The Main Trend Is Up
Current Market Outlook
There’s no shortage of things to worry about today, with everything from the Presidential election to Syria to Russia to interest rates seemingly hanging in the balance. And as all good investors know, bull markets climb a wall of worry! So it’s no surprise that the market continues to lean bullish. Leading the group in the U.S. are small-cap stocks (while the major indexes lag), and leading the way internationally are the Chinese stocks, a couple of which appear in this issue—and not for the first time.
The Chinese stocks, however, may be due for a correction, so our Top Pick is Yelp (YELP), which combines a great growth story with a chart that’s in a good buying range.
| Stock Name | Price | ||
|---|---|---|---|
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| NetEase, Inc. (NTES) | 0.00 | ||
| Nintendo Co., Ltd. (NTDOY) | 0.00 | ||
| Parsley Energy (PE) | 0.00 | ||
| TD Ameritrade (AMTD) | 0.00 | ||
| Twilio (TWLO) | 183.39 | ||
| US Silica Holdings, Inc. (SLCA) | 0.00 | ||
| Weibo (WB) | 98.16 | ||
| Williams Companies (WMB) | 0.00 | ||
| Yelp (YELP) | 41.30 |
MercadoLibre, Inc. (MELI)
Why the Strength
MercadoLibre is the largest online marketplace in Latin America, with a platform that allows both companies and individuals to set up online stores in either auction or fixed-price modes. The total value of all merchandise sold on MercadoLibre’s sites topped $2 billion in Q2, which was up 21% year-over-year in U.S. dollar terms and up 68% in local currencies. The company’s MercadoPago online payment service (just like PayPal) processed $1.8 billion in payments in the quarter, up 51% in dollar terms and 102% in local currencies. MercadoPage also achieved a record high 75% platform penetration, showing its potential as a payment solution outside MercadoLibre transactions as well. We’re impressed that MercadoLibre has been able to deliver this kind of growth despite the difficult political and economic conditions in Brazil and Venezuela. MercadoLibre has the potential to expand across Latin America, lessening its reliance on Brazil and Argentina, which made up 83% in 2015 revenue. MercadoPago has the technology to automatically calculate payments in different currencies, which make it potentially valuable to the entire Latin American online community. MercadoLibre will release its Q3 results on November 3, and investors will be watching closely for guidance on full-year performance.
Technical Analysis
MELI has been rallying for nine straight months, finishing every month since January with a price gain. MELI reached all-time highs in May 2015, but a four-month pullback (climaxing with the August broad-market meltdown) pulled it back to prices it first reached back in 2011. So this rally has what amounts to a very long base to build on. MELI got a high-volume boost on August 5 from a good quarterly report and on September 2 from an analyst’s upgrade. The stock has formed a shallow cup since September 22, and is near its breakout price. A buy here with a stop at its 50-day moving average (now at 175) looks like a good risk/reward opportunity.
MELI Weekly Chart
MELI Daily Chart
NetEase, Inc. (NTES)
Why the Strength
NetEase is one of the biggest Chinese web portals, offering the usual menu of news, weather, sports, online community, email, e-commerce and other services. Where the company has pulled away from its competition is in online games. NetEase won the Chinese franchise for World of Warcraft in 2009, and developed its in-house game development division to the point that its massively multi-player online games based on Chinese themes are huge winners. Revenue comes from pay-to-play fees and in-game purchases that let players decorate and power-up their characters. As with other Chinese Internet companies, the stampede of users to mobile devices has increased the market for games and other services, driving NetEase’s revenue growth up by 90% in 2015 and by 108% and 83%, respectively, in the first two quarters of this year. Earnings are forecast to increase by 42% in 2016, but the 79% and 89% EPS growth in Q1 and Q2 make that estimate look too cautious. With three-quarters of revenue coming directly from game services, NetEase doesn’t have to worry too much about advertising, which contributes less than 10% to total revenue. NetEase enjoys excellent management, which has kept the company’s roster of games fresh with new material. NetEase’s stock also pays a dividend that yields a little over 1%. This is a strong story.
Technical Analysis
NTES has been in a long-term uptrend since early 2013, soaring from 37 to 258 in the process, although there have been three significant corrections along the way. The last of those corrections was a drop from 186 in December 2015 to 130 at the low point of the January/February market slump. NTES finally came out of the subsequent consolidation in May, and has been on a roll since, scoring new price and RP peaks just last week. NTES shows enough volatility that you should be able to buy in on a pullback of three or four points. A loose stop at 235 is prudent.
NTES Weekly Chart
NTES Daily Chart
Nintendo Co., Ltd. (NTDOY)
Why the Strength
Nintendo, founded way back in 1889 as a playing card company, today is well known as one of the world’s leading video game companies. Its Nintendo Entertainment System (NES), Game Boy handheld system (first released in 1989), DS and Wii systems made characters like Donkey Kong, Mario Bros. and Pokemon (pocket monsters) household names. In 2009, these franchises drove the company’s revenues to a peak of $18.6 billion. But as customers shifted to newer mobile phone games, Nintendo didn’t. Since 2010, revenues have fallen—every year—and in fiscal 2016 (ended March 31), revenues were just $4.2 billion, down 77% from the peak! By then, however, Nintendo had seen the light, and was already making plans to join the crowd. In March 2015, the company announced a partnership with Japanese mobile gaming company DeNA to bring its iconic figures to “smart devices.” In July 2016, the release of Pokémon Go by Niantic took the world by storm, and even though Nintendo won’t benefit in a big way from the game, the publicity helped the stock. Lastly, in September, Nintendo announced the development of the mobile game Super Mario Run, scheduled for release in December on iOS devices and later on Android devices. None of these games has had an impact on the income statement yet, but the potential for growth is very high, as Nintendo works to climb its way back up the revenue (and earnings) ladder.
Technical Analysis
From its peak in 2007 to its low in 2013 (the chart always precedes the revenue and earnings results), NTDOY fell 86%, and now the stock is working its way back up. To date, each of the three new announcements described above has resulted in a pop by the stock, and after each pop, the stock has settled in to build a base at a higher level, as short-term profit-takers clear out and long-term investors move in. The current base is centered between 32 and 33, so buying in that region makes sense, as we wait for the next announcement to drive the stock above the old high of 38. For protection, a stop just under 30 makes sense.
NTDOY Weekly Chart
NTDOY Daily Chart
Parsley Energy (PE)
Why the Strength
Parsley remains one of the market’s top energy stocks as it has all the key criteria you look for in the sector. First and foremost is the company’s acreage and well returns—it has about 133,000 net acres in the Delaware and Midland Basins (that includes a big 42,000 acres that have been acquired just this year) that has some of the best land within the larger Permian Basin. Many of the company’s wells currently crank out returns in the 70% to 90% range at $50 oil, so management isn’t shy about ramping up output—in the second quarter, Parsley’s production rose 23% from the prior quarter, with the top brass expecting 68% growth for 2016 as a whole. Moreover, there’s a good chance management will increase activity further during the next couple of years, with 30% to 60% annual growth likely through 2018 (depending on the price environment. Throw in some excellent work on cost reductions (drilling and completion costs in the Midland Basin are down 26% since mid-2015), a solid hedging program and no near-term debt maturities, and there’s little standing in the way of huge growth going forward. We like it.
Technical Analysis
PE has been a leader all year, hitting multi-month highs in March and ripping higher right through mid-August after second-quarter results blew away expectations. Shares did shake out below the 50-day line late last month as oil stocks pulled back, but as soon as oil prices bounced, so did PE, pushing to new price and RP highs on good volume. You can buy some around here.
PE Weekly Chart
PE Daily Chart
TD Ameritrade (AMTD)
Why the Strength
This online brokerage firm has $9.3 billion in cash on the books and it’s ready to spend it. According to Bloomberg, TD Ameritrade is interested in acquiring rival brokerage firm Scottrade Financial Services, the second-largest private e-broker in the U.S. (behind Fidelity). With a reported price tag of $4 billion, Scottrade would be quite affordable for TD Ameritrade. If it happens, a Scottrade deal would accelerate TD Ameritrade’s already improving sales and earnings growth. The company reported 25% earnings growth on 5% sales growth in the second quarter—the firm’s best top- and bottom-line growth since 2014. The June Brexit vote sparked a flurry of trades before and after the vote, resulting in 462,000 client trades per day at TD Ameritrade, a year-over-year increase of better than 6% and prompting a 5.8% improvement in commissions and transaction fees. Analysts expect another 5% sales increase in the third quarter (results are due out October 25) as continued uncertainties such as the impending Fed interest-rate hike and the Presidential election likely inspire above-average trade volume. But for now, the possibility of a Scottrade buyout is what’s really piquing investors’ interest in TD Ameritrade’s stock.
Technical Analysis
The rally in AMTD began in July, just as the market was perking up following the brief Brexit vote selloff. After re-testing a late-June bottom at 26, the stock raced to 30 by the end of July. It hit a ceiling at 31 in early August, and after a couple of re-tests, the stock broke to 32 by the end of the month. But the big breakout came in late September, when the stock gapped up to 35 on four times normal volume on the Scottrade buyout rumors. It has continued to motor higher since, opening in the mid-36s this morning. Buy on any signs of weakness—dips of a point or two would suffice. Set a stop around the 50-day moving average, which has acted as support for more than two months.
AMTD Weekly Chart
AMTD Daily Chart
Twilio (TWLO)
Why the Strength
Twilio has been one of the best received IPOs of 2016. The company checks all the boxes for growth investors. It operates in the cloud, is posting phenomenal quarterly growth that continues to top 70%, and is making consistent progress toward profitability (which could come in 2018). All of this suggests tremendous demand for Twilio’s technology, which is a pay-as-you-go cloud-based platform designed for developers. The platform allows developers to build and manage communications applications, without the complexity of developing or managing the underlying infrastructure. As more and more businesses rely on the cloud, Twilio’s platform provides a simple solution to help them scale their operations. Over one million developers have registered accounts. However, late last Friday, the company announced that it will sell $50 million in stock, and existing shareholders will sell an undisclosed amount. The lack of detail means that investors today reacted fearing the worst, and our guess is that reality won’t be so bad, so we think this presents a fine buying opportunity.
Technical Analysis
TWLO went public at 15 in June and leapt right out of the gate, rallying as high as 40 by the end of the month. Shares maintained their momentum with high-volume buying taking shares to 60 in August, and 70 in September. The correction since, capped by today’s drop on the secondary offering news, has brought the stock to its 50-day moving average—for the first time ever—and that presents a good buying opportunity for both traders and investors.
TWLO Weekly Chart
TWLO Daily Chart
US Silica Holdings, Inc. (SLCA)
Why the Strength
U.S. Silica supplies industrial silica for a variety of markets (building, chemical, filtration, glass) as well as sand for use as a fracking proppant for the oil and gas industry. The latter is the bigger slice of its business, representing 67% of revenue in 2015. With demand for sand finally picking up again, U.S. Silica has made a number of strategic decisions that have pleased Wall Street. The company completed a 10-million-share offering to raise capital, purchased a regional sand mine and supplier, purchased additional sand reserves and acquired one of the leading last-mile logistics technology companies. All of these moves signal an aggressive management team that sees immense opportunity in the recovering fracking sand industry. In particular, U.S. Silica will be able to both pull sand out of the ground and deliver it to the wellhead. This is a tough strategy for competitors to emulate, and with the rig count up 23% from second quarter lows, U.S. Silica is now well positioned to benefit from an uptick in drilling activity. This year should mark the bottom of the company’s sales cycle with expected revenue of $566 million. That could potentially double in 2017, and help EPS improve from -$0.65 this year to $0.58 next.
Technical Analysis
Shares of SLCA formed a bottoming pattern around 15 between October 2015 and March 2016. Then they leapt into action as the fundamentals of fracking sand improved. Shares rose above their 50-day moving average in March at 17.50, and haven’t broken that trend level since. That’s quite a feat considering shares are trading at 49 today. There’s a lot of momentum here, and we see the trend continuing if energy prices hold up. Buy on the dips.
SLCA Weekly Chart
SLCA Daily Chart
Weibo (WB)
Why the Strength
Weibo is a Chinese social media platform that combines elements of Twitter and Facebook to create a rich environment where users can create their own content, play games, and get their news, weather and other services online. Weibo is the brainchild of Sina.com, a Chinese web portal that created Weibo in 2009 and spun it off in 2014 (while keeping a majority stake). The company’s roster of monthly active users (MAU) was reported at 282 million in its Q2 earnings report (up 33% from the previous year), with 89% of those logging on via mobile devices. (The platform is compatible with all major mobile operating systems.) The continuing growth of the mobile population in China has meant huge revenue and earnings growth for Weibo; revenue was up 43% in 2015 and the company has booked seven quarters of at least triple-digit earnings growth. The company gets its revenue from a fairly standard mix of advertising and marketing sales based on its enormous user base. Weibo is still relatively young, and has only been publically traded since April 2014, so the potential for growth remains large. Weibo is one of a group of big players in the mobile online space in China, and has both attracted investment capital from Alibaba and others and is making its own investments and joint ventures as the Chinese online ecosystem evolves.
Technical Analysis
WB’s IPO in April 2014 was followed by a long base-building period. From its 17 IPO price, the stock did manage to spike as high as 26 in September 2014, but then keeled over, finally bottoming at 9 during the market’s August 2015 slump. WB rebounded to 21 by the end of 2015, but slipped to 12 during the market’s February blues. But since then, it’s been all advances for WB, which cleared its previous high price in June and has just kept going. WB hasn’t really paused for breath during this rally, booking only two corrections that lasted two weeks along the way. WB is now trading around 55, far ahead of its 25-day moving average, now at 36, so you should wait for a pullback of a point or two before buying. Use a loose stop around 46.
WB Weekly Chart
WB Daily Chart
Williams Companies (WMB)
Why the Strength
Williams Companies (which includes its partnership, Williams Partners) is a big, diversified energy infrastructure company with some top-notch natural gas pipelines, storage and processing facilities. Thanks to a lot of fee-based revenues that aren’t reliant on energy prices, the company’s cash flow has remained resilient ($1.46 billion so far this year). However, not everything has been smooth—management recently cut the dividend (current yield 2.6%) and sold off some Canadian assets (just over $1 billion worth) in order to invest $1.7 billion into its partnership through the end of next year. (One of the bigger investments is Transco, the country’s largest and fastest-growing interstate pipeline system that connects many of the country’s top basins.) Investors seem OK with the decision, as the goal is to begin boosting the payout in 2018 and beyond, thanks to the growth projects Williams is investing in. It’s not a humongous growth story, but after the bear market in the sector, investors are looking toward earnings and cash flow growth in the years ahead. Barring another huge plunge in energy prices that crimps output from most basins, Williams should do well going forward. Earnings are out October 31.
Technical Analysis
WMB crashed from 61 in mid-2015 to 10 at its lows in February, but it’s been a relatively smooth ride higher since then. Best of all, the stock appears to be setting up a good entry point here; after running from 22 to 31, WMB has moved straight sideways over the past four weeks as its 25-day line has caught up. You could buy a little here and look to add shares on a push above 32.5.
WMB Weekly Chart
WMB Daily Chart
Yelp (YELP)
Why the Strength
Yelp has taken a few lumps over the past couple of years due to increased competition for online advertising dollars from the likes of Google and Facebook, as well as accusations of fraud—namely, that the company faked positive reviews for some of its advertisers. But those negative headlines did little to dampen sales at the online-reviews service. Yelp’s revenue growth, though not the 50% and 60% rate of a couple of years ago, is still very impressive at 30% to 40% over the last four quarters. Its app is used on 21 million devices, with 146 million people visiting its website every month and 102 million cumulative reviews. Its new businesses—Eat24 (a food ordering and delivery service), SeatMe (a cloud-based reservations system) and NoWait (a mobile platform that allows users to get “in line” at casual dining restaurants without leaving their couch)—are all growing steadily. And margins and cash flow should improve in the coming quarters as the company scales back on R&D spending. Perhaps the biggest short-term catalyst for Yelp is its new single-class common stock structure, a departure from its previous dual-class structure (with Class B shares being converted to Class As) that will make the company a more palatable takeover target for the Apples, Amazon.coms and Googles of the world. That action alone prompted one analyst to hike his price target on YELP stock by more than 7%. It’s the fifth analyst upgrade of YELP in the past two months.
Technical Analysis
YELP’s first two years after coming public in February 2012 were bliss, as the stock zoomed from 24 to 97. The next two years were miserable, a slow bleed that didn’t stop until the stock dipped as low as 15 this February. Perhaps the next two years will be as good as the first two—from that February bottom, the stock kited to 22 in March, consolidated its gains until May, then gapped up to 26 on earnings and kept trickling to 30 in July. It gapped up again in early August, settling in the 36-39 range, and broke out of that range last week, touching 42 on news of its new stock structure before retreating to 40. You can buy right here with a stop around 36, which has acted as support since the August breakout.
YELP Weekly Chart
YELP 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.
