Trend is Still Down, but Energy Stocks Emerge
The market finally bounced following last Tuesday’s big-volume support day, which has allowed many beaten-down growth stocks to get off their knees. It’s also allowed many energy stocks to show their muscle—many have lifted to new highs after multi-month launching pads! Overall, we’re keeping our Market Monitor neutral, as there’s no evidence yet that a sustainable bottom has been reached. But we’re OK with a little buying in the energy sector (as well as some other strong commodity stocks), because if the current rally gains momentum, many of these names could prove to be leaders of the upmove.
This week’s list did pick up on a few growth stocks that are beginning to separate from the pack, but half the stocks are commodity-related. Our favorite of the week is GasLog (GLOG), a shipper of liquefied natural gas that sports both rapid and predictable growth.
| Stock Name | Price | ||
|---|---|---|---|
| Weatherford International plc (WFT) | 0.00 | ||
| Vipshop Holdings (VIPS) | 14.25 | ||
| Taiwan Semiconductor (TSM) | 78.41 | ||
| SanDisk Corp. (SNDK) | 0.00 | ||
| Rice Energy (RICE) | 0.00 | ||
| Garmin (GRMN) | 97.45 | ||
| Gulfport Energy (GPOR) | 0.00 | ||
| GasLog (GLOG) | 21.39 | ||
| Finisar (FNSR) | 0.00 | ||
| Allegheny Technologies (ATI) | 27.78 |
Weatherford International plc (WFT)
Why the Strength
Weatherford International is another energy company that’s enjoying rapid growth as it offers well construction, formation evaluation, completion and production services to oil and gas drillers around the world. (The company is in the process of moving its nominal headquarters from Switzerland to Ireland, but it’s operationally based in Houston, Texas.) Two-thirds of Weatherford’s revenue comes from outside North America, and it got about a quarter of its 2013 revenue from well construction and another quarter from well completion. The company can handle every oil field challenge, from mapping and evaluating reservoirs, connecting wells to distribution networks and using artificial lift systems to get oil, gas and liquids to the surface. For 2014, the company is focused on lowering costs, including a headcount reduction of 7,000 from its current 67,000, eliminating unprofitable operations and lightening its support structure. As a result of these moves, plus the continuing growth in the energy sector, Weatherford is expected to grow earnings by 67% in 2014 and 55% in 2015. Earnings are likely out in early May, with analysts looking for EPS of 11 cents and revenue of $3.7 billion.
Technical Analysis
WFT went through a long, painful correction in 2011 and 2012, dropping from 26 to 9. But the recovery in energy stocks helped lift the stock to 17 in November. After another correction to 13 in January, WFT rallied hard in February, regaining the 17 level in just four weeks. After a few weeks of consolidation around 17, the stock gapped up above 18 last Wednesday on big volume, marking a new one-year high. We think WFT looks buyable on any weakness below 18, although we don’t advise taking a big position ahead of earnings. If you do buy a position, use a stop at 16.5.
WFT Weekly Chart
WFT Daily Chart
Vipshop Holdings (VIPS)
Why the Strength
The dynamic growth of online shopping in China is one of the big stories of global retail in the last couple of years. Vipshop Holdings is a discount retailer of high quality and popular branded goods that it sells mostly through limited-time flash sales. The company gets its merchandise through partnerships with over 5,800 Chinese and international brands, some of which provide limited-run merchandise as a way to build brand buzz. China has no large discount retail chains or brand outlets, so Vipshop’s online offer is unique. The company’s growth of new active customers was 109% from Q4 2012 through Q4 2013, with repeat customers increasing by 70%, leading to nearly 91% of orders coming from repeat customers in Q4. This led to revenue growth of 135% in 2013 with EPS jumping from a loss of four cents per share in 2012 to $1.12 in earnings in 2013. Chinese consumers see Vipshop as a way to acquire prestigious luxury brands at a steep discount, and this dynamic is expected to continue to support strong growth in the short- to mid-term. Vipshop Holdings is one of very few ways for Western investors to gain exposure to Chinese retail.
Technical Analysis
VIPS hacked around for five months after it came public at 6.5 in March 2012. But the stock began to skyrocket in August 2012 and began to trade on significant volume in February 2013 when the stock was trading in the 20s. Shares soared to as high as 182 early last month, but were pulled down by a widespread selloff of tech stocks in general and Chinese stocks in particular. The stock dipped to 123 on April 7, but has rebounded to the high 140s on mild volume. It looks like VIPS may have put in a bottom, and earnings are likely not out until early June. VIPS looks buyable on a dip of a couple of points, with a stop at 130 at the bottom of its earnings gap.
VIPS Weekly Chart
VIPS Daily Chart
Taiwan Semiconductor (TSM)
Why the Strength
Taiwan Semiconductor, the largest contract manufacturer of computer chips in the world, debuts in Top Ten this week after a stronger-than-expected quarterly report last Thursday, sweetened by guidance that exceeded expectations. Revenue growth came in at $4.87 billion, up 10%, while earnings were up 15%. Management commented that demand in the communication and consumer sectors was stronger, fueled by industry efforts to replenish inventories and from the global buildout of LTE wireless broadband that was especially strong in China. Smartphones require more chips, and the company has been building the chips for Apple’s iPhone 6, among others. The company’s after-tax profit margin of 32.3% is very strong, and represents the fourth consecutive quarter of margins over 30%. The prospects for Taiwan Semiconductor are also buoyed by the growth of the Internet of Things, devices other than computers and phones that are connected to the Internet. Some estimates are for the number of devices linked to the Internet to reach 50 billion by 2020. And Taiwan Semi has the scale and manufacturing expertise to make whatever chips are necessary to keep all those household appliances, industrial equipment and data-gathering sensors in touch. An attractive 1.9% forward annual dividend yield sweetens the pot.
Technical Analysis
TSM has been in a gradual uptrend since its price topped double figures for good in late 2010, but its advance has been punctuated by six substantial pullbacks along the way. The latest advance began in February when the stock completed a 15-week correction at 16 and began a strong rally. TSM spiked to near 21 on big volume after earnings and relaxed back toward 20 today. With its relatively low volatility and solid dividend, TSM looks like a good buy right here. A stop at the 50-day moving average makes sense.
TSM Weekly Chart
TSM Daily Chart
SanDisk Corp. (SNDK)
Why the Strength
While momentum stocks in the technology sector have taken a hit during the past month, flash memory maker SanDisk is holding its own. The company’s memory modules are used in multiple devices, including smartphones, cameras and many other mobile devices. SanDisk also sells solid-state memory drives under its own brand. After the market close on April 16, SanDisk reported Q1 earnings that topped Wall Street’s estimates while issuing a sales forecast better than the estimates. Earnings grew 13%, as revenue soared 71% year-over-year. The company is driving growth by cashing in on mobile devices and focusing on making faster solid-state drives (SSDs), which command a higher-than-average price than memory sticks and cards. SanDisk also said that it has seen SSD sales rise steadily for use in server applications. What’s more, the company’s manufacturing efficiency campaign, designed to improve factory utilization and reduce costs, has been more successful than anticipated, driving SanDisk to boost its gross margin projections for fiscal 2014 from 45%-48% to 47%-49%. It’s not a dynamic story but there’s no doubt business is good today.
Technical Analysis
In February, SNDK emerged from a 15-week basing period in the 70 region. The start was a bit slow, with shares stuttering for a couple of weeks before surging higher on strong volume on March 18. SNDK would ride that momentum past 80 and into resistance at 85 before succumbing to heavy broad-market selling pressure. The stock put in a short-term bottom just below 75 before last week’s earnings report prompted a rebound. SNDK is now digesting last week’s gains just below former resistance at 85. With post-earnings enthusiasm still in the air, and the market remaining volatile, you can buy on dips of a point or two if you’re game.
SNDK Weekly Chart
SNDK Daily Chart
Rice Energy (RICE)
Why the Strength
Rice Energy is a newly-public firm that is as exciting an energy explorer as we can remember. Of course, we’re not the only ones who think so—the company is worth just south of $4 billion, yet revenues in 2013 totaled just $89 million! However, there’s a solid reasoning here: The company owns some of the most lucrative acreage in the Marcellus and Utica shales (about 90,000 acres in all) that, combined with the company’s unique technical approach to drilling (better drilling techniques, more sand per well and fewer feet per fracking stage) is leading to monstrous returns—it’s getting returns of 100% or so for each of its wells, with payback of all costs in just one year! And the drilling program is just getting going, with only 40 wells in production at year-end, but more than 700 potential locations to drill; all told, Rice expects production to grow 125% this year, with revenues topping $400 million. Interestingly, in the Utica area, management believes it could have some of the most profitable acreage in the entire country—it’s partnered with Gulfport Energy (written about earlier in this issue), which has complementary acreage in the Utica. Wells are just being spud now and should begin to produce results later this year. Last but not least are Rice’s midstream operations, which help with pricing and flexibility, facilitating the firm’s drilling expansion. Earnings should begin to explode this year, and if management pulls the right levers, there should be years of rapid growth ahead. We like it.
Technical Analysis
There’s not much to analyze in RICE’s chart, but that’s fine by us—the stock came public in late-January, tightened up for a few weeks in February and early March, and has moved higher since. Being so new, the stock is thinly traded, so any dip in the energy group could hit the stock relatively hard, but we think RICE has great potential if results continue to impress. Try to buy on dips.
RICE Weekly Chart
RICE Daily Chart
Garmin (GRMN)
Why the Strength
Back in 2007, when Garmin made its two previous appearances in Cabot Top Ten Trader, the company looked like a huge winner, as GPS satellite navigation systems were very hot. But the advent of smartphones, each of which had its own sat-nav system, cooled the company off quickly. Garmin has continued to prosper by serving niche markets like automotive, outdoor, fitness and aviation markets with robust capabilities and system integration that smartphones can’t match. One example of a product that’s helping Garmin’s competitiveness is the Vivofit wearable fitness band, which tracks and stores information like heart rate, calories and distance during workouts. Another new product is a bicycle-mounted computer that keeps track of the usual time and mileage, but also tracks which gear is being used when. The company also markets cameras, altimeters for airplanes, trackable dog collars and golf course maps, and these products have helped to offset weakness in automobile sales. The company’s reputation with investors has also been helped by its win in a patent infringement case brought by Pacing Technologies. The company will release Q1 earnings results on April 30, before the market opens.
Technical Analysis
GRMN built a huge cup with handle pattern from April 2012 to October 2013, with highs around 50 and a handle that extended from late October through early February. The stock broke out of this pattern on February 19 on monster volume following a constructive quarterly report and kept rising through the first week of April. The stock met resistance at around 57, and it’s possible that it will trade sideways until the end of the month when earnings come out. GRMN has also been riding its rising 25-day moving average higher. You can take a small position ahead of earnings or wait for an earnings-induced breakout above 57 if the news is good. A stop near 52 makes sense.
GRMN Weekly Chart
GRMN Daily Chart
Gulfport Energy (GPOR)
Why the Strength
Gulfport Energy is yet another small exploration firm that’s about to become much bigger as it implements a big drilling program on its vast, lucrative acreage. The big draw here is its position in the core of the Utica Shale, which many analysts are thinking could prove to be the richest shale in the entire U.S.; Gulfport owns a whopping 165,000 acres in the play! And production is just starting to ramp up—in the fourth quarter, Gulfport’s production from Utica was up 49% from the prior quarter, and with seven rigs running (aiming to drill 64 to 71 net wells this year), the Utica area is going to be the main driver behind the company’s five-fold growth in production this year. (The wells look like half dry gas, a quarter condensate, 20% wet gas and the rest oil.) Beyond the Utica, Gulfport does have some ownership in a Canadian oil sands operation, an operation in Louisiana that isn’t growing but is solidly cash-flow positive, and an equity interest in Diamondback Energy, giving Gulfport exposure to the Permian Basin. Any of those could prove an added bonus, but big investors are clearly focused on the Utica operation, which has a decade or two of growth ahead of it. Earnings are expected to start to surge in the first quarter and keep growing from there. We like it.
Technical Analysis
GPOR has only begun to tap its Utica acreage, but the stock has enjoyed a big comeback since the wheels fell off in mid-2012, rising nearly five-fold during that time. More recently, the progress has been choppier, with a base built during last summer, and another one starting in October and lasting through mid-March. Since then, though, GPOR has been in a firm uptrend, generally riding its 25-day line higher. A little weakness from here would offer a decent entry point.
GPOR Weekly Chart
GPOR Daily Chart
GasLog (GLOG)
Why the Strength
GasLog has an intriguing story, combining elements of rapid growth, dividends and certainty in the forecast. The company owns and operates a fleet of liquefied natural gas (LNG) carriers; it had just two ships on the water at year-end 2012, but that rose to eight at the end of 2013, thanks to new deliveries. And while the company has another seven LNG carriers on order (to be delivered from 2104 to 2016), it’s not waiting around—it’s begun to acquire ships from BG Group in a big way, with three already acquired early this month and another three coming in a few weeks. And the beauty of the business is that, while GasLog has a little exposure to the spot market, most of these ships are on multi-year time charters; the ones acquired from BG Group, for instance, are chartered for six year terms! (GasLog pays for these acquisitions through share offerings and debt, but all are very accretive because of the long-term contracts.) All told, the company has more than $2.5 billion of contracted future revenue, which will allow it to continue expanding its fleet (through both newbuilds and purchases), boost earnings (expected to double this year) and raise its dividend (now 12 cents per quarter for an annual yield of 1.7%). With the future of LNG very bright in the U.S. and around the world (Chinese imports in January were up 77% from a year ago!), GasLog could be starting a huge growth phase. We like it.
Technical Analysis
GLOG came public in March 2012, and after a few weeks of poor action, it ground higher through last year, though it wasn’t outperforming the market by much. But that changed as earnings exploded and investors perceived higher earnings and dividends ahead. The stock has “grown up” nicely, with volume up more than 30% as shares raced from 17 to 28 since the start of the year, including a big-volume advance last week. We don’t think the run is near over, but with the 50-day line down near 23.5 and the stock still relatively thinly traded (just $32 million per day or so), we advise nibbling on dips.
GLOG Weekly Chart
GLOG Daily Chart
Finisar (FNSR)
Why the Strength
Optical networking specialist Finisar remains a hot ticket on Wall Street. The company supplies key networking components such as 10G, 40G and 100G transceivers, which are crucial to maintaining high-speed fiber optic networks, to Tier 1 customers including Cisco, Ciena, AT&T and Huawei. Finisar is currently riding a resurgence in capital spending, as data centers, telecoms and other digital service providers move to upgrade their networks and hardware. In fact, Finisar has enjoyed triple-digit percentage earnings growth and double-digit percentage revenue growth during the past three quarters. What’s more, capital spending on network infrastructure is expected to pick up speed. For instance, Google recently reported higher-than-expected capex, with intentions to continue ramping up spending in its efforts to build out data centers. (While neither firm has confirmed a relationship, analysts believe that Finisar is key supplier for Google’s data center build-out.) Elsewhere, telecom providers are in the process of switching existing 10G products to 100G products; Verizon has rolled out some 21,400 miles of 100G network with Finisar customer Ciena providing the 100G gear.
Technical Analysis
FNSR finished 2013 strong, but broad-market turmoil has left the stock in choppy waters so far in 2014. FNSR appeared to wake up in mid-March with the stock enjoying a post-earnings rally toward 28. A selloff in the tech sector caused a bout of weakness for FNSR, but shares held at support near their 50-day moving average. The stock is currently riding high on speculation of Finisar’s involvement in Google data centers, placing FNSR in position to challenge 28. You can nibble on weakness, with a stop near the 50 day line.
FNSR Weekly Chart
FNSR Daily Chart
Allegheny Technologies (ATI)
Why the Strength
Allegheny Technologies is one of the top players in the U.S. specialty steel industry, manufacturing stainless steel as well as specialty steels, nickel- and cobalt-based alloys, titanium and titanium alloys, tungsten materials, and other more exotic alloys such as niobium and zirconium. Allegheny’s flat-rolled business (sheet, strip and plate metals) accounts for roughly 47% of sales. The company caters mainly to the aerospace, chemical process, and oil and gas industries. Analysts believe that a rebound in capital spending in 2014 should help boost Allegheny’s bottom line considerably. While lower raw materials surcharges and low base metals prices are impacting its Flat-Rolled Products division, Allegheny has banked on outperformance from oil and gas exploration and forecasts for this revenue stream remain strong. Allegheny also stirred up interest recently with its acquisition of Dynamic Flowform, a company that utilizes a flowforming process to manufacture thin-walled alloy shapes for the aerospace, defense, and oil and gas industries. Allegheny will release its Q1 earnings report tomorrow morning, though investors’ main focus is on the huge earnings turnaround expected later this year.
Technical Analysis
ATI entered 2014 with a whisper, as shares spent the first half of January attempting to firm up in the 35 region. By mid-January, weakening metals prices and slower-than-expected global growth forced ATI down for a test of support at its 200-day moving average in the 30 region. After spending the rest of February forming a base, ATI popped back above its 50-day trendline in early March. Shares have since been on a tear higher, as investors reacted to forecasts for increased capital spending in 2014. Dips of a point or two look buyable, with a stop back below the January high.
ATI Weekly Chart
ATI 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.
