September 16, 2013
The major indexes continue to impress, pushing higher in fine fashion this month, but also causing a couple of developments that you should be aware of: Investor sentiment has gotten a bit frothy, which raises risk, and we’re seeing some of the highfliers take a breather, with rotation into a few beaten-down groups. None of this represents abnormal action, and while you should be prepared for some volatility (especially among stocks that have had huge runs of late), we think it’s best to remain bullish. This week’s Cabot Top Ten Trader has many names that are either completely new to us, or haven’t appeared here in many months. Our favorite is a fast-growing retailer that just broke out from a multi-month base.
Rotation is Evident
The major indexes continue to act very well; today’s pop higher is par for the course. That said, the hot growth stocks of the past few weeks are starting to take a breather; there hasn’t been much abnormal selling, but new buying is being focused on some other groups. Moreover, investor sentiment has, by our measures, become elevated, which raises risk. Altogether, we’re leaving our Market Monitor where it has been. Continue to keep your feet on the ground and try to do your buying on weakness, or in stocks that are recently emerging from multi-week pauses.
This week’s list has a bunch of newer names to Top Ten, or at least stocks that haven’t appeared in a couple of months or longer. Our favorite is Five Below (FIVE), a small but exciting growth company whose stock just popped out of a long consolidation.
|Swift Transportation (SWFT)||0.00|
|Qihoo 360 (QIHU)||0.00|
|Ocwen Financial (OCN)||0.00|
|Melco Crown (MPEL)||0.00|
|Cheniere Energy (LNG)||63.82|
|Gulfport Energy (GPOR)||0.00|
|Five Below (FIVE)||134.58|
|Concur Technologies (CNQR)||0.00|
|ACADIA Pharmaceuticals (ACAD)||47.84|
Swift Transportation (SWFT)
Why the Strength
Swift Transportation is a transportation services and truckload carrier that hauls freight, such as building materials, food, paper products and retail merchandise, throughout North America. The company operates a fleet of more than 16,300 tractors and 52,200 trailers through a network of some 35 terminals. The company has been a solid performer during the past year, with earnings growth averaging about 21% per quarter on revenue growth of roughly 4%. Swift has even surprised Wall Street analysts, who have underestimated the company’s earnings reports during the past three quarters. This outperformance has led the analyst community to boost their earnings estimates across the board for Swift, with the company slated to report earnings next month. More recently, Swift made headlines for its acquisition of independently held Central Refrigerated Transportation—the fifth largest refrigerated truckload carrier in the market. The acquisition adds roughly 2,065 tractors and 3,394 trailers to Swift’s fleet. The acquisition also makes Swift the second largest temperature-controlled truckload provider in the U.S., and brings with it several key customers, including Kraft Foods and Wal-Mart Stores. The acquisition is seen by some as controversial, as Swift CEO Jerry Moyes owns Central Refrigerated. However, since Moyes owns 3.5% of Swift, any overpayment by Swift would also hurt his interest in the company.
SWFT went public in December 2010, and after a quick run to 15, shares reversed course, tagging a low near 5 less than a year later. Shares quickly recovered, but turbulent market conditions kept SWFT from even approaching the 15 area until this year. Driven by resurgence in shipping and a recovering U.S. economy, SWFT vaulted higher in January, with shares once again challenging the 15 region. In May, SWFT eclipsed this former technical hurdle, bolstered by support at its 10-week and 25-week moving averages. The shares have since gone on to overtake the 20 region, despite concerns about the acquisition of Central Refrigerated. Shares are currently a bit overextended following their recent run; a period of consolidation could provide a nice entry point.
SWFT Weekly Chart
SWFT Daily Chart
Qihoo 360 (QIHU)
Why the Strength
Qihoo 360 looks like a follow-on opportunity to Baidu’s huge run in 2010 and 2011 when it began to dominate the Chinese search market. Qihoo has one of the most popular Internet browsers and home pages, which led it to enter the search business last year; the firm has already taken 17% of the market, and management believes it will get to 20% by year-end, and 30% in 2014! However, in terms of revenue, Qihoo has only just started to monetize that viewership, with less than 1% of the $7 billion-plus Chinese paid-search market—as that figure grows, it’s a good bet Qihoo’s bottom line could explode. Of course, the numbers in the table below are already exciting; Qihoo has always done a great business with its anti-virus and mobile security products, and it also has the leading mobile app store in China, which is leading to a surge in gaming. In the second quarter, gaming revenues were north of $60 million, up 181% from the prior year! Today, though, shares took a hit as Chinese e-commerce giant Tencent took a big stake in Sohu.com’s search business (which Qihoo was rumored to be interested in); it likely means more competition in general in the industry. But none of that affects the aforementioned projections by management, and we think earnings estimates ($2.11 per share for 2014, up 64% from this year) are very conservative. This is still a big idea.
QIHU formed a very long post-IPO base, which it broke free from in May of this year. The stock had a quick, sharp rise (about 30% in just three weeks), before the market’s May-June correction pulled the stock lower. But since then, buyers have overwhelmed the sellers; shares have risen 12 weeks in a row on huge volume. The stock did pull back late last week, and today’s dip brings it closer to its rising 25-day line (above 78). If you don’t own any, you could buy a little here and look to add if the stock finds its footing and resumes its advance.
QIHU Weekly Chart
QIHU Daily Chart
Ocwen Financial (OCN)
Why the Strength
More and more investors are starting to discover the powerful growth story behind Ocwen Financial, as well as its major peer, Nationstar Mortgage. Big banks continue to shed the servicing rights of underperforming mortgages because, first, it’s just not their main business and they have no expertise in getting customers current on their payments, and second, the restrictive regulatory environment is pushing them to do so. Ocwen’s book of mortgages is up near $500 billion at this point, and it believes it has another $400 billion (measured in unpaid principle) that it could acquire during the next 12 to 18 months! Ocwen gets paid a small fee based on that principle balance, which will translate directly to earnings and cash flow; moreover, Ocwen has the industry’s best history of getting customers current on their mortgage, which cuts costs. While earnings have been booming, the company’s cash flow is far larger; in the latest quarter, it churned out about $2 per share in cash flow (!), which allows it to acquire those mortgage servicing rights without issuing new shares. And it should also soon lead to a significant share buyback plan, possibly totaling more than 10% of the company! As the best-in-class servicer, this company has tremendous earnings power that’s just beginning to be understood by the market. We like it.
Investors first caught on to OCN’s potential in 2012, sending the stock soaring from 15 in April to 40 in October. But then began a long basing process—the stock sat out the early-year rally and went nowhere through late June of this year. Since then, however, OCN has been in a steady advance, including some solid accumulation this month. Shares could pull back a bit, but with the 50-day line near 50 and rising, we think OCN is buyable around here with a stop below that line.
OCN Weekly Chart
OCN Daily Chart
Melco Crown (MPEL)
Why the Strength
Melco Crown is a Hong Kong-based company that runs multiple casinos in Macau, a former Portuguese colony on the China coast that has the only legal gambling operations in China. Macau has attracted droves of Chinese tourists, plus a healthy contingent of high rollers, pushing gaming revenues in 2012 to a record $38 billion. (Just for comparison, the entire U.S. gaming industry, including Las Vegas, took in just $35.6 billion in 2011.) The Melco Crown story is fairly familiar to Cabot Top Ten Trader readers after its eight previous appearances here. But the story continues to develop, with the company’s co-owned operation in the Philippines scheduled to open in 2014. A new rail connection to the Guangzhou-Zhuhai Intercity Railway is bringing more visits from the mainland to Macau. Melco Crown’s growth slowed in 2012, but the company Q2 earnings report featured a vigorous 38% increase in revenues and a 119% jump in earnings. The company’s huge capital investments in its City of Dreams hotel/casino complex is paying off. The Macau gambling story has legs, and Melco Crown is one of the leaders.
MPEL has come a long way from its big 2011 rally that lifted it from 3 to 16. But it’s the rally that began at 9 in the middle of 2012 that has drawn attention. MPEL has only had one correction that lasted three weeks during its rush from 9 to over 30 in recent trading. The stock had above-average volume gains on September 3, 9 and 10 as it ripped from 28 to over 31 in less than two weeks. The stock picked up an upgrade from Citi on September 11, which accounted for part of that leap. MPEL looks buyable on any weakness. A little patience might get you in at 29, which would be ideal. A stop at the 50-day moving average, now a hair above 26, makes sense.
MPEL Weekly Chart
MPEL Daily Chart
Cheniere Energy (LNG)
Why the Strength
Houston-based Cheniere Energy is a good example of a company that has had to make enormous capital expenses to adapt to a major change in the energy landscape. Cheniere’s Sabine Pass liquefied natural gas (LNG) plant in Louisiana was developed to facilitate LNG imports into the U.S. But when the horizontal drilling/fracking revolution caused U.S. production of natural gas to skyrocket, Cheniere had to convert its facility on the Louisiana Gulf coast to export LNG. The Sabine Pass LNG terminal is 60% owned by Cheniere Energy and the Creole Trail Pipeline that supplies it is 100% owned by Cheniere. But what investors are looking forward to is the expected approval of the company’s Corpus Christie facility, which is 100% owned by Cheniere. The U.S. Department of Energy has recently approved export licenses for four other companies, and Corpus Christie is now fifth on the order of precedence list for consideration. The string of approvals from the DOE is considered a positive sign that Corpus Christie will receive its license, with probable operations beginning in 2019. Revenue growth has been flat since the 2008–2009 surge when Sabine Pass began operating, but investors are being very patient, bidding Cheniere Energy up every time a piece of news increases the probability that Corpus Christie will become a reality.
LNG made a big move beginning in November 2012 at 14 and peaking at 32 on May 20 of this year. LNG consolidated for three months after that rally, eventually tightening up between 28 and 29 in late August. The stock broke out on good volume on September 5 and got more high-volume action on September 9, 11 and 12. The correction of the last couple of days has created a nice buying opportunity in LNG, though it’s speculative given the length of the approval/construction horizon for Corpus Christie. You can buy right here, or on a dip below 32. Use a stop at 27.
LNG Weekly Chart
LNG Daily Chart
Gulfport Energy (GPOR)
Why the Strength
Oklahoma-based Gulfport Energy, along with much of the U.S. energy industry, is making its name by taking natural gas, oil and liquids out of previously unproductive shale formations. While Gulfport has properties along the Gulf of Mexico, the Permian Basin of Texas and the Niobrara Shale of Colorado, the formation that’s attracting the attention of investors is the Utica Shale of eastern Ohio. The company’s 136,000 net acres in the Utica have proved reserves of about 6.6 million barrels of oil equivalent (MMBoe) and probable reserves of 18.2 MMBoe. The other big asset is the company’s estimated 765 MMBoe in Canadian oil sands, but that oil source is far behind U.S. shales in actually getting product to markets. The company’s net production in 2012 was a little over 7,000 barrels of oil equivalent per day (BOEPD); that figure is estimated to top 15,000 BOEPD in 2013. The bad headlines for Gulfport came last week when the company lowered its production guidance for the third quarter due to a delay in pipeline construction by a third party. It’s worth noting that all of the capital expenses of drilling and preparing Gulfport’s wells for delivery have already been booked, so this delay isn’t a big deal, amounting to about a 15% lowering of Q3 estimates. Investors took a little skin off the stock after the news (short interest spiked briefly), but have since calmed down. Gulfport has a bright future.
GPOR dithered in 2011 and dropped steeply in 2012, falling from 38 in February to 16 in June. But the stock has been rallying strongly since, and is now trading well over 60. Even last week’s dip after the downward revision of Q3 estimates took only a minor bite out of the stock, and it has made up almost all of that one-day pullback. With the stock around 63 and the rising 25-day moving average now over 58, GPOR is buyable on any weakness. Use a stop at the 50-day (now at 55) for safety.
GPOR Weekly Chart
GPOR Daily Chart
Five Below (FIVE)
Why the Strength
Five Below is a new type of dollar store that’s carved out its own highly successful niche. The company caters to teens and pre-teens, selling goods priced from $1 to $5; these products aren’t the staples like soup or condiments that you might find at Dollar Tree, but instead things like footballs and basketballs, iPhone cases and keyboards, markers and crayons, backyard chairs, party gifts, candy and even some apparel. The big idea here is the potential for growth—at the end of the second quarter, the company had just 276 stores, but it’s opening 60 this year, and management is on record saying it’s aiming to grow its store base at 20%-plus rates for many years. Eventually, Five Below believes it can have at least 2,000 stores! Such rapid expansion is possible because each store is relatively small (about 7,500 square feet on average) and pays back 150% of the initial investment within one year. The recent quarterly report was outstanding, with same-store sales growth of 6.6% (the fastest in a couple of years) contributing to a big beat on sales and earnings. Five Below has a unique combination of being a small company with huge growth potential, yet also having a proven concept that’s working in various areas of the country. Of course, the valuation (65 times this year’s earnings!) is rich, but all the pieces are in place for years of strong growth. We like it.
Other than the fact that FIVE is a bit thinly traded (even after the recent volume ramp, the stock trades about $30 million per day), it has a picture-perfect chart. It came public in July 2012 and had a good run for a few weeks, but then entered what was a big base-on-base structure (two consolidations, one “sitting on top” of the other); the recent base began in March and, after a few ups and downs, FIVE broke out powerfully last week on earnings. Volume on the breakout was 10 times average! We do think FIVE is buyable here, but you might want to start with a small position given the stock’s choppy history and low volume.
FIVE Weekly Chart
FIVE Daily Chart
Why the Strength
Dril-Quip is a mid-sized energy equipment maker that’s leveraged to the growth of offshore drilling. The company’s offerings include just about everything a deepsea explorer would need, including subsea and surface wellheads and trees, wellhead connectors, diverters and completion equipment. And business is good not just because of triple-digit oil prices (which aren’t anything new), but because the number of deepwater rigs continues to increase (from 200 in 2008 to 300 last year to an estimated 400 within five years), and those rigs continue to drill at deeper depths (6,000 to 7,500 to 8,500 feet during the same time); Dril-Quip’s products are especially suited to harsh weather and ultra-deepwater drilling, so it’s not a surprise to see the company’s sales and earnings re-accelerate (see table below). Even better, the company’s backlog is surging—it ended last year at $881 million, but a torrent of orders this year has driven that up to $1.13 billion, up 28% in six months! Analysts see earnings of $4 this year and $5.20 next year. It’s not a blue-chip stock, but we like what Dril-Quip has to offer.
DRQ is a bit thinly traded (just 350,000 shares per day, or $40 million), but shares have been in a firm uptrend since the start of the year. And this upmove came on the heels of a nearly two-year basing process, so the stock could easily have further to run. The stock popped after a great earnings report in early August, paused for a couple of weeks, and has surged higher this month. Volume patterns have been bullish, but shares are stretched to the upside. We advise buying dips, possibly toward the quickly-rising 25-day line.
DRQ Weekly Chart
DRQ Daily Chart
Concur Technologies (CNQR)
Why the Strength
Sending employees where they need to go and paying their travel expenses can be a major headache for corporations. The need to control expenses (and the hours needed to report, verify and reimburse them) is one big reason the Concur Technologies has been growing revenues steadily. Concur’s software programs streamline the expense-reporting process, letting companies manage travel procurement, automate expense reporting, manage itineraries, pay invoices, analyze expenses and verify corporate travel rates. These functions are all handled online, even via mobile devices and in the Cloud. The company’s revenue growth spiked in 2008 as companies sought to get a handle on expenses. Today, Concur has over 9,000 corporate clients, including many government agencies. Its prospects are improved by the recent acquisition of two of the three largest middle office software providers, increasing its dominance of the travel management industry. These acquisitions also give Concur visibility into about half of all the bookings in the global corporate travel market, and that data is expected to prove very profitable when offered to travel providers for marketing purposes. Concur has had positive earnings in just three of the last 10 quarters, but the capital outlays that led to those losses are expected to pay off big in the future.
CNQR tends to soar and consolidate for a while, with rallies in late-April, July and the last couple of weeks. The big spike from 90 to 103 on August 1 came after a strong quarterly report on July 31. After that report, the stock drifted lower for four weeks with support materializing at 95. Then September brought a steady rally that led to new all-time highs last week. CNQR typically rests a bit after a surge like the one it’s experienced in September. If you like the story, you can wait for a pullback of a couple of points or take a small position and look to average up. A dip below that August gap at 95 would be bearish.
CNQR Weekly Chart
CNQR Daily Chart
ACADIA Pharmaceuticals (ACAD)
Why the Strength
ACADIA Pharmaceuticals specializes in researching and developing drugs for the treatment of central nervous system disorders. The company has two clinical-stage drug candidates in development for the treatment of chronic pain and glaucoma, but the big driver for most investors is ACADIA’s pimavanserin treatment. Pimavanserin is currently in clinical trials for the treatment of the psychosis that accompanies Parkinson’s disease. Data from the current Phase III trial for pimavanserin has provided quite a buzz, with early results showing that the drug reduces Parkinson’s psychotic episodes without impacting patient motor function. But ACADIA is looking to apply pimavansern outside of the Parkinson’s realm, with the company announcing that pimavansern could be used to treat Alzheimer’s and schizophrenia; it’s starting a Phase II study for Alzheimer’s treatment later this year. Given the drug’s potential as a revolutionary treatment for neurological disorders, analysts are conservatively estimating market valuation for pimavanserin at between $300 million and $400 million annually. Actual valuation could be much higher, potentially topping $1 billion. While pimavanserin will not likely come to market until 2015, with the FDA set to potentially approve the drug in late 2014, any positive developments and trial data should bode well for ACADIA going forward.
Following years of stagnation, ACAD shares came to life in November 2012. Throughout this rally, ACAD has enjoyed solid support at its rising 10-week moving average. During the past several months, ACAD has consolidated into this trendline, with resistance in the 20 region limiting additional gains. Recently, however, ACAD appears to have put this technical hurdle in the past. The stock is a bit overbought following last week’s rally, however, so we recommend buying on dips of a point or two.
ACAD Weekly Chart
ACAD 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 September 16, 2013|
|8/26/13||Green Mountain Coffee||GMCR||83-88||85|
|3/18/13||Lion’s Gate Entertainment||LGF||21-22.5||37|
|6/10/13||Pioneer Natural Resources||PXD||139-144||185|
|WAIT FOR BUY RANGE|
|9/9/13||Nu Skin Technology||NUS||86-90||94|
|8/26/13||Cabot Oil & Gas||COG||37.5-39||38|
|DROPPED: Did not fall into suggested buy range within two weeks of recommendation.|