Split Tape
Current Market Outlook
The market has turned into a case of the haves and have nots, as most major indexes and many cyclical sectors (materials, energy, industrials, transports) remaining in clear uptrends, while growth stocks and indexes either mark time or come under severe distribution. It’s not the healthiest situation—the market tends to do best when everything is in gear—but at this point, we’re not willing to make any broad statements. In other words, we’re just taking the evidence for what it is: The trends of the overall market are up and many stocks are acting well, so you should focus your attention on those strong sectors, while honoring stops and cutting losses in the areas that are under pressure. We’re keeping our Market Monitor at a level seven.
This week’s list is heavy on the market’s strongest areas, with materials, energy, financials and some retail represented. Our Top Pick is Freeport-McMoRan (FCX), the largest copper firm in the world, which appears to be just starting a new uptrend after a horrible bear phase. Try to buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Burlington Stores (BURL) | 193.95 | ||
| Children’s Place (PLCE) | 0.00 | ||
| Dave & Buster’s (PLAY) | 57.01 | ||
| Deere & Company (DE) | 0.00 | ||
| Freeport-McMoRan Inc. (FCX) | 13.78 | ||
| Halliburton (HAL) | 0.00 | ||
| Helmerich & Payne (HP) | 63.68 | ||
| iRobot (IRBT) | 103.17 | ||
| Jack in the Box (JACK) | 0.00 | ||
| Stifel Financial (SF) | 56.32 |
Burlington Stores (BURL)
Why the Strength
We last featured Burlington Stores on September 12 because the off-price apparel, footwear and home goods chain was delivering improving sales, gross margins and EPS. Nothing has changed. But even though EPS more than doubled in both Q2 and Q3, the stock fell during a broad October retail stock retreat. The bulls are back in town now, and they’re running rampant through Burlington’s brick-and-mortar locations. In Q3, inventories were down 8% and sales were up 9.1%, while operating margin growth of 1.5% and a share buyback program helped drive a 104% EPS explosion (to $0.51). It helped that results beat on revenue too, and Burlington just re-upped its share buyback program to $200 million. The mid-cap retailer (market cap is $6.3 billion) has a history of beating expectations and growing faster than its peer group. That’s partly why the market is willing to pay a premium for the stock, which trades at 24 times next year’s expected earnings of $3.74. But expected 9% to 10% top-line and 15% to 20% EPS growth, with profit margin expansion, fits growth investors much better than typical off-the-shelf retailers. So as long as Burlington keeps delivering, the stock should too.
Technical Analysis
BURL rallied from 62 to 85 between late June and early September. A broad retreat in retail stocks pulled it back down to 70 by early November. Since then, shares have been in high demand. Volume picked up and the stock regained its 50-day moving average at 78 just before reporting on November 22. That event catalyzed a gap up to 86, and now the stock is consolidating in the 87 to 90 range. You can nibble here or on dips with a stop around 80.
BURL Weekly Chart
BURL Daily Chart
Children’s Place (PLCE)
Why the Strength
The Children’s Place is a New Jersey-based retailer of children’s clothing, footwear and accessories whose string of outlets includes 1,061 brick-and-mortar stores in the U.S., Canada and Puerto Rico, plus an online store and 139 international points of international distribution operated by six franchise partners in 17 countries. While The Children’s Place has made six previous appearances in Cabot Top Ten Trader, the wave of current interest from investors began in January 2016 after a forecast-beating quarterly report. It looks like this is a good, old-fashioned execution story, with the company scoring on merchandise selection and marketing. The latest good news came on November 17, when the company announced financial results for the quarter that ended in October. (Like many retailers, the company’s fiscal year ends in January.) The report showed accelerating same-store sales during all three months, resulting in revenue well above the high end of the company’s guidance. After a rough calendar 2015 that showed declining revenue, the 4% revenue growth and 19% earnings growth in the most recent report were good news. Management credited superior product, good technology, alternate distribution channels and fleet optimization for the outperformance. The Children’s Place calls itself “the largest pure-play children’s specialty apparel retailer in North America,” and it is hitting on all cylinders now.
Technical Analysis
PLCE came out of a long period of stagnation after a good earnings report in November 2015 kicked off a rally that sent the stock from 46 to 84 in March 2016. The stock corrected in April and May, rallied to new highs at 90 in August, then fell back to 70 in November when the post-election rally and the good earnings report blasted it off to 107 on November 25. PLCE has been trading quietly sideways since then. You can nibble anywhere under 105 or wait for any weakness as the 25-day catches up. Use a stop at 95.
PLCE Weekly Chart
PLCE Daily Chart
Dave & Buster’s (PLAY)
Why the Strength
“Eat. Drink. Play. Watch.” That’s Dave & Buster’s story in a nutshell, and it’s a unique one—it’s the only chain where the entire family can be entertained, offering not just food, drinks and games on TV, but also games to play. (Think of it as a giant sports bar with an arcade.) That’s attracting high-end consumers (average household income is north of $75,000 per year), with 41% of its customers being families. Interestingly, the games account for more than half of Dave & Buster’s revenue (its 87 stores, which are all located in the U.S. and Canada, bring in more revenue than any of its competitors on a per-store basis, thanks to games), which has boosted profit margins (EBITDA margins are nearly 50% higher than its closest competitor!). Long-term, the company is just getting going—thanks to lucrative store economics (stores return nearly half their initial investment in the first year), it’s aiming to boost its store count by 10% annually, and sees the potential for more than 210 locations in the U.S. And that says nothing about the international opportunity, which is huge. Combined with modest same-store sales growth (likely in the 1% to 3% range going forward), Dave & Buster’s should see earnings and free cash flow advance in the mid-teens for many years to come. The next big event will be earnings, which are due out tomorrow evening (December 6).
Technical Analysis
PLAY formed a big launching pad from September 2015 through June 2016, with its earnings-induced breakout looking like the real deal. But it wasn’t! The stock gyrated for a while before falling into another, shallower correction. But PLAY picked up steam during the past month and has approached its highs ahead of the report. We think a strong gap up is buyable, with a stop in the mid-40s.
PLAY Weekly Chart
PLAY Daily Chart
Deere & Company (DE)
Why the Strength
Deere is one of the largest suppliers of farming equipment, with north of $26 billion in revenue, but that’s been a tough place to be in recent years—the farm industry as a whole has been in a recession as farmer incomes have been soft due to weak agricultural commodity prices. And, frankly, it doesn’t look like the industry is at an inflection point yet. So why is Deere’s stock so strong? Mainly because the company has done an excellent job of managing the downturn by slashing costs and boosting efficiencies. It’s not sexy, but its moves have helped its earnings to come in well above expectations, which has caused big investors to rush in for a couple of reasons. First is that Deere’s low ebb during the industry’s downturn should be much higher than previously thought; analysts now see earnings of nearly $4.50 per share for the next 12 months (up from an estimate of $3.85 before the recent quarterly report). And second, with commodity prices firming, many anticipate an improved spending outlook for the farm economy; North American agriculture demand is near 20-year lows, so any uptick could quickly boost Deere’s results. (The firm’s cash flow remains strong, funding a 2.3% dividend.) This isn’t a great growth story, but big investors are sniffing out early signs of a big turnaround. It’s an interesting speculation.
Technical Analysis
DE had been hovering between 80 and 95 for more than three years before shares tumbled to 70 earlier this year. The recovery was very slow and uninspiring, but DE reacted well to earnings in August and trended higher into November. And then the roof blew off! Shares soared to new all-time highs two weeks ago following earnings on volume that was seven times average. You can buy around here with a stop in the low 90s.
DE Weekly Chart
DE Daily Chart
Freeport-McMoRan Inc. (FCX)
Why the Strength
Freeport-McMoRan, which has made seven previous appearanace in Cabot Top Ten Trader, is primarily a copper miner, the largest in the world, with copper reserves of about 100 billion pounds. But there is some diversification from reserves of 27 million ounces of gold, three billion pounds of molybdenum, 271 million ounces of silver and estimated oil & gas reserves totaling 252 million barrels. Copper is an economically sensitive commodity, and was in a price downtrend from early 2011 through late October of this year, when it became clear that both candidates for the U.S. presidency were committed to large-scale infrastructure projects. Since then, the price of copper has soared more than 25%! Freeport-McMoRan, which posted a loss of 13 cents per share in 2015, ended a string of four losing quarters in Q3, earning 14 cents per share on revenue growth of 15%. While 2016 is expected to be profitable, earnings are forecast to surge by 420% in 2017 as the value and market price of its enormous copper reserves soars. This is a big story, based on a forecast for increased copper usage as the global economy heats up. A low forward 12 P/E ratio and a small dividend complete an attractive package.
Technical Analysis
FCX has been a little more volatile than the chart of copper prices, but the general shape is the same. FCX dipped sharply in the last three months of 2015, then rebounded sharply in late January when copper prices stabilized. After jumping from 3.5 in January to 14 in April, the stock traded sideways for months and was at 9.5 in October when copper prices began to soar. FCX topped 16 last week and relaxed to 15 by the end of the week. Today’s action looks like good evidence that investors are still very interested. We think you can buy on any minor weakness, but use a loose stop below 13.5 to give this volatile stock plenty of wiggle room.
FCX Weekly Chart
FCX Daily Chart
Halliburton (HAL)
Why the Strength
Halliburton needs no introduction—it’s one of the leading oil service firms in the world, with nearly $17 billion in revenue from its drilling and evaluation (including drilling fluids, drill bits, software modeling and consulting) and completion and production products. All in all, Halliburton is one of the best at helping its customers get more from their wells, whether conventional (often in mature fields), unconventional or deep water, an offering that’s in demand as customers yearn to cut costs per barrel produced. Of course, business has been horrid for many quarters, as the oil price plunge caused a historic decline in drilling activity (the U.S. oil rig count fell from 1,600 in mid-2014 to about 325 earlier this year!!), which of course slammed demand for Halliburton’s services. But now it looks like the turn up has finally come, which is why the stock is strong—the U.S. oil rig count is up to 477 as of last Friday, and drilling activity worldwide is slowly picking up steam as operators perceive that oil prices have support in the low $40 range and should be able to head higher with OPEC’s agreement to cut production (along with optimism surrounding the regulatory environment). Encouragingly, Halliburton has been generally profitable throughout the bust, and while no one anticipates a return to the good old days of 2014 (earnings north of $4 per share), 2017 should bring a solid leap into the black as revenue growth turns positive. A tidy dividend (1.4% annual yield) is a nice cherry on top.
Technical Analysis
While Halliburton is a huge company, its stock regularly makes big moves. Shares fell from 74 to 28 during the energy bear market, then rallied back to 47 by June of this year. That began what ended up being a six-month consolidation—early last week, it was no higher than it was in June. But now the buyers are in control, as HAL gapped to its highest level in two years on huge volume following OPEC’s announced cuts. We think the stock is buyable around here or on dips, with a stop near 49.
HAL Weekly Chart
HAL Daily Chart
Helmerich & Payne (HP)
Why the Strength
Drilling stocks have been the hardest hit during the energy bust, and the slowest to recover. That’s no surprise—the group is near the bottom of the food chain in the industry. But when the cycle turns up, business can improve in a hurry, and investors are thinking last week’s announcement of OPEC production cuts will accelerate the newly increased demand for drilling rigs. Helmerich & Payne is the leading provider of land drilling rigs in the U.S., with a U.S. land market share of around 15%. A big differentiator for the company is its FlexRig designs, which appear to be the best-in-class for the technically challenging shale well environments; a replacement cycle for more advanced rigs (like those HP offers) is also expected to help. All told, after a historic plunge of 80% from the highs, the land rig count has bounced 20% off the lows, and resilient oil and natural gas prices are enticing more explorers to increase their activities, especially in some of the highest-potential basins in the country. Already, Helmerich & Payne is seeing signs of a turnaround; it expects the current quarter to show a 20% sequential hike in rig usage, though margins should shrink a bit as prices remain weak. Still, the point is that the environment is improving, so HP’s healthy cash flow (it’s cash flow from operations was about $5 per share last year, helping to fund a 3.6% annual dividend) should improve nicely going forward.
Technical Analysis
HP has a similar pattern to most energy stocks—it topped in mid-2014 (at 119), plunged to its low earlier this year (at 40), rebounded for a bit (to 70) and then made no net progress for the next many months. But OPEC’s announcement changed everything, with HP exploding to multi-month highs on its largest volume in more than a year. We don’t expect a huge retreat, but we do think grabbing shares on dips of two to four points makes sense.
HP Weekly Chart
HP Daily Chart
iRobot (IRBT)
Why the Strength
If you dislike vacuuming, cleaning the pool, mopping and clearing gutters (we think it’s safe to say this describes 99% of us), you’ll probably like iRobot. The $1.5 billion market cap company makes robots for handling these chores, named Roomba, Mirra, Braava and Looj, respectively. And until April of this year, it also made robots for bomb disposal. That was before the company announced that it would sell off the military division (9% of 2015 sales) for $45 million in February, 2016. That has proved to be a game-changing strategic move for the stock, which had languished in 2015. Once the decision to sell was announced, things changed. The stock, which was at 30 in February 2016 took off. Investors loved that iRobot would be able to focus 100% on robots for the home, and it didn’t hurt that the proceeds from the sale helped to fund an $85 million share buyback program. The sale will hurt revenue and EPS growth in 2016, but it’s now a leaner and meaner company. Analysts now expect 6% revenue growth in 2016 (down from 11% in 2015) and a 4% decline in EPS (to $1.41 from $1.47 in 2015). But 2017 should be a different story as the home-focused pure-play is expected to deliver 33% EPS growth on 14% revenue growth. We like the singular focus, stock buyback and long-term growth potential of robotics.
Technical Analysis
IRBT went nowhere in 2015 as the stock started and finished the year near 33. That pattern changed in early February 2016 when management announced the sale of the military division. The stock steadily climbed to 38 by June, before pulling back to 34 by the 4th of July. Then it climbed again, almost non-stop, and cleared the 55 hurdle in late November. A Q3 earnings beat on October 25 helped. We suggest buying on a dip and setting a stop in the upper 40s.
IRBT Weekly Chart
IRBT Daily Chart
Jack in the Box (JACK)
Why the Strength
Jack in the Box owns two chains of fast food restaurants, operating under the Jack in the Box (burgers) and Qdoba (Mexican) brands. Jack in the Box is the sixth largest burger joint in the country, while Qdoba is the third largest Mexican restaurant (albeit a distant third, with just 4.7% market share). Since 2012, the company has been on a mission to replicate the success that Dunkin’ Brands has enjoyed with a heavily franchised restaurant base. At that time, Jack had just 72% franchisee ownership. Now it has 82%, and is eyeing the 90% level. At the same time, it is trying to open new restaurants and renovate outdated ones. Management has torn another page from Dunkin’s playbook by repurchasing stock and growing the dividend (initiated in 2014). Quick-serve restaurant chains tend to generate steady cash flow, which is why investors pay a modest premium (Jack has a forward P/E of 19) for the relatively low margin businesses (Jack’s profit margin is generally between 7% and 9%). In Jack’s case, investors are also attracted to the increasingly consistent mid-single-digit revenue growth. And it doesn’t hurt that EPS growth is expected to hit 34% in 2017, after already growing by 66% in 2016.
Technical Analysis
JACK got off to a slow start in 2016 as the stock chopped around in the 60 to 75 range. A better-than-expected Q2 on May 11 pushed it to the high-end of that range, then big-volume buying in late May caused the stock to break out into the 80s. Another good quarter was reported in early August, sending the stock as high as 102. It pulled back to 90 by November, but had climbed back above 100 when the November 21 earnings release pushed it as high as 108. We like it around this level and suggest a tight stop below the century mark.
JACK Weekly Chart
JACK Daily Chart
Stifel Financial (SF)
Why the Strength
Stifel Financial is a diversified financial services company that provides brokerage, trading, investment banking and financial advisory services within the U.S. The company’s brokerage activities are run by its wholly owned Stifel Nicolaus & Company subsidiary that was founded in 1890. The big news for Stifel (and the entire financial world) is the consensus that the Federal Reserve Board will raise interest rates by a quarter point later this month—the start of a tightening regime that will continue for many months. Higher interest rates increase the value of a company’s cash reserves, and Stifel Financial has $234.5 billion in total client assets under management. Stifel has been quite active in M&A, acquiring Sterne Agee, Barclays Wealth and Investment Management, KBW Inc. and Thomas Weisel Partners in 2015 and City Financial in 2016. Despite this program of acquisition, Stifel isn’t a fast grower; after a 24% jump in revenue in 2013, revenue growth slowed to 11% in 2014 and 6% in 2015. And with earnings estimated to rise just 5% in 2016 and 16% in 2017, the appeal is the company’s stability and prospects for increased profitability from the enhanced value of its assets. Stifel Financial’s stock trades at a fairly tame 20 P/E. It’s also worth noting that the company has bought back 3.4 million shares of its stock so far in 2016, totaling about $113 million. This is a healthy business with a strong catalyst going forward.
Technical Analysis
SF had a terrible 2015, falling from 60 in June to 25 in February 2016. The stock fought back, spending September and October under resistance at 40, then broke out sharply after the results of the presidential election were known, soaring to 50 in just eight trading days. SF has been trading flat under resistance at 50 since then, with a couple of moves toward 51. SF looks buyable on minor weakness, with a stop around 45.
SF Weekly Chart
SF 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.
