Preserve Capital and Confidence
Current Market Outlook
The market continued to unravel last week, with leading growth stocks getting battered again and the rest of the market joining the downturn. In the near-term, we have seen some signs of panic and also some support, so it’s certainly possible the market can get off its duff a bit in the days ahead. But given the severity of the selling and the fact that the intermediate-term is firmly down, the odds favor more correction and consolidation ahead. That means the main goal here is the preservation of your capital and your confidence, both of which will come in handy during the next upturn. Nibbling on a name or two if you already hold a lot of cash is fine (we have some intriguing resilient situations in today’s issue) and could prove profitable if we bounce. But the big money will be made in the next sustained uptrend, so it’s best to stay mostly safe until that arrives.
This week’s list is a hodgepodge of stocks and sectors, which isn’t surprising given the environment. Our Top Pick is Ulta Beauty (ULTA), which remains resilient and looks ready to be a steady leader once the market correction is over.
| Stock Name | Price | ||
|---|---|---|---|
| Advanced Micro Devices (AMD) | 82.24 | ||
| Amarin (AMRN) | 14.06 | ||
| Callaway Golf (ELY) | 20.21 | ||
| Ensco plc (ESV) | 6.52 | ||
| Kirkland Lake Gold (KL) | 51.30 | ||
| Match (MTCH) | 0.00 | ||
| The Mosaic Company (MOS) | 29.22 | ||
| PBF Energy (PBF) | 38.93 | ||
| Petrobras (PBR) | 14.78 | ||
| Ulta Beauty (ULTA) | 331.95 |
Advanced Micro Devices (AMD)
Why the Strength
Advanced Micro is a fabless semiconductor company that designs CPUs and GPUs for business and consumer markets. Its three biggest end markets are personal computers, gaming consoles and cloud servers. Revenue was up 24% in 2017 and is seen rising another 26% in 2018, driving EPS up 177%. The stock is doing well because of strong year-to-date sales of computing and graphics solutions. Analysts have applauded market share gains since Intel fumbled the ball with its 10nm chip (delayed for almost a year) and that firm’s poor execution meeting demand for chips found in low-end notebook CPUs. On the other hand, recent reports suggest Intel could get 10nm production going in the early part of next year, implying AMD is looking at a more competitive market. The bottom line is AMD has garnered a lot of love because revenue and margin growth show it capitalized on the opportunity in 2018, while also building a more competitive product roadmap for 2019 and beyond. But what’s unknown is how this will translate once Intel catches up, especially when it adopts multichip architecture in early 2019. With AMD 20% off its 52-week the risks are more balanced than they were a month ago and we have a potential near-term catalyst with earnings coming out on October 24. Keep any new positions small ahead of earnings.
Technical Analysis
AMD built a huge base for most of 2017 and early 2018 before beginning a strong rally in May. The stock rallied 10 weeks in a row to new highs, and after pausing south of 17 for five weeks, really got going, exploding to 34 by early September! The pullback since then has been sharp, but given its run, also reasonable, giving up about half of the prior advance and holding near its 50-day line. We’d prefer to see a bit more of a bounce, but if you want to nibble with a tight stop, you can.
AMD Weekly Chart
AMD Daily Chart
Amarin (AMRN)
Why the Strength
Amarin is a biopharmaceutical company working on therapies to improve cardiovascular (CV) health by addressing issues beyond just lowering cholesterol. Most of its research is in lipid science and the therapeutic benefits of polyunsaturated fatty acids. Its first FDA-approved treatment, Vascepa, hit the market in 2013 and is a Pure EPA Omega-3 prescription that lowers very high triglycerides; the drug is responsible for driving 2017 revenue up 39% (to $181 million) and Q2 2018 revenue up by 16%. That’s good, but the big happening here is that shares of Amarin rocketed 300% higher on September 24 because Vascepa was shown in a long-term (began in 2011), large-scale study (over 8,000 patients) to lower risk of a major adverse CV event by around 25%. Management believes this study paves the way for Vascepa to become the standard of care as the first treatment option beyond statin therapy for cost effective management of CV risk. Given that Vascepa is a gel capsule and is relatively cheap (as little as $9 for 90 days), and that CV is the leading cause of death in the U.S. and costs $555 billion to treat annually, it’s easy to see why investors are excited. The tease of a takeover (Regeneron, Amben and Sanofi could all benefit) adds intrigue to the story. It’s an interesting speculation.
Technical Analysis
AMRN traded in a wide range mostly between 2.5 and 4.5 from 2017 through August 2018. That all changed on September 23 when the stock launched 300% higher overnight. Impressively, though, it hasn’t been a one-day wonder, as AMRN has continued to advance over the last three weeks and is sitting just below its recent closing high of 20.5! Clearly there is a lot of speculation here about takeover premium and market potential. If you’re willing to roll the dice with a starter position, AMRN is sure to take you on an interesting ride.
AMRN Weekly Chart
AMRN Daily Chart
Callaway Golf (ELY)
Why the Strength
Callaway Golf is all about golf equipment, including woods, irons, putters, golf balls, gloves bags, umbrellas and all the rest. Golf isn’t exactly a growth industry, but Callaway has a history of slowly growing revenue, with two exceptions. The first exception was 2015, when revenue fell by 5% and the second was 2017, when revenue galloped ahead by 20%. The factors in this resurgence, which have produced 30% growth in Q1 and Q2 this year, are the halo effect that Tiger Woods’ return to competitive golf has on the game’s popularity and Callaway’s profitable investment in Topgolf, a string of entertainment venues that feature driving ranges, food, music and games. Topgolf is expected to expand to between 80 and 100 locations, and Callaway’s $71 million dollar investment (a 14% stake) is forecast to be worth $600 million by 2020. Callaway’s earnings report for the second quarter on August 2 revealed record net sales and earnings—EPS up 85% and revenue up 30%—and was accompanied by increased full-year guidance. The company had previously declared a quarterly dividend of a penny a share. Callaway is riding a wave right now, but has a history of steady growth.
Technical Analysis
ELY went through the wringer from 2007 (when it was trading just below 20) to October 2011, when it bottomed at 4.7. The stock had another bad year in 2014, but grew steadily until March 2017, when its RP line really got moving. ELY shot from 13 to 21 in the first half of 2018, but pulled back below 20 heading into earnings. The great Q2 report on August 2 gapped the stock to near 24, and it has been digesting that gain with sideways trading since, ignoring the market’s flip-flops. If you like the story, you can take a small position around 23, with a stop around 21.
ELY Weekly Chart
ELY Daily Chart
Ensco plc (ESV)
Why the Strength
Two weeks ago Rowan, a smaller offshore energy driller with a lot going for it, was our Top Pick after showing some unusual strength. And now we know the reason for that strength—last week, Ensco, a somewhat larger driller based in Britain, announced it was buying Rowan! The stock-for-stock combination of the two (expected closing in first half of 2019) will have the largest jack-up fleet and second-largest deepwater fleet in the world, including a bunch of high-spec drillships. The merger will also provide major diversification (presence in nearly all major offshore drilling markets), should produce $150 million of annual synergies, be accretive to cash flow in the first full year after closing and offer a ton of liquidity (no debt issues until 2024 given its cash and borrowing capacity). And this merger comes after Ensco’s buyout and integration of Atwood Oceanics (another deepwater driller)—it looks like Ensco is trying to buy low in the industry’s cycle. We think it could work, as there are signs that the offshore drilling sector is stabilizing (higher levels of contracting and utilization), which makes sense given elevated energy prices and the multi-year downturn. It’s still speculative, as the bottom line is drenched in red, but should the sector turn up, the new, larger Ensco should be a big beneficiary. Earnings are due October 30.
Technical Analysis
Like most of its peers, ESV was destroyed in recent years, but has been bottoming out for about a year now. The stock fell to 4 in August 2017, and after a spike to 7.5, fell back to 4 in March of this year. The rally since then has been jagged, but ESV has held above its 40-week line since mid April and, thanks to a rally starting last month, has now shot to 18-month highs. We think ESV could do very well once the pressure comes off the market—nibble on dips or keep an eye on it.
ESV Weekly Chart
ESV Daily Chart
Kirkland Lake Gold (KL)
Why the Strength
We haven’t had a gold stock in Top Ten for a while, but Kirkland Lake Gold is an intriguing, growth-oriented miner to consider. The company operates five mines in Canada and Australia, though its two biggest are the Macassa mine north of Toronto (north of 220,000 ounces of expected output this year) and the Fosterville mine in Australia (nearly 300,000 ounces expected); all told, the firm expects more than 635,000 ounces of output from its mines this year, up 6.5% from last year in spite of some discontinued operations and temporary shutdowns at one of its smaller mines. Despite the sluggish growth, the firm’s costs have been sinking quickly (operating cash costs per ounce down 16% from a year ago in Q2) thanks to tight operational controls, and combined with solid pricing (the grade of gold produced at Macassa has soared in recent quarters), has resulted in some bullish earnings and cash flow (up 56% in Q2) results. As for the gold sector in general, prices have been trending somewhat lower for a while, but recent action has been intriguing, with a two-month bottom and a big pop higher last week. If gold prices get a boost from here, Kirkland could be a stock that succeeds despite the tough market environment.
Technical Analysis
KL enjoyed a very nice run during the past couple of years, as earnings and cash flow picked up steam as output levels improved. The top near 24 at the tail end of July led to a sharp five-week dip, but the stock found support near its 40-week line (and showed some nice tightness on the weekly chart, too) and, last week, popped on good volume when gold prices perked up. It’s still in its basing area, but we’re OK starting with a small position here with a stop just below 19.
KL Weekly Chart
KL Daily Chart
Match (MTCH)
Why the Strength
Dating websites are all the rage for the single and restless and when people go online to meet up they’re likely using one of Match Group’s dating sites. In fact, the company says that 60% of all dates, relationships and marriages that originated from online dating sites came from a Match Group property. That’s not hard to believe given that Match has over seven million subscribers across its portfolio, which includes Tinder, Match, PlentyOfFish, OkCupid, OurTime, Meetic and Pairs. Each site has a different approach to engage its target audience, though Tinder is clearly the prime property—it’s the number one downloaded dating app worldwide, the top grosser among dating sites and the second highest grossing app overall worldwide. While shares took a hit earlier this year because of questions around user growth, investors piled back in after the August earnings report because revenue was up 36%, subscriber growth was up 27% and EPS growth was up 156%. Following that report analysts upgraded their forecasts and now see 30% revenue growth and 117% EPS growth in 2018. Like any relationship, we wouldn’t recommend jumping in with both feet, but if you’re game you could nibble on a few shares here then build a position if the market cooperates.
Technical Analysis
MTCH initially took off in August 2017 and rallied from 21 to 49 within eight months. The stock then fell sharply to 34 after an earnings report fell short of expectations, but after basing out for a few months it got going again in August. From there the stock walked up to 60 by mid-September, and while the recent pullback has been sharp, MTCH has actually held up near its 50-day line, a rarity among growth stocks. If you’re game, you could grab a few shares here.
MTCH Weekly Chart
MTCH Daily Chart
The Mosaic Company (MOS)
Why the Strength
Mosaic is the second fertilizer company to show up in Top Ten recently. But where CF Industries (CF) makes its fertilizers from natural gas feedstock, Mosaic mines and refines its phosphates and potash feedstock. The company distributes its products globally, but a majority heads to users in North America (54%) and Brazil (30%). The rebound in commodities stocks is lifting Mosaic after a seven-year swoon that has pushed earnings lower in five of the last nine years. Analysts are seeing strength returning to the sector, with Mosaic’s earnings forecast to jump by 59% in 2018 and 30% in 2019. The stock picked up coverage from Barclays in September and got upgrades from four analysts in the last six months, versus one downgrade. Management’s five-year outlook is for continuing increases in shipments and Mosaic’s stock pays a small dividend (0.3% annual yield). This is no high flyer, but the story is a solid one and the turnaround potential in this and other commodity sectors is big given the multi-year declines.
Technical Analysis
MOS slumped from 163 to 22 during the Great Recession, but recovered to 89 in early 2011. Then came seven tedious years of net declines that had MOS at 19 in September 2017. The stock’s recovery from that point was fairly steady, with just one big correction that was erased within three months. MOS has remained volatile, but ran to 34 on October 4 and has only given back a point or so. If you’re game, you can take a nibble at 33, and use a stop just under 30 for protection.
MOS Weekly Chart
MOS Daily Chart
PBF Energy (PBF)
Why the Strength
Refining stocks have been a mixed bag, but PBF Energy remains one of the stronger ones in the market, probably thanks to some unique advantages it has compared to its peers. The company operates five refineries across the country with 884,000 barrels per day of capacity; overall, it’s the fifth largest independent refiner in the U.S. What’s interesting from a fundamental standpoint is that the company also owns 44% of PBF Logistics ($1 billion market cap), a limited partnership that has a variety of pipelines, terminals and storage facilities that support PBF Energy’s operations—the logistics outfit has a ton of organic growth projects underway and represents a cheap way for PBF Energy to raise capital through asset dropdowns. Throw in a bunch of solid industry fundamentals (very high refinery utilization, a general easing of regulations), and business is very good—sales and cash flow are improving in a big way, analysts see earnings nearly doubling next year to $5.29 per share, the dividend (2.4% annual yield) is solid and big investors are piling in (754 own shares at the end of September, up from 530 at the start of 2018). The next big update will come via the quarterly report on Halloween.
Technical Analysis
PBF went on a great run to 36 by the end of last year, and after a sharp pullback to 28 (refining stocks can move quickly in both directions), ran to 51 in early June. Since then, the momentum hasn’t been great, but the stock has nosed out to a couple of new highs and has held in an area of support, despite the market-wide rout. Like most other stocks in this issue, you could nibble here, or just watch PBF for an eventual move back to new highs once the market turns healthy.
PBF Weekly Chart
PBF Daily Chart
Petrobras (PBR)
Why the Strength
Petrobras (Petróleo Brasileiro S.A.), the Brazilian national oil company, is a great turnaround story that has already qualified for Cabot Top Ten Trader twice this year. The company has several things going for it right now, with the most important being the continuation of high oil prices and increasing prices for natural gas. That makes Petrobras’ reserves of well over 12 billion barrels of oil equivalent (BOE) a very valuable asset. The company, which got a new CEO in June, is also reaping the benefits of a program of cost cuts that have improved after-tax profit margins and was partly responsible for the company’s earnings turnaround in the second quarter. Since 2014, Petrobras was at the center of a legendary scandal that implicated dozens of politicians, business leaders and company executives, and emerging from that scandal has also helped to restore the company’s credibility. And finally, with its financial health recovering, the company is embarking on a program of capital expenditures that will improve exploration and drilling efforts. Investors are also pleased with reports that the company may sell or spin off assets to help finance growth and reduce debt. Petrobras is a definite contender for comeback of the year awards. And its 10 forward P/E ratio and modest dividend (2.1% forward annual yield) increase its appeal.
Technical Analysis
PBR peaked at 68 back in 2008, but fell to 2.7 in January 2016 at the height of the scandal. The stock has been up and down since, including a rip to 17 in May after a good earnings report only to fall back to 9 in June. August brought a recovery to 13 and a pullback to 10, but October has seen a rally to 15 on excellent volume. You can either buy some PBR as a long-term bet on the value of its reserves or just nibble on any pullback of half a point or so with a tight stop around 14.
PBR Weekly Chart
PBR Daily Chart
Ulta Beauty (ULTA)
Why the Strength
“Romance-Transition-Reality” is a pattern we’ve seen play out countless times over the years, with the Romance phase consisting of a fast run-up as valuation expands; the Transition phase seeing the stock struggle and valuation contract; and the Reality phase seeing the stock (if the company is doing well) get back on the upswing in a more measured way. Ulta, which is taking huge share in the beauty product market from drug and department stores (which still make up the majority of the industry sales), looks like it started a new Reality phase a couple of months ago, when it popped on earnings because big investors feel the recent deceleration in growth and valuation re-set (28 times trailing earnings now, vs. 46 times back in mid 2016) is just about over. And, despite the deceleration, growth is still looking solid—in the second quarter, comparable store sales were up a solid 6.5% (includes 4% retail and a 38% boom in e-commerce sales), total square footage was up 11% and, looking ahead, there should be years worth of store growth ahead as demand remains strong. Throw in a business that’s generally immune to economic worries (Ulta’s offerings run the gamut from low-end to premium) and there are plenty of reasons the stock could be a steadier leader once this market correction finishes up.
Technical Analysis
When we wrote about ULTA a few weeks ago, it had just emerged from a long correction and consolidation, with a multi-day string of big-volume advances that brought the stock to a 14-month high. Since then the stock has done … not much of anything, which is fine by us—shares have taken a few knocks but held above their 50-day line and actually finished up last week, a rarity among growth stocks. You could nibble here or just keep ULTA on your watch list.
ULTA Weekly Chart
ULTA 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.
