Broad Market vs. Growth Stocks
Current Market Outlook
It’s hard to talk about “the market” right now, partly because there are so many diverging trends out there. The broad market remains in rough shape, with 200 to 300 stocks hitting new lows every day and small- and mid-cap indexes looking poor. But the bigger-cap indexes are holding up, and, surprisingly, we’re seeing lots of growth stocks holding up (and a few shooting ahead) despite the turbulence out there. Overall, then, we remain in a cautious (but not defensive) stance—you should hold stocks that are acting fine, and some buying (preferably on dips) is fine, too. But we’re still advising you to hold a good amount of cash in case the broad market infects the resilient sectors.
This week’s list features many stocks that remain in favor today. Our favorite is Stratasys (SSYS), a leader in 3D printing whose stock has spent most of the year consolidating. The recent pullback looks normal, and you could start a position around here.
| Stock Name | Price | ||
|---|---|---|---|
| Twitter (TWTR) | 40.37 | ||
| Stratasys (SSYS) | 0.00 | ||
| Regeneron Pharmaceuticals (REGN) | 512.96 | ||
| Medivation (MDVN) | 0.00 | ||
| Mobileye N.V. (MBLY) | 0.00 | ||
| Facebook, Inc. (FB) | 0.00 | ||
| Deckers Outdoor Corp. (DECK) | 141.68 | ||
| Community Health Systems (CYH) | 0.00 | ||
| Ambarella (AMBA) | 52.79 | ||
| American Eagle (AEO) | 0.00 |
Twitter (TWTR)
Why the Strength
Twitter is one of the most resilient stocks in the market today because big investors are starting to believe it can follow in Facebook’s footsteps—that is, Twitter can continue to monetize its huge user base (though, at 271 million users, it’s not even close to Facebook’s 1.32 billion) and drive sales and (eventually) earnings through the roof. And that’s what we’ve been seeing of late, both in the quarterly growth numbers (sales growth is triple-digits and accelerating some) and from some recent commentary—one analyst opined that Twitter’s pay-for-performance ad campaigns are working great, and its international ad rollout, promoted video ads and its coming “Buy Now” button should help growth in the quarters ahead. Probably the biggest question mark on the company is whether Twitter is near the upper end of its user base, or whether it can continue to appeal to millions more. Average monthly users did grow 24% in the second quarter (probably partially boosted by the World Cup) and timeline views increased 15% (to 173 billion!), but those will be the key figures big investors are watching. We won’t predict exactly what user growth will look like, but we will say that many of the market’s biggest winners offer something that changes the way we work and live, and Twitter—as an entirely new way to communicate and market to others—fills the bill. All told, we like it.
Technical Analysis
TWTR had a fun first couple of months as a public company, but after peaking near 75 in December it fell a whopping 60% by the start of May! But since that post-IPO droop wiped out all the weak hands, TWTR has acted well, with a big-volume, earnings-induced surge in July definitively changing the trend. And, even better, shares have acted well this month, holding their 25-day line during all of the market’s dips. We think a small position around here can work, with a stop near 47.
TWTR Weekly Chart
TWTR Daily Chart
Stratasys (SSYS)
Why the Strength
3D printing specialist Stratasys is on the move again, with the company making a few key deals during the past month that have the potential to keep growth humming. First up, Stratasys has announced that it is acquiring GrabCAD, a provider of CAD-sharing software. GrabCAD’s Workbench software is a cloud-based tool that allows engineers and designers to share and collaborate on CAD files and other design data. According to CEO David Reis, increased collaboration and sharing of 3D CAD files should help accelerate adoption of 3D printing solutions. Second, Stratasys recently announced that The UPS Store has selected its uPrint SE Plus 3D Printer to expand the company’s 3D printing services at some 100 store locations. The UPS Store is the first nationwide retailer to offer 3D printing services, and the move should further bolster Stratasys’ market leading position by increasing consumer exposure. Overall, the company has had impressive revenue growth in 2014, averaging 99% year-over-year increases during the past four quarters. Sales are expected to rise by 37% in fiscal 2015, but analysts are predicting considerable growth further out. In fact, Wohlers Associates believes that 3D printing products and services will reach sales of $6 billion worldwide by 2017, growing to $10.8 billion by 2021. Given its position in the 3D printing market, Stratasys stands to control a significant portion of this market.
Technical Analysis
SSYS is down considerably from its January peak near 138, with a selloff during the first half of the year taking shares down to an annual low near 85 in May. A false start in June saw SSYS eclipse the century mark, but it wasn’t until late August that the stock would begin to challenge staunch resistance in the 120-130 region. Currently, SSYS is pinned between its 10-day and 25-day moving averages, though support is building in the 120 area. You can nibble on weakness here, with a stop above 110.
SSYS Weekly Chart
SSYS Daily Chart
Regeneron Pharmaceuticals (REGN)
Why the Strength
Regeneron is a familiar sight in Top Ten, having been featured here 16 times, dating back to 2006. The company’s marketed products are EYLEA, an injected treatment for neovascular age-related macular degeneration and macular edema, Zaltrap for metastatic colorectal cancer, and Arcalyst, which treats a very specific inflammatory condition. Regeneron’s new drug pipeline is strong, with two drugs—Alirocumab for use against elevated cholesterol, Sarilumab for rheumatoid arthritis—in Phase III trials and one—Dupilumab for asthma, atopic dermatitis and nasal polyposis—in Phase II trials. With EYLEA now submitted for approval for use against a new condition, Regeneron has the potential for five major regulatory submissions or approvals in the next five years. Regeneron experienced a 209% jump in revenue in 2012 when EYLEA was approved, and Q2 results continued a string of revenue growth over 40% per quarter. Regeneron gets a shade under 70% of its revenue from product sales, accruing the rest from its collaboration partners like Bayer and Sanofi. The company’s success at drug development makes it a high-potential issue, and earnings estimates for 2014 and 2015 look strong and are likely conservative. We like it.
Technical Analysis
REGN topped 350 briefly in March, then corrected for four months, slipping as low as 270 in late June. But the stock got moving again in late July after a new drug approval and roared above 350 again at the beginning of September. REGN has been trading sideways for a while, using the 340 area as support. With its rising 25-day moving average just catching up, REGN looks like a good buy anywhere under 360, with a stop at 340.
REGN Weekly Chart
REGN Daily Chart
Medivation (MDVN)
Why the Strength
Medivation’s blockbuster anti-prostate cancer drug Xtandi is about to take the company’s revenue outlook to the next level. The drug is currently approved to treat post-chemotherapy patients, and is competing directly with Johnson & Johnson’s Zytiga. Sales have remained strong, despite the competition, but analysts believe that Xtandi is about to overtake Zytiga in a big way. On September 10, Xtandi received FDA approval for pre-chemo treatment, opening up a huge market for Medivation. According to analysts at Canaccord Genuity, the pre-chemo market could reach $2.7 billion. With forecast fiscal 2014 revenue arriving at $640 million for Medivation, the company has considerable room for growth. Why Xtandi over Zytiga? Because Medivation’s drug offers improved progression-free survival rates, delaying the need for chemo by 17 months, compared to just 8.4 months with Zytiga. That’s huge! Additionally, Xtandi also delays sketetal problems from cancer that spreads to bones and does not require an additional corticosteroid. Overall, Zytiga raked in $1.7 billion in 2013 and $1.07 billion in the first half of 2014. With Xtandi arriving as an arguably superior treatment, Medivation’s potential is gigantic.
Technical Analysis
MDVN started 2014 in rally mode, quickly soaring to fresh all-time highs in the 90 region. However, it was brought down in early March following a poorly received quarterly report, and tested support in the 54 region throughout April. MDVN has since recovered, and the uptrend that we noted in mid-August is now in full swing, sending the stock back into all-time high territory. Last week, MDVN briefly eclipsed the 100 mark after rallying on news of Xtandi’s new FDA indication, but broad-market weakness has caused the stock to consolidate since. Given the company’s growth potential with Xtandi, we believe this weakness is buyable.
MDVN Weekly Chart
MDVN Daily Chart
Mobileye N.V. (MBLY)
Why the Strength
One of the most successful IPOs of 2014 has been Mobileye. The company is a technology leader in the developing active collision avoidance industry, which automakers see as a new area for premium products. Mobileye’s big product is a set of proprietary algorithms that can detect and interpret lane markers, road boundaries and barriers, traffic signs and lights as well as other cars, pedestrians, animals, debris and other road hazards. This interpretive software, contained in Mobileye’s microchips, can step on the brakes or otherwise control the car to avoid a collision. As the Advanced Driver Assistance Systems (ADAS) business grows, Mobileye looks like a leader, with installations in cars from Volvo, Ford, GM, BMW, Hyundai, Opel Mitsubishi and many others. While rear-view cameras are becoming increasingly common, Mobileye’s systems include up to six wide-field cameras for a surrounding view of potential hazards. The company’s Q2 report on September 4 showed a 91% gain in revenue and a 67% bump in earnings. As camera-based ADAS becomes a favorite of consumers, insurance companies and fleet automobiles, Mobileye will be in the lead.
Technical Analysis
MBLY came public on August 1, 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 in the middle of September. The stock is now sitting right on its rising 25-day moving average after a couple of weeks of trading in a range between 46 and 53. A buy on a dip to 50 with a loose stop at 44 looks reasonable.
MBLY Weekly Chart
MBLY Daily Chart
Facebook, Inc. (FB)
Why the Strength
Facebook remains one of—if not the—top stocks for institutional growth investors, with a combination of growth, future potential and trading liquidity that’s hard to match. At this point, just about every investor knows the basic Facebook story; the firm’s rapid monetization of its more than one billion users (via advertising, especially on mobile) is going swimmingly. And with user growth still humming along in double digits, and new and improved ad targeting software coming out (it just released a revamped version of a product that allows advertisers to better measure the performance of ads seen or clicked on by Facebook users, even if those clicks are on third-party sites!), growth should remain vibrant for many quarters. That said, we think the next leg of the story could rest with Instagram, WhatsApp and, to a lesser extent, its own Facebook Messenger product—the monetization of these properties has either just begun (Instagram) or hasn’t even started (WhatsApp), and given the hundreds of millions of users using those sites and apps, the potential is mind-boggling. Of course, management still has to execute, and not upset the giant and growing user base, but history suggests they know what they’re doing. Analysts see earnings up 84% this year and 25% next; the latter figure is almost surely very conservative.
Technical Analysis
FB kicked off its overall run back in July 2013, so it’s not in the early stages of the advance. In fact, the action from its March peak through early-July was uninspiring, raising the specter of a top. But FB has acted well since gapping up on earnings in July—while it hasn’t set the world on fire, the stock and its relative performance (RP) line have hit new peaks, and recently, the stock has held above its 25-day line despite the market’s weakness. We’re OK with buying a small position around here, with a stop in the 72 area.
FB Weekly Chart
FB Daily Chart
Deckers Outdoor Corp. (DECK)
Why the Strength
Deckers describes its mission as “find[ing] and build[ing] niche brands into global lifestyle leaders through innovative design and marketing.” Most investors would say that its mission is to exploit its leadership in the design, production and marketing of the distinctive UGG sheepskin footwear that remains a very trendy style even after 40 years on the market. UGG sales, both wholesale and retail, accounted for three-quarters of 2013 sales, with the remainder coming from sales of Teva, Sanuk, TSUBO, Ahnu, MOZO and HOKA ONE footwear and associated merchandise. The company’s latest quarterly report showed a 24% increase in revenue and a slightly larger than usual loss for the June quarter, which is always the weakest quarter of the year. The company’s 126 owned and operated stores are found in more than 50 countries, but wholesale revenue from footwear sold through other retailers is still more than half of Deckers’ revenue. There aren’t likely to be any huge changes in Deckers’ business plan, but the company’s foundation of UGGs footwear and stable of other niche footwear brands is forecast to produce 17% earnings growth in 2015 and 18% in 2015.
Technical Analysis
DECK went over the falls in 2012, dropping from 119 in late-October 2011 to 30 a year later. But DECK got right back into rally mode, soaring to 90 in January 2014 before a six-month consolidation. The stock finally moved to new yearly highs in August, when it finally regained 90 for good and is now within a point or so of its push to near 100 last week. DECK isn’t extended and is trading calmly. It looks like a reasonable buy anywhere under 98, with a stop below its 50-day moving average at 93.
DECK Weekly Chart
DECK Daily Chart
Community Health Systems (CYH)
Why the Strength
The strength of Community Health Systems’ stock comes down to three factors. The first contributor is the huge expansion in the number of U.S. citizens who have health insurance following passage of the Affordable Care Act (ACA). This one factor was a boon to hospitals, which previously had to provide medical care to patients regardless of their ability to pay. Community Health’s revenue growth of 29% in Q1 and 50% in Q2 (after years of mostly single-digit or negative growth) owes much to ACA. The second contributor is the company’s $7.6 billion acquisition of Health Management Associates last year. The deal, which finally closed on January 27, 2014, made Community Health the largest hospital chain in America, with 206 hospitals in 29 states with a total of 31,000 licensed beds. The third factor is the settlement of a suit brought against Community Health by the Department of Justice that accused it of improper billing practices. The company settled the lawsuit by paying around $89 million to Federal and state authorities, removing the cloud over its operations. Investors have been betting that the combined company’s larger scale would increase its efficiency, and the 95% increase in earnings in the company’s latest quarterly report is good evidence of that. Community Health does have about $17 billion in debt, but its combined operations should allow it to reduce that over time. With two good stories to its credit, Community Health Systems looks like a healthy winner.
Technical Analysis
CYH rallied strongly through 2012 and the first half of 2013, soaring from 15 to 51. Then came a nine-month correction to around 35 (following news of the HCA acquisition) that bottomed in April 2014. The rally that broke out on big volume in late May has had legs, and CYH has been rallying since then, with only one correction to the 50-day along the way. CYH has been trading sideways since a five-day rally that started on September 5 pushed it to new all-time highs. The stock is still consolidating that rally. It looks buyable around 55, with a stop at 51.
CYH Weekly Chart
CYH Daily Chart
Ambarella (AMBA)
Why the Strength
The shares of camera-on-a-chip maker Ambarella were on the verge of taking off once again when we looked at the company earlier this month. Driven by the popularity of the firm’s proprietary high definition camera hardware and software, Ambarella posted blow-out second-quarter earnings in early September, with sales rising 25% compared to analyst expectations for a 10% advance. Ambarella also guided higher for the current quarter. What’s more, Ambarella has been swept up in the GoPro excitement heading into the launch of its newest camera model, the Hero 4, and the speculation surrounding a “budget” GoPro camera. Roughly 25% of Ambarella’s revenue comes from its deals with GoPro, meaning that new models and soaring sales at GoPro bode extremely well for Ambarella, which is expanding rapidly, and is looking beyond GoPro’s niche in the sports industry. In fact, Ambarella has a thriving automotive segment, which will benefit from increased demand for dashboard cameras, a growing presence in wearable high-definition broadcasting, and is helping in the development of wearable cameras for Google’s Helpouts online service that offers assistance and expertise on multiple topics.
Technical Analysis
The semiconductor industry was smacked with a selloff since we last visited AMBA in early September. But AMBA held up remarkably well. In fact, the stock’s largest decline on September 15 was immediately followed by a snap back the next day. Now AMBA has pushed past former resistance at 40 to trade at all-time highs as speculation surrounding new GoPro cameras ramps up. Not wanting to chase market exhuberance, we believe AMBA is buyable on dips.
AMBA Weekly Chart
AMBA Daily Chart
American Eagle (AEO)
Why the Strength
American Eagle was a growth retailer with a focus on 15- to 25-year olds during the mid-2000s but it eventually fell behind the “cool” curve, got sloppy with its costs and saw sales and earnings generally stagnate. So what’s new now? Mainly a new interim stemwinder—CEO Jay Schottenstein’s family has a history in the retail field and owns a huge stake of American Eagle. (Mr. Schottenstein has bought even more shares of late, including $2.1 million one week ago!) He’s determined to get it back on track, and the quarter ending July showed some promising signs; while sales and earnings fell from year-ago levels, both numbers topped estimates by a good margin, and some sub-metrics (such as inventories being down 15% from last year) were also encouraging. Possibly most important to investors was talk that capital spending, which should total $230 million this year, will fall drastically to $150 million in 2015. That should free up cash, which will help solidify the dividend (current yield 3.5%) and possibly result in some share buybacks (the share count was down about 1% in the July quarter). Of course, the biggest unknown is whether the firm’s merchandise improvements will prove successful … and we offer no guesses whether that will be the case. But analysts are optimistic that the bottom line will begin growing early next year (estimates see a 31% earnings gain in 2015), which should help the stock stay in favor.
Technical Analysis
AEO topped in the second half of 2012 and then began a long, tedious downtrend, taking shares from 23 to 10 in both May and July. But the August earnings report helped the stock to soar back above its 10- and 40-week moving averages, and, more important, the stock has acted well in the month since then. Turnaround stories can be touch and go, but it looks like all the weak hands are out. A small position on dips of a point or so, with a stop near 12.5, should work if the market holds together.
AEO Weekly Chart
AEO 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.
