Next Up: Earnings Season
Current Market Outlook
The market remains in great shape with all the major indexes in gear on the upside, a ton of stocks and sectors acting well and a general lack of selling pressure even after the recent run. Surprisingly, we’re still seeing hesitation among investors in terms of money flows, which, from a contrary point of view, is bullish. The next big test for the market and (especially) individual stocks is earnings season—how leading stocks respond (both those that have been running for a while, and new leaders that emerged in September) will have a big say on the market’s short-term future. But given the overall evidence, the odds continue to favor higher prices down the road, so any reasonable dips should be viewed as buying opportunities.
This week’s list is another good-looking mix of growth and industrial stocks with strong charts. Our Top Pick is Adient (ADNT), which owns about one-third of the car seat market and has big earnings, a cheap valuation and a tidy pullback after a powerful September breakout. Keep new positions small ahead of earnings.
| Stock Name | Price | ||
|---|---|---|---|
| Adient (ADNT) | 0.00 | ||
| Atlassian (TEAM) | 182.16 | ||
| Baidu (BIDU) | 0.00 | ||
| CF Industries (CF) | 45.23 | ||
| DXC Technology (DXC) | 0.00 | ||
| LPL Financial Holdings (LPLA) | 85.22 | ||
| Monolithic Power (MPWR) | 0.00 | ||
| Sherwin-Williams (SHW) | 526.09 | ||
| Thor Industries (THO) | 104.76 | ||
| Vishay (VSH) | 0.00 |
Adient (ADNT)
Why the Strength
It was almost a year ago that Adient was spun off from Johnson Controls (JCI) to become a pure-play manufacturer of automotive seating and interiors. The spinoff has been a huge success; shares of Adient have dramatically outperformed Johnson Control’s since the separation, and analysts see more upside for Adient, which makes more than one-third of the world’s automotive seats. The company’s three-pronged growth strategy hinges on, 1) expanding into autonomous-driving technologies, electric cars, radar systems and other components; 2) getting into non-automotive seating markets (management sees a $1 billion opportunity in aircraft, trucks and trains); and 3) acquiring competitors. It’s making progress, most notably by closing on the $360 million acquisition of privately-held Futuris (15 seating facilities) in August, which brought major customers Tesla, Ford and GM into the Adient family. Given that seating is far from a commoditized business (switching costs are high once an incumbent supplier with valuable intellectual property is integrated with just-in-time fulfillment), any market share gains and/or market expansion initiatives should pay dividends for years. Revenue should be down 4% in 2017 and up just 1% in 2018, but earnings are huge and growing (more than $9 this year and over $10 next), the stock is cheap (forward P/E of just 8.3), and the pure-play strategy is working. Earnings are due November 2.
Technical Analysis
ADNT began trading a year ago at 42 and advanced steadily to 76 by March. That began a six-month consolidation that included a top-to-bottom 20% correction, but shares began to tighten up a bit in July and August and surged as September arrived. ADNT has ripped to new highs on excellent volume and the recent modest, grudging pullback looks buyable as the 25-day line (now near 82.5) catches up.
ADNT Weekly Chart
ADNT Daily Chart
Atlassian (TEAM)
Why the Strength
Many software stocks are strong today, but none likely has as unique a story as Atlassian. The company’s products, including its core Jira suite, is all about team productivity—Atlassian says it’s trying to do for team workplace productivity what Microsoft Office did for personal productivity many years ago by coordinating workflow, incorporating messaging and improving content sharing (which is far better than just passing around the latest version to the next person in line with your edits in place). It sounds niche-y, but it’s really just the opposite; thanks to its relatively low prices, the company is targeting more than 21 million software developers around the world, with another 100 million technical team members also potential users. And it’s succeeding because it’s a product-driven company—Atlassian spends less on sales than any of its peers, but by far the most on R&D (37% of revenue!)—which has led to a big user base (89,000 organizations are clients), rapid and consistent growth (82% of revenue is recurring in nature), and, like many software firms, free cash flow that’s much larger than earnings ($183 million during the past 12 months, or about 81 cents per share). It’s not an easy product to “touch and feel” for the average investor, but management clearly knows what it’s doing, and there’s every reason to expect more 30%-plus growth in the quarters and years ahead. The next update will come on Thursday (October 19), when the firm releases third-quarter results.
Technical Analysis
TEAM has a great long-term chart. The stock came public in December 2015 and built a huge post-IPO base that lasted through April of this year. The breakout looked powerful, but ended up leading to another, very tight structure (about 15% from top to bottom) from June through September. Now, though, TEAM is back at it, surging to new highs this month on excellent volume. The only hitch is that earnings are out this week—if you want in, keep it small ahead of the report.
TEAM Weekly Chart
TEAM Daily Chart
Baidu (BIDU)
Why the Strength
After 29 appearances in Cabot Top Ten Trader dating back to 2007, Baidu is probably familiar to most investors. The company, often called the Google of China, operates a highly successful online search service that makes money through advertising, just like Google. Baidu is one of the three online giants of China (along with Alibaba and Tencent Holdings), but the company went through a slack period (revenue growth fell from 52% in 2014 to 32% in 2015 and 1% in 2016) when it failed to adapt to its users’ switch to mobile devices as their primary way of accessing the internet. That problem is now behind the company, as mobile revenue made up 72% of revenue in Q2, up from 62% in Q2 2016. Baidu’s financial health (it had $13.6 billion in cash in June) makes it a player in the research contest going on in China. Baidu is concentrating on artificial intelligence (AI) as a way to deliver even better search results, but AI’s applicability to self-driving cars and other headline projects hasn’t gone unnoticed. Baidu’s Q2 earnings report featured its strongest after-tax profit margins since Q3 2014, and management expect to report total revenue growth of 27% to 33% when it releases its latest results on October 26 after the market closes.
Technical Analysis
After its last previous appearance here in November 2014, BIDU went through a remarkable consolidation that lasted well over two years and was marked by consistently lower highs and higher lows. The stock finally broke out of this tightening band in July 2017, and (after a flat August) has been rallying strongly ever since. BIDU is out to new highs, but you can take a small position ahead of the October 26 earnings date. Try to buy on dips and use a loose stop around the 50-day moving average, now at 236.
BIDU Weekly Chart
BIDU Daily Chart
CF Industries (CF)
Why the Strength
CF Industries is a giant in the production and distribution of fertilizers—urea ammonium nitrate, urea ammonia nitrate, granular urea and ammonium nitrate. CF manufactures its fertilizers from natural gas feedstock at its eight production sites and distributes through its industry-leading distribution facilities. The company has completed a major capital investment program focused on expanding manufacturing capacity. The entire industry has been under pressure from lower prices for nitrogen fertilizers, but management has been focused on reducing operating costs, which have offset stagnant revenue growth. The feeling is that CF Industries is well-positioned to survive the current low-price, excess supply environment and to continue paying its generous dividend; the company’s board declared a dividend of 30 cents per share on October 10, payable to holders of record as of November 15 (annual yield is 3.2%). Management’s skill at cost reductions and the dividend are what’s attracting investors right now, and many are starting to look ahead to the anticipated turnaround in CF’s bottom line in 2018.
Technical Analysis
CF capped a long rally when it tagged 65 in July 2015, then skidded below 20 in August 2016. After a post-election rally to 36 in January 2017, CF pulled back to support at 25 in late Spring and formed a cup-shaped recovery to 36 in September, with a three-week sideways handle. CF got a major boost from the dividend announcement on October 10 and looks like a good buy anywhere under 37 with a loose stop near its 50-day moving average.
CF Weekly Chart
CF Daily Chart
DXC Technology (DXC)
Why the Strength
DXC Technologies is a relatively unknown name, but as we wrote when we recommended the stock in August, it’s a behemoth in the IT services industry. The company was formed when the enterprise services division of Hewlett Packard Enterprise merged with Computer Sciences Corp., and it now sports thousands of clients, 170,000 employees and revenues of around $25 billion. Because of its size, growth isn’t expected to be wonderful, but the stock has been under accumulation because management sees a whopping $1.5 billion of synergies from the merger within a year, which should help produce huge earnings (nearly $7 per share this year and more than $8 next). And free cash flow should be even larger than earnings, growing 20% annually for a few years! In the near-term, investors are excited by the recent announcement that DXC is set to combine its U.S. public sector businesses with a couple of other firms, and (if all goes on schedule) spin it out as an independent company (with $4.3 billion of annual revenue) next March. The move should unlock more shareholder value for DXC and helped bring buyers into the stock. It’s not a cocktail party story, but the “newness” of DXC, the cash flow potential and the latest announcement all should keep the trend pointed up. Earnings are likely out in early November.
Technical Analysis
DXC emerged in its new form in early April and has stair-stepped higher ever since. It formed a great base from mid-May to early August before gapping up on earnings. That gap led to another tight area centered on 85 through September. This month, though, the stock has shot to new highs, including last Thursday’s pop on the spin-off announcement. You can buy some here or on dips of a point or two.
DXC Weekly Chart
DXC Daily Chart
LPL Financial Holdings (LPLA)
Why the Strength
LPL Financial is another Bull Market stock that’s starting to benefit from the market upturn, with big growth expected going forward. This mid-sized firm ($4.1 billion in revenue) is a leading retail financial advisor, one of the fastest growing custodians for registered investment advisors and the nation’s largest independent broker-dealer—it provides proprietary technology, training, clearing and independent research to more than 14,000 financial advisors and over 700 financial institutions. About three-quarters of revenues are either commission- or advisory-based, with some asset-based and transaction-related revenue making up the rest. The stock is strong today because assets are steadily increasing, its various business lines are perking up and much of that is starting to fall to the bottom line. After a long stretch of shrinking revenues, the top line has perked up each of the past two quarters, and earnings (up 40% in Q2) and EBITDA (up 29%) are beginning to surge. Like most brokerage firms, from this point it’s a matter of higher interest rates and higher stocks prices driving higher profits; analysts see earnings up 20% for all of this year, with growth accelerating to 37% in 2018. A nice dividend (1.9% annual yield) is a cherry on top of a solid story. Earnings are due on October 26.
Technical Analysis
LPLA imploded as low as 15 in early 2016, and then began a long road back to 43 in December. Shares then went sideways through mid-July before sneaking to new highs above 45. But the real strength didn’t begin until the start of September—since then, LPLA has advanced persistently to around 53 before catching its breathe in recent days. We’re OK with a small buy here or on dips.
LPLA Weekly Chart
LPLA Daily Chart
Monolithic Power (MPWR)
Why the Strength
Semiconductor stocks have been on a tear, and one of the more compelling (yet lesser-known) names in the space is Monolithic Power. The company specializes in analog and mixed-signal integrated circuits for consumer electronic (39% of revenue), computing and storage (22%), communications (14%), industrial (13%) and automotive (12%) markets. Annual revenue growth has averaged 18% over the last three years, and the stock is doing well because analysts see that growth rate continuing. Even better, earnings growth should accelerate from 22% in 2016, to 25% in 2017 and 2018. The most exciting areas of growth are storage and automotive—on the Q2 earnings call, management flagged solid-state drives (SSD), cloud and high-end notebooks as the main drivers of computing and storage growth (that segment’s revenue was up 34% in the quarter). And it highlighted infotainment and lighting as driving automotive solutions’ 56% growth. An underappreciated revelation was also Monolithic’s new solutions-focused growth strategy—the company has rolled out a new website platform that helps engineers customize, configure and order parts online. That’s a major leap forward in an industry that historically relied on prototypes, testing and longer lead times, and it has the potential to draw even more customers to the platform. Earnings are due out October 26.
Technical Analysis
MPWR’s uptrend dates back to the end of 2011 when shares traded at 10. While one might think that means new investors are late to the table, the trend’s tenacity suggests otherwise. Better yet, the stock looks to have just emerged from what was effectively a three-and-a-half-month consolidation—shares touched 104 in June but were sitting at 103 near the end of September before the latest push brought MPWR to new price and RP peak. You could nibble here or (preferably) on dips ahead of earnings.
MPWR Weekly Chart
MPWR Daily Chart
Sherwin-Williams (SHW)
Why the Strength
Sherwin-Williams is a steady growth firm that’s excellently managed, with the top brass making some big splashes on the M&A front and squeezing out efficiencies to drive major earnings gains in recent years. By our measures, the stock is strong today for three reasons. First is overall confidence in the business—the top brass has delivered strong and consistent growth in profit margins and earnings in recent years by improving operations and riding the recovery construction market. Second, there’s excitement about Sherwin’s recent acquisition of Valspar—management has a history of success with mergers (21 of them in the past 10 years) and believes it can generate around $400 million of synergies by 2020 (more than $4 per share!). And third, the stock’s most recent surge came as (a) damage to third-quarter earnings from Hurricane’s Harvey and Irma weren’t so bad, and (b) a recent Investor Day showed that the company believes it can grow its EBITDA (a measure of cash flow) by 50% from last year through 2020. (Free cash flow is also expected to be very strong, rising from $15 per share last year to about $21 per share in 2020, with dividends rising about 60%.) Obviously, a lot can happen to the global economy and housing market between now and 2020, so you can’t take these forecasts to heart, but given management’s track record of delivering, it’s hard to bet against them. Earnings are due out on October 24.
Technical Analysis
SHW had a huge run from 2011 through 2015, but then began a two-year pause—from February 2015 through January of this year, the stock made no net progress. Then came a breakout, which led to a nice run to 362 in July, where SHW formed a shallow (10% deep) base during the next three months. Now, though, shares are freewheeling again, lifting to new highs on great volume after the long-term outlook mentioned above. Try to buy small on dips ahead of earnings.
SHW Weekly Chart
SHW Daily Chart
Thor Industries (THO)
Why the Strength
We’re as surprised as you to be featuring a second recreational vehicle (RV) manufacturer in as many weeks (we covered Winnebago on October 2). But the fact is that the RV market is red hot! Gas prices remain low, consumer confidence is high (hitting a 13-year high last week, in fact), and more people are taking the plunge and hitting the road. It also hasn’t hurt the RV industry that 2017 has brought a very tough hurricane season, and some investors perceive that translating into demand for alternative housing. Thor Industries is the biggest in the market, with 39% share of the motorized RV industry. That said, 71% of last year’s sales were towables, which includes sales of the Airstream brand, as well as camper trailer specialist Jayco (acquired in July 2016). All in, revenue was up 58% last year largely because of the Jayco acquisition, but expectations for 11% revenue growth (to $8 billion) and 15% EPS growth (to $8.18) in fiscal 2018 suggest a relatively smooth road ahead for Thor. To help meet rising demand, Thor is boosting its production capacity, starting with expanding Jayco’s current footprint in Twin Falls, Idaho. That’s a good sign, as is a reasonable valuation (forward P/E of just 14.5), and a dividend (yield is 1.2%) that was just increased by 12%.
Technical Analysis
THO has had an up and down year that started well, turned rocky in the middle, and is on track to end better than it began. Shares entered the year at 100 and worked their way up to 115 before sliding back to 90 in the weeks after fiscal Q4 results were released in early March. The stock found firm ground at its 200-day line, then jumped back above 100 once better-than-expected fiscal Q3 results were released in early-June. Another consolidation period lasted through late August. The breakout happened in the last week of September when THO broke through resistance at 115, leading to a surge to 130 before a recent pause. Dips look buyable.
THO Weekly Chart
THO Daily Chart
Vishay (VSH)
Why the Strength
Pennsylvania-based Vishay Intertechnology is making its debut in today’s Cabot Top Ten Trader on the strength of its lineup of rectifiers, diodes, transistors, integrated circuits and other electronic components. The Vishay story began in 1962 when its founder started his own company to make high quality resistors. Over the years, Vishay has grown by acquisition, making it a one-stop shop for all kinds of components for just about every kind of electronic equipment. While still affected by the chip cycle, Vishay’s extremely diverse application base—industry, computing, autos, consumer goods, telecom, military and aerospace, power supplies and medical—has allowed it to remain profitable year after year. After an 8% dip in revenue in 2015 and 1% growth in 2016, Vishay’s revenue grew by 6% in Q1 2017 and 9% in Q2. The company’s free cash flow allowed stock buybacks of $23.2 million in 2016 and the August 2 announcement of a $150 million repurchase plan to run through May 2018. The company also paid its first cash dividend (six cents per share) in Q1 2014 and increased that by 4% in Q1 2016. Management sees the Internet of Things and automotive applications as the biggest drivers of future growth. Vishay will report Q3 results on October 26, before the open.
Technical Analysis
VSH had a great 2016, then traded flat through the middle of August 2017, when it began its current rally that has featured a series of high-volume trading days during a 16-day string of consecutive advances. Today’s pause may signal a period of consolidation. With just 10 days until earnings, we don’t advise taking a full position. But VSH is still trading at a reasonable 20 P/E and you can take a nibble on any weakness with a fairly tight stop around 19.
VSH Weekly Chart
VSH 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.
