Bending With the Wind
Current Market Outlook
The market’s snapback in recent days has been impressive, with the Nasdaq toying with new-high ground, some other indexes popping back above their 50-day lines and many growth stocks acting much better. But not all is bright and sunny—there remain many divergences in the market, and the advance is extremely thin, with just one-third as many stocks hitting new highs today as during the Nasdaq’s initial run at this level in early July. Because the evidence has improved, we’re shifting our Market Monitor toward bullish territory, so you can put some sidelined cash to work, but we advise stepping back into the market slowly.
Regardless of the daily gyrations, we remain encouraged by the many growth stocks showing better action. Our Top Pick this week is LinkedIn (LNKD), a stock that still has resistance to chew through, but has turned the corner after getting cut in half.
| Stock Name | Price | ||
|---|---|---|---|
| YY Inc. (YY) | 0.00 | ||
| Western Refining (WNR) | 0.00 | ||
| Tata Motors Limited (TTM) | 0.00 | ||
| Tesla, Inc. (TSLA) | 818.87 | ||
| Medivation (MDVN) | 0.00 | ||
| LinkedIn Corporation (LNKD) | 0.00 | ||
| Jumei Holdings (JMEI) | 0.00 | ||
| Green Plains Energy (GPRE) | 0.00 | ||
| FleetCor Technologies (FLT) | 0.00 | ||
| Carter’s (CRI) | 0.00 |
YY Inc. (YY)
Why the Strength
YY Inc. is a young Chinese company that has the knack for creating content and opportunities for online interaction that really appeal to young Chinese users. The company’s unique interactive platform allows mobile users to compete in karaoke contests and play games against one another. The company’s latest earnings report on August 6 revealed stronger-than-expected sales of online music and entertainment, driving revenue increases of 103% and earnings growth of 100%; that marks six consecutive quarters with triple-digit earnings growth. The company’s outperformance for the quarter was driven by strong music sales, but management pointed to a nearly 300% jump in revenue from their online dating business as a pleasant surprise. YY Inc.’s strength is all based on the unique interactiveness that its platform makes possible. With that as the attractor, the company’s other services have a built-in source of new customers. YY Inc. was founded in 2011, and it has made remarkable strides in a short time in a huge market.
Technical Analysis
YY came public in November 2012 at 10.5, and it proved to be a real rocket, blasting to 91 in early March of this year. But a steep correction to 53 just two months later appeared to have killed investors’ interest. At that point, the stock began a remarkable V-shaped recovery that shot it back to 90 just last week. The stock got a high-volume spike on the day after its earnings report and has now pulled back a couple of points from last week’s high. You can either take a small position here, or wait for the stock to break out above its resistance at 90, erasing the fear that its highs at 90 in March and last week constitute a double top. Use a stop just below 79.
YY Weekly Chart
YY Daily Chart
Western Refining (WNR)
Why the Strength
Western Refining is an independent oil refiner operating primarily in the southwestern U.S. The company’s refineries have a capacity of more than 165,000 barrels per day, of which more than 90% is light transportation fuels, including diesel and gasoline. The company also owns more than 220 convenience stores and gas stations in four southwestern states. Western Refining has seen steady gains during the past year, benefiting from rising oil prices and an improving U.S. economy. During the past four quarters, Western Refining has averaged revenue growth of 46% year-over-year, even as weak margins placed pressure on earnings. The company’s most recent bout of strength derives from its August 5 earnings report, where Western missed earnings expectations, but reported strong revenue and offered up solid guidance. The company said that the third quarter was off to a “strong start,” and that its prospects in the Permian and San Juan basins are expanding nicely, taking full advantage of the U.S.’s boom in shale oil, while a new pipeline should start operating in early 2015. Looking ahead, sales are expected to grow by 19% this year, tapering off to 8% in 2015.
Technical Analysis
After posting a strong rally in 2012, WNR ran into trouble last year. The stock quickly rallied into resistance at 40, before weak oil prices and U.S. economic concerns sent the stock sliding back to support near 25. WNR finished the year strong, however, ultimately toppling resistance at 40 and establishing a trading range in the region. During the past six months, WNR bounced around between 36 and 45, as oil prices fluctuated. The company’s recent earnings report appears to have stabilized those fears, pushing WNR above resisitance. You can take bites here, or wait for support above 45 to firm up before diving in.
WNR Weekly Chart
WNR Daily Chart
Tata Motors Limited (TTM)
Why the Strength
Tata Motors is a diversified Indian vehicle manufacturer that makes everything from heavy trucks, military vehicles and buses to affordable passenger cars to the luxury marques Jaguar and Land Rover. Tata is also in the IT, construction equipment and machine tools businesses, but 99% of revenue comes from automotive sales. Although the company is thoroughly Indian, it gets by far the most revenue (28%) from sales in China, with India contributing 16%, the U.K. 12%, the rest of Europe 13%, the U.S. 11% and all others 20%. The current enthusiasm for Tata Motors has three sources. First, the company’s earnings report last Monday was very strong, with 36% revenue growth and a shocking 209% jump in earnings. The second source is the company’s two new domestic passenger car models, the Tata Zest and Tata Bolt, which are expected to compete well in the Indian market. And third, the quarterly report reflected strong sales of Jaguar and Land Rover in China, where the government’s anti-corruption campaign was thought to threaten luxury car sales. Tata Motors’ small dividend (forward annual yield is 0.30%) isn’t a major factor, but it doesn’t hurt.
Technical Analysis
The rally that began for TTM in early February has been very strong, pushing past late-2013 resistance at 32 late in the month and soaring to 41 in May before a 12-week consolidation under resistance at 42. TTM even experienced a sharp three-week correction in the runup to quarterly earnings, dropping from 43 to 38 in 13 trading days. The rally that kicked off on August 11 has now enjoyed six straight advances and is in multi-year high territory. TTM is buyable on any pullback of a point or so, with a stop at 41.
TTM Weekly Chart
TTM Daily Chart
Tesla, Inc. (TSLA)
Why the Strength
With 13 previous appearances in Cabot Top Ten Trader,Tesla Motors is getting to be quite familiar. The Palo Alto-based electric automobile manufacturer is one of the brain children of Elon Musk, a serial innovator whose other companies are making waves in solar power and space travel. Tesla’s stock was a monster in 2013 as the company turned profitable far earlier than expected and the demand for its vehicles created massive waiting lists. Today, the buzz about Tesla is the company’s projected introduction of a new model, designated Model X, a full-size crossover utility vehicle (CUV) that is expected to be the luxury family vehicle of the year in 2015. Right now, the news stories about Tesla concern the company’s extension of its drivetrain warrantee on Model S sedans from four years and 50,000 miles to eight years and unlimited miles. This concerns some analysts, who see the cost of the warrantee extension (which is retroactive to all Model S vehicles sold) as cutting into earnings. But investors have yet to show any disapproval. Tesla still enjoys the Musk touch.
Technical Analysis
TSLA was so hot in 2013, roaring from 35 at the start of the year to 195 in September, that anxieties about what would happen when the correction came grew to disturbing levels. When that correction arrived, it pulled the stock back to 116 in November. But investors piled back into TSLA, pushing it to 265 in February of this year before a second major correction in March and April that bottomed at 177 in May. Subsequent action has powered TSLA to very near its February highs again. TSLA is buyable on any weakness, with a stop at 240.
TSLA Weekly Chart
TSLA Daily Chart
Medivation (MDVN)
Why the Strength
Biopharmaceuticals firm Medivation has a hit on its hands with its anti-prostate cancer drug Xtandi. The medication is currently approved to treat patients who have already received chemotherapy, and is competing directly with Johnson & Johnson’s Zytiga. Despite that competition, Medivation’s Xtandi saw sales surge 111% to $148 million during the second quarter. The strong sales helped Medivation reverse a second-quarter loss from a year ago, while more than doubling the consensus estimate for revenue during the period. But there could be greater potential just around the corner, as Xtandi is expected to receive FDA approval for use in earlier prostate-cancer treatments in September, while Medivation is also researching the drug’s application in the treatment of breast cancer. Analysts are forecasting that, should all these factors play out, Medivation’s annual revenue could grow to more than $1 billion by 2016. Taking a closer look, the company is expected to post its first annual profit this year, $2.38 per share, with double-digit growth anticipated for the foreseeable future, including a 33% expected rise in fiscal 2015. With Xtandi looking to expand into pre-chemo prostate treatment, and additional indications possible, we really like Medivation’s potential.
Technical Analysis
This is not the first time we have visited MDVN in Top Ten. When we last checked in on the stock, MDVN was flying high just below the 90 region. A poorly received quarterly report set the shares reeling in early March, forcing MDVN to test support in the 54 region throughout April. Shares have since recovered, and, after basing just below 80 for the past two months, the stock has finally filled in its March post-earnings gap. You can nibble here, or buy on weakness with a stop near 78.
MDVN Weekly Chart
MDVN Daily Chart
LinkedIn Corporation (LNKD)
Why the Strength
LinkedIn has always had a great story—the firm has created a professional social network, changing the way big companies find and hire talent, leaving services like Monster.com in the dust. For a while it was a big leader, but earnings flattened out as the company spent heavily on a variety of initiatives, especially its shift toward content-related marketing (it’s now generating 30,000 posts per week from members) and, recently, significantly boosting the number of job opportunities (more job listings and better matching technology via its purchase of Bright). Those initiatives are now bearing fruit, and institutional investors are piling in, looking toward huge growth in 2015 and beyond. In the second quarter, all of the company’s segments (recruiting, marketing and premium subscriptions) grew at least 44% from the year before, earnings picked up steam and LinkedIn saw unique visitors to its website grow to 84 million per month, up 12% from a year ago. More important for investors, there’s growing confidence that the earnings slowdown is in the past—analysts see earnings up 16% this year, but then estimate 47% growth in 2015 and many years of rapid growth beyond that. Of course, the valuation is big, but this is a one-of-a-kind story (it’s the hands-down leader in the online recruiting niche) that could be just starting a new growth wave that should last for years. We like it.
Technical Analysis
LNKD was a solid winner in early 2013, gapping out of a huge post-IPO base in February of that year and running from 127 to 258 in September. But then the stock went through the wringer, falling 47% as investors bailed as earnings flattened out. Now, though, with all the weak hands long gone, LNKD has come back to life, thanks in part to a great second-quarter report. If you really want in, you could nibble here, but we advise buying on dips, with a stop inside the recent earnings gap.
LNKD Weekly Chart
LNKD Daily Chart
Jumei Holdings (JMEI)
Why the Strength
Jumei International is another entrant in the very strong mobile shopping sector in China, a market that grew 141% in the first quarter of 2014. Mobile shopping is a hot topic at the moment, with JD.com (JD) and Vipshop Holdings (VIPS) among the leaders of this revolutionary (for China) activity. Jumei specializes in branded beauty products and apparel, offering curated sales, an online shopping mall and flash sales of limited-quantity products. The company is the leader in online beauty sales with a market share of 22.1% in 2013. Jumei is too young to have an extensive history, but enjoyed a 970% jump in revenue in 2012 (to $233 million) and a 107% gain (to $483 million) in 2013. Analysts expect the company’s earnings per share to jump from 17 cents in 2013 to 56 cents per share in 2014, a 229% gain. The stock’s immediate future will be determined by the company’s Q2 earnings report, which will be released today after the close. Analysts are expecting EPS of 12 cents per share and revenue of $150 million. Jumei has made amazing strides for such a young company, and its 2013 record of 89% of sales coming from repeat customers helps to explain why.
Technical Analysis
JMEI came public on May 15 at 22 and spent 11 weeks trading in a tightening range. The breakout came just this month with JMEI starting an eight-session rally on August 6 that kicked it to 38 last Friday. Everything now depends on tonight’s earnings results. If investors like the news, JMEI should blast past 39 tomorrow on good volume, which will be a buyable breakout. We don’t advise buying in the overnight market, as relying on after-hours markets is a bad idea. It may mean buying higher, but waiting for the open to see how investors are taking the results is a safer course. The stock is already somewhat extended, so use a stop at 34.
JMEI Weekly Chart
JMEI Daily Chart
Green Plains Energy (GPRE)
Why the Strength
Green Plains is a front runner in the race to replace oil, leading the charge with ethanol. Founded in 2004, the company operates more than a dozen ethanol facilities in Indiana, Iowa, Nebraska, Michigan and Tennessee, churning out more than a billion gallons of ethanol annually. It also produces and sells about 2.5 million tons of animal feed per year as well as corn oil—the main byproducts of ethanol production. Due to the Renewable Fuel Standard laws in the U.S., all gasoline purchased in the States is required to contain a certain blend of biofuels. This standard is up for renewal this year, and the Obama administration is looking to increase the amount of blended biofuels, thus increasing demand for companies like Green Plains. Specifically, based on rising gasoline demand and improving market conditions, industry experts are expecting an increase to about 13.6 billion gallons of ethanol from 13 billion gallons. As a result, the company boosted guidance for the second half of the fiscal year during its second-quarter earnings report. All in all, Green Plains is expected to see earnings soar more than 200% in 2014, and while estimates for 2015 are currently flat, if the biofuels industry gains additional sway in new Renewable Fuel Standards, we could see next year’s targets revised higher.
Technical Analysis
GPRE has been on fire since bottoming in the low single-digits in mid-2012. The stock has been on a steady ascent during this period, riding its 10-week and 25-week moving averages to a big gain. The stock has really started to take off in 2014, however, as investors focus on the potential impact of new renewable fuel standards. In fact, GPRE eclipsed the 40 region in the past month despite increased broad-market turmoil. Following the recent run, GPRE may be due for a bit of consolidation. We believe the stock is buyable here, or on dips of a point or two.
GPRE Weekly Chart
GPRE Daily Chart
FleetCor Technologies (FLT)
Why the Strength
FleetCor has made hay in recent years with a devilishly simple idea—it offers cards and card payment services to truck fleets, oil companies and service stations, so drivers don’t have to rely on cash or personal credit cards. This allows trucking firms to monitor fuel consumption and vehicle locations much better, so they chip in a monthly fee, and service stations appreciate the near-guaranteed payment, so they chip in a per-transaction fee. This is a global business, operating in more than 40 countries with about half its business coming from overseas; it has more than 500,000 global accounts and millions of cardholders. All of that has produced years of steady growth and crazy-big after-tax profit margins (nearly 40%!), but what has the stock acting well today is a bold acquisition that should drastically broaden the firm’s potential—FleetCor is paying $3.5 bilion to acquire Comdata, a business-to-business e-commerce payment company that facilitates more than $54 billion in payments a year for supplies (including fleet cards). The synergy potential here is enormous, and FleetCor’s management has already said the deal will be very accretive to 2015 earnings (which should total $6.30 per share or so). It’s not the first inning of this story, but the Comdata acquisition could be the “new” aspect to the story that keeps earnings growth humming for a few more years.
Technical Analysis
FLT has been a monster performer since late-2012, but it ran into some turbulence around Thanksgiving of last year, which started a multi-month, choppy, up-and-down period for the stock. However, the stock got off its duff in April and, after rallying for a few weeks, tightened up in the 130 area. Then, last week, news of the Comdata buy sent the stock to new price and RP peaks on good volume. We still see the stock as later-stage, but we’re OK with a small buy around here or on dips, with a stop near 133.
FLT Weekly Chart
FLT Daily Chart
Carter’s (CRI)
Why the Strength
Carter’s is exclusively focused on apparel for babies and young children; in fact, it’s the largest firm dedicated to that field in the U.S., with 509 stores at the end of June (including 18 net new stores opened in the second quarter alone). Business has been growing slowly but steadily for many years (who doesn’t like to spend money on babies and young children?), but the reason for the stock’s latest push higher is a fantastic second-quarter earnings report, as sales growth remained in double digits, led by beefy direct-to-consumer (read: e-commerce) growth of 17% to 20% in its Carter’s and OshKosh brands. But the big surprise came on the bottom line, with earnings up 33%, miles ahead of estimates, as profit margins increased to 5.8% in the quarter, up from 5.3% and 4.7% in the prior two years. Throw in some solid guidance, a modest dividend (1.0% annual yield) and a share repurchase program (it’s bought back about 1% of the company during the past six months), and that’s been enough to kick the stock higher. As for upside potential, we can’t say Carter’s is going to double or triple from here, but we believe earnings can top the so-so forecasts from analysts (15%-ish growth this year and next) in the quarters ahead.
Technical Analysis
CRI was a steady advancer during the 2011 to late-2013 period, but shares have been range-bound between 65 and 80 during the past year or so. But the latest earnings-induced rally in late-July (shares surged 8% on more than five times average volume; the weekly volume jump was impressive, too) probably marks the end of that consolidation. As we wrote above, we don’t expect jaw-dropping advances, but a buy in this area or (preferably) on dips, with a stop near 73, has a good shot at working should the market stay out of trouble.
CRI Weekly Chart
CRI 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.
