Here Comes Earnings Season
Current Market Outlook
The market remains in very strong shape. Whether you’re looking at breadth, the trends of the indexes, the action of leading stocks, or sentiment among investors (mostly apathy with some disbelief thrown in), most of the evidence continues to point to higher prices ahead. Of course, that’s for the market as a whole—for individual stocks, earnings season is likely to rock the boat a bit, with some failing while others take the leadership mantle. You should remain heavily invested, but make sure you have your plan in place when it comes to handling your stocks during earnings season. As always, we’ll ditch any stocks that crack and hop on board new leadership that emerges.
This week’s list has a nice mix of sectors, including a few that have already reported earnings. Our Top Pick is Burlington Stores (BURL), a retailer that’s firing on all cylinders and recently pre-announced bullish earnings. Try to buy on minor weakness.
| Stock Name | Price | ||
|---|---|---|---|
| Yelp (YELP) | 41.30 | ||
| UFPI (UFPI) | 0.00 | ||
| PulteGroup (PHM) | 45.93 | ||
| Proofpoint (PFPT) | 113.79 | ||
| MSCI Inc. (MSCI) | 0.00 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| Ligand Pharmaceuticals (LGND) | 267.14 | ||
| Ironwood Pharmaceuticals (IRWD) | 0.00 | ||
| New Oriental Education (EDU) | 113.97 | ||
| Burlington Stores (BURL) | 193.95 |
Yelp (YELP)
Why the Strength
Yelp has had its share of troubles during the past couple of years, from both increased competition (many big players like Google, Facebook and TripAdvisor are looking to grab local online advertising dollars—a $19 billion market that’s growing) and fraud accusations (that Yelp faked positive reviews of companies that advertised with it). But the stock is coming to life for a few reasons. First, business is still pretty darn good—revenue growth has been buoyant, and key metrics (app usage of 21 million devices, 146 million unique monthly users to its website, 102 million cumulative reviews) look great. Second, it has some interesting emerging businesses like Eat24 (a food ordering and delivery service with $14.5 million of revenue in the latest quarter) and SeatMe (cloud-based online reservations system with 2,600 paying users). And third, after a few quarters of heavy sales and R&D spending, investors are looking ahead to margins perking back up and profits and cash flow zooming higher. Analysts see revenue up 27% this year and cash flow up more than 40%, with similar increases likely in 2017, too. Obviously, there’s still a lot of competition, which could be a pothole, but after a tough couple of years and lots of spending, it looks like Yelp could be on the comeback trail. Earnings are due out August 9.
Technical Analysis
YELP topped at 102 in March 2014 and didn’t stop falling until it dipped to 15 in February of this year. The action following that low was just OK, with a quick pop and a sideways phase even as the market perked up. But YELP reacted very well to earnings in early May (up 24% on seven times average volume!) and has been trending higher along its 25-day line since. We like the set-up here, though with earnings due out in two weeks, you should keep new positions small.
YELP Weekly Chart
YELP Daily Chart
(UFPI)
Why the Strength
The push to build new homes to meet escalating demand in the real estate market has benefited this lumber company. Universal Forest manufactures lumber, composite wood and other building products for the retail, construction and industrial markets. All its products were big sellers in the second quarter, the results of which Universal reported last week. The company set a new record for earnings, which came in at $1.64 per share, 28% higher than the same quarter a year ago. The growth was across several of Universal’s business segments: increasing repair and remodeling demand spurred 7.5% growth in the company’s retail segment, and construction grew by 6.5% thanks to nationwide improvements in housing starts. An 8% year-over-year boost in lumber prices also helped matters. Several recent acquisitions have helped fuel Universal’s growth—in June alone, it bought Idaho Western, a well-known lumber distributor, and acquired certain assets from Robbins Manufacturing, which makes preservative-treated wood products. Universal CEO Matt Massad said the company is searching for more acquisitions in the coming months—a nice reflection of its positive cash-to-debt ratio. Put simply, Universal Forest is a growing company that occupies a unique-yet-important niche within the ongoing housing and construction industry recovery.
Technical Analysis
The first big push for UFPI began in February, when the stock leapt off its 40-week moving average and kept trickling higher, to 87, by the end of March. Some consolidation followed, with the stock slumping back to 76 by late April. It wasn’t until June that UFPI got back to 87, and it didn’t truly breakout until late last month, but it’s been humming ever since. The stock hasn’t dipped below its 50-day moving average for two solid months. Buy on the dips and set a stop in the low 90s.
UFPI Weekly Chart
UFPI Daily Chart
PulteGroup (PHM)
Why the Strength
A builder of single-family detached homes, townhouses, condominiums and duplexes, Pulte Group is another strong play on the surging U.S. construction industry. Last week’s second-quarter earnings results were evidence of that—the company reported a 41% sales jump and a 61% improvement in earnings per share, both of which were partly driven by an 11% increase in the average sales price (now $367,000) of Pulte’s homes. Orders also increased 11%, and the company now has a backlog of 9,679 homes valued at $3.7 billion. But a strong second quarter is only part of what’s driving PHM; a $1.5 billion share repurchase plan, announced last Thursday and to be carried out over the next six quarters, is also capturing investors’ attention. Pulte plans to buy back $250 million of its own stock every quarter until the end of 2017! On top of that, Pulte just rearranged its board, appointing three new directors at the prompting of Elliott Management, an activist hedge fund that took a 4.7% stake in the company last month. Wall Street seemed to like the move, as investors pushed the stock up 5.3% even before the company released its second-quarter earnings.
Technical Analysis
PHM had a bit of a false start in June, rising from 17.8 to 19.7 before pulling back to 18 (below its moving averages) by month’s end. The first leg of the recent breakout came in the first week of July, when the stock kited from 18 to 20.5 in a span of 10 days. It spent the next two weeks consolidating before breaking above 21 last week on three times its normal volume. With buying volume high (9.3 million shares were traded last Friday), you can buy on minor weakness with a stop in the mid-19s.
PHM Weekly Chart
PHM Daily Chart
Proofpoint (PFPT)
Why the Strength
It’s been many months since we’ve seen strength from cybersecurity stocks, but there are positive signs in the sector now and Proofpoint looks a leader in the group. The company offers a suite of cloud-based solutions that include many types of threat protection (via email, social media, apps or other avenues), information archiving and compliance systems (controlling who is able to see and send certain data). Demand has been very strong for Proofpoint’s products, partly because of some key partnerships—it works with Palo Alto Networks, integrating its social media and targeted attack prevention software with Palo Alto’s platform. It’s also tied in with Intel’s security arm (formerly McAfee). When combined with the general movement away from legacy security systems to cloud-based platforms, Proofpoint has been growing rapidly and consistently—the company has seen revenues grow sequentially for 52 quarters in a row, and growth is actually accelerating over the past couple of quarters. Last week’s report easily topped expectations, and management’s outlook for the rest of 2016 was hiked as well. (Interesting to us: Despite earnings being in the red, free cash flow should total around 85 cents per share this year.) Of course, the valuation is up there ($3 billion market cap, $313 million of revenue), but this is a great fundamental story.
Technical Analysis
After hitting a double top in the mid-70s, PFPT imploded earlier this year, falling more than 50% from top to bottom. The rebound from there was just OK, but during the past couple of months, it has been picking up steam—PFPT ramped up in early June, held its 50-day line during the Brexit shakeout, reached new recovery highs earlier this month and then surged last week following earnings. There’s still old resistance to deal with, so if you’re game, look to buy on dips of a couple of points.
PFPT Weekly Chart
PFPT Daily Chart
MSCI Inc. (MSCI)
Why the Strength
When the financial world is looking for reliable information about companies and national markets around the world, the top choice is often MSCI Inc. The company’s global Index division (which contributes a little over half of annual revenue) aids institutional investors in portfolio construction, asset allocation, benchmarking and the creation of index-linked investment products. The Analytics segment (about 40% of annual revenue) offers products and services for risk management and reporting, helping institutional investors understand risk and return in all kinds of asset classes. MSCI’s clients are typically pension funds, endowments, foundations, central banks and all kinds of asset management firms. The MSCI/BARRA brand is the gold standard for reliable information. While revenue growth isn’t rapid—just 9% in 2014 and 8% in 2015—earnings growth was 35% in Q4 2015 and 36% in Q1 2016. Estimates are for 24% EPS growth in 2016 and 19% growth in 2017. The company also pays a dividend that yields 1.1% annually. MSCI Inc. isn’t going to be a runaway growth company, but it’s steady and offers reliable performance with modest long-term risk. But since the company will be reporting its latest quarterly results before the market opens this Thursday (July 28), its short-term risk is considerably higher.
Technical Analysis
Since November 2012, MSCI has been a real tractor, chugging higher with reasonable pullbacks along the way. After this year’s January/February pullback in the market dropped MSCI from 73 to 62, the stock rebounded quickly, reaching 80 by the end of May. The June market stumble pulled MSCI back to 72, but July brought a new surge to above 80. If you want to initiate a position now, just keep it small and keep a short leash on losses. A small buy around 82 with a stop below the 50-day moving average (now at 77.5) could pay off.
MSCI Weekly Chart
MSCI Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
MercadoLibre (that’s “free market” in Spanish) is usually called the eBay of Latin America. And that’s accurate in a couple of ways, because like eBay (which owns 18.4% of MercadoLibre), the company is really two stories in one. The first story is the e-commerce business that offers online auctions and fixed-price storefronts. The company’s e-commerce business sold 38.3 million items in Q1, with Brazil leading the way with 45.6% growth. The second story is MercadoPago, the company’s online payment business (the equivalent of PayPal), which processed 27.5 million payments worth $1.38 billion in Q1. That’s year-over-year growth of 32.7% in U.S.$ and 108% in local currencies. Some analysts see MercadoPago as an even bigger growth story than MercadoLibre itself. The company is working to enhance its technology in both payments and mobile, buying the software development company Monits (and thereby adding 50 software engineers to its talent pool) and the online payments business of Mango. MercadoLibre’s business results will always be sensitive to currency fluctuations, both the strength of the U.S. dollar and variability among Latin American currencies. But over the long run, the increasing volume of online sales and the growing popularity of its online payment system (plus its half-percent dividend yield) will keep MercadoLibre high in the minds of international investors.
Technical Analysis
MELI has been through three major corrections since late 2013, and several smaller ones. But since completing a double-bottom at 85 in September 2015 and February 2016, the stock has soared to over 150. That’s excellent momentum for an emerging markets stock, and we think it looks buyable on any dip to 150. A stop at the 50-day moving average (now at 139) seems prudent.
MELI Weekly Chart
MELI Daily Chart
Ligand Pharmaceuticals (LGND)
Why the Strength
Ligand Pharmaceuticals is one of the strongest stocks in the market because its unique licensing business model should produce booming sales and earnings for many years. Ligand has more than 140 fully funded research programs with various partners (including many of the big players in the drug and biotech sector), as well as 13 products that are currently on the market. Two products (one marketed by Amgen, the other by Novartis) make up most of Ligand’s licensing revenue today, but that’s just the beginning—total underlying product revenue for Ligand’s licensed products should grow from around $1.1 billion last year to $1.8 billion this year and nearly $2.5 billion in 2017! While Ligand makes just four cents or so (on average) for every dollar of product sold, that’ll be enough to drive earnings to about $3.30 per share this year and to $5 in 2017, according to management’s estimates. And there should be plenty more beyond that as some mid-stage treatments earn approval in 2018 and beyond. And beyond that, Ligand is using its recently acquired OmniAb platform (a big help in antibody research) to build new potential licenses down the road; Gilead Sciences recently became the 20th partner to sign up with the OmniAb platform, and Ligand expects three antibodies will be in clinical trials by the end of 2017. This is a unique growth story with lots of upside if Ligand’s partners continue to bring their drugs to market. We like it.
Technical Analysis
LGND built a big base-on-base formation from August of last year through June of this year. But as soon as the pressure came off the overall market post-Brexit, LGND spiked, including a big-volume move to new highs last week. Earnings are due out August 4, which is a risk, but we’re OK with a small position here or on dips.
LGND Weekly Chart
LGND Daily Chart
Ironwood Pharmaceuticals (IRWD)
Why the Strength
This developer of gastrointestinal disorder drugs is on the brink of having a new constipation drug gain commercial approval. In June, the Food and Drug Administration (FDA) accepted for review Ironwood’s 72 mcg-dose of its drug Linzess, used to treat adults with chronic idiopathic constipation, a disease that affects 35 million Americans. The FDA is expected to complete its review by early next year. Ironwood has enrolled some heavy hitters—Allergan and AstraZeneca—to help push its new Linzess drug through. There’s a reason those big pharma companies want a slice of the Linzess pie: net sales of the drug grew 44% to $137 million in the first quarter, accounting for exactly two-thirds of Ironwood’s total revenue. The company expects annual sales of Linzess, which it jointly owns with Allergan, to top $1 billion by 2020—and that’s without the FDA’s approval of the new 72-mcg dose, which it believes will increase Linzess’ overall marketability. Meanwhile, Ironwood’s sales growth is already quite strong at 128% last quarter after nearly doubling in 2015. Analysts anticipate 98% quarterly sales growth when Ironwood unveils its second quarter results on August 4.
Technical Analysis
It’s been a big year for IRWD, with potentially much more to come. After dipping in January, the stock got going around 7 in February and didn’t stop until it topped 11 a month later. For the next two months, it set up camp in the 10-11 range before breaking to the high side in late May, rising as high as 13. Another six weeks of base building followed until the stock stair-stepped its way above 14 last week. You can start small here and add to your position after next week’s earnings report, assuming the stock reacts well. IRWD hasn’t dipped below its 50-day moving average since mid-May, so that’s a good place to set a stop-loss.
IRWD Weekly Chart
IRWD Daily Chart
New Oriental Education (EDU)
Why the Strength
Education is seen as a key to future prospects in China, which makes it a highly competitive business. New Oriental Education, the largest provider of private educational services in China, specializes in K-12 after-school tutoring and English language classes, but offers a wide variety of educational services, including online classes. Since New Oriental’s latest appearance in Top Ten, the company has increased the number of its schools from 62 to 66, and grown its staff to 18,700 teachers in 55 cities. When the company reported its latest quarterly earnings results on July 20, investors approved of its estimate-beating 20% revenue growth and 12% jump in earnings, both of which were based on strong increases in enrollments in after-school programs. The strength of the New Oriental story has attracted a rapidly increasing number of institutional investors, up from 278 a year ago to 604 now. Revenue grew by 19% in the company’s fiscal 2016, which ended in May, and after-tax profit margins followed their usual pattern of double-digits in three of the year’s four quarters. The business appears to be immune to the pace of the Chinese economy, which is a comfort to investors.
Technical Analysis
EDU went through a significant correction along with most Chinese stocks in 2014, falling from 35 in January 2014 to a double bottom at 18 in January and August 2015. But when its new rally began in October 2015, the stock took out that 2014 high and moved into all-time high territory in March 2016. EDU took a tumble from 43 to 39 on June 8, but began its recovery immediately, and was trading at 42 last Wednesday when that good earnings report blasted it back to 45. The stock has given up just a little over a single point in the days since, which looks like a good entry point. EDU looks buyable here, with a stop at 40.
EDU Weekly Chart
EDU Daily Chart
Burlington Stores (BURL)
Why the Strength
Off-price retailers have carved out a nice niche in today’s online-centric consumer climate. According to a recent survey conducted by NPD Group, two-thirds of U.S. retail consumers now shop at discount retailers. Burlington Stores may be the poster child for success among these discount retailers. The apparel, footwear and home goods chain grew earnings by 39% last quarter and sales by 8%, but what’s really driving the stock are the company’s expectations for the second quarter. The company released its second-quarter guidance last week, forecasting between 4.2% and 4.5% same-store sales growth and EPS of $0.28 to $0.30—both considerably higher than previous estimates. Though the company won’t reveal its second-quarter results for another month, the improved guidance was enough to keep investors’ interests piqued. Improvements in its women’s apparel and home goods businesses have been the main drivers behind Burlington’s escalating same-store sales. Plus, the company itself is expanding, having grown from 475 to 570 locations in the last five years, with another 25 net new stores set to open by the end of its current fiscal year. An ongoing $200 million share repurchase program has also helped matters.
Technical Analysis
BURL had a rough 2015, as the stock fell from a March high of 61 to 41 by year’s end. But 2016 has been a very different story from the get-go: it gapped up from 41 to 48 in the second week of January and kept on rising to 57 by the end of February. Three months of basing followed, with the stock finding support at 51 the third week of May. The turnaround since has been swift—by month’s end, it had broken above 57 resistance and then some, settling in a range between 62 and 64 until another breakout arrived in late June. Triggered by the improved second-quarter outlook, it’s now in the midst of a third break to the high side in as many months. Buy on the dips and set a stop below recent support around 66-67.
BURL Weekly Chart
BURL 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.
