Nasdaq 100 Watch List: May 30, 2014

Performance Review

In our Nasdaq 100 Watch List from May 24, 2013 (found here), we had the following performance of the top five stocks (May 24, 2013 to May 23, 2014):

The top five stocks underperformed the Nasdaq 100 by -5.50%.  However, the stock that we had a strong interest in, Teva Pharmaceutical (TEVA), garnered the following commentary:

“…Teva appears to have all of the attributes that we’re looking for in both the short and long-term.  Teva has earnings that can support a reasonable dividend with a margin for error if annual earnings were to decline -40%.  According to Value Line Investment Survey, Teva is selling 70% below fair value based on 2012 cash flow of $7.44 per share.  For all intents and purposes, we believe that Teva has long term viability…”

“…The strategy for taking advantage of the relative low in the price is to break the purchase of Teva into 2 or 3 stages.  In either scenario, buying now would be a reasonable reaction to the current price.”

TEVA never fell as low as we had expected.  However, the recommendation of purchasing TEVA at the price indicated was appropriate and has generated reasonable gains.

We’d like to add that while our overall list from last year didn’t exceed the market, it would have done much better had we excluded Intuitive Surgical (ISRG) and Nuance Communications (NUAN).  We believe that ISRG could be excluded because on March 19, 2013 (found here), we said the following of the stock:

“The next stock of interest is Intuitive Surgical (ISRG).  The last time the stock was our watch list was in November 26, 2010 at a price of $275.08 (found here).  As with our observation on Apple’s (AAPL) contracting volume as the price rose, ISRG has experienced the same phenomenon (found here). In addition, as ISRG has declined recently, the amount of average volume has increased dramatically. This suggests that there may be support for the idea that this stock could fall much lower from the current levels.

“According to Dow Theory, ISRG has downside targets of $426.91, $342.92 and $258.93.  We think that $426.91 AND $342.92 are a lock for the downside risk.  A decline below $342.92 suggests that $299 and below is the next target.”

We believe that pointing out the conflicting trend of price and volume was fair warning that ISRG was at risk of continuing the declining trend.  As recently as May 9, 2014, ISRG has decline as low as $346.46 or within 2% of our Dow Theory downside target.  Nuance Communications (NUAN) was not highlighted as a stock of interest to us within the last year.

On the opposite side of our “negative” view on ISRG or absence of interest with NUAN, our commentary on Intuit (INTU) is best represented in our review of the stock from our June 7, 2013 watch list (found here):

“While Garmin (GRMN) appears to be the best value on our Watch List this week, Intuit (INTU) seems the most compelling.  Applying Dow Theory to Intuit’s price we get the following downside targets:

• $51.98
• $44.03
• $38.08

“Based on Dow Theory, Intuit has a minimum downside target to the 1/3 level ($51.98) which seems to have provided a surprising support level at the red arrows.  However, this is price action within a confirmed bull market.  What we want to know is what could happen if we enter a bear market.

“In the decline from the October 2006 peak to the December 2009 trough, Intuit fell as much as –43.54%.  If Intuit were to decline by a similar amount from peak to trough, the stock would fall as low as $38.62.  Our bear market calculation almost matches our lowest Dow Theory downside target of $38.08. Finally, if we assume a –43.54% decline from the current price of $59.46 we arrive at a price of $33.47, this is only 12.10% below the Dow Theory low.  The bottom line on Intuit is that the downside risk is fairly limited.”

Excluding the performance of NUAN and ISRG, our watch list would have gained +44.16%.  While we can’t take credit for all the coincidental postings and the subsequent performance, we hope that our measured approach to analyzing these stocks has broadened your perspective as an investor.

Nasdaq 100 Watch List: May 30, 2014

Below are the 14 stocks that we’re currently tracking from the Nasdaq 100:

Analyst Earnings Estimates

Below is a snapshot of the analysts low estimated earnings assuming the stock retains the current p/e ratio until the end of the year and the percentage change in price that is implied based on these low earnings estimates.

As we head into the month of June, we have to expect that LMCA and ISRG are the most likely to provide upside surprises as these stocks are considered by most analysts to underperform the market by a wide margin.

Watch List Summary

One stock of interest to us is Ross Stores (ROST).  On March 8, 2013, we had the following to say about the company:

“Based on the most recent low in the price of ROST, we can expect that if the stock goes below $52.01 then the downside target is going to be to the conservative downside target of $37.35.  Alternatively, if ROST rises above $61.50, the stock is likely to rise to the previous high of $70.  We’d take a wait and see attitude on this value prospect.  We’d buy ROST in two stages, once at $52.50 and again at $40 using 7% of the portfolio for each purchase.”

Ross Stores fell to $51.71 and then vaulted up to $81.99.  Downside considerations become paramount for a stock like ROST.

As shown in the chart above, the Speed Resistance Lines for ROST, the conservative downside target is $37.73 and the extreme downside target is $27.33.  Because there is such a large difference between the current price and the conservative downside target, we expect that, at minimum, there will be a replication of the previous move from $68.90 to $51.71.  If a repeat of the previous decline were to occur, we should expect $61.49 to appear on our radar before a meaning attempt at the old high.  We would not be buyers of the stock at the present time, however, the extreme upside target for this stock is $113.19 based on the work of Gould.