The Evidence Deteriorates
Growth stocks remain dead in the water, with the sellers still focusing their efforts on the high valuation names that led the market higher during the past eight months. But now we’re beginning to see the weakness is that niche spread—broader indexes like the S&P 500 are feeling the heat, and while few cyclical-type stocks have broken down, most are starting to look ragged as big investors head toward defensive names. All told, it’s not 2008 all over again, but now is the time to hold plenty of cash, build a watch list and, if you buy, keep position sizes small and make sure you have your stops in place.
This week’s list is heavy with still-resilient cyclical stocks with great projected growth during the next couple of years. Our Top Pick is Devon Energy (DVN), a big company with a solid turnaround story and a stock that’s just getting going after a few down years.
| Stock Name | Price | ||
|---|---|---|---|
| Williams-Sonoma (WSM) | 64.96 | ||
| Ultra Petroleum (UPL) | 0.00 | ||
| Schlumberger (SLB) | 0.00 | ||
| RH Inc. (RH) | 252.93 | ||
| Southwest Airlines (LUV) | 0.00 | ||
| GT Advanced Technologies (GTAT) | 0.00 | ||
| Electronic Arts (EA) | 0.00 | ||
| Devon Energy (DVN) | 0.00 | ||
| CARBO Ceramics (CRR) | 0.00 | ||
| AerCap (AER) | 0.00 |
Williams-Sonoma (WSM)
Why the Strength
San Francisco-based Williams-Sonoma is a leader among brick-and-mortar specialty retailers, with 585 stores in 44 states, Canada (25 stores), Australia (5) and the U.K. (1). The company also operates 27 franchised stores in the Middle East. Williams-Sonoma also sells products from its various chains—including Pottery Barn, Pottery Barn Kids, PBTeen, Williams-Sonoma Home, West Elm, Mark and Graham and Rejuvenation—through its seven e-commerce websites and and eight direct mail catalogs. All told, Williams-Sonoma’s brands own a 4% share of home furnishing sales in the U.S. Revenue growth has been steady, including 9% in fiscal 2013 and 2014 (the company’s fiscal year ends in January). The company’s quarterly report on March 13 was a complete blowout, with both revenue and earnings topping estimates. Investors were also pleased to hear that the company was increasing its dividend by 6%, upping the forward annual dividend yield to 2.0%. With the entire retail industry fighting the colossus of Amazon, Williams-Sonoma’s success with its mix of brick-and-mortar stores, online and catalog sales is good news for the health of the sector.
Technical Analysis
WSM has been in a general uptrend for years, with long periods of consolidation and base-building along the way. WSM completed a long rally in July 2013 at 62, corrected to 52 in October then traded very flat for the last eight weeks of 2013 under resistance at 60. A January correction to a double bottom at 52 led to a strong rebound in February right back to that resistance at 60 again. The great earnings report finally provided the fuel to break out above 60 and the stock’s gap up to 66 came on very heavy volume. WSM spent a couple of weeks at that level before the recent market pulled it back to its 25-day moving average at 64. This looks like a buyable correction, with a possibility of getting in between 63 and 64. A 15% stop-loss would peg the stop at 54, but a tighter one at 59 makes more sense in these market conditions.
WSM Weekly Chart
WSM Daily Chart
Ultra Petroleum (UPL)
Why the Strength
Ultra Petroleum was one of the best performing stocks of the 2003 to 2008 commodity boom, but like many natural gas-heavy firms, sales and earnings fell off during the past couple of years as prices slid. However, the worst of that cycle is over, and more important, Ultra is bringing its best-in-class cost structure to the oil patch through a recent acquisition. The company’s core acreage remains in Wyoming, where its Pinedale and Jonah fields have about 2,000 Ultra wells operational, and where new wells sport lifetime returns in the 60% to 100% range; not surprisingly, that’s where most of the company’s development efforts remain as there are another 2,000 wells that can be drilled there for very low cost! But it’s Ultra’s recent purchase of acreage in the Uinta basin in Utah, which is very oily, that could change the firm’s fortunes—there are 550 potential new wells to drill there, with returns per well above 100% if oil prices stay near $100 per barrel! All told, Ultra’s production this year should only be up a few percent, but thanks to tight cost controls and much better pricing, cash flow and earnings are expected to surge about 40%, and it’s all up from there in the years ahead. We don’t expect a repeat of the mid-2000s, but after a long down period, Ultra’s arrow is pointing up again.
Technical Analysis
UPL fell from 103 in 2008 to just 15 early last year, and even through October, the stock was still mired at 18. But shares bounced from there, then staged a breakout in January and, impressively, have gyrated higher since—there have been a couple of sharp pullbacks when the market has turned weak, but every dip has been bought aggressively. And last week the stock took off on the upside, despite the market’s dip! We don’t advise chasing here, but the trend has turned up after years of poor action, so a dip of a point or two would be a good time to nibble, with a stop around 25.
UPL Weekly Chart
UPL Daily Chart
Schlumberger (SLB)
Why the Strength
Driven by the continuing boom in U.S. oil and natural gas production, oilfield services companies have been a relative bright spot in the market. At the forefront of this strength is Schlumberger, the world’s largest oilfield services company. Schlumberger provides a full range of services, including seismic surveys, formation evaluation, drilling technologies and equipment, cementing, well construction and completion, and project management. The company has been quite strong since announcing on March 24 that its first-quarter earnings would come in considerably higher than the same quarter last year. The company cited cost cutting and wresting market share from its rivals as leading drivers for the impressive performance. What’s more, Schlumberger accomplished this growth at a time when the industry as a whole was stymied by low demand due to wintry weather in North America and Russia. The company’s solid presence in deep-water drilling has insulated it from a challenging natural gas environment in the U.S., with active drilling in the Gulf of Mexico making notable contributions to Schlumberger’s bottom line. Furthermore, the company’s cost-cutting measures allowed it to increase revenue per rig by 5% last year, a figure boosted by management strategy and advanced technology. As an added bonus, Schlumberger recently increased its quarterly dividend by 28% to 40 cents per share.
Technical Analysis
SLB topped at 90 in April 2011, and bottomed near 55 in September 2011 and traded in a range between 70 and 80 for much of 2012 and 2013. The stock broke out of this pattern in July 2013, with shares blowing past 80 on strong earnings growth. Shares have since ridden their 10- and 25-week moving averages steadily higher, meeting with token resistance at 90 along the way. In late March, SLB cracked its old high of 90 and is now heading toward a showdown with the century mark. If you’re game, you can take bites on dips toward support near 95.
SLB Weekly Chart
SLB Daily Chart
RH Inc. (RH)
Why the Strength
Many retailers have been warning investors that the unusually severe winter weather would lead to missed revenue goals when earnings season heats up this month. But Restoration Hardware, a home furnishings company that concentrates on the luxury end of the market, didn’t have that problem when it reported its fiscal fourth-quarter results, booking an 18% jump in revenue and a 30% gain in earnings for the fiscal quarter that ended in January. Even more impressive was the company’s 27% growth in same-store sales during the year. Investors were also impressed that management’s guidance for Q1 earnings was for 9 to 11 cents per share, well above consensus of 7 cents. Restoration Hardware is bucking an industry trend toward smaller stores, with 70 retail stores and 17 outlets that feature a wide selection of furniture, hardware, bathware, lighting and accessories. The company also puts out massive catalogs called Source Books that run to 1,600 pages each. Expansion plans include three new locations in 2014 and negotiations are underway for an additional 25 locations. Restoration Hardware seems to have found the sweet spot in home retail, with excellent product selection, a retail strategy that is producing strong results and an ambitious expansion policy.
Technical Analysis
RH came public again (after a period of being privately held) in October 2012 and the stock put in almost six months building a base under resistance at 40. The breakout came in April 2013 when the stock blew past 40 and ripped to 75 in June on big volume. Since then, the stock has traded under resistance around 75, dipping as low as 55 in January. RH gapped up from 64 to 70 after its Q4 report, then rode its momentum to as high as 76 before broad market weakness pulled it back toward 70. If you want to start a position, RH looks like a reasonable buy anywhere under 70. Use a stop at the 50-day moving average, now at 64.
RH Weekly Chart
RH Daily Chart
Southwest Airlines (LUV)
Why the Strength
Airlines are about the last place you’d expect to find a bunch of strong stocks in a world of $100 oil prices, but after decades of incompetence, the industry’s major players have been avoiding price wars and focusing on key routes instead of expanding mindlessly, leading to very solid profits and expectations of more growth to come. Southwest Airlines is probably the best-managed airline in the country, and it’s also now the largest domestic airline; it’s been profitable for 41 straight years, has the third-lowest cost structure in the industry, and is spinning off a ton of cash. And management continues to make moves to prudently expand, including its acquisition of AirTran (which should be fully integrated by year-end), a gradual fleet upgrade and an innovative rewards program that’s already boosting revenue. On the cash flow front, Southwest produced a whopping $1 billion of free cash flow last year (after all capital expenditures), and it’s been giving about 60% of cash back to shareholders each year, partly through a small dividend (0.7% yield) but mainly through share buybacks; it cut its share count by 4% last year alone, and already in 2014, it’s bought back more than $300 million worth of shares (a bit less than 2% of the market cap). We’re not bold enough to expect a long-term uptrend in the airline sector, but given the huge recent earnings growth, solid projections for this year and next and a shareholder-friendly management, we think Southwest can continue to do well.
Technical Analysis
LUV has an excellent chart—it broke out from a four-month double bottom base in October (which itself was part of a long two-year consolidation) and ran up 13 weeks in a row on great volume. Then, starting in early December, the stock had three mild pullbacks, each one sitting on top of the other, which is constructive action. LUV briefly hit new highs last week before pulling in with the market, but the selling pressure has been light. We think the stock is buyable around here, but you should keep a tight stop around 22 (near the 50-day line) in case the uptrend stalls.
LUV Weekly Chart
LUV Daily Chart
GT Advanced Technologies (GTAT)
Why the Strength
Last month we highlighted GT Advanced Technologies in Top Ten due to the company’s significant turnaround story. Specifically, GT diversified its product pipeline to include not only equipment used to produce silicon wafers and solar cells, but also sapphire glass and the furnaces used to produce this material. Sapphire glass is a major competitor to Corning’s Gorilla Glass in the mobile and smartphone touchscreen markets. Furthermore, GT scored a major contract on the sapphire glass front, striking a $578 million deal last November to supply the glass for the next generation of Apple products. Recent reports indicate that Apple may be ramping up sapphire glass production, with MacRumors and AppleInsider reporting that Apple is looking to expand its Arizona plant. While Apple has yet to specify how it will utilize GT’s sapphire glass, a major investment in expanding product could provide a strong hint at the glass being used in the new iPhone 6. Lastly, the company’s solar cell specialty furnace business is also thriving, with GT just announcing a $58.6 million order for high temperature refractory metal furnaces—proof that the company is leveraging its acquisition of Thermal Technologies. Sales and earnings are expected to explode starting in the second half of the year.
Technical Analysis
After a taking a long nap in the low single digits, GTAT finally woke up in July 2013. The stock reclaimed its 10-, 25- and 50-day moving averages, and went on to breakout above its 200-day trendline in September 2013. GTAT spend the next three months digesting these gains before blowing past the 10 level in February as investors began to realize the full potential of sapphire glass. GTAT has since surged along its 10-day moving average, topping out just shy of 20 in late March. The stock has since retreated from its highs, as weakness pervades the tech sector. That said, we believe the stock still has great potential, and suggest nibbling on weakness at this point.
GTAT Weekly Chart
GTAT Daily Chart
Electronic Arts (EA)
Why the Strength
Global video game giant Electronic Arts is responsible for some of the biggest software titles in the industry, including Battlefield, FIFA Soccer, Madden NFL, The Sims, and Need for Speed. The company also scored the rights for the Star Wars franchise from Disney, and is rapidly expanding into the highly lucrative digital and mobile formats. This shift toward digital and mobile is paying off big for EA, with both categories helping to drive the company to beat fiscal third-quarter earnings expectations by four cents per share. Furthermore, EA’s latest release, Titanfall, has attracted considerable praise and attention from the gaming community, potentially establishing another AAA franchise for the company. On the Star Wars front, EA is creating a considerable amount of buzz after announcing that it has hired Amy Hennig, the former creative director from the popular “Uncharted” line of Sony action-adventure games. Hennig will reportedly be working on a revival of the once-popular Star Wars: Battlefront shooting game. Finally, EA is also seeing considerable growth due to the popularity of the recently launched Xbox One and Playstation 4 consoles. The strong uptake of these “next-gen” consoles bodes well for top-tier game makers like EA.
Technical Analysis
Following a long decline from a peak near 25 in late 2011, EA finally found a bottom near 11 in mid-2012. Shares wasted little time in bouncing back, cracking the 15 level in January 2013 and then surging toward 28 by August. Growth concerns and worries about holiday sales sent EA down for a retest of support near 20 by December, but a strong holiday season sparked another turnaround. EA has since eclipsed former resistance at 28, tagging a high just north of 30 in mid-March. Recent weakness in the tech sector has weighed on EA, but the stock is standing right on top of its 50-day line. Nibbling here, with a stop near 26, is a decent risk-reward trade.
EA Weekly Chart
EA Daily Chart
Devon Energy (DVN)
Why the Strength
Devon Energy is a huge energy company (more than $10 billion in revenue) that has shifted focus during the past couple of years and now looks like a major turnaround opportunity. The firm is in the process of selling non-core, generally natural gas-heavy assets (including some Canadian operations for north of $3 billion recently) and, conversely, acquiring some oil-rich acreage, including its recent buy of 82,000 net acres in the Eagle Ford shale. The company’s even made a bold move to combine some midstream assets with CrossTex Energy, resulting in a powerhouse—Devon’s stake in the venture is estimated to be worth $7 billion, more than one-quarter of the current market cap! Back to the production side, Devon’s not just planning on solid growth in oil production (up more than 20% in 2014), but the company should be solidly free-cash-flow positive, a rarity among exploration firms—in the Eagle Ford alone, Devon expects to spin off $2.5 billion of cash during the next four years, while its remaining Canadian operations should start throwing off lots of cash next year. Management has been slowly buying back shares (20% cut in the share count during the past decade) and boosting the dividend (now 1.4% annually), and there’s probably more where that came from considering the earnings estimates for the next two years. We like the story and potential here.
Technical Analysis
DVN peaked at 127 in 2008, and then formed a long double bottom at 51 (reaching that level in late 2011 and mid-2013). And it was still meandering in early February when the stock’s character began to change—it ran up five straight weeks, paused for one week, and has now leapt to its highest price since 2012 on two weeks of very healthy volume. If you’re game, you could nibble around here with a stop near 63.
DVN Weekly Chart
DVN Daily Chart
CARBO Ceramics (CRR)
Why the Strength
Hydraulic fracturing technology requires the use of proppants, small grains of sand or other material to hold the fracked substrate apart to allow oil and gas to flow freely. Most fracking uses special spherical sand to do the job, but CARBO Ceramics has a higher-tech solution: ceramic proppants and resin-coated sand that have superior strength and greater width as selling points. CARBO is the world’s largest supplier of ceramic proppants, with an annual manufacturing capacity of over 2.2 billion pounds. The company also sells software that allows drillers to design the fracking process and high-strength proppants for use in extremely deep or high-stress wells. While a vast majority of sales come from the U.S. and Canada, CARBO is a global company, with manufacturing plants in China and Russia and storage and distribution facilities in the U.S., Canada, Europe and China. There is some risk involved in a company that gets 48% of its total revenues from just two customers, but the measurable advantages of CARBO’s products provide some protection. The company has no debt and analysts expect business to increase steadily as fracking technology gains adherents around the world. CARBO announced a dividend of 30 cents per share payable to shareholders of record as of May 1.
Technical Analysis
CRR made a monster run from June 2009 through July 2010, soaring from 33 to 183. But the stock flopped back to a double bottom at 60 in October 2012 and 62 in June 2013. It perked back up again in July 2013 as the energy sector began to recover and stair-stepped higher during the year, topping 130 in late October after a great earnings report. CRR corrected to 105 in an orderly fashion and gathered momentum again in February. CRR broke out in late March, topping its October high at 130. You could nibble here with a stop at 120.
CRR Weekly Chart
CRR Daily Chart
AerCap (AER)
Why the Strength
With a fleet of 378 aircraft, Netherlands-based AerCap Holdings is one of the largest aircraft leasing and aviation finance companies in the world. The company has 95 customers in 50 countries and its fleet of Airbus and Boeing airliners is young and fuel-efficient. AerCap gets 90% of its revenue from aircraft leases and has offices in Ireland, the U.S., China, Singapore and the United Arab Emirates. While AerCap has been a growing, consistently profitable company for years, it took a blockbuster $5 billion purchase of rival International Lease Finance Corp. (ILFC) from AIG to really grab investors’ attention. When the deal closes in the second quarter, AerCap will more than triple its fleet of planes to almost 1,400. ILFC was the second-largest leasing company in the world, and the AerCap–ILFC entity will rival the scope of GECAS (GE Capital Aviation Services), which has 1,630 planes. The ILFC deal also gives AerCap early delivery slots for the latest Boeing 787s and Airbus A320s and A350s, which will command top rental fees. The company’s 385 planes on pre-order will push it past GECAS in fleet size when the planes are delivered. The aircraft leasing business is highly scalable, and analysts predict that the ILFC merger will go smoothly, with many opportunities for cost savings. AerCap is making its increased scale look good.
Technical Analysis
AER enjoyed an 18-month rally that began in June 2012 at 11 and tractored steadily higher to 22 in December 2013. The ILFC deal rocketed the stock to 34 in one day, and the stock has pushed as high as 44 in early March. AER has been trading mostly sideways since late February, resisting the weakness in the market. The stock touched its 50-day moving average in late March and the 50-day is just catching up again. If you want in, AER would be a reasonable buy anywhere under 40 with a relatively loose stop at 35.
AER Weekly Chart
AER 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.
