Easy To Spot Strength
We all prefer rising markets to declining markets, but there is a silver lining to a weak tape – when most stocks are heading south, it becomes easy to spot abnormal strength. That’s what OptiMo, our proprietary stock screening system, has been doing in recent weeks; if big investors aren’t selling shares in this market, they’re likely to buy with abandon during the next bull move. Of course, with the bears in control of most stocks, you should stick with a defensive stance for now – no use investing a ton of money when the odds are against you. But nibbling on a couple of leaders and readying your watch list should pay off when the bulls return. This week’s Top Ten contains another batch of commodity, solar and emerging market stocks. Our favorite of the week is ICICI Bank (IBN), an Indian bank that’s directly leveraged to that country’s tremendous growth. The stock broke out last week, and Indian stocks are acting well.
| Stock Name | Price | ||
|---|---|---|---|
| ABX (ABX) | 0.00 | ||
| ASTI (ASTI) | 0.00 | ||
| CF (CF) | 0.00 | ||
| CHU (CHU) | 0.00 | ||
| HOLX (HOLX) | 0.00 | ||
| IBN (IBN) | 0.00 | ||
| ILMN (ILMN) | 0.00 | ||
| JASO (JASO) | 0.00 | ||
| KGC (KGC) | 0.00 | ||
| SWN (SWN) | 0.00 |
(ABX)
Why the Strength
It took nearly 28 years, but gold prices have finally taken out their 1980 peaks, plowing over the $900 per ounce level last week. The cause? Well, we’re hesitant to stick reasons on why a market is going up or down (things aren’t usually that simple), but in this case, it’s obvious – money is leaving U.S. shores as the subprime debt problem pushes the economy toward recession. Combined with a Fed that’s likely to aggressively cut rates in the months ahead, the result is a downtrending U.S. dollar and higher inflation. And that’s a picture-perfect environment for gold! Barrick Gold, one of the larger producers in the world, is set to take advantage of higher prices, thanks to solid costs controls and some very large projects underway. Still, historically, Barrick and other gold stocks will rise or fall with gold itself, as opposed to any fundamental developments. That’s good news these days, and we continue to expect higher prices.
Technical Analysis
There are two facts concerning ABX’s chart that impress us most. First, this stock broke free from a long basing structure in early September, so the advance is just over four months old – not long in the tooth by any means; it’s really just getting going. Second, as gold prices recently ramped up, ABX surged to new peaks on its highest weekly volume ever, an obvious sign that deep-pocketed investors were buying hand over fist. While the stock is extended to the upside, we don’t expect much of a retreat. Thus, if you bought last week, just sit tight; if you didn’t, buy a little here or on any minor pullback.
ABX Weekly Chart
ABX Daily Chart
(ASTI)
Why the Strength
Ascent Solar is not your typical solar power company; it’s not profitable, and it has no real revenues yet. But what it does have is perhaps the most advanced technology of all public solar power companies. Basically, most companies in the business use silicon wafers as their substrate material; that’s first generation technology. Fast-growing and very profitable First Solar is a notable exception; it uses second-generation thin-film technology, using CdTe (cadmium telluride) as its active components. It’s substantially cheaper, but its solar efficiency is a bit lower, too. Ascent Solar, by contrast, uses thin-film technology with CIGS (copper-indium-gallium-diselinide) components. The result – in-laboratory solar efficiencies of 19.5%! Admittedly, it’s a long way from the laboratory to the marketplace, but the prospects look very good. The company has been funded so far by contracts with government agencies like the Air Force, DARPA and NASA, because its non-metallic cells would be ideal for applications in space and near-space. But management also plans to target the huge residential market … once it gets volume up and costs down.
Technical Analysis
ASTI came public in August 2006 at 3 and has been advancing in an erratic pattern (typical of low-priced stocks) since. Back in September, a Norsk Hydro deal sparked buying that pushed the stock above 10, starting the advance that continues to this day. This advance peaked at 28 just nine trading days ago, and now the stock has pulled back toward its 50-day moving average at 20. The stock could fall through that level, but if the uptrend remains intact – and we think it is, that would be a terrific buying opportunity. If you can handle the volatility, we think buying here is okay.
ASTI Weekly Chart
ASTI Daily Chart
(CF)
Why the Strength
CF Industries used to be a farmer’s cooperative focused on bulk buying for its members. The enterprise was founded in 1946, but shifted gears in 2002 and became a competitive supplier, following market trends and selling to customers outside the co-op. The company’s business is easy to understand — it’s fertilizer: granular urea, anhydrous ammonia and urea ammonium nitrate. The world needs more food and more corn for ethanol, and more fertilizer means bigger crops. This is a story that burst on the market in 2006 and it has continued to advance. CF’s record 14.6% after-tax profit margins and 436% gain in earnings per share are extremely impressive for an old-world business. When CF appeared in Top Ten (twice) in early 2007, its P/E ratio for the trailing 12 months was 128. Now it’s 23, showing that a growth stock can lower its P/E if earnings are growing fast enough.
Technical Analysis
CF came public in mid-2005 at 16 and its chart traced out a big “W, ” with one bottom in October 2005 and the second bottom in July 2006. Since that second bottom, the stock has soared from 13 to 113, with only a nod to the July/August 2007 global meltdown and a minor correction in November. We have always said that trends can go on longer than anyone thinks they can, and CF offers abundant proof of that principle. Try to buy on a pullback and keep your eyes peeled for evidence that investors are getting tired of the fertilizer sector. We haven’t seen it yet.
CF Weekly Chart
CF Daily Chart
(CHU)
Why the Strength
China Unicom, China’s second-largest mobile phone company, has been playing second fiddle for a long time. China Mobile (CHL) is the dominant competitor in the country’s fast-growing mobile market, and hasn’t shown any signs of easing up. But a news report that Beijing has endorsed a reorganization of the country’s telecommunications industry has sparked new interest in China Unicom. According to the story, China Unicom will merge its GSM (global system for mobile communications) business with the operation of fixed-line company China Netcom (CN). Unicom’s CDMA (code division multiple access) mobile division will be taken over by China Telecom (CHA). And China Mobile, the largest company, will hook up with fixed-line operator China TieTong Telecommunications Corp. and will be given a license to build a nationwide fixed-line network. It’s a little confusing, but basically, the new arrangement will create a new market dynamic with three companies, each of which will have a mobile component and a fixed line component. This will create more competition and more choices for consumers, as there will be three companies with integrated land-line and mobile operations. China Unicom won’t be one of those three, but investors anticipate that there will be a payoff for the loss of the GSM business. It’s an intriguing sector to be exploring.
Technical Analysis
After peaking at 13 in early 2004, CHU dropped to 7 in May of that year and spent more than two years building a slowly rising base, with the stock in a tight trading range. Then in September 2006 with the stock at 9, it caught an upwind and has been rising ever since. Recent action has been fascinating, with high-volume spikes gapping the stock up to 25 in late October, 24 on November 30 and 24 again last Friday. The lows after these spikes have risen, indicating that buyers are still hungry. It’s not a clear picture (we would really like a breakout above 25), but it’s an interesting one, and may reward a small speculation for those who like to follow the news out of China.
CHU Weekly Chart
CHU Daily Chart
(HOLX)
Why the Strength
Hologic is a firm we’ve liked for some time, but the stock wasn’t consistent enough on the upside for our taste. But that may now be changing, thanks to ever-brighter business prospects. The big idea with Hologic is its Selenia digital mammography system; digital systems have proven far better than older analog systems at finding many types of breast cancer, so there’s a buying spree going on at hospitals and the like – less than a quarter of all scans are now done digitally, so there’s huge growth potential here. Even better, Selenia is beating the pants off competition; General Electric’s system has been losing share. Beyond Selenia was Hologic’s recent buyout of Cytyc, a women’s healthcare firm that gives the combined company a better sales force and myriad products to market to doctors. Institutions are clearly getting interested, as they see a potential emerging blue-chip in the medical field.
Technical Analysis
HOLX formed a nice double-bottom base in the middle of 2007, and when it broke free in late September, it appeared the stock was set to resume its major uptrend. But a rocky market, combined with a so-so third quarter earnings report, caused some weakness in November. Encouragingly, however, HOLX held tight after the earnings shock, and moved out to new price peaks in December! And it’s holding firm so far in 2008, despite the horrid market. We think you can buy a little in the upper 60s, and set your loss limit under 64.
HOLX Weekly Chart
HOLX Daily Chart
(IBN)
Why the Strength
India’s largest bank, ICICI Bank is also the third-largest company listed on the Indian stock exchange. Behind ICICI’s success is a tried-and-true business model: the bank recognized a huge unfulfilled demand in the Indian market and supplied it with a good product. It may be an old story, but as a business model, it’s still a surefire road to success. Private saving is increasing rapidly in India, as preference shifts away from physical assets and government bonds toward bank deposits. Accordingly, ICICI offers savings accounts tailored to every market from children to senior citizens. On top of the booming deposit business, the bank also lets Indians invest their money, buy insurance and get credit cards and loans. And for Indians abroad, ICICI provides easy, cheap electronic money transfers. There’s no reason for Indian demand for financial services to do anything but get bigger, and that’s good news for ICICI.
Technical Analysis
IBN is in a long uptrend, interrupted by periods of correction and consolidation. It’s tempting to say that a ten-year investment here should prove very profitable … but that’s not our method. We’ll just say that IBN appeared in Cabot Top Ten in late October and early November, trading at 68 and 67, and then corrected to form a double-bottom at 56. Selling pressures were never worrisome. And now it’s broken out above its old high of 70, a level that is likely to provide support in the weeks and months ahead. We recommend buying on any weakness.
IBN Weekly Chart
IBN Daily Chart
(ILMN)
Why the Strength
The future of healthcare may very well be “personalized medicine,” a sci-fi-worthy vision of diagnoses from DNA samples and treatment tailored to patients’ unique genetic profiles. This vision depends totally on the realization of economical, commercially viable DNA analysis. The clear leader in the industry is Illumina, maker of large-scale tools for genetic analysis with the high throughput rates necessary for commercial viability. Until then, Illumina’s technology is already invaluable as a basis for disease research, drug development and molecular testing. All three applications got a boost, and a milestone on the way to economic viability was passed, earlier this month when Illumina launched two new BeadChips, the Infinium High-Density Human1M-Duo and Human610-Quad. Both contain even more information than existing tools, meaning they can recognize and analyze even more genetic variations. On top of that, both chips double sample throughput and reduce DNA sample requirements by 70%. As if that’s not enough progress for one month, the company has announced that it will double production capacity over the next several quarters. The future looks bright, especially in light of last Thursday’s news that rival Affymetrix has agreed to dismiss a patent lawsuit – and not bother Illumina for four years – for a $90 million payoff.
Technical Analysis
In last week’s issue we advised selling ILMN, which we had recommended in the 40s, mainly because its stock had failed to make any progress in 13 weeks … and we were cautious about the market. But the Affymetrix news changes everything. The stock has cleanly broken out above its old highs on big volume, and now those old highs represent support. If you’ve still got it, congratulations. Hold on tight. If you don’t own it, look to buy in this neighborhood.
ILMN Weekly Chart
ILMN Daily Chart
(JASO)
Why the Strength
JA Solar remains a leader in the solar sector, a group that’s (predictably) taken some lumps during the market beating. But JA’s compelling story is keeping its stock afloat. On the surface, the firm is just another Chinese solar maker, but key deals with various polysilicon manufacturers not only ensure supply for all of this year (thus avoiding buying silicon on the costly spot market), but should help reduce wafer prices going forward, boosting margins. Management has shown the ability to execute, generally ramping production ahead of schedule, and setting high goals – it expects to increase its total production capacity to 425 megawatts (MW) by the end of 2008, up from 175 MW at the end of the third quarter! Sure, there could be some growing pains, but demand trends remain extremely strong (JA inked a deal to sell up to 60 MW in ’08 to a single Spanish firm) and we’re optimistic the best is yet to come.
Technical Analysis
JASO has been among the most resilient solar stocks in recent weeks. Part of that could be due to misplaced excitement surrounding the stock’s upcoming 3-for-1 split on February 8 (big splits often occur near tops, not bottoms), but the overall picture is bullish. Of course, there has been a bit of churning lately, and JASO had a wild go of it last week, dropping to touch its ten-week moving average early on before rallying to finish higher on big volume. The volatility is extreme, but if you’re sitting on a ton of cash, you could nibble on JASO on any weakness. On the downside, any drop below 63 would be a sign to exit.
JASO Weekly Chart
JASO Daily Chart
(KGC)
Why the Strength
The rising price of gold has been driving gold mining stocks up across the board, and Kinross is no exception. But two features distinguish Kinross from the pack. First, Kinross only owns mines in “stable” countries – specifically Canada, the United States, Brazil, Chile and Russia – removing some of the volatility and risk inherent in the business. Second, Kinross acquires all its mines through mergers and acquisitions, avoiding the costly and risky process of starting new mines from scratch. The acquisition of Bema Gold in 2007 gave Kinross whole or partial ownership in 2 mines in Russia and 2 more in South America, bringing its total number of mining operations to ten. Two new mines – in Russia and Washington state – are on line to begin producing this year. And metallurgical testing at a third, Cerro Casale in Chile, suggests it’s among the largest undeveloped gold and copper deposits in the world. Based on these promising new developments the company is forecasting production will increase to 2.6-2.7 million ounces by 2009 (compared to 1.6 million ounces last year).
Technical Analysis
KGC, like ABX, trades above all on the price of gold … both its reality and its perceived future. The stock peaked at 16 in September, 2006, and then corrected all the way to 10 at last August’s market bottom. Then it hit 21 in November, and pulled back to 16 in December. And now the surging price of gold has catapulted it to new highs again. Obviously, there’s a pullback coming somewhere, but no one knows where it will start. We think aggressive investors can get in here.
KGC Weekly Chart
KGC Daily Chart
(SWN)
Why the Strength
Southwestern Energy remains one of the best-performing energy stocks in the market, thanks to aggressive expansion plans and, of course, elevated energy prices. And that includes not just oil but also natural gas, which has advanced sharply the past couple of weeks. At this point, it’s really a matter of execution – Southwestern’s Fayetteville Shale site is ramping up in a big way, with production at the end of the third quarter up a whopping 30% from the end of July, driving sales and earnings higher. In fact, sales growth is accelerating, and earnings growth is heading that way as well; analysts are also looking for a 37% earnings rise in 2008, which is likely conservative. All told, this company has some of the best growth numbers in the energy exploration industry, and is poised to take advantage of elevated prices.
Technical Analysis
After a long rest period for much of 2006 and 2007, it appears SWN is resuming its major, long-term uptrend. The stock zoomed to new peaks near the end of October (its last Top Ten appearance was around that time), then pulled back along with the market in November. Yet, despite the crummy market the past few weeks, SWN has climbed out to new peaks, a sure sign of strength. We don’t advise chasing the stock, as it’s been subject to the occasional quick, sharp pullback. Thus, look to buy on a retreat, and place a loss limit somewhere under its 50-day moving average, currently near 54.