More Work To Do
Current Market Outlook
The major indexes have done a decent job of holding above the August 24 lows, and a few stocks and sectors have pushed to new high ground. In the short term, we still think further upside testing is possible, especially if the Federal Reserve issues some reassuring words later this week. However, it’s going to take more than just another couple of good days to turn the market’s trends back up—right now, all of the major indexes (and the vast majority of stocks) are still buried beneath resistance and are trading below key moving averages. Thus, we’re sticking with our defensive stance—the onus is clearly on the bulls to re-take control.
This week’s list has another batch of potential leaders; there’s not many defensive stocks making the list, which is encouraging. Our Top Pick is Royal Caribbean (RCL), a big-cap leisure stock that has a strong chart and big earnings estimates.
| Stock Name | Price | ||
|---|---|---|---|
| WellCare Health Plans, Inc. (WCG) | 271.83 | ||
| Virgin Airlines (VA) | 0.00 | ||
| Tempur Sealy (TPX) | 85.53 | ||
| RH Inc. (RH) | 252.93 | ||
| Royal Caribbean Cruises (RCL) | 0.00 | ||
| Neurocrine Biosciences (NBIX) | 123.40 | ||
| Martin Marietta Materials (MLM) | 261.52 | ||
| Clovis Oncology (CLVS) | 0.00 | ||
| Amazon.com (AMZN) | 2.00 | ||
| Abiomed (ABMD) | 0.00 |
WellCare Health Plans, Inc. (WCG)
Why the Strength
WellCare Health Plans is thriving by addressing the growing number of subscribers to government-sponsored managed-care services that are funded through Medicaid, Medicare Advantage and Medicare Prescription Drugs Plans. The company serves nearly four million members, and has built itself into a Fortune 500 company with over 6,100 associates. The real story of WellCare can be seen in the growth of its annual revenue. After a 21% contraction in 2010, revenue grew 12% in 2011, 21% in 2012, 29% in 2013 and 36% in 2014. The company operates its Medicaid programs for low-income members in nine states, its Medicare coordinated care programs in 18 states and its prescription plan in 49 states and the District of Columbia. Projections for 2015 earnings forecast 67% growth and 37% growth in 2016. The continuing increase in participation in government-sponsored health plans looks to be a steady driver of growth for WellCare. The company has announced that it expects to be on the acquisition end of the wave of consolidation that’s hitting the health-care industry. And if it can find the right business to buy, it will only increase the company’s attractiveness to investors. The company announced last week that it had received a notice of intent to renew its contract with the state of Georgia for its Medicaid business, which pleased investors.
Technical Analysis
WCG has been in a general uptrend since 2009, but the stock has always been an up-and-down proposition. The stock enjoyed a run from 56 in October 2014 to 95 in March 2015, then put in a sloppy cup-shaped correction from March through August of this year. The stock had just regained its March high when the August free-fall pulled it back to its 200-day moving average. But WCG bounced back quickly, helped by the contract renewal news. You can buy WCG anywhere under 96, with a stop around 88.
WCG Weekly Chart
WCG Daily Chart
Virgin Airlines (VA)
Why the Strength
Virgin America is another airline that’s benefiting from a still-resilient travel market as well as the plunge in fuel prices. The company prides itself on being able to offer premium travel accommodations (first class, top destinations, full in-flight entertainment, loyalty programs, etc.) combined with a low-cost carrier structure (point-to-point network, a young, fuel-efficient fleet, etc.); indeed, Virgin has lower costs per mile flown than other low-cost firms like JetBlue, Hawaiian Air and Alaska Air. Moreover, the firm is working to expand its ancillary revenue (bag fees, etc.), which is up to 10% of total revenue and has been growing 23% annually since 2011. All that said, this isn’t a great growth story; capacity growth has been next to nothing recently (up 4.0% in the August from a year ago) and much of this year’s profit boost came from efficiencies and lower fuel prices. But with earnings elevated and likely to remain above $4 in 2016, there’s good reason to think Virgin America (and airline stocks in general) could have a leg up once the market gets back on its feet.
Technical Analysis
Many IPOs during the past few years have traced out a pattern similar to VA. First there’s the actual IPO and a quick run-up over one to three months (for VA, from 30 to 45 in seven weeks), then a crash (VA fell to 27 by May and bottomed out for a couple of months) and then, if all goes well, a sustained uptrend. That’s what VA is attempting to start today—shares surged on earnings in late-July, held the 50-day line during the market’s mini-crash and have since crawled back toward its prior high. You can nibble here with a stop in the low 30s, or just keep an eye on it for when the overall market improves.
VA Weekly Chart
VA Daily Chart
Tempur Sealy (TPX)
Why the Strength
Tempur Sealy is the result of a 2013 merger between mattress giants Tempur-Pedic and Sealy, which came at the perfect time—just as discretionary spending on things like new mattresses began to surge. Tempur Sealy’s sales have doubled in the last two years, and revenues have now increased for 10 consecutive quarters. The sales improvements are finally starting to spill over to the company’s bottom line: Earnings per share increased 36% last quarter, topping consensus expectations by 20%. For the year, Tempur Sealy’s EPS is expected to improve 20% from 2014, which would mark the second straight years of earnings growth since the merger—a nice turnaround for a company that saw two straight years of profit declines pre-merger. To build on that growth, the company hired a new CEO, former Dollar Thrifty Automotive Group chairman Scott Thompson, earlier this month, in a move that was a response to pressure from activist investor H Partners Management. Between the merger, improving earnings, and management change, Tempur Sealy has a glossy, fresh feel these days. Sort of like a new mattress.
Technical Analysis
TPX has been climbing steadily since February, stair-stepping its way from a low of 49 that month to 78 in mid-August. The market downturn took the stock down to 70 (on a closing basis), but the stock already recovered all those losses, bouncing back to 78 last week. So far it’s met some solid resistance there, but TPX has been breaking through temporary resistance all year. The dip down to 76 could be a nice entry point if you’re game. Set your stop-losses in the upper-60s.
TPX Weekly Chart
TPX Daily Chart
RH Inc. (RH)
Why the Strength
One of these days, Restoration Hardware’s stock is likely to get going, and its pop on earnings last week raises the odds that it will (finally) happen once the market pulls out of its funk. The company has a lot going for it, from its unique real estate strategy (going with huge 50,000-foot show rooms that can display most of the firm’s offerings, compared to mall-based locations that show just a fraction of it) and sourcing (it has deals with many world famous designers and is a huge purchaser of high-quality materials), as well as its current move into a couple of adjacent markets; it’s launching Modern and Teen lines later this year, each of which will have its own website and meaningful real estate presences. The draw of the firm’s products and a couple of new showrooms has kept growth humming—sales and earnings topped estimates last week, and the outlook was solid as well—and with more huge showrooms set to open (three more by year-end, with more in 2016), the new lines of business and a positive housing market, analysts see 20% to 25% earnings growth for the next few years. This remains a unique retail story that could drive the stock far over time.
Technical Analysis
RH has formed a series of tighter and tighter bases during the past year, but every time it’s attempted to hit new highs, it’s quickly backed off and etched a new base. The latest breakout took the stock to 106 in mid-July before the ensuing pullback, which found support around 90 (on a closing basis) during the past three weeks. RH then popped in nicely on earnings last week. You could nibble here with a stop near 90, though we prefer to keep the stock on your watch list and see if it finishes building a launching pad in the weeks ahead.
RH Weekly Chart
RH Daily Chart
Royal Caribbean Cruises (RCL)
Why the Strength
Royal Caribbean is riding a couple of beneficial trends, and investors are taking notice. The first trend is very cheap energy prices that are reducing fuel costs and pushing after-tax profit margins higher; the 9.0% margin in Q2 was the highest in years for a non-third quarter (fall always boasts bigger numbers than the other three quarters). The second trend is the increasing popularity of cruising among Chinese vacationers. Investors are also looking forward to the opening up of Cuban destinations as a possible catalyst for greater passenger traffic. And the third trend is the increasing popularity of the super-premium cruise segment, a group of cruisers that Royal Caribbean is targeting with its Royal Suite Class accommodations and services. The company is expanding its terminal facilities in Miami at a cost of $100 million, a move that will facilitate cruising in the Caribbean and the anticipated service to Cuba. The company also just announced a 25% increase in its dividend, bringing it up to a 1.6% annual yield. Throw in some beefy earnings estimates (+35% this year and +28% next) and there’s a lot to like.
Technical Analysis
RCL began its current rally in the middle of 2013, and has soared from 30 to the low 90s since then. There have been a few stumbles along the way, but corrections have typically been followed by renewed buying within a few weeks. RCL reached 86 in January 2015, then was hit by selling that pulled it back to 66 on May 6. But since then, RCL has been on a roll, gapping up to new all-time highs on July 31 and rebounding from the August meltdown to reach more new highs last week. With a P/E of 26, the stock isn’t even especially expensive. If you like the story, try to get in on weakness and use a stop at 86.
RCL Weekly Chart
RCL Daily Chart
Neurocrine Biosciences (NBIX)
Why the Strength
Neurocrine is a clinical-stage biotech with some promising drugs in the pipeline. Two of them have already advanced to late-stage trials: elagolix, a gonadotropin-releasing hormone antagonist for women’s health that is partnered with AbbVie, and NBI-98854 (a.k.a. valbenazine), a compound intended to treat patients with severe tardive dyskinesia (involuntary movements of the extremities) with an underlying diagnosis of mood disorder or schizophrenia. The latter just completed a key stage of its pivotal Phase III trial—initial subject randomization of 240 patients with the disease—last month. If all goes well, Neurocrine will file a new drug application in for tardive dyskinesia sometime next year. With no current treatments on the market, if approved, valbenazine has a chance to be the lone treatment for a disease that affects 200,000 people in the U.S. alone! Meanwhile, Neurocrine’s elagolix drug candidate is seeing encouraging results in its Phase III trials, and expects to release more data in the next six to nine months. At a time when biotechs with potentially groundbreaking treatments remain resilient, Neurocrine Biosciences gets extra credit for having two treatments seemingly so close to commercial approval.
Technical Analysis
2015 has been a good year for NBIX. The stock opened the year at 22, exactly doubled to 44 by March before a consolidation phase over the ensuing three months. In June and July came another big move up to 53 before the August market correction pulled shares back to 41. Now it’s back on the uptick, breaking through mild resistance at 53 to close out last week at 54. Like most biotechs, NBIX is a speculative stock, but one that might be worth adding to your watch list or buying on the dips.
NBIX Weekly Chart
NBIX Daily Chart
Martin Marietta Materials (MLM)
Why the Strength
The story that has already propelled Martin Marietta Materials to three appearances in Cabot Top Ten Trader this year is a simple one: Expanding economies generate infrastructure and building projects that use huge amounts of aggregates like crushed stone and sand in concrete. North Carolina-based Martin Marietta Materials is one of the largest aggregate producers in the U.S. and gets about 85% of its $11.6 billion in annual revenue from aggregate sales. With the U.S. economy growing steadily, the company projects 2015 earnings to increase by 32% (which would have been higher had unseasonably rainy weather in the second quarter not slowed construction in Texas) and to jump 54% in 2016. This story is insulated from turmoil in Europe and China because 98% of the company’s sales occur in the U.S. Martin Marietta Materials is also attractive because the backlog of orders from projects delayed by the Q2 rains is expected to keep prices high. The company sold its California cement operations in early August for $420 million and pays a quarterly dividend that yields just under 1% annually.
Technical Analysis
MLM surged higher in February and May, then consolidated sideways for months until the next piece of good news. The company’s Q2 earnings report came out on the day the market began its August free-fall, but bounced back quickly. MLM was trading as high as 177 on August 18, and is now back near 174. We like the solidity of the story and the stock’s long-term uptrend. Volatility has been high, but a buy right here should do well if the market continues to hold support. A stop at 160 looks prudent.
MLM Weekly Chart
MLM Daily Chart
Clovis Oncology (CLVS)
Why the Strength
Data that Clovis presented at last week’s World Conference on Lung Cancer in Denver apparently was a big hit. The data pertained to the company’s TIGER-X trials, which measured the effectiveness of its lung cancer drug candidate rociletinib. The drug already had momentum going into last week’s conference, having been granted Breakthrough Therapy status by the FDA last year. It could be on the market as early as next quarter in the U.S., and next year in Europe. Given Wall Street’s response to the Denver presentation, chances are rociletinib will hit the shelves sooner rather than later. When it does, the drug will be a total game changer for Clovis. Goldman Sachs estimated that the drug could fetch between $1.5 billion and $2 billion in peak sales—a windfall for a company that has done a mere $14 million in sales in its entire history. Another Clovis drug candidate, rucaparib, a treatment for ovarian cancer, also gained Breakthrough Therapy designation by the FDA recently. Put the two together, and you can see why investors are snatching up CLVS as a speculative play.
Technical Analysis
Up and down for much of the year, CLVS took off last week as news of its presentation trickled out, soaring from 84 to 104. Prior to that big push, the stock had been meeting resistance at 93. CLVS has been all over the place lately, dipping as low as 67 on several occasions in the last few months. But given the recent momentum, it’s at least worth adding to your watch list. If you do decide to buy, make it a small position with a hard stop in the mid-80s.
CLVS Weekly Chart
CLVS Daily Chart
Amazon.com (AMZN)
Why the Strength
Amazon is known to every investor, but the stock is strong today because investors are betting that a couple of catalysts will propel earnings to the moon in the quarters ahead. The first catalyst: After years of heavy spending that kept earnings in check (EPS has been 28 cents, 59 cents and a loss of 52 cents in the past three years!), the firm’s management has leveled off its spending and, in the conference call, even talked about prioritizing profit margins. Second, and probably more important, is the firm’s cloud computing operation, which everyone knew was growing fast. But now Amazon is disclosing that operation’s figures and they’re blowing away expectations—in the second quarter, Amazon Web Services (as it’s called) saw revenues grow a whopping 81% to $1.8 billion and posted an operating margin of 21%, up from 17% a year ago, with expectations of more rapid growth and profitability going forward. Add to that the company’s healthy retail operations—Amazon Prime remains a huge draw, even after the recent price hike to $99 per year—and analysts have been tripping over themselves to raise their outlooks, with earnings anticipated to leap to $5 per share next year. Even that is likely conservative, though, given the magnitude of Amazon’s earnings beats during the past couple of quarters.
Technical Analysis
AMZN is probably the top-acting big-cap growth stock in the market right now; we think it has the juice to do very well once the market turns back up. Shares did nothing for all of 2014, but the stock has changed character this year, with huge rallies before and after earnings, followed by relatively tight, sideways consolidations (a sign of accumulation). AMZN is handling itself very well during the market correction, holding its 50-day line and, last week, seeing its RP line move out to new highs. We’re not opposed to nibbling here with a tight stop.
AMZN Weekly Chart
AMZN Daily Chart
Abiomed (ABMD)
Why the Strength
Massachusetts-based Abiomed used to be in the artificial heart business, manufacturing the AbioCor implantable heart. But these days, the company concentrates on much smaller heart-support devices that can give an injured or weak heart time to repair itself. The company’s premier product line is the Impella series of pumps that can be placed in the heart via catheter for a matter of hours or weeks and removed when no longer needed. The target patients for these devices are those with heart failure, which is a large population. New models under development aim at much longer periods of implantation and at getting patients discharged from hospitals. Abiomed has enjoyed four consecutive quarters with triple-digit percentage gains in earnings, and Q2 revenue growth accelerated to 50%. The company also has a robust pipeline of new models and projects that the addressable market over the next five years can be as high as $1.8 billion in revenue. Estimates are for earnings to increase 19% in fiscal 2016 (which ends in March) and 47% in 2017. With a large target population, a strong history of both incremental and revolutionary product improvements and strong barriers to entry for potential competitors, Abiomed looks like a long-term winner.
Technical Analysis
ABMD was on life support for much of the previous decade, but started to get a little traction 2013–2014 and really caught fire in October 2014 when it finally broke out past its decade-long resistance at 30. Another surge in January 2015 blew the stock to 60 in March and 75 on March. After a mild correction in April and May, ABMD blasted off again last month, tagging 110 before settling down into a consolidation just below 100. ABMD looks attractive anywhere under 95 if you feel like putting a little money to work. Use a stop at 86.
ABMD Weekly Chart
ABMD 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.
