On Your Marks, Get Set …
We’re not ready to declare an end to the market’s correction, despite last week’s encouraging action. After all, a horrendous November (the Nasdaq was down more than 10% for the month before last week’s rally) was bound to lead to some type of bounce; what happens from here will be key. Regardless, there’s no question that many stocks improved their standing, finding big-volume support and, in some cases, shooting to new peaks. These are the names you want at the top of your watch list; the first groups out of the gate usually lead the ensuing bull move. For now, we advise continued prudence – buying just small amounts, keeping some cash on the sideline – but you should also be ready to turn bullish if the market follows-through powerfully in the days ahead. This weeks’ Top Ten contains an eclectic mix of names, some conservative, some high-flying. Our favorite: Turkcell (TKC), the leading wireless service provider in Turkey, which is registering strong bottom-line growth. We love the big-volume upside of late, a sign big investors will support the stock on any pullback.
| Stock Name | Price | ||
|---|---|---|---|
| ANR (ANR) | 0.00 | ||
| DV (DV) | 0.00 | ||
| FOSL (FOSL) | 0.00 | ||
| ISRG (ISRG) | 0.00 | ||
| OSIP (OSIP) | 0.00 | ||
| SLT (SLT) | 0.00 | ||
| SOHU (SOHU) | 0.00 | ||
| TKC (TKC) | 0.00 | ||
| VRSN (VRSN) | 0.00 | ||
| WFR (WFR) | 0.00 |
(ANR)
Why the Strength
Alpha operates 65 coal mines in Virginia, West Virginia, Kentucky and Pennsylvania, and our opinion is that management is smart. Alpha was founded in 2002 on the bones of Pittston Coal by First Reserve Corporation, a private equity firm, and in the years since, it’s grown dramatically via numerous acquisitions. As a result of these acquisitions, the company’s historical numbers don’t look so hot; its profit margin was under 2% in the past two quarters – the worst numbers in years. But the stock is strong today because investors anticipate booming international demand for coal in the years ahead … for two reasons. The first is that continuing demand for steel in China and other developing nations will increase demand (and prices) for metallurgical coal. And the second is that higher prices for oil and gas will increase demand for thermal coal, used for generating electricity. In fact, just last week, an analyst predicted, “thermal coal prices will remain strong for at least the next three years.” We’re not going to crawl out on that limb, but we do note the stock is reasonably priced, selling at just one times annual revenues, and we think you can ride it as long as its trend remains up.
Technical Analysis
ANR first appeared here six weeks ago, trading at 26, after which it climbed to 28 and dipped to 24. If you bought in our recommended buy range (24-26), you should now be holding happily. But if you didn’t, we think you can buy a little here. We do see a short-term triple top at 28, and suspect that the stock may need a little time for its 50-day moving average – now nearing at 26 – to catch up before it blasts off on a new advance. But the long-term prospects are bright.
ANR Weekly Chart
ANR Daily Chart
(DV)
Why the Strength
Education stocks are among the market’s strongest, and DeVry is one of the leaders. The Illinois company owns and operates DeVry University, Ross University, Chamberlain College of Nursing, and Becker Professional Review. With 86 locations in the U.S. and Canada, as well as online offerings, it’s an excellent resource for adults looking for career-oriented education. The school offers undergraduate and graduate degrees in accounting, biomedical engineering, business administration, computer engineering, computer information systems, electronics and computer technology, electronics engineering, game and simulation programming, health information technology, network systems administration, technical management, and network and communications management. The career value is clear; for the 10-year period ending June 2006, more than 90% of DeVry graduates who actively pursued employment held positions in their chosen fields within six months of graduation. Today the school serves over 52,000 students, and the reason for the stock’s strength is a blowout earnings report back in late October that saw revenues climb 14% and earnings soar 208%, thanks to excellent cost controls.
Technical Analysis
DV was a great growth stock from 1991 to 2000, climbing from a dollar (split-adjusted) to 41. And then came the seven years of wandering in the wilderness, during which the stock fell as low as 12. But October’s surge of buying, which gapped the stock from 40 to 50 on huge volume, marked a breakout into new high territory. And since then, the stock has held firmly above 50, a fine sign of support. As we write, the stock is right at its 25-day moving average, and we think that marks a decent buying area.
DV Weekly Chart
DV Daily Chart
(FOSL)
Why the Strength
Fossil, a maker and marketer of watches, jewelry, sunglasses and other accessories, has a couple of key catalysts driving shares higher. The first is a restructuring of its business model; the company used to sell most of its wares at home, but now more than half of its revenue comes from overseas. And that’s been a very good thing – the third quarter saw international sales jump 32% year-over-year, and Fossil’s new China distribution business (up and running for less than a year) and a recently established subsidiary in India should only help. The second catalyst came from management’s decision to boost its direct-to-consumer sales, which has pushed margins sharply higher – from 7.2% last year to 8.5% today, an 18% improvement – while growth is accelerating due to overseas markets. The result: Booming earnings that are handily beating expectations. It’s not an outstanding growth story, but a successful retailer during the holiday season is a good bet to deliver solid performance.
Technical Analysis
FOSL has been rising since May of 2006, when it hit a low of 16. The advance since then has been anything but smooth, but the last couple of earnings reports (one in mid-August, the other two weeks ago) have kept the uptrend intact. While this isn’t a momentum-type stock, we don’t believe a huge retreat is likely unless the market suffers another big leg down; the 38 to 40 range looks like solid support. Our advice: try to get in on a dip of a point or two, keep a tight loss limit in place, and see if the holiday season can boost the stock.
FOSL Weekly Chart
FOSL Daily Chart
(ISRG)
Why the Strength
Intuitive Surgical is (we think) the current champion in Top Ten appearances, making its 17th appearance in this issue. This isn’t a trivial observation, as it testifies that Intuitive’s management has been able to keep the company’s stock among the strongest in the market every year since August 2004. The company’s fortunes revolve around the da Vinci surgical robot, a revolutionary product with enormous advantages over its competition and high barriers to entry. The dexterity of the da Vinci instruments together with the magnified stereoscopic imaging and variable motion scaling give surgeons previously unattainable precision and control, which leads to measurably better outcomes and faster recoveries. This pleases patients, hospitals and insurance companies. With strong recurring income from sales of disposable or limited use components, Intuitive Surgical is gaining increasing acceptance and its stock has just reached a new high in institutional supporters. We like it.
Technical Analysis
ISRG is in its second great rally, the first coming during 2004 and 2005 when the stock initially burst upon the scene. Top Ten jumped on the stock just three months after it began its rise, and featured it 13 times before it went into a 17-month consolidation that ended in July 2007 after a monster gap up on earnings. Since then, the stock has topped out in late October near 340, and pulled back to near its 50-day moving average at 264 in mid November. Prudent investors will want to take a small position on any dip in the direction of the stock’s 25-day moving average at 300 and then add to it when ISRG breaks out to a new high above 340.
ISRG Weekly Chart
ISRG Daily Chart
(OSIP)
Why the Strength
OSI Pharmaceuticals first appeared in Top Ten back in July and August 2006, climbing strongly on the strength of sales of Tarceva, one of the only treatments that has shown improved survival rates in pancreatic cancer and non-small cell lung cancer. OSI’s small-molecule targeted therapies have shown promise against cancers with few other treatment options, and that makes Tarceva a very important drug. In addition to cancer, the company’s research targets diabetes and obesity, both widespread conditions with large patient populations, and macular degeneration. The success of several of OSI’s drugs led to a small profit in 2006 ($0.01/share), a year earlier than expected, and 2007 estimates call for a huge increase to $1.66 a share). That 2007 estimate is what has the company’s stock rising to a two-year high; analysts have been upgrading their ratings on the strength of the new estimates. The company’s management has handled the transition to profitability well, vowing to keep a balance between financial performance and research & development activities. Just the fact that OSI has successfully run the gauntlet that faces all small biopharmas is impressive enough.
Technical Analysis
OSIP traded near 100 in 2004, but fell to 21 in 2005 as losses mounted. Then Tarceva revenues began rolling in, and OSIP’s 2006 Top Ten appearances came during a runup from 25 to 43. The earnings forecast on last Friday finally boosted the stock into a breakout above its old resistance level at 43, and OSIP has been holding its gains in the high 40s. A retreat to 40 is possible, but not likely. Look for a correction of a point or two as an opportunity to buy.
OSIP Weekly Chart
OSIP Daily Chart
(SLT)
Why the Strength
Sterlite Industries is a metals company that makes most of its money from copper and zinc. It was the first private company in India to set up a copper smelter and refinery and is the operator of the largest cast copper rod plant in that fast-growing country. Sterlite owns a couple of mines, although one has been closed since 2005, and also operates plants producing sulphuric and phosphoric acid. Much of the growth of the company, which is owned by Indian billionaire Anit Agarwal, has come from the huge increases in copper prices in recent years. Sterlite came public in the U.S. as an American Depositary Receipt (ADR) just in June, which was, at the time, the largest overseas sale of shares by an Indian company. The company also has interests in an Australian copper mine, a zinc company and both aluminum and alumina refiners. With proven and probable reserves of 69 million tons of zinc and 13.2 million tons of copper, Sterlite is an interesting way to play the development of the industrial infrastructure in India.
Technical Analysis
SLT came public at 13.5 in June, and had advanced to nearly 19 when the global selling spree of July and August dropped the stock briefly to 9. But from that absurdly undervalued low, the stock rebounded strongly, rising effortlessly through its old high before running out of gas 26 in November. After a brief visit with its 50-day moving average just above 21, the stock has just gapped up past that old 26 resistance level. Look for another correction, this time to its 25-day moving average at 24, as a prudent buy point.
SLT Weekly Chart
SLT Daily Chart
(SOHU)
Why the Strength
Sohu.com, making its eighth appearance in Top Ten, is a good example of a great idea that can tax the patience of the most dedicated investor. Sohu.com is one of the most popular Internet portals in China. It has the kind of content-rich website that (like Yahoo! in the U.S.) keeps millions of Chinese logging on every day for news, e-mail and entertainment. Also like Yahoo, the site offers a wealth of other services, such as a Chinese-language search engine, an online alumni club, a games network, a real estate Website, a wireless service provider and an online mapping service. Six of Sohu.com’s previous appearances in Top Ten came in 2003, just as foreign investors were beginning to understand the scale of the Internet opportunity in China. But a stagnation of earnings growth in 2004 kept the stock from making further progress in all of 2004 and 2005. The buzz now is about big plans by foreign investors to make another run at the Chinese Internet sector. Barry Diller’s IAC conglomerate, for instance, has announced plans to spend $100 million to expand in China. Capital inflows like that will get the blood flowing in the Chinese Internet industry. Sohu.com is a trusted, even loved, name in China, and investors are betting that money will follow love.
Technical Analysis
SOHU soared in 2003, but peaked at 43 in July 2003, then took more than four years to hit that level again. In those four years, the stock traded as low as 14, but always found support there. Those lows kept rising, and after the July/August 2007 meltdown, SOHU took off in a big way, soaring to 65 in early November, then correcting again to 47. The latest push has the stock back toward 60, which looks like the top of a decent buy range.
SOHU Weekly Chart
SOHU Daily Chart
(TKC)
Why the Strength
Our sister publication, Cabot China & Emerging Markets Report, recently featured three Russian cell phone service companies, all of which have been acting well in the recent weak market. And neighboring Turkcell is no different. The number one provider of cell phone service in Turkey, with a 60% market share, it also serves other countries from the former Soviet Union, like Ukraine, where operations just turned positive in the third quarter. We like the accelerating revenue growth in recent quarters. We like the fat after-tax profit margin. We like the increased earnings estimates of analysts. And we like the reasonable valuation; the company is expected to grow earnings 28% next year, yet the stock sells at only 14 times those estimated earnings.
Technical Analysis
TKC came public at 34 in July 2000, just after the market top, and proceeded to fall all the way to $1 by the middle of 2001. But in recent years the trend has been strongly up, and we have no doubt it will eventually eclipse that old high. The stock appeared in Top Ten back on October 8, when it was trading at 23. We gave it a buy range of 19 to 23, and it did decline to 20 in the two weeks following, nearly touching its 50-day moving average. But since then it’s been strong, most recently hitting a high of 28 twice in the past three weeks. If you own it from our earlier recommendation, hang on tight. If not, try to get on board on the next pullback. The 25-day moving average is down at 25, while the 50-day is nearing 24.
TKC Weekly Chart
TKC Daily Chart
(VRSN)
Why the Strength
VeriSign was one of the bubble’s biggest winners in 1999 and 2000, as demand for its online security solutions and Internet domain registration business was super-strong. Then came the bust, and the then-CEO sought a way to turn the ship around. His solution was what turned out to be a $1.5 billion acquisition spree, to diversify the company into other areas like wireless technologies and content. But that was a failure! So new CEO Bill Roper (just took over in May) has announced a new direction – VeriSign will go back to its core roots, selling off divisions like m-Qube (mobile billing), LightSurf (wireless messaging) and Jamba (content) and re-focus on domain registration, online user verification and identity protection, and some Internet security products. Wall Street loves the news, as the stock ignored the market’s November slide and pushed to multi-year peaks on good volume. It’s not a great long-term growth story, but the spinoffs should provide fuel for the stock in the months to come.
Technical Analysis
After hitting a peak of 36 in 2004, investors began bailing out of VRSN as it became obvious the acquisition strategy wasn’t going to work. Shares hit a low of 16 last summer and have been slowly working their way back ever since. More recently, the stock was basically range-bound between 28 and 35 during the last four months, but news of the spin-offs has resulted in four straight up weeks on solid volume. We don’t expect a big retreat, but if you want in, we suggest you try to grab shares a couple of points down from here.
VRSN Weekly Chart
VRSN Daily Chart
(WFR)
Why the Strength
Solar stocks have retained their position as the #1 glamour sector in the market, and that should benefit MEMC Electronic Materials, a leading maker of silicon wafers used in solar cells. Of course, most of the company’s business comes from the semiconductor market, but that’s quickly changing – a few huge solar deals have been inked, resulting in a whopping $15 to $16 billion of backlog over the next ten years. And the firm has enough capacity in place that it will likely sign another $3 billion of deals in the weeks and months to come. Such deals alleviate the worry about overcapacity hurting MEMC (since revenue is already booked) … although with the solar sector expanding at such a rapid rate we’re skeptical silicon will be oversupplied as some believe. In any case, earnings are likely to grow 30% or more next year, and we see this stock benefiting as big investors look for ways to ride the solar boom.
Technical Analysis
News of a couple of huge deals helped WFR break free of a six-month basing structure at the end of October, but the market’s November weakness sucked the stock back down into the mid 60s. Still, WFR’s big rise last week as the market came back to life tells you that it was the market, not the stock, that was weak last month. We expect some short-term consolidation and then, if the market follows-through on its rally, higher prices for WFR.