Bullish Action
Current Market Outlook
After weeks of banging on resistance, the major indexes lurched above some key levels last week, and many individual stocks did the same. To be fair, “breakouts” in indexes are notoriously unreliable, which is why we put more emphasis on the overall trend (choppy, but still positive) and the action of leading stocks (improving, though earnings season continues to have its say). Thus, while last week wasn’t a major buy signal, the weight of the evidence tells us to push our Market Monitor up a notch into bullish territory and continue to look for new leadership to emerge in the weeks ahead.
This week’s list has a wide variety of stocks, but for our Top Pick, we’re going with the mega-cap stock that just gapped up on earnings—Amazon’s (AMZN) surge last week pushed it out of a 15-month base as investors see huge potential for the firm’s cloud computing division.
| Stock Name | Price | ||
|---|---|---|---|
| Taser (TASR) | 0.00 | ||
| Men’s Wearhouse (MW) | 0.00 | ||
| Ligand Pharmaceuticals (LGND) | 267.14 | ||
| HD Supply Holdings, Inc. (HDS) | 0.00 | ||
| Hasbro (HAS) | 0.00 | ||
| GW Pharmaceuticals (GWPH) | 174.52 | ||
| Fortinet Inc. (FTNT) | 137.53 | ||
| Axalta Coating (AXTA) | 0.00 | ||
| Amazon.com (AMZN) | 2.00 | ||
| Akamai Technologies (AKAM) | 0.00 |
Taser (TASR)
Why the Strength
The Taser story has always been about the company’s Conducted Electrical Weapons (CEWs) that use an intense electrical charge delivered by electrode darts to incapacitate dangerous opponents without killing them. The Taser has become so familiar that its nickname has entered popular culture (“Don’t taze me man!), but Taser has a family of products—including body cameras that record interactions with suspects and software that saves and organizes evidence—that help law enforcement agencies do their job more efficiently and responsibly. The company got a boost on April 20 on news of an order for 1,000 of its Taser X2 next-generation smart weapons from the Ontario, Canada provincial police department. While no dollar value was given, the order gave evidence that demand for the new weapons will be strong. Among other reports of sales, the company also received an order earlier this month from the City of London (U.K.) police for 178 Axon body cameras and a one-year subscription to Evidence.com. This was Taser’s first significant U.K. sale. And last Friday, it was reported that the London Metropolitan Police will purchase 30,000 body cams. Taser can be headline-sensitive, with investors buying shares whenever a report of a police shooting seems likely to increase demand for body cameras. But with three years of revenue growth around 20% annually, the long-term trend seems obvious. The company’s February 26 Q4 earnings report missed on earnings, but the combination of Tasers and body cameras gives Taser excellent growth potential.
Technical Analysis
TASR took a hit on February 26 from a disappointing earnings report, falling from 27 to 23. But after slipping to 22, the stock got moving again, rising to 25 earlier this month and gapping up on April 9 on supportive news about new orders. TASR touched 30 on April 20, and has been consolidating just under 30 since then. We think it’s buyable here, but a little patience may produce an opportunity near 29. The stock is pretty volatile, so a loose stop around 26 will give it room to move.
TASR Weekly Chart
TASR Daily Chart
Men’s Wearhouse (MW)
Why the Strength
Men’s Wearhouse has been expanding its brand mainly by acquiring other brands. In the past two years, the men’s formal attire chain has bought out competitors Joseph Abboud and Joseph A. Bank for a combined $1.9 billion. The company is already seeing a significant return on its investments. Sales improved 32% in 2014 after barely budging the two previous years. Earnings per share also increased 17%, the company’s biggest improvement in three years. At a time when many brick-and-mortar retailers are shuttering stores, Men’s Wearhouse is opening them. The Joseph A. Bank acquisition instantly added 600 new stores to the Men’s Wearhouse fleet, and now the company is in the process of opening another 100 stores of its own. Meanwhile, Joseph Abboud—a high-end men’s clothing brand that never had its own store—just opened its first location in Midtown Manhattan last month. Having added two high-end men’s clothing brands to its portfolio and with new locations popping up all over the country, Men’s Wearhouse is expecting a spike in revenues, while earnings per share are projected to grow another 11% in the company’s current fiscal year. The acquisitions’ impact on the company’s image may be even more profound: there’s no better way to flex your muscle to investors than to buy out a competitor—nevermind two of them.
Technical Analysis
From July 25 to December 15 last year, MW plummeted from 58 to 40. Since the calendar flipped to 2015, however, shares have been on an upward trajectory, recovering nearly all their losses to get back to 57. Big moves have been followed by brief dips, so another brief pullback may be on the horizon after the recent push from 51 to 57. Buy on the next sign of weakness, and look to the 50-day moving average—currently just under 52—as a logical loss limit.
MW Weekly Chart
MW Daily Chart
Ligand Pharmaceuticals (LGND)
Why the Strength
Ligand Pharmaceuticals is a tiny biotech company, but this isn’t the usual story—instead of pinning its hopes on trials for one potential blockbuster drug, Ligand has done a ton of early-stage research and has partnered with 65 companies (including Amgen, Pfizer, Novartis, Lilly, Celgene, Hospira and more) for more than 100 drug programs. The plan is to keep expenses low and, eventually, enjoy a huge stream of royalties. The beginnings of the plan are already in effect; about half its revenues currently stem from royalties, thanks mainly to two products, Promacta and Kyprolis, both of which should continue to see strong growth. Looking ahead, another partnered drug could hit the market later this year, and there are 13 more in Phase III trials. All told, the company expects more than 20 revenue-generating drugs on the market by 2020, up from seven right now. There is also lumpy but recurring revenue from the firm’s Captisol technology that is helping now, but the big score will be the long-term royalty stream. The proof of that is already being seen—profit margins are incredible (54.2% last quarter!) and earnings are expected to grow 40% this year, 50% in 2016 and reach $4.50 per share by 2017. This is a big, cash-generating story that we like a lot.
Technical Analysis
LGND had a big run in 2013 and early 2014, but topped with many growth stocks last February and had a big 48% correction afterward. After hitting bottom in October, shares bounced and tightened up in the mid-50s through February. And then came a big breakout, and LGND has been advancing ever since. Given the fact that the stock’s been running for two months and is extended to the upside, we advise buying on dips.
LGND Weekly Chart
LGND Daily Chart
HD Supply Holdings, Inc. (HDS)
Why the Strength
HD Supply is a huge industrial distributor, delivering more than a million individual products to more than 500,000 customers in a variety of fields (facilities maintenance, water infrastructure, power solutions, construction, etc.). And, despite some forecasted hiccups from a dip in demand from the energy sector, business remains healthy—sales growth has been consistently in the high single digits, and thanks to ever-increasing profit margins due to operating leverage, the bottom line is growing much faster than that. All told, despite a conservative outlook in the recent quarterly report, management still sees 2015 sales up between 6% and 7%, cash flow up 9% to 14% and EPS surging toward $2. The big risk here is the overall economy, especially in the construction and maintenance fields—HD Supply is so big that a dip in the end markets will lead to the same in its overall business. But that’s obviously not the case today. While HD Supply offers nothing revolutionary, it’s a nice, well-managed business that’s leveraged to the overall economy.
Technical Analysis
HDS came public in June 2013 and rallied for a few weeks, but since then, it’s basically been a market performer, as the relative performance (RP) line went sideways from September 2013 right through March 2015. The past few weeks have seen the stock push higher and the RP line make a new all-time high … a sign the buyers are finally in control. It’s not the fastest moving stock, but we think HDS is a low-risk buy around here, with a stop just below the top of its old base.
HDS Weekly Chart
HDS Daily Chart
Hasbro (HAS)
Why the Strength
Hasbro, which is making its first appearance in today’s Cabot Top Ten Trader, is the vision of a game company in transition from legacy games (Monopoly, Mr. Potato Head and Tonka) to totally modern modes of play (Transformers and Magic: The Gathering). The company’s franchise brands include My Little Pony, Play-Doh and Nerf, all of which remain very popular. But right now, revenue growth is being driven by the company’s alliance with Disney for merchandising the Disney Princess and Frozen brands. Hasbro is also following many companies into the production of original content and the licensing of powerful brands for development, and these activities are expected to drive growth. Hasbro’s revenue has regisitered in the single digits lately, compared to flat growth in 2013 and a 5% dip in 2012. And the company’s last two quarterly earnings reports have been received enthusiastically by investors, especially the 50% jump in earnings in its April 20 release. Conservative investors have always appreciated the company’s low volatility and high (2.9%) annual dividend yield. But growth investors are now taking a serious look at Hasbro as it alters its strategy to increase revenue beyond toy sales.
Technical Analysis
HAS began to show more life at the beginning of 2013, although the stock traded effectively flat from its 52 start to 2014 through 51 in January 2015. But big gaps up on high volume on January 9 and April 20 produced gains to as high as 74 last week. HAS has now corrected below 72, offering a good entry point. We think HAS looks good anywhere under 72, although you might want to wait to see where its post-earnings correction finds support. In either case, a stop around 66 (the bottom of its April 20 gap) looks prudent.
HAS Weekly Chart
HAS Daily Chart
GW Pharmaceuticals (GWPH)
Why the Strength
Another stock making its first appearance in today’s Top Ten is GW Pharmaceuticals, a U.K. company that develops drugs derived from marijuana cannabinoids. GW has one such medicine, Sativex, being marketed in 15 countries and approved in 12 more for the treatment of spasticity due to multiple sclerosis. Sativex is also in Phase 3 clinical trials for use against cancer pain, with funding being supplied by GW’s development partners. The company’s unpartnered drug pipeline includes three drugs for use against epilepsy-related conditions, including one in Phase 3 trials, two orphan drugs, one in Phase 2 trials and one preclinical, and other drugs for use against type 2 diabetes, ulcerative colitis and schizophrenia, all in phase 2 trials. With sales of just $50 million a year and a market cap of nearly $2.4 billion, investors are clearly expecting great things from GW Pharmaceuticals. The April 14 news that the company had initiated a second Phase 3 trial for Epidiolex, its treatment for a rare form of childhood epilepsy called Dravet syndrome, contributed to a spike higher for its stock on more than five times its average volume. With earnings losses expected to increase through 2016, this is a speculative issue. But given the size of the patient populations that might be affected by its candidate drugs, the potential is enormous, and investors are pricing that into the stock.
Technical Analysis
GWPH came public at 9 just two years ago and the stock based for just 12 weeks before beginning a strong rally that eventually reached 111 in June 2014. The stock started a nine-month rebasing process at that point, falling to as low as 60 and not regaining 100 for good until April 14. GWPH topped 120 last Friday and spiked over 127 briefly today before pulling back to near 120 again. This is another boom-or-bust pharmaceutical with huge potential and high volatility. If you’re interested, look to start a position on a pullback of at least a couple of points and set a loose stop to allow for some significant moves.
GWPH Weekly Chart
GWPH Daily Chart
Fortinet Inc. (FTNT)
Why the Strength
Along with Palo Alto Networks and FireEye, Fortinet is one of the upstart cybersecurity companies that are taking huge share from the legacy players in the industry. (For what it’s worth, we do view Palo Alto as the institutional leader of the group, but the opportunity from just taking share from the old guard like Cisco and Checkpoint is massive, so it’s not going to be a winner-take-all situation.) Fortinet’s stock is strong today because of another fantastic quarterly report—revenues rose 26%, billings were up 36%, deferred revenue leapt 33% and, intriguingly, the company saw a ton of large deals get done (contracts inked between $250,000 and $500,000 grew 51%!), another sign of huge demand. Earnings were weak but they underestimate the health of the business for a variety of reasons. Net income was $13.5 million, for instance, but cash flow from operations was north of $60 million. The main risk, of course, is that the group is red hot and expectations are sky high; any small slowdown in demand could dent stocks like Fortinet. But we pay more attention to what’s happening now, and the fact that the stock just gapped up on earnings tells you there are still plenty of buyers around.
Technical Analysis
FTNT was really just a market performer until October of last year, when its relative performance (RP) line turned up. And it’s been gathering strength ever since, riding its 10-week line higher during that time. Last week, FTNT gapped out of a brief four-week range on its heaviest volume in more than a year. It’s not a true breakaway gap, but we’re OK buying a little here or, preferably, on dips, with a stop near the 10-week line.
FTNT Weekly Chart
FTNT Daily Chart
Axalta Coating (AXTA)
Why the Strength
Although it’s making its debut in today’s Cabot Top Ten Trader, Axalta Coating Systems is actually a global paint and coatings company with a 145-year history. The company, which used to be the paint division of DuPont, has a hand in every conceivable kind of coating, from OEM paint for new cars and refinishers, to industrial coatings for equipment and structures, to high tech coatings. The company is riding a wave of support from last Friday’s news that Warren Buffett just took an 8.7% position in AXTA, adding more coatings exposure to its previous buy of Benjamin Moore. Investors’ enthusiasm is also being stoked by estimates of 2015 earnings of $1.06 per share, up a whopping 783% from the 12 cents per share in 2014. Both figures represent a big rebound from Axalta’s 98-cent-per-share loss in 2013. That improvement is partly due to a program of cost cutting and partly to lower prices for many petroleum-based raw materials. Even though Axalta has only been public since November 12, 2014, it has managed to attract a roster of nearly 220 institutional investors. And the power of the Buffett name will likely boost investor interest. Investors also note that Buffett’s ownership of Benjamin Moore might offer some M&A opportunities. The next big thing to watch for is the company’s Q1 earnings report on May 6, before the market opens.
Technical Analysis
AXTA came public at 19.5 last November, and immediately ran to 27 in the middle of December. The stock then cooled off, but still closed at 29 on April 1. News of the Buffett buy gapped AXTA up to 31 on April 7, and after nearly three weeks of trading as high as 32 and as low as 30, that’s where it is today. Trading volume dwindled to 134,000 shares last Friday, so there may not be much action ahead of next week’s earnings report. We think AXTA is buyable under 31, with a stop at 28.5.
AXTA Weekly Chart
AXTA Daily Chart
Amazon.com (AMZN)
Why the Strength
Most know Amazon as an online marketplace where you can buy books, order cheap diapers and watch streaming video. But most don’t know it as a cloud-computing company. Perhaps that’s about to change. Last Friday, the e-commerce giant beat earnings expectations, thanks largely to surprise profits from its budding cloud-computing wing. Called Amazon Web Services cloud, the unit turned an operating profit and produced a 17% operating margin last quarter. This marked the first time Amazon had divulged numbers from its cloud-computing division, which is on track to bring in $6 billion this year, with revenues advancing at a 50% clip. Though it was formed nearly a decade ago, in 2006, Amazon’s cloud-computing business had been hidden behind a veil of secrecy until last week. Now that it’s out in the open, and apparently thriving, Amazon Web Services—which provides cloud-computing services for a wide range of companies, including Netflix—could be the key to Amazon finally becoming consistently profitable. For its part, Wall Street loves Amazon’s cloud-computing potential: last Friday’s announcement propelled Amazon shares to a new all-time high despite a steep decline in earnings per share.
Technical Analysis
The big gap up last Friday was what took AMZN shares to new heights, but it was merely the latest in a flurry of upward moves. From January 20 to February 2, the stock jumped from 289 to 364, and eventually crept its way up to 387 in early March. A tight consolidation followed, but the stock consistently found support at its 50-day moving average, never falling below 366. Now above 400 for the first time ever and with volume last Friday more than four times average, AMZN has as much momentum as it’s had in years. Buy on the dips, and ride that momentum.
AMZN Weekly Chart
AMZN Daily Chart
Akamai Technologies (AKAM)
Why the Strength
Akamai Technologies reports first-quarter earnings tomorrow after the close, and Wall Street is expecting big things. Outsized expectations for the world’s largest provider of online content are nothing new. Over the past four quarters, earnings per share have improved by an average of 23%, while sales have risen 24.5%. There’s no reason to suspect a slowdown is imminent. Demand for greater bandwidth is never-ending, and Akamai Technologies is at the forefront of that boom. Few companies can match the 170,000 servers Akamai provides, or the 1,100 global networks it serves. Internet television and streaming video are all the rage these days, and those are Akamai’s specialties. It provides the bandwidth for websites to support streaming video, as it did during last year’s World Cup—the most-watched live online sporting event in history. With more people kicking their cable companies to the curb in favor of watching all their favorite shows and sporting events online, Akamai should continue to benefit. Wall Street has certainly taken notice: Blue Harbour Group upped its stake in Akamai shares in the fourth quarter, and the stock is drawing a flurry of bullish options trades ahead of tomorrow’s earnings report.
Technical Analysis
AKAM made a big gap up from 58 to 71 in early February, but had been relatively quiet since. The stock traded in a fairly narrow range, finding support at 69 but never topping 73. That changed last week, when the stock broke as high as 76. Tomorrow’s earnings report could trigger another uptick—as the last one did in early February—but, as always, we don’t advise taking a big position right ahead of earnings. You can either nibble here, or look to buy after the report as long as AKAM doesn’t fall apart.
AKAM Weekly Chart
AKAM 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.
