A Lack of Sellers
Current Market Outlook
The Nasdaq poked above the 5,000 level for the third time in six weeks today, and most other indexes aren’t far behind. To us, what’s distinctive about the recent upmove is a complete lack of selling—very few stocks are hitting new lows, and even bad news has failed to attract the bears. Now, to be fair, buyers aren’t exactly flexing their muscle, either; not many stocks are hitting new highs and volume’s been generally light. Overall, we’re going to keep our Market Monitor where it is because the sideways trend of the market is still intact, but we do think there’s a good chance the third time could be the charm as the Nasdaq tests new high ground.
This week’s list has a bunch of good prospects, including some from unexpected areas (energy and yieldcos!). But our Top Pick is Valeant Pharmaceuticals (VRX), a steady grower in the drug field that should see earnings accelerate thanks to its recent acquisition of Salix.
| Stock Name | Price | ||
|---|---|---|---|
| Valeant Pharmaceuticals (VRX) | 0.00 | ||
| Terraform Power (TERP) | 0.00 | ||
| Sabre Corp. (SABR) | 0.00 | ||
| PDC Energy (PDCE) | 0.00 | ||
| Orbital ATK (OA) | 0.00 | ||
| JD.com (JD) | 39.58 | ||
| Intercept Pharmaceuticals (ICPT) | 0.00 | ||
| Harman International Industries, Inc. (HAR) | 0.00 | ||
| Canadian Solar (CSIQ) | 0.00 | ||
| Autohome (ATHM) | 98.65 |
Valeant Pharmaceuticals (VRX)
Why the Strength
Valeant Pharmaceuticals has been a long-term winner in the drug business, succeeding with some solid drug development, but also a slew of acquisitions over the years that have boosted its product lineup and kept earnings on a fast-growth track (from $2.08 per share in 2010 to an estimated $10.63 this year). And that’s a big reason why the stock is one of the strongest in the market today—Valeant just completed a major acquisition of Salix Pharmaceuticals, giving it a major foothold in the gastrointestinal (GI) business (to go along with its dermatology and ophthalmology lines of business) and likely providing about 20% accretion to Valeant’s bottom line in 2016. The near-term risk involves a decision in May from the FDA on Salix’s Xifaxan treatment for irritable bowel syndrome with diarrhea; the odds favor it being approved, and this could eventually be a huge drug, but it’s possible Salix’s recent sale could force the FDA to take another look. A delay would probably hit earnings estimates in the near-term, but most believe it’s a matter of when, not if, the drug gets approved. The bottom line is that Valeant is a well-managed company that should crank out very solid growth for the next few years, including booming earnings during the next two years as Salix’s operations are integrated. We like it.
Technical Analysis
VRX is up about five-fold since mid-2012, so the stock clearly isn’t at the very beginning of its run. However, like many growth stocks, it did have a long dead period last year (11 months of no progress, including a 31% correction from top to bottom) before getting going again in January. It gapped higher on the Salix news near the end of February and has moved straight sideways since. We think you could buy some here and look to add shares if the stock continues higher.
VRX Weekly Chart
VRX Daily Chart
Terraform Power (TERP)
Why the Strength
Yieldcos are a new breed of entity in the market; they’re basically subsidiaries of parent companies who “drop down” assets with long contracts—think containerships, LNG ships, or, in Terraform Power’s case, power plants. These firms then pass that revenue through in the form of beefy (and, ideally, consistently growing) dividends. Because of that, we don’t expect to see yieldcos in Top Ten … but Terraform looks like a real growth story and investors are sniffing it out. Its parent, SunEdison, has become the leading builder of renewable energy power plants (mostly solar, but it’s recently made a big move into the wind market as well); the company completed 1.05 gigawatts (GW) worth of plants in 2014 alone, and ended the year with a backlog of 2.6 GW, and had another 2.5 GW in the pipeline. Once completed, many of these will be “dropped down” to Terraform, which will operate the plants and benefit from the 10- to 25-year power purchase agreements for each of them! The company anticipates paying out at least $1.30 in dividends per share this year, which is nice, but the growth potential is the real story here—Terraform operated 1.5 GW of power plants in February, up 86% from its IPO last July, and another 1 GW could be received from SunEdison this year alone. Terraform’s management sees a clear path to nearly 5.0 GW and expects dividends to grow nearly 24% annually for the next few years. Longer-term, we think it could be much, much bigger than that. Terraform looks a lot like a brand new utility stock with huge and predictable growth ahead.
Technical Analysis
TERP came public last July and immediately had a post-IPO droop from 34 to 22. But a big acquisition (First Wind) kicked the stock higher in November, and it’s been steadily advancing since, bolstered by the occasional acquisition (including another wind power acquisition on April 1). We think a dip of a point or two is buyable, with a stop in the mid-30s.
TERP Weekly Chart
TERP Daily Chart
Sabre Corp. (SABR)
Why the Strength
A provider of technology solutions to the global travel and tourism industry, Sabre has made a series of headline-grabbing moves of late. First, it launched the first-ever platform that automates round-the-world airline bookings, streamlining a process that heretofore had to be performed manually by airlines and travel agencies. Then, Wyndham Hotel Group, the largest hotel chain in the world, entered into a deal to use Sabre’s central reservation systems—becoming the first global hotel company to do so. Most recently, Sabre’s travel application TripCase, which allows travelers to connect with millions of travel companies and manage their travel itineraries in one place, earned the award for “Best Mobile Travel App” at the Mobile Innovation Travel Awards in San Francisco. All that positive momentum comes on the heels of a strong fourth quarter in which Sabre’s earnings per share doubled. Sabre’s future growth also looks promising, with EPS expected to improve another 17% this year. With travel and tourism on the rise as the global economy heals, companies like Sabre should continue to capitalize on the increased demand among both travelers and travel companies.
Technical Analysis
Almost a year to the date after going public, SABR seems to be hitting its stride. Essentially flat in the first six months after its IPO, shares started to take off in October and have advanced steadily since. After reaching 22 in early February, the stock traded sideways for six weeks. But having broken through that resistance in late March, SABR continued to climb, reaching a new high at 25 last week. The stock hasn’t dipped below its 50-day moving average—currently at 22.4—since November. Use that as a stop and buy on any small sign of weakness.
SABR Weekly Chart
SABR Daily Chart
PDC Energy (PDCE)
Why the Strength
Denver-based PDC Energy is an oil exploration and production company that operates primarily in the Wattenberg Field in Colorado, where it has 2,600 horizontal drilling locations, and the liquid-rich Utica Shale in southeastern Ohio. While each area has a different balance of crude oil, natural gas and natural gas liquids, the bulk of PDC’s production comes from the Wattenberg Field, which is heavy in crude oil. Over the past three years, the company has grown its production at a 42% compound annual rate, while increasing proved reserves by 30% per year. The company’s presentation at its latest analysts’ day revealed a three-year growth plan based on its deep inventory in the core Wattenberg field. The company’s projections were based on oil priced at $50 per barrel in 2015, rising to $60 in 2016 and $70 in 2017. By adding to its drilling rig count in the Wattenberg at a rate of 1.5 rigs per year and drilling more closely-spaced wells, the company will continue to increase its production into the projected rebound in the price of crude. A program of hedges also provides protection from continuing weak crude pricing. While capital expenditures undercut 2014 earnings, PDC Energy increased revenue by 118% during the year and projects a return to profitability ($1.91 per share) in 2015. PDC Energy will report its Q1 results before the market opens on May 7.
Technical Analysis
PDCE crashed with all other energy stocks last year, declining from 70 in June 2014 to 28 in November. But the stock’s rebound has been exceptionally strong, kicking it to 45 by late December. PDCE was on a steady upward track in January and February and has been consolidating under resistance at 55 since late February. Try to buy on any weakness and use a fairly loose stop to allow for volatility.
PDCE Weekly Chart
PDCE Daily Chart
Orbital ATK (OA)
Why the Strength
We sometimes say that growth investing isn’t rocket science, but with Orbital ATK making its debut in today’s Cabot Top Ten Trader, that’s not quite true. Orbital is the largest manufacturer of small- and medium-caliber ammunition in the U.S., as well as a leading maker of solid rocket propulsion systems, commercial satellites and space-launch vehicles and systems. The company also makes a variety of other defense materials and systems, but its revenue comes from a healthy mix of national security, NASA/civil government and commercial/international sales. Orbital ATK is a product of the merger of Orbital Sciences with the Aerospace and Defense Groups of Alliant Techsystems (thus the ATK in the new company’s name). Orbital ATK has been trading on the NYSE under the OA symbol since February 10, and investors have clearly noticed that the combined technological expertise of the new company will make it a strong competitor in both defense and aerospace contracts. Orbital ATK already has a contract backlog of over $12 billion, which is a large book for a company whose prior annual sales were just above $5 billion. The combined company will be able to offer substantial cost reductions to customers along with new and enhanced products. A bigger defense budget from Unlce Sam doesn’t hurt either. It also pays a 1.4% annual dividend yield.
Technical Analysis
OA has been in a strong uptrend since the middle of December, bouncing off a low of 46 after a seven-month correction from 70. The stock charged to over 80 in late March, and has been trading very flat with resistance at 78 and support at 76 for almost three weeks. The stock’s rising 25-day moving average is at 76 now, which may provide some lift. We think OA looks like a buy at the bottom of its narrow trading range with a stop at 69, which was brief resistance in February.
OA Weekly Chart
OA Daily Chart
JD.com (JD)
Why the Strength
Chinese online retailers have gotten lots of attention recently, as investors have bought the story and are trying to sort out the contenders. JD.com is separating itself from the pack by following the Amazon model of having its own warehouses and delivery systems, offering a huge variety of goods and actually controlling the goods it sells. That alone distinguishes it from Vipshop Holdings (flash sales) and Alibaba (online marketplace only). JD.com has made headlines recently by taking market share from Alibaba, growing its share of Q4 gross merchandise sales by 5%, while Alibaba’s Tmall lost 2%. The other story that caught investors’ attention was news that international clothing retailer Uniqlo had signed up to use JD.com’s warehousing and delivery services for its Chinese customers. JD.com has been in a heavy investment mode for more than a year, giving up some earnings growth to gain market share and build its storage and distribution infrastructure. So, while revenue grew 72% in 2013 and 64% in 2014, earnings were flat for the period at just three cents per share in both years. But earnings are projected to be in the black this year and explode 375% in 2016. Chinese stocks are very hot right now, and JD.com has a growth strategy that matches that heat.
Technical Analysis
JD came public at 19 in May 2014, and the stock has never traded below that. After soaring to 33 last August, the stock began a three-month correction that pulled it back to 22 at the beginning of December. And since that low, JD has rebounded to 35, completing the right side of a cup formation while moving out to new all-time highs. Yes, it would be nice if JD would correct for a week or so, offering a safer buy point. But JD is clearly under very strong accumulation. You can nibble right here, but a pullback of a point would be advantageous. If you buy here, use a loose stop at 31 to allow for some volatility if the stock starts to correct.
JD Weekly Chart
JD Daily Chart
Intercept Pharmaceuticals (ICPT)
Why the Strength
A clinical-stage biotech that aims to treat chronic liver disease, Intercept’s signature drug was recently granted breakthrough status by the Food and Drug Administration (FDA) to move to Phase 3 of its clinical trials. Called obeticholic acid, or OCA for short, Intercept’s new drug treats patients with non-alcoholic steatohepatitis, or NASH, a serious liver disease for which there are currently no approved medicines. While the FDA’s breakthrough status doesn’t guarantee OCA will be approved for the market, it puts it on the fast track toward commercialization if clinical trials go well. If approved, Intercept’s OCA drug would be the first of its kind available to treat a disease from which more than 10% of the U.S. population suffers. In essence, Intercept would have a monopoly on a market that includes one out of every 10 Americans! In addition, Intercept is in the earlier stages of other studies to determine OCA’s effects on primary biliary cirrhosis and primary sclerosing cholangitis, and plans to file for marketing approval of the former in the U.S. and Europe in the next few months. It’s an intriguing speculation.
Technical Analysis
It’s been a bumpy ride for ICPT since the company went public in October 2012. In January 2014, the stock made the quantum leap from 69 to 445 in a matter of a week. But starting that March, it came crashing back down to earth, dropping as low as 137 in December. Now it’s back up again, climbing as high as 295 last month as volume spiked. The recent rest period sets up a nice entry point, with some room to run before ICPT bumps up against its one-year resistance level around 300. If it breaks above 300, the stock may be on its way to an even bigger move. Keep any position small and use a relatively loose leash.
ICPT Weekly Chart
ICPT Daily Chart
Harman International Industries, Inc. (HAR)
Why the Strength
Harman has always done good business with its best-in-class audio systems for automobiles. But, while the company remains best known for that (its recent buyout of Bang & Olufsen will boost its presence in the luxury car audio market), investors are getting excited about a larger opportunity—Harman has transformed itself into a leading provider of infotainment systems for the automobile, in terms of connectivity, audio and more. Individual products aside, the big idea here is the movement toward more technologically advanced and connected cars; the ability for each speaker in the car to play something different, for advanced route navigation, even cloud computing and driver assistance systems, all provided at least partially thanks to Harman’s software. There’s still a cyclical element to the business—if car sales slump in a recession, so will Harman’s revenues—but the movement toward connected cars should continue for many years. Revenue growth has been solid in recent quarters (bolstered a bit by some acquisitions), but earnings growth has picked up, and analysts see the bottom line leaping 33% this year and another 20% next. Given that Harman routinely tops estimates (including January’s blowout report), we think those estimates will prove conservative. Earnings are due out April 30.
Technical Analysis
HAR has a typical growth stock chart over the past year so. First there was a top in the spring of 2014, then a long, choppy consolidation with a couple of shakeouts (in October and January), followed by a big breakout on earnings earlier this year. And since then, HAR has again paused, this time in a tighter range. We think you could nibble here, or wait for a decisive push above 141 on big volume, though it’s best to keep your position smaller than normal with earnings coming up.
HAR Weekly Chart
HAR Daily Chart
Canadian Solar (CSIQ)
Why the Strength
Canadian Solar’s March acquisition of rival Recurrent Energy for $265 million from Japanese energy giant Sharp Corporation instantly made it one of the largest solar energy developers in the world. Recurrent Energy is a San Francisco-based energy developer with a pipeline of 3.3 gigawatts in planned projects all over North America. The Recurrent buyout boosts Canadian Solar’s project pipeline to 8.5 gigawatts, and will bring an estimated $2.3 billion in potential sales. The deal significantly strengthens Canadian Solar’s footprint in North America, where it faces stiff competition from the likes of First Solar, SolarCity and SunPower. Where Canadian Solar has a leg up on those U.S. rivals is overseas, with extensive operations in China, Brazil and Japan. With the global solar energy market expected to reach $137 billion by 2020, that kind of geographic diversity has Canadian Solar well positioned for growth in the next five years. The company is already well on its way; revenues improved by 79% in 2014, while its earnings per share have increased roughly 200% in each of the last two quarters. More growth is ahead, and at less than eight times next year’s estimates, the stock looks cheap.
Technical Analysis
The Recurrent Energy buyout has been a game changer for CSIQ. Since news of the buyout came on the first trading day of February, the stock has been on a tear, rising as high as 36 in late March before beginning to consolidate, which it’s done in a tightening range in recent weeks. CSIQ is still well shy of its 52-week high; last September, the stock topped out at 40. But CSIQ remains well above its 50-day moving average, now at just under 31. Use that as a stop, and buy up to its March high around 36.
CSIQ Weekly Chart
CSIQ Daily Chart
Autohome (ATHM)
Why the Strength
As more and more Chinese consumers are becoming automobile owners, the lack of huge car dealerships has created an opportunity for online sources of information. Autohome operates China’s most popular online auto information, advertising and communication site, giving consumers the information they need and giving manufacturers and dealers a chance to offer information and make their pitch. Autohome has booked a string of five years with revenue growth of 70% or more, and during that period earnings have risen from 12 cents per share to $1.16 per share. And in Q4, both revenue and earnings rose more than 80%, with a strong 36.5% after-tax profit margin. Also in Q4, the company announced that its network of dealers who subscribe to its website had grown to over 17,000, up 69% from the same quarter in 2013. Competitor BitAuto (BITA) made five appearances in Top Ten in 2013 and 2014, but Autohome has taken over the leadership role in the Chinese online automobile marketplace arena. The company’s primary website is aimed solely at new car sales and information, but its che168.com site is devoted to the growing used-car market in China. Investors are betting that Autohome’s overtaking of BitAuto will generate additional momentum as the leadership effect kicks in.
Technical Analysis
ATHM came public at 17 in late 2013, but the stock has never traded under 27. After its IPO gap up, ATHM soared to 52 in March 2014, then scooped below 30 before zipping to new highs in August and November 2014. The stock is now putting the right side on a cup formation that started at 53 in November 2014 and bottomed at 35 in January. The right side of the cup has featured a gap up on heavy volume on March 4 (earnings) and another volume spike on April 8 when the stock topped 51. ATHM looks like a good speculative buy on any weakness, with a loose stop below 43.
ATHM Weekly Chart
ATHM 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.
