Stick with the Evidence
Trouble usually comes from where investors least expect it, and it’s fair to say that Cyprus was not on most radar screens before this weekend. The much-publicized shock brought up fears of a 2008-style bank run, but it’s important to keep your feet on the ground and stick with the evidence. Right now, the trend is still up, and most stocks are in good shape; we did see some churning among the most extended stocks last week, so they might need a break, but we haven’t seen much abnormal action that occurs when the sellers take control. If that changes, we’ll let you know, but right here we’re keeping our Market Monitor in bullish territory—further short-term weakness could be in store, but the odds continue to favor higher prices in the weeks ahead.
This week’s list has a bunch of charts that look very strong and most are not overly extended to the upside. Our top pick is from the energy patch—Tesoro (TSO) is part of the very strong refining group, and the stock has eased back to support after a powerful run in February. We think it’s a good buy around here.
| Stock Name | Price | ||
|---|---|---|---|
| Tesoro (TSO) | 0.00 | ||
| Parexel Corp. (PRXL) | 0.00 | ||
| ServiceNow (NOW) | 341.86 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Lions Gate Entertainment Corp. (LGF) | 0.00 | ||
| Delta Air Lines (DAL) | 54.28 | ||
| Cabot Oil & Gas (COG) | 0.00 | ||
| Celgene (CELG) | 0.00 | ||
| Citigroup Inc. (C) | 0.00 | ||
| Aruba Networks (ARUN) | 0.00 |
Tesoro (TSO)
Why the Strength
Tesoro is one of the biggest refiner/marketers in the U.S., getting about 92% of its revenue from refining and 8% from retail. Tesoro operates in the western U.S., with seven refineries in Alaska (1), Hawaii (1), California (2), Washington (1), North Dakota (1) and Utah (1). All told, the company’s refineries have a throughput capacity of 675,000 barrels per day. The company’s retail operations include over 1,200 retail stations in 18 states. Tesoro’s competent management and disciplined approach to cost control have made the company a Cabot Top Ten Trader all-star, with 21 previous appearances. Management continues to show its savvy in the recent announcement that the company would begin shipping petroleum feedstock from the Bakken shale region to its Anacortes, Washington, refinery, taking advantage of attractive pricing. Tesoro reinstated its cash dividend in August 2012 and voted to begin a $500 million share repurchase program, taking advantage of attractive crude prices to return capital to investors. Refining is a cyclical business, but Tesoro has shown that it knows how to ride a positive cyclical move.
Technical Analysis
TSO made a big run in late 2010 and early 2011, then took a 14-month break to consolidate its gains. A new rally began in June 2012, and TSO broke out in July on huge volume; the stock ran up 17 weeks in a row! A pullback in October began a three-month base-building phase and the stock took off again in January. TSO has been correcting for two weeks since hitting a new all-time high at 59 earlier this month. This controlled pullback has put the stock back in touch with its 25-day moving average, which should provide both support and some upward momentum. We think you can buy TSO right here.
TSO Weekly Chart
TSO Daily Chart
Parexel Corp. (PRXL)
Why the Strength
Parexel International is a leading biopharmaceutical services company that offers global outsourcing of research and clinical trials to the pharmaceutical, biotech and medical device industries. The company’s three divisions can handle every stage of drug development, including clinical trials, analysis of results, submission for approval and marketing. The Clinical Research Services division manages clinical trials from Phase I through Phase IV, including biostatistics, data management and clinical pharmacology. The Consulting and Medical Communications Services division handles regulatory affairs, industry training, publishing, product development, management consulting and other services. And the Perceptive Informatics division offers medical imaging, interactive voice response systems, clinical trials management, web-based portals and other services that facilitate the development process. All of this is geared toward helping customers control costs and speed up the path to pharmaceutical approval. Parexel made two of its three Cabot Top Ten Trader appearances in early 2010, and the company’s revenue growth in 2012 was 7%, twice the rate of growth in 2010. After-tax profit margins topped 5% in Q4, the first time that’s happened since Q3 2010. The other big news for PRXL is that the company’s aggressive $200 million share repurchase program (announced last August) has been supplemented by a $50 million accelerated share repurchase program.
Technical Analysis
After capping a rally in April 2010, PRXL spent 22 months trading up and down, with no gain. A big-volume rally in January 2012 got the stock moving again and PRXL has been heading higher ever since, with plenty of pullbacks along the way. The rally that began in late December has reflected higher momentum and has had no significant pullbacks. Last week’s trading showed very strong volume support. PRXL will likely need a break from this torrid advance, and you should be able to get in on a dip of at least a point.
PRXL Weekly Chart
PRXL Daily Chart
ServiceNow (NOW)
Why the Strength
ServiceNow is taking IT automation into the Cloud. ServiceNow’s Cloud-based software works across operating systems, servers, networking equipment, PCs, mobile devices, and other technologies, allowing IT professionals to facilitate workflow automation, data consolidation and business administration processes. The company is the unrivaled leader in the IT automation field, with more than 1,500 enterprise-level customers and an impressive 98% renewal rate. Soaring demand forced ServiceNow to more than double the number of employees in 2012, following a whopping 880% increase from 2008-2011. Revenues have been soaring with fiscal 2012 fourth-quarter revenue up 92% to $75.2 million, and 2013 guidance topping analyst expectations. For fiscal 2013, ServiceNow expects full-year revenue of $387-$392 million, well above analysts’ estimates of $368 million. With CEO Frank Slootman recently estimating that ServiceNow holds a 12% share of the IT Service Automation market, it is clear that the company has ample room to continue its rapid growth, which could translate into potentially significant returns for investors.
Technical Analysis
When NOW went public is June 2012, the IPO market was a wasteland, with investors shying away from new issues in the wake of a botched Facebook IPO more than a month earlier. Yet, as a testament to the company’s strength and savvy, NOW soared more than 37% in its first day of trading. The stock went on to peak near 42 in October before succumbing to selling pressure. NOW finally bottomed near 25 in January before turning sharply higher in 2013. As a result, NOW appears to be on the upswing portion of a bullish cup formation. Shares are currently consolidating their recent gains near 36, paced by support at their 10-day moving average. With the upper bound of the cup formation near 40-42 (which could result in a handle and another breakout), NOW has plenty of room to run for the time being. We recommend buying on weakness, with a stop near 33.
NOW Weekly Chart
NOW Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
First, Netflix was a big winner because it took the movie rental market by storm by offering DVDs by mail; it was a main reason why former big boys like Hollywood Video and Blockbuster went under. Then, after a couple years in the wilderness as that move ended, the stock had another monstrous run thanks to its move into video streaming, which attracted millions of subscribers. The stock went through the wringer in 2011 and 2012 after an ill-advised price hike and customer relations snafu, but now Netflix is back, partly because content costs seem to be under control, but also because of its move into original content—the firm’s hit series House of Cards has been very well received. While there have been no direct subscriber acquisition numbers linked to the recent release, Netflix has another five original series out later this year, with more (follow-up seasons plus new shows) likely next year. All of this raises the possibility that the company will become the equivalent of an HBO or Showtime, or possibly even bigger, as Netflix has access to a much wider variety of content than those two. Of course, Netflix is just barely coming back into profitability, and the short interest and valuation are huge. But the potential is huge, too, and analysts see earnings rebounding to about $1.40 per share this year and nearly $3 in 2014. High risk, but potentially high reward.
Technical Analysis
What makes NFLX so intriguing is the unusual strength it’s shown this year—the stock was bouncing off the bottom for a few months but after its fourth quarter report, it exploded from 100 to 175 in one week, eventually tapping on 200 before consolidating. Now, NFLX is very volatile, and we’re not ruling out a dip toward the 10-week moving average (170-ish), but in general, we think buying a small position around here makes sense, with a stop around 160 and the idea of buying more on a decisive breakout above 200.
NFLX Weekly Chart
NFLX Daily Chart
Lions Gate Entertainment Corp. (LGF)
Why the Strength
The movie and TV content business is a tough one, as films and TV shows are expensive to make and their reception is never certain. But Lions Gate Entertainment is in the enviable position of having several very popular, very lucrative film franchises right now, with young audiences eager to see the next installments. The highest profile franchise is the Hunger Games trilogy (which grossed $687 million last year after its first installment), but the studio has lots of other strong properties, including the Saw films, Tyler Perry’s movies, the Twilight films (acquired in the takeover of Summit Entertainment), and TV series like Mad Men, Weeds and Nurse Jackie. Lions Gate owns a substantial catalog of 13,000 film and TV libraries that are a source of continuing income. One entertainment industry analyst points out that the studio owns the rights to the novel Divergent, another title with big youth-market appeal that has sold more copies than Hunger Games had at the same stage of its release. Right now, Lions Gate can’t seem to put its foot wrong, which is driving the results you see in the table below. Lions Gate’s stock will likely make a big move (one way or the other) as the summer movie season tells its tale. There’s no way to predict the public’s reaction, but the company’s pre-sold franchises definitely put the odds in its favor.
Technical Analysis
LGF closed 2011 at 8, then blasted off to 16 by the middle of March 2012. After nine months that included a big correction followed by a big recovery and a nice base at 16 again, LGF began its recent rally in late December. The stock has soared to 23, leaving its 25-day moving average behind at 17.9. This makes a consolidation or correction likely, but not certain. Look to buy in on any weakness.
LGF Weekly Chart
LGF Daily Chart
Delta Air Lines (DAL)
Why the Strength
After being derided as investment duds for quite some time, airline stocks are making even the most hardened investor take a second look. With the potential for an economic rebound over the next year, many analysts believe that the sector can fly even higher. Helping to lead the charge, Delta has several factors that allow it to stand out from its peers. First, consolidation within the sector has greatly improved Delta’s bottom line. The company acquired Northwest Airlines in 2008, United merged with Continental in 2010 and Southwest Airlines bought AirTran in 2011. The narrowing of the playing field has allowed for less price competition and higher ticket prices. In fact, the average fare rose about 8% from 2008 through 2012. Second, Delta’s management has done a good job cutting costs by shedding excess capacity, making strategic investments (Delta bought a 49% stake in Virgin Atlantic to gain better access to Heathrow Airport), and by buying its own refinery to save $300 million a year in fuel costs. What’s more, Delta expects another $600 million in savings from cost initiatives in the second half of the year. The results are already starting to materialize, as revenue per seat mile grew 5% year-over-year in January. Overall, analysts see earnings of $2.60 per share, giving the stock a lowly P/E ratio of 5 for 2013, compared to the S&P average of 14. It’s not a buy-and-hold-forever stock, but Delta has plenty going for it today.
Technical Analysis
Airline stocks as a whole have been lousy investments for years, but DAL has recently shown signs of heavy buying power. The stock hit a double top near 15 in 2010, and plunged to a low near 6 in 2011. Shares then rebounded nicely, meeting with resistance near 12 in mid-2012. But DAL held firm, forming a base near 10 for the remainder of 2012, and since early-December, DAL has rocketed higher on huge volume! The stock has even broken out above former resistance near 15, tagging a fresh multi-year high above 16 last week. Given the recent run, we see DAL as buyable on minor weakness, with a stop down around 13.
DAL Weekly Chart
DAL Daily Chart
Cabot Oil & Gas (COG)
Why the Strength
We’re seeing quite a few natural gas-reliant stocks perk up of late despite so-so prices for the commodity itself; it appears investors might finally be paying up for these firms’ tremendous production growth, figuring natural gas prices have generally bottomed. The best-of-breed in the industry is Cabot Oil & Gas, which has the best acreage in the most lucrative natural gas shale in the country—the Marcellus Shale in Pennsylvania. Right now, the company is firing on all cylinders, aiming for production growth of 35% to 50% this year as the firm invests in more drilling rigs and as infrastructure comes on-line. The company is also diversifying just a bit with its acreage in the Eagle Ford shale, which produces a lot of natural gas liquids (NGLs), which are higher priced than regular natural gas. But the big story remains the Marcellus—the company still has a decade or more of drilling inventory (3,000 wells!), and even better, well costs are falling as supply of drilling and fracking equipment picks up. Despite soggy commodity prices, Cabot has put together two straight quarters of solid earnings growth (actually, sales and earnings growth are accelerating) and the bottom line is expected to nearly double this year and rise another 85% in 2014. Simply put: If natural gas prices remain steady or rise, we think COG will do very well.
Technical Analysis
COG began a mild uptrend in June of last year, rallying from about 30 at that time to the 47 area in mid-January. Then came the company’s fourth-quarter report and outlook, and that has changed the character of the stock—COG gapped higher on the news and has pushed higher ever since with small, tight pullbacks along the way. That said, buying this stock after a big move has rarely worked in recent years, so it’s best to target a buy in the mid-60s; a stop around 57 makes sense.
COG Weekly Chart
COG Daily Chart
Celgene (CELG)
Why the Strength
Celgene has a firm hold on its position in the biotechnology market. The company sports five major commercialized drugs—Revlimid, Vidaza, Abraxane, Thalomid, and Istodax—and more than 25 clinical trials for new drugs (or new uses for existing ones) in Phase III. Celgene also has a licensing agreement with Novartis for royalties on Focalin RX and Ritalin. Cancer treatment Revlimid is by far the company’s biggest seller, raking in $3.77 billion in sales annually, but trials of pancreatic cancer treatment Abrazane have been extremely positive, placing the drug on the fast track to rival Revlimid’s revenue. Celgene has been hot in the wake of news that the company has formed a strategic collaboration with Presage Biosciences for that firm’s proprietary platform to identify novel drug combinations for solid tumor indications. The technology allows for faster results leading to the most personalized and effective treatment regime. Looking at the numbers, Celgene has averaged revenue growth of 29% during the past five years, with earnings growth of more than 70% annually during that timeframe. The company also sports free cash flow of 35% of annual sales, giving Celgene ample cash to divert into R&D. Despite this strong balance sheet, Celgene has a P/E ratio of just 23, compared to the industry average of 46.3, giving the company an attractive valuation for potential investors.
Technical Analysis
CELG has been on the move in 2013. Following a controlled rebound from its 200-day moving average in June, CELG rose steadily toward resistance near 80 in December. The stock broke out in early January on positive guidance, eventually consolidating near 100, before breaking out once again in early March. CELG is currently perched just north of 110, as investors once again pause to digest the stock’s breakneck rally. The stock remains a great buy-and-hold investment, and we think it’s buyable here or, preferably, on a little weakness.
CELG Weekly Chart
CELG Daily Chart
Citigroup Inc. (C)
Why the Strength
As we noted when Citigroup made its second appearance in Cabot Top Ten Trader in January, banks with huge market caps don’t show up here often. But Citigroup’s market cap has now jumped from $110 billion in January to near $144 billion today, so Citigroup must be doing something to appeal to investors. It turns out that the company’s mix of banking, investment, insurance and credit card services in more than 160 countries is a good, conservative play on the recovery of the global economy. In addition to the macroeconomic lift Citigroup is getting, CEO Mike Corbat has been setting new standards for revenue growth, efficiency improvements and lower credit losses. Expenses have been tightened up and the company has announced the redemption of $3 billion of trust preferred securities, bringing the total retirement of high-coupon securities to $9.4 billion since the beginning of 2012. Moves like these are quietly making Citigroup into a leaner business with higher profit potential. Citigroup stock was trading at a P/E ratio of 12 when we recommended it in January. That P/E has now increased to 14, reflecting improved investor perception of the company. And that’s still cheap.
Technical Analysis
C put in a sloppy double bottom under 24 in late 2011 and soared to 38 in March 2012. An eight-week dip back to 25 in the middle of the year proved to be a shakeout, and the stock got moving again in July and hasn’t had a big correction since. The latest rally came after the stock spent most of January and February trading sideways in a range between 41 and 44. C dropped to its 50-day moving average in late February, but rode it higher until the stock took off again in March, which has been a good month. C has dipped from 47 to 46 on the upsetting news out of Cyprus, but that’s likely to represent a good buying point, not the start of a new correction. C is a good buy anywhere under 46.
C Weekly Chart
C Daily Chart
Aruba Networks (ARUN)
Why the Strength
These days, just about everyone you know probably owns a smartphone, tablet or both, and they use them all the time. Yet when these same people head to work, they usually have to use a company-issued laptop or smartphone to access the company’s network and any important data; it’s the company’s way of ensuring proper security and access rights (so employees only get access to stuff they’re supposed to). It makes sense, but it’s tremendously cumbersome and results in a ton of extra cost for the company. Enter Aruba Networks, which is focused on providing networking equipment that allows so-called BYOD (Bring Your Own Device), helping companies and other large entities (government agencies, college or other campuses, etc.) save money, simplify operations and, importantly, make life easier for employees. Aruba has competition from the usual suspects like Cisco, but management remains confident that their technology is best-in-class; in the latest conference call, the top brass said their win rate against Cisco may have actually increased of late, despite some new Cisco product introductions. Analysts see earnings growth in the 25% to 30% range for the next few quarters, and while Aruba doesn’t offer anything revolutionary, we think demand for its BYOD solutions should stay strong for a long time. We like it.
Technical Analysis
ARUN had a huge run through early 2011, then fell apart as growth slowed a bit, finally bottoming last August before rebounding for a few weeks. Then came a multi-month base, which looked constructive, followed by a monstrous-volume gap up on earnings in late February. Impressively, since that gap, ARUN has traded very tightly (see weekly chart) as it hovers in the mid-20s. We think it’s buyable around here, or on any weakness, with a stop around 23.
ARUN Weekly Chart
ARUN 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.
