Damage Done, but Not Likely a Major Top
Current Market Outlook
After trading in a tight range for nearly two months, the major indexes were clobbered last Friday; most fell below their 50-day lines and a couple hit their lowest levels since Brexit. The action should certainly be respected—we’re knocking our Market Monitor down a couple of notches—but it’s important to look at all the evidence. While the intermediate-term trends are mostly sideways at this point, the longer-term trend is still up, the broad market isn’t falling apart as it would at major tops, and many individual stocks are pulling back normally so far. Overall, you should take things on a stock-by-stock basis, selling stocks that crack but giving others a chance to hold support and resume their advance. Overall, we remain optimistic, but picking your spots is important, and the next few days should be telling.
This week’s list includes many resilient stocks from a variety of sectors, which is a positive sign. Our Top Pick is Las Vegas Sands (LVS), a big-cap turnaround stock that has just lifted off following a huge bottoming effort.
| Stock Name | Price | ||
|---|---|---|---|
| Urban Outfitters (URBN) | 0.00 | ||
| Twilio (TWLO) | 183.39 | ||
| Tempur Sealy (TPX) | 85.53 | ||
| PDC Energy (PDCE) | 0.00 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| Las Vegas Sands Corp. (LVS) | 0.00 | ||
| GrubHub (GRUB) | 140.03 | ||
| Callon Petroleum (CPE) | 0.00 | ||
| Burlington Stores (BURL) | 193.95 | ||
| Alibaba (BABA) | 254.81 |
Urban Outfitters (URBN)
Why the Strength
One key to a strong retail stock is its ability to maintain pricing power—too much price discounting suggests customers need extra enticement to get through the door. On balance, Urban Outfitters has risen above the competition this year. Credit Suisse’s proprietary pricing basket analysis shows the company’s flagship brand discounting just 4% compared to an average 13% from its peer group (Gap and Abercrombie have discounted the most). While the Urban brand’s pricing power has been partially offset by deeper discounting within its Anthropologie and Free People brands, which together make up 60% of revenue, company-wide gross margins were still up 1.8% to 38.5% in the second quarter. Net sales growth was a better-than-expected 3%, and those higher margins led to a $0.10 EPS beat of $0.66. For the full-year, growth in the Urban brand should overshadow slower growth in the other brands and result in 4% revenue growth. EPS growth should be around 16% as fatter margins hold. Store count is growing as well; in the third quarter, 11 new stores should open (2 Urban Outfitters, 3 Free People and 6 Anthropologie), with 23 new stores opening in fiscal year 2017. The company will also continue to invest in its marketing and digital strategies, as well as build an East Coast distribution facility. An ongoing share repurchase program is another plus. Critically, the company is cash-flow positive, and should have no long-term debt after the next quarter.
Technical Analysis
URBN has been both hot and cool this year. Shares hit a January low of 20, then rallied 75% by early April. A summer drought killed momentum and shares shriveled to the mid-20s. They then crossed key moving average lines in early July (at 28) during a 15% rally into the August 16 earnings report. A better-than-expected result catalyzed a 15% gap up to 36. Over the past month, the stock has been consolidating in the 35 to 38 range. You could buy a position here and use a stop in the 32 area, which is near the 50-day line.
URBN Weekly Chart
URBN Daily Chart
Twilio (TWLO)
Why the Strength
You wouldn’t expect a stock with a nosebleed valuation ($219 million in revenue, market cap of $4.7 billion and no earnings yet) to hold up during the recent market chop and pullback, but Twilio has. Part of the reason for the stock’s strength is because it’s new; there are still more big investors that are likely building positions. But a big part of the reason is the firm’s fundamental story—Twilio’s cloud-based communications platform is both unique (it’s by far the leader in the field) and extremely pervasive. By allowing clients to send customized text, video or voice messages and information automatically, Twilio’s solution is proving to be a building block for a wide variety of firms’ communications needs. (Dispatch notifications, call tracking, contact center, automated surveys and instant leads are just some of the uses.) The company had 30,780 active customers at the end of the second quarter (up 45% from a year ago), including Uber, ServiceNow, HubSpot, Nordstrom, TripAdvisor, Expedia, Edmunds.com, Airbnb, PayPal, OpenTable and more. (A recent upgrade in capabilities for enterprise customers should help Twilio grab more big customers.) The beauty of this business model is that it’s usage-based, so Twilio’s top line will expand as its customers integrate more of its functions into their businesses. It’s a big story.
Technical Analysis
TWLO formed a brief IPO base in July and early August, then went bonkers on the upside in the middle of August, soaring as high as 66 before pulling back to 50. But the stock has found some support since then, and it’s held above its rising 25-day line (now near 54) during the market’s recent dip. TWLO remains super volatile, but a nibble here with a stop in the 47-48 area seems like a decent bet.
TWLO Weekly Chart
TWLO Daily Chart
Tempur Sealy (TPX)
Why the Strength
Americans are always looking for something that can deliver a good night’s sleep, and the ultra-competitive mattress market depends on that search. Tempur Sealy, which gets three-quarters of its revenue from the U.S., turned into a real player in the sleep business back in 2013, when Tempur-Pedic, the biggest purveyor of visco-elastic pressure foam mattresses, merged with Sealy, a strong brand name in the conventional mattress field. Tempur Sealy has been enjoying a boost from a strengthening U.S. housing market, as new home sales bring new mattress sales. But sales growth slowed to just 5% in 2015, and that, plus a steep correction in the broad stock market, took a bite out of Tempur Sealy’s stock price in December and January. But a great earnings report on July 28—revenue growth of just 5%, but earnings up a stunning 74%—went a long way toward convincing investors that Tempur Sealy deserved a second look. Analysts’ estimates call for a 31% jump in earnings this year and 20% in 2017, which also helps. There are a few cautions associated with the company, including 10 days of short volume and a large (439% of equity) debt load (Tempur-Pedic assumed $750 million of Sealy’s debt in the 2013 merger). But that debt has been whittled down by more than half from three years ago and the high short interest could fuel a short-covering rally if TPX gets going again. The company will release its next set of quarterly results on October 27.
Technical Analysis
TPX made a big run in 2015, but gave back its entire gain for the year in the December–January correction. The stock bounced mildly, then traded sideways for months until the late-July earnings-fueled rally blasted it from 53 in early July to 76 at the end of the month. TPX climbed as high as 81 in August, then drifted lower for a week and a half before a two-day rally last week kicked it to 82 before the weakness in the broad market dropped it to 77 last Friday. TPX is a good candidate for your watch list right now, as you wait for evidence that investors are still bullish. A return to 80 on volume would be a good buy signal. If you buy here, a stop at the 50-day (now at 71) makes sense.
TPX Weekly Chart
TPX Daily Chart
PDC Energy (PDCE)
Why the Strength
PDC Energy is an energy stock that operates in three of the country’s highest-potential areas—the Delaware Basin in the Permian, the Wattenberg Field in Colorado and the Utica Shale in Ohio—and a recent, huge acquisition looks like it could be the catalyst to kick the stock even higher. PDC paid a whopping $1.5 billion (including $590 billion in equity) for 57,000 acres in the Delaware Basin that currently produces 7,000 barrels of output per day, and the firm has identified 710 drilling locations in this area going forward. The buyout should close within a few months, and PDC expects to have two rigs up and running in the Delaware by year-end. Combined, the Delaware and Wattenberg areas should drive growth at PDC for many years—the areas each have more than 10 years of drilling inventory, with more than 2,800 drilling locations combined (!), with many of them providing returns north of 50% at current pricing. (PDC’s output is about 40% oil, 40% gas and 20% liquids.) Throw in some encouraging results from newer, longer lateral drilling techniques, and the future looks bright: PDC’s management expects production to grow 30% annually during the next three years, with cash flow booming. If energy prices move higher, the potential here is huge.
Technical Analysis
PDCE hit its bear market low in late-2014, and hit higher lows in August 2015 and again in February of this year. But when the sector turned higher from there, the stock couldn’t crack resistance, and it eventually backed off into July. But the stock is revving higher again now, and this time it’s showing real power—it popped as high a 71 before pulling back with the market and because of a share offering (to pay for the new acreage). If you want in, we think you can buy a half-sized position here with a stop near 60, and look to average up on a push above 72.
PDCE Weekly Chart
PDCE Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
MercadoLibre closely resembles Alibaba (also in this issue) in that it runs an online e-commerce marketplace where sellers can offer all kinds of merchandise and be supported by a comprehensive suite of services. In addition to an eBay-like sales site that offers auctions and online shops, MercadoLibre offers a payment service that can automatically convert currencies across its Latin American core markets and make payments for outside transactions (MercadoPago), a shipping service (Mercado Envios) and a classified advertising program. If that seems a lot like eBay’s menu of services, that’s not a coincidence: eBay owns about an 18% stake in MercadoLibre and has donated lots of expertise. MercadoLibre has enjoyed many years of double-digit percentage revenue growth, but the 29% bump in the company’s latest quarter is the strongest in many years, as is the 68% growth in earnings per share. It’s worth noting that this strong growth has come in spite of the economic and political difficulties afflicting Brazil, which is the company’s biggest source of revenue. Earnings are forecast to dip by 6% in 2016, but analysts see 30% EPS growth in 2017. Like Alibaba, MercadoLibre’s growth is a function of the rapid build-out of the cellular network in Latin America that increases the number of consumers with access to e-commerce. A small dividend (annual yield is 0.3%) sweetens the deal a bit.
Technical Analysis
MELI gyrated up and down from 2013 to early 2016, but the rally that began after the February market bottom has kicked MELI into decisive new-high territory. The stock got a huge boost from well-received quarterly numbers on August 5 and enjoyed another boost from an analyst’s upgrade earlier this month. The weakness in the broad market has pulled MELI down by 10 points from its September 6 high, but the stock is still well above its 25-day moving average. MELI looks like a good buy under 178, with a loose defensive stop at its 50-day moving average, now at 161.
MELI Weekly Chart
MELI Daily Chart
Las Vegas Sands Corp. (LVS)
Why the Strength
The recent strength in this casino operator is all about Macao. Its new Parisian Macao resort, operated by its subsidiary, Sands China Ltd., opens tomorrow (September 13) on the heavily trafficked Cotai Strip, where its Venetian Macao, Plaza Macao, Four Seasons Hotel Macao and Sands Cotai Central resorts already reside. The casino-and-resort industry has been in a downturn during the last couple of years, and Las Vegas Sands’ sales have slumped since mid-2014. But a turnaround may be imminent—Macau’s gross gaming revenue in August reached its highest level for a non-holiday month since April 2015. The opening of Steve Wynn’s new $4.2 billion Wynn Palace in late August had something to do with the revenue bump for the world’s largest gaming hub. But Las Vegas Sands CEO Sheldon Adelson is confident that his new $3 billion Parisian resort—complete with 100 table games, five restaurants, an Eiffel Tower replica, an Aqua World & Hotel pool, Qube Kingdom for kids, a health club and theater—can compete with Wynn Palace. With no other new competition coming in, Las Vegas Sands’ cash flow should explode if the industry is in the early stages of a turnaround. In the meantime, the 5.2% dividend yield acts as a nice security blanket.
Technical Analysis
After reaching a high of 55 in March, LVS embarked on a gradual two-month slide down to 41. Since then, it’s gone nowhere but up, surging to 50 in July, inching its way to 52 in August, then—after a brief shakeout back down to 50—gapping up to 55 last week on more than twice its normal trading volume. Having just broken through 52-week resistance at 54, this could be the beginning of a new upmove for LVS if the market cooperates. Buy on dips of a point with a loose stop around 50, which has been the support level since late July.
LVS Weekly Chart
LVS Daily Chart
GrubHub (GRUB)
Why the Strength
GrubHub remains one of the market’s strongest stocks, and we think it’s because, if the company can execute its plan, its growth potential is as big as it gets. That potential stems from the size of the market, and the fact that its business is a win-win for all involved. On the size front, U.S. food takeout is a $45 billion-per-year market, and that doesn’t count takeout and delivery services from chains, a market GrubHub has successfully entered. (GrubHub is the leader in this industry, yet with “only” $733 million in gross food sales last quarter, it has just a fraction of the market.) And whether it’s restaurants (which see an average of 30% more takeout orders in the first year on GrubHub and have no upfront cost) or diners (who enjoy a network of more than 40,000 restaurants, no mark ups and industry-low delivery fees), everyone benefits from the company’s business. Encouragingly, more than 90% of orders are from repeat customers, proving the concept works. Competition has been a big worry, but it turns out GrubHub’s take-rate (the cut it gets from each order) has actually been rising, partly due to its move into delivery services, which provides direct revenue (a small delivery fee) and has led to an uptick in overall orders. It’s a big story, and the strong growth (current and expected) bodes well. We like it.
Technical Analysis
GRUB took a bit of a hit late last week, but compared to its recent run, the retreat looks normal. The stock pulled back about four points after its earnings gap in August, but then advanced persistently to new multi-month highs over 13 days, before shaking out in recent days. With GRUB still handily above its 50-day line, this pullback is likely buyable, though a stop in the mid-30s makes sense.
GRUB Weekly Chart
GRUB Daily Chart
Callon Petroleum (CPE)
Why the Strength
The price of oil ripped 25% higher (to $49 a barrel) in the first three weeks of August. That move pulled most oil-related stocks along, especially those with exposure to the Permian Basin, where Callon has become an increasingly powerful player. The company’s track record on key operating metrics has grabbed Wall Street’s attention. In the second quarter, Callon produced an average of 13,400 barrels of oil equivalent per day (BOE/D), a 41% increase over the same quarter last year. The company pulled this oil from 118 gross horizontal wells, and at the time it estimated it had another 1,700 potential horizontal drilling locations. But that was before the recent $327 million Howard County acquisition, which adds 2,300 BOE/D of production and 5,667 net acres, bringing Callon’s total acreage up to almost 40,000 acres. The acquisition also increases Callon’s inventory of locations that break even with oil under $35 (by 45%). Even better, the acquired property is just five miles away from one of Callon’s best wells; the Silver City Wolfcamp A well, which outperformed expectations by 161% through its first 30 days online. The newly acquired production should be more-or-less absorbed by a nearly 30 million share offering (to fund the acquisition), so shareholders shouldn’t expect a near-term bump to profits. But this is a profitable company right now, and expected EPS growth of 75% annually over the next two years should whet the appetite of big investors.
Technical Analysis
CPE started the year by promptly falling from 8.10 to 4 during the January market rout. Since then, it’s been nearly unstoppable. It rallied with the entire sector throughout the first half of the year, then consolidated in the 10 to 12.50 range in June and July. An August rally coincided with a surge in the price of oil and the company’s August 8 earnings report. Since then, buying has been consistent, though the stock retracted with everything else on Friday. You can use the pullback to initiate a small position.
CPE Weekly Chart
CPE Daily Chart
Burlington Stores (BURL)
Why the Strength
Discount brick-and-mortar retailers continue to buck the trend toward online shopping, and few are thriving more than Burlington Stores. The off-price apparel, footwear and home goods chain is seeing consistent improvements in sales, same-store sales, gross margins and especially earnings—the latter more than doubled last quarter on a per-share basis. An ongoing $200 million share repurchase plan has helped goose EPS growth; the company has bought back 4.8 million shares of its stock over the past nine months, and still has $125 million of shares left to buy! Same-store sales expanded by 5.4%, and have now grown for 14 consecutive quarters thanks in large part to improvements the retailer has made in its women’s apparel, beauty and home goods businesses. Overall sales are growing too—at close to a 10% clip in the second quarter—due to the retailer’s continued expansion; in the past five years, the company has gone from 475 locations to 575, with another 25 stores set to open by year’s end. All that growth is attracting attention from institutional investors—MKM Partners upgraded the stock from “Neutral” to “Buy” last month, becoming the third firm to do so this year.
Technical Analysis
We recommended BURL in June when it was trading in a range between 61 and 63, then again in July, when it had risen to the 71-73 range. Now it’s up to 81. BURL’s 2016 run started from the get-go, when it jumped from 41 to 54 in January. It reached as high as 57 in February before consolidating for three months, with 51 acting as a bottom. The move to the low 60s came in June; it kited as high as 76 in July; and it touched as high as 84 this month before pulling back a bit over the last few trading days. Dips have been shallow and short-lived during this bull run for BURL, so you can buy here or on dips with a stop below the 50-day line; the stock hasn’t fallen below it since May.
BURL Weekly Chart
BURL Daily Chart
Alibaba (BABA)
Why the Strength
Alibaba runs the world’s largest online and mobile marketplace, bringing buyers and sellers together to the tune of an annualized gross merchandise volume (GMV, the total price of goods sold on its various online marketplaces) of $126 billion in the quarter that ended in June, which was up 24% from a year ago. Despite the challenge of a slowing Chinese economy, Alibaba has been able to continue its strong growth by building its customer base outside China’s big cities. In fiscal Q1 2017, the company increased its network by adding 17,700 Chinese villages. The company is also expanding outside China, with plans to open an office in Melbourne, Australia and hosting events to attract merchants in Australia, New Zealand and South Korea. The company has said that it expects to double its GMV by 2020 and increase its customer base to a mind-boggling two billion (from 423 million last year). The company is well known for the size of its 2014 IPO, the largest in history, but investors have been hesitant to jump in during a period of economic challenges to Chinese economic growth. The company’s strong quarterly report in the middle of August may finally have convinced investors that Alibaba’s performance isn’t tied to China’s growth, with a 48% jump in revenue and a 25% increase in earnings. Estimates call for earnings to increase by 26% in fiscal 2017 and 29% the next year. The company’s huge cash flow gives it the clout to make big acquisitions and invest in substantial joint ventures, supplementing organic growth in its core online marketplace business.
Technical Analysis
BABA went into a long correction after its headline-making IPO and subsequent rally in September 2014, falling from a high of 120 in November 2014 to 57 in September 2015. A rally in late 2015 ran into the broad market correction in January and February 2016, but BABA rallied from 59 in February to build a nice base from March through June, setting the table for a rally that began in late June, picked up speed in July and lifted off in August. The recent market weakness has pulled BABA back below 100, and that looks like a good buy point. Use a stop near 90.
BABA Weekly Chart
BABA 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.
