More Growth, Some Froth
The market continues to act excellently, and we’re pleased to see more and more growth-oriented stocks flex their muscles, while many defensive sectors take a breather. Of course, part and parcel of that is that we’re seeing a little froth; investor sentiment is getting a bit giddy as some names explode higher. That doesn’t mean a top is imminent—our Market Monitor is solidly in the bullish camp—but it does mean you should be prepared for some news-driven potholes. Overall, you should be holding your best performers and putting more money to work at good entry points, but be sure not to get carried away after a good few months.
This week’s list has an impressive array of stocks that are showing extremely powerful accumulation. Our favorite of the week is SodaStream (SODA), which is very volatile but just broke out on earnings last week on very big volume.
| Stock Name | Price | ||
|---|---|---|---|
| Uni-Pixel (UNXL) | 0.00 | ||
| SodaStream (SODA) | 142.91 | ||
| Spirit Airlines (SAVE) | 57.03 | ||
| Oceaneering International (OII) | 0.00 | ||
| Ocwen Financial (OCN) | 0.00 | ||
| Meritage Homes (MTH) | 102.20 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| Fortune Brands Home & Security (FBHS) | 81.02 | ||
| Electronic Arts (EA) | 0.00 | ||
| Ctrip.com International Ltd. (CTRP) | 34.94 |
Uni-Pixel (UNXL)
Why the Strength
When Uni-Pixel, a maker of engineered films for touch-screen devices that are both cheaper and more energy efficient than the current standard, made its debut in the March 11 Cabot Top Ten Trader, its stock was trading at 29 and the company’s record was dismal, showing two consecutive quarters with no revenue at all. But the potential for grabbing a sizable chunk of business in a very hot industry was intriguing; the company’s films resist fingerprints, kill viruses and bacteria and reduce glare, and its UniBoss process can be used to produce printed circuits on flexible films. The story has been like catnip to investors, and there has been a swirl of news, including a lawsuit with a one-time British collaborator, a tie-up with Kodak to start a production facility and (inevitably) a rumor that Apple is going to incorporate Uni-Pixel technology into a new touch-screen MacBook Pro. The company’s latest earnings report on April 30 produced more revenue than analysts had expected ($5 million was an engineering milestone payment from a PC manufacturer), but missed on earnings, realizing just seven cents per share when analysts had predicted 12 cents. All in all, Uni-Pixel remains a very hot, very speculative company, whose huge potential is balanced by equally large risks. If you want in, you need to pay close attention and watch your stops.
Technical Analysis
UNXL came public in late 2010, and spent almost two years bumping around in single digits. But there was a steady climb from 4 in August 2011 to 7.5 in December 2012. UNXL got its first real blastoff on December 10 when it jumped from 10 to 15 in one day, and trading volume swelled, and it made a couple of runs at 40 in April, but pulled back after its earnings report and has been trading quietly above support at 32–33. The stock’s 25-day moving average has just caught up with it. If you like the high-potential story, you can take a small position under 35 and average up if the stock pushes back above 40. A dip to 30 would be a warning sign.
UNXL Weekly Chart
UNXL Daily Chart
SodaStream (SODA)
Why the Strength
SodaStream is quickly becoming the Green Mountain Coffee Roasters of the soft drink world. The company manufactures home carbonation systems that turn your own tap water into soft drinks and sparkling water. Via some 35,000 retail stores, SodaStream sells countertop soda makers powered by CO2 cylinders. Naturally, SodaStream offers CO2 refills and cylinder exchanges, a whole cadre of soda flavors, as well as soda bottles and accessories. Targeting both cost-conscious and environmentally-concerned consumers, SodaStream touts its lower cost per liter and its green advantage over store-bought beverages due to its reusable bottles. With an average revenue growth of 47% over the past four quarters, SodaStream is making significant strides in market acceptance. In the most recent quarter, SodaStream saw revenue rise 35% year-over-year, with significant growth in the U.S. and Western Europe offsetting weakness in the Asia Pacific region. What’s more, sales of consumables (the soda flavors and CO2 refills) rose 19.6% on the quarter. Consumables are a significant factor for SodaStream, providing 54% of the company’s revenue. Inroads into the U.S. are apparently faring well, as the company saw soda maker sales growth of 68% and consumables sales growth of 109%. Judging from these figures, it’s clear that SodaStream has tapped a vein in the U.S. market, one that could provide considerable growth going forward.
Technical Analysis
After going public in late 2010, SODA rocketed skyward, but the stock quickly found that its early heights near 80 were unsustainable, freefalling to 35 by the end of August 2011. The next year brought a rollercoaster ride for investors, with SODA bouncing between support near 30 and resistance near 40—with brief breakouts to 45 and 50. The stock finally found its footing in November 2012, establishing support at its 10-day and 25-day moving averages. The rally paused in February, with SODA jostling between 45 and 55, but a solid quarterly earnings report reinvigorated investors, sending shares soaring toward 60. You could take a small position here in anticipation of a continuation rally, or take larger bites on any pullbacks to the 56 region.
SODA Weekly Chart
SODA Daily Chart
Spirit Airlines (SAVE)
Why the Strength
Over the long run, airlines are notorious for being horrible investments, as the sector is not only beholden to the economy, but to huge regulations, lots of competition, repeated labor issues and the ups and downs of fuel prices. However, when the stars align, the group can actually perform very well, and this looks to be one of those times. Spirit Airlines is one of the strongest in the group, and we can actually get excited about it because it’s young, has some of the lowest costs in the industry and is still in growth mode—in the recently reported first quarter, Spirit not only saw sales rise 23% and earnings leap 36%, but that was bolstered in part by a 21% jump in overall capacity. And there’s more on the way, as the firm’s fleet should expand by another 10% (to 54 jets) by year-end, which will aid it in adding new routes. Yet even with those additional planes, the company’s base fares remain the lowest in the industry, averaging $79.09, while non-fare revenue (think bags, etc.) averaged $54.75, both up mildly from a year ago. Another reason to like Spirit is that it’s not getting carried away with its success; management has taken on no debt, and the firm holds $484 million in cash, the equivalent of 22% of the stock’s market cap! Analysts see earnings up 48% this year and another 21% next year. We think Spirit and the group as a whole has room to run.
Technical Analysis
SAVE more than doubled in its first year after coming public, rising to 24 by May of last year. But then the wheels came off, with the stock falling back into the mid-teens as economic and political fears punished most cyclical stocks. This year, however, SAVE has soared to new highs, including a big-volume ramp following its great quarterly report. We don’t advise chasing it here, but a dip of half a buck or more, with a stop near 26, should work well.
SAVE Weekly Chart
SAVE Daily Chart
Oceaneering International (OII)
Why the Strength
To a technophile, Oceaneering International is possibly the coolest provider of oilfield services. Why? Because the company is the world’s largest provider of underwater oilfield robots. What’s even more impressive, especially if you are an investor, is that the underwater robots business has become extremely lucrative. In fact, in late April, Oceaneering hit the trifecta by beating first-quarter earnings expectations, lifting its fiscal 2013 earnings guidance and boosting its quarterly dividend. A quick overview of the numbers reveals that the company banked a 47% jump in quarterly earnings on a 22% rise in first-quarter revenue, maintaining a trend of double-digit revenue and earnings growth during the past four quarters. Additionally, Oceaneering boosted its 2013 earnings range, while lifting its quarterly dividend 22.2% to 22 cents per share. With global oil demand showing no signs of diminishing, and deep-water drilling becoming more and more common, Oceaneering stands as the leading specialist in remotely operated vehicles (ROVs) designed to handle technical tasks and inspections as deep as two miles below the ocean surface. This specialization gives the company unique pricing power in the market, offering investors an opportunity to get in on the future of deep-water oil services.
Technical Analysis
While the trek has been rocky, OII shares have trended higher since setting a double bottom at 20 in 2009 and 2010. Throughout this rally, OII has followed its 50-week moving average higher, and the trendline teamed up with the 50 level to provide key support in the final quarter of 2012. The stock topped 60 in mid-January, but quickly met with resistance near 65. This area capped OII until March, when a period of volatility forced shares to support in the 60 region. A solid quarterly earnings report ended this period of weakness, sending OII soaring past 70, where it’s currently digesting its recent gains. You can take bites here as the stock takes a breather, or buy on controlled pullbacks if you are looking for a better entry point.
OII Weekly Chart
OII Daily Chart
Ocwen Financial (OCN)
Why the Strength
There’s a once-in-a-lifetime shift going on in the mortgage servicing industry, as the huge banks that have been hit over the head with new regulations are eager to shed non-core assets and responsibilities, like servicing sub-prime loans that are a pain to deal with. The end result is that hundreds of billions of dollars of these loans have been sold off, and there’s likely more than a trillion dollars more to go! Ocwen is a leader in this new, emerging field, specializing in servicing these loans successfully (by bringing down delinquency rates) and making a ton of money while they’re at it. Perhaps most impressive is that Ocwen has already built up such a huge book of business (servicing north of $450 billion of mortgages) that even if it did little else but service these loans, it would produce an unbelievable $7 billion during the next 10 years in free cash flow. This year alone, free cash flow might total more than $1 billion. All this for a firm that’s valued at less than $6 billion by the market! And there’s still plenty of growth potential; Ocwen’s CEO believes this shift from the balance sheets of big banks to firms like Ocwen is in the middle innings, with hundreds of billions of dollars of attractive acquisition opportunities likely during the next 12 months. We think it’s a big idea.
Technical Analysis
The market began catching wind of OCN’s potential last spring; the stock was a decent performer before then, but then exploded from 15 in May to 40 by September. Then began a long, gyrating consolidation phase; there were ups and downs, but at the end of April, this stock had gone nowhere for nearly seven months. But now the buyers are back—OCN held above its 40-week line, and its bullish quarterly report two weeks ago has helped kick the stock back toward its old highs. It’s sure to be volatile, but we think buying some around here, with a stop just below 38, will work well.
OCN Weekly Chart
OCN Daily Chart
Meritage Homes (MTH)
Why the Strength
The annualized pace of housing starts in the U.S. recently regained the one million level, but that still leaves it 50% short of the average over the past five decades! That, in a nutshell, is why we think the housing bull market has a ways to go, and Meritage Homes looks like one of the better ways to play it. What interests us about this firm is that it operates in many locales that were hardest hit during the 2006-2011 bust, and those areas are rebounding the fastest. For instance, in California, Meritage’s management just said that quarterly order rates are the highest they’ve seen in many years, even back to 2005 or before! The company also has operations in Arizona, Florida, Colorado, Texas and the Carolinas, and all are storming back as home prices remain relatively depressed and mortgage rates are still hovering near record lows. As for actual results, they’ve been spectacular—in the first quarter, the firm’s total dollar backlog rose 89% despite a huge increase in sales and earnings. And the top brass expects earnings per share to leap into the $2.20 to $2.45 range this year, expressing confidence the housing rebound should persist as pent-up demand continues. (Analysts see 2014 earnings of $3.70 or so.) The one risk comes from the cost side, as many building material prices are approaching the elevated levels of a few years ago, but with home prices rising (Meritage’s average new order price was up a whopping 25% in the first quarter), profit margins are still able to expand. We like it.
Technical Analysis
Like many homebuilders, MTH has been hard to handle in recent months, but now appears to be on its way higher. The stock basically topped out in September just above 42, and had a few sharp moves after that in both directions. But MTH was standing at 40 (right on top of its 200-day moving average) in mid-April, basically making no progress during a seven-month period. Then came a huge-volume advance three weeks ago, with shares pushing higher since. We think the path of least resistance is up; you can buy here or on any weakness.
MTH Weekly Chart
MTH Daily Chart
MercadoLibre, Inc. (MELI)
Why the Strength
Argentina-based Mercadolibre has long been known as the “eBay of Latin America.” And there are plenty of resemblances, including both fixed-price and auction listings for items offered for sale, a system of advertising (MercadoClics) that offers businesses an opportunity to promote themselves, a secure online payment system (MercadoPago) that parallels eBay’s PayPal system and a MercadoShops program that helps sellers build online shops. MercadoLibre is even 18% owned by eBay! The company has booked seven years of revenue growth of 25% or more and estimates are for 22% earnings growth in 2013. Mercadolibre is certainly no stranger to Cabot Top Ten Trader, having achieved All-Star status with 15 previous appearances. But the company’s business is sensitive to the macroeconomic environment and can be hurt by currency fluctuations. On the plus side, the build-out of the mobile network in South and Central America is increasing the potential customer base for smartphone and tablet users. The company’s earnings report on May 7 beat earnings expectations by a bit and revenue estimates by a wide margin ($102.7 million vs. consensus $97.4 million). As a gradually improving U.S. economy strengthens the economies of North and South America, the prospects for Mercadolibre appear healthy once again.
Technical Analysis
MELI has been in an uptrend since late last November, soaring from 70 to its current 120 in a little over five months. The stock put in two nice bases during this rally, one in January and February in the high 80s and another in March and April in the mid-90s. The rally that began on April 19 finally broke out above 100 earlier this month, and the earnings-fueled gap up on May 7 approached 125 before settling down near 120 to digest its gains. MELI may need a little time to consolidate this atypical leap, and we think you should be able to get in on a dip toward 115 with a little patience. The 25-day moving average is far behind at 101, and a pullback to 100 would be bearish.
MELI Weekly Chart
MELI Daily Chart
Fortune Brands Home & Security (FBHS)
Why the Strength
Fortune Brands Home & Security has a relatively short history as an independent company, having been spun off in late 2011. But the company hit the jackpot in timing terms, offering its specialized portfolio of home plumbing and cabinetry brands to investors just as the U.S. housing and remodeling industry was coming out of its post-housing bubble depression. Fortune Brands offers quality products under the Moen, Simonton, KitchenCraft, Omega, Master Lock, Waterloo and other brand names. With both new home construction and remodeling gathering speed, demand for the company’s faucets, accessories, kitchen and bath cabinets, windows, door systems and security products has been robust. While revenue has grown in the single digits for the past three years, Fortune Brands’ Q1 earnings report on May 3 featured an 11% jump in revenue and a 200% jump in earnings. Management also raised its full-year earnings outlook to $1.23–$1.33 per share, which was at the high end of estimates. The other piece of news that contributed to investors’ enthusiastic response was the announcement that Fortune Brands would acquire WoodCrafters Home Products, a maker of bathroom vanities. The addition of a well-known brand that fits right into Fortune’s lineup should yield positive results in short order.
Technical Analysis
FBHS has been a very strong performer since it came public at 12 in September 2011. The stock hit 38 on March 21, then corrected to 33 in early April. Investors penned the stock in a very tight range ahead of earnings with eight days between 36 and 37. So there was a nice base for the good earnings news to use as a launching pad. FBHS jumped to 40 on May 3, and has inched higher since. FBHS—and its 1.0% dividend yield—looks like a good way to play the recovery in the U.S. housing market. A buy on a dip of a half a point, with a stop at 36, makes sense.
FBHS Weekly Chart
FBHS Daily Chart
Electronic Arts (EA)
Why the Strength
One of the largest video game publishers in the world, Electronic Arts produces such top-line game franchises as Battlefield, Madden NFL, The Sims and Need for Speed. The company also publishes games based on other media franchises such as Harry Potter. Last week provided a wealth of positive data for the company. First, EA announced that it has renewed its exclusive licensing agreement with FIFA (the International Football Association) through 2022, once again locking down the company’s dominance in the sports gaming genre. Next, EA signed a multi-year deal with Walt Disney to collaborate on Star Wars video games that spans consoles, PCs, tablets, mobile devices and more. The week was capped off by EA’s fourth-quarter earnings report. While the report itself was nothing to write home about, with EA posting a 12% year-over-year decline in revenue amid a 224% surge in earnings per share, the company’s fiscal 2014 guidance looks impressive. Specifically, EA now anticipates earnings of $1.20 per share versus analyst expectations for $1.08 per share. What’s more, the company’s shift toward digital operations is starting to pay off, with digital revenue up 6% year-over-year, led by a 54% spike in subscriptions and in-game advertising revenue. With a whole new galaxy to play in, and its shift toward digital taking hold, EA is well positioned to continue to outperform its peers.
Technical Analysis
After spending the last half of 2011 and the first half of 2012 in a near free-fall, EA shares embarked on a tentative road higher in the latter half of 2012; the stock has enjoyed solid support at its 10-week and 25-week moving averages since November, and hasn’t closed a week below them since. The stock looked to challenge the 20 level in March, but was forced to regroup near support at 17. Last week’s deluge of positive data, however, finally provided the impetus for EA’s breakout above 20. With the stock fresh off a blistering short-term rally, controlled pullbacks or consolidation offer the best entry points.
EA Weekly Chart
EA Daily Chart
Ctrip.com International Ltd. (CTRP)
Why the Strength
Ctrip.com, the Chinese online travel agency, first appeared in Top Ten in March 2008 as a nine-year old baby with annual revenues of less than $160 million. But it had already grown from its tiny beginning as an aggregator of unused hotel accommodations into a full-service travel planning and booking service. The company’s revenue mix is still evenly balanced between hotel reservations (40%) and airline tickets (39%), with packaged tours kicking in 14% and services like corporate travel arrangements making up the rest. Revenue growth has slowed in recent years, hitting just 21% in 2012, but the company’s Q1 results on May 9 showed surprising strength with a 29% jump in revenue. While the after-tax profit margin shrank to 22.8%, investors were pleased by the unexpectedly robust revenue growth and management’s rosy outlook for the current quarter. A strong push into mobile travel booking on mobile devices is one reason for the optimism. As often happens when a company has been enjoying great support from investors, one analyst (Goldman) has just lowered its rating on Ctrip.com’s stock from buy to neutral, citing high valuations, but that’s short-term. Long-term, the scale of the potential customer base in China, coupled with increasing penetration of smartphone technology augurs well for Ctrip.com’s future.
Technical Analysis
CTRP finished an emphatic 20-month correction from over 50 to 12 in August 2012, and rebounded to 25 by January 2013. A correction to 20 was followed by a nicely shaped re-basing that took 14 weeks of trading on calm volume to get back to resistance at 22.5. May produced a push to 24, when the good earnings news ignited a jump to 30 in one day. The Goldman downgrade produced a point-and-a-half dip, but CTRP looks to be under control. We think CTRP is buyable anywhere under 28.5 with a stop at 24 (the bottom of the stock’s gap).
CTRP Weekly Chart
CTRP 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.
