Intermediate-Term Trend Close to Turning Positive
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 | ||
|---|---|---|---|
| BHP Billiton (BHP) | 0.00 | ||
| Eagle Materials Inc. (EXP) | 0.00 | ||
| HealthEquity, Inc. (HQY) | 70.70 | ||
| MasTec, Inc. (MTZ) | 66.65 | ||
| Nucor Corporation (NUE) | 66.20 | ||
| Proofpoint (PFPT) | 113.79 | ||
| Texas Capital Bancshares (TCBI) | 0.00 | ||
| Vulcan Materials Company (VMC) | 137.10 | ||
| Western Alliance (WAL) | 0.00 | ||
| XPO Logistics (XPO) | 0.00 |
BHP Billiton (BHP)
Why the Strength
BHP Billiton is an Australian giant that mines coal, iron ore, oil, manganese and base metals. The company has been enjoying renewed investor interest as hopes for increased infrastructure spending in both the U.S. and China have been pushing prices for copper, iron ore and metallurgical coal higher. Iron ore prices have risen by 30% since October, hitting new two-year highs, as President-elect Donald Trump has said he will spend $550 billion on infrastructure projects like bridges, roads and airports. Evidence from China also indicates that the country is moving from a focus on fiscal reform to a growth-oriented strategy, which will strengthen commodity prices. Partly as a result of this expected increase in demand, prices for copper have also broken decisively through the $5,000-per-metric-ton level. BHP Billiton has had a tough time of it over the last few years, with four years of shrinking revenue at a progressive rate of decline, and a loss of $2.40 per share in the fiscal year that ended in June. The company is also dealing with the aftermath of the failure of a tailings dam in Samarco, Brazil in November 2015 that killed at least 17 people. BHP was a half owner of the mine and dam with Brazil’s Vale. The announcement of a $2.3 billion settlement of claims related to the disaster gave BHP Billiton stock a boost when it was announced in March 2016. A 1.6% dividend yield is also a plus.
Technical Analysis
BHP was trading as high as 63 in July 2014, but went into a 17-month swoon that finally found bottom at 18 in January 2016. BHP has been marching higher since that low, getting a 5% lift in March on the settlement news and another spate of support following the election. After its steady rise from January, BHP is trading at its highest level since July 2015. With our market timing indicators still advising caution, we think BHP, which has a big story behind it, can be nibbled at on any weakness of a point or so, with a stop at 34.
BHP Weekly Chart
BHP Daily Chart
Eagle Materials Inc. (EXP)
Why the Strength
Eagle Materials is one of many construction stocks that have exploded higher since the U.S. election last Tuesday. The company has exposure to residential and commercial markets (it’s a major producer of gypsum wallboard and paperboard), infrastructure (concrete, cement and some aggregates) and frac sand (it has 3.4 million tons of capacity). While the products the company offers are basically commodities, Eagle has impressively positioned itself as a low-cost producer, with pre-tax margins nearly 50% higher than its nearest public competitor. Obviously, the hope for a major, long-term infrastructure bill from Congress next year sparked the bounce, but the fact is there are many long-term drivers for Eagle’s businesses already. Most investors expect a steady increase in housing starts in the years ahead, and Congress already passed a major transportation bill last year. Plus, it turns out concrete has been gaining share versus asphalt during the past 10 years, so as activity heats up, customers should be coming to Eagle. Analysts see earnings north of $5 per share next year (up 22%), bolstered in part by a solid share repurchase plan (share count is down 4.5% from a year ago). As the construction industry continues to recover, so should Eagle’s bottom line.
Technical Analysis
EXP crashed from 106 in mid-2014 to 45 at this year’s market low, and then staged a multi-month recovery to 88 in July. EXP then went on to build a shallow base during the next three months, including some encouraging tightness in October. Shares began to rally three weeks ago, then boomed to two-year price and RP highs last week. Dips toward 90 would be tempting with a stop in the low 80s.
EXP Weekly Chart
EXP Daily Chart
HealthEquity, Inc. (HQY)
Why the Strength
HealthEquity is a true growth company with a great story. The company is a leading custodian of health savings accounts (HSAs)—through its various third-party relationships, the company has 2.3 million individual members that have a total of $4.2 billion in assets, and those figures have been growing rapidly in recent quarters. (Members rose 50% from a year ago in the third quarter, while assets rose 60%.) Health savings accounts, which go along with high deductible plans, have become increasingly popular in recent years (the industry grew about 25% in the first half of the year), with consumers getting tax deductible deposits (and, often, deposits from their employers) and enjoying far lower premiums. HSAs also allow for portability (if you lose your job) and investments (to build up your savings even faster). There is competition from all the big players, but HealthEquity is growing faster than the market and, given that the industry is estimated to grow 50% by 2018 (and much more beyond that), there’s plenty of room for many providers to be successful. The stock has surged of late on the perception that HSAs will be a centerpiece of the new administration’s health structure. Politics or not, however, HealthEquity is a rapidly growing company that has a very bright future (analyst see earnings up 36% next year). Earnings are due out November 29.
Technical Analysis
HQY plunged from 36 to 16 during the market’s plunge in late 2015/early 2016. Then it recovered all of that lost ground over many months before another big shakeout from 39 to 30 in less than a month. But the post-election action has all been on the upside, with last week’s volume tally the second largest since the stock came public in 2014. Expect big swings, but a small position on dips with a stop in the mid-30s makes sense.
HQY Weekly Chart
HQY Daily Chart
MasTec, Inc. (MTZ)
Why the Strength
This small cap infrastructure construction company had already delivered two consecutive quarters of impressive revenue and EPS growth before the election. But there’s no question that anticipation of a major infrastructure upgrade cycle under President-elect Trump fanned the flame already burning under shares of MasTec. The company provides building, installation and maintenance services, mainly for power generation (9% of revenue), oil and natural gas pipeline infrastructure (36% of revenue) and wireless/wireline/satellite communications (47% of revenue). Business in the oil and gas segment was particularly good in the third quarter, and helped propel revenue and EPS 44% and 211% higher, respectively. Management indicated that oil and gas revenue was not only better than it had expected, but that its future pipeline revenue was at a record high as well. MasTec raised its full-year 2016 revenue guidance and promoted the strength of its balance sheet, two things that Wall Street always loves to hear from an industrial company. Analysts have been upping their price targets into the mid-to-high 30s. That suggests increased confidence that MasTec will deliver 21% revenue growth this year, and do better than current projections of 6% growth in 2017.
Technical Analysis
MTZ formed a base around 15 early in the year then began an upward march that largely kept shares above their 50-day moving average. The stock crossed 18 in March, then rallied from 25 to 31 in August after a Q2 earnings beat. After settling back into a trading range between 27 and 30 for September and October, shares lit up upon Trump’s win, rallying from 29 to over 34. Look to buy on a dip, and sell if shares fall below 31.5.
MTZ Weekly Chart
MTZ Daily Chart
Nucor Corporation (NUE)
Why the Strength
Nucor is a hard-core industrial stock. The steel manufacturer supplies the automotive, construction, machinery and appliances industries with cold-finished steel bars, sheet goods, joist girders and fasteners. It’s far from a growth stock these days. Whereas revenue was up 42% and 26% in 2010 and 2011, respectively, revenue growth in 2015 was -22%. And the quarter ending September 30, 2016 was the only one of the last seven with positive revenue growth (a meager 2%). So why are we covering Nucor in Cabot Top Ten Trader. Because what has been won’t always be. Nucor is expected to grow revenue modestly over the next two years, and projected EPS growth of 32% this year and 28% in 2017 (to 2.97) illustrates the company’s ability to expand its gross profit margin (up from 2.7% in 2010 to 7.5% last quarter). More importantly, over the last two weeks, three key things have happened that are potentially bullish for steel companies like Nucor. First, the U.S. Commerce Department (DOC) is investigating Chinese steel products manufactured in Vietnam, believing they are circumventing U.S. trade laws. Second, Trump won, and that’s potentially bullish for U.S. steel fundamentals and tighter enforcement of U.S. trade laws. And third, a surge in raw material prices caught the market off guard. The greatest risk to investors in Nucor right now is that the stock is over-stretched and exposed to a steep decline should any of the three aforementioned catalysts evaporate.
Technical Analysis
NUE entered the year around 40. After dipping to 34 in January the stock found firm ground and rallied to 50 by the end of May. The stock then entered a trading range between 44 and 52 for the next six months, with one notable surge above 56 in mid-July. NUE began November at 48 and had a few good days, rising to 51, before Trump won and the stock surged above 58. Look to buy on a dip below 57, and set a stop just below the 52-week moving average.
NUE Weekly Chart
NUE Daily Chart
Proofpoint (PFPT)
Why the Strength
One growth-oriented group that has improved post-election is cybersecurity stocks, which were big winners into mid-2015 but have had their ups and downs since. Should the sector get going from here, Proofpoint looks like one of the leaders. The company has made a name for itself in the industry by protecting against some of the most worrisome up-and-coming cyber threats, including attempts to rip off wire transfer payments from firms that have suppliers overseas ($3 billion has been lost to these types of attacks since 2014), ransomware (software that blocks access to a network or computer until a ransom is paid) and Dridex (banking malware that allows attackers to steal credentials and personal information). Thanks to its leading position in email security in general, Proofpoint has been able to team up with some big would-be competitors (Intel McAfee is one example), while the move toward cloud-based systems (especially Office 365) is boosting demand for additional security. The proof of Proofpoint’s success is in its numbers—sales growth has been accelerating, billings are strong (up 47% last quarter) and renewal rates are north of 90%. And management sees a huge runway of growth even among its current 4,000-plus customer base, many of which only take a small portion of Proofpoint’s available offerings. We’d also note that, due to the firm’s subscription model, free cash flow is much greater than earnings—management sees cash flow of about $95 million in 2017, or well over $2 per share. We like it.
Technical Analysis
PFPT crashed earlier this year (75 to 36 in just a couple of months!) with the market, then began a steady recovery that briefly took the stock to new highs in August. But that push was short lived, followed by a normal nine-week base-building effort (which included a solid earnings reaction). And now it appears PFPT is ready to move—the stock closed at new price and RP highs on good volume last week. We’re game with a small position here and a stop in the mid-70s.
PFPT Weekly Chart
PFPT Daily Chart
Texas Capital Bancshares (TCBI)
Why the Strength
The meltdown in oil prices in 2015 wreaked havoc on a lot of energy-exposed stocks. Among the hardest hit were bank stocks with energy loan balances. Texas Capital Bancshares was one of them, and shares of the small cap lender were absolutely clobbered a year ago, falling from over 60 in November, 2015 to 30 in March, 2016. In hindsight, that drubbing created an exceptional buying opportunity as the expected loan implosion never materialized. In fact, Texas Capital has grown revenue every year since 2009, and grew by 17% in the recently reported Q3. With stabilizing energy loan balances, a focus on middle-market lending and expansion in mortgage warehouse financing (now 30% of the total loan book), this growth-oriented lender is poised to return to double-digit return-on-equity (ROE). It is also expected to deliver 2017 revenue and EPS growth of 11% and 24%, respectively. The prospect of rising interest rates and a lower regulatory environment under President-elect Trump has only helped to increase the glitter factor of Texas Capital (and all other banks, for that matter). To be sure, this is a growth-oriented bank, and that profile makes TCBI prone to the mind-numbing retreats that occurred a year ago at the very hint of credit concerns. But when things are looking good, as they do now, the stock is capable of rewarding investors with a Texas-sized rally.
Technical Analysis
TCBI entered 2016 in the depths of a retreat that began at 60 and ended at 30. March 2016 was the turnaround month. As the threat of credit losses diminished, the stock staged a stop-and-go rally that carried shares above 52 by the end of May. A retreat to 42.50 in June was the last major pullback. Since then, shares have remained mostly above their 50-day moving average, and returned to 60 at the end of October. Trump’s victory sent them to a 52-week high above 68. Look to buy on a dip and set a stop loss just below the 50-day moving average.
TCBI Weekly Chart
TCBI Daily Chart
Vulcan Materials Company (VMC)
Why the Strength
There’s been a boomlet in infrastructure and construction stocks since last week’s election, though many of them address niche areas within the larger sector (some focus on road building, some homebuilding, telecom installation, etc.). But Vulcan Materials, which is the largest maker of construction aggregates (sand, gravel, crushed stone, slag, etc.) in the U.S., doesn’t have that problem—aggregates go into all things construction, and there are only a couple of major producers of aggregates (Martin Marietta (MLM), which was in Cabot Top Ten last week, is another), making Vulcan a sort of a bullets supplier to the infrastructure “wars.” The only issue here is that, based on weather delays and spending irregularities from states, results can be lumpy, but the bigger picture here is very bright, as construction demand is in the middle of a multi-year recovery from a major downturn. Indeed, despite a drop in shipments last quarter, Vulcan’s management said “there has been clear accelerating growth in the longer-term project pipeline,” mainly due to state and Federal projects. While earnings estimates have come down a bit during the past two quarters, analysts are still looking for excellent growth next year (earnings up 43%) thanks to higher shipments and firm pricing. There’s nothing sexy about construction aggregates, but the sector is in the midst of a major growth wave, and last week’s election has certainly boosted perception of Vulcan’s future.
Technical Analysis
VMC had a solid run from its lows in February at 79 to its high near 127 in July. Then came a normal base-building effort—the stock fell to 106 a couple of times, but found support at its 200-day line each time before recovering a bit following earnings in late-October. Then came last week, when the stock broke out to new price and RP peaks on big volume. We think you can buy some here or on dips with a stop near 120.
VMC Weekly Chart
VMC Daily Chart
Western Alliance (WAL)
www.westernalliancebancorp.com
Why the Strength
The financial sector broke down badly in the second half of 2015, finally touching bottom in February 2016. Western Alliance Bancorp, a Phoenix, Arizona-based holding company for Bank of Nevada and two other banks operating in Arizona, Nevada and California, is riding the resurgence of the sector in 2016 and the blastoff of optimism for the sector under the incoming Trump administration. Western Alliance differs from many banks by specializing in the commercial, industrial and commercial real estate sectors. The company has only 48 offices, indicating that it’s not interested in getting a ton of individual accounts. Concentrating on loans to businesses keeps costs low and increases the value of the loans Western underwrites. The company enjoyed 26% revenue growth in 2015 and kept growing, with revenue up 43% in Q1, 50% in Q2 and 26% in Q3, with after-tax profit margins consistently above 14%. Western Alliance Bancorp sticks to a specific segment of the banking industry and executes its strategy well.
Technical Analysis
WAL was trading under resistance at 39 last December when the stock made its only appearance in Cabot Top Ten. After getting caught in the market downdraft and bottoming at 27 in February, the stock began working its way back, correcting in June, but finally getting out to new highs in October. With a long basing period under its belt, WAL responded to the election news by kiting to new all-time highs on November 9 and continuing to soar in the days since. If you like the story, you should probably wait for this blastoff to catch its breath, looking for a little pullback to get started. A stop at 8% or 10% below your buy price seems prudent.
WAL Weekly Chart
WAL Daily Chart
XPO Logistics (XPO)
Why the Strength
XPO Logistics wants to consolidate and dominate the fragmented global shipping business. The company’s ambitious CEO, Bradley Jacobs, sees a $1 trillion addressable opportunity in the industry and has been buying up shippers and truckers with an eye to making XPO Logistics a one-stop choice for moving goods around the planet. The M&A program has pushed XPO’s revenue up by 152% in 2013, 236% in 2014 and 223% in 2015. And now, after five years of losses, the company has turned profitable in the last two quarters, with estimates for 2017 earnings up 82%. XPO Logistics has 86,000 employees in 34 countries, with 16,000 owned tractors and 39,500 trailers, plus 9,400 intermodal boxes and 9,000 chassis. 59% of revenue comes from the U.S. and all but 12% of the rest of gross revenue comes from Western Europe. Retail and e-commerce deliveries contribute a quarter of revenue, with the rest diversified across industries. CEO Jacobs has already implemented this roll-up strategy in the rental and waste-hauling industries, and investors are betting he can do it again. A great Q3 earnings report on November 2—57% revenue growth and earnings of 41 cents per share—reinforced their confidence.
Technical Analysis
XPO was in a jumpy uptrend from late 2012 through the middle of 2015, when the stock reached 51 in May. But the stock went into freefall, dipping to 21 in October, then 18 in January 2016. Since that low, the stock has surged to 34 in April, corrected to 22 in June, then roared back to 37 on August 8 after a gap up on monster volume. The blastoff on November 2 came after a fairly orderly three-month consolidation and featured heavy volume. There may still be some overhead to deal with, but XPO, while it’s quite volatile, has good momentum. You should look to buy on a pullback and keep a loose stop, as XPO is likely to be a bumpy ride.
XPO Weekly Chart
XPO 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.
