October 7, 2013
The market is being pushed and pulled by news and rumors coming from Washington, D.C. But despite the uptick in volatility, the major indexes are in OK shape (growth indexes are doing relatively well) and most leading stocks have taken the ups and downs in stride. We don’t view this as a time to be super-bullish, and if the sellers truly take control, we’ll quickly advise paring back. But for now, the evidence is positive, so we’re sticking with our “lean bullish” advice of the past few weeks.
News- and Rumor-Driven Market
It seems like nearly every October gives the market something to worry about, and this year it’s (again) the politicians in Washington, D.C.—statements and rumors from various leaders have been pushing and pulling the market in recent days, and there’s no reason to expect anything less in the near-term. That said, despite day-to-day (sometimes hour-to-hour) volatility, the market’s overall stance hasn’t changed much; the indexes are in good-not-great shape, but most leading stocks have taken it all in stride. Thus, we’re sticking with our lean bullish advice, and think buying during weakness can pay off.
This week’s list is encouraging in that many names are new to Top Ten; while the market hits some potholes, money is still finding a home in more and more stocks. Our favorite of the week is U.S. Silica (SLCA), another play on the rebounding oil sector; we like its reasonable valuation, recent breakout and big increase in sponsorship in recent quarters.
|YY Inc. (YY)||0.00|
|Sanchez Energy (SN)||0.00|
|US Silica Holdings, Inc. (SLCA)||0.00|
|Sina Corp. (SINA)||0.00|
|Canadian Solar (CSIQ)||0.00|
|Chicago Bridge & Iron (CBI)||0.00|
|Buffalo Wild Wings (BWLD)||0.00|
YY Inc. (YY)
Why the Strength
There is a tremendous appetite in China for social media, but the government is leery of allowing foreign platforms like Twitter and Facebook free access, partly because these companies may be resistant to the monitoring and censorship the government requires. This has created huge opportunities for companies like YY Inc., the wildly popular Chinese online social platform that’s still evolving. The core of YY’s appeal is software that allows users to interact online in real time without any downloads or installations. The flexibility of the platform allows innovative ideas (like competitive karaoke and tie-ins with popular TV shows) that attract new users and drive revenue growth. YY Inc. has booked 14 consecutive quarters with triple-digit revenue growth and annual earnings have jumped from four cents per share in 2011 to an estimated $1.16 per share in 2013. Analysts like the idea that the firm’s relatively low monetization of users leaves big room for growth. The big story underlying investors’ enthusiasm is the enormous growth in Smartphone ownership in China, which is creating an opportunity for Mobile YY, raising the service’s advertising rates. Despite already large growth, YY Inc. looks to have a bright future.
YY still hasn’t experienced a major correction since it came public in November 2012 at 10.5. The stock tagged 47.5 in early August, then pulled back below 37.5 on August 22. The stock got back on track and has spent four weeks consolidating under 50. The stock’s rising 25-day moving average is now at 47, and may bring a little energy with it when it meets the stock. If this young stock can build a base under 50, it will all be to the good. You can start a small position here, or on weakness of a point or two. We’re raising our buy range from YY’s September 9 appearance in Top Ten by two.
YY Weekly Chart
YY Daily Chart
Why the Strength
We’ve written this before, but it’s worth remembering that institutional investors’ favorite combination is a young company showing fast growth and huge potential ... but also has solid barriers to entry and a relatively predictable outlook. That’s the main reason Yelp is strong, and why the stock is one of our favorite fundamental ideas—not only is the company the hands-down leader in collecting user-generated content (reviews on tens of thousands of restaurants and attractions), but each of its markets have followed a similar path of growing user visits, reviews, and eventually local ad revenue from businesses. That’s why Yelp’s sales growth has been so steady (between 63% and 69% in each of the past seven quarters), and why management is confident enough to continue expanding into new markets; the firm entered Brazil in late-August, its 23rd country and first in Latin America. Importantly, though, even Yelp’s “older” markets, which it entered in 2005 and 2006, are still showing great growth—in the second quarter, its six oldest markets combined for 33% growth in cumulative reviews and 43% growth in local ad revenue generated. Management has been investing, which has led to mild losses, but that should change soon. Earnings are likely around month’s end.
YELP continues to act well, generally ignoring the market’s daily fluctuations. That’s not to say the stock doesn’t move around a lot; shares are very volatile and regularly move 4% or more in a day. But since ripping out of a month-long consolidation in early September, YELP has chopped its way higher and remains safely above its 25-day line (now near 66), a line it hasn’t closed below since mid-June. We think the stock is a buy, but given the market’s recent grumpiness, we advise buying on dips.
YELP Weekly Chart
YELP Daily Chart
Why the Strength
Synaptics develops and manufactures human interface products designed for use in mobile phones, notebooks, handheld computers and other mobile electronic devices. The company’s main products include TouchPad, for use in monitors and remote controls, ClickPad, which replaces a mouse for notebook PCs and netbooks, and ClearPad, which provides touchscreen control for various mobile devices. The company has scored design wins with many of the industry’s biggest smartphone manufacturers, and these phones account for greater than half of overall sales. In fact, the company’s products are in virtually every high-end smartphone at the moment, with the exception of Apple. Overall, Synaptics has scored several key design wins this past year, including Samsung’s Galaxy Note 3 and Dell’s new line of Venue tablets. On the earnings front, Synaptics saw net income triple to $45.3 million last year, from $12.3 million in the year prior. And Synaptics has averaged double-digit revenue growth and triple-digit earnings growth in the past two quarters. With the smartphone market picking up after nearly a year-long slump, we like Synaptics’ prospects going forward.
Following several starts and stops throughout the past two years, SYNA shares appear to have finally gained some traction in 2013. The stock’s most recent rally began late last year, after SYNA spent October and November forming a base near 25. Shares have since nearly doubled in value, riding higher along support at their 10- and 25-week moving averages. Recently, SYNA eclipsed its May highs near 45, breaking out after a four-month pause. Given the exuberance of last week’s breakout, we recommend buying on pullbacks toward support in the 45 region.
SYNA Weekly Chart
SYNA Daily Chart
Sanchez Energy (SN)
Why the Strength
Sanchez Energy is a very exciting oil explorer that’s focused on the Eagle Ford shale. The company’s strategy can be boiled down to two things—it’s acquiring high-quality acreage in the Eagle Ford, especially in areas that are “oily,” and then it’s drilling these areas like mad, boosting output at a breakneck pace. At this point, the company has about 140,000 net acres in the Eagle Ford, with 147 wells in operation, but the company is tapping 56 wells in total this year, and plans on another 76 in 2014. Plus, management says it’s identified more than 1,700 (!) drilling locations on its current acreage. Imagine! All told, total production in the second quarter was up 98% from the first quarter, and the firm expects output to at least double in 2014. However, despite the rapid expansion, cost controls look good, and cash margins remain high (thanks in part to its lucrative acreage), which is helping earnings to boom—the numbers in the table below are almost ridiculous, and analysts see the bottom line jumping north of $2 per share next year, up 79%. Obviously, if the price of oil really skids, that would be an issue, but Sanchez seems to have acquired the acreage it needs to become much, much larger during the next few years. We like it.
SN came public in December 2011 and promptly ... did little of anything for about 18 months, hovering between 17 and 25 for the most part. All of the meaningful action has occurred just in the past few weeks—the company announced (and, as of Friday, has completed) another big acquisition in the Eagle Ford (the Wycross area), and that sent shares exploding higher on monstrous volume. It’s extended to the upside, but we don’t expect a major retreat as long as the market remains afloat. Any dip of a point or two looks buyable, with a stop around its prior highs.
SN Weekly Chart
SN Daily Chart
US Silica Holdings, Inc. (SLCA)
Why the Strength
U.S. Silica is the second largest U.S. producer of silica ... basically, sand. What’s so exciting about that? Well, this is very high-quality sand—it used to be used in making glass and other industrial materials, and even now that still makes up 40% of all revenues. But the real action surrounds the oil and gas industry, which uses the company’s sand as a proppant in the fracking process; revenues from that sector made up 60% of the total in the second quarter, and grew 43% year-on-year. This kind of sand doesn’t grow on trees (to mix metaphors)—the firm’s mines are located mainly in Illinois, Wisconsin and Minnesota, but management has done an excellent job inking deals with railroads (to transport the sand) and building, leasing and sharing the operation of storage facilities that are located near every major shale basin in the U.S. Some prices have come down as energy explorers have become more efficient with their operations, but U.S. Silica is growing nicely, and earnings are expected to reaccelerate beginning in the just-completed third quarter, and keep accelerating through 2014, when analysts see the bottom line increasing 35% to $2.15 a share. It’s not revolutionary, but with the energy sector back in favor, U.S. Silica is a pick-and-shovel way to play that. A decent dividend (1.8% yield) completes the package.
SLCA came public in February 2012, rallied to 22 and then had a post-IPO droop down to 9 last July. Then it rebounded all the way to 28 by March of this year, before another slide began. However, the past few months have seen tight, proper action—SLCA gradually quieted down, held above its long-term 40-week line, and then tightened up nicely in September. And then last week, the buyers returned, driving the stock higher on big volume. There’s still a little resistance around 29, but you could start small here or on pullbacks, with a stop near 24.
SLCA Weekly Chart
SLCA Daily Chart
Sina Corp. (SINA)
Why the Strength
Sina Corp., one of the most successful Internet portals in China, is turning 20 this year, but it’s still acting like a young company. The company has always been profitable, using its mix of content (news, weather, sports, business, etc.) and services (search, email, games, social networking, etc.) and specialized forums to build a huge user base. The service that sets Sina apart is Sina Weibo, a microblogging service launched in 2009 that allows users to exchange messages, videos, games and pictures. Weibo’s 500 milion users place it at the top of Chinese social media, which is probably what motivated Alibaba, China’s largest e-commerce website, to pay $586 million for an 18% stake. (Alibaba will likely come public in the U.S. in the next six months.) Besides the cash, Sina gets a boost from the Alibaba endorsement implied by the sale. Sina Weibo has thrived in China in part because the Chinese government blocks Twitter and Facebook. But the company has made its mark against determined domestic competition, getting Weibo to the lead position among online social media. Investors see a bright future for Sina, Weibo and the business of running a rich online content and service provider in China.
SINA has been an up-and-down proposition for the last couple of years, but since trading at 45 in April 2013, the stock has made a great run, ripping from 55 in July to 85 on August 13. That jump to 85 on high volume led to a seven-week consolidation while the 25-day moving average caught up. SINA broke out above 85 last week, booking new multi-year highs on slightly elevated volume. That seven-week pause should give the stock a base to build on. We think SINA looks like a good buy on any dip of a couple of points. A mental stop at the 50-day moving average (now at 80) makes sense as earnings season looms.
SINA Weekly Chart
SINA Daily Chart
Canadian Solar (CSIQ)
Why the Strength
The big story for Canadian Solar is pretty much the same as every other large solar company, and that’s the big resurgence of interest in green energy in general and solar in particular. Canadian Solar is a giant among solar firms, a vertically integrated maker of silicon ingots, wafers, solar cells, solar modules, solar power systems and specialized solar products that ranks among the four largest in the world. A Chinese company, despite the name, Canadian Solar was founded in 2001 and has survived and thrived through both the 2006–2007 solar boom and the solar bust in 2008. Some of investors’ interest in the company is a result of its 2012 purchase of a majority interest in 16 solar power plant projects in Ontario, Canada, totaling 200 megawatts. Canadian Solar has been selling off these power plants, placing five of them with buyers to date. Canadian Solar has 2.4 gigawatts of annual solar module manufacturing capacity, 330 megawatts of which is located in Ontario, with the rest in China. Beside the general strength of the global solar industry, Canadian Solar has the scale to handle utility scale projects as well as an R&D program that’s finding new ways to integrate solar technology into architectural projects and home generating units. The gathering strength of the global economy is freeing up more government money to support solar projects and Canadian Solar is expected to return to profitability in 2013 after eight quarters of losses. Investors clearly see the potential.
CSIQ has made a monumental run since it was trading at 2 in November 2012. The stock climbed to 5 on modest volume in February 2013, then blasted off in April on a high-volume run that hasn’t ended yet. A two-week correction in August pulled the stock from 16 to 10.5, but the stock ended September with a string of new highs. CSIQ has nudged 20, but has spent a few days trading above 19, trading good volume, but looking like a pause to consolidate may be in the cards. CSIQ looks good to buy anywhere under 19, with a stop at the stock’s August resistance at 16.
CSIQ Weekly Chart
CSIQ Daily Chart
Why the Strength
It’s official; health care exchanges tied to the Affordable Care Act went live on October 1. Regardless of your position on ACA, there are multiple ways to profit from this legislation, including investing in healthcare providers like Centene, a multi-line healthcare enterprise that provides programs and services to a number of under-insured and uninsured individuals. The company operates in two segments: Medicaid Managed Care and Specialty Services. The company has grown steadily during the past several years, with revenue ramping up recently due to the staged implementation of ACA. In the past four quarters, Centene has seen average revenue growth of 58% year-over-year. Furthermore, with the expansion of Medicaid under ACA, Centene should continue to see this type of growth in the foreseeable future. That said, analysts believe that companies like Centene could see annual revenue growth of 15% per year even without ACA’s Medicaid expansion, as more states turn to private insurers to manage Medicaid benefits. For example, Florida just awarded Sunshine State Health Plan, a Centene subsidiary, with a contract for the state’s Managed Medical Assistance program which covers nine of the state’s 11 Medicaid regions. With more potential state-level deals on the horizon, and expanding coverage under ACA, Centene’s growth prospects look extremely healthy.
CNC had a good run through mid-2011, but then suffered a few severe declines—from a peak of 39, it found itself sitting at 35 last October, more than 16 months of no progress. But since then, the stock’s been in a relatively smooth uptrend; CNC hit new highs in June and then popped higher two weeks ago on big volume. It’s not a go-go stock, so we advise trying to pick up shares on dips.
CNC Weekly Chart
CNC Daily Chart
Chicago Bridge & Iron (CBI)
Why the Strength
Chicago Bridge & Iron is domiciled in the Netherlands and hasn’t had much to do with bridge-building since its early days. Early on, the company began building containment vessels for water and oil, and has parlayed its expertise into a lead position in building entire plants for energy, petrochemical and natural resource companies worldwide. Projects include entire refineries, petrochemical storage and transportation facilities, liquefied natural gas (LNG) terminals, nuclear containment vessels, etc. Chicago Bridge & Iron made another big leap in capabilities when it acquired Shaw Group in February 2013 for $3 billion, increasing the company’s engineering and construction portfolio. There has been a wave of investment in energy projects globally, and the Shaw acquisition, which caused a 119% jump in Chicago Bridge’s Q2 revenue, is expected to add value immediately. With annual sales in excess of $8 billion, Chicago Bridge & Iron is neither nimble nor innovative. However, the company is building earnings (2013 estimates are for $4.17 per share, up from $3.08 in 2012) via its enormous expertise in cranking out turnkey facilities that do their jobs well. That, plus the Shaw acquisition, is enough to hold investors’ interest.
CBI (and its small dividend) has been in a long-term uptrend for years. The stock built a six-month rising base in late 2012, drifting up from 35 and making one surge above 40, then broke out above 40 in December and hit 62 by late-March. A shakeout to 50 cleared out the weak hands and the stock jumped to 65 in May. After three months of consolidation with support at 60, CBI took off again in September, hitting new all-time highs and soaring to 70. The stock has spent a few days trading flat at 70, and you should be able to grab it on a dip to 69 if you like the story. A stop at 61 (consolidation level from May through August) makes sense.
CBI Weekly Chart
CBI Daily Chart
Buffalo Wild Wings (BWLD)
Why the Strength
It’s football season! And whether you are a college football fanatic or a diehard NFL fan, there are few better places to eat, watch the game, and have a few beers than Buffalo Wild Wings. Known for its buffalo-style chicken, BW3 has perfected the fusion of fast-casual dining and sports bar, franchising more than 940 eponymous restaurants in 49 states and Canada. This winning combination has led the company to average revenue growth of nearly 30% during the past four quarters despite tough economic conditions. What’s more, the company recently delivered same-store sales growth of nearly 4%, continuing the company’s multi-year leadership on this front in the casual dining sector. Specifically, Buffalo Wild Wings’ same-store sales growth has outperformed its peers in the casual dining group by an average of 5% over the last four quarters and by an average of 6% over the last five years. Despite this impressive growth, Buffalo Wild Wings is not resting on its laurels. At the recent Wells Fargo restaurant conference, the company announced plans to increase its draft beer offerings, offer branded event days, and implement tablet-based guest technology. With fall sports season hitting its stride, we like BW3’s short-term prospects, and with the company’s attention to maintaining its leading position in sales growth, long-term growth looks solid as well.
BWLD has been in a strong uptrend since the market bottom in 2009, riding support at its 10-week and 25-week moving averages. The shares saw a sharp spike in interest in early 2012, but the rally was short lived, with BWLD spending the rest of the chopping around support/resistance in the 80 region. The stock eventually stabilized heading into the start of 2013, and BWLD has since resumed its formerly smooth uptrend. Riding key support at its 10-week moving average, the stock is now perched north of 115, as it gathers steam while its short-term trend lines play catch-up.
BWLD Weekly Chart
BWLD 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.
|First||Stock||Symbol||Top Pick||Original Buy Range||Price as of October 7, 2013|
|9/23/13||Las Vegas Sands||LVS||62-65||66|
|6/10/13||Pioneer Natural Resources||PXD||139-144||196|
|WAIT FOR BUY RANGE|
|DROPPED: Did not fall into suggested buy range within two weeks of recommendation.|