The Bulls Join The Party
Last week was a decisive week, in our view. Not only did the major indexes score solid gains, but many individual leading stocks put on a good show, telling us the bulls are finally joining the party. Of course, with the meat of earnings season still coming up, there are bound to be ups and downs in the weeks ahead. But we’re growing more confident that the bear phase from October of last year through March of this year—punctuated by the collapse of Bear Stearns—is coming to an end. This week’s Top Ten is once again heavy in the commodity areas, which are leading the market higher. We do believe traditional growth stocks will appear if this market is going to run, but for now, the buying is clearly in metals, steels, oil and gas. Our favorite of the week may be a surprise. It’s U.S. Steel (X), a big, old firm, but one that might be best positioned to take advantage of higher steel prices in the months ahead. Try to buy on weakness.
Stock Name | Price | ||
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AGU (AGU) | 0.00 | ||
BUCY (BUCY) | 0.00 | ||
EAC (EAC) | 0.00 | ||
HP (HP) | 0.00 | ||
MEE (MEE) | 0.00 | ||
MMR (MMR) | 0.00 | ||
PXD (PXD) | 0.00 | ||
SOHU (SOHU) | 0.00 | ||
WFT (WFT) | 0.00 | ||
X (X) | 0.00 |
(AGU)
Why the Strength
Agrium is making its first Top Ten appearance, but the story is a familiar one. The company mines, refines, and markets fertilizers, both wholesale and retail, with operations that are expanding worldwide. The continuing buzz in fertilizers comes from the increased demand from both food crops and energy crops (like corn produced for ethanol). Pressure on global food supplies has made fertilizer a big deal, raising the price on shipments to China, for instance, from $176 a metric ton in 2007 to $576 a ton in 2008. Agrium gets a premium on its sales from its advanced technology products such as timed-release fertilizers and branded retail (under the Vigoro name). The company is pursuing global expansion, buying a 20% stake in a Chinese fertilizer company and building a new nitrogen facility in Egypt. There’s no telling how long the fertilizer industry will continue its rocket ride, but we’ve always said that trends can go on longer than anyone expects.
Technical Analysis
AGU has been in an uptrend since 2005, and the stock’s advance has been growing steeper every year. It began a monster run in the middle of 2007, and the chart has shown the kind of steep swings that indicate the presence of hot money, rising and correcting as news entices or repels leveraged players. With the stock having made a run from 63 at the beginning of April to just below 90 today (the 25-day moving average is back at 70), it’s hard to predict another big jump. As with all really hot stocks, you should look for corrections and buy small to start.
AGU Weekly Chart
AGU Daily Chart
(BUCY)
Why the Strength
Bucyrus designs and manufactures equipment for surface mining commodities such as coal, copper, and iron ire. Besides initial sales, Bucyrus also sells aftermarket parts and services that often exceed the price paid for the equipment. Bucyrus posted an impressive 165% increase in revenue over the past year, while the stock itself increased 115% over the past year. Unlike other major equipment manufacturers that have suffered in the home-building slump, Bucyrus’ sole focus on mining equipment has let it profit from the surge in demand for commodities. Three-quarters of its sales are related to coal, and with the global need for coal continually increasing, Bucyrus in a perfect position to continue selling and servicing its mining equipment.
Technical Analysis
Bucyrus has been steadily moving up since mid February. After some volatile trading days in March, it had a great past two weeks, moving from 110 to 125. The stock is a bit extended above its moving averages, however, so we recommend waiting a few days to see if the stock can build a base near the 120 level before buying.
BUCY Weekly Chart
BUCY Daily Chart
(EAC)
Why the Strength
Encore Acquisition is a well-managed, mid-sized energy explorer that offers plenty of exposure to the price of oil, as opposed to natural gas. About three-quarters of its fourth-quarter production was oil, while 80% of its reserves are black gold. The company is benefitting not just from rising prices, but also to a solid increase in production (it expects output to increase 6% to 8% this year, which could be conservative), relatively tame costs (land drilling rig prices are only now beginning to move higher) and a nice share buyback, which should drop the number of shares by 3%. All told, the company posted two great quarters to end last year, and should see earnings double in 2008. There’s nothing unique here, but Encore Acquisition is making the right moves in the right environment, and that should lead to better times ahead. Earnings are due out May 8.
Technical Analysis
EAC was featured a couple of times in April, and the stock remains in a firm uptrend. Probably the best piece of the recent trading history came two weeks ago, when EAC traded in a tight band just north of 40 on very low volume for a few days. In a bull market, such tight, quiet action in a generally uptrending stock is a positive sign; it’s telling you no big sellers are coming into the market despite a recent rise in prices. Last week, EAC spiked higher after that tightness, so it’s likely ready for a brief rest. If you want in, look for a drop of a couple of points.
EAC Weekly Chart
EAC Daily Chart
(HP)
Why the Strength
While oil exploration stocks have been hot for a few weeks, oil service firms are joining the party. Helmerich & Payne is a contract energy driller, with most of its rigs operating on land, as opposed to in shallow or deep waters. Thanks to a major new construction program in recent years, the firm’s rigs are younger and much more efficient than the competition (customers can drill a well in about half the time with one of HP’s FlexRigs), leading to higher dayrates charged. Even so, the company is at the mercy of the industry, as dayrates rise and fall with supply and demand. The good news is that, with oil and natural gas prices surging, and with the industry working off some excess rig inventory during the past few quarters, the next year or two should bring accelerating growth. And Helmerich & Payne, while not the largest, is the best land driller with the best technology, so it’s sure to benefit.
Technical Analysis
HP broke out of a base near the end of last year, but the horrific market in January quickly crushed that attempt. But as soon as the market bounced, this stock surged to new peaks and held firm in the mid 40s during March. Now the buyers are showing their hand en masse, driving HP straight up during the past couple of weeks as investors see the energy bull having longer to run. The stock could just keep running, but we believe it’s best to look for at least a couple of down days before pulling the trigger. Earnings are out May 1.
HP Weekly Chart
HP Daily Chart
(MEE)
Why the Strength
Massey Energy is the fourth-largest U.S. coal firm, and the reason its stock is among the best performing in the market is simple—the company recently announced that it expects significantly higher sales prices during the next few years, as spot prices for all types of coal surge. Specifically, management expects selling prices to average around $62 per ton this year (from an original expectation of $55), $69 in 2009 (from $58) and $81 in 2010 (from $65), thanks mainly to the amazing surge in the price of metallurgical coal, which is used to make steel. Interestingly, the CEO of ArcelorMittal, the largest steel firm in the world, said he expects metallurgical coal prices to double or triple in the future; if anything like that happens, Massey Energy’s bottom line will go through the roof! As it stands now, one analyst believes this company could earn $5 in 2009, well above consensus estimates. Commodity stories are always touch and go, but Massey’s story appears to have legs. Earnings are due out Thursday.
Technical Analysis
MEE has been difficult to handle in recent months, with some brief, sharp rallies, followed by equally sharp declines. But the stock’s tenor changed three weeks ago, after management announced its expected sales prices for the next couple of years. The stock bolted to new peaks on the news, pulled back relatively calmly the week after, and pushed ahead last week on above-average volume. True, the stock is extended, but the power behind the upmove leads us to believe any retreat will be shallow. Hold on if you own some, and if you don’t, you can buy a little around here.
MEE Weekly Chart
MEE Daily Chart
(MMR)
Why the Strength
McMoRan Exploration made the Top Ten cut in March and again earlier this month, as the upward spiral of crude oil prices has lifted lots of small oil and gas producers. The company’s earnings report on April 17 showed a swing to a profit of $0.47 a share, a huge change from its $0.61 a share loss in Q1 2007. Together, rising crude and improved results have made McMoRan Exploration a hot commodity. Lots of oil and gas companies are doing well now, buoyed by the rising price of crude, and it’s hard to say whether McMoRan is truly a leader, or is just one of the boats being raised by the tide. We think that the company’s exceptional base of exploring and drilling experience may give it an edge, and we’re attracted by its triple-digit sales growth.
Technical Analysis
MMR has been on fire since it bottomed at 11 in October 2007. With just a couple of minor pauses in January and March, MMR has ripped to a new high above 26 since its Q1 earnings announcement. With its 25-day moving average in the dust below 20 and a gap up from 23 to 24 on April 18, the stock seems decisively overbought. Look for any move to fill that 23/24 gap as a buying opportunity.
MMR Weekly Chart
MMR Daily Chart
(PXD)
Why the Strength
Pioneer Resources is another energy company that’s making its first Top Ten appearance. Although the company has interests in fields in Tunisia and South Africa, the focus of its operations is North America. It specializes in the development of proved properties, but has also drilled nearly 700 wells, contributing to its total of more than 8,400 producing wells and proved reserves of 964 million BOE (barrels of oil equivalent). A program of acquisitions has kept the company’s reserves growing, with properties in South Africa entering the production stream in mid 2007, and those in Alaska expected to increase total production in mid 2008. One wild card here is the company’s growing expertise in the exploitation of coal-bed methane, which is not common in the industry. Rising crude prices boosted Q4 earnings by 267%. The company pays a small dividend (0.5%) and will announce quarterly results on May 7.
Technical Analysis
PXD spent an extraordinary amount of time under resistance at 55, dating back to 2005. The stock made runs at that level in April and October 2007, and finally broke through decisively on April 15. It has held onto these gains, and is now consolidating just below 59. This is bullish action for a stock that has been the wallflower at the orgy of energy stock advances. A run from 38 to near 60 isn’t to be sneezed at, and we think aggressive investors can pick up a little right here, while waiting for earnings in a couple of weeks.
PXD Weekly Chart
PXD Daily Chart
(SOHU)
Why the Strength
Sohu.com, now making its ninth appearance in Top Ten, is sometimes called the Yahoo! of China, and the description fits. The company’s flagship website is rich in content like news and entertainment and offers email, a game network, a search engine, real estate services, and maps. The company is still relatively small (just $188 million in revenues in 2007), but its seven different web portals have such a devoted following among Chinese internet users that the possibilities always seem endless … even though reality doesn’t quite measure up. Attention is turning to Sohu again for three reasons. First, the Olympics are approaching and investors expect the company to be able to monetize the event somehow. Second, after three quarters with negative earnings growth, the last two quarters have shown a sharp improvement in earnings. Third, Sohu will announce earnings on April 28, and investors seem to be anticipating good news.
Technical Analysis
SOHU was a monster in 2003, rising from 8 to over 40, but it wasn’t until late 2007 that it hit that level again. In late 2007 a couple of trips north of 60 (after a March dip to near 20) were too hot to sustain and the stock made a couple of dips to below 40 earlier this year. The prudent way to approach SOHU is to buy a little here and then watch the reaction to the earnings announcement.
SOHU Weekly Chart
SOHU Daily Chart
(WFT)
Why the Strength
There is no doubt that the price of crude oil has risen sharply recently, and Weatherford International is one of the companies profiting from that rise. Weatherford offers high-tech services and drilling equipment for both oil and gas wells, and has a big presense both in deepwater and overseas, two hot areas. Weatherford posted decent results this morning with a 22% increase in earnings compared to its previous year, as well as a quarterly increase in revenue of 19%. Its growth should accelerate as the year progresses, however, because of its Latin American, European and African operations. Indeed, estimates call for a 38% jump in Q2 earnings, and given to the expected hike in drilling activity, it should be all up from there.
Technical Analysis
After a major rise to 70 in September of last year, Weatherford moved between 60 and 70 for several months, with a brief, sharp drop down to the 50s. However in early April, Weatherford was able to break through heavy resistance to create a new positive trend that has taken it into the mid 80s. The stock pulled back somewhat today on its earnings report, but that was normal given the stock’s 7% bilge on Friday. Look to buy on a little further weakness.
WFT Weekly Chart
WFT Daily Chart
(X)
Why the Strength
U.S. Steel is the granddaddy of the U.S. steel sector. But despite its huge size and long history, this might be the best positioned company to benefit from the changes going on in the industry. Specifically, two of the main raw materials for steel—coking coal and iron ore—are soaring in price, and the steel industry is beginning to successfully pass that along to customers. But U.S. Steel is in better position than most, as it has some longer-term supply deals for its coal at prices that are much more favorable than current spot prices. And it also produces just about all the iron ore it consumes, which is keeping expenses down. Thus, the company’s costs are holding relatively steady, yet it will be able to pass along massive surcharges to customers in the near future. Underlying all of this is China and India, both of which continue to demand incredible amounts of steel to build out their infrastructure, despite slightly slowing economies. Analysts expect 2008 to bring a 50% jump in U.S. Steel’s earnings, but given the industry’s current dynamics, we think that’s conservative. It’s big, but we like it. Earnings are due out April 29.
Technical Analysis
X has been enjoying a good run in recent weeks, but it looks like the advance is still in the early innings. The stock topped in June of last year, slid sharply into August, and spent many months slowly repairing the damage. In fact, starting in January, it built a much better looking structure, and it broke out near the end of March. It’s risen sharply since then, so it’s probably ready for a short-term rest. But we don’t expect a big pullback given the recent powerful upmove.