Looking for Confirmation
Current Market Outlook
We’ve seen some constructive action during the past few days—the major indexes have thus far successfully re-tested their August lows and we saw some positive divergences in the broad market (far fewer stocks hitting new lows this time around). Now we’re looking to see if the intermediate-term trend can turn up; by our measures, it could happen within a day or two if the market holds its recent gains. And if it does happen, we’ll move to a more neutral stance—giving some stocks looser leashes and advising more new buying (though we wouldn’t advise jumping in with both feet). We’ll see how it goes, but for now, be sure to have your shopping list ready.
This week’s list has a few steady Eddies but also some real growth stories, including a couple of new ones to us. For our Top Pick we’ll stay with the big-cap growth theme that’s offered many resilient stocks—Adobe Systems (ADBE) dominates its field and just completed a transition to the cloud, which will lead to huge recurring revenues going forward.
| Stock Name | Price | Buy Range | Loss Limit |
|---|---|---|---|
| Zoës Kitchen (ZOES) | 0.00 | 38-41 | 35-36 |
| VeriSign (VRSN) | 190.71 | 71-73 | 67-68 |
| Sarepta Therapeutics (SRPT) | 120.93 | 39-42 | 35.5-36 |
| Shopify (SHOP) | 585.00 | 34-37 | 31.5-32 |
| Jabil Inc. (JBL) | 41.50 | 21-22 | 19-20 |
| Incyte Corporation (INCY) | 76.98 | 116-121 | 105-106 |
| Edwards Lifesciences (EW) | 228.06 | 145-150 | 138-140 |
| Cal-Maine Foods, Inc. (CALM) | 0.00 | 57-60 | 53.5-54 |
| Adobe Inc. (ADBE) | 315.23 | 83-85 | 78-79 |
| Advance Auto Parts (AAP) | 0.00 | 187-191 | 167-170 |
Zoës Kitchen (ZOES)
Why the Strength
Many great cookie-cutter retail stories are either well along their growth curve (possibly having 50% or more of their potential stores already in operation) or are unproven (lots of potential new store openings … but business isn’t doing very well with the stores that are open). Zoës Kitchen is bouncing back nicely because it has a great combination of both—it’s concept of Mediterranean food made with southern hospitality (fresh, no fryers or microwaves used, etc.) has been a hit, especially among affluent women, who make up 70% of visits; the average customer’s income is north of $100,000. Zoës’ has 158 stores (almost all company-operated) spread out among 17 states mostly in the U.S. south and southeast, but new store openings have been coming up the east coast and have proven just as successful as other places. Same-store sales growth has been solid (5.6% in the second quarter), and management has embarked on a rapid growth plan—the firm is boosting its restaurant count by 31 to 33 this year and about the same in 2016, with a 1,600 goal over the long term. Sales growth has been solid and should register 20% to 30% for many years; earnings have been slower to lift off, but that’s mainly because new-store opening expenses have been north of 15% of revenues! Clearly, as the firm gains size, margins will increase and earnings should boom. We still like this story.
Technical Analysis
ZOES came public in April 2014 and proceeded to do little of anything until June 2015—a big launching pad that led to a solid two-month advance. But the market’s collapse in August (along with a slight deceleration in comp sales growth) brought ZOES down a sharp 35% by mid-September. But it found support in its prior basing area, and has now recouped about 60% of its losses as it forms the right side of a cup base. ZOES still has work to do, but we’re OK with a small position here and adding to it if the market gets going and the stock continues higher.
ZOES Weekly Chart
ZOES Daily Chart
VeriSign (VRSN)
Why the Strength
One big plus for a growth company is having barriers to entry for competing business. And on that basis, Verisign is a real gem. The company is in charge of the authoritative registry for all .com, .net, .tv, .cc and .name Internet domains. Any person or company that wants to use a web address (like www.cabot.net, for instance) has
to pay Verisign every year for the privilege. The company also offers Internet security services and manages two of the world’s 13 root servers, but it’s the monopoly on top-level domains that provides the bulk of revenue. While revenue growth fell to 5% in 2014, investors appreciate the steadiness of earnings growth (forecasts are for 12% growth in earnings in both 2015 and 2016) and the company’s consistently high after-tax profit margins—37.5% in Q2, which is just about average for a number of years. Verisign announced on September 16 that two million domain names were added to the Internet in Q2 2015, bringing the total to 296 million. When the company releases its Q3 results on October 22, after the close, analysts are expecting 76 cents per share in earnings and $265 million in revenue. The company’s motto is “Powered by Verisign,” and if results are good, the predictability of the company’s business will likely react positively.
Technical Analysis
VRSN has been a steady grower over the years, but hasn’t beaten the market by much. But good earnings news in July gave VRSN a big boost, powering a rally that began at 62 and ended up at 71. After the August meltdown, VRSN bounced back to 71 by the middle of September. A short correction toward the end of the month gave way to a breakout on increased volume on September 30 and October 1, and VRSN is now trading at all-time highs above 73. This is unlikely to be a rocket stock, but it’s a favorite of institutional investors (including Warren Buffett) and could do well if it beats its estimates. Waiting for quarterly results is the prudent course, but a nibble on weakness is also an option.
VRSN Weekly Chart
VRSN Daily Chart
Sarepta Therapeutics (SRPT)
Why the Strength
Sarepta is another clinical-stage biotech that’s benefiting from positive data. The company announced late last week that eteplirsen, its drug candidate for Duchenne muscular dystrophy, showed signs of long-term efficacy and safety in a Phase IIb study. Tested on 12 young boys diagnosed with Duchenne muscular dystrophy, eteplirsen added an average of 151 meters to their six-minute walk test. Duchenne muscular dystrophy is an inherited disorder of progressive muscle weakness, typically in boys. There are no current treatments for the disease. Sarepta’s drug is currently under priority review, with a decision expected in late February. If approved, eteplirsen would be able to address an estimated 13% of the total Duchenne muscular dystrophy population, which includes as many as 200,000 new cases in the U.S. per year. For a company that currently has no sales, that would be a major game-changer.
Technical Analysis
The first big move for SRPT came in May, when the stock doubled from 13 to 26 virtually overnight. It climbed steadily from there, rising to 39 in mid-September. Headwinds in the biotech space pushed it down to 31 in late September, but the stock has already recovered those losses thanks to the positive eteplirsen data. Shares pushed above resistance today in the 41 area, a strong sign of potential leadership. You could take out a small position here, and sell if SRPT falls back toward the mid-30s.
SRPT Weekly Chart
SRPT Daily Chart
Shopify (SHOP)
Why the Strength
Shopify is a company few have heard of, but chances are, many of you have used it at one time or another. The company’s cloud-based software platform is the backbone of e-commerce efforts for more than 175,000 businesses today (including Facebook and Tesla Motors, although it mainly targets small and mid-sized companies); it helps firms build and manage websites, process payments and sell goods across multiple channels (social media, mobile, etc.). Business has been great, but Shopify is strong thanks to a slew of positive announcements lately, the biggest of which was the selection of Shopify as the e-commerce provider for Amazon Webstore merchants—this could bring in thousands of new customers and boost usability for many current customers that use Amazon. The company has also broadened its appeal recently by making it easier for merchants to sell on Twitter and Facebook, allowing for Apple Pay payments and making it easier to buy and print shipping coupons from the U.S. postal service. Revenue growth has been rapid, with all aspects of the business following suit—gross merchandise volume flowing through its customers’ sites was up 100% in the second quarter (to $1.6 billion), with Merchant Solutions (driven by payment volumes) up 140% and a 67% gain in monthly recurring revenue from subscriptions. Earnings are still in the red as the company reinvests in the business, but there’s little doubt cash flow will surge as the firm gains scale. We like it.
Technical Analysis
SHOP just came public in May of this year, running from 26 on its first day to 40 in early August. It quickly fell back to 25 during the market meltdown, but then exploded higher in mid-September after striking the deal with Amazon. Since then, SHOP has etched a nice handle, and a close above 40 would be very encouraging. Our main rub (besides the still iffy market) is the stock is very thin (only about $10 million of trading per day). Thus, if you buy, keep it small.
SHOP Weekly Chart
SHOP Daily Chart
Jabil Inc. (JBL)
Why the Strength
While Cabot Top Ten Trader is focused on growth stocks, Jabil Circuit is essentially a value stock with growth stock potential. The company has traditionally been a contract manufacturer of electronic circuitry and devices, one that can come up with a good idea, develop it, design its supply chain, manufacture it and figure out how to recycle it. But Jabil, which serves the aerospace, automotive, computing, consumer, medical and telecom industries, ran into a stretch from 2012 to 2014, when its revenue either grew in single digits or fell. That turned around in the fiscal year that ended in August, with revenue scoring three quarters of growth at 20% in Q2, 15% in Q3 and 15% again in Q4. The company’s quarterly and annual report on September 24 included an upward revision of earnings estimates (and a 960% jump in earnings for the latest quarter). Part of this rebound comes from Jabil’s diversification into packaging (including smart packaging for the health and consumer electronics industries) via its 2013 takeover of Nypro for $665 million. That acquisition has put new life into Jabil. The company’s stock is still trading at a bargain 9 forward P/E ratio (11 trailing P/E ratio) and it pays a 1.5% dividend. This looks like a good long-term buy for a value-oriented investor who wants a stock with a good catalyst for growth.
Technical Analysis
JBL has been in a long-term trading range, with years of bouncing between support in the mid-teens and the mid-twenties. But after swooning from over 24 in June to 17 on August 24, the stock bounced back above 20 and was trading at 19 when the good earnings news blasted it to 22 on more than four times average volume. JBL has held those gains and is showing continued strength today. We think a buy anywhere below 22 looks good with a moderately loose stop at 20.
JBL Weekly Chart
JBL Daily Chart
Incyte Corporation (INCY)
Why the Strength
Positive test results are like gold for any clinical-stage biotech, and that’s precisely what happened with Incyte last week. An experimental rheumatoid arthritis drug Incyte is developing with pharmaceutical giant Eli Lilly was found to be more effective than a current leading treatment. The drug, called baricitinib, showed signs of reducing rheumatoid arthritis symptoms better than Methotrexate, which has been used to treat the disease for decades, after just 24 weeks. The latest positive data represents the third leg of the companies’ joint Phase III study into the effectiveness of baracitinib; a fourth leg of the Phase III study is already underway, with results set to be released before year’s end. If the drug eventually gains FDA approval and goes to market, its potential is immense: more than 23 million people worldwide suffer from rheumatoid arthritis. The most popular current treatment for rheumatoid arthritis, AbbVie’s Humira, generated $12.5 billion in sales last year—a year when Incyte brought in just $163 million.
Technical Analysis
Climbing steadily for much of 2015, INCY got slammed along with most other biotechs in late September after Hillary Clinton said she would put a cap on drug prices if elected, causing INCY to plummet to 95, its lowest level since April. It was nothing a little positive phase III data couldn’t cure; since the results were announced last week, INCY has shot all the way back up to 126, with volume more than doubling from its pre-data levels. With trading activity showing no signs of slowing, and the stock still on the rise, now might be a good time to dip a toe in and see if INCY’s rally has more legs. That said, given the volatility in biotechs of late, be sure to watch it closely and set your stop losses in the mid-100s.
INCY Weekly Chart
INCY Daily Chart
Edwards Lifesciences (EW)
Why the Strength
Edwards Lifesciences calls itself “a global leader in … heart valves and hemodynamic monitoring.” In practice, this means the company makes both traditional and transcatheter valves, plus technologies to support minimally invasive procedures and monitoring of heart performance in high-risk surgical and critically ill patients. More than 40% of revenue comes from sales of transcatheter heart valves, 35% from valve therapy and 24% from critical care devices and instruments. Several factors are working in Edwards’ favor right now. First, the company expects the global market for transaortic valve replacement (TAVR) to double from its 2014 level (around $1.5 billion) to more than $3 billion in 2019. Second, the company just closed on its $350 million acquisition of CardiAQ, a company whose transcatheter mitral valve system is being considered for regulatory approval in Europe. (It’s not approved in any country now.) With an excellent reputation for quality and innovation and a potentially profitable new technology onboard via takeover, Edwards Lifesciences has big potential.
Technical Analysis
EW enjoyed a very strong 2014, starting the year at 67 and rallying to as high as 150 in March 2015. But it’s been an up-and-down ride since then, with dips to 123 in May and 125 in August, but a sprint to 159 in July. EW got a small boost from a good quarterly report just two days after the market’s August 24 nadir, but was kept under wraps until last week, when it rallied back toward 155. Investors are likely biding their time until the success of the CardiAQ buyout becomes evident. We think this is a good stock to keep an eye on until it powers past its old resistance at 158. If you were to buy here, a loose stop at 140 will give the stock some wiggle room.
EW Weekly Chart
EW Daily Chart
Cal-Maine Foods, Inc. (CALM)
Why the Strength
Eggs and Bird Flu—that’s the reason Cal-Maine Foods is strong today. The company is one of the largest producers of shell eggs in the country; it’s done a nice business over the years, but with lots of ups and downs, depending on the demand for eggs and the prices they fetch. Now those prices are through the roof, as a strain of bird flu ripped through the U.S., leading to a slaughter of 48 million egg-laying hens, which has cut down on the supply of eggs. In the second quarter, prices for Cal-Maine’s eggs soared 66% from a year ago, while volume was up about 3%, helping earnings to surge to dizzying heights. And the company is dedicated to paying out a quarterly dividend of one-third of net income; that means a beefy dividend of 98 cents per share (payable mid-November to holders as of October 26) coming up, and payouts should remain huge for another few quarters (analysts see earnings totaling $7 per share next year, down from $11 or so this year). Obviously, this isn’t a long-term growth story, and prices are likely to ease significantly once the country’s flock increases. But it’s also possible earnings will remain elevated for longer than anticipated, leading to big dividends and higher share prices. Consider it an interesting speculation.
Technical Analysis
CALM has been in a general uptrend for a couple of years, with some solid base-building efforts along the way. The stock consolidated from September 2014 through mid-April 2015, before soaring as high as 60 in May when egg prices exploded. It then pulled back to the mid-40s during the August mini crash, but has advanced steadily since; last Monday’s shakeout was quickly bought up, and CALM is now just south of new high ground. You can consider a small position here with a stop just under 54, and look to buy more shares on a powerful push above 60.5.
CALM Weekly Chart
CALM Daily Chart
Adobe Inc. (ADBE)
Why the Strength
Adobe Systems used to be a software company that sold you a blister pack with a CD of your Acrobat, Flash or Photoshop software. These enormously popular programs were mainstays of creative designers for the Web, print or media. But the company has been working hard to convert its users to a software-as-a-strategy to sell its popular products in a package (called “Creative Cloud”) that will smooth out its revenue stream with continuing subscription fees. The company’s quarterly report on September 17 featured a snappy 93% jump in earnings on a 21% gain in revenue. Both the improved EPS and revenue growth rates were the strongest in years, and investors appeared to take the company’s (slightly) disappointing guidance for Q4 in stride. Adobe’s announced intention to become a digital cloud juggernaut looks quite possible, as the company added 684,000 net new subscribers during the latest quarter, bringing its total to over 5.3 million. The company has beefed up its offerings in the past year with a takeover of online stock-photo leader Fotolia in December 2014 and a 3D animation company, Mixamo, in May. Investors like the aggressive moves to augment the product line and the new revenue model. Adobe Systems looks to have plenty of fuel.
Technical Analysis
ADBE broke out of a long-term trading range in April 2015, rallying from 72 on March 26 to 87 on August 18. The August market free-fall pulled the stock briefly below its March starting point, but the recovery was quick in coming, with the good quarterly report helping to push ADBE to 86 on September 23. The late September market dip turned out to be a one-week-down and one-week-back-up affair and ADBE is right back to 86, with only the 87 August high to conquer. ADBE has had a wild ride, but we like the story and the speed of the stock’s recovery. Try to buy on a dip of at least a point, and use a stop around 79.
ADBE Weekly Chart
ADBE Daily Chart
Advance Auto Parts (AAP)
Why the Strength
Earnings and revenue growth have slowed in recent quarters at this auto-parts giant, and the company plans to close 50 stores by year’s end. And yet, the stock was one of the best-performing retailers on the market last quarter. Why? For one, margins are improving, something that had been a sticking point for new activist investor Starboard Value. In the last two quarters, Advance Auto Parts’ profit margins improved from 4.8% to 7.1%. Starboard has designs on expanding those margins even further: the New York-based hedge fund has taken a 3.7% stake in Advance Auto Parts with the intent of driving margins up to the 12% range. When a hedge fund of Starboard’s size ($3 billion) and stature takes out a substantial stake in a company, it tends to turn a few heads on Wall Street. Meanwhile, despite the earnings and revenue slowdown of late, Advance Auto Parts has still recorded nine consecutive quarters of growth in both categories, and sales have doubled since 2007. The main catalyst has been the post-recession recovery in the auto industry; the more cars people buy, the more auto parts they need. Low gas prices and escalating consumer confidence haven’t hurt Advance Auto Parts’ growth either.
Technical Analysis
AAP has been stair-stepping higher since late April, advancing from 143 to 187 in mid-August. Then came the mini-market crash, when shares pulled back to 171. Despite a few fits and starts, the stock was still stuck in the low 170s last week when Starboard announced its new stake in the company. That prompted a quick gap up all the way to 192. It’s been sitting there for the last few days, perhaps building a solid base for another run if the market gets well. It’s worth adding to your watch list to see how it behaves in the coming days. If you decide to take out a small position, buy on the dips and set a hard stop at 170, where the stock found consistent support prior to last week’s big jump.
AAP Weekly Chart
AAP 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.
