Still Lots of Crosscurrents
The market isn’t in awful shape, but it’s not in as good shape as the major indexes would have you believe—the advance has been narrowing for a while now, and last week, as the Dow and S&P leapt to new highs, many stocks and sectors lagged behind. It’s not the end of the world and there’s nothing that says the market can’t chop around for a bit, get its act together and march higher; we’re certainly not advising you to sell everything. But given the evidence, and the fact that earnings season picks up this week, we think it’s best to keep our Market Monitor in neutral territory and see what comes.
Backing up that thought is this week’s list—there are a few very enticing ideas, but it’s not exactly chock-full of young whipper-snappers. Our favorite of the week is GameStop (GME), a stock that’s strong because of industry-specific factors that should boost earnings later this year.
| Stock Name | Price | ||
|---|---|---|---|
| Yahoo (YHOO) | 0.00 | ||
| Tesla, Inc. (TSLA) | 818.87 | ||
| Toyota Motor (TM) | 0.00 | ||
| Regeneron Pharmaceuticals (REGN) | 512.96 | ||
| Omega Healthcare Investors (OHI) | 0.00 | ||
| International Paper Company (IP) | 0.00 | ||
| GameStop (GME) | 0.00 | ||
| Avis Budget Group (CAR) | 0.00 | ||
| BlackRock (BLK) | 0.00 | ||
| BE Aerospace (BEAV) | 0.00 |
Yahoo (YHOO)
Why the Strength
As one of the original dotcom behemoths, Web-portal and online content provider Yahoo! needs no introduction. The company has come a long way from its years of market dominance in the early 2000s, with Google usurping much of Yahoo’s former territory. Ironically, former Google executive Marissa Mayer now has the helm at Yahoo, and is finally righting the ship. Yahoo has always been an excellent value as a company from an asset perspective alone—it’s why Microsoft tried to purchase Yahoo back in 2008. But, under Mayer’s leadership, Yahoo is finally starting to develop meaningful partnerships to take advantage of its online assets. For instance, Yahoo recently signed on to a deal with Cloud-storage specialist Dropbox in order to offer broader Yahoo!Mail services. Most notably, however, is the deepening relationship with Apple. Since both Apple and Yahoo have a common enemy in Google, a closer integration of services and data offerings on Apple iOS devices benefits both companies significantly, with Apple distancing itself from Google and Yahoo developing a much needed presence in the mobile market. As for Yahoo’s bottom line, Mayer’s presence has helped reinvigorate stagnant revenue, with Yahoo banking 2% growth last quarter on earnings growth of 28%. In fact, Yahoo has averaged earnings growth of 47% during the past four quarters. Investors should note that Yahoo is scheduled to release its 2013 Q1 earnings after the close on April 16. While we expect no real surprises, you should take only small bites ahead of the event, or hold off until after the report.
Technical Analysis
For the past several years, YHOO shares were as flat as the company’s revenue growth. In fact, the stock hardly strayed outside of a 2-point trading range between 16 and 18 since the start of 2009. That all changed in the second half of 2012, as Marissa Mayer was appointed CEO. The stock came to life following the news, embarking on rally in late October that would carry YHOO more than 60% higher. The stock has enjoyed solid support from its 25-day and 50-day trendlines throughout this uptrend. With earnings looming, YHOO is trading at a multi-year high just below former support/resistance in the 25 region. Another solid quarterly report could be just the catalyst YHOO needs to extend its current revival.
YHOO Weekly Chart
YHOO Daily Chart
Tesla, Inc. (TSLA)
Why the Strength
When founder Elon Musk announced on April Fool’s Day that Tesla would report a profit in the first quarter of 2013, it caught a lot of investors off guard. Tesla’s transition from what is essentially a very powerful concept car (the Roadster) to the Model S family sedan has been great for the company’s revenue (which doubled in 2012), but investors hadn’t expected actual profits until later in 2013. While Musk—who has an amazing track record of pulling off complex projects like the SpaceX reusable orbital rocket program—has successfully walked the tightrope to get Tesla this far, many people are betting that his foot will slip eventually. That’s why short interest in Tesla is a daunting 13 days of average trading volume. But there’s no arguing that Tesla is already a success story; the company announced recently that it would repay its development loan from the U.S. Department of Energy five years early. The company doesn’t actually book revenues until a car is delivered to the customer, so the 678% jump in revenue in Q4 is a good yardstick of advances in production. There are many more orders for the Model S than Tesla can produce right now, and much will depend on how well the company manages its expansion and the build-out of charging stations. But betting against Elon Musk hasn’t been a very rewarding proposition in the past, and many investors have been climbing aboard.
Technical Analysis
TSLA has been volatile since it came public in June 2010 at 17, but there is no doubt that the central tendency shown by the chart is an uptrend. The volatility has shown up in dips from 36 to 21 in early 2011 and from 40 to 26 in early 2012. The bottom line, however is that TSLA is now trading at 43, after popped as high as 46 on very high volume after the profitability announcement. We think a small position in TSLA makes sense for investors with a sense of adventure and a tolerance for big swings. Because of the stock’s high beta, a buy below 42 makes sense, with a loose stop at 36.
TSLA Weekly Chart
TSLA Daily Chart
Toyota Motor (TM)
Why the Strength
Japanese automaker Toyota is a very familiar, very successful company with a market cap of $195 billion and 9.7 million vehicles sold in 2012. With that sales number, Toyota recaptured the crown of world’s largest carmaker, a title it lost to GM in 2011. The company’s product line includes an enormous lineup of models, led by the Corolla, Camry and Yaris passenger cars, SUVs like the 4Runner, RAV4, Land Cruiser and Highlander, the hybrid Prius and the sporty Scion and luxury Lexus lines. Anyone who has watched television this year will also recognize the full-sized Tundra pickup that has been featured in ads towing the Space Shuttle through Los Angeles. But there’s more than just enormous sales behind Toyota’s growing appeal. The main catalyst for change in Toyota’s perception is the weakening of the Japanese yen precipitated by recent stimulus moves by the Bank of Japan. A weaker yen is expected to increase the price appeal of all Toyota products in the U.S. and around the world. This kind of boost to an already successful lineup of vehicles could be a significant engine of growth, and investors are jumping on quickly. The company’s fiscal year ends in March, and the announcement of a reinstituted cash dividend program is expected before then.
Technical Analysis
TM has traded essentially flat for years, with an occasional leap into the low 90s and dips that usually bottomed in the low 70s or high 60s. (A four-month pullback that started in July 2011 tagged 60, but the recovery was almost instantaneous.) The current rally began in late 2012 and pushed the stock to its highest level since 2008, which was also the last time the company paid a regular dividend. TM put in a nice base between 100 and 105 in February and March, and its breakout above 110 has had good volume support. TM may be a little extended at 112, and a correction of a few points is likely, as the 25-day moving average is back at 106. TM looks good as either a long-term income stock or as a shorter-term momentum issue if you can catch the buy price.
TM Weekly Chart
TM Daily Chart
Regeneron Pharmaceuticals (REGN)
Why the Strength
Regeneron is still savoring the excitement of booking its first profitable year, a result of the runaway success of Eylea, the company’s treatment for age-related macular degeneration and macular edema. Regeneron has been marketing Arcalyst for the treatment of a rare hereditary condition since 2008, and Zaltrap for the treatment of metastatic colorectal cancer since 2011. But neither drug has had the economic impact on Regeneron’s results that Eylea has, including triple-digit revenue growth every quarter of 2012. The drug has also received recent approval from EU regulators and is quickly gaining market share in Europe. The company has ongoing Phase III trials for a treatment for rheumatoid arthritis and LDL cholesterol reduction, as well as additional uses for Eylea. Two drugs in Phase II trials and eight in Phase I trials show promise for future additions to the marketed product lineup. It’s worth noting that the conditions targeted by the company’s Phase III candidate drugs are enormous markets. Regeneron is expanding its New York headquarters to build on its current success.
Technical Analysis
REGN has been in a bumpy uptrend since it bottomed at 12 back in 2009, although the shakeouts would have been difficult to ride out. The stock formed a flat late-stage base that lasted from December through the end of March, with a very tight three-week stretch just before the blastoff on March 28. A four-day pause at its old 185 resistance was followed by another upswing on big volume. Most pharmaceuticals are news-driven, and REGN has likely priced in the latest good news, leaving its 25-day moving average far behind at 182. But a little patience should produce an opportunity to get in on a pullback of at least 10 points. Quarterly results are due out on May 3, and the stock may pause a bit ahead of that event. A small buy on any weakness with a stop at the old resistance at 185 makes sense.
REGN Weekly Chart
REGN Daily Chart
Omega Healthcare Investors (OHI)
Why the Strength
Omega Healthcare Investors is a U.S.-based health care real estate investment trust (REIT), with a heavy focus on long-term care and skilled nursing facilities. Looking to take advantage of the growing health care market in the U.S., this underrated REIT closed on more than $500 million in new investment properties in 2012, boosting its portfolio to 476 skilled nursing facilities, assisted living facilities and other specialty hospitals. Overall, Omega controls some 55,000 beds in 33 states that are operated by 46 third-party companies. The company is particularly bullish on Florida, owning nearly 90 facilities in the Sunshine State, totaling roughly 20% of Omega’s revenue. REITs are particularly hot investment topics, as they avoid paying federal income taxes by returning at least 90% of their taxable income to investors. Omega has an annual dividend yield of 5.6%. Speaking of income, Omega has averaged steady double-digit earnings growth during the past four quarters of about 17%, on average revenue growth of 20% for the same period. The company’s strong growth led Omega to boost its dividend rate during the past two quarters (ending in October and January). With Omega recently announcing plans to expand into assisted living, and the Baby Boomer generation closing in on 70, the outlook for this health care REIT is bright.
Technical Analysis
Prior to January, the 25 area was a major sore spot for OHI shares. The stock was rejected just shy of 25 in October 20010 and again in April 2011, ending a multi-year rally for the stock. The resulting correction sent shares down to support near 15. In September 2012, OHI once again challenged the 25 area, with the stock faltering but holding near support at 22. In late November, OHI garnered strength from its 10-day and 25-day moving averages and blew past the 25 level, gathering steam heading into 2013. Shares have since ridden this trendline duo some 50% higher. OHI would provide a nice opening for investors on further weakness.
OHI Weekly Chart
OHI Daily Chart
International Paper Company (IP)
Why the Strength
The rebound in the shipping materials and corrugated packaging market has made investing in companies such as International Paper lucrative. The company is leader in the global paper and packaging market, with manufacturing operations primarily in North America, Europe, Latin America, Russia, Asia and North Africa. While paper products aren’t exciting, International has shown increasing revenues and solid cash flows, and has consistently rewarded investors with growing dividends. Specifically, International recently reported that fourth-quarter revenue jumped 11%, topping the company’s average revenue growth of 7% for the past year. Driving revenue growth has been the extremely efficient integration of Temple-Inland, which International acquired in early 2012. The company has already achieved business synergies of $350 million per year, setting the integration about a year ahead of prior estimates. As a result of the increased cash flow, International recently increased its dividend by 14%, marking its third dividend increase since November 2010. Additionally, continued cash flow should help International continue to pay down debt, with the company shedding $1.9 billion in debt since acquiring Temple-Inland. With solid fundamentals, a dividend yield of 2.6%, and continued growth potential, it’s a solid investment opportunity.
Technical Analysis
IP has seen steady growth since bottoming alongside the rest of the market in 2009. That said, shares battled resistance near 30 for much of the past three years, with rejections contained by support near 20. The stock attempted a breakout in early 2012, only to be sent lower after testing the 35 region and finding a lack of buyers. IP’s return trip in early 2013, however, has proven considerably more fruitful, with shares riding key support at their 10-week moving average. IP has not only bested the 35 area, but has also topped 45 and is heading for 50. The stock has pulled back sharply; you could nibble here or wait for support to show up above 44.
IP Weekly Chart
IP Daily Chart
GameStop (GME)
Why the Strength
Long-term, we’re not big fans of GameStop; while the company has been doing its best to nose into the mobile and digital game industry, its core business of selling video games via brick-and-morter outlets is clearly outdated and will shrink over time. But GameStop does have a big cyclical component to it, but the cycle has less to do with the overall economy and more with the industry itself—later this year, Microsoft is set to launch the latest version of its Xbox, with Sony’s PlayStation 4 hitting the shelves after that. Plus, Take-Two Interactive is releasing the next version of its Grand Theft Auto series (which has sold an unbelievable 125 million copies during the past few years) in the second half of 2013. When you combine that with the fact that gamers usually buy three, four or five games with (or soon after buying) each new console, it only makes sense that GameStop should have a great few quarters. We saw a similar thing with the company back in 2007, when a new console release cycle pushed earnings, and the stock price up dramatically. We’re not anticipating such an earnings bump this time, mainly because of the headwinds mentioned above. But the company is cutting costs (it’s closing hundreds of stores this year), is returning its large cash flow to shareholders (3.4% dividend annually), trades at a very low multiple (10 times trailing earnings), yet analysts see this year’s earnings flat and 2014’s figure up nearly 20% because of the expected uptick in the industry. It’s not a buy-and-hold-forever name, but right here, we think GameStop has good potential.
Technical Analysis
After years on the outs, GME finally reached a low near 15 last August and had a nice off-the-bottom rally to 28 by mid-December. Then it went about building its first proper base in a very long time; the stock tightened up in late March (notice the very small weekly range at that time) before shooting ahead during the past three weeks. Because this isn’t generally a runaway stock, we think it’s best to target any new buying on weakness, with a stop in the 27 to 28 area.
GME Weekly Chart
GME Daily Chart
Avis Budget Group (CAR)
Why the Strength
A recent wave of consolidation in the rental car business has produced a smaller number of larger companies, and investors seem to approve. Hertz acquired Dollar Thrifty last November, leading to Hertz’s first appearance in Top Ten in February. And now, Avis Budget is making its Top Ten debut, putting the stamp of approval on Avis’s takeover of Budget in June 2011. Avis Budget also bought out ZipCar, the car-sharing service that allows customers to rent a car by the hour or day, in January. Avis Budget achieved a 25% gain in revenue in 2012, partly as a result of the 2011 merger, continuing the recovery from virtually flat revenue in 2010. The company’s after-tax profit margins were a healthy 6.0% and 7.9% in Q2 and Q3 2012, respectively, showing the cost-saving effects of the merger. Analysts see improving demand for rental cars at airports as economic activity builds. And they see opportunities for hourly rental rate hikes at ZipCar. It’s worth noting that the company still carries a lot of debt from the merger, which is probably why short interest (now nearly 10 days of average volume) is so high. But with a very reasonable P/E ratio of 12, Avis Budget looks like a very reasonable bet.
Technical Analysis
CAR tumbled from 19 to 8 in 2011, but fought its way back to resistance at 17–18 in late 2012. After a three-month consolidation at that level, the stock got moving in November and hit new highs as the year ticked over. CAR has continued to soar, and hasn’t closed below its 25-day moving average since last November! The stock put in a new base in March, trading under resistance at 28 for three weeks before tagging 29 last Wednesday. Today’s retreat has put the stock within a point of its rising 25-day moving average. Any pullback to 28 looks buyable, with a stop at 25.
CAR Weekly Chart
CAR Daily Chart
BlackRock (BLK)
Why the Strength
When bull markets come, it certainly pays to uncover a few companies with new, revolutionary products or something unique going for them; those are the names that can produce dazzling returns. However, you shouldn’t overlook more straightforward ways to profit, including what we call Bull Market stocks—companies whose business is directly tied to the health of the market. You could try to dig for some smaller brokerage or investment houses, but frankly, most don’t look too good today. BlackRock, on the other hand, is the most institutional-quality option out there; not only is it gigantic ($3.79 trillion of assets at year-end 2012), but it has a few growth drivers, including the iShares franchise, which had $750 million of assets at year-end and is growing nicely. (The firm still does a huge institutional business that makes up about two-thirds of all assets.) Put it all together, and you get slow-but-steady top-line growth, but thanks to newer products, higher profit margins, improved earnings and a huge cash flow ... so huge that BlackRock’s management recently hiked its dividend (now yielding 2.6% annually) and is buying back a bunch of shares (nine million last year, with authority to repurchase another 10 million going forward out of a total of 175 million). Earnings are out tomorrow morning, which could throw a monkey wrench into the story, but it’s unlikely; as long as the market itself is on firm ground, BlackRock’s business should be sound and big investors should remain interested.
Technical Analysis
BLK recently tested its 50-day line for the second time during its advance, and has come through that with flying colors, rebounding into new high ground last week. Moreover, this advance since late last year has pushed the stock out to multi-year peaks, above its highs of 2008 and early 2010. Now, as mentioned above, earnings will come out before the market opens tomorrow; if for whatever reason the stock sinks below 250, you should hold off, waiting for BLK to find support. Otherwise, though, we think the stock is buyable around these levels, with a stop below 245.
BLK Weekly Chart
BLK Daily Chart
BE Aerospace (BEAV)
Why the Strength
As far as steady growth stories go, BE Aerospace is one of our favorites for two reasons. First, there’s a multi-year airline purchase and upgrade (retrofit) cycle in place, with carriers both in the U.S. and (especially) overseas buying wide-body, newer aircraft that will boost efficiency. Second, BE Aerospace is by far the largest maker of cabin interior products for airplanes, as well as the largest distributor of consumables and fasteners, and all of these new aircraft have a ton of their products. Because of that, competition isn’t a major drag, so as goes the industry, so goes BE’s prospects. And prospects these days are very, very good—at the end of 2012, the company had a booked backlog of $3.7 billion, but that doesn’t include $4.5 billion of contracts it’s been awarded as a sole source supplier (its new lavatory configuration is a big seller, allowing an extra row of seats) that haven’t been officially booked yet. When you combine this with huge backlogs at both Boeing and Airbus, the fact that airline passenger growth is outstripping new capacity and that BE Aerospace has a huge client base that leads to a stream of retrofit orders, it’s no wonder why the stock has been moving steadily higher in recent months. Except for the worst of the Great Recession, earnings have been chugging ahead at 20% to 25% rates for years, and that trend is expected to continue in 2013 and 2014 as profit margins expand. Earnings are due out April 22.
Technical Analysis
BEAV had a big rebound into the beginning of 2011 before topping out just above 40. And for the next 18 months, it really didn’t do anything—some ups, some downs, but it found itself at 36 in August 2012. Since then, though, BEAV’s been trending nicely higher, generally hugging its 10-week line as it advances. Recently, the stock was yanked down by the market, but held that 10-week line and bounced back last week on great volume. If you’re game, you could buy a small position here with a stop near 55, and then see what earnings brings next week.
BEAV Weekly Chart
BEAV 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.
