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Top Ten Trader
Discover the Market’s Strongest Stocks

October 27, 2014

We’re very impressed with the market’s rebound during the past week and a half, which has seen the major indexes recoup more than 70% of their losses and many individual stocks soar on gigantic volume. The market isn’t totally out of the woods, but we are nudging our Market Monitor back into neutral territory, and will be watching for more powerful breakouts among potential leading stocks during earnings season.

Impressive!

Market Gauge is 4

Current Market Outlook

First, the bad news: the intermediate-term trend of the market remains down, and there remains a wide swath of the broad market that’s in rough shape. But following some panic selling on October 15 and 16, the market’s rebound has been very, very impressive—the major indexes have quickly regained 70%-plus of their recent losses, many stocks found huge-volume support at the lows, and a few (mostly growth) stocks have already leapt to new highs. The market isn’t out of the woods, and even if it was, we’re still smack-dab in the middle of earnings season, so at the very least, volatility is a sure thing. All in all, we’re nudging our Market Monitor up into neutral territory—we still believe in holding some cash and keeping positions small, but we’re also seeing lots of stocks acting well.

This week’s list isn’t all go-go stocks, as it also has some “defensive growth” and some sector-specific winners. Our Top Pick is Celgene (CELG), a big-cap growth stock that, after 10 months of consolidation, is under extreme accumulation.

Stock NamePriceBuy RangeLoss Limit
Union Pacific (UNP) 0.00111-114107-108
O’Reilly Automotive (ORLY) 0.00166-169159-160
Lennar (LEN) 61.8542.5-4440-40.5
Leggett & Platt, Incorporated (LEG) 49.7936.5-3834-35
Illumina Inc. (ILMN) 289.74182-187165-171
ICICI Bank (IBN) 0.0052-5448-49
Genuine Parts (GPC) 0.0091-9489-90
Celgene (CELG) 0.0098-10292-94
Alaska Air Group (ALK) 0.0048-50.545-46
Akorn (AKRX) 0.0041-4338-39.5

Union Pacific (UNP)

www.up.com

Why the Strength

Union Pacific is a leading rail carrier in the U.S., operating more than 74,500 freight cars and about 8,400 locomotives on some 26,000 miles of rail in 23 states. The company transports all manner of cargo, including automobiles, chemicals, coal, oil, gas, industrial equipment and other bulk freight; if it can fit on a rail car, chances are Union Pacific ships it. Business has picked up for Union Pacific, with earnings averaging year-over-year growth of 19% and revenue rising 9%, on average, during the past four quarters. According to CEO Jack Koraleski’s comments during the company’s recent third-quarter conference call, “Assuming the economy and weather cooperate, we are well positioned to finish up the year with record results.” Third-quarter earnings came in better than the Street was expecting, with solid growth in intermodal shipping containers, industrial products, and agricultural goods driving results. There are merger and acquisition rumors circulating among analysts concerning the railroad industry, but Koraleski doesn’t think mergers make sense for Union Pacific at the moment. While the Canadian Pacific/CSX merger was abandoned earlier this year, any speculation on this front could be a boon for Union Pacific stock.

Technical Analysis

Technically speaking, it’s been a relatively smooth ride for UNP investors during the past couple of years. The stock has enjoyed a relatively steady uptrend along support at its 10-week and 25-week moving averages since 2012. UNP breached this trendline pair in late 2013, but a recovery led to a rally from 80 to north of 110 year-to-date in 2014. Shares were briefly shaken by this month’s market correction, but UNP quickly recovered, driven by strong third-quarter earnings results. Currently, UNP is trading at multi-year highs just shy of 115. If you’re up for it, you can buy on dips of a point or two, with a stop near 107.

UNP Weekly Chart

UNP Daily Chart

O’Reilly Automotive (ORLY)

www.oreillyauto.com

Why the Strength

O’Reilly Automotive sells aftermarket parts, tools, supplies, equipment and accessories to do-it-yourselfers and professional automotive service providers. The company embarked on a bold expansion plan in 2014, opening some 145 new stores in the first nine months of the year, expanding its reach to 43 states and bringing its total stores to 4,311 as of the end of September. O’Reilly’s most recent bout of strength is due to its third-quarter earnings report. Not only did the company beat both top- and bottom-line expectations, but O’Reilly also lifted its full-year earnings and revenue guidance, boosted its same-store sales expectations, lifted its gross margin guidance, and raised its operating margin guidance. What’s more, the company remains on course to open a total of 200 stores in 2014, with another 205 planned in 2015. Lastly, O’Reilly’s share repurchase program has another $303 million left in the hopper. With the company firing on all cylinders, and the DIY auto parts market expanding rapidly, we like O’Reilly’s overall growth potential.

Technical Analysis

After popping higher in February following an impressive quarterly report, ORLY entered a trading range centered on the 150 level. By mid-year, this range migrated north of 150, with resistance at 160. Shares barely registered the recent correction, dipping to their 200-day trendline for support, before third-quarter earnings provided a wake-up call for investors. ORLY is now trading in all-time high territory north of 170. We like the power seen on the stock’s breakout, but given the still-choppy environment, we recommend buying dips with a target near 165.

ORLY Weekly Chart

ORLY Daily Chart

Lennar (LEN)

lennar.com

Why the Strength

Despite growing pessimism surrounding the sector (including upcoming Fed rate hikes, stagnant housing starts, and, recently, falling home prices), many homebuilding stocks are showing some life. Of them all, Lennar is definitely looking like the leader, both chart-wise and fundamentally. The company has continued to crank out solid growth despite some hiccups in the industry; in the quarter ending August 31, not only did sales (up 26%) and earnings (up 44%) top expectations, but so did the closely watched metrics of new orders (up 23% in units and 28% in dollars) and backlog (up 29% to $2.5 billion). And now, despite the aforementioned worries, investors are taking heart from some soothing words from various Fed members, as well as the recent dip in mortgage rates. Long-term, we’ve always felt there would be another leg up in the housing group; the bust was so deep and long that the recovery should progress for many years. Indeed, even now, housing starts (at about one million annually) are only back to the levels seen at major industry bottoms during the past few decades! Put it together, and you have the top player in a group that, after resting for nearly two years, could be coming back to life. We’re intrigued.

Technical Analysis

LEN was the leading homebuilder during the sector’s recovery from late-2011 through the start of 2013 (it rallied from 12 to 44), but both it and the group have basically meandered sideways since; LEN bounded around in a 30% range for more than a year, and since March, it’s held within a tighter 20% range. Since early August, though, LEN’s character has changed, with the RP line heading up and, during the past two weeks, soaring on big volume as soon as the selling pressure came off the market. A small buy around here or on dips could work out well.

LEN Weekly Chart

LEN Daily Chart

Leggett & Platt, Incorporated (LEG)

leggett.com

Why the Strength

When new stocks make their debut in Top Ten, a good earnings report is often the catalyst, and Leggett & Platt is no exception. This Missouri-based furniture, fixtures and materials manufacturer has been a relatively sleepy, dividend-paying name (annual yield is 3.3%) for years. But with the housing, furnishings and automotive segments in the U.S. showing healthy growth, the company reported a 14% jump in quarterly revenue and a 31% jump in earnings in its third-quarter numbers last Wednesday, a major acceleration from prior quarters. Leggett & Platt’s product line doesn’t include a lot of finished furniture, but the company makes the innerspring wires, seat frames and steel mechanisms that go into beds. It also designs and makes shelving, counters, showcases and garment racks as well as the metal components of office chairs and some finished furniture. In its materials division, the company turns out steel rods, wires, tubing and other components that go into automotive seating and aerospace applications. Nearly three-quarters of sales come from within the U.S. Leggett & Platt experienced a 25% drop in revenue during the Great Recession. But it has been consistently profitable and the big quarterly beat last week (and the sizable dividend) have impressed investors.

Technical Analysis

LEG isn’t a fast-moving issue. The stock made a restrained run from 19 in December 2012 to 32 in May 2013, but didn’t break out above that level again until April 2014. The current rally began last January at 29 and climbed to 36 in a couple of surges before last week’s break out on volume. With LEG now at all-time highs, it makes sense to wait for a pullback of a point or so before initiating a position. A buy at 38 with a stop at 35 makes sense.

LEG Weekly Chart

LEG Daily Chart

Illumina Inc. (ILMN)

www.illumina.com

Why the Strength

When an established company with a dominant position in a growing industry starts to ramp up its revenue and earnings growth, investors take notice. That’s what’s happening with Illumina, a leader in the systems that allow large-scale analysis of genetic variation and biological function business. The company’s skill and scale have made it a player in genetic analysis in medicine, agriculture and even the business of telling consumers where their ancestors came from. Illumina has put together a long string of annual revenue growth, bouncing back from a 9% gain in 2012 with a 24% jump in 2013. And quarterly revenue growth this year has increased from 27% in Q1 to 35% in Q3. While Illumina is hardly a stranger to growth investors—with 25 previous appearances in Top Ten it’s frequently a leading stock—it can still surprise with an unexpectedly strong quarterly report. The company’s Q3 report on October 20 easily bested estimates, which led to a spate of increases in projections from analysts as well as a strong bump in the stock. Several analysts also hiked their ratings and price targets as a result. Illumina is the picture of a long-term winner.

Technical Analysis

ILMN took a three-and-a-half month break after finishing off its April-to-June rally, correcting from 183–185 to as low as 145 in mid October. But buyers moved back in quickly when the market improved, and ILMN gapped up on October 21 from 164 to 180 and has kept its momentum going. With ILMN trading at new highs, it’s prudent to wait for a pullback of a couple of points before buying in. Look for a dip toward 187 as an entry point. A break below the 50-day moving average (now at 171) would be bearish.

ILMN Weekly Chart

ILMN Daily Chart

ICICI Bank (IBN)

www.icicibank.com

Why the Strength

Sometimes Top Ten stocks have a dramatic event driving performance and sometimes the reason for success is more fundamental. ICICI Bank, the second-largest bank in India, is an example of un-dramatic success, a story based on the growing strength of India itself. The Indian economy is expected to expand 5.6% this year, which is both an improvement over last year’s 5.0% growth and less than the 6.4% growth forecast for next year. This improvement in economic growth may be partly due to improved optimism due to the May election of Narendra Modi, a politician with a strong pro-business history and agenda. Modi’s election (and the dramatic election results that gave his party an absolute majority in the Indian legislature) is expected to allow him to energize the country’s stifling bureaucracy and improve its position in the global economy. ICICI Bank, meanwhile, is enjoying a 32% increase in retail loan disbursements and 20% compound annual growth rates in retail savings deposits since March 2009. Analysts like the bank’s network of 3,350 branch operations that concentrates on growth in rural and semi-urban areas. A strong quarterly report from rival HDFC Bank is also taken as a good sign, as is the strong growth of India’s domestic stock market.

Technical Analysis

IBN has come a long way since it bottomed at 25 in August 2013. The stock surged to 44 in April and put in a tight base, then did the same thing at 51 in May, June and July. A push to new highs in August ran into a strong correction in emerging market stocks in September that pulled IBN from 55 to 47 in early October. IBN has recovered strongly along with the market and is now trading sideways just under resistance at 55. You can either buy on weakness to 54 or so, or wait for the breakout above 55. A stop at 49 is prudent.

IBN Weekly Chart

IBN Daily Chart

Genuine Parts (GPC)

www.genpt.com

Why the Strength

If the name Genuine Parts doesn’t ring a bell, the NAPA brand surely will. Genuine Parts is the majority owner of National Automotive Parts Association (NAPA), a voluntary trade association that distributes auto parts nationwide. The company operates about 1,000 NAPA Auto Parts stores in 40 states and 690 NAPA Canada stores. Auto parts retailers have been strong lately due to a slow economy and the rising age of vehicles on the road. As we noted last week, HIS Automotive projects that the average age of cars on the road will rise from its current high of 11.4 year to 11.7 years by 2019. This is good news for the NAPA brand, as auto parts sales account for roughly 52% of Genuine Parts’ bottom line. In the company’s third-quarter earnings report, Genuine Parts reported an 8% rise in revenue, a 10% jump in earnings, and solid sales growth across all four of its business segments. Furthermore, Genuine Parts continues to repurchase stock, reducing its shares outstanding by 1% during the past year. Even better, the company didn’t have to borrow money to do so, with its $516 million in free cash flow generated year-to-date providing enough to cover both dividends and buybacks. It’s hard not to like a company running this cleanly.

Technical Analysis

After trading sideways for much of 2012, GPC shifted gears in early 2013, with the stock quickly rallying from 60 to 80 in a matter of weeks. The stock has since downshifted, however, opting for a more measured pace along support at its 10-week and 25-week moving averages. Throughout most of 2014, GPC was content to ricochet between trendline support and 90, with trading narrowing to a five-point range by September. Last week’s earnings report provided the spark necessary for an upside breakout on overwhelming volume. You can nibble here if you’re game, or buy on pullbacks of a point or two.

GPC Weekly Chart

GPC Daily Chart

Celgene (CELG)

www.celgene.com

Why the Strength

Biotech stocks have taken off like rockets during the past couple of weeks, and Celgene might be the leader of the bunch. The company has been an institutional favorite for a couple of years now, thanks primarily to Revlimid (mainly as a treatment for multiple myeloma; sales were $1.3 billion in the third quarter, up 19% from a year ago), and there are multiple avenues for label expansion (possible new treatments and, recently, longer dosing schedules) for that going forward. But Celgene is far from a one-trick pony; the company has numerous other drugs that are doing well (such as its recently launched Otezla for plaque psoriasis and Abraxane for certain breast and lung cancers), as well as a few irons in the fire (Phase II trial data, released two weeks ago, for its Crohn’s disease drug were very, very promising). Last week’s quarterly results were steady-as-she-goes, and analysts are looking for 25% to 30% earnings growth annually for the next few years. There aren’t many growth stocks that offer (a) big trading volume, (b) foreseeable growth for many years that isn’t overly dependent on the economy and (c) a reasonable valuation (29 times trailing earnings). That’s the main reason the stock looks like a big-cap leader today.

Technical Analysis

CELG had a huge breakout from a five-year base in January 2013 and did very well for about a year. But from mid-January this year through early October, the stock didn’t do much—there was a 23% correction earlier in the year, and some constructive tight areas after it rebounded, but no progress was made. But that’s changed now—CELG found huge-volume support at its 40-week line two weeks ago, and then soared on even bigger volume last week to new price and RP peaks. Given the enormous volume, we think modest dips can be bought.

CELG Weekly Chart

CELG Daily Chart

Alaska Air Group (ALK)

alaskaair.com

Why the Strength

Airline stocks have done well for the past couple of years, as industry consolidation has led to less competition, higher prices and more fees (we just paid $50 to check two bags last month!), while stable fuel prices and a recovering economy have also helped. All of those bullish factors remain in place, and despite the recent shakeout, the plunge in fuel prices (oil and unleaded gas are down more than 20% since the start of July) should only help business. That’s exactly what’s playing out at Alaska Air, whose quarterly report last week was fantastic—passenger revenues actually grew 7%, earnings were up 32% and most of the sub-metrics (pretax profit margins up to 21.8%, return on capital up to 17.2%) look promising as well. Throw in some recent labor deals, a meaningful share buyback program (it’s bought back nearly 4% of all shares so far this year) and a modest dividend (1.0% annual yield), and there’s certainly potential going forward. The wild cards here are, of course, fears of a global economic slowdown and Ebola, though investors may be betting that falling fuel prices will offer another leg to the firm’s earnings growth (projected at only 8% next year). All told, expect volatility, but the path of least resistance is still up.

Technical Analysis

ALK has had a recent V-shaped recovery, which doesn’t usually make for low-risk entry points. But the shakeout was actually part of (or, more likely, the end of) a three-plus-month double-bottom consolidation, and last Thursday’s bullish reaction to earnings catapulted the stock above its breakout level of 48.5 or so. As with most stocks, we’re half-expecting some digestion after two big up weeks, but if you’re game, you can nibble on dips with a stop just below 45.

ALK Weekly Chart

ALK Daily Chart

Akorn (AKRX)

www.akorn.com

Why the Strength

For years, Akorn was known as a “niche generic pharmaceutical” company, but it has used the acquisition route to transform itself into a full-fledged drug development company with a significant roster of approved drugs with patent protection and a strong pipeline of candidate drugs in clinical trials. The company’s specialization in difficult-to-manufacture generics gives it a strong revenue base, and the assets acquired in the takeovers of Hi-Tech Pharmacal in April and VersaPharm in August have added upside potential. The company’s Q2 earnings report reflected the success of the newly combined company, featuring a 79% jump in earnings on a 96% spike in revenue. Akorn’s stock got support from a new analyst on October 14, when WallachBeth initiated coverage with a buy rating. But the strong rally on rising volume that AKRX has been enjoying is likely recognition of the company’s potential after nearly two months of base-building. Akorn will report its quarterly results on November 6, before the market opens, and analysts are looking for a little over $155 million in revenue and earnings of 25 cents per share.

Technical Analysis

AKRX finished a powerful rally from 21 in April to 39 in August and took a while to rebase. The stock pulled back in an orderly fashion to 34 in the middle of October before investors moved back in in a big way. The rally that began on October 16 spiked to around four times average volume as the stock pushed past resistance at 39 into new-high territory. Volume has stepped back down to its old average, but the evidence that institutional investors watched the stock until it hit a price point they liked is a big positive. AKRX looks buyable on any pullback of a point, though keep any position small ahead of earnings. Use a stop at the stock’s old resistance at 39.5.

AKRX Weekly Chart

AKRX 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 27, 2014
HOLD
10/6/14ActavisACT238-243238
10/6/14Acuity BrandsAYI128-132136
9/8/14AmbarellaAMBA36-3840
6/16/14BaiduBIDU
icon-star-16.png
170-175220
8/4/14CelgeneCELG85-87103
8/4/14FacebookFB70-7380
10/6/14FedExFDX156-161165
7/7/14Gilead SciencesGILD84-87113
10/13/14GoProGPRO65-7065
9/2/14Hain CelestialHAIN94-98103
6/16/14Health NetHNT38.5-4045
8/25/14Home DepotHD
icon-star-16.png
88-9195
10/20/14Jack in the BoxJACK65-6871
6/16/14Keurig Green MountainGMCR115-121143
9/8/14MallinckrodtMNK
icon-star-16.png
82.5-85.591
8/18/14MedivationMDVN82-85103
10/13/14MercadoLibreMELI108-112110
10/6/14Monster BeverageMNST88-9298
10/13/14Mylan LaboratoriesMYL50-5151
10/6/14NikeNKE86-8992
10/20/14Pacira PharmaceuticalsPCRX97-101108
9/15/14Palo Alto NetworksPANW
icon-star-16.png
94-98104
9/22/14ParexelPRXL59-6164
8/25/14RegeneronREGN340-350407
9/29/14StratasysSSYS118-123116
9/2/14TwitterTWTR47-5049
10/6/14Ulta SalonULTA113-117118
10/13/14United TherapeuticsUTHR120-124133
9/22/14XPO LogisticsXPO36-3839
10/20/14Zoe’s KitchenZOES32-3436
WAIT FOR BUY RANGE
10/20/14Advance Auto PartsAAP135-138144
10/20/14AutohomeATHM44-4749
10/20/14Dominos PizzaDPZ65-6888
10/20/14Sherwin-WilliamsSHW213-217225
SELL RECOMMENDATIONS
9/29/14American EagleAEO14.5-1513
10/6/14Carter’sCRI81-8377
8/4/14Chipotle Mexican GrillCMG640-670630
DROPPED: Did not fall into suggested buy range within two weeks of recommendation.
10/13/14AMAG PharmaceuticalsAMAG27.5-29.534