Market Considered Bearish
Current Market Outlook
We’ve pointed out the numerous yellow and red flags seen in the market during the past few months, and during the past two or three weeks, those chickens have come home to roost—the massive weakness in the broad market is now infecting the major indexes and most formerly resilient stocks. It’s not 2008 out there (the worst of the selling is still in the commodity and economically-sensitive areas) and there are signs of short-term panic (820 combined new lows on Friday). But the trend of the market and the vast majority of stocks is now down, so you should be in a defensive stance until the bulls prove they have the strength to get things going on the upside. We’re knocking our Market Monitor down to reflect this.
This week’s list isn’t defensive, per se, but most of the stocks here have defensive characteristics (businesses that aren’t too economically sensitive) or have enjoyed a recent bullish catalyst. Our Top Pick is American Eagle (AEO), a turnaround that pays a nice dividend.
Stock Name | Price | ||
---|---|---|---|
United Therapeutics (UTHR) | 0.00 | ||
Mylan (MYL) | 0.00 | ||
MercadoLibre, Inc. (MELI) | 980.83 | ||
The Hain Celestial Group, Inc. (HAIN) | 0.00 | ||
GoPro, Inc. (GPRO) | 0.00 | ||
Gilead Sciences (GILD) | 75.10 | ||
Foot Locker (FL) | 0.00 | ||
AMAG Pharm. (AMAG) | 0.00 | ||
American Eagle (AEO) | 0.00 | ||
Apple (AAPL) | 248.94 |
United Therapeutics (UTHR)
Why the Strength
United Therapeutics is the third medical stock in this week’s Top Ten, which has at least something to do with the surety of future earnings. (Drug sales aren’t tied to the health of the economy or the action of the U.S. dollar.) But this isn’t some super-defensive stock, either—United has a good combination of a solid current business in pulmonary arterial hypertension (PAH) thanks to its main product, dubbed Remodulin, as well as a couple of major catalysts that should propel business higher. The first catalyst came in the courtroom, when an early-September ruling upheld patents surrounding Remodulin for another three years. That’s good, but more important, the second catalyst involves the recent launch of United’s new and improved PAH treatment called Orenitram, which yields similar results to Remodulin, but is delivered via extended-release tablet instead of infusion therapy! Long story short, it looks like the mix of the trial win (along with the ensuing drop in legal costs) and the successful launch of Orenitram should help earnings soar this year (up 86%!) and expand at a 15% annual clip in the years ahead. Valuation is reasonable (15 times this year’s earnings), and big investors look comfortable holding their shares.
Technical Analysis
UTHR had a nice move through the end of last year, but lawsuit uncertainties and a dip in earnings caused the stock to gradually lose ground (a 27% drop in all) into early August. But the court ruling caused a monstrous rally in the stock (shares rose 28% on nine times average volume that day!) and UTHR pushed as high as 137 before pulling back a few percent. If you want to nibble, we think support should appear in the 120 area. Or you can just keep the stock on your watch list.
UTHR Weekly Chart
UTHR Daily Chart
Mylan (MYL)
Why the Strength
Mylan is one of the top manufacturers of prescription drugs in the world, producing generic versions of antibiotics, antidepressants, anti-inflammatories, and respiratory drugs in a wide range of dosages and delivery forms. Mylan has largely flown under the radar this year, with revenue and earnings growth averaging in the high single digits since the start of 2014. Those expectations changed in early October, however, after the company boosted its third-quarter and full-year guidance. Citing better-than-expected operational growth and a string of new drug approvals and product launches, Mylan lifted its third-quarter earnings from a range of 90-95 cents to $1.12 to $1.16 per share. Adding to the mix, Mylan also expects to benefit significantly—an additional 14 cents per share in the third quarter—from an agreement with India’s Strides Arcolab Limited. Lastly, there is some speculation on Wall Street that Mylan could be a takeover/merger target, with Teva Pharmaceuticals rumored to be the suitor. That said, we may have to wait until Mylan’s third-quarter conference call on October 30 for additional information on merger/buyout front.
Technical Analysis
MYL has been locked in a long-term uptrend since bottoming near 20 in mid-2012. Throughout this uptrend, the stock enjoyed support at its 10- and 25-week moving averages—that is, until MYL breached these trendlines and the 50 level in early August. During the ensuing weeks, MYL proceeded to consolidate just below the 50 region, forming a base near 45. In early October, strong earnings guidance provided the boost MYL needed to pop back above 50, but the victory was overshadowed by broad market selling pressure. While shares have dipped back below 50, they remain above their 10- and 25-week moving averages. We like MYL’s staying power and believe you should add it to your watch list for a move back above 50.
MYL Weekly Chart
MYL Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
Founded in Argentina in 1999, MercadoLibre is the eBay of South America, operating in 12 South and Central American countries and Portugal (Brazil’s connection to the old country). Brazil accounts for 44% of revenues, Argentina 26%, Venezuela 18% and Mexico 7%. As on eBay, sellers can use an auction system or a fixed-price system, and on MercadoLibre, 80% use fixed-price. eBay has been a major shareholder of MercadoLibre since 2001, and today it owns 18.4% of the company. Revenues have grown every year of the past decade and earnings have grown every year of the past nine. This year, earnings are expected to decline, in part due to currency exchange rates, but analysts are looking for a huge rebound next year—which is one reason the stock is up. The other reason is that bigger fish, namely eBay, Amazon.com and Alibaba, have all been mentioned as possible acquirers of MercadoLibre.
Technical Analysis
MELI came public in 2007 and plunged to new lows in the broad 2008 market collapse, but then embarked on a five-year run that took it to a high of 146 late last year. The sellers then took control, driving MELI down to a low of 80 this May, but since then the bulls have been back in control. Most impressive, especially considering the action of the broad market, has been the stock’s action over the past six weeks. From its early September high of 118, the stock pulled back to bottom at 108 (a modest 8% decline) two weeks ago, and today it is no lower, even though the broad market has fared much worse. Technically, therefore, there’s a lot of support here. Venturesome investors could dip a toe in here.
MELI Weekly Chart
MELI Daily Chart
The Hain Celestial Group, Inc. (HAIN)
Why the Strength
While none of the stocks in this week’s Top Ten are outright defensive stocks (blue chips, consumer staples, etc.), many have businesses that aren’t heavily tied to the state of the economy, and have had a recent catalyst of some sort to keep big investors hanging around. Hain Celestial fills the bill perfectly—it’s a good-sized (just over $2 billion in revenue) organic food producer, with a bunch of top-selling brands under its umbrella, including Garden of Eatin’, Celestial Seasonings, Health Valley and many others. It’s highly unlikely that organic food sales will go anywhere but up no matter what the economy does, as the trend toward healthy eating continues. What has caused Hain to be one of the most resilient stocks in the market today is its late-August earnings report, which was much better than expected, with sales and earnings growth accelerating and management providing a huge forecast for the next 12 months—it expects sales to expand 27% to 30%, and the firm has a history of guiding conservatively, too. Of course, Hain isn’t undiscovered; the stock trades at 32 times trailing earnings and has generally been a solid performer for years. But the bullish sales guidance should keep big investors interested.
Technical Analysis
HAIN has been a good performer for a while, but it usually has solid multi-month runs followed by long consolidations. The latest consolidation began in January as the stock hit resistance just south of 100—the correction was never deep (HAIN pulled back a maximum of 20%) but shares fell toward 80 three times. The earnings report in August finally brought out the buyers and the pullback in recent days has been on low volume. If you want in, you can buy a few shares in the 97 area.
HAIN Weekly Chart
HAIN Daily Chart
GoPro, Inc. (GPRO)
Why the Strength
A few decades ago, the leading companies in the photography business were Kodak, which had virtually created the industry, and Polaroid. Then digital photography came along and the old giants failed to adapt. Before long, Canon and Nikon ruled the business, while Olympus, Panasonic, Pentax, Samsung, Sony and Minolta all played catch-up. And now history is repeating itself, as every one of those digital manufacturers has missed the hottest development in photography, the rise of high-definition video captured through small portable cameras mounted on helmets, bicycles, surfboards, airplanes, dogs—anything that moves. GoPro is the creator and dominant force in this market and the odds are good that it will remain so for some time, just as Canon and Nikon dominated the digital photography industry for decades. Go Pro recently came out with its HERO4 camera ($400 and up) and we expect they’ll sell a ton this holiday season. We also expect that the company, which currently gets 57% of its revenues from the Americas, will grow faster internationally as they penetrate more markets. To date, growth trends have been irregular, interrupted by investments and acquisitions, but the main trend is clearly up, and investors are very bullish; note the stock’s forward PE of 104.
Technical Analysis
GPRO came public in June at 24, but never traded that low; by the end of the month, it had doubled to hit 50. That was followed by some base-building around 40, and then from August into October, the stock doubled again, nearly touching 100 and in the process becoming one of the market’s leading glamour stocks. Last week, it finally succumbed to the market’s broad selling pressures and we’d like to see support materialize between 65 and 70, where the stock paused briefly on the way up. The 50-day moving average, now at 62 and climbing, could also offer support there.
GPRO Weekly Chart
GPRO Daily Chart
Gilead Sciences (GILD)
Why the Strength
Gilead Sciences continues to bask in the glow of Sovaldi, its revolutionary Hepatitis C drug that has driven its sales, earnings, cash flow and profit margins (60% in the last quarter!!) to unimaginable heights. Importantly, a lot of the hubbub surrounding the huge price tag of Sovaldi ($84,000 for a complete course of treatment) has calmed down, and that bodes well for the combination treatment (dubbed Harvoni) that got approval last week and should sell for a whopping $94,500 for a 12-week course. The big advantage to Harvoni is that it’s far more tolerable (fewer side effects) and effective in trials, so it’s bound to grab even more market share. Longer-term, of course, there will be competition and prices will likely fall (AbbVie is coming out with a competing product next year, though Gilead should retain a 70% to 80% market share), and analysts don’t see a ton of earnings growth after this year’s step-function higher in the bottom line (up 10% to 20% each of the next three years). Overall, though, Gilead has a combination that’s in demand right now in the stock market—not only are earnings and cash flow out of this world (which it’s partially using to buy back billions of dollars of stock each quarter), but it’s also not subject to the ups and downs of the economy, and the stock’s valuation is more than reasonable. All told, we expect big investors to continue to support shares even if the market remains weak.
Technical Analysis
GILD has had a huge run during the past couple of years, but shares had a multi-month, 25% correction (dipping below the 40-week line) earlier this year that at least partially “re-set” the stock’s advance. GILD zoomed off that mid-April low, and even during the past six weeks, it’s held relatively firm. In this environment, it’s fine to simply keep the stock on your watch list, but if you’re game, you could nibble on dips toward 100.
GILD Weekly Chart
GILD Daily Chart
Foot Locker (FL)
Why the Strength
While many stocks cowered during the market’s selloff last week, athletic retailer Foot Locker (FL) refused to give ground. The company, which operates more than 3,500 stores across 30 countries, has shown remarkable strength of late, shrugging off a downturn in mall traffic to boast average earnings growth of more than 20% during the past four quarters. The company owes its stability to the booming athleisure trend—a trend defined by Americans wearing athletic shoes and gear, regardless of whether they actually work out. The growing popularity of athleisure helped propel Foot Locker to solid September same-store sales growth. Furthermore, the company also reaped the rewards of a better-than-expected first-quarter earnings report from Nike, which accounts for roughly 8% of Foot Locker’s sales. As for its own quarterly report, analysts are projecting a 16% year-over-year rise in Foot Locker’s third-quarter earnings. That said, with September comparable sales and back-to-school sales coming in strong, these estimates could be on the conservative side, especially with basketball shoes remaining a hot trend in kids apparel. With Foot Locker earnings seen growing by 20% in 2015 and by 11% in 2016, we continue to like the company’s prospects.
Technical Analysis
While FL shares are off since we last visited the stock in mid-September, the stock has held up remarkably well compared to the broader market. In fact, FL’s decline from its September peak near $59 has seen shares consolidate into support in the 55 region. This area is also being bolstered by FL’s rising 50-day moving average, below which shares have not closed since early August. So, while growth concerns are limiting the overall market, FL is still holding firm at key support levels. If you can stomach the risk, you can nibble here. Otherwise, we recommend holding until conditions improve.
FL Weekly Chart
FL Daily Chart
AMAG Pharm. (AMAG)
Why the Strength
AMAG Pharmaceuticals is a small ($89 million in sales) specialty pharmaceutical firm that has had a nice upturn in business thanks to Feraheme, an IV treatment for iron deficiency for chronic kidney disease; it’s captured 16% market share and management is planning to broaden its use to all patients with iron deficiencies. That’s all to the good, but the very big news is AMAG’s recent decision to buy the Maternal Health business of Lumara Health for $675 million in cash and stock. The acquisition brought with it Makena, the only FDA-approved drug to reduce the risk of preterm birth in women who have already had a preterm baby in the past. (Nearly 12% of U.S. births are technically preterm, so it represents a huge market.) Sales of Makena were about $130 million during the past year, up 72% from the year before. Bottom line: The purchase turns AMAG into a highly profitable pharmaceutical company (estimated $110 million of cash flow annually) with $20 million in synergies and big growth ahead. Analysts still see 2014 producing a loss, but expect earnings to mushroom to about $5 per share next year and grow handily in the years after. This is a little-known story that could go far if management continues to pull the right strings.
Technical Analysis
AMAG was basically a nothing stock for the past few years; despite the uptick in Feraheme sales, the stock hadn’t made much persistent progress. But the buyout of Lamara has made AMAG a completely different company and a super-strong stock—shares zoomed 28% on 12 times average volume, and have held those gains in recent days, despite the big market dip. Nibbling on dips of another point or two could work, or just keep the stock on your watch list.
AMAG Weekly Chart
AMAG Daily Chart
American Eagle (AEO)
Why the Strength
Fashion is fickle. What’s hot one day is cold the next. That’s the big theme behind American Eagle’s fall from favor, which saw earnings fall (relative to the prior year) each of the past six quarters. But there are others, and one of the biggest is that midway through this slump (after the stock had lost nearly half its value), the company brought back as interim CEO Jay Schottenstein, who had been CEO from 1992 to 2002. That was in January, but it didn’t stop the decline! After all, this is a very big ship to steer, with more than 1,000 stores in the United States, Canada, Mexico, China and Hong Kong, as well as e-commerce sites that ship to 81 countries. It wasn’t until September that the company released an earnings report that (even though it showed continued losses) actually beat analysts’ estimates and stemmed the exodus from the stock. Other positives: AEO has very little debt and pays a nice 3.6% dividend. If you like the idea of a turnaround that provides a little income to boot, this might be your ticket.
Technical Analysis
From its high of 22.97 in October 2012 to its low of 10.12 in May 2014, AEO lost 56% of its value. At that level, bargain-hunters were surely sniffing. But it wasn’t until the company reported second-quarter earnings on September 20 that buyers appeared in force. In two weeks’ time, they bid the stock from 11 to 14, and a month later AEO hit 15. Over the past two weeks, it’s cooled off to 14, quite understandable considering the market environment, and we think this marks a decent entry point, though it’s certainly possible the stock will drop to 13.50.
AEO Weekly Chart
AEO Daily Chart
Apple (AAPL)
Why the Strength
The title “Most Valuable Brand in the World,” according to the Interbrand Best Global Brands annual report, will look nice next to Apple’s current title of biggest corporation in the world (by market valuation). Last month, the iPhone 6 and iPhone 6 Plus hit the market, breathing new life into the company’s hottest product line. The popular phone reportedly already has 20 million in pre-orders in China, and it will hit another 36 countries later this month. That said, Apple’s other key products, the iPad and Mac, are beginning to show their age. That could change this week, as Apple is expected to unveil new versions of these devices. The October 16 event will be streamed live on Apple’s website, with analysts predicting design improvements, fingerprint scanners and 4K display screens for the iPad Air 2 and Mac product lines. Then, on October 20, the company is expected to release its fourth-quarter and full-year earnings figures. Analysts are currently projecting year-over-year growth of 9% and 8%, respectively, with fiscal 2015 earnings seen rising 15%.
Technical Analysis
After skipping more than 25% higher through August, AAPL shares have slowed down considerably during the past several weeks. Concerns about iPhone 6 bending have made news, but the real killer for AAPL’s growth has been global economic growth concerns. As such, the stock has been range-bound in the 98-102 region since the beginning of September. Furthermore, shares continue to bounce along support at their 50-day moving average. If this week’s event goes well, and if those 20 million Chinese pre-orders pan out, the recent turmoil could be seen as just another bump in the road for AAPL. That said, we still recommend caution, with dips toward 99 providing opportunities to nibble. Also, place a stop at 97—AAPL’s split-adjusted peak in September 2012.
AAPL Weekly Chart
AAPL 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.