A Break in the Clouds
The market’s rally since its mid-November lows has proven durable enough to turn our intermediate-term indicators back into a bullish mode. (Our Market Monitor, shown to the left, has followed suit.) Granted, the buyers aren’t exactly flexing their muscle here, with plenty of choppy action as investors await word on the Fiscal Cliff. But there’s enough evidence that the sellers have left the building, seen in both the major indexes, which have refused to give back any gains of late, and in leading stocks, more and more of which are setting up. You shouldn’t head for the deep end yet, but putting some sidelined cash to work is advised.
This week’s list is a hodgepodge of stocks and sectors, with a handful of turnaround-type stories thrown in. Our favorite of the week is MasTec (MTZ), an off-the-radar name in the construction business. Growth is picking up, and the stock is acting excellently.
| Stock Name | Price | ||
|---|---|---|---|
| United Rentals, Inc. (URI) | 0.00 | ||
| Rackspace (RAX) | 0.00 | ||
| Rackspace (RAX) | 0.00 | ||
| MasTec, Inc. (MTZ) | 66.65 | ||
| Marathon Petroleum Corporation (MPC) | 0.00 | ||
| Louisiana-Pacific (LPX) | 0.00 | ||
| Lowe’s Companies (LOW) | 98.15 | ||
| First Solar (FSLR) | 83.74 | ||
| Canadian Pacific Railway (CP) | 0.00 | ||
| ASML Holding (ASML) | 350.01 | ||
| Amazon.com (AMZN) | 2.00 |
United Rentals, Inc. (URI)
Why the Strength
United Rentals is, at its core, a “risk-on” stock; its rental equipment business thrives when construction and repair work picks up. But what makes it one of the strongest stocks in the market is that it also has an intriguing growth story, both from a major recent acquisition (it bought RSC Holdings earlier this year) and the fact that, over time, more and more customers are cutting back on expenses, leading them to rent instead of buy ... which plays right into the hands of United Rentals! Back to the acquisition, the RSC purchase not only boosted United’s market share (it’s the largest player in the market now with more than 800 locations, though the industry remains highly fragmented), it’s also leading to huge cost synergies; management is squeezing out $100 million of cash flow savings this year, with an ultimate goal of $250 million by 2014. The combination of it all has led to fantastic top- and bottom-line growth, and analysts see that continuing ($4.84 earnings per share in 2013, up 42%). Of course, if the U.S. economy truly tanks, all bets are off, but it seems investors are already discounting a slowdown, as the stock trades at just 13 times trailing earnings (and 9 times next year’s estimates). If the economy surprises on the upside, United Rentals could be a real leader.
Technical Analysis
URI has made great progress during the past few years, but the corrections it suffers during “risk-off” periods are harrowing. During the mini-crash of 2011, URI fell from 35 to 13, and after topping this April, fell from 48 to 27. However, it now looks poised for a move; shares have rounded out a nice base on the weekly chart, tightened up for a month, and are making a run at resistance. We’re setting our buy range a bit lower, but it’s OK to take a stab at URI if you see a huge-volume breakout above 45.
URI Weekly Chart
URI Daily Chart
Rackspace (RAX)
Why the Strength
The biggest buzzword in the tech space these days is Big Data, which refers to all the gazillions of information chunks being collected by companies who do business on the Internet, which is just about everyone. Big Data has taken over from the previous buzzword, The Cloud, which referred to the trend toward locating all of a company’s information and archives and software on remote servers. But no matter what qualifies as the hottest buzzword, everything in tech needs more storage space for information and resources, and Rackspace’s suite of OpenStack-based Cloud solutions does the job. OpenStack allows customers to move toward Cloud-based operations without tying themselves to a particular proprietary technology. Information storage on Rackspace’s servers is secure, available and cost-effective. This combination is what has paced Rackspace’s revenue growth from 18% in 2009 to 24% in 2010 and 31% in 2011. With an after-tax profit margin that topped 8% for the first time and a growing roster of institutional owners, Rackspace and its more than 89,000 servers are leading the migration to the cloud.
Technical Analysis
RAX came public at a difficult time (2008) and endured a big post-IPO droop before getting into gear in 2009. Since then, although there have been two significant corrections (July–August 2011 and May–June 2012) and one big consolidation (seven months in 2010) it’s been on an upward track. That’s one reason the stock has appeared in Cabot Top Ten Trader 17 times in the past four years, which is evidence of exceptional strength. RAX nudged 70 in early October, and, after correcting to 60 in November, worked its way back to that level late in the month. We regard the stock’s drop on December 1 as a buying opportunity. You can either buy here, or wait for the breakout above 70.
RAX Weekly Chart
RAX Daily Chart
MasTec, Inc. (MTZ)
Why the Strength
MasTec is a mid-sized infrastructure construction company based in Coral Gables, Florida, that engineers and builds energy, communication and utility projects in North America. The company has been around since 1929, and has a great history of steady growth. But it’s in Top Ten today because its two most-recent earnings reports (early August and November 1) were very strong and beat analysts’ expectations handily; management went out of its way to say that its largest markets—natural gas pipelines and facilities, wireless infrastructure construction and power generation facilities—aren’t just bouncing back from a few slow years, but have major growth potential ahead. The other contributing factor to the company’s jump in late October was SuperStorm Sandy, a destructive force that has created a huge opening for companies like MasTec that specialize in building (and rebuilding) all forms of infrastructure. The combination of a couple of surprisingly strong quarters and the promise that Sandy will present additional opportunities makes MasTec a tempting opportunity.
Technical Analysis
MTZ made a big, six-month run in Q4 2010 and Q1 2011. But after topping at 23 in April 2011 and testing that high again in October 2011, MTZ went into a 15-month correction that pulled it down to below 15. The turnaround came with the great August earnings surprise and was reinforced in early November. After tagging 24 in the first week of November, MTZ corrected to 21.5 in mid-November, then spent a couple of weeks trading tightly under resistance at 23. The stock got a boost last Friday from the sale of some family shares. We think you can buy some here with a stop near 21.5; a push above 25 would be bulish.
MTZ Weekly Chart
MTZ Daily Chart
Marathon Petroleum Corporation (MPC)
Why the Strength
Marathon Petroleum is a fairly new company, having spun off from Marathon Oil on July 1, 2011. Marathon Petroleum works the retail side of the petroleum business, refining, transporting and marketing gasoline and other end products. The company’s operations are focused on the Midwest, Gulf Coast and Southeast regions of the U.S., with retail sales coming through the company’s string of 5,100 Marathon service stations and 1,460 Speedway convenience stores. The company’s six refineries also distribute refined products through its own nearly 5,000-mile network of pipeline. Marathon Petroleum has been a favorite of institutional investors right from the start due to its size, stability and sizable float of about 356 million shares. Investors also like the positive effect of the cheap and abundant natural gas that has pushed the company’s after-tax profit margin to 5.3%. The 2.3% annual dividend yield is also a great selling point for institutions. Individual investors are perhaps tempted a little more by the prospect of getting an institutional-grade stock for a super-cheap forward P/E ratio of just 7. All told, Marathon is a leader in the strong refining sector.
Technical Analysis
MPC chopped around for a year after its July 2011 IPO, but showed some appeal in January 2012 when it popped from 30 to 45 in just four weeks. The stock gave back much of that gain, falling to 34 at the end of May 2012. But once the stock got moving again in June, it got up a good head of steam, popping to 60 on October 8 before settling down to digest its big run in October and November. After trading under resistance at 60 for six days, MPC popped out to new-high territory last Friday. Look for a correction back to the stock’s old resistance at 60 to pick up shares, with a stop near 56.
MPC Weekly Chart
MPC Daily Chart
Louisiana-Pacific (LPX)
Why the Strength
If you’re looking for a way to take advantage of the improving housing market, but are queasy about investing directly in homebuilders, Louisiana-Pacific may be the foundation for you. Louisiana-Pacific produces oriented strand board (OSB), siding products, engineered wood products, decorative molding and cellulose insulation. The company’s products are used in new home and manufactured housing construction and for repair and remodeling, so you can see why the budding recovery in the housing market has been a boon for Louisiana-Pacific. What’s more, the company has benefited from a tightening lumber supply and subsequent rising lumber prices. In fact, pine lumber prices in the U.S. South remain significantly above year-ago levels. Elsewhere, the ongoing Hurricane Sandy recovery efforts should remain a driver for Louisiana-Pacific, as rebuilding and reroofing remain top priorities for many in the Northeast. Finally, Louisiana-Pacific continues to expand in what is a cyclically weak time of the year for the company. Specifically, the company recently bought out Canfor Corp.’s 50% stake in the Peace Valley mill in British Columbia, Canada. Louisiana-Pacific shelled out $75 million for the plant which CEO Curt Stevens said will “continue to play an important role in LP as the housing market rebounds.”
Technical Analysis
The stock has retreated a bit since we last visited LPX in early November, with the shares pulling back to support at the 16 level and their rising 25-day moving average. As we noted before, the stock was a bit over-extended last month, indicating that a bit of consolidation could be in the cards. From a long-term perspective, LPX has still soared more than 170% since setting a bottom in October 2011, with the stock largely ignoring the past year’s economic woes. LPX’s recent dip should be seen as a potential buying point amid a longer-term uptrend.
LPX Weekly Chart
LPX Daily Chart
Lowe’s Companies (LOW)
Why the Strength
Homebuilding stocks have cooled after monstrous year-long runs, but we think much of that has to do with the groups’ humongous advances during the past year. Housing supply firms, though, remain in favor, as demand has steadily improved with the housing market in general. Lowe’s had some trouble grabbing hold of the industry’s turnaround, but after tinkering with some pricing (it’s gone back to low prices across the board) and slashing its own costs, it’s beginning to benefit. Earnings in the latest quarter were up 11%, and more important, were well above estimates, with the company’s top brass offering encouraging words about the future. (Indeed, analysts see the bottom line jumping 21% in 2013.) It also isn’t hurting that Hurricane Sandy’s devastation should lead to a flood of reconstruction orders; Home Depot indicated as much a couple of weeks ago, and Lowe’s should catch a tailwind from that, too. All told, there’s nothing revolutionary here, and we don’t think this stock is going to triple. But with a reasonable valuation, a solid dividend (1.8% yield), a still-powerful housing market and a management team that’s finally pulling the right levers, the stock’s path of least resistance is clearly up.
Technical Analysis
LOW was rebounding with the entire housing sector through April, but the market’s spring retreat and a bad earnings report caused the stock to lag through mid-August. (Notice the sharp decline in the RP line during that time.) Since then, though, LOW has been acting well, and after touching its 10-week line during the market’s mid-November plunge, it gapped higher on earnings and has inched higher since. It’s not a fast-moving stock, so we advise trying to buy on a dip toward the top of the earnings gap, around 34.
LOW Weekly Chart
LOW Daily Chart
First Solar (FSLR)
Why the Strength
Arizona-based First Solar was a monster stock in 2007, when its proprietary thin-film solar cells gave it an advantage over its silicon-hogging solar cell competitors. First Solar weathered the storm of the Great Recession, and has remained profitable by designing, building and selling photovoltaic power systems that sell for less, mostly due to the company’s size and its silicon-saving construction technology. In 2011, the company’s capacity was nearly two gigawatts, making First Solar a major player. The U.S. was the biggest source of the company’s sales with 45% of 2011 revenue, while Germany kicked in 23%. The outcome of the U.S. presidential election was weighing on First Solar, as investors assumed that a big Republican win would jeopardize the tax credits that still provide significant support for solar power projects in the U.S., although they’re not as big as those in Germany. Investor enthusiasm for First Solar got a huge boost in August, when the company announced a surprising 80% jump in sales, primarily due to the strategy of aiming sales efforts at U.S. utilities that want to build huge solar farms. There has been more good news since then, including a massive Chinese government grant to a competitor that improved the market’s view on all solars. First Solar is the low-cost, big-project leader in solar.
Technical Analysis
FSLR soared from its IPO price of 24 in December 2006 to as high as 317 in the middle of 2008. After a 2011–2012 plunge to 12 in June, FSLR put in a two-month base at 15, then got moving in August after that great earnings report. It took three months of consolidation under resistance at 25 before FSLR was ready to move again, but the stock broke out again in late November and popped above 30 last week. It’s probably best to regard FSLR as a cheap way to play the long-term prospects for alternative energy. FSLR trades at 12 times earnings and has plenty of room to rise. Look to get in on a dip toward 29.
FSLR Weekly Chart
FSLR Daily Chart
Canadian Pacific Railway (CP)
Why the Strength
Canadian Pacific Railway, Canada’s second-biggest railway, hauls freight over a roughly 15,000-mile network in Canada and the U.S. While most of the company’s business lies in Canada, Canadian Pacific’s U.S. units include Soo Line Railroad; Dakota, Minnesota & Eastern Railroad; and Delaware and Hudson Railway. For the most part, the company hauls intermodal containers, coal, grain and industrial and consumer products. Despite turmoil in the transportation sector due to a sluggish global economic recovery, Canadian Pacific has seen strong growth. In fact, revenue has averaged 10% year-over-year growth during the past four quarters, while earnings have averaged quarterly gains of 82%. While this steady performance is nice, new details in the company’s restructuring plan have created a spike in interest. For instance, newly installed CEO Hunter Harrison has made moves to close redundant rail yards, revealed plans to cut around $500 million in costs, and has announced the elimination of roughly a quarter of the company’s workforce by 2016. With revenue already growing at a solid clip, and management making tough decisions to ensure greater profitability going forward, Canadian Pacific should continue to win over investors.
Technical Analysis
CP started 2012 heading in the right direction. The stock rallied steadily along support at its 10-day and 25-day moving averages until meeting up with resistance at 80 in March. CP then staged an orderly retreat, ultimately forming a bottom near 70 in June. The stock rebounded sharply from this support level in the wake of restructuring news, allowing CP to reclaim long-term support at its 50-day trendline. Shares are currently fresh off a bounce from this moving average, and are poised to challenge the century mark in a bid for fresh all-time highs. A stop loss at 93 could help limit losses.
CP Weekly Chart
CP Daily Chart
ASML Holding (ASML)
Why the Strength
When it comes to technology, mobile is where it’s at, and ASML Holding is one of the biggest players in the mobile semiconductor market. The company specializes in manufacturing the equipment that the big boys like Intel, Taiwan Semiconductor and Samsung use to churn out chips for your Galaxy S IIIs and Apple iPhone 5s. The company made headlines earlier this year by initiating an unconventional customer investment plan, ultimately enticing Intel and Taiwan Semiconductor to pledge $4 billion and $1.4 billion of investment capital, respectively. More recently, however, ASML’s $2.55 billion buyout of lithography specialist Cymer has dominated headlines. The move was designed to speed up development of Extreme Ultraviolet semiconductor lithography—a technology that is seen as vital to the industry and one that was a lynchpin in attracting the aforementioned capital investments. Fundamentally, things are improving for ASML, though the company is still fighting to emerge from the malaise blanketing the chip sector as a whole. While Windows 8 has not sparked the anticipated demand in the mobile and PC markets, ASML expects sustained demand within the tablet and smartphone markets. As economic conditions improve, so too should ASML’s prospects.
Technical Analysis
Despite uncertainty within the semiconductor market, ASML has maintained a steady upward trajectory. The stock endured two corrections in 2012, with a broad-market decline weighing heavily on shares between April and May, and a quick plunge to 50 in October following news of the Cymer buyout. That said, ASML came roaring back in both instances, with the stock breaking out to multi-year highs in recent weeks. Currently, ASML is trading firmly north of 60 as it awaits support from its 10-day and 25-day moving averages. Buying dips is recommended at these levels, while a stop loss near 58 may be prudent.
ASML Weekly Chart
ASML Daily Chart
Amazon.com (AMZN)
Why the Strength
Amazon.com needs no introduction—from its roots as an online bookseller back in the late 1990s, the company has become a one-stop retail shop, as well as a major player in the e-reader and tablet market with its various Kindle devices. And, through its Web Services division, it’s the leading provider of cheap computing power, with an estimated $1.5 billion in Cloud revenues this year, with 50% annual growth likely going forward! But the main reason the stock is strong today is the feeling that online sales this holiday season are robust. There were many reports around Thanksgiving weekend that Amazon’s traffic and sales were surging (comScore said total online sales topped $1 billion on Black Friday, and that Amazon was the most visited website), and it doesn’t hurt that Amazon announced that Cyber Monday was the best-selling day ever for its Kindle lineup. Moreover, the company recently leaked that downloads of its App Store—an indirect metric on Kindle Fire sales—were up 500% during the past year (!!). Now, because the company is spending like mad to expand, and it’s believed to be selling Kindle Fires at a loss (it leads to a slew of new e-book and media revenue), the firm’s earnings are in the tank. But sales growth remains mind-boggling for a company with $57 billion in revenue, and there’s no doubt that Amazon could earn big money right now if it wanted. As it is, we feel Amazon will be a big-cap leader should the market kick into a higher gear.
Technical Analysis
Though it’s higher priced, AMZN really hasn’t been a star performer; in fact, shares are barely up during the past 12 months. But we like the stock’s recent action a great deal—shares pulled back during the market correction but found support at their 40-week moving average, and, most important, have bounced excellently during the past three weeks. (It’s regained 80% of its losses during that time.) It’s a tennis ball! Today’s pullback looks reasonable, we think a small buy around here or on weakness is a good bet, with a stop around 235.
AMZN Weekly Chart
AMZN 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.
