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Top Ten Trader
Discover the Market’s Strongest Stocks

January 28, 2008

The market found some big-volume support last week, and there’s a good chance that we’ve begun a bottom-building process. However ... the trend remains down, and many stocks are likely only beginning to build launching pads. Thus, you should stay defensive, and wait patiently for better times. This week’s Top Ten contains a mixed group of resilient issues, but one group has shown tremendous power -- our Editor’s Choice stems from this sector, and it’s definitely worth a look.

Pockets of Strength, but Trend Remains Down

The bulls made another, more impressive stand last week, and we do believe last week’s lows have a good shot at holding up for a few weeks. Best case scenario is that a bottom-building process is now underway, which will allow new leaders to build launching pads that will eventually result in much higher prices. But (you knew that was coming, right?) for now, the trend remains down, and while some groups and stocks are catching our eye, it’s best to give the bears real respect until proven otherwise. This week’s list is a mishmash of stocks, but one group that showed exceptional power off last week’s bottom was coal stocks. Consol Energy (CNX) is our favorite of the week – its stock is under tremendous accumulation, as coal prices spike due to tight supply and still-strong demand. Take a small position on any weakness.

Stock NamePriceBuy RangeLoss Limit
CNX (CNX) 0.0068-75-
CPHD (CPHD) 0.0027-30-
ILMN (ILMN) 0.0062-66-
NLY (NLY) 0.0018-20-
RATE (RATE) 0.0042-46-
SID (SID) 0.0078-86-
URBN (URBN) 0.0025 1/2 - 27 1/2-
WLT (WLT) 0.0038-42-
AEM (AEM) 0.0056-62-
AUXL (AUXL) 0.0030-33-


Why the Strength

If there was one group that showed tremendous strength in the days following last Wednesday’s market low, it was the coal stocks. The fundamentals surrounding the coal industry remain bullish; Consol’s management indicated that demand in emerging markets and tight supply should push prices higher. Indeed, just in the past couple of weeks, coal futures have spiked as disruptions in South Africa and Australia promise to limit supply, and China declared a two-month halt to any coal exports, due to power demand. That last point could be huge; China has long been an exporter, but with breakneck economic growth, those days could be ending, causing countries to scramble for coal. Consol is one of the blue chips of the group, and analysts expect ’08 earnings to reach $3 per share due to higher prices … although we believe that figure could be conservative.

Technical Analysis

CNX effectively “re-set” itself during most of 2006 and 2007, trading in a wide range of 30 to 50 during that time. But a powerful breakout in October has turned the trend up, and even a poor overall market hasn’t been able to do any lasting damage. Most impressive was last week’s action – after three straight down weeks to start the year, CNX soared back to its December peaks on huge volume (Friday’s volume was the stock’s largest in eighteen months!), a sure sign that big investors were getting in. While a straight-up move from here is unlikely, we expect any pullback to be halted in the upper 60s. You could buy a little here, though any weakness would provide a better entry point.

CNX Weekly Chart

CNX Daily Chart


Why the Strength

The business of detecting infections in hospitals is big business – one government study found that nearly 10% of all hospital patients will get an infection, costing the economy billions of dollars. Cepheid makes genetic analysis systems that can identify infections in just a few hours, compared to the normal three days it takes hospital laboratories to do the same thing. The company’s GeneXpert seems to be the flagship product, and each system contains up to a few dozen modules, which handle disposable cartridges that perform the tests. Cepheid also has systems for bioterror detection, but management has emphasized the hospital market, and with great results – a total of 800 modules were placed in the third quarter, increasing the total by 81%! And growth continued in the fourth quarter, with another 783 modules sold; as customers ramp up their use of these GeneXpert systems, Cepheid’s sales and earnings should surge. There is competition, but all told, we like this story.

Technical Analysis

CPHD continues to outperform the market, rising again last week despite a volatile week for the indexes. Even better, we like that the stock has closed just above 30 each of the past three weeks; it could be a subtle sign of accumulation as big investors grab shares in a tight price zone. Still, with the market under the control of the bears, we believe you should look to buy on weakness. We’ll tweak our buy range from last week.

CPHD Weekly Chart

CPHD Daily Chart


Why the Strength

Just as Microsoft drove the desktop computing revolution by making tools that we all could use, Illumina is driving the era of genetic medicine by making tools that are used all over the world by scientists, researchers and drug developers in a wide variety of medical sectors. Its array-based tools for DNA, RNA and protein analysis enable SNP genotyping, copy number variation, DNA methylation studies, gene expression profiling and more. Some of this is low-volume research, while some is very high-volume. And there’s no doubt that business will continue to grow in the years ahead. In fact, the company plans to double its production in the quarters ahead! Illumina turned profitable in 2006 and has grown its earnings in most every quarter since. Revenue growth has been slowing in recent quarters (it’s still very fast) but profit margins are healthy and the future is extremely bright. The only “problem” is the valuation; the company is selling at 10 times revenues. But you know what we say; the best growth companies are always expensive. Fourth quarter earnings will be announced Monday February 4, after the market close.

Technical Analysis

Three weeks ago, after it was announced that competitor Affymetrix (AFFY) had agreed to dismiss a patent lawsuit (for a small $90 million payoff), ILMN jumped out of its three-month base at 60 and hit 75! The following week, we gave the stock a recommended buy range of 64 to 72. And now, two weeks later, here it is, down at 65. If you bought earlier, hold on tight; all is well. And if you haven’t bought yet, here’s your chance.

ILMN Weekly Chart

ILMN Daily Chart


Why the Strength

Annaly is an odd duck, but if you’re lucky (and good) it may lay you a golden egg. The company is technically a REIT (real estate investment trust), but it doesn’t own any hard property. It simply invests in high-quality mortgage-backed securities, collateralized mortgage obligations and agency callable debentures. It also invests in Federal Home Loan Bank, Federal Home Loan Mortgage Corporation and Federal National Mortgage Corporation debentures. And if the dividends from these investments exceed the company’s cost of capital, it makes a “profit.” But because it’s a REIT, it must distribute at least 90% of its “profit” to shareholders. And when it does so, it avoids Federal tax! Today, those distributions provide shareholders dividend income of 5.3% per year. By itself, that wouldn’t be attractive, but today the stock is going up because interest rates are falling, reducing the cost of capital and making the company’s holdings increasingly valuable. Last Wednesday, the company priced a public secondary offering of 51 million shares of stock at $19.25 per share. Demand was heavy.

Technical Analysis

NLY came public in 1997 at 13, peaked at 21 in 2002, 2003 and 2004, and then fell to 11 at the end of 2005. But since then it’s been working its way back to its old highs, and the odds are that this time it will get through. But where to buy? Last week’s 19.25 offering price is now the anchor point for many shareholders, so there should be support there. Plus, the 25-day moving average is at 19. We think buying anywhere in that range will work out fine.

NLY Weekly Chart

NLY Daily Chart


Why the Strength has huge appeal for two groups. The first group is consumers who want information about mortgage, savings, credit card, insurance and investment rates. The company’s website is an easy-to-navigate goldmine of information for people looking to finance or refinance their homes or just wanting to comparative shop the bewildering tangle of different rates. The second group is advertisers, who rightly see as a great way to get their names and offers in front of motivated potential customers. By making information free to consumers, can charge top dollar to advertisers, resulting in after-tax profit margins that have increased from 17.5% in Q1 2005 to over 30% in Q3 2007. This growing profitability (Q3 earnings were up 70% over 2006) has attracted a steadily expanding roster of institutional investors, although there are still few enough (110 at latest count) that the upside potential is huge. The company made news in December with its acquisition of Nationwide Card Services and, strengthening both its product lineup and its information base. News of Q4 earnings will be released on February 5 after the close.

Technical Analysis

RATE rose from 12 in May 2005 to 52 in May 2006, but corrected hard to 25 just three months later. Since then the stock has worked it way back, gaining a second Top Ten appearance in June 2007 during a run that actually produced a new high in July. But the stock has traded in a range since then, with only one brief spike above its resistance level at 50. The December acquisition news motivated another run at that level, but the recent slump pulled it back to near 40. With a good base under its belt, the stock looks like a good buy right where it is, although the earnings report will tell the real tale.

RATE Weekly Chart

RATE Daily Chart


Why the Strength

The world’s hunger for steel continues to grow, and Companhia Siderurgic Nacional (CSN) has a number of advantages that are helping it to benefit from that hunger. CSN began life as a national company, and was given world-class support facilities, including its own iron mines, hydroelectric power supply, railroad and seaport. Management has taken those advantages and turned the company into the largest steel producer in Brazil and the eighth-largest in the world. Since CSN was privatized in 1993, management has been improving facilities (including construction of new rebar factory and a concrete plant), and working on growth through acquisition. Steel capacity is scheduled to increase from its present annual capacity of 4.5 million tons to 6.5 million tons in 2011. There aren’t any secrets here, just a thriving company with aggressive management in a booming Latin American economy. We like it, especially with a 2.9% dividend attached.

Technical Analysis

SID has been going up for a long time, but made its first Top Ten appearance on the last day of 2007. At that point the stock was in the middle of a seven-day period that it spent bumping against resistance at 90. After a slight pullback and another uptick toward that resistance level, the stock was pulled as low as 73 just a few days ago. Now trading a little above 82, SID looks like a pretty good bargain. The prudent choice will be to wait until the stock has managed to break out above 90 on good volume, but it might make a good speculative buy (in a small amount) right where it is.

SID Weekly Chart

SID Daily Chart


Why the Strength

Urban Outfitters is a trendy retailer with a unique product lineup (it’s not just apparel) aimed at the younger adults. The company was a hit during the ’03 to ’06 time frame, as earnings soared from just $0.11 a share in 2002 to $0.77 a share in ’06, riding big gains in all three of its brands – the firm has 122 Urban Outfitter stores (18- to 30 year olds), 105 Anthropologie stores (30 to 45 year old women) and 15 Free People stores (25 to 30 year old women). The firm fell behind the fashion curve a couple of years ago, causing growth to stall, but management’s expansion plans (it’s opening about 40 new stores per year) remain intact, and a new product lineup is attracting shoppers again. Sales and earnings growth is picking up steam, and during November and December (read: holiday season), sales grew 28% in all, thanks mainly to a big boost in Anthropologie and Free People. It’s not changing the world, but we anticipate more good results ahead for the company.

Technical Analysis

URBN topped out in late 2005, and was chopped in half by the summer of ’06. Since that time, the stock has been slowly repairing the damage, and that process has become more constructive in recent months – URBN has held well above last summer’s low while most weekly volume spikes have been on the upside. True, the stock isn’t in a strong uptrend at this point, but given the market environment, that’s not unusual. In the short-term, we expect more base building, with an eye toward an eventual breakout above 29. If you buy, keep it light for now.

URBN Weekly Chart

URBN Daily Chart


Why the Strength

Walter Industries has an interesting history, starting with founder Jim Walter’s first buy and sell of a home in Tampa, Florida in 1946. But the important thing now is that the company presents a unique business mix, with more than half of its revenue generated by its Alabama coal mining operations (which yield furnace coke, foundry coke and methane), about 21% coming from its homebuilding operations, 17% from financing and the rest from various insurance and reinsurance activities. It doesn’t seem like a natural mix, but management makes money with it. Walter Industries made six Top Ten appearances in less than six months back in late 2004 and early 2005 as demand for certain types of coal heated up. Coal is again a big factor in the company’s current run, which attests to management’s ability to keep all operations in the black. A more supportive interest-rate environment for its affordable home-building operations has given the company a boost; a small dividend (0.5%) is another attractive feature.

Technical Analysis

After WLT’s dramatic run from 5 in March 2004 to 47 in April of that year, the stock has had some big moves. The divestment of a water subsidiary in December 2006 resulted in a 50% haircut from 52 to 25 in one week. After that, the stock went mostly sideways, but caught a huge upwind following last year’s July/August global meltdown. From a bottom of 21 then, WLT has soared to new price and RP peaks. Look for a pullback below 40 as a reasonable buy point.

WLT Weekly Chart

WLT Daily Chart


Why the Strength

Unsettled markets always raise investors’ appetite for gold, and Agnico-Eagle Mines, a long-established Canadian explorer/producer, took nearly 246,000 ounces of it out of the ground in 2006. The company has mining interests in Canada, Mexico, Finland and the U.S., including the LaRonde mine in Quebec, which is Canada’s biggest gold deposit. As of October 2007, the company had proven and probable reserves of about 15.8 million ounces of gold, the metal that creates the big interest. But it’s zinc that produced nearly half (46%) of Agnico’s 2006 revenues, with gold (34%), silver (13%) and copper (7%) making up the balance. Investors appreciate that Agnico-Eagle has paid a cash dividend for 26 consecutive years, has about $495 million in cash and carries no long-term debt. And in an economic environment that can produce big swings in gold prices, they also appreciate that the company doesn’t engage in forward gold sales; all gold is sold at market rates, which gives full exposure to price changes. Q4 results will be released after the close on February 20.

Technical Analysis

AEM has a history of long consolidations punctuated by monster runs. One such run took the stock from 11 in May 2005 to 42 in May 2006 (earning two of AEM’s three previous Top Ten appearances in the process). Then came a year of trading in a tightening range that ended in August 2007 with a run toward 60 in November. After a year-end correction, the stock has broken decisively above 60 on big volume. With a new price high and a new RP peak, AEM looks like a reasonable choice for someone who wants some exposure to gold along with the comfort of a small cash dividend.

AEM Weekly Chart

AEM Daily Chart


Why the Strength

This is Auxilium’s fourth appearance in Cabot Top Ten Report since last September, so we won’t repeat the whole story of the business. We’ll just remind you that the company’s biggest product is Testim, a gel that increases the level of testosterone in men, and that it’s branching out into treatments for Dupuytren’s contracture, Peyronie’s disease, frozen shoulder syndrome and more. Also, it has exclusive rights to a transmucosal film delivery system (it adheres to your upper gum) that can deliver hormones or treat urologic disorders. The stock’s behavior tells us the market expects great success – and eventually earnings – from these treatments. And several additional factors makes it an attractive investment today. One, the company is still unknown to most investors; it only came public in 2004. Two, the number of mutual fund holders has grown each of the past seven quarters and now exceeds 45. Three, the company is not yet profitable, but may well be in 2009, and when that milestone is achieved a whole new crop of buyers will come looking. And four, the mass-market potential of some of these treatments means the growth potential is terrific. Earnings will be announced February 14.

Technical Analysis

AUXL’s last big base was built at 15; the stock blasted off from there in late July, and ran all the way to 31 in late December. Until today, it held strongly in that neighborhood, a powerful sign considering the action of the broad market. There’s been no selling pressure on this stock! And today, it broke out above 31 on good volume! If you’re underinvested and you can keep it on a tight leash, you can buy some here.

AUXL Weekly Chart

AUXL Daily Chart