Very Impressive!
Current Market Outlook
A lot has changed since our last issue two weeks ago! Most important of all is the “blast-off” or “volume thrust” signal that came from two consecutive days (December 17 of 18) of very broad and powerful upside market action. It was strong enough to erase any lingering negative technical action, setting the stage not only for a nice Christmas rally but also the traditionally solid start to January that we expect. Thus our Market Monitor is now solidly back in the green bullish zone. So what to buy? Not oil stocks; it’s better to focus on what’s going up! Today’s issue brings a diverse group of both big old companies and younger faster growers, and all of them have great potential, but our Top Pick is Freescale Semiconductor (FSL), a chip manufacturer that has great potential to benefit from the boom in machine-to-machine (MTM) communication.
| Stock Name | Price | ||
|---|---|---|---|
| Whirlpool (WHR) | 0.00 | ||
| Taser (TASR) | 0.00 | ||
| Swift Transportation (SWFT) | 0.00 | ||
| RockTenn (RKT) | 0.00 | ||
| Red Hat (RHT) | 0.00 | ||
| ServiceNow (NOW) | 341.86 | ||
| Hawaiian Holdings Inc. (HA) | 0.00 | ||
| Freescale Semiconductor (FSL) | 0.00 | ||
| Bluebird Bio (BLUE) | 0.00 | ||
| Broadcom Limited (AVGO) | 266.26 |
Whirlpool (WHR)
Why the Strength
Whirlpool is rarely thought of as a growth stock, but it keeps re-appearing in Top Ten, which is a clue that something very positive is happening. The company, of course, is the leading home appliance maker in the world, selling more washing machines, refrigerators, freezers and dishwashers than you can count. While sales have been flat for a while, they’re set to pick up next year (analysts see sales up 19% in 2015) thanks to some international acquisitions (one in Italy for a leading European brand, and one in China that gives the company a beachhead to that fast-growing market), a rebounding U.S. economy and a resilient housing market. Combine that with good cost controls and a modest share buyback plan, and the company is looking for earnings of $14 to $15 per share next year. But investors are excited about more than just that—management also recently put out a long-term growth marker, stating that it expects earnings of $22 to $24 per share in 2018 thanks to persistent international growth. Throw in a decent dividend (1.6% annual yield) and a reasonable valuation (18 times trailing earnings), and it’s easy to see why big investors continue to accumulate shares.
Technical Analysis
Not only is WHR’s fundamental story surprisingly exciting, its chart is very powerful. The stock broke out of a nice base on earnings in October and kited up to 190 before pulling back with the market in early December. It couldn’t stay down, as management’s bullish 2015 and 2018 guidance caused the stock to explode off its 10-week line on more than double its weekly average volume, and the stock has drifted higher since. We think WHR is buyable around here or on dips, with a stop near 175.
WHR Weekly Chart
WHR Daily Chart
Taser (TASR)
Why the Strength
Both the product and the story for TASER International are easy to describe. TASER is the developer of industry leading Conducted Electrical Weapons (CEWs) that can incapacitate dangerous, high-risk subjects without shooting them. TASER’s lead product is a pistol-shaped launcher that shoots a set of electrodes at a subject, delivering an intense, non-lethal electrical charge that takes them down without lasting harm. The company is also moving into body camera systems as that wave sweeps across police departments in the U.S., but that’s still a relatively light sideline in revenue terms. The story is that every time a police shooting (like the one in Ferguson, Missouri) makes headlines, TASER’s products are cited as an alternative. TASER has booked 11 consecutive quarters with double-digit revenue growth and earnings are forecast to grow 26% in 2015. Sales outside the law enforcement community include military, corrections and consumer markets, but police use is still the biggest selling point. Sales of cartridges, batteries and charging systems provide continuing revenue. It remains to be seen whether the company can grab a significant share of the growing body cam market, but Obama’s request for $75 million in funding for police body cameras certainly looks to be heating up that market.
Technical Analysis
TASR has been in a steady uptrend since the market turned up in the middle of October. An excellent quarterly report on October 30 gave the young rally a big-volume shot in the arm, and the President’s call for more body cam funding also spiked volume higher on December 2. A small shakeout during the second week of the month renewed the rally, and TASR has been performing well since it regained new-high territory on December 22. TASR looks buyable on any weakness, with a buy near 26 being the ideal. Use a stop at 24.
TASR Weekly Chart
TASR Daily Chart
Swift Transportation (SWFT)
Why the Strength
Arizona-based Swift Transportation is the largest transportation services company in North America and one of the largest in the world, offering hauling services in four segments. The truckload segment is the traditional one-way hauling over irregular routes. The dedicated segment offers long-term contract delivery services using refrigerated, dry van, flatbed and other trailer types. The Central Refrigerated Segment operates temperature controlled trailers, and the Intermodal Segment uses rail containers to move loads by train and deliver from railheads to customer locations. The company has grown from one truck in 1966 to more than 18,000 tractors and 58,000 trailers operating from more than 40 terminals in 24 states and Mexico. The company has a dynamic CEO in Jerry Moyes, the man who engineered the company’s growth and its takeover of a major rival in refrigerated hauling. Swift will do well as long as the economy continues to improve, as more retail sales and more manufacturing activity generate more revenue. The company is an aggressive bidder on dedicated transportation services and coiunts Wal-Mart among its long-term customers. Swift went through a reversal last July when the company reported that it was having trouble finding drivers for its trucks, but that appears to be sorted out. Swift is a steady grower, which is appreciated by long-term investors.
Technical Analysis
SWFT dipped from 26 to 21 on July 25 after the company reporting difficulties finding drivers. The stock spent three months trading flat over support at 20 before catching another updraft when the U.S. market improved. SWFT moved out to new highs in November and has built a nice base under resistance at 29. You can either buy some now and look for the rising 25-day moving average (now at 28.5) to deliver a boost or wait for the breakout above 29 on volume. A stop around 26.5, which was resistance in November, should give sufficient protection.
SWFT Weekly Chart
SWFT Daily Chart
RockTenn (RKT)
Why the Strength
Packaging may not seem exciting, but without RockTenn’s boxes, shippers and online-retailers would have a hard time getting their products to consumers. The company makes corrugated boxes, paperboard, preprinted packages, merchandising displays and specialty paper products, and the holiday shipping season has been strong for RockTenn. The company is fresh off two consecutive quarters of better-than-expected financial results, and RockTenn has quickly become a favorite among Wall Street investors. During the most recent quarter, the company topped the consensus estimate by 25 cents per share! More importantly, business trends appear to be stabilizing after last year’s blockbuster acquisition of Smurfit-Stone, with volume finally starting to normalize with the rest of the market. Looking ahead, RockTenn should continue to benefit from rising corrugated cardboard prices, cost improvements, and the acquisition of Simpson Tacoma Paper Mill – which is expected to result in annual synergies of $10-$15 million. Currently, Wall Street is forecasting earnings growth of 9% in both fiscal 2015 and 2016. Add an improving global economy into the mix, and we really like RockTenn’s prospects.
Technical Analysis
After trending higher for the better part of the past two years, RKT hit a snag in 2014. Following a quick trip to 60 by March, the stock essentially flatlined through the middle of the year, bouncing around the 50 region. Broad market selling pressure took hold in September, forcing RKT to test lows near 45 by mid-October, but RKT wouldn’t stay oversold for long, and the shares rebounded quickly, pausing only briefly in late October near their 50-day trendline before extending their gains into the 60 region. With RKT entering a basing period, we believe the shares are buyable here ahead of their next potential upleg.
RKT Weekly Chart
RKT Daily Chart
Red Hat (RHT)
Why the Strength
You may be familiar with Red Hat due to its dominant position in the Linux marketplace, where the company is the chief rival of Microsoft’s Windows operating system. However, Red Hat has made a serious name for itself in the Cloud, where it has combined Cloud business services with low cost Linux server software. The model plays well with Red Hat’s bread-and-butter of providing consulting, custom application development, support, and training services. So well, in fact, that Red Hat just posted its 11th straight quarter of mid-to-high teens revenue growth as Big Data companies continue to demand more open source solutions and support. What’s more, during the company’s fourth-quarter conference call, CFO Charlie Peters noted that Red Hat set new records for the number of deals in excess of $1 million during the quarter. Deals in excess of $10 million were also at record levels. Finally, Red Hat noted during its conference call that application development and emerging technology subscription revenue (read as Cloud-based revenue) topped 48% growth during the quarter – the highest this metric has been since the company began breaking it out. Down the road, Wall Street is forecasting revenue growth of 6% in 2015 and 16% in 2016, numbers that are almost certainly conservative.
Technical Analysis
Technically, RHT has been up and down for the past two years. 2013 saw the stock trend lower, tagging a low near 40 in October. 2014 kicked off on the right foot, with RTH surging toward the 60 region, but resistance in the area proved too much, and the stock retested support at its 200-day trendline in May before turning higher once again. After quickly reclaiming its 50-day trendline, RHT finally pushed above 60 by November. Last week’s strong quarterly report sealed the deal, and RHT is now red-hot following the stellar quarterly report, but if you are game, RHT is buyable on dips of a point or two.
RHT Weekly Chart
RHT Daily Chart
ServiceNow (NOW)
Why the Strength
ServiceNow may never be a household name, but many investors think this small-ish software firm (about $670 million in sales this year) has a great shot at becoming a multi-billion dollar company within a few years. ServiceNow’s software manages requests among employees from different departments in an efficient way; instead of leaving a voicemail and shooting over an email, the software serves as a record book of needs and wants, helping to get things done quicker and also help management know of any recurring issues that are popping up. The company usually starts by selling into the IT department, but the software is spreading to areas like human resources, legal departments, operations and even supply chain management. Huge companies love it—473 of the Global 2000 are now customers, nearly double two years ago, and 107 clients now pay at least $1 million annually. ServiceNow’s renewal rate has been north of 96% in recent quarters, as competition from the likes of Hewlett-Packard and CA is extremely outdated. The only flies in the ointment are the gigantic valuation (north of $10 billion market cap!) and the lack of profits, but big investors are looking ahead, thinking ServiceNow may be another blue-chip software firm in the making.
Technical Analysis
NOW peaked with all the glamour stocks in March of this year, but its correction after that was not unreasonable (38%), and it’s one of the few that has clawed all the way back to just a few percent from that March peak. More recently, NOW pulled back six weeks in a row, but volume was very light the entire time, and then shares popped on good volume as soon as the pressure came off the market two weeks ago. We think you can buy a small position here or on dips, and possibly buy more on a decisive push above 72.
NOW Weekly Chart
NOW Daily Chart
Hawaiian Holdings Inc. (HA)
Why the Strength
Hawaiian Airlines is a niche carrier that’s been around 85 years; it provides non-stop service to Hawaii from 11 gateway cities in the U.S., service from a variety of Eastern countries (China, Japan, South Korea, etc.), and many island-hopping flights. Like many airlines, Hawaiian Airlines’ business has been improving slowly; November saw total passengers transported grow 6.7% and the load factor improve to 80.3%, up more than a percentage point from a year ago. But the writing is on the wall for a big 2015, and that’s why the stock is super strong today—management is adding seats to its island-hopping flights, could expand its U.S. mainland flights in the longer-term and has stated that plunging fuel prices won’t necessarily result in declining ticket prices (i.e., the lower prices will fall to the bottom line) as long as demand remains strong. Big picture, the combination of much lower fuel costs and an accelerating economy is like catnip for airlines, and analysts see Hawaiian’s earnings up 47% next year after booming more than 60% in 2014. Obviously, this is a cyclical stock, and an economic hiccup or rally in fuel prices will hit the stock. But the wind is clearly at the company’s back today.
Technical Analysis
HA has always been a second-tier player in the industry, but it’s been a great stock for much of the past couple of years. The stock rallied to 16.5 by June, then built a big double-bottom launching pad, with the second bottom coming at the mid-October market bottom. Since then HA has been a skyrocket, exploding into the mid 20s on gigantic volume. Sure, after such a sharp rally, some retrenchment is likely, but the huge volume tells us dips should be well controlled.
HA Weekly Chart
HA Daily Chart
Freescale Semiconductor (FSL)
Why the Strength
Freescale Semiconductor produces a broad range of semiconductors and microchips for the automotive, industrial, consumer products and telecom industries. The company’s biggest sellers are microcontrollers for automobile electronic systems, microprocessors for wireless networks, and sensors for mobile devices and hybrid electric vehicles. Freescale has operations in Malaysia, Hong Kong, Japan, and Switzerland, with about 80% of sales coming from outside the U.S. The company has been a hot topic on Wall Street lately, with several brokerage firms upgrading the stock and offering bullish research notes on key players in the semiconductor industry – especially those serving the Internet-of-Things (IOT) or machine-to-machine (M2M) communications. Specifically, Freescale is expected to see strong automotive and general purpose microcontroller sales over the next two years, as M2M business really takes off. Furthermore, analysts at Bernstein have noted that cyclical indicators have improved for semiconductors, and that low expectations and valuations favor firms like Freescale. For its part, the company is expected to see blockbuster earnings growth of 227% in 2014, with growth moderating to a healthy 21% in fiscal 2015.
Technical Analysis
Technically speaking, 2014 was a rocky year for FSL. The stock started the year trading near 15, soared to 26 by April, but then spent the next several months erasing those gains and returning to support near 15 by mid-October. The shares would rebound quickly, however, and FSL was trading back above its major trendlines and the 20 level by November. Several key ratings upgrades and brokerage notes drove strong gains in early December, and FSL is now trading just north of 25 heading into the new year. While we don’t recommend chasing rallies, FSL is buyable on dips here if you’re game.
FSL Weekly Chart
FSL Daily Chart
Bluebird Bio (BLUE)
Why the Strength
bluebird bio is a Cambridge-based biotech company specializing in developing gene therapies for use against life-threatening diseases. The company’s lead developmental product is called Lenti-D, a gene therapy drug that has the potential to be a one-time treatment to stabilize and prevent progression of Childhood Cerebral Adrenoleukodystrophy (ALD). Lenti-D is in Phase 2/3 clinical trials in the U.S. and Europe. There are also Phase 1 and II studies underway to evaluate LentiGlobin for use against sickle cell disease. Strong data from two small studies on LentiGlobin led to a major blastoff in bluebird bio’s stock on December 9, but the program that has really caught investors’ attention is a strategic collaboration with Celgene to develop a gene therapy using chimeric antigen receptors (CAR) T cells to target and destroy cancer cells. CAR T cell therapy uses the patient’s own genetic material to build a T cell that will bind with and kill cancer cells. bluebird bio and Celgene are working with the Baylor College of Medicine to evaluate CAR T therapies against a variety of blood cancers and solid tumors. While the CAR T studies are still in preclinical development, investors are betting on commercial success. Like all biotechs, bluebird bio is subject to big swings on news, but the news has been positive so far.
Technical Analysis
BLUE came public at 17 in June 2013 and traded as high as 35 in July before slipping back to its IPO price in November and again in May 2014. Good news powered BLUE to 40 in June, but the stock stalled at that point, trading around 40 for more than five months. When the breakout came in December, BLUE ripped to over 90, which is where it has been tightening up all month. BLUE is likely to remain news driven, so look to buy on as big a pullback as possible. You should be able to snag some near 85 with luck. Use a stop near the bottom of the gap at 77.
BLUE Weekly Chart
BLUE Daily Chart
Broadcom Limited (AVGO)
Why the Strength
Avago Technologies is a Singapore-based chip designer that began life in 1961 as a division of Hewlett Packard. Spun off from Agilent Semi in 2005, the company now specializes in designing and developing analog semiconductors, custom chips, radio-frequency and microwave components. The big draw for investors is that the company’s exports to China (46% of last year’s revenues) included big shipments to Fox Conn for inclusion in Apple’s iPhones. Beyond Apple, Avago is also getting a big boost from the buildout of smart-phone networks in China. Quarterly revenue and earnings trends have been exceptionally strong for several quarters, with revenue up 97% two quarters ago and 115% in the latest quarter. Earnings growth, which has been rising at increasingly large double digit rates for five quarters, hit 124% in the latest quarter. The company’s quarterly report on December 4 included great guidance for the coming quarter based on strong iPhone demand. Chip stocks, like the chip industry, are cyclical, but when the cycle is up, stocks like Avago can do very well. Avago stock also pays a dividend with an annual yield of 1.4%.
Technical Analysis
AVGO traded sideways from the middle of 2011 through the middle of 2013. But when the stock caught fire, it showed amazing persistence. The rally that started at 31 in April 2013 topped 100 earlier this month. Since that December 4 gap up to 103, AVGO has been tightening up around 100. The arrival of the stock’s rising 25-day moving average (now near 98) may supply the impetus for a breakout from this tight trading. We think AVGO is buyable at or near 100, with a protective stop at its pre-gap high at 94.
AVGO Weekly Chart
AVGO 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.
