Short-Term Onus is on the Bulls
Current Market Outlook
In the big picture, we still have yet to see much abnormal action from the market—the long-term trend is up, the broad market is relatively healthy and, while many leading stocks have been dented, plenty are still acting well. Because of that, the odds still favor the next big move being up. But the short-term is trickier to game—it looks to us as if the market topped out for a few weeks starting in early September, with last Tuesday’s breakdown and last Friday’s rally rejection signs that big investors are liquidating some positions. With the major indexes just 2% to 3% off their highs, now is not a time to panic, but it is time to prudently manage your risk by cutting losses short, holding some cash and keeping new buys on the smaller side. We’re nudging our Market Monitor down to level 6 (out of 10) and believe the onus is on the bulls to reignite a new uptrend.
This week’s list has a wide variety of stocks and sectors to choose from. Our Top Pick is Paterson-UTI Energy (PTEN), which has been in rough shape during the energy bust, but the stock is now forecasting better times ahead.
| Stock Name | Price | ||
|---|---|---|---|
| Aerie Pharmaceuticals (AERI) | 0.00 | ||
| Diamondback Energy (FANG) | 0.00 | ||
| GoDaddy (GDDY) | 0.00 | ||
| ICU Medical (ICUI) | 0.00 | ||
| Las Vegas Sands Corp. (LVS) | 0.00 | ||
| Momo Inc. (MOMO) | 44.65 | ||
| Patterson-UTI Energy (PTEN) | 0.00 | ||
| PRA Health Sciences Inc. (PRAH) | 96.08 | ||
| RPC Inc. (RES) | 0.00 | ||
| TAL Education (XRS) | 0.00 |
Aerie Pharmaceuticals (AERI)
Why the Strength
AERI made a Top Ten appearance on September 19 after shares had just surged 60%. The catalyst was news that its glaucoma drug, Roclatan, performed well in the first 90 days of its Phase 3 “Mercury 1” trial. Roclatan is a once-daily eye drop that combines the company’s first-generation intraocular eye pressure (IOP) drug, Rhopressa, with an off-patent eye drop (latanoprost) made by Pfizer. Aerie could capture a good portion of the $2.2 billion market if the drug makes it to market. Shares have held up, in part because testing showed Roclatan worked better than stand-alone tests of both Rhopressa and latanoprost (the current market leader). Most analysts have increased their price targets to a range of 50-55, suggesting shares still have room to run. But all the recent attention has led to some negative speculation too. One report implied patients tested were of the “easy to cure” variety (Aeri’s management has since refuted the claim by disclosing additional test results). And on Friday Barron’s ran an article highlighting a $2 million stock sale by Foresite Capital (which still holds over 3.3 million shares, so we’re not concerned). A second Phase 3 trial is needed to support Roclatan’s efficacy. If this trial goes well, Aerie could have an application for FDA approval submitted within 12 months. That’s what matters most, and what will dictate the stock’s trajectory.
Technical Analysis
AERI exploded over 60% higher (from 20 to 34) on massive volume upon Roclatan’s favorable trial results on September 15. Shares then climbed for a few days before settling into a trading range between 36 and 42. The stock is down in only 7 of the last 22 sessions, suggesting that there is still plenty of buying interest. While clearly a speculative stock, we think small positions can be bought here or on dips. We would look for the exit should it break well below the September 15 gap higher.
AERI Weekly Chart
AERI Daily Chart
Diamondback Energy (FANG)
Why the Strength
Once the bulls retake control, the energy sector looks poised to have a great run, and Diamondback has reemerged as one of the leaders in the group. The firm has 86,000 acres in the Northern Midland Basin, and thanks to a recent acquisition, another 19,000 lucrative acres in the Delaware Basin (both within the larger Permian Basin). The big story here is the company’s near-best-in-class well returns even within the Permian itself, combined with its huge runway of growth—thanks to sharp cost reductions (drilling costs down by nearly half since Q4 2014), many of Diamondback’s wells return a whopping 100% or more at $50 oil, and in its Midland acreage, that price point should allow for 2,200 drilling locations, or more than 30 years of drilling inventory! That’s all well and good, but the main reason the stock is strong is that it’s delivering on all that promise—Diamondback raised its third-quarter production guidance by a good amount, and says 2017 should see another 30% output jump, and even that could prove conservative should prices rise. Impressively, the company remained solidly profitable throughout the bust, and analysts see earnings and cash flow ramping up in the quarters ahead.
Technical Analysis
FANG was one of the more resilient energy stocks during the bust, falling “only” 45% and actually hitting its ultimate bottom in late 2014, more than a year ahead of the sector as a whole. The stock did run to new highs this spring, but then tracked sideways from June through September before gapping to new highs last week following its production guidance. The pullback since then is normal, though a lot will depend on the market. We’re OK with a small buy here and a stop in the low 90s.
FANG Weekly Chart
FANG Daily Chart
GoDaddy (GDDY)
Why the Strength
GoDaddy is known for its obnoxious Super Bowl ads, but the company has a very solid business, billing itself as the largest technology supplier to small business. The firm gets about half of its revenue from domain registration services, which then serve as a gateway to its hosting services (37%) and business applications (13%), which include things like email marketing and search engine optimization help. (Domain revenue grew 10% in Q2, but hosting grew 15% while business applications lifted 45%.) The story here starts with the long-term, slow-but-steady growth in domains, which, thanks to expansion in GoDaddy’s product line and further expansion overseas, should lead to quicker growth in its other business lines. Revenues have consistently advanced in the 14% to 18% range in recent quarters, while cash flow is surprisingly big (well over $1 per share in the first half of the year) and earnings are expected to leap into the black in the third quarter. The firm’s $539 million of bookings in Q2 was up 14% from a year ago, while its 14.3 million customers (up 8%) shows this is a big market both in the U.S. and around the world. Interestingly, we’re not the only ones intrigued by the story—Fidelity owns 12.2 million shares (up from 7.6 million last quarter), or about 7.5% of the entire company. Third quarter earnings are due out November 2.
Technical Analysis
GDDY looks to be emerging from a long post-IPO basing phase. The stock had some ups and downs in the months after coming public in April 2015, but it’s generally hovered in the 24 to 35 range, and this year, the range tightened to 28 to 33. But the stock’s character changed in early August, when it lifted on earnings, and after GDDY went sideways for another month, shares nudged up to all-time price (and multi-month RP) peaks. If you want in, nibble on dips below 35.
GDDY Weekly Chart
GDDY Daily Chart
ICU Medical (ICUI)
Why the Strength
ICU Medical has long been a consistent, if fairly modest, grower in the medical device space, but a new deal with Pfizer could accelerate that growth. ICU Medical bought Pfizer’s thriving Hospira infusion systems business—which includes IV pumps, solutions and devices—for $1 billion in cash and stock earlier this month. The deal instantly makes ICU Medical, a developer of disposable medical connection systems for use in vascular therapy, oncology and critical care applications, a leader in infusion therapy. Thanks to Pfizer’s extensive reach, the acquisition gives ICU Medical a complete portfolio of IV therapy products with a much larger global footprint. Pfizer bought Hospira in September 2015, and it brought in $1.13 billion in sales last quarter. ICU Medical is merely buying Hospira’s infusion systems wing, but it should help jolt ICU’s sales once the deal closes in early 2017. Wall Street is certainly buying in—ICUI stock got a nice 15% bump the day the Pfizer deal was announced on more than 10 times average volume.
Technical Analysis
ICUI was already having a good year prior to the Pfizer-Hospira deal. After bottoming at 86 in February, the stock got going in earnest, reaching 104 by the end of March. Two months of consolidation followed before a mini-breakout to 108 in June, then a jump to 115 in July, followed by a gap up to 126 in August. From there, it spent another two months building a solid-looking base, and earlier this month it exploded higher, gapping up to 144 and continuing on to 151 last week. It has since retreated a bit, which could open up a better entry point. Buy on the dips with a loose stop right around 130.
ICUI Weekly Chart
ICUI Daily Chart
Las Vegas Sands Corp. (LVS)
Why the Strength
As its name says, Las Vegas Sands is a Nevada-based company, but the reason for its appearance in this issue of Cabot Top Ten Trader comes down to one word: Macau. Macau is the only place in China where gambling is legal, and the world’s largest casino market. Las Vegas Sands, which is the world’s biggest casino company by revenue, has five locations there, Sands Macao, the Venetian Macao, Four Seasons Hotel Macao, Sands Cotai Central and the just-opened Parisian Macao. Las Vegas Sands’ huge Macau operation was badly crimped by the Chinese government’s 2014 decision to put heavy restrictions on Macau gambling, especially the high-roller gambling that casinos rely on for a majority of their revenue. The rebound in Macau gambling has coincided with the opening of the $3 billion Parisian, and analysts see stronger cash flow now that construction expenses will no longer be a factor. Owner Sheldon Adelson is a strong advocate for the move of the Oakland Raiders to Las Vegas, and has committed $650 million in personal funds to aid in stadium construction. If the Raiders do move, Las Vegas will get another source for tourism, which analysts see as a plus for Las Vegas Sands. The company’s latest quarterly results are scheduled for this Wednesday (October 19) after the close of the market. Analyst’s consensus estimates call for earnings of 60 cents per share and revenue of $2.78 billion. As always, the generous dividend paid by Las Vegas Sands—5.0% annual yield—is very attractive.
Technical Analysis
LVS fell a long way from its March 2014 peak, but it has also bounced nicely from its mid-January low, where it completed a double bottom at 36 and rallied strongly in late January. After soaring to 53 in early March and correcting to 41 in late June, LVS got moving in July, tagging 60 last week before scrubbing off a few points during the market’s weakness. LVS looks like a good long-term bet, dividend included, but we don’t advise taking a big position two days before earnings come out. You can make a small buy or just watch the stock’s reaction to earnings and jump in if investors approve. A stop around 10% below your buy price is prudent to start.
LVS Weekly Chart
LVS Daily Chart
Momo Inc. (MOMO)
Why the Strength
Momo is often called the Tinder of China, although the company denies that it’s a hookup site. The company’s mobile networking platform uses subscriber profiles to find other nearby subscribers and rank them by common interests and demographics. The service launched in 2011, first for iOS users, then for Android. By 2012, the roster of registered users topped 22 million and in 2013, the company added a premium level and a sticker shop and came out with a Windows phone version and its first in-app game. 2014 brought a short video service, the launch of the fourth in-app game and listing on the Nasdaq for the company’s stock. Momo gets 44% of its revenue from membership subscriptions, with mobile marketing (29%) and games (23%) also making big contributions. Momo turned profitable in 2015 and reported 78.4 million monthly active users (MAU) in August. Revenue has risen by triple-digits in seven of the last eight quarters, with earnings also up by triple digits in six of the latest seven quarters. Momo made headlines earlier this year when e-commerce giant Alibaba indicated that it wanted to take it over; the stock’s chart for April shows the flat trading price at which the market expected the deal to close. But the Chinese government nixed the deal, and Momo took a while to recover. But recover it has, and its growth prospects are excellent. The company will release its latest quarterly results on November 8 before the market opens, so if the story appeals to you, the right time to get started is probably sooner rather than later.
Technical Analysis
MOMO came public at 14 in late 2015, just in time to catch the market downdraft in January and February. From its February low below 7, the stock soared to its apparent buyout price just below 17 in April, then corrected sharply in May and June when the deal fell through. July then brought a meteoric rally that hit 26 in early September. MOMO has been trading mostly sideways under that 26 high ever since. We think a buy at 24 or under looks like a good, but speculative, investment. Use a loose stop at the stock’s rising 50-day moving average, which is now at 21.5.
MOMO Weekly Chart
MOMO Daily Chart
Patterson-UTI Energy (PTEN)
Why the Strength
After hitting rock bottom in May, U.S. land drilling for oil and gas is on the rise again and rig counts are increasing. That includes Patterson Energy, which, after a year of declines, has been adding rigs every month since June. It now operates 62 rigs in the U.S. (plus two in Canada), up from 53 in May, though much lower than the 99 rigs it had last September. With four straight months of rig increases, this could be the beginning of a long-term turnaround for onshore drillers, especially in some low-cost basins like the Permian. OPEC’s recent announcement that it plans to scale back oil and gas production could add some extra fuel to that recovery, as larger exploration and production companies start investing in drillers’ higher-end rigs again. Patterson is still far from profitable and sales have declined for six straight quarters (third-quarter earnings results are due out October 27). But right now, investors are focused on the escalating rig count, which is why Bank of America/Merrill Lynch and Gabelli & Co. have each upgraded Patterson’s stock in the last two months.
Technical Analysis
PTEN has made three big moves this year: in January and February, the stock kited from 11 to 18 before settling into a holding pattern for three months. The next breakout came in June, when it jumped from 17 to 21. It spent another three-plus months consolidating, repeatedly failing to break above 21 resistance despite numerous re-tests, though never falling below 18 support. The third big move began in late September, when the stock finally broke through its ceiling to reach 22. Free of technical barriers, PTEN has continued to advance in the three weeks since, touching 24 last week. You can buy a little here or on dips, and keep the stock on a fairly tight leash with a stop around 21.
PTEN Weekly Chart
PTEN Daily Chart
PRA Health Sciences Inc. (PRAH)
Why the Strength
PRA Health is a clinical research organization (CRO) providing outsourced clinical development services to biotech and pharma companies. The company benefits from growth in R&D spending as the costs and complexity of clinical development increase, which tends to happen just about every year. As the fifth largest CRO, with a diverse client list and a wide range of service offerings, PRAH is arguably the best in its business. The Street has liked that the company continues to field more request for proposals than many competitors, and that Q2 revenue (+17%) and EPS ($0.63) were both ahead of expectations. Analysts were less impressed that management didn’t raise forward guidance (2017 expected revenue and EPS growth is 11% and 17%, respectively). But a recently announced strategic partnership with Japan-based Takeda Pharmaceutical (15th largest pharma company in the world) to provide clinical development (Phases 1 through IV) and post-approval services is further evidence of PRAH’s leadership position. This deal will generate revenue and EPS this year, and make Takada a top 10 customer next year and a top three customer in 2018. In other words, it’s a big deal. And it has helped previously skeptical analysts jump on the PRAH train.
Technical Analysis
PRAH has had an up and down year. A May secondary offering cut into a rally that had taken shares from 40 to 51. By the beginning of July, shares were back at 40. But a broader move in biotech stocks and better-than-expected earnings at the end of July helped fuel a rally from 44 to 58. That’s where the stock was prior to last week’s drubbing, which cut the entire biotech sector back a notch. PRAH is currently trading just above its 50-day moving average, which appears to be a buying opportunity.
PRAH Weekly Chart
PRAH Daily Chart
RPC Inc. (RES)
Why the Strength
Oil service stocks have shown life lately for the first time in a while, as more investors come around to the view that the bottom is in for energy prices and drilling activity. RPC has a bunch of different subsidiaries, but on the whole, the company provides completion services (about 80% of revenues) including pressure pumping, tubing services and workover activity, as well as rental services; its operations are mainly in the U.S. and mainly onshore. The company’s largest presence is in the Permian Basin, which is by far the most resilient energy area in the U.S. (activity there is down 20% from its peak, versus 40% for the U.S. as a whole). The stock is gaining strength because RPC looks to be well positioned to benefit from a recovery in the industry—the firm is very conservatively managed (it’s debt free and has $141 million in cash), which has allowed the firm to hold onto some people and equipment that others couldn’t because of cash crunches. Investors believe that will soon pay off, as the rig count and completion activity perks up with oil prices hanging around $50 per barrel. (Analysts see Q2 as the bottom, with revenues improving nicely going forward.) Interestingly, the company is about 70% owned by insiders—that can be a bad thing (not enough shareholder say in operations), but also means the top brass is managing the firm as if their livelihood depends on it. All told, RPC has the makings of a nice turnaround story.
Technical Analysis
RES fell from 25 to 8.5 during its bear phase, but built a multi-month bottom in late-2015 and early 2016 and then rallied to the 16 area in March. But the stock stalled out there and ended up gyrating between 13 and 16 for months on end. A couple of successful tests of the 200-day line ensued in July and September, and the last few weeks have shown excellent action, with RES advancing persistently to multi-month highs. Dips of a point or so would be tempting, with a stop below 16.
RES Weekly Chart
RES Daily Chart
TAL Education (XRS)
Why the Strength
Education is regarded as the surest way to get ahead in China, which creates a big opportunity for private education companies. TAL Education, which made the first of its five appearances in Top Ten in late 2015, is one of the biggest Chinese education firms, with K-through-12 class offerings that aim to enhance a student’s performance, leading ultimately to admission to an elite university. The company’s classes include math, English, Chinese, physics, chemistry and biology, all taught in either small classes, personalized tutoring or online courses. Since its founding in 2003 as a single learning center in Beijing, TAL Education now has nearly 400 learning centers in 25 cities and is constantly expanding, both organically and via acquisition. Revenue growth accelerated to 43% in fiscal 2016 (ended in February) and exceeded that pace in the company’s latest quarter. The company just announced that it has acquired ACESSAT, a training service for Chinese students who are studying abroad. ACESSAT will become part of TAL’s HiWorld service, which focuses on training overseas students for taking U.S. qualifying tests like the SAT, ACT and TOEFL. Analysts point to the relaxation of China’s one-child policy as another catalyst for TAL Education’s growth. TAL will release its latest quarterly results on October 27 and analysts are looking for revenue of $251 million and earnings of 53 cents per share.
Technical Analysis
XRS has been in a long-term uptrend since late 2013, but spent a year trading sideways from September 2014 to the market meltdown in August 2015. Since the December/January market correction, the stock was in a jumpy rally until the middle of September, when it spiked higher on heavy volume. Since that September jump, XRS has been less volatile and is making new highs regularly. With earnings less than two weeks away, we think XRS should be bought carefully, keeping new positions smaller than usual and waiting for pullbacks of at least a point. A stop at the stock’s previous resistance at 65 makes sense.
XRS Weekly Chart
XRS 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.
