More Uncertainty
Current Market Outlook
The market was due for a pullback after three straight good weeks, and that’s what we’re seeing now as investors ponder 50-50 polls on Britain’s upcoming E.U. vote (a yes vote is generally considered bearish), the Fed’s meeting this week and Sunday’s horrible terrorist attack. The bottom line is that many indexes are approaching their 50-day lines, though few leading stocks have broken down. As always, you should play it by the book: By our measures, the market’s trends are still sideways-to-up, so we’re sticking with our overall bullish stance; dips following strong advances still look buyable. That said, you should also honor your stops and loss limits, jettisoning any stocks that break support. Further market weakness would have us turning cautious, but today we’ll keep our Market Monitor where it’s been.
Encouragingly, we had no problem finding some great-looking stocks. Our Top Pick is Dave & Buster’s (PLAY), which has a newer retail concept that’s working well, and the firm is on a solid expansion pace.
| Stock Name | Price | ||
|---|---|---|---|
| Dave & Buster’s (PLAY) | 57.01 | ||
| Penumbra Inc. (PEN) | 173.25 | ||
| Match (MTCH) | 0.00 | ||
| LLL (LLL) | 0.00 | ||
| Halliburton (HAL) | 0.00 | ||
| Cornerstone OnDemand (CSOD) | 51.01 | ||
| CDK (CDK) | 0.00 | ||
| Burlington Stores (BURL) | 193.95 | ||
| AMN Healthcare (AHS) | 0.00 | ||
| Agnico Eagle Mines (AEM) | 79.05 |
Dave & Buster’s (PLAY)
Why the Strength
Dave & Buster’s is a unique retail concept with good potential. The company’s claim to fame is that it combines “eat, drink, play and watch” all under one roof—whether it’s kids playing arcade-style games, adults watching a sporting event with a few beers, or the whole family enjoying some pub food, Dave & Buster’s appeals to a wide customer base. (About 60% of customers are adults, while the rest are families.) And that’s showing up in its results; the company’s locations produce an industry-leading $11.8 million in revenue per year (more than half of that is from games, with the rest from food and drink), about triple what successful outfits like Buffalo Wild Wings and Outback Steakhouse bring in! (Profit margins are much larger as well.) That’s led to excellent store-level economics; during the past few years, new locations have paid back about half the initial investment in the first year alone. Not surprisingly, the top brass is looking to expand—Dave & Buster’s has 84 stores open today, and is aiming to boost that about 10% annually for many years (including nine to 10 new stores this year) to at least 200 in the U.S. alone. Combined with solid same-store sales (up 3.6% in the first quarter), the expansion plan is pushing sales up at a 15% to 20% clip, with earnings growing at a much faster pace as margins expand. It’s not revolutionary, but we think this unique concept has lots of upside.
Technical Analysis
PLAY came public in October 2014, and it had a good first few months, rising from around 16 to 43 in September 2015. Then came a big basing formation, which included a 31% top-to-bottom correction and a shallower retreat in April and May. Then, last week, the roof blew clean off following earnings—shares surged 10% to new highs on seven times average volume. You could buy some around here or (preferably) on dips, with a stop in the low 40s.
PLAY Weekly Chart
PLAY Daily Chart
Penumbra Inc. (PEN)
Why the Strength
Penumbra is a small ($205 million in sales), relatively new company (founded in 2004, but public since September 2015) that offers a variety of medical devices that help with some challenging vascular conditions, including various neurovascular-related issues. The neuro side of the business makes up about 70% of revenues, driven in part by products that revascularize vessel blockages from ischemic stroke (a stroke caused by an obstruction of a vessel supplying blood to the brain) and embolization products. Outside of the brain, Penumbra’s peripheral vascular business makes up around 30% of the pie, and is growing rapidly thanks to its Indigo system, which is gaining share in many thrombectomy procedures. All of this is helping business, though earnings are lagging a bit—revenues are expected to grow 28% this year and 22% next (though that’s likely conservative), while earnings are supposed to come in just south of breakeven for the next couple of years. Overall, the company looks to be in the right place at the right time with the right products, though it’s also competing with some big fish in these markets. Consider it an interesting speculation.
Technical Analysis
PEN came public last September, and quickly surged from about 40 its first week to nearly 60 in early December. Then came the base-building phase—it corrected down to 40 by February, and after bouncing back toward its old highs, pulled back again during the market’s April/May dip. But as soon as the pressure came off the market, PEN surged to new highs on big volume; it’s been up four weeks in a row on a nice expansion in volume. As a recent IPO, it’s very choppy, so if you want in, keep positions small and try to buy on weakness.
PEN Weekly Chart
PEN Daily Chart
Match (MTCH)
Why the Strength
Online dating has become a major growth industry, and Match Group owns the fastest-growing online dating property. According to Pew Research Group, 15% of Americans have used an online dating site or mobile app, up from 11% in 2013. Young adults (ages 18 to 24) have been the primary driver of that growth, as 22% say they have used an online dating app, up from a mere 5% just two years ago. Tinder is the reason. It’s the online dating app that has become extremely popular among young single people, and it is the biggest reason why sales at Match Group (which also owns Match.com and OKCupid) have expanded by double digits for seven quarters running. Now the company is monetizing its free dating app—late last year, Tinder launched a subscription option that allows users to perform certain premium functions such as “super-liking” in exchange for a monthly fee. Launched in November, the Tinder subscription option already exceed one million users, and Match Group expects that number to double by year’s end. The company also plans to increase advertising, and anticipates significant growth in ad revenues starting next year. Profits are growing too: after a few down quarters, EPS swelled 22% last quarter, and is expected to increase 68% in 2016.
Technical Analysis
MTCH came public at 14 last November, and that’s where it remains today. But the stock is definitely trending in the right direction—MTCH dipped as low as 9 in February before bouncing back to 11 in March. That remained the ceiling until May, when the stock gapped up to 14.5. It has spent the past month consolidating, with 13 acting as new support. Volume in MTCH is paper thin, with just over one million shares trading hands per day. But the setup looks good, and the stock hasn’t dipped below its 50-day average for close to two months. You can nibble here and add to your position if the stock breaks above resistance at 16.
MTCH Weekly Chart
MTCH Daily Chart
(LLL)
Why the Strength
When it comes to defense spending, America has no peer. Our $598 billion defense budget in 2015 nearly matched the $664 billion that the next 14 largest spenders shelled out! Defense contractors are the beneficiaries of all that spending, and L-3 Communications is one of the Pentagon’s biggest customers—it just inked a $1.9 billion deal to provide airframe contractor logistics support for KC/KDC-10 tanker aircraft. Prior to that, L-3 was awarded a $302 million contract with the U.S. Navy to supply materials for and perform maintenance on several trainer aircraft. In addition to aircraft supplies and support, L-3 Communications makes everything from night vision goggles to advanced security systems. Sales have actually been on steady decline during the last few years, but margins are on the rise, and the company was remarkably profitable in the first quarter, with earnings per share up 51% from a year ago. Better cost controls and lower taxes helped boost margins and EPS growth during the quarter. And sales weren’t all bad: The U.S. government is L-3’s core business, accounting for 72% of sales, and it grew organically by 4% in the first quarter. The dividend is also becoming more of an attraction: L-3 increased its quarterly payout from $0.65 to $0.70 in February, and the yield is up to 1.9%. Between the two recent big contracts, the huge first-quarter EPS growth and the rising dividend, there’s a lot for investors to like about L-3.
Technical Analysis
LLL bottomed at 104 last September and after a big late-year rally, came crashing back to 108 in late January. It quickly recovered to the 115-120 range, and broke out in a big way in late April, rising to 137. Another push higher started in late May, with the stock touching 147 last week. LLL hasn’t dipped below its 50-day moving average since mid-February, so buy on dips and use that line as your stop.
LLL Weekly Chart
LLL Daily Chart
Halliburton (HAL)
Why the Strength
Everything started to go wrong for companies in the oil patch in July 2014. That’s when crude oil prices began their decisive drop below $100 a barrel and just kept on dropping. When the bottom was finally reached—just four months ago—crude had fallen to $26 a barrel and taken oil stocks down with it. Halliburton, one of the largest oil-field services companies in the world, has actually weathered this storm pretty well, remaining profitable despite five quarters of shrinking revenue. Halliburton’s technological expertise in completing, capping and maximizing production from new wells have made it a favorite of the explorers and drillers still operating. So while the company’s stock chart pretty much paralleled the falling price of crude, it has also rebounded with crude prices. Estimates of 2016 earnings call for a loss of 20 cents per share, but the rosier outlook for crude prices have pushed 2017 EPS estimates to 94 cents per share. For those interested in participating in the resurgence of oil prices, Halliburton offers a global operation and a tidy dividend with a 1.6% annual yield. It’s worth noting that the number of institutional owners of Halliburton has fallen over the past quarter, but the number of shares owned by the whales has risen. Clearly the pros are upping their bets on oil via Halliburton, which seems like a reasonable play.
Technical Analysis
HAL shows its strong links with crude, from parallel highs in July 2014 to lows in January and February 2016. HAL has bounced from its January low at 28 to a high at 47 last Wednesday. The market-induced correction to below 45 offers a good entry point. A moderately loose stop at 40 will give the stock some wiggle room.
HAL Weekly Chart
HAL Daily Chart
Cornerstone OnDemand (CSOD)
Why the Strength
Cornerstone OnDemand is a player in the cloud software business, helping 2,670 clients (including blue chip customers like Walgreens, Virgin Media, Neiman Marcus and Starwood Hotels) with talent management—the firm’s products help recruit, onboard, train and measure the performance of a client’s employees. Basically, a company can manage all aspects of its talent management and all phases of the employee lifecycle Cornerstone’s solution. Like many cloud companies, there’s lots of competition out there, but that competition is tiny compared to the number of companies with no talent management products, or those that are using older, less functional legacy systems. With Cornerstone, the proof is in the numbers—revenue growth is slowing a bit, but the top line grew 29% last year and should expand 27% this year and another 24% in 2017. In the first quarter, bookings and deferred revenue rose north of 30%, and while earnings have lagged, the bottom line should accelerate into the black starting later this year. With so many competitors, we can’t say Cornerstone has a revolutionary product, but it is one of the leaders in the talent management niche, and there’s no sign that business should do anything but improve from here. It’s a good story.
Technical Analysis
Like many cloud stocks, CSOD had an excellent run into March 2014, but then fell on hard times, with the stock falling from a peak of 62 to as low as 22 during the market plunge this past February. But that was the bottom, and CSOD’s major trend appears to be turning back up—the stock plowed steadily higher through mid-May, then accelerated to new multi-month peaks on great volume in early June. We think the next pullback is buyable, with a stop near 37.
CSOD Weekly Chart
CSOD Daily Chart
(CDK)
Why the Strength
Making its first appearance in Cabot Top Ten Trader, CDK Global helps auto dealerships sell cars and manage the related activities—advertising and marketing, financing, insurance, parts supply, repair and maintenance, CRM, paperwork, telephones, data management and analysis and training. With operations in more than 100 countries worldwide, CDK serves more than 27,000 retail locations that include almost every automotive manufacturer. The company’s single-digit revenue growth for the last four years reflects the subdued growth of the global economy. But estimates of auto sales are increasing as growth increases steadily and an aging vehicle fleet presents increasing demand. Estimates for fiscal 2016 (the company’s fiscal year ends in June) call for a 32% jump in earnings with 29% growth in 2017. The company got a new CEO in March, and management announced on June 8 that it would speed up the remaining $710 million of its previously announced $1 billion return of capital to investors in the form of stock repurchases and quarterly dividends. The new completion date is the end of 2016, rather than the end of 2017 as previously planned. About two-thirds of CDK Global’s revenue comes from North American auto sales support, but the potential in other markets is also high. This is an under-the-radar business, but institutional sponsorship of CDK Global stock is growing steadily.
Technical Analysis
CDK came public in September 2014, and caught a strong updraft in October, soaring from 25 in the middle of October 2014 to 57 in June 2015. Then came an orderly eight-month pullback that ended with a double bottom at 40 in January and February 2016. CDK began to strengthen at that point, but didn’t really get a head of steam up until May 4, when a quarterly report that beat on earnings triggered a strong rally on heavy volume. CDK has maintained its increased momentum since early May, and is still well above its soaring 25-day moving average despite the recent dip. CDK looks buyable on any weakness, with a stop at May resistance at 52.
CDK Weekly Chart
CDK Daily Chart
Burlington Stores (BURL)
Why the Strength
Discount retailers are flourishing right now, and Burlington Stores is no exception. The off-price apparel, footwear and home goods company recently reported better-than-expected first-quarter earnings—the $0.57 per share it earned was a 39% improvement from the same quarter a year ago and four cents higher than estimates. A 4.3% bump in same-store sales helped a lot, spurring an 8% rise in overall sales. CEO Tom Kingsbury credited the company’s expanding home goods and women’s apparel businesses—two areas in which Burlington Stores has historically lagged—as the main catalysts behind the same-store sales increase. New-store sales have been a major factor behind the company’s recent growth as well—in the last five years, the number of Burlington Stores has increased from 475 to 570, with plans to open another 25 net new locations this year. Meanwhile, a $200 million share repurchase program, installed last November, has helped boost the company’s EPS growth; it bought back $50 million worth of stock in the first quarter alone. The company expects to buy back the remaining $150 million by year’s end, which is a big reason why it expects full-year EPS growth of 21%.
Technical Analysis
After a steady decline from March 2015 through the end of the year, during which time it fell from 61 to 41, BURL suddenly awakened when the calendar flipped to 2016. The stock jumped to 54 by the end of January, and inched its way to 57 by the end of February. A solid three months of consolidation followed, with 58 acting as resistance and 51 the new floor. But the late-May earnings surprise brought a break above 60 on more than double normal volume, and the stock has kept on rising to 64. Volume has fallen back to normal levels, but that hasn’t stopped BURL from continuing to advance. Buy on dips and set a stop below the 50-day line.
BURL Weekly Chart
BURL Daily Chart
AMN Healthcare (AHS)
Why the Strength
More Americans have health insurance these days. The percent of the U.S. population that is uninsured dropped to 10.4% in 2014 (2015 figures have yet to be released), down from 13.3% in 2013—the largest year-to-year drop in the number of uninsured since the Census Bureau started tracking the data in 1987. More people with health insurance means increased demand for healthcare, and the sudden spike has left hospitals across the country routinely understaffed. That’s where AMN Healthcare comes in. It provides temporary staffing of physicians and nurses to healthcare facilities around the U.S. Thanks to the surge in demand for extra hospital staffing, AMN’s sales improved by 41% last year, and business isn’t expected to slow down anytime soon. The company recently acquired B.E. Smith (in January) and Peak Health Solutions last week. B.E Smith, at a cost of $160 million, was the big fish: it provides interim leaders to the healthcare industry. That buyout has made AMN’s stellar sales growth even more robust: B.E. Smith generates $100 million a year in revenue. Sure enough, in AMN’s first quarter since the B.E. Smith buyout, sales were up 43%, while earnings per share doubled from the prior year. For full-year 2016, sales and earnings are expected to grow by 26% and 36%, respectively. Investors are responding to all that growth, and snatching up AHS shares as a play on the healthcare staffing boom.
Technical Analysis
AHS peaked at 37 last August and September, then spent the rest of 2015 tumbling, first to 23, then to as low as 21 in February. The turnaround was sharp—the stock broke above its 50-day moving average in late February and after taking a breather around 32 for a couple of weeks, continued to kite higher for the past two months-plus. It dipped to 34 last month but has since risen as high as 41 before pulling back a bit. You can start a position around here or on dips, with a stop below the 50-day line.
AHS Weekly Chart
AHS Daily Chart
Agnico Eagle Mines (AEM)
Why the Strength
Gold is an investment that marches to its own drummer, and Canadian gold miner Agnico Eagle Mines is enjoying the resurgence of interest in gold that began earlier this year. Agnico Eagle’s mines in Canada, Finland and Mexico produced 411,336 ounces of gold in the first quarter, up from 404,210 ounces in Q1 2015 at a byproduct cost basis of $573 per ounce and all-in cost of $797 per ounce. Management issued guidance along with Q1 results that projected production for the year of 1.525 to 1.565 million ounces of gold, which is at the high end of previous estimates. Management also announced the sixth consecutive quarter of reduced net debt and declared a dividend of $0.08 per share. Agnico Eagle’s resurgence is clearly being fueled by rebounding gold prices. Gold was trading near $1,900 per ounce in September 2011, and fell to $1,048 per ounce in December 2015. The rebound in gold prices to near $1,300 in May (it’s around $1,290 right now) has been a huge factor lifting all miners. But Agnico’s operational success is also playing a part. Drilling operations in Sweden have yielded increases in the size and richness of the gold deposits there. And Mexican operations also yielded a new quarterly record of 752,000 ounces of silver. If gold is on your wish list, Agnico Eagle Mines is a tried-and-true leader.
Technical Analysis
AEM’s chart shows a huge runup from 12 in May 2005 to 76 in 2008, the 2009 meltdown to as low as 19 and the bounce back to new highs at 81 in December 2011. At that point, the stock began a four-and-a-half year correction that would drop it to 21 in August 2015. AEM has made exceptionally steady progress since January, and is now trading above 51 after a June 3 gap up. A small (0.6%) dividend isn’t a consideration, but AEM’s steadiness makes it a good choice in the gold patch. If you buy here, use a stop at 46.
AEM Weekly Chart
AEM 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.
