Search

Bruce Kaser, Chief Analyst of Cabot Undervalued Stocks Advisor and Cabot Turnaround Letter talks about Turnaround Investing. Among the topics he covers:
* Why turnaround stocks can be successful investments
* Criteria we use to pick turnaround stocks
* How catalysts can restore prosperity to struggling companies
* What to avoid when selecting turnaround stocks
PLUS—Bruce shares the details of three turnaround stocks that are attractive to buy now!

The market’s rebound from the August 5 mini-panic has been unusual—in a good way, with a straight-up advance that’s recouped most of its prior decline, given up very little of its gains along the way, and has been led by a gaggle of growth stocks that have powered ahead on earnings. Now, we’re not totally free and clear here, and some short-term wobbles could easily come; by our measures, the intermediate-term trend is sideways and defensive stocks are percolating, so there’s more work to do. All in all, we’re putting a little more money to work tonight but will still be holding just shy of 40% in cash as we see if the market can further confirm a new uptrend.

The market has been volatile in recent weeks, but the two biggest pieces of evidence to us have been the continued longer-term uptrend, as well as the buoyant action among many individual growth stocks, a few of which we own; while they can get tossed around, they have tended to bounce back strongly as soon as the pressure comes off the indexes. That said, there are still some flies in the ointment out there, with many broad growth measures just so-so we’re not cannonballing into the pool, but we are putting some more money to work tonight, averaging up in a current holding and adding one more potential leader.

Today brought some selling in growth stocks, mostly egged on by weakness in some “old” leading groups, but the evidence (both market-wide and among leading stocks) is still bullish, so we are, too, though we continue to keep our feet on the ground and manage our portfolio given things are a bit euphoric. Today, we’re filling out one of our positions, leaving us with 13% cash.

Elsewhere in today’s issue, we go over some intriguing new ideas (including one peer of a name we own that looks terrific), and answer some of the barrage of questions we’ve been getting, with some talk about the weakness seen in the formerly strong chip group.

Current Market Outlook


Last week saw all the major indexes close clearly below their 50-day moving averages, a development which, combined with another batch of breakdowns among leading stocks and cracks in key sectors (like chip stocks), has us taking another couple of steps back—we’re moving our Market Monitor down to a level 5 (out of 10) in today’s issue. To be clear, the market isn’t a disaster here, as most major indexes are just 3% or 4% from all-time highs, many stocks (especially growth stocks) are still relatively resilient and the longer-term uptrend isn’t in doubt. But the onus is on the bulls to take a stand. After six weeks of correcting and consolidating, we need to see buyers step up before putting a bunch of new money to work. In the meantime, we’re holding some cash and keeping new buys small.

Encouragingly, our screens are still picking up on plenty of attractive charts and stories. Our Top Pick is Innoviva (INVA), which has a couple of asthma treatments that are raking in the dough (much of it from royalties). It’s thinly traded, so consider buying a small position on dips.

Stock Name	Price	Buy Range	Loss Limit
Align Technology (ALGN)	316.20	111-114	102-104
Arista Networks (ANET)	0.00	129-133	119-121
Bioverativ (BIVV)	0.00	54-57	49.5-51
HP (HPQ)	0.00	17.7-18.2	16.7-17
Innoviva (INVA)	0.00	13.5-14.2	12.5-12.8
JD.com (JD)	39.58	31.5-32.5	29.5-30
MACOM Technology Solutions (MTSI)	0.00	49-51	46-47
PulteGroup (PHM)	45.93	23.4-24.4	22-22.5
Seagate Technology (STX)	0.00	46.5-49	43-45.5
Yum China (YUMC)	0.00	31.5-33	29-30

It’s been a rough few years for the housing sector.

Ever since the Fed raised interest rates to multi-decade highs in 2022/2023, both housing starts and existing home sales have fallen off a cliff in the U.S. Housing starts peaked at 1.82 million in April 2022; they dipped as low as 1.28 million this May, a 30% dropoff. Existing home sales have fallen even further, from a 6.6-million-unit peak in January 2021 to a 3.9-million-unit nadir this June – a 41% haircut.

With the broad market making new highs in the face of renewed tariff threats, it seems investors are willing to shrug off macro concerns, at least for now.

We’ll heed the bullish action by stepping into three new positions this month, but hedge our bets by making one of them a half-sized position. We also add two new names to our Watch List.

This is, almost certainly, our last update before the Fed starts slashing interest rates for the first time this year. According to the CME Group’s FedWatch Tool, there is now a 100% chance Jerome Powell and company will cut rates by some amount on September 17; 90% think it will be by 25 basis points, another 10% think it will be by 50 basis points, much like last September.

Current Market Outlook


Wow! After a surprise U.S. election result last week, we got a surprise market reaction—straight up, at least when it comes to “old world” and small- and mid-cap stocks. That’s a good sign, and if the major indexes can hold their ground (or build on their advances) from here, the intermediate-term trend should turn up, which will tell us to become more aggressive. That said, there are huge cross-currents out there; the market is very divergent with tons of stocks hitting new highs and new lows, and growth stocks have actually come under pressure in recent days. Right now, then, we still advise being cautious—we’re nudging our Market Monitor up to a level 5 (out of 10), but won’t go further than that until the trend turns up.

The good news is there are many newly-powerful charts. This week’s list is chock full of construction, infrastructure and financial stocks that have solid growth outlooks and whose stocks look great, too. Our Top Pick is XPO Logistics (XPO), a new leader in the strong transportation group that’s just burst to new highs.

Stock Name	Price	Buy Range	Loss Limit
BHP Billiton (BHP)	0.00	35.5-37.5	33-34
Eagle Materials Inc. (EXP)	0.00	90-94	84-86
HealthEquity, Inc. (HQY)	70.70	38.5-41	34-35.5
MasTec, Inc. (MTZ)	66.65	33.5-35.5	30.5-31.5
Nucor Corporation (NUE)	66.20	55-57	51-52
Proofpoint (PFPT)	113.79	79-82	74-75.5
Texas Capital Bancshares (TCBI)	0.00	63-66	56.5-58
Vulcan Materials Company (VMC)	137.10	129-133	119-121
Western Alliance (WAL)	0.00	42-44	39.5-40.5
XPO Logistics (XPO)	0.00	39-41	36-37

Current Market Outlook


It came on low volume and Independence Day made it just four days, but last week’s trading action was encouraging, with the major indexes generally holding key support early in the week and then bouncing nicely into the weekend. By our measures, the intermediate-term trend is still tilted up, and while there are fewer stocks hitting new highs than there were a few weeks back, there remain many stocks in good shape. With the improved evidence, we’re nudging our Market Monitor up a notch to 7; like we just wrote, last week was encouraging. But we also want to see how the indexes and leading stocks handle themselves now that big investors are back at their desks and earnings season gets underway.

This week’s list is again heavy on growth-oriented stocks, including a couple of newer names we haven’t seen before. Our Top Pick is Vertex Pharmaceuticals (VRTX), which has surged toward the top of an 11-month consolidation. We’re OK starting small and adding more if shares advance.

Stock Name	Price	Buy Range	Loss Limit
AeroVironment (AVAV)	80.48	68-71	61-63
Carrizo Oil & Gas (CRZO)	24.03	28-30	25-26
Dexcom (DXCM)	421.36	96-100	87-89
iRhythm Technologies (IRTC)	51.15	84-87	76-78
Lululemon Athletica (LULU)	304.69	122-128	112-115
Novocure (NVCR)	0.00	31.5-33	28.5-29.5
Shake Shack (SHAK)	92.08	62-65	55-57
Twitter (TWTR)	40.37	42-45	37.5-39.5
Vertex Pharmaceuticals (VRTX)	230.36	169-175	158-161
Yext Inc. (YEXT)	21.32	18.5-19.5	17-17.5

Current Market Outlook


Trend following is our preferred method of market timing for two major reasons: If you follow the system, you’re guaranteed never to remain heavily invested in serious downtrend, and you’re also guaranteed never to miss out on a major uptrend. We’ve seen that play out in recent months—our Market Monitor shifted to neutral in mid-November and to bearish at the start of January, and we continue to advise a defensive stance as the market remains under pressure. We do think stocks could snap back some in the short-term, partially because the broad market isn’t in nearly as bad shape as it was on January 20, when the indexes initially dipped to these levels. But, bounce or not, it’s best to stick with the system, which means remaining defensive until the intermediate-term trend turns up.

This week’s list is a hodgepodge of stocks and sectors, but we feel many can do well once the market finds its footing. Our Top Pick is Michael Kors (KORS), which, after a multi-month bottoming effort, reacted well to earnings last week as results weren’t as bad as feared. The stock is dirt cheap, too.

Stock Name	Price	Buy Range	Loss Limit
Vantiv (VNTV)	0.00	43.5-45.5	41-42
Vulcan Materials Company (VMC)	137.10	86.5-90	81-82
Super Micro Computer (SMCI)	0.00	29-31	26-27
PayPal (PYPL)	147.00	32-34	29-29.5
Universal Display (OLED)	187.54	40-43	37-38
Newmont Mining (NEM)	57.31	23.5-25	21.5-22
Mattel, Inc. (MAT)	0.00	30-31	28-28.5
Michael Kors Holdings Limited (KORS)	73.22	47.5-50.5	43-44
First Solar (FSLR)	83.74	62-64	57.5-58
Agnico Eagle Mines (AEM)	79.05	31-33	28-28.5

Current Market Outlook


The market has turned mostly neutral, with the intermediate-term trend slightly negative, the longer-term trend slightly positive, and individual stocks a mixed bag. In the big picture, the pullback in the major indexes during the past month is reasonable given the February-April gains, and we’re encouraged by both the broad market’s resilience (few stocks or sectors are in disarray) and the dearth of bullish sentiment. Even so, it’s best to go with the market’s action first and foremost, and right now, it’s a mixed bag. Thus, we’re knocking our Market Monitor down another notch and will keep an open mind—a big-volume selloff from here would raise the odds of a deeper correction, but a surge back above the 50-day lines for the major indexes would likely signal the resumption of the post-February advance. Stay tuned.

This week’s list again has a solid growth feel to it, including a few stocks that recently reacted well to earnings. Our Top Pick is Fidelity Information Services (FIS), a steady fundamental performer that gapped up on earnings three weeks ago and has held firm since.

Stock Name	Price	Buy Range	Loss Limit
Weibo (WB)	98.16	22-23	20-21
Ultimate Software (ULTI)	0.00	193-199	183-185
TransUnion (TRU)	83.09	30-31	28-28.5
Tallgrass Energy Partners (TEP)	0.00	46-49	42.5-44
NetEase, Inc. (NTES)	0.00	158-163	145-147
Fidelity National Information Services (FIS)	0.00	70-73	65-66
Emergent BioSolutions, Inc. (EBS)	0.00	41-43	38-39
Salesforce.com (CRM)	0.00	79-82	74-75
Becton Dickinson (BDX)	0.00	162-166	157-158
Applied Materials (AMAT)	0.00	21.5-22.5	20-20.5

I find myself shaking my head when I read the words Efficient Market Theory or Efficient Market Hypothesis (EMH), because my experience doesn’t jive with that concept.

The market’s evidence continues to improve, with more bullish breadcrumbs being dropped--last week, it came via a rare, blastoff-type indicator that triggered for just the fifth time since 1970. To be fair, our primary indicators are still iffy, so you shouldn’t throw caution to the wind, but we’re doing a bit more nibbling tonight, and aim to continue buying if the market can prove itself on the upside going forward.

In October’s Issue of Cabot Early Opportunities we zero in on four software and internet companies that are benefiting from a variety of tailwinds, including two that are finding success after years of less-than-stellar performance. We also revisit an old MedTech friend that helps deliver drugs and vaccines around the world.

Enjoy!

The market’s evidence has worsened of late, with our Cabot Tides flipping to bearish earlier this week, and going along with that is a dearth of stocks hitting new highs. To be fair, it’s not all bad news — we’re seeing fresher leadership hold up relatively well, even during this latest decline, while the longer-term signposts are still positive — but we continue to think a relatively cautious stance is appropriate. Since the last issue, we’ve had a couple sells and three buys (repositioning the portfolio into some more resilient names), but we’re still holding onto about 44% in cash.

In tonight’s issue, we go over all our positions (including the new buys, which we think are battling for pole position for the market’s next advance) and talk about one simple chart tool that can help you spot other potential leaders going forward, too.

The major indexes remain in uptrends, there’s no doubt about that. And, despite some still-soggy action among many growth stocks, most of the broad market is trending higher, too. But not all uptrends are equal, and right now, we don’t see much power out there. That’s not a bad thing, per se, but it’s more of a two-steps-forward, one-step-back kind of advance, with lots of rotation still going on week to week. By all means, continue to do some buying in names you like, but we also advise holding some cash and picking your spots.

This week’s list has a slightly steadier feel to it than prior weeks, as money flows toward companies with dependable growth. There are also a few stocks that have popped on earnings and tightened up of late, including SanDisk (SNDK), which is our top pick. Shares are at a good risk-reward point here.

Stock Name	Price	Buy Range	Loss Limit
Waddell & Reed (WDR)	0.00	63-65	56-57
SanDisk Corp. (SNDK)	0.00	67-70	64-65
Salix Pharmaceuticals (SLXP)	0.00	86-88	74-75
US Silica Holdings, Inc. (SLCA)	0.00	31-33	29.5-30
Mohawk Industries (MHK)	0.00	138-143	129-130
Southwest Airlines (LUV)	0.00	17.5-18.5	15-16
Baker Hughes (BHI)	0.00	56.5-58.5	53-53.5
HomeAway, Inc. (AWAY)	0.00	35-37	31-32
Actavis (ACT)	0.00	160-163	156-157
ACI Worldwide (ACIW)	0.00	60-61	58-59

The most bullish thing a market can do is go up, and that’s what this market continues to do, with the Dow and most other major indexes at (or close to) all-time highs. Now, we saw the usual trumpeting of the new high in the Dow last week by the media, and that often coincides with some choppiness in the market; then again, there’s a distinct lack of greed, with most investors still seeking safety and avoiding risk. Bottom line, we’re keeping our Market Monitor bullish, and while a pullback is always possible, you should be looking to buy as opportunities arise.

This week’s list has a few newer names (to us) from a variety of industries, including REITs, autos, housing and media. But our favorite of the week is Workday (WDAY) a recent IPO that just broke out of a beautiful base, has rapid sales growth and is operating in a huge market.

Stock Name	Price	Buy Range	Loss Limit
Workday (WDAY)	194.88	59-62.5	-
Uni-Pixel (UNXL)	0.00	21-24	-
Time Warner (TWX)	0.00	54-56.5	-
PBF Energy (PBF)	38.93	36.5-38	-
Medical Properties Trust (MPW)	0.00	14.3-14.9	-
The GEO Group (GEO)	0.00	34.5-35.5	-
Fortune Brands Home & Security (FBHS)	81.02	34-35.5	-
Delphi Automotive (DLPH)	0.00	41.5-43.5	-
Discovery, Inc. (DISCA)	0.00	74-76	-
AOL, Inc. (AOL)	0.00	35.5-37	-

The coronavirus is sending the market into a tailspin. It took a thriving bull market from all-time highs to the cusp of a bear market in a matter of weeks.
It is likely that this market will not significantly recover until there is more clarity on the extent of the economic disruptions it is causing and how long they will last. That seems unlikely for several weeks at least. In the meantime, the market is vulnerable to constant headline risks.


It is likely that the market has not found a bottom.


That said, this too shall pass. The coronavirus is a black swan event that is singularly responsible for the market crash. When the panic and emergency subsides, and it will, the market will likely recover and make up for lost time.
In this issue I discuss the ramifications and measures to protect your investments. As well, I identify rare securities that are timely opportunities while the market is down. These stocks have limited downside if the market continues to fall and huge upside leverage when it recovers.

Current Market Outlook


Our thought that March 23 would prove to be a workable low was correct, and the past three weeks have seen the major indexes recoup 40% to 55% of their crash declines (depend on the index). It’s obviously been good to see, as is the continued constructive action in many stocks; it appears the wheat is separating from the chaff. Still, we think the next week or two will be the key juncture—if the major indexes can ramp from here, the intermediate-term trend would turn up and could coincide with some powerful breakouts. On the flip side, if the sellers reappear, a deeper pullback or a retest of the lows could be on tap. Right now, we’re optimistic, but we never anticipate signals; today, with the trend still down, you should remain defensive.

Happily, we continue to see a lot of stocks that want to go higher if bulls do retake control. Our Top Pick this week is Inphi (IPHI), which is already at new closing highs as demand for its high-speed goods improves. Start small and/or aim for dips.

Stock Name	Price	Buy Range	Loss Limit
Amazon.com (AMZN)	2.00	2070-2130	1890-1920
American Tower Corporation (AMT)	252.32	238-248	220-225
Bilibili (BILI)	28.71	25-27	21-22.5
Chewy (CHWY)	43.92	37.5-40.5	32-33.5
Ciena (CIEN)	44.25	42.5-44	38.5-39.5
Inphi (IPHI)	120.16	87-91	77-79
Veeva Systems (VEEV)	180.23	159-163	144-146
Wheaton Precious Metals (WPM)	34.43	31-32.5	27.5-28.5
Wingstop (WING)	121.52	92-96	81-83
ZTO Express (ZTO)	28.84	26-27.5	23.5-24.5