Nice Bounce, but More to Prove
After being unable to get off its knees for more than a few hours, the market staged a rally during the past two days, which is always good to see. That said, while the Nasdaq is looking halfway decent (back above its 50-day line today), the other major indexes are still in rough shape, and the broad market is still iffy. Now is certainly not the time to be complacently negative—it’s not like every stock is in tatters and the major indexes are in bear phases. But after the toppy action in July and decisive break two weeks ago, we need to see more than just a couple of mild-volume rallies to put a bunch of money back to work. Thus, you should remain generally defensive as we patiently wait for the bulls to re-take control.
The good news is that many growth stocks (and a few turnarounds) continue to act well—not much money is being made but many names are building solid bases. Our Top Pick this week is Under Armour (UA), an emerging blue chip stock that, while not early in its advance, is in great position after a beautiful base and breakout.
| Stock Name | Price | ||
|---|---|---|---|
| 58.com (WUBA) | 0.00 | ||
| Vipshop Holdings (VIPS) | 14.25 | ||
| Under Armour (UA) | 0.00 | ||
| Tenet Healthcare (THC) | 0.00 | ||
| Royal Gold, Inc. (RGLD) | 129.66 | ||
| NRG Yield (NYLD) | 0.00 | ||
| NorthStar Realty (NRF) | 0.00 | ||
| Lithia Motors Inc. (LAD) | 146.30 | ||
| Dexcom (DXCM) | 421.36 | ||
| Arista Networks (ANET) | 0.00 |
58.com (WUBA)
Why the Strength
The Chinese retail landscape remains a puzzle to many international investors who are used to dealing with national chains like Wal-Mart or Target. In the absence of major brick-and-mortar players like those, online businesses like 58.com have exploded as more and more Chinese consumers gain access to the Internet via their smartphones and digital devices. 58.com is similar to Craigslist in that it’s an online marketplace that’s organized locally, giving local businesses and customers a place to offer and buy new and used merchandise and list job openings, entertainment opportunities and other services. The company now reaches around 380 Chinese cities. Online giant Tencent Holdings has taken a 20% stake in the company for $736 million, a move that will give Tencent and its WeChat platform access to 58.com’s user base. It will also give 58.com’s management money to buy back shares from pre-IPO investors. Chinese retail is very much on investors’ minds as the Alibaba IPO is still expected in a month or so. They will be watching closely when 58.com reports Q2 results before the market opens on August 21. 58.com turned profitable in 2013 and analysts foresee 76% earnings growth in 2014 and 134% growth in 2015. Chinese retail is a big market with big opportunities.
Technical Analysis
WUBA is a young stock that came public in October 2013 at 17, but has never traded under 21. The stock spiked above 58 in March, then corrected to 36 in May as Chinese stocks fell out of favor. The stock got a high-volume boost on June 26 and 27 on news of the Tencent investment and its range from those two days (46 to 56) has contained the stock since. WUBA is trading just above its 25-day moving average and seems like a reasonable buy right here, if it weren’t for the upcoming earnings report in eight trading days. If you like the story, you can take a small position right here, with a stop at the stock’s 50-day moving average now at 48.
WUBA Weekly Chart
WUBA Daily Chart
Vipshop Holdings (VIPS)
Why the Strength
Vipshop Holdings is just one of the companies (like 58.com, also in this issue) that are benefiting from the enormous growth of online commerce in China. Vipshop Holdings specializes in heavily discounted flash sales of branded merchandise, much of which is exclusive to the site, a result of Vipshop’s huge network of partnerships with fashionable apparel companies. The flash sales strategy—offering limited amounts of goods only until they sell out—keeps customers coming back to see what’s new and also keeps Vipshop’s warehousing and inventory costs down. The company’s earnings jumped from a four-cent-per-share loss in 2012 to $1.12 in 2013, and 2014 earnings are estimated to rise 152%, an estimate that Vipshop’s 206% EPS jump in Q4 2013 and 271% gain in Q1 2014 gives credence to. Vipshop Holding will release earnings for Q2 after the market closes on Wednesday, and analysts are looking for revenue of $791.6 million and earnings of 64 cents per share. The company has been featured in six previous issues of Top Ten in the past year, which gives a good illustration of its continuing strength.
Technical Analysis
Except for a nine-week correction from early March through early May, VIPS hasn’t done much in the way of correcting or consolidating. The stock was trading at 42 when it was first featured on July 22, 2013, and it’s now well above 210. The stock’s advance has been so steady that it’s not even extended over its moving averages. It’s not a good idea to jump in head first into VIPS before its Wednesday earnings report, but taking a small position might pay off. If you do decide to make a small bet, use a stop at its 25-day, now at 203.
VIPS Weekly Chart
VIPS Daily Chart
Under Armour (UA)
Why the Strength
Under Armour is the next Nike. That one sentence encapsulates 80% of the reason Under Armour has been a great performer for years, and after another fanastic quarterly report, remains one of the market’s growth stock leaders today. Recently, the “big” change we’ve seen is, thanks to some new products (especially the footwear line and a move into more international markets), revenue growth has accelerated; the firm’s revenue grew between 23% and 27% for seven straight quarters, before mid-30% growth the past three. And, while Under Armour’s estimates are usually conservative, most investors expect the faster growth to continue, as management has a history of under-promising and over-delivering. Long-term, the big idea here is that Under Armour, even after years of strong growth, is less than one-tenth the size of Nike—in a market that’s growing steadily, and the potential for newer lines of business (some believe women’s apparel could prove larger than men’s over time!) to drive years of growth is very real. Of course, the valuation reflects such high expectations, but institutional investors are willing to pay up.
Technical Analysis
UA isn’t in the early innings of its advance, but we’re impressed by its picture-perfect basing structure from March through July, followed by a monstrous-volume breakout on earnings two weeks ago. Moreover, despite some ugly market action since then, UA has traded calmly and tightly in the 65 to 70 range. If the market has another leg down, all bets are off, but we’re OK with a small position around here and a tight stop in the low 60s.
UA Weekly Chart
UA Daily Chart
Tenet Healthcare (THC)
Why the Strength
Tenet Healthcare operates 80 acute care hospitals and over 190 outpatient centers in the U.S. The company is doing well because the number of Americans with health insurance has been expanded greatly by the Affordable Care Act. This has led to a higher number of patients seeking health care plus a reduction of unreimbursed care given to those without insurance. Tenet is still digesting its $4.3 billion acquisition of Vanguard Health Systems, a move that brought with it a highly regarded team of acquisition analysts. Tenet’s CEO has expressed interest in expanding its services into new markets. Tenet got a high-volume boost in its share value on July 25 when direct competitor LifePoint Hospitals reported strong earnings and pointed to Obamacare as a contributing factor. Investors assumed that this trend would extend to Tenet, and when the company reported its own quarterly results on August 5, that turned out to be true. Tenet’s $4.04 billion in revenue represented 67% growth and earnings of 17 cents per share were well ahead of the breakeven estimate. Bad debts were also down by 18.2%. Following the good earnings report, Tenet was buoyed by a couple of upgrades from analysts.
Technical Analysis
THC’s breakout in July came after the stock built a 15-month base under resistance at 50. That lengthy basing structure is likely to provide good support for THC’s price advance. The chart shows THC bouncing off its 200-day moving average in early July, then getting two major boosts on the LifePoint earnings beat and the company’s own strong earnings results. THC powered past 50 on July 25 and got another burst of energy on August 5 and has kept forging higher since then. Look for a pullback of at least a point, since THC is a bit extended, and use a stop at 52.
THC Weekly Chart
THC Daily Chart
Royal Gold, Inc. (RGLD)
Why the Strength
Denver-based Royal Gold is a gold company that doesn’t actually mine gold, preferring to gain royalty interests in gold production via financing agreements with developmental stage miners. At the beginning of July, the company owned royalty interests in 37 producing mines and had investments in 23 developmental stage mines and over 140 exploration stage mines in the U.S. and 18 other countries. The average gold price this year has been just under $1,300 per ounce, well down from its $1,600 average in 2013. The latest hot property for Royal Gold is Mt. Milligan, a surface copper and gold mine in central British Columbia that produced 4,100 ounces of gold from the start of production in October 2013 through the end of June 30, 2014 and has reserves estimated at 5.05 million ounces. Royal owns a little over 52% of the payable gold from Mt. Milligan at a delivered price of $435 per ounce. So, while the price of gold is volatile, Royal Gold employs a strategy that insulated it from the vagaries of pricing moves. In its Q2 report, the company reported a 22% increase in revenue and a strong 44% jump in earnings. For a relatively safe way to get exposure to gold, Royal Gold is a sensible play.
Technical Analysis
RGLD made a big move from 60 at the end of May to 76 at the end of June. Since then, the stock has been inching higher in a fairly volatile trading range. Last week’s move from 76 to today’s open near 80 represents a mild breakout from a rising base. RGLD has now enjoyed six consecutive up days, which is a pretty good recommendation on its own. RGLD and its 1.1% annual dividend yield look like a relatively low risk way to play the price of gold. You can buy on any weakness with a stop at 74.
RGLD Weekly Chart
RGLD Daily Chart
NRG Yield (NYLD)
Why the Strength
NRG Yield is part of a new breed of investment opportunities on Wall Street that is quickly gaining in popularity. Specifically, NRG is an investment vehicle known as a “yieldco,” or a vehicle with the purpose of achieving stable cash flows via alternative energy sources (typically green energy sources) and distributing those returns via dividends. The bonus here is that yieldcos offer a combination of high yield and dividend growth. Essentially, you could think of firms like this as REITs for alternative energy. Created by NRG Energy, NRG Yield owns seven solar power plants, three natural gas plants, one wind generation facility and eight thermal power systems, which sell power under long-term contracts to customers including AEP, CL&P, and PG&E. In its initial public offering, NRG raked in about $431 million, which it intends to use toward the construction of another solar power plant in California. Outside of the growing popularity of yieldcos, NRG Yield’s recent round of strength has been bolstered by its parent company’s (NRG Energy) strong second-quarter report. Specifically, NRG Energy recently completed its first “drop-down” transaction with NRG Yield, totaling $357 million. With demand for alternative energy sources growing rapidly, and yieldcos the new hot topic on Wall Street, we like NRG Yield’s potential.
Technical Analysis
Since going public in September 2013, NYLD has surged more than 90%. The stock has moved in a stair-step pattern, with periods of gains (such as those between October and January, and April through July) followed by periods of consolidation. Throughout the uptrend, NYLD has enjoyed the support of its 10-week and 25-week moving averages, which the stock has not closed a week below since its inception. Currently, NYLD could be due for another upleg, as the stock has spent nearly two months basing in the 50 region. If you’re game, we recommend taking bites here or on dips of a point or two.
NYLD Weekly Chart
NYLD Daily Chart
NorthStar Realty (NRF)
Why the Strength
NorthStar Realty Finance is a real estate investment trust (REIT) that specializes in managing commercial properties, related securities and debt secured by commercial real estate. The company’s main source of revenue comes from investing in manufactured housing communities and healthcare properties throughout the U.S.; these account for more than 70% of NorthStar’s holdings. The company has been in the news a lot lately. Back in early July, NorthStar spun off its management unit as a standalone business in a move designed to raise additional capital. The move created a leaner REIT with a wealth of growth opportunities, which NorthStar immediately sought to capitalize upon—the company announced last week that it was going to buy Griffin-American Healthcare REIT for $3.35 billion. The move was NorthStar’s second acquisition in the healthcare field this year, with the company snapping up 43 private-pay senior housing facilities and 37 skilled nursing facilities for about $1.1 billion from Formation Capital and Safanad Limited in March. In addition to adding some 295 healthcare properties to its portfolio, the Griffin-American deal also extends NorthStar’s reach into Britain. Continued expansion into healthcare REITs bodes well for NorthStar, especially with an aging population in the U.S. As such, we like the company’s prospects for continued growth.
Technical Analysis
NRF spent most of the second half of 2013 consolidating just below the 20 region before news broke that the company would spin off its management unit. NRF quickly surged to a peak near 36 in May, before the spin-off sent the stock back to trade in its former range below 20. With the spin-off now under its belt, NRF is once again moving higher, with news of the Griffin-American deal providing additional fuel. Not ones to chase a rally, we recommend buying on dips as the market digests NRF’s recent acquisition news.
NRF Weekly Chart
NRF Daily Chart
Lithia Motors Inc. (LAD)
Why the Strength
Lithia Motors has been in high gear since we last checked in on the new/used auto retailer. The company, which operates more than 90 stores in about 10 states, sells some 25 brands of new domestic and imported vehicles and all brands of used cars and trucks through its stores and online. Recently, Lithia reported another solid quarter, with revenue growing 28% year over year as earnings rose 21%. Helping to drive growth going forward, Lithia recently acquired DCH Auto Group for $363 million—a deal that is expected to increase the company’s stores to more than 128 and add 65-75 cents per share to earnings in 2015 and beyond. During Lithia’s Q2 conference call, CEO Bryan DeBoer noted that the company purchased three more stores during the quarter, stating that “The acquisition market remains robust.” The three new stores, in Texas, Oregon and Alaska, are expected to bring in another $165 million in annual revenue. In total, Lithia has purchased or opened eight new stores so far in 2014. Lastly, the company offers a dividend of 16 cents per share, which is just icing on the cake. We continue to like Lithia Motors’ prospects.
Technical Analysis
When we last checked in with LAD, the stock was looking a bit overheated following a sharp rally due to the DCH Auto Group deal. Shares have since gone on to test the waters near the 98 area before pulling back to enter a basing period in the 90 region. Currently, LAD is pinned between its 25-day and 50-day moving averages, as the shares are squeezed into the 90 level. If you own some, sit tight. If not, this is a lower-risk entry point; you could nibble here with a stop in the mid-80s.
LAD Weekly Chart
LAD Daily Chart
Dexcom (DXCM)
Why the Strength
DexCom is a small medical company ($201 million in revenue) that has some of the best continuous glucose monitors (CGMs) on the market. These devices help diabetics improve their quality of life in a big, big way, and Dexcom’s G4 Platinum CGM is the lightest (2.4 ounces) and smallest (0.5 inches thick) CGM on the market, with a sensor needle one-third smaller than the nearest competitor and a wireless range of 20 feet—three times that of the next best device. (It also comes in slick colors, making it look more like a consumer device than a medical one.) Most important, the G4 and the latest software is approaching fingerstick accuracy! Basically, the G4 is the best, which is why many insulin and insulin pump makers have teamed with DexCom. Yet the company has a long runway of growth ahead—it only recently entered the pediatric market, and it’s having great success (25% to 30% new customers in the second quarter were pediatric) and it’s working on getting Medicare coverage, as 500,000 people over 65 have Type 1 diabetes. Because of a ramp in spending (especially on salespeople), profits have been elusive, but revenues have been cranking ahead in the 55%-plus range for many quarters. The valuation is huge, but so is the potential.
Technical Analysis
We’re intrigued with DXCM because it was one of the hot, money-losing (but rapidly-growing) stocks that topped out in March and suffered an ugly decline of more than 40% in just a few weeks. Most of those high-fliers remain dead today, but DXCM is actually approaching its old highs after a positive earnings reaction last week. But buying here is tricky; there’s still overhead resistance and the stock is extended above some moving averages. Thus, if you want in, start small and try to buy on dips.
DXCM Weekly Chart
DXCM Daily Chart
Arista Networks (ANET)
Why the Strength
Arista Networks has a story straight out of 1999, when the buildout of the Internet’s infrastructure was all the rage. In the networking world these days, the focus is on firms that have specialized data switches and software that help enable cloud computing, and Arista looks like a new leader in that respect—its products allow networks to be easily managed and quickly integrate apps and customized features. And that, in turn, lowers costs for large Internet companies and cloud service providers. Business has been growing rapidly, and the recent quarterly report confirmed that Arista remains in hypergrowth mode—not only did revenues grow 65% but earnings soared 95%, crushing expectations as profit margins exploded to 17.2%. Moreover, the company continues to broaden its customer base, adding another 200 customers to bring its total to 2,700. (Microsoft has historically accounted for 20%-plus of revenues but that should decrease as Arista expands.) Bottom line, Arista has best-in-class products and top-notch partnerships (it’s worked closely with VMware for years) that are taking share from the big players in the industry, including Cisco. There’s risk here, but if everything falls right, it could go very far.
Technical Analysis
ANET is still getting its sea legs, having just come public in early June, and its day-to-day swings (including a wild reversal last Friday) aren’t easy to handle. But looking at the weekly chart, we see that ANET has spent many weeks between 65 and 80 or so—a good-looking IPO base that often leads to higher prices. If you’re game, you could nibble around here and look to add should the stock (and the market) get going; otherwise, just put it on your watch list.
ANET Weekly Chart
ANET 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.
