Trend is Up, but Expect Volatility
Last week was a quiet one for the major indexes, but many individual stocks had big moves ... mostly on the upside. We don’t have much to add from our last few commentaries—our Market Monitor remains bullish, and most stocks and sectors are in good shape, so you should be thinking positively and sticking to the bullish game plan. That said, be sure to keep your feet on the ground and be prepared for a pickup in volatility; we’re not predicting anything, but it’s been three months since the market low and seven weeks of nearly straight-up action, so it only makes sense to be prepared for some hiccups sooner or later.
One very hopeful event of the past two weeks is that many growth stocks, which had been lagging the market, are beginning to perk up. Our favorite this week is NXP Semiconductors (NXPI), a good-sized chip stock with a few irons in the fire and a stock that recently lifted off from a huge base. Try to buy on weakness.
| Stock Name | Price | ||
|---|---|---|---|
| Qihoo 360 (QIHU) | 0.00 | ||
| Oasis Petroleum (OAS) | 12.57 | ||
| NXP Semiconductors (NXPI) | 0.00 | ||
| Nationstar Mortgage (NSM) | 0.00 | ||
| Medicines Company (MDCO) | 56.98 | ||
| Masco (MAS) | 0.00 | ||
| Lazard (LAZ) | 0.00 | ||
| Michael Kors Holdings Limited (KORS) | 73.22 | ||
| Hertz Global Holdings, Inc. (HTZ) | 0.00 | ||
| First Solar (FSLR) | 83.74 |
Qihoo 360 (QIHU)
Why the Strength
Qihoo 360 is a young Chinese company that has been making a good living selling anti-virus and anti-theft software to Chinese cellphone owners, where malware threats are widespread. The company also runs a popular online browser for mobile devices, and in August, when it started using its own search service (instead of Google) as its mobile search provider, Qihoo 360 suddenly had nearly 10% of the online search market in China. This development gave a huge boost in both visibility and stock price to Qihoo 360 and started a downtrend in the fortunes of Baidu. Qihoo 360’s higher profile has brought attention from Muddy Waters, the short-selling specialist that seeks out companies with inflated numbers and rides them into the dirt. But Qihoo 360 has proven surprisingly resistant to rumors and charges of misreporting and the number of days short has been falling steadily. Investors love the 191% revenue growth in 2011 and the triple-digit revenue gains through the first three quarters of 2012. When the company reports its Q4 earnings tomorrow (February 19), there will be lots of eyes on the bottom line, with big movement up or down likely. We don’t advise taking a full position just before an earnings report, but if the news is good, a quick jump onto the bandwagon can prove quite profitable.
Technical Analysis
QIHU took a huge leap last August when the news of its success in gaining mobile search market share pushed it from 14 to 26 in less than a month. Another surge in late December and early January kicked the stock to 33, which is where it’s sitting now, waiting for earnings news to set its new direction. You might want to put a toe in the water with a small buy (one-half or one-third of your usual dollar amount) before earnings. Or you can just wait, watch and be prepared to jump on should the stock react well to the numbers.
QIHU Weekly Chart
QIHU Daily Chart
Oasis Petroleum (OAS)
Why the Strength
Oil stocks took a hit on Friday after oil prices fell hard amidst some global economic worries; such action is a reminder that oil stocks, no matter how good the growth story, are still subject to oil price swings on a week-to-week basis. That said, if oil prices do remain elevated, we think Oasis Petroleum’s outstanding growth prospects could drive the stock much higher. The company is a major player in the Williston Basin, one of the most lucrative areas in the Bakken, with more than 300,000 leased acres. And management has been hitting the ball out of the park when it comes to boosting production and cutting costs; thanks to an aggressive drilling program, production has doubled each of the past two years, and should increase another 40% to 50% in 2013. Moreover, by launching its own well services division, Oasis was able to cut its well costs by 16% last year, and it’s also hooked up nearly all of its wells to natural gas processing facilities, helping output. (About 90% of production is oil but more natural gas is being pumped out every day.) There have been occasional rumors about an acquisition, but the stock’s recent strength is due to strong expected growth going forward; analysts see sales and earnings up 50% or more this year. Earnings are due out February 25.
Technical Analysis
OAS is emerging from a good-looking long-term base. The stock had a big post-IPO run into March 2011, and then etched a nearly two-year base. What we like is how, during the market’s correction late last year, OAS tightened up, basically moving straight sideways in a tight range for three months. Now the stock has been pushing steadily higher, interrupted by last Friday’s slide. We think the dip, which came on average volume, could lead to a little further retrenchment, but the trend is up and OAS looks buyable around here with a stop near 34.
OAS Weekly Chart
OAS Daily Chart
NXP Semiconductors (NXPI)
Why the Strength
NXP Semiconductors is a microchip designer/manufacturer based in the Netherlands that sells its high-performance mixed signal (HPMS) and standard chips around the world. The company has a strong position in the fast-developing near-field communication (NFC) chips that enable car keys to start a car just by being inside the car or mobile phones to pay for a purchase by being swiped next to a reader. HPMS products account for more than two-thirds of NXP’s sales, and more than 90% of revenue comes from Asia-Pacific and Chinese markets. The NFC product category is putting NXP into the news, as the company has signed a deal with Delphi Automotive, which selected NXP as the supplier for its next generation of car radio tuners and controls. But the big reason investors are jumping into NXP is the company’s Q4 report on January 30 that featured a 108% jump in earnings (once one-time costs are factored out) and a 20% gain in revenues. These results, which were at the high end of the company’s guidance, were bolstered by strong guidance for Q1. The semiconductor industry, always cyclical, is on an upswing right now, and NXP Semi has its fingers in two of the industry’s hottest sectors.
Technical Analysis
NXPI rallied strongly after its IPO in 2010, and qualified for Cabot Top Ten Trader twice in early 2011. But the stock traded in a tightening range from the beginning of 2012 and traded essentially flat from August through November. NXPI began to rally from 23 in December and took out its old high at 28 in January. After a three-week consolidation centering on 30, the stock caught another updraft on February 8 and popped up to 33. NXPI has had plenty of positive volume spikes during its rally, indicating an increasing appetite for its shares. We think it’s buyable anywhere under 32, with a stop near 28.
NXPI Weekly Chart
NXPI Daily Chart
Nationstar Mortgage (NSM)
Why the Strength
Most big winners come from so-called “traditional” growth sectors—the Internet, retail and medical sectors, for instance, have spawned countless big winners. But every so often you get a great growth story from a different place, and Nationstar Mortgage is a perfect example. The company is growing like mad because of a one-time shift of mortgage servicing rights (collecting payments, distributing them to the proper parties, dealing with foreclosures, and getting a small fee for it all) from huge banks to smaller specialty firms. The roots of the shift stem from the financial crisis; increased regulations have most big banks wanting to shed non-core assets to keep their balance sheets pristine. The result is literally trillions of dollars of these rights being sold by the big banks, with Nationstar getting a good chunk of those. The most recent was a $215 billion deal with Bank of America that changed Nationstar’s earnings power in a big way—because of the deal, the firm has total servicing rights of $425 billion of mortgages, which management believes will produce $4 per share (up from about $2.40 last year) and $6 per share in 2014. Yet even those huge figures include none of the potential $300 billion that’s still in its pipeline, and the company is also running its own mortgage origination business (it has a deal with KBHome) and recently bought Equifax’s title and appraisal business. In the long run, we think the sky’s the limit.
Technical Analysis
NSM came public just a year ago and had a great run through last fall. Then came a nasty correction as it lost out on a big deal, but the firm righted itself and burst to new highs in early January on the BofA deal. After that, the stock slid 17% before coming to life and briefly hitting higher highs last week. We love the story and the chart is strong, but worry that the stock has a very small float, leading to some wild day-to-day swings and little institutional sponsorship. Still, we think it’s worth the risk; you can buy a little around here as long as you use a loose stop near 33.
NSM Weekly Chart
NSM Daily Chart
Medicines Company (MDCO)
Why the Strength
The Medicines Company is a New Jersey based biomedical company that has three products approved for sale in the U.S. and two approved for sale in other countries. The lead product is Angiomax, an injectible anticoagulant to treat certain heart conditions and used during certain types of angioplasty; Argatroban, another anticoagulant used to dissolve thromboses; and Cleviprex, an injectible treatment for the reduction of blood pressure. The Medicines Company has a long-term history of profitability and three product candidates in Phase III clinical trials and one in Phase I. The big news for The Medicines Company was the report on January 8 that Cangrelor, one of those drugs in Phase III trials, showed a major improvement in reducing thrombosis during coronary interventions versus the current standard treatment. Investors, who had been pushing The Medicines Company’s stock slowly higher since the middle of 2010, rushed to buy. Coming on top of the December 20 announcement of encouraging results against acute skin infections for the company’s antibiotic, the momentum for this firm is considerable. Investors will be watching closely when the company issues its Q4 results two days from now on February 20.
Technical Analysis
MDCO has been in a modest uptrend since the middle of 2010, punctuated by a few major pullbacks. But following a correction from 27 to 20 in October and November, MDCO got two boosts from clinical trial results, jumping from 22.5 to 24 on December 20 and from 25.5 to 29.5 on massive volume on January 8. MDCO has now spent almost four weeks trading in a very tight range over support at 30, and is showing signs of beginning its breakout from that base. Even though much of the good trials news is already baked into MDCO, more good news should produce further gains. Buy on any weakness of a half point.
MDCO Weekly Chart
MDCO Daily Chart
Masco (MAS)
Why the Strength
Masco is a big home improvement and building supply company, manufacturing cabinet, decorative architectural and plumbing products and also offering installation services. (It owns the Delta faucet and Merillat cabinet brands.) The reason the stock remains one of the strongest in the market is the new housing bull market—while home improvement projects are flat-ish, new construction is on the rise and that has Masco’s management predicting bullish things for 2013 and beyond. In its fourth quarter, all five of the company’s operating segments showed growth for the first time since the housing bubble burst, and the top brass said that its various brand and cost-cutting moves in recent years have it well positioned to benefit from further housing strength. Analysts rushed to bump up their earnings estimates (now 65 cents for 2013, up 103% from last year, with 2014 possibly bringing $1 per share), but as with most housing firms, we believe thinking even bigger is important—Masco, for instance, earned north of $2 per share near the top of the housing market, and while nobody’s predicting a return to those heady times, costs have been cut to the bone during the bust. Thus, we think there could be plenty of upside earnings surprises ahead as housing activity steadily picks up.
Technical Analysis
MAS hasn’t been a flag-bearer for the housing bull market, but it’s been advancing in a choppy pattern for months. As you can see in the chart, the stock has calmed down a bit this year, with its weekly ranges much tighter than last year. And last week, the buyers rushed in after its earnings surprise—MAS popped 12% on its biggest weekly volume since last July. It’s a bit out of trend on the upside, and the stock isn’t a gap-and-go type of name, so if you’re interested, try to buy on a dip back toward 19, with a stop near 17.5.
MAS Weekly Chart
MAS Daily Chart
Lazard (LAZ)
Why the Strength
Billing itself “one of the world’s pre-eminent financial advisory and asset management firms,” Lazard operates from 42 cities in 27 countries, with business split roughly equally between financial advising and asset management. These assets totaled $167 billion at year-end, a record high, and we’re happy to see they were largely (82%) invested in equities. On the financial advising side, business is good and getting better. 2012 saw the firm participating in these big deals: Deutsche Telecom in the $32.8 billion combination of T-Mobile and MetroPCS, Anheuser-Busch InBev in the $20.1 billion Grupo Modelo and Constellation Brands deal, and GDF Suez/Electrabel in the $12.6 acquisition of International Power. Recent M&A clients have included Microsoft in Dell’s privatization, IntercontinentalExchange in the NYSE Euronext acquisition, Hertz in the acquisition of Dollar Thrifty, Oriental Trading Company’s sale to Berkshire Hathaway and Cerberus in Albertson’s acquisition of SUPERVALU. And on the restructuring/debt side, the firm has worked for Hostess Foods, A123 Systems, Eastman Kodak and the Allied Pilots Association with respect to American Airlines. Interestingly, the company’s long-term growth trends are not impressive; revenues peaked in 2007. But management is working to return cash to shareholders through dividends (currently 2.1%) and share repurchases, and analysts currently estimate that earnings will rise 39% in 2013 and 27% in 2014.
Technical Analysis
LAZ has done nothing interesting, technically, for years, but that’s changing! For three months it’s been climbing substantially faster than the broad market, and now volume is picking up, thanks to an exceptionally strong fourth-quarter earnings report two weeks ago. The stock has been digesting that surge in the days since, and looks to be setting up to continue the uptrend. We recommend buying here, or anywhere down to 35, with a stop near 33.
LAZ Weekly Chart
LAZ Daily Chart
Michael Kors Holdings Limited (KORS)
Why the Strength
We’ve been picking stocks for a few decades and have done our share of research, and we can say with a straight face that we don’t remember ever seeing the type of growth numbers out of a retailer that Michael Kors is producing. Last week the company released another jaw-dropping report, with its third-straight quarter of 70%-plus revenue growth and its seventh-straight quarter of at least 87% earnings growth. But what’s most impressive to us is that same-store sales grew an amazing 41% even as the firm rapidly opened new stores; overall retail sales expanded 67% and now make up just over half of all revenues (wholesale and licensing make up the rest). One more amazing statistic: Revenues in recession-torn Europe grew 58%! Beyond the numbers, on the conferecnce call, management went into detail on all of its international opportunities, especially in Asia; suffice it to say there are years of growth ahead, with plenty of store opening potential all over the place. Analysts rushed to increase their earnings estimates; on average, they see next fiscal year’s (ending next March) rising 30%, but we’re guessing those figures are conservative—Kors has crushed estimates nearly every quarter and when a retailer is in its groove (much like Coach from 2002 through 2007), the growth tends to persist. We like it.
Technical Analysis
Despite the continued good numbers, KORS hasn’t been the easiest stock to invest in. Shares had a huge post-IPO run in early 2012, skyrocketing to 51 by March. But then it began a huge base-on-base formation—first a deep, tedious pullback last spring, and then another sideways-looking consolidation during the past few months. But that huge launching pad is bullish if the stock stages a powerful breakout ... which is what KORS did last week. The stock zoomed to new price and RP highs on its heaviest weekly volume ever. We expect lots of starts and stops, but we think it’s buyable here with a stop near 56 or 57.
KORS Weekly Chart
KORS Daily Chart
Hertz Global Holdings, Inc. (HTZ)
Why the Strength
Hertz is one of the largest rental car agencies in the U.S. and abroad. Traditionally operating at the luxury end of the rental car business, the company had been losing market share to companies that catered to budget-minded renters. But that situation changed last month when Hertz announced that it was buying Dollar Thrifty Automotive Group. This move is just a continuation of the consolidation of car rental companies; Avis bought Budget in 2006 and Enterprise bought National and Alamo in 2007. The acquisition will solidify Hertz’s position as the number-two rental agency in the U.S. and will give it the top position in market share at U.S. airports. All told, Hertz will have about 10,400 locations in 150 countries worldwide. Hertz will have to get rid of its Advantage Rent A Car business to gain regulatory approval, but analysts still expect the acquisition to prove immediately accretive to earnings. The firm has been a steady grower in revenue and earnings terms, but nothing spectacular. And the market was initially apathetic about the big merger until February 14, when rival Avis reported excellent results, raising general optimism about the car rental business. The company will be releasing its Q4 and 2012 earnings results within a week or so, and right now, investors are enthusiastic that the Dollar Thrifty acquisition will brighten its future in a strengthening rental car market.
Technical Analysis
The current rally in HTZ began in November 2012 when the stock jumped from 13 to 16, which was the old short-term resistance from earlier in the year. After spending December messing around at 16, the stock got moving in January, pushing out toward 19. When news of the big merger came, HTZ didn’t react much. The big breakout came on February 14, when the Avis news raised expectations for the industry. HTZ popped to 20 on good volume and has now relaxed by a half a point. This looks like a good buy point, although a little patience might get you in at 19 ahead of earnings. A stop at 17.5 makes sense.
HTZ Weekly Chart
HTZ Daily Chart
First Solar (FSLR)
Why the Strength
First Solar is the world’s most valuable solar power company, as well as its second-largest by revenue. Headquartered in sunny Tempe, Arizona, the company has grown revenues every year of its existence. And it’s grown earnings every year, too, with the exception of 2011, when earnings were cut in half, mainly because of plummeting prices for polysilicon. But the stock is strong today (along with other solar power stocks) because there are signs that demand has bottomed, and that with global economies on the mend and political support for alternative energy strengthening, the entire industry will boom in 2013. Furthermore, an analyst last week forecast that annual investor financing for residential solar systems would rise to $5.7 billion by 2016, up from $1.2 billion last year. Lastly, First Solar in particular is benefiting from a rumor that giant General Electric is interested in acquiring the company! We’re not counting on that, but we are counting on the chart, which shows growing interest in the stock.
Technical Analysis
FSLR peaked at 317 in 2008, when the company earned $4.24 per share, and bottomed at 11 in 2012, when the company earned roughly $4.61 per share, providing a clear illustration of how perception trumps earnings. Today’s set-up dates back to December, when the stock appeared in Cabot Top Ten Trader twice, trading at 30 and 31. Unfortunately, we got shaken out on the late-January dip to 28, but the price action and buying volume since then have been very bullish. Last week saw the stock hit a new closing high (for this cycle) of 35, and we think you can buy on the current pullback.
FSLR Weekly Chart
FSLR 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.
