Leaders Continue to Act Well
Current Market Outlook
You shouldn’t read too much into last week’s action; volume was super-light as most investors were on the beach. We’ll get a clearer read on things this week and next as institutional investors return to their trading desks. Still, taking a step back, the market’s rally from early August is intact, and we’ve seen a continued, gradual improvement among leading stocks, with a few popping higher each week and, importantly, with many moving higher after their initial breakouts. Right now, we’ll keep our Market Monitor where it stands—we continue to lean bullish, but we’re not yet willing to pound the table—but we like the persistently positive action of the past month.
This week’s list features another strong group of stocks that have seen heavy-volume buying of late, a sign big investors are getting in. Our Top Pick is Avago Technologies (AVGO), a chipmaker with a couple of major catalysts that should propel earnings much higher in the quarters ahead.
| Stock Name | Price | ||
|---|---|---|---|
| Twitter (TWTR) | 40.37 | ||
| Skyworks Solutions (SWKS) | 0.00 | ||
| Seagate Technology (STX) | 0.00 | ||
| Petrobras (PBR) | 14.78 | ||
| Madison Square Garden (MSG) | 298.38 | ||
| Macquarie Infrastructure (MIC) | 0.00 | ||
| Mobileye N.V. (MBLY) | 0.00 | ||
| The Hain Celestial Group, Inc. (HAIN) | 0.00 | ||
| Broadcom Limited (AVGO) | 266.26 | ||
| Aruba Networks (ARUN) | 0.00 |
Twitter (TWTR)
Why the Strength
Making its Top Ten debut in this issue, Twitter is a truly revolutionary company—it’s changing the way hundreds of millions of people (as well as hundreds of companies) communicate. Make fun of its 140 character limit and the at-times useless commentary all you want, but the company has a super-loyal customer base (I’m on it all day long at work), and similar to Facebook a year ago, it’s just starting to monetize all those eyeballs. In the second quarter, average monthly users grew 24% to 271 million, alleviating fears of slowing user growth (though the World Cup helped), timeline views grew 15% (to 173 billion!), and, most important, revenue per timeline view doubled—i.e., they’re offering more and better targeted ads and collecting a ton of money in the process. Revenue growth has been consistently in the triple digits (and growth has been accelerating slightly of late), and we like the fact that earnings have been in the black three quarters in a row and should grow from here. (Cash flow has also been huge in recent quarters.) There are worries, of course—user growth remains something the bears point to—but it looks like the bigger story is the monetization of the already-large user base. From here, it’s just a matter of expanding its reach and inking more advertising deals. Yes, it’s expensive, but there aren’t many firms with this much potential.
Technical Analysis
TWTR came public in November and zoomed as high as 75 within a couple of months, buoyed by the straight-up bull market late last year. But then came the crash, with the stock imploding 60% in just under five months! The trend has been up since that early-May bottom, though the character of the stock really changed following the second-quarter report—TWTR gapped up 27% on nearly four times average volume that day, and has been under accumulation since. There’s still old resistance to chew through, and the stock is extended to the upside, so if you want in, try to buy on dips and use a looser stop near 43.
TWTR Weekly Chart
TWTR Daily Chart
Skyworks Solutions (SWKS)
Why the Strength
We last checked in with “Internet of Things” guru and Wi-Fi integrated circuits specialist SkyWorks Solutions back in May. At the time, the company had just lifted its Q3 earnings estimates, prompting a stir from investors. Since then, Skyworks topped its own Q3 earnings guidance and boosted its Q4 expectations well above Wall Street’s expectations. The company is benefiting on multiple levels. First, the race to improve wireless data speeds has created significant demand for the latest and greatest of SkyWorks high-performance analog semiconductor chips. Second, the increasing number of Internet-connected devices is providing additional leverage for SkyWorks, whose market-leading position makes it a go-to supplier for “Internet of Things” manufacturers looking for solutions in the wearable, automotive and medical device markets. Also along this line, SkyWorks recently announced a supply deal with an unnamed tier-1 automotive supplier to provide wireless control systems that should spread to several major car manufacturers. Lastly, in addition to its deals with Samsung, Nokia, LG and Cisco Systems, SkyWorks is a key supplier for Apple’s iPhone. The company is already supplying chips for the iPhone 5 line, and industry expectations have SkyWorks producing chips for the upcoming iPhone 6 as well.
Technical Analysis
SWKS has been on fire in 2014. The stock has entered a stairstep pattern during the past several months, with SWKS transitioning from support near 40 in May to a base above 45 in June. Following the company’s Q3 report, SWKS jumped 14% to eclipse the 50 level in mid-July. Follow-through buying has pushed the stock past the 55 level and into highs not seen since December 2000. With strong price action and a red-hot industry, we like the stock with dips looking buyable.
SWKS Weekly Chart
SWKS Daily Chart
Seagate Technology (STX)
Why the Strength
Hard disk drive and electronic data storage firm Seagate Technology continues to be one of the pockets of strength in the technology market. Back in mid-July, the company was dinged for reporting in-line quarterly earnings results, but the accompanying conference call revealed that management was projecting revenue well above the consensus estimates. Going forward, Seagate is expecting elevated demand for its high-capacity, power-efficient storage devices, even as it expands its product capabilities into cloud systems and flash technology. In more recent news, the U.S. International Trade Commission (ITC) ruled in late July that the company violated a Realtek integrated circuit patent, but because Realtek doesn’t have a U.S. business, it couldn’t enforce the patent using the ITC. The ruling was a relief for Seagate investors, as the ITC has the power to keep the company’s products off the shelves in the U.S. Lastly, Seagate announced in May that it is acquiring LSI’s Accelerated Solutions and Flash Components Divisions from Avago Technologies. The acquisitions should deliver solid growth for Seagate’s flash-storage products. In fact, the company is expected to see earnings growth in excess of 10% through fiscal 2016.
Technical Analysis
STX has surged more than 200% since the start of 2012, with STX’s trailing 50-week moving average providing a key backstop for any market corrections. Despite the overall uptrend, 2014 has been rough for STX. The stock quickly jumped above 60 before retreating to bounce along support at 50 for much of the year. STX found its footing in May, and has since bounced back to challenge former resistance in the 60 region. Driven by strength in the technology market, STX has established a foothold north of 60, and is poised to once again resume its former uptrend. STX is buyable here, or on dips of a point or two.
STX Weekly Chart
STX Daily Chart
Petrobras (PBR)
Why the Strength
Petrobras (formally known as Petroleo Brasileiro) is an integrated Brazilian explorer, producer and distributor of oil and natural gas. The company, formerly the Brazilian state oil company and still state-controlled, is responsible for 96% of Brazil’s petroleum production through its 293 production fields (which produce 2.4 million barrels per day of oil equivalents), 12 refineries, 7,600 service stations and 9,200 kilometers of natural gas pipeline. While investors have been leery about investing in the company in the past because of Brazil’s ongoing problems with inflation and political conflict, nobody doubts that Petrobras controls impressive amounts of oil and natural gas, much of it in deep water and ultra deep water offshore fields. All told, Petrobras holds an estimated 50 billion barrels of reserves from some of the most significant finds in recent years. The current wave of interest in the company results from big new offshore drilling successes—the Moita Bonita ultra-deepwater wells in the Sergipe-Alagoas Basin just reported new drilling successes—and the possibility that current president Dilma Rousseff might lose to Marina Silva, a Socialist Party candidate and environmental activist. Ironically, many analysts feel that Silva’s policies would strengthen Brazil’s economy and bolster Petrobras’s bottom line. The company’s 12% revenue growth in Q1 was constructive, but it’s investors’ optimism for Petrobras’s future that’s moving its stock.
Technical Analysis
After peaking at 78 in May 2008, then free-falling to 15 in November 2008, PBR returned to 53 in November 2009, only to begin a multi-year correction. The stock finally found bottom near 10 in March of this year and has been in a steady rebound since then. Despite doubling off the bottom, PBR still trades at an attractive 14 P/E ratio, and volume has been rising during this rally. We think PBR is a good long-term buy on a pullback of a point, which would lower its distance from its 25-day average, now at 17. A pullback to the 25-day would be bearish.
PBR Weekly Chart
PBR Daily Chart
Madison Square Garden (MSG)
www.themadisonsquaregardencompany.com
Why the Strength
Spun off from AMC Networks in 2010, Madison Square Garden runs the gamut of entertainment in New York City. Known for its eponymous arena, the company also owns or operates additional venues, including Radio City Music Hall, the Chicago Theatre, and the Beacon Theater. The company also owns the New York Knicks and the New York Rangers, which operate as part of the company’s MSG Sports segment. Earnings have been solid for Madison Square Garden, driven by the recent appearance of the New York Rangers in the NHL’s Stanley Cup Finals. The company has been in the spotlight most recently due to its quest to sell off its other NBA team, the Los Angeles Clippers. Amid a bidding war that included investor group Ressler-Karsh and a group backed by David Geffen, Madison Square Garden finally unloaded the team to former Microsoft Chief Executive Steve Baller for a hefty sum of $2 billion, nearly four times the value that some Wall Street analysts had placed on the team. Earnings have been lumpy in recent quarters, but the bottom line is expected to ramp from here, expanding 25% in 2015 and 36% in 2016.
Technical Analysis
Technically speaking, MSG has been asleep for the better part of the past year and a half. The stock spent nearly all of 2013 bouncing around the 60 region, rarely straying more than a couple of points from this baseline. The stock began to sink heading into 2014, and the 60 region transformed from support into firm resistance, with MSG eventually relenting and pulling back to test support near 50 just prior to the Clippers’ sale. The Ballmer pay-day sparked a surge for MSG, and the stock quickly rose past the 60 level and has kept going. We advise buying dips of a couple of points.
MSG Weekly Chart
MSG Daily Chart
Macquarie Infrastructure (MIC)
Why the Strength
Macquarie describes itself as owning, operating and investing in “a diversified group of infrastructure businesses in the United States.” The four areas of Macquaries’ business interests are 1) airport services—fixed-base operations (FBOs) like terminal operation, refueling, de-icing and aircraft parking and hangering at 63 U.S. airports, 2) bulk liquid terminals that handle petroleum products, chemicals and vegetable and animal oils; the company leases more than 45 million barrels of storage capacity, 3) gas processing and distribution via HAWAI’IGAS, a producer and distributor of synthetic natural gas and a distributor of liquefied petroleum gas on the six major islands of Hawaii and, 4) contracted power and energy—the company has invested in five solar and two wind power generating facilities that have long-term contracts to supply electric power. This diversified operation is producing exceptional earnings growth, with 2014 estimates up 115% and 2015 estimates up 92%. The company also pays a handsome forward annual dividend yield of 5.4%, which is plenty for many investors who seek steady income. Macquaries’ executives have shown a sharp eye for investment and ownership in a number of areas that make money rather than headlines.
Technical Analysis
MIC has been in a long-term uptrend since it traded in penny stock territory in the aftermath of the Great Recession. The most relevant aspects of MIC’s chart are the start of a long basing period under resistance at 60 in May 2013 and the breakout from that base in July 2014. That breakout came on July 8, when MIC jumped from 61 to 68 in nine times its average volume. MIC motored up to 73 after that gap up and has been consolidating in that range since then. We think MIC is buyable right here, with a stop at 67.
MIC Weekly Chart
MIC Daily Chart
Mobileye N.V. (MBLY)
Why the Strength
Very few companies in the automotive world can be said to have a “killer app,” a unique and attractive product with instant and broad appeal. But Netherlands-based Mobileye has just such a product. It’s called the EyeQ chip, and together with Mobileye’s proprietary algorithms, it’s at the heart of an active collision avoidance system that’s taking the automotive world by storm. Mobileye’s system can detect and interpret lane markers, road boundaries and barriers, traffic signs and lights. It can also detect other cars, pedestrians, animals, debris and other road hazards and will actively engage brakes or other controls to avoid collisions. Mobileye sold its millionth chip in the middle of 2012 and added another 1.3 million installations in 2013, with installations expected to be available in 160 car models from 18 different automakers by the end of 2014 and 237 models from 20 carmakers by 2016. The Mobileye chip/algorithm package wins more than 80% of the business it’s invited to bid for! The company is working on major algorithm upgrades that will work on country roads and city traffic. Revenue has expanded by over 100% for two straight years and a truckload of analysts have initiated coverage on the company. As Mobileye’s technology works its way down from premium vehicles to entry level vehicles, preventing collisions and saving huge amounts of money, this could be huge. Earnings are due out Thursday morning.
Technical Analysis
MBLY is a very new stock, coming public just at the beginning of August, debuting at 36 and trading a very active 37 million shares on its first day. The stock rode its IPO wave to as high as 41.5 on its second day of trading, then corrected over the next couple of weeks to as low as 31. MBLY began to lift off a bit on August 14 and soared to new highs last week. With earnings out this week, you should keep any position small; it’s a very volatile stock anyway. Try to nibble on dips.
MBLY Weekly Chart
MBLY Daily Chart
The Hain Celestial Group, Inc. (HAIN)
Why the Strength
Hain Celestial has been riding the organic/healthy living food trend for years, and the stock is strong today because its recent quarterly report emphasized that the trend is continuing, if not accelerating. In the June quarter, sales and earnings growth posted their second straight quarter of acceleration, topping estimates thanks to across-the-board strength in a variety of Hain’s brands, as well as a couple of accretive acquisitions (including a specialty rice company that has a good presence overseas, and a gluten-free bread company in the U.S.) As with any food company, there’s nothing revolutionary here, but management has pulled the right levers for years and, in the recent conference call, emphasized that growth can come from existing brands, not just new buyouts. The valuation is a bit high (31 times trailing earnings) for a firm that’s likely to grow earnings in the 20% to 25% range, but more and more institutions (610 funds now own shares, up from 472 a year ago and 355 two years ago) are comfortable taking the long view, figuring Hain has years of solid growth ahead that won’t be affected by an upstart competitor or an economic slowdown. As an aside, we also think investment money that’s flowed out of Whole Foods’ stock may be finding homes in some of the smaller, nimbler organic food companies like Hain.
Technical Analysis
HAIN has been in a long-term uptrend for years, but with plenty of multi-month consolidations mixed in. The stock’s latest pause began just after 2014 began; shares gyrated between 80 and 100 for about seven months, and had one more shakeout in early August to get rid of the weak hands. Then the stock surged on earnings two weeks ago and has nosed out to new price highs. Because HAIN has come straight up off its lows, and there’s still some resistance near 100, we advise buying on dips.
HAIN Weekly Chart
HAIN Daily Chart
Broadcom Limited (AVGO)
Why the Strength
Chip stocks are notoriously hit and miss, but the cycle is up right now, and Avago Technologies has a couple of unique growth drivers that should continue to propel it higher. First, it’s one of the leading suppliers of radio-frequency chips in smartphones, so customers like Apple (whose iPhone 6 should create a nice demand spike in the months ahead) and Samsung have been gobbling them up as their phones become more popular. (China’s move to 4G is also a big driver.) Second, Avago completed a huge $6.6 billion acquisition of LSI, giving it a big position in the growing storage chip business; it’s not as dynamic as the smartphone market, but it’s steadier, and the move to Cloud computing should help boost demand. Last week’s quarterly report was the first since the acquisition was completed, and it was fantastic—earnings growth accelerated in a huge way while crushing estimates, and management’s forecast for the current quarter also blew away Wall Street projections (thanks largely to its smartphone business). Of course, any hiccup in demand from one of the big smartphone providers (or a major slowdown in China) could crimp results, but that doesn’t appear likely during the next few quarters—analysts see earnings up 72% this quarter and 35% next year. And given recent results, even those numbers could prove conservative. As chip stocks go, we like it.
Technical Analysis
AVGO got going late last year and has been in a solid uptrend since. That said, shares did take a breather during the past couple of months—the stock never suffered a big correction, but generally gyrated between 68 and 75 since mid-May. However, the stock has acted very well since the market’s early-August low, pushing toward its old highs, and then surging last Friday following its earnings report. You can start a position around here or on dips, with a stop in the low 70s.
AVGO Weekly Chart
AVGO Daily Chart
Aruba Networks (ARUN)
Why the Strength
Aruba Networks is a software company whose products let corporate networks go wireless. Aruba’s enterprise mobility software gives employees secure access to data, voice and video applications across networks that include both mobile devices and wireline devices. The company’s leadership in secure corporate WiFi earned it seven appearances in Top Ten in 2010 and early 2011 and two more in early 2013. Investors have been concerned that Aruba Networks might run into 1) a wave of commoditization of WiFi as it got to be so cheap and ubiquitous that margins were pressured and 2) competition from Cisco, the giant in this arena. Fortunately for Aruba, the spread of WiFi hasn’t happened and, contrary to worries, it’s actually taking market share away from Cisco. The company’s outstanding quarterly earnings report August 26 revealed a whopping 85% gain in earnings on a 33% jump in revenue, beating analysts’ expectations on all fronts. The company’s stock has also picked up three upgrades from analysts recently. Aruba Networks has just announced that it would lay off 70 workers (about 4% of its workforce) as part of a restructuring effort. As long as the company keeps winning its running battle with Cisco, investors are likely to see this as a positive.
Technical Analysis
ARUN has been in a lumpy downtrend since it peaked in April 2011, but after a plunge to 12 in May 2013, the stock began to tighten up in a range with support at 16 and resistance at 22. After a run of 15 gains out of 16 sessions in August, ARUN blasted off on August 27, gapping up from 20 to 22 on eight times average volume. The stock is still digesting that big gap move, and looks buyable anywhere under 21 as its 25-day moving average (now above 19 and rising fast) catches up. Use a stop just below 19.
ARUN Weekly Chart
ARUN 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.
