Cream is Rising
The market put in a solid show last week, with the indexes finally getting off their knees. However, as you can see from our new market monitor above, the field is still tilted toward the bears – eight days of rallying doesn’t undo the 15% to 20% decline seen from mid-December to mid-January. If a new bull market is starting, there will be plenty of time and opportunities, but for now, you should stay defensive, holding cash, and buying only small amounts of certain stocks. OptiMo’s pickings remain somewhat slim, as much of the market’s recent strength has come from the most beaten-down sectors (financials, homebuilders, transports), which aren’t high-odds setups. But we believe there are some emerging leaders in today’s Top Ten, led byInteractive Brokers (IBKR), a newly-public market maker and brokerage firm for professional investors. Its business depends on the market’s action; if a new bull market unfolds, it should drive earnings and the stock much higher.
| Stock Name | Price | ||
|---|---|---|---|
| ACI (ACI) | 0.00 | ||
| ACOR (ACOR) | 0.00 | ||
| CALM (CALM) | 0.00 | ||
| IBKR (IBKR) | 0.00 | ||
| NITE (NITE) | 0.00 | ||
| OI (OI) | 0.00 | ||
| RATE (RATE) | 0.00 | ||
| SID (SID) | 0.00 | ||
| TNE (TNE) | 0.00 | ||
| WMS (WMS) | 0.00 |
(ACI)
Why the Strength
Coal stocks are the strongest group in the market today. Most have soared to new peaks during the past two weeks on overwhelming volume, as big investors anticipate huge price increases in the quarters ahead. The big picture looks like this: Electricity demands, as well as an increased demand for steel, have increased the hunger for coal across the globe. Supplies have become so tight that some South African gold mines have shut down because of electricity shortages, while China has halted coal exports for the same reason. Coal shortages also are present in Australia (because of a major flood) and India. The good news is that many American companies, like Arch Coal, have excess supplies to take advantage of today’s tight markets. Actually, Arch sells mainly inside the U.S. (its coal accounts for about 6% of the country’s power supply), but prices will be affected by the bigger international picture. All told, we like it.
Technical Analysis
ACI is not quite as strong as some of its peers, as the stock is still below its mid-2006 peak in the upper 50s. Still, with all the volume that’s poured into this sector during the past two weeks, we believe the landscape has changed – ACI, in particular, has zoomed ahead to multi-month highs the last two weeks on its heaviest volume since last summer. To us, the stock is unlikely to simply move straight up from here … but with big investors clearly getting in, we don’t expect a huge price decline either. Our advice: Buy a little on any weakness in the days ahead.
ACI Weekly Chart
ACI Daily Chart
(ACOR)
Why the Strength
Acorda is a young drug company with no earnings and no near-term expectations of earnings. Yet its stock is strong because its prospects are bright. The company has one existing product based on Zanaflex, a short-acting drug used to manage spasticity, and current revenues from this drug are growing nicely. But the market is most excited about Fampridine, a drug that has the potential to address many problems involving the central nervous system. Acorda is currently conducting Phase 3 clinical trials of Fampridine to evaluate its potential to improve walking ability in people with multiple sclerosis. A week ago the company announced that it had successfully completed QT studies, and today the company announced that it had acquired certain assets of privately held Neurorecovery, Inc., which has focused on developing drugs to treat inflammatory diseases of peripheral nerves. This acquisition, which includes Orphan Drug designations, will enable Acorda to explore additional indications for Fampridine. Beyond that, the company is doing preclinical work to address other aspects of multiple sclerosis and central nervous system function. The potential is big, but the road is long.
Technical Analysis
ACOR earned a spot in Cabot Top Ten Report once before, on February 12, 2007 when it had zoomed from 15 to 22. But it spent the year since then consolidating that gain, and only in the past week has it broken out to new highs. Trading volume can be light, below 200,000 shares per day, so volatility is a factor. But we think buying on any normal pullback toward the 50-day moving average at 22 could work out well.
ACOR Weekly Chart
ACOR Daily Chart
(CALM)
Why the Strength
Cal-Maine Foods is the largest egg company in the U.S., supplying about 15.5% of the country’s domestic consumption. In fiscal 2007, that translated to about 8.2 billion eggs, produced by about 23 million hens. The company sells in 29 states, pretty much everywhere except in the northwest, upper Midwest and New England, and has nine out of ten of the top food retailers in the U.S. as customers. Business has been good for two reasons. First, people on high-protein weight-loss regimens tend to eat a lot of eggs. And second, the increasing popularity of specialty eggs — cage-free, reduced cholesterol and organic — has opened an avenue to a higher margin market. Cal-Maine has also grown through acquisitions, with 10 purchases under its belt since 1989. The company’s earnings went into a tailspin back in 2004, but revved back up in late 2006. Its fiscal second quarter profits reported on December 28 reflected huge profits due to soaring egg prices. A small dividend adds to the company’s interest.
Technical Analysis
After five quarters of trading in a tight range between 6 and 8, CALM took off in Q4 2006 and just topped 30 on fiscal Q2 profit news. Short interest in the stock now amounts to over 15 days of volume, which could be a significant source of buying power … if the stock keeps rising. A dip below 30 is likely, and would make a satisfactory entry point for the bold investor.
CALM Weekly Chart
CALM Daily Chart
(IBKR)
Why the Strength
Interactive Brokers is the first of two “bull market stocks” in this week’s Top Ten – i.e, stocks that directly benefit from more active and rising markets. The company’s automated, proprietary trading platform is targeted mainly at financial professionals, with access to over 70 exchanges around the globe, allowing customers to trade stocks, options, futures, currencies and bonds. The brokerage segment currently serves 95,000 accounts, and in the fourth quarter, those accounts executed 307,000 trades per day, up 54% from the prior year. Interactive’s market-making segment also registered a great quarter, with revenues surging 43% from the year before. All told, the company’s sales and earnings growth looks good, but it will all come down to the market’s future course; a continued market downmove would likely lead to less trading activity as professionals pull back, but a new bull market will have the opposite effect.
Technical Analysis
IBKR came public in May 2007, and immediately fell into the end of July, as the market felt the first shockwaves of the mortgage mess. But since that point, the stock and its relative performance (RP) line have been pushing higher, with the most recent action especially encouraging. IBKR barely dipped during the market’s January decline and, despite a one-day hiccup on its earnings report, surged to new highs last week on solid volume. If you’re game, we think you can buy a small amount on a pullback of a couple of points.
IBKR Weekly Chart
IBKR Daily Chart
(NITE)
Why the Strength
Knight Capital has two divisions. The first, accounting for one fourth of revenues, is asset management. The second, accounting for three-fourths of revenues, is trade execution for broker/dealers, and that’s what’s driving the stock today. The fourth quarter report, released last week, saw revenues decline 2% but earnings increase a surprising 52% thanks to increased trading activity in volatile markets. In the quarter, average daily U.S. equity trades increased 78%, from 939 to 1,671. The effect was a huge boost in Knight’s after-tax profit margin and a huge boost in the stock. But can the growth continue? A lot depends on the market. The company’s last big growth phase, for example, came in 1999-2000; revenues now are lower than they were then. But the stock’s valuation is modest; NITE trades at just 1.9 times revenues and has a P/E ratio of just 15. So real growth can bring investors real returns. And last week the company announced the closing of two funds that had been poor performers – a sign of proactive management. It’s not our favorite story, but in a bull market with elevated trading volume, it could be a winner.
Technical Analysis
NITE peaked at 82 in 2000 and bottomed at 4 in 2004. Most recently, the stock has zoomed from 12 to 17 on big volume, working to surmount its June high of 18. We think aggressive investors can buy on a retreat toward the 50-day moving average at 14.
NITE Weekly Chart
NITE Daily Chart
(OI)
Why the Strength
Owens Illinois is the largest manufacturer of glass containers in North America, South America, Australia, New Zealand, China and Europe. It makes about half the glass containers in the world. (It had been in plastics, but sold that business last July.) We all know that glass containers are not a great growth industry, so why is the stock strong? Because management has costs under control and is repaying its heavy debt. Because payments to settle asbestos claims peaked in the second quarter as the company worked to accelerate the conclusion of that ugly business. And because globally, prices for glass containers are up. Also, with a price to sales ratio of 1.08 and a price-earnings ratio of 17, the stock is a decent value … provided these favorable trends continue.
Technical Analysis
OI peaked at 49 way back in 1998. Its earnings peaked then as well. The stock then fell all the way to 3 in 2000! But today both earnings and the stock are in uptrends, and with the stock hitting all-time highs, the sky’s the limit. Most recently, OI declined to its 200-day moving average at 39 in mid-January (shaking out weak holders) before zooming out to new highs the following week, after a great earnings report. Now, 50 represents modest support while 46 represents strong support. We think you can buy a little on a pullback.
OI Weekly Chart
OI Daily Chart
(RATE)
Why the Strength
Getting information online is second nature for consumers, and bankrate.com is a goldmine of information about mortgage, savings, credit card insurance and investment rates. With the Fed exerting tremendous pressure on rates, interest in both first mortgages and refinancing is high, and this will mean increased traffic to the company’s Web site and higher ad revenues. Over 53 million people visited bankrate.com in 2006, and the Q4 report (due after the close on February 5) will likely tell a tale of significant expansion. In the battle for consumers’ eyes, Bankrate is offering an easy-to-navigate site that’s rich in information (and got even richer when the company took over two smaller competitors in December). This also makes the site a winner in the battle for advertisers’ dollars. Bankrate is profitable and growing, and when the Q4 numbers come out, the speculators who are shorting the stock (currently 10.3 times daily volume) may have to cover their positions, which will mean another boost.
Technical Analysis
RATE got very hot in 2005, but corrected deeply in the second half of 2006. Since that correction, the stock had been rising slowly, running into strong resistance above 50. That changed last week as RATE shattered that old resistance level, rising to an all-time high (and a new RP peak) on increased volume. Investors are expecting good news from tomorrow’s earnings report, and if they get it, the stock could be off to the races again. It’s pretty much an all-or-nothing proposition, although the stock just caught downgrades from a couple of analysts, which offers a handy pullback for those looking to take a chance.
RATE Weekly Chart
RATE Daily Chart
(SID)
Why the Strength
Companhia Siderurgic Nacional (CSN) has used its advantages wisely since it was privatized in 1993. Its legacy from its days as a national utility — ore sources, hydropower, rail and seaport facilities — have given it a head start in efficiency. A base in the fast-growing Brazilian economy has been augmented by the growth of global demand, and that base has been expanded by management’s aggressive stance, including the establishment of a plant in Terre Haute, Indiana to serve rust-belt industries. All of these factors have kept the company growing. The company hasn’t announced when it will release Q4 results, but investors are obviously expecting good news. We like it, especially with a 2.9% dividend attached.
Technical Analysis
When SID made its second Top Ten appearance in last week’s issue, we advised waiting for a breakout above 90 on good volume, but called it a good speculative buy where it was. Last Thursday’s jump from 90 to 97 and Friday’s bump to 101 were exactly what we were looking for. The problem now is to figure out where to get in on the stock. We think any pullback of a few points would make a good buy. Just keep your first investment small.
SID Weekly Chart
SID Daily Chart
(TNE)
Why the Strength
Tele Norte Leste is the largest fixed-line telecom in Brazil and the largest in South America. The company covers almost two-thirds of Brazil and has about 14.4 million lines in service, all digital, as well as 583,000 public phones. Growth has been pretty good, as Brazil’s economic boom continues. But what’s making headlines right now is the company’s plan to take over Brasil Telecom, the country’s #3 fixed-line carrier, in a $2.7 billion deal. The merger has the backing of Brazil’s government, which wants a locally-owned competitor to foreign telecoms Telefonica (Spain) and America Movil (Mexico). The deal, if it goes through, would create a fixed-line giant with nationwide coverage and also a 17% slice of Brazil’s cell phone market. Investors seem to like the idea, and the stocks of both companies have reacted positively. The company will announce Q4 results before the market opens on February 28.
Technical Analysis
TNE is making its first Top Ten appearance in this issue, which makes sense, because until the merger news hit, TNE was mostly an old-technology fixed-line telecom with limited potential. But following the merger news on January 10, the stock leapt up from 19 to 25 in just four days. Since then the stock has corrected back to 21 and then taken off again to 27. A dip back to the small gap at 24 would present an attractive entry point.
TNE Weekly Chart
TNE Daily Chart
(WMS)
Why the Strength
WMS Industries is taking advantage of a major, long-term growth trend we believe will continue for many years – the increasing acceptance of gambling (called gaming by the industry) both in the U.S. and around the globe. WMS manufactures video and reel-spinning gaming machines. A couple of its more popular games currently are Top Gun and Monopoly Super Money Grab. It also has some of its own gaming operations, placing leased participation gaming machines and getting a cut of the action. Overall, this company is no one-shot wonder – sales and earnings have been growing at a great clip for the past three years, and analysts expect the next few quarters to also be similarly fruitful. Of course, without a definitive competitive edge, WMS could get tossed aside should it fail to continuously upgrade its games. But management is proven, and we expect good things ahead.
Technical Analysis
WMS formed a long, wide base during 2004-2006, but since it broke above the 23 level in November 2006, the stock has been making solid (but not spectacular) progress. WMS took a hit during the market’s August decline, but registered new peaks soon after. Even during the painful November and January dips, this stock hung in there, as institutions (159 mutual funds owned shares at last count) sat tight. Now the shares are nosing into new-high territory again, a clear sign of leadership. Earnings are due out Wednesday after the close, so if you want in before that, we advise keeping it very light and then seeing how the stock reacts to the report.