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Top Ten Trader
Discover the Market’s Strongest Stocks

December 31, 2012

The market has been pushed and pulled by Fiscal Cliff news during the past few days, but overall, the market’s bigger picture hasn’t changed -- it’s still in rally mode, though there hasn’t been enough power to get too heavily invested. Thus, we think it’s best to “lean bullish” by holding your best performers and looking to do some buying as opportunities arise, but you should also hold a decent cash position until we see buyers show more strength. This week’s Cabot Top Ten Trader is a near even-split of newer growth stocks and older (but intriguing) turnaround situations. Our favorite is a small Chinese firm that could be a big winner if things go right in 2013.

Happy New Year!

The market took a hit last week, as Washington’s ineptitude continued to grab the headlines and cause investors to raise cash and book some profits. The action wasn’t pretty, for sure, but we can’t say it’s changed the big picture—the rally since the mid-November lows is still intact, and many of the stocks and sectors that had been performing well took last week’s dip in stride. Another day or two of big declines would change our outlook, but right here, you should continue to “lean bullish,” holding your better performers and putting some money to work as opportunities arise. You should, however, also hold a decent cash position until we see more power and decisiveness from the market.

This week’s list is almost evenly split between great growth companies and turnarounds, including a couple of well-known names that are looking good. We like many of the charts, but we’ll go with Qihoo 360 (QIHU) as our favorite of the week. The stock is a bucking bronco, but it has great growth and a big story.

Stock NamePriceBuy RangeLoss Limit
Tenet Healthcare (THC) 0.0030-31.5-
Terex (TEX) 0.0025-26.5-
Rackspace (RAX) 0.0069-72-
Rackspace (RAX) 0.0069-72-
Qihoo 360 (QIHU) 0.0026-28-
Mohawk Industries (MHK) 0.0087-89-
General Motors Company (GM) 0.0026-27-
FLSR (FLSR) 0.0028-30-
Equinix, Inc. (EQIX) 547.73198-205-
3D Systems (DDD) 0.0048-50-
Bank of America (BAC) 0.0010.8-11.4-

Tenet Healthcare (THC)

www.tenethealth.com

Why the Strength

Managed healthcare and healthcare facilities saw solid growth in 2012, with investors becoming increasingly confident in the sector following President Obama’s re-election. With 2013 bringing about another step in the Affordable Care Act’s (ACA) implementation, hospital operators like Tenet Healthcare stand to reap considerable benefits. Tenet owns or leases 50 acute care hospitals with some 13,000 beds in 10 U.S. states. In addition to its acute care holdings, Tenet also operates specialty hospitals, skilled nursing facilities, physician practices, outpatient centers, imaging centers and other healthcare facilities. Despite the fact that all of ACA’s provisions have yet to be implemented, Tenet still saw strong revenue growth during 2012. In fact, revenue rose by an average of 5% year-over-year during the past four quarters, while earnings averaged an impressive growth rate of 82%. What’s more, during its most recent earnings report, Tenet said that adjusted admissions increased by 1.4%, marking the eighth consecutive quarter of growth and the 18th of the past 21. Finally, while some analysts are concerned that slow growth could stymie many sectors of the economy, managed care firms like Tenet should hold up well. Specifically, an estimated 30 million more Americans will have access to healthcare in 2014 as the rest of ACA takes effect. Such an increase in the patient pool would add to Tenet’s already strong earnings and revenue growth.

Technical Analysis

With the presidential elections looming large, and the fate of the healthcare landscape at stake, THC struggled for most of 2012, peaking just shy of 25 in February before broad-market selling pressure took hold. The stock bottomed near 17 in August before resuming its uptrend along support at its 25-day and 50-day moving averages. With political uncertainty removed, THC has taken off in the past two months; shares are now trading near multi-year highs. Look for a bit of consolidation over the short term. You can buy some here or on further weakness, with a stop near 28.

THC Weekly Chart

THC Daily Chart

Terex (TEX)

www.terex.com

Why the Strength

Terex is a classic “risk on” stock, with its wide array of construction equipment, cranes, heavy duty vehicles and the like in big demand when global growth picks up. Of course, the opposite is true as well, and as the global economy slowed in recent quarters, Terex’s business has done the same. But, impressively, management has cut costs to the bone (including a recent debt refinancing), kept earnings on the upswing and now, with signs that emerging markets like China are re-accelerating, is poised to see business pick up meaningfully. In fact, the reason the stock is strong is all about the future—excluding acquisitions, revenues fell 8% last quarter, and backlog, while still healthy at $1.7 billion, was down 20% from a year ago. But the fact that earnings have been rising throughout this slow period has investors excited that the best is yet to come; the bottom line is expected to rise 30% to $2.60 or so next year, and considering that Terex earned nearly $6 per share at its peak in 2007 (the stock peaked above 96 back then!), there’s plenty of upside should business pick up. It’s not a great growth story, but if the stars align, Terex could do very well.

Technical Analysis

Like most industrial stocks, TEX’s latest major peak came in early 2011, when the stock topped out at 38.5 before skidding as low as 9 during the market’s mini-crash that year. It then rallied to 27 earlier this year and has been building a base ever since. What we like most is that since the market’s low in mid-November, TEX has rallied smartly, including four weeks of gains in above-average volume. It backed off a bit during last week’s Cliff-related maelstrom, but we think it’s buyable around here, with a tight stop around 24.

TEX Weekly Chart

TEX Daily Chart

Rackspace (RAX)

www.rackspace.com

Why the Strength

Rackspace made its debut in Cabot Top Ten Trader back in June 2009, when small and medium-sized businesses were making the switch to the Web hosting service in droves. The hosting service attracted these companies because Rackspace’s server farms were cheaper than do-it-yourself, and Texas-based Rackspace had a huge commitment to client service. Now, after 18 appearances in these pages, Rackspace is riding the surge of migration for all computer software, data storage and backup services onto remote servers, which is now known as “The Cloud.” Rackspace has been a growth juggernaut, slowing its revenue growth to just 18% in 2009, but has averaged 30% year-over-year revenue growth for the last eight quarters. The company’s OpenStack software looks like it could become the industry standard, which Rackspace sees as a big help in battling Amazon Web Services, the biggest server service in the business. Beyond the company’s stellar growth history, investors are intrigued by the rumors that Rackspace might be an acquisition target. But that’s just the kind of hot news that’s always swirling around a profitable company in a fast-growing market segment. Rackspace has enough strength to win business all on its own.

Technical Analysis

RAX hit an all-time high near 74 on December 20 after sprinting past 70 on higher-than-usual volume on December 18. The stock has now spent eight days at this higher level, building a new base with support at 72 during the market’s holiday lull. The ideal buy would be to snag a position during an intraday dip toward 70, which the stock actually managed last Thursday. But RAX, with a steady increase in institutional support and a great history of price gains dating back to February 2009, is a strong growth issue that took just three weeks to wipe out a six-week correction in October and November.

RAX Weekly Chart

RAX Daily Chart

Qihoo 360 (QIHU)

www.360.cn

Why the Strength

Baidu (“the Google of China”) has been the dominant presence in online search in China for years, even dropping Google’s head in a basket. But in investors’ eyes, that has made Baidu into a slow-moving whale, just ripe for a fast-moving shark to start taking chunks out of it. Simply put, Qihoo 360 looks like that shark. Qihoo, incorporated just in 2005, was just an ambitious seller of security apps for mobile devices until it added a mobile search function to its popular Web browser. When the company announced in July that it had achieved a nearly 10% market share in mobile search, its stock soared (and Baidu’s plummeted). The company’s gaudy 191% revenue growth in 2011 was likely followed by a 91% jump in 2012. And earnings, which popped from nine cents a share in 2010 to 51 cents in 2011, are projected to hit 74 cents in 2012 and $1.06 in 2013. The big story right now is the unexpectedly rapid adoption of smartphones in China, just one more area in which the Chinese are recapitulating moves made in the West, but at enormously higher speeds. Investors now know that Qihoo’s big gains in mobile search should make the company a real Chinese success story.

Technical Analysis

In July, QIHU was just building a new base at around 15 after a four-month correction that pulled it down from 26. The came August and the stunning three-week rocket shot that pushed the stock back to 25. It took 10 weeks to digest that move before QIHU could get on the growth track again, but the stock delivered a useful tipoff move on December 3, soaring 10% that day on five times its average trading volume. The stock gave back that entire move during the next two sessions, but the predictive power of that move proved true last week when the stock moved to multi-year highs, and the strength continued today. QIHU is volatile, so try to grab some on a dip of at least a point and a half.

QIHU Weekly Chart

QIHU Daily Chart

Mohawk Industries (MHK)

mohawkind.com

Why the Strength

It appears that we jumped the gun when we moved Mohawk Industries to the sell column in the December 17 edition of Top Ten. In our defense, the stock was drifting toward its November lows, but little did we know that management was working on a deal to acquire the fifth largest ceramic tile producer in the world. On December 20, Mohawk announced the acquisition of Italian ceramics manufacturer Marazzi Group for $1.5 billion. The move broadened Mohawk’s international reach, as Marazzi distributes ceramic tile in more than 100 countries. While tile accounts for only about 9% of the U.S. flooring market, those percentages balloon to 30% in Western Europe and roughly 60% in Italy. Central and South America also have significant tile flooring markets. The acquisition adds to Mohawk’s growing list of top-shelf products, as the company also recently acquired Pergo, the most recognized brand of premium laminate flooring in the U.S. and Europe. In terms of organic growth, Mohawk is enjoying strong sales amid a budding recovering in the housing market. With the company delivering a solid performance across the board due to an improved product mix, pricing, volume and productivity, Mohawk remains a solid investment in the housing sector.

Technical Analysis

Since hitting a bottom near 40 in September 2011, MHK shares have been locked in a steady uptrend. In fact, shares more than doubled during this timeframe while closing only one week below the aforementioned trendlines. More recently, MHK struggled to make headway in the wake of the company’s Pergo purchase, with the shares topping out near 90 in November. After drifting toward support in the 80 region, MHK rebounded sharply on the Marazzi news. You can take bites here, or add to your position on any dips if you still own some. Either way, a stop loss on a trade below 82 makes sense.

MHK Weekly Chart

MHK Daily Chart

General Motors Company (GM)

gm.com

Why the Strength

Back in 1953, when Charles Erwin Wilson (once the president of General Motors) was being confirmed as Secretary of Defense, he is supposed to have said that “What’s good for General Motors is good for the country.” The quote isn’t accurate, of course, but if you turn it around, it’s true today: “What’s good for the country is good for General Motors.” After following Chrysler into bankruptcy and being bailed out by the U.S. government, General Motors has made a solid comeback. The company has a host of brands, including Buick, Cadillac, Chevrolet, GMC, Opel, Daewoo, Holden and Vauxhall, and Chinese marques lik Alpheon, Jiefang, Baojun and Wuling. It also does lots of its own financing through General Motors Financial Company and leases vehicles through its dealerships. Earnings were $3.88 per share in 2011, and are expected to dip to $3.26 per share in 2012. But investors are sniffing out an estimated 20% jump to $3.90 in 2013 and looking forward to a resumption of the company’s dividend program if the recovering U.S. economy lifts sales this year. Renegotiated contracts with auto workers and other cost-saving measures have boosted GM’s after-tax profit margin to 5.0% and with the company buying back the remaining $200 million of its shares from the U.S. government, the road ahead looks clear.

Technical Analysis

GM stopped trading during its bankruptcy restructuring from July 2009 through November 2010. And after trading resumed at 33, the stock made a quick uptick, then corrected for nine months, bottoming at 19 in October 2011. The chart shows a triple bottom at that level, with subsequent visits in December 2011 and July 2012. But since July, the stock has been on a solid run, albeit with plenty of pullbacks. GM formed a sloppy, rising base at around 25 from late August through most of December, then gapped up on volume to 27 on the buyback news. GM, with a P/E of just 9, looks like a good buy on a pullback of a point.

GM Weekly Chart

GM Daily Chart

(FLSR)

Why the Strength

First Solar is a pretty good stand-in for the fortunes of the entire solar industry. The company was a monster back in 2007, when governments (especially Germany) flush with cash were offering big subsidies for solar projects. The big limitation on the industry then was a shortage of silicon. And that shortage made First Solar’s patented thin-film technology a big winner, because it held down material costs and sidestepped supply issues. The company’s 273% revenue growth that year tells the story. That annual growth rate dwindled to just 8% in 2011. But, as frequently happens when companies can weather huge downturns, First Solar is bouncing back, with nearly half of sales coming from U.S. buyers and just 23% from Germany. Estimates are for First Solar to do $3.62 billion in sales in 2012, which will be a 31% increase. Oil prices are high enough to make solar look attractive again and the industry, after losing many weaker competitors, is in great shape for 2013. First Solar has a manufacturing capacity of two gigawatts of solar arrays, and the company’s strategy of targeting large-scale projects makes it a strong bidder for both U.S. and global business. Chinese solar stocks have been rallying since the Chinese government’s announcement on December 19 that it would cut subsidies to solar companies, allow bankruptcies and encourage mergers and acquisitions, which should cut the global oversupply of manufacturing capacity. First Solar looks to be back on the growth track.

Technical Analysis

FSLR shot from 24 to 317 from November 2006 to April 2008, then got slammed by the Great Recession. But the biggest drop came in the 12 months from February 2011 to May 2012, when the stock plummeted from around 175 to as low as 12. FSLR has now more than doubled off those lows, and institutional support, which never dropped below 600, has started to revive. FSLR has been through its romance phase and a bigger correction than most. It looks now like it’s ready to appreciate on its own solid growth and growth prospects. The stock’s dip from its high of 33 a couple of weeks ago marks a decent entry, with a logical stop near 26.

FLSR Weekly Chart

FLSR Daily Chart

Equinix, Inc. (EQIX)

www.equinix.com

Why the Strength

In the current news-driven, uncertainty-filled environment, institutional investors are looking for companies with great growth prospects that also have a degree of safety or surety to them. That is why Equinix is one of the strongest stocks in the market today—the company’s position at the heart of the Internet (most of the world’s traffic flows through its data centers) as a top provider of co-location and interconnection services guarantees continued growth no matter what the global economy does. Indeed, Equinix is set to launch a big hub in the Middle East this week, and it continues to ink new customers, including a couple of high-profile financial deals, and yet more than 90% of the company’s revenues are recurring, as once a firm has placed its hardware in many data centers it makes little sense to switch providers. All of this has shown up in the top and bottom lines during the past few quarters (see table below), with an added bullish kicker being the company’s upcoming switch to a REIT structure in early 2015, which should provide big dividends and help save millions in taxes. Granted, there are some negatives (big valuation, good-not-great revenue growth), but overall, we think Equinix has what it takes to keep big investors interested.

Technical Analysis

Another thing we like about EQIX is that the stock appears to be in the middle innings of its overall run—shares moved out of a two-year consolidation in January and basically doubled to their peak in mid-September. That’s a good run, no doubt, but it’s not like the stock has been running for three years and is obvious to everyone. Moreover, EQIX has now built a good-looking three-month cup base, with a tight, calm pause last week while the market was going haywire. You can buy some here, with a stop around 190; if you want to be safer, you can simply wait for a big breakout above 210.

EQIX Weekly Chart

EQIX Daily Chart

3D Systems (DDD)

www.3dsystems.com

Why the Strength

While the technology has been around since the mid-1980s, 2013 could finally be the year that 3D printing goes mainstream. With prices dropping across the board, the technology could hit critical mass this year as people begin printing everything from dental fillings to aviation components. Standing at the forefront of this red-hot technology is 3D Systems, which has seen impressive growth during the past year. Revenue for this timeframe averaged year-over-year growth of 52% per quarter, while earnings rose an average of 37% per quarter on the same basis. As a testament to the company’s strong sales growth, 3D Systems noted in its third-quarter earnings report that printer sales soared more than 120% for the period. The strong figures led the firm to boost its full-year revenue forecast to $345 million to $365 million, on earnings of $1.20 to $1.30 per share. In addition to organic growth, 3D Systems has been busy snapping up competitors, with more than 20 acquisitions since 2009. Finally, investors should be aware that 3D Systems began taking on debt in 2011, but that debt remains manageable, at less than 25% of total assets.

Technical Analysis

Since going public in May 2011, DDD shares have been on fire, nearly quadrupling in value. While shares stagnated for much of 2011, DDD embarked on its current rally in January 2012, with solid support at the 10-week and 25-week moving averages. The stock enjoyed a steady rally through August, before weak market conditions forced a top. While DDD broke support at its 10-week trendline, the 25-week held its ground and provided a springboard for the stock. The rebound from this moving average coincided with a strong third-quarter earnings report, helping to propel DDD past resistance at 45 and toward fresh all-time highs above 50. Shares are now consolidating these gains; we think a dip of a couple of points would provide a good opportunity, with a stop near 45.

DDD Weekly Chart

DDD Daily Chart

Bank of America (BAC)

Why the Strength

How can Bank of America, a $107 billion behemoth that was practically the poster boy for the 2008 financial crisis, and a company that has earned plenty of public and government scorn, be among the strongest stocks in the market? There are a few reasons. First is that the sector as a whole looks poised to turn the corner—obviously a lot will depend on the market itself, but years of Fed pumping and now a rebounding housing market have done a lot to make the balance sheets of most big banks pristine. Second is the economy as a whole; if the circus act in Washington, D.C. can deliver some permanence, it could help the underlying economy find some traction. But the third reason really has to do with Bank of America itself; there’s a good chance that, because of its much-improved capital position, the firm could announce a big dividend bump and/or share repurchase plan next year, which, combined with an expected 118% jump in earnings, should attract more investors. There’s no denying that turnaround stocks have provided many of the big winners in recent years, and we think Bank of America could join that group in 2013.

Technical Analysis

BAC was the dog’s dinner until about a year ago, when shares doubled to 10 during a three-month period. But then came a long, well-rounded base; it fell below 7 in May and July, but rebounded back near its peak after the Fed’s QE3 announcement in September. And then, most encouragingly, BAC moved straight sideways during the market’s correction, before breaking out four weeks ago on huge volume. Shares have acted well since, and we think you can start a position around here, or on a dip toward 11.

BAC Weekly Chart

BAC 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.

FirstStockSymbolTop PickOriginal Buy RangePrice as of December 31, 2012
HOLD
10/29/123D SystemsDDD40-4353
12/17/12AECOM TechnologyACM22.5-23.524
12/17/12Abercrombie & FitchANF43-4548
11/12/12AMC NetworksAMCX49-5150
12/10/12ASML HoldingASML60-6364
9/10/12Affiliated ManagersAMG118-122130
11/26/12Alaska AirALK40.5-4243
5/14/12Amazon.comAMZN
icon-star-16.png
218-227251
11/12/12BE AerospaceBEAV43-4549
10/15/12Barclay’sBCS14-1517
11/12/12BioMarin PharmaceuticalBMRN46-47.549
10/29/12Cabot Oil & GasCOG44.5-46.550
12/10/12Canadian Pacific RailwayCP97-99102
10/22/12CitigroupC
icon-star-16.png
35-3740
12/3/12ColfaxCFX37-38.540
11/5/12CommVaultCVLT62-6470
9/24/12Computer SciencesCSC31.5-3340
11/12/12Copa HoldingsCPA91-9499
12/17/12CreeCREE37.5-3934
12/3/12Dillard’sDDS82-8484
10/22/12Domino’s PizzaDPZ40-4244
7/2/12Eagle MaterialsEXP
icon-star-16.png
35.5-37.559
11/5/12Eastman ChemicalEMN57.5-59.568
11/26/12Eaton VanceEV30-31.532
4/23/12eBayEBAY38.5-40.551
2/27/12EquinixEQIX
icon-star-16.png
129-135206
11/5/12ExpediaEXPE58-59.561
12/3/12FacebookFB
icon-star-16.png
25-2727
12/3/12Gulfport EnergyGPOR35-3738
10/29/12HDFC BankHDB36-3741
11/26/12HollyFrontierHFC42-4447
7/2/12LennarLEN
icon-star-16.png
28.5-30.539
11/5/12Louisiana-PacificLPX15.5-1719
12/10/12Lowe’s CompaniesLOW33.5-34.536
12/10/12MasTecMTZ
icon-star-16.png
22-2425
10/29/12Melco CrownMPEL13.5-14.517
8/20/12Michael KorsKORS
icon-star-16.png
49-5351
11/12/12Nam Tai ElectronicsNTE
icon-star-16.png
13-1414
10/22/12Ocwen FinancialOCN34-3835
10/1/12Packaging Corp.PKG
icon-star-16.png
34-3638
9/24/12Phillips 66PSX45-4753
9/17/12PulteGroupPHM15-1618
11/5/12PVH Corp.PVH105-110111
10/8/12Qihoo 360QIHU21-2330
11/12/12Quanta ServicesPWR25-2627
12/10/12RackspaceRAX65-6874
11/26/12Salesforce.comCRM
icon-star-16.png
155-162168
12/3/12StratasysSSYS69-7280
11/26/12Tenet HealthcareTHC26.5-27.532
12/17/12Trimble NavigationTRMB
icon-star-16.png
55-5960
10/29/12United RentalsURI37-39.546
10/8/12WhirlpoolWHR
icon-star-16.png
81-84102
WAIT FOR BUY RANGE
None this week
SELL RECOMMENDATIONS
11/12/12AMC NetworksAMCX49-5150
10/8/12AccentureACN68-7067
11/5/12GameStopGME23-24.525
9/24/12Moody’sMCO44-4550
10/15/12Royal CaribbeanRCL29.5-3134
7/30/12Watson PharmaceuticalsWPI77-7986
DROPPED: Did not fall into suggested buy range within two weeks of recommendation.
12/10/12Marathon PetroleumMPC58-6063