Can’t Escape the Chop
Current Market Outlook
We’re eight and a half months into 2014, and it finally looked as if the choppy (four weeks up, four weeks down, etc.) type of environment had been left behind. But not yet! Just during the past couple of trading days, we’ve seen the market churn near its highs and the sellers come out of the woodwork. We can’t conclude at this point that the market is set to sink for a few weeks; the evidence doesn’t support that. But given that sustained trends have been hard to come by, we also continue to think holding some cash on the sideline and booking partial profits makes sense. We’ll keep our Market Monitor in a “lean bullish” position, but we’ll be watching the upcoming action closely. If the uptrend is OK, buyers should show up soon.
This week’s list has a broader array of stocks and sectors on it, with a few stable stories. Still, we’re going with a true growth stock as our Top Pick—Palo Alto Networks’ (PANW) quarterly report was a barnburner and the stock soared to new highs on record volume. And we think its pullback since looks normal.
| Stock Name | Price | ||
|---|---|---|---|
| WhiteWave Foods (WWAV) | 0.00 | ||
| United Therapeutics (UTHR) | 0.00 | ||
| TriQuint Semiconductor (TQNT) | 0.00 | ||
| Gentherm (THRM) | 0.00 | ||
| Palo Alto Networks (PANW) | 236.92 | ||
| Monster Beverage Corporation (MNST) | 0.00 | ||
| Southwest Airlines (LUV) | 0.00 | ||
| Jazz Pharmaceuticals (JAZZ) | 0.00 | ||
| Greenbrier (GBX) | 57.73 | ||
| Foot Locker (FL) | 0.00 |
WhiteWave Foods (WWAV)
Why the Strength
On one level, WhiteWave Foods is just another organic food company. The company’s brands include: Silk brand soy milk products (a leader in its category, $669 million in revenue for the trailing 12 months (TTM) ended June 30); Horizon Organic premium dairy products (also top in category, with $607 million in net sales); Earthbound Farms (organic greens and produce: also top of category with $565 million in TTM sales); International Delight and Land O’Lakes coffee creamers and beverages (#2 in category, $943 million in TTM net sales); and Alpro, (a European operation with TTM sales of plant-based foods and beverages that generated $469 million in net sales). On another level, WhiteWave is a company that’s positioned to capitalize on the increasing demand for organic foods sold at retail outlets like Whole Foods Markets. The company has experienced steady low-double-digit percentage revenue growth since 2008, and its last two quarterly reports showed identical 38% earnings growth on 36% revenue growth. WhiteWave foods has excellent expansion possibilities in Europe and is showing steady growth in the U.S. It’s not likely to go to the moon, but with the stocks of Whole Foods and The Fresh Market in downtrends, WhiteWave is bucking the tide in fine fashion. Investors’ appreciation of the organic food story was reinforced last week by a favorable report on organic sales from the grocery giant Kroger. WhiteWave also just announced the issuance of $500 million in notes, which it will use to pay down debt and support growth initiatives, including acquisitions.
Technical Analysis
WWAV came public in October 2012 at 16 and built an eight-month base before catching fire in July 2013 on huge volume. The stock moved permanently above 20 in November 2013 and has been in a general uptrend since, with corrections in March–April and late-June–July bouncing back quickly to roughly the previous trend line. WWAV topped 38 late last week, so today’s correction marks a buyable pullback, as the stock is still well above its 25-day moving average at 34.9. Use a stop at 33.
WWAV Weekly Chart
WWAV Daily Chart
United Therapeutics (UTHR)
Why the Strength
United Therapeutics is a biotech firm that’s doing good business in the pulmonary arterial hypertension (PAH) market; the firm has been solidly profitable for years, though the bottom line did dip in recent quarters, partly due to a major legal challenge to its main product, Remodulin. But the good news is that, three weeks ago, the company got something close to a best-case result from the lawsuit, effectively upholding its Remodulin patents for another three years. But that’s not the only good news—the company has launched a new and improved PAH treatment called Orenitram, an extended-release tablet that is far less invasive than Remodulin (which is an infusion therapy). Add it up, and not only has the risk of a bad ruling in the courts disappeared, but investors can now look ahead toward steady growth (and less legal-related spending) in the quarters ahead. Throw in a reasonable valuation (just 14 times this year’s earnings estimates) and there’s reason to think United Therapeutics can do very well in the months to come.
Technical Analysis
UTHR enjoyed a great rally from mid-2012 through late-2013 (when Orenitram was originally approved by the FDA), but then investors backed off, sensing the lawsuit battle. That led to a multi-month, double-bottom consolidation that took 28% off the stock’s price and wore out most weak hands. As you can see on the chart, the favorable court ruling three weeks ago caused the stock to explode, and it’s followed through to the upside. Given the market’s recent weakness and UTHR’s big upmove, we advise buying dips.
UTHR Weekly Chart
UTHR Daily Chart
TriQuint Semiconductor (TQNT)
Why the Strength
TriQuint Semiconductor, making its debut in today’s issue, is a chip maker that specializes in radio frequency (RF) chips for mobile devices, network infrastructure and defense and aerospace markets worldwide. About two-thirds of the company’s revenue comes from mobile device sales, with network infrastructure kicking in a little over 20% and the rest coming from defense and aerospace applications. The big news for TriQuint is that it is merging with RF Micro Devices (RFMD) in a $1.6 billion merger of equals to create a chip company with global scale and a bigger slice of the chip market in its category, with expected annual sales of about $2 billion. Since that announcement on February 24, the stocks of both companies have been in strong uptrends. It’s likely that the combined company will use the RF Micro Devices identity. Shareholders in TriQuint will get 1.675 shares of the new company for every share they own. So buying TQNT is a way to play the newly combined strength of a stronger competitor in an industry in which each has been successful. The gaudy 622% estimates for 2014 earnings for the combined company reflect the merger, but the 37% estimate for 2015 is likely a valid take on the strength of the company and the category.
Technical Analysis
TQNT has been trending up since April 2013, with a gap up from 9 to 12 on monster volume (around 49 million shares) on February 24, when the merger was announced. TQNT pushed above 21 on September 3, and has been drifting lower as its 25-day moving average rises to meet it. If the merger story appeals to you, you can buy anywhere under 20 with a stop around 18.
TQNT Weekly Chart
TQNT Daily Chart
Gentherm (THRM)
Why the Strength
Gentherm is a supplier of devices that heat and cool automobile seats, a key comfort factor for drivers. The company has excellent adoption among pretty much all U.S. and European carmakers and it’s making good progress with getting Japanese and Korean carmakers on board. The company’s seat climate control systems are based on thermoelectric devices (TEDs) that use semiconductor elements to deliver heating and cooling very quickly, a priority for drivers. There’s also a kicker for Gentherm, which is a thermoelectric generator (TEG) that generates electrical energy from the waste heat that usually goes out the tail pipe of a vehicle. The company’s TEG will, if it proves successful, be used to power seat heating and cooling, plus powering cell phone chargers, displays and other devices in the car. Even without the TEG, Gentherm has been soundly profitable, averaging earnings growth of 127% per quarter for the last four quarters. Revenue growth spiked by 229% in 2011, but slowed to 19% in 2013. With a solid base, excellent room for expansion of its current product line into Asia and a possible ground-breaking technology under development—the TEG is being tested by Ford Motors and BMW—Gentherm looks like an automotive winner.
Technical Analysis
THRM has been in a long-term rally since late 2012, when it turned up after a nearly 18-month correction. THRM blew out of a seven-week base in February, then spiked higher on huge volume in March. The stock experienced a brief-but-sharp 16% correction ahead of earnings in late July, but settled down after the strong report and pushed to new highs in late August. THRM has just pulled back by a couple of points and looks like a good buy right here, with a stop at 45.
THRM Weekly Chart
THRM Daily Chart
Palo Alto Networks (PANW)
Why the Strength
The network security field has been around for a couple of decades, ever since the Internet and vast corporate networks began being built out. But this industry has taken on a whole new level of importance in today’s hacker-rich world—nearly every week another major breach of credit cards or other sensitive information is revealed. That plays right into the hands of Palo Alto Networks, which sells next-generation firewall systems, often through a subscription service, so a company’s security is never out of date. And, to no one’s surprise, business is booming: In the just-reported quarter, revenue growth accelerated sharply (up 59% vs. 46% to 49% in prior quarters), while billings grew 64%, recurring subscription revenue expanded 74% (now more than one-fifth of all revenues and heading higher) and cash flow was strong. There is competition out there—FireEye made a splash earlier this year—but Palo Alto looks like the lead dog, as some recent acquisitions have rounded out its technological capabilities. Given the amount of legacy network security systems still in place out there, we think this company can grow rapidly for years to come.
Technical Analysis
PANW has been a choppy stock since coming public in mid-2012, but it looks like it’s changing character. Shares made a great run after bottoming last November, but then spent the six-plus-months since its March peak building a big launching pad. Last week’s bullish earnings report kicked the stock and (importantly) its relative performance (RP) line to new highs on the stock’s biggest weekly volume ever. Expect volatility, but we’re OK with starting a position here, or on dips of a couple of points.
PANW Weekly Chart
PANW Daily Chart
Monster Beverage Corporation (MNST)
Why the Strength
Monster Beverage (formerly known as Hansen Natural) was a leading glamour stock in the mid-2000s and again in 2010-2011, as its Monster energy drinks grabbed tons of market share, driving earnings higher. The company has matured since then though—revenues are nearing $2.5 billion and top-line growth has slowed to 12%, give or take. So why is the stock strong? Because Coca-Cola is throwing its weight behind it! The soft drink giant will invest $2.15 billion in Monster (14% stake) and is transferring its global energy drink brands (which have struggled) to Monster for them to manage. Also, Monster will transfer its non-energy drink brands to Coca-Cola (such as its Hansen Natural sodas and teas). But most important of all, Monster will now have access to Coca-Cola’s behemoth distribution network, especially overseas, which, along with the cash infusion that could lead to some acquisitions, could re-energize growth. Of course, investors are already discounting some of that growth (the stock trades at 35 times this year’s earnings), while analysts aren’t yet onboard (earnings expected to rise “only” 19% next year). Still, the pathway to re-accelerating growth is clear, and institutions are betting that the Cola-Cola partnership will pay off big.
Technical Analysis
MNST peaked in June 2012 around 80, was cut in half by November of that year and, despite moving somewhat higher since, really didn’t do anything spectacular—it had been more of a market performer in the year and a half since. But the Coca-Cola news has changed the stock’s character, helping it to soar to new price highs and, intriguingly, trade tightly in the month since the announcement. We think buys near the approaching 25-day line (at 86 but rising quickly) could pay off, with a stop just below 80.
MNST Weekly Chart
MNST Daily Chart
Southwest Airlines (LUV)
Why the Strength
Southwest Airlines, founded in 1967, is a good example of a successful strategy being executed well. Everything about the company works, which explains why it’s the largest U.S. airline in terms of annual passenger boardings. Passengers like the Bags Fly Free program and the in-flight WiFi and free video-on-demand.The company’s fleet is standardized on Boeing 737s (over 600 in service) and 717s (nearly 70 in service). The company specializes in short-haul flights into satellite or downtown airports, serving 93 cities in 40 states, the District of Columbia, Puerto Rico and five geographically close foreign countries. The success of its strategy allows Southwest to target a 15% pre-tax return on invested capital. In 2013, the company returned $611 million to shareholders via a $540 million stock buyback program and $71 million in dividends. Southwest bought AirTran Holdings in 2011 and expects to complete the integration of AirTran’s operations into its own by the end of 2014. With 41 consecutive years of profitable operation under its belt, Southwest Airlines is a consistent winner in the volatile airline industry, boasting a 9.7% after-tax profit margin in Q2, the highest in years. Estimates of 2014 earnings are for a 50% jump in earnings, with estimates for an 18% jump in 2015.
Technical Analysis
With the exception of a four-month lull in the middle of 2013, LUV has been in an uptrend since late 2012. The stock soared above 10 in December 2012 and paused under resistance at 14 from May through August of 2013. But the rally that began in September 2013 is still going on, including a steeper advance that began on August 8. LUV is now trading around 34, but is still trading at a reasonable 19 times this year’s earnings. The stock executed buyable pullbacks of about a point in April, June and July, and it makes sense to wait for another. Look to buy in near 33, with a stop at 30.
LUV Weekly Chart
LUV Daily Chart
Jazz Pharmaceuticals (JAZZ)
Why the Strength
Biotechnology firm Jazz Pharmaceuticals is hot once again, but not for any new information on its blockbuster treatments. As a quick refresher, Jazz offers a full stable of treatments, including drugs for neurological, oncology, and women’s health conditions. The company’s biggest revenue driver is currently Xyrem, Jazz’s narcolepsy drug. In fact, Xyrem made up two-thirds of Jazz’s second quarter sales. The company also offers Erminaze, a treatment for acute lymphoblastic leukemia. Earlier this year, Jazz snapped up fellow biotech Gentium, giving it access to defibrotide, a treatment for severe hepatic veno-occlusive disease (VOD) with projected potential peak sales of about $210 million once it receives FDA approval. The big news today, however, are rumors of a potential buyout offer from Botox maker Allergan. Allergan is currently fending off a hostile takeover bid from Valeant Pharmaceuticals, and a Jazz takeover would provide Allergan with a stronger pipeline and a tax inversion strategy given Jazz’s Irish corporate location. While nothing is official, according to Irish law, news should be forthcoming soon, as the law requires disclosure following a notable move in the underlying stock. Jazz shares surged 7% on September 5 due to takeover speculation.
Technical Analysis
JAZZ stock certainly doesn’t need takeover speculation to drive investor interest, but it helps. The stock surged more than 150% last year, and extended that rally in the first quarter of 2014, tagging a high near 176 in February. But shares cooled off rapidly, retreating to support near 120 and their 200-day moving average in May. After a rally into July, weakness sent JAZZ down for another test of its 200-day trendline in early August. A quick rebound and buyout speculation reinvigorated shares, though today’s dip was ugly. Still, if you’re game, you can buy a little on this dip.
JAZZ Weekly Chart
JAZZ Daily Chart
Greenbrier (GBX)
Why the Strength
Greenbrier is an “old world” company that’s thriving thanks to its leading position in designing and building railroad freight cars; these products (along with some ocean-going barges) make up about 70% of revenue, with servicing and repairs another 25% or so. The big story here is that, thanks mainly to the shale boom in the U.S. (but also because of the general pickup in the economy), demand for rail cars is booming and, according to Greenbrier, should continue at least through 2018. Rail cars are more fuel-efficient than trucks, and can be built far more rapidly than new pipelines, hence the huge demand from the energy industry—rail car shipments were just 45,000 industry-wide in 2011, but should average about 70,000 per year from 2014 through 2017! Greenbrier is taking advantage of that; sales and earnings have just begun to surge, rail car backlog totaled $2.75 billion at the end of the latest quarter, new orders totaled a whopping $1.65 billion and earnings estimates are strong for this year and next. And going along with their bullish multi-year outlook, management has declared a modest dividend (0.8% annual yield) and a good-sized share buyback program (it bought back about 1% of the company last quarter alone). Obviously, at some point, earnings will top out and come back down, but it appears the cycle will play out for a lot longer than many think.
Technical Analysis
GBX has been running higher since November of last year, basically riding its 10-week line higher the entire time. That means, of course, that the stock isn’t in the very early stages of its advance, but we’re also not seeing any signs that sellers are taking control—it bounced strongly off its 50-day line in early August, and has actually tightened up on its weekly chart during the past four weeks. If you’re game, you can buy some around here, but we also advise using a stop below 64, as a break of that level could usher in a deeper consolidation.
GBX Weekly Chart
GBX Daily Chart
Foot Locker (FL)
Why the Strength
Thanks to a booming trend dubbed “athleisure,” athletic footwear retailer Foot Locker has been able to further entrench itself as a market leader. The company currently sports more than 3,320 stores in more than 20 countries in North America and Europe, as well as Australia and New Zealand. In addition to its brick-and-mortar stores, Foot Locker sells direct to customers via catalog retailer Eastbay and Footlocker.com. The company has been a bright spot for the struggling U.S. apparel industry, which has been beleaguered by slow mall traffic and stagnant sales growth. Foot Locker has bucked this downtrend by capitalizing on the “athleisure” trend, as more Americans are wearing workout-style gear, whether or not they’re working out. “You see a lot more women who are wearing tights and exercise pants and exercise tops around,” CEO Ken Hick noted in the company’s second-quarter conference call. Speaking of earnings, Foot Locker recently reported record second-quarter earnings of $1.64 billion, which came in $70 million higher than analysts were expecting. Looking ahead, analysts are forecasting 20% earnings growth for Foot Locker in 2015, with that figure slowing to 11% growth in 2016. Foot Locker should continue to gain momentum as the “athleisure” trend gains momentum.
Technical Analysis
Momentum is a good word to describe FL’s price action so far in 2014. Following a flat performance last year, shares have raced higher along their 10-week and 25- week moving averages in 2014. So far, FL has rallied more than 38%, with shares gaining ground rapidly after eclipsing resistance at the 50 level in mid-August. Shares are now consolidating in the 57 region, which is currently home to FL’s 10-day moving average. With the post-earnings euphoria dissipated, you can look to buy some on dips of a point ot two.
FL Weekly Chart
FL 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.
