daniels Midland remains a big (market cap is over $27 billion) global company with a ton of institutional sponsors (74% of its float is held by institutions) that pays a solid dividend (2.6% annual yield) and is benefiting from a cyclical recovery in commodity stocks. The company’s Q3 earnings report reflected a large increase in exports due to higher-than-expected harvests of several farm commodities. The company’s guidance for future results reflects its expectations of continuing strengthening in agricultural markets. After a long down period for commodities stocks and a wave of consolidation in the industry, Archer Daniels Midland is riding a nice wave of recovery.
Technical Analysis
ADM was a strong performer in 2013 and 2014, but corrected from 51 in June 2015 to 29 in January 2016. After that stiff correction, ADM rebounded to 45 in late July, then drifted slowly lower in August, September and most of October before gapping up strongly from 44 to 47 on big volume on November 1 after the good earnings news. ADM held its gains all week, defying a steep correction in the broad market, as big investors loaded up. We think ADM is a good choice as a defensive or income stock, as it trades at a reasonable 16 times future earnings. A little patience should provide a chance to buy below 47, and a stop around 43 (ADM’s 50-day moving average) will give you protection.
ADM Weekly Chart
ADM Daily Chart
AveXis (AVXS)
Why the Strength
AveXis is a clinical-stage biotech company working on treatments for spinal muscular atrophy (SMA). The stock is rallying due to the November 2 announcement that the FDA has weighed in with suggestions to optimize a single-arm trial for AveXis’ candidate targeting SMA, AVXS-101. The fact that the FDA advised on the trial design is good news. The relatively simple single-arm design means the therapy won’t be tested against a placebo. Instead, results will be compared against historical disease progression. If successful, AVXS-101 might only need to be administered once. And given the FDA’s remarks, the path to a marketing application (needed to move to commercial stage) is clearer. The trial will be initiated in the first half of 2017 and if all goes well, the drug candidate can move into Phase 2. Any incremental clarity in the world of biotech is good, as investors demonstrated by driving shares of AveXis up almost 20% on news of the FDA’s feedback. After slashing some risk out of their financial models, a few analysts bumped up their price targets. The new risk-adjusted models suggest 80 is fair value right now, but that will go up if trials continue to go smoothly. Remember that clinical-stage biotech stocks are among the most speculative stocks in the market. And any setbacks tend to crush the stocks. Invest accordingly.
Technical Analysis
AVXS went public in February 2016 at 20 and was hot right out of gate. By June, it was at 45, then a soft summer market brought it steadily back down to 32 by early August. Two failed break-out attempts occurred in mid-August and mid-September before shares finally hit 50 on October 10. They then tightened up in the 42.5 to 50 range before the November 2 FDA announcement sent AVXS surging as high as 65. Look to buy on a retreat and set a stop in the low 50s.
AVXS Weekly Chart
AVXS Daily Chart
Clayton Williams Energy (CWEI)
Why the Strength
Clayton Williams Energy is a relatively low-quality company that’s super-strong today because investors are being enticed by solid growth potential and great value. The growth comes from the same area that’s helping most of the best energy firms these days: the Permian Basin, and in Clayton’s case, the Delaware Basin in particular, where it owns about 70,000 acres. And the value comes from many acquisitions that have occurred in the Permian during the past few months, with many fetching $30,000 to $40,000 per acre! (There have been no official buyout rumors with Clayton but there’s no question the value is there.) The low-quality aspect comes from the firm’s recent past—management wasn’t prepared for the oil bust, which resulted in a cash crunch because the firm had too much debt. But it’s slowly chipping away at that through some equity sales (including some directly to Ares Management) and, recently, a $400 million sale of its Eagle Ford acreage (also in Texas) that will help pay down debt and boost drilling in the Delaware Basin. Of course, the numbers in the table below have been a horror show, but sales growth turned positive in the third quarter and if energy prices can resume their advance, cash flow from operations (which is already positive) should surge as more wells come online and interest expenses are cut. It’s an interesting speculation.
Technical Analysis
CWEI has had a gigantic advance since mid-July, so you’d expect to see it hit the skids during the market’s recent correction. But that’s what makes its action lately all the more interesting—shares did dip to their 50-day line two weeks ago, but then soared following the sale of its Eagle Ford properties and hit new highs again after reporting third-quarter earnings. Trading has been extremely volatile lately, so if you want to nibble, do so on dips.
CWEI Weekly Chart
CWEI Daily Chart
Eagle Pharmaceuticals Inc. (EGRX)
Why the Strength
New Jersey-based Eagle Pharmaceuticals made an appearance in Cabot Top Ten Trader in late 2015 and another six weeks ago based on its five marketable products and its pipeline of four candidate drugs. The company’s BENDEKA, a drug to fight leukemia, is being marketed by Teva Pharmaceuticals, with Eagle getting a 20% royalty, and sales have been brisk. But Eagle’s appearance today is a result of news that BENDEKA has been given a unique J-code (a product-specific billing code) by the Centers for Medicare and Medicaid Services. This is important because BENDEKA is a formulation of bendamustine, and the unique billing code is official recognition that it is distinct from other varieties. This will give more patients access to BENDEKA, make reimbursement easier and simplify adoption of the drug. BENDEKA keyed a 245% jump in Eagle’s revenue in 2015 and analysts have projected that the company’s earnings will increase by 165% in 2016 and 74% in 2017. Given that there could be additional good news from any of the four candidates in Eagle’s development pipeline—the company’s RTU bivalirudin anticoagulant has filed its new drug application and its Ryanodex treatment for exertional heat stroke has been given fast track designation by the FDA—the company is in a position to defy the downtrend in biopharmaceuticals.
Technical Analysis
EGRX came public in early 2014 and lived up to its eagle name in 2015, topping 100 in August and December. 2016 brought a stiff correction, with EGRX spending 14 weeks in the middle of the year building a base in the mid-30s. The stock made three rallies in July, August and September to get back to 70, but was caught in the October market correction, falling to 55 as November began. But the BENDEKA news kicked EGRX to its highest level since January on great volume. EGRX is somewhat speculative, as it might depend on more good news to power the next rally. But the sources of that potential news are easy to see. If you like the story, you can buy a little on any weakness, with a stop at 67.
EGRX Weekly Chart
EGRX Daily Chart
Gigamon (GIMO)
Why the Strength
Several datacenter-related stocks have graced the pages of Top Ten Trader in recent months. Gigamon is another example. The company makes appliances and software for enterprises and service providers to help them manage all the traffic beaming through their data centers. It’s essentially a cybersecurity company; core products provide stronger security and more efficient network performance. The stock is trending higher because the need for network performance, management and security is growing (it’s already a $5 billion annual market) and Gigamon can help companies in three critical areas: virtualization, network upgrades from 1GbE to 10/40/100 GbE, and a new Cloud solution to address security concerns. In late October, the company reported results that beat expectations for the eighth consecutive quarter. Revenue growth has averaged 44% over the past six quarters, and was up 47% (to $83.5 million) in the third quarter of this year. EPS has been positive for eight quarters too—something not common in small cap tech stocks—and was up 64% to $0.36 in the third quarter. One of the most exciting areas for future growth is Gigamon’s planned 2017 rollout of visibility solutions for Amazon Web Services (AWS), Microsoft Azure and Google Cloud. Customers want help securing and troubleshooting applications on these platforms, and that demand should power at least 25% revenue growth in 2017.
Technical Analysis
GIMO hasn’t looked back since bottoming earlier this year. The stock has been rising steadily since mid-February, pausing to consolidate around 30 in April and May, then again around 45 in August and early-September. Shares then rallied above 56 as excitement around the AWS visibility product grew. An early-October shakeout to 47 was halted by Q3 earnings on October 27, with shares pushing to new highs today. You can add shares on dips and set a loose stop loss below 50.
GIMO Weekly Chart
GIMO Daily Chart
Las Vegas Sands Corp. (LVS)
Why the Strength
Las Vegas Sands is strong today because investors think the turnaround in Macau is for real, and when combined with a recent resort opening, should push cash flow and earnings nicely higher in the quarters ahead. Total October gaming revenues in Macau rose nearly 9%, the third straight month of gains after 26 straight monthly (!) revenue declines, and in last week’s quarterly report, CEO Sheldon Adelson also said stats like the number of overnight stays and the length of stays continued to improve. All of that led to a solid (not spectacular) 9% lift in cash flow in the third quarter with big margins (north of 35% on a cash flow basis), and with the new Parisian Macao opening on September 13, most investors see another step function increase in the bottom line going forward. (Early returns for the new resort look favorable, with $19 million of EBITDA and a profit margin of 28% over its first two weeks.) The firm has other lucrative properties (especially its Marina Bay Sands in Singapore, which accounts for 35% of Sands’ cash flow), but the turnaround in Macau and the new Parisian opening is what’s attracting buyers today. Another plus is the dividend, which was just nudged up to 74 cents per share, per quarter (annual yield of 4.9%).
Technical Analysis
LVS already had its bear market, falling from 88 to 35 over nearly two years. It then built its first base of its new uptrend from March through August, breaking out at 53 and running to 60. And impressively, it’s held those gains in recent weeks even as the market has fallen off; LVS tested its 50-day line last Thursday before rallying back toward its highs following earnings. We’re OK with a nibble here, or just wait for a healthier market and a decisive push above 60.
LVS Weekly Chart
LVS Daily Chart
Martin Marietta Materials (MLM)
Why the Strength
Martin Marietta Materials is one of the leading U.S. producers of construction aggregates—including things like crushed stone, ready-mix concrete and gravel—that are vital in all things construction. (This isn’t just housing but commercial, industrial and municipal building activity, too.) The long-term story here has been enticing for a couple of years: After a multi-year bust period, a major recovery has begun in the construction sector, and, buoyed by last year’s $305 billion U.S. highway bill and many state-level infrastructure bills, demand and prices should firm for many years to come. The problem, though, is that the recovery is very lumpy; weather and the timing of projects can have a big impact on quarterly results. But after Martin Marietta’s third-quarter results last week, investors are thinking the upmove should pick up steam going forward: While aggregate shipments were down 5% due to bad weather, prices rose 9% and management sounded a bullish tone going forward. Meanwhile, profit margins continue to expand (management is looking for sales growth of 10% for 2016, but EBITDA to rise 27%) and all the macro indicators point toward 2017 being another year of growth. (Analysts see 2017 earnings per share up 35%.) It also doesn’t hurt that both Presidential candidates seem interested in boosting infrastructure spending. A small dividend (0.8% annual yield) and a decent share buyback program (the share count is down 5% from a year ago) puts a bow on the package.
Technical Analysis
MLM’s bottomed in February of this year and had a very solid run for a few months, taking it north of 200 to all-time highs. The action since looks like a solid base-building effort to us: MLM found repeated support in the 170-180 area for many weeks, then surged last week following earnings. There’s still overhead to chew through, but we’re not opposed to a nibble here with a stop in the low 180s.
MLM Weekly Chart
MLM Daily Chart
Melco Crown (MPEL)
Why the Strength
Melco Crown Entertainment is a Hong Kong company whose gambling casinos are located just over 40 miles from Hong Kong in Macau, the only place in China where gambling is legal. Melco Crown operates two huge casino/resort complexes, City of Dreams and Studio City, plus a string of Mocha Clubs that cater to day trippers and a City of Dreams casino, hotel, retail and entertainment resort in the Philippines. Melco Crown was featured 10 times in Top Ten from 2011 through 2013, but the Chinese government changed things in 2014 when it officially frowned on high-ticket gambling, especially by members of the Communist Party. (Beijing was concerned that gambling was being used to launder funds obtained via corruption and also that it set a bad example of lavish living when the Party needed discipline to set a good example.) The effect on all Macau casino operators was disastrous for Melco Crown and also for American companies like Wynn Casinos and Las Vegas Sands (which is also featured in today’s issue). Although it remained profitable, Melco Crown’s revenue fell by 6% in 2014 and 17% in 2015. Revenue growth returned in 2016 and EPS grew for the first time in Q3, signaling a rebound from a pretty low bottom. Melco Crown’s Q2 earnings report featured revenue growth of 22% and earnings growth of 18% and the company has reinstated its dividend, albeit at a small 0.4% yield. Even more optimistically, Macau gross gambling revenue hit its highest level in 21 months in October. There’s risk here, but also a real opportunity as Macau recovers.
Technical Analysis
MPEL was a roaring bull stock from 2009 through 2013, soaring from 2 at the post-recession market bottom in February 2009 to 43 in January 2014. The correction that followed the chill in China pulled MPEL to a double bottom at 12 in February and July 2016, when the improving numbers started to power a rebound. MPEL pushed to 18 early last week and has been hanging around that level since. With the market in a threatening mood, we think MPEL is probably a good addition to your watch list. If you decide to take a flyer on it, look for a pullback below 17.5 and keep a stop at the 50-day moving average, now at 16.
MPEL Weekly Chart
MPEL Daily Chart
Spirit AeroSystems (SPR)
Why the Strength
Despite the weak market, we’re beginning to see a few aerospace stocks take flight, and Spirit AeroSystems looks like one of the leaders. The company is one of the key companies in the making of jet planes; Boeing’s 787 has been a big boost to business lately, but the company builds Airbus jets as well. Specifically, Spirit is one of the largest makers of fuselages (about half of revenue), while also doing big business in propulsion systems and wing systems (each about one-quarter of the business). This is an industry with very long lead cycles, so the company is booked as far as the eye can see; its backlog is $46 billion! Thus, Spirit’s big challenge is simply executing on all of the business it has to fill. And in the third quarter, it continued to do that—revenues were up 7%, but earnings per share leapt 30% and free cash flow was a whopping $214 million (equal to about $1.70 per share). And management is committed to returning a chunk of that to shareholders via share buybacks (it repurchased 7.4 million shares last quarter alone and the share count has fallen about 10% during the past year) and the company just instituted a 10 cent per share, per quarter dividend (annual yield of 0.7%). There’s nothing revolutionary here, but while aerospace stocks don’t tend to have amazing growth, they do have a history of prolonged uptrends when the industry experiences an ordering boom as airlines replace older jets. That’s happening now, and it should result in tons of profits, slow growth and huge amount of cash flow for Spirit in the quarters and years ahead.
Technical Analysis
SPR had a big run to 58 in August of last year before falling with the market to 40 in February. Even in late-September, the stock was still in the low 40s. But now SPR has changed character, with shares catapulting from 45 to 55 in just three weeks, including a solid earnings gap last week as results topped expectations. There’s old overhead to deal with, but after such a long, tight bottoming process, the path of least resistance is up. If you want in, aim to do so on weakness.
SPR Weekly Chart
SPR Daily Chart
Take-Two Interactive (TTWO)
Why the Strength
It’s been a good market for video game stocks, and Take-Two Interactive has been leading the pack higher. Its lead grew last Thursday after the stock rallied 10%, a move catalyzed by another (the fifth in a row) quarterly earnings beat. Revenue was up 21% to $420 million while EPS of $0.45 was up 50% (and beat estimates by $0.16). Take-Two’s blockbuster franchises Grand Theft Auto and NBA 2K are helping to drive growth, as is an uptick in digital revenue. Analysts are expecting 26 new game releases in 2017 (including nine on both PlayStation and Xbox, and six on PC), including Mafia III, BioShock and the immersive Carnival Games VR. Analysts appear lukewarm on the stock given that the consensus price target doesn’t differ much from Friday’s close. We think the main reason for the indifference is the likelihood that the next quarter or two will represent a relative lull in growth. Revenue and EPS growth is only expected to be 8.5% and 5.8% this fiscal year, respectively. But in 2017, 25% revenue growth should unleash earnings leverage and drive EPS up over 50%. We expect more analysts will come off the sidelines as that scenario begins to play out. The flipside to this is that the market will become more bearish if any cracks in the growth story emerge.
Technical Analysis
TTWO has stair-stepped higher in 2016, rising by 50% from 32 to 48. The stock has hovered relatively close above its 50-day moving average line for most of the year, with two notable exceptions in May and late-June, when it came close to its 200-day moving average line. The latest retreat (a three day, 10% decline to 42) was in early October. But the stock resumed its normal trading pattern quickly, and last Thursday’s earnings-induced rally sent it to a 52-week high of 50. Buy on the dips, and set a stop around the 50-day line near 45.
TTWO Weekly Chart
TTWO 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.
