Here Comes Earnings Season
The market stalled out a bit last week, which is normal considering its recent advance. Overall, our Market Monitor remains bullish, as the trends of most stocks and the major indexes are solidly up. That said, you shouldn’t be surprised if there’s a bit of turbulence coming up; we’re not predicting that, but we did notice some slippage in a few key growth stocks last week, and earnings season, which technically began a few days ago, really heats up during the next three weeks, and that almost always adds to volatility. That’s not a reason to turn cautious—it’s likely some new leadership will emerge on their earnings reports, after all—but just a heads up to make sure you have a battle plan going ahead, namely, stick with what keeps working and rotate out of stuff that breaks down.
This week’s list is a good reflection of the current environment—a few growth stocks but mostly cyclical and turnaround-type names are where the money is flowing. Our favorite of the week is BlackRock (BLK), a huge “Bull Market stock” that reported a great quarter last week. It’s not going to triple, but after a long rest period the stock is under very strong accumulation.
| Stock Name | Price | ||
|---|---|---|---|
| Valero Energy (VLO) | 97.40 | ||
| United Rentals, Inc. (URI) | 0.00 | ||
| Morgan Stanley (MS) | 0.00 | ||
| Melco Crown (MPEL) | 0.00 | ||
| HCA Healthcare (HCA) | 137.60 | ||
| Keurig Green Mountain (GMCR) | 0.00 | ||
| Ford Motor Co. (F) | 0.00 | ||
| Equinix, Inc. (EQIX) | 547.73 | ||
| Copa Holdings (CPA) | 0.00 | ||
| BlackRock (BLK) | 0.00 |
Valero Energy (VLO)
Why the Strength
Valero Energy is best known as the largest independent oil refiner in the world, with 16 refineries in the U.S. and Canada, and overseas operations in the U.K. and Aruba. Total refinery throughput capacity is three million barrels a day. But Valero is also one of the largest petroleum products retailers in the U.S., with 6,800 retail and wholesale sites, including the company owned Corner Store convenience stores and gas stations. Valero is getting great results from the increasing supply of crude from U.S. sources as fracking and horizontal drilling increase domestic output. The company’s refineries specialize in handling heavier “sour” or acidic crude stocks, which also lowers costs. Valero has announced plans to spin off its retail stores to concentrate on refining. The purchase of a U.K. refinery is part of this repositioning to concentrate on refining with a broader geographic footprint. A company refinery in California has just come back online after a shutdown to fix leaks, and that should boost results in 2013. Valero is geographically well positioned to take advantage of Gulf Coast and mid-American crude supplies, with pipelines and terminals and 10 ethanol plants for gasoline production. The company is also expanding its Houston refinery and buying more rail cars to facilitate deliveries. Earnings will be reported on January 29, so keep your eyes open.
Technical Analysis
VLO has taken a long time to break decisively above 28, but is now trading at its highest level since late 2008. The 28 level presented resistance back in March 2012 and supplied support in October when the stock corrected from its September high at 34. The rally that began in late November has now produced new multi-year highs on average volume. We think VLO represents a good buy anywhere under 36, although caution should be the word until earnings are out next week.
VLO Weekly Chart
VLO Daily Chart
United Rentals, Inc. (URI)
Why the Strength
Cyclical stocks have been all the rage in recent weeks, and United Rentals has one of the best sets of growth numbers and underlying growth stories in the sector. As its name suggests, the firm is a leader in providing construction and other heavy-duty equipment to customers on a rental basis; we’re talking things like backhoes, forklifts, earthmoving equipment and boom lifts, though it also does business in lighter equipment like pressure washers, water pumps, heaters and generators. Acquisitions have helped keep growth afloat in recent quarters, but with investors sniffing out a better-than-expected economic rebound, demand for United Rentals’ products should pick up. More than that, though, is the fact that the long-term trend is in the company’s favor—customers are opting more and more to rent instead of buy, thus keeping fixed costs low in these uncertain times. The results can be seen in United Rentals’ results; earnings have gone from a loss of 76 cents per share during the recession in 2009 to a profit of around $3.40 last year. This year, analysts see the bottom line approaching $5, and we think that could prove conservative if the economy really does snap out of its multi-year doldrums. It’s not a true growth stock, but this firm looks to be in the right place at the right time. We like it.
Technical Analysis
URI has suffered two very deep retreats during the past two years—in 2011, the stock was crushed, falling from 35 to 13 as fears over Europe and the U.S. debt ceiling reached a fevered pitch. Then, during last year’s growth scare, the stock fell from 48 to 27, a 44% haircut! But the stock has been marching back steadily for a few months now; URI isn’t overly powerful but the stock has lifted to new price highs and the relative performance (RP) line is right there as well. Longer-term, we think higher prices are likely, though we think you could get shares a couple of points lower in the days ahead.
URI Weekly Chart
URI Daily Chart
Morgan Stanley (MS)
Why the Strength
Financial services and investment management firm Morgan Stanley is the latest hot-topic to emerge from the financial sector. The company created a firestorm for investors in the wake of last week’s fourth-quarter earnings report, reporting earnings of 45 cents per share, excluding items, reversing a loss of 20 cents per share last year. Revenue soared 37% to $7.5 billion. Morgan’s Wealth Management unit was the centerpiece of the report, with revenue rising 8% on strong margins and investment banking returns bolstered by initial public offerings and global mergers. Driving wealth management gains was Morgan’s steal-of-a-deal to acquire most of Citigroup’s Smith Barney brokerage. And, while trading revenue fell short of expectations, management emphasized a focus on future returns centering on growing consumer strength in the U.S. economy. This optimism should continue to support Morgan Stanley as the firm strives to improve return on equity. “After a period of turmoil, a period of restructuring, a period of development, we’re now pivoting to a period of growth and performance,” Morgan CEO James Gorman told Bloomberg TV. After slashing some 6,000 jobs in the past year as part of the restructuring effort, Morgan Stanley is leaner, and more focused on growing its bottom line than ever.
Technical Analysis
After failing to hold above potential support near 20 in early 2012, MS shares followed the rest of the market lower throughout the summer. Shares found a floor near 12 in June/July, and utilized support in the region to rally back above several key moving averages. Following a period of consolidation in the 16-18 region, just above its 50-day trendline, MS finally broke out and eclipsed former resistance near 20. Last week’s earnings report was icing on the cake, sending MS to fresh annual-high territory above 22. With some consolidation inevitable following last week’s spike, we recommend buying on dips to achieve the best entry. A loose stop near 19 would be prudent.
MS Weekly Chart
MS Daily Chart
Melco Crown (MPEL)
Why the Strength
As a former Portuguese colony, Macau’s rules differ from those in most of China, especially with regard to gambling. Macau is the only place in China where gambling is legal, and the “Monte Carlo of the Orient” has surpassed the Las Vegas Strip in gambling revenues since 2007. The tiny area has attracted big casino operations from MGM Grand and Las Vegas Sands. But Melco Crown, a Hong Kong company that has obtained one of the precious gambling concessions in Macau, is punching well above its weight in competing with these gaming giants. Melco has lots of smaller slot parlors, but it’s the City of Dreams and Altira Macau casinos that make it a major player. City of Dreams has 550 gambling tables and 1,500 gaming machines and contributed 65% of 2011 revenue, and Altira Macau has 220 tables and 550 machines and kicked in 31%. These facilities include opulent theaters, water shows, shopping and luxury accommodations. As China came out of its economic slowdown in 2010, revenue increased 98%, and 2011 showed 45% revenue gains, though those figures have slowed. But odds favor more strong growth as the Chinese economy is picking up speed again. Melco Crown’s huge investment in City of Dreams is paying off handsomely, and analysts like Credit Suisse and J.P. Morgan have issued positive guidance on Macau gambling in general and Melco Crown in particular. When earnings are revealed, probably in early February, investors are expecting good things.
Technical Analysis
MPEL has been a volatile issue for years; it soared from 3 in mid-2010 to 16 in July 2011, then tumbled to 7 in October. Another rally to 16 in April 2012 was followed by another drop, this time to 9 in July 2012. But since that July low, MPEL has been in a determined uptrend, with only minor pullbacks to the 25-day moving average in November and December. And since the new year began, the rate of ascent has increased, pulling the stock well above its 25-day. Ideally, MPEL will take a little time to regroup under resistance at 20. The stock’s volatile history holds out the possibility of a dip to 19, which would be an ideal buy point.
MPEL Weekly Chart
MPEL Daily Chart
HCA Healthcare (HCA)
Why the Strength
If you are one of the millions suffering from an unexpectedly virulent flu season, it may be some consolation that there are ways to get some payback. Specifically, as the flu tightens its grip on the U.S., healthcare providers stand to reap increased benefits. And, as the largest private operator of healthcare facilities in the world, HCA Holdings Inc. is positioned at the forefront of the flu fight. The company manages more than 160 acute care, psychiatric and rehabilitation hospitals in the U.S. and U.K., serving up more than 40,500 beds total. Outside of the potential short-term rise in revenue from a worse-than-expected flu season, HCA should also see longer-term benefits from the Affordable Care Act. Specifically, many previously uninsured patients that hospitals were required to pay for themselves will soon be covered by ACA, significantly expanding the pool of paying patients. As a result, forecasts for hospital operators like HCA have been hiked by as much as 25%. The analyst community is finally beginning to take notice and adjust their expectations accordingly, with HCA the subject of several positive research notes recently, including a price-target increase by Imperial Capital last week. Such activity should continue to attract investor interest for some time.
Technical Analysis
HCA has been in a very choppy uptrend for months, though now the buyers have taken full control. You can see in the weekly chart how the stock would occasionally surge to new price peaks ... only to be followed by sharp dips in the weeks ahead. The last of those dips came in late October, with HCA steadying itself below 32 afterwards. And, since the first of the year, the stock has shot ahead to new peaks. We advise trying to get in on a dip of one or two points.
HCA Weekly Chart
HCA Daily Chart
Keurig Green Mountain (GMCR)
Why the Strength
Green Mountain Coffee made its first appearance in the August 27, 2007 issue of Cabot Top Ten Trader and went on to become one of the most-featured companies in Top Ten history with 24 appearances. This story of a small, regional coffee business that expanded by signing up grocery stores and coffee shops was vaulted into hyperspace by the company’s acquisition of the Keurig brand of individual coffee pods. Keurig brewers were sold at discounted prices, which guaranteed continuing revenues from pod sales. Investors loved the story, and the stock. But when the stock fell from grace, it fell hard, which is just what you expect from issues that become the focus of huge investor interest. The Keurig industry now looks to be a mature one, and investors are getting interested again, but this time based more on the company’s earnings potential. The Keurig business now represents about 44% of Green Mountain’s revenue, coffee kicks in 40% and Canadian combined sales make up the rest. Analysts have been raising price targets for Green Mountain and expect 65 cents per share in earnings and revenue of $1.33 billion from Q4 results, which are expected on February 6.
Technical Analysis
GMCR began its dramatic climb at 8 in early 2009 and finished it at 116 in September 2011. When the disenchantment began, it gathered momentum quickly and GMCR fell to 39 in less than two months. Buyers moved in at that point and lifted the stock back to 70, but more bad news in May 2012 gapped the stock down below 30, and it drifted down to 17 in July. The stock built a long base under 30, and when investors moved back in late November, the stock gapped up to 37 in a day and has been re-basing around 40 ever since. There’s likely still a lot of overhead resistance for GMCR, but good results in February could produce big gains. Try to get in at 39 or so with a small position and a stop around 33.
GMCR Weekly Chart
GMCR Daily Chart
Ford Motor Co. (F)
Why the Strength
Big 3 automaker Ford hardly needs any introduction. The company’s best-selling line of “built Ford tough” trucks has provided a solid revenue source for years—one that allowed the company to forego government bailout money when its peers were searching for lifelines. With fuel economy increasingly at the forefront of consumer demands, Ford has since reinvigorated its automobile line with several gas sipping models. But, as the company’s showing at the recent Detroit Auto Show demonstrated, Ford has not given up on its dominant truck lineup. Specifically, Ford introduced its new Atlas Concept pickup truck, which sports a turbocharged engine with EcoBoost, innovative design and advanced engineering focused on maintaining power while increasing MPG. Ford told spectators that it plans to implement many of these gas-saving features across its full line of trucks. Given this innovation, we don’t believe it to be a coincidence that Ford trounced the automotive industry as a whole in a recent Experian Automotive brand loyalty survey. According to the data, 44.1% of customers buying a Ford between July and September 2012 already owned a Ford at the time of purchase. Finally, in news that could draw additional investors to the stock, Ford recently announced that it was doubling its quarterly dividend (yield of 2.8%)—a sign that this automotive giant is firing on all cylinders.
Technical Analysis
Despite starting 2012 off on the upswing, F shares ran into trouble rather quickly, as the stock stalled near resistance at 13 in late January. Succumbing to selling pressure in April, F retreated to support near 9 by mid-year. But the stock has since rallied more than 55%! The stock attracted additional buyers in December, after F’s 50-day and 200-day trendlines completed a “golden cross.” The spiking in investor interest has since pushed F past former resistance at 13, providing F with a perch above 14. Shares are now consolidating their gains; a small dip should offer a decent entry.
F Weekly Chart
F Daily Chart
Equinix, Inc. (EQIX)
Why the Strength
While it doesn’t have a cutting edge, revolutionary product that’s taking the Cloud computing world by storm, Equinix remains one of the most straightforward ways to play the boom in that industry. The company is basically the interstate highway system for the Internet; its dozens of data centers in key markets around the world are in big demand from companies of all types. This isn’t just about hosting; the real value Equinix provides is the interconnections to other big Internet-heavy businesses. In that sense, the firm benefits from a virtuous circle—since it already has so many Fortune 50 customers (Apple, Facebook, Amazon, AT&T, etc.), others are pining to sign up to have easy access to others’ networks. All told, it’s estimated that more than 80% of all traffic flows through Equinix’s data centers, and encouragingly, nearly 95% of its revenues are recurring—once a customer signs up, it sticks around and usually expands its usage over time. That’s led to a very steady increase in revenues and cash flow during the past few years, and there’s no sign of that slowing anytime soon. The kicker to this bullish story is the company’s transition to a real estate investment trust, something that now looks likely to happen in 2014 (six months to a year earlier than expected), which will ease the tax burden and eventually lead to generous dividends. As the movement toward more interconnectedness continues, Equinix is sure to benefit.
Technical Analysis
When we last wrote up EQIX in early December, the stock had just rebounded above its 50-day line on heavy volume ... a good time to begin a position. Since then, the stock has stretched to new highs, albeit on generally light volume, a fact that has had us looking for a short-term dip of a few points. That may still happen if the market finally pulls back, but we like EQIX’s straight-sideways action of the past many days; it looks to us like the stock is under accumulation despite some ups and downs from the market. Thus, we think you can start a position here or on minor weakness, with the idea of adding shares should the stock rise a few percent from your purchase price.
EQIX Weekly Chart
EQIX Daily Chart
Copa Holdings (CPA)
Why the Strength
Copa is a Panamanian airline that serves much of Central and South America from its hub in Panama City, and offers the rest of the world via codeshare arrangements with United Airlines. The airline is benefiting from its modern fleet of airliners and from favorable fuel prices, as well as increased air travel in its primary operating area. Copa gets 96% of its revenue from passenger traffic, so having stable costs and an increasing load factor augurs well for future earnings. The other growth factor is the company’s plan for an increase in the number of routes served. Revenue was off in 2009, but increased 13% in 2010 and 29% in 2011, and quarterly results in 2012 point to a jump in the mid-20s. Copa also appeals to investors because of its attractive valuation, with a trailing P/E ratio of just 14 and a forward P/E of 11. The company’s generous annual dividend (trailing annual yield is 4.0%) is usually paid in June, but was moved up to December 27 to avoid any possible tax hikes that the Fiscal Cliff negotiations might produce. Earnings are tentatively scheduled for February 4. There’s not much drama in Copa Holdings, just good management, steady growth, a substantial dividend and nice valuation.
Technical Analysis
Although CPA spent 20 months trading sideways from March 2010 through December 2011, the stock was actually building a nice rising base. This began to pay off in December 2011 when the stock began a rally that kicked it from 58 to 87 in just four months. After a four-month consolidation, CPA began a new rally in October that drove its price to 100. Then, on January 11, the stock ramped up its angle of attack, racing to 111 in just six days. CPA is a little stretched out over its 25-day moving average, now at 98. Watch for a dip of at least a couple of points and keep an eye out for the reaction to earnings early next month.
CPA Weekly Chart
CPA Daily Chart
BlackRock (BLK)
Why the Strength
As the general market has heated up, we’ve noticed more and more “Bull Market stocks”—brokerage, investment bank and asset management firms, each of which directly benefit from higher stock prices and increased trading activity—pushing to new highs. BlackRock might be the granddaddy of the group; the company has an almost unbelievable $3.8 trillion of assets under management! Obviously, that’s not mom-and-pop investors, but big institutional pension and hedge funds, as well as some very wealthy individuals. One big driver is the firm’s iShares business, which it purchased in 2009 and has been a big hit; BlackRock’s top brass alluded to a secular shift into ETFs and more passive investments, which plays right into iShares’ hands. Best of all, management is committed to returning cash to shareholders—it just hiked the dividend 12%, resulting in an annual yield just south of 3%, and continues to buy back shares quarter after quarter; the company repurchased about 5% of its shares last year, and has authority to buy another 5% going forward. With sales growth picking up, earnings growth accelerating and the potential for better-than-expected earnings in 2013 if the market continues its winning ways, we think BlackRock has solid upside.
Technical Analysis
BLK actually peaked back in January 2010 at 244; since that time, earnings have grown quarter after quarter, yet the stock hasn’t been able to make any progress. That looks to be changing now, however—after bottoming last May, the stock tightened up beautifully for a few months, and now it’s climbing steadily, punctuated by last week’s solid upmove. BLK isn’t a runaway-type stock, so we think you can get in on a small pullback in the days ahead.
BLK Weekly Chart
BLK 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.
