Be Selective
During the July-through-September period, we often saw the major indexes lag (the S&P 500 went nowhere from mid-May through mid-October) while growth leaders surged. Now, though, we’re starting to see the opposite—the broad market’s health has improved, and many groups have come to life, but just about any stock that’s had a huge run in recent months is under pressure. We don’t advise panicking out of all your winners, but set your stops and consider booking partial profits. On the flip side, there are many less well-known names that are acting great, including a bunch that have recently broken out on earnings, and that’s where any new buying should be focused.
This week’s list has a nice collection of those type of names. Our favorite is United Rentals (URI), a company we’ve long liked, and now the stock is getting going after an eight-month rest.
| Stock Name | Price | ||
|---|---|---|---|
| Whiting Petroleum (WLL) | 0.00 | ||
| United Rentals, Inc. (URI) | 0.00 | ||
| Nu Skin Enterprises Inc. (NUS) | 46.07 | ||
| ServiceNow (NOW) | 341.86 | ||
| Northrop Grumman (NOC) | 0.00 | ||
| Noble Energy (NBL) | 0.00 | ||
| Illumina Inc. (ILMN) | 289.74 | ||
| Gentex Corp. (GNTX) | 0.00 | ||
| Five Below (FIVE) | 134.58 | ||
| Align Technology (ALGN) | 316.20 |
Whiting Petroleum (WLL)
Why the Strength
On the surface, Whiting is “just” another successful U.S.-based explorer that operates in some of the country’s most lucrative shales—it has operations in a few locations, but most of its production comes from the Williston Basin in the Bakken and the Niobrara Field in Colorado, and output is heavily oil (79%). And sure enough, the firm has been solidly profitable for years (save 2009), and its reserves are more than 14 times its currently production. All of that is to the good, but what appears to have made Whiting one of the strongest stocks in the market is its new and potentially revolutionary completion technique—we won’t pretend to know all the ins and outs of it, but basically the company’s new cemented liner with so-called “plug & perf” has far more perforations, and that’s resulting in jaw-dropping production growth. In the firm’s conference call last week, for instance, Whiting said that about a dozen test wells at various locations produced 40% to 60% more output than using previous completion methods. And this new method costs the same or less than the standard method. Imagine! It’s still early, but Wall Street is catching on to the fact that the cemented liner, combined with Whiting’s lucrative acreage, could be a game changer. As it stands now, sales and earnings have accelerated wildly the past two quarters, though analysts still see single-digit growth in 2014. But we believe that could prove very conservative as the company expands its new completion technique to potentially hundreds of wells in the quarters ahead.
Technical Analysis
WLL has a very powerful chart. Shares didn’t do much the past couple of years, but the stock formed a picture-perfect base from March through early September, and since then, the power has been impressive—WLL has surged eight weeks in a row on a major expansion in volume, a clear sign that big investors are getting in. (If you’re a chart watcher, the pattern looks a lot like DO and RIG back in October 2004 as they began multi-year runs.) The shakeout last week, followed by the earning-induced rally to new highs, tells us something big could be happening here. Any weakness looks buyable.
WLL Weekly Chart
WLL Daily Chart
United Rentals, Inc. (URI)
Why the Strength
Unlike the Caterpillars and the Deere’s, United Rentals is not your conventional play on the budding industrial equipment recovery, but, this is exactly why we like it. United Rentals is directly benefiting from customers’ unwillingness to commit capital to long-term equipment purchases. Specifically, companies are turning to rental equipment as a way to offset the bottom line costs associated with equipment upgrades and maintenance. United Rentals offers some 3,300 classes of rental equipment to construction companies, manufacturers, oil and gas companies, utilities, governments and other customers. The company rents everything from backhoes, forklifts and earth-moving equipment to general tools, pressure washers, water pumps and safety gear. Uncertainty has paid off big for United Rentals, as the company has averaged earnings and revenue growth of 52% and 41%, respectively, during the past four quarters. Looking ahead, CEO Michael Kneeland anticipates increasing demand for rental equipment in the non-residential construction market due to the quickening pace of home and office construction. Lastly, a bonus for URI investors, the company’s board approved a $500 million share repurchase program.
Technical Analysis
URI shares started 2013 on the right foot, quickly rallying along their 10-day and 25-day moving averages toward the 55 level. Unfortunately, the stock stalled, and spent the next several months bouncing between support at 50 and overhead resistance in the 55-60 region. Earnings proved to be the catalyst for URI’s breakout, with shares blowing past 60 on strong volume in mid-October. Shares are now digesting their gains just north of 65, as their 10-day moving average plays catch up. Shares look buyable here, as URI consolidates into rising trendline support.
URI Weekly Chart
URI Daily Chart
Nu Skin Enterprises Inc. (NUS)
Why the Strength
Nu Skin markets personal care products and nutritional supplements and is finding a growing market in Asia that’s fueling very strong performance. As a direct selling retailer, following the model of Herbalife, Avon and Tupperware, Nu Skin benefits from the energy of its sales force and the appeal of its AgeLOC anti-aging products in China. Nearly 80% of 2012 revenue came from Asia, and the company continues to recruit new reps in Korea, China and South Asia. The company’s success at rolling out its new weight-management system was a big contributor to an expectation-smashing Q3 earnings report that featured a 75% jump in revenue and a 107% gain in earnings. Nu Skin raised its full-year guidance as well, the fourth upward revision of forecasts since last November. With an appealing product mix and a successful market system that harnesses entrepreneurial ambition, Nu Skin looks likely to continue its success.
Technical Analysis
NUS has been trending higher since it ended a nine-month correction in December 2012. The stock has now ripped from its December low of 32 to over 115, with only a couple of mild pauses along the way. After its earnings gap-up from 103 to 111 on good volume last Tuesday, NUS has enjoyed four days of steady advances on declining volume. The stock (and its 1% annual dividend yield) looks like a good buy on any weakness of a point or two. Use a soft stop at 100 to keep risk in check.
NUS Weekly Chart
NUS Daily Chart
ServiceNow (NOW)
Why the Strength
ServiceNow is just nine years old, but it’s a mature business that’s helping IT departments operate and manage their entire operation via Cloud-based software. The problem that ServiceNow’s products solve is how to get information to departments and devices in multiple offices. By offering this kind of service in the Cloud, ServiceNow is taking on huge rivals like Hewlett-Packard, IBM and BMC Software, companies that haven’t been nimble enough to adapt to the advent of Cloud operations as quickly. Service Now’s software saves clients money and is quick and easy to install, a big selling point when clients are changing over from legacy systems. The immediate reason for investors’ enthusiasm is its quarterly report on October 23 that beat expectations. The company reported earnings of one cent per share (after seven quarters of losses) and a 73% jump in revenue. Even though the company’s guidance for Q4 was mixed, analysts see a bright future for ServiceNow as its products displace the products of its rivals. Every new win for the company adds to continuing revenue, as subscription fees make up 85% of revenue.
Technical Analysis
NOW, which popped out to new all-time highs on Wednesday after its Q3 report, is still a relatively young stock, coming public just in June 2012. The stock has been in a strong uptrend since January 2013, with only a couple of mild corrections along the way. NOW corrected from 55 to 48 in early October during the market’s period of indigestion, but was trading back at 54 when the earnings report came out. After popping over 58, the stock has settled back a few points on calm volume. NOW looks like a buy anywhere under 56, with a stop at its rising 50-day moving average, now a hair above 50. The stock has tested its 50-day a couple of times since June, but has found support and gotten moving again, so a convincing drop below that level would be bearish.
NOW Weekly Chart
NOW Daily Chart
Northrop Grumman (NOC)
Why the Strength
You’ll never hear us say that Northrop Grumman is a growth stock; revenues have been flat for many quarters, though thanks to rising profit margins, earnings have kited higher in recent years. The big attraction these days is that (a) sequestration, which knocked off a few pegs from the defense budget, has largely been factored in, and (b) management is using its tremendous free cash flow to buy back tons of shares and pay dividends. In the just-reported third quarter, the firm crushed earnings estimates ($2.14 per share vs. $1.82 expected) thanks to cost cutting, hiked estimates for the full year (it now sees earnings north of $8 per share) and continued on its repurchasing spree, buying back 8.1 million shares, or nearly 3.5% of the entire company. This year alone, it’s bought back more than 20 million shares, and the top brass is on record that it will retire one quarter of all its shares within a couple of years! That should keep earnings elevated, which, combined with a tidy dividend (2.3% annual yield), a bargain valuation (13 times earnings) and lots of surety in its results, is giving big institutions the confidence to accumulate shares on dips. We don’t think the stock is going to double from here, but we see no reason shares can’t continue to chug higher in the months ahead.
Technical Analysis
NOC just broke out of a six-year base (!) in March, so while shares have been advancing for more than six months, we don’t think the major run is over. The stock, in fact, just came off a two-month rest and a test of its 10-week line, which led to a renewed buying wave. And last week’s terrific results added fuel to the fire. This isn’t a stock to chase, but a dip of a couple of points looks buyable, with a stop in the upper 90s.
NOC Weekly Chart
NOC Daily Chart
Noble Energy (NBL)
Why the Strength
Independent oil and natural gas firm Noble Energy has come on strong during the past month. Noble operates in five main areas: the DJ Basin and the Marcellus Shale, which are onshore locations in the U.S., the deepwater Gulf of Mexico, offshore West Africa and offshore Eastern Mediterranean. Riding strength in the energy markets due to improving economic conditions, Noble posted better-than-expected third-quarter earnings results last week, as earnings spiked 137% year-over-year on sales growth of 39%. Driving the growth was record sales volume of 293,000 barrels of oil equivalent per day, up 13% from the prior quarter. Furthermore, Noble reported that discretionary cash flow rose 29% on the quarter. Looking ahead, the company expects continued growth in production from its Marcellus and DJ locations, both of which contributed to a 14% increase in crude oil sales volumes and a double-digit increase in natural gas volumes. Noble also cited growth in domestic unconventional production and the ramp-up of its natural-gas fields in the Levant Basin for its third-quarter growth. All in all, the company is executing well, and as long as energy prices hold their own, Noble should continue to do well.
Technical Analysis
Despite a few pitfalls along the way, NBL shares have added more than 50% so far in 2013. The shares have largely trended higher along support at their 10-, 25-, and 50-day moving averages only during April’s brief correction did shares breach this trio by any serious degree. The stock’s current rally began in early October after NBL retreated from resistance near 70 to test its 50-day trendline. The stock rebounded sharply from this trendline, and then catapulted even higher in the wake of last week’s quarterly report. Since chasing NBL at this point would be risky, we recommend buying on pullbacks.
NBL Weekly Chart
NBL Daily Chart
Illumina Inc. (ILMN)
Why the Strength
As a manufacturer and developer of life science tools used in genetic analysis, Illumina had some exposure to the government shutdown, yet, the company still saw revenue grow by 25% in the third quarter, topping Wall Street’s expectations. In fact, the company averaged top-line growth of 23% during the past year. What’s more, according to CEO Jay Flatley, the shutdown did not materially impact spending patterns among its academic customers, leading the company to lift its full-year guidance. Illumina has also been on an acquisition spree this year, a move that has diluted earnings per share. Despite the dilution, the company was still able to top analyst third-quarter expectations by nearly 10% in the third quarter. Underscoring the point that expansion via acquisition remains central to Illumina’s plans, the company announced today that it has signed a deal to acquire Santa Clara-based NextBio—a leader in clinical and genomic informatics. With the company not only weathering but thriving during tough economic conditions, Illumina remains an important investment in the health-care sector.
Technical Analysis
ILMN wasn’t much to look at in the first quarter of 2013. Shares spent several months basing above support near 50 before finding their feet in mid-April. The stock has since embarked on a choppy rally along support at its 50-day moving average; one punctuated with sharp gaps higher following strong quarterly earnings reports. In fact, a stairstep pattern has emerged, with ILMN taking out 60 in April, 70 in June, 80 in July, and 90 just last week. These breakouts have been followed by periods of consolidation that ultimately resolve into uptrends along the stock’s 50-day moving average. We expect similar price action for ILMN after last week’s quarterly report, and we believe that the stock is buyable on dips of a point or two.
ILMN Weekly Chart
ILMN Daily Chart
Gentex Corp. (GNTX)
Why the Strength
Gentex is a Michigan-based manufacturer of devices for the automotive, aerospace and fire-protection industries. The company’s signature product is auto-dimming automobile mirrors, but the product line includes auto-dimming airline windows, commercial fire detectors and automobile safety cameras and other electronic devices. Automotive products bring in all but a few percent of revenue, and the company’s auto business is global, with 35% of revenue coming from the U.S. (where GM is a client), 22% from Germany (VW/Audi and Daimler) and 9% from Japan (Toyota). The recent buzz about Gentex comes from the company’s successful Q3 earnings report, which featured a 33% jump in net income on improved sales, and a forecast for Q4 that is 20 to 25% higher than last year’s, with a recent acquisition giving a hand. The company’s stock has also just picked up positive rating revisions from two analysts. The company’s recent acquisition of HomeLink, a vehicle-based control system that allow drivers to control garage doors, home locks and lighting and security systems from a distance, is a good deal because it’s been using HomeLink’s radio frequency controls for its automatic-dimming rear view mirrors for years. Gentex looks like a company with a good innovative streak and a profitable niche in the improving automotive industry.
Technical Analysis
GNTX was in a long, slow decline from the beginning of 2011 until November 2012. November was when the stock, which had formed a four-month base after a big July correction, began a rally at 16 that took it all the way to 25. After another three-month base, the stock got moving again in September, then paused for three weeks ahead of earnings. The gap up after earnings wasn’t huge, but volume was high. GNTX has now spent four days trading tight at 30, and is buyable on any weakness of half a point. A return to the stock’s old resistance at 26 would be bearish.
GNTX Weekly Chart
GNTX Daily Chart
Five Below (FIVE)
Why the Strength
We continue to enthuse about the longer-term potential of Five Below because of its top-notch execution, its huge potential for store growth and the fact that it serves a mass market. The company is a new type of dollar store (all items are $5 or below) that focuses on teens and pre-teens with fun items like candy, sporting goods, iPhone cases, arts, crafts, school and party supplies and much more; they’re cheap and fun, but also useful. (I got a nice beach shovel and a pink football for my three-year old daughter for a total of $6.) The stores are smaller and flashier, but also cheaper to open and operate at around 7,500 square feet each. And because the payback from opening a new store is relatively quick, management is expanding like mad—at the end of July, the firm had 276 stores in just 19 states, up from 226 a year ago (up 22%). And that’s just the beginning, as the company has plans to open 50 to 60 new stores per year for the next year or two, and long-term, it thinks it could have upwards of 2,000 stores! Combine that with solid same-store sales growth in the 4% to 7% range (it was 6.6% last quarter), and you have a recipe for years of rapid growth. Analysts see earnings up 40% this year and 35% next, as new stores ramp and margins expand. There’s potential for some big retail outlet to offer similar products, but we think Five Below is quickly gaining mindshare and has become a cool place for teens to shop. We like it.
Technical Analysis
FIVE spent a year bobbing and weaving before staging a huge-volume gap higher last month on earnings; the stock roared ahead 17% on 10 times average volume! However, the firm announced a good-sized share offering a week later, which briefly dented shares and led to the current, choppy six-week range from 42 to 50. FIVE remains somewhat thin and volatile, but we think the earnings-related volume clue in September hints that the next big move is up. Hold on if you own it; if not, you could start a small position here with a stop near 44, and look to average up above 51.
FIVE Weekly Chart
FIVE Daily Chart
Align Technology (ALGN)
Why the Strength
Align Technology’s big idea is Invisalign, a clear, nearly invisible plastic appliance that straightens teeth in a series of two-week steps. Invisalign appliances look like retainers, but they move teeth into line without the shiny array of metal strips and wires that make braces so uncomfortable in every sense. Align Technology also makes CAD/CAM software and dental scanners, but the Invisalign system is responsible for more than 90% of the company’s revenue. The firm has been expanding rapidly into the Asia-Pacific region, which is the fastest-growing region in the world for orthodontic work. The most recent evidence of Align Technology’s success came with the company’s Q3 earnings report on October 17. The company reported revenue of $165 million and EPS of 42 cents, topping consensus estimates of $159 million in revenue and earnings of 30 cents per share. Management also issued guidance for Q4 of $169 million and 41 to 43 cents in earnings, well above analysts’ previous estimates. All in all, Align Technology looks to have a product with a distinct advantage over its main competition that’s finding a widening customer base.
Technical Analysis
ALGN has tended in the past to make big runs, then suffer steep corrections. While the stock is up from 9 in late 2008 to above 55 in recent trading, corrections from 26 in April 2011 to 14 in September 2011 and from 40 in September 2012 to 23 in December have made it a hard stock to hold. The stock’s volatility on the upside has been equally impressive, with a rally that took off from a three-month base at 26 climbing to nearly 50 at the beginning of October. ALGN slid to 42 in the first two weeks of October, but gapped up from 46 to 60 after the good earnings news. The stock has corrected to near 56 on declining volume, which may indicate a tendency toward flat trading for a while. We think ALGN is buyable here or on a dip below 56, with a stop at 48.
ALGN Weekly Chart
ALGN 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.
