Year-End Thoughts
It’s been a fun, interesting and profitable year for readers of Cabot Top Ten Report, and it would be easy to recap the highlights … like Baidu, First Solar, Intuitive Surgical and Research in Motion. But you’re not paying us to look back, you’re paying us to look ahead. So here’s what this week’s stocks tell us we should watch going forward. First is the trend toward solar power; investors in these stocks are looking for major revenue and earnings growth in the years ahead. Second is the strength of commodities; from coal to steel to silicon, basic materials are getting more expensive … and profitable. Third is the continuing strength of well-managed foreign companies. Part of their appeal comes from a weak dollar, but the bigger and more important part comes from the greater growth opportunities in developing countries. You’ll find three stocks in this category in this issue; our Editor’s Choice today is good old Baidu, the Google of China. The stock has been knocking on the ceiling at 400 for two months and we’re confident it will break through eventually.
| Stock Name | Price | ||
|---|---|---|---|
| BIDU (BIDU) | 0.00 | ||
| BUCY (BUCY) | 0.00 | ||
| ENER (ENER) | 0.00 | ||
| JASO (JASO) | 0.00 | ||
| MA (MA) | 0.00 | ||
| MBT (MBT) | 0.00 | ||
| MELI (MELI) | 0.00 | ||
| MICC (MICC) | 0.00 | ||
| SID (SID) | 0.00 | ||
| WFR (WFR) | 0.00 |
(BIDU)
Why the Strength
We regard return appearances in Top Ten as a sign of strength, indicating that a company’s story has continuing appeal for investors. And since Baidu is making its eighth appearance (including a run of five consecutive monthly appearances from June through October), its strength really isn’t in question. With the dominant market share in Chinese- language online searches, Baidu has proven itself against all competitors, both foreign and domestic. Its story is simple; China has more people online than any country other than the U.S., and Baidu gives better search results than any other service in China. This gives the company the biggest slice of Chinese-language keyword search pie and the revenue that goes along with it. Baidu is one of the top stories of 2007, and there don’t appear to be any structural barriers to further advancement.
Technical Analysis
On the other hand, BIDU is a very expensive stock, both in absolute terms and based on its P/E ratio (now 195). Still, as we always say, good growth stocks are expensive, and BIDU is one of the best. The stock peaked at 429 back in early November, then corrected sharply to spend a couple of weeks at support at 300. This correction, where the stock closed below its 50-day moving average five days in a row, knocked out some of the stock’s weaker holders, and now the uptrend has resumed. The psychologically important 400 level will eventually be breeched, and we think the stock can be bought here.
BIDU Weekly Chart
BIDU Daily Chart
(BUCY)
Why the Strength
Bucyrus is one the world’s two main manufacturers of mining equipment, and the global boom in commodities means its offerings are in high demand. In fact, the company has a growing backlog, and is expanding its Milwaukee production plant in an effort to keep up. The majority of the company’s products are used in surface mining; these include shovels, drills and draglines. But the company ventured into the underground mining sector in May 2007 with the purchase of DBT America from RAG of Germany. The growth of revenues in the past two quarters, therefore, is due partly to organic growth and partly to the acquisition. Looking forward, this growth is likely to continue for at least several more quarters. And beyond that, who knows? Eventually, commodity prices will top, and stocks like this will fall, but the exact timing of that event remains to be seen.
Technical Analysis
BUCY first appeared here three weeks ago, trading at the all-time high of 96. But we thought that was high, and we said so, recommending that you wait for a pullback and buy between 88 and 92. Happily, the stock traded in that range over the following seven trading days, and we hope you bought some, because since then it has soared to 104. If you’re on board, sit tight. If not, try to buy on a pullback toward the 25-day moving average at 93.
BUCY Weekly Chart
BUCY Daily Chart
(ENER)
Why the Strength
Energy Conversion Devices has what is easily the best story in this issue. The company was founded by scientist/inventor Stanford Ovshinsky in 1960 to support his research into phase-change semiconductors, and for 47 years the firm made great progress. It invented the nickel-metal hydride (NiMH) battery, and it’s done pioneering work on fuel cells. But Stan Ovshinsky, who was aided by his wife Iris at every step, had one flaw … at least as far as shareholders were concerned. He never cared about making a profit! As a result, the company seldom did. Well, Iris passed away in 2006 and Stan finally retired in August 2007, and now the stock is going up! But it’s not just new management that’s attracting investors (analysts estimate the company will earn a profit of $0.95 per share in 2009); it’s also the fact that the company’s biggest division is focused on solar roofing technology and products. Named United Solar Ovonic, it’s done major installations in Germany and France, it recently won a $70 million contract from an Italian developer for its building-integrated photovoltaic (BIPV) systems, and it will soon install its laminates on the roof of the General Motors facility in Fontana, California, completing one of the largest solar power installations in corporate use in the U.S. In sum, the future is, ahem, bright.
Technical Analysis
ENER came public in 1995, full of promise, and peaked at 31 in 1996. And eleven years later, here it is a couple points higher! But for the first time, all the stars seem aligned. The stock’s recent high was 36, while its 25-day moving average is down at 30. Ideally, you want to buy on a dip toward 30 … but only after the dip has been completed.
ENER Weekly Chart
ENER Daily Chart
(JASO)
Why the Strength
In the boom market for solar technology, the limiting factor for most manufacturers is silicon supply. The silicon shortage pressures prices and forces companies to compete for what’s available. This shortage may give way to a glut when all of the silicon refineries now planned come online, but for now, supply is tight. That puts JA Solar, the Chinese manufacturer of solar cells, right at the head of the sector, because it has agreements for lots of low-cost supplies, both with its parent company and with a U.S.-based company. With plenty of silicon, the company’s management (headed by the politically well-connected Huaijin Yang) has been scoring big sales, like the deal announced on December 21 to sell 60 megawatts of silicon cells to a Spanish company in 2008. Solar is hot, and JA Solar has enough clear advantages to put it near the head of the class. We like it.
Technical Analysis
JASO has been volatile since its February IPO at 15 in February, but the major trend has been sharply up. Since the July/August market slump, it has zoomed from 27 to 77! This is heady territory, but the stock isn’t even especially extended above its 25-day moving average (now at 63). There is enough volatility here to reward patience; look for a dip into the mid-60s as a spot to establish a partial position, then add to it if the stock breaks out to a new high.
JASO Weekly Chart
JASO Daily Chart
(MA)
Why the Strength
MasterCard is one of the world’s best-known names, in part because of its “Priceless” advertising campaign that encourages you to use your credit/debit card. Yet MasterCard is grossly misunderstood. The company does not issue credit cards or loan money; only financial institutions and merchants do that. MasterCard is simply the brains behind the scenes. It runs the secure network that processes those charges so very fast. It sets the rates so that everyone involved profits a bit. And it does the marketing, keeping the MasterCard brand in the public eye. Business is terrific, and should remain so in the future, as buyers and sellers around the globe increasingly favor plastic over checks and cash. Arch-competitor Visa is likely to come public in early 2008, and the action of both stocks should be interesting. But long-term, we’re bullish on MasterCard. Barriers to entry are high. Revenue growth is very good. After-tax profit margins are spectacular. And the fact that there are only 213 mutual funds on board tells us that a lot of institutional investors have yet to buy.
Technical Analysis
MA came public in May 2006 at 39 and finished that year at 100. In 2007, the stock more than doubled. We don’t expect that pace of growth to continue, but we do think there’s still good upside potential. As we write, the stock has corrected from its recent high of 227, and touched its 25-day moving average, and we think buying here could work out well.
MA Weekly Chart
MA Daily Chart
(MBT)
Why the Strength
Mobile Telesystems used to be one of the Russian telecom Big Three. But now that VimpelCom is acquiring Golden Telecom, Mobile Telesystems will be one of the Big Two. Big is good in Russia, where size confers political clout and the ability to compete successfully for new bandwidth and licenses. With 81 million subscribers (nearly three-quarters of them in Russia, the rest in Armenia, Belarus, Turkmenistan and Uzbekistan), Mobile began life when the Moscow City Telephone Network teamed up with Germany’s T-Mobile to form a new company with a strong technological and financial base. While growing rapidly through acquisitions, Mobile also built into virgin territory. It offers a standard mix of voice, data and facsimile services with an added design/build service for communication and data networks for companies. Earnings growth has been especially strong since the beginning of 2007, and the latest quarter featured a nearly 30% after-tax profit margin. A small dividend (0.3%) is a nice bonus. Institutional investors have also been increasingly drawn to Mobile Telesystems this year, reversing a downtrend from 2006.
Technical Analysis
MBT spent much of 2004, all of 2005 and the first half of 2006 making no progress at all. But after bottoming out in June 2006, the stock advanced in a hurry, rising from 26 to over 100 in recent trading. Along the way, there have been many small pullbacks, but no major corrections. A dip to the stock’s 25-day moving average (now at 94) would mark a prudent entry point.
MBT Weekly Chart
MBT Daily Chart
(MELI)
Why the Strength
MercadoLibre (Spanish for Free Market) is making its second Top Ten appearance in this issue, having debuted earlier this month. This Argentinian online auction site obviously invites comparisons with eBay, since it’s the dominant auction site in its extended market, which includes all of Central and South America. It also has its own equivalent of PayPal (MercadoPago), which facilitates online payments. Sellers can list just about anything in online classifieds, including cars and trucks, boats, planes, real estate and services. As the Internet spreads rapidly through Latin America, advancing right along with cellular phone coverage, MercadoLibre’s potential market is growing quickly. Q3 2007 was a great quarter for the company, producing record sales, earnings and after-tax profit margins. Institutional investors are piling on board rapidly; 35 of them already own the stock in just its second quarter as a public company. The future looks bright for MercadoLibre.
Technical Analysis
MELI came public in August and has been on a roll ever since. The nominal new-issue price was 18, but the stock never traded under 21; it spent its first five weeks building a base at 30. Five strong up days in September then pushed MELI to 40, where it spent 11 weeks building a sloppy base. A second blastoff in December pushed the stock to 60 — where it spent just seven trading days — then a third blasted it to 80. This kind of volatility will take some digesting, so you could try to get MELI on a retracement of at least half of its latest rocket ride; look for a drop to 70/72 as a prudent buy point.
MELI Weekly Chart
MELI Daily Chart
(MICC)
Why the Strength
Millicom is a Luxembourg-based provider of cellular phone service, extending its services to 20 million people in 16 countries: El Salvador, Guatemala, Honduras, Bolivia, Colombia, Paraguay, Chad, Condo, Ghana, Mauritius, Senegal, Sierra Leone, Tanzania, Cambodia, Laos and Sri Lanka. All of Millicom’s cellular phone services are pre-paid, and thus affordable to people who can’t afford a monthly commitment. Half of revenues come from Central America, but the company’s greatest growth in the third quarter was in Africa. More important is that every geographic segment shows growth, and that the company is adept at tweaking its offerings and rates for each individual market. Most impressive to us is the company’s after-tax profit margin, which swelled to 20.1% in the third quarter. As a result, the company found that its balance sheet was stronger than expected, so on December 21, management announced that it would force redemption of $200 million of 4% convertible bonds that were due in 2001. Fundamentally, we like it.
Technical Analysis
MICC has appeared in Top Ten once before, in February of 2007 when it was trading at 78. But it was hit by a mild sell-off in March and then the big market-wide selloff in August. Still, the stock has recovered fast, and it’s been hitting new highs in recent months. As we write, the stock has pulled back from its all-time high of 127 to touch its 25-day moving average at 114, and we think it’s a decent buy here.
MICC Weekly Chart
MICC Daily Chart
(SID)
Why the Strength
Companhia Siderurgic Nacional (it means National Steel Company, but is usually known to Brazilians as CSN) is the largest steel producer in Brazil and the eighth-largest in the world. Founded in 1941 as a strategic national industry, the company was privatized in 1993. Since then, the company has been expanding and modernizing, while retaining the advantages that it enjoyed as a national asset, including control of its own iron ore sources, electric power from a wholly owned hydroelectric dam, and superb rail and seaport facilities. Recent expansion efforts have included the construction of a new re-bar plant and the development of a complementary concrete business. A much-publicized bid to buy the Anglo-Dutch steel firm Corus failed earlier this year, but management will not be long in finding new ways to grow. Just this month, the company revealed plans for a $5.3 billion program to increase production of both iron ore and steel. These capital expenditures have taken a bite out of earnings, but are expected to pay off in the long run. In the meantime, a 2.7% dividend gives investors a tangible taste of the company’s success.
Technical Analysis
SID has a long history of strong advances punctuated by pullbacks of a quarter or two. The current rally began in Q1 of this year following six quarters of poor — or non-existent — earnings growth. After leaping to 92 last Monday, the stock has pulled back slightly and is holding tight at 90. We think you can buy it here, although buying on a pullback toward 83 would lower your risk.
SID Weekly Chart
SID Daily Chart
(WFR)
Why the Strength
Back in the 90s, when high-profile Internet commerce stocks were growing through the roof, savvy investors made good profits investing in the companies that were providing the enabling equipment; JDS Uniphase, Qwest and Exodus were all big winners. Today, if you look at the red-hot stocks of companies in the solar power industry and look for their enablers, you get one response … MEMC Electronic Materials. Spun off from Monsanto decades ago, this Missouri company makes silicon ingots, granules and wafers. Historically, its biggest market has been the manufacturers of semiconductors in the electronics industry, but today the solar power industry is very hungry, and MEMC is locking up ten-year supply contracts left and right. Interestingly, capacity constraints mean MEMC’s revenue growth is not as rapid as it could be. The upside is that the company can charge higher prices, and thus earn fat profit margins. MEM is not undiscovered (454 mutual funds are on board) and it’s not cheap. But it occupies a position of prime importance in what is increasingly viewed as a major source of alternative energy. We like it.
Technical Analysis
WFR appeared here four times in 2006 and four times prior to this in 2007. The stock’s uptrend is long and persistent. Short-term, we believe its recent strength is due in part to window-dressing, and that a substantial pullback in 2008 is likely. But long-term, we’re bullish. If you’ve got it, hold on tight. If not, note that the 25-day moving average is down at 82 while the 50-day is at 76.