“Never trade in situations where you don’t have control. For example, I don’t risk significant amounts of money in front of key reports, since that is gambling, not trading.”
— Paul Tudor Jones
Shares remain in good shape. Leadership is thin, as most glamours, from the Four Horsemen to most recent new issues, pause to consolidate the year’s wins.
The reduced ranks of the leaders has left few titles with sound basing patterns from which to launch new up legs. This report reflects this paucity in long vehicles, as there are simply not a lot of names worthy of our attention. However, we are seeing some titles that, given a couple of weeks of seasoning, may be ready to come out.
This is all considered normal for a market that has exceeded the expectations of most. From an intermediate-term speculator’s standpoint, it would not be the worst thing in the world for the averages to correct. This would allow prior leaders a chance to build sturdier and more durable bases to serve as potential launch pads for another move up.
While this is usually the most exciting time of year for investors, we would ignore what should happen, and focus on what is happening.
Among the names, Priceline.com (PCLN) is expected to grow earnings by 30%/24% this year and next. Revenue growth is also very solid and accelerating over the past few quarters from 20% to 26% to 27% to 33%. For a company with this magnitude of earnings growth, its earnings stability is very high at just 7% (annualized standard deviation). Net profit margins have lifted substantially over the figures for ’12. This makes PCLN extremely attractive among institutions with a mandate to invest in growth shares.
The stock has held up well during the growth sector’s post-Oct. 1 soft patch. Its recent earnings report of late last week lifted the stock 5% on volume 222% above average on Friday. The stock can potentially be purchased around Friday’s closing level of 1073.20. A stop could be placed just below Thursday’s low of 1020.69 which is just above the 50-day line. Alternatively, one could wait until the recent high of 1098.70 is taken out.
Amazon.com (AMZN) is a turnaround situation. Earnings are expected to be up big from their trough of ’12 (161%/266% for ‘13/’14). The stock began showing some nice accumulation in the summer. Just ahead of, and coinciding with, its recent earnings report, price showed four major accumulation days. Then two weeks ago, there was the 9% jump on volume 369% above average.
However, since then, there have been three major distribution days. While price found support late last week at the 20 ma, we would be inclined to wait to see some more “proof” from AMZN (e.g. a major accumulation day) before entering just yet.
With the big estimates, the deep institutional backing, and the recent gap up, AMZN has to be considered a contender for leadership among the liquid glamours in the mold of the Four Horsemen.
CaesarStone Sdot-Yam (CSTE) produces quartz surfaces for residential kitchens. Earnings are expected up 27%/24% in ‘13/’14. This stock is thin at an $11MM average daily dollar volume. Its redeeming qualities are its growth rate, its status as a big leader since coming public 20 months ago, and its six-week base, the latter a rarity in a market devoid of them.
CSTE is in a two-day pullback after meeting up with resistance at 48.69, the 9/26 high. It can be watched to see if it fills out its handle or overall pattern, which may open up a possible entrance.
Gogo (GOGO) is a recent new issue offering Internet services on commercial flights. Most analysts see losses for ‘13’14. In situations like this, we look for good sequential revenue growth. This compares the most recent quarterly revenue figure with that of the prior quarter, not of the year-ago quarter. With this metric, we are generally looking for 10%+ growth, and the more the merrier. In GOGO’s case, the figures are 10%, 11%, and 12% over the past three periods.
Unlike most other IPOs of recent vintage, GOGO encountered a rocky start. In its first eight weeks, price dropped 43%. This formed the bottom of a cup, from where the stock doubled over the next three weeks. Price is now building a six-week formation. A positive is that the pattern is forming directly above the first cup base, its low corresponding with the high of the initial formation. There have been three major accumulation days in the last two weeks, a plus.
Pending GOGO’s earnings release (expected before Monday’s open), the stock could potentially be taken above the high of 19.80, set 9/26. A very aggressive actor for aggressive operators only.
Insys Therapeutics (INSY) was profiled in our week-ago report. The positives are the expected 58% earnings growth rate in ’14, the giant sequential revenue growth of the past two quarters (122% and 69%, respectively), the high relative strength (99 percentile), and the development of a four-week consolidation pattern.
As might be expected from an actor coming off a fourfold move in only five months, the chart pattern is rough around the edges. For those entering above the 44.52 high of 10/18, as discussed in the week-ago report, a 5%-8% stop-loss would have been violated. With volatile, younger names like INSY, a wider-than-normal stop on a junior-sized (half of normal) position often makes more sense than a 5%-8% stop on a full-sized position, which does not take into account the stock’s volatility.
For an aggressive speculator seeking to wait until after earnings (expected 11/12), a potential entrance above the 11/5 high of 46.70 is reasonable, using a junior position with a wide stop. INSY is thin, at $11MM in average dollar volume, and therefore represents higher risk.
Jazz Pharmaceuticals (JAZZ) is expected to post earnings growth of 32%/25% in ‘13/’14, and these figures were most recently revised upward.
Two weeks ago, the stock attempted to come out of a three-week mini-cup. Volume was 20% above average and price was turned back. This often occurs when price first attempts to scale resistance. The second attempt occurred last Wednesday in conjunction with the earnings report, with price up just 1% on volume 70% above normal. Price then idled Thursday on less volume, as participants sifted through the effects of the earnings release. On Friday, price rose 4.8% into new-high ground, as did its relative strength line, a plus.
JAZZ offers a potential entrance around Friday’s closing level of 98.24. A 7% stop on a junior position puts it right in the vicinity of the 20 ema, where it held a few times in recent sessions.
Netflix (NFLX) is the only one of the Four Horsemen worthy of our attention at the moment. The company is a game-changer in the entertainment field in more ways than one. Earnings in ’14 are expected to be up 127%.
In our view, the 11/6 high of 344.37 presents an entrance for the aggressive speculator, if it is accompanied by volume. This would be roughly 8% above the 50 ma, where it has found support twice in the last month.
Pacira Pharmaceuticals (PCRX) is a biotech concern with losses projected for both ’13 and ’14. The stock has been a big leader since going public in ’11. More recently, price has been working off the excesses of a nearly-50% run into its high of 55.99 set three weeks ago. The current three-week pattern of consolidation appears normal, though two days of major distribution surfaced last week. A plus is the stock’s ability to find demand at its 50 ma. We would watch this name with the idea of an entrance coinciding with a break above the 55.99 high.
Sunpower (SPWR) is a 99 relative strength stock in a 99 relative strength group. Earnings are expected to decline by 14% in ’14. The market is obviously looking at something other than earnings, though it is unclear what that might be, as revenue growth is flat. Therefore, we are trading off the technicals and the high relative strength of the group.
After moving up about 75% in just nine weeks, price has been basing for the past three weeks. Volume has been elevated for a good chunk of this consolidation. We would like to see this calm down, as well as the attention that has been heaped on this group lately.
In the meantime, this is one to watch for a possible breakout entrance after it has put in more time.
Elsewhere, Nexstar Broadcasting Group (NXST), working on a four-week pattern, can potentially be taken above the 48.19 high set on 10/15.
In summation, leadership is such that there are not many five-week-plus bases at present. At the same time, we are seeing some encouraging developments beneath the surface. Hopefully, there will be more to report on this in the next report. Given that the trend of the averages remains up, selective buying is valid.
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The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Gil Morales & Company LLC (“GMC”), Marder Investment Advisors Corp., or an affiliate thereof held no positions, though positions are subject to change at any time and without notice.