Earnings Season Off to a Solid Start
Current Market Outlook
Not much changed with the market last week, as the major indexes finished up a fraction of a percent, remaining in the trading range of the past three months. That said, there’s no doubt that individual stocks are acting better, especially the liquid leaders that are generally a good barometer of institutional sentiment. Not only are most well-traded growth stocks holding firm, some have actually emerged to new highs on earnings. We’re not ready to change our Market Monitor yet (the intermediate-term trend remains slightly negative and there are tons of earnings reports this week), so it’s best to pick your spots on the buy side, hold some cash and practice patience with your resilient performers.
This week’s list has a bunch of good-looking charts from a variety of industries. For our Top Pick, we’ll go one of the liquid leaders that’s just emerged.PayPal (PYPL) exploded out of a 15-month base last Friday on its heaviest volume since the day of its IPO. We think it’s buyable here or on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Copa Holdings (CPA) | 0.00 | ||
| Domino’s Pizza (DPZ) | 339.47 | ||
| FMC Technologies, Inc. (FTI) | 0.00 | ||
| HDFC Bank Limited (HDB) | 0.00 | ||
| ICON plc (ICLR) | 0.00 | ||
| Match (MTCH) | 0.00 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| PayPal (PYPL) | 147.00 | ||
| Steel Dynamics (STLD) | 0.00 | ||
| Zayo Group (ZAYO) | 0.00 |
Copa Holdings (CPA)
Why the Strength
Copa Holdings is the parent company of Copa Airlines, which was founded in 1947 as the national airline of Panama. With a strategic location and alliances with larger U.S. airlines, the company sees itself as a hub for travel to both North and South America. With 11 Top Ten appearances since its debut in 2006, Copa Holdings clearly has the potential to field a winning stock. But after a big year for earnings growth in 2013, the Panamanian airline hit a number of headwinds that battered the company in 2014 and 2015, slowing earnings growth to 4% in 2014 and slashing EPS by 53% in 2015. But a stringent program of cost-cutting and an increase in air travel in South and Central American countries has set the stage for the company’s comeback. The report on September system-wide passenger traffic showed a 15.4% jump and investors have also noticed that United Continental and American Airlines have both beaten estimates with their quarterly reports in the last two weeks. This accumulation of good news about both the company and the airline industry has improved investors’ perception about Copa Holdings. The company will announce its Q3 results on November 8 after the market closes. Analysts are looking for $1.22 in earnings per share on revenue of $548 million. With an annual dividend yield of 2.2%, Copa Holdings is a good bet on the continuing recovery of Latin American economies.
Technical Analysis
CPA’s current run began in July, when it caught fire after the good earnings report on August 3. The stock has been volatile, but it flattened out under resistance at 90 in September before the good news about other airlines’ earnings trends lifted it to new highs for the year. With earnings just two weeks away, you can either wait to see the reaction to results or buy a small position (a half of your usual position size), preferably on a dip. Use a relatively loose stop at the 50-day.
CPA Weekly Chart
CPA Daily Chart
Domino’s Pizza (DPZ)
Why the Strength
Domino’s is the biggest pizza delivery company on the planet, blanketing all 50 states and over 70 countries. Its franchiser-owned business model (97% of stores are franchised) and strategic plan to grow its online and mobile ordering business has helped DPZ crush the competition. In recent quarters, around 50% of orders have come through the digital channel. Customer loyalty is high, in part due to a new loyalty program, and DPZ has been vigilant about updating its menu to stay current with ever-evolving consumer tastes. Just about everything DPZ has been doing is working. Revenue growth has topped 10% over the past two years, and last week’s quarterly release beat expectations on both revenue and earnings (revenue was up 17% and EPS of $0.96 beat by $0.06), suggesting DPZ will surpass 11% revenue growth this year and 12% in 2017. EPS growth should continue to hover around 20% per year. While debt is creeping higher, DPZ’s share count is decreasing due to a share buyback program. Bottom line: the company is a finely tuned fast-casual dining machine, and the stock’s trajectory (it’s up almost 80% since the beginning of 2015) bears that out. Given the performance, shares trade at a premium valuation, but big investors clearly believe the price is worth it as earnings are expected to crank ahead 20% for a long time to come.
Technical Analysis
DPZ crossed above its 50-day moving average at 125 in late April and has been in rally mode since. Prior to last Tuesday’s earnings release, shares were at 151. A big beat catalyzed a gap up to around 160, and buyers have since driven shares above 166. We expect a period of consolidation after the recent run, which should give new investors a chance to accumulate before the next leg up. Buy on the dips, and use a stop below the recent low of 150.
DPZ Weekly Chart
DPZ Daily Chart
FMC Technologies, Inc. (FTI)
Why the Strength
Investors have been snatching up shares of this equipment and machinery supplier for the oil and gas industry in recent months on the prospects of a potential turnaround. Last week, their faith was rewarded, as the company beat earnings estimates for the first time in four quarters. FMC, which makes products such as high pressure valves, liquid and gas measurement and transportation equipment used in land and offshore drilling, reported $0.35 earnings per share in the third quarter—down 43% from a year ago, but well ahead of analysts’ estimates of $0.23 EPS. FMC’s better-than-expected profits were largely a result of lower operating costs (sales tumbled 29% year over year, and actually fell short of analyst estimates). Most of those lowered costs stemmed from massive job cuts—the company has slashed 5,200 workers in the past two years, or roughly 25% of its workforce. There are more cuts still to come, according to CFO Maryann Mannen. Putting that many people out of work isn’t the best look for a company, but it’s helped stop the bottom-line bleeding as low oil prices have weighed heavily on profits during the last couple of years. Plus, FMC got more good news last week—it reached a $2.5 million settlement with the SEC over allegations that it overstated first-quarter 2013 profits to meet internal earnings goals. Two-and-a-half million bucks is relative chump change and it removed a dark cloud hanging over the company. Investors reacted well to the news, just as they did to the earnings beat. Sometimes on Wall Street, low expectations can be a blessing—and that’s certainly been the case for FMC Technologies of late.
Technical Analysis
For the first nine months of the year, FTI was stuck in the mud, trapped in a tight range between 23 and 30. Then, in late September, it suddenly burst to new highs, and kept rising to 32 by the second week of October. With 31 acting as the new floor, the stock bounced off that support last week on news of the earnings beat and government settlement. You can nibble here or on dips with a loose stop below 30.
FTI Weekly Chart
FTI Daily Chart
HDFC Bank Limited (HDB)
Why the Strength
HDFC Bank was one of India’s first private sector banks, established in 1994 after the Royal Bank of India (RBI) liberalized the industry. HDFC is now a leading financial institution, with 4,541 branches and over 12,000 ATM in 2,587 cities. The bank is a major lender for auto, personal and home loans, and offers credit cards, retail banking and commercial lending and banking. The bank is also a government tax collector and foreign exchange facilitator. The Indian economy has enormous potential, but structural barriers have blocked growth for a long time. But the RBI is expected to lower interest rates at least twice over the next year, which will stimulate an economy that is already picking up speed. HDFC’s revenue growth slowed to 5% in fiscal 2014 (ended March 2014), but strengthened to 15% and 17% during the past two years. Earnings are forecast to jump 23% this year and 24% in fiscal 2018. India has a demographic advantage over China, as its population’s average age is much lower and its rate of growth is higher. In 10 years, India’s average age will be 29 years, while China’s will be 37. This is a long-term trend, but HDFC Bank is a long-term proposition. The company will announce its latest quarterly results on October 25, which will provide a good read on investors’ support for the company’s stock and its 0.6% annual dividend yield. HDFC Bank is a perfect way to play the big story of Indian growth.
Technical Analysis
HDB was on a roll from August 2013 through 2014, but stagnated in 2015 and fell to 51 in February 2016. The stock surged from there, mainly into new all-time high territory in July and rallied up to a peak at 74 in early September. HDB has been trading sideways since that high, tightening up as investors await tomorrow’s earnings report. We advise waiting to see how investors react to the news; if they push the stock up, you can jump in and hold on. If the reaction is negative, HDB will likely need a while to regroup.
HDB Weekly Chart
HDB Daily Chart
ICON plc (ICLR)
Why the Strength
ICON is a contract clinical research services company, which means that it provides a way to outsource drug development for drug and medical device companies, ICON can handle every phase of drug development, from finding candidate compounds to organizing clinical trials (including recruitment of subjects and data analysis) and from laboratory services through commercialization. The company can also assist generic drug companies with identification of biosimilars, and aid medical device companies with the development of devices and diagnostics. From a five-person company in 1990, ICON has grown to an employer of 12,200 professionals in 37 countries. Revenue growth hasn’t been spectacular, but it has been steady (5% in 2015 and 6% in the two most recent quarters). Earnings have grown more quickly, and estimates call for 20% EPS growth in 2016 and 13% in 2017. Investors are excited about ICON right now because of an estimate-beating earnings report on October 20 and an increased 2016 EPS estimate from Jefferies Group. ICON isn’t likely to be a runaway performer, but it’s steady and its stock trades at a reasonable 19 P/E. There’s a good future in helping drug companies save money.
Technical Analysis
ICLR began a remarkable rally in late 2011, running from 15 in October 2011 to 84 in late July 2015. After that 2015 top, ICLR marched sideways for a year before finally tightening up just under 80 for a couple of months. The October 20 earnings news blasted the stock to 85 on double its average trading volume and continues to act well. With an earnings gap up to new all-time highs, ICLR has the potential to continue its long-term uptrend. We think a buy on a dip to 84, with a defensive stop at the 50-day moving average (now at 77) has good potential.
ICLR Weekly Chart
ICLR Daily Chart
Match (MTCH)
Why the Strength
Match Group continues to ride the strength of Tinder’s industry-leading growth. A year ago, Tinder—a wildly popular dating app for young singles—accounted for 11% of Match Group’s total paid subscribers (across 45 brands in 190 countries!). It’s now up to 23%, adding more than 200,000 subscribers per quarter. Match Group’s total sales have increased 28% since Tinder rolled out its paid subscriber option—at a price range of $9.99 to $19.99 per month depending on your age—in March 2015, more than double the average 13% sales growth of the previous five quarters. Prior to that, Tinder was a free dating app that derived all of its revenues from ad sales; it now has 1.23 million paid subscribers. Tinder is branching out too, investing in a friend-finding app for women called Hey! Vina—which made headlines by attracting 100,000 users within two weeks of its launch. The Hey! Vina deal helps Tinder expand from strictly a relationship app to a friend-finding one, opening up a whole new potential revenue stream. In the meantime, we’ll know how fast Tinder grew last quarter when Match Group releases third-quarter earnings results on November 2.
Technical Analysis
MTCH has been stair-stepping higher for months. In May, it made the leap from 11 to 14; in July, it jumped from 14 to nearly 17; and last week it surged from 17 to 19.5. It probably won’t budge much over the next week with November 2 earnings looming, but you can nibble here and add to your position if the stock pops again post earnings. Set a stop around 17, which has acted as new support since the stock lifted from 15 in the third week of September.
MTCH Weekly Chart
MTCH Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
Netflix looks to be emerging as a big-cap leading growth stock again after a stellar third-quarter report that hinted the firm has turned the corner toward big earnings growth in the quarters to come. Business itself hasn’t been much of an issue recently—revenue growth has been accelerating for a few quarters (and did again in the third quarter, up 32%) thanks to the international side of the business (revenue up 65% in the quarter, while paid subscribers rose 54%). And now that the firm’s price hike (and “un-grandfathering” many old subscription plans) from months ago is nearly phased in, the company expects to make good money next year while continuing to reinvest in its various blockbuster original shows (Narcos season 2 and Stranger Things boosted subscriptions in a big way last quarter). All told, third-quarter net subscriber additions were nearly 3.6 million, well ahead of estimates, and the top brass expects to add 5.2 million more in the current holiday quarter. Most important, after a couple of years of huge investments (earnings fell for six straight quarters), Netflix’s growth is starting to hit the bottom line—earnings have shot ahead the past two quarters and analysts see the firm collecting nearly $1 per share next year (up 138% from this year), which is likely conservative. The valuation remains high, of course, but Netflix is a one-of-a-kind business that’s coming to life again as its bottom line revs up.
Technical Analysis
NFLX has been dead money for a while—shares effectively topped out in August 2015 around 129, eventually falling to 80 in February and the stock was still below 85 in July. But NFLX’s action has improved since then, with shares rallying toward 100, tightening up, and then booming last week on earnings. Encouragingly, it wasn’t just a one-day rally, either, with NFLX surging a few days on big volume following earnings. You can buy a little on minor weakness.
NFLX Weekly Chart
NFLX Daily Chart
PayPal (PYPL)
Why the Strength
Paypal is arguably the most exciting large-cap name in the payment processing space, due in large part to double digit annual revenue and EPS growth, a global footprint with over 190 million users, and significant exposure to the fast-growing digital commerce industry. Last Thursday’s third quarter results helped to validate the company’s bull case. Quarterly revenue and EPS growth of 18% and 13%, respectively, came in at the high end of management’s guidance. And management raised its long-term (three-year) revenue growth outlook to 16% to 17% (from 15%) given that it expects to continue grabbing market share. One of the strategic decisions paying dividends is PayPal’s customer choice initiative, which allows customers to fund their PayPal Wallet with a debit card, credit card or bank account of choice (not just fund from their PayPal balance). This initiative has helped ink new partnerships with global partners, which now include Visa, Mastercard, Alibaba, Xoom, One Touch, Venmo, Yelp and Yandex Direct, among others. Mobile payments, which grew by 56% in the third quarter, now represent 30% of total payment volume. The stock trades at a premium valuation, but we believe investors will willingly continue to pay up given PYPL’s rapid growth, and potential to become a dominant player in the global digital payments industry.
Technical Analysis
PYPL was spun off from eBay in July of 2015 and closed its first day as a stand-alone company at 42.55. The stock had failed to break that level in the fourteen months since, but did so on Friday as buyers pushed the stock up 10% on its heaviest volume since the day of its IPO. That move elevated shares above their six-month trading range (which was mostly between 36 to 41). You can nibble on shares and keep a stop around 40.
PYPL Weekly Chart
PYPL Daily Chart
Steel Dynamics (STLD)
Why the Strength
Steel Dynamics is stuck in a highly cyclical industry, but it’s the best operator in the group (the company has been profitable every year since at least 2002 despite some horrid industry stretches), so as industry conditions improve, it’s cashing in. Steel Dynamics operates many efficient mills (which have higher variable costs) in the U.S. as well as metals recycling plants; it’s grown through expansion and especially acquisition (its latest purchase was the largest maker of threaded rod products in the U.S. for $126 million), but has always been a prisoner to steel prices to some extent. The good news now is that the U.S. has placed tariffs on various forms of steel from China and elsewhere, which has given pricing a lift (rallying back to mid-2015 levels), all while demand from construction and automotive customers is increasing. (A rebound in the energy service sector for things like pipe could be materializing, too.) The result: Rapidly rebounding earnings and a continuing stream of cash flow ($643 million in the first three quarters of the year, or about 10% of the market cap) that’s more than enough to service capital expenditures, acquisitions, a solid dividend (2.1% annual yield) and a decent share buyback plan ($450 million worth if opportunities arise) that was recently announced. Obviously, Steel Dynamics isn’t changing the world, but earnings should leap north of $2 next year and, if the energy sector rebounds, cash flow could go nuts. As far as cyclical stocks go, it’s a good story.
Technical Analysis
STLD had a relatively mild decline for a steel stock during the commodity bear market, falling from 25.5 to 15.3 over 15 months. Then the stock showed some real leadership—it lifted to new highs over 28 by July before building its first launching pad. STLD held its 200-day line in September and October and then exploded higher last week following its quarterly report. There’s still some overhead to deal with and the market remains iffy, but we’re OK with a small buy here with the idea of adding shares on a push above 28.
STLD Weekly Chart
STLD Daily Chart
Zayo Group (ZAYO)
Why the Strength
Zayo Group may never be a household name, but it’s become a vital technology infrastructure provider to many huge firms. The company owns more than 8.7 million miles of fiber in the U.S. and Europe, including fiber that connects more than 24,000 metro buildings (including in San Francisco, New York City, Atlanta, Chicago, Denver, Washington D.C., London, Paris and Toronto!). Zayo also operates 61 colocation data centers (668,000 square feet). With such prime assets, more than 6,800 customers use the firm’s infrastructure for bandwidth and connectivity (46% of customers are telecom carriers), leading to slow-but-steady growth—organic sales growth was up 7% in the second quarter, while EBITDA rose 12%. (While earnings are just reaching into the black, Zayo’s cash flow has been solid, with EBITDA of about $1 billion this year.) Best of all, nearly all of the firm’s revenues are recurring, which is a big reason why Zayo has seen 27 straight quarters of sequential revenue growth. Acquisitions are also a part of the story, with Zayo completing six buyouts since January 2015, including a couple of good-sized acquisitions recently (hence the rapid revenue growth over the past two quarters). It’s not a barnburner, but with demand for connectivity, networking and colocation services expanding rapidly, there’s every reason to expect steady growth and buoyant cash flow in the quarters ahead. Earnings are due out November 8.
Technical Analysis
ZAYO came public in late 2014 and had a good first few weeks before its long post-IPO droop—shares fell from 32 near the end of 2014 to below 20 in February of this year. The stock chugged back to 30 by July, and then built a tight, flat launching pad for a couple of months. October has brought out the buyers, pushing ZAYO to new highs on excellent volume. We’re OK with a small-ish buy here or on dips and seeing how shares react to earnings.
ZAYO Weekly Chart
ZAYO 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.
