Thinning Out
Last week was a decent one for the market, though much of the strength was concentrated in defensive-type sectors (consumer durables, health care, etc.), and today, as the second quarter began, the sellers re-appeared. As we wrote last week, the overall trend remains up, so we’ll leave our Market Monitor in bullish territory, but there are a few yellow flags out there that could have an effect. All told, we see a good number of decent set-ups, but we are also seeing more stocks stagnate and some fall by the wayside. Hold your best performers and do some selected buying, but don’t hesitate to dump your losers and laggards and hold a little cash at this point.
This week’s list does have a bunch of high-quality names with strong charts, something that’s usually a good sign for the market. Our favorite of the group is Trinity Industries (TRN), the leading railcar maker that’s part of the still-strong transportation group. We think it’s a good buy around here or on further weakness.
| Stock Name | Price | ||
|---|---|---|---|
| Trinity Industries (TRN) | 0.00 | ||
| Proto Labs (PRLB) | 0.00 | ||
| Pandora Media Inc. (P) | 0.00 | ||
| LinkedIn Corporation (LNKD) | 0.00 | ||
| Kansas City Southern (KSU) | 176.54 | ||
| Cabot Oil & Gas (COG) | 0.00 | ||
| CBRE Group (CBG) | 0.00 | ||
| Biogen (BIIB) | 0.00 | ||
| Bonanza Creek Energy (BCEI) | 0.00 | ||
| Activision Blizzard, Inc. (ATVI) | 0.00 |
Trinity Industries (TRN)
Why the Strength
As noted with Kansas City Southern, freight demand in the U.S. is expected to grow to $27.5 billion by 2040, according to data from the U.S. Department of Transportation. As the largest railcar manufacturer in the U.S., this news is music to Trinity Industries’ ears. The company is already benefiting from a new golden age for transportation stocks, especially railroads. The sector has broken out of a nearly two-year long consolidation period, as companies gear up for stronger economic growth. Providing another revenue stream for industry growth is the energy sector. Specifically, the shale drilling boom has increased production faster than the current infrastructure can handle it. With politics and bureaucracy slowing pipeline growth, petroleum firms have once again turned toward railcars, playing into Trinity’s business model. Lending credence to the sector’s resurgence, billionaires Warren Buffet and Carl Icahn are both taking advantage of this trend (through ownership in other railcar manufacturers). But Trinity doesn’t need Buffet or Icahn, as the company’s revenue and earnings growth speak for themselves, with revenue averaging year-over-year growth of 31% during the past year, while earnings have risen 91%, on average, during the same period. With Trinity sporting a bargain valuation and a modest dividend (1% yield), we think the stock’s strength can continue.
Technical Analysis
While the past several years have been a bumpy ride for TRN investors, the stock finally found its footing in late 2012. TRN bottomed near 29 in November, and hasn’t looked back since. The shares have rallied more than 55% during this time frame, climbing steadily along support at their 10-day and 25-day moving averages. After tagging a multi-year high near 46 last month, TRN has entered a period of consolidation, providing an excellent entry point for potential investors. We believe the shares are buyable here, or on minor weakness.
TRN Weekly Chart
TRN Daily Chart
Proto Labs (PRLB)
Why the Strength
With the advent of 3D printing, on-demand, short-run product prototyping has become a booming business. While other companies have rushed to jump on the 3D printing bandwagon, Proto Labs has been extremely profitable by going its own way. As you might have guessed, the company is an online, tech-enabled manufacturer of custom parts, but instead of printing those parts, Proto Labs utilizes its proprietary software and computer numerical control (CNC) machining and injection molding processes to manufacture custom parts. The company’s Web-based interface and software automate many typically time consuming processes, allowing customers to directly upload CAD files for processing. In fact, Proto Labs has streamlined its business to the point that it can often turn around injection molded parts overnight, compared to an average turnaround time of three months for traditional shops. The result is average revenue growth of 28% during the past four quarters, with average earnings growth of 49% during this period. What’s more, earnings per share spiked 121% in the most recent period, underscoring the success of Proto Labs’ leadership and business model in the face of the more trendy 3D printing competition.
Technical Analysis
PRLB has gained nearly 70% since going public in February 2012. The shares were content to idle between support at 30 and resistance near 40 for the better part of last year, but 2013 has seen PRLB accelerate sharply to the upside. In fact, the stock is up 30% year-to-date, bolstered by key support from its 25-day and 50-day moving averages. PRLB spiked significantly on February 12, hitting a high near 54 on record volume as investors cheered the company’s earnings report. The stock has since come back to earth, with the shares now poised to challenge short-term resistance at 50, after resting for a few weeks. The stock is buyable here, but minor weakness might provide a more attractive entry point.
PRLB Weekly Chart
PRLB Daily Chart
Pandora Media Inc. (P)
Why the Strength
Pandora, making its debut in today’s Cabot Top Ten Trader, is an Internet radio service that lets listeners create up to 100 personalized stations on which they can listen to unlimited hours of free music and comedy. The company also runs Pandora One, a paid subscription service. The company’s Music Genome Project is an ambitious program to analyze and categorize all of pop music to allow users to find exactly the music they want. Pandora’s users listened to 2.7 million hours in Q4 2012, and are estimated to have listened to 4.0 million in Q4 2013, a 46% increase. Revenue comes primarily from advertising, with subscriptions and other sources making up the other 13%. Pandora is a major holdout from the domination of Apple’s iTunes as a music source, and some analysts speculate that an Apple deal with Spotify might take a bite out of Pandora’s market share. But with over 125 million registered users, Pandora is a successful business right now. The other thing that’s making analysts a little antsy is that Joe Kennedy, the CEO who has run the company since 2004, is stepping up to be Chairman of the Board, so the company is looking for a new leader. There are risks here, but also bright prospects.
Technical Analysis
P came public in June 2011 at 16, and proceded to bump downhill through November 2012, when it bottomed at 7. But in the four months since then, P has fought its way back to 14, helped by a big gap up on volume on March 8, when the company issued unexpectedly strong guidance for the current quarter. In the three weeks since that big jump, P has been trading sideways with support at 13.5. The rising 25-day moving average is just above 13, and should provide some support soon. A buy on a pullback toward 13.5 could pay off. Use a loose stop at 12.5 as a warning signal and 12 as a sell.
P Weekly Chart
P Daily Chart
LinkedIn Corporation (LNKD)
Why the Strength
In our book, LinkedIn is the #1 growth stock of this bull move, and in the long-term, it has all the characteristics of big market winners (huge sales and earnings growth, huge earnings estimates, a big potential market and significant barriers to competition). The company is sometimes referred to as a new and improved Monster.com, but it’s far more than that—it’s no longer just about posting a job opening and hoping the resumes roll in. Instead, companies can actively seek out the best talent, and even currently-employed workers can effectively market themselves to potential (higher paying) firms. This part of the business makes up about half of revenues and is growing the fastest of all segments, up 90% in the fourth quarter. But LinkedIn is also making its site into a news, advice and information destination for professionals, which is helping its advertising business (revenues up 68% from a year ago) take off. Combine those two with premium subscriptions (up 79%), which allow users much more information and data when looking for a potential employee, and LinkedIn is firing on all cylinders—it has a revolutionary offering that’s delivering a major benefit to users, and thanks to the network effect, the gap between it and any competition is widening. It’s no wonder institutional investors are piling in.
Technical Analysis
In the big picture, LNKD just broke out from a nearly two-year-long, post-IPO consolidation in February, so, while it’s had a big run in recent months, we’re optimistic the stock is still in the early stages of its overall move. Short-term, it’s been hard to buy the stock in recent weeks as it motored higher, but shares have hit some resistance in the 180-ish area since early March, and the 50-day line is slowly catching up (now above 155). If you don’t own any, you could buy here or on weakness, with a stop around the 50-day line.
LNKD Weekly Chart
LNKD Daily Chart
Kansas City Southern (KSU)
Why the Strength
Demand for low-cost transportation alternatives has led to a renaissance in rail shipping. Helping to lead this railroad resurgence, Kansas City Southern operates mainly in North America via the north/south freight corridor, which connects commercial and industrial markets in the central U.S. with industrial cities in Mexico. While a drought in the Midwest cut into demand for corn shipping, the company’s No. 1 commodity, innovations in shale drilling led to a boom in the energy sector, and increased demand for crude product transportation. Rail became the shipping option of choice due to a lack of pipeline infrastructure in many drilling areas and Kansas City took full advantage of the shift. Overall, growth expectations remain strong, with Kansas City Southern forecasting revenue growth in the high-single digits for fiscal 2013. What’s more, a recent U.S. Department of Transportation report projects that freight demand will grow to $27.5 billion by 2040. As a result, 2013 stands to be the industry’s third year in a row of record capital spending, with more than $14 billion pouring into rail infrastructure. With its history and solid leadership, Kansas City Southern is well positioned to take advantage of this railroad renaissance.
Technical Analysis
KSU continues to chug steadily higher, extending a long-term uptrend that has favored the shares for the better part of the past four years. From a short-term perspective, KSU has added more than 30% so far in 2013, with the shares riding solid support at their 10-day and 25-day moving averages. In late February, KSU finally broke out above psychological resistance at the century mark, prompting yet another buying spree. The stock has since settled down, and is consolidating recent gains near 110, in record-high territory. Buying dips is probably your best approach, with a stop near the 50-day line at 100.
KSU Weekly Chart
KSU Daily Chart
Cabot Oil & Gas (COG)
Why the Strength
We wrote about Cabot Oil & Gas two weeks ago, and we remain very bullish on the company. In fact, we’ve enthused about the company for years—but with the vast majority of its output in natural gas, that commodity’s dive for much of 2011 and early 2012 put a lid on the stock. However, natural gas prices are now firming up, and the stock is looking like a real leader. The big draw here is Cabot’s tremendous production growth; management has it targeted at 35% to 50% this year, but that’s just the beginning. Within its highly lucrative acreage in Pennsylvania’s Marcellus Shale (the firm has 15 of the top 20 producing wells in the Marcellus!), Cabot could be growing at rapid rates for years. Consider that, in the Marcellus, the company has between 250 and 300 wells currently in operation, and that it’s planning to spud another 85 wells. Yet the firm believes it has 3,000 drilling locations on its acreage! And this says nothing about its growing production from the oil- and liquids-rich Eagle Ford shale and elsewhere! More than likely, 25%-plus production growth will be the norm for many years, and with a slew of natural gas-consuming factors coming on-line in the years ahead (more power plants, LNG export facilities, greater transportation demand), natural gas prices should remain firm. We like it.
Technical Analysis
There are many good looking natural gas stocks today, but we still think COG is the #1 play in the group—despite soggy gas prices in recent years, the stock has been a solid winner. Its latest run began last June, with the stock making steady upward progress, but the fireworks started in February after a great fourth-quarter report. And, after a straight-up move to 68 or so, COG has paused for a couple of weeks. We think you can nibble here or, better yet, grab shares on weakness.
COG Weekly Chart
COG Daily Chart
CBRE Group (CBG)
Why the Strength
CBRE Group (formerly CB Richard Ellis Group) (formerly Coldwell Banker) specializes in brokering, managing and offering investment opportunities in commercial real estate. The company is one of the world’s largest commercial real estate firms, and is widely diversified. The recent rebound in the global economy in general, and the real estate sector in particular, has given CBRE Group a shot in the arm. The company advises other companies about buying real estate around the world, originates mortgage financing and manages those properties on the owners’ behalf. About 60% of annual revenues come from the U.S., but CBRE Group has been active in M&A, acquiring CB Richard Ellis (Vietnam) Co. in September 2012, EA Shaw in November 2012 and Resource Real Estate Partners and TPA Realty Services in January 2013. Right now, it’s the health of the North American real estate market that’s heating up interest in CBRE Group, as Europe’s prospects continue to see-saw with the health of the eurozone. The company’s Q4 results—a 14% jump in revenue and a 23% gain in earnings with a multi-year high 9% after-tax profit margin—give promise of even better results to come when Europe stops contracting.
Technical Analysis
CBG made a huge run—from 2.3 in March 2009 to 30 in April 2011—as the U.S. real estate market bounced back from enormously depressed levels. But a four-month correction to 12 in September 2011 led to a protracted re-basing period. The new rally began in November 2012 with the stock at 17, and it has now surged back to 25. As an economically sensitive stock, CBG is likely to remain volatile, but it’s also got excellent potential if the global economy (especially Europe) strengthens. If you like the story, you should be able to get in on CBG on a pullback toward 24 with a relatively tight stop at 22.5.
CBG Weekly Chart
CBG Daily Chart
Biogen (BIIB)
Why the Strength
Biogen is a major player in the global biotech business, a company with several blockbuster drugs like Avonex (for the treatment of relapsing multiple sclerosis), Rituxan (for non-Hodgkins lymphoma and rheumatoid arthritis) and Tysabri (for relapsing MS). The company’s Tecfidera (an oral treatment for MS) just received FDA approval, and news that the company was pricing it at $54,900 annually (which is lower than comparable treatments from Novartis and other competitors) gave the company a big boost in analysts’ ratings. Biogen has a number of successful drugs that target major diseases that affect large populations. Sales are global, with a little over half coming in the U.S., a hair less than 40% from Europe and the rest around the world. Biogen also has a strong pipeline of candidate drugs in late-stage clinical trials, including one for leukemia and one for hemophilia. The company plows nearly a quarter of its free cash flow back into R&D, and shows no signs of resting on its strong base of approved drugs. The company has a war chest of about $3.7 billion in cash, cash equivalents and securities that are expected to be used in promoting strategic alliances and share buybacks. Biogen’s ongoing stock repurchase program bought $2.1 billion of shares in 2010 and $1.5 billion in 2011. A restructuring in November 2010 sheared away 13% of the company headcount, which translates to about $300 million in reduced expenses. Biogen is set to run lean and to keep buying back its shares.
Technical Analysis
BIIB has been in a steady uptrend since the middle of 2010, boosted by approvals of its major drug products. From 46 in June 2010, BIIB had soared to 177 at the beginning of last week. And the Tecfidera news kicked the stock as high as 197 today! BIIB traded under resistance at 155 from the middle of September until late January, but has been on a roll since. With its 25-day moving average back at 175, BIIB may be a little extended, but it’s not out of line with its long-term price trend. Look for a pullback toward 190 as an entry point and put a loose stop around 165, as BIIB isn’t a high-risk proposition.
BIIB Weekly Chart
BIIB Daily Chart
Bonanza Creek Energy (BCEI)
Why the Strength
Bonanza Creek is one of our favorite growth stories in the energy group. Unlike firms like Cabot Oil & Gas and Range Resources, which are weighted toward natural gas, Bonanza Creek is focused on oils and liquids; about three-quarters of its production last year was either oil or liquids, and, in the fourth quarter, those brought in about 90% of revenues, so this is clearly an oil-based story. The company is mainly getting that black gold from the Wattenberg Field in Colorado, a newer but increasingly established shale play; Bonanza is dedicating the vast majority of its CapEx to that area in 2013, with four horizontal drilling rigs aiming to spud more than 60 wells. The firm also has great potential in Cotton Valley in Arkansas, where it has two vertical drilling rigs operating that should open more than 30 wells and do a ton of re-completions. Like many of the best energy explorers, this one looks to have years of growth ahead of it—the company is only drilling in a small area within its Wattenberg acreage, with lots of testing going on in its Niobrara fields that should yield results in 2014 and beyond. So far, Bonanza’s results have been spectacular, with fourth quarter production and cash flow more than double their year-earlier levels (the firm aims to hedge more than half its production to guarantee strong cash flows), and management has guided toward a 60% production hike in 2013. Of course, if the European turmoil causes oil prices to sink, all bets are off, but with that commodity still fetching north of $90 per barrel, we think this story has legs.
Technical Analysis
BCEI came public at the very end of 2011 and had lots of ups and downs during 2012. But ever since the market’s bottom in mid-November, the stock has been a star, trending steadily higher with a few sharp dips along the way, including one during the late-February market retreat. But we’re impressed with BCEI’s ramp since that pullback, as it ripped as high as 41 before consolidating in recent days. We think you can buy some in the upper 30s and use a stop just below the 50-day line, which is around 35.
BCEI Weekly Chart
BCEI Daily Chart
Activision Blizzard, Inc. (ATVI)
Why the Strength
Activision Blizzard designs and distributes video games that play on game consoles, mobile devices and computers. Its Activision Publishing segment develops and publishes interactive entertainment software. The Blizzard Entertainment segment specializes in real-time strategy, role-playing PC games and online subscription-based massively multiplayer online role-playing games (MMORPGs). Activision Blizzard Distribution is the logistical arm. The big names in the Activision Blizzard universe are World of Warcraft and Call of Duty, although new games like Destiny and Skylanders are leaders in their niches. The big news in recent months has been the blockbuster Q4 earnings report that showed a very healthy 26% jump in both revenue and earnings, with a reassuring 50.4% after tax profit margin. (The after-tax profit margin always surges in the fourth quarter, boosted by holiday sales.) Sales of Call of Duty: Black Ops 2 drove much of that growth. The company’s business is being buoyed by the release of new generations of game consoles, which increase demand for newer games. The company also announced that it was considering significant stock repurchases. Since the stock, which pays a small dividend, is trading at an attractive P/E of just 12, this seems like a good idea. It’s unlikely that Activision Blizzard will ever recapture the excitement of its big run from 2003 through 2008, but it’s showing some life.
Technical Analysis
ATVI traded essentially flat from the middle of 2009 through February of this year. The good earnings news in February gapped the stock up from 12 to 13.5 on excellent volume, and ATVI rode the infusion of energy all the way to 15 during the second week of March. A pessimistic report on February video game sales caused a drop in mid-March, but ATVI has been holding firm since then. We think ATVI is buyable right here, with a stop at its 50-day moving average, now at 13.
ATVI Weekly Chart
ATVI 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.
