September 23, 2013
The market remains in an uptrend, though we saw some abnormal selling in many leaders today. To be fair, few stocks truly broke down, so we’re not changing our overall market stance. But today is likely a shot across the bow; the next few days should be telling. For now, though, we still advise holding your top performers and looking for new purchases in stocks that have either just broken out of big ranges, or have pulled back after strong uptrends.
Some Abnormal Selling Appears
In recent weeks, we’ve seen outstanding moves among growth stocks (and, increasingly, the broad market), which coincided with increasing giddiness among many investors. That’s a yellow flag, and today, we saw the first signs of abnormal selling among the leaders—big-volume distribution was evident among many stocks, no matter what the sector. To be fair, few names truly broke down, so we’ll keep our Market Monitor where it’s been. But today was a shot across the bow; the next few days should tell us whether this is a shakeout (we’ve seen a few this year), or whether a deeper (and well-deserved) retreat is likely during October.
This week’s list has many names that are more recent winners, and those types of names held up far better than most extended stocks today. Our favorite of the week is Las Vegas Sands (LVS), a leader from 2009-2010 that has re-emerged after a two-year rest. Try to buy on dips.
|Ulta Beauty (ULTA)||331.95|
|NQ Mobile (NQ)||0.00|
|Las Vegas Sands Corp. (LVS)||0.00|
|Incyte Corporation (INCY)||76.98|
Why the Strength
Whirlpool has long been a standout as the number-one worldwide brand in consumer appliances. The stock has been in favor during the past several months, as Whirlpool continues to benefit from the rebound in the housing market. The company has also taken steps to expand out of the slow growing markets in North America and Europe and into emerging markets in Asia and Latin America. Specifically, Whirlpool recently acquired 51% of Hefei Rongshida Sanyo Electric, a Chinese home appliance maker that will give the company broad access to China’s middle-class. Meanwhile, Whirlpool is also expanding its product base through plenty of wheeling and dealing; the company has an agreement with Chesapeake Energy to develop home refueling stations for natural-gas powered cars, while another agreement with SodaStream brings the company’s in-home carbonation technology to KitchenAid appliances. All in all, it’s easy to see how Whirlpool has averaged earnings growth in excess of 300% during the past four quarters! And with the housing market continuing to bounce back in the U.S., we like prospects for Whirlpool’s continued growth.
It should come as no surprise that WHR’s technical recovery coincides with the housing market bottom in mid-2011. After forming a base near 45 in late 2011, shares came to life in early 2012. The stock stalled a bit in June, but recovered quickly and hasn’t looked back since. So far in 2013, WHR has rallied nearly 50%, supported by its 50-day and 200-day moving averages. Shares have eclipsed former resistance in the 140 area, placing WHR in all-time high territory. The stock could take a bit of a breather here following last week’s rally, allowing you to accumulate on dips.
WHR Weekly Chart
WHR Daily Chart
Why the Strength
Workday is a young company, which proves to be an advantage in providing enterprise software in the Cloud, because the company’s products have been designed from the ground up with the Cloud in mind. This is proving to be a big advantage for Workday and Salesforce.com, both of which are taking a bite out of Oracle’s hide in this fast-growing sector. Workday’s products include human capital, spending and financial management software and are marketed on a subscription basis, mostly to companies with 1,000 or more employees. That subscription business model is important, because it provides a more dependable revenue stream. Workday’s revenue has achieved triple-digit growth in four of the past five years, which is why investors are less concerned with the company’s lack of profitability. That will come. The company gets about two-thirds of its revenue from subscriptions and one-third from professional services like customization and support, and its overseas data centers in Ireland and the Netherlands give it a nice foothold in international expansion. Salesforce.com just announced that it would integrate its product lines with Workday to improve performance and data compatibility. That should improve the two companies’ record of outcompeting Oracle even more.
WDAY is a very young stock, coming public at 28 in October 2012. It has never traded below 46, and needed just 20 weeks of consolidation with support at 50 before it started appreciating steadily in late February. WDAY is now trading just below 80, having topped 83 last week after the news of the tie-up with Salesforce.com hit the headlines. WDAY is volatile, so a pullback toward 77.5 is a possibility. If you like this David and Goliath story, look to buy in on any weakness of a couple of points and put in a stop at 70.
WDAY Weekly Chart
WDAY Daily Chart
Ulta Beauty (ULTA)
Why the Strength
Ulta Salon bills itself as the largest beauty retailer that’s a one-stop shop for whatever haircare, skincare, bath and body, fragrance or cosmetic products a customer wants. It’s main attraction is its wide selection—the stores are on the larger side, and offer everything from cheap, mass-market items to higher-end wares, 20,000 in all!—and some newer stores even have their own full-service salons. It’s been a successful model, and the big idea from an investor’s point of view is Ulta’s cookie-cutter approach; the firm opened a whopping 33 stores in the second quarter alone (it’s aiming for 125 new stores for the year as a whole), ending with 609 locations, while total square footage is up 25% from a year ago. Combined with solid growth from stores open at least a year (up 8.4% last quarter), you see the tidy sales and earnings results in the table below. And there’s more where that came from, with analysts forecasting earnings in the 25% range both this year and next. Of course, the valuation (40 times trailing earnings) already reflects lots of hope, but it’s not unusual for a cookie-cutter retail story to stay expensive as long as management continues to churn out growth.
ULTA was one of the market’s biggest winners from 2009 through 2012, as this new story got traction and investors realized 25% to 30% earnings growth was likely for years to come. No stock goes up forever, though, and this one basically topped out in April 2012 in the mid-90s; the RP line moved sideways for many months before investors drove shares down to 73 in March of this year. That long sideways-then-down movement likely scared out most weak hands, and ULTA has moved higher since, including a nice gap up on earnings two weeks ago. We don’t expect a repeat of the 2009-2012 upmove, but buying on dips should work well.
ULTA Weekly Chart
ULTA Daily Chart
Why the Strength
The retail food business isn’t a frequent contributor to Cabot Top Ten Trader (except for Whole Foods); groceries are generally a high-volume, high-competition business that produces very low profit margins. But today, Safeway is making its second appearance of the year, indicating that it’s doing something right. The something right is the sale of its Canadian stores to Sobeys for $5.7 billion, leaving Safeway with 1,412 stores. This is part of Safeway’s restructuring plan, a plan that includes the construction of new stores with sizable apartment complexes on top, which amounts to a near-captive customer base. Safeway also owns 49% of Casa Ley, a chain with 195 stores in western Mexico, and 73% of Blackhawk Network Holdings, a gift- and prepaid-card subsidiary that came public in April. Safeway is consistently profitable (Q2 after-tax profit margin was 0.8%) and increased its dividend by 21% last year. The annual yield is 2.5%. Safeway also bought back $1.6 billion of its stock in 2011 and $1.3 billion in 2012. The buyback program still has $800 million in authorized purchases available. With the Canadian sale building a big war chest, Safeway has plenty of cash to continue its share buybacks and build innovative stores aimed at increasing margins.
SWY was trading at 15 in 2012, but shot to 28 in April as the Canadian sale was announced. The stock slid as low as 23 in June, but shot past 30 last week when the company announced a poison pill plan to keep itself from being acquired. Investors liked both the evidence that a takeover company was accumulating shares and the plan itself. SWY isn’t especially expensive with just a P/E of 17. It’s likely that the stock will trade sideways at 31 for a while, so its buyable right here. Use a stop at 27, which would mean the stock had filled its September 13 gap. Earnings are due out during the second week in October.
SWY Weekly Chart
SWY Daily Chart
NQ Mobile (NQ)
Why the Strength
When mobile phones started to proliferate in China in the early 2000s, mobile malware and spyware began to multiply as well. The more capable the phone, the greater the likelihood that it will download some nasty programs, and NQ Mobile was founded in 2005 in direct response to this threat. NQ Mobile claims to have the most comprehensive virus database in the world, and to be the first to identify three out of every four global threats to mobile networks and users. NQ boasts 460 million registered user accounts and 138 million active accounts, including 11.3 million premium users. On the corporate side, the company has 1,250 enterprise customers, including more than 80 members of the Fortune 500. NQ Mobile Security protects mobile voice and data, NQ Mobile Vault uses encryption to protect privacy and NQ Mobile Family Guardian strengthens parental controls. Outside China, NQ Mobile’s programs are marketed through 3,500 U.S. retail locations and via a partnership with America Movil in Latin America. NQ Mobile’s mix of games and productivity software has led to triple-digit revenue growth for the past three years and earnings are up from $0.08 per share in 2010 to $0.66 per share in 2012. Investors were impressed with the company’s rollout of its new mobile “Music Radar” app, and this past Friday, the company announced that it expects revenues to exceed the high end of its previous guidance. Everything is going right for NQ Mobile.
NQ broke out of a four-month base in the middle of July, moving above 10 in rising volume and touching 20 in the middle of August. After just four weeks of consolidation and a dip to support at 17, the stock’s trading volume began to ramp up on September 11 and spiked on September 13 as the stock broke through the 20 level. We think today’s dip is buyable, but we also advise a stop near 19 in case things go awry.
NQ Weekly Chart
NQ Daily Chart
Las Vegas Sands Corp. (LVS)
Why the Strength
It’s not the go-go growth stock it was a couple of years ago, but Las Vegas Sands is a leader again because of its top-notch casino and resort facilities, mainly in Macau, China, but also in Singapore, where its Marina Bay Sands facility is a cash cow. In fact, the term “cash cow” is being tossed around a lot when talking about Las Vegas Sands recently—in the second quarter, while earnings were up 48% to 65 cents per share, the firm’s pre-tax cash flow totaled a whopping $1.41 per share (about half came from Macau, 30% from Singapore and the rest from the U.S.). And management isn’t being shy about returning it to shareholders via regular dividends (quarterly payment of 35 cents per share, for a yield of 2.1%), special dividends (it paid a $2.75 per share dividend last December), share buybacks ($47 million worth in the second quarter, with another $2 billion coming), along with the continued development and expansion of its existing facilities. Long-term, investors are intrigued by the possibility of gaming in Japan, which could approve a measure allowing new casinos now that the Olympics are coming there in 2020. We don’t expect the stock to match its awesome 2009-2010 performance going forward, but business remains buoyant, and with more and more Chinese (and others in the region) using gambling as a form of entertainment, growth should remain solid.
LVS nearly went under during the 2008 bust, but then rebounded in 2009 and soared in 2010 as Macau recovered and as Marina Bay Sands ramped up at an amazing clip. But then came a long winter—the stock was at 55 late last month, compared to 52 at its peak in November 2010! Now, though, the bulls are back in control, with LVS breaking out three weeks ago and marching ahead ever since on solid volume. Officially, we do think you can buy some here, but a dip of a couple of points wouldn’t surprise us, either.
LVS Weekly Chart
LVS Daily Chart
Incyte Corporation (INCY)
Why the Strength
When biopharmaceutical company Incyte appeared here in May 2012, its annual sales were just $99 million. Growing adoption of its first product—Jakafi (ruxolitinib), a treatment for myelofibrosis, a type of chronic leukemia that affects between 16,000 and 18,500 people annually—has now lifted sales to $347 million annually. The big engine of investor interest now is the progress of clinical trials testing Jakafi against other diseases, with Phase III trials nearly complete for treatment of polycythemia vera and late Phase II trials against pancreatic cancer. The company also has a treatment for rheumatoid arthritis in early Phase III trials and nine other Phase II trials for alternative uses or unique products. Incyte’s 215% jump in earnings in 2012 illustrates the power a single drug approval can have, although consistent profitability isn’t expected until 2014. With candidate drugs aimed at potential lucrative ailments such as psoriasis and rheumatoid arthritis, Incyte continues to attract investment. The company got a huge boost on August 21 when news came out that the company’s ruxolitinib showed excellent results against certain kinds of pancreatic cancer. Another high-profile package of good news from clinical trials would only increase the enthusiasm investors are showing for Incyte.
INCY has been pretty volatile for years, but the longer-term trend is certainly up. After a big correction in 2012, INCY traded sideways from February 2013 until late July, sticking mostly between 22 and 24. A good earnings report on August 1 keyed a breakout to 27 and the good clinical trial news on August 21 brought a blastoff to 36. INCY has been consolidating that gap up ever since, and the 25-day moving average has just caught up. We think it’s a solid buy here with a stop at the 50-day moving average (now at 30).
INCY Weekly Chart
INCY Daily Chart
Why the Strength
Finisar is a leader in the high-end data communications market. The company manufactures transmitters, receivers, transceivers and transponders that connect LAN/WAN networks. More importantly, Finisar makes one of the most sought after Ten Gigabit Ethernet (10GbE) optical links—a device that helps telecommunications companies add and expand high-speed fiber optics systems on their existing networks. Finisar’s fiber optic subsystems and components are helping to enable high-speed voice, video and data communication in the U.S., Malaysia, China and other markets, with companies like Cisco Systems and Huawei each accounting for more than 10% of revenues. The wave of capital spending among telecommunications firms to keep up with rising demand for bandwidth has provided a boon to Finisar’s bottom line. Specifically, the company ended eight straight quarters of declining profits by reporting a 158% spike in the July fiscal first quarter. Revenue also continued to improve for the second straight quarter, rising 21% on increased sales of 10G, 40G, and 100G Ethernet transceivers for datacom applications. What’s more, analysts expect demand to remain robust, especially with next generation datacom products just over the horizon.
After peaking above 45 in early 2011, FNSR endured a long, painful correction that ended with shares hitting a low of 11 in November 2012. The stock would spend the next year and a half flirting with resistance near 17 and support in the 12.5 region. After forming a base near 12.5 during April and May, FNSR broke out in early June, going on an 81% tear to trade just shy of the 25 level—a fresh annual high. Throughout this rally, FNSR enjoyed support at its 10-day and 25-day moving averages. Currently shares are consolidating into the former of these trendlines, as FNSR takes a break following a sharp earnings-induced rally earlier in the month. We feel the stock is buyable here, or on dips.
FNSR Weekly Chart
FNSR Daily Chart
Why the Strength
Whether or not Salesforce.com turns out to be the Microsoft of the Cloud computing era remains to be seen, but the company is certainly off to a stellar start. Salesforce offers a myriad of on-demand business software products, including packages centered on human-capital management, financial-management and business analytics. The company’s Cloud-based business model has helped it slash the costs associated with the traditional business software model pioneered by Microsoft decades ago. What’s more, Salesforce’s software model’s portability helps boost productivity and allows companies access to leading-edge mobile and social networking applications as well. More importantly, however, Salesforce is clearly leading the way in the Cloud business software market, with the company reporting in late August that fiscal second-quarter revenue powered ahead 31%, while cash flow rose 34% and booked business rose to an impressive $5.6 billion, up 30%. Furthermore, the company has averaged sales growth in excess of 30% during the past four quarters. More recently, investors cheered the company’s plans to integrate its product lines with leading Cloud human-resources software maker Workday. Arriving on the heels of Salesforce’s July acquisition of email-marking specialist ExactTarget, the Workday deal is yet another sign that the company’s growth should remain brisk.
CRM entered 2013 bouncing between resistance near 45 and support at 40, with the occasional spike toward 47 in March and May. Following May’s pop to the 47 region, CRM was smacked sharply lower, with shares ultimately bottoming near 36 in June. The stock has recovered nicely since then, with strong volume and better-than-expected earnings reports driving CRM past resistance at 47 in late August. Last week’s Workday deal prompted another new high, boosting CRM past former resistance at 50. The stock is now digesting those gains in the 53 region. You can take small bites here, or buy larger blocks on any pullbacks toward 50.
CRM Weekly Chart
CRM Daily Chart
Why the Strength
Few growth investors will dig into a story like Boeing’s, assuming that this behemoth ($83 billion in revenue!) will be a slow poke. But the stock has a storied history of embarking of strong, persistent, multi-year upmoves, and we think another one of those just got underway in March. The big ideas here are that, first, Boeing’s new 787 Dreamliner, after numerous delays and problems, is finally being built and shipped; its larger but more fuel-efficient than many current jets, and orders have been huge. Second, and more generally, the entire jet industry is entering a big new order phase, as most are in good financial shape (for the first time in many years), and many international operators are rapidly expanding their fleets. Thousands of orders in backlog and increasing production rates should help Boeing’s earnings crank ahead by 15% or so for the next couple of years, but the big story is cash flow—according to one analyst, the firm’s free cash flow will total $13 per share in 2015 and actually grow from there. And management has said it wants to return 80% of free cash flow to shareholders each year! Translation: Dividends (now 49 cents quarter, yield of 1.6%) and share buybacks should expand greatly, which combined with growing earnings and a reasonable valuation (18 times this year’s estimate) should prod big investors to continue accumulating shares. We like it.
BA topped at 108 back in 2008, fell apart with everything else, and then rebounded back to 81 by April 2011. Then began a nearly two-year base as the company encountered many issues with its Dreamliner. But that all changed in March of this year—BA busted loose and rose to 108 in a straight line before taking a few weeks to catch its breath. And then it ripped ahead to new all-time highs (eclipsing that 2008 peak) during the past two weeks on some new orders and positive analyst commentary. You could buy some here, but as with many names, a dip of another couple of points is possible and would mark a better entry point.
BA Weekly Chart
BA 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 23, 2013|
|6/10/13||Pioneer Natural Resources||PXD||139-144||183|
|WAIT FOR BUY RANGE|
|8/26/13||Green Mountain Coffee||GMCR||83-88||79|
|3/18/13||Lion’s Gate Entertainment||LGF||21-22.5||34|
|DROPPED: Did not fall into suggested buy range within two weeks of recommendation.|
|9/9/13||Nu Skin Technology||NUS||86-90||94|