So Far, So Good
There remain a few warts on the market’s current rally, including some meaningful divergences (the Nasdaq and Russell 2000 have yet to reach new highs like some of the broader big-cap indexes) and a lack of decisive breakouts from big-cap leaders (most are still working on launching pads). But the evidence is rarely going to line up perfectly; the fact is that during the past few weeks, more and more stocks have been acting well as selling pressures ease. Now’s a time to grow gradually more optimistic as the stocks you own and follow improve.
This week’s list includes one of those classic, big-cap breakouts that we alluded to above. Top Pick Applied Materials (AMAT) is in the process of completing a major acquisition that should boost its market dominance in a big way, and the stock has exploded out of a nice consolidation on very big volume.
| Stock Name | Price | ||
|---|---|---|---|
| Zebra Technologies (ZBRA) | 154.94 | ||
| Skyworks Solutions (SWKS) | 0.00 | ||
| MeadWestvaco (MWV) | 0.00 | ||
| Lannett Company (LCI) | 0.00 | ||
| Illumina Inc. (ILMN) | 289.74 | ||
| Carrizo Oil & Gas (CRZO) | 24.03 | ||
| Consol Energy Inc. (CNX) | 0.00 | ||
| Bonanza Creek Energy (BCEI) | 0.00 | ||
| Arris Group (ARRS) | 0.00 | ||
| Applied Materials (AMAT) | 0.00 |
Zebra Technologies (ZBRA)
Why the Strength
Zebra Technologies got its start in the bar code printing business, but today it produces a wide variety of marking and printing solutions, so organizations can track assets, people and transactions. In addition to bar code and QR code, the company’s technologies include radio-frequency identification (RFID) and ultra-wideband (UWB). You can find Zebra products in hospitals, schools, concerts, oil rigs, grocery stores, trucks and more. Until now, growth has been good but not great; since 2005, revenues have grown from $702 million to $1.03 billion. But the year ahead will see huge growth, because on April 15, Zebra announced an agreement to acquire the Enterprise business of Motorola Solutions—a business that had about $2.5 billion in revenues in 2013! The acquisition is expected to be immediately accretive, as Zebra gets a jump-start in Motorola’s two areas of expertise—mobile and enterprise. In fact, after the acquisition is complete, Zebra expects to be the leader in “Enterprise printing, asset tracking, Internet of Things (IoT) solutions and motion and location sensing,” which will make it “an industry leader in enterprise asset intelligence for the Connected Age.” This is a high-potential acquisition that catapults Zebra to a new level.
Technical Analysis
ZBRA has been a decent stock for years but never a great one; it has never earned a spot in Cabot Top Ten Trader until today. But this year, everything is going right. February brought a 2013 year-end earnings report that beat expectations and sparked buying that gapped the stock up from 57 to 65. The acquisition announcement was first received negatively—the stock dipped to 60 on big volume—but a day later, the rebound began that took it out to a new high at 75. And just last week, it joined the market leaders in breaking out to new highs! With modest support at 75 (that old high) and its 50-day moving average at 71, buying on normal pullbacks is recommended.
ZBRA Weekly Chart
ZBRA Daily Chart
Skyworks Solutions (SWKS)
Why the Strength
The “Internet of Things” may not sound glamorous, but it is the impetus behind soaring profits from companies like Skyworks Solutions. According to market tracker IDC, the global market for Internet of Things is expected to jump $7.1 trillion by 2020 from just $1.9 trillion last year. We last visited Skyworks in late April, noting that the company, which makes integrated circuits for wireless applications, had achieved average quarterly revenue growth in excess of 12% due to key partnerships with mobile giants Samsung and Apple. During a second-quarter conference call, CEO David Aldrich said that Skyworks was capitalizing on the “Internet of Things” trend. Aldrich recently reiterated this statement, and backed it up by boosting Skyworks’ fiscal third-quarter earnings and revenue guidance. The company is now expecting to realize a 48% jump in earnings in Q3, and a 31% spike in revenue. For fiscal 2014, Skyworks earnings are seen rising by 33%, though this figure could see upward revisions in light of the company’s recent upward Q3 revisions. Additionally, Skyworks entered into a partnership with Panasonic, one that Skyworks sees yielding 1% of gross margin improvement by fiscal 2015.
Technical Analysis
Once a DotCom diva, SWKS is used to the limelight. Following a rough couple of years, SWKS spent 2013 recovering, forming support in the 25-30 region by the end of the year. So far this year, SWKS has been off to the races. Riding its 10-week moving average, SWKS quickly accelerated past resistance at 30, eclipsed the 40 level, and is now on pace to challenge 50. Driven by a string of solid quarterly reports, SWKS has gained more than 70% so far this year. Currently, shares are still dealing with post-guidance euphoria, so you might be better off buying dips until the shares settle down.
SWKS Weekly Chart
SWKS Daily Chart
MeadWestvaco (MWV)
Why the Strength
If you need it packaged, wrapped, contained or shipped in a carton, MeadWestvaco has you covered—literally. The company manufactures folding cartons, corrugated boxes and printed plastics for the health care, personal and beauty care, food, pharmaceutical and tobacco markets. The company also manufactures packaging equipment for the dairy and beverage markets. MeadWestvaco has been a steady performer despite a troubled global economy, and recent cost-cutting measures helped push earnings in the most recent quarter up by 156% over the same quarter last year. Analysts at Starboard Value, however, believe that the company could do much more to improve its bottom line. Creating quite a stir for MeadWestvaco, Starboard recently disclosed that it has taken a 5.6% stake in the company, noting that MeadWestvaco is “deeply undervalued” and is being impacted by “excessive corporate overhead.” According to Starboard, MeadWestvaco could unlock even more value if the company trimmed business operations inefficiencies by spinning off underperforming areas and taking more drastic cost-cutting measures. With mergers and acquisitions heating up, and MeadWestvaco expected to see earnings growth of 80% this year, this undervalued company is certain to attract additional attention going forward.
Technical Analysis
Despite choppy stock action, MWV managed to put in a positive performance in 2013. The stock was stymied by overhead resistance in the 40 region, with a rejection there in early November forcing MWV to retreat below former support in the 35 area for a brief spell. The stock entered 2014 in basing mode, with shares forming up around growing support near 35. In March, MWV finally resumed its former uptrend, and made a run at 40 at the end of May. Last week’s Starboard news provided the spark that MWV was lacking, sending the stock skipping past 40 toward fresh all-time highs. MWV is currently a bit overheated, so buying on dips of a point or two is recommended.
MWV Weekly Chart
MWV Daily Chart
Lannett Company (LCI)
Why the Strength
Tight economic conditions and an intense focus on health care costs have led to a rise in demand for generic prescription drugs in the U.S—a trend that has significantly benefited generics specialist Lannett Company. Lannett makes generic prescription drugs designed to treat ailments ranging from thyroid deficiencies, to migraines and epilepsy, to congestive heart failure. The company has a deep pipeline of bioequivalents of branded medicines made by other drug companies. Lannett also keeps costs down by outsourcing a significant portion of its manufacturing to Jerome Stevens Pharmaceuticals. With an increased focus on generic drugs, Lannett has seen sales growth accelerate in each of the past three quarters, hitting a triple-digit gain of 105% last quarter. Earnings growth has easily kept pace, averaging 256% during the past four quarters. Looking ahead, analysts are forecasting impressive earnings growth of 298% this year, followed by an increase of 35% in fiscal 2015. Despite its pedigree, Lannett has largely flown under the radar of most investors—a situation that is sure to change. With the stock’s recent addition to the S&P 600 SmallCap Index, Lannett is certain to attract a much broader following.
Technical Analysis
After essentially sleeping in the mid-single digits for years, LCI shares finally found an audience in 2013. In fact, LCI was among the hottest pharmaceutical stocks last year (which is impressive for a generic manufacturer), rallying more than 500%. So far in 2014, LCI has slowed down a bit. Shares surged to a high near 47 by mid-February, but sold off in April, and retested support in the 30 region. As a result of LCI’s rebound, the stock is nearing the completion of what appears to be a cup-and-handle formation. If this pattern progresses in typical fashion, LCI should consolidate for a short period before breaking out to the upside. Either way, we believe LCI is buyable here or on pullbacks to 45.
LCI Weekly Chart
LCI Daily Chart
Illumina Inc. (ILMN)
Why the Strength
Illumina is the leading manufacturer of the tools used for gene-based science, particularly with regard to the development of new pharmaceuticals (that’s where the money is). But it also serves academic, government and biotechnology researchers, offering systems for SNP genotyping, copy number variation, genome sequencing, DNA methylation studies, transcriptome analysis and gene expression profiling. Illumina’s gene sequencing systems can sequence a small genome in as little as five hours or a whole genome in less than three days. But the real money is in the supplies that users must buy to run the machines. Most recently, 62% of revenues came from these consumables, and as that number grows, it means greater visibility about future cash flows. Looking at the numbers, we see that Illumina grows revenues every year; it grows earnings most years (except when it has a major acquisition); and it grows its profit margin, too. In short, it’s a well-managed company with a leading position and a fairly robust moat—thanks to patents. Long-term, it’s a winner. And short-term, the stock was notable last week for a $900 million offering of convertible senior notes that was very well received.
Technical Analysis
ILMN came public in July 2000 and spent its first three years going down, like most of the market. But since then, the main trend has been up. Most recently, the stock topped at 183 at the start of March and then fell to 130 in the correction that followed (paralleling the correction of most growth stocks). After putting in a double bottom there, it rebounded to 160, built a small base, and then soared to 170 last week as the notes offering went well. Today it’s a bit extended, but momentum is very strong and the old high of 185 is the first target. Try to buy on a normal pullback.
ILMN Weekly Chart
ILMN Daily Chart
Carrizo Oil & Gas (CRZO)
Why the Strength
Instead of focusing on just one of the lucrative shale areas, Carrizo Oil & Gas is succeeding by spreading its efforts around. The firm operates three rigs in the Eagle Ford shale in Texas, one in the Niobrara field and is starting one up in the Utica shale (about which we continue to hear super-bullish reports). Right now, the Eagle Ford is the #1 growth story, where the firm has north of 67,000 net acres and has about 155 wells either producing or waiting on completion. But it likely has another 650 to 900 more wells to drill there, each one cranking out 80% to 100% returns! In the Utica, the firm has nearly 26,000 acres; it’ll drill just seven wells this year as it “de-risks” the acreage, but early results are very encouraging. Returns on Utica wells are estimated in the 75% range. Lastly, there’s the Niobrara formation in northern Colorado (same place Bonanza Creek operates), with 47,000 acres, where it’s cranking out returns in the 50% range. All told, current results are solid (first quarter production was up 48%, including oil output that was up 61%), and analysts see the company’s bottom line growing 23% this year and then accelerating to a 45% gain in 2015 as Eagle Ford and Utica results begin to gush. We like it.
Technical Analysis
CRZO has one of the best charts in the oil patch. The stock ran up nicely into last October, then built a very sound four-month base between 38 and 47. The breakout came on big volume in late-February, and since then, CRZO has pushed slowly higher along its 10-week line. That is, until last week, when shares catapulted decisively to new highs on big volume! It’s extended to the upside, but the solid buying volume last Tuesday should keep pullbacks tame, assuming the sector remains healthy. Try to buy on weakness.
CRZO Weekly Chart
CRZO Daily Chart
Consol Energy Inc. (CNX)
Why the Strength
Consol is best known as a good-sized coal producer, and that remains true—but instead of trying to grow, Consol is aggressively managing costs and profit margins, using its low-cost production base to turn its operations into a cash cow. And where’s it using that cash? To drill for natural gas, mainly in the Marcellus shale! That move from a coal producer to a gas producer has proven to be a boon; after a couple of years of growing its position and infrastructure, Consol will grow gas output 30% in each of the next three years. That’s really the whole story; with a ton of fixed costs, and with the company focusing on cash flow, the extra production is falling to the bottom line—analysts see earnings soaring 148% this year, and then growing 43% in both 2015 and 2016. Of course, there are risks, including the price of natural gas and the never-ending headwinds the coal industry seems to face. But with its coal business relatively stable and its gas output on a steady, rapid growth track, we think Consol can do well. FYI, the firm has an analyst day this Thursday (June 12), which could provide some news.
Technical Analysis
CNX isn’t the most dynamic name, but as investors are catching on to the company’s “new” story, it’s picking up steam. Shares had been gradually outperforming the market for a while, and then spiked in April following a bullish earnings report. That was followed by a very tight, very constructive four-week pause, which led to last week’s big-volume rally to new highs. We think you can buy some here or (preferably) on weakness, with a stop near the 50-day line.
CNX Weekly Chart
CNX Daily Chart
Bonanza Creek Energy (BCEI)
Why the Strength
Last week we wrote about Sanchez Energy, which saw a sudden change in perception after a major land acquisition. It’s a similar story with Bonanza Creek, an up-and-coming explorer that’s focused in the Niobrara and Codell fields in northern Colorado (often called the Wattenberg Field)—two weeks ago, the company agreed to pay about $240 million in cash and stock for another 34,600 acres in the Wattenberg, effectively doubling its acreage! The purchase will add another 700 net drilling locations, leaving the firm with 2,000 future wells to tap … a 25-year drilling inventory at current drilling rates. Of course, Bonanza was doing just fine even before the acquisition; production was kiting higher (up 60% in the first quarter) despite operating just four rigs in the Wattenberg area, with the average well (which is about 70% oil and liquids) being highly profitable. Each of its Wattenberg wells produce a 65% rate of return at $90 oil, paying back all capital expenditures within 1.5 to 2.0 years. The acquisition of additional acreage should allow for an accelerated drilling plan in the years ahead, and analysts are looking for earnings to rise 37% both this year and next. It’s not in one of the more well-known basins, but Bonanza Creek has a great story.
Technical Analysis
BCEI came public in December 2011 and did little but go up through early October of last year, when it peaked north of 57. It’s been building a big base since then, but within this structure, it formed a 10-week, double-bottom base beginning in March, and concluded with the gigantic-volume rally following the acquisition news. It looks like BCEI’s rest period is over, and while there’s some resistance in the upper 50s to chew through, we think any dip is buyable, with a stop in the high 40s.
BCEI Weekly Chart
BCEI Daily Chart
Arris Group (ARRS)
Why the Strength
Arris Group is something of a 1999-type story, with product segments like DOCSIS 3.1 and HEVC/4K. But the overall story is simple to understand: The company is a leader in video delivery and broadband products, mainly for TV operators (both cable and telco). And it’s global, too, selling into 85 countries (although, to be fair, the big TV providers in the U.S. make up the lion’s share of revenue). The exciting part about Arris is that it’s the main beneficiary (thanks to last year’s buyout of Motorola Home) of what is now a broadband boom in the industry; its customers are tripping over themselves to boost video and broadband speeds and quality for their customers via new set-top boxes, gateways and advanced modems, as well as some cloud-related products and services. In the first quarter, not only did results crush expectations, but orders (37% more orders than shipments) and backlog (now $996 million) surged, indicating very solid demand for Arris’ new products. Management believes it’s in the early to middle innings of this cycle, which should lead to many quarters of strong growth. Combine that with a reasonable valuation (just 13 times this year’s earnings estimates), and Arris could do very well.
Technical Analysis
ARRS broke out from a huge, five-year base last November, soaring from 17 to 31 in just four months. Then came a new basing formation while the market was in a correction, and it was a good one; ARRS only pulled back 21% from top-to-bottom, gapped up on earnings in early May, tightened up, and has lifted off nicely as the market’s done better of late. With the 25-day line below 31, ARRS might pause a bit longer, but the big-volume rally tells us any pullback is buyable.
ARRS Weekly Chart
ARRS Daily Chart
Applied Materials (AMAT)
Why the Strength
Applied Materials, the world’s largest maker of semiconductor production equipment, is about to get even bigger. The company’s hardware dominates the chip-making process across the globe, with equipment specializing in layering film on wafers, etching circuits, and semiconductor metrology and inspection. Applied also extended its reach into the solar power cell market after acquiring Applied Films. Currently, however, the buzz surrounding Applied Materials is centered on its pending $2.6 buyout of fellow semiconductor equipment maker, Tokyo Electron. The merger still has several regulatory hurdles to clear, including approval from the DoJ and antitrust regulations in China, Japan and Korea, but analysts remain confident that the deal is a go. In fact, analysts at Jefferies recently initiated coverage of Applied Materials with a “buy” rating, citing the potential for increased pricing power and “scale benefits.” The company is already raking in a tidy profit, with revenue growth averaging 16% and earnings growth coming in at 138% (on average) year-over-year during the past four quarters. Looking ahead, the Tokyo Electron acquisition is likely to help push Applied Materials’ earnings growth to 81% this year, with an additional 25% upside seen in 2015.
Technical Analysis
After spending 2012 bouncing around in the teens, AMAT took off in 2013 and hasn’t looked back. Since January 2013, shares have enjoyed a steady stairstep pattern along support at their 10-week and 25-week moving averages. Volume spiked in September last year, when Applied announced its acquisition plans for Tokyo Electron. Volume once again picked up in early 2014 after the boards of both companies approved the deal. Following a recent test of support near its 25-week moving average, AMAT eclipsed 20 and is now trading at multi-year highs. We recommend buying as AMAT consolidates its recent gains into support in the 20 region.
AMAT Weekly Chart
AMAT 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.
