Still Choppy, but More of an Upside Bias
Current Market Outlook
The market remains very volatile, reacting to the news of the day (Greece, in particular, seems to be pushing and pulling the market on a daily basis), and most indexes are still trapped within trading ranges. However, stepping away from the headlines reveals increasing bullish evidence—growth stocks have been acting well for a few weeks and the Nasdaq has punched out to multi-year highs, yet investor sentiment remains apathetic. It’s not time to jump in with both feet (selectivity on the buy side and taking partial profits on the way up still makes sense), but we’re nudging our Market Monitor up another notch in reaction to the market’s action.
This weeks’ list has a good mix of names from a variety of industries. Our Top Pick is Ciena (CIEN), which has a history of big pops and drops, and started a fresh uptrend during the past few weeks.
| Stock Name | Price | ||
|---|---|---|---|
| Youku Tudou (YOKU) | 0.00 | ||
| Intrexon (XON) | 0.00 | ||
| Bank of the Ozarks (OZRK) | 0.00 | ||
| Outerwall Inc, (OUTR) | 0.00 | ||
| Lions Gate Entertainment Corp. (LGF) | 0.00 | ||
| Insys Therapeutics (INSY) | 0.00 | ||
| HD Supply Holdings, Inc. (HDS) | 0.00 | ||
| Salesforce.com (CRM) | 0.00 | ||
| Cheetah Mobile (CMCM) | 0.00 | ||
| Ciena (CIEN) | 44.25 |
Youku Tudou (YOKU)
Why the Strength
Youku Tudou is a Chinese online video company that’s clearly aiming at being the YouTube of China; its name is even consciously similar to YouTube’s. Youku Tudou is the result of a $1 billion merger between Youku (which appeared in Cabot Top Ten Trader twice in early 2011) and Tudou, a smaller rival in the Chinese video space. The idea was that the combination of the two companies, who, between them, controlled about a third of the video market in China would lower the cost of acquiring new content and produce other economies. That content includes lots of user-generated video along with professionally produced video like episodes of TV shows, movies and variety shows. Even after the merger, the company found it hard to compete for traffic with Baidu and Tencent, and profitability remains elusive. The company tried reducing spending to build earnings, but wound up with a slipping market share. But the recent surge in Chinese stocks—and an announcement of renewed spending to secure market share—has given Youku Tudou a huge boost, starting in May, just as a wave of shareholder lawsuits for misrepresentation (a code word for losing money and a falling stock price) was cresting. But in April and May, Youku Tudou was red-hot, soaring on volume as Chinese stocks in general climbed and the company’s revenue growth of 39% in Q4 and 47% in Q1 gave evidence that the increased spending was working to build its user base again. The company also issued positive Q2 guidance on May 22. Youku Tudou has enjoyed a great run, but the potential of the Chinese online TV market promises the possibility of greater growth to come.
Technical Analysis
YOKU suffered through a year-long correction from 38 in March 2014 to 12 in March 2015, prompting some analysts to write the stock off as a lost cause. But YOKU came storming back starting in April, and soared to 31 on May 22 on huge volume. Since that high, the stock has been consolidating, dipping to 26 before making another run to over 31, then relaxing back to 28. Buying YOKU near the bottom of this re-basing structure looks like a good speculative bet, with a stop at 25.5 to control risk.
YOKU Weekly Chart
YOKU Daily Chart
Intrexon (XON)
Why the Strength
While a Cabot Top Ten Trader all-star like Illumina has made 27 appearances by refining and powering up gene testing technology, Intrexon Corporation is making its Top Ten debut today by putting gene technology to work. Intrexon’s motto is “Powering the Bioindustrial Revolution with Better DNA,” and the company offers a suite of technologies to use DNA to build better living cells. The company’s business model is to collaborate with a partner (or form a joint venture) to develop and deliver a particular biologically-based solution to a particular problem. One collaboration that’s making headlines now is the company’s work with ZIOPHARM, Merck Serono and NCI to develop a gene therapy drug for the treatment of breast cancer that’s now in Phase II clinical trials. Other medical programs address a wide variety of ailments. Intrexon’s ability to assemble new DNA from component parts and its technology to turn a gene expression on and off are powerful instruments in synthetic biology. The company hasn’t turned an annual profit yet, but it has booked two profitable quarters, including a Q1 result that duplicated Q4’s 330% revenue growth and showed a 525% leap in earnings. As a speculative play on genetic engineering, Intrexon has plenty of lines in the water and it will only take one good win to have a huge impact on its bottom line.
Technical Analysis
XON came public in August 2013 and spent 14 months knocking around between a high of 37 and a low of 13. The big rally began in October and the stock finally broke out to new highs above 38 in February 2015, ultimately sprinting to 49. A 15-week cup formation with a bottom at 38 has brought XON back to new highs near 50. It would be nice, from a technical standpoint, if XON would trade sideways and down for a week or so, completing the cup-with-handle pattern. But new highs aren’t anything to sneeze at, even without technical perfection. If you like the story, look to initiate a small position right here, then add to it if the stock gives you a little profit cushion. Use a looser stop at 44.
XON Weekly Chart
XON Daily Chart
Bank of the Ozarks (OZRK)
Why the Strength
For a medium-sized bank based in Little Rock, Arkansas, Bank of the Ozarks has been on quite a spending spree of late. The company has been acquiring competitors left and right; its $64.7 million Bank of the Carolinas buyout announced last month brought its acquisition total to 12 since 2010. All those buyouts have expanded Bank of the Ozarks’ national footprint, and added to its revenue base. Sales have improved 45% in the last two years, and are expected to jump another 38% this year alone. And despite all the money spent on acquisitions, the bank’s earnings per share have nearly tripled since 2009. That high growth rate caught the attention of financial services specialist Keefe, Bruyette & Woods, which named Bank of the Ozarks one of its 25 “in-between”-sized banks poised for greater growth in the years ahead. While most of the big banks have been slow to recover since the subprime mortgage crisis, medium-sized regional banks have been more appealing alternatives for investors due to their faster growth rates. Few have been growing faster than Bank of the Ozarks, and analysts see that continuing for at least the next few quarters.
Technical Analysis
Since the Bank of the Carolina acquisition in early May, OZRK has been on a tear. The stock has risen from 38 to 47 in that time, with only a few brief hiccups along the way. The latest brief dip came three weeks ago, allowing the stock to catch its breath before pushing to even higher levels. OZRK has scarcely fallen below its 25-day moving average since February, which means it still has plenty of support. We advise waiting for a dip before buying, and setting your stop losses in the 41-42 range, which is a bit below the 50-day moving average.
OZRK Weekly Chart
OZRK Daily Chart
Outerwall Inc, (OUTR)
Why the Strength
Outerwall is strong today for one reason: Cash flow. The company operates the Redbox (cheap DVD and video game rental), Coinstar (change machine) and ecoATM (contribute old cell phones for cash) kiosks, usually along the outer wall of popular shopping destinations (hence the name). All told, the company has more than 65,000 kiosks and has experienced great growth for a few years; Redbox is the big attraction here; in the first quarter it represented 85% of all revenues, and it has seen some positive developments of late, including a price hike and an extension with Fox Home Entertainment. But the reason the stock is strong is because, after years of expansion, management is now focused on the bottom line—expenditures are down, and that means cash flow is enormous. And Outerwall aims to return 75% to 100% of its free cash flow each year through dividends (1.5% annual yield) and share buybacks. Indeed, in the first quarter, the firm repurchased more than 3% of all shares, and year-on-year, the share count had declined by a whopping 25%! Considering that free cash flow is expected to total about $230 million this year (or 15% of the current market cap), it’s a sure bet that the company will continue retiring shares and, likely, boosting dividends going forward. Long-term, this isn’t a great growth story, but Outerwall has morphed into a cash cow and more investors are taking notice.
Technical Analysis
OUTR has been a herky-jerky stock in recent years despite booming earnings per share, etching higher highs and lows over time, but with big corrections along the way. However, the stock may now be changing character—shares popped higher in May on earnings, and have acted properly since then, with a move toward old highs, a tight pullback to its 10-week line, and then today, a push to new highs. We’re OK with buying some here and placing a stop in the mid 70s.
OUTR Weekly Chart
OUTR Daily Chart
Lions Gate Entertainment Corp. (LGF)
Why the Strength
You may not have heard of Lions Gate, but you’ve almost certainly heard of its products. This is the production company behind some of the most commercially and culturally significant pieces of entertainment of the past five years—including The Hunger Games and Divergent franchises, Mad Men, and Orange Is the New Black. LGF shares took a hit last month on the news that Chairman Mark Rachesky had sold 10 million of his shares (almost a fifth of his stake) in a secondary offering, and worse, that he could not connect with a strategic buyer. At the same time, Lions Gate announced that its guidance for 2015 would be at the lower end of the $1.2 to $1.3 billion, citing weaknesses in its latest Hunger Games and Divergent releases. In the long-term, however, Lions Gate’s story is much stronger. 2017 EPS estimates are as high as $1.92—up 21%—and the company announced a $0.07 per share dividend last Monday. Most important, Lions Gate Entertainment is keeping an eye on the future. While many entertainment companies have resisted the trend towards streaming media, Lions Gate has embraced it: with the streaming-exclusive Orange Is the New Black and Mad Men’s immediate availability on Netflix, it has become the clear industry leader in box office to video-on-demand conversion. Streaming media is causing an enormous shift in the entertainment industry, and in periods of change, we like to bet on a company for its adaptability and its market might—and Lions Gate Entertainment has both.
Technical Analysis
After years of being pulled back and forth by news, earnings and dividend announcements, LGF broke through 18 month resistance to an all-time high last week. Bad news has put the stock through the wringer over the last year, but that might end up being a good thing—it certainly shook out the weak hands—and LGF has always been able to quickly find support after big selloffs. The stock has been climbing pretty quickly over the last few weeks, so we recommend buying on a dip toward 37. If LGF falls past 33, you should consider cutting the loss.
LGF Weekly Chart
LGF Daily Chart
Insys Therapeutics (INSY)
Why the Strength
Insys is a profitable specialty pharmaceutical company with one very strong seller on the market—called Subsys, it uses sublingual spray technology (delivering a fine mist beneath the tongue; patent-protected to at least 2027) to combat cancer pain. There are a couple of competing products from Teva, but the spray technology results in far faster onset (just five minutes versus 15 minutes for Teva’s products) and is much easier to administer (one minute versus 10 to 25 minutes), both of which are key issues when abating pain. That’s resulted in Subsys grabbing market share, and given that today it accounts for basically all of Insys’ revenues, it’s what’s driving growth. Looking ahead, Subsys should continue to do very well, but it also has other irons in the fire—the company aims to be a leader in what’s known as pharmaceutical cannabinoids, including one liquid product set to hit the market next year that is basically a pharmaceutical-grade version of THC (found in medical marijuana), which is likely a market north of $200 million. (There are already generic versions of this, but the new liquid version will allow for rapid absorption and dosing flexibility.) Short interest in the stock is very high based on some past marketing accusations—nearly 7.5 million shares, or more than 10% of all shares outstanding. But there’s no question business is good and should get a lot better going forward.
Technical Analysis
INSY ran to 28 in March 2014, topped along with most growth stocks, and then plunged to 10 by May on the aforementioned accusations. But that was the low, and INSY has been marching higher since, including a leap to new price and RP highs during the past seven weeks. It’s bound to be volatile, but we think the next pullback is buyable, and advise using a loose stop in the low 30s.
INSY Weekly Chart
INSY Daily Chart
HD Supply Holdings, Inc. (HDS)
Why the Strength
Excluding behemoths like Home Depot, HD Supply is probably the biggest, broadest way to get exposure to the construction and infrastructure segments of the economy. The firm distributes more than a million products to more than half a million customers in all sorts of “heavy” industries like facilities maintenance, waterworks, power products, construction, industrial and more. The growth here is relatively slow, but consistent, in the mid- to high-single digit range, but with so much leverage in the business model, HD Supply is seeing cash flow and earnings grow much faster than the top line. It’s also been a plus that the company focuses mostly in the U.S., so currency movements haven’t had a big effect. And in the early-June quarterly report, management said that sales actually accelerated in April and May, which lends credence to macro evidence that the building industry and infrastructure spending is beginning to pick up steam. With solid management and big earnings estimates, we see HD Supply as a relatively low-risk way to ride what could easily be a multi-quarter run for the industry as a whole. It’s not changing the world, but we like the potential for the stock to be a steady tractor on the way up.
Technical Analysis
By our measures, HDS broke out on the upside in early April, so the stock is still early in its overall advance. Of course, as you’d expect from such a well-situated company, progress has been slow, but solid—the stock ran to 34, consolidated tightly for a few weeks in a two-point range, and has now popped to new price and RP peaks since reporting earnings earlier this month. We think HDS is buyable here, with a stop near 32.
HDS Weekly Chart
HDS Daily Chart
Salesforce.com (CRM)
Why the Strength
Cloud computing is a hot market on Wall Street these days, and that’s what has kept Salesforce.com at the front of investors’ minds. Lately, however, the company has been making headlines by expanding into another hot market: wearable technology. Earlier this month, Salesforce invested in a new software by APX Labs that turns mobile devices such as the Apple Watch and Google Glass into something useful in the workplace (such as approving contracts and sending emails with a single tap). That new investment comes on the heels of investments in Speakeasy, a conference-calling software, and Will.i.am’s smartwatch company Puls. Amid the mobile device investments, Salesforce’s core cloud computing business continues to make waves. The company updated its signature marketing cloud tool “Journey Builder” to look at buyer behavior, and it added a new app to its Wave Analytics Cloud ecosystem that allows businesses to assign tasks and accelerate deals on a mobile device. On top of it all, the company’s first-quarter earnings didn’t disappoint: sales reached an all-time high of $1.51 billion, while earnings per share improved 45% year over year.
Technical Analysis
After gapping up from 66 to 74 in late April (partly on buyout rumors), CRM has been stuck in a holding pattern for the better part of two months—never able to break above 77, but not falling below 70. Last week, CRM perked up, as the stock closed above 75 for the first time in its history. The stock looks poised for a breakout, so there are two ways to play it: you could nibble here or wait for a decisive push north of 77. In either case, a stop around 70 makes sense.
CRM Weekly Chart
CRM Daily Chart
Cheetah Mobile (CMCM)
Why the Strength
Cheetah Mobile is a Chinese Internet and mobile software developer that’s built a broad base of users—over 395 million mobile monthly active users—who download its apps to keep their smartphones free of malware and viruses. (The company’s Clean Master is the top mobile app in the Google Play Tools category worldwide.) Users are also attracted by a rich trove of free games, and revenue comes from ad sales as well as sales of software like fingerprint-based security recognition for Android phones. The company has enjoyed three years of revenue growth over 100%, and kept that string going in the first quarter with revenue up 113%. China’s massive shift to smartphones as the primary means of accessing the Internet is the wave Cheetah is surfing right now, but the company is also enjoying rising sales outside China. The company got a big boost in April when it made a strategic investment in Nanigans, an advertising automation software. Investors also approved of the company’s Q1 earnings report in May, bidding the stock up heavily on big volume. Cheetah Mobile still has great potential for monetizing its enormous user base. We like it.
Technical Analysis
CMCM came public at 14 just over a year ago, and traded up to 30 within a few months. The traditional post-IPO correction pulled it back below 16 in December, and it was trading near 17 in April when the Nanigans news kicked it to 24 in just four days. After a five-week consolidation, the stock took off in May in anticipation of, and then reaction to, the company’s strong earnings report. After topping 36 briefly in May, CMCM has been trading sideways in a range with support at 32 and resistance at 36. The stock has been riding its 25-day moving average higher and looks like a good buy anywhere under 34. The alternative would be to wait for the breakout above 36. A stop at 30 will give this very volatile stock some room.
CMCM Weekly Chart
CMCM Daily Chart
Ciena (CIEN)
Why the Strength
After reporting stagnating growth in the previous two quarters, Ciena’s latest earnings release likely signaled a turnaround. The telecom-equipment maker reported a 106% year-over-year improvement in earnings per share on a revenue increase of 11%. Ciena’s specialty is data management—it supplies the networking equipment and software that supports the transport of voice, video and data traffic. Global demand for those data services is expanding, resulting in a much higher number of international orders for Ciena last quarter. Around the world, telecommunications carriers are boosting their demand for greater bandwidth and network upgrades, which bodes well for Ciena as one of the leading suppliers of 40G and 100G optical transport technology. AT&T is Ciena’s biggest customer, accounting for 19% of revenues in the latest quarter. However, Ciena is showing signs of being less reliant on AT&T—its non-AT&T business in the U.S. improved by 22% last quarter. The promising second-quarter results prompted a round of analyst upgrades on Wall Street: RBC Capital, Citigroup and MKM Partners have all increased their price targets for Ciena in the past two weeks.
Technical Analysis
CIEN has been climbing since early April. During that time, the stock surged from 19 to 26 before pulling back to the mid-25 range to close out last week. Dips have been short-lived, with none in the past six weeks lasting longer than a couple of trading days. Thus, this mini-pullback from 26 may be enough of an entry point given CIEN’s recent upward trajectory, though a deeper retreat is always possible. You could buy a little here or on further weakness, while a dip below 23 would be a signal that momentum has evaporated, which would mean it’s time to get out.
CIEN Weekly Chart
CIEN 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.
