Booking 56.91% Gains and Betting on a Small-Cap Breakout

U.S. stock markets eked out another gain last week, with the Dow Jones up 0.10%, the S&P 500 rising 0.20% and the NASDAQ gaining 0.43%. The MCSI Emerging Markets Index, however, lost 3.91%.

Big gainers in your Bull Market Alert portfolio included the Ultra Nasdaq Biotechnology ProShares (BIB), which added 6.28%; ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA), which rose 4.85%; and NetEase, Inc. (NTES), which gained 2.07%.

With your December ULTA $160 calls (ULTA151218C00160000) up just under 57%, sell half of your options to lock in these gains. Hold on to the rest of the options for potentially bigger gains ahead.

Alaska Air (ALK) fell below its 50-day moving average and moved to a HOLD.

This week’s Bull Market Alert recommendation is Paycom Software (PAYC), a small, fast-growing cloud-based software company. Paycom’s software helps companies cut costs, manage payroll and deal with the mind-numbing complexities of the ObamaCare plans.

Here’s why I expect Paycom’s stock to roar ahead in the near future.

First, enterprise software is hot. Research firm Gartner forecast in August that global spending on enterprise software will rise more than 7% this year to $149.9 billion and top $201 billion in 2019. Paycom is in a sector where a rising tide will lift all boats.

Second, Paycom is slated to report this Tuesday after the market’s close. Revenues are projected to climb 41% to $51.51 million. Analysts expect earnings per share to rise 40% to 7 cents. The good news is that Paycom has beaten the Street’s earnings expectations five quarters in a row. If it does so yet again, there is a good chance the stock may break out in the market’s current “risk on” environment.

Third, despite the overall stock market’s recent recovery, Paycom is still technically oversold and is due for a bounce. That’s because the recent rally has been largely restricted to large-cap stocks, while small-cap stocks, such as Paycom, have been laggards. But with the Russell 2000 small-cap index breaking out of a consolidation pattern just last week, I expect that trend to turn in the coming weeks, especially as we enter the strongest time of the year.

So buy Paycom (PAYC) at market today and place your initial stop at a wide $30. If you want to play the options, I recommend the February $40 calls (PAYC160219C00040000), which last traded at $4.10 and expire on Feb. 19.

Portfolio Update

ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA) had a strong week, rising 4.85%. ULTA came within $1.00 (0.6%) of its 52-week intraday high last Friday and appears to be in a position to break above this mark. ULTA will report third-quarter earnings on Dec. 3. ULTA is a BUY.

Alaska Air (ALK) lost 3.59%. Alaska Air Group, Inc. is a member of Airlines for America, the leading U.S. air carrier trade association, giving ALK some additional bargaining power within its industry. This group consists of nine airlines, including three large cargo carriers. Airlines for America is a lobbying group that pushes for changes such as modernization of the nation’s air traffic control system, lower taxes on airlines and the removal of unnecessary regulations. ALK dipped below its 50-day moving average (MA) last week to become a HOLD.

Ultra Nasdaq Biotechnology ProShares (BIB) added 6.28% last week. After surviving a politically charged whipping several weeks ago, the biotech sector finally broke out to the upside last week. In doing so, BIB also pushed above its 50-day MA intraday last Thursday as a sign of strength. BIB remains a BUY.

Big Lots, Inc. (BIG) dipped 0.13%. Big Lots remains a favorite among analysts, with 14 analytical firms rating it a “Buy” and six firms rating the stock at “Hold.” Their average 12-month price target is $53.13 — a potential 15% move above Friday’s close. BIG is a HOLD.

NetEase, Inc. (NTES) continued its five-week long-streak of gains to add another 2.07% last week. NTES gains nearly 80% of its total revenue from online gaming, and its market segment continues to grow like a weed. Chinese Internet gaming leapt 35% year over year in 2014 and analysts believe this sector will surpass the U.S. mobile gaming sector in the near future. NTES will report earnings on Nov. 11, after markets close. NTES is a BUY.

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