Great Rebound, Though Still Tricky
Current Market Outlook
The market rebounded very nicely from last Monday’s big decline, with all of the major indexes shooting ahead and most notching new all-time highs. Thus, from a top-down perspective, the picture remains bright, with the intermediate- and longer-term trend of the market (and most stocks) pointed up. That said, it’s tricky out there—below the surface, the rotation is still vicious on a day-to-day basis, and many leading growth stocks remain stagnant. We’re still mostly bullish (we’re nudging the Monitor back up to 8 this week) and advise you to hold your strong stocks and look for new buys as they come. With the crosscurrents and earnings season (which is set to begin in a couple of weeks), it’s best to be selective and keep your feet on the ground.
This week’s list has a ton of very strong charts, with many showing persistent advances during the past few weeks. Our Top Pick is AbbVie (ABBV), which has come under extreme accumulation and looks like a new big-cap leader in the medical space.
| Stock Name | Price | ||
|---|---|---|---|
| AbbVie Inc. (ABBV) | 93.53 | ||
| Carpenter Technology (CRS) | 53.25 | ||
| E*Trade Financial (ETFC) | 0.00 | ||
| Eagle Materials Inc. (EXP) | 0.00 | ||
| Loxo Oncology (LOXO) | 186.59 | ||
| MKS Instruments (MKSI) | 109.43 | ||
| Meritor (MTOR) | 21.46 | ||
| Valero Energy (VLO) | 97.40 | ||
| Winnebago (WGO) | 48.56 | ||
| YY Inc. (YY) | 0.00 |
AbbVie Inc. (ABBV)
Why the Strength
AbbVie is a biopharmaceutical company that develops treatments for chronic autoimmune diseases, virology and neurological disorders. The company was spun off from Abbott a few years back to house the U.S. drug portfolio and pipeline, while Abbot focused on medical devices and overseas drug sales. It’s a modest grower (10% to 15% annual revenue growth) and extremely profitable (EPS of $4.82 in 2016), and pays a yield of almost 3%. The stock has been rising lately because of broader biotech strength, and AbbVie and Amgen just settled a patent dispute over Humira, AbbVie’s biologic treatment for rheumatoid arthritis, psoriasis and Crohn’s disease. Given that the drug generated 63% of revenue last year, and that market penetration remains below 25%, settling this issue is a big deal. In the wake of the news, analysts have rushed to increase price targets. Investors now expect around 10% revenue growth in 2017 and 2018, and average annual EPS growth of around 16%. While Humira will face increased competition in a few years, AbbVie’s pipeline includes next-generation immunology drugs (targeting IL-17 and JAK pathways) for rheumatoid arthritis and psoriasis (both should help mitigate competition), as well as treatments for blood cancers (Imbruvica drove 7% of sales in 2016), all of which management believes will be big sellers.
Technical Analysis
ABBV had been creeping higher for most of 2017 in a nonchalant sort of way, trading mostly above its 50-day line and establishing a pattern of higher highs and higher lows. The only real test came in mid-July when the stock peaked at 75, then fell swiftly to 69 over just five days. It met the 50-day line there however, and held firm at 70 before rallying on explosive volume to 90 over the course of four weeks. Shares wobbled a little and traded down to 83 last week, then news of the settlement pushed them back above 88. This move took ABBV out of a nearly three-year base, so we’re game with taking a swing at the stock around here or on dips, with a loose stop.
ABBV Weekly Chart
ABBV Daily Chart
Carpenter Technology (CRS)
Why the Strength
Carpenter Technology makes premium special alloys that are found in many aerospace, transportation, energy, medical and various industrial products. Aerospace is the big dog here, accounting for more than half of all revenues. If you’re looking for something unique or revolutionary, look elsewhere; Carpenter is strong today for a variety of factors, including its exposure to the surging aerospace sector; a general corporate focus on becoming a broad-based solutions provider for its customers (as opposed to just a supplier), which should smooth out some of the lumpiness in the business; and a cost-reduction program that’s boosting margins. While it doesn’t seem like much, Carpenter’s 11% revenue growth in Q2 was the fastest in more than three years, while earnings have now notched solid gains two quarters in a row. As mentioned above, aerospace is the main driver, though a turnaround in its oil and gas (Q2 revenues up 48%) and medical (up 20%) segments also helped. Going forward, sales growth is expected to be in the 7% to 10% range, but earnings and cash flow are likely to boom as all that extra money falls right to the bottom line. All told, it’s not a cocktail party stock (you’re not going to tell everyone about it), but Carpenter’s future looks bright as it boosts efficiencies and rides some solid industry trends.
Technical Analysis
CRS is yet another stock that’s been in the doghouse for years but is now showing major sign of accumulation. The stock fell from 67 in early 2014 to 24 in early 2016 before rallying back to the mid-40s the fall of last year. But CRS stalled out and did a whole lot of nothing for months on end. Now, though, after tightening up in the 38 to 41 area, the stock has begun to soar, quickly rallying to multi-year highs on excellent volume. Try to buy on dips.
CRS Weekly Chart
CRS Daily Chart
E*Trade Financial (ETFC)
Why the Strength
Financial stocks are emerging from a multi-month slumber, and our favorite sub-sector in the group is Bull Market stocks, whose business rises (and falls) with the market’s fortunes. E*Trade looks like one of the leaders in that area today, both fundamentally and technically. Business has been picking up for a while thanks to both the higher stock market (which boosts activity and client assets) and higher short-term interest rates, which has boosted interest income. (Indeed, in Q2, net interest income made up more than 60% of total revenue, with commissions and fees making up the rest.) Sales growth has been strong despite an early-year cut in commission rates (the whole industry slashed rates) and should continue to be—August showed a 44% year-over-year hike in trading activity and a 21% gain in total customer assets; the next monthly report will be out mid-October—while earnings have been fidgeting around due to some one-time items. But the major trend is clear: With the bull market in good shape, trading activity should rise and, as the man on the street joins in, more assets should pour in. A potential added bonus surrounds the possible corporate tax cut, which would likely boost E*Trade’s earnings in a big way. It’s a good story with lots of growth levers and a reasonable valuation (22 times earnings). We like it.
Technical Analysis
ETFC rallied with all financial stocks into early 2017, breaking out of a 17-month consolidation in the process. However, it ran into trouble in late January and began what turned out to be a seven-plus month base-on-base pattern, with a deeper correction during the spring and summer and a shallow, tight pause in July and August. Now, though, ETFC is freewheeling, bursting to new price and RP highs last week. You can buy here or on minor weakness.
ETFC Weekly Chart
ETFC Daily Chart
Eagle Materials Inc. (EXP)
Why the Strength
After a great end to last year, 2017 has been disappointing for most materials stocks, but we’re finally beginning to see the strongest of them resume their longer-term advances. Eagle Materials is a major player in many construction-related markets—about half its cash flow comes from cement, concrete and construction aggregates, with the other half from gypsum wallboard and paperboard. (Interestingly, the firm also recently entered the frac sand market, but that’s currently just 5% of revenues.) Eagle is a very well-run company and a low-cost producer (its margins are well above its peers), working on its sixth straight year of solid earnings growth. The stock has come back to life in recent weeks after a solid July quarterly report that revealed accelerating sales growth (driven by cement revenues rising 26% and more modest gains in paperboard and wallboard), with the long-term outlook (partially boosted by last year’s U.S. transportation bill, which should hike cement demand for many years) promising more growth to come. It’s not changing the world, but analysts see earnings up 27% this fiscal year (ending next March) and another 20% the next year. Like many other stocks, a potential corporate rate cut is improving investor perception, as the firm paid a 31% tax rate in the most recent quarter.
Technical Analysis
EXP peaked at 111 in January and February with most construction stocks and fell into a tedious correction—it dropped as much as 22% and was below its long-term 40-week moving average for two months, knocking out all but the true believers. Now, though, the tide has turned, as EXP soared on earnings in late-July and has continued to show excellent price/volume action since. There’s some old resistance to chew through, but we’re OK starting a position here or on dips and looking to buy more on the way up.
EXP Weekly Chart
EXP Daily Chart
Loxo Oncology (LOXO)
Why the Strength
Loxo Oncology is a highly specialized biopharmaceutical company focused on cancers that are defined by a single genetic mutation that keeps them alive and spreading. The company creates treatments that target those mutations. Loxo is hot right now because it announced on June 5 that one of its treatments, Larotrectinib, had achieved a 76% objective response rate in trials targeting TRK fusion adult and pediatric cancers, which means cancers that exhibit tropomysin receptor kinase mutations. Larotrectinib is described as a potential first-in-class therapy, and Loxo expects to file a new drug application in late 2017 or early 2018. While the population of cancer patients who might be aided by Loxo’s therapies isn’t huge, the potential of having a highly-effective treatment with few side effects is enormous, and accounts for the company’s market cap of $2.8 billion despite having zero revenue. The company released additional good news on September 13 when it announced that it would be presenting clinical data for its compound Loxo 292 to the meeting of an international lung cancer study group. Loxo 292 targets 2% of non-small-cell lung cancers, 10% to 20% of papillary thyroid cancers and a subset of colon and other cancers. It’s speculative, but Loxo Oncology has two potential blockbusters cued up, which helps to explain the growth of institutional sponsorship for the company from 146 a year ago to 292 now.
Technical Analysis
LOXO IPO’d at 13 in July 2014, and has enjoyed a couple of big runs since. The first took it to 35 in the second half of 2015. The second took it to 50 in June 2017. And the third kicked off when the good news about Larotrectinib keyed a gap up on 1,875% of its average volume. The stock reached 83 before that rally lost steam and the stock traded sideways until the September announcement about Loxo 292 kicked off another rally on a 600% volume spike. If you like the story, you can buy on any dip toward 90 and use a loose stop around 80 for protection.
LOXO Weekly Chart
LOXO Daily Chart
MKS Instruments (MKSI)
Why the Strength
MKS Instruments is a provider of capital equipment to the semiconductor industry (53% of revenue), with additional exposure to the industrial (17%), research (14%), life sciences (11%) and thin film (5%) industries. Management claims that every semi chip in the world has come into contact with its products, which include instruments, subsystems and process control solutions. Shares have been strong because of the cyclical boom in the semiconductor industry and because of mounting evidence that, this time around, industry growth is more sustainable due to demand from non-consumer markets including the cloud, automobiles and artificial intelligence. Of course, MKS has to execute as well, and on the July 25 quarterly conference call, it sounded like the company has been doing just that. Management flagged spending on DRAM, 3D NAND and Etch as three particularly bright spots. And it said the second half of the year should be stronger than the first. That’s a bullish sign given that revenue growth in Q1 and Q2 was 138% and 48%, respectively! Some of that growth was due to acquisitions, like the purchase of Newport (which specializes in lasers, photonics and motion control). The market is attracted to growth, and it’s clear that big investors are thinking that 2018’s modest estimates (earnings up just 9%) are too conservative.
Technical Analysis
MKSI broke out in mid-2015 near 40 and ran all the way up to 88 in June, so it’s not like the stock is in the first inning of its overall advance. However, after a sharp correction in June (88 to 66), the stock went on to build a decent base, with some tightness showing up in late August and, last month, with the buyers taking control, pushing MKSI out to new price and RP peaks. With the wind at the sector’s back, we’re game with buying a position here or on dips.
MKSI Weekly Chart
MKSI Daily Chart
Meritor (MTOR)
Why the Strength
Meritor, located in Troy, Michigan, is a Fortune 500 company that makes vehicle components for military suppliers, truck and trailers. The company was spun off from Rockwell International in 1997. Meritor is impressing investors recently because management is making good moves to solidify and expand the company’s position in the automotive industry. The company reported 9% revenue growth in Q2 after 10 straight quarters of declines, along with 12% earnings growth after declines in five of the last six quarters. Investors heartily approved of management’s sale of the company’s stake in a joint venture with WABCO for $250 million, as Meritor will keep the distribution rights to the joint venture’s product line. Meritor’s stock, which was already rising, blasted off on volume after that news. Investors also like the company’s acquisition of the Fabco product portfolio. With management making good moves, a 12 forward P/E and a 1.5% dividend yield, Meritor looks like a good long-term proposition.
Technical Analysis
MTOR pulled out of an 18-month correction from 16 to 6 in early 2016, hitting new multi-year highs in May 2017 and picking up its advance on rising volume in late August. The stock opened September at 20, and was trading at 23 when the news of the WABCO sale hit, kicking the stock to 27 on September 25 on big volume. MTOR has been trading sideways since then and looks like a reasonable buy at its current 26 price, although with its 25-day moving average back at 23, a pullback of a point or two is possible.
MTOR Weekly Chart
MTOR Daily Chart
Valero Energy (VLO)
Why the Strength
Valero needs no introduction, as it’s one of the largest refiners in the U.S., with 15 refineries that have 3.1 million barrels per day of capacity, 11 ethanol plants with 1.4 billion gallons per year of capacity and its own drop-down limited partnership. The stock is strong today for a mix of reasons. First, Hurricane Harvey, which devastated much of the country’s refining capacity, boosted margins for the industry; while margins have come back down, gas prices are still above where they were before Harvey hit. But this isn’t just a short-term hurricane play—the long-term fundamentals for refiners look good with capacity tight (Valero usually runs at 95% utilization), and Valero’s many growth projects in the works should boost cash flow by another $2.50 per share within four years. And the company is dedicated to huge shareholder returns—the company has reduced its share count by 21% since 2011 and is aiming to steadily increase an already-solid dividend (3.6% annual yield) in the years ahead. Analysts see earnings rising 17% this year and, importantly, another 28% in 2018, as some expansion efforts and higher margins (and possibly a tax cut) take effect. There’s nothing revolutionary here, but after a couple of years in the doghouse, refining stocks are showing excellent strength, and as a blue chip in the group, Valero looks like a leader.
Technical Analysis
VLO staged a multi-year recovery that finally took it back to its old highs in late 2015 around 74. From there, the stock fell to 47 last July, rallied back to 71 around year-end, and so far this year, etched a very tight, very tedious trading range. VLO did get a bump in August from Harvey, but the stock’s character really changed in September, as shares have moved straight up and broken out of a 21-month base in the process. You could buy here or (ideally) on its first dip of a couple of points.
VLO Weekly Chart
VLO Daily Chart
Winnebago (WGO)
Why the Strength
We suspect every adult has dreamed of owning a recreational vehicle (RV) at one point in life, yet research shows only 10% have taken the plunge. For those who haven’t yet (or never will), Winnebago’s stock may fulfill the craving. The company, which produces under brands including ERA, Winnebago, Itasca, and, as of November 2016, Grand Design (a high-end towable RV), holds the third slot in terms of market share in the motorized RV industry (17% market share), with only Thor (39% share) and Forest River (23% share) ahead of it. The Grand Design acquisition greatly increased the company’s share in the hugely important towable market, where it was previously deficient. The acquisition has also helped power the stock higher since it’s turned Winnebago into a growth story. Earnings and (especially) sales were basically flat over the past two years, but this year, revenue should be up by 57% (to $1.53 billion) and EPS should jump by 33% (to $2.23)! Towables represent 42% of year-to-date revenue, compared to just 9% in 2016. Clearly, this was a major acquisition, and investors are doubly happy since Winnebago has been aggressively paying down debt since it closed on the buyout (current debt of $275 million after a $43 million reduction in Q2) and 2018 RV models have been well reviewed.
Technical Analysis
WGO initially rose from 26 to 38 in the weeks following the announced acquisition of Grand Design. But the stock languished in the first half of 2017 and hit a low of 24 on the last day of May. Shares gained momentum heading into the June 21 Q2 earnings release, after which they jumped from 30 to 36 over 10 sessions. The stock then consolidated in the 33 to 37 range through August, then broke out to fresh highs in the second week of September. Look to buy on dips, but given the volume and persistence of the recent advance, we don’t expect a major retreat in the near-term.
WGO Weekly Chart
WGO Daily Chart
YY Inc. (YY)
Why the Strength
In general, Chinese social media are pretty similar to their U.S. counterparts, but YY Inc. is the exception. The company’s streaming media enables karaoke, games, movies, music and videos and dating. YY Inc. also streams a ton of original content like talk shows and educational content, and lets users create their own groups around shared interests. When YY Inc. made its most-recent (7th) appearance in Top Ten Trader in July, the number of monthly active users (MAU) had reached 63 million. In the most recent quarter, the MAU increased to 66 million. Revenue growth in Q2 was up 29% and earnings were up 53%; analysts expect EPS growth for the year to hit 46%. The company attributes its Q2 growth to its continued focus on the mobile sector, where live streaming revenue increased by 43% year-over-year and contributed 91% of total net revenues. Management has increased the stickiness of the live streaming experience with a new small-room online social game called Happy Werewolf Kill and a short-form video service in YY Live, both of which attracted a younger generation of users. The company is taking steps to increase the number of paying users and the results are showing up in quarterly numbers.
Technical Analysis
YY was a rocket back in 2013 and 2014, but the stock went into a protracted decline after the failure of management’s attempt to take it private. The stock bottomed in June 2016 but its rebound was too volatile to touch. YY began a steady rally in April 2017, running from 43 on April 18 to 83 on August 10. The stock corrected to 68 in late August, but recovered to form a flat base in the high 70s in September before blasting off to new multi-year highs around 90. YY looks buyable on any normal weakness, with a stop around 80.
YY Weekly Chart
YY 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.
