Sellers Making No Headway
The major indexes haven’t done much since the market’s opening-day jump this year, but the vast majority of stocks and sectors are in firm uptrends. In fact, probably our biggest takeaway of the past couple of weeks is that the sellers look spent—most shakeouts or downdrafts are met with buying within hours or a couple of days, and so far, any pullbacks have come on far lighter trade than their prior advances. Of course, earnings season is getting underway, and that’s sure to add volatility to the mix, but the evidence is bullish and thus you should continue to hold most of your best performers, while looking to add exposure on normal pullbacks.
This week’s list has a bunch of great-looking charts from a variety of industries; many of them have shown excellent buying volume of late, which bodes well. Our favorite is Transocean (RIG), a powerful turnaround situation that is getting going after a rough couple of years. We’re now seeing institutional investors pile back in.
| Stock Name | Price | ||
|---|---|---|---|
| Urban Outfitters (URBN) | 0.00 | ||
| Trinity Industries (TRN) | 0.00 | ||
| Seagate Technology (STX) | 0.00 | ||
| Transocean Ltd. (RIG) | 0.00 | ||
| NXP Semiconductors (NXPI) | 0.00 | ||
| Nationstar Mortgage (NSM) | 0.00 | ||
| Goldman Sachs Group, Inc. (GS) | 0.00 | ||
| Facebook, Inc. (FB) | 0.00 | ||
| Celgene (CELG) | 0.00 | ||
| Chicago Bridge & Iron (CBI) | 0.00 |
Urban Outfitters (URBN)
Why the Strength
Selling clothing and accessories to young people in the so-called “lifestyle specialty retail” sector requires a high level of skill in anticipating and leading trends, sourcing competent manufacturing and top-quality marketing and store design. Urban Outfitters makes it look easy. The company has positioned its various brands in highly defined customer niches, including its Urban Outfitter stores (213 stores selling everything from clothes and shoes to apartment furnishings to an 18-to-28 demographic), Anthropologie stores (180 stores selling clothes, accessories and furnishings to women aged 28 to 45), Free People stores (about 77 stores aiming women’s apparel, shoes and stuff at women 25 to 30), plus two Terrain garden centers and two BHLDN wedding gown stores. The company also sells through its Free People wholesale operations to 1,400 specialty stores and department stores. All of these outlets are also present online and send catalogs. All in all, Urban Outfitters just knows its business, which is reflected in its unbroken string of positive annual revenue growth dating back to 2004. The immediate good news is that the company’s holiday sales through all outlets spiked higher in 2012 (especially online sales), raising expectations for Q4 and annual results, which will be announced in March.
Technical Analysis
URBN gapped up last summer, soaring from 31 to 37 on August 21, then grinding to 40 in a follow-up rally. The stock then built a three-month cup-with-handle pattern, with highs at 40 and a bottom at 35 in November. The handle on this pattern was put in in late December, then the stock popped to 41 in January before breaking out January 10 on good volume. Earnings will come out the week of March 11. Try to buy on a dip below 42, with a loose stop at 38.
URBN Weekly Chart
URBN Daily Chart
Trinity Industries (TRN)
Why the Strength
Trinity Industries is America’s largest railcar producer, so it makes sense that the company is benefiting from the resurgence of transportation stocks, which have recently broken free from a nearly two-year-long consolidation on hopes for faster economic growth. But what’s surprising is that the big demand for Trinity’s railcars is now coming from the energy industry. That’s right! In many parts of the country, the shale drilling boom has increased production faster than the current infrastructure can handle; new pipelines (which are the most efficient way to transport petroleum) can’t be built fast enough, partly due to red tape (environmental concerns, permitting, rights-of-way, etc.). That has led to a huge spike in rail cars that can transport petroleum, which plays right into the hands of Trinity. Interestingly, Warren Buffet and Carl Icahn are both investors in this trend (through ownership in other rail car manufacturers), adding some credibility that this won’t be a one- or two-quarter pickup in demand, but something more lasting. Trinity’s results during the past few quarters have been solid, and with a bargain valuation (10 times 2013 earnings estimates), a small dividend (1.2% yield) and signs that demand is picking up, we think the stock’s strength can continue.
Technical Analysis
TRN peaked with most transportation stocks in mid-2011 and fell hard during that year’s market meltdown. It’s had a couple of big ups and downs since then but has basically been capped by the 36 to 38 level. Since the market low in mid-November, though, TRN has acted much better; the stock cleared resistance around 34 on big volume last month, and while it hasn’t been soaring so far in January, the action has been tight and proper. We think shares are buyable here or on minor weakness, with a stop around 33.5.
TRN Weekly Chart
TRN Daily Chart
Seagate Technology (STX)
Why the Strength
Seagate is one of the stronger stocks in the market today because it’s become a true cash cow, and it’s working hard at returning all that cash to shareholders. Historically, of course, this company rode the ups and downs of the disk drive industry; there were many good times, but they’ve always been followed by painful busts as demand dried up and prices collapsed. Now, however, things have changed—the Thai floods of late 2011 permanently altered the industry’s supply chain, while boosting customers’ desire to secure adequate supply. Also, industry consolidation has gotten to the point where there are just three players, and two of them (Seagate and Western Digital) control about 90% of the market. Translation: With less competition and relatively steady demand, selling prices, profit margins and cash flow are coming out in elevated levels, leading to huge dividends and share repurchases. Seagate’s dividend amounts to about a 4.6% yield, and in the fourth quarter, the company repurchased 30 million shares ... or about 8% of the total outstanding! Actually, it’s been doing that for many quarters, and aims to reduce its share count by another 30% by the end of 2014 (!), as well as steadily boost dividends as profits remain elevated. Business itself isn’t bad either—Seagate recently upped its outlook for its fourth quarter—but it’s the cash flow and what the company is doing with it that has big investors buying shares.
Technical Analysis
STX broke out of a multi-year base back in early 2012 and had a huge move before it topped in the spring. Since that point, it’s been gyrating all over the place, with a couple of sharp downturns and some big recoveries as well. The stock is in the midst of one of those recoveries now, and while it’s still a few percent below its peak, we think shares have upside—there’s been a ton of high-volume buying since early December with almost no distribution. We do, however, think it’s best to try to buy on weakness, as STX is likely to take a breather as it approaches its old high near 35.
STX Weekly Chart
STX Daily Chart
Transocean Ltd. (RIG)
Why the Strength
Transocean looks like a major turnaround play in the booming deepwater energy drilling sector. The company, in fact, is the largest offshore driller in the world, with 48 ultra-deepwater and regular rigs, 25 mid-water rigs and more than 60 jack-ups. While the industry has been doing well, the big event for Transocean in recent years was the horrid oil spill in the Gulf of Mexico in 2010; the firm’s rig was apparently at fault, leading to a bunch of lawsuits, especially from the U.S. government itself. That, of course, led to tremendous uncertainty and a spike in costs, but now it looks like the worst on that front is over; Transocean settled with the government for “only” $1.4 billion, lower than most experts expected, and while there is one more large lawsuit out there, this settlement likely set a bullish standard for anything going ahead. Importantly, outside the courtroom, business has been improving rapidly and analysts see the bottom line increasing 40% this year and more beyond. Moreover, new contracts are showing jaw-dropping numbers; for instance, the company is now building four state-of-the-art ultra-deepwater rigs, set to be delivered in 2015 or so ... and all four have been inked to 10-year deals (!!!) by Shell for a total of $7.6 billion. Imagine! Finally, it was revealed this weekend that Carl Icahn is accumulating shares, a good sign.
Technical Analysis
RIG tanked in early 2010 after the Gulf disaster, though it did bounce back into early 2011. But since that point, it’s been a horror show; the stock fell apart from 86 in early 2011 to 38 by the end of that year, and wasn’t able to generate much upside momentum after that. However, RIG’s character changed late last year—note the very tight trading and volume dry-up for a few months, a sign that the sellers were worn out. And then, after the settlement, shares came to life, with the RP line moving to its highest point in nine months. We don’t think RIG will move straight up from here, but we do think the worst is passed, so it can be bought on any weakness.
RIG Weekly Chart
RIG Daily Chart
NXP Semiconductors (NXPI)
Why the Strength
Netherlands-based NXP Semiconductors is a big, highly diversified chip company that averages about a billion dollars per quarter in sales. The company has its hands in both the traditional mixed-signal, analog, power management, RF and digital processing world and the cutting edge realm of lighting (designing LEDs that mimic the warmer look of an incandescent bulb), systems that connect cars to active safety systems and touchless payment systems. The company was spun off from Philips, and has a rich history of innovation that’s reflected in its over 6,000 patent families, second only to Texas Instruments. The company’s revenue has been growing just under seven times faster than the broad semiconductor industry average. NXP Semi has been paying down its debt since its IPO in August 2010, reducing gross debt from $5.1 billion to $3.6 billion. This is a global company with a broadly diversified product stream, a potent R&D program that generates lots of intellectual property and excellent prospects. Q4 and annual results will come out on February 8.
Technical Analysis
NXPI came public in July 2010 at 14, and took just nine months to rocket to 35. Then it took just five months to correct to 13! Since then, the stock has rallied twice to resistance at 28, trading in a tightening pattern with rising lows. The rally that began in mid-November has now pushed NXPI right back to 28, setting up a situation that can yield a strong buy signal if the stock breaks out above resistance that dates back to March 2012. A small buy here makes sense for an aggressive investor, with a stop near 25.
NXPI Weekly Chart
NXPI Daily Chart
Nationstar Mortgage (NSM)
Why the Strength
Nationstar Mortgage is one of the strongest stocks in the market because it’s riding a powerful (though under-followed) trend—nearly all big banks are looking to dump their mortgage servicing responsibilities. We’re not talking about lending here; it’s about collecting the payments, pushing the money to where it’s supposed to go (lenders, tax collectors, etc.), and dealing with delinquent borrowers. For all that, the company gets a small percentage fee of the unpaid balance of the loan. So why is this such a big opportunity? Thanks to regulations, as well as a desire to clean up their balance sheets, trillions of dollars of these servicing rights are being sold off by big banks like Bank of America. Just last week, in fact, Nationstar bought more than $200 billion of rights from them! And, according to those in the industry, this shift is likely only in the third or fourth inning, meaning there could be two or three more years of asset sales by the big banks, which will make firms like Nationstar (as well as peer Ocwen Financial) huge winners. Back to that BofA deal last week, Nationstar’s management significantly upped earnings guidance to about $4 per share this year and $6 or more in 2013 (!) as the huge buy is fully integrated ... and many analysts think those estimates are conservative, especially as the company has hundreds of billions of dollars still in its deal pipeline. The man on the street may never know much about this industry, but we think it’s a humongous opportunity.
Technical Analysis
NSM came public early in 2012 and had a terrific run, moving from 15 to 37 within a few months before topping out last October. It then fell sharply (partially because it lost out on a deal to Ocwen), sliding more than 35% in just a few weeks. NSM recovered steadily after that, and last week it gapped to new highs on volume that was more than five times average. Such a deep correction and quick recovery often leads to a period of rest, and we also note that private equity firm Fortress Investment owns a ton of shares; it’s possible they’ll want to lighten the load in the weeks ahead. Long-term, though, we like NSM, and think you could start a position here or on minor weakness.
NSM Weekly Chart
NSM Daily Chart
Goldman Sachs Group, Inc. (GS)
Why the Strength
Goldman Sachs is a big company with global operations in investment banking, securities and investment management. The company has a client base that includes everything from corporations and governments to financial institutions and individual investors. Goldman is both well-loved (for its profitability and size) and well-loathed (for its role in the liquidity crisis of 2008). But the relevant fundamentals are all good; the company’s quarterly and annual report on January 16 is expected to reveal its first year of positive revenue growth since 2007, due largely to a strong December. World-wide, investors are showing an increased appetite for risk, and Goldman Sachs has a long history of profitability. The company is also benefiting from stability and modest growth in the value of its real estate and other assets. Goldman stock pays an attractive 1.5% forward annual dividend yield.
Technical Analysis
GS has been in a nice uptrend since late July, but there have been a couple of rough corrections (123 to 113 in September; 126 to 114 in November) along the way. The current rally came after a smaller correction from 130 to 125 in December. The stock popped above 130 on the first trading day of 2013 and has been advancing ever since. If you’re patient, you should be able to pick up some GS around 135. We don’t recommend making a full buy this close to earnings (out later this week), but a small position could pay off.
GS Weekly Chart
GS Daily Chart
Facebook, Inc. (FB)
Why the Strength
Given the ubiquity of social media, Facebook, the biggest purveyor of status updates, children’s pictures and political rants, needs no formal introduction. It is the most visited website in the world, after all, so if you don’t “Facebook,” it’s a surefire bet that you know someone who does. Despite its online popularity, this dotcom juggernaut ran into trouble with its investors shortly after its initial public offering (IPO) last May. Not only were many burned by the poor handling of the IPO, but many investors began to question Facebook’s ability to monetize its subscribers. However, while the company’s first quarterly reports since going public revealed a sharp decline in Facebook’s blistering revenue growth, investors began to realize that the company’s transition to a mobile strategy was proceeding well. In fact, mobile ads made up 14% of total ad revenue in the third quarter, and Facebook hinted that this ?gure was growing rapidly. Despite analyst concerns, Facebook has averaged year-over-year revenue growth of more than 40% during the past four quarters, which should be more than enough to attract additional investors as the stock’s IPO stigma fades. Finally, investors should pay close attention to Facebook’s “Come see what we’re building” event on January 15. The last such media event resulted in the release of Facebook Gifts and a list of companies slated to partner with the service.
Technical Analysis
With many investors finally moving past the bad press surrounding the IPO, FB has begun to recover nicely. Following several stutters and false starts in the latter half of 2012, FB began to move higher in earnest in mid-November. The stock reclaimed its 10-day, 25-day, and 50-day moving averages, and blew past formerly staunch resistance near 25 heading into December. The shares tested the 25 region on December 28, and found solid buying support. Last week, FB broke out above the 30 area, a region that provided support in June/July last year. Shares could be a bit overextended here, so we view pullbacks as prime buying opportunities. Consider a stop loss on a trade below 27.
FB Weekly Chart
FB Daily Chart
Celgene (CELG)
Why the Strength
While lists of top-performing stocks every year feature young biopharmaceutical companies, it’s harder for bigger companies with lots of institutional support to generate excitement. Celgene is certainly big (market cap of $40 billion), but since January 7, its stock has turned in performance that you’d usually expect from a much smaller firm. The big news was the company’s announcement of guidance indicating that its 2012 earnings would meet or exceed the upper end of its previous guidance. The company has followed that announcement with others that flesh out a very healthy long- and short-term revenue and earnings picture. Celgene’s long-term attractiveness comes from its scale (both its huge market cap and its substantial float of 419 million shares) and its success in developing and marketing drugs to treat cancer and immune-inflammatory related diseases. With revenue growth of 35% in 2010 and 34% in 2011, after-tax margins of nearly 40% for the past two quarters and a robust pipeline of both new drugs and new uses for existing drugs, investors are quite attracted to Celgene. Earnings are due out on January 24, and the company has already assured them that results will be good.
Technical Analysis
CELG has been the picture of steady growth with moderate volatility since the middle of 2009. The stock made an unbroken string of higher lows for that period. More aggressive investors wouldn’t have been pleased with the stock’s failure to book a new high from March 2010 until October 2011, yet that stretch wouldn’t have bothered buy-and-hold types. But everyone must be enjoying the surge in CELG since the calendar turned. The stock has blown past its old resistance at about 80 and shot to 96 last Friday. This means that most or all of the good earnings news has been priced into the stock, but if you have a taste for long-term growth, a buy on any weakness should give good results.
CELG Weekly Chart
CELG Daily Chart
Chicago Bridge & Iron (CBI)
Why the Strength
The oil and gas industry has been kind to construction services and infrastructure firm Chicago Bridge & Iron. The company is currently building a $2.3 billion lique?ed natural gas (LNG) plant in Western Australia, a set of $500 million LNG storage tanks in the same area, and a $60 million LNG tank complex in Saudi Arabia. Chicago was also recently awarded a $250 million design services contract by Daewoo Ship Building & Marine Engineering. However, the real headline grabber recently has been Chicago’s acquisition of fellow energy infrastructure firm Shaw Group. The $3 billion deal is moving forward after holders of 83% of Shaw’s outstanding shares backed the acquisition, ending a long period of analyst speculation and concern that the deal could face resistance. Outside of oil and LNG, Chicago Bridge & Iron provides development and construction expertise for the water, nuclear and metals production segments as well, with this business unit accounting for half of company income. Finally, management recently raised its revenue guidance to $6.3 to $6.7 billion for 2012, ending December 31, projecting that earnings per share will arrive in a range of $3.35 to $3.65 per share. The new figures far exceeded the consensus estimates for $5.4 billion in revenue and $2.98 per share in earnings, and could attract a wealth of new investors.
Technical Analysis
CBI spent most of the latter half of 2012 bouncing around in the 40 region. In fact, the stock was unable to make any headway above its September peak near 42. CBI’s fortunes changed near the middle of November, as the stock rebounded from support near 35 and reclaimed both its 10-day and 25-day moving averages. Riding this wave of buying pressure, CBI crashed through 45 in late December, breaking out to its highest levels since December 2007. CBI is currently consolidating its gains into its 10-day moving average, creating a potentially lucrative entry point for CBI buyers. A stop loss near 43.5 might be prudent.
CBI Weekly Chart
CBI 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.
