In the Neutral Zone
Current Market Outlook
There has been a lot of dramatic headlines recently, and we’ve even seen some sharp market moves. But net-net, the market remains where it’s been for the past few weeks—generally stuck in a tight trading range, with some stocks doing well, some faltering and most just biding their time. Long-term, we’re still optimistic that the next major move will be up, based on the still-bullish major trend of the indexes, the lack of selling pressure on the broad market and numerous studies that point toward higher prices in the months ahead. Because of that, we’re all for holding your strong performers, and it’s fine to pick up shares of new leaders at good buy points. But it’s best to quickly get rid of losers and hold a little cash until the buyers flex their muscles.
This week’s list has a nice mix of growth stories and turnaround situations. Our Top Pick is FMC Corp. (FMC), an agricultural chemicals firm that soared last week after a game-changing acquisition that should significantly boost earnings.
| Stock Name | Price | ||
|---|---|---|---|
| Darden Restaurants (DRI) | 106.63 | ||
| FMC Corp. (FMC) | 0.00 | ||
| iRobot (IRBT) | 103.17 | ||
| Louisiana-Pacific (LPX) | 0.00 | ||
| Madison Square Garden (MSG) | 298.38 | ||
| Medidata Solutions (MDSO) | 0.00 | ||
| Melco Resorts (MLCO) | 0.00 | ||
| Micron Technology, Inc. (MU) | 43.31 | ||
| Qorvo (QRVO) | 129.47 | ||
| Wright Medical (WMGI) | 0.00 |
Darden Restaurants (DRI)
Why the Strength
Retail and restaurant stocks have been terrible performers during the past few months, but the group is starting to show a few signs of life and Darden could be a blue-chip leader if the group kicks into gear. Darden operates seven restaurant brands, with Olive Garden and Longhorn Steakhouse the two most important to the firm’s results. (It also operates Yard House, Capital Grille, Seasons 52, Bahama Breeze and Eddie V’s.) The stock is strong today for a couple of reasons. First, the recent quarterly report topped expectations, with same-store sales eking out a gain of 0.9% (Olive Garden’s growth was 1.4%), which is actually far faster than the industry, while cost controls helped earnings squeeze out a 9% gain, topping expectations. (Analysts have also nudged up their estimates, now seeing a 13% earnings gain this year.) Second, Darden spent $780 million to acquire Cheddar’s Scratch Kitchen, giving it exposure to a different kind of dining concept; with just 165 locations in 28 states, Cheddar’s has lots of store expansion potential in the years ahead, and the purchase should result in about 20 cents per share of synergies going forward. All told, Darden’s business is outperforming the industry, the Cheddar’s purchase opens up a new avenue of growth, and the firm is known to treat shareholders well (dividend yield is 2.7% annually).
Technical Analysis
In July 2015, DRI reached a peak of 76; more than a year and a half later, it was still at 76. But the earnings/Cheddar’s news combination helped the stock break out powerfully from its long-term range—DRI surged 9% on seven times average volume, and it’s inched higher since. It’s not going to set the world on fire, but the stock looks like a good risk-reward situation here.
DRI Weekly Chart
DRI Daily Chart
FMC Corp. (FMC)
Why the Strength
FMC Corp. is a specialty chemicals company that sells mainly into the agricultural market (herbicides, pesticides and fungicides; combined they make up 71% of revenues), though it also does good business in health and nutrition (stabilizers that are used in goods, beverages, ice cream and more; 20% of total revenues) and the lithium market (9% of revenue). The story is anything but sexy, but the stock is super strong because of a game-changing acquisition announced last week. FMC will get DuPont’s crop protection business (with revenues of around $1.5 billion), while DuPont gets FMC’s health and nutrition business as well as $1.2 billion. (The deal should officially close in the fourth quarter.) The move will make FMC the fifth largest agricultural player in the industry and significantly boost its R&D and production capabilities. And, more important, because of its attractive purchase price (it only paid five times net EBITDA for the whole transaction), FMC expects the deal to boost its earnings by more than 60 cents per share this year (on a pro-forma basis) and around $1 per share in 2018! Considering that management expected the firm to earn around $3.40 per share this year, the buyout is clearly a big deal. It’s not a long-term growth story, but we think the DuPont deal should keep big investors interested for months to come.
Technical Analysis
FMC wasn’t much of a performer during the past couple of years, but the picture brightened in October 2016, when the stock broke out of a multi-month base near 50 and advanced to 63 in January. It then rested for eight weeks and was looking ready to get going when the DuPont news provided the spark—FMC soared 13% on nine times its average volume and has continued higher since. You could nibble here or (preferably) on dips, with a stop in the mid 60s.
FMC Weekly Chart
FMC Daily Chart
iRobot (IRBT)
Why the Strength
iRobot is familiar to most Americans as the maker of the Roomba floor vacuuming robot, which shows up in cartoons and on FaceBook/YouTube posts. The company also makes the Scooba floor washing robot and the Verro pool cleaning robot, having divested itself of its tactical military robots for reconnaissance and bomb disposal in April 2016. While the company’s revenue growth has been so-so (12% in 2013, 14% in 2015 and 7% in 2016) and earnings growth is estimated to drop by 3% in 2017, investors are excited about plans to hook Roombas up to the Internet of Things (IoT) and software that will allow the automatic vacuums to be controlled by Amazon’s Alexa. iRobot just released a new version of its HOME app that will show post-cleaning maps of performance and connect to iPhones and Android devices. Investors had a paradoxical reaction to the company’s Q4 earnings report on February 9 that beat on revenue and earnings for the quarter, but disappointed with 2017 guidance. The company’s stock gapped down after the news, but began an immediate rebound that hit new highs in just seven weeks. Estimates that 2018 earnings will spike higher by 60% may explain the bounce. With just 10% penetration of its robotic vacuums in the U.S., the stage is set for a surge in adoptions as part of increasing interest in the smart home. Investors seem to agree.
Technical Analysis
IRBT traded basically sideways from July 2013 (when it peaked at 41) to September 2016 (still below 41). The stock’s fortunes began to rise at that point, and IRBT rallied strongly to a high of 64 just before earnings in February. The post-earnings gap down took the stock to 52, but it recovered quickly to 59 as March began. After a quick correction to 56, IRBT powered ahead in March and broke into new high territory late in the month. We think it’s buyable on any weakness, with a stop in the 60 area.
IRBT Weekly Chart
IRBT Daily Chart
Louisiana-Pacific (LPX)
Why the Strength
Lousiana-Pacific looks like an attractive turnaround situation. The company is a global leader in engineered wood building materials; its two largest segments are oriented strand board (it’s the largest producer in North America) and siding (#1 maker of treated engineered wood siding), which makes the firm a direct play on the housing market (and construction more generally). The company has had a terrible time of it, losing money in six of the eight years from 2008 through 2015, but the housing market’s recovery (and cost controls) finally kicked up demand for the firm’s products enough to turn earnings positive last year, and business is accelerating. In the fourth quarter, sales rose 19% (led by its oriented strand board, which saw sales leap 34% and make up half of revenues), while EBITDA rose 150% and earnings trashed estimates. From here, it’s just a matter of the housing market continuing its steady recovery; U.S. housing starts remain well below their multi-decade average, and as demand picks up, much of the extra business will fall to Louisiana-Pacific’s bottom line. A hiccup in the economy or an overly-aggressive Federal Reserve could change things, but so far, mortgage rates remain tame and job growth is steady—both of which indicate continued good times for the company.
Technical Analysis
The most bullish aspect of LPX’s chart is the long-term view. From March 2013 through January 2016, shares bobbed between 13 and 22. But that changed in February, when shares exploded as high as 25 on huge volume following its quarterly report. Then came a rest period (23 to 25) for another six weeks before LPX again moved to new highs on good volume last week. We think it’s buyable here with a stop near the 50-day line.
LPX Weekly Chart
LPX Daily Chart
Madison Square Garden (MSG)
www.themadisonsquaregardencompany.com
Why the Strength
The Madison Square Garden Company is in the live sports and entertainment business. The MSG Sports segment owns the New York Knicks NBA basketball team, the New York Rangers NHL hockey team and the New York Liberty WNBA women’s basketball team, among others. The MSG Entertainment segment stages live events at The Garden, the Theater at Madison Square Garden and The Forum. The company also has a controlling stake in Boston Calling Events (music festivals), a 12% stake in Townsquare Media, and, most important, a $181 million (62.5%) stake in TAO Group, a restaurant and nightlife company. Investors approved of the TAO buy, sending the company’s stock soaring. There is risk here, as the performance of its sports teams (whether they make the playoffs or not) is uncertain. The company usually loses money in the first three quarters of the year, then makes a bunch in Q4 as the Radio City Music Hall Rockettes bring in huge crowds. Some analysts also worry that control of the company by the Dolan family might raise governance issues. But right now, with an expanding portfolio of entertainment holdings (and a projected return to profitability in 2018), the company is making an attractive case to investors. Note: MSG has been around for a while, but its price history only goes back to September 2015, when the company, which was spun off from AMC Networks in 2010, split off from its media unit.
Technical Analysis
MSG has been an up-and-down issue since it debuted in September 2015, with a nice rally in May–August 2016 giving way to a flat basing period from November 2016 through February 2017. After a high-volume tipoff day on February 16, the stock caught fire on February 28, and soared from 175 to 202 in just nine trading days. A few weeks of consolidation under 200 gave way last Thursday to a rally above 200, which the stock has maintained. MSG looks buyable on a pullback of a few points.
MSG Weekly Chart
MSG Daily Chart
Medidata Solutions (MDSO)
Why the Strength
Medidata Solutions is a cloud-based software company that’s making hay by serving the life sciences industry, though it appears to have a more targeted focus. Its systems help big customers manage the clinical trial process, with a leading position in electronic data capture (EDC), which collects data in electronic form, and one of a few players in the clinical trial management system (CTMS) market, which helps to plan and report the trial process. There is competition—Oracle is a big one in EDC, and Veeva recently entered both EDC and CTMS—but Medidata is a leader and besides, there’s still plenty of growth available simply by displacing older, legacy systems in these two areas. The company’s growth has been solid and picked up in the fourth quarter, with revenue growth accelerating to 26% and cash flow from operations rising 33%; a record 288 new clients were inked last year (up 43% from 2015), including 66 in the fourth quarter. And with a subscription backlog of $404 million at year-end (up 21% from a year ago), growth is likely to continue unabated for many quarters to come. Interestingly, Fidelity owns a huge position in the firm (7.4 million shares, or nearly 13% of the entire company), a figure that rose 700,000 in the fourth quarter. All told, Medidata looks like a good company in big, multi-billion dollar fields.
Technical Analysis
MDSO has a very enticing chart in both the intermediate- and longer-term. Intermediate-term, the stock built a six-month base between 46 and 59 last September through this March, including a very tight range (54 to 59) during the past seven weeks. And this structure was part of a giant long-term consolidation that began back in March 2014. So last Friday’s big breakout on five times average volume looks buyable; use a stop in the mid- to upper-50s.
MDSO Weekly Chart
MDSO Daily Chart
Melco Resorts (MLCO)
Why the Strength
Melco Resorts & Entertainment (formerly Melco Crown Entertainment) has just changed its name and ticker symbol (formerly MPEL) following the withdrawal of former partner Crown Entertainment. The company’s new name won’t change much for Melco, which is a major casino/resort company operating in Macau, the only territory in China where gambling is legal. Melco will still be the proprietor of the City of Dreams on the fashionable Cotai Strip, City of Dreams Altira Macau and Mocha Clubs in Macau, plus the City of Dreams Manila in the Philippines. But Macau’s upturn in gambling revenue following the Chinese government’s restriction of gambling as part of an anticorruption campaign, are the real story. Melco’s revenue fell 6% in 2014 and 17% in 2015, but rose 14% in 2016. And Macau’s gross gaming revenues rose 18% in March, the eighth straight month of growth. Analysts are predicting 38% earnings growth for Melco in 2017 and 28% in 2018, a forecast given support by the 33% earnings growth on 13% revenue growth in Q4. The Macau story is a big one and Melco Resorts is riding the same wave that has been pushing Wynn Casinos and Las Vegas Sands higher after their January 2016 lows. And the company’s history of sound management makes it a good way to play the rebound.
Technical Analysis
MLCO peaked at 41 in March 2014, then skidded to a double bottom at 11 in February and July 2016. The longer-term chart shows MLCO’s rise from 3 in early 2010, which puts the big 2014–2015 correction into perspective. MLCO’s rebound to near 20 has created good momentum, but hasn’t pushed it too high to buy. We think you can grab shares around here, with a stop at 17.5.
MLCO Weekly Chart
MLCO Daily Chart
Micron Technology, Inc. (MU)
Why the Strength
Micron is the stock that just keeps giving. We’re going back to the well again because three days after we last mentioned it (on March 20), the stock gapped up nearly 10% after reporting a better-than-expected fiscal Q3. Revenue of $4.7 billion was up 59% while EPS of $0.90 beat by $0.05. Moreover, a terrific outlook increased expectations (again) for 2017. Prior to the report, analysts were looking for 47% revenue growth and earnings of $2.96 per share this year. But now, revenue growth is now expected to hit 58% while EPS is expected to soar north of $4! Those are staggering numbers from a company with a market cap of over $30 billion. But they reflect increasing confidence in positive fundamental trends that have persisted since mid-2016. These include Micron’s ability to drive higher prices and profit margins on NAND (selling price up 18%) and DRAM (up 21%) memory due to tight supply and strong demand, as well as aggressive cost reductions. The company’s financial performance and outlook drove another slew of analyst upgrades with many (including Credit Suisse, Citigroup and Wells Fargo) saying the stock is worth 35 right now. That represents 23% upside. We plan to stick with this cyclical chip stock until the trend breaks, which doesn’t appear ready to happen anytime soon.
Technical Analysis
MU is inching toward its peak of 36 from the last cycle, which ended in 2014. The stock began last year at 10, but made a move to 18 by October. It bounced around in the 16-18 range until mid-November, then jumped to 23 after the December 21 earnings report. It then moved into a pattern of higher highs and higher lows. The March 23 earnings report drove a gap from 26 to 30. Shares have since settled down and are trading in a tight range between 28 and 29. Based on recent history, we think the stock can hold above 27, offering investors another opportunity to accumulate shares.
MU Weekly Chart
MU Daily Chart
Qorvo (QRVO)
Why the Strength
Qorvo specializes in radio frequency (RF) solutions for mobile devices. RF chips are a variety of semiconductors that facilitate communication with wireless networks. Think big picture markets like mobile, connected car and home, Internet of Things (IoT), defense and wireless infrastructure; Qorvo serves them all. One of the reasons for bullish sentiment is that revenue growth is being driven by demand for more RF content in smartphones. For instance, the iPhone 3G had around $4 of RF content. That went up to $12.50 with the iPhone 5S and then up to $24.38 with the iPhone 7. And the iPhone 8 is expected to have north of $28 worth of RF content! As an Apple supplier, Qorvo is a beneficiary of this trend (along with Broadcom and Skyworks Solutions). In a recent presentation, Qorvo said its RF solutions represent around $16.25 of the RF content in today’s premium smartphones. That’s likely to keep increasing, and help Qorvo meet or exceed expectations in 2017. The big payoff should come next year as the iPhone 8 launches, which should drive earnings higher. Combined with a reasonable valuation (16 times earnings), there are many reasons Qorvo should do well. And many are coming around to Qorvo because of its relatively inexpensive valuation relative to peers (P/E of just 12.4).
Technical Analysis
QRVO bounced around in the 50 to 58 range for most of the second half of 2016. But the stock took off with a fury on January 1, rallying to 64 by the end of the month. The pace of the ascent subsided in March but the stock was up another four points to 68 by the time April rolled around. Shares then consolidated in the 64 to 69 range through the beginning of last week before buyers stepped up to push the stock to a 52-week high on Friday. We think this breakout signals that interest in the name remains strong.
QRVO Weekly Chart
QRVO Daily Chart
Wright Medical (WMGI)
Why the Strength
Wright Medical is a designer and manufacturer of joint replacement devices and other treatments for trauma, plus sports medicine and orthobiologic products. Netherlands-based Wright is making its debut in today’s Cabot Top Ten Trader on the strength of a great quarterly report and positive guidance. Wright has yet to turn profitable, but after shrinking by 4% in 2014, revenue grew by 36% in 2015 and 70% in 2016. Annual losses have been shrinking, and profitability is forecast for 2018. Much of Wright’s current success is attributable to a 2015 merger with Tornier, a specialist in upper extremities products, which, combined with Wright’s strength in lower extremities repairs, strengthened the company’s product lineup. The company’s success with torn-shoulder repairs and its new line of bone grafts led CEO Robert Palmisano to guide 2017 revenue estimates to $755 to $756, up strongly from 2016’s $690 million. With a wide offering of devices for both upper and lower extremities, plus biologics for bone grafts, Wright Medical is well positioned to aid an aging global population’s orthopaedic needs.
Technical Analysis
WMGI took a while to get moving after the 2015 merger, as its stock corrected heavily into February 2016 and thrashed around until it caught an updraft in June 2016. WMGI soared from 15 in June to 26 in August, then corrected to support at 22, which is where it was trading as 2016 began. The stock started the year with a bang, reaching 25 quickly, then consolidating for a few weeks before heading higher again. WMGI is now trading at 31, down just a fraction from last week’s high. WMGI has very positive momentum, and a buy right here should work out well, as the rising 25-day moving average is now just above 30. Use a loose stop at 27.
WMGI Weekly Chart
WMGI 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.
