Onus Remains on the Bulls
Current Market Outlook
Last Monday we wrote that the next few days would be telling—and given the action, it’s clear the onus remains on the bulls to show they have sufficient strength to halt the market’s downtrend. There are some positives, including the fact that the indexes have held above their late-August lows for five weeks and, believe it or not, the broad market is in slightly better shape now than in late August. But, as always, it’s best to just take the evidence as it comes—today, that means holding lots of cash and limiting new buying as we patiently wait for a bottom to form.
This week’s list has a big-cap feel to it as investors seek out some dependability. Our Top Pick is Salesforce.com (CRM), whose stock is big, liquid and remains resilient.
| Stock Name | Price | ||
|---|---|---|---|
| Vantiv (VNTV) | 0.00 | ||
| Starbucks (SBUX) | 64.49 | ||
| Nike (NKE) | 89.77 | ||
| Nordic American Tankers (NAT) | 0.00 | ||
| Medicines Company (MDCO) | 56.98 | ||
| JetBlue Airways Corporation (JBLU) | 0.00 | ||
| Imperva Inc. (IMPV) | 0.00 | ||
| Salesforce.com (CRM) | 0.00 | ||
| Chipotle Mexican Grill (CMG) | 773.32 | ||
| Big Lots (BIG) | 43.12 |
Vantiv (VNTV)
Why the Strength
As payment processors go, Vantiv is unique: it works both sides of the electronic payments fence, providing payment services and technologies to merchants and physical credit and debit cards to financial institutions—it owns 18% of the merchants market, and 10% of the credit and debit card market. Both sides of Vantiv’s business are getting a boost from the industry shift to “chip cards”—credit and debit cards with an imbedded microchip and PIN that don’t require a paper signature and offer better protection against credit hacks. Vantiv’s business has already been growing at an impressive clip, with sales more than doubling since 2010. Last quarter revenues increased 29% while earnings per share jumped 19%, marking the sixth straight quarter of EPS growth. As a company, Vantiv hits several sweet spots in the current global marketplace: it provides payment processing capabilities to retailers at a time when spending is back on the rise, and it provides security services at a time when cyber threats have reached a historical peak. Above all, Vantiv’s standing as a versatile middleman in the electronic payments industry has helped it stand out in a crowded field.
Technical Analysis
VNTV started to make its move in late June, advancing from 37 to as high as 45 in mid-August. After a quick tumble, the stock found support at 41, and blasted up to 46 within a matter of weeks. The stock has been holding firm since that big move, which could bode well for another breakout. Just know that VNTV hasn’t been shy about pulling back in recent months, so keep a stop near the August lows if you do decide to buy.
VNTV Weekly Chart
VNTV Daily Chart
Starbucks (SBUX)
Why the Strength
Starbucks is both a well-loved and well-hated company, an international coffee and food vendor with over 22,500 stores worldwide. Besides its lineup of coffee, the company also sells tea, brewing equipment, food, other beverages and snacks. Starbucks’ ready-to-drink beverages and coffees are also available at many supermarkets and convenience stores. Revenue growth has exceeded 11% for the past three years and after-tax profit margins have topped 10% for years. In July, the company announced authorization for the repurchase of 50 million shares of its stock, a number that was on top of the 11 million shares repurchase authorization still on the books from June. This is a mature business with full penetration in most major U.S. cities, but overseas expansion is still robust. Investors have also noted the company’s introduction of a new mobile ordering and paying system in its U.S. stores that will speed customers past the line at the register. As a universally known business whose stock is owned by over 2,000 institutional investors, there isn’t much potential left for rampant growth. But earnings estimates still call for near-20% growth this year and next, and the share-repurchase increase and the stock’s 1.1% dividend yield provide an added boost.
Technical Analysis
SBUX has been a steady grower since March 2009, when the U.S. market revived. It stalled out in 2012 and traded sideways from December 2013 to the beginning of 2015, but it has climbed from 39 in January 2015 to 57 in recent trading (after recovering from the August market meltdown). SBUX isn’t likely to blast off like a rocket, but a buy on any weakness should work out well in the long run. It’s also a lower-risk choice in this difficult market. Use a stop at 52.
SBUX Weekly Chart
SBUX Daily Chart
Nike (NKE)
Why the Strength
Nike is a blue-chip multinational with sales that have been growing like a little-known small cap thanks in large part to, of all places … China. Sales of footwear in China surged 36% last quarter despite the country’s recent financial struggles. Clothing sales growth in China was also impressive at 22%. Here in the U.S., where Nike has been a household name for decades, growth hasn’t been too shabby either. That’s a credit to America’s new “athleisure” trend, in which people are now regularly wearing sports attire outside the gym. Nike is also doing a better job targeting women—the company’s women’s branch grew by double digits last quarter, boosted by the launch of a new training shoe (Metcon 1) specifically designed for women. On a macro level, Nike is also benefiting from a global shift to improved health and fitness, evidenced by the company’s 12 straight quarters of sales and earnings growth. In the last four years, Nike’s sales have improved nearly 50%—uncommon growth for a company of Nike’s size and long history.
Technical Analysis
NKE has been the best performing stock in the Dow Jones Industrial in 2015. It opened the year at 96, jumped up to 101 in March before an extended consolidation period, then went on a three-month run that took the stock all the way to 116 in early August. After a brief drop to 104, NKE rallied all the way back to 116 before breaking through that resistance last Friday after the company’s surprisingly strong China-fueled earnings were released. In this environment, we expect pullbacks, but the bullish earnings section should keep big investors interested.
NKE Weekly Chart
NKE Daily Chart
Nordic American Tankers (NAT)
Why the Strength
Many investors hear the words “oil shipper” and think bad things—after all, most energy stocks are in the dumps and shipping stocks aren’t doing much better. But there’s actually a stealth boom going on in this industry, with Nordic American Tanker one of the leaders. The company operates 23 (soon to be 24) Suezmax vessels, and demand is strong as low oil prices have stimulated demand; there are also some long-term factors helping here, including longer shipping routes due to the shift in where energy is produced (increasingly in North America) and consumed (Asia). Obviously, this is a very cyclical industry, with big ups and downs, but we’re impressed with Nordic’s conservative management—the firm has low levels of debt, has paid a dividend for 72 consecutive quarters, and recently, has been boosting those payouts as dayrates for its vessels have spiked. The latest quarterly dividend was 40 cents per share (equates to a whopping 10% annual yield) and management has indicated it thinks it can increase that payout more in the quarters ahead. As for the fleet size, it’s increasing slowly but surely (from 22 this summer to 24 by October, and to 25 next year). This isn’t a buy-and-hold stock, but Nordic American’s earnings and dividends should remain elevated for at least the next few quarters.
Technical Analysis
NAT was super strong most of this year, surging from 10 in February and March to 17.5 in mid-July. Then came a huge correction, mostly due to the market; NAT plunged toward 12 (and its 40-week line) on big volume as investors dumped any stock perceived as economically sensitive. But shares have rebounded nicely since then, briefly poking back above 16 (and registering a new RP peak) before easing again. A small position here with a tight stop is one idea, or just place NAT on your watch list.
NAT Weekly Chart
NAT Daily Chart
Medicines Company (MDCO)
Why the Strength
With nine drugs approved for use in the U.S., Medicines Company is a successful biomedical company specializing in drugs for acute and intensive-care settings. The catalyst for the latest jump in the company’s stock is the approval of IONSYS, a fentanyl-based treatment for post-operative pain in adults, by the European Medicines Agency. (IONSYS was already approved in the U.S.) With 234 million major surgeries being performed every year around the world and 75% leading to post-op pain, the market for ONSYS is potentially huge. Coming on the heels of the late-August news of early-stage success for a cholesterol drug—reported reductions of bad cholesterol topped 80%!—the company has great momentum. While the company expects to lose money in 2015 and 2016 due to compensation that will be paid to the firm from which Medicines Company has bought drugs, the company’s growth prospects are outstanding, both in the U.S. and abroad. The quarterly report is due out around October 21.
Technical Analysis
MDCO corrected in a big way in 2014, falling from 41 in January to 20 in October. But the stock began a steady rebound at that point, and was trading at around 34 in August when the good news about the new cholesterol drug broke. MDCO jumped to 41 on the last day of August and pushed as high as 44 before rolling over a little under pressure from the broad market. MDCO looks buyable here, with a stop at its rising 50-day moving average, now around 36. But given the market environment, you could also just keep an eye on it and see if it finds support.
MDCO Weekly Chart
MDCO Daily Chart
JetBlue Airways Corporation (JBLU)
Why the Strength
While many industries of the world are coming under pressure, it continues to be a Goldilocks environment for U.S. airlines—the economy is resilient enough to keep business travel steady, while lower fuel costs have kept expenses low and provided a little more incentive for individuals to get away on vacation. JetBlue has taken full advantage of the environment, which is why the stock remains strong—the company continues to boost its capacity (7% to 9% more seats this year), while fuel prices plunged a huge 31% in the second quarter, allowing earnings to more than double. Of course, growth from this point will almost be certainly slow, but more and more investors are coming around to the view that energy prices will stay low for a long time. When combined with further increases in capacity, analysts see earnings up another 15% next year with cash flow increasing rapidly. It’s not changing the world, but the wind remains at JetBlue’s back today.
Technical Analysis
JBLU and other airline stocks aren’t in the early innings of their overall advances; most stocks in the group took flight back in 2013 and have risen four- or five-fold since then. But the trend remains up, and JBLU looks like the leader of the group—after building a sloppy base in June and July, the stock had a big shakeout during the August market plunge but immediately spiked to new highs. And it remains above its prior highs, even after the poor market action of recent days. If you want in, you can buy a token position with a stop near the August closing lows.
JBLU Weekly Chart
JBLU Daily Chart
Imperva Inc. (IMPV)
Why the Strength
Cyber terrorism has reached a fever pitch in 2015, and cybersecurity companies like Imperva have never been more essential. Imperva’s latest earnings report reflects that demand: sales reached a record $53.5 million in the second quarter, up 31% from a year ago. The company also increased its full-year sales outlook to a range of $215 million to $217 million, up from the previous projection of $207 million. If accurate, that would be a 31% improvement on the company’s 2014 sales, and would mark a 10th straight year of sales growth. Adding to this year’s sales growth are three acquisitions Imperva made last year, all of which have better equipped it to compete with the big boys in the cybersecurity arena—it has won 39 contracts over IBM in the past 18 months. Those tend to be much larger contracts—typically over $200 million (IBM doesn’t go fishing for minnows). Winning those contracts over the likes of IBM has helped improve Imperva’s profile within an industry that is growing at 25% a year. It’s a good story.
Technical Analysis
IMPV had a huge spike starting in early May, vaulting from 43 all the way to 71 by late July. The ensuing market collapse pushed the stock back down to 55, but it has recovered quite nicely since, rallying right back to its old highs. It has since dipped back to 68, still a couple of ticks above its 50-day moving average (66). This could be a good place to take out a small position if you are game. If you’re not feeling quite so bold, IMPV is a stock worth keeping a close eye on given its strong chart and leading position within a strong sector.
IMPV Weekly Chart
IMPV Daily Chart
Salesforce.com (CRM)
Why the Strength
In our opinion, Salesforce is becoming the Microsoft of the cloud era, with many of the most popular productivity-enhancing software products in the industry. The firm got its start with customer relationship management software, but it’s gone way beyond that now, with software that addresses nearly every nook and cranny of a business, including human resources and finance departments. And that has led to lots of stickiness (repeat buying) for its solutions—as more and more companies integrate their marketing, service, analytics and (eventually) Internet of Things applications into Salesforce’s platform, they become joined at the hip to Salesforce. The firm’s annual Dreamforce conference was a hit, with a few new product announcements (including a new user interface dubbed Lightning) and some bullish long-term talk from management; the top brass believes 20% to 30% growth is sustainable for many years as many of its products still have low market share (lots of companies have yet to switch to new-age, cloud-based software). Of course, the valuation here is also huge, but that’s a bit misleading; Salesforce’s cash flow is always much larger than its reported earnings ($304 million cash flow versus $152 million net income in the latest quarter) and deferred revenue is humongous ($6.2 billion). All in all, we view Salesforce as an emerging blue chip in the tech field.
Technical Analysis
CRM hasn’t been a hot stock for a very long time, which we see as a good thing (fewer pent-up selling pressures). Indeed, the stock has held up very well in recent weeks, taking just a brief trip to its 40-week line during the market’s August meltdown before crawling higher during the past few weeks, with the RP line registering new peaks. We’re not opposed to nibbling on today’s dip, or you could just watch it, looking for an eventual breakout above 76.
CRM Weekly Chart
CRM Daily Chart
Chipotle Mexican Grill (CMG)
Why the Strength
Chipotle Mexican Grill opened its first restaurant in 1993 and now operates more then 1,850, including 17 outside the U.S. With a limited menu (just burritos, tacos, burrito bowls and salads) and a policy of using local, sustainably grown and humanely raised meats and vegetables, Chipotle has been a real favorite of young diners in the fast casual space. The company has just gone through a rough patch because its carnitas (pork) had been taken off the menu in over a third of its restaurants for a while because a pork supplier was found to be violating its policies. It took over nine months to find a new source for humanely raised pork, but the problem is now fixed and carnitas are back on the menu in 90% of locations. Chipotle has increased revenue more than 20% in four of the last five years, and expects to increase earnings 23% this year and 19% next year. Chipotle is a prime example of the cookie-cutter strategy, which powers growth by opening new locations; the company projects that it will have opened between 190 and 205 new outlets by the time 2015 is over. This isn’t a new story, but it’s a solid one with five quarters of double-digit percentage after-tax profit margins under its belt. Chipotle Mexican Grill will report its latest quarterly results on October 20 after the market closes. Analysts are looking for $1.22 billion in revenue and $4.61 in earnings.
Technical Analysis
CMG spent nearly a year—from late July 2014 through early July 2015—trading sideways or correcting. But the stock blasted off 12 weeks ago, running from 600 when July began to around 760 in early August. The stock was dragged down along with the market in August, but recovered calmly and has been trading sideways in a tight range between 720 and 740 for a few weeks. CMG may keep to this range until earnings on October 20, but the stock’s rising 50-day moving average has just caught up with it, which may bring a little energy. If you like the story, you can buy a small amount, but it’s probably a better idea to just watch it. If you buy here, use a stop at 680.
CMG Weekly Chart
CMG Daily Chart
Big Lots (BIG)
Why the Strength
Big Lots is a national retailer that specializes in selling closeout merchandise in its more than 1,400 retail stores in 48 states. By offering brand-name products from 3,000 manufacturers, the company offers big value in furniture, seasonal goods, consumables and food (among other items) to its customers. This isn’t a rapid growth company, as revenue growth has been in the low single digits for years. But investors are interested right now as the company’s August 28 quarterly earnings report topped analysts’ estimates on both revenue ($1.21 billion vs. estimates of $1.20 billion) and earnings (40 cents per share when analysts had predicted 34 cents per share). Management also raised earnings guidance for the fiscal year from $2.87 per share to a range from $2.90 to $3.00. Earnings are forecast to rise 20% in fiscal 2016 and 19% the year after. That kind of quarterly beat and raising of projections tends to get investors’ attention, and it has worked on Big Lots’ stock. With an attractive 1.6% annual revenue yield and a reasonable 18 P/E ratio, Big Lots is a nice package.
Technical Analysis
BIG hasn’t been a frequent visitor to Top Ten, with just two previous appearances, one in 2007 and one in 2008. But the stock’s blastoff on August 28 came on more than seven times average volume. After gapping up from 42 to 49, BIG corrected back to attention. If you’re game, BIG looks like a good buy near 48 for conservative investors. Use a stop at 44 for risk control.
BIG Weekly Chart
BIG 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.
