Ramping Up
Though the current market rally is just two weeks old, we’re already beginning to see some big-volume upmoves in the most fundamentally and technically attractive stocks in the market … a sure sign that institutional investors are getting active on the buy side. While this week’s Fed meeting will almost certainly have a big say in the market’s near-term direction, the evidence right now tells us the bulls are re-taking control. And that means you should be putting some money to work! The last couple of Top Ten Reports have highlighted many leaders, and this week’s batch has plenty of interesting stories, big and small, new world and old world. Our favorite of the week is Gafisa (GFA), a Brazilian homebuilder that came public just a few months ago. It’s just now lifting from its first basing structure on good volume, but be aware the shares are somewhat thinly traded, so the stock can be choppy.
| Stock Name | Price | ||
|---|---|---|---|
| BIDU (BIDU) | 0.00 | ||
| BUCY (BUCY) | 0.00 | ||
| CCC (CCC) | 0.00 | ||
| DE (DE) | 0.00 | ||
| EDU (EDU) | 0.00 | ||
| FCSX (FCSX) | 0.00 | ||
| GFA (GFA) | 0.00 | ||
| MLNM (MLNM) | 0.00 | ||
| RTP (RTP) | 0.00 | ||
| WDC (WDC) | 0.00 |
(BIDU)
Why the Strength
Baidu is the Google of China. Just like Google, it derives 99% of its revenues from ads, it dominates its market, and it’s very, very profitable. But Baidu is far smaller than Google (1/80th the size), it’s addressing a far larger market, and it’s growing twice as fast … so it’s the better growth play today. Also, Baidu is more profitable; its profit margin has exceeded Google’s for the past eight quarters! Interestingly GOOG is now owned by a whopping 839 mutual funds, and we tend to view a stock that’s owned by over a thousand funds as fully owned, and thus having lower profit potential. BIDU, contrarily, is owned by just 64 funds, telling us it can be pushed higher faster. The one measure by which Google looks better is valuation; GOOG’s market capitalization is 11 times revenues, while BIDU’s is a whopping 49 times revenues. But that doesn’t bother us; the best growth stocks are always expensive!
Technical Analysis
BIDU came public in August 2005 at 27, hit 154 in its first week of trading, and bottomed at 44 in early 2006. But since then the trend has been up, and five weeks ago, at the market top, BIDU was hitting new price and RP highs … a true market leader. After that the stock pulled back to 300, falling below its 50-day moving average for a week in the process, and then – in eight days of trading – blasted back to 400. The buyers are clearly in control now; you can buy some here, but a short retreat into the mid 300s is possible.
BIDU Weekly Chart
BIDU Daily Chart
(BUCY)
Why the Strength
In our view, Bucyrus is one of the better ways to play the global commodity boom, as the company’s large-scale excavation equipment for surface mining (electric mining shovels, blasthole drills, etc.) is in big demand from mining giants like BHP Billiton, who are looking to take advantage of high prices. Bucyrus, along with its peers, is capacity constrained, so the big task over the next few quarters is keeping up with demand – management reported that its surface mining shovel business is already two-thirds booked for 2008, and should be sold out by early next year. In response, the company is expanding its Milwaukee plant, which will help the bottom line grow for the next couple of years. Analysts are expecting a healthy 50% jump in earnings next year, though even that could be conservative, as Bucyrus crushed estimates last quarter. All in all, we like it.
Technical Analysis
BUCY remained resilient all during the market’s November slide, closing most weeks right around the 80 level. That was a sign that big investors weren’t letting go of their shares, and now the stock has pushed to new peaks on good (but not great) volume. We think higher prices are in the offing as long as the market continues its recovery, but BUCY isn’t blasting off with force. Translation: A retreat is certainly possible, so sit tight if you own some, and look to buy on weakness if you don’t.
BUCY Weekly Chart
BUCY Daily Chart
(CCC)
Why the Strength
Calgon Carbon, founded in 1942 in Pittsburgh and still headquartered there, is the world’s largest manufacturer and supplier of granular activated carbon. This material, also called activated charcoal, has an extremely large surface area; a gram “can have a surface area in excess of 500 m2, with 1500 m2 being readily achievable. For comparison, a tennis court is about 260 m2.” The company also makes carbon aerogels, which have even higher surface areas, but are considerably more expensive. All these products, along with Calgon Carbon’s equipment, are used to absorb impurities in water and air. The U.S. market accounts for 56% of revenues while the rest comes from all over the world. And the stock is strong today for three basic reasons. One, business is a bit better, with growing demand for both water treatment and odor treatment products. Two, prices for activated carbon are rising, just like the prices of most other commodities. And three, after losing money in 2005 and 2006, the company cut costs! Add those three up and you get a profit margin that in recent quarters has gone from zero to 2.4%, 5.0% and 5.9%, and a stock that’s in a strong upward trend. The valuation is only twice annual revenues, so even though growth is not rapid, there’s good potential for upside in the stock.
Technical Analysis
CCC has been public since 1987, but the stock was in a downtrend from 1991 to 2006. Now that downtrend is officially over. The stock hit 16 at the market’s October high, dipped to nearly its 200-day moving average in the November correction, and has now broken out to new highs. We like it.
CCC Weekly Chart
CCC Daily Chart
(DE)
Why the Strength
Farm equipment! A few years ago we never thought this would be a hot sector, but thanks to high crop prices (partly due to demand for corn-based ethanol), farmers are increasing their planting acreage and investing in newer, more efficient equipment. Deere is the global leader in products such as tractors, harvesters, sprayers, mowers, you name it. It’s also a big player in construction-related equipment, and that segment has been hurt by the U.S. housing slump. But international sales of farm equipment – helped by a weak U.S. dollar – are making up for that and then some, and the future looks equally bright; futures prices for many crops remain elevated, and a Congressional bill is likely to solidify ethanol usage in the years ahead. Of course, a downturn in the world economy, in particular a hiccup in China, could hurt commodity prices and, hence, Deere’s sales. Still, for the months ahead, the wind is at the industry’s back, and Deere is the unquestioned leader.
Technical Analysis
DE broke out of a base in early November of last year and has been trending higher ever since. The advance hasn’t always been dynamic, but in general, corrections have been well controlled, even during the market slumps of July/August and this November. Recently, DE found support at 70 thanks to a better-than-expected earnings report, and has been surging on terrific volume the past couple of weeks. The low- to mid-80s should offer very strong support, so we believe you can use any weakness as a buying opportunity.
DE Weekly Chart
DE Daily Chart
(EDU)
Why the Strength
New Oriental is the largest private educator in China, with 37 schools, 149 learning centers and an online network with some three million registered users. But it’s growing fast and still has a lot of growth ahead of it, which is why the stock is so strong today. At this point, the company’s two strongest markets have been test preparation and English language teaching, and there’s no doubt those will remain the cornerstones of the school’s curriculum. But the company is branching into other academic subjects, with mathematics getting a big push this year. Like all schools, New Oriental copes with seasonal fluctuations in revenue flows; the quarter ended August 31, for example, is the big one, because it includes the summer period when students take extra English and test prep courses. This year, that quarter brought a fat profit margin of 43.9%, while the slow quarter before it brought a margin of 2.9%. Long-term, we remain very bullish on this company.
Technical Analysis
This marks EDU’s fourth appearance in Cabot Top Ten this year; the previous appearances were in February, when the stock was at 41, and twice in October, when the stock was at 65 and 73. On that last appearance, in fact, we made EDU the Editor’s Choice. Unfortunately, we got knocked out of the stock in the market’s November slump. But it came roaring back from that slump on big volume, touched its old high of 92, and is now on a modest correction. We think you can buy it here.
EDU Weekly Chart
EDU Daily Chart
(FCSX)
Why the Strength
Commodities producers and dealers have always needed a way to hedge against price fluctuations, and with hot global economies consuming increasing amounts of natural resources and corn having become an energy product, the demand for increasingly sophisticated hedging and derivatives strategies has skyrocketed in recent years. Des Moines, Iowa company FC Stone has a history of providing risk adverse hedging that goes back to the 1930s, and the company is thriving in this diversified global environment. Stone has been named the electronic market maker for ethanol futures contracts and is working on the problem of quantifying carbon credits for trading. With operations in agriculture, carbon credits, energy, food service, forest products, fuel surcharges, livestock and renewable fuels that include simple brokerage, market analysis, and a trademarked Integrated Risk Management Program (IRMP), FC Stone offers the entire spectrum of commodities hedging and derivatives services. Business has been good, with the latest quarter featuring a 160% jump in earnings and an all-time high 14.8% after-tax profit margin. This is a smart company in a hot sector.
Technical Analysis
FCSX came public at 16 in March 2007 and had soared to 38 (3-for-2 split-adjusted) when it made its first Top Ten appearance in late June. Since then, except for the July/August global slump, it’s been all upward momentum as more and more institutional investors sign on. Look for a dip back to 43 as an entry opportunity.
FCSX Weekly Chart
FCSX Daily Chart
(GFA)
Why the Strength
Gafisa, the Brazilian homebuilder headquartered in Sao Paulo, is in a different kind of housing market from that of the U.S. According to one estimate, there are buyers for about 1.2 million homes a year in Brazil, but only 900,000 are being built. Gafisa is the first homebuilder to go national in Brazil, using both acquisitions and joint ventures to expand operations outside of Sao Paulo and Rio de Janeiro. With operations in 39 cities and 17 of Brazil’s 26 states, Gafisa is indeed national, but it has significant areas left for expansion. The company is also doing innovative work in providing affordable housing with its Bairro Novo Affordable Entry Level (AEL) housing developments in suburban areas. Brazil’s economic expansion is providing continuing demand and increasing ability to pay. Gafisa made its Top Ten debut in mid-November, and this second appearance confirms that it can resist the downward pull of the U.S. housing slump. With just 23 institutional supporters, Gafisa has a long way to run.
Technical Analysis
GFA came public in March 2007, and rose strongly from its IPO until the July/August slump dropped it back to just below its IPO price. Since that August bottom, the stock has had strong buying support and just reached new peaks in both price and RP. Good story, good numbers, good stock. A pullback to 38 would present an attractive buy point.
GFA Weekly Chart
GFA Daily Chart
(MLNM)
Why the Strength
Millennium Pharmaceuticals is a medium-sized drug maker with a couple of profitable products. The lead product is Velcade, a treatment for multiple myeloma and mantle cell lymphoma. Velcade sales pushed the company into the black in 2006 and provided the fuel for the stock’s October run, which is still in progress. First came news of a huge increase in Velcade sales. Then came the headlines about results from Phase III trials that will likely push the drug to the head of the list as the standard treatment for multiple myeloma. With a pipeline that includes several anti-inflammatory and anti-cancer drugs already in clinical trials, as well as trials of other uses for Velcade, Millennium has a good probability of producing the kind of surprises that fuel advances by pharmaceutical companies.
Technical Analysis
MLNM is coming off a very long stagnant spell that began when the stock bottomed out at 8 back in March 2005. The stock spent ten quarters making scant progress, twice hitting resistance at 12 (in 2006 and 2007) and then bottoming again at 9 in August before the October move that blasted the stock off on its run to 15. MLNM is now out to new price and RP peaks, and the prudent choice is to wait for the kind of pullback that occurred in late November. If the stock won’t cooperate, you might try taking a nibble and then another if you get a little profit cushion. But don’t chase it.
MLNM Weekly Chart
MLNM Daily Chart
(RTP)
Why the Strength
Mining companies that don’t produce gold seldom qualify for Top Ten. But global growth rates, especially those in emerging markets, have created so much demand for basic minerals that even big, conservative miners are becoming attractive to growth investors. Rio Tinto, the U.K. mining giant, has been growing strongly on rising demand from China for iron ore and copper. But the real shift from the company’s “grow-slow-and-pay-the-dividend” strategy came when M&A rumors started to swirl around some of the industry’s biggest players. Midwest Corp., an Australian iron-ore extractor, has attracted a takeover bid from China’s Sinosteel. And earlier this month, Rio Tinto itself rejected a takeover bid of $130 billion from Australian mining giant BHP Billiton. There’s no way of knowing whether Rio Tinto’s rejection reflects a determination to remain independent or is just a negotiating tactic. But the growth of China has changed the game for big miners like Rio Tinto, which also gets revenue from aluminum, industrial minerals and diamonds. The company reports only semiannually and pays a 1.0% dividend.
Technical Analysis
RTP spent all of 2006 and the first quarter of 2007 building a long base centered at 200. The breakout came in May 2007, with a big-volume move to 327 before the July/August market meltdown. The stock then recovered quickly, running into new resistance at 375 before takeover news gapped it up to 480. A pullback toward 450 seems probable, and would offer an attractive entry point. Don’t fret about the high price – just buy fewer shares.
RTP Weekly Chart
RTP Daily Chart
(WDC)
Why the Strength
Western Digital is one of two giant publicly traded hard disk drive manufacturers in the U.S. (Seagate Technology, STX, is the other). The company’s business is as cyclical as they come, as hard disks are basically a commodity product; every year brings larger capacity and falling prices, which is great for consumers, but not always a plus for Western Digital. However, right now, the industry’s fundamentals are outstanding – lower production from a couple of Asian competitiors has kept inventory levels low, while demand remains very strong thanks to an explosion in mobile device sales (the firm’s mobile-related drive sales were up 55% in the third quarter) and healthy growth in computer and digital video recorder shipments. The result: Third quarter earnings crushed estimates by 39%, and the firm just upped its fourth quarter outlook last week. All told, we expect the positive news flow to continue for the intermediate-term.
Technical Analysis
WDC peaked at 25 in February of 2006, fell to 16 by March of this year, and has been strongly uptrending since. The best aspects of the chart, however, occurred just in the past few weeks – the surge at the start of November was caused by a great earnings report, the stock held up well during the market’s November slide, and last week’s push to new multi-year peaks came on a higher fourth-quarter forecast. WDC is extended to the upside, but we don’t believe a big pullback will come. You can buy a little here, and look to add on strength.