Stuck in the Middle
Sometimes, the market’s outlook is clear – either the buyers are clearly in control, and the leading stocks are surging on huge volume … or the sellers are driving things lower, as everyone’s favorite stocks get taken out and shot. Today, however, we’re somewhere in the middle. Many leaders are hanging in there, with some showing great volume trends, but a few are breaking down, and the broad stock market is in horrible shape. Thus, while it’s not a full-fledged bear market, the odds aren’t heavily in favor of the bulls, either. Your best strategy is to hold some cash on the sideline, and restrict your new buying to only the best stocks at logical, sound entry points. Our favorite of this week is Massey Energy (MEE), a big, liquid stock from the suddenly powerful coal (yes, coal!) sector. We advise buying on weakness.
| Stock Name | Price | ||
|---|---|---|---|
| OXPS (OXPS) | 0.00 | ||
| WFR (WFR) | 0.00 | ||
| ARD (ARD) | 0.00 | ||
| BEAV (BEAV) | 0.00 | ||
| CYBS (CYBS) | 0.00 | ||
| JASO (JASO) | 0.00 | ||
| MEE (MEE) | 0.00 | ||
| MELI (MELI) | 0.00 | ||
| NDAQ (NDAQ) | 0.00 | ||
| OSIP (OSIP) | 0.00 |
(OXPS)
Why the Strength
OptionsXpress is an online broker that was founded in 2000 and has grown larger every year since. As the name suggests, options trading is at the heart of the company’s offerings. But today you can trade almost anything, including stocks, bonds, mutual funds and ETFs. Barron’s has named the company the best online broker in four of the past five years! What’s impressive fundamentally is the way revenues and earnings have continued to grow in recent quarters, even accelerating as the company attracts new investors to its stable. After-tax profit margins have ranged between 35% and 40% for the past eleven quarters. The company recently reported that daily average revenue trades (DARTs) in November jumped 55 percent from the year-ago period to 44,500. Also, there were 5,300 net new customer accounts in November, bringing the total to 258,100. Finally, the company recently instituted a dividend, which now pays 0.8% per year. We like it.
Technical Analysis
The strength of OXPS’s chart, like NDAQ’s chart, tells you not just that the company is doing well, but that a bull market is likely in the future. But OXPS is not quite as strong as NDAQ, in that it is still below its all-time high of 34 set back in April 2006. The current trend looks fine, however, with buying volume easily topping selling volume, and there’s little doubt the stock will reach that old high in time. For now, we recommend buying on any reasonable pullback.
OXPS Weekly Chart
OXPS Daily Chart
(WFR)
Why the Strength
The streaking global market for solar technologies has had a huge effect on MEMC Electronic Materials. It used to be that the company’s proprietary technologies that allowed it to turn out exceedingly pure silicon wafers found markets only in making microchips. But the solar boom has added a second pool of customers, and put enormous pressure on the global capacity for the production of polysilicon for solar cells. New silicon foundries aren’t easy to build, and MEMC has had the whip hand in terms of price. Institutional investors have been stampeding into the sector, and MEMC — with its high capacity and quality — has been a favorite target. After-tax profit margins have topped 30% for the last three quarters and earnings have grown more than three times as fast than revenues for the last five quarters. That’s impressive. The solar wave shows no signs of slowing down, and MEMC should have a nice stretch of growth to look forward to.
Technical Analysis
This is the ninth Top Ten appearance — four in 2006 and now five in 2007 — for WFR, showing that it has a taste for leadership. The stock took a seven-month break after its four closely-spaced appearances in 2006 and it did the same thing after its three earlier this year. Each of these basing periods reset the stock for further growth, and WFR looks to be ready for more advances. We think that the market’s current weakness might drag the stock as low as 80, which would be an attractive buy point.
WFR Weekly Chart
WFR Daily Chart
(ARD)
Why the Strength
Arena Resources is an energy explorer with properties in Oklahoma, Texas, Kansas and New Mexico. And the reason the stock is strong is simple – energy prices are elevated and rising, so the stuff Arena pulls out of the ground is fetching higher prices, driving sales and earnings growth. But this is a solid growth company as well; in the third quarter, the company drilled 28 new wells, boosting its overall oil output by 34% and its gas output by 27%. And this looks to be just the beginning, as Arena has taken delivery of a second drilling rig, which, combined with new personnel, should allow it to drill a whopping 200 new wells in 2008. We like the fact that realized energy prices are way below current market prices (its third-quarter average oil sale grossed nearly $70 per barrel), so there’s plenty of room for raising prices. As long as energy prices remain in an uptrend, Arena will remain a good bet.
Technical Analysis
ARD has been trending higher for years, but in the past year or so, the uptrend has become smoother, likely due to higher trading volumes and an increasing number of institutional investors (96 funds now own shares, up from 48 a year ago). The best feature of the chart appeared in October and the first half of November, when ARD moved straight sideways, ignoring the market’s weakness, before bolting the past four weeks in a row to new peaks on solid volume. We suggest picking up a few shares on any mild retreat.
ARD Weekly Chart
ARD Daily Chart
(BEAV)
Why the Strength
While the stock of Boeing doesn’t look like anything special, aerospace parts and component suppliers remain in good shape. And BE Aerospace is one of our favorites – the company is the leading maker of interior cabin products for aircraft, including such things as food and beverage preparation and storage equipment, and, especially, aircraft seats. Interestingly, BE Aerospace is benefiting not just from new airline builds, but also from retrofitting of existing aircraft, especially overseas. Airlines are eager to upgrade their older fleets, which is becoming necessary to compete effectively; U.S. airlines are even starting a big retrofit phase. All together, demand for BE’s seemingly basic products is booming – the firm’s backlog stood at $2 billion at the end of the third quarter, and management is predicting a 35% bump in earnings next year, followed by 25% gains in both 2009 and 2010 … and even those numbers could be conservative. It’s not a rocket, but we like the long-term story a great deal.
Technical Analysis
BEAV has been in a long, strong uptrend since the middle of 2006, and since the end of 2003 before that. Recently, it has hit some turbulence, first falling sharply during the market’s August panic, and then dropping sharply over three weeks during the November downturn. But buyers arrived on the scene a couple of weeks ago, and the stock got a boost from its recent inclusion in the S&P 400 Midcap index. Usually, there is a drop after an index addition-related jump, so if you’re game, buy after the next correction.
BEAV Weekly Chart
BEAV Daily Chart
(CYBS)
Why the Strength
If you’re a merchant, CyberSource is quickly becoming the way to ensure that your online transactions are processed quickly, effectively and safely. The company has always churned out solid growth, as it takes a small cut of every transaction that its systems process. But its recent acquisition of Authorize.net has made the entire company a strong leader in the field, able to service both large enterprises (CyberSource’s core offering has more than 20,000 customers, including half of the Dow Industrial firms) and small businesses (Authorize.net had 200,000 customers, all of which do less than $3 million in card charges per year). Revenue growth is strong and steady, and earnings are starting to pick up steam with the acquisition – the company recently bumped up its fourth-quarter guidance, and analysts are looking for a 60% earnings jump in 2008. All told, we like it.
Technical Analysis
CYBS has gradually made it out of low-priced territory the past couple of years, but the real action of late occurred in October, when a blowout earnings report caused a rush of buying volume, pushing the stock to new peaks at 17. CYBS grudgingly gave up ground during November, but last week, as the stock tested its ten-week moving average, another rush of buying appeared … but now the stock has been yanked back down to its 50-day line due to the market’s weakness. If buyers support the stock above 15, look to buy a little. But let the stock find its footing first.
CYBS Weekly Chart
CYBS Daily Chart
(JASO)
Why the Strength
In the red-hot solar power industry, there are several ways for manufacturers to win. First Solar (FSLR) has done it by using third-generation thin-film technology that uses just 1% of the silicon that other manufacturers use. Suntech Power (STP) has done it by building cells that are more efficient, and expanding capacity like mad. And JA Solar has done it by locking up low-cost supplies of silicon and focusing on a specific segment of the business. JA’s parent company is Jing Long Group, the largest mono-crystalline silicon wafer and ingot manufacturer in the world, and Jing Long has guaranteed JA Solar a steady supply of silicon. More recently, JA Solar has increased and broadened its supply chain by contracting with Hemlock, a U.S.-based company with the world’s largest supply of raw silicon. In short, no Chinese company has a better supply of silicon than JA Solar. And what does the company do with all this silicon? It makes photovoltaic cells, and sells them to manufacturers who then assemble them into modules. Like all companies in the industry, JA Solar has a sky-high market valuation, but if rapid growth continues, there’s no reason that valuation can’t be sustained. The company is increasing capacity as fast as possible, profit margins are healthy, and the number of institutional investors is increasing.
Technical Analysis
JASO came public in February, and first appeared in Cabot Top Ten in May, when it was trading at 28. It returned in July, September and October, and it continues to satisfy. Most recently, it topped 72 in early November, plunged to its 50-day moving average at 48 in just two days’ trading, and then resumed its uptrend. As we write, it has once again topped 70, and it’s now itching to break out into new high territory.
JASO Weekly Chart
JASO Daily Chart
(MEE)
Why the Strength
Solar power may be the future, but coal is very much a part of the present. That makes Massey Energy and its 2.2 billion tons of coal reserves in the central Appalachians (southern West Virginia, eastern Kentucky, southwest Virginia and Tennessee) a very relevant, medium-sized energy play. Massey’s history goes back to 1916, but 80% of the coal it’s mining today comes from reserves acquired since 1987, and most of the news that the company makes has to do with new acquisitions. Coal is a low-margin commodity, but the company is reaping the benefits of a major investment in modern handling and transportation technology made in 2002, including over 240 miles of belt structure that delivers coal to processing plants and transportation termini. Price increases have boosted Massey’s earnings in the last three quarters by 250%, 975% and 400%, which tends to get investors’ attention. A small dividend (0.6%) makes an attractive addition to a company with lots of low-sulphur coal close to the power plants on the mid-Atlantic coast that need it most.
Technical Analysis
MEE fell from the high 50s in late 2005 to 16 at the end of this year’s July/August slump. The problem was a slight contraction in revenues brought a major shrinkage in earnings. But that’s in the past. Since that bottom, the stock has soared as high as 37, and corrected slightly to support at 35. We think it looks good right where it is.
MEE Weekly Chart
MEE Daily Chart
(MELI)
Why the Strength
It’s always nice when a company making its first Top Ten appearance has a handy shorthand classification, and Argentinian online auction site MercadoLibre has a great one: The eBay of Latin America. The company began in Argentina in 1999, and has outlasted and outgrown its competition to emerge as the dominant site in South America. Brazil is the company’s top market, supplying 43% of revenues, with Argentina and Mexico supplying smaller amounts. The company is still expanding, with moves into Central America markets, and an eBay-like integration of an electronic payment system is a plus. There’s still lots of room for expansion into new markets and for higher online expansion into existing markets (Brazil has just 14% Internet penetration). Even today, revenue growth is accelerating! The potential for MercadoLibre is easy to see, and investors have been pushing the stock up fast. This makes it especially important to play any investment correctly.
Technical Analysis
Timing is important, and MELI came public in August, just in time to catch the bounce from the market’s July/August meltdown. The issue price was 18, but the stock never traded for less than 21, and soon built a small base under 30, then another between 40 and 45. The most-recent five-day rocket ride has pushed MELI well over 60, and it will take a little cooling off to return the stock to a reasonable buy point. It may not oblige us, but chasing a comet like this is risky. Either look for a pullback to 55 (the 25-day moving average is back at 45) or buy a small amount below 60 and build a position gradually.
MELI Weekly Chart
MELI Daily Chart
(NDAQ)
Why the Strength
There are two stories here, one simple and one complex, and both have value. The complex story centers on Nasdaq’s expansion outside the U.S., where it’s the largest electronic screen-based equity securities market, to the international markets, where it’s made deals in Tel Aviv, Dubai, London and more to become a big player in the global securities network. The simple story is that the charts of brokers and exchanges tend to be good forecasters of the markets themselves, and so the chart of Nasdaq Stock Market suggests to us there’s a bull market ahead. Recent quarters have brought the company accelerating growth of earnings and increasing after-tax profit margins, and a good bull market could extend those trends even further.
Technical Analysis
NDAQ has a great chart, but you can only see it if you look at the long-term picture. The stock began trading in February 2005 at 10, and ran up to a high of 47 a year later. That was followed by a long 21-month consolidation phase, which lasted until the stock blasted up to a high of 50 in the first week of November. This long consolidation, while the fundamentals were steadily improving, is absolutely normal; the breakout marks the first phase of the next uptrend. But the uptrend hasn’t gotten going yet. After hitting 50, the stock plunged quickly to its 50-day moving average at 39, shaking out the weakest investors and allowing stronger investors to get on board. With the stage set, you can buy a little now and await the uptrend.
NDAQ Weekly Chart
NDAQ Daily Chart
(OSIP)
Why the Strength
After a couple of Top Ten appearances in late 2006, OSI Pharmaceuticals showed up again a couple of weeks ago. The catalyst was the announcement that a date had been set for the company’s cancer treatment Tarceva (erlotinib) to be marketed in Japan. Tarceva is a breakout drug for OSI, one of the only treatments that has shown improved survival rates in pancreatic cancer and non-small cell lung cancer. The drug has become increasingly profitable as it has gained acceptance, and clinical trials are underway to test its usefulness in different kinds of cancer treatment. The profitability of Tarceva has made it possible for OSI to fund its own research and development programs in oncology, diabetes and obesity. With three new therapeutic applications in Phase III clinical trials and one in Phase II, there is the potential for more good news to come.
Technical Analysis
Like all small pharmas that rise and fall along with the fortunes of a small roster of products, OSIP has had some ups and downs; back in 2004 it traded as high as 99. The Tarceva era that began in 2006 produced a rise from 25 to 43 in October 2006. The stock then traded sideways and down for a year, before a November breakout that pushed the stock to a three-year high. A dip below 46 would present an attractive buying opportunity.