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Top Ten Trader
Discover the Market’s Strongest Stocks

September 8, 2015

This week’s Top Ten has a bunch of medical, construction and retail stocks—probably the three groups that have shown the most life since the recent market low. Our Top Pick is a retail name that just came public a month ago but has the story and numbers to help it head higher once the bulls return.

Main Trend Remains Down; Bounces Possible

Market Gauge is 2

Current Market Outlook

The market continues to gyrate wildly, gapping up or down based on the news of the day. In the short-term, the indexes (and most stocks) have etched out a little trading range, and that could continue for a while longer. But the main trend remains down, so you should be using these bounces as a chance to unload any broken stocks and raise cash if you’ve yet to do so. On the buy side, we are starting to see the wheat separate from the chaff, but it remains too early to put any big money to work; a couple of small positions is fine, but we suggest focusing mostly on preserving capital for the next sustained run—that’s when the big money will be made.

This week’s list includes with some recently strong themes (medical, construction and retail), including a couple of recent IPOs. Our Top Pick is one of those newly-public firms—Planet Fitness (PLNT) has a good story and the stock has shown solid relative strength since coming public.

Stock NamePriceBuy RangeLoss Limit
Signet Jewelers (SIG) 0.00135-140125-127
Post Holdings (POST) 0.0063-6559-60
Planet Fitness (PLNT) 0.0017-1915-16
PDC Energy (PDCE) 0.0053-5648-49
Medicines Company (MDCO) 56.9838-4134.5-36
Lululemon Athletica (LULU) 304.6964-6660-62
JetBlue Airways Corporation (JBLU) 0.0023-2421-21.5
TopBuild (BLD) 111.0032-3429.5-30
Anacor Pharmaceuticals (ANAC) 0.00125-132118-120
AMN Healthcare (AHS) 0.0033-3531.5-32

Signet Jewelers (SIG)

Why the Strength

Signet Jewelers released its second-quarter earnings at the perfect time—just as the market was bouncing following its first correction in years. Of course, a bad quarter would have only made things worse, and fortunately Signet’s second quarter was far from bad: earnings per share improved 20% from a year ago on a 15% jump in sales. It was the third straight quarter that Signet’s EPS has grown at least 20%. Meanwhile, sales have improved every year since 2010. Signet owns the popular jewelry brands Kay Jewelers, Jared and Zales, the latter of which is growing revenues at 57%. All that growth comes at a time when sales at Tiffany, one of Signet’s biggest rivals, have been slumping. It’s another reflection of an improving U.S. economy; Signet’s brands are mainstays in malls all over the country, targeting middle-income customers. With unemployment at its lowest level in seven years and gas prices about 30% cheaper than they were last summer, retail sales have risen 3.5% in the last five months. A lot of those consumers are spending their extra money on jewelry, and Signet is benefiting.

Technical Analysis

SIG shares have been on a wild ride in the last six months. In March, they jumped from 117 to 139; in July, they fell all the way back to 118, eventually sagging to 117 in August amid the market slump. Then came second-quarter earnings, prompting a huge gap back up to 139. It has yet to break through that resistance, retreating back to 136 since the big move. It might be worth a nibble right here; if the stock does break through resistance, it might keep going for a while. Cut your losses at anything below 127, which would tell us this latest gap up was a false move.

SIG Weekly Chart

SIG Daily Chart

Post Holdings (POST)

Why the Strength

Post Holdings is a food conglomerate that makes and sells a variety of foods, but its headline brands are Grape Nuts, Raisin Bran, Alpha Bits and Honey Bunches of Oats breakfast cereals. These legacy products from the company’s inception are joined by a wide range of egg products, refrigerated potato products, cheese and other dairy case products and a host of private-label brands, food supplements and health foods. Post was once the marquee company at General Foods, but ownership passed to Philip Morris in 1985, and the company was spun off again as a separate company in 2008. After some struggles to regain market share and move into higher-margin product lines, the company looks to be back on track. A 2014 acquisition program brought eggs, potatoes, cheese, protein bars and hot cereals under its umbrella, turning earnings negative for the year, but providing more marketing heft. The immediate reason for investors’ interest is a stronger-than-expected earnings report on August 7 that featured earnings of 27 cents per share (analysts were expecting seven cents). Management also hiked forecasts for full-year results. The improved earnings were mostly driven by the new brands in Post’s portfolio. With a revamped product line performing well, investors see Post as a way to play the healthy eating trend.

Technical Analysis

POST came public again as a separate entity in January 2012. The stock jumped from 24 at its IPO to over 60 in March 2014, then tumbled as low as 31 during the year as the acquisition spree undercut earnings. But POST got moving again in October 2014 and was trading above 40 by the end of the year. The stock had its ups and downs, but investors were clearly waiting for Q2 results from late June through July, as the stock traded pancake flat under resistance at 54 until the good news on August 7. After that report, POST powered to 66 by August 11, and that’s about where it’s trading now after a pullback to 61. The rising 25-day (now at 63) will likely supply a little energy when it arrives, so a buy on a pullback of a point or two could work. Use a stop at 60.

POST Weekly Chart

POST Daily Chart

Planet Fitness (PLNT)

Why the Strength

Now here’s a newly public company (IPO on August 6) with a great brand name that has an interesting growth story. Planet Fitness is known for its relatively easy-going fitness centers, mainly targeted to the casual gym goer; it has just over 1,000 centers in the U.S. (almost all of which are franchised), charges just $10 per month with a $49 sign-up charge for initial members and prides itself for being “judgment free,” with lots of grunting and dropping weights discouraged. The company also has a premium membership ($20 per month) that allows members to bring a guest each visit and allows them to use any Planet Fitness gym; those more expensive memberships now account for more than half the total, but even so, Planet Fitness’ average charge per subscriber is about one-third the industry average. As for locations, a big expansion is in process, with management aiming to double its numbers of fitness centers (all franchised) during the next seven years (it added 38 new locations in the second quarter alone). Combine that with healthy same-store sales growth (up 7.3% in the second quarter), which is bolstered by a commitment from franchisees to purchase new equipment every few years, and we believe Planet Fitness can post solid growth numbers for many years to come. It’s a good story.

Technical Analysis

There’s not too much to analyze on PLNT’s chart, but there are two things we like. First, while the stock got hit during the market’s mini-crash, it immediately snapped back toward its highs, notching a new relative performance peak in the process. Second, PLNT’s action of the past month has created a nice-looking IPO base. In a healthy market, we’d be all for buying shares on a big push above 20, but in a downtrend, we advise either keeping positions small or simply keeping PLNT on your watch list.

PLNT Weekly Chart

PLNT Daily Chart

PDC Energy (PDCE)

Why the Strength

While the energy sector as a whole remains in rough shape, we’re starting to see a few rays of light—some stocks in the group have resisted the recent plunge well. PDC Energy is one of those; we think it’s likely to be a leader once the sector (and the market) comes out of its funk. The reason is simple: Despite lower energy prices, PDC operates some of the best acreage in the country and is actually seeing earnings surge in this environment thanks to improving efficiencies, a great hedge book (worth $250 million at the end of July) and a still-solid return despite lower prices (40% to 60% return at $50 oil). The firm operates mainly in the Wattenberg Field in Colorado; about two-thirds of its proved reserves are liquids (including 47% oil). And while it has taken some defensive measures (it will cut its rig count from five to four late this year), it’s drilling far more wells this year than last (155 vs. 119) and expects production to soar 60%! Moreover, PDC expects to operate on a cash-flow-neutral basis through 2016 as it anticipates growing production another 35% with more growth in 2017. It also has some intriguing operations in the Utica Shale, but the Wattenberg is likely to drive results going forward. Obviously, a lot will depend on the price of oil, but even an intermediate-term rally in energy prices could lead to a tradeable rally in PDC. It’s worth watching.

Technical Analysis

PDCE plunged from 70 in June 2014 to 28 in December as it crashed along with the entire group. But since then it’s shown lots of encouraging action—it blasted off that low on three straight huge-volume weeks (“weekly skyscrapers” for those that attended my talk at Cabot Investors Conference) that kicked off a rally back to 60. And during this latest dip, PDCE only fell as low as 41 and has shown a ton of support in the mid-40s even as the market fell off a cliff. You could nibble on dips with a stop below 50, or just keep the stock on your watch list.

PDCE Weekly Chart

PDCE Daily Chart

Medicines Company (MDCO)

Why the Strength

By lowering cholesterol, The Medicines Company raised its Wall Street profile. The drugmaker’s stock has been on a tear since late August, when it revealed that its experimental cholesterol drug lowered LDL-C (“bad”) cholesterol levels by 83% in an early-stage study. Early stage or not, 83% is nothing to sneeze at. It’s a similar number to what Amgen and Sanofi/Regeneron achieved in an early study on their PCSK9 inhibitor, which eventually gained FDA approval. What could make The Medicines’ Company’s drug more appealing is that it only has to be taken every six months; the other two injected anti-cholesterol drugs on the market must be taken every two weeks. The Medicines Company plans to advance its cholesterol drug to a mid-stage clinical trials by year’s end, and late-stage trials by 2017. That’s a ways down the road, but investors are willing to pay up ahead of time, as this could be a multi-billion dollar drug when launched.

Technical Analysis

After six weeks of steady decline, MDCO surged from 28 to 41 in just a few days following the release of its promising cholesterol drug results. The big jump came on strong volume, including the stock’s highest-volume trading day (43 million shares) since going public around the turn of the century. Volume has slowed a bit since, and the stock is building what looks like a solid base around 40. MDCO has been a bit volatile, but the volume increase could make the stock worth at least adding to your watch list, or perhaps nibbling on the dips.

MDCO Weekly Chart

MDCO Daily Chart

Lululemon Athletica (LULU)

Why the Strength

With 16 appearances in Top Ten (including 13 from 2010 through 2012), Lululemon is a familiar name for growth investors. The Canadian maker and retailer of high-end yoga and leisure wear came out of the spotlight for a couple of years, a victim of over-familiarity and a few product failures (like transparent yoga pants). But investors are keeping a close eye on the company’s results, which will be released on Thursday before the market opens. Analysts are expecting earnings of 33 cents a share and sales of $446 million. If it hits those marks, it will be the company’s biggest EPS gain since the October quarter of 2013 (the company’s fiscal year ends in January). While Lululemon has good brand loyalty, especially among U.S. women, who wear the company’s yoga pants everywhere, it has been locked in a marketing war with Nike and Under Armour, both of whom want to poach that core of active-wear customers. Revenue grew just 13% in Lululemon’s fiscal 2015, and the latest quarter showed just 10% growth. So a great deal is riding on Thursday’s quarterly report.

Technical Analysis

LULU pulled out of its 2013–2014 correction in October 2014, and soared higher until it topped at 70 in April 2015. Since then, the stock has seen big swings within a wide trading range. LULU dropped as low as 55 on August 24, but has recovered to over 65. We don’t advocate taking a big plunge this close to earnings and with the market still weak, but if you like the story, keep an eye on the reaction after the earnings announcement. If LULU gets a thumbs-up from investors and rises on good volume, it may have plenty of gas in the tank after its persistent low-temperature correction. There’s a technical support area around 62 that makes a good stop.

LULU Weekly Chart

LULU Daily Chart

JetBlue Airways Corporation (JBLU)

Why the Strength

JetBlue is thriving for a couple of reasons. First, the entire airline industry is getting a boost from low fuel costs and a gradually improving U.S. economy that has air travel on the increase. But the second reason, the really important one, is that JetBlue just runs its business better than its competitors. For instance, while the airline industry enjoyed a 7% margin expansion in Q1 2015 (vs. 2014), JetBlue made a 14% gain. And if you back the improvement in fuel costs out of that measurement, the industry actually fell back by 2% while JetBlue gained 2%. The company’s strategy of operating in high-value markets and offering superior service—the most legroom in coach, free TV and premium movies, Wi-Fi on all flights—is paying off. And the company’s new Mint Class first-class service is getting great reviews from coast-to-coast travelers. Earnings are projected to grow 166% in 2015, and another 13% in 2016. Airlines are doing well, but JetBlue is doing great.

Technical Analysis

JBLU began its current rally in 2013, and caught another updraft in late 2014. JBLU was pulled down by the May–June market decline and the August air pocket, but has now bounced back to near its all-time highs. Despite its excellent performance, JBLU trades at a very reasonable 18 times trailing earnings and has a forward P/E of 12. JBLU looks like a fairly low-risk buy on any pullback below 24, with a protective stop at 21.5.

JBLU Weekly Chart

JBLU Daily Chart

TopBuild (BLD)

Why the Strength

TopBuild is a newly public firm that was recently spun-off from Masco, and it’s poised to benefit from the continuing uptick in the housing market. The company has two main divisions that focus on insulation (71% of revenues), rain gutters (7%) and other (22%) building products; it has the #1 share in residential installation for its markets (more than twice the size of its closest competitor), with its products finding its way into an amazing 35% of all new housing starts. Two-thirds of all business comes from residential new construction, so TopBuild is a direct play on housing starts, although cost cuts have dropped its breakeven point for new housing starts to 750,000, compared to nearly 1.1 million today. The risk here is obvious—should the housing market stumble, TopBuild’s top and bottom lines will likely be chopped significantly despite the diversification efforts its made in recent years (residential construction used to be 90% of business). But, today, the firm is in the right place at the right time—many indicators look bullish for housing starts, so sales and earnings (estimates up huge this year and another 45% in 2016) should do well for at least the next few quarters.

Technical Analysis

There’s not much chart to analyze when it comes to BLD—the stock started trading at the beginning of July and has been in a two-steps-forward, one-step-back advance ever since, despite the horrid market. Shares are thinly traded (about 300,000 shares per day in recent weeks), but if you’re interested, a small position on pullbacks with a stop near the recent low of 30 could work if the construction sector remains bullish.

BLD Weekly Chart

BLD Daily Chart

Anacor Pharmaceuticals (ANAC)

Why the Strength

Anacor Pharmaceuticals is attracting a great deal of attention for a money-losing company with only a toenail fungus cream to sell. The excitement is being generated by the company’s candidate drug called Crisaborole, a cream that’s now in Phase III clinical trials for eczema and Phase II trials for psoriasis. Investors look at the size of the eczema and psoriasis markets and are reaching for the buy button. Anacor’s drugs are based on its proprietary boron-based compounds, which will provide good barriers to entry for copycat drugs. The company also has three drugs licensed out to other companies for development and a group of other drugs being developed in-house that are in early clinical trials. The latest spike of interest in Anacor came on July 13, when Crisaborole’s late-stage clinical trials proved it capable of clearing up eczema rashes. The strength of the Crisaborole story has been the sole reason for investors’ interest, but it’s a good one. Even with lots of good news already priced in, there’s likely more in the tank when the company actually applies for approval from the FDA and again when it gets it.

Technical Analysis

ANAC came flying out of nowhere in the second half of 2013, soaring from below 10 to 23 in March 2014. After a sharp correction to 13 in June 2014, ANAC hasn’t really lost momentum for more than a week or two. The gap up from 85 to 132 on July 13 came on over 10 times average volume, and gave the stock momentum that pushed it as high as 157 in July. The stock corrected slowly but surely in August, but found support at its rising 50-day moving average on August 24, and has been riding that average higher since then. If you like the story, you can buy a little on any dip toward 133, with a stop around 120.

ANAC Weekly Chart

ANAC Daily Chart

AMN Healthcare (AHS)

Why the Strength

AMN Healthcare occupies a unique niche in the healthcare industry. It supplies temporary staffing—nurses, physicians and other healthcare professionals—to hospitals and clinics across the country, and operates job sites and portals for professionals in the healthcare industry. That niche is a good place to be right now, as a combination of an aging demographic and ObamaCare have fueled demand for healthcare services, necessitating extra staffing. To help control costs, hospitals prefer to hire temporary staff members who don’t receive all of the benefits and salary of full-time employees. And many of them need the staffing in a pinch when suddenly inundated with patients. The surge in healthcare demand has given AMN a clear boost: earnings per share nearly doubled from 2012 to 2014, and are expected to increase another 54% this year. Revenues have expanded 36% and 40% in the last two quarters. And its cash flow is growing at a 13.5% clip, double the 6.3% industry average. Add it all up and AMN is a solid growth story in a hot industry.

Technical Analysis

2015 has been a banner year for AHS. The stock began the year at 19, consolidated after hitting 23 in February, then put its foot on the gas pedal in May and June, advancing as high as 31. After another brief consolidation phase in July, the stock added to its gains in August, reaching 37 before the recent market downturn. Since then, AHS has found support right around 33, and has scarcely fallen below its 50-day moving average all year. If you’re game, you can buy a little here or on dips with a tight stop near 32.

AHS Weekly Chart

AHS 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.

FirstStockSymbolTop PickOriginal Buy RangePrice as of September 8, 2015
7/20/15Alaska AirALK10/23/201572-7475
3/10/15Anacor PharmaceuticalsANAC11/06/2015144-151130
8/17/15Allegiant TravelALGT10/22/2015228-236203
8/10/15BofI HoldingBOFI11/04/2015125-129116
3/10/15Buffalo Wild WingsBWLD10/27/2015188-193190
8/24/15CDW Corp.CDW11/06/201536.5-3840
8/24/15Chipotle Mexican GrillCMG10/20/2015
8/17/15D.R. HortonDHI11/11/201530-31.530
8/17/15Fortune BrandsFBHS10/29/201549-5248
8/24/15Global PaymentsGPN10/02/2015104-108111
8/24/15Heron TherapeuticsHRTX11/06/201532-3538
3/10/15ICON plcICLR10/22/201578-80.577
8/10/15Lockheed MartinLMT10/21/2015
2/16/15Martin Marietta MaterialsMLM11/04/2015138-145168
8/24/15Mohawk IndustriesMHK10/30/2015187-194197
8/17/15Molina HealthcareMOH10/30/201578-8075
7/20/15Progressive Corp.PGR10/30/201530-3130
8/10/15Royal CaribbeanRCL10/30/201588-9288
8/24/15Tempur SealyTPX10/30/201569.5-72.573
10/6/14Ulta BeautyULTA08/27/2015
8/10/15Ultimate SoftwareULTI10/28/2015178-185176
8/17/15Vulcan MaterialsVMC11/04/201596-9994
None this week
8/17/15Envision HealthcareEVHC11/05/201542-44.541
7/6/15Hain CelestialHAIN11/17/201564-6761
9/15/14Palo Alto NetworksPANW09/09/2015
6/29/15Sealed AirSEE10/29/201551-52.551
3/10/15Wisdom TreeWETF10/31/201524-2619
DROPPED: Did not fall into suggested buy range within two weeks of recommendation
None this week