Broad Market Continues to Weaken
Current Market Outlook
The major indexes continue to whip around, with last Monday’s dip followed by a strong recovery, and now a renewed drop. By our measures, the intermediate-term uptrend is on the fence, and it’s clear that large chunks of the broad market are falling apart (gold, silver and oil shares are especially weak). And, at the very least, it’s obvious the environment remains very choppy and making big money is difficult. Of course, we’ve seen repeated shakeouts followed by recoveries, but the evidence tells us to pull in our horns; we’re shifting the Market Monitor back toward neutral while we wait for the buyers to return.
When doing buying, the key is to focus on what’s working and this week’s list has a good batch to consider. Our Top Pick is Parexel (PRXL), a steady grower in the medical testing field that is just getting going after a couple of big corrections during the past year.
| Stock Name | Price | ||
|---|---|---|---|
| XPO Logistics (XPO) | 0.00 | ||
| Steel Dynamics (STLD) | 0.00 | ||
| Salix Pharmaceuticals (SLXP) | 0.00 | ||
| Charles Schwab (SCHW) | 0.00 | ||
| Parexel Corp. (PRXL) | 0.00 | ||
| Norwegian Cruise Lines (NCLH) | 0.00 | ||
| Gilead Sciences (GILD) | 75.10 | ||
| Canadian Solar (CSIQ) | 0.00 | ||
| Spansion (CODE) | 0.00 | ||
| Archer Daniels (ADM) | 0.00 |
XPO Logistics (XPO)
Why the Strength
XPO Logistics, a Connecticut company with a market cap of a hair over $2 billion, wants to be the top dog in the logistics business, which means delivering every kind of good for every kind of customer. XPO is already the fourth-largest freight brokerage firm in North America, the third-largest intermodal services provider and the biggest last mile deliverer of heavy goods, expedited shipments and premium contract logistics. Logistics has traditionally been a fragmented industry, but XPO is aiming at consolidating it, including six acquisitions last year. The company just announced this month that it’s completed its takeover of New Breed Holding Company, a deal that brings XPO’s operations to a total of 203 locations and around 10,400 employees. XPO isn’t a big freight hauler. Rather, it’s a contractor with more than 3,600 trucks under contract to its drayage, expedited and last-mile operations and relationships with over 27,000 other carriers who can be called upon as needed. Every takeover builds XPO’s scale and moves the company closer to its goal of being the dominant ground, rail, sea and air carrier in North America, and maybe beyond. XPO Logistics isn’t profitable yet, but anticipates that milestone in 2015. This is an ambitious company that experienced 152% revenue growth in 2013, with estimates for 228% growth in 2014. A major ($700 million) infusion of funding from a teacher’s pension plan and Singapore’s sovereign wealth fund, announced on September 12, let investors know that XPO Logistics will have the cash to continue its expansion.
Technical Analysis
XPO has been in a long-term uptrend for years, but volatility has been extreme along the way. After spending 16 months trading under resistance at 19 from March 2012 through June 2013, XPO has surged higher but also experienced three major corrections. A high-volume breakout on July 30 (earnings) and another on September 12 (funding) kicked the stock higher in short order and it has been hitting new highs all month. XPO would be a good buy anywhere under 38, with a stop at the bottom of its September 12 gap at 34.5.
XPO Weekly Chart
XPO Daily Chart
Steel Dynamics (STLD)
Why the Strength
While few investors know it, steel stocks have been among the hottest in the market during the past few months as industry fundamentals have improved and some company-specific catalysts have boosted views. In the case of Steel Dynamics, the firm’s just-completed acquisition of Severstal Columbus (bought from a huge Russian outfit), one of the most efficient mini-mills in the country, is boosting Dynamics’ steel shipping capacity by a whopping 40%, and the purchase price of $1.6 billion means the deal is accretive to earnings. By itself, Steel Dynamics has always been one of the best U.S. steel operators—it was founded in 1993 and has been profitable for many years in a row as its mills are far more efficient than competitors. And now the combination of increased demand from a variety of end markets and the Severstal buyout should kick earnings through the roof—analysts see the bottom line growing 56% this year and another 60% in 2015 (to $2 per share!), which will probably lead to higher dividends (currently 1.8% annual yield). Of course, there’s risk with steel stocks, as a global economic slowdown would surely crimp business. But with the sector just kicking off after many years in the wilderness, we think there’s a chance the forecasted numbers prove conservative. We like it.
Technical Analysis
STLD’s breakout in late-July remains the dominant feature of its chart. After a very tight, proper three-month base, news of the Severstal acquisition caused STLD to explode higher on two straight days of enormous volume. And since then the stock has chugged higher, before popping to new highs last week as the company nudged up earnings estimates. A pullback after nearly eight weeks of up action is possible, but we think dips of a point or two are buyable.
STLD Weekly Chart
STLD Daily Chart
Salix Pharmaceuticals (SLXP)
Why the Strength
For most of its life, Salix Pharmaceuticals maintained an exclusive focus on treating ills of the gastrointestinal tract, including Xifaxan, a treatment for traveler’s diarrhea that brought in 69% of 2013 revenue. But that changed when the company bought out Santarus in a $2.6 billion all-cash deal (closed on January 2, 2014) that brought with it treatments for bowel disease, angiodema, heartburn and type II diabetes. The combined company maintains a primary focus on the GI tract, but its lineup of 22 products approved for sale also includes Glumetza, a treatment for Type II diabetes that was included in the Santarus deal. Salix Pharmaceuticals has a long history of profitability and the takeover of Santarus keyed a strong 67% jump in earnings in Q1 (on 90% revenue growth) and a very promising 109% earnings bounce in Q2 on 62% revenue growth. Analysts were watching closely to see what kind of cost savings the consolidated company would achieve, and the news from the first half of the year was all to the good. Estimates for 2014 earnings growth are for an increase from 2013’s $3.39 per share to $6.19 per share, an 83% bump. Salix has received tentative approval from the FDA for its uCERIS treatment for ulcerative colitis. While the company is now dealing with patent issues, it anticipates that it will launch uCERIS during the first quarter of 2015. Salix has just announced a merger with Cosmo Technologies, an Irish subsidiary of Cosmo Pharmaceuticals, which will provide a tax domicile savings. The other big news for Salix is the rumor that it may be a takeover target for Allergan.
Technical Analysis
SLXP has been featured in Top Ten 13 times since its debut in 2004, and the stock has been in a strong uptrend since the last week of 2012. SLXP corrected under resistance at 120 through March, April and May, but broke out in June and has had two high-volume advance days since, one on July 1 and one on August 19, when news of the Cosmo deal came out. SLXP is out to new all-time highs and looks like a good buy on dips, with a stop at 145.
SLXP Weekly Chart
SLXP Daily Chart
Charles Schwab (SCHW)
Why the Strength
Brokerage and investment firms are back in favor on Wall Street, as investors look toward improving returns due to an increasingly invested and aging population. One investing firm that is firing on all cylinders is Charles Schwab. The company has shown strong growth during the past several quarters, with total assets under management rising 18% year-over-year to a record $2.45 trillion in August. In fact, new asset growth during the month totaled $8.5 billion. Overall, Schwab currently operates more than 325 offices, 9.3 million active brokerage accounts, 1.4 million corporate retirement plan participants and 964,000 banking accounts. In a move to further improve its position, Schwab recently announced that it has added 65 exchange-traded funds to its commission-free OneSource platform, which has been a winner for Schwab, raking in some $31 billion in assets under management as of August. So far this year, clients have invested some $5.9 billion in the program, accounting for about 45% of Schwab’s total ETF flows. Looking ahead, revenue is expected to grow by 23% in fiscal 2015, but with changes in the Fed’s monetary policy on the horizon, this figure may be conservative.
Technical Analysis
After flat-lining in 2012 and putting in an impressive rally in 2013, SCHW has split the difference so far in 2014. The stock spent much of the first half of the year consolidating into support in the 25 region. After bouncing off its 50-week moving average in May and June, SCHW finally regained its feet and began to trek higher. Bolstered by its 10-week moving average, SCHW has pushed into fresh all-time high territory, eclipsing technical resistance at the 30 level late last week on strong volume. While we like SCHW’s prospects, we’d recommend buying pullbacks.
SCHW Weekly Chart
SCHW Daily Chart
Parexel Corp. (PRXL)
Why the Strength
When pharmaceutical companies are looking to reduce costs in their drug development, clinical trials and FDA submission programs, the company they turn to most often is Parexel International. Parexel is the prime outsourcer for these services, taking over the operations of an entire division, running drug trials—including recruiting and paying the subjects—analyzing results, writing up reports and taking a candidate drug through the entire submission and approval process, saving client companies big money. The company can also generate the educational materials that will accompany the new drug’s rollout and assist with its commercialization. With 75 locations in 50 countries, Parexel is a global business that has helped to develop around 95% of the 200 top-selling biopharmaceuticals on the market today! The company just celebrated a big five-year contract win with Pfizer, and works with all 50 of the top biopharmaceutical companies and all of the top 30 biotech companies, but also scores high with smaller companies that save money through outsourcing. The company has booked 10 consecutive quarters of double-digit revenue growth and has projected earnings growth of 24% in fiscal 2015. Parexel is a steady growth story with a successful history.
Technical Analysis
PRXL has been through two painful corrections in recent history, falling from 55 to 38 in October/November 2013 and from 57 to 42 in March/April 2014. But recovery followed each of these corrections. PRXL broke out to new all-time highs on elevated volume on September 11 and 12 and has been consolidating since. With PRXL trading at around 61 and its rising 25-day moving average just below 59, the stock looks like a reasonable buy on any weakness. Use a stop at 56.
PRXL Weekly Chart
PRXL Daily Chart
Norwegian Cruise Lines (NCLH)
Why the Strength
Norwegian Cruise Lines is a company that many are familiar with. The company is thriving today for a few reasons. First, the overall environment: despite some promotional price cuts in the Caribbean market, the general cruise industry has been doing very well (Royal Caribbean has appeared in Top Ten a couple of times recently). Second, Norwegian itself is in the midst of a solid expansion phase: it has 14 ships on the water, including the Gateway, which was just delivered in January, and has another four on order (the next ship to hit the water will come in October 2015). But third and most important, the company made a splash earlier this month by agreeing to acquire Prestige Cruises in a $3 billion cash and stock deal. Prestige operates eight ships (and has a ninth on order) under two brands, and the deal should give Norwegian a big position in the luxury cruise market and diversify its routes. Investors liked the news, and given the strong industry fundamentals and the newbuild program, analysts see earnings kiting higher during the next couple of years. A reasonable valuation (16 times this year’s estimates) and modest share buyback program (it has a three-year program that should buy back about 6% of the outstanding shares) put a cherry on top of this story.
Technical Analysis
NCLH came public in early 2013, rallied for a few weeks … and then did nothing for the next 18 months! In fact, even now, it’s hard to say the stock is in a super-strong uptrend. However, NCLH did gap up strongly three weeks ago on the Prestige news (volume was six times average!) and has traded tightly since. After a long dead period, the path of least resistance has turned up, and we think starting a position here should work, with a stop just below 34.
NCLH Weekly Chart
NCLH Daily Chart
Gilead Sciences (GILD)
Why the Strength
Gilead Sciences has been a big-cap leader of growth stocks for a couple of years now, and it remains so today on the back of monstrous levels of earnings for the next few years. The company has done a great business in HIV treatments for many years, and that franchise, along with some new treatments hitting the market (such as one for lymphoma just approved in Europe), will produce solid profits and steady growth. But the big driver is the firm’s Sovaldi treatment for Hepatitis C; it’s a revolutionary medicine that effectively wipes out the disease over a few months. The big talk in recent months hasn’t been about the product’s effectiveness as much as pricing (a deal to offer Sovaldi in emerging markets for a much cheaper price has spooked some investors), some competition coming down the pike and combination treatments that should hit the market soon. Still, we think the bottom line is that, while the hypergrowth of 2014 isn’t going to continue, Gilead is set to churn out ridiculous levels of earnings and cash flow in the years ahead, which it can use in a variety of ways, including share repurchases—the company bought back about 1% of the company in the second quarter, is expected to buy back even more in the third quarter, and has another $5 billion repurchase program coming after that. It’s high profile, which is a risk, but the big earnings should keep big investors interested.
Technical Analysis
GILD was a huge winner in 2012 and 2013, but early 2014 proved rough—the stock had a 25% correction that, by the time it bottomed in April, pushed the stock back to where it was nine months earlier. But since then, GILD has been extremely strong, registering just three down weeks (including two recently). GILD just tested its 10-week line for the first time since its early-year base; we think it’s buyable around here, with a stop in the mid-90s.
GILD Weekly Chart
GILD Daily Chart
Canadian Solar (CSIQ)
Why the Strength
The solar energy story is familiar to most investors, including the big silicon supply crunch in 2006, the big hit to the industry from the disruption of support programs following the 2008 collapse of the global economy and the resurgence in the past couple of years in the wake of a consolidation and shakeout wave. Canadian Solar, an Ontario-based company with Chinese roots, is a veteran of all those crises, and it’s a success story on every level. Canadian Solar is a vertically integrated solar company that does everything from produce its own silicon ingots to producing wafers, solar cells, modules, solar arrays, all the way up to constructing entire turn-key electricity generating plants. Starting in 2009, the company formed a global photovoltaic power division aimed at design, construction and sale of megawatt-scale (MW) solar farms that would connect to the power grid, providing low-cost, renewable power. One recent win was a contract to supply a 1.5MW rooftop system for a university in Amman, Jordan. The company has exceeded 60% revenue growth in the last three quarters and 2014 earnings estimates are for 448% growth. With China targeting the installation of 70 gigawatts of solar generating capacity by 2017, India looking at 20 gigawatts by 2022 and Japan stepping up its commitment to solar in the wake of the Fukushima disaster, the outlook for the solar industry in general is positive, and Canadian Solar’s efficient products and plant construction expertise make it a good candidate for excellent results in the future.
Technical Analysis
CSIQ was a monster in 2013, but ran into a wall earlier this year on concerns about global economic health. But a strong rebound in August after a big earnings beat pushed the stock from 23 as the month began to 35 as it closed. CSIQ has continued to advance in September, climbing as high as 40 last week before today’s sizable correction. With CSIQ right back at its rapidly rising 25-day moving average, today’s pullback looks like a good buying opportunity. And the recent crossover of CSIQ’s 25- and 50-day moving averages back above its 200-day is a nice technical sign of support. CSIQ looks buyable anywhere near 37, but use a looser stop around 32.
CSIQ Weekly Chart
CSIQ Daily Chart
Spansion (CODE)
Why the Strength
Originally formed as a joint venture between semiconductor giants Advanced Micro Devices and Fujitsu, Spansion has established itself as an up and comer in the flash memory market. The company makes and markets NOR flash memory—the type of memory typically used in wireless phones, networking equipment, and automotive subsystems. Spansion is also looking at expanding into the NAND flash memory market, which is more widely used than NOR and is heavily utilized by MP3 players, digital cameras and USB flash drives. Spansion’s NAND products are expected to be based on its MirrorBit technology, which the company hopes will give it an edge on the competition. As a smaller, more nimble semiconductor company, Spansion has been able to achieve strong revenue growth in the competitive flash memory market, with sales growth averaging 45% over the past year. What’s more, recent company deals could help Spansion’s growth considerably: it recently announced the signing of a cross-license agreement with Windbond Electronics, a worldwide leader in supplying specialty memory. The agreement allows both companies access to each other’s flash memory patent portfolios, creating significant opportunity for Spansion.
Technical Analysis
After spending 2012 and 2013 bouncing around in the teens, CODE finally took off in 2014. Driven at first by takeover speculation, shares rebounded from the 10 level in late 2013 and blew past technical resistance at 15 in January. The stock has since gone on to add more than 70% year-to-date, riding support at its 10-week and 25-week moving averages. In late July, CODE hit a snag in the 23 region, forcing the stock to build a new base. But now, CODE has resumed its former uptrend, and appears poised to once again challenge overhead resistance.
CODE Weekly Chart
CODE Daily Chart
Archer Daniels (ADM)
Why the Strength
When we last checked in with Archer-Daniels-Midland, the company was riding high due to consolidation trends within the agriculture processing market. Already among the world’s largest agriculture commodities processors, Archer-Daniels still has its eyes on Australia’s GrainCorp, even after the Australian government nixed a buyout offer last year. With GrainCorp still out of reach, investors have turned their attention toward Archer-Daniels’ more immediate prospects: this year’s grain harvest. Due to perfect growing conditions, U.S. farmers are expected to turn in some 18.3 billion bushels of soybeans and corn this year, overwhelming storage silo capacity. As a result, many farmers are going to be forced to sell their crops early at considerably lower prices rather than wait for higher returns expected in May 2015. And lower corn and grain prices will be a considerable boon for Archer-Daniels, which is the world’s largest corn processor. Analysts are already anticipating that the company’s pretax profits may rise as much as 36% to $106 billion in 2015. While some of this forecast is due to a bumper crop, Archer-Daniels has done an excellent job of improving storage and infrastructure utilization—a fact evident in the company’s strong earnings growth during the past year.
Technical Analysis
Technically, ADM has been in rally mode since hitting a low near 24 in November last year. More recently, the stock encountered long-term resistance at the 50 level. After spending most of August battling 50, ADM finally broke out to the upside last week, hitting an all-time high in the process. Shares will likely enter a period of consolidation at this point, as ADM digests its recent gains. We recommend buying dips with a target near 50-51.
ADM Weekly Chart
ADM 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.
