A Vacuum of Selling Pressures
Current Market Outlook
You really can’t ask for better action from the market since the Brexit vote two weeks ago—the quick shakeout in the major indexes has given way to many days of strong buying, pushing the S&P 500 briefly to new highs this morning and driving other indexes toward key levels. Moreover, a ton of individual stocks have either lifted to new highs or look ready to do so. Short-term, a pullback wouldn’t be surprising given the recent run higher, especially with earnings season set to get underway. Thus, we don’t advise going wild on the buy side. But we’re pushing our Market Monitor back into bullish territory to reflect the evidence—we think you can continue to put money to work as opportunities arise.
This week’s list has a bunch of potential leading stocks if the market keeps improving. Our Top Pick is Acuity Brands (AYI), a leader from a couple of years back that, after a long consolidation, has reasserted itself on the upside as it rides the LED revolution.
| Stock Name | Price | ||
|---|---|---|---|
| Vantiv (VNTV) | 0.00 | ||
| Thor Industries (THO) | 104.76 | ||
| Rice Energy (RICE) | 0.00 | ||
| Monster Beverage Corporation (MNST) | 0.00 | ||
| LifeLock Inc. (LOCK) | 0.00 | ||
| KB Home (KBH) | 36.05 | ||
| Ellie Mae (ELLI) | 0.00 | ||
| Acuity Brands (AYI) | 0.00 | ||
| Applied Materials (AMAT) | 0.00 | ||
| Acacia Communications (ACIA) | 51.83 |
Vantiv (VNTV)
Why the Strength
Payment processors are one of the many sectors that have been riding the coattails of the slow but steady improvement in the U.S. economy, and Vantiv is one of the most trusted payment processing providers among retailers, merchants and financial institutions. It serves more than a third of the 100 largest retailers in the U.S., distributes to more than 4,000 merchant branches, and was recently named Best Processor at the Judges Choice and Customer Choice Awards. Spun off from Fifth Third Bancorp in 2009, Vantiv has grown its sales every year since, with another 10% sales growth forecast for this year, though the company has topped that in each of its first two quarters this year (third-quarter earnings are due out July 27). According to CEO Charles Drucker, Vantiv has expanded its merchant market share faster than any of its peers over the past five years, growing from 13% to 19%. By distinguishing itself in an industry with excellent long-term growth prospects, Vantiv continues to capture investors’ attention.
Technical Analysis
VNTV has been a fast-rising stock for the past two years, but it has really put its foot on the gas pedal since January. That’s when the stock raced from 43 to 53, then inched its way to 56 in April. After two months of consolidation with 51 acting as support, VNTV broke above 56 resistance last week, ticking all the way to 59; upside volume has been excellent since mid-June. Buy on the dips with a stop below the 50-day line at 54.
VNTV Weekly Chart
VNTV Daily Chart
Thor Industries (THO)
Why the Strength
One of the largest makers of recreation vehicles (RVs) in the world just became even bigger. Earlier this month, Thor Industries completed an acquisition of fellow RV maker Jayco for $576 million, expanding its number of North American dealerships to 850, with 31 facilities and 17 production lines. More importantly, Thor Industries gets a company that generated $1.5 billion in sales last year; that’s 37% of Thor’s total 2015 sales. Meanwhile, Thor is coming off a record-setting quarter, with sales and net income both reaching all-time highs. Low gas prices and an improving economy have helped make purchasing a gas-guzzling RV seem a little less daunting to consumers. For fiscal year 2016, which ends at the end of this month, the company is expected to grow sales by more than 12%—not bad. But with the addition of Jayco, Thor’s sales are expected to jump 38% next year, while earnings surge toward $6 per share.
Technical Analysis
Like most stocks, THO started to make its move in February, jumping from 48 to 63 by late March. Two months of consolidation followed, as THO operated in a tight range between 60 and 65. A breakout came in June, with the stock kiting to 68, but the move was fleeting, as the stock slipped back to 60 following the Brexit vote. Now, after the Jayco purchase, it’s back on the rise, opening at 71 this morning. You can buy here or on pullbacks, but considering THO just had a major shakeout, we don’t expect a huge retreat going forward. Set a stop in the mid- to upper 60s.
THO Weekly Chart
THO Daily Chart
Rice Energy (RICE)
Why the Strength
Energy stocks are making a big comeback, and few are bouncing better than Rice Energy. The company, which controls 86,000 acres in Pennsylvania’s Marcellus Shale, Upper Devonian Shale and Utica Shale fields and 55,000 acres in Ohio’s Utica Shale field, has developed a reputation for reducing costs while increasing production. This is exactly the kind of fiscal discipline that low energy costs have imposed in drillers, and it has worked to Rice’s advantage. The company’s extremely accurate drilling skills also place its wells at the top in terms of production rates among all Marcellus and Utica shale drillers. Rice also owns its own natural gas transportation infrastructure (including a majority stake in Rice Midstream Partners, its own MLP) which keeps costs low. With 88% of remaining 2016 production of natural gas hedged at an average price of $3.25 per million BTU, and with prices now at around $2.92, Rice looks like a lower-risk way to play the possible rise in energy prices. The company just completed a secondary stock offering for its MLP, which will increase capital for operations. Rice is a young company (incorporated in 2008), but it has clearly learned the business well.
Technical Analysis
RICE came public in January 2014 at around 20, climbed to 34 in June, then began a long decline that ended with a triple bottom at 8 from December 2015 through February 2016. RICE’s rebound from that bottom has been much stronger than the bounce in energy prices. RICE soared to 23.5 at the end of June, and has been trading sideways for about three weeks. RICE looks like an exceptionally strong energy play. You can buy some anywhere under 23, with a stop at 20.5.
RICE Weekly Chart
RICE Daily Chart
Monster Beverage Corporation (MNST)
Why the Strength
Monster Beverage is strong today because many investors (including many institutional investors) think it’s an emerging blue chip in the beverage industry. The company is best known for its Monster line of energy drinks, which took the industry by storm a few years ago. The big attraction now is international expansion, and that all comes down to Coca-Cola—in a deal that involved Coca-Cola buying a near-17% stake in Monster, the behemoth threw open its famed global distribution network to Monster, opening up gigantic potential for growth. That integration (including Coca-Cola’s bottlers) took a while to get going, but it’s starting to bear fruit. Monster launched its products in Australia, New Zealand and Singapore in the first half of May, in Peru in June, and there’s a plan to launch in China (and re-launch in India) later this year. Beyond international expansion, Monster bought a flavor company in April (providing it with a secure supply of flavors at a good cost), recently completed a $2 billion share buyback offer (6.3% of all shares outstanding) and has launched a few new Monster products, too. There are still a lot of moving pieces here (including currency gyrations, which could impact results), but if management pulls the right levers, Monster could go far.
Technical Analysis
MNST had a big run from 75 to 143 from August 2014 through February 2015, but then basically began a long sideways phase—as of April of this year, the stock was actually down around 120. But a good earnings report caused a quick rally to 150, and MNST has been grinding higher since, nosing out to new high ground. You can buy some here or (preferably) on dips of a couple of points, with a stop below 150.
MNST Weekly Chart
MNST Daily Chart
LifeLock Inc. (LOCK)
Why the Strength
Identity theft is big business, costing Americans $15 billion in 2014 alone. And it’s not just about stealing your credit card number; it’s also about thieves opening new accounts, filing tax returns or even renting or buying properties under someone else’s name and social security number. LifeLock offers a complete solution—for a monthly fee (average revenue per user is just under $12 per month, with an 86% annual member retention rate), the firm uses a patented data technology to scan more than a trillion data points (it gets new application data from four of the top five cell carriers, credit card issuers and retail credit card issuers, as well as many auto lenders and pay day firms), alerts users to any suspicious activity and (importantly) has a U.S.-based team of people who do all the dirty work (calls, paperwork, handling disputes) to prove that “you are you” if your identity is compromised. It’s positioned as a premium offering, and demand for LifeLock’s services has been growing consistently; revenues and membership has grown sequentially for 44 straight quarters (4.3 million members as of March), and sales (13%) and earnings (20% to 25%) are expected continue expanding nicely each of the next couple of years. Big picture, we could see LifeLock as a new type of insurance in the digital age, something millions of people (especially higher-income folks) will sign up for to protect their identity and assets. Throw in the firm’s debt-free balance sheet and two share buybacks this year (totaling $100 million) and there’s a lot to like here.
Technical Analysis
LOCK came public in October 2012 and had a good first year, but then it ran into trouble, falling from 23 to 7 over about 18 months (partially due to an FTC complaint and lawsuit). But it’s been acting better since last August, rallying back to 16 and then building a base since last November. It’s thinly traded, but LOCK has tightened up nicely just south of 16. A small position here with a stop near 14 could work.
LOCK Weekly Chart
LOCK Daily Chart
KB Home (KBH)
Why the Strength
Low interest rates and low energy prices continue to be a major boost for the housing industry. New single-family home sales in the U.S. hit an eight-year high in April, and home prices are being marked up accordingly, hitting new record highs. That’s been a boon for KB Home, which builds single-family homes, townhouses and condominiums in nine states. KB Home’s sales have reached double-digit growth in each of the last six quarters, including 30% growth in its recently completed second quarter. First-time homebuyers were the main catalyst behind KB Home’s big quarter, buying homes at an average sales price ($346,700) that was 2% higher than a year ago. In addition, KB Home’s earnings per share expanded by 70% in the second quarter, and the company expects a 58% bump in EPS for the year. “With favorable market trends and our financial and operational progress in the first half of the year, we have positive momentum in our business heading into the remainder of 2016,” said CEO Jeffrey Mezger. A backlog of 5,205 homes—a 10% increase from the previous quarter—reflects Mezger’s claim. Since that glistening late-June earnings report, KB Home has unveiled two new developments: Cayden Creek homes in Houston, and The Villas Escalante in East Tucson, Arizona. On top of all that growth, KB Home’s stock is cheap—KBH trades at just 12 times this year’s exprected earnings.
Technical Analysis
KBH made the jump from 10 to 13 in February and early March, gradually ticked to the upper 14s in April and consolidated in May, finding support around 12.6. It got going again last month but ran up against resistance in the high 14s, repeatedly getting knocked back. The breakthrough came in late June, on the heels of the strong second-quarter report, and the stock has run all the way to above 16. Buy on the dips, with a stop in the 14s.
KBH Weekly Chart
KBH Daily Chart
Ellie Mae (ELLI)
Why the Strength
Ellie Mae is a California-based mortgage software company whose Encompass software serves banks, credit unions and mortgage companies across the U.S. Of the 8,000 mortgage lenders in the market, Ellie Mae counts 1,700 as customers, including seven of the top 25. Using Encompass, the company’s 180,000 contracted software-as-a-service clients can be sure of compliance with all legal requirements while getting appraisals, credit reports, closing documents and other requirements, all in one unified system. The system also includes customer relationship management and business management tools. Ellie Mae’s acquisition binge in 2014 (buying MortgageCEO, ARG Interactive and AllRegs) plus the continuing recovery in the U.S. housing market boosted 2015 revenue by 57%. And while earnings per share are estimated to increase 14% in 2016, that number should rise to 35% in 2017. Management points out that the mortgage software business is a fragmented one, but that full adoption of Ellie Mae’s software can increase a client’s profit per loan by up to $625. If management’s vision comes to pass, Ellie Mae will become the de facto software infrastructure for the whole industry. Quarterly results are due either late this month or in early August, and analysts are looking for revenue of $85.6 million and earnings of 55 cents per share.
Technical Analysis
ELLI made a big run from May 2014 to August 2015, soaring from 24 to 83. The stock calmly pulled back to support at 60 in December and January, but once the broad market bottomed in February, ELLI roared back, topping 94 near the end of April before dipping after a quarterly report that hit its numbers, but was still met with selling. ELLI took just seven weeks to climb back to new highs, and (after a two-day post-Brexit dip) rallied strongly to another all-time high last Wednesday. ELLI is buyable on any weakness of a couple of points, with a protective stop around 85.
ELLI Weekly Chart
ELLI Daily Chart
Acuity Brands (AYI)
Why the Strength
Atlanta-based Acuity Brands sells lighting solutions for everything from parking garages and factories to swimming pools and landscapes. Acuity’s product line is enormous, with 1.8 million individual products, and the company has unique expertise in building automation systems (BAS) and design services. With 20 manufacturing facilities, Acuity is a vertically integrated lighting provider. With all that said, what’s really driving gains at Acuity Brands is the LED lighting revolution, which makes it profitable for factories, building owners and municipalities to update aging lighting systems, lowering energy costs and keeping up with regulatory changes. Plus, an improving economy is leading to more new construction projects that use Acuity’s products and design services. The company has enjoyed revenue growth over 25% in its two most-recent quarterly reports, with earnings growth of 53% in Q1 and 40% in the Q2 report on June 29. After-tax profit margins have also topped 10% in the last three quarters, which is the first time that’s happened in years. EPS estimates for in 2016 call for 40% growth, slowing to 21% in 2017. Acuity Brands has been a real tractor for years, growing steadily. With a strong economy behind it, the Acuity Brands story has legs.
Technical Analysis
AYI has been in an accelerating uptrend since October 2011, which accounts for its nine appearances in Top Ten from 2012 on. The stock took a six-month break in 2014, but resumed its consistent advance, with market-based corrections in August 2015 and January 2016. AYI followed its April 6 gap up with three months of base-building, trading between 240 and 260. The stock broke out last week along with the market and has now popped to new highs near 270. AYI is buyable on any pullback, with a loose stop at its old support at 240.
AYI Weekly Chart
AYI Daily Chart
Applied Materials (AMAT)
Why the Strength
It all started with Applied Materials’ strong first-quarter earnings, in which the chipmaker reported record orders from China, significant demand for its organic light-emitting diodes (OLED) and 3D flash memory businesses, and a 17% year-over-year earnings increase. That was in late May, prompting us to recommend the stock in our May 23 issue. AMAT has continued to rise since; the new catalysts include a $2 billion share repurchase plan (on the heels of a $3 billion buyback), three analyst upgrades and several other upped price targets. Its OLED technology is what’s really driving Applied Materials these days. Smartphone companies are phasing out LCD technology for their display screens and replacing it with OLED technology, and Applied Materials CEO Gary Dickerson estimates that his company’s OLED opportunity is three times larger than for LCD. Notably, Apple is rumored to be debuting an OLED screen in its yet-to-be-released iPhone 8, and those rumors—along with a jaw-dropping 483% jump in Applied Materials’ display screen orders in the first quarter—have many forecasting even greater things from the company in the coming quarters.
Technical Analysis
2015 was a rough year for AMAT. From a high above 25 in March, the stock plummeted all the way to 14 in September. 2016 has been a far different story; in February and March the stock vaulted from 15 to 21, and after dipping back to 19 in May, gapped all the way to 24 on the strength of its stellar first-quarter earnings report. Since then, AMAT hasn’t dipped below its 50-day moving average—a brief post-Brexit dip was the only time it’s fallen below 23 since late May. Last week, it broke through resistance around 24.5, and is knocking on the door of new highs above 25. Buy on dips with a stop near that 50-day line.
AMAT Weekly Chart
AMAT Daily Chart
Acacia Communications (ACIA)
Why the Strength
Acacia is a newly public company (it IPO’d on May 13) that appears to have a better mousetrap in the high-performance networking industry. The company’s interconnect modules focus on the rapidly-growing high-speed 100G optical market, where demand is booming thanks to myriad bandwidth-hogging services for consumers (like over-the-top video services) and companies (cloud computing) and major upgrades taking place at all areas of the network (long-haul, metro or interconnecting within a data center). There are many players in the field, but Acacia is the only one that’s integrated silicon into its photonic integrated circuits, resulting in lower costs for Acacia (through cheaper components and higher manufacturing yields) and less power use—putting the company on a fast path toward even more powerful modules going forward. (Acacia should see excellent growth in its next-generation 200G and 400G products starting in a year or two.) Judging by its recent growth (see table), its technology has been a hit, and analysts see sales and earnings continuing to surge going forward. Obviously, competition is always a potential pothole in this industry, and Acacia does have customer concentration issue (one big Chinese telecom makes up more than 30% of revenue … though that’s expected to fall to below 10% within two years). But the upside potential is huge if the company stays out in front.
Technical Analysis
ACIA (which was brought public by Goldman Sachs, a positive sign) closed its first day near 31, and after a brief dip, soared to 45 in mid-June. Shares took a big Brexit dip, but rebounded quickly, tagging new highs today. ACIA is very, very volatile (it moves 3.2 points a day on average!), so if you want in, keep the position small and use a loose stop.
ACIA Weekly Chart
ACIA 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.
