Finding Tennis Balls
The market had another rough go of it last week, as the major indexes finished down more than 4%, though they remain safely above their late-January lows. Overall, the trends of the market and most stocks remain firmly down, and thus the market monitor above remains on the bearish side – and that means you should continue to play defense and buy only small amounts. On a positive note, OptiMo (our stock screening system) is uncovering more stocks meeting with buying pressures – this week’s list contains a few more good stories, and we’re beginning to see signs of group leadership. Gold, coal, metals and now energy stocks (especially energy producers) are sporting more than a few strong stocks, as big investors bet on continued commodity inflation. Our favorite this week is Range Resources (RRC), a mid-sized natural gas explorer that’s hitting new highs. Try to buy on weakness.
| Stock Name | Price | ||
|---|---|---|---|
| ACI (ACI) | 0.00 | ||
| BVN (BVN) | 0.00 | ||
| CLF (CLF) | 0.00 | ||
| CMO (CMO) | 0.00 | ||
| KGC (KGC) | 0.00 | ||
| OI (OI) | 0.00 | ||
| PRGO (PRGO) | 0.00 | ||
| RRC (RRC) | 0.00 | ||
| SWN (SWN) | 0.00 | ||
| URBN (URBN) | 0.00 |
(ACI)
Why the Strength
Coal stocks have gone from old, slow, dirty companies to exciting, sexy growth stocks within the past month. Institutional investors have awoken to the fact that there’s not enough coal being mined in the world today, especially among the emerging economies. Strong demand combined with inclement weather and disasters (like a huge flood in Australia) have caused problems in India, China and South America; the latter two are hoarding their own production and limiting exports. That’s driving coal prices much higher, which is a boon to companies like Arch Coal, which, according to one analyst, has decades worth of reserves and a relatively unhedged sales position. Analysts are looking for earnings to double in 2008 and increase another 40% in 2009, although given the recent rapid price increases, the sky’s the limit.
Technical Analysis
ACI is still a few points south of multi-year peaks, but we doubt those old highs will provide much resistance. First, the prior peaks came in the spring of 2006, nearly two years ago, so those who bought then are likely out of the stock by now. Second, and more important, ACI has shot ahead 15 points on huge and increasing volume over the past three weeks, a sure sign that big institutions are in control here. If you’re game, we suggest picking up a few shares on a pullback of a couple of points.
ACI Weekly Chart
ACI Daily Chart
(BVN)
Why the Strength
As you’ll also read in our writeup of Kinross Gold in this issue, Peruvian miner Buenaventura has been catching a steady tailwind from the rising price of gold. But a power-supply problem in South Africa has kept competitor AngloGold Ashanti from doing any mining, putting further pressure on the world’s supply of newly-mined gold and putting just that much more wind in Buenaventura’s sails. The company gets its gold from both its seven wholly owned mines in Peru, and from its minority interest (almost 44%) in Yanacocha (with Newmont Mining) and in Cerro Verde, a Peruvian copper producer. As of March 1, 2007, Buenaventura’s proven and probable reserves of gold amounted to just over 30 million ounces, plus nearly 18 million ounces of silver and smaller amounts of zinc, lead, copper and molybdenum. Notably, the company has unwound its entire book of hedging positions, putting its gold in complete synch with the global price. It’s a simple story that will go as far as the price of gold can take it. A small dividend completes the package. Q4 earnings will be reported on February 29.
Technical Analysis
BVN’s two previous Top Ten appearances in July and November 2007 were part of the same run the stock has made off a long base that lasted from late 2005 to early 2007. The stock is now sitting just below 70, having spiked up last week on news the firm had junked its gold hedges. With its hedges gone, BVN will likely trade on news of gold prices, but a correction back toward 65 is still possible, and would make an attractive buy point.
BVN Weekly Chart
BVN Daily Chart
(CLF)
Why the Strength
Cleveland-Cliffs’ six iron ore mines in Michigan, Minnesota and Eastern Canada produced 33.6 million tons of iron ore pellets in 2006, making it the largest producer of pellets in North America. With three coking coal mines in West Virginia and Alabama, the company is also a big name in the metallurgical coal (which is used to make steel) business. In addition, this Ohio-based firm owns pieces of an Australian iron ore mining company, a Brazilian iron ore project and an Australian coking and thermal coal project. It’s always nice when a growing company pays a dividend, but it’s especially hopeful when the company initiates a 40% increase in the size of that dividend, as Cleveland-Cliffs did in January, the third such increase since 2005. The company is profitable, growing and is right in the middle of the emerging markets-fueled demand for iron. Not bad for a company that incorporated in 1847. Q4 and 2007 results will come out on February 27.
Technical Analysis
CLF has been in a strong uptrend for years, but went on a really stunning run that took it from 4 in mid-2003 to 55 in early 2006, earning it appearances in Top Ten six times in 2004 and 2005. Its current run hit resistance near 105 three times in October, December and earlier this month, so its present breakout to 109 is all the more technically impressive. Look for a brief correction below 105 as an entry point.
CLF Weekly Chart
CLF Daily Chart
(CMO)
Why the Strength
Capstead Mortgage is a no-nonsense real estate investment trust (REIT) headquartered in Dallas, Texas. As the name REIT implies, the company makes money by investing in real estate-related assets and uses leverage to increase its trading clout. The story of why Capstead’s stock is strong can be told from its quarterly earnings line. The company suffered through a period of six straight quarters of negative earnings that began with Q3 2005 and ended in Q4 2006. In 2007, Capstead reported quarterly earnings of 6 cents, 4 cents, 1 cent, and then, in Q4 earnings that came out of February 7, a whopping 29 cents. With a dividend of 6.1%, Capstead is showing that it has the savvy to find the bargains and pockets of value in a tough mortgage environment. It also raised $118 million in common equity capital with a public offering of 6.5 million shares (later raised to 8 million). That’s pretty much the story: Capstead finds the profits and investors are finding Capstead.
Technical Analysis
In December 2005, CMO bottomed out at 5 after a long drift down. But at that point, the stock got moving — first with a gradual rise punctuated by pullbacks, and then in August 2007, starting to soar from 8 in an accelerating uptrend. CMO has now topped 17, and may need a rest. If its big dividend looks good to you, try to catch it on a correction below 15 and watch the checks roll in.
CMO Weekly Chart
CMO Daily Chart
(KGC)
Why the Strength
Canadian miner Kinross Gold has lots of things going for it, first and foremost the demand for gold as a security blanket for investors worried about the health of the global economy, which is sending gold prices to unprecedented highs. This makes Kinross’s proven and probable reserves of 27.9 million ounces of gold (and 27.8 million ounces of silver) more valuable every day. Second, there’s the persistent power shortage that has shuttered the South African mines of AngloGold Ashanti. This problem has taken 200,000 ounces of AngloGold’s gold off the market in the first quarter, and will result in a 400,000 ounce reduction for the year. Reduced supply in a market with robust demand means higher prices. Kinross has mines in the U.S., Brazil, Russia and Chile, and is the third-largest primary gold producer in North America by reserves. With no hedging policies, the company is fully exposed to the price of gold. 2007 earnings will be reported on February 21.
Technical Analysis
KGC has been in a long-term uptrend, but it took last year’s July/August global meltdown of stocks to really get it moving. After that subprime mortgage-fueled slump, investors began heading for the perceived safety of gold in droves, driving KGC up from a brief drip to 10 in August to a couple of runs at 24 in January. Now trading at around 22, KGC looks like a reasonable pure-gold play. A further slip toward 20 would make this miner a real bargain.
KGC Weekly Chart
KGC Daily Chart
(OI)
Why the Strength
While three of every four big-winning stocks are growth-oriented, the other one-fourth are turnarounds – companies that are taking advantage of improving industry conditions and top management to drive earnings significantly higher. Owens-Illinois is just such a firm. Its core business of providing glass containers and plastic packaging is anything but exciting, however, the top brass has focused on manufacturing efficiencies and cost containment, as well as honing in on higher pricing (it’s been willing to sacrifice higher volumes for higher prices) and shorter-term contracts (so it won’t be subject to raw material price hikes). The result has been decent revenue growth, but an explosion in earnings, thanks to significantly higher margins. (After-tax profit margins tripled to 8.4% in the fourth quarter, from 2.1% a year ago.) All told, we believe this turnaround likely has further to run.
Technical Analysis
OI’s longer-term advance looked to be coming to an end in January – the stock was testing major support and the market was sliding sharply. But a blowout quarterly report caused OI to surge 26% two weeks ago, and then, encouragingly, shares held very tight last week, despite another market sell-off. We don’t have a huge amount of confidence in the stock considering it already enjoyed a big run-up last year (from 19 to 50), but if you’re interested, you could nibble on a pullback toward 50.
OI Weekly Chart
OI Daily Chart
(PRGO)
Why the Strength
Perrigo is the world’s leading maker of over-the-counter pharmaceuticals for the store brand market, i.e., it makes cheaper generic versions of popular prescription drugs that have recently gone off patent. Thus, the company is benefiting not only from a slower economic environment (which leads to more penny-pinching by consumers, and hence more demand for its cheaper drugs) but, more important, is taking advantage of the slew of big-selling drugs whose patent protection is expiring. For instance, the firm received FDA approval in late December to sell a generic version of Zyrtec for allergy relief. (On a side note, our local grocery chain announced over the loudspeaker this weekend that it was now selling this product.) More products are surely on the way, as are acquisitions – Perrigo recently bought a U.K. generic drug supplier that will boost earnings within the first year. Earnings, reported last week, beat expectations, and management also upped its forecast for the rest of the year. It’s not revolutionary, but this firm’s business should thrive in the quarters to come.
Technical Analysis
PRGO wasn’t a strong performer until last October, when a blowout earnings report kicked off a new advance. The stock quickly rose from 23 to 37, but a weak stock market pulled shares down into their current six-week base-building phase. Even if the market turns around and shoots higher from here, it’s unlikely PRGO will simply burst to new highs and keep going. So the strategy is, if you’re interested, to buy a little here, and then look to buy a little more if the stock breaks above 37 and the market confirms a new uptrend, in the weeks ahead.
PRGO Weekly Chart
PRGO Daily Chart
(RRC)
Why the Strength
Range Resources is a top-notch energy exploration company with a history of outstanding results. The company operates in the southwestern, Appalachian, and gulf coast regions of the U.S., and about 80% of its production is natural gas. And the stock is strong today because natural gas prices are firming up, while the company’s production outlook remains outstanding. Specifically, Range has increased production for 20 consecutive quarters, and ’08 should be no different – management expects overall production growth of 15% (probably a conservative figure) while stating that it has a “large, multi-year drilling inventory, which consists of more than 11,000 drilling projects.” While Q4 earnings aren’t yet on the books, most of the data is out; production was up 17% from a year ago, while realized sales prices rose 26%. Earnings growth is re-accelerating after a couple of down quarters in 2006, and we believe future surprises will be on the upside.
Technical Analysis
RRC enjoyed a solid 2007, and recently, the stock has refused to break down despite the horrible market environment. It staged a breakout in October, which failed due to the market … then broke out again in December, which failed because of the market … and now it’s once again testing new-high ground. Will the market pull it down again? We’re not so sure – the sellers can only put up a fight for so long. If you’re game, you could buy a little RRC on any pullback; good support exists in the low 50s.
RRC Weekly Chart
RRC Daily Chart
(SWN)
Why the Strength
Like Range Resources, featured on the prior page, Southwestern Energy is an explorer with a heavy emphasis on natural gas. The company operates in Oklahoma, Texas and New Mexico, but its big operations are located in Arkansas in the Fayetteville Shale location. That area should account for two-thirds of Southwestern’s production in 2008, and it’s growing fast; management has stated that, with planned increases in drilling activity, the region’s production could grow 50% or more during the next few months. Overall, the company is targeting a huge 35% jump in production this year, which, combined with higher prices, should drive earnings nicely higher. Earnings growth is re-accelerating, and we’re optimistic even better times are ahead.
Technical Analysis
SWN has been extremely volatile in recent months, but given the market’s action, its resilience is impressive. In fact, the stock’s pattern is similar to Range Resources – a late-October breakout failed due to the market, and new highs in January didn’t last, again, because the bears were in control. But now SWN is threatening to reach new-high ground again; every time the pressure comes off the overall market, buyers are there to push the stock up. Hold on if you already own some. If you don’t, you could buy a little here.
SWN Weekly Chart
SWN Daily Chart
(URBN)
Why the Strength
Urban Outfitters is a trendy retailer that enjoyed a tremendous run of higher profits (and stock prices) during 2004-06, but then fell on hard times, falling behind the fashion curve and having a few execution issues. But now the company is back on track, with all of its brands (including Urban Outfitters, Anthropologie and Free People) selling well. The stock is strong today because of increasingly good results – last week, the company reported that same-store sales for fourth quarter (ended January 31) rose 18% for Anthropologie, 19% for Free People and 6% for the core Urban Outfitters stores, for a total same-store sales increase of 11%. Overall, sales for the quarter jumped 29%, which will mark the third straight quarter of accelerating revenue growth. And, for this year, the company is looking to boost its store count by 20%. We expect a solid earnings number when the company reports in March. All told, Urban is a leader.
Technical Analysis
Last week, URBN did what few growth stocks have been able to do in recent months – break out of a consolidation on heavy volume. Indeed, the stock has registered three straight up weeks on great volume after slipping in January. Of course, until the market itself confirms a new uptrend, any breakout is far from a sure bet; you often see sudden selling pressures appear in these situations during a bear market. Still, URBN’s action is impressive, so if you’ve bought on our prior recommendations, sit tight. Those looking to get in could buy a small amount here while keeping a three-point stop-loss in place.