Crosscurrents
It’s not uncommon for nascent market rallies to feature a lot of crosscurrents, and we’re seeing just that during the past few weeks—the action has been generally constructive, but the environment remains news-driven with lots of rotation among stocks and sectors on a day-to-day basis. That said, because of the resilience of the major indexes and the strength (or set-ups) seen from leading stocks, we think you should continue to “lean bullish,” which means doing some buying as opportunities arise, but not pushing the accelerator to the floor. If this rally is the real deal, we expect more and more stocks from a variety of sectors to begin lifting off from multi-week launching pads. It’s something to watch for.
This week’s list is another mixed bag, with many turnaround situations and a few true growth plays. Our favorite of the week is Trimble Navigation (TRMB), an under-the-radar story with solid growth and a powerful stock.
Stock Name | Price | ||
---|---|---|---|
Trimble Navigation (TRMB) | 0.00 | ||
PVH Corp. (PVH) | 0.00 | ||
Melco Crown (MPEL) | 0.00 | ||
Gulfport Energy (GPOR) | 0.00 | ||
Eastman Chemical (EMN) | 0.00 | ||
Computer Sciences (CSC) | 0.00 | ||
Salesforce.com (CRM) | 0.00 | ||
Cree, Inc. (CREE) | 67.96 | ||
Abercrombie & Fitch (ANF) | 15.37 | ||
Aecom Technology (ACM) | 0.00 |
Trimble Navigation (TRMB)
Why the Strength
Consumers know Trimble is a leading manufacturer of GPS systems, used by drivers and hikers the world over as an aid to navigation. But that’s just the tip of the iceberg! Trimble’s main business is serving commercial interests, from surveyors to miners to truckers to farmers to utility workers. All these workers have specialized needs and Trimble is expert at meeting them, from the famer whose tractor allocates fertilizer based on its location in the field to the power line engineer who uses Trimble tools to calculate sag-tension numbers to the drone pilot who relies on Trimble tools to hit his target. The company has seen revenues triple over the past eight years, and there’s no doubt more growth is ahead. In fact, analysts recently raised their earnings estimates for 2012 and 2013. But the biggest reason to invest in the company now is the chart. See below.
Technical Analysis
TRMB is in a long-term uptrend, which is appropriate for a growth company of this caliber that isn’t particularly widely known. But it hit resistance at 52 back in April of 2011 and then hit resistance at 55 in April 2012, and all year it failed to get above that level, even while business at the company was humming (creating more value). Then, in the last week of November, it broke through that resistance, and it nearly hit 60 last week before pulling back normally. This pullback is your cue to get on board, somewhere between 55 (resistance becomes support) and 59. Use a stop at 53 as protection in case trends turn against you.
TRMB Weekly Chart
TRMB Daily Chart
PVH Corp. (PVH)
Why the Strength
PVH Corp. has come a long way since it was just a U.S. shirtmaker called Phillips-Van Heusen. The company owns a huge portfolio of brands, including Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, Bass, Arrow and Eagle, and licenses brands like Geoffrey Beene, Kenneth Cole New York and Reaction, Sean John, Joseph Abboud, Michael Kors, CHAPS and others. The company does the designing, sourcing and marketing for these brands, then hires manufacturers to do the actual needlework. The big story for PVH Corp. is its successful move toward global operations. The company gets about 50% of its revenue from outside the U.S. and about 60% of its profits. The last time PVH Corp. was featured here (on November 5), the big news was the company’s takeover of Warnaco, a move that brings with it a reunification of the Calvin Klein brand. PVH Corp. had previously owned the Calvin Klein suits and other clothing line, but now also owns the lucrative Calvin Klein jeans and underwear lines. Those lines constituted 75% of Warnaco’s brand, and PVH Corp. expects to integrate the new business into its structure very quickly. The company’s most-recent quarterly report featured 24% earnings growth and a 10.5% after-tax profit margin, which is not only higher than any quarter in years, but also remarkable for a retailer.
Technical Analysis
PVH has been in a steady uptrend for years, although there have been plenty of flat stretches and shakeouts along the way. A strong rally from the middle of last December through the end of March gave way to a big correction in May and flat trading through June and July. After gapping up on November 1, PVH has traded mostly sideways, although a rally on big volume on November 28 kicked it to a new high at 117. PVH has given up much of that pop, but hasn’t dipped anywhere near its November gap. If you like the story, PVH looks like a buy right here, as the stock is below its 25-day moving average, which has also flattened out. A dip toward 100 would be worrying.
PVH Weekly Chart
PVH Daily Chart
Melco Crown (MPEL)
Why the Strength
Melco Crown is a pure play on the gambling resort business in Macau, the only place in China where gambling is legal. The company is a Hong Kong-based enterprise that has poured money into progressively larger and more elaborate Macau casinos, including the City of Dreams development on the Cotai Strip that includes three hotels, 200 retail shops, theaters and the largest in-the-round water show in the world. The company has been successful in getting City of Dreams built, augmenting its existing Altira, Studio City and Mocha Clubs operations. Earlier this month, analysts reported that gambling revenues have been increasing more quickly than expected, which gives additional fuel to Melco Crown. There have been scares in the past about what effect the Chinese government’s crackdown on money laundering might have on Macau’s gamblers, and the possibility that a new recession in China might put a damper on things. But Melco Crown has weathered all of these storms thus far, and looks like a good bet to continue growing as long as China remains healthy.
Technical Analysis
MPEL made a great run from August 2010 (when it was trading below 4) to 16 in July 2011. Since then, the stock has experienced two major pullbacks (to 7 in October 2011 and to 9 in July 2012), but has returned to 16 each time. MPEL popped above 16 for the first time last week, a run that began at 14 on December 4. The stock’s recent advances have all been followed by pullbacks of at least half a point, and that’s what you should look for now. A dip below 13.5 would be bearish.
MPEL Weekly Chart
MPEL Daily Chart
Gulfport Energy (GPOR)
Why the Strength
While Cabot Oil & Gas is the face of the lucrative Marcellus Shale in Pennsylvania, and Oasis Petroleum (among many others) is making hay in the Bakken formation in the Dakotas and Montana, Gulport Energy is making a name for itself in the little known Utica Shale, which is a huge formation that runs from western New York and Pennsylvania all the way into eastern Ohio. Gulfport’s acreage in the Utica Shale is mainly in Ohio, and while the firm has some other operations in the U.S., its activities in this region are attracting investors—the firm’s 64,000 acres in the region will likely be able to spawn 800 wells, but Gulfport is just starting to exploit the area. It’s only drilled about a dozen test wells thus far (with very encouraging results) but is ramping that to 50 next year and, assuming all goes well, the drilling program should expand from there. The big number to remember: Gulfport has guided for a production increase of 140% next year! (That production will be split equally between oil, natural gas and liquids.) Of course there are risks, including what will be a huge capital expense effort to get those wells gushing, not to mention the ever-changing prices for oil and gas. But if the Utica Shale proves to be anywhere near as popular as the Bakken or Marcellus plays, Gulfport’s business should mushroom, which will attract even more institutional investors. We like it.
Technical Analysis
GPOR topped out back in early 2011 with many commodity stocks, and then formed a long top with consistent resistance in the upper 30s. And then it got crushed earlier this year, falling more than 50% within a few months! While that seems like a bad thing, it actually refreshed the stock, wiping out all the weak hands. And as its prospects in the Utica Shale improve, the stock has put on a fantastic show, climbing all the way back to its old highs, and just three weeks ago, surging on one of its heaviest volume days ever after bullish test well results. It’s held those gains since, and we think you could buy some here, or on a pullback of a point or two, with a stop near 34.
GPOR Weekly Chart
GPOR Daily Chart
Eastman Chemical (EMN)
Why the Strength
Eastman’s roots go back nearly 100 years; this is a company with a long-term perspective. But it’s thriving now because it’s paying attention to what the global markets want today in the fields of specialty polymers, polyethylenes, inks, coatings and other chemicals. For example, it’s cooperating with Asian carmakers to make colors tailored for the local automotive markets. It’s designing consumer packaging that is more attractive to the consumer yet costs less. And it’s ever exploring for potential new markets for its wares. Yet the company remains vulnerable to macro economic trends, which is why revenues dropped 35% in 2009. Happily, the company has been rebounding since. In 2011, revenues soared 23% to an all-time high of $7.2 billion, and this year the trend has continued. Furthermore, the profitability associated with the growth is eye-popping! In the third quarter, Eastman’s after-tax profit margin was 10.9%, which is huge for a “commodity” company. Finally, confident about its cash flow going forward, the company earlier this month increased its dividend payout by 15%; the stock now yields 1.9%.
Technical Analysis
Back at the 2009 market bottom, EMN hit 9. But it didn’t stay there long; a year later it was trading at 30. The stock’s uptrend since then has not been particularly steady; there have been several substantial setbacks. But the bottom line is that EMN has made headway; in early December it broke out of a base at 60 and last week it closed at new highs on Wednesday, Thursday and Friday, as growing numbers of shareholders rushed to get on board. Odds are this trend will continue.
EMN Weekly Chart
EMN Daily Chart
Computer Sciences (CSC)
Why the Strength
Let’s face it, over the past couple of years, the stock market hasn’t exactly been nourishing for growth stocks—most have done OK but in a stop-and-start fashion. On the other hand, turnaround-type stocks have been in favor, as investors search out firms with renewed earnings growth, cheap valuations, dividends and management teams that are pulling the right levers. Computer Sciences, making its third appearance in Top Ten since late-September, checks all those boxes. The company is huge, but grew lazy and inefficient in recent years even as its core offerings (application development, professional services, etc.) saw steady demand. Now, though, management is tightening the screws; earnings picked up last quarter thanks to cost cutting, cash flow is doing even better, new orders have been strong (including $4.2 billion last quarter) and the firm is divesting its credit card business for a whopping $1 billion, of which the company will dedicate $300 to $400 million to share repurchases (more than 5% of the current market cap). The bottom line is that through better operational efficiencies and some shrewd moves by management, Computer Sciences is unlocking tons of value, which is attracting buyers. A good dividend (2.0% annual yield) and solid projected earnings growth (up 30% next year) completes the bullish picture.
Technical Analysis
CSC was the dog’s dinner until August of this year, when the stock soared after a much better-than-expected earnings report. It then pulled back calmly for a few weeks during the market correction, before zooming on another great quarterly report, and the momentum has continued since. It’s a bit extended to the upside here, but we like the volume patterns and think any pullback will be limited. If you don’t own any, consider buying on a dip of a point or so, with a stop around 35.
CSC Weekly Chart
CSC Daily Chart
Salesforce.com (CRM)
Why the Strength
If our leaders in Washington, D.C. come together for some sort of Fiscal Cliff deal that leads to some permanency in tax rates and spending, it will remove one of the last big uncertainties for the business community. (Other uncertainties like Europe, China and whether or not the Fed will ease seem to be solved for the time being.) And if that happens, big businesses will begin putting some of their record cash reserves to work, especially as they look to accelerate their movement into Cloud computing ... which is right up Salesforce’s alley! All that said, there are many other reasons why this stock is one of the strongest out there, the main one being that the movement to the Cloud remains a top priority for most Fortune 1000 firms. Heck, even in recessionary Europe, Salesforce saw its revenues grow 29% last quarter, a clear sign that customers are getting value from their investment. In the same quarter, its cash flow and deferred revenue both grew more than 30%. Long-term, we think this company could be the Microsoft of the Cloud era, with the most innovative productivity software on the market, and after a long rest, the stock looks ready to start its next big move.
Technical Analysis
CRM is a good example of what we’re seeing in many areas of the market—a stock that had a big, big run for a couple of years after the 2009 market low, but then chopped around for 18 to 24 months (with some big retreats during that time) as the market remained relatively trendless. CRM did rebound from its lows earlier this year, but then chopped around some more until last week, when shares pushed above resistance in the 160 area on solid volume. Given that the story, the numbers and the chart are all attractive, we think you can buy some here with a stop in the mid-150s.
CRM Weekly Chart
CRM Daily Chart
Cree, Inc. (CREE)
Why the Strength
Cree = all things LED. That’s the ruling reason why Cree was once a big market winner, and why, if its current turnaround continues, it could be a big winner again. The company is the only pure-play vertically integrated LED firm, playing in the traditional lighting market, the LED component market as well as the LED module market, and it also makes LED chips and materials. It’s not the “cleanest” story as each market has its own ebbs and flows, but we think the lighting market is going to be the big prize. Lighting is already one-third of Cree’s revenues, total industry shipments for street lights alone are projected to grow nearly six-fold by 2020, and as the price-performance of Cree’s solutions improve, so do sales; Oyster Bay, New York is installing 4,000 LED street lamps that will save $200,000 in electricity costs per year! That said, there’s plenty of competition out there, and a sluggish economy has resulted in lumpy profit margins; indeed, earnings just turned up after six straight quarters of decline, and management made a point of saying economic conditions remain challenging. But, clearly, investors believe the future is bright (no pun intended) and with the bottom line expected to accelerate higher from here, we think Cree has a good shot at returning to its glory days.
Technical Analysis
CREE was one of the market’s mid-cap winners from the 2009 market bottom to mid-2010; shares surged on hopes that the time for LEDs had come. But it was not to be—the stock collapsed from that point through the end of last year, dropping by about 70% as investors bailed. This year has generally been one of base-building, but now it looks like the buyers are in control; CREE gapped up on a good earnings report in late-October and has advanced eight of the past nine weeks. Look for a dip toward the 25-day line (now at 32.2 and rising) if you want in.
CREE Weekly Chart
CREE Daily Chart
Abercrombie & Fitch (ANF)
Why the Strength
Selling clothing to younger buyers is a tough business, and retailer Abercrombie & Fitch has had a tough few years, which some analysts attribute to a failure to discount goods and a cautious design policy. But with new styles now on racks, the economy doing better and some clearance discounting going on, Abercrombie looks to be hot again as its clothing lines are resonating with teenage buyers. The Abercrombie brand mix of Hollister (49% of last year’s revenues), Abercrombie & Fitch (40%), Abercrombie Kids (9%) and Gilly Hicks (2%) has been experiencing strong holiday sales, both in stores and in direct-to-consumer channels. The big turnaround for Abercrombie from investors’ point of view was the November 14 earnings report that reflected the results of a program of closing less-profitable stores and cutting other costs. While revenue was up just 9%, earnings soared 53% and after-tax profit margins were a healthy 6.1%. Investors also appreciate the company’s 1.5% annual dividend yield.
Technical Analysis
ANF made a nice run from 15 in November 2008 to a triple top at 77–78 in May, July and October 2011. Then came a crash to 45 in November, six months of sideways trading and then another plummet in May 2012, followed by another five months of very choppy action. The turn came after the stock’s November gap up from 31 to 42 on earnings, which has been followed by a steady rise for ANF; it looks like the sellers have been cleared out. The rising 25-day moving average is now nearly 44, and ANF has paused to consolidate for a few days. We think you can buy ANF on a dip of a point or two with a looser stop down around 38.
ANF Weekly Chart
ANF Daily Chart
Aecom Technology (ACM)
Why the Strength
AECOM Technology is a pure infrastructure play, as the company’s business is providing technical and management support for projects from transportation to energy and water systems. The company was formed in 1980 in an employee buyout of elements of Ashland Corp. Now AECOM’s teams of engineers, planners, architects, landscape architects, environmental specialists, economists, scientists, consultants, cost managers, construction managers and program managers—all 45,000 of them—are focused on projects in more than 130 countries. Lots of work comes from Asia, where the company has helped to build rail projects in Hong Kong and the Universal Studios at Resorts World in Singapore. But other high-profile projects include the rebuilding of the World Trade Center site, renovating the Pentagon and work on the London Olympics housing community. AECOM is getting support from a slowly rebounding global economy and from its acknowledged ability to include green value in big projects, protecting the environment and people. It is the number one-ranked engineering design firm in the world.
Technical Analysis
ACM has an unusual chart, one that shows years of slow decline that ended with a big gap up in August that kicked the stock from 16 to 19 in a day. ACM followed that breakout with a steady rise to 21.5, where the stock traded flat for six weeks. Then came a disappointing earnings report on November 13 and ACM dropped from 22 to below 19 on big volume. But that proved to be a one-day shakeout, as the stock immediately began a powerful rally that topped its November highs in three weeks and continued all the way to 24. ACM is still a cheap stock, with a P/E of just 10, and earnings estimates for both 2013 and 2014 look good. It looks buyable on minor weakness.
ACM Weekly Chart
ACM 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.