Trends Remain Up
Current Market Outlook
Today finally saw a meaningful pullback in the major indexes and most stocks; the realization that the Fed is likely to hike rates next month has created some jitters, and given that the S&P 500 and Nasdaq bumped up against their old highs last week (and that the advance has been narrow), further weakness wouldn’t be unusual. But until we see abnormal action, we’re going with the major trends, which continue to point up. Thus, we believe this dip, while probably having further to run, is buyable. That said, stock selection remains key, as we’re still seeing many stocks fall apart even as others remain in favor.
This week’s list has a well-sponsored feel to it, which isn’t surprising given the market’s preference for bigger-cap stocks of late. Our Top Pick is Nvidia (NVDA), which looks like a liquid leader following its recent run higher. Try to buy on dips of a point or two.
| Stock Name | Price | ||
|---|---|---|---|
| Sinclair Broadcasting (SBGI) | 54.14 | ||
| Phillips 66 (PSX) | 0.00 | ||
| Bank of the Ozarks (OZRK) | 0.00 | ||
| NVIDIA Corporation (NVDA) | 242.42 | ||
| ServiceNow (NOW) | 341.86 | ||
| MSCI Inc. (MSCI) | 0.00 | ||
| Lear Corp. (LEA) | 0.00 | ||
| Imperva Inc. (IMPV) | 0.00 | ||
| Activision Blizzard, Inc. (ATVI) | 0.00 | ||
| Align Technology (ALGN) | 316.20 |
Sinclair Broadcasting (SBGI)
Why the Strength
One of the largest broadcasting chains in the U.S., Sinclair Broadcast Group is being propped up by returning strength in the auto industry. Automakers and dealers are pouring their money into commercials these days, and those ads carried Sinclair’s overall sales last quarter to an 11% improvement from the previous year. Though earnings per share were down 8% year-over-year, the $0.45 Sinclair earned far exceeded analyst estimates of $0.23 per share. The company also just launched a new science fiction network called “Comet”—on Halloween, fittingly—which will reach more than 65 million homes. Prior to the Comet launch, Sinclair’s broadcasting stable already included 164 television stations in 79 markets; it owns and operates ABC, CBS, FOX, NBC, CW, Telemundo and Univision affiliates around the country. Though net income growth has been up and down, Sinclair’s sales have nearly tripled since 2011. The company pays a dividend too; it currently yields 2.5%.
Technical Analysis
Up and down for most of the year, SBGI took off in September after bottoming at 25. It shot up to resistance at 29 in October, formed a solid base there for most of the month, then jumped again at the start of November, topping 33 last week for the first time in over a year. It’s been holding steady there for the past few trading sessions on higher-than-average volume, perhaps catching its breath before another big move. It’s worth dipping a toe in to see what happens next. If it dips below the 50-day moving average at 28, you should cut the loss.
SBGI Weekly Chart
SBGI Daily Chart
Phillips 66 (PSX)
Why the Strength
Given the struggles in the energy sector, Phillips 66 may seem like an odd choice. But Phillips 66 isn’t a driller, it’s a refiner; and right now, that’s a huge distinction. Converting oil into gas has high profit margins when oil prices are low, at least as long as demand remains strong (which it has); thus, this low crude-price environment is actually helping Phillips 66. After-tax margins have more than doubled this year and the company’s earnings per share are growing at a healthy rate, increasing 50% in the latest quarter. The company is returning a lot of that money to shareholders: in May, Phillips upped its quarterly dividend by 12%, good for a very strong 2.8% yield. A year ago, investors were treating PSX like any other big energy company amid plummeting oil prices—guilt by association, perhaps. Now Wall Street has wised up to the difference between refiners and producers, and PSX is benefiting from that awareness.
Technical Analysis
The first big push for PSX this year came back in January, when the stock leapt from 59 to 80. Six months of consolidation followed, with PSX trading in a fairly tight range between 74 and 84. The stock breached that support during the August market dip, falling to 70; but by early October, PSX was back up at 84, testing that resistance. In late October, it finally broke through, and the stock has scarcely slowed since. Buy on weakness and set a hard stop below 81, the current 50-day moving average.
PSX Weekly Chart
PSX Daily Chart
Bank of the Ozarks (OZRK)
Why the Strength
Part of the reason Bank of the Ozarks is one of the strongest stocks in the market has to do with the industry—the prospects of a Fed rate hike (now looking more likely than not for December) should help the group’s margins, allowing them to make more on loans versus what they have to pay out to depositors. But this company has a lot more going for it than that; CEO George Gleason has taken a small Arkansas banking outfit and transformed it into a regional player via organic growth (checking account and loan growth has been healthy in recent years) and, especially, acquisitions—the company has inked deals for 14 buyouts since March 2010, including its largest ever just a couple of weeks ago ($800 million for a Georgia bank that will complement Ozarks’ existing Georgia locations and be immediately accretive to earnings and book value). All in all, though, there’s still a ton of room for expansion, as Ozarks has just 174 offices in nine states (almost all across the southeast and Texas). It’s not changing the world, of course, but led by a great stemwinder and with the interest rate environment likely to help, we think the company will continue to post solid growth for many years to come (analysts see earnings up 21% next year).
Technical Analysis
The long-term uptrend in OZRK’s stock (from 10 in 2010 to north of 50) and business (earnings from 66 cents per share to $2.07 during the same period) has been impressive, though it’s had four good-sized corrections during just the past 20 months. The latest correction took shares down from 49 to 38 during the market dip, but OZRK found support at its 40-week line and it’s ripped back to new highs in recent weeks. We don’t advise chasing it, but buying on a dip of a couple of points with a loss limit in the mid-40s makes for a good risk-reward trade.
OZRK Weekly Chart
OZRK Daily Chart
NVIDIA Corporation (NVDA)
Why the Strength
The steep decline in the personal computer market has done serious damage to many of the semiconductor companies that make chips used in PCs. Not Nvidia. The company has managed to stay ahead of the curve by developing chips for industries that aren’t in a downward spiral, including mobile. Its graphics processing units (GPUs) are used to display animated scenes in online games, a growing industry that contributed 44% revenue growth for Nvidia last quarter, accounting for 58% of the company’s total sales. The auto industry is another big customer—the company develops chips that generate images for car dashboards and navigation systems. More than 50 automakers use Nvidia’s technology for its navigation systems, including Tesla Motors, which uses Nvidia processors exclusively. Those two growth industries have helped Nvidia overcome the PC slowdown. Last week, the company beat earnings estimates in its fiscal fourth quarter, reporting 18% EPS growth and 6% sales growth from the same quarter a year ago, marking the seventh straight quarter of top- and bottom-line growth. That kind of growth, along with the gigantic potential from the gaming industry (including virtual reality), is enough to capture Wall Street’s attention.
Technical Analysis
NVDA started to make a move in late July, jumping from 19 to 23 in a couple of weeks. It didn’t last, as the broad market correction knocked the stock back to 20 by the end of August. Since then, it’s been on a tear, breaking through year-long resistance at 23 in early October (as soon as the market got going) and motoring ahead to 28 early this month. Last week’s earnings beat extended the rally, pushing the stock to 31 on volume that was four times normal levels. It’s possible NVDA will just keep running, but we think it’s best to buy on dips as the stock is likely to digest its recent rally.
NVDA Weekly Chart
NVDA Daily Chart
ServiceNow (NOW)
Why the Strength
ServiceNow will never be well-known by the average Joe, but we still view the stock as an emerging blue chip in the cloud sector. The company’s software offers a better way to coordinate and automate all sorts of tasks across an organization. It began by selling into IT departments, helping them prioritize and register tasks (effectively replacing email or phone calls to the department), and indeed, IT departments are still usually the first place ServiceNow’s software lands at new clients. But nowadays, the company’s software is more of a platform that boosts efficiency in all sorts of departments, dramatically boosting its target market, which has kept growth humming. In the third quarter, sales (up 55% in constant currency figures) and earnings (up 400% from a year ago) topped expectations, and most of the sub-metrics wowed investors—it added 176 new clients (2,804 total), including 39 from the Global 2000 (more than 600 total), had 206 customers with an annual contract value north of $1 million (up 62% from a year ago) and saw its renewal rate come in at an unbelievable 98%, the fifth straight quarter of at least 97% renewal rates! Long-term, management is on record aiming for $4 billion in revenue by 2020 (up from about $1 billion this year) with big operating margins, too. Of course, the valuation here is humongous, but most big investors don’t mind—Fidelity and T. Rowe Price own a combined 25.3 million shares, or about 16% of the company. It’s a good story.
Technical Analysis
NOW has been in a longer-term uptrend since coming public in 2012, with some big downs and ups and a few basing areas, including a sideways phase that began in the spring of this year. But the stock has now changed character—after a shakeout during the market correction, NOW reacted well to earnings three weeks ago and hasn’t looked back, nosing to new price and RP peaks last week. You could nibble here, though we’re more inclined to buy on dips of a couple of points after the recent run.
NOW Weekly Chart
NOW Daily Chart
MSCI Inc. (MSCI)
Why the Strength
MSCI Inc. offers a relatively rare commodity in international investing: completely reliable and objective data on what’s actually going on in markets. The company, which is making its debut in today’s issue, provides a myriad of global indexes that convey performance in regions, markets, countries, asset classes and by valuation, style and currency. The company’s roots go back to Capital International, the first publisher of market indexes for non-U.S. markets, which was founded in 1968. After Morgan Stanley licensed the rights to CI’s indexes in 1986, the brand changed to Morgan Stanley Capital International, yielding the MSCI monicker. Subsequent acquisitions—Barra in 2004, RiskMetrics in 2010, Investment Property Databank in 2012, Investor Force in 2013 and GMI Ratings in 2014—have diversified the company’s analytic capabilities. MSCI was spun off from Morgan Stanley in 2007 and divested in 2009. MSCI gets the majority of its revenue (58% in 2014) from the publication of its indexes, with risk analytics kicking in 31% and portfolio management analytics 11%. While MSCI’s stock has been in a long-term uptrend since late 2012, the recent excitement stems from the company’s Q3 earnings report on October 29 that featured a 20% jump in earnings, which were reported at 60 cents per share, well above the expected 53 cents. MSCI is a well-diversified vendor of one-of-kind market information and analytics and should continue to grow steadily, especially if the market continues higher. Its stock pays a 1.5% annual dividend yield.
Technical Analysis
MSCI has been a steady performer since going over the falls in October 2012, when it dropped from 35 to 24. The stock advanced steadily to 68 at the end of last July, then fell with the broad market, first to 58 in late August then to 57 as October began. A strong rebound from that level developed into a real blastoff late in the month, and on November 2, MSCI roared to 71 on a big volume spike. The stock has been retracting in an orderly way since that high, and looks buyable here. Use a stop at the 200-day moving average, now at 61.
MSCI Weekly Chart
MSCI Daily Chart
Lear Corp. (LEA)
Why the Strength
Lear is a supplier of original equipment components for new automobiles and specializes in two areas: seating and electrical components. The company’s components, both wired and wireless, control lighting, audio components, battery charging in hybrids and all-battery vehicles, and manage communication among all systems. In seating, Lear’s frames, foams and customized fabric and leather coverings are used in over 200 vehicle models globally. Growth at Lear comes both organically as the global automotive market grows, but also from increased opportunities in high-end vehicles. The company expects to grow about 5% faster than the industry as electrical components become more complex. The company has enjoyed double-digit earnings percentage growth in nine of the last 10 quarters and earnings are forecast to increase 29% in 2015 and 11% in 2016. With excellent global diversification—21% of revenue comes from the U.S., 13% from Mexico, 13% from Germany, 12% from China and the remaining 41% from the rest of the world—Lear is a solid business with 135,000 employees at 240 facilities in 35 countries. As cars get more complex and more comfortable, Lear should do well. And with an attractively low 12 P/E ratio, it’s a bargain.
Technical Analysis
LEA has been in a long-term uptrend since the middle of 2012, advancing steadily from 34 in July 2012 to over 120 in recent trading. The stock’s small dividend (annual yield is about 1%) probably doesn’t have much to do with this positive history, but the general trend of the market does. LEA corrected strongly in July and August, but rebounded in September and moved into new-high territory in October. The positive Q3 earnings report gave LEA a boost on slightly elevated volume in late October, but didn’t gap it up. Since tagging 127 as November began, LEA has pulled back slightly on calm volume, providing a good buy point. You can buy LEA here with a loss limit at its rising 50-day moving average, now at 113.
LEA Weekly Chart
LEA Daily Chart
Imperva Inc. (IMPV)
Why the Strength
Six months ago, every stock involved in cybersecurity was red hot, but now it’s become more selective—some stocks have been trashed (like FireEye), some are base-building (Palo Alto Networks) and some niche players, like Imperva, look great. Imperva is a smaller player (just $213 million in revenue) in the industry, but it’s made a name for itself by having some of the best products for Web and application-specific firewall products. Most companies have big-picture network firewalls, but demand is now exploding for application- and data-specific protections, which have seen increasing attacks from hackers—and that’s what Imperva specializes in! That’s one major positive, and another is management—CEO Anthony Bettencourt took over last August and has turned the firm’s top-notch products into hugely accelerating sales and earnings. (In fact, Imperva lost 203 contracts to IBM from 2010-2014, but it’s now gotten back 40 of those deals this year alone, including a few huge ones.) Imperva’s third-quarter report was a tremendous blowout, with sales and earnings miles ahead of estimates and strength seen in both products and subscriptions; analysts now think profits will total 31 cents per share next year (up from a prior estimate of a loss before the report), but we think that is likely to be very conservative. There’s a lot to like here.
Technical Analysis
IMPV crashed from 67 in early 2014 to 18 a few months later, as the company’s prior management missed estimates and most big investors bailed. But since Bettencourt took over in August 2014, results have improved and the stock has acted better—IMPV has been in a solid uptrend with a couple of consolidations, including one from August through October of this year. The blowout earnings report gapped the stock back up to its old highs, and the recent pause looks like a chance to get in.
IMPV Weekly Chart
IMPV Daily Chart
Activision Blizzard, Inc. (ATVI)
Why the Strength
This is the fourth Top Ten appearance for Activision Blizzard this year alone. Clearly, the company is doing a lot right. For starters, it just launched a movie and television studio—a bold move for a video game maker. But it tells you the kind of weight the Activision name carries with the gaming public, most of whom no doubt also watch movies and TV. The new studio—aptly named Activision Blizzard Studios—will create original content based on its popular gaming franchises such as “Call of Duty” and “Skylanders.” With the production studio, Activision hopes to not only convince their massive core audience (i.e., gamers) to buy their movies and TV shows, but also reach a broader, more mainstream audience. That announcement came on Friday. Earlier in the week, the company announced it was buying King Digital Entertainment, maker of the popular smartphone game “Candy Crush” for $5.9 billion. Busy week! It all came on the heels of Activision’s release of its latest “Call of Duty” game, the launch of a new eSports league to gain traction in that rapidly growing industry, and the release of solid quarterly results. When you make that many big headlines, investors tend to notice. And right now, Activision Blizzard has Wall Street’s full attention.
Technical Analysis
ATVI just keeps humming along. The stock started to climb from 18 in January and has scarcely slowed since, topping 37 last week before closing the week at 34. The 50-day moving average has been a fairly reliable support level since July; only once since then has the stock dipped below it. The late-week retreat may have set up a nice entry point, too. If you’re “game” (pun intended), you can buy here and set a hard stop at 31, below that 50-day moving average.
ATVI Weekly Chart
ATVI Daily Chart
Align Technology (ALGN)
Why the Strength
Align Technology, which made the most-recent of its eight appearance in Top Ten in October 2013, has one big idea. The company’s Invisalign system uses nearly invisible plastic orthodontic retainers that move teeth into line without the uncomfortable “metal-mouth” strips and wires that have been the bane of teenagers’ lives for generations (teens make up 75% of the orthodontic market). The Clear Aligners that make up the Invisalign system are changed every two weeks, and the company has recently changed its pricing policy. Previously, each new set of Invisible Aligners was paid for separately, which led to customer complaints. The company now provides free additional Aligners in some cases, which shaved about six cents per share off earnings. Align Technology’s latest quarterly report indicates that the loss of income for subsequent Aligners has been partially made up for in increased case volume. In Align Technologies’ Q3 earnings report on October 23, international sales were up 35.1% from last year and North American sales gained 18.6%. Sales in the teenage market were 22.3% higher than last year’s. While the 34 cents per share in earnings was down 26% from last year, it was in line with estimates. The company bought 662,000 shares back as part of the $300 million repurchase program that began in 2014. While some key patents on the Invisalign system will begin to expire in 2017, the medium-term outlook for Align Technology, especially in the Asia Pacific region, is strong.
Technical Analysis
ALGN rallied strongly in 2013, but began to flounder in 2014, falling from its January 2014 high of 65 to as low as 43 in October 2014. The stock recovered from that dip, but was constrained by resistance at 65 for 21 months before last month’s October 23 breakout on triple its average volume. Since gapping up to 68, ALGN has used 65 as support and showed a new move toward 68 last week. With a very long base to build on, we think ALGN looks like a reasonable buy on dips below 67, with a stop around the bottom of its earnings gap at 62.
ALGN Weekly Chart
ALGN 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.
