The Evidence Remains Bullish
Current Market Outlook
In the short-term, there’s no question the market is “overbought” and there are some signs of complacency, so we’re not ruling out a market-wide shakeout, some kind of below-the-surface correction or simply a tricky earnings season. But the real money is in the intermediate- and longer-term moves, and on that front, the vast majority of evidence remains in the bull camp, as the trends of the indexes are pointed up, leading stocks are acting well and some new leadership is starting to emerge on earnings. Thus, our game plan remains the same—you should generally be holding your strong stocks (though booking a few partial profit is fine) and looking to do some buying either on pullbacks (for stocks that ran up strongly in September) or on powerful breakouts (likely on earnings).
This week’s list contains another varied batch of strong stocks, including a couple that have shown superb power in recent days. Our Top Pick is Skechers (SKX), which exploded higher last week after a blowout quarter—we advise starting small and adding shares if the stock continues higher.
| Stock Name | Price | ||
|---|---|---|---|
| Beacon Roofing (BECN) | 0.00 | ||
| Cree, Inc. (CREE) | 67.96 | ||
| Essent Group (ESNT) | 0.00 | ||
| HollyFrontier Corporation (HFC) | 0.00 | ||
| Michael Kors Holdings Limited (KORS) | 73.22 | ||
| Navistar International (NAV) | 0.00 | ||
| Proofpoint (PFPT) | 113.79 | ||
| Skechers (SKX) | 0.00 | ||
| Sohu.com (SOHU) | 0.00 | ||
| Zogenix (ZGNX) | 46.50 |
Beacon Roofing (BECN)
Why the Strength
Beacon Roofing is one of many building-related stocks that’s come to life in recent weeks, riding both industry-wide and company-specific reasons for its strength. The firm is North America’s largest publicly traded roofing distributor, with 385 branches in the U.S. and Canada, 67,000 customers and 46,000 individual products. A bit more than half of sales is from residential roofing, with 30% from non-residential roofing and the rest other building-related products. Business bobs up and down with the industry, which should be a good thing going forward; Texas alone likely had more than $50 billion in damage from Hurricane Harvey, for instance, and the housing market in general remains in good shape. But a big part of Beacon’s story is acquisitions—the firm has completed an average of four buyouts per year since 2012, with the purchase of Roofing Supply Group in October 2015 (bringing 85 branches) goosing sales and earnings last year. Now investors are excited about the latest acquisition: Beacon is buying Allied Building Products, a top distributor of roofing, siding, wallboard and more, which has 208 branches, should lead to $110 million (more than $1.50 per share) in annual synergies over time and be immediately accretive to earnings when the deal closes (likely early January). It looks like a transformative buyout that, combined with bullish industry fundamentals, could drive earnings much higher in 2018 and beyond. Earnings are likely out in mid-November.
Technical Analysis
BECN had a choppy but solid uptrend from early 2015 through mid-2016, thanks in part to the acquisition of Roofing Supply. But the stock’s relative performance (RP) line peaked last July and shares looked sick in late August when the Allied buyout was announced. BECN surged on the news and has continued to trend up, notching new highs in recent days on solid volume. Dips look buyable, with a stop just under 50.
BECN Weekly Chart
BECN Daily Chart
Cree, Inc. (CREE)
Why the Strength
Shares of Cree just broke out to a multi-year high after reporting a better-than-expected fiscal Q1 last week and providing guidance that boosted investor confidence that a return to growth is coming next year. The backstory is that Cree specializes in LED lighting systems, LED bulbs and semiconductor solutions for power and radio-frequency (RF) applications. Its products are found in homes and businesses, electronic signs, electrical vehicles, and renewable energy, radar and satellite communication applications. It was once a growth stock, but the business became stagnant over the past couple of years. Now, it’s getting back on the right track. A new CEO (former Freescale Semiconductor CEO Gregg Lowe) was just hired in September, and analysts are in favor of his agenda. A big part of his growth strategy is to split the lighting business from the LED products and Wolfspeed segments, the latter of which is Cree’s power and RF business. Wolfspeed specializes in wide bandgap semiconductors and is the company’s fastest growing area (revenues up 9% in fiscal Q1, despite capacity constraints). Analysts believe investments in increased capacity for Wolfspeed’s product lines will kick in after a few quarters and help drive company-wide revenue and EPS growth of 7% and 323%, respectively, next year. That type of growth, combined with a clearer sense of where the business is headed, should continue to attract investors back into the stock.
Technical Analysis
CREE hasn’t done much of anything over the past couple of years, basically bouncing around in a wide trading range. The best evidence of the sideways trend is the stock’s 200-day moving average line, which has been stuck between 25 and 27 for 20 months! Shares finally moved in late September when news of the CEO hire took them from 25 to 29. Then the breakout came after last Tuesday’s earnings announcement when shares gapped up to 34 on massive volume. You could nibble here or on modest dips.
CREE Weekly Chart
CREE Daily Chart
Essent Group (ESNT)
Why the Strength
Essent is a leading mortgage insurer (for homebuyers who put down less than 20% at closing), which usually scares off investors who have lingering memories of the financial crisis, but times are different now. Less competition due to some large acquisitions, a healthy housing market, far higher credit quality among those insured and market share gains by private players (as Uncle Sam and other big players pare back) has led to excellent growth for the industry, including Essent. At the end of June, the firm had $99.5 billion of mortgages insured (up 32% from a year ago), while insurance written in the second quarter was $11.4 billion (up 31%), which drove 27% revenue growth and a 35% hike in earnings. (Because it’s technically located in Bermuda, Essent has a whopping 52% after-tax profit margin, too.) Just as important, the firm is maintaining good quality on its book of business—86% of its mortgages have a borrower FICO score of at least 700, with another 8% north of 680; just 5% of its mortgages have a loan-to-value north of 95% (less than 5% equity). Both of those have led to minor credit write-offs in recent years and a steady stream of growth. That’s not to say there isn’t risk, of course, but with leading economic indicators pointing up, the next few quarters should be great for Essent. Earnings will be released on November 9.
Technical Analysis
ESNT rallied from a low 16.5 in early 2016 to 38 in February of this year, but then the stock began a long consolidation. Shares did poke to marginal new highs in April and again in August, but as of two weeks ago, the stock was right around 39. Then came a huge buying spree—ESNT rose nine days in a row (many on big volume) as the stock and its RP line moved to new highs. Given that earnings are due out soon, keep positions small.
ESNT Weekly Chart
ESNT Daily Chart
HollyFrontier Corporation (HFC)
Why the Strength
Back in February 2011, two oil refining companies with multiple Top Ten appearances to their credit—Holly Corp. and Frontier Oil—decided to merge, hoping to get a leg up in the dog-eat-dog refining business. The merger produced HollyFrontier, a successful company that now boasts a market cap of $6.5 billion and an aggregate crude refining capacity of 457,000 barrels per day at its five refineries in Kansas, Oklahoma, New Mexico, Utah and Wyoming. The company also owns Petro-Canada Lubricants, an Ontario company that produces base oils and other specialized lubricant products. HollyFrontier refines gasoline (which accounts for more than half of revenue) and diesel fuel (about 35% of revenue), with smaller amounts of jet fuel, lubricants, asphalt, fuel oil and LPG. The company has been a beneficiary of low crude oil prices and has gotten an additional boost from the damage to Houston refineries from hurricane Henry. After losing money in Q4 2016 and Q1 2017, earnings were up 136% in Q2, with 2017 estimates calling for a 239% jump in EPS and another 35% in 2018. The outlook for continuing low prices for HollyFrontier’s crude oil feedstock, the company’s improving profitability and a generous dividend (forward yield is 3.7%) make HFC an attractive buy for income and price appreciation.
Technical Analysis
HFC traded fairly flat under resistance in the low 50s through 2015, but slid to a double bottom at 22 in July and November 2016. A rally to 35 in January 2017 was followed by another slump to 23 in May. Since then, HFC has been strong, advancing well and recovering quickly from an August correction to reach 37 on October 5. HFC has been trading sideways in a tight range since then on modest volume as investors await Q3 results, probably out around November 3. HFC looks like a reasonable buy anywhere under 36, with a stop around 32.
HFC Weekly Chart
HFC Daily Chart
Michael Kors Holdings Limited (KORS)
Why the Strength
While many investors are steering clear of retailers because they think Amazon will achieve global domination, some are beginning to come back to the sector as results slowly improve. Consider Michael Kors: It’s been almost three months since shares of the luxury fashion brand blasted off following a blowout fiscal Q1 report (EPS of $0.90 beat by $0.28), and the stock is still rising. The reason is a return to exclusivity—Kors’ turnaround plan involves rationalizing its store fleet over the next two years (including closing 100 to 125 underperforming retail locations, opening 50 new stores in more lucrative areas and opening 77 shop-in-shops), cutting promotion activity and enhancing product offerings. On the latter point, the acquisition of Jimmy Choo (shoes, bags and accessories) is a major step forward (expected to close in early November). While that acquisition’s $1.2 billion price tag is viewed as expensive by some analysts, most agree that adding the luxury brand, along with greater international exposure, could pay off handsomely. Analysts don’t see revenue growth this year or next, but are forecasting EPS to rise by 2% (to $3.79) in 2018 after a good-sized drop over the past two years. Throw in a still-cheap valuation (12 times trailing earnings) and the likelihood that estimates are conservative, and there’s good reason to think Kors will continue higher. Earnings are likely out in early November.
Technical Analysis
KORS displayed a typical bottoming pattern this year as shares spent most of 2017 trading sideways in the 34 to 38 range. The breakout came in early August when the stock jumped from 37 to 46 after reporting fiscal Q1 results. After that move, the stock dipped to 42 for a couple of weeks, but buyers returned in mid-September and, over the past six weeks, have pushed shares up to 50. Dips toward the 25-day line (nearing 48) should mark a good entry point.
KORS Weekly Chart
KORS Daily Chart
Navistar International (NAV)
Why the Strength
We recommended Navistar a month ago (though we missed our entry point) and detailed the reasons why the turnaround story is gaining momentum and pushing the stock to multi-year highs. Recall that Navistar makes trucks and buses under the International and IC bus brands, as well as engines and related components. The September Q3 report showed earnings progress (EPS of $0.37 improved from a loss of $0.47 a year ago), a cleaner balance sheet, and potential benefits from a strategic alliance with Volkswagen truck and bus (covering procurement, technology sharing, and the connected vehicle product, OnCommand Connection). The biggest news over the last month came out of the North American Commercial Vehicle (NACV) conference in Atlanta, where Navistar updated the market on its platooning (numerous trucks following each other and linked with vehicle-to-vehicle communications), autonomous and electric trucking plans. The company announced it will launch a truck with built-in platooning technology from Peloton in 2018, a class 6/7 electric medium duty truck around 2019/2020, and a release of its Live Action Plans feature enhancement for its OnCommand system in 2018. All these announcements suggest major breakthroughs in creating the fuel-efficient, autonomous truck fleet of the future, and that’s keeping investors interested. It doesn’t hurt that analysts now see 9% revenue growth and a surge in earnings to more than $2 next year.
Technical Analysis
NAV was up and down for the first half of the year then broke out on heavy volume after its September 3 earnings report. Demand for shares drove the stock just above 44 before the stock entered a normal pullback. It has since given back a few points in October, but the retreat looks totally normal given the prior advance, and we like last Friday’s big-volume show of support. You can buy some here or on dips, with a stop near the 50-day line.
NAV Weekly Chart
NAV Daily Chart
Proofpoint (PFPT)
Why the Strength
Cybersecurity stocks haven’t been leaders since 2015, but some are starting to shape up. And if the group does get going, Proofpoint looks poised to be a leader. The company has made a name for itself as a leader in email- and social media-related cybersecurity, (though it’s expanding into many related hot spots) which is right where demand is spiking—in its quarterly threat report, the firm highlighted an 85% spike in email phishing scams and a huge 600% increase in malicious URLs. The stock is set up well today because big investors are coming around to the view that, despite what looks like lots of competition from big players (Symantec, Cisco, etc.), Proofpoint is a few steps ahead of the field in terms of the results its products provide customers. (The general move to Office 365 and other cloud-based products is also providing a long-term tailwind in demand.) In the third quarter, revenues rose 35%, billings were up 33% and earnings were up 32%, all topping expectations. Importantly, like many cloud providers, cash flow is much larger than earnings—free cash flow was around 71 cents per share in the quarter (compared to 25 cents of earnings), and the top brass expects free cash flow to total around $2.20 this year and around $3 per share in 2018. Longer term, there’s plenty of opportunity for Proofpoint—just among its current customers, it has the potential to triple its recurring revenue over time, which is one of many reasons the company has an early projection of well over $5 of free cash flow in 2020. Fundamentally, there’s a lot to like here.
Technical Analysis
PFPT formed a very deep base during late-2015 and 2016 when the market had its troubles, then etched a tighter (but still sloppy) formation from last November through May of this year. Since then, the stock has really tightened up, generally hovering between 83 and 96 or so during the past five months—and now shares are close to getting going, as PFPT closed at new all-time highs on solid volume last Friday. It’s still hasn’t decisively broken out, but we’re OK with a small position here and adding on the way up.
PFPT Weekly Chart
PFPT Daily Chart
Skechers (SKX)
Why the Strength
Skechers looks like a powerful turnaround situation after last week’s third-quarter earnings report demolished estimates and management said the momentum should continue into 2018. The company, of course, is a leading producer of lifestyle and athletic footwear for men, women and kids. The firm has a fantastic stretch of growth from 2013 through 2015 before business slowed and profits eased somewhat as competition intensified. But, while the rapid growth of a few years ago isn’t likely to return, the future looks bright thanks to its international operations and company-owned retail stores. In the third quarter, total revenues lifted 16%, but international wholesale revenues were up 26% and retail store revenue rose 19% (including a 4.4% increase in same-store sales) despite some store closures during Hurricanes Irma and Harvey. Really, it’s the international piece—both wholesale and retail—that’s the big growth driver now, and management is bullish that it will be comfortably more than 50% of total revenues in the future. (Including third-party owners, the firm has 2,428 retail stores now, up 140 from just one quarter ago, with another 130 or so likely to open in the fourth quarter—the vast majority of which are overseas.) While the Q3 earnings beat was in part because of a lower tax rate, analysts hiked their 2018 numbers (now looking for 23% growth), which will probably prove conservative. Throw in a very healthy balance sheet—Skechers has net cash of nearly $5 per share—a reasonable valuation (17 times 2018 earnings) and the likelihood of expanding margins, and you have a recipe for higher prices ahead.
Technical Analysis
SKX ran from 4 in 2012 to as high as 54 (!) in 2015 before topping out; shares eventually plunged as low at 19 last October. That was the bottom, but the stock didn’t advance much, bobbing between 22 and 30 during the following year. But last week changed everything—SKX rose a whopping 41% following its earnings report on more than 12 times average volume. There will be volatility, but such power after a long bottoming effort bodes well. You can buy a little here or on dips.
SKX Weekly Chart
SKX Daily Chart
Sohu.com (SOHU)
Why the Strength
China has three big Web portals that offer a widespread mix of news, weather, sports, online search, games, e-commerce and media, and Sohu.com is one of them. The company’s Sogou.com search engine—the number-three mobile app in China—stores web pages in the tens of billions and is optimized for input in Chinese characters. Like U.S. media services Netflix and Amazon, Sohu has moved into the production of original video content, which increases viewership and allows for paid subscriptions to access programs. Sohu has been losing money since 2014, and isn’t expected to be profitable this year or next. But investors have been encouraged by the company’s July 31 earnings report that beat expectations and by the announcement on October 13 that it would spin off Sogou.com in a U.S. IPO. Investors expect the Sogou spinoff to realize more of the value of this popular service, with Sohu presumably retaining a significant position in the new stock. Sohu is in a very competitive market with its big rivals NetEase and Sina.com, and the Sogou spinoff is a good move to get the maximum benefit from its leading product. The company will report its Q3 results this Friday, October 27, before the market opens. Analysts are looking for revenue of $493 million and an earnings loss of 98 cents per share.
Technical Analysis
SOHU went through a long correction from its high of 72 in June 2015 to its low of 33 in December 2016. The stock has been stair-stepping higher all year, with surges higher in January, May, July and this month. The most recent advance has led to a modest pullback in recent days. Much will depend on the results of Friday’s earnings report, but the Sogou IPO gives SOHU a bigger, more predictable boost in investors’ eyes. With its 25-day moving average back at 59, a little more weakness is possible, and you should look for an entry point at least a point lower and use a fairly tight stop around 62.
SOHU Weekly Chart
SOHU Daily Chart
Zogenix (ZGNX)
Why the Strength
California-based biopharmaceutical company Zogenix is making its debut in today’s Cabot Top Ten Trader because the company’s candidate drug for the treatment of Dravet Syndrome has shown positive results in Phase III clinical trials. Dravet Syndrome is a severe, intractable form of epilepsy that begins in infancy and has disastrous effects on intellectual development, mobility and susceptibility to accidents and infections. The syndrome occurs in one of every 15,700 births. Zogenix’s drug ZX008 achieved significant reductions in the number of seizures and increases seizure-free intervals, with some patients experiencing zero seizures during the treatment period. ZX008 is the whole story for Zogenix and the drug has been granted orphan drug status in the U.S. and Europe, a designation given to drugs that have been specifically developed to treat, diagnose or prevent a rare disease. Orphan drug status makes it easier to get marketing approval for a pharmaceutical compound and gives the developer a longer period of exclusivity and protection from competition. Investors see the announcement of positive results for ZX008 on September 29 as likely proof that Zogenix’s fortunes are about to improve markedly. The company isn’t expected to turn profitable in 2017 or 2018, but the potential here is big.
Technical Analysis
ZGNX came public in late 2010 and traded as high as 55 shortly after its IPO. But while the stock has been volatile, including one rally from 9 in December 2012 to 42 in February 2014, the general trend has been down, with ZGNX trading mostly under resistance in the mid-teens from July 2014 until the good news on September 29 blasted the stock from 13 to 35 in one day. ZGNX has been trading sideways in a range between 38 and 41 since October 2, and if you like the story, you should aim to buy at the low end of that range.
ZGNX Weekly Chart
ZGNX 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.
