October saw some exceptional returns as earnings season came at just the right time.
It was “the right time,” of course, because earnings season came around the same time that the S&P 500 and the other major indices were hitting their September lows and short-term technically oversold conditions.
So if nothing else, the market was set for a “dead-cat bounce” anyway.
To investors’ surprise, the earnings season provided better-than-expected results, fueling some super growth among the S&P 500. In October, 14 S&P 500 companies posted gains of 20% or more for the month — better than any other month this year. In each case, earnings provided the catalyst for strong bullish runs.
The question is: Of October’s top stocks, which ones are still worth buying?
October’s Top Stocks: #10, Transocean Ltd (RIG)
October Return: 20%
Surprisingly, there was only one energy- or oil-related name in the top 10 despite some serious sector-level relative strength.
Transocean (RIG) made the jump on regulatory news as a Senate panel voted to pass legislation lifting oil export bans. After that, a flurry of news regarding the number of shuttered fleets and investigations kept the stock within a loose range from $15 to $17.
The company will release earnings after the bell Wednesday, Nov. 4, amid a strengthening technical picture. The current picture heading into the report favors more gains as short interest remains relatively high and RIG is trading at the top of its recent range. This is a common sign of a pending short squeeze — something that could be triggered by a strong earnings announcement.
Given that, RIG shares remain on our bullish list with a target of $19, but all bets are off if Wednesday’s report goes sour.
October’s Top Stocks: #9, Yahoo! Inc. (YHOO)
October Return: 21%
If there’s a dead-cat bounce in the top 10 list, this is it.
Yahoo (YHOO) shares rallied more than 20% after an earnings report that felt like it left more questions than answers. YHOO shares got their largest boost from the announcement that they would continue to seek the spinoff of Alibaba (BABA), which accounted for the move from $28 to almost $31.
YHOO continues to be crowded with bulls, which means investors should be a little cautious about shares. Even though there was some organic growth in Yahoo’s numbers, the technical picture remains overly bearish.
The combination of bullish sentiment and bearish technical indicates that the recent rally may be nothing more than a good opportunity to take profits.
October’s Top Stocks: #8, United Rentals, Inc. (URI)
October Return: 24%
United Rentals (URI) was already turning a technical corner when its earnings announcement boosted shares from $67 to $74 in a day, and the intermediate-term trend is likely to continue higher.
Despite fears that the housing and construction trends are slowing, URI continues to see increases in revenue and earnings as the company beat analyst EPS expectations by 9%.
Technically, URI shares have been building a bottom at the $64 level, which served as a launching pad for the post-earnings rally. Sentiment toward the company remains cautious with 55% of analysts tracking the stock rating it a “buy.” This leaves room for upgrades as the price trend grows in strength.
Bottom line: URI is a buy with a price target of $90, or about 17% higher from here.
October’s Top Stocks: #7, Autodesk, Inc. (ADSK)
October Return: 25%
This technical software company got some love from Barron’s near the end of September. Autodesk (ADSK) then kept the ball rolling with positive news by reaffirming its earnings guidance. The news caused the shorts to start covering their bearish bets as short interest declined in the latest report. This covering likely helped ADSK shares rally consistently through October.
With earnings approaching in mid-November, we’re taking the position that the market has already “bought the rumor” on ADSK, which means there is a better-than-average chance that we could see them “sell the news” after earnings.
Hold off on buying ADSK for now and consider protecting shares already held.
October’s Top Stocks: #6, E I Du Pont De Nemours And Co (DD)
October Return: 31%
Basic materials companies are trying to draw a bottom, as the sector rallied more than 13% for the month of October. One of the leaders was DuPont (DD), which had already seen a nice rally before besting analyst earnings expectations on the 27th to finish the month more than 27% higher.
The long-term picture for basic materials companies remains too tepid to buy DD shares after this bounce. That said, investors already holding DuPont should consider holding for now as DD is trading back in a technically bullish trend.
With that in mind, those not holding the shares should consider $60 a potential buying point.
October’s Top Stocks: #5, Wynn Resorts, Limited (WYNN)
October Return: 32%
Reports that China may start to support the casinos in Macau gave Wynn Resorts (WYNN) and other gaming stocks a boost early in the month. Unfortunately, this was followed up with a less-than-exciting earnings report from the company later in the month.
The fundamental roller coaster netted a healthy gain for WYNN in October, but it’s hard to swallow the idea of buying shares based on what is effectively quantitative easing for Macau casinos. The technicals remain bearish for WYNN, as does the outlook.
If you’re holding Wynn Resorts, it might be a good time to ring the register and sell.
October’s Top Stocks: #4, TripAdvisor Inc (TRIP)
October Return: 33%
The short-term charts don’t relate it well, but Tripadvisor (TRIP) has maintained a relative-strength role in the market all of 2015. Shares got an extra boost in October when it was announced that the company would be partnering with Priceline (PCLN).
With only 24% of the analysts recommending TRIP shares as a “buy,” there is plenty of room for upgrades to drive prices higher as the company widens its reach on the travel business. In addition, TRIP is set to announce earnings on Nov. 5 after the close.
We’re looking for a strong follow-up to October for TRIP shares and consider them a buy at current levels.
October’s Top Stocks: #3, First Solar, Inc. (FSLR)
October Return: 34%
First Solar (FSLR) shot to the top of the list in the closing days of the month as the company announced better-than-expected preliminary third-quarter results. The news has moved the stock into a technical bull market trend for the first time since October 2014.
Given the technical improvements and the relatively pessimistic sentiment, FSLR shares have room to run higher as they climb the trusted “wall of worry.”
Intermediate-term target price for First Solar shares is $70 — about 20% higher — which makes them a buy, even after the post-earnings spike.
October’s Top Stocks: #2 KLA-Tencor Corp (KLAC)
October Return: 34%
Another semiconductor company that benefited from a good earnings report and an announced acquisition was KLA-Tencor (KLAC). On Oct. 21, the company announced earnings that beat analyst expectations by 27% and that it had agreed to be acquired by Lam Research (LRCX) for $67 per share.
With the cat out of the bag and the lawyers working on the deal, KLAC shares should have an extended stay at the agreed-upon price of $67.
We would be a seller of the shares at this point, looking instead for a new opportunity for growth.
October’s Top Stocks: #1, SanDisk Corporation (SNDK)
October Return: 42%
SanDisk (SNDK) hit a sweet spot last month. Despite a year-over-year drop in revenue, the company blew out its earnings estimates, which was the icing on the cake after sealing a deal to be purchased by Western Digital (WDC). The deal announcement earlier in the month was the real catalyst, popping shares from $62 to $69 in one day.
For now, though, the stock has come too far too fast and has likely burned most of its fuel in doing so. We’re expecting the shares to rest on their heels through November while the rest of the market catches up. However, SNDK still isn’t trading near the offer value of $86.50, so there still could be more upside.
Hold SNDK (with a trailing stop), but don’t buy the shares at this level.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.