So Far, So Good for Earnings Season
Current Market Outlook
There’s still another couple of weeks to go, but so far, earnings season has been good for the market, not only driving the major indexes to new highs last week but reinvigorating many growth stocks and launching a few fresh breakouts and new leadership. In the short-term, we expect continued volatility among the indexes and various sectors based on earnings reports and news flow (both financial and otherwise), with dips possible after last Friday’s moonshot advance. But the evidence remains bullish in the intermediate- and longer-term. Thus, we’re sticking with a bullish stance, and advise you to hold your strong performers and look to latch onto new leaders as they lift off, while getting out of any holdings that crack.
This week’s list has many earnings winners from last week in a variety of industries, as well as a few names set up well ahead of their reports. Our Top Pick is First Solar (FSLR), which looks like a powerful turnaround after blasting ahead following a blowout earnings report. Try to grab shares on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Avis Budget Group (CAR) | 0.00 | ||
| Dana Holding (DAN) | 0.00 | ||
| First Solar (FSLR) | 83.74 | ||
| Flir Systems (FLIR) | 0.00 | ||
| GrubHub (GRUB) | 140.03 | ||
| Polaris Industries (PII) | 0.00 | ||
| PulteGroup (PHM) | 45.93 | ||
| STMicroelectronics (STM) | 30.09 | ||
| SVB Financial Group (SIVB) | 0.00 | ||
| Terex (TEX) | 0.00 |
Avis Budget Group (CAR)
Why the Strength
Shares of Avis Budget Group are strong because the story is improving and has great potential. It’s essentially an operational improvement story, with a few growth initiatives mixed in. First, the operational aspect. Avis is on the tail end of a period where per-unit fleet costs went up (from $233 in 2012, to around $335 in 2017). Given that 75% of company-wide costs are variable, and that fleet costs are the biggest component, getting them under control is a big deal. The company is making progress on that front, as 75% of the company’s riskiest cars were sold as of mid-August. Throw in a successful season negotiating prices on new cars (at a lower average price than last year), and fleet costs should decrease in the future. As for actual growth, Avis has a deal to maintain Waymo’s autonomous vehicle fleet (Google’s self-driving car project), a digital strategy (i.e., mobile) to reach consumers and an effort to grow the Zipcar segment (just 10% of revenue) by challenging ride-sharing companies like Uber. Zipcar just launched a commuter-oriented service in eight major cities where renters get a dedicated car and parking spot for a monthly fee and per-mile rate. Add it all up, and Avis Budget’s EPS should expand 23% in 2018. Earnings are due out November 6.
Technical Analysis
CAR came out of a deep dip in June when the agreement with Waymo began to change investor perception. As news of operational improvements percolated, shares marched higher, crossing above their 200-day line in August and establishing the pattern of higher highs and higher lows. Encouragingly, CAR’s volatility has lessened, a sign few big investors are anxious to sell; over the past two weeks, shares have barely moved at all. We’re OK buying a small position around here with a stop below the 50-day line.
CAR Weekly Chart
CAR Daily Chart
Dana Holding (DAN)
Why the Strength
Dana Inc. made its debut in Cabot Top Ten Trader in July, after an earnings report confirmed the company’s recovery from a string of 10 consecutive quarters of declining revenue. The company, which makes automotive components like axles, transmissions, suspensions, gaskets, driveshafts and the like, has factories around the world, including one that opened in China in 2013 and another in India in 2014. This year, the company has broken ground on a new gear factory in Europe. Dana is in this week’s Top Ten because the company’s Q3 earnings report last Thursday featured an estimate-beating 32% jump in revenue (the fourth quarter in a row with accelerating growth rates) and a 20% bump in earnings. Acquisitions contributed $133 million of the revenue increase, but the earnings boost was due to strong demand, new business and cost discipline. The company also raised its guidance across the board. Dana is an innovative company with a vault-full of patents and a global reputation for quality. And since the company’s stock trades at an attractive 12 P/E and pays a small dividend (annual yield is 0.8%), this looks like a good way to play the reviving strength of the global automotive industry.
Technical Analysis
DAN corrected from the middle of 2015 through the middle of 2016, falling from 22 to 10. But since that low, DAN has advanced quickly, with a 10-week correction earlier this year giving way to a strong rally in April. DAN topped 30 last Friday and is attracting a growing roster of institutional investors. DAN pulled back by a point today, confirming its status as more of a steady grower than the rocket it resembled in September. A buy anywhere under 30, with a stop around 27, looks like a good bet.
DAN Weekly Chart
DAN Daily Chart
First Solar (FSLR)
Why the Strength
Solar power has been a promising clean-energy technology for decades, but First Solar is one of the first major manufacturers that can claim to produce electricity that’s price-competitive on an unsubsidized basis with even the cheapest fossil fuels and nuclear. First Solar’s unique thin-film silicon technology, which uses glass substrates rather than silicon wafers, can turn out a module in 3.5 hours, while a comparable crystalline silicon module would need three days and multiple factories. This proprietary technology keeps costs low and efficiency high, and the company’s scale and experience (more than 17 gigawatts installed worldwide) makes it a preferred partner for big power grid and corporate power installations. With 25 previous appearances, First Solar is something of a Top Ten all-star. Its appearance today comes courtesy of a very strong quarterly earnings report last Friday (October 27) that crushed estimates with $1.09 billion in revenue and $1.95 per share in earnings. Analysts had expected a little over $824 million in sales and 85 cents in earnings. The company also reiterated its 2017 guidance for revenue in the range of $3 billion to $3.1 billion. First Solar’s excellent results provided a boost to the entire solar industry and kicked off a major rally.
Technical Analysis
FSLR has been all over the map as energy prices, policies and subsidies have fluctuated. FSLR was trading above 74 in March 2016, but fell to 26 in April 2017 amid regulatory uncertainty. FSLR blasted off in late April, and ran to 37 in May, then 49 in July. The stock traded under resistance at 50 for three full months while investors awaited the next earnings news. When it came last Friday, FSLR exploded higher on more than six times its average volume and followed through on the upside today. With a long base to build on, there should be more upside potential for FSLR. Try to catch any weakness and keep a loose stop around 53.
FSLR Weekly Chart
FSLR Daily Chart
Flir Systems (FLIR)
Why the Strength
FLIR Systems is a U.S. designer and manufacturer of thermal imaging and infrared camera systems for commercial, industrial and government customers. The Oregon-based company was growing revenue by over 30% per year back in 2007 and 2008, but annual growth turned negative in 2012 and has been in positive single digits ever since. Quarterly revenue mostly followed suit, which is why the company’s 15% revenue growth, reported in its Q3 earnings report last Wednesday (October 25), had such a positive impact. October has been a good month for FLIR Systems, with news on October 2 that the company had scored a $75 million military contract for its TacFLIR surveillance cameras and an announcement on October 11 that Australia had ordered $6.8 million of the company’s Black Hornet personal reconnaissance systems for its army. The good news continued on October 25 when the company announced its Q3 fiscal results. FLIR Systems got a new CEO in June, a veteran of 16 years at Stanley Black & Decker and a U.S. Army vet who has seen the advantage FLIR Systems’ sensors give to soldiers. With military demand expected to remain high and a potential for higher demand for detectors on U.S. borders, investors are showing considerable interest in the company.
Technical Analysis
FLIR topped 45 back in July 2008, and has spent the years since then entirely under resistance at 37 with support generally in the 20s. The stock popped to 39 in June 2017, signaling a gradual improvement in investor sentiment, but didn’t really catch fire until October, when the successive pieces of good news stoked a rally that finally topped its old 2008 high. FLIR’s blastoff to 46 last week came on heavy volume and the stock has now pulled back a point from its high at 48 last Thursday. If you like the story, look to get started on a dip toward 46 and keep a tight stop at 41.
FLIR Weekly Chart
FLIR Daily Chart
GrubHub (GRUB)
Why the Strength
Despite three buyouts earlier this year that solidified its position as the top dog in online food ordering and delivery, Grubhub was pushed and pulled by competition fears in recent weeks. But the stock spiked after Q3 results (and the outlook) confirmed that business is good and that competition fears look overblown. In the third quarter, revenues surged 32%, earnings and cash flow both rose in the low 20% range and most of the sub-metrics (especially active diners rising 28% to 9.81 million, the highest rate of organic diner growth in two and a half years) also impressed. Because of the firm’s best-in-class scale in both active diners and delivery capabilities (now in 80 markets), more national chains are partnering with Grubhub—Cheesecake Factory began this quarter, and Grubhub covers 150 locations for Red Robin Burgers, 100 for BJ’s, 200 for Boston Market and 100 for Qdoba, among others. Looking ahead, management raised sales and cash flow guidance for Q4, and had many positive things to say about its Eat24 acquisition from Yelp, which just closed October 10; the move will double the firm’s presence in many Tier 2 markets and, in total, add another 30,000 restaurants to its platform. Analysts have hiked their estimates (up 30% in 2018), and given Grubhub’s scale (four times as big as its closest competitor) and the size of the takeout market, growth should remain rapid for years.
Technical Analysis
GRUB soared to new all-time price highs (leaping out of a two-year base) following earnings in late July, which appeared to be the go signal for a sustained advance. But sellers showed up as announcements of big players entering the online food market (Facebook, Amazon, etc.) brought the stock back down to near 50. Support around there held for a month, and last week, GRUB ripped to new highs after earnings on three straight days of good volume. We’re OK buying around here or on dips.
GRUB Weekly Chart
GRUB Daily Chart
Polaris Industries (PII)
Why the Strength
We like discovering off-the-beaten-path growth stories, and no stock fits that description better than Polaris Industries. The mid-cap company makes all-terrain vehicles (ATVs), utility vehicles, motorcycles and snowmobiles. It’s one of the oldest companies in the powersports business, with a deep stable of brands including the RZR Side by Side, Indian motorcycle, Switchback snowmobile, GEM passenger and utility vehicle, and Slingshot open-air roadster. This is another operational improvement story, supported by a strong economy in which consumers and businesses are once again spending money beyond the bare essentials. There is also a growth-through-acquisition component given that Polaris acquired Transamerican Auto Parts, which makes relatively high-margin off-road and aftermarket accessories, a year ago. The stock’s breakout came last Tuesday when Polaris released a better-than-expected Q3 report, highlighted by operating margin expansion, North American sales of off-road vehicles up in the mid-teens, Indian motorcycle sales up 16%, strong initial orders of 2018 models and (importantly) the lowest dealer inventory in three years. The bottom line was 13% revenue growth and 192% EPS growth (to $1.46). Analyst estimates have since risen to 18% revenue growth and 37% EPS growth (to $4.78) for this year, with another 17% earnings gain expected in 2018. With a greater focus on product innovation, and operational efficiencies kicking in, it looks like investors will continue to jump on Polaris.
Technical Analysis
PII moved mostly sideways for the first half of 2017 with shares spiking and dipping in the 80 to 90 range. The stock lifted out of that range in the second half of August, before catching its breath in the 101 to 108 area for part of September and early October. The set-up was pristine, heading into earnings, and PII reacted beautifully, surging to new highs last Tuesday and pulling back grudgingly since. You can buy here or on dips.
PII Weekly Chart
PII Daily Chart
PulteGroup (PHM)
Why the Strength
Fears over Fed rate hikes, uncertainties over tax reform and some seemingly unsustainable housing price gains dampened investor enthusiasm for homebuilding stocks for much of 2017, but the group has come alive in recent weeks on evidence of an accelerating economy, booming consumer confidence and, most importantly, solid third-quarter results. Pulte is one of the bigger industry players ($8.3 billion in revenue over the past year), and the stock rushed to new highs after Q3 numbers were well received last week. Both sales (up 10%) and earnings (up 40%) looked good, but most important were its continued solid leading indicators, with net new orders up 11% in units (up 23% in dollars), which in turn drove total backlog up 15% in units (up 26% in dollars), and that demand occurred despite Hurricanes Irma and Harvey. Long-term, the firm continues to invest smartly in new land, with a large 4.4 years of “land inventory” on the books. A big part of Pulte’s story is also its shareholder-friendly management—the firm pays a decent dividend (1.2% annual yield) and has been buying back shares like mad, with diluted shares down 12.5% from a year ago. There’s nothing revolutionary here, and if interest rates really spike, some big investors could bail. But the strength in Pulte specifically and the sector in general bodes well for the next few months at least.
Technical Analysis
PHM rallied from 3 way back in 2011 (when housing stocks finally bottomed out) to 24 by mid-2013, before entering a new, multi-year consolidation. The stock was rejected by that 24 level earlier this year, but it snuck out to new highs in the summer and was crawling higher through mid-September when the buyers floored the accelerator. Since then, PHM has rallied from 26 to 30, including last week’s big-volume move to new highs following earnings. You can buy some here or (preferably) on dips.
PHM Weekly Chart
PHM Daily Chart
STMicroelectronics (STM)
Why the Strength
We covered semiconductor manufacturer STMicro in early September, right after the stock broke into new high ground. At the time, we highlighted strong market demand for its solutions, including chips for smartphones (Samsung Galaxy S8, iPhone 8 and iPhone X all use ST’s solutions) and ramping excitement about the company’s automotive exposure (39% of revenue). In particular, bullishness was growing around STMicro’s long-term opportunity with electric vehicles (EVs), which some believe could reach 80% of global auto sales by 2050; up to 50% of an EVs value comes from electrical systems and electronics, and this is where ST Micro could cash in. Last Thursday’s Q3 earnings beat has only increased the market’s confidence in the company’s diversified growth trajectory. Revenue was up 19% while EPS of $0.28 was up by 155%. Even better, profit margins expanded (on track to hit 40% in 2018), inventory levels are low, and Q4 guidance implied 10% sequential growth, way above the normal seasonal Q4 rate of zero growth! Analysts have since boosted price targets based on across-the-board design wins in 3D sensing (in particular for iPhone X) and electrification and radar in autos. In short, the bull-case scenario is intact, which has kept the stock in good shape.
Technical Analysis
STM had a huge run from the middle of last year through February, but then entered a classic sideways consolidation. The stock made just a little progress from mid-March through August, but since then, the buyers have been in control—STM rallied to 20 in September, paused for a month and then catapulted on earnings last week. Look for minor weakness to enter, with a stop centered around 20.
STM Weekly Chart
STM Daily Chart
SVB Financial Group (SIVB)
Why the Strength
SVB Financial (stands for Silicon Valley Bank) is about the growth-iest bank you’ll ever see—the company focuses its lending operations on innovative industries like private equity and venture capital (about 40% of gross loans), software and internet firms (26%), private banking lending (11%), life sciences and healthcare (8%), some premium wine (1%) and more. The company has a long history of steady growth, and a strong economy (especially in the above sectors) and higher interest rates are helping growth to accelerate—in the third quarter, the company total assets were up 17% (to $50.7 billion), which drove revenues up 22% and earnings up 32%, which crushed expectations. That was a strong sign for investors, but even better news came when management (which usually offers fairly reliable forecasts) nudged up their 2017 outlook and offered a bullish view for next year—loan balances should grow in the mid-teens percentage-wise, while net interest income should expand in the high-teens to low-20s. Analysts responded by hiking their numbers (now looking for 35% earnings growth in Q4 and 22% next year), and investors responded by piling into the stock. Banks are never going to offer anything revolutionary, but SVB’s years of experience and top-notch connections in some fast-growth industries should continue to pay off in the quarters ahead.
Technical Analysis
Like most financial stocks, SIVB had a huge post-election move, rallying from around 120 in November to nearly 200 in late February. Then came a long consolidation—it wasn’t overly deep (about 20% from high to low), but the stock was well below its 40-week line when the bulls returned in early September. SIVB rallied back to about 190 before pausing for three weeks, when last Friday’s earnings report gapped the stock to new highs. You can buy around here or on pullbacks.
SIVB Weekly Chart
SIVB Daily Chart
Terex (TEX)
Why the Strength
Terex, a leading manufacturer of heavy construction equipment, looks like one of the leading industrial stocks in the market right now, thanks to generally bullish industry conditions and company-specific reasons. For the industry, two straight quarters of 3% GDP growth (first time that’s occurred in three years) and tax reform hopes have goosed industrial stocks, and Terex has seen demand grow, with Q2 backlog up 36% from a year ago. But even more exciting is that Terex is in the process of what could be a multi-year restructuring that should significantly boost margins and cash flow. During the past couple of years, management has reversed a long roll-up strategy, selling a few non-core businesses (and garnering $1.6 billion in the process), putting in place numerous cost-efficiency plans and buying back a bunch of shares (the share count was down 11% from a year ago in June). The combination of both factors looks set to lead to a major turnaround—after years of flat-to-down earnings, the bottom line is expected to grow to north of $1 per share this year and more than double that in 2018. And, longer term, the top brass believes it will be able to triple the firm’s returns on capital by 2020, which should go hand in hand with skyrocketing earnings and cash flow. The next big event will come on Wednesday morning (November 1), when the firm reports Q3 results.
Technical Analysis
TEX has been generally heading higher since its major bottom in early 2016, but it’s had a couple of long dead periods during that time (March through October 2016; January through June of this year). In recent months, though, the stock and relative performance (RP) line have started to trend higher more consistently, with the stock’s huge-volume September ramp being the most bullish action on the chart. You could nibble here or just wait to see how TEX reacts to earnings on Wednesday.
TEX Weekly Chart
TEX 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.
