The Correction Continues
We look at hundreds of charts every week, and we’ve seen worse environments than this—while high-growth stocks have taken a beating, much of the broad market is at least hanging in there. But the fact is that as long as the intermediate-term trend of the major indexes is pointed down, it’s going to be tough to make much money; the last couple of trading days has reinforced that fact. Thus, while a little buying here or there is fine, especially in resilient groups, less is generally more in this environment—preserving most of your capital and building your watch list are what will pay off down the road.
The good news is that, as earnings season progresses, we’re able to see which stocks have “it,” and which ones are being tossed out by big fund managers. This week’s list has a few recent earnings winners, including our Top Pick, Harley-Davidson (HOG), which just blasted out of a 14-week base on a great quarterly report.
| Stock Name | Price | ||
|---|---|---|---|
| WABCO Holdings (WBC) | 0.00 | ||
| Skyworks Solutions (SWKS) | 0.00 | ||
| SunEdison (SUNE) | 0.00 | ||
| SunPower (SPWR) | 12.26 | ||
| Salix Pharmaceuticals (SLXP) | 0.00 | ||
| Matador Resources Company (MTDR) | 27.89 | ||
| Harley-Davidson Inc. (HOG) | 0.00 | ||
| Delta Air Lines (DAL) | 54.28 | ||
| Comstock Resources (CRK) | 0.00 | ||
| Cabot Oil & Gas (COG) | 0.00 |
WABCO Holdings (WBC)
Why the Strength
WABCO makes braking, stability, suspension and transmission control and air compressing systems for commercial trucks, trailers, buses, SUVs and passenger cars. WABCO also makes shock absorbers, cruise control components and tire pressure monitors, selling parts directly to auto and component manufacturers, including Ford, GMC, Nissan, Volvo and Volkswagen. Despite a tough economic market that has seen slowdowns in global truck and bus manufacturing, WABCO has added $1 billion in new business contracts, including $620 million that’s expected to directly impact revenue and earnings between 2014 and 2018. The company also announced on Friday that it set a new quarterly record for global aftermarket sales. Outside of organic growth, WABCO snapped up fleet management firm Transics International in February, and signed a strategic alliance deal with SmartDrive Systems in the first quarter. Transics gives WABCO access to service contracts for more than 85,000 vehicles across Europe, while SmartDrive’s technology helps fleets to reduce collisions and lower fuel consumption—a technology that should enable WABCO to expand such service to commercial vehicles across North America. Earnings are expected to grow at a 15% clip this year, and 19% in 2015.
Technical Analysis
WBC finally pulled away from 60 at the turn of 2013, bolstered by its 10-week and 25-week moving averages. These trendlines have provided key support throughout WBC’s uptrend, with the stock closing only one weekly below this duo since. Following a brief dip below 90 in February, WBC came roaring back to eclipse the century mark following news of the Transics buyout. WBC spent the ensuing weeks bouncing along support in the 100-105 area before falling with the market today. If you want in, you can nibble here, but keep a tight stop in the high 90s.
WBC Weekly Chart
WBC Daily Chart
Skyworks Solutions (SWKS)
Why the Strength
Skyworks Solutions is a major player in the mobile field, as its power amplifiers and front-end modules have become industry staples used by smartphone and mobile phone makers including Samsung, Apple, LG, Ericsson and Nokia. In fact, Skyworks’ partnerships with Samsung and Apple have helped drive average quarterly revenue growth of 12% and earnings growth of 23% during the past year. During the most recent quarter, Skyworks topped earnings and revenue guidance, while its gross margin rose 250 basis points to 44.7%. Going forward, Skyworks expects current quarter earnings to be up 35% year over year, with revenue rising 23%. While many industry analysts are forecasting a slowdown or a leveling off in smartphone revenue, Skyworks expects to capitalize on machine-to-machine communication—i.e., the Internet of Things industry. This could expand Skyworks’ market to automotive, smart energy, home automation, medical devices and a plethora of other devices. What’s more, during the company’s Q2 conference call, CEO David Aldrich said that Skyworks is “…set to substantially outpace the broader semiconductor industry as we capitalize on increasing analog system complexity driven by the Internet of Things.” Lastly, the company just announced its first quarterly dividend: 11 cents per share to be paid out on May 22, 2014.
Technical Analysis
After plunging in 2011 and trading choppily in 2012, SWKS stabilized in the 20 to 25 region in 2013. In July, a strong quarterly report helped SWKS reclaim its 50-day moving average, setting the stage for a breakout above 25. In November, shares finally left 25 behind, driving higher along support at their 10- and 25-week moving averages. SWKS has seen a noticeable pickup in volume so far in 2014, and, with the help of last week’s strong Q2 report, shares have responded by rallying into multi-year highs north of 40. We recommend buying dips of a point or two with a target near 40.
SWKS Weekly Chart
SWKS Daily Chart
SunEdison (SUNE)
Why the Strength
Back in 2006 and 2007, a silicon ingots, granules and wafers company called MEMC Electronic Materials was on a roll, benefiting from both its original customer base among microchip manufacturers and the burgeoning solar-cell business that was experiencing strong growth and limited supply. The company made 10 appearances in Top Ten in those years, then quieted down as solar demand dwindled during the Great Recession. In May 2013, responding to the company’s new strength in the solar power business, the company changed its name to SunEdison and its stock symbol from WFR to SUNE. Silicon products now make up less than a third of the company’s business, with the remainder from a global business building and selling photovoltaic generation plants. Demand for such plants has been soaring and the company’s construction starts have increased from 38 megawatts (MW) in Q4 2012 to 400 MW in Q2 2013. And the pipeline of projects now stands at 3.4 gigawatts, driven primarily by North America. The company’s revenue and earnings history has been spotty, but investors are anticipating a spinoff of the semiconductor business in the near future that will provide a capital influx. SunEdison also got a lift last week from news that it had received $104 million in financing from Deutsche Bank for two solar projects totaling 33 MW in Canada. With solar demand high and increasing, SunEdison has great prospects.
Technical Analysis
SUNE has followed the general pattern for solar stocks, falling through mid- to late 2012 and ripping higher since with high volatility. SUNE hit its low at 1.4 in June 2012 and is now consolidating its gains at around 19. The stock tagged 22 at the beginning of March and dipped as low as 16 before the Deutsche financing news provided a high-volume lift. SUNE is right atop its 25- and 50-day moving averages; if you want in, you can nibble here but use a loose stop at 16.
SUNE Weekly Chart
SUNE Daily Chart
SunPower (SPWR)
Why the Strength
California-based SunPower makes high-efficiency solar cells, panels and arrays. The improved efficiency of its panels allows it to use smaller installations per delivered watt, which gives it an advantage in rooftop installations where space is at a premium. This is important, because one report estimates that the rooftop market in the U.S. will grow at an annual rate of 45% between 2013 and 2016, compared to an 8% rate for utility-scale projects. Despite those projections, much of SunPower’s 2013 EPS growth came from big grid-linked solar installations in the U.S., and the company’s pipeline of projects has grown from 6 GW in 2013 to 7.5 GW this year. The company’s parent company, oil company Total S.A., has been a great advantage for SunPower in accessing project opportunities in the global marketplace. A recent contract win for a 70 MW project in China represents a nice foot in the door for that country’s growing solar demand. SunPower delivered a strong earnings report on April 24, solidly beating expectations with 9% revenue growth and 123% earnings growth. With solar power now at grid parity in many markets, the outlook for SunPower is bright.
Technical Analysis
After years of lurching downhill, SPWR finally made a double bottom at 4 in 2012, and its progress since then has been remarkable. The stock has been very volatile, soaring in short, strong bursts, then staging modest (but often tedious) corrections. After hitting 35 in October, SPWR traded sideways for six months, dipping below 26 in the week before its quarterly report. The stock gapped up nicely after that report, but is still trading in the range it has occupied since October, with resistance at 35–36. You can buy a little here and average up on the breakout, or just wait for the move above 35 to get started. A stop at 30 is prudent.
SPWR Weekly Chart
SPWR Daily Chart
Salix Pharmaceuticals (SLXP)
Why the Strength
Salix Pharmaceuticals has enjoyed a long history of profitability using a strategy of focusing on gastrointestinal tract ailments, licensing late-stage candidates and already marketed drugs which it then commercialized through its robust sales force. The company’s acquisition of Santarus in a $2.6 billion all-cash deal brought a much wider selection of drugs, but the principle remains the same. Salix got nearly 70% of its 2013 revenue from sales of Xifaxan, a treatment for traveler’s diarrhea. But investors are watching closely to see how much in expense reductions the company will be able to realize from the Santarus deal. It may be a bit early, but the first clues may emerge when the company releases its Q1 results after the market closes on May 8. Right now, the biggest news is that Salix and its partner Progenics have successfully filed for a review of Relistor, a subcutaneously injected drug for the treatment of opioid-induced constipation in adults with chronic non-cancer pain. The scaled-up Salix Pharmaceuticals has a good profit history and a robust pipeline of candidate drugs to keep growing.
Technical Analysis
SLXP has mimicked the market in recent weeks, peaking at 120 on the last day of February and correcting to under 95 on April 15. The stock rebounded with the market last week, roaring back to 110 before today’s market weakness pulled it down. SLXP isn’t considered vulnerable to any disappointment in its earnings report, so buying now shouldn’t be exceptionally risky. A buy on a pullback to 106 would be ideal. A stop a bit below 100 will keep risk under control.
SLXP Weekly Chart
SLXP Daily Chart
Matador Resources Company (MTDR)
Why the Strength
Matador Resources is another young, fast-growing explorer that’s making hay thanks to the shale boom and elevated energy prices. The company is mainly focused on the Eagle Ford shale in Texas, where its acreage is very oily; the firm is focusing about three-quarters of its total capital spending in that area during 2014, aiming to drilling 47 wells this year. The other quarter of the budget is focused on the Permian Basin, where the company has been buying up acreage in a big way (now totaling 50,000 acres); it’s looking to drill just 10 wells in the Permian this year but there looks to be huge long-term potential there. All told, Matador is likely to boost its oil production by nearly 40% this year (oil should make up 60% of all production by year-end), while natural gas production gains 10% or so. So-so pricing will keep revenue growth to just 25% to 30% this year, but analysts are looking for earnings growth of 69% thanks to some efficiencies, and more gains in the years ahead. A small added positive is that both the Eagle Ford and Permian are in Texas, where there are fewer fears of regulatory meddling. All in all, Matador should do well if energy stocks remain in favor.
Technical Analysis
MTDR came public in February 2012, dropped for the next year, and has been doing well ever since. That makes it a bit “late stage,” raising the possibility its advance is in the later innings—but there’s no sign of weakness yet. The stock consolidated from November through February, and has been pushing steadily higher since, including a nice-volume rise last Wednesday. MTDR is a bit extended to the upside, especially considering the market’s renewed weakness, but we believe dips of a point or more are buyable, with a stop just under 25.
MTDR Weekly Chart
MTDR Daily Chart
Harley-Davidson Inc. (HOG)
Why the Strength
Harley-Davidson was slammed during the market crash of 2008, but the iconic American motorcycle maker has come roaring back as loud as its signature Hogs. Driven by a combination of improved operations, production synergies, cost cutting measures and a push toward international sales, Harley has ridden to four-consecutive quarters of double-digit revenue growth. Last week, Harley announced that Q2 sales rose 10% year-over-year, blowing past Wall Street expectations. Driving growth was a more than 20% rise in Asia-Pacific sales, while European, Middle Eastern and African sales combined for an 8% rise, and Latin America sales jumped 9%. These impressive international figures offset domestic sales growth of just 3%. The company reiterated its 2014 sales guidance, noting strong demand for its Project Rushmore motorcycles. Harley also said it has started shipping the much anticipated Harley-Davidson Street 750 and 500 models. Overall, Harley had the top two selling motorcycles in the U.S. in 2013, the Harley-Davidson Street Glide Special and the Custom Cruiser Harley-Davidson Breakout. With the company continuing to release innovative new models, and its Surge Production plan’s goal of improving product mix and on-time delivery, Harley-Davidson should continue to see solid growth.
Technical Analysis
HOG has seen choppy trading amid the recent market turmoil. Shares hit a snag at 70 at the turn of 2014, sending HOG down for a test of 60 and its 200-day moving average. HOG battled back throughout the first quarter, but was limited by resistance until last week’s blowout earnings provided the pop HOG needed to eclipse the 70 level. Shares are still seeing strong post-earnings volume, with pullbacks toward 70 offering opportunities to take bites.
HOG Weekly Chart
HOG Daily Chart
Delta Air Lines (DAL)
Why the Strength
The airline industry is notoriously touchy, with revenue and profits at the mercy of weather, fuel costs and relentless price pressure. Delta had to cancel 17,000 flights this past winter, losing $90 million in revenue in the process. But Delta still managed to grow revenues by 5% in the first quarter, largely as a result of cost-cutting and upgrades to its fleet of airplanes. Delta has been enjoying the benefits of bigness since it acquired Northwest Airlines in 2008. The company also nabbed a 49% share in Virgin Atlantic to get improved landing schedules at London’s Heathrow Airport, and has been actively cutting the frequency of flights to less profitable destinations. And, alone among major airlines, Delta enjoys good relations with its pilots’ union. The company’s improved cash flow has also allowed for an upgrade to its fleet, which will cut maintenance and fuel costs. All of these moves paid off last Wednesday when the company reported Q1 results that featured a 230% jump in earnings despite relatively tame revenue growth. Delta has come a long way since it started as a crop dusting service in 1924. All airlines are volatile, but Delta is heading in the right direction.
Technical Analysis
DAL has been in a strong uptrend since September 2012—the stock was featured here three times in 2013—and it gapped up from 35 to 37 last Wednesday after its strong earnings report. DAL has seen increased volatility in recent months, with a mild month-long correction in December and shorter pullbacks in February, March and April. But the major trend is clearly up, and the stock has given up only a fraction of a point from its earnings-gap high. If you’re game, DAL and its small dividend (forward annual yield is 0.6%) look like a good buy right here. Use a stop just under 34.
DAL Weekly Chart
DAL Daily Chart
Comstock Resources (CRK)
Why the Strength
Comstock Resources remains one of the better-performing energy stocks because investors are buying into its transformation from a Haynesville shale natural gas producer into an Eagle Ford shale oil and liquids producer. That transition has been going on for a while, but 2014 looks like the inflection point; the company’s drilling plan for this year includes solely oil wells in the Eagle Ford, boosting the firm’s oil output by 80% to 90%. Throw in the usual improvements in well results (Comstock’s new wells in the Eagle Ford showed a 28% hike in output last year thanks to improved drilling techniques) and efficiencies (cost per well was down more than 10% last year), and the stage is set for earnings to boom. Interestingly, management notes it also has huge upside in natural gas should prices continue to rebound; it has a whopping 1,000 more drilling locations in the Haynesville shale, which it could tap should a bull market develop in natural gas. For now, though, big investors are focused on the earnings turnaround, and potentially higher dividends—thanks to some asset sales, the firm pays a current dividend that yields 1.9% annually, and if the oil-rich drilling program bears fruit, management could boost the payout or add to its small share repurchase plan. Earnings are out the morning of May 6.
Technical Analysis
CRK was one of the first energy stocks to lift to new highs, reaching virgin turf in late March. Despite some hairy action from the market after that, the stock barely flinched, pulling back for a couple of days in early April before exploding higher in the past two weeks. Late last week, CRK finally showed some signs of short-term exhaustion, but volume on the dip has been reasonable. There’s always the chance the market completely unravels and drags everything down, but given the stock’s powerful blast-off, the odds favor higher prices down the road.
CRK Weekly Chart
CRK Daily Chart
Cabot Oil & Gas (COG)
Why the Strength
We’ve featured many energy stocks in recent weeks that have excellent growth stories as they begin to tap their lucrative acreage. But in our minds, Cabot Oil & Gas (no relation to us) might have the best story of all—the firm’s acreage in the Marcellus Shale region produces unheard-of results, with rates of return for each well in the triple digits (200% return at $4 gas!), and this despite nearly all of its production being lower-priced natural gas. But as we’ve written many times, a great story isn’t enough, and after a big advance in recent years, the stock stalled out for months on pricing worries; basically, Cabot’s realized prices were at times $1 less than the spot price. That is likely to continue for a couple of quarters, but it hasn’t stopped the company from drilling like mad (production has risen more than 40% each of the past two years, and should do so again this year), and with a ton of firm sales contracts in place for 2015 and beyond, investors are beginning to look past the near-term pricing issues. Cabot is also expanding in the Eagle Ford shale at a good clip (production in the first quarter was up 42%), which adds a little oil exposure, but the Marcellus acreage, production and pricing is what drives this stock. With huge sales and earnings growth, great projections and an unbelievable 3,000 identified drilling opportunities on its acreage (compared to 160-ish wells being drilled this year), the sky’s the limit for Cabot. We like it.
Technical Analysis
COG isn’t as strong overall as most energy stocks right now; it’s still working on its basing structure, while many others are hitting new highs. That said, we’re intrigued by the overall pattern—after a big run into early 2013, shares basically stalled out, trading between 31 and 42 ever since. But after a big dip in February and March, COG steadied itself in the low 30s, and burst back above its 50- and 200-day moving averages on nice volume thanks to the earnings report last week. It’s fine to simply put the stock on your watch list, but we’re OK with a nibble here and a stop in the mid-30s.
COG Weekly Chart
COG 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.
