Here Comes October
Current Market Outlook
October is an infamous month in market history, with many huge dips and crashes taking place at this time of year. This time around, the major evidence is much more positive than when the market experienced those prior wipeouts—the longer-term trend is up and we remain impressed with the resilience of the broad market and growth stocks. Of course, the intermediate-term trend remains neutral, and with so many uncertainties out there (U.S. election, Deutsche Bank, etc.), we can’t rule out a leg down in the near-term to scare out many investors. As always, we advise going with the flow—today, that means leaning bullish, but not flooring the accelerator until the bulls decisively retake control.
This week’s list has more of a mix of stocks and sectors than previous weeks, but that’s fine with us. Our Top Pick is Inphi (IPHI), a fast-growing networker that looks ready to get going after a few weeks of rest.
| Stock Name | Price | ||
|---|---|---|---|
| Apache (APA) | 0.00 | ||
| Autodesk (ADSK) | 229.00 | ||
| Carrizo Oil & Gas (CRZO) | 24.03 | ||
| Inphi (IPHI) | 120.16 | ||
| Line Corporation (LN) | 0.00 | ||
| Micron Technology, Inc. (MU) | 43.31 | ||
| Quanta Services (PWR) | 91.45 | ||
| Symantec Corporation (SYMC) | 0.00 | ||
| Thor Industries (THO) | 104.76 | ||
| XPO Logistics (XPO) | 0.00 |
Apache (APA)
Why the Strength
Apache is a big-cap energy producer, with more than $5 billion in revenue and a market cap well over $20 billion; it has operations all over the place (including overseas), but the growth driver is, not surprisingly, the Permian Basin, where it has the third largest acreage position. That’s good, but the main reason for the stock’s strength is its discovery of a new, giant resource area in the Delaware Basin that it’s calling “Alpine High”—Apache owns the vast majority of the play (more than 300,000 acres worth), which, after two years of research and testing, is estimated to hold three billion barrels of oil and 75 trillion cubic feet of rich gas. All told, Alpine High should be able to support another 2,000 to 3,000 drilling locations. Apache already has nine wells operating on the acreage, but it’s boosting its CapEx plans for the year by $200 million; all told, about one-quarter of the company’s capital spending will be dedicated to Alpine High this year. And the rise in oil prices last week after news of an OPEC production cap will only boost the firm’s cash flow going forward. With lots of liquidity (nearly $5 billion worth), Apache should be able to ramp up its drilling should energy prices get going on the upside (analysts are partly expecting that, estimating earnings to leap above $1 per share next year). A nice dividend (1.6% annually; next ex-dividend day is October 16) completes the package.
Technical Analysis
APA rallied from a low of 32 in January to 60 by May, at which point the stock began chopping sideways—shares gyrated between 50 and 60 for three and a half months. But APA has changed character since then, blasting off on the Alpine High discovery on gigantic volume, and continuing higher on excellent volume since then. You can buy some here or on a small dip with a stop in the mid-50s.
APA Weekly Chart
APA Daily Chart
Autodesk (ADSK)
Why the Strength
Autodesk is right in the middle of a major shift in its business strategy. The company’s industry-leading 3D design software for engineers, architects and product designers used to be sold in shrink-wrapped packages, reaping a high price, with occasional software updates thereafter. But in 2015, the company switched to a cloud strategy, signing customers to long-term contracts and providing its software (always fully updated) via the cloud. The advantage to customers comes from harnessing the computing power of major server banks (which can produce design results for big projects in a fraction of the time) and from having constant access to the latest software. In the short term, the changeover to a subscription basis has reduced revenue, but that’s expected to improve as subscriptions increase and result in a steadier, more predictable revenue stream. Investors were a little skeptical about Autodesk’s June acquisition of Shotgun Software, but their attitudes improved quickly. Autodesk’s stock got a boost on August 26, when the company reported a loss that was smaller than analysts had estimated. Another lift was provided by the company’s Product Lifecycle Management conference in Boston on September 16. Autodesk looks to be well on its way to delivering on the promise of the cloud, and earnings growth should reaccelerate in the quarters ahead.
Technical Analysis
ADSK fell during most of 2015, but rallied in October only to get caught in the market correction that bottomed in February 2016. The stock rebounded in late February and rallied through April before rolling over again through July. The current rally began in June after the Shotgun Software takeover correction and has been running ever since, with only one two-week correction in late August and the first week of September. A buy here, or on normal weakness, with a stop at the 50-day moving average (now at 65) looks promising.
ADSK Weekly Chart
ADSK Daily Chart
Carrizo Oil & Gas (CRZO)
Why the Strength
The OPEC decision to cap production caused oil prices to pop a few bucks a barrel, which has goosed many energy stocks. One of them is Carrizo Oil & Gas, which has acreage in a handful of the top basins in the U.S. (including the Delaware Basin, Marcellus and Utica Shales and the Niobrara Formation in Colorado), though its main driver is the Eagle Ford Shale in Texas, where it has a breakeven cost of less than $35 per barrel of oil! (About two-thirds of the firm’s output is oil, the rest is gas and liquids.) Indeed, thanks to solid hedges and cost cuts (CapEx is down 45% since 2014), Carrizo believes it has 1,600 potential drilling locations even at $50 oil; rates of return for its Eagle Ford wells are around 75% at that price. In the second quarter, the company’s total production was up 15% from a year ago, and thanks to a solid liquidity position (no debt maturities until 2020), management is aiming to accelerate production growth (boosting its rigs to four from two) in early 2017 if the pricing environment is fruitful. All told, the pieces are in place for Carrizo to churn out a ton of cash flow as the industry recovers.
Technical Analysis
CRZO bottomed at 16 in January with all other energy stocks, and rallied back to 42 in late May, which was some resistance back to late 2015. Then the stock went on to build a base for the next four months, mostly hovering between 33 and 42 during that time as it tested its 40-week line a few times. The stock spiked back to the top of that range last week on two excellent volume days. We’re OK with a small buy around here, with the idea of buying more if the stock surges above 44 or so.
CRZO Weekly Chart
CRZO Daily Chart
Inphi (IPHI)
Why the Strength
Inphi calls itself the FedEx of digital data. It’s an apt description for the Santa Clara-based networking equipment manufacturer. The company specializes in linear amplifiers and drivers, but also makes analog multiplexers, encoders and memory buffers. These small devices speed up data transfer within and between the massive data centers powering modern cloud networks. As we reported on August 15 when we last featured Inphi, major cloud operators like Amazon, Apple, Google and Facebook have been buying Inphi’s products. Over the last six years, Inphi has shipped more units than all of its competitors combined. That’s dominance. The company is on track for three-year average revenue and EPS growth rates of 42% and 151%, respectively. And after it reported Q2 results on August 9, analysts upped their price targets (most fall between 45 and 55). Next year’s revenue is now expected to grow by 26%, and EPS should increase by 32%. The Street is duly impressed with the company’s cash hoard, which is now over $405 million after Inphi closed on the divestiture of its memory business. This cash paves the way for a meaningful acquisition or stock buyback program. Investors clearly expect more good news when Inphi reports Q3 earnings in late October.
Technical Analysis
IPHI is on a multi-year run, and has rallied from 25 to 43 since the beginning of 2016. It broke out on high volume on August 8 after delivering a strong Q2 earnings report. A 14% decline to the 50-day moving average occurred in early September, partially due to a share offering. But buyers stepped in and pushed the stock back near its 52-week high of 44.5. Shares are prone to significant swings, so buy on the dips. We like the stock above its 50-day moving average, and would be sellers if that technical line is decisively broken.
IPHI Weekly Chart
IPHI Daily Chart
Line Corporation (LN)
Why the Strength
Line Corp. is a mobile messaging, video calling and data distribution company that aims to work across borders, languages and operating systems. The company’s Line app is highly customizable to adapt to different communication styles in different countries. The app also offers instant translation between Japanese, Korean and Chinese and works on all major operating systems, including Android and iOS. The company’s messaging app is very popular in Japan, and is the top platform in Thailand and Taiwan. Japanese users are especially fond of the digital decorations (called stickers) that can be used to adorn messages. Line’s strategy is to use its messaging app to bring in users, then offer them taxi services, mobile payment solutions, entertainment streaming and access to other businesses. Line just came public on July 14, so there are only a few institutional investors on board and little analyst coverage for its stock. Fortunately, the company is profitable and grew revenue by 29% in Q1 and 62% in Q2. With 218 million monthly active users worldwide—including 61 million in Japan, which is its top-spending app market—Line Corp. has a solid base for its games, stickers and ads. As Taiwan and Thailand join Japan in the monetization phase, Line should continue to grow revenue and earnings rapidly. An announcement in late September that Line was taking a 25% interest in Snow, an up-and-coming rival, was welcomed by investors.
Technical Analysis
LN came public at 32.75, but hasn’t traded below 36 in its brief life. August was a good month, and the stock put in a few weeks trading mostly between 42 and 44 in August and September before running to as high as 51 last week. This is still a very young issue, so volatility may be high. Accordingly, it’s a good idea to buy well—between 46 and 48 looks good—and keep a loose enough stop to avoid being stopped out; the 50-day moving average is just above 43, which seems reasonable.
LN Weekly Chart
LN Daily Chart
Micron Technology, Inc. (MU)
Why the Strength
Micron is a semiconductor manufacturer specializing in DRAM, NAND and NOR flash memory. These memory technologies are essential in all kinds of consumer electronic devices (smartphones, tablets, automobiles, connected home devices, etc.). They’re also found in enterprise networking and cloud server markets. The company is in a hugely cyclical industry, and the market thinks last quarter was the trough of the current cycle. Does that mean blue skies and smooth sailing from here? One might think so after listening to management’s comments at investor conferences in early September. It said industry supply is slowing and inventory is relatively low, yet demand is strong, helped by an improving PC market. What’s not to like? The story gets better when we focus on profitability; management indicated that selling prices are going up. And analysts cheered news that Micron will ramp up R&D efforts and reduce manufacturing costs. The company is expected to deliver an EPS loss of around -$0.01 when it reports full-year results tomorrow (a month ago the expected loss was -$0.08). We think consensus estimates could still be low. Next year’s expected revenue growth of 14% could actually top 25%, and expected EPS of $0.75 could top $1.25 if the environment remains bullish. If tomorrow’s report confirms the trend in revenue and EPS growth, we see more institutional money pouring into Micron and higher prices ahead.
Technical Analysis
Both MU and the Philadelphia Semiconductor Index (SOX) were weak though most mid-May, then buyers showed up and shares of MU rallied 30% by June 1. MU’s June 30 quarterly report set much higher expectations for the next 18 months, and a rally began in early July as shares marched from 12 to 18 (a 50% move). The stock remains in a powerful uptrend well above its 50-day moving average. You could nibble here or wait to see how the stock reacts to earnings tomorrow.
MU Weekly Chart
MU Daily Chart
Quanta Services (PWR)
Why the Strength
If you want to move electricity or oil and natural gas from one place in the U.S., Canada, Australia (and a few other countries) to another, Quanta Services may be the company to contact. Quanta specializes in building electrical delivery grids and energy pipelines, including designing, installing, maintaining and repairing power lines and pipelines. The Houston, Texas-based company was incorporated in 1997 and has grown into a $4 billion company with annual revenue of more than $7 billion. The company got 65% of its 2015 revenue from electric power projects, and the multiyear investment cycle in North American infrastructure is a major tailwind driving earnings estimates for 2016 up by 40% and 28% in 2017. In addition to electrical infrastructure demands, the switchover in fuel for electricity generation from coal to natural gas is creating a need for midstream infrastructure and takeaway capacity, as shale natural gas fields tend to be in geographic areas that lack existing pipelines. As the largest energy infrastructure contractor in North America, Quanta can handle the largest projects and handle multiple projects at the same time; the company’s backlog of projects reached $9.8 billion in June. Quanta has $500 million allocated to stock buybacks through February 2017. At this point, Quanta isn’t a revenue or earnings growth story, as its Q2 earnings report was well behind expectations. But with oil prices rising, the company’s scale should position it as a prime resource, and analysts expect both revenue and earnings to pick up.
Technical Analysis
PWR was a strong performer during 2012 and 2013, but topped out in 2014. The stock is in the middle of a rebound after falling from 37 in September 2014 to 17 during the market low last February. PWR shot back up in late February and has enjoyed a couple of additional surges higher this year. PWR traded at new 52-week highs last week and today’s small pullback looks buyable. PWR has dipped below its 50-day moving average three times in the past three months, so use a loss limit at about 10% below your buy price.
PWR Weekly Chart
PWR Daily Chart
Symantec Corporation (SYMC)
Why the Strength
Symantec is still gaining strength from its June buyout of Blue Coat. Prior to that $4.65 billion acquisition, Symantec (the maker of Norton antivirus software security systems) was fast becoming a dinosaur in the cyber security industry. The Blue Coat deal was like sipping from the fountain of youth—its security systems protect networks and the cloud, whereas Symantec’s only protect PCs, data centers and emails from contracting viruses. In essence, the Blue Coat deal transforms Symantec from a backup and legacy security provider to a next-generation, full-service provider. It should also transform Symantec’s sales—Blue Coat generated $600 million in revenue last year, exactly one-sixth of Symantec’s total fiscal 2016 revenue. Thus, analysts are expecting a 13% bump in Symantec’s sales this year, which is quite a feat for a company that has seen its sales nearly sliced in half since 2013. Institutional investors are buying into Symantec’s turnaround: Citigroup and Guggenheim both upgraded SYMC to a “Buy” in the past six weeks, and analysts see earnings surging more than 50% in 2017.
Technical Analysis
The rally in SYMC mostly coincided with the Blue Coat buyout. The stock bounced off support at 16 in May before gapping up to 21 on news of the deal in early June. After some consolidation, the stock got going again in August, breaking above 21 following Q2 earnings and then accelerating to 24 by month’s end. It has since trickled higher to 25, but spent most of September tightening, which bodes well for another potential breakout. Buy on small dips with a stop below the 50-day moving average, which SYMC hasn’t come close to dipping below since its June breakout.
SYMC Weekly Chart
SYMC Daily Chart
Thor Industries (THO)
Why the Strength
Much has been made of the recovery in the U.S. housing sector over the last few years. You don’t hear much about the number of people buying RVs (recreation vehicles). But the combination of low gas prices and spiking consumer confidence have Americans buying more RVs than ever before, and that has been big business for Thor Industries, the largest RV maker in the world. The company just completed a record 2016 fiscal year, reporting a 14% increase in sales and a 32% improvement in earnings per share. Thor’s sales growth accelerated in its most recent quarter after the company bought out travel and camper trailer specialist Jayco for $576 million in early July. The Jayco buyout sparked a 22% jump in Thor’s sales last quarter, up from 9% the previous quarter, and the company expects a 45% sales increase in the current quarter and a 40% increase in its new fiscal year. “The success of Jayco is an integral part of our future growth plans,” CEO Bob Martin said during last week’s earnings call. Thanks to the Jayco deal and rising demand for RVs, Thor is a fast-growing company in a fast-growing industry—two things Wall Street craves.
Technical Analysis
THO first got going in February, when it bounced off 47 to reach 63 by the end of March. Three months of consolidation followed, with another huge breakout starting in late June and early July, after the Jayco deal was finalized. The stock kited all the way to 81 in early September, almost without interruption, before a brief shakeout knocked the stock back to 77. Now it’s on the uptick again, establishing new highs above 86 following earnings last week. Buy on the dips with a loose stop around new support at 77.
THO Weekly Chart
THO Daily Chart
XPO Logistics (XPO)
Why the Strength
Slowly but surely, investors are starting to look ahead toward faster economic growth—leading economic indicators are standing at two- to three-year highs, truck tonnage shipped is up 3.5% from a year ago, and the Dow Transports nosed out to their highest levels since April last Friday. All of that is wind at the back of XPO Logistics, which is a big logistics, freight brokerage and (thanks to its purchase of Con-Way last year) trucking firm. The big story here is that, after years of acquisitions under the guidance of stemwinder Bradley Jacobs (who has a history of taking small companies, growing via acquisition, and then selling them years later), XPO has decisively turned the corner in terms of earnings and cash flow, and expects sharply improved results going forward. The second quarter saw earnings spike (sales were up a smidgen after accounting for prior acquisitions), with EBITDA surging more than four-fold. And there’s more where that came from—management sees EBITDA rising nearly four-fold for the year as a whole, and then expand another 35% by 2018, including plenty of free cash flow (more than $150 million this year and rising rapidly from there). Thus, XPO is a special situation, as efficiency gains should lead to monstrous bottom-line growth in the quarters ahead, all while the industry’s tailwinds help out. It’s a good story.
Technical Analysis
XPO is a turnaround situation, with a huge decline during most of 2015 (partly due to the market, partly due to the acquisition of Con-Way), a multi-month bottoming effort, and then a huge-volume rebound after its blowout earnings report in August. The stock had a shakeout with the market earlier this month, but found support at its 50-day line and is approaching multi-month highs. You can buy some around here with a stop in the 33 to 34 area.
XPO Weekly Chart
XPO 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.
