Still Fighting it Out
The market has shifted into a news-driven environment; today the indexes popped higher as it appears any strike on Syria will be delayed, or possibly abandoned. But with many economic reports coming up that could affect interest rates (including the jobs report on Friday) and with Congress debating Syria, expect more gyrations ahead. Overall, our outlook is the same as the past two weeks—with many growth stocks acting well, you should hold your top performers and look to do a little buying on weakness. But with the indexes chopping around, you should also hold some cash and wait for a real green light before getting too aggressive.
This week’s list includes a few secondary-type names; there aren’t as many liquid leaders as has been the case in past weeks. But there are plenty with big potential. Our favorite is Hain Celestial (HAIN), a direct play on the organic food movement, whose stock just emerged from a year-long rest.
| Stock Name | Price | ||
|---|---|---|---|
| Zillow (Z) | 76.64 | ||
| Web.com (WWWW) | 0.00 | ||
| Sina Corp. (SINA) | 0.00 | ||
| Nationstar Mortgage (NSM) | 0.00 | ||
| Laredo Petroleum (LPI) | 0.00 | ||
| Jazz Pharmaceuticals (JAZZ) | 0.00 | ||
| Incyte Corporation (INCY) | 76.98 | ||
| HD Supply Holdings, Inc. (HDS) | 0.00 | ||
| The Hain Celestial Group, Inc. (HAIN) | 0.00 | ||
| Chesapeake Energy Corporation (CHK) | 0.00 |
Zillow (Z)
Why the Strength
Zillow helps make connecting home buyers and home sellers easier by moving the entire process online. The company has even added mortgage lenders to the mix, providing visitors to Zillow’s website with the one-stop convenience of finding a home and financing. The company jumped back into the headlines last week after announcing that it had completed its acquisition of StreetEasy, a real estate website in New York City. StreetEasy attracts roughly 1.2 million unique visitors a month, providing another sizeable source of income for Zillow. The company draws revenue from selling home buyer and seller information to consumers and brokers for buying, selling, renting, borrowing and remodeling homes. The company also offers a paid subscription package called Zillow Pro, which recently topped 100 brokerage partners. While Zillow is not the biggest player in the real estate market, it is the fastest growing. During the most recent quarter, Zillow posted a 69% jump in sales to $46.9 million. And looking longer-term, the company has grown from revenue of $17.5 million in 2009 to $116.8 million in 2012. With the housing market continuing to improve, we believe that Zillow remains a solid investment.
Technical Analysis
Z has had its ups and downs since we last took a look at the stock in late July. Shares broke out above 80 in early August, with Z’s rally falling just shy of the century mark. The stock was unable to hold its perch, however, and fell back to support at 80 after a share offering, though it’s ripped back toward 100 in recent days. This is a wild stock, so you should keep new positions small and try to buy on pullbacks.
Z Weekly Chart
Z Daily Chart
Web.com (WWWW)
Why the Strength
Web.com Group helps get businesses online. The company specializes in website building, custom design consulting and Web hosting services. The firm’s ItsRegister.com business provides domain name registration, its eWorks! XL service offers initial site-design setup and online marketing and technical report services, and the company’s SmartClicks service offers search engine optimization and local pay-per click advertising services. While Web.com may not have been on your radar prior to today, the company has a pair of notable feathers in its cap. First, the company is the official sponsor of the Web.com PGA Tour. The Tour has opened doors for Web.com, bringing in more than 100 golfers looking to improve their online presence. Second, the company helps with Facebook ads. The Facebook deal has helped Web.com considerably, with average monthly revenue per user rising to $14.09 in the second quarter from $13.89 in the first quarter. Overall, second-quarter earnings and revenue were up 34% and 22%, respectively, marking the fourth-straight quarter of double-digit growth on both fronts. The company also boosted its full-year earnings and revenue guidance, placing both figures well above the consensus estimate.
Technical Analysis
WWWW shares have been on fire for the past two years. In fact, the stock has nearly tripled in value since September 2011. What’s more, despite a consolidation period at the beginning of 2013, WWWW is still up more than 90% year-to-date. Currently, the stock is consolidating between short-term resistance at 30 and rising support at its 10-day and 25-day moving averages. We believe that this lull in WWWW’s uptrend provides a decent entry point.
WWWW Weekly Chart
WWWW Daily Chart
Sina Corp. (SINA)
Why the Strength
Interestingly, U.S.-traded Chinese stocks have been one of the strongest groups in the market during the past few weeks. One that’s come back to life is Sina Corp., which has huge potential. The company is one of China’s leading Internet portals, offering the usual array of email, chat, news, weather and so on, and derives the lion’s share of its revenue (about 77% of it) from online advertising. However, the big story here is the company’s Weibo microblog, the leading Twitter-like website in China. It’s been growing rapidly for years (somewhere around 500 million registered users, though far fewer are actively using it), and now Sina is monetizing it—Weibo’s advertising revenues soared to $30 million in the second quarter, tripling from a year ago, and its value-added services (member fees, game revenue, etc.) totaled $7.7 million, up 186%. And this is just the beginning—Alibaba, China’s largest e-commerce firm, paid $586 million to buy an 18% stake in Sina Weibo, with options to boost that to 30% down the road. Moreover, there will be lots of integration between the two firms, which should lead to huge advertising opportunities from Alibaba’s customer base. Analysts see earnings soaring to nearly $1 this year and then $2 in 2014 as revenue growth accelerates. We like this story a lot and think Sina could go very far as Weibo’s growth pushes ahead.
Technical Analysis
SINA topped at 147 in April 2011 and proceeded to plunge to 47 by December. Then it spent all of last year, and the first few months of 2013, building a wide bottom. But the picture began to brighten in April; SINA popped higher late that month, then consolidated into mid-July. And since then, the buyers have flexed their muscle, pushing the stock as high as 86 before the recent pullback. Shares are currently hovering near their 25-day line; we think a small position here or on weakness, with a loose stop near 68, could work.
SINA Weekly Chart
SINA Daily Chart
Nationstar Mortgage (NSM)
Why the Strength
Interest rates are rising, financial stocks are getting hit and the housing market is slowing down. So why is Nationstar Mortgage one of the market’s strongest stocks? Because it’s riding a major trend of big banks divesting themselves of mortgage servicing rights, especially for troubled loans; Nationstar and peer Ocwen Financial are experts in the industry (both have great histories of lessening the rate of delinquencies, which cuts costs). They have been gobbling up these rights during the past couple of years. Nationstar is now servicing $435 billion of mortgages, up from $208 billion at the end of 2012, and management believes it has another $455 billion that it could acquire in the year or two ahead! Overall, the financial industry is likely to shed something like $1 trillion more in servicing rights during the next three years or so, which should provide ample opportunity for the company to keep growth humming. The one worry here is that Nationstar does get a decent chunk of its profits through mortgage originations, which could slow down as the housing market does. However, there was zero sign of that in the second quarter, when results crushed estimates across the board. Earnings are expected to leap to $7 per share in 2014, with cash flow going along for the ride. We like it.
Technical Analysis
NSM is a choppy stock and a bit thinly traded (about $45 million volume per day), and that shows up on its weekly chart—the stock has had three tedious corrections to its 40-week line during the past year. But, as the market has pulled back, NSM has tightened up; shares are trading just south of 50 as volume has dried up. If you’re game, you could nibble here (or on minor weakness) with a stop near the 50-day line (at 45 and rising), or, to be safer, wait for a decisive breakout above 52.
NSM Weekly Chart
NSM Daily Chart
Laredo Petroleum (LPI)
Why the Strength
Laredo Petroleum is an oil-weighted explorer that’s nearly a pure play on the Permian Basin in West Texas, where the company has more than 200,000 acres. Historically, the firm has been heavy on natural gas, but management has divested some of those assets and is now focusing on oil- and liquids-rich areas; oil made up 44% of total production in the second quarter, and should leap to 60% by year-end, which will boost pricing and margins. That’s a big part of the bullish story, but another positive factor is that the company operates in two relatively concentrated areas, and as the firm “de-risks” its acreage, its reserves will skyrocket. In fact, in a July presentation, management said that it believes Laredo’s resource potential is actually about eight times greater than proven reserves! Combine all of that with solid execution and cost controls, and most expect big sales and earnings growth ahead. As it stands now, sales growth is accelerating, and earnings are expected to rise 62% this year and another 51% in 2014 (to nearly $1 per share) as the firm focuses on oil and liquids. If oil prices remain north of $100 per barrel, we think those figures will prove conservative. All in all, Laredo has a lot to offer.
Technical Analysis
LPI is a relatively new issue, coming public in December 2011 near 17. It quickly rose to 28 within a couple of months, but then the wheels fell off, with the stock trending lower until April of this year, when it traded at 16. But since then, the action has been inspiring—shares quickly spurted above 20, consolidated tightly through July, and have spiked on big volume during the past month. LPI can be a bit choppy, and there’s still some resistance at its old peak near 28. If you want in, try to buy on minor weakness.
LPI Weekly Chart
LPI Daily Chart
Jazz Pharmaceuticals (JAZZ)
Why the Strength
Specializing in the treatment of neurological, oncology and women’s health conditions, Jazz Pharmaceuticals aims to help patients with unmet needs. The company has a solid stable of drugs, including anxiety treatment Luvox CR, chronic pain medicine Prialt, and cancer drug Erwinaze. But the company’s biggest seller is narcolepsy drug Xyrem. When we last checked in on Jazz in early August, the company had pumped up investors in the wake of its second-quarter earnings report. The firm posted a 68% year-over-year jump in sales, with Xyrem driving roughly 60% of the bottom line. The company’s success also led management to boost its fiscal 2013 earnings and revenue outlook for the second consecutive quarter. Jazz continues to benefit from an increasing number of Xyrem patients, as well as its ability to increase drug prices with little fear of competition. Lastly, the company has all but silenced detractors citing a generic threat to Xyrem, announcing two new patents for the drug. The move should help protect Xyrem from generic competition, including the pending lawsuit with Roxane Laboratories. We expect solid growth for many more quarters.
Technical Analysis
JAZZ reached an all-time high just above 80 in August, then dipped a bit following earnings. But Jazz’s strong revenue growth prompted investors to shake off any concerns and the stock reclaimed support at its rising 10-day moving average, and is now trading just shy of the 90 level. Shares remain a bit overextended here, however, so you should look to buy on a dip of a point or two.
JAZZ Weekly Chart
JAZZ Daily Chart
Incyte Corporation (INCY)
Why the Strength
Biotechnology firm Incyte focuses on discovering and developing drugs that inhibit specific enzymes associated with cancer, diabetes, blood disorders and inflammatory diseases. The company’s leading technology is the JAK (Janus Associated Kinase) inhibitor program, which specializes in treating inflammatory diseases and cancers. The company’s first commercial product, JAKAFI, was approved for the treatment of myelofibrosis—a rare blood cancer—in 2011. The company’s pipeline is chock full of drug candidates in various stages of trials, including treatments for rheumatoid arthritis, psoriasis, solid tumors and breast cancer. But Incyte’s biggest burst of strength lately has come from positive Phase II trial data for JAKAFI’s treatment of late-stage pancreatic cancer. According to the results, the six-month survival rate for patients treated with JAKAFI and chemotherapy was 42%, compared to an 11% survival rate for patients treated with chemotherapy alone. Incyte banked sales of $54.1 million from JAKAFI in the second quarter, and expects full-year 2013 revenue of about $220 million. Should the drug receive approval for pancreatic cancer treatment, analysts at Canaccord Genuity are projecting annual sales of an additional $514 million by 2023.
Technical Analysis
Despite enjoying an overall uptrend for the past four years, INCY shares can be volatile at times. The stock surged to new highs near 25 in July 2012, but then pulled back, forming a base near 15 in December and January. This year has been less exciting for INCY, with shares settling into a trading range near 20. However, recent JAKAFI developments have sent the stock surging to fresh 12-year highs north of 30. Currently, shares are settling down, with support emerging in the 34-35 region. We think you can buy here with a stop below 30.
INCY Weekly Chart
INCY Daily Chart
HD Supply Holdings, Inc. (HDS)
Why the Strength
HD Supply is a new name, but at the same time it’s a familiar one. It’s the wholesale business that Home Depot built up since acquiring Hughes Supply in 2006, adding numerous smaller acquisitions even as the building market crumbled. In 2007, with Home Depot under pressure, the company was sold to a trio of investment banks (for $8.5 billion), while the parent company kept 13%. And on June 27 these investment banks finally took the company public. The company has 630 locations and serves roughly 440,000 contractors, government entities and institutions, and while on paper the entity hasn’t had a profitable year yet, it does show revenue growth every year since 2010. Furthermore, analysts are projecting that earnings will hit $0.76 a share this year and $1.83 in 2014. The stock is selling at just 12 times that today and at just 53% of revenues, so there’s certainly room for upside movement if those estimates are achieved. We like the fact that HD Supply is a new name, and thus has far more potential buyers than sellers. And we like the fact that it’s in building sector, where the business rebound still has potential to run higher.
Technical Analysis
HDS has a pretty simple chart; it came public June 27, at the very end of the May-June market correction, and since then it’s been going up! Importantly, it’s been going up at a rate greater than the broad market, so it has positive relative strength. Most recently, the period since August 12 has seen the stock consolidate its gains, trading mainly between 23 and 24, while the broad market struggled. This action has allowed the 25-day moving average to catch up—it’s now at 23—and presents a decent buying opportunity.
HDS Weekly Chart
HDS Daily Chart
The Hain Celestial Group, Inc. (HAIN)
Why the Strength
Institutional investors definitely love rapid sales and earnings growth, however, they also value consistency; if a company’s business could turn down quickly, it’s harder to get big mutual and pension funds to hold big positions. Hence, the attraction to Hain Celestial, one of the fastest-growing organic and natural food producers; its brands include Earth’s Best, Celestial Seasonings, Garden of Eatin’, Almond Dream, Plainville Farms and more, and are found at thousands of grocery stores across the U.S. and overseas (including the U.K., which is now the second-largest market for Hain). Second-quarter results, which were released two weeks ago, were terrific, thanks to strong organic growth from its existing brands, as well as dozens of new products. From this point, it’s simply a matter of continuing to expand distribution, both in existing locations and in new overseas markets, and riding the wave of greater consumption of natural foods; with many popular brands, it’s unlikely to lose share to any great degree. Analysts see earnings up 20% during the next 12 months, and there’s no reason the firm can’t grow at 15% to 20% rates for many years if management continues to pull the right levers. It’s not revolutionary, but it’s a solid story.
Technical Analysis
HAIN enjoyed a steady uptrend from late-2009 (when it was around 14) through last August (when it peaked at 74). But it then entered a long base-building phase, as you can see on the weekly chart; shares dipped toward 50 earlier this year before beginning to repair the damage. The stock made it all the way back to its prior peak in July, paused for a bit, and then surged on a great earnings report to new highs. In a good market, we’d advise buying right here, but instead you should consider nibbling on pullbacks, with a stop in the low 70s.
HAIN Weekly Chart
HAIN Daily Chart
Chesapeake Energy Corporation (CHK)
Why the Strength
Chesapeake Energy is the second-largest producer of natural gas in the U.S. It’s the largest producer in the Marcellus Shale region of Pennsylvania, and also has interests in Louisiana, Texas, West Virginia, Oklahoma, Kansas and Wyoming. Thus the price of natural gas is a key factor in the company’s fortunes, and as we all know, the success of fracking has led to a drop in natural gas prices. Happily, Chesapeake gets roughly 50% of its revenues from its marketing and oilfield services, and these have proven a wise diversification from the commodity side of the business. In the latest quarter, both revenues and earnings grew at a healthy clip and after-tax profit margins were the highest since late 2011. But there are two other factors that seem even more important today. The first is the departure of co-founder Aubrey McClendon, who left the company in April and was finally replaced three months later—which was followed a few weeks ago by the departure of four senior executives. That’s cleaning house! The second is the news that activist Carl Icahn has taken a 9.98% stake in the company. With all this brainpower focused on shaking up the company, there’s optimism by institutional investors that Chesapeake will do bold and brilliant things to increase shareholder value.
Technical Analysis
CHK was a star performer from 2003 through 2007, but it’s been lagging the market since, not least because earnings growth was difficult to maintain. But earnings have been trending up for two quarters now, and the stock’s momentum has turned positive, too. Most recently, the excellent earnings report on August 1 sparked high-volume buying that gapped the stock up to 25. It then spent three weeks building a base there before resuming its uptrend. Buying on weakness is recommended.
CHK Weekly Chart
CHK 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.
