Lots of Damage, But Some Groups Hold Up
The selling pressures have been spreading during the past couple of weeks, moving from just the highfliers of the past year to much of the broad market. Most stocks (especially growth stocks) have suffered severe damage on their charts, and that will take time to repair; the odds are against a sustained rally from this point. That said, a few commodity-related groups continue to trade well, including a bunch of energy stocks that are beginning to push higher—they could prove to be new leaders if the market stabilizes. Overall, you should remain in a defensive stance because the overall trend is down, but buying a little of a resilient name or two is OK.
This week’s list is very heavy on commodity names, and our Top Pick is Athlon Energy (ATHL), a fast-growing producer in the Midland Basin. Its recent land grab is helping the stock push out from its first-ever base.
| Stock Name | Price | ||
|---|---|---|---|
| Zillow (Z) | 76.64 | ||
| Stillwater Mining (SWC) | 0.00 | ||
| Pacific Ethanol (PEIX) | 0.00 | ||
| Huntsman (HUN) | 0.00 | ||
| HDFC Bank Limited (HDB) | 0.00 | ||
| HD Supply Holdings, Inc. (HDS) | 0.00 | ||
| Diamondback Energy (FANG) | 0.00 | ||
| Concho Resources (CXO) | 0.00 | ||
| Athlon Energy (ATHL) | 0.00 | ||
| Archer Daniels (ADM) | 0.00 |
Zillow (Z)
Why the Strength
The global mass movement of every kind of business to the Web has produced many winners, and Zillow is a great example. Zillow brings home buyers, home sellers, renters, mortgage lenders and real-estate professionals together in one marketplace with a wealth of data (the company’s name is said to represent a combination of a zillion data points and the pillow on your bed at home). The company gets three-quarters of its revenue from subscriptions and fees associated with its marketplace and the other quarter from display ads. Zillow is a high-profile company, with an aggressive program of signing up users, including on Facebook and Twitter. Users can search for houses by location, price, features and school districts, as well as browse realtors, mortgage lenders and rates and even see estimates of the value of their own homes, whether or not they’re on the market. As of last month, the company boasted 76.5 million unique monthly users in March, up from 50.3 million a year ago. The gradual improvement in housing and lending markets has been a big boost to the company’s business, with revenue up 77% in 2012 and 69% in 2013. There aren’t many surprises in the Zillow business model, just a wealth of reliable data that attracts potential buyers and sellers and lets them make contact with service providers.
Technical Analysis
Z came public at 20 in July 2011 and tripled in value in its first week of trading. The stock came back to earth later in the year at 21, but again Z soared from 23 in late 2012 to 103 in September 2013. The stock built a cup formation, topping 100 again about three weeks ago and putting a handle on in a dip to its 50-day moving average at 87. Z is a very volatile stock, and had some high-volume selling days during the market’s recent correction. But it’s holding in its trading range and looks buyable right here if you like the long-term real-estate story. A stop below 80 looks reasonable.
Z Weekly Chart
Z Daily Chart
Stillwater Mining (SWC)
Why the Strength
The platinum group metals (PGM) include platinum and palladium, two metals that are well known for their use in automobile catalytic converters, but are also important in the chemical, petroleum and electrical industries. Stillwater Mining, based in Billings, Montana, is the only producer of palladium and platinum in the U.S. and the largest producer of PGM outside South Africa and the Russian Federation. The company’s other core business is recycling spent palladium, platinum and rhodium. Non-core projects include a copper and gold mine in Argentina and a PGM and copper mine in Ontario, Canada. The company is profitable, but the biggest source of investor interest is the possibility of supply interruptions from Russian and South African sources, for geopolitical reasons (Russia) or labor problems (South Africa). Almost 60% of palladium produced goes to the automotive industry, and increasing demand for cars from China and Europe will keep pressure on prices. Stillwater reported earnings on March 3 and the results were uniformly strong, with total revenues of $1.04 billion for the year, up 30% from 2012. PGM production of 524,000 ounces was ahead of the 514,000 in 2012 and total recycled PGM was up 38.5% at 616,000 ounces. The company also reported excellent liquidity, with $496 million in cash and short-term securities. Stillwater is benefiting from its geographical location and its strong performance.
Technical Analysis
SWC spent 2012 trading between 7 and 15, then tightened its range to between 10 and 13 in 2013. The stock exploded higher on strong volume in early March, and traded tightly between 14.5 and 15.5 through March and early April. The stock picked up coverage from a new analyst on April 4 and has exploded higher today after a couple of positive comments last Friday. SWC looks like a solid bet on any weakness. A little patience should find an entry point under 16. Use a stop at the stock’s 50-day moving average, now at 14.2.
SWC Weekly Chart
SWC Daily Chart
Pacific Ethanol (PEIX)
Why the Strength
Back in 2006, when Pacific Ethanol made its only four appearances in Cabot Top Ten Trader, the company was still months away from actually producing any ethanol. Demand was enormous because the government had just mandated that the additive MTBE, which had made up about 10% of the volume of gasoline, be eliminated, with ethanol taking its place. It took the company until 2011 to record a profitable year, and with the price of corn down 50% from earlier highs, 2014 is projected to yield earnings of $2.20 per share. Pacific Ethanol now operates four biorefineries—two in California, and one each in Idaho and Oregon—with a combined ethanol production capacity of 200 million gallons per year. Increasing demand led to the recent re-opening of one of the California plants that had been mothballed since 2009. The company also gets revenue from transporting ethanol, from sales of its used grain (wet distillers grain) as animal feed and from sales of corn oil. Pacific has located its production facilities close to both feedstock suppliers and end users, which keeps costs under control. The company just concluded a $28 million secondary offering of 1.75 million shares, with the proceeds to be used for general corporate purposes. Pacific Ethanol is getting support from investors as a green renewable energy business and as a well-run company with improving earnings prospects. Also on the horizon are prospects for using beet sugar and sorghum as feedstock for ethanol production.
Technical Analysis
After spiking in May 2006, PEIX spent years plowing mud at the bottom of the river. But the stock began to rally in late December and finally bolted above 10 on February 27 after a great earnings report. PEIX has been trading sideways with support at 14 since then, with a couple of excursions to as high as 18. The stock held its price despite the sizable secondary offering, indicating that there’s an appetite for a healthy ethanol producer. A buy on a dip toward 14 makes sense, with a stop at 12.
PEIX Weekly Chart
PEIX Daily Chart
Huntsman (HUN)
Why the Strength
Restructuring efforts by global chemicals manufacturer Huntsman are beginning to have a major impact on the company’s bottom line. The company offers a broad range of products, including MDI (methylene diphenyl diisocyanate), amines, surfactants, epoxy-based polymers and polyurethanes, which are used in the adhesives, construction products, electronics, medical and packaging industries. On February 11, Huntsman reported that fiscal 2013 fourth-quarter revenue soared 71% year-over-year, reversing three straight quarters of declines. During the accompanying conference call, CEO Peter Huntsman cited favorable chemicals pricing and solid execution of the company’s restructuring and cost savings plans for the turnaround. In fact, Huntsman exceeded its 2013 cost savings goal of $100 million by $50 million. But the company isn’t done yet, targeting another $60 million in savings and efficiencies by 2015. Elsewhere, Huntsman has cleared anti-trust hurdles in the U.S. for its acquisition of Rockwood Holdings’ performance additives and titanium dioxide businesses—a deal the company expects to close in the first half of 2014. This acquisition is expected to broaden Huntsman’s product offerings and create synergies of $130 million before the end of the year.
Technical Analysis
HUN has gained nearly 130% during the past two years, riding support at its 10-week and 25-week moving averages. In early 2013, HUN met with resistance near 20, but following a mild mid-year correction, the stock broke out on strong volume in late-September. Since then, HUN has gone on to encounter another technical hurdle in the 25 region, which it’s still battling. That said, the stock is standing on top of solid support and recent dips have come on mild volume. You could buy a little here or wait for a renewed push above 25.
HUN Weekly Chart
HUN Daily Chart
HDFC Bank Limited (HDB)
Why the Strength
HDFC Bank is the largest private-sector bank in India by market cap, and its fortunes are closely tied to the health of that market. The company has a nice mix of retail banking, wholesale banking and treasury operations, with wholesale banking supplying about one-third of revenue, retail banking kicking in 16%, auto loans 14% and commercial auto and construction equipment financing 11%, the same contribution as personal loans and credit cards. The growth of the Indian economy is providing plenty of organic growth for HDFC Bank, with the company’s 2013 report on February 24 revealing a 17% increase in revenue, the third straight year of double-digit revenue growth. The company’s Q4 results showed a small increase in revenue, but a multi-year high of 18.3% in after-tax profit margin. HDFC has had the benefit of stable leadership, with one man at the head of the company since its founding in 1994, when India first allowed private banks to do business. The longer-term story is that India’s financial infrastructure has long lagged behind Western models, with limited access to credit cards, personal loans, auto loans and other banking services. HDFC Bank is leading the development of stronger banking services that both benefit from and support economic growth. With a network of 3,336 branches and 11,473 ATMs in 2,100 Indian cities and towns, HDFC Bank is positioned to grow as India does. A small dividend (0.7% forward annual yield) is a nice addition.
Technical Analysis
After hitting a multi-year high at 44 in May 2013, HDB took a nearly four-month flop to 27. A recovery to 37 at the end of October led to a four-month rebasing pattern under resistance at 36. So when the stock broke out in early March, it had a good base to support its run, which topped 40 in early April. HDB looks like it may need to rest for a while with 40 as support. Any dip of a point or so looks buyable. Use a loose stop at the 200-day (now just over 34), as this stock is a long-term play on India’s strength.
HDB Weekly Chart
HDB Daily Chart
HD Supply Holdings, Inc. (HDS)
Why the Strength
HD Supply, spun off from Home Depot in 2007, is a huge supplier of more than one million different products to more than 500,000 customers, operating in a variety of sectors—residential and non-residential construction (35% of revenue), infrastructure (31%) and maintenance, repair and operations products (34%). None of its products in any of its businesses are sexy—we’re talking about wheelchairs, beddings, janitorial supplies, fire alarm sprinklers, lighting fixtures, wire and cable, specialty saws and construction tools and cement-related products. So how is HD Supply one of the strongest stocks in the market? Because current business is good, as the recent earnings report (for the quarter ending February 2) revealed; sales were flat, partly due to inclement weather and a tough comparison (there was an extra week in the prior fiscal year), but cash flow grew nicely. More important, the future looks bright as, despite being #1 in most of the industries it serves, the supply market is highly fragmented, allowing plenty of opportunity to grab share through organic growth and acquisitions. It also doesn’t hurt that margins are set to pick up as capital expenditures (just 1.5% of sales) remain very low. All told, you have a slowly-but-steadily growing, reasonably-priced stock (19 times this year’s estimates) whose business is likely to pick up as construction activity does the same.
Technical Analysis
HDS came public last June and ran up to 25 in September, before building its first-ever base. That consolidation lasted six months and banged on the 25 level two more times before an earnings-induced breakout on March 25. HDS has since rallied to over 27 before being pulled down by the market, but it remains above its breakout level, which is an encouraging sign. We like that the stock is off most investors’ radar screens, partly because of its youth. All told, if you want in, you could nibble here, with a stop below the 50-day line.
HDS Weekly Chart
HDS Daily Chart
Diamondback Energy (FANG)
Why the Strength
A relative newcomer to the oil and natural gas market, Diamondback Energy has been quick to take advantage of the boom in shale oil production. The company went public in October 2012, and has grown at a breakneck pace, expanding production by nearly 150% in fiscal 2013, with forecasts to grow by more than 100% in fiscal 2014. Diamondback has taken full advantage of its rapid growth, aggressively lowering its overall production costs in the process. In fact, in the fourth-quarter alone, the company saw lease operating expenses (LOE) fall to $6.04 per BOE in the fourth quarter, versus $7.27 per BOE in the third. What’s more, Diamondback recently updated its full-year guidance, reporting that first-quarter production rose 30% quarter-over-quarter to 13.6 million barrels of oil equivalent (BOE), with a quarter-end exit rate in excess of 16 million BOE/day. The company also lifted full-year production guidance by 10% to 16 to 18 million BOE/day. Additionally, Diamondback announced the acquisition of 6,450 gross acres from private sellers in Martin County, Texas, for $294 million and the addition of a fifth horizontal rig. If it can maintain its current growth rate, Diamondback has the potential to be a very lucrative investment.
Technical Analysis
While the company continues to expand rapidly, recent market weakness has slowed FANG’s price action to a crawl. The stock began trading in October 2012, opening near 18. Since then, FANG has nearly tripled in value, rallying steadily along unfailing support from its 10-week and 25-week moving averages. Not much has changed for FANG since we looked at the stock last month. Shares are still consolidating into support at their 10-day and 25-day moving averages, but the trading range has widened to encompass the 65-70 region due to choppy broad-market action. The stock is a hold here if you already own it; otherwise, you can consider nibbling on pullbacks to 65.
FANG Weekly Chart
FANG Daily Chart
Concho Resources (CXO)
Why the Strength
Concho Resources was a big winner during the 2009 to 2011 bull move, thanks to its leading position in the Permian Basin in Texas; in fact, it’s the top pure play on the Permian, with lots of opportunities in the Delaware, Midland and Central basins within the Permian. A focus on natural gas led to a stagnant stock and earnings for the past couple of years, but now management has expanded its higher-priced oil and liquids production, and is just embarking on a bold three-year plan that will double production. In total, Concho now owns a whopping 605,000 net acres and has identified an unbelievable 22,000 future drilling locations; when you compare that to the 607 wells it expects to tap this year, you see Concho has decades of inventory on its land. More important, the firm has successfully transitioned to horizontal drilling (about 90% of the firm’s rigs are now drilling horizontal wells), which has boosted results and led to far more oil output, which now makes up two-thirds of total production, up from about half two years ago. The expansion plans are ambitious, but Concho’s management has a history of executing, which has led to solid institutional support. Sales growth has picked up nicely during the past three quarters, and earnings are expected to grow 23% this year and accelerate from there. It’s not changing the world, but the new growth plan combined with elevated energy prices and great action among most energy stocks tells us the stock should do well. We like it.
Technical Analysis
As noted above, CXO was a huge winner in the post-2008 rally, running from 15 to 110 by the spring of 2011 thanks to booming earnings. The stock then went generally sideways for nearly three years, but now it’s looking ready to run—it’s built a nice-looking base since mid-October that included a bunch of strong-volume up-weeks after the market’s January low. And now it’s hovering just above support in the 120 area, even as the overall market turns sick. We think a small position around here with a tight stop near 118 has a good shot at working.
CXO Weekly Chart
CXO Daily Chart
Athlon Energy (ATHL)
Why the Strength
Athlon Energy is a young, small, fast-growing energy explorer that’s focused on the Midland Basin within the larger Permian Basin in Texas. The company’s claim to fame is its huge reservoir of low-risk drilling locations; after a major acquisition last week added 23,500 acres to its tally (and boosted its current production by 30%!), Athlon has more than 5,700 vertical well locations it can drill, as well as 1,550 horizontal well locations. Given its current drilling program, that translates into 30 years of inventory! The vertical wells bring solid returns in the 30% range, and Athlon is going to drill just over 200 more of them this year. But it’s the horizontal wells that provide the upside—the rates of return on them are near triple-digits, so the company is adding another couple of rigs this year so it can drill 21 horizontal wells. Add it up, and the firm expects total production to grow 70% this year (though that was before last week’s acquisition), with about 60% of that being oil; interestingly, management usually hedges about 75% of its future production so cash flows (which doubled in the fourth quarter) are predictable. All the usual caveats apply, especially if oil prices tank, but Athlon looks to have a very bright future with a long runway of growth. We like it.
Technical Analysis
ATHL is trying to break free from its first launching pad since coming public. The stock went up for a bit after its IPO, but then dipped into January, rallied into March, and more recently pulled back on light volume for five weeks. Last week’s buyout, though, may have kickstarted a new uptrend—shares rose 13% on nearly triple average volume, and held up well despite the late-week market selloff. We’re not opposed to nibbling here with a stop near 34. Alternatively, you can keep it on your watch list for when the market enters a new uptrend.
ATHL Weekly Chart
ATHL Daily Chart
Archer Daniels (ADM)
Why the Strength
Archer-Daniels Midland is among the world’s largest agricultural commodities processors. With more than 260 processing plants worldwide, ADM converts corn, oilseeds, wheat and cocoa into products for food, animal feed, industrial and energy uses. ADM is also a leading manufacturer of protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol and other value-added food and feed ingredients. Helping to feed the world remains a profitable business for ADM, with revenue rising 34% last quarter. What’s more, the company is expected to see revenue grow roughly 38% year-over-year in fiscal 2014. With the current market turmoil, we like ADM’s stability, but the real driver behind the company’s recent strength is the increasing consolidation within the agricultural processing market. For example, China’s Cofco has moved to buy majority stakes in several agricultural firms, while Marubeni of Japan is acquiring U.S.-based Gavilon, and Glencore is buying Canada-based Viterra. For its part, ADM tried to acquire Australia’s GrainCorp last year. GrainCorp owns 280 grain storage facilities and seven of the eight grain shipping ports on that nation’s east coast. ADM’s acquisition was blocked due to national security concerns, but the Australian government should allow ADM to increase its stake in GrainCorp—a move that bodes well for continued growth.
Technical Analysis
ADM has been a strong stock during the past several months. After hitting a low near 27 in early January 2013, the stock has trekked steadily higher along support at its 10-week and 25-week moving averages—gaining 63% during this timeframe. More recently, the GrainCorp news has helped bolster ADM during a period of broad-market turmoil. In fact, the stock recently pushed above former resistance at the 44 level to tag a five-year high. And, with its 10- and 25-day moving averages rising into the region, ADM appears to have ample support. If you’re up for it, you can take bites here or on pullbacks to 44.
ADM Weekly Chart
ADM 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.
