A Choppy Uptrend
The title says it all—overall, the trend remains up for the major indexes and most stocks and sectors, and so our Market Monitor remains in bullish territory. But there’s also no question that the environment is whippy; big moves happen almost daily, and earnings season continues to bring a bunch of big moves in both directions. None of this is bad, per se, but it does mean you have to be more discerning with your buys and make sure your timing is right and your stops aren’t too tight.
This week’s list has yet another impressive crop of stocks with good stories and charts that have shown large recent buying power (usually on earnings). Our favorite is Yelp (YELP), a relatively recent IPO that has a great, sustainable story, rapid sales growth and a stock that just exploded higher on earnings.
| Stock Name | Price | ||
|---|---|---|---|
| Yelp (YELP) | 41.30 | ||
| Trulia (TRLA) | 0.00 | ||
| Seagate Technology (STX) | 0.00 | ||
| Parexel Corp. (PRXL) | 0.00 | ||
| IntercontinentalExchange, Inc. (ICE) | 0.00 | ||
| Hertz Global Holdings, Inc. (HTZ) | 0.00 | ||
| Hornbeck Offshore (HOS) | 0.00 | ||
| Guidewire (GWRE) | 90.60 | ||
| Gilead Sciences (GILD) | 75.10 | ||
| EQT Corporation (EQT) | 0.00 |
Yelp (YELP)
Why the Strength
Yelp is the third recent IPO in today’s Top Ten, and it might have the best story of them all. The company is becoming the 21st century, interactive version of the yellow pages; it’s essentially the de-facto search engine that connects local businesses with consumers who are ready to buy. One study showed that just having a decent presence on Yelp can boost sales by about $8,000, with that number tripling if it’s combined with marketing efforts. All of this is leading to more businesses signing up, which is attracting more individuals to the site, which is leading to greater and greater advertising opportunities. Revenue growth has been rapid (see table below), as has the growth in reviews (now 39 million, up 42% from a year ago), monthly unique visitors to the site (102 million, up 43%) and active local business accounts (45,000, up 63%). These days, much of the viewership is taking place on mobile devices, and Yelp has a burgeoning business in that area; 45% of the firm’s searches in Q1 came on mobile devices, and Yelp’s mobile app is used on more than 10 million devices. Today, most of the revenue is in the U.S., but the company now has operations in 21 countries (New Zealand is the latest), so there’s every reason to expect years of growth ahead. Earnings remain in the red, but that’s because management is investing; cash flow is already positive and the bottom line should hit the black during the next couple of quarters. With competition at bay (Yelp is the hands-down leader in content and viewership), we think this is a good, sustainable growth story.
Technical Analysis
YELP gyrated all over the place from its initial offering in March 2012 through last October, a clear sign not many big investors were involved. However, since then, the trend has been both up and persistent; YELP chugged higher for a few months before launching to the moon last week on humongous volume (the stock rose 27% on Thursday, with volume eight times normal!). Given that many recent earnings gaps have invited some short-term selling (see charts of NOW and ANGI), you can buy around here with a loose stop in the 26 to 27 area.
YELP Weekly Chart
YELP Daily Chart
Trulia (TRLA)
Why the Strength
Trulia is one of a handful of leading online real estate websites that’s growing like mad as more and more consumers search for homes online. Of course, with more buyers online, the real estate agents aren’t far behind, and that’s where Trulia makes most of its money; the company’s “marketplace” revenue, which generally consists of premium subscriptions for agents, made up 70% of total revenue in the first quarter and was up 100% from the year before. Agents can get on the site for free, establish a profile and contribute content (answer questions, comment on listings, etc.), but a paid subscription allows them to promote their own listings in search results, target mobile users and generally get more high-qualified leads. The rest of Trulia’s revenue comes from advertising (up 91% in the first quarter), which is driven by the awesome user growth seen both for the company as a whole (31.4 million unique monthly users, up 52% from a year ago) and especially for mobile (11.4 million users, up 122%!). The bigger question is: What does Trulia have that companies like Zillow or Redfin don’t? And the answer seems to be user-generated content—Trulia has the largest database of real estate-related, user-generated content (neighborhood reviews, agent recommendations, etc.), which creates a network effect of higher traffic and more buy-ready customers. Whatever the reason, the company is growing rapidly; growth is accelerating and cash flow is picking up quickly. It’s still very small (just $80 million in revenue), but we see big potential.
Technical Analysis
TRLA came public last September, right near the market’s high, and proceeded to plunge from a peak north of 26 to a low south of 15. But after a brief bottoming period, the stock zoomed to 38, pulled back sharply and has been riding its 50-day line higher since. Last week was a big one, with TRLA boosted by its blowout earnings report, and the stock moving above resistance at 34. This is a thin, volatile stock, so you shouldn’t invest the rent money. But a small position around here, with a stop near 30, makes sense.
TRLA Weekly Chart
TRLA Daily Chart
Seagate Technology (STX)
Why the Strength
Seagate Technology is strong today for two main reasons. First, the combination of the devastating Thai floods in late 2011 (which permanently altered the supply chain in the hard disk drive industry) and consolidation in the sector (less competition) looks to have permanently raised prices and profitability for Seagate and Western Digital, which together control north of 80% of the worldwide market. Now, to be sure, hard disk drives aren’t exciting, but demand is steady thanks to the explosion in Cloud computing (data center storage), which is offsetting weak computer sales. The end result isn’t rapid growth, but instead, elevated earnings that are looking more and more sustainable ... and that leads to the second big reason for the stock’s strength; Seagate pays a big dividend and plans to buy back a tremendous number of shares. Specifically, management is targeting a share count of 250 million by the end of 2014, about a 30% decline from current levels! As for the quarterly dividend, it totals 38 cents per share for an annual yield of 3.8%; management believes it can steadily increase its per-share payout as the share count comes down and earnings remain buoyant. Speaking of earnings, analysts see the bottom line totaling around $5.50 per share both this year and next, so you’re talking about a stock that’s trading around seven times earnings, with a yield near 4%, and a company that plans to buy back more than 1% of its stock every month. It’s not a great growth story, but in this lower-risk, dividend-hungry environment, Seagate looks good.
Technical Analysis
STX has been a tough horse to ride during the past few years—it more than tripled from its low in the fall of 2011 through the spring of 2012, but then had some wild ups and downs, correcting from 32 to 22, then zooming to 35 in the fall, then back down to 25, and then back up to 38 around year-end. Yikes! However, this year, STX has acted much more calmly, building a tighter 13-week base through April, and then breaking out powerfully on its earnings report late last week. We think it’s buyable on any weakness, with a stop around 37.
STX Weekly Chart
STX Daily Chart
Parexel Corp. (PRXL)
Why the Strength
Parexel International is a biopharmaceutical services firm that helps customers control costs and speed up the path to pharmaceutical approval. When Top Ten last zeroed in on Parexel, we were excited about the company’s fiscal 2012 revenue growth of 14%, which was more than double 2010’s growth rate. Parexel has since entered the earnings confessional once again, releasing its third-quarter earnings report on May 1. The company proved that its sales growth is still picking up with revenue rising 27% year over year. In fact, sales growth has averaged 27% during the past year, with earnings growth averaging 104% during the same period. Parexel’s biggest success story, however, was news that gross margins at its Clinical Research Services improved 3.5 points, driven by improvements in efficiency and productivity and by the company’s ability to convert contractors to full-time employees. Lastly, the company is looking to improve its Consulting and Medical Communications Services (CMCS) division. Specifically, Parexel is acquiring the Heron Group, an evidence-based life sciences consulting company that provides commercial decision support services. While CMCS’ margins were down, Parexel believes that the Heron acquisition will help set things back on the right path.
Technical Analysis
PRXL spent much of 2010 and 2011 bouncing between support near 20 and resistance at 25. The trend ended in January 2012, when a large-volume rally sent shares skyward. PRXL hasn’t looked back since, with shares garnering key support from their 10-week and 25-week moving averages. Heading into the company’s Q3 earnings report, PRXL was bumping up against resistance at 40, but a solid quarterly report sparked another surge in volume, sending the stock toward a multi-year high just shy of 45. With the post-earnings buying spree nearly played out, you should consider any short-term weakness as a buying opportunity.
PRXL Weekly Chart
PRXL Daily Chart
IntercontinentalExchange, Inc. (ICE)
Why the Strength
IntercontinentalExchange is a big operator of financial markets and clearing houses, and it’s looking to get a lot bigger if its planned purchase of NYSE Euronext goes through in the months ahead. For now, there’s not a ton of growth to this story—sales and earnings have been basically flat for the past few quarters. But investors are optimistic that Intercontinental’s increasing share in the global energy markets (bolstered by a recent expansion into the natural gas trading area), its move into adjacent markets (it launched a whopping 29 new contracts in the energy, environmental, freight and metal sectors in late-April) and the general uptick in financial markets around the world will help results going forward. Indeed, this firm is something of a Bull Market stock, benefiting from buoyant market action, and some of that may finally be hitting results; after releasing its so-so quarterly report last week, the company said overall futures volume on its exchanges was up 18% in April (boosted by a 26% gain in the firm’s core oil contracts), compared to a flat-ish performance for the first three months of the year. As it stands today, analysts see earnings picking up in the low to mid-teens both this year and next, but that could prove conservative if the NYSE deal gets finished up and the global markets remain in good shape.
Technical Analysis
ICE used to be a great growth story after it came public in late-2005, but it’s morphed into more of a sure, steady grower as it expands its offerings. The stock had been dead in the water in recent years, basically trading between 100 and 140 since mid-2010, but it’s shown some life in 2013; shares reached multi-year highs in February, paused for a few weeks, and then bolted ahead on great volume last week. We’re not expecting a huge upmove, but as a conservative stock that’s tied to the health of the markets, ICE looks buyable on weakness.
ICE Weekly Chart
ICE Daily Chart
Hertz Global Holdings, Inc. (HTZ)
Why the Strength
The rapid consolidation of the rental car business has produced excellent opportunities for investors, as a gradually improving economy and more efficient operations yield higher profits. Hertz Global Holdings was featured here back in February, and Avis Budget Group (CAR) made its debut here in April. Hertz is getting a surge in investor interest from its takeover of Dollar Thrifty Automotive Group earlier this year, a move that made Hertz the top dog in the industry, as well as giving it an entrée into the lower-priced end of the rental market. The company’s Q1 earnings report on April 29 featured a 21 cent per share profit, which beat the consensus number of 16 cents by a wide margin. Revenue was up 24% to $2.44 billion, while projections were for just $2.39 billion. According to management, the integration of operations from the Dollar Thrifty acquisition is proceeding more quickly than expected. Guidance for the rest of the year was also higher than expected. With solid revenue and earnings outlook, support for the rental story from Avis and a macroeconomic push behind the rental business, Hertz Global looks like a solid winner.
Technical Analysis
HTZ broke above resistance at 15 in late November and hasn’t had two consecutive down weeks since. From that base at 15, HTZ is not pushing above 24 and hasn’t closed below its 25-day moving average since late December. Through this rally, the stock has maintained contact with its moving averages, so we can’t say that it’s really extended. The stock’s action since the beginning of April has been a little jumpier than before, so it’s likely that you can sharp-shoot an initial position on a pullback of at least half a point. With a stock this channeled, a dip below the 50-day (now at 22.2) would be a warning sign.
HTZ Weekly Chart
HTZ Daily Chart
Hornbeck Offshore (HOS)
Why the Strength
Despite the excitement about natural gas drilling and production in the U.S., offshore drilling remains an important component of the global petroleum exploration and production world. Hornbeck Offshore specializes in supplying offshore rigs with everything they need to operate, including drilling equipment, supplies for rig crews and transport for both drilling fluids and other liquids. Hornbeck’s fleet of 48 offshore supply vehicles (OSVs) includes 24 vessels designed specifically for the task by the company’s naval architects. Larger multipurpose supply vehicles (MPSVs) support installation, maintenance and decommissioning of offshore platforms, while tugs and tank barges move oil and other fluids around in the Northeastern U.S., the Great Lakes and Puerto Rico. Hornbeck is constantly adding to its fleet, and increased demand led to a 34% gain in revenue in 2012. Right now, however, it’s the company’s Q1 earnings report that showed a 119% leap in earnings on 23% revenue increase (and the 14.5% after-tax profit margin) that’s piquing investors’ interest. There is some risk in having 30% of Hornbeck’s revenue coming from two customers, and short interest is moderately high. But that great Q1 report is catalyzing lots of support.
Technical Analysis
HOS has only been featured once before in Top Ten, back in late 2011. But the stock has been in a long-term uptrend since the middle of 2010. High volatility (the stock’s beta is over 2) has kept HOS from being a favorite of growth investors. But after trading sideways since the first week of February, HOS popped from 45 to 50 on May 2, with excellent volume support. HOS is still trending up, but will eventually have to either pause or correct to reestablish a connection with its 25-day moving average, which is back below 44. HOS will likely cool off toward 50 in the near future, and that’s where to jump on. A stop below 45 looks prudent.
HOS Weekly Chart
HOS Daily Chart
Guidewire (GWRE)
Why the Strength
One of the consequences of the migration of so many businesses to computer-based records and the Cloud is the appearance of customized software that’s specialized for a particular segment. For Guidewire Software, the narrow slice of the business world that’s addressed is the property and casualty insurance industry. With Guidewire software, paper policies are a thing of the past, as policies are underwritten, administered and billed electronically, and claims and reinsurance management are built-in functions. The requirements of the insurance business are very strict, and a successful software company has to have a deep, thorough understanding of the legal and regulatory environment. And Guidewire has just that kind of understanding for any country, although the vast majority of its clients are in the English-speaking world. The company grew revenue at 35% in 2012, and its 40% jump in earnings in fiscal Q1 (reported on February 27) was way above estimates. The company’s fiscal Q2 results are due out in early June.
Technical Analysis
GWRE is making its first appearance in Top Ten. After coming public at 13 in January 2012, the stock nearly tripled, hitting 38 after eight weeks of trading, but an 11-week correction set up a solid base at 22 and the stock has been looping higher ever since. The late-February pop from 31 to 38 (after the strong results described above) led to a seven-week consolidation with support at 36. GWRE caught another updraft in late April and has traded above 40 in May. While it’s not expected to be a rocket, GWRE represents a company with a strong position in a growing niche market, and looks buyable on any dip below 41. A drop below 36 would be bearish.
GWRE Weekly Chart
GWRE Daily Chart
Gilead Sciences (GILD)
Why the Strength
As you can tell from recent Top Ten activity, the biopharmaceutical sector has been a hotbed of bullish market action. One company taking Wall Street by storm in recent weeks has been Gilead Sciences. The company has made a name for itself with its blockbuster HIV/AIDS drugs, with 2012’s introduction of Stribild creating quite a stir. The best part of Stribild is that the drug is made entirely from ingredients manufactured in-house. But Gilead isn’t a one-trick-pony; it also has top selling medications for the treatment of liver disease, pulmonary arterial hypertension, chronic angina, lung infections in cystic fibrosis patients, flu, fungal infections and other conditions. But the reason for Gilead’s recent success comes from solid Phase II trial data for the company’s up-and-coming hepatitis C treatment. Specifically, the company’s combination treatment of sofosbuvir and ledipasvir reportedly sports a 95% cure rate in most cases, and a 100% cure rate under very specific circumstances. In early 2012, Gilead spent $11.1 billion to buy hepatitis C drug developer Pharmasset, giving the company control of sofosbuvir, and if trial data continues to show results this promising, Gilead’s gamble could pay off in spades. Anticipating this, analysts see earnings booming next year.
Technical Analysis
GILD put in a solid 2012, rallying nearly 100% on the year. What’s more, 2013 is on course to show similar gains! After pulling back to support at its 25-week moving average in January, GILD has since followed its 10-week trendline steadily higher. In mid-April, GILD topped potential psychological resistance at 50, and following two consecutive sessions of strong volume on Phase II results, GILD is now trading at all-time high levels. You could take small bites here, but given the stock’s recent surge, you might want to wait for a period of consolidation before jumping in.
GILD Weekly Chart
GILD Daily Chart
EQT Corporation (EQT)
Why the Strength
Oil and natural gas explorer/producer/distributor EQT Corp. is making its debut in today’s Cabot Top Ten Trader. This Pittsburgh-based company has been in the drilling business in the Appalachian basin for more than 120 years, and has made the transition to natural gas in a big way. The company’s 3.5 million acres of drilling area include 540,000 acres in the highly productive Marcellus shale area and it just moved to acquire an additional 99,000 net acres and 10 horizontal wells in the Marcellus play. With 14,000 productive wells and 6.0 trillion cubit feet of proved reserves, EQT has lots of product to sell. The company’s midstream operation includes 11,000 miles of pipeline that give it access to natural gas markets in the Northeast U.S. The company’s efforts to encourage the adoption of natural gas as a vehicle fuel include a fleet fueling station in Pittsburgh and the conversion of 20% of its Marcellus vehicles to natural gas fuel. After flat revenue growth in 2012, EQT’s revenue popped 24% higher in Q1, with earnings up 38%. EQT Corp. pays a tiny dividend, but it’s the company’s aggressive drilling program in one of the most productive natural gas regions around that’s catching investors’ interest.
Technical Analysis
EQT spent six months in a trading range under resistance at 62.5 before catching a wave higher in late February. That rally pushed the stock to 70 in mid-April. After another correction to 66, EQT got moving again and was cruising higher at 69 when the news of the company’s acreage and well-buying pushed it to 74 in one day on April 25. EQT has been working its way slowly higher since then and is now trading above 76. The stock’s 25-day moving average is right at 70, so look for a pullback of at least a point to initiate a position, with a stop at 69.
EQT Weekly Chart
EQT 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.
