Still Bullish, but Wait for Your Pitch
After a great three-month advance, last week’s big distribution on Wednesday and Thursday is a shot across the bow; more than likely we’ve seen some type of short-term peak, and experience tells us to expect some follow-on selling in the near-term (we saw some today after a big upmove at the open). However, when looking at the intermediate-term, the trend remains up, which is why we’re keeping our Market Monitor in bullish territory. Thus, it’s prudent to cut back on your losers and laggards and hold a little cash, but you should stick with your best performers. And, when it comes to new buying, you can be a bit more discerning, buying on weakness and waiting for your pitch.
This week’s list, frankly, has more great-looking charts than we expected to see, albeit from some less-sexy sectors. Our favorite of the week is AECOM Technology (ACM), a good-sized construction firm that’s shown outstanding accumulation. Look to get in on weakness.
| Stock Name | Price | ||
|---|---|---|---|
| State Street (STT) | 79.42 | ||
| RockTenn (RKT) | 0.00 | ||
| Norwegian Cruise Lines (NCLH) | 0.00 | ||
| Lions Gate Entertainment Corp. (LGF) | 0.00 | ||
| Kansas City Southern (KSU) | 176.54 | ||
| Computer Sciences (CSC) | 0.00 | ||
| Cabot Oil & Gas (COG) | 0.00 | ||
| BlackRock (BLK) | 0.00 | ||
| Aruba Networks (ARUN) | 0.00 | ||
| Aecom Technology (ACM) | 0.00 |
State Street (STT)
Why the Strength
With exposure to both domestic and overseas markets, State Street has become one of the most prominent trust banks in the market. What’s more, State Street is also one of the top four ETF providers in the U.S. The company’s clients include mutual funds, collective investment funds, corporate and public retirement plans, insurance companies, foundations, endowments and investment managers. State Street operates in 29 countries and in more than 100 geographic markets worldwide. Despite the uncertainty in the global economy, and the stigma still attached to financial institutions, State Street continues to grow both organically and through mergers. Revenue rebounded last quarter, rising 3% year-over-year, while earnings spiked 19% during the same time frame. Meanwhile, State Street closed out 2012 by acquiring Goldman Sachs’ hedge fund business. More recently, the company announced plans to expand commission-free ETF trading via a partnership with Charles Schwab, the largest independent U.S. brokerage. Finally, the trust bank recently boosted its quarterly dividend by 8.3% to 26 cents per share from 24 cents per share. The company’s annual dividend yield of 1.7% is icing on the cake for an already attractive investment in the financial sector.
Technical Analysis
STT shares came roaring back following the March 2009 market bottom, but the fanfare was short-lived as the stock stalled near long-term resistance in the 55 area. As investors became disillusioned with the slow recovery, STT was left idling between resistance near 50 and support in the 40 region for the better part of the following three years. Heading into 2013, however, STT was rejuvenated following a strong quarterly report and news of the company’s purchase of Goldman’s hedge fund unit. Riding support at its 10-day and 25-day trendlines, STT broke out above 50 and charged past formerly stiff resistance at 55. Shares are now consolidating just above 55 as they wait for trendline support to catch up. Because of the newly-choppy market, try to buy on dips with a stop near 52.
STT Weekly Chart
STT Daily Chart
RockTenn (RKT)
Why the Strength
Making packaging may not seem exciting, but without RockTenn’s boxes, shippers and online retailers would have a hard time getting their products to consumers. The company specializes in making corrugated boxes, paperboard, preprinted packages, merchandising displays and specialty paper products. There are two factors that have investors taking a heightened interest in RockTenn at the moment. First, Deutsche Bank reports that competitor Georgia-Pacific plans to raise containerboard prices—a move that should lead RockTenn and others to follow suit, increasing revenue and ending a nearly two-year stagnation in pricing. Second, the packaging sector is cyclical, with the Spring and early Summer providing increased demand, making now an excellent time to take a closer look at RockTenn. Revenue growth was a healthy 80% in 2011, dipping to 71% in 2012. Looking ahead, the company sees increasing synergies from its acquisition of Smurfit-Stone, with RockTenn’s Q4 finally bearing fruits from the buyout. Specifically, RockTenn posted Q4 earnings of $1.35 on January 22, handily beating analysts’ expectations of $1.27 per share. Finally, the company’s stock pays a small dividend, with a yield of 1.1%.
Technical Analysis
RKT has been in a long-term uptrend since the market’s recovery in March 2009, but until recently, the stock had found stiff resistance near 75. The stock finally blew past this technical roadblock at the beginning of 2013, with the reaction to RockTenn’s Q4 results putting not only 75, but 80 firmly in the rearview mirror. With the stock trading in all-time high territory above 85 following a big run, we expect a bit of consolidating here as RKT digests these gains. The stock remains a solid choice as a way to play the recovery of the U.S. economy, and you should look to establish a position on weakness, with a stop near 79.
RKT Weekly Chart
RKT Daily Chart
Norwegian Cruise Lines (NCLH)
Why the Strength
It’s not exactly high tide for the cruise industry in the wake of Carnival’s epic ship failure a couple of weeks ago. But the fact remains that the industry as a whole remains in a steady growth mode as the U.S. economy gradually advances, and newly-public Norwegian Cruise Lines is set to take advantage. The company is one of the big three (Carnival and Royal Caribbean are the others), with 11 current ships that can carry just over 26,000 passengers combined. But the best is yet to come—the firm will take delivery of one new ship each of the next three years (starting this April), and each of these ships is huge, carrying a whopping 4,000 passengers or more! All told, then, the company’s total capacity is set to increase nearly 50% during the next three years, so if the vacation industry remains relatively healthy, and as travelers tend to shy away from Carnival after a couple of mishaps in recent years, business should boom. Indeed, after three years of slow recovery along with the entire industry, Norwegian’s revenue growth is expected to accelerate (up 14% this year, 20% next) while earnings take off (up 50% this year and another huge gain in 2014). It’s not revolutionary, but Norwegian appears to have a couple of major catalysts that should propel business higher, which seems likely to attract more big investors.
Technical Analysis
NCLH just came public in mid-January so there’s not much to interpret on the chart. What we can say is that the stock opened well above its offering price and then marched persistently higher for a few weeks, reaching a high of nearly 32 before backing off. Now, clearly, NCLH is still getting its sea legs (couldn’t resist) and only trades about 500,000 shares per day, but we like the potential as investors build positions. We think you can start a small position on a dip below 30.
NCLH Weekly Chart
NCLH Daily Chart
Lions Gate Entertainment Corp. (LGF)
Why the Strength
Lions Gate Entertainment is an entertainment giant with a slightly lower profile than some studios. But the company gets 75% of its revenue from motion pictures (including the wildly popular Hunger Games properties, the Saw franchise and Tyler Perry’s movies) and 25% from television production (the hit series Mad Men, Weeds and Nurse Jackie). Lions Gate got big by buying smaller studios, most recently taking over Summit Entertainment, the owner of the popular young-adult Twilight series. The economics of the entertainment industry are tricky, as big movies and TV shows require large up-front financing and have no guarantee of success. This is probably the reason for the relatively high level of shorting activity, which is a little over nine days of average volume. But that’s a double-edged sword, and every piece of good news (like the strong opening weekend box office results for the Summit film, Snitch, which took in $13 million) will pressure shorts to cover their positions. The company has completed an early payoff of a $500 million loan that was used to complete the Summit takeover, and has $85 million of a share repurchase authorization left. Lions Gate is making the right moves in an uncertain industry and the two remaining titles in its Hunger Games series are expected to keep the box office jumping.
Technical Analysis
LGF made its first attention-grabbing move in January 2012, popping from 8 to 16 in just eight weeks. After a big shakeout and recovery, the stock built a new base around 16 from September through December, then broke out in January in a rally that’s still going on. The stock hasn’t touched its 25-day moving average since the end of December and has just moved out to new all-time highs in both price and RP. The current P/E ratio is 51, but the forward P/E is just 15, which tells you something about how analysts see earnings going in 2013. Try to buy on a dip toward 20.
LGF Weekly Chart
LGF Daily Chart
Kansas City Southern (KSU)
Why the Strength
If you watch any television commercials, you’ve probably seen the one for CSX telling you that they can move a ton of freight 436 miles on a gallon of fuel. While Kansas City Southern doesn’t do any TV ads, the company is every bit as efficient as CSX at moving freight through its 6,600-mile rail network that connects Midwest cities like Kansas City with the big shipping ports on the Gulf of Mexico. The company also indirectly owns and operates Kansas City Southern de Mexico, a primary Mexican railroad that runs through the industrial heartland of Mexico, owns a 50% interest in the Panama Canal Railway Company and owns the Texas Mexican Railway that links its U.S. and Mexican tracks. Kansas City Southern has been getting a boost from both the increasing energy transport business generated by swelling shale-oil volumes and the concurrent high prices of fuel that are hurting the trucking business. Kansas City Southern’s intermodal and auto transport business are booming and the company’s bet on increasing volume in the NAFTA trade corridor is paying off. Q4 results showed a 19% gain in earnings on a 7% jump in revenues and after-tax profit margins topped 12% for the fourth straight quarter. This is a good stable business that offers a way to play the increasing economic activity of both the U.S. and Mexico along with a small (forward annual yield is 0.9%) dividend.
Technical Analysis
KSU has been in an uptrend since early 2009, progress that has been punctuated by some steep corrections. The stock spent much of 2012 building a base-on-base pattern. The current rally began in November and has pushed the stock from 75 to 98 in just 14 weeks. KSU is no skyrocket, but its history of steady appreciation and a small dividend make it an attractive choice for long-term investors with a taste for transportation. A buy on weakness of a point or two makes sense.
KSU Weekly Chart
KSU Daily Chart
Computer Sciences (CSC)
Why the Strength
Computer Sciences is a big IT consulting, systems integration and outsourcing business that serves lots of global companies and lots of government agencies. The company has been in business since 1959, and its Falls Church, Virginia, location helps make it a prime government contractor. The company has always been profitable, but revenue growth has been spotty—annual growth since 2009 has been negative in two years and hit just 1% in the other two. But now management has begun to make some decisive moves to improve the situation. Divesting its credit card services unit to Equifax in early December brought in $1 billion, and Computer Sciences is using between $300 and $400 million of it to repurchase shares of its stock. The company’s fiscal third quarter report on February 5 revealed 90 cents per share in earnings, which beat analysts’ expectations. While investors are appreciating management’s aggressive moves to return value to shareholders, there is also concern that the company’s high exposure to government spending may make it vulnerable to cuts if the budget sequestration occurs. But the chart of the company’s stock tells us not to worry. A nice dividend (forward annual yield is 1.7%) is also a plus.
Technical Analysis
CSC’s reputation as a turnaround stock is based on its decline from 58 in late 2009 to a double bottom at 22 in November 2011 and July 2012. The stock blasted off to 32 in August, consolidated for 10 weeks at that level, then gapped up in November. That gap up led to a prolonged rally that got an additional boost from the February 5 earnings report. CSC pulled back by a couple of points during last week’s two-day selloff, but investors still seem to like the stock just fine. We think CSC is buyable anywhere under 47, but keep a close eye on sequestration headlines to see if sellers can get any traction. A loose stop at 42 is prudent.
CSC Weekly Chart
CSC Daily Chart
Cabot Oil & Gas (COG)
Why the Strength
If natural gas prices ever enter a sustained uptrend, Cabot Oil & Gas (no relation to us) will surely be one of the stars of the entire stock market. But even in the current environment, the company’s extraordinarily lucrative acreage in the Marcellus Shale (Pennsylvania) and, to a lesser extent, the Eagle Ford Shale (Texas) and Marmaton (Oklahoma), along with an outstanding leadership team, is leading to some fantastic results. In the just-reported fourth quarter, total production was up 44% (and nearly all the production was natural gas), more than making up for a 3% drop in the sale price for its gas. That completed the company’s second straight 40%-plus year of production growth, but what’s amazing for this good-sized firm ($1.2 billion in revenue last year) is that production growth might even accelerate in 2013—management, which is usually conservative, sees this year’s output growing 35% to 50% (and reserves growing at a double digit pace) thanks to big drilling programs in all of its key locations, as well as improved infrastructure (pipelines, processing facilities, etc.). Obviously, Cabot’s earnings outlook will vary with gas prices, but right now analysts think the bottom line will rebound to $1.30 per share (up 100%) in 2013, its highest level ever, with another doubling of earnings possible the year after. As cyclical energy drillers go, we like it.
Technical Analysis
COG didn’t do anything for much of 2009 and 2010; it actually was no higher in September 2010 than in late 2008. But then, as investors saw the steadily rising production rates, they began to bid the stock up and up—it more than tripled within a year! But, as natural gas prices tanked, so did COG, falling back to 29 last summer. And then it started another uptrend—this one wasn’t as steep as the first, but it’s been steady, and caught a tailwind last week after the much better-than-expected earnings report. If you want in, try to get in down in the 56 to 58 area, with a stop around 52.
COG Weekly Chart
COG Daily Chart
BlackRock (BLK)
Why the Strength
When BlackRock was founded in 1988, it was called Blackstone Financial Management and it helped pioneer the mortgage-backed securities business in the U.S. 25 years later, BlackRock has become one of the largest investment managers in the world, by taking over smaller investment houses. One critical takeover was the company’s 2009 acquisition of Barclays Global Investors, a move that gave BlackRock control of the iShares family of ETFs. At the end of 2012, BlackRock had about $3.8 trillion (with a “T”) under management and 10,000 professionals in 30 countries worldwide. The company offers equity, fixed income, cash management, alternative real estate and advisory strategies. In the most recent headlines, BlackRock’s application to offer an ETF based on the price of copper has been approved, providing just one more example of its commitment to the entire spectrum of investible opportunities. BlackRock is the ultimate bull market stock, making money both from the appreciation of its investments and from the rapid flow of capital from the sidelines and into anything that can beat the pathetic returns on Treasuries and other unrewarding asset classes. The company’s success allows it to pay a dividend with a forward annual yield of 2.8%, while still sporting an attractive P/E ratio of just 17. With the bull on its side, BlackRock is on a roll.
Technical Analysis
BLK has been a fairly stable stock for years, trading since late 2009 mostly above 140, but penned in on the upside below 200 or so. But the quiet rally that began last June gathered steam and finally pushed to stock above its long-term upper limit. With BLK now using 235 as support and the 25-day moving average over 238 and rising quickly, BLK has put in a five-week base and looks ready to get back on the upward track. A dip toward support at 235 would be an ideal buy point, but you can also take a small position right here and add to it when the stock breaks out above 245.
BLK Weekly Chart
BLK Daily Chart
Aruba Networks (ARUN)
Why the Strength
Diving into the details of a networking company can give you the proverbial ice cream headache, and Aruba is no different—for instance, it focuses on WLAN and BYOD with its Mobility Controllers (which provide context-aware networking access) and its ClearPass Access Management System (policy management and provisioning of devices), among other products. But, at heart, Aruba’s story is simple: It offers ways for entities to allow employees to access the corporate network via any Wi-Fi enabled device, thus bringing the access capability into the 21st century and greatly boosting flexibility. (Compare this to the “old” way where you have to sit at your desk with a designated work computer and plug into the network.) Technically, Cisco is the leader in the field, but there’s no doubt Aruba’s technology is best in class and is gaining share—the company’s latest quarterly report, released last Thursday evening, crushed expectations (we like the accelerating earnings growth), and management said near the end of the conference call that, despite Cisco having some new product launches of late, Aruba’s win rate vs. Cisco has modestly increased. Of course, competition is always an issue with technology firms, but Aruba is playing in a huge and growing market and gaining market share. We like it.
Technical Analysis
ARUN was a huge winner from its bear market low in 2009 (at 2!) to its peak in early 2011 (36). But then growth slowed down, as did the overall stock market, and ARUN fell in waves down to 12 last summer. Then came a great off-the-bottom rally into September, followed by a four-month base, and last week’s gargantuan-volume upmove on earnings. That said, ARUN still has resistance in the mid-20s, and given the market’s selloff last week, we think nibbling on weakness with a loose stop near 22 is the way to go if you want in.
ARUN Weekly Chart
ARUN Daily Chart
Aecom Technology (ACM)
Why the Strength
Infrastructure companies have attracted quite a bit of attention since President Obama highlighted improving the country’s ailing bridges and roads in his State of the Union address. Within the sector, AECOM Technology is a pure infrastructure play, ranking as the number one engineering design firm in the world. That said, AECOM is still smaller and more nimble than its blue-chip competitors Caterpillar and Deere & Co., placing the company in a prime position to take advantage of any focus on revamping the U.S.’s infrastructure. Its most recent win involves a $15.6 million first-year contract for the Western Corridor Gas Infrastructure Development Project by Ghana National Gas. The contract is renewable annually. AECOM has a plethora of projects under its belt, including rail projects in Hong Kong, the Universal Studios at Resorts World in Singapore, helping to rebuild the World Trade Center site, renovation of the Pentagon, and work on the London Olympics housing community. The firm is getting support from a slowly rebounding global economy and from its acknowledged ability to include green value in big projects, protecting the environment and people.
Technical Analysis
ACM’s current rally began shortly after the stock was slammed by investors following its poorly received November 13 earnings report. The stock tagged a low near 19 on big volume following the report, but ACM recovered quickly and hasn’t looked back since. In fact, shares have added more than 40% since that one-day shakeout. Throughout this rally, ACM has been supported by its 10-day and 25-day moving averages, and hasn’t closed a day below this duo since November. Currently, ACM is consolidating multi-year highs above potential support near 30. Shares are a bit overextended at this point, so we recommend buying on weakness as ACM continues to digest recent gains.
ACM Weekly Chart
ACM 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.
