Continuing to Lean Toward the Bears
Current Market Outlook
As each week has passed, we’ve seen more and more yellow and red flags, including divergences, an implosion in the broad market, and recently, some key leading groups (like chip stocks) and individual stocks break down. There are still some positives out there, especially that many growth stocks remain within multi-month consolidations; if the market pulls out of its funk, they could be the leaders of the next advance. But, right now, that’s a big if—with selling pressures intensifying, we’re knocking our Market Monitor down another notch. Holding cash and being very choosy when doing some buying is your best course.
This week’s list has a larger-cap flavor to it as investors hunker down in well-traded names. Our Top Pick is Nike (NKE), which recently staged a huge gap on earnings, something that almost always leads to good performance in institutionally-owned stocks.
| Stock Name | Price | ||
|---|---|---|---|
| Ulta Beauty (ULTA) | 331.95 | ||
| Nike (NKE) | 89.77 | ||
| Monster Beverage Corporation (MNST) | 0.00 | ||
| Mallinckrodt (MNK) | 0.00 | ||
| Home Depot (HD) | 0.00 | ||
| Keurig Green Mountain (GMCR) | 0.00 | ||
| FedEx (FDX) | 0.00 | ||
| Carter’s (CRI) | 0.00 | ||
| Acuity Brands (AYI) | 0.00 | ||
| Actavis (ACT) | 0.00 |
Ulta Beauty (ULTA)
Why the Strength
Ulta Salon is the largest beauty retailer in the U.S., offering one-stop shopping for mass-market brands, prestige products, and salon products and services. The company was founded in 1990, and it’s been expertly managed since, racking up a perfect record of sales and earnings growth every year of the past decade. Also, after-tax margins have been slowly improving over time; while they were in the 6% region back in 2011, they’ve been mainly over 7% since and just hit 8.3% this quarter. But the stock has made no progress since 2012, as slowing growth has led to P/E contraction. Now that may be changing, thanks to a five-year road map the company laid out four weeks ago after releasing its second-quarter report. With that road map, management showed analysts how Ulta would hit $6 billion in sales in 2019, and grow earnings at a 20% annual rate over that time—and analysts liked it a lot! After a couple of years in the wilderness, Ulta’s long-term growth story looks to be coming back to life.
Technical Analysis
ULTA made nine appearances in Top Ten back in 2010-2011 when the stock was climbing steadily, but since early 2012, it’s been underperforming the market, only appearing here once. Now, the stock’s high-volume blast-off in response to the five-year plan marks what could be the start of a major new run, and if so, it’s worth getting on board here. The next upside hurdle is 133, where the stock hit resistance in late 2013, and if the stock can push through that level, terrific. But first it’s got to hold up here. All in all, nibbling on dips is advised, with a stop in the mid-100s.
ULTA Weekly Chart
ULTA Daily Chart
Nike (NKE)
Why the Strength
Nike is 10 times the size of clothing retailer Carter’s, which also appears in this issue, yet it’s growing at roughly the same speed, which is amazing. And as long as Nike succeeds in keeping its finger on the pulse at the intersection of sport and fashion, growth can continue. Today the stock is strong because two weeks ago the company released an excellent fiscal first-quarter earnings report, earning $1.09 per share while analysts’ consensus was just $0.88. Revenues were strong, with major contributions from both sporting goods sales during the World Cup and, possible most important from a growth investor’s point of view, the growing trend to wearing fitness clothes outside the gym. Also helping are improved margins (12% after-tax margin was the highest in more than four years), a lower tax rate and a decline in share count, thanks to buybacks. Looking forward, we think Nike still has plenty of room to grow, particularly in Asia, where consumers are increasingly following U.S. style and increasingly able to afford it. The stock pays a 1.1% dividend.
Technical Analysis
NKE has been in a long uptrend for years, slightly outperforming the market over time. But last week’s report sparked the stock’s biggest surge in years. In part, that’s because much of this market has been weak, and the number of leaders dwindling. But it’s also because NKE had been trying to break out above 80 since November 2013! The stock began to break out in early September, but the market pulled it back to its 50-day moving average at 79. And that’s when the quarterly report came out! We’ve learned over many years never to underestimate a huge, well-traded stock that gaps up huge on earnings. NKE fills the bill perfectly and we think you can buy a little around here.
NKE Weekly Chart
NKE Daily Chart
Monster Beverage Corporation (MNST)
Why the Strength
Monster Beverage is still basking in the glow of the game-changing deal it inked with Coca-Cola in August. Besides the obvious positive that Coke took a big stake in Monster (16% or so), the deal involves a bunch of other plusses—Monster will turn into an energy drink-only company, as it will transfer its legacy fruit juice and natural soda lines to Coca-Cola, while receiving that company’s small energy drink business. Most important, though, is that Coca-Cola will give Monster access to its second-to-none distribution network, which should accelerate growth in both the U.S. and overseas. Most analysts believe Monster will take the money it receives from Coca-Cola (as well as its own huge cash flow) and return it to shareholders (buybacks) to avoid dilution and support the share price, which helps, too. And let’s not forget Monster’s core business is doing very well on its own—the company’s energy drinks are consistently gaining share, management has only scratched the surface of the international opportunity, and profit margins have ticked higher (20% last quarter!) thanks to good cost controls. Earnings estimates are so-so, but we believe most big investors see those figures as conservative once Monster takes advantage of Coke’s distribution avenues.
Technical Analysis
MNST topped in mid-2012 and built a huge, two-year base, which included a lot of multi-month upmoves and downmoves. But the decisive move came in August, when MNST soared to new price highs on 10 times average volume thanks to the Coke deal. Even more impressive is the incredibly flat, tight action since then, despite the wild action in the overall market. MNST certainly looks very much “under control” with no selling pressures to speak of. If you want in, you can buy a small position around here with a stop near 84.
MNST Weekly Chart
MNST Daily Chart
Mallinckrodt (MNK)
Why the Strength
Most investors have never heard of Mallinckrodt, but it’s not a fly-by-night firm—it was spun off from Covidian last summer and, thanks to a couple of big acquisitions, has $2.3 billion in revenue during the past 12 months. This combination—a big company that’s relatively unknown among most investors—is enough to get us interested. But it’s the aforementioned acquisitions that are getting buyers to stand up; the company acquired Cadence Pharmaceuticals for $1.4 billion in March, bringing with it Ofirmev, which is basically IV acetaminophen and gave Mallinckrodt a camel’s nose under the tent in the hospital field. Then the company made an even bigger splash by purchasing Questcor Pharmaceuticals for $5.6 billion (closed in mid-August), bringing with it Acthar, a treatment for a variety of autoimmune diseases and which brought in $761 million of revenue in 2013 (up about 50% from the year before). Acthar has great potential but there are some worries about future generic competition, insurance coverage and its importance to the company’s bottom line (it should be about 30% of revenue). Still, the bottom line is that Mallinckrodt has a growing product line, and the earnings estimates are huge (up 54% next year; $7 per share is possible). We like it.
Technical Analysis
MNK has generally been in a choppy uptrend since coming public in mid-2013, with lots of multi-week rallies and multi-week retreats. But ever since the stock tagged its 40-week moving average in August, MNK has been a powerhouse, rising eight weeks in a row and hitting new price and RP peaks; in fact the stock has shown no willingness to pull back at all during the market’s recent dips. It’s a bit extended here, but we’re OK with a small buy around here (though preferably on dips) and a stop near 84.
MNK Weekly Chart
MNK Daily Chart
Home Depot (HD)
Why the Strength
We’ve been looking for another leg up in the housing industry for a while, but it’s been hard to find—housing starts have stagnated and reports from homebuilders have been lukewarm. But, surprisingly, many housing supply stocks have been perking up; there are two in this week’s Top Ten, including Home Depot, the granddaddy of the group. Of course, this firm isn’t thriving solely because of some solid industry fundamentals; the firm itself has squeezed costs and improved efficiencies (profit margins are rising about 10% year-on-year in recent quarters), and it’s using its huge cash flow to pay a solid dividend (2.0% yield) and buy back a ton of stock (its share count was down 6.2% in the second quarter!). Thus, while sales growth has been chugging along in the mid to high single digits, earnings growth has generally been north of 20%. A big data breach a few weeks ago temporarily grabbed some headlines, but we doubt it will affect the stock longer-term. To us, the big picture is one of a still-recovering housing market, an accelerating overall economy (good for all sorts of construction) and, importantly, a still-tame interest rate and mortgage rate environment. All of those bode well for continued solid earnings growth at Home Depot. As mega-cap stocks go, we like it.
Technical Analysis
HD has a gorgeous chart. It chugged persistently higher from about 30 back in 2011 to 81 in mid-2013, thanks to the housing recovery. Then the stock went straight sideways for more than a year, trading between 72 and 83 the entire time. Then came HD’s August earnings report, which caused the stock to gap to new price highs on its heaviest weekly volume in 17 months. The stock has held up very well since then despite the broad market selling pressure and the data breach news, and looks ready to run if the market lets it. A small buy around here or on dips should work.
HD Weekly Chart
HD Daily Chart
Keurig Green Mountain (GMCR)
Why the Strength
The folks at Keurig Green Mountain are not only experts at making coffee, they’re experts at making deals! The first big deal was the merger of Green Mountain Coffee with single-serving technology company Keurig in 2006. Deals with rivals Starbucks and Dunkin Donuts came in 2011, and this year we saw first a deal with Subway to place Keurig brewers in all their shops, then a deal with Coca-Cola to develop and market single-serving cold beverages (a huge deal that saw Coca-Cola buy 16% of the company!), and then a deal with Kraft Foods to make Maxwell House and a deal with McDonalds to make McCafe pods for Keurig brewers. Today, Keurig gets 73% of its revenue from selling portion packs of coffee and tea, which is great recurring revenue (the stock pays a dividend of 0.8%), but years from now, a large portion of that recurring income will come from other beverages. The biggest upside could come from the Keurig Cold, which is supposed to be released next year—if effective, it could prove to be even more popular than the traditional coffee brewers! Management here can be counted on to both innovate and deal.
Technical Analysis
GMCR has been base-building since the Kraft announcement six weeks ago, setting up for a breakout to new highs. The old high is 136, while the 50-day moving average is at 126, so entering here seems fairly sensible. A breakout to new highs would be terrific, especially if it comes soon, while a stop around 120 will keep any loss from getting out of hand.
GMCR Weekly Chart
GMCR Daily Chart
FedEx (FDX)
Why the Strength
With more than $45 billion in revenue, FedEx needs no introduction—it’s the #2 shipper of goods for individuals and businesses, behind only UPS. FedEx gets about 85% of revenues from FedEx Express and Ground deliveries, with 13% from Freight and the rest from various services. The company has been a blue-chip stock for years, but it’s one of the strongest stocks in the market because of a fantastic earnings report—revenue growth of 6% was tame, but was actually the fastest rate of growth since mid-2012, bolstered by a recovering economy. And earnings growth of 37% was well ahead of estimates, thanks to fading fuel prices (a trend that should continue, as oil and gas prices sink), better efficiencies and a strong share buyback program (the share count in the past year is down 9%!). And the future looks very promising, too—as fuel prices decline and price hikes of 4.9% take effect in January 2015, analysts see earnings growth of at least 20% for the next few quarters. Throw in a reasonable valuation (22 times trailing earnings) and a token dividend (0.5%), and we think FedEx can do well, even in a challenging market environment.
Technical Analysis
FDX had a great last few months of 2013, running to 144 in December. Then it began a nine-month base-on-base formation—the stock consolidated into June, before breaking out on bullish earnings, but it then formed a new, tighter consolidation that lasted until mid-September. That pause ended after another great quarterly report (and news of price hikes), which has pushed the stock to new price and RP peaks. And, importantly, it’s held up well despite the market’s shakiness. It’s not that volatile a stock, so you can buy some around here and use a tight stop.
FDX Weekly Chart
FDX Daily Chart
Carter’s (CRI)
Why the Strength
Carter’s has been selling sensible clothes to Americans since 1865, but the company really shifted into high gear when it acquired OshKosh B’Gosh in 2005, gaining an even stronger foothold in the children’s clothing sector. In addition to those leading brands, the company now sells its Just One You, Precious First and Genuine Kids brands through Target and its Child of Mine brand through Walmart. Revenues have grown every year of the past decade and earnings have done nearly as well, missing only when major investments interrupt the pattern. Today, the stock is strong because second-quarter earnings results, released last Thursday, beat estimates, and management increased its projections for the quarters ahead. One factor behind the growth (as at most retail establishments) has been the opening of new stores. The company opened 20 Carter’s stores in the quarter and closed two; and opened four OshKosh stores and closed three. But a bigger factor has been the company’s success at selling directly to consumers online through its websites. Its Carter’s brand saw comparable retail store sales grow 2.9% while e-commerce sales grew 36.5%! At OshKosh, comparable retail store sales grow 7.0% while ecommerce sales grew 43.2%! These are great trends, fairly dependable, and enhanced by a $0.19 quarterly dividend that brings a yield of 0.9%.
Technical Analysis
CRI has been in a slow uptrend for years. It hit an all-time high of 84 in late August, pulled back to 77 in sympathy with the broad market, and then rocketed higher last week after the excellent earnings report. But can it punch through 84 on this run or will it need time to build a base? Until it does punch through, the prudent buy is on a modest pullback.
CRI Weekly Chart
CRI Daily Chart
Acuity Brands (AYI)
Why the Strength
Acuity Brands isn’t necessarily a direct play on the housing and construction markets … but it’s close. The company is a leading provider of lighting solutions—both new and retrofit—for residential, commercial and industrial clients. The reason for the stock’s strength was a solid quarterly report last week (many investors feared bad results given the so-so numbers from some others in the construction group); Acuity’s revenues continued to crank ahead at a mid-teens clip (products sold were up 17% but prices fell a bit), while earnings grew even faster thanks to expanding margins. But the real excitement surrounds the firm’s LED-related sales, which are growing like mad—sales have been up about 100% in each of the past two quarters, and now make up 40% of total revenue. Obviously, the major long-term economic advantages of LEDs are very attractive to big buyers (think of a supermarket or big industrial plant retrofitting its lights with LEDs), and Acuity’s management believes trends should remain very favorable for many years to come. Of course, the stock isn’t exactly undiscovered—it’s been doing well since mid-2012 and trades at 27 times this year’s earnings estimate—but institutional investors (578 mutual funds own shares, up from 477 a year ago) are betting on many years of 20%-plus earnings growth.
Technical Analysis
AYI changed character in July of last year, zooming higher and eventually reaching 146 in February. Since then, shares haven’t done much—in fact, as of two months ago, AYI was in rough shape, having fallen below 105 on worries about all things construction-related. But shares rebounded a bit after that, and last week’s big-volume, earnings-induced surge is very encouraging. Yes, there’s still some overhead resistance to deal with in the 140 area, but we think the weak hands are out of the stock. If you want in, nibbling on dips toward 130, with a stop around 120, should work out.
AYI Weekly Chart
AYI Daily Chart
Actavis (ACT)
Why the Strength
Beginning life as California-based Watson Pharmaceuticals in 1993, Actavis has transformed itself into a global leader in generic and specialty pharmaceuticals by steadily gobbling up smaller drug companies. Acquisitions in 2000, 2006 and 2009 netted the company a large portfolio of generic drugs and an international presence. The Actavis name came with a 2012 acquisition, and the Dublin address was brought along by the 2013 acquisition of Warner Chilcott and its specialty drug portfolio. This summer, Actavis completed its largest takeover to date, acquiring Forest Labs and its large drug portfolio, including anti-depressant Lexapro, for approximately $25 billion. The company’s latest purchase was just announced this morning; the $675 million buyout of Durata Therapeutics adds a unique IV antibiotic to Actavis’ lineup of specialty drugs. It’s a story with many moving parts, but to us, the bottom line is that growth has picked up markedly, and analysts see the bottom line up 23% next year and double-digit growth for many years after that. Combined with excellent management and a reasonable valuation (20 times trailing earnings), there’s no reason big investors won’t continue to grab shares.
Technical Analysis
Actavis started 2014 with a bang thanks to the announcement of the Forest Labs acquisition in February. The stock traded in a range for the next six months, then broke out to new highs in September, when it was revealed that Pfizer had been in takeover talks with the company. The Pfizer talks had already ended without bearing fruit, but the stock popped on the attention and has held up well at new high ground. Dips toward the 25-day line (now around 238) look buyable, with a stop just above 220.
ACT Weekly Chart
ACT 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.
