Buyers Flex Their Muscle
Current Market Outlook
The market’s gradual improvement since mid-August continued last week, with the intermediate-term trend of the major indexes turning back up and individual stocks (including both leading growth stocks, as well as many sectors bouncing strongly off prolonged corrections) acting well. We’ve even seen an impressive rebound in the broad market, with the number of stocks hitting new lows drying up drastically. We can’t say the major indexes are incredibly powerful, as many are at or just above their prior highs, but overall, the most bullish thing a market can do is go up, and that’s what we’re seeing. We’ll push our Market Monitor up another notch this week to a level 8 (out of 10) and will continue to put money to work as the evidence improves.
This week’s list has a bunch of strong charts from a variety of industries, including three chip names as that sector reasserts itself. For our Top Pick, we’ll keep it simple and go with one of the market’s liquid leaders—Nvidia (NVDA) has exploded out of a tight base on big volume over the past two days. You could start a position here or on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Adient (ADNT) | 0.00 | ||
| Allegheny Technologies (ATI) | 27.78 | ||
| Bitauto Holdings (BITA) | 0.00 | ||
| Celgene (CELG) | 0.00 | ||
| Lear Corp. (LEA) | 0.00 | ||
| Micron Technology, Inc. (MU) | 43.31 | ||
| NVIDIA Corporation (NVDA) | 242.42 | ||
| ON Semiconductor (ON) | 24.07 | ||
| Square, Inc. (SQ) | 91.04 | ||
| Terex (TEX) | 0.00 |
Adient (ADNT)
Why the Strength
Adient used to be the automotive seating division of Johnson Controls, but after Johnson Controls merged with Tyco, Adient was spun off as an independent company—with headquarters in Ireland, presumably because that’s the most tax-friendly location. Today, the company is the world’s leading provider of automotive seating, with 230 manufacturing or assembly facilities in 33 countries; the company makes one-third of the world’s automotive seats. But growth has been hard to come by in this old industry, so Adient has a three-pronged strategy. One, expand into autonomous-driving technologies, electric cars, radar systems and other components; two, get into non-automotive seating markets; and three, acquire competitors. And it’s that last reason that accounts for the stock’s strength today, because back on August 21, Adient announced that it would acquire privately held Futuris Group of Oak Park, Michigan for $360 million, including the assumption of approximately $18 million of net debt. Futuris operates 15 automotive seating facilities in North America and Asia; its biggest customers are Tesla, Ford and General Motors. Adient expects the transaction to add approximately $500 million in revenue on an annual basis and to be accretive to Adient’s adjusted fiscal 2018 earnings per share. Ideally, there will be more acquisitions to come. The stock pays a dividend of 1.4%.
Technical Analysis
ADNT began trading last October at 42 and climbed steadily to 76 by March, when it began a period of consolidation, and that phase came to an end with the acquisition announcement. Since then, the stock has soared from 66 to 80, breaking out to record highs in the process. Thus all shareholders are now in profitable positions, which means they have no reason to sell except valuation—and the valuation can hardly be considered excessive. Try to buy on pullbacks.
ADNT Weekly Chart
ADNT Daily Chart
Allegheny Technologies (ATI)
Why the Strength
Allegheny Technologies is often thought of as a steel firm, and it does have some commodity-like exposure; the company has a good-sized flat-rolled steel segment that, in the second quarter, basically operated at breakeven as nickel prices faded, and management believes improvement will be slow. But the main draw to Allegheny is more about the company’s higher performance materials business, which is a direct play on the aerospace sector and accounts for about half of the firm’s total sales. Next-generation jet engines and airframes use an increasing amount of advanced alloys and forgings, which Allegheny makes, and the general rebound in government defense purchases should help, too, as the company should benefit from the Navy ship and F-35 building efforts. Also helping are some good-sized recent deals, including a long-term agreement with Pratt & Whitney that could be worth more than $1 billion through 2030, as well as a titanium joint venture with GE Aviation. The stock is strong today because, after years of sour performance (four straight years of losses!), Allegheny looks like it’s early in a turnaround, with earnings positive the past two quarters and with analysts forecasting a surging bottom line through at least 2018. Given that second-quarter earnings easily topped estimates, our guess is that those estimates are conservative.
Technical Analysis
ATI fell from 46 in July 2014 to 7 in early 2016, then rallied back to 24 after earnings in January. Since then the stock has built a deep but good-looking base, with shares notching excellent price/volume action in recent months, including numerous up weeks on above-average volume. And ever since an analyst upgrade on August 22, ATI has been surging, including intense buying last week. We think dips are buyable.
ATI Weekly Chart
ATI Daily Chart
Bitauto Holdings (BITA)
Why the Strength
BitAuto is the top automotive website in China, a place for auto dealers to post pictures and specifications, answer car shoppers’ questions and offer assistance with financing, registration, insurance and used car sales. The company makes money by selling subscriptions to auto dealers, insurance and finance companies, and by providing website and marketing services. Car shoppers get a one-stop destination for research and communication and the industry gets a constant supply of qualified leads. That kind of symbiosis pushed revenue growth of 30% in 2016 and 32% and 52% in the first quarters of this year. Earnings estimates are for 14% growth this year but a whopping 71% in 2018. BitAuto hasn’t been a big favorite of institutional investors, with sponsorship well down from its 2014 peak as earnings growth weakened in 2015 and much of 2016. But BitAuto rival Autohome has been soaring, and investors are coming back to BitAuto as well. The Chinese auto industry is robust and there’s plenty of room for two successful consumer websites.
Technical Analysis
BITA peaked at 98 back in 2014, then plunged to 16 in February 2016. A rally to 33 in September 2016 gave way to a correction back into the teens at the end of the year. But since then, BITA has been a volatile powerhouse, soaring to 34 in May and 41 in August. The stock has now advanced on 12 of the last 13 trading days, with a nice volume spike on September 14 when the stock rallied from 41 to 44. With the stock having run up, there’s a significant chance of a little profit taking or a pullback, which should offer a chance to get in a point or two lower. In light of BITA’s volatility, use a loose stop to avoid being shaken out prematurely.
BITA Weekly Chart
BITA Daily Chart
Celgene (CELG)
Why the Strength
We wrote up Celgene a couple of months back when the biotech sector first showed signs of life, but were shaken out during the market’s August dip. But we’re quickly giving the stock another shot as it (like the sector) has turned strong again. It’s hard to find a fundamental story that offers the same combination of growth and predictability—Celgene’s main four assets (Revlimid and Pomalyst in multiple myeloma, Otezla for psoriasis and Abraxane for pancreatic cancer) are all doing well and have combined to produce steady sales and earnings growth for many quarters. Beyond those core treatments, Celgene has a pipeline that’s considered as good as it gets in biotech, including a bunch of new potential treatments in multiple myeloma, myeloid disease, lymphoma, tumors, and various inflammatory issues; between now and the end of next year, the company will get results from 18 drugs in Phase III trials and expects approval from three big-potential (at least $2 billion in annual sales potential) drugs by the end of 2019. Add it up, and management sees continued huge growth ahead—by 2020, the top brass (which has a history of meeting its forecasts) believes it will crank out $21 billion in revenue and earnings of $13 per share, with steady growth beyond that, too. After a long period out of the spotlight, big investors appear to be back in accumulation mode.
Technical Analysis
CELG looked like it was blasting off in June after a couple of years of bottom building, but as often happens, the market wasn’t quite done shaking out the weak hands—shares dipped tediously back to support at 127 as the market retreated in August. But since then the stock has turned strong again, with buying volume picking up. It’s not always easy buying back soon after being shaken out, but we think CELG’s path of least resistance is up.
CELG Weekly Chart
CELG Daily Chart
Lear Corp. (LEA)
Why the Strength
Lear makes automotive seating and electronics systems for every major automaker in the world. Lear isn’t a fast grower—2016 revenue growth was just 2%—but the global auto industry is thriving (especially in China, where the company booked 12% of its revenue last year), and investors expect Lear to grow along with it. The company announced last month that it would begin construction on a new 160,000 square foot factory to supply parts to GM’s Flint Assembly plant. When the new factory opens in early 2018, it will employ about 600 workers, adding to the company’s 156,000 workers in 257 facilities in 38 countries. The company’s most recent quarterly report continued a string of results that feature earnings growth of at least 19%, which is exceptional for any industry. The immediate cause for the surge in Lear’s stock is the announcement last Thursday that the company would be collaborating with Honeywell to create software for self-driving cars. That set off a two-day spike higher in Lear’s stock on increased volume. With a bargain-basement valuation (forward P/E is below 10) and a 1.2% dividend yield, Lear looks like a good risk-reward opportunity.
Technical Analysis
LEA went through a long consolidation under resistance at 119 from April 2015 through November 2016, but rallied from late 2016 through March 2017 up to new all time highs. While there was another price peak at 153 in June, the stock traded generally sideways until last week, when it moved out to new highs early in the week and really blasted off to new highs at 168 on good volume on Thursday and Friday. There should be a pullback of a few points following this exceptional action, and you can establish a position anywhere under 166, with a stop near 150.
LEA Weekly Chart
LEA Daily Chart
Micron Technology, Inc. (MU)
Why the Strength
We’ve covered Micron a number of times this year and, as stated last time, plan to stick with the cyclical chip stock until the trend breaks. It hasn’t yet, and the upcoming fiscal Q4 earnings report on September 26 represents another potential catalyst for shares. The stakes are certainly high given that Micron’s performance over the last few quarters has created high expectations, but investors remain confident Micron’s growth will continue. Revenue for fiscal 2017 (ended August 30) is seen rising 62%, to $20 million, while EPS should come in near $4.72, up from a fraction of that total a year ago. At this point, though, the focus has shifted to 2018, where analysts believe revenues will rise 13% and earnings lift another 20% to north of $6 per share. These are huge numbers, driven largely by Micron’s ability to increase prices and profit margins for both DRAM and NAND memory in an industry where supply remains tight (albeit less so than six months ago). Analysts remain bullish on Micron despite its cyclicality, as industry trends suggest a longer peak cycle given new application drivers around DRAM and Artificial Intelligence (AI), both of which are more energy intensive than previous leaps in technology. We’d note that the last bull cycle (2014) lasted seven quarters, and Micron’s upcoming report only represents the fifth quarter of this cycle. That’s more descriptive than predictive, obviously, but tells you that the fundamentals still have room (and time) to improve further.
Technical Analysis
MU’s 2017 trading pattern has been mostly one of higher highs and higher lows, though the stock is coming off its biggest pullback all year. After the stock failed on two attempts to break above 33 in June, momentum faded and shares broke decisively below the 50-day line in late July. They soon found support at 27 however, and within a couple weeks MU regained its 50-day line just above 30. Over the past month buying has been smooth and steady. You could nibble here, though we prefer to target dips of a point or two.
MU Weekly Chart
MU Daily Chart
NVIDIA Corporation (NVDA)
Why the Strength
Our feature stock from May 15 continues to churn higher on the back of accelerating growth and analyst upgrades. It also hasn’t hurt that Cramer recently came out and said buying Nvidia now is like buying Intel in 1993, before shares multiplied 17-fold. Why is everybody so bullish on the chipmaker? Nvidia has its hands in arguably the highest-potential markets, including PC-gaming, auto, datacenter, artificial intelligence (AI), virtual reality (VR) and cryptocurrencies. Results in Q2 (reported August 10) were fantastic. Datacenter revenue was up 2.5-times. Nvidia’s self-driving car platform is seeing greater adoption. Its chips power the Nintendo Switch, arguably the most popular console in the gaming industry. And block chain mining for cryptocurrency was more than double expectations (coming in at $251 million). Perhaps the biggest weak spot was just 2% growth in cloud business, but management attributed that to the launch of the new Volta GPU, a processor for deep learning and AI that’s 100-times faster than GPUs from just four years ago. Look for Volta to contribute to growth in the upcoming quarters. All in, revenue was up 56% to $2.2 billion, and EPS of $1.01 beat by $0.31. Obviously, the stock isn’t unknown at this point, which raises the risk that investor perception is elevated. But there’s no question the fundamentals are excellent and that growth should remain rapid for many quarters to come, which should keep big investors interested.
Technical Analysis
The last time NVDA touched its 200-day line was in early 2016, and it’s been comfortably above its 50-day line for the majority of 2017. Shares consolidated for the first months of the year before first-quarter results on May 9 propelled a fresh rally that carried it above 160 in early July. The stock then tightened up in the 160 to 175 range for nearly two months before decisively breaking out Friday and today on good volume. You can start small here or on dips and look to average up on further strength.
NVDA Weekly Chart
NVDA Daily Chart
ON Semiconductor (ON)
Why the Strength
ON Semiconductor remains a company in transition one year after its transformative acquisition of Fairchild. The stock has responded well thus far and just broke out of a long trading range. The big picture story is that, largely because of the acquisition, the company is growing far faster than its peers (expected revenue growth of 36% in 2017), but trading at a significant discount on a P/E basis (forward PE of 11, versus industry PE of 17). The company is enjoying cyclical tailwinds, and second quarter results (delivered August 6) suggest better leverage and synergies from the acquisition than previously forecast, which is music to Wall Street’s ears. Revenue in the quarter surged by 52% to $1.3 billion (beating by $20 million), and while EPS was only up 5% (to 0.22), analysts now expect full-year EPS will be up 53% to $1.39. Autos is ON Semi’s biggest end-market (31% of sales), and is being driven by image sensors for advanced driver-assistance systems and LED lighting. Industrial (26% of sales) demand for machine vision, medical and building automation/lighting solutions is another bright spot, while Computing (10% of sales) and Consumer (15% of sales) round out end-market exposure. Bottom line, business is good, and ON looks positioned to ride the renewed strength in the chip sector.
Technical Analysis
ON rallied strongly into February, when it peaked at 16, but then it entered a prolonged consolidation phase—in early July, the stock was sitting below 13 and hovered around its 40-week line. Since then, the action has improved thanks to a big surge in early August, another one in late-August and a push to new highs last week. It’s a jumpy stock, so you can try to sharp shoot an entry down a few dimes from here.
ON Weekly Chart
ON Daily Chart
Square, Inc. (SQ)
Why the Strength
Square remains in great shape mostly because of the firm’s leadership position in one of the market’s strongest themes this year; helping small-, mid- and good-sized outfits make the most of their e-commerce businesses. Square, of course, got its start with various card dongles, and thanks to a greatly expanded product line, payments remain the driving force of its business. In the second quarter, Square’s readers processed $16.4 billion of payments, up 32% from a year ago, and impressively, the company’s take-rate (the cut it takes of each transaction) remains extremely steady. Plus, the company’s add-on services, from short-term loans to clients (49,000 loans in Q2 for $318 million, up 68% from a year ago) to instant deposit to food delivery, are growing rapidly, up 99% in Q2. Thus, the growth is fantastic, but we believe Square continues to find buyers for a couple of reasons. First, the company’s platform is increasingly attracting larger clients—19% of payment volume came from bigger firms, up from 14% a year ago. And second, Square’s analyst day in May provided some jaw-dropping statistics, including this one: For every $100 Square spends on acquiring a new customer, it usually gets back $220 within two years when accounting for both payments and add-on services. That’s a giant return figure that should boost cash flow margins (which are already 15%) in a big way going forward. Mutual funds are certainly believers, with 353 owning shares at the end of June, up from 137 a year before.
Technical Analysis
SQ broke out from a big post-IPO base in February and has been generally advancing along its 50-day line since. However, that doesn’t mean the rise has been persistent—like the market, the stock formed a base-on-base pattern, with the first consolidation (22.5 to 25 during most of June) followed by another one (24 to 28 in August and early September). Now, SQ is showing signs of getting going, lifting to new price and relative performance peaks on Thursday.
SQ Weekly Chart
SQ Daily Chart
Terex (TEX)
Why the Strength
Terex is a get-your-hands-dirty kind of stock—it’s a leading producer of all sorts of heavy construction equipment, ranging from boom lifts to excavators to cranes to pavers. Naturally, the business has historically been extremely cyclical, with the global economic environment having an outsized impact on the firm’s bottom line. The economy is still a big factor, of course (the firm’s total backlog is up 36% from a year ago, with strength across all segments), but the big idea here is Terex’s multi-year effort to improve its own operations, which management (and at least one big hedge fund manager) believes could cause cash flow to mushroom in the years ahead. Terex has been busy selling off non-core businesses (including its Indian and U.K. backhoe businesses, as well as shares of a British crane operation it owned at stake in), paying down debt (its long-term debt fell from $1.5 billion to less than $1 billion in the first six months of the year), buying back shares (the share count is down around 20% from a year ago!) and putting in place numerous operational improvements. The turnaround is just beginning, but the stock is strong because big investors think the writing is on the wall for a prosperous few years. The top brass believes Terex’s return on invested capital can rise from 6% today to 20% in 2020, and a top fund manager believes the company can earn nearly $8 per share that year, up from $1 or so this year. It’s an intriguing story.
Technical Analysis
TEX bottomed with most industrial stocks in early 2016 and got another lift after last November’s election, topping out near 34 late last year. Shares meandered mostly sideways through May, but have begun to trend higher since then. Even better, shares formed a tight shelf after hitting 40 in early August, but in recent days, has surged to new highs on string of high-volume days. We’re OK buying here or on dips, with a stop in the upper 30s.
TEX Weekly Chart
TEX 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.
