Still Flopping Around
The market’s action of two weeks ago gave evidence that the bulls were taking control…but last week’s volatility tells us the bears still have plenty of tricks up their sleeves. All told, this remains a tough market, so your best move is to keep some of your powder dry while focusing on specific stocks and sectors that are in their own, private bull markets. That means focusing on commodities, especially oil, as well as a few emerging growth-oriented leaders. Just remember that earnings season is beginning, so you should have a game plan in place on how you want to handle your stocks before they report. This week’s Top Ten is similar in structure to many of the past few weeks, but contains a couple of new names to consider. Our favorite of the week is Mechel (MTL), a company that has its hands in all the right cookie jars—steel, iron ore and coal. The stock powered ahead on big volume last week, and we think you can take a position now.
| Stock Name | Price | ||
|---|---|---|---|
| MTL (MTL) | 0.00 | ||
| NFLX (NFLX) | 0.00 | ||
| POT (POT) | 0.00 | ||
| XCO (XCO) | 0.00 | ||
| APA (APA) | 0.00 | ||
| CLR (CLR) | 0.00 | ||
| CSIQ (CSIQ) | 0.00 | ||
| FDG (FDG) | 0.00 | ||
| KEX (KEX) | 0.00 | ||
| MTH (MTH) | 0.00 |
(MTL)
Why the Strength
Some of the strongest stocks in recent months have been in the iron ore, coal and steel industries. Mechel, happily, participates in all three! It’s the sixth-largest steelmaker in Russia, but that country only accounts for half its revenues; nearly a third of revenues come from western Europe, and the rest come from eastern Europe, Asia and the Middle East. The big factor, of course, is increased global demand for steel, which has both increased production quantities and hiked prices; Mechel is not alone in enjoying the benefits of these trends. But Mechel also is benefiting from an acquisition spree; it keeps buying smaller competitors ––all over the globe––and rolling them into its operations. As long as the demand trends remain strong, Mechel will benefit.
Technical Analysis
This marks Mechel’s fourth appearance in Cabot Top Ten Report since last October, when it was trading at 74. If you bought then, you might have been knocked out on the dips under 72 in November and January, but if you held on, congratulations! The main trend remains decidedly up. Short-term, MTL could easily pull back to mild support at 142 or to stronger support at 130, where its 25-day and 50-day moving averages may soon converge. But the buying volume in recent days has been impressive, suggesting the sellers have very little power here. If you’re game, and you can manage risk, you can buy here.
MTL Weekly Chart
MTL Daily Chart
(NFLX)
Why the Strength
Netflix has established itself as the de-facto standard when it comes to online movie rentals. Created in 1997, it blindsided the reigning rental giant, Blockbuster, by offering quick delivery of the latest films without the worry of late fees. Yet even after handily defeating Blockbuster when it entered the online movie rental market, Netflix continues to look forward. The company is now working with Korean electronics giant LG to possibly sell set-top boxes which stream Netflix’s online movie offerings directly to customers’ televisions. This functionality could even be placed inside DVD players or video game consoles. The online video distribution market has yet to truly be tapped by a company (only 1% of adults watch movies online), but if there is a company primed to control this market, it is Netflix. Analysts have also increased its 2008 earnings estimate, giving us reason to believe that its growth will continue.
Technical Analysis
After a brief pullback in January, Netflix has resumed the positive trend it began in September of last year. While it has yet to surpass its all-time high set in 2004, that may have been a long enough time ago to not provide much resistance to worry about. The support level building at 36, a level that’s just been touched by the uptrending 25-day moving average, provides a prime entry point.
NFLX Weekly Chart
NFLX Daily Chart
(POT)
Why the Strength
Potash is a mineral fertilizer that’s mined, just like coal, and Potash Corp. owns more than half of the world’s reserves. Demand had always been steady, but the enormous demand for corn caused by the decision to make ethanol 10% of every gallon of gasoline really lit the fire. And strong crop prices because of a rising middle class in emerging economies haven’t hurt either. High corn prices and growing demand have allowed fertilizer producers to demand higher prices for their products, and Potash Corp.’s earnings have been up 102%, 67%, 110% and 63% in the last four quarters. The company also has been active in securing additional reserves with buys of companies (and stakes in companies) around the world. This is a big story, and a $0.40 a quarter dividend only makes it more attractive. Earnings are scheduled for release on April 24, which is the big wild card.
Technical Analysis
POT took off in September 2006 and has been in an uptrend ever since, although a couple of base-building pauses and a few sharp pullbacks below its 50-day moving average have made it tricky to handle. Many investors have been put off by this long history of gains, reasoning that the trend can’t go on. But we know that trends can continue much longer than anyone expects … it’s one of the things the market does best. With that said, we don’t suggest jumping into POT with both feet. A small buy on a pullback toward 170 might prove rewarding. But keep an eye on that earnings date.
POT Weekly Chart
POT Daily Chart
(XCO)
Why the Strength
Exco was our Editor’s Choice last week, winning that designation primarily because of its super-strength, and this week it’s back again. This Dallas-based company is an oil and gas explorer and producer, with operations in New Mexico, Texas, Oklahoma, Louisiana, Kansas, Wyoming, Pennsylvania, Ohio, Kentucky and West Virginia. The underlying reason for its strength is known to all; prices of oil and gas are up. But Exco has other attractions. Because its annual revenues are under $1 billion, it can grow faster than many other companies in the industry; it’s boosting spending by $175 million this year to $800 million, so that it can acquire more properties and pump more oil and gas. And because it’s not well know (it’s owned by only 74 mutual funds), there’s still great potential for buying by institutions. That, obviously, is what’s been going on in recent weeks.
Technical Analysis
Last week’s Cabot Top Ten Report was published following Exco’s spurt from 14 to 21, a 50% jump in eight weeks. Expecting a correction, we gave the stock a recommended buy range of 17 to 19, but that proved too cautious, as the stock soared to nearly 23 on Thursday before pulling back slightly on Friday. Chasing a hot stock like this is all about balancing risk and reward. If you’re on top of it, and can follow the hourly gyrations and/or use close stops, there’s no reason to wait for a pullback. But the higher the stock gets, the greater your risk. Today, with the stock nearly 30% above its 50-day moving average, risk is even higher than last week. But the long-term is still very bright.
XCO Weekly Chart
XCO Daily Chart
(APA)
Why the Strength
Apache is probably the favorite way for institutional investors to play the bull market in energy, and natural gas in particular. The company has posted production increases in 28 of the past 29 years, and also has increased its proved reserves for 22 years in a row. Management expects 2008 to be no different, with production increasing a modest 6% to 10%. But thanks to rising gas prices, especially internationally (Apache has a strong presence in Australia, Argentina, Canada and Egypt), the company’s bottom line could soar 50% this year and more in ’09. Recently, the stock has gotten a boost from news of a few big natural gas discoveries, some in the Ootla shale site in Canada (which could turn into one of the larger shale plays in North America) and some offshore Australia. These won’t immediately boost production, but they validate Apache’s exploration efforts. It’s not undiscovered, but this company’s big margins, good growth and excellent outlook make it a leader in the energy group.
Technical Analysis
APA has a great-looking long-term chart, as the stock went next to nowhere from September 2005 (just after Hurricane Katrina) to the summer of 2007. But it’s enjoyed an uptrend since then, with a couple of shakeouts along the way, including a nasty one in late January. It’s been moving up on above-average volume—a clear sign institutions are buying—and while it’s a bit extended to the upside (it rose 18 points in seven trading days), we think you can grab some shares on a pullback.
APA Weekly Chart
APA Daily Chart
(CLR)
Why the Strength
Continental Resources is an oil and gas explorer/producer, a type of company that’s very familiar to Top Ten readers in recent months. It’s got medium-sized reserves (135 million barrels of oil equivalent as of the end of 2007) in the Rocky Mountain, mid-continent and Gulf Coast regions, and surging earnings (up 144% in the latest quarter) and an impressive 46.5% after tax profit margin. The company’s expertise in horizontal drilling has allowed it to exploit fields that conventional drillers couldn’t, and two such fields account for 75% of Continental’s production. The stock is also benefiting from its relatively recent IPO (May 2007), which means institutional ownership is much lower than comparable companies with more mature stocks, though 66 funds have already signed on. Earnings will be coming out on May 5.
Technical Analysis
CLR built a nice four-month base at 15 after its IPO, then took off like a rocket in September, rising to 25. Five months later, it was up against resistance at 30, where it spent a month before a March rally that is still going on. With the stock at new price and RP peaks in the high 30s, its history of long base-building periods is relevant. Look for a pullback to 35 as a useful entry point.
CLR Weekly Chart
CLR Daily Chart
(CSIQ)
Why the Strength
Canadian Solar is actually a Chinese company (don’t ask) that’s striving to be one of top players in the alternative energy world. By far the number one reason for the stock’s resilience in recent months has been its amazing growth, thanks to strong European demand. Revenues are up more than 400% each of the past two quarters, while earnings are just lifting off the ground and should soar for the next couple of years. The firm has already acquired all the raw materials (silicon, wafers, etc.) it needs for ’08, which should lead to a tremendous jump in production and another triple-digit growth year in revenues. Canadian Solar isn’t unique, although we’re intrigued by its move toward using cheaper metallurgical silicon for some solar cells, which could boost future margins. There is some risk that its silicon suppliers won’t come through in full, but obviously the market is impressed with the firm’s prospects, as are we.
Technical Analysis
CSIQ’s correction during the past few months is a bit wide-and-loose, but that’s to be expected given the fact that the firm was owned by just 12 mutual funds at year-end, leading to big swings up and down. The stock’s March low was much higher than the January low, a positive sign you’ll see among many of today’s best stocks. At this point the stock is in a base-building phase, and there’s still plenty of overhead to chew through. Our advice: Keep any position small at first, and take it slow until you see a powerful breakout above 28. On the downside, any drop below 21 would tell you the bears are taking control.
CSIQ Weekly Chart
CSIQ Daily Chart
(FDG)
Why the Strength
In February 2003, Canada’s three biggest producers of hard coking coal—metallurgical coal that is used to make steel—were joined to form a company called Elk Valley Coal. The vision behind the company was to sell this vital resource to steel companies anywhere in the world that were served by deep-water ports. Today 45% of the coal goes to Asia, 35% to Europe and the rest to North and South America. Fording is an open-ended mutual fund trust that holds a 60% stake in Elk Valley and is managed to maximize payouts to unitholders. Last year, dividends amounted to $2.02, yielding about 3.2%. The trust owns 46% of the port facility at which shipments are loaded. With proven reserves of 463 million tons of coal, as long as the world is hungry for steel, the future looks bright for Fording.
Technical Analysis
FDG has been in a strong uptrend since November 2006, a rise punctuated by several sharp pullbacks. After its first Top Ten appearance in February 2008, the stock spent six weeks building a new base, then rocketed from 54 to 65 during the first week of April. Institutional investors have begun returning to FDG, but it will still take a good earnings report on April 21 to keep the ball rolling. This is a high-quality income stock with growth potential. We like it. A move by the stock to fill the gap at 58 would make an attractive buy point.
FDG Weekly Chart
FDG Daily Chart
(KEX)
Why the Strength
Kirby is the premier inland tank barge operator in the U.S., transporting bulk liquid products on the Mississippi and the Gulf Intracoastal Waterway. Generally, its cargoes are petroleum products and agricultural chemicals, and we all know that price trends are up in those industries. The result has been increased demand for Kirby’s barges and higher prices for its services. The improvement in business is so good, in fact, that on March 17, the company took the step of announcing that first quarter earnings would top $0.66 per share, exceeding the more optimistic analyst’s forecast of $0.62. The actual results will be released after the market close on April 23, but more important than the numbers will be management’s words about business prospects for the future. We have little doubt that those words will be optimistic; ideally, they’ll include concrete details as well.
Technical Analysis
Kirby was our Editor’s Choice on February 24, when it was trading at 57. The attraction then was the big-volume breakout above four months of resistance at 50. Reasoning that the stock would correct soon, we gave it a recommended buy range of 52 to 55, and patient investors were rewarded when the stock dipped into that range eight trading days later. Since then the stock has touched its uptrending 25-day moving average at 23, and, in general, behaved perfectly. If you like the story, now’s the time to buy.
KEX Weekly Chart
KEX Daily Chart
(MTH)
Why the Strength
Another week, another housing stock has made its way into Top Ten Report. The reason Meritage is making an appearance isn’t because investors see a big, new upturn for the housing market, but that the stock has already discounted the worst of the downturn. The company pre-announced first quarter sales a couple of weeks ago, and the news was encouraging—while revenues and earnings will continue to sink, the company cut its unsold house inventory by 30% in the quarter, has just $2 million of debt left on the books, and expects total write-downs in 2008 to be significantly less than last year. Combine that with the fact the stock is valued at just $540 million, and investors are thinking the downside is limited. We’re not big believers in buying beaten-down stocks, but the recent upside action in the housing group is intriguing, as is the persistent, pervasive negative sentiment (telling us most people have already sold). Considering it an interesting speculation.
Technical Analysis
MTH plummeted into the market’s late-January low, but then staged two gigantic up weeks on heavy volume. That’s not unusual—you often get, short, sharp rallies in a bear market—but what happened next was; MTH moved sideways for a few weeks, and then broke out to new recovery peaks, again on good volume. The stock now stands above its short-, intermediate- and long-term moving averages, so we believe you can buy a little around here, and keep a stop-loss in place in the 17-18 range.