Great Bounce! Now What?
After a straight-down move following the election, the market rallied smartly during Thanksgiving week on light volume. Clearly, the move was good to see, and there are a decent number of good-looking set-ups out there. However, by our measures, the market’s trends remain down, and we think the rubber will meet the road from this point forward—if the correction is over, we expect more and more stocks to shape up, and for the major indexes to build on their gains. If not, we expect the sellers to take advantage of these prices during the next few days. For now, remain cautious, and we’ll let you know if we get any new buy signals.
In the meantime, it’s imperative to be up on the best-acting stocks and sectors in the market. This week’s list has many names that are off most investors’ radar screens, which we like. Our favorite of the week is Salesforce.com (CRM), a big firm that looks ready to get going after a two-year pause.
| Stock Name | Price | ||
|---|---|---|---|
| Tenet Healthcare (THC) | 0.00 | ||
| Regeneron Pharmaceuticals (REGN) | 512.96 | ||
| Qihoo 360 (QIHU) | 0.00 | ||
| Packaging Corp (PKG) | 0.00 | ||
| HollyFrontier Corporation (HFC) | 0.00 | ||
| HDFC Bank Limited (HDB) | 0.00 | ||
| Gilead Sciences (GILD) | 75.10 | ||
| Eaton Vance Corp. (EV) | 0.00 | ||
| Salesforce.com (CRM) | 0.00 | ||
| Alaska Air Group (ALK) | 0.00 |
Tenet Healthcare (THC)
Why the Strength
Following President Obama’s re-election, the Affordable Care Act (ACA) has become the so-called “law of the land.” Whether you agree or disagree with the law, you might as well profit from it. One company that stands to reap considerable rewards is hospital operator Tenet Healthcare. Tenet owns or leases 50 acute care hospitals with some 13,000 beds in 10 U.S. states. In addition to its acute care holdings, Tenet also operates specialty hospitals, skilled nursing facilities, physician practices, outpatient centers, imaging centers and other health care facilities. With the pool of paying patients set to expand significantly under ACA, analysts expect hospital earnings to rise by as much as 25%. Such an increase would add to Tenet’s already strong earnings and revenue growth. During the past four quarters, revenue rose by an average of 5% year-over-year, while earnings grew at a blistering 82% rate, on average, year-over-year. During its third-quarter earnings report, Tenet said that adjusted admissions increased by 1.4%, marking the eighth consecutive quarter of growth, as well as 18 of the past 21. Finally, Tenet is growing at a rapid pace, and expects to operate 124 freestanding outpatient centers (double the number operated just four years ago) by the end of this year.
Technical Analysis
With a fair amount of political uncertainty now dissipating, THC shares have begun to trek higher. The shares had experienced a rough-and-tumble 2012, with the presidential elections taking their toll. THC battled its way higher early in the year, peaking just shy of 25 in February before succumbing to broad-market selling pressure. After bottoming near 17 in August, THC resumed its uptrend along support at its 25-day and 50-day moving averages. The shares are currently fresh off a rebound from their 50-day trendline, which has pushed THC to a multi-year high above 28. A bit of consolidation here should be expected, so buying dips is likely the safest strategy. A stop loss near 26 could also be beneficial in limiting losses.
THC Weekly Chart
THC Daily Chart
Regeneron Pharmaceuticals (REGN)
Why the Strength
Regeneron Pharmaceuticals has been a monster winner in 2012, but the stock is acting as if it has even bigger things in store. The company has gone from development stage to highly profitable during the past few quarters thanks to EYLEA, a treatment for age-related macular degeneration (so-called wet macular degeneration), a market that, in the U.S. alone, totals about $1.5 billion every year, and that doesn’t even include about the same amount that’s treated off-label by Avastin. All told, then, you’re talking about a $2 to $3 billion market just in the U.S., with more overseas (where Regeneron has a 50-50 partnership with Bayer), and Regeneron has grabbed upwards of 40% of the market within a year. A glance at the table below shows you just how big an impact the drug has had, and analysts see more where that came from (estimates are for upwards of $5 per share in earnings in 2013, which is likely conservative). The stock got an added boost in recent days after partner Sanofi got positive European regulatory news for Zaltrap, an add-on cancer treatment, although it’s unlikely that drug will have a large impact on Regeneron’s bottom line in the near term. All told, the story is well-known, but EYLEA is one of the largest biotech drug launches in history, and management believes it can continue growing for many quarters to come.
Technical Analysis
The weekly chart shows you how big a run REGN has enjoyed; shares took off at the start of the year and have experienced just one major correction (this spring) and one minor retreat (during the past month). But more important to us is the stock’s recent action; after living below its 50-day line for a couple of weeks, REGN bolted above the line two Fridays ago and has pushed into new-high ground since! And on big volume, to boot! If you really want in, you can buy a small amount here, but we prefer to put our buy range down a bit, hoping to buy on weakness, with a stop near 155.
REGN Weekly Chart
REGN Daily Chart
Qihoo 360 (QIHU)
Why the Strength
For a company with sales of just $288 million, Qihoo 360 boasts an impressive market cap of nearly $2.8 billion. The company’s basic business of designing and distributing cybersecurity software for China’s mobile phone users was enough to make it a Top Ten pick last March. But what caught investors’ attention was the company’s decision to drop Google as its mobile search provider in favor of an in-house produced search engine. The company’s immediate gain in market share in mobile search was impressive enough to take a big bite out of Baidu’s support from investors and keyed huge interest in Qihoo 360’s stock. The company’s quarterly report on November 19 beat analysts’ estimates on both top and bottom lines with revenue growth of 77% and 25% earnings growth. After-tax profit margin was a strong 28.8%. Investors are pleased with Qihoo 360s growth, and also intrigued with rumors that the company could become the target of a takeover bid from Baidu, a move that would give Baidu access to Qihoo’s PC users and solve the problem of the smaller company’s increasing bite of market share in mobile search. Whether Baidu makes the move or not, Qihoo 360 is showing plenty of organic growth.
Technical Analysis
QIHU’s big August rally pushed it from 14 to 25, but market weakness and profit taking pulled it back to 20 at the end of October. November has seen a new rally, topped by a jump to near 25 on the good earnings news, but QIHU has slipped for a few days toward 23. QIHU is likely to take a little time at this level as investors handicap its chances in its battle with Baidu. A small bet on QIHU anywhere under 23 makes sense as a slightly speculative bet on an emerging markets contender.
QIHU Weekly Chart
QIHU Daily Chart
Packaging Corp (PKG)
Why the Strength
Container-board and corrugated packaging aren’t the products that often produce hot stocks, but Packaging Corp. looks to be a big exception. The company is in the midst of a major turnaround, thanks to good old supply and demand; years of sluggishness in the industry have led to major capacity cuts, all while demand has been slowly rebounding with the economy. The results for Packaging Corp. are not only plenty of cost cuts in-house, but as of a couple of months ago, a $50-per-ton price hike for container board, with a similar hike for corrugated products. The initial price hike was swallowed whole by customers, and management expects the full effect of these hikes (which will fall right to the bottom line) to be felt in the first quarter. Obviously, if the economy falls apart, then all bets are off; demand for this stuff is directly linked to U.S. output. But there’s no sign of that, which is why earnings estimates are so buoyant (up 29% this year and another 34% in 2013). The combination of a big upturn in earnings, a reasonable valuation (19 times earnings) and a good dividend (2.7% annual yield) that has the potential to be hiked meaningfully should keep buyers interested. We still like it.
Technical Analysis
PKG broke out of a long 17-month base (which itself was part of a larger five-year base!) in August of this year, ran up to 36 in September and has basically moved straight sideways since. The stock had a shakeout near the lows of the correction, diving below its 50-day line on elevated volume, but it’s quickly snapped back on modest volume toward its highs. We think you can nibble here or on weakness, but you shouldn’t put on a big position until the market confirms a new uptrend and until PKG lifts above 37 on big volume.
PKG Weekly Chart
PKG Daily Chart
HollyFrontier Corporation (HFC)
Why the Strength
In February 2011, news reached investors that Holly Corp., a refinery company with operations in New Mexico, Utah and Oklahoma, would merge with Frontier Oil, which owns refineries in Wyoming and Kansas. The merger was considered a merger of equals and was financed with an all-stock deal. Now the newly combined business is continuing the strength of each of its component companies as sales of gasoline, diesel fuel and jet fuel have been strong. HollyFrontier’s 72% growth in revenue in 2010 was topped by 86% growth in 2011. The company is benefiting from the lower price of U.S. crude oil and natural gas and its proximity to the biggest producing areas like the Bakken, Barnett and other shale basins just east of the Rocky Mountains. In addition to its location, HollyFrontier is getting a boost from the lower cost of combined operations and increasing demand for fuels both in the U.S. and Central America. This combination of two successful refiners is working out well.
Technical Analysis
HFC was trading just above 25 when the merger was announced and it took a long time to consolidate, trading as high as 39 and as low as 21. But after breaking out to new highs last summer, HFC popped over 41 in September and has rallied strongly all during November. Volume has been tailing off a bit, but with HFC still trading at a very attractive P/E ratio of just 6 and the company’s dividend sporting a healthy yield of 1.8%, the stock looks like a very good deal. You can take a small position right here, or wait for the stock to slow down and try to get in on weakness of a point or two.
HFC Weekly Chart
HFC Daily Chart
HDFC Bank Limited (HDB)
Why the Strength
Companies that are selected for inclusion in Cabot Top Ten Trader usually have a clear incident or piece of news that’s fueling their rise. But HDFC Bank earned this appearance (its fourth) by representing a pure play on the growth of India’s financial sector. HDFC Bank is the second-largest private bank in India—ICICI Bank is larger—but it’s growing rapidly, offering banking services to the growing number of Indian citizens who are becoming prosperous enough to need them for the first time. While India’s growth is slower than China’s, it’s still rapid enough to send many Indians to HDFC’s more than 2,600 branch banks and 10,300 ATMs. This tide has boosted HDFC’s revenue by 25% in fiscal 2011 and 22% in 2012. The company’s assets topped $70 billion earlier this year—up 22% from the previous year—and investors are looking for increasing adoption of credit cards, housing loans and auto loans to maintain the growth trend. With an admirable 15.8% after-tax profit margin and a small dividend, HDFC Bank is a solid, consistently profitable way to participate in the strength of emerging markets.
Technical Analysis
HDB consolidated for a long time after climbing out of its Great Recession hole in 2009. It took the stock nearly two years to top its 2010 resistance at 37. But after a jump to 39 in early October, HDB put in a five-week base with support at 37 before breaking out last week on modestly increased volume. This leap from 37 to 41 may lead to a pause, coming as it does from a stock that doesn’t often defy gravity in this way. But the story is strong and the long-term prospects for HDB are rosy, so a buy on weakness makes sense.
HDB Weekly Chart
HDB Daily Chart
Gilead Sciences (GILD)
Why the Strength
Gilead Sciences is making its third appearance in Cabot Top Ten Trader this year, and the news fueling its strength remains the same. The company has had a leading combination therapy for HIV/AIDS called Atripla. Now Gilead has brought out a new combination therapy for HIV/AIDS, called Stribild, which is even more effective and has the advantage (from Gilead’s point of view) of being made entirely from in-house components. The other good news is that its new treatment for hepatitis-C has had good results from clinical trials. The compound in trials combines one drug developed in-house and one acquired via Gilead’s takeover of Pharmasset, and results have been outstanding. Gilead has many other drugs on the market, but HIV/AIDS and hepatitis-C are the main drivers of revenue. Even though Stribild will be taking market share away from Atripla, investors are betting that the increase in profit margin will prove advantageous and that the candidate treatment for hepatitis-C will turn into another blockbuster. These new drugs haven’t contributed to the bottom line yet, but Gilead looks like a sure bet to deliver on its promise.
Technical Analysis
GILD enjoyed a big rally that began in December 2011, then corrected in February 2012. It took the stock five months to regain its highs, then just over a month to begin another push to new highs in September. After six weeks in consolidation, GILD gapped up on huge volume on November 12 on the Stribild news and has inched higher since then on decreasing volume. It’s likely that the stock will need a little time to digest its big gap-up gains, and you should get a chance to get in on a pullback toward 72.
GILD Weekly Chart
GILD Daily Chart
Eaton Vance Corp. (EV)
Why the Strength
Eaton Vance offers a veritable smorgasbord of investment vehicles. Specifically, the company offers more than 100 mutual funds, specializing in tax-managed equity funds, municipal bond funds, floating-rate bank-loan funds, income and value equity funds, global and high-yield bonds, closed-end funds, as well as alternative investments. Traditional asset managers like Eaton Vance have seen lower profits over the past year as investors move their money to lower-fee funds. However, Eaton has seen a reversal of this trend, reporting strong fourth-quarter earnings growth as investors moved more money into its funds. Following two straight quarters of declining earnings, Eaton posted a 13% jump in the fourth quarter, while revenue ended a three-quarter losing streak to rise 4% during the quarter. During the fourth-quarter conference call, CEO Tom Faust noted that these improved trends should hold firm into 2013 due to the company’s focus on current investment trends and evolving investor needs. Eaton saw fourth quarter net inflows of $2.2 billion, allowing the company to finish the year with a record $199.5 billion of assets under management. We think there’s more growth ahead
Technical Analysis
Despite a rough patch between March and June 2012 has been kind to EV shares. The shares tested long-term resistance near 30 in late March, with a rejection sending the stock down for a test of support near 23. EV came roaring back, however, and has since gained roughly 30% since June along support at its 10-day and 25-day moving averages. The stock’s most recent gains followed its breakout above aforementioned resistance at 30, with EV racing to an annual high just shy of 32. The stock is a bit overextended, and any pullbacks should be considered buying opportunities.
EV Weekly Chart
EV Daily Chart
Salesforce.com (CRM)
Why the Strength
While many technology and software companies are warning of a poor overall environment, Salesforce.com remains in a rapid growth phase, driven by its best-in-class business productivity offerings. These offerings, which now go well beyond the firm’s core sales software (many resemble social media-like applications for businesses), continue to be snapped up, and what’s most impressive is the across-the-board growth Salesforce is seeing; the company actually cranked out growth of 29% in Europe (!) during the recently reported quarter. The earnings weren’t as impressive, but that’s because of the accounting for these subscription-based firms; far more important metrics are sales growth (35%), billings growth (31%) and deferred revenues (up 41% from a year ago), all of which continue to paint a picture of a company firing on all cylinders. And analysts see more where that came from; next year’s revenues are expected to grow 27%, with some analysts seeing free cash flow totaling $4 per share. From a bigger-picture perspective, the stock appears to have transitioned from the Romance phase in 2004-2010, through a Transition phase (the long sideways base, discussed below) and could be entering the Reality phase, where institutions accumulate positions based on the firm’s outstanding growth. We like it.
Technical Analysis
CRM topped out at 151 back in late 2010, and has basically been capped by the 160-ish area ever since, with some harrowing corrections during that time (usually when the market goes over the falls). However, the stock’s action in recent months tells us the long-awaited breakout could be near. First, we see 14 weeks up in a row earlier this year, a sign of persistent demand. Then we have a well-controlled retreat during the past couple of months, just 12%. And now we see a thrust toward the highs following earnings. We think you can nibble here, or just wait for a big push above 162 on volume.
CRM Weekly Chart
CRM Daily Chart
Alaska Air Group (ALK)
Why the Strength
Alaska Air, which is actually based in Seattle, operates primarily on the West Coast under the names Alaska Airlines and Horizon Air. Historically, the airline industry has been notoriously cyclical, rising and falling alongside economic trends, fuel prices and seasonal demand. With the holiday travel season gearing up, Alaska Air’s solid position in the market makes it a prime investment candidate. For starters, the company has never filed for bankruptcy, something only one of the so-called top-tier airlines (Southwest) can claim. The company has also shown impressive revenue growth in the neighborhood of 8% during the prior four quarters. Furthermore, CFO Brandon Pedersen said during the company’s recent conference call that both Christmas and Thanksgiving are booking up solidly and normal. Meanwhile, the company has rolled its fuel hedging strategy forward, utilizing call options to both protect against rising fuel costs and more easily take advantage of declines. As you may know, Alaska Air can only utilize fuel call options (which are unavailable to many in the airline industry) because it has a pristine balance sheet. Finally, the company announced in September that it was initiating a $250 million stock buyback program—a rarity in the industry. So while seasonal and cyclical forces make Alaska Air attractive over the short term, the company’s stellar management and long-term prospects are the real story here.
Technical Analysis
ALK has trended steadily higher for the better part of the past three years, with the stock enjoying support at its 10-week and 25-week moving averages. Shares stumbled in 2012, as broader economic forces and a presidential election took their toll on the stock market. Even so, ALK refused to stray from its trading range near 35. The company’s buyback program, however, appears to have rejuvenated ALK’s former rally. In fact, shares have broken out to record highs above the 40 level. The downside to this breakout is that ALK is a bit overextended, meaning that dips and pullbacks to support will be prime buying opportunities. A stop loss at 39 makes sense.
ALK Weekly Chart
ALK 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.
