Please ensure Javascript is enabled for purposes of website accessibility
Top Ten Trader
Discover the Market’s Strongest Stocks

October 20, 2014

This week’s Cabot Top Ten Trader has a few potential new leaders, along with some steady-Eddie stocks that are actually pushing higher, even in this tough environment. This week’s Top Pick just gapped out of a base on earnings, and its business should continue to push ahead regardless of the market or economy.

Short-Term Bounce, But Main Trend Down

Market Gauge is 2

Current Market Outlook

The good news is that the market found some support in the middle of last week and has finally been able to get off its knees during the past couple of days; some potential growth stock leaders, too, have bounced back nicely, including a few in today’s issue. We do think the current bounce will likely go further given the severe selling of the past month and some of the climactic readings seen last week. But it’s going to take more than a couple of up days to change the market’s intermediate-term trend, which remains firmly down. We’re keeping our Market Monitor in bearish territory, and while a little nibbling is fine, the main goal is to remain defensive until a sustained uptrend emerges.

This week’s list is very interesting, as there are a few vibrant growth stocks that have snapped back nicely. Still, our Top Pick is more slow-and-steady —Domino’s Pizza (DPZ) just leapt out of a tight base on huge volume thanks to a bullish earnings report. Dips look buyable.

Stock NamePriceBuy RangeLoss Limit
Zoës Kitchen (ZOES) 0.0032-3429.5-30.5
XPO Logistics (XPO) 0.0034-3731-32
Sherwin-Williams (SHW) 526.09213-217204-206
Regeneron Pharmaceuticals (REGN) 512.96350-365335-340
Pacira Biosiences (PCRX) 54.8597-10190-92
Palo Alto Networks (PANW) 236.9295-9888-89
Jack in the Box (JACK) 0.0065-6862-63
Domino’s Pizza (DPZ) 339.4782-84.578-79
Autohome (ATHM) 98.6544-4739-40
Advance Auto Parts (AAP) 0.00135-138129-130

Zoës Kitchen (ZOES)

www.zoeskitchen.com

Why the Strength

Zoe’s is a classic cookie-cutter story that we believe can go very far in the years ahead. Think of it as a Chipotle Mexican Grill, but instead of burritos and tacos, Zoe’s serves up Mediterranean-inspired dishes with a little Southern flair—pitas, hummus, chicken sandwiches and kabobs, along with a ton of fresh fruits and veggies, using no fryers or microwaves during preparation. (Interestingly, women represent 70% of customer visits, and the average household income of each customer is north of $100,000!) What we like about this story is that it’s large enough to be a proven concept—Zoe’s has 125 restaurants in 15 different states, and last year its top 20 performing locations came from seven different states, so this isn’t just a business with local appeal. But it also has huge growth potential; the firm will boost its store count by about 30 this year, and a similar number of openings in 2015 looks reasonable. Long-term, the top brass thinks it can have 1,600 locations! Throw in solid, mid- to high single-digit same-store sales growth, and success is just a matter of prudently expanding the store base over time. Sales growth is excellent (and accelerating), while earnings are near break-even as the firm puts its money into expansion.

Technical Analysis

ZOES just came public in April and ran to about 35 in July before forming what is now a 16-week, double-bottom base that corrected only 24% from high to low. And what’s really impressive is the action of the past few weeks—while the market has imploded, ZOES has ramped up six weeks in a row, albeit with lots of wild daily swings. The only rub here is that the stock is very thinly traded (just $17 million per day), so if you decide to buy, keep it small and use a very loose leash.

ZOES Weekly Chart

ZOES Daily Chart

XPO Logistics (XPO)

www.xpologistics.com

Why the Strength

Greenwich, Connecticut, is a city frequently associated with hedge funds, not transportation companies. So the fact that XPO is headquartered in Greenwich is revealing; this is a company whose strength is partially financial, and partially intellectual. Founded in 2000, its business is freight forwarding and truckload brokerage and its growth strategy involves acquiring established operators (the industry is still quite diversified) and rolling them into a higher-functioning scaled business, with the help of software (that’s the intellectual part). In 2012, XPO acquired Turbo Logistics, Kelron Logistics, Continental Freight Services and BirdDog Logistics; in 2013, it acquired East Coast Air Charter, Covered Logistics, Interide Logistics, 3PD, Optima Service Solutions and NLM. And so far in 2014, it’s acquired Pacer International (making it the third largest intermodal provider in North America), last mile logistics company ACL and New Breed Logistics, a leading provider of premium contract logistics. These acquisitions, understandably, wreak havoc with earnings trends; the company’s last annual profit was in 2010, and in 2015, it’s expected to earn less than it did then! But revenue trends are very healthy, and as the growth story of Amazon.com taught us, if your aim is to grow into the biggest in the business, attention to earnings should be secondary. Management is clearly capable of doing it.

Technical Analysis

XPO has been public since 2004, but it didn’t earn a spot in Top Ten until this year, and one reason is certainly the chart; though the long-term trend has been up, the short-term movements have been twitchy. But the stock is growing up as the company grows, and we like the way it’s acted recently. Specifically, there were gaps up on big volume in July and September, the sharp pullback with the market into October and a strong rebound last week that brings it near its old high of 40. Buy on dips.

XPO Weekly Chart

XPO Daily Chart

Sherwin-Williams (SHW)

www.sherwin.com

Why the Strength

We remain intrigued by the action of some construction- and housing-related stocks; while the news has turned generally worrisome for the industry (though last week’s housing starts figure was encouraging) and many homebuilders look terrible, a few construction-supply stocks are acting well. Sherwin-Williams is one of those—as a leader in paints and coatings, the company has been cranking out solid growth for the past few years as the housing market has recovered, and analysts see that continuing for at least another couple of years as construction activity and existing home sales (which have a very high correlation to coatings sales) push higher. Also playing into the stock’s good vibes is the recent downtick in mortgage rates, which, barring a recession, should help housing activity. All in all, there’s nothing revolutionary here, just a well-run company that leads an industry that is benefiting from positive macro factors. A small dividend (1.0% annually) and solid stock buyback plan (it repurchased about 3% of all shares in the first half of the year) put a nice bow on the package.

Technical Analysis

SHW had a big run from late-2011 through early-2013, when the stock reached 191. But since then, the stock, while advancing, has done so grudgingly, with lots of brief-but-sharp dips along the way. Because of that, SHW wasn’t something we were following, but last week’s action put shares back on our radar screen—the stock tested its 40-week line early in the week and then soared back to within a few points of its high on big volume … a real tennis ball! It’s worth watching, but if you want to buy a little, do so on dips.

SHW Weekly Chart

SHW Daily Chart

Regeneron Pharmaceuticals (REGN)

www.regeneron.com

Why the Strength

Regeneron is a large, diversified developer of drugs that treat eye diseases, inflammatory diseases and cancer. These include colorectal cancer, LDL cholesterol, rheumatoid arthritis, asthma, dermatitis and nasal polyposis. But the big moneymaker for the company is Eylea, an injected treatment for wet age-related macular degeneration that was approved in late 2011. Costing users $16,000 per year (less than the $24,000 for the then-leading product made by Roche), Eylea ended a long string of money-losing years, and business at the company has been booming since. As a result, Regeneron is very well known; more than 1,000 mutual funds own shares of the company, and the stock is up six-fold since that 2011 approval. And now history might repeat itself, as Regeneron, just last week, saw Eylea outperform two other drugs in a clinical trial to treat patients with vision loss caused by diabetic macular edema. With diabetes being one of our biggest health problems, this is a big deal, possibly giving Regeneron another leg to its growth story.

Technical Analysis

When REGN first appeared in Top Ten, back in 2006, it was trading at 23. It’s appeared here over a dozen times since, and this is probably not the last. The stock stood out recently because it resisted the market’s gravitational pull for a long time, holding up at 360. It finally yielded to the broad market’s influence less than two weeks ago, beginning a correction that took it down to 320 (just 11%). But it rebounded easily when the pressure came off the market, and then when the news about Eylea came out, boom!, it was off to new highs, on very big volume. If you’re looking for a growth stock leader to buy, you can pick up some shares here.

REGN Weekly Chart

REGN Daily Chart

Pacira Biosiences (PCRX)

pacira.com

Why the Strength

Pacira Pharmaceuticals is known for its unique injection therapy technology called DepoFoam. DepoFoam is an injection-based product delivery platform that allows for both immediate and sustained release of injected therapies. While DepoFoam has considerable licensing potential, Pacira has been grabbing headlines this year for its most promising drug candidate, EXPAREL, which is a local analgesic that reduces the need for post-operative opioids. The drug is currently in clinical trials for additional uses, but Pacira has already submitted a supplemental New Drug Application (sNDA) submission for a nerve block indication for EXPAREL. The move is based on positive data from a pair of Phase III studies assessing the drug’s safety and efficacy in femoral nerve block and intercostal nerve blocks. In fact, the big news driving Pacira recently has been newly released safety data on EXPAREL, with the drug showing safety comparable to placebo and the popularly prescribed bupivacaine HCI. EXPAREL has already generated revenue of $79.3 million in the first half of 2014 for Pacira, up 209% year over year, and an expanded indication for the drug should continue to drive significant growth for the company. In fact, analysts are projecting revenue of $2.58 per share in 2015, up from 19 cents per share this year.

Technical Analysis

PCRX has held up well since we last checked in with the stock in August. Shares were pressured by weakness in the overall market, but refused to stray far from the 100 region, bouncing along support in the 95 region for much of the past month. What’s more, last week’s news helped propel PCRX back above the century mark. If you’re game, you can buy dips around here, but maintain a stop near 95. Or just add it to your watch list.

PCRX Weekly Chart

PCRX Daily Chart

Palo Alto Networks (PANW)

paloaltonetworks.com

Why the Strength

The more we study Palo Alto Networks’ business (and the more we see the stock act resiliently), the more we believe Palo Alto could be an emerging blue chip. The company is the top dog in the rapidly growing network security industry, which is being transformed from something most companies should have to something every company must have as attacks get more sophisticated, as more high-profile breaches occur (Target, Home Depot and JP Morgan come to mind) and as more business is done online. Palo Alto’s next-generation firewall technology is both best-of-class and the most well-rounded in the industry; it offers a complete solution (including defense against so-called “zero-day” attacks, or those which haven’t been seen before), as opposed to just a piece or two of the security pie. And, business-wise, we like how the firm is moving toward a subscription model by upselling regularly-updated features for a regular fee; in the quarter ended July, recurring subscription revenue totaled 21% of all revenues, but was up 74% from the year before. This is both a near-term story (there is likely to be an firewall upgrade or “refresh” cycle next year) and a long-term story, as network security becomes paramount. It’s a big idea.

Technical Analysis

On the weekly chart, the first thing that stands out are the many bullish volume spikes for PANW during the past few months, including the record-volume, earnings-induced jump north of 100 in early September. The stock has been very choppy since then, but also very resilient—PANW briefly dipped 18 points during the market’s skid, but has immediately snapped back to the century mark. If you want to nibble, you could consider it in the mid-90s with a stop near 87. Or just put the stock near the top of your watch list.

PANW Weekly Chart

PANW Daily Chart

Jack in the Box (JACK)

jackintheboxinc.com

Why the Strength

Fast food restaurateur Jack in the Box has had a hot hand lately. The company serves up burgers, fries, soft drinks, salads and tacos at more than 2,866 franchises in California, Texas and roughly 20 other states. The company also operates some 625 Qdoba Mexican Grill “fast casual” restaurants in 47 states, which compete in the same red-hot Mexican-inspired market segment as Chipotle. While the eponymous Jack in the Box locations are doing well, the Qdoba chain is on fire, with same-store sales rising 7% during the most recent quarter. While the company hasn’t publicly stated any plans, there is speculation within the analyst community that Jack in the Box might be considering a Qdoba spinoff to capitalize on the brand’s considerable strength. While a full spinoff may be costly, analysts believe that Jack in the Box could sell off a minority stake in Qdoba to its shareholders via an IPO with little trouble. As a whole, the company has been performing extremely well, with earnings growth averaging 42% year-over-year over the past four quarters. Overall, analysts are projecting growth of 35% for the current fiscal year and 15% for 2015.

Technical Analysis

While it hasn’t been a smooth rally, JACK has clambered more than 38% higher so far in 2014. The stock quickly reached a peak north of 60 by mid-March, but was unable to hold that perch, falling to a low near 53 by the end of April. Shares would spend the next several weeks bouncing around between 55 and 60 before breaking out in early August. Since re-testing support at 60 in September, JACK has trended higher, even amid the recent market turmoil. Shares are fresh off both a test of resistance at 70 and support at 65, and are currently perched just north of their 10-day moving average. If you want in, you can grab a few shares on dips.

JACK Weekly Chart

JACK Daily Chart

Domino’s Pizza (DPZ)

www.dominos.com

Why the Strength

A few years ago, Domino’s Pizza was looking like a lost business—it was still profitable, but sales shrank a total of 7% over the four years through 2009, while earnings dipped far more. But a new menu with some cheaper items and a few new recipes, a “pizza theater” set-up in many new stores (where customers can see their pizzas prepared), and a solid expansion plan have turned the ship around the past two years. The reason the stock is strong today is over a bullish earnings report last week; revenue growth of 11% was the highest in many years, and earnings growth is accelerating slightly (up 15%, 18% and 24% the past three quarters), topping analyst estimates. Helping to drive growth was a 7.5%-ish rise in overall same-store sales, as well as 160 new store openings in the quarter. Another factor working in Domino’s favor is the nature of the business—a relatively cheap pizza joint isn’t going to see business plunge during an economic slowdown, and with business clearly doing well, big investors feel comfortable putting money to work. A modest share buyback program and dividend (1.2% annual yield) also are aiding the bulls.

Technical Analysis

DPZ has been grinding its way higher for a couple of years, though its performance hasn’t been great since the fourth quarter of 2013—the RP line basically peaked in October of that year and flat-lined afterwards. But the stock did build a nice base for most of this year, consolidating tightly along its 40-week moving average, and last week’s quarterly report caused the stock to jump on its heaviest volume in 15 months! If defensive-oriented stocks remain in demand, DPZ could do well. Try to buy on dips.

DPZ Weekly Chart

DPZ Daily Chart

Autohome (ATHM)

www.autohome.com.cn

Why the Strength

Autohome is the leading provider of automotive information to Chinese consumers, who use its websites to research both new and used automobiles. The company is only six years old, but it’s surpassed BitAuto—now number 2—by providing a more valuable user experience, and the resultant increase in traffic means Autohome is now where all the dealers and manufacturers come first to advertise! Advertising provides 81% of revenues, while dealer subscription accounts for 19%. In 2010, the Chinese automotive market surpassed the U.S. as the largest in the world, and over the past four years, Autohome’s revenues have grown at the astounding rates of 77%, 79%, 70% and 70%. That’s expected to slow down as the company’s sales have expanded north of $250 million, but it’s still reflective of the power of the Chinese market’s growth, and we think that’s the main reason this stock refuses to be kept down.

Technical Analysis

ATHM came public in December of 2013, so it’s still a relative youngster, which means there are far more potential buyers than sellers. But it’s not been an easy stock to invest in. After hitting an April peak at 52, the market correction saw the stock drop 45%, to 28.5. That was followed by a quick run up to top 57, but the broad market’s collapse pulled it down again to 40, for a 33% correction. Ideally, the stock is maturing, and with maturity (and higher levels of sponsorship) will come lower volatility. Right now, the stock is blasting off strongly from the recent bottom, but the odds favor some backing and filling.

ATHM Weekly Chart

ATHM Daily Chart

Advance Auto Parts (AAP)

www.advanceautoparts.com

Why the Strength

Advance Auto Parts is the #2 auto parts retailer, trailing just behind AutoZone and ahead of competitor O’Reilly. The company operates more than 3,500 stores in some 40 states, Puerto Rico and the Virgin Islands. Advance Auto has seen solid growth this year, with earnings rising 23% year-over-year on average during the past four quarters. This strength has come from the rising average age of vehicles on the roads. In fact, HIS Automotive predicts that the average age of cars on the road will rise from its current high of 11.4 years to 11.7 years by 2019, as consumers look to get even more value out of their used vehicles—a trend that benefits Advance Auto Parts. The company is also expanding via acquisitions, snapping up Carquest earlier this year to shore up the company’s position among dealerships and auto mechanics. Oddly enough, the auto mechanic niche is growing faster than the DIY market as a way to deal with repairs on aging cars. On November 3, Advance Auto Parts will release its third-quarter earnings report with analysts projecting a 32% rise in quarterly earnings for the company, marking the third straight quarter of 30% growth. For the full year, earnings are forecast to grow 37%, tapering to 12% growth in 2015.

Technical Analysis

Following a gap higher in February, AAP eclipsed resistance at 120 only to run into a wall at 130. The stock would spend most of the spring and summer bouncing between these levels, with a false start breakout in late June the only outlier. Still AAP’s momentum in June weakened the 130 region, helping the stock to rally past 130 once again in August to hit a fresh multi-year high near 140. AAP has since settled down, with resistance turning into support at 130. You can buy dips of a point or two here, with a stop near 128.

AAP Weekly Chart

AAP 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.

FirstStockSymbolTop PickOriginal Buy RangePrice as of October 20, 2014
HOLD
10/6/14ActavisACT238-243227
10/6/14Acuity BrandsAYI128-132130
9/8/14AmbarellaAMBA36-3839
9/29/14American EagleAEO14.5-1514
6/16/14BaiduBIDU
icon-star-16.png
170-175217
10/6/14Carter’sCRI81-8378
8/4/14CelgeneCELG85-8792
8/4/14Chipotle Mexican GrillCMG640-670653
8/4/14FacebookFB70-7377
10/6/14FedExFDX156-161156
7/7/14Gilead SciencesGILD84-87102
10/13/14GoProGPRO65-7076
9/2/14Hain CelestialHAIN94-98102
6/16/14Health NetHNT38.5-4046
8/25/14Home DepotHD
icon-star-16.png
88-9192
6/16/14Keurig Green MountainGMCR115-121143
9/8/14MallinckrodtMNK
icon-star-16.png
82.5-85.587
8/18/14MedivationMDVN82-8595
10/13/14MercadoLibreMELI108-112107
10/6/14Monster BeverageMNST88-9295
10/13/14Mylan LaboratoriesMYL50-5150
10/6/14NikeNKE86-8989
9/15/14Palo Alto NetworksPANW
icon-star-16.png
94-98101
9/22/14ParexelPRXL59-6161
8/25/14RegeneronREGN340-350366
9/29/14StratasysSSYS118-123117
9/2/14TwitterTWTR47-5051
10/6/14Ulta SalonULTA113-117120
10/13/14United TherapeuticsUTHR120-124126
9/22/14XPO LogisticsXPO36-3838
WAIT FOR BUY RANGE
10/13/14AMAG PharmaceuticalsAMAG27.5-29.532
SELL RECOMMENDATIONS
6/23/14AppleAAPL89-91100
8/25/14Community HealthCYH50-5253
9/15/14Foot LockerFL55-5754
9/29/14MobileyeMBLY49-5150
8/11/14Tenet HealthcareTHC55-5756
DROPPED: Did not fall into suggested buy range within two weeks of recommendation.
None this week