Make Hay While the Sun Shines!
Current Market Outlook
With the broad market zooming, finding strong stocks is easy these days. But while buying any strong stock might work, your best odds will come from buying strong stocks that have set up well. That means they have a base, where supply and demand have stabilized for a while, or they have a breakout, which can kick off a new advance, or other supportive patterns. What you don’t want to do in a market this strong is buy (or own) laggards. Make hay while the sun shines! (And take advantage of what are traditionally the two last months in the market’s favorable November-April season.)
Our Top Pick this week is WABCO Holdings (WBC), a global supplier of technology systems for commercial trucks, buses and trailers. Business is booming and the stock has great and growing sponsorship.
| Stock Name | Price | ||
|---|---|---|---|
| WABCO Holdings (WBC) | 0.00 | ||
| Norwegian Cruise Lines (NCLH) | 0.00 | ||
| IntercontinentalExchange, Inc. (ICE) | 0.00 | ||
| Hilton Worldwide Holdings (HLT) | 0.00 | ||
| Salesforce.com (CRM) | 0.00 | ||
| Cracker Barrel Old Country Store (CBRL) | 0.00 | ||
| Cavium (CAVM) | 0.00 | ||
| Acuity Brands (AYI) | 0.00 | ||
| Akorn (AKRX) | 0.00 | ||
| Agrium (AGU) | 0.00 |
WABCO Holdings (WBC)
Why the Strength
Six years after it had to be bailed out by American taxpayers, the U.S. auto industry is thriving, and WABCO Holdings, a maker of auto and truck electronics and control systems such as cruise control and anti-lock brakes, is cashing in. Since 2009, WABCO’s EPS has increased more than 13-fold, while sales have nearly doubled. The Belgian company (U.S. headquarters are in Rochester Hills, Michigan) is projecting more big things this year as U.S. auto sales are expected to reach a record 17 million units. In its fourth-quarter earnings release, announced in mid-February, WABCO forecast 2015 sales growth of between 6% and 11%, surpassing analysts’ expectations of 5.6% growth. Though European auto sales have been slower, WABCO recently became the first supplier of advanced emergency braking systems in accordance with European Union regulations. Also, WABCO’s fleet management business, Transics International, entered into a new agreement with ASKO NorgesGruppen, Norway’s largest grocery company, in January. Transics will supply ASKO’s 700-vehicle fleet with on-board computers, mobile technologies and other software. Those developments have helped WABCO offset European weakness while U.S. sales boom.
Technical Analysis
WBC struggled for much of 2014, plummeting from a high of 116 in June to 85 during the market downturn in October. By year’s end, the stock had climbed back to 106, but it couldn’t break through resistance at that level until last month’s encouraging earnings report. On February 13, the day WABCO’s fourth-quarter earnings were released, WBC shot up to 109. Having broken through the 106 barrier, shares have continued their ascent, breaching 119 on February 25. The stock pulled back to 116 last week, presenting a nice entry point. With resistance far in the rear-view mirror and having risen almost in a straight line for more than a month, WBC should continue to climb.
WBC Weekly Chart
WBC Daily Chart
Norwegian Cruise Lines (NCLH)
Why the Strength
While leisure stocks have turned into a mixed bag lately, many remain in good shape, including Norwegian Cruise Lines (as well as Hilton, also in this issue), one of the major cruise lines in the world. The big idea here is not just the tailwinds helping the overall industry—lower fuel prices are sure to help going forward, as will an accelerating U.S. economy and job market—but also a bullish outlook in the firm’s recent conference call (management said the current January to March promotional season has seen “a significant acceleration in booking volume”) and good news from the firm’s late-2014 acquisition of Prestige Cruise Holdings (which operates higher-end brands Regency and Seven Seas), with $50 million of synergies identified. Long-term, Norwegian is aiming for growth—it has 21 ships on the water today, but another six (28%) will be added by 2019. Sales and earnings have been clipping along nicely during the past few years, and analysts see that continuing, with the bottom line rising 24% this year and 31% in 2016. Obviously, cruise lines are as cyclical as they come, and any major economic hiccup or fearful event (like the Ebola scare last fall) can send the stocks into a tailspin. But today, conditions are bullish, so Norwegian should continue to do well in the quarters ahead.
Technical Analysis
NCLH came public in early 2013 and basically went straight sideways right through October 2014—there was a probe or two higher, but the Ebola scare brought shares down toward 30, right where they were in February 2013. But since then, NCLH has acted very well, with the stock flying to new highs into year-end, pausing for a month, and then ramping higher on the heels of its earnings report. We think buying around here or on dips makes for a good risk-reward trade.
NCLH Weekly Chart
NCLH Daily Chart
IntercontinentalExchange, Inc. (ICE)
Why the Strength
Intercontinental Exchange operates a global network of regulated securities markets, seven transaction clearing houses and 12 exchanges for trading energy, commodities and equity indexes. The company’s revenue comes from fees charged for trading and clearing a range of securities and derivatives contracts and for information services based on prices and trading data such as indexes. The Intercontinental Exchange is one of the three major trading networks left after a wave of consolidation hit the industry. The company operates the New York Stock Exchange, and futures and derivatives markets for all kinds of commodities. The company has been benefiting from the general volatility of equity markets, recording revenue growth of 148% in 2014 (reflecting its several acquisitions), with earnings reaching $9.40 for the year. Investors are particularly interested in Intercontinental Exchange because the company was able to deploy about $1 billion in share buybacks and dividends in 2014, despite the expense of the NYSE acquisition. The company paid a variable dividend of $2.00 per share in January and hiked its regular dividend by 6.4% in February. Analysts expect the company to lower its expenses in 2015 as it continues the integration of its takeover companies. As long as trading volumes in all modes remain high, Intercontinental Exchange will likely thrive.
Technical Analysis
ICE built a long cup-with-handle pattern throughout 2014, starting the year at 224, pulling back to 181 in July, regaining 224 in December, then building a handle that dipped to 202 in late January. February brought a strong rally out of that formation that shot ICE to as high as 240 last week. With the stock now trading at around 237, an opportunistic buy on any weakness looks advisable. A dip below the stock’s rising 50-day moving average (now at 222) would be a warning sign.
ICE Weekly Chart
ICE Daily Chart
Hilton Worldwide Holdings (HLT)
Why the Strength
In the world of hotel mega-chains, Hilton ranks #2 by size, ahead of Marriott but behind InterContinental. But Hilton ranks first in employee happiness, and in the hospitality business, happy employees are a key asset. Operating under the brands Hilton, Doubletree, Hampton, Homewood Suites, Embassy Suites, Conrad, Canopy, Waldorf Astoria, Curio and Home2 Suites, Hilton has more than 4,000 hotels in more than 90 countries, and is building new hotels constantly; it added more than 36,000 rooms in 2014 and has approximately 230,000 rooms in development. Revenues have grown at single-digit rates for years, and show no prospect of accelerating, but earnings are booming, and investors have noticed. The company reported fourth-quarter and full-year earnings three weeks ago, and exceeded analysts’ expectations, thanks in part to increased business travel in the U.S. The company’s first-quarter forecast was a tad conservative because of concern about the strong dollar negatively impacting foreign revenues (even though 75% of the company’s revenues come from the U.S.). Long-term, however, trends are excellent.
Technical Analysis
HLT came public in December 2013 at 20 and has been climbing steadily higher since, showing remarkable consistency for such a young stock. The fourth-quarter report sparked a surge of buying that drove the stock from 26.5 to 29, and the reaction that followed saw the stock dip below 29, where it easily found buyers. We think you can initiate positions here, with a stop below 26.5.
HLT Weekly Chart
HLT Daily Chart
Salesforce.com (CRM)
Why the Strength
Few sectors are hotter than cloud computing these days—and Salesforce.com is one of the fastest-growing companies in the industry. Known primarily for its customer relationship management (CRM, hence the ticker symbol) product, Salesforce is expanding into data analytics, corporate social networks and marketing services. Those new revenue-generating opportunities should only enhance Salesforce.com’s position as the largest maker of customer-management software. The company just raised its 2016 sales forecast, and billings were up 32% in its fiscal fourth quarter, the results of which were released last week. Meanwhile, earnings per share doubled from the previous year. By diversifying its business, Salesforce.com is attracting much larger customers, and the number of large transactions is growing in both average and size. The company closed 550 deals worth more than a million dollars last year, up from 100 such deals the previous year. Salesforce’s shift into data analytics could be a particular game changer—some believe the analytics market may be even bigger than the CRM market.
Technical Analysis
CRM soared after last week’s glowing earnings report, gapping up from 61 to a record 70 in just two trading sessions before pulling back slightly. Prior to that big move, the stock had been up and down for the better part of a year, alternating between the low 50s and lows 60s. The back and forth was a rarity for a stock that has risen exponentially since the Great Recession. Now that the bulls are fully back on board, CRM should push even further into record territory—something it has done repeatedly over the past six years.
CRM Weekly Chart
CRM Daily Chart
Cracker Barrel Old Country Store (CBRL)
Why the Strength
With gas prices and unemployment both at six-year lows, Americans have more discretionary income to spend than at any time since the Great Recession. And in true American fashion, many of them are spending it on food. That was certainly the case at Cracker Barrel last quarter, as traffic increased 4.7% and same-store sales jumped 7.9% at the Tennessee-based restaurant chain with a country flair. Seasonal promotions such as the restaurant’s apple cider barbecue chicken and triple berry French toast contributed to Cracker Barrel’s strong fiscal second-quarter performance, which ended January 30. Earnings per share continue to improve too as the company cuts $20 million in costs this year. The combination of cost-cutting and increased customer traffic has prompted Cracker Barrel executives to raise their full-year financial outlook. The company now expects EPS of $6.40 to $6.50 in its current fiscal year, a marked improvement over the $5.64 per share it earned in 2014. As long as gas prices remain low and the U. S. economy doesn’t implode, Cracker Barrel should continue to benefit along with the rest of the retail sector.
Technical Analysis
After trading in the 124 to 140 range since November, CBRL gapped all the way up to a new all-time high above 152 last week on the Q2 earnings beat. Average volume more than doubled from 324,000 in February, topping a million on two occasions. A pullback may soon follow, but it will likely be short lived. Despite a few bumps along the way, CBRL has been on a steady ascent since October, breaking through multiple technical barriers along the way. Expect a dip after last week’s surge, but don’t expect it to last long.
CBRL Weekly Chart
CBRL Daily Chart
Cavium (CAVM)
Why the Strength
Cavium is a designer of highly integrated semiconductors that improve data processing for networks, communication and the digital home. The company’s chips are noted for their ability to improve throughput in networks, and its suite of embedded security protocols enable threat management, connectivity, perimeter protection and other tools that keep networks operating at maximum efficiency. The company’s products are designed-in by a wide range of global tech manufacturers, including Alcatel-Lucent, Aruba Networks, Cisco, Citrix, F5 Networks, IBM, Motorola, Nokia and Qualcomm, among others. 2014 was a good year for chipmakers, and Cavium enjoyed 23% revenue growth, while earnings growth averaged nearly 46% for the year. The company’s Q4 earnings report on January 28 revealed healthy 25% revenue growth and 35% adjusted earnings growth for the quarter. The trend in electronic devices toward greater speed, multimedia modes and streaming content is the big reason for Cavium’s success, as the company’s products continue to increase the amount of content that can be delivered at greater speed.
Technical Analysis
CAVM is a volatile issue, with many ups and downs, but the long-term trend is definitely up. After correcting from 57 in August to 41 in mid-October, the stock stormed back to 64 in December, then drifted back to 56 in February. But the rally that began on February 10 at 58 has now pushed CAVM to 71. CAVM is nearly twice as volatile as the broad market, so a pullback is always a possibility, but buying on any dip under 70 looks like a good risk/reward balance, with a stop at its January resistance at 64 providing protection.
CAVM Weekly Chart
CAVM Daily Chart
Acuity Brands (AYI)
Why the Strength
We’ve been believers in LED lighting for a couple of years now—its advantage over traditional bulbs (far lower energy expense and longer life, too) and over CFL bulbs (far better environmentally) means it’s set to become the dominant lighting technology in the years ahead. And that’s the main reason to be bullish on Acuity Brands, a good-sized ($2.5 billion revenue) manufacturer of lighting and controls that operates under various brand names. Lighting by itself isn’t an exciting industry (low single-digit growth), but LEDs are now stealing the show—in the most recent quarter, LEDs made up 42% of total sales, and were up a whopping 70% from a year ago, not only boosting revenues but profit margins, too. And management seems super-bullish on the longer-term prospects, as more and more commercial, industrial and, yes, even residential construction customers are choosing to use LEDs as the primary lighting source. Between new construction and replacement demand, Acuity should see big demand for many years—analysts see the current fiscal year (ending in August) bringing 35% earnings growth, with another 23% (likely conservative) the year after. We like it.
Technical Analysis
AYI isn’t tearing up the charts, but it emerged from a big nine-month base in January, and, after a month-long consolidation in January (while the market was chopping up and down), has pushed to new highs. The past two weeks have seen AYI pull back calmly on mostly tame volume, which offers a good entry point. Just be aware that the stock can be thinly traded (just 350,000 shares per day, though the dollar volume of $50 million is acceptable), so try not to buy right at the open or close.
AYI Weekly Chart
AYI Daily Chart
Akorn (AKRX)
Why the Strength
Akorn’s program of acquisition has enabled the company to grow from a niche generic pharmaceutical company into a diversified drug development company. Akorn’s product line now includes generic and branded prescription drugs plus animal and consumer health products. The company’s drug portfolio is especially strong in ophthalmic drugs and unique dosage forms. Acquisitions pushed the company’s revenue growth to 89% in 2014, with after-tax profit margins over 20%. Investors have been interested in the company for years, but its extremely strong Q4 earnings report caused another wave of support. The report, on February 26, featured 168% revenue growth and a remarkable 257% jump in earnings, with an after-tax margin of 27.4%. The company’s strong drug development pipeline includes four new drugs that are tentatively approved, which will help to power Akorn’s estimated 57% earnings growth in 2015. Akorn’s steadily expanding roster of institutional investors is also evidence of approval from the whales.
Technical Analysis
AKRX has been on a roll since February 5, when it powered out of a five-month base with resistance at 44 and support at 34. Then the strong Q4 earnings report on February 26 gapped the stock up to 54 in one day. AKRX is likely to get follow-on support from investors based on both its excellent results and it’s long-term prospects. We think the stock is buyable around 53, with a loose stop at its pre-gap high at 48.
AKRX Weekly Chart
AKRX Daily Chart
Agrium (AGU)
Why the Strength
Agrium is a fertilizer company that’s benefiting from a number of influences. First, demand for fertilizer is strong worldwide. Second, the company’s distribution network of 1,300 retail locations has been driving revenue. (This point was driven home by a 2013 campaign by an activist investor to force the company to sell its retail operations.) Third, the company’s excellent cash flow has allowed its board to increase its dividend target and authorize the repurchase of up to 5% of its shares over the next year. Agrium’s revenue growth isn’t spectacular (just 2% in 2014, after a 2% decline in 2013), but estimates are for a 35% jump in earnings per share in 2015. And the company announced on February 24 that it would pay a dividend of 78 cents per share to shareholders of record on March 31. Investors are also intrigued by the larger equity stake taken by another activist investor in October. With solid earnings growth and the possibility that an activist might stir things up, investors are enjoying the prospect of positive change ahead.
Technical Analysis
AGU corrected sharply from its peak at 109 in early 2013, falling as low as 76 in August 2013, then settling into a slightly higher trading range in 2014. The stock rebounded quickly in October 2014, ripping from a low of 81 to 103 in just six weeks. After November–December pullback, AGU began its current rally in mid-December and hasn’t pulled back since. The announcement of the increased dividend on February 24 pushed the stock decisively into new-high territory. AGU looks buyable on any pullback of a couple of points, which is likely, as the stock is trading well above its 25-day moving average, now at 108. A stop at 106 will provide protection.
AGU Weekly Chart
AGU 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.
