Earnings Dead Ahead
The market and most stocks remain in a solid uptrend, though earnings are beginning to have the anticipated push-pull effect on the market, with lots of gaps up and down to start the day. We think increased volatility is nearly a sure bet going forward, especially after such a great rebound. In the short-term, then, make sure you have a plan of how you want to deal with earnings season (we include any upcoming earnings dates of our recommendations in today’s issue), and be prepared for lots of action in both directions. Long-term, though, the path of least resistance remains up, so we favor using normal retreats as buying opportunities.
This week’s list is one of the more growth-oriented that we’ve seen this year; just about every stock has a real, sustainable growth story with solid numbers. Our favorite of the week is Proto Labs (PRLB), which has set up a nice risk-reward entry here after tightening up for a few weeks.
| Stock Name | Price | ||
|---|---|---|---|
| Zillow (Z) | 76.64 | ||
| Vipshop Holdings (VIPS) | 14.25 | ||
| Trulia (TRLA) | 0.00 | ||
| Santarus (SNTS) | 0.00 | ||
| Spirit Airlines (SAVE) | 57.03 | ||
| Proto Labs (PRLB) | 0.00 | ||
| Nu Skin Enterprises Inc. (NUS) | 46.07 | ||
| Nationstar Mortgage (NSM) | 0.00 | ||
| Generac Holdings (GNRC) | 86.60 | ||
| Ambarella (AMBA) | 52.79 |
Zillow (Z)
Why the Strength
Zillow has made the daunting task of connecting home buyers and sellers easier by moving the entire process online. The company has even thrown mortgage lenders into the mix, allowing visitors to the company’s website to not only find their perfect home, but also acquire financing on the spot. Zillow’s profits come from selling home buyer and seller information to consumers and brokers for buying, selling, renting, borrowing and remodeling homes. The company also offers a paid subscription package called Zillow Pro, which recently topped 100 brokerage partners. While Zillow’s profits could be considered small potatoes by the bigger players in the traditional mortgage market, the company’s sales growth has been impressive. During the most recent quarter, Zillow posted a 71% jump in sales to $39 million! Long-time Zillow investors have come to expect this type of growth, with the company’s revenue advancing from $17.5 million in 2009 to $116.8 million in 2012. Not content with organic growth, Zillow has embarked on an acquisition spree lately, snapping up smaller competitors such as RentJuice, Buyfolio, and HotPads. There are no secrets to Zillow’s success, just an information-rich website with easy to use features driven by a resurgent housing market.
Technical Analysis
After a couple of sour years, Z recovered in 2012, forming a solid rally from 21 in December to 47 in September. Poor earnings in November 2012, however, saw the shares gap lower from 35 to 28 in one day, with subsequent trading dropping it to 23. But Z rebounded quickly and has since surged to fresh all-time highs above 60—site of the stock’s IPO. Z is currently consolidating its recent gains into the 65 region as it prepares to challenge 70. You can take bites here and add to your position during this breather, or hold for a firm breakout above 70.
Z Weekly Chart
Z Daily Chart
Vipshop Holdings (VIPS)
Why the Strength
Young Chinese consumers like a bargain as much as anyone, and Vipshop Holdings caters directly to their love of fashionable clothing and accessories via online flash sales. Vipshop serves customers mostly in southern China, offering domestic and foreign merchandise in limited-time sales at heavy discounts. A visit to the company’s website shows lots of clothing, but also cosmetics, bedding, watches, cooking gear, sports equipment and jewelry. Vipshop membership has grown to over 28 million in just over four years, and the company has partnerships with over 5,800 domestic and international brands to offer discounted items on a limited-time, limited quantity basis. The typical Vipshop customer is a young, white-collar woman looking for a little fashion kick at an attractive price. Revenue grew by 205% in 2012 and the company has now notched three consecutive profitable quarters, supporting projections that 2013 will be a profitable year. Vipshop was attacked by short-selling specialists in May, who contended that the company inflated traffic figures and underestimated expenses. The company defended itself vigorously, however, and appears to have won investors’ confidence. Vipshop will report earnings in early August.
Technical Analysis
VIPS came public in March 2012 and took a little over five months to build a base with support at 5. The rally that began in late August topped out at 38 in May, when the short-seller’s attack (and general market weakness in June) began a correction that pulled the stock back to 23 on June 24. From that low, the stock rebounded strongly, including some high-volume up days last week. Investors are showing a good appetite for VIPS ahead of earnings and the stock is just below its record May highs. VIPS looks like a good buy on a pullback of a point. Or you can wait for earnings results and buy if the reaction pushes the stock over 38, a move that may have some power, given the fifteen-week base VIPS has built. A dip below the stock’s 25- and 50-day moving averages (now trending sideways near 31) would be bearish.
VIPS Weekly Chart
VIPS Daily Chart
Trulia (TRLA)
Why the Strength
Trulia is one of several upstart online real estate websites that have grown up since the housing market went bust. Taking advantage of the growing online trend, Trulia connects home buyers with real estate agents via the company’s marketplace websites. And business is booming. Marketplace revenue, which consists of premium subscriptions for real estate agents, made up 70% of Trulia’s total revenue in the first quarter. What’s more, this revenue source was up 100% year-over-year in the most recent quarter. What’s in it for the agents? They can get on the site for free, establish a profile and contribute content, but paying for a premium subscription allows them to promote their listings in Trulia’s search results and target mobile users—resulting in higher-quality leads. The balance of Trulia’s revenue comes from advertising, which is driven by traffic. During the first quarter, ad sales rose 91% as users ballooned 51% to 31.4 million unique monthly users. Trulia’s biggest difference versus competitors like Zillow and Redfin is likely its user-generated content. The company currently has the largest database of real estate-related, user-generated content in the business, which helps its website generate higher traffic and generally attracts more buy-ready customers. Whatever the reason, Trulia is growing rapidly, and while the company is still small compared to traditional real estate players, it has big potential. Earnings are out July 31.
Technical Analysis
TRLA went public right when the market was peaking in September last year, and then plunged from 26 to 15. Following a short basing period, TRLA rocketed to an all-time high of 38 before retreating sharply to support at its 50-day moving average. TRLA looked to breakout following its Q1 earnings report in May but the strength was short lived, and the stock spent the next several weeks grinding sideways. The situation changed once again at the beginning of July, with TRLA reclaiming its 50-day trendline and soaring past former resistance near 35. Shares are now taking a breather, consolidating above 35 and their 10-day moving average is a bit overextended, so buy on dips.
TRLA Weekly Chart
TRLA Daily Chart
Santarus (SNTS)
Why the Strength
Santarus is a San Diego-based pharmaceutical company that’s enjoying a double boost from increasing acceptance of its approved drugs and encouraging results from clinical trials of its candidate drugs. Uceris, the company’s bowel-disease drug, was approved in January and sales have been excellent, bringing in $6.6 million in Q1. The company’s Ruconest treatment for hereditary angioedema was submitted to the FDA on June 18 after completing its Phase III clinical trials with sterling results. If you add in Zegerid, a heartburn drug, and Glumetza, a treatment for type II diabetes, and two other approved drugs, it’s apparent that Santarus has a nice range of products that address several conditions with large patient populations. Santarus has been a hot property since January 2012, when it resumed shipments of Glumetza and released 2010 results that blew away analysts’ estimates. Since then, Santarus has had a string of positive news, and the company’s Q2 earnings report, expected in early August, should continue the string.
Technical Analysis
SNTS has been in a strong uptrend since January 2012. Since that time, the stock has soared from 3.3 to over 25, with very few major corrections along the way. SNTS took a rest in May and June, slipping from a high of 24 on May 22 to below 20 on June 25. But the stock has rebounded nicely and is now trading around 25 on solid volume. In the long run, the company has excellent prospects; in the short run, much will depend on the next earnings report in early August. With the stock up 10 times its early 2012 price, there’s always a risk from the earnings report. But short interest is very low and institutional sponsorship is on the rise, so the signs are positive. Try to buy on a dip of a point and put a stop in at 21.
SNTS Weekly Chart
SNTS Daily Chart
Spirit Airlines (SAVE)
Why the Strength
Spirit Airlines and many airline stocks are strong for one simple reason: Business is very good. And this is despite a recent, rapid rise in gas prices, which usually crimps the group. The background is that every major airline has cut routes in a big way in recent years, cutting unprofitable flights and overhead. And, combined with a steadily expanding economy (which leads to more business and leisure travel), that’s led to fuller flights and a ton of profits. Now, Spirit Airlines obviously isn’t one of those major carriers that’s cutting back ... just the opposite, in fact. Spirit is taking advantage of shrinking seat capacity from the big boys to expand like mad, and it’s been able to do so prudently while keeping its flights full. In June, for instance, Spirit’s total capacity was up a whopping 22% from a year ago, and those flights were 88.3% full, which was up a couple of points from a year ago. Yet despite this expansion, Spirit’s potential is huge—the firm only operates about 250 flights per day now, and management has dozens of new aircraft on order, which should support further growth. Of course, as with many firms, the next big event is earnings, which are due out Wednesday; analyst see earnings up a huge 50% this year to $2.15 per share, and another 20% in 2014, and management already said the second quarter’s revenue per seat mile was a bit better than expected. As airlines go, we like it.
Technical Analysis
SAVE was a dog last fall, but began to rebound with the market for a few months, and has been on a tear since March. Shares successfully tested their 10-week moving average a couple of times during this advance (late-April and late-June), and each time brought a bunch of new buyers. We especially like SAVE’s powerful snapback since the recent market low. If you want in, you can nibble here and see what earnings bring. A stop near the 50-day line is prudent.
SAVE Weekly Chart
SAVE Daily Chart
Proto Labs (PRLB)
Why the Strength
Proto Labs, making its third appearance here since its debut in April, is a combination of old and new technologies. The old part is the company’s reliance on traditional machining and injection molding to produce the objects ordered by its customers. The new part is Proto’s use of customer-supplied computer-aided design (CAD) files to control the manufacturing process. Proto’s customers are usually design engineers looking for a small run of a new product design. By using computer-controlled machining for production runs of 10 or fewer (a service Proto calls Firstcut), and injection molding from CAD designs for larger runs (a service called Protomold), Proto can typically turn around parts orders in anywhere from one day to 15 days. Catering to customers’ need for speed has enabled Proto to grow revenue rapidly (see box below) and earnings are up from 18 cents per share in 2009 to $1.07 per share in 2012. Proto’s success comes from catering to the same demands that are often served by 3D printers. And the increasing availability of those printers may represent a threat down the road. But for now, Proto’s speed remains attractive to customers in a hurry. Proto will report Q2 results on August 1, before the market opens.
Technical Analysis
PRLB came public in February 2012 at 16, but finished its first day of trading near 30. After nine months of sideways trading, the stock got moving in late 2012 and popped above 40 for good in January. PRLB tends to surge and consolidate, jumping higher in February, April and June. Right now, the stock is trading sideways between resistance at 66 and support at 62. The 25-day moving average, now around 64, should provide some impetus, but it will be the earnings results on August 1 that will set the trend in the near term. A small buy on any weakness, with a stop at 58, presents a good risk/reward proposition.
PRLB Weekly Chart
PRLB Daily Chart
Nu Skin Enterprises Inc. (NUS)
Why the Strength
Nu Skin is a direct seller of personal care products and nutritional supplements, which it sells under the Nu Skin and Pharmanex brands. While the Utah-based company has operations in 53 international markets, nearly 80% of 2012 revenue came from sales in the north Asia, greater China and south Asia/Pacific regions. The focus of Nu Skin is anti-aging products, either nutritional supplements (Pharmanex) or skin care (Nu Skin). The company’s ageLOC system is rolling out a new weight-loss innovation this year that is expected to keep revenue growth humming. Revenue growth expanded out of single digits in 2010 when it hit 15%, and 2011 and 2012 brought increases of 13% and 24%, respectively. Investors are particularly interested in Nu Skin now because of the company’s updated guidance on July 10 that hiked EPS estimates from 91 to 95 cents per share to $1.20 per share. The company has always done well when it introduced new products, and the ageLOC weight-loss system has great promise. The company has also received authorization to begin direct selling operations in five additional Chinese provinces. And since China is the third-largest direct selling market in the world, good results are a good bet. A 1.5% forward annual dividend yield is an added attraction. The company will report earnings before the market opens on August 1, but the pre-announcement on July 10 has taken most of the drama out of that event.
Technical Analysis
NUS had a pretty good 2011, but the stock began a serious correction in 2012, falling from 60 in March to 32 as 2013 began. A new rally that began in April 2013 formed a lumpy cup pattern and a May/June consolidation put a handle on it. The announcement of raised guidance fueled a gap up from 67 to 73 on more than 10 times average volume. NUS has traded as high as 85, but looks like it wants to trade sideways with support at 80 for now. With the company’s optimistic guidance already priced in, NUS may take a little time to build a new base. A buy anywhere below 80, with a stop at the top of the gap (71), should do well.
NUS Weekly Chart
NUS Daily Chart
Nationstar Mortgage (NSM)
Why the Strength
The mortgage servicing industry is not well understood, so as interest rates began rising, some of the up-and-coming mortgage servicers, like Nationstar Mortgage, took it on the chin. And, indeed, rising rates do pose a risk; the company has a fast-growing full service mortgage origination business, for instance, which is probably slowing down. This business not only produces immediate revenue (closing costs, title checks, etc.), but also feeds its growing servicing book, and higher mortgage rates affect both refinancings and new mortgages. But the biggest draw of this industry has always been the fact that the big banks, which have historically controlled 80% to 90% of all mortgage servicings, are still selling tons of servicing rights, especially on subprime loans, due to new regulations. Companies like Nationstar (and Ocwen Financial) are experts in reducing delinquencies and improving cash flows from these mortgages, and they’ve been buying up these rights like mad. Nationstar’s biggest splash came in January, when it purchased $215 billion of servicing rights from Bank of America, a deal which is closing in chunks throughout the year. The deal is so big that management upped its earnings guidance to $7 per share in 2014! There could be more deals ahead (though they’re likely to be in much smaller pieces) as this trend is likely still in the middle innings. Long-term, we think this story could go very far.
Technical Analysis
NSM is a very choppy stock, and part of the reason is that it remains majority owned by Fortress Investment (symbol FIG); while there are zero signs that the firm wants to unload shares, it’s always a possibility, which has led to so-so sponsorship and wild moves. That said, the weekly chart looks good—after a big post-IPO run, NSM has now formed three launching pads, each one sitting on top of the one before. And now the stock is storming back (albeit on only average volume) to within a few percent of its peak. This has rarely been a stock to buy after a big move up, so we suggest starting small, hopefully on weakness, and then looking to add if the stock can decisively take out its prior high near 47.
NSM Weekly Chart
NSM Daily Chart
Generac Holdings (GNRC)
Why the Strength
There is nothing generic about Generac. Founded in 1959, the company’s engine-driven standby portable generators have been life savers during many power outages and natural disasters, as they’re used in homes, businesses, hospitals and RVs. The company sells its wares through retailers and wholesale distributors, and all of the company’s sales are derived from the U.S. and Canadian markets. Generac’s generators have been a big hit in the residential market, with the company maintaining a 70% market share. The company has a sizeable distribution network, encompassing more than 4,800 dealers, including big names such as Home Depot. The breadth of Generac’s network has helped the company maintain its competitive edge, placing it above many upstarts in the growing personal power generation market. As proof, the company’s sales surged to the $1 billion mark for the first time in 2012, with Generac reporting year-over-year growth of 48% last year. What’s more, the company averaged year-over-year earnings growth of 29.4% during the past three years. Generac made a key acquisition last year by snatching up Latin American firm Ottomotores, a move that opens the door for the company to expand its growth beyond North America, which will accelerate Generac’s growth prospects.
Technical Analysis
Despite being around for more than 50 years, GNRC has only been trading publicly since 2010. After a rough start that saw GNRC dive from an IPO near 13 to a low near 10 by mid-2010, the stock’s overall trend has been broadly higher. The stock gapped higher in late October 2012 following a strong quarterly report, sending GNRC into a trading range between 35 and 40 that would hold throughout most of the first half of 2013. Fresh off a rebound from the 35 region, now home to GNRC’s 200-day moving average, shares are looking to hold their ground above 40. We expect a bit of consolidation following the stock’s move to all-time high territory, and recommend buying dips accordingly.
GNRC Weekly Chart
GNRC Daily Chart
Ambarella (AMBA)
Why the Strength
Chip stocks are notoriously hit or miss, but the successful ones (in terms of stock performance) tend to specialize in one fast-growth area and lead it for a few years. Ambarella’s focus is on HD video; initially that meant networking infrastructure, which the company still does good business in. But now the main attraction is in cameras, including wearable cameras (often for sports), automotive aftermarket cameras (in Asia and Russia, many cars are mounted with dashboard cameras to record traffic accidents), so-called telepresence cameras (like a Skype camera for your PC) and IP security cameras (something that could see sustained higher demand in the wake of the Boston Marathon bombings). (Ambarella does not target the smartphone or tablet market, FYI.) The current solutions usually compromise on video quality, or use a ton of power, taking away the benefit of being portable. Apparently Ambarella’s technology, built from the ground up for this sort of thing, is a year or two ahead of the competition, and that’s made it a hit in the firm’s target markets. We wouldn’t say the firm addresses the most obvious mass markets, which makes it a bit harder to understand, but there’s no doubt business is very good—sales and earnings are on a great growth track (see table below), and analysts see the bottom line increasing about 30% in 2014. It’s not changing the world, but the firm looks to be in the right place at the right time.
Technical Analysis
AMBA is a thinner stock (it trades about $23 million per day), but there’s no question more investors have been discovering the name; volume has more than tripled since March! And the stock’s been acting very well, trending higher in a choppy manner since a sharp January-February pullback. More recently, the recovery from the market’s late-June low looks great, so we think you can start a position around here, and simply trail a stop near the 50-day line.
AMBA Weekly Chart
AMBA 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.
