The Animal Spirits Awaken
Current Market Outlook
September is often a herky-jerky month, with crosscurrents arising as institutional investors position their portfolios for the rest of the year. So far, though, despite some ups and downs in the major indexes, the action has been encouraging—growth stocks are waking up, with some glamour stocks (including a few recent IPOs) tearing up the charts. As we’ve written repeatedly, there are still some dark clouds out there; despite the improved action, we still see many broader, smaller-cap indexes acting poorly, and even the big-cap indexes have hit resistance in recent days. But the action of individual stocks continues to have us leaning bullish.
This week’s list has a few out-of-the-way ideas today, and our Top Pick is one of them—Mallinckrodt (MNK) is a little-known (but well-established) drug firm with huge earnings estimates for the next few quarters. And the stock has been super strong during the past few weeks.
| Stock Name | Price | ||
|---|---|---|---|
| Western Refining (WNR) | 0.00 | ||
| Mallinckrodt (MNK) | 0.00 | ||
| Health Net (HNT) | 0.00 | ||
| GoPro, Inc. (GPRO) | 0.00 | ||
| Green Plains Energy (GPRE) | 0.00 | ||
| Chipotle Mexican Grill (CMG) | 773.32 | ||
| Cavium (CAVM) | 0.00 | ||
| Baidu (BIDU) | 0.00 | ||
| Banco Bradesco (BBD) | 0.00 | ||
| Ambarella (AMBA) | 52.79 |
Western Refining (WNR)
Why the Strength
Western Refining is a refiner, and therefore, two things generally determine its profits—how much crude oil it processes into different products, and the “spread” in price between how much it pays for that oil, versus what it collects for the various end products. Both of those factors are playing in Western’s favor these days—in its second-quarter report from a month ago, the company said the throughput for its refineries was at an all-time high, while crude oil differentials widened during the quarter, helping earnings to remain elevated. Moreover, this trend continued into July, causing analysts to bolster their earnings estimates for the next couple of quarters. However, what is very interesting to us is that Western also has a 40% ownership stake in Northern Tier (NTI), giving it exposure to the Bakken field, and a 65% interest in Western Refining Logistics (WNRL), giving it 300 miles of pipelines, gathering facilities, lots of storage capacity and some asphalt facilities, too. And Western is using all the cash it’s generating (and getting from WNRL and NTI) to pay a tidy dividend (2.2% annual yield) and repurchase shares (it bought back more than 1% of the company from April through July). The refining group is notoriously cyclical, but as long as the industry does well, Western should be a leader.
Technical Analysis
WNR had a big run from late-2011 through early-2013, but then spent well over a year constructing a huge base-on-base formation—the first consolidation lasted from March through November last year, with the second lasting from January through August. But a bullish quarterly report helped WNR break out last month, and it’s showed good action since, including a controlled pullback for the past two weeks before ramping higher on Friday. We think it’s buyable around here with a stop near the 50-day line.
WNR Weekly Chart
WNR Daily Chart
Mallinckrodt (MNK)
Why the Strength
Spun off by pharmaceutical firm Covidien in 2013, Mallinckrodt specializes in developing, manufacturing and distributing specialty drug products to wholesalers and retail pharmacies. Mallinckrodt is a top producer of acetaminophen and supplier of opioid pain medications in the U.S. thanks to its purchase of Cadence Pharmaceuticals. The company also sells its diagnostic imaging agents to hospitals, doctors and medical clinics. The firm’s recent bout of strength can be attributed to multiple fronts. First, Mallinckrodt announced the $5.8 billion acquisition of Questor Pharmaceuticals in August, with the deal expected to be immediately accretive to Mallinckrodt’s bottom line. Additionally, the company joined the S&P 500 Index as of the close of trading on August 18. And Mallinckrodt recently announced encouraging results from a Phase III study involving its latest pain medication, MNK-155. The medication is an extended-release oral formulation of hydrocodone and acetaminophenm, which is being evaluated for the management of moderate to moderately severe pain. According to the study data, MNK-155 produced a statistically significant reduction in pain compared to the placebo. Lastly, Mallinckrodt is a potential short-squeeze candidate, with 27.3 million shares sold short—representing more than 50% of the company’s total float, or shares available for public trading.
Technical Analysis
Technically speaking, MNK spent the months following its IPO in 2013 bouncing around in the high 40s. Shares found their footing in November, breaking out above 50 and then stair-stepping their way toward 70 by February and, after a six-week pullback, rising above 80 in May. But then came a three-month, double-bottom base, with MNK finding support at 70 (close to its 40-week moving average) in August. It’s been all up since then, with huge volume accompanying the upmove. We think you can buy some here.
MNK Weekly Chart
MNK Daily Chart
Health Net (HNT)
Why the Strength
California-based Health Net administers health benefits to about 5.5 million people across the U.S., primarily through group, individual, Medicare, Medicaid, DoD, TRICARE and Veterans Affairs programs. The company gets nearly 95% of its revenue from health plan premiums, and investors see the Affordable Care Act as a powerful driver of growth in this industry. The company experienced uncharacteristically weak earnings in 2012, earning just 31 cents per share. But they rebound to $2.12 per share in 2013 signaled a return to normal. Interest in Health Net got a boost on May 7 as the company’s slightly disappointing quarterly numbers were accompanied by very strong guidance on future results. The company’s August 6 quarterly report featured a nice beat on revenues and guidance that was in line with expectations. The latest good news for the company was the announcement on August 26 that it had received disease management reaccreditation from URAC, an independent, nonprofit accrediting organization. This reaccreditation is expected to contribute to Health Net’s marketing success. The company’s business looks healthy, and earnings should continue to grow nicely next year.
Technical Analysis
HNT blasted out of a long base in May after strong guidance rescued an otherwise disappointing quarterly report, jumping from 34 to 37 on monster volume. HNT put in five weeks rebasing at 40, then stepped up to 43 in July. The reaction to Q2 earnings was delayed, but ultimately produced a rally that began on August 8 and broke out to new highs in late August. From its high of 47 on the last trading day of August, HNT has corrected to 46 and is now holding above 46 as it consolidates its gains. HNT is a buy anywhere near 46, with a stop at its 50-day moving average, now at 43.5.
HNT Weekly Chart
HNT Daily Chart
GoPro, Inc. (GPRO)
Why the Strength
GoPro is king of the wearable action camera. The company manufactures small, lightweight and extremely durable high-definition cameras that allow consumers to easily record their adventuring escapades and then just as easily post and share those videos and pictures online. GoPro’s flagship products include the HD Hero and the Hero 3+, which can download footage into GoPro Studio, the company’s desktop video editing application. The company also offers remote controls and integration with mobile devices via its GoPro App. Although the company’s most recent quarterly report raised a few eyebrows, analysts expect GoPro to have a big holiday season, and this is what’s behind the strength in GPRO shares, with analysts at Dougherty telling clients that “GoPro has established itself as one of the most valuable brands in consumer technology and has significant headroom to grow.” For instance, during the 2013 holiday season, GoPro was sold in roughly 3,000 locations. Now, the company’s cameras have shelf space at nearly every sporting goods and electronics retailer location! Lastly, the company is expected to realize significant growth overseas, a market which GoPro is only beginning to tap into. Overall, GoPro earnings growth is expected to top 52% this year, while moderating to 24% in 2015.
Technical Analysis
Despite being one of the hottest IPOs of the year, GPRO shares have spent quite a bit of time moving sideways. After going public, GPRO vaulted from the low 30s to test resistance near 50 in just three weeks. However, the 50 region would cap GPRO for the rest of July and August, with shares bounding around 40. But the stock appears to have finally come to life, gaining traction in late August, and breaking out above 50. Following a brief test of support at 50 in early September, GPRO appears ready to finally head higher. We like the shares of this volatile performer on dips of two or three points.
GPRO Weekly Chart
GPRO Daily Chart
Green Plains Energy (GPRE)
Why the Strength
Green Plains is an Omaha-based producer, marketer and distributor of ethanol made from corn. The company owns and operates 12 ethanol plants that have an annual production capacity of about one billion gallons of fuel-grade ethanol. The company also markets ethanol for other producers and produces three million tons of animal feed and 250 million pounds of industrial grade corn oil from its annual processing of 10 million tons of corn. The company has grown via acquisitions to become the fourth-largest producer of ethanol in North America and its history of growing earnings is impressive. From 40 cents per share in 2012, Green Plains increased earnings to $1.26 per share in 2013 and it is forecast to deliver $3.81 per share in 2014. On August 14, the company announced a share repurchase program of up to $100 million and a quarterly dividend of eight cents, which is double the previous quarterly payout. Green Plains is also in a joint venture to commercialize technologies for growing and harvesting algae for biomass energy production. The company’s stock now pays a 0.4% forward annual dividend yield.
Technical Analysis
GPRE has been a tractor since it bottomed at 4 in July 2012. The stock topped 10 in March 2013 and 20 in January 2014. After a correction from 31 to 25.5 in April and May, GPRE resumed its rally, and has now put in gains in 16 of the last 18 weeks. A dip from 46 to 44 last week got the stock a little closer to its rising 25-day moving average and produced a nice buying opportunity. With GPRE still below 45, we think you can buy right here, with a stop near 40.
GPRE Weekly Chart
GPRE Daily Chart
Chipotle Mexican Grill (CMG)
Why the Strength
Chipotle Mexican Grill is on its way to joining the ranks of McDonalds, Home Depot and other cookie-cutter retail stories that thrived over a decade or two as they opened more stores and expanded into other fields. The very big idea here, as Chipotle’s co-CEO said recently, is that Chipotle and other fast-casual chains will significantly eat into traditional fast-food chains’ business as buyers look for more than just the cheapest meal, but instead, quality food at a reasonable price. Back to today, though, Chipotle is strong following a fantastic second-quarter report that featured jaw-dropping same-store sales growth of 17%, and some price hikes of late should keep growth humming. With 1,700 locations, the company can likely double in size in the U.S. without saturation, and that says nothing of the international opportunity or some of its new ventures—the firm has a few ShopHouse locations (Asian-style, fast-casual cuisine), and we’re very optimistic about its Pizzeria Locale businesses (mainly in Colorado today), where consumers can pick out their toppings and, with the help of a special oven, get their pizza in just a couple of minutes! For now, of course, the traditional Chipotle locations will drive growth, with analysts seeing earnings up 31% this year and 27% in 2015.
Technical Analysis
CMG looks like a good set-up right here. Shares popped to about 550 a year ago, but then gyrated up and down for the next eight months and were sitting just south of 600 when earnings were released in July of this year. That caused a breakaway gap to new highs, and since then, CMG has moved straight sideways, closing very tightly each of the past seven weeks. A shakeout toward 650 is possible, but we’re OK with a buy around here and a stop near 630.
CMG Weekly Chart
CMG Daily Chart
Cavium (CAVM)
Why the Strength
Cavium is a chip company that has a story right out of the 1990s—the company makes semiconductors that enable intelligent data processing at very high speeds, making them perfect for communications (routers, switches, 4G wireless infrastructure), storage, data center and even security applications. (Its biggest customer is Cisco, which makes up more than 15% of total revenue, and names like F5 Networks, Palo Alto Networks and Citrix are also customers.) Cavium has been hitting the ball out of the park with its recent results, with great growth in nearly all of these areas, and management is bullish on the next few quarters thanks to some new design wins and product releases, particularly in its data center (the move toward cloud computing is helping) and core enterprise segments. Our only worry has nothing to do with the company itself, but the fact that it’s a “down the food chain” stock, as are most chip firms—if business softens a bit for Cisco, F5 or Palo Alto, orders could dry up in a hurry. But the flip side of that is the markets Cavium is serving are booming now and are likely to grow handsomely for a long time; demand isn’t up for just temporary reasons. That’s why analysts see the bottom line rising more than 40% this year and nearly 30% in 2015. It’s not changing the world, but Cavium is in the right place, at the right time, with the right products.
Technical Analysis
CAVM has been a very choppy stock during the past few months, which makes it hard to handle—for instance, we had recommended it in the spring, but were knocked out of it as the stock dipped from mid-June to late-July. However, it’s come roaring back since then, moving to new price highs on earnings two weeks ago and consolidating since. The recent dip could go a bit further, but we think buying CAVM on dips and using a stop near the 50-day line makes for a good risk-reward trade.
CAVM Weekly Chart
CAVM Daily Chart
Baidu (BIDU)
Why the Strength
When Baidu was making the first of its 26 previous appearances in Top Ten in January 2007, everyone referred to it as “the Google of China.” Now, with its annual revenue up from $85 million then to $6.48 billion now, the company doesn’t need a U.S. model. Baidu remains the dominant search engine in China, and is stronger than ever after surmounting a challenge from smaller companies over the transition to mobile devices. Baidu is now emerging as one of the Big Three Chinese companies—along with Alibaba, which will be coming public on September 18 or 19, and Tencent Holdings—that dominate e-commerce, messaging and search in the Middle Kingdom. Baidu makes money through a familiar model of giving away its search service while selling ad words to advertisers. The company enjoyed 47% revenue growth in 2013 and has averaged well over 50% growth in the last three quarters, with a handsome 31.4% after-tax profit margin in Q2 despite heavy investment. Baidu is using its massive cash flow to buy complementary businesses and to develop products like BaiduEye, its version of Google Glass. It’s also stepping into e-commerce via a $813 million tie-up with Tencent and China’s Dalian Wanda Group for an online shopping venture. If Baidu can convert a goodly portion of its huge user base to active shoppers, its growth will continue for a long time.
Technical Analysis
BIDU endured a long slide due to concerns about its mobile market share, but that ended in August 2013 with the stock at 83. The stock roared back, hitting 175 at the beginning of 2014 and is trading today at 227, having nicked 230 last week. BIDU has been trading mostly sideways since it gapped up on earnings in late July, but a high-volume jump from 215 to 224 last week looks like a hint of things to come. The possible effects of the Alibaba IPO are unclear, but BIDU looks like a long-term winner. A buy around here or on dips with a stop at the 50-day moving average (now at 208), makes good sense.
BIDU Weekly Chart
BIDU Daily Chart
Banco Bradesco (BBD)
Why the Strength
Banco Bradesco is Brazil’s second-largest private sector bank and is making its Top Ten debut today. The bank has been kicked around a little by both state-owned Banco do Brasil and private-sector rival Itau Unibanco, but it’s fighting back with an aggressive program of expanding distribution to the Internet and mobile banking channels. CEO Luiz Carlos Trabuco says that his bank will expand by offering “the most complete platform of lending and financial services products.” Banco Bradesco achieved a 3% jump in revenues and a 6% gain in earnings in its latest quarter, reversing a long string of declines in both categories. Brazilian growth has been hampered in recent years by economic and political issues, but new elections are coming in early October, and a favorable August manufacturing purchasing managers’ index (PMI) indicates a recovery in the country’s manufacturing sector. Investors are interested in Banco Bradesco as both a proxy for strengthening Brazilian growth (and possible political change) and for its own sake as an aggressive, expansion-minded financial institution. The stock trades at a reasonable 14 P/E ratio.
Technical Analysis
BBD traded above 20 in November 2010, then bounced gradually lower for almost four years, finally finding bottom at 10 last February. But BBD bounced to 15 by the middle of May and began another rally in August that kicked it above 18 by the end of the month. BBD is now at multi-year highs and is a little extended from its moving averages—the 25-day is at 15.3. It looks like a good buy on any weakness. Use a stop at 16.5.
BBD Weekly Chart
BBD Daily Chart
Ambarella (AMBA)
Why the Strength
System-on-a-chip designer Ambarella is at the epicenter of the booming wearable camera craze. The company designs and markets high-definition image processing semiconductors, combining its hardware with proprietary software to create and publish broadcast quality HD video and digital still photos. Ambarella’s chips enable video cameras to be smaller and run on less power, making them extremely attractive to smartphone/tablet manufacturers and wearable technology makers. Two of Ambarella’s biggest customers are GoPro and DropCam—both listed among Amazon.com’s top five best-selling products. (Roughly 25% of Ambarella’s revenue comes from its deals with GoPro.) The company has come on strong during the past couple of years, with GoPro spearheading the wearable camera movement. As a result, Ambarella has seen average quarterly revenue growth of 26% during the past year, with earnings growth averaging 32%. The company’s strength comes as a result of its most recent quarterly report, in which Ambarella easily topped Wall Street’s earnings estimates and guided higher for the coming quarter. The company also noted that it’s looking beyond GoPro’s niche in the sports industry to police protection, drones and security cameras.
Technical Analysis
Since going public in late 2012, AMBA has been on a steady upward trajectory. Bolstered by support from its 10-week and 25-week moving averages, shares surged from an IPO near 7 in October 2012 to tag a high north of 36 this past January. So far this year, AMBA has digested those rapid gains, with shares pulling back to test support near 25 in May. The stock has since rebounded from this annual low, climbing back above 30 by July. Currently, AMBA is riding strong volume in the wake of its better-than-expected Q2 report. We suggest buying dips.
AMBA Weekly Chart
AMBA 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.
