Super Strength!
When we moved our Market Monitor into bullish territory back on December 10 we had no idea how much strength would develop in the market. It’s been a great run! Today many stocks finally hit a bit of resistance as profit taking showed up; in the short-term, it’s possible the long-awaited pullback could be starting. But, while potholes will come, the evidence doesn’t point to a major correction; most stocks and sectors have just leapt out of 12- to 24-month bases with great power, and many measures of the broad market confirm the underlying strength. Bottom line: while you shouldn’t throw your money into stocks willy-nilly or ignore your sell rules, you should remain bullish and give your best performers a chase to continue higher.
This week’s list reflects the encouraging earnings season thus far; many stocks on the list have recently shot ahead after bullish results and outlooks. Our favorite of the week is Cree Inc. (CREE), the best way to play the growth in LED lighting. Its turnaround plan is working and the stock looks like a new leader.
| Stock Name | Price | ||
|---|---|---|---|
| Tesla, Inc. (TSLA) | 818.87 | ||
| Terex (TEX) | 0.00 | ||
| RockTenn (RKT) | 0.00 | ||
| Oshkosh (OSK) | 95.04 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Mohawk Industries (MHK) | 0.00 | ||
| Kansas City Southern (KSU) | 176.54 | ||
| Delta Air Lines (DAL) | 54.28 | ||
| Credit Suisse (CS) | 0.00 | ||
| Cree, Inc. (CREE) | 67.96 |
Tesla, Inc. (TSLA)
Why the Strength
Equity investors love a good story, and are often willing to pay a lot to own it. Tesla Motors, whose powerful electric Roadster captured the imagination of car lovers, now sees its Model S making inroads in the family sedan market. Part of Tesla’s story is the track record of co-founder and CEO Elon Musk, who founded PayPal and turned SpaceX into a successful private contractor flying supplies to the International Space Station. The Model S has a base price of $57,400, and with the biggest available battery option, can travel an estimated 265 miles between charges. Deliveries began in June 2012. The battle among investors over whether Tesla can be a profitable company has produced an interesting situation. Skeptical short sellers have pushed short volume to nearly 26 days of average volume. Thus, any additional price gains from Tesla stock will trigger a short-covering rally that will have some real horsepower. Musk announced on January 15 that the company will turn a profit in 2013, probably late in the year. When that happens, Tesla will likely begin trading on the strength of its results. For now, the strength of its story and the possibility of a big short-covering rally make this an attractive proposition for aggressive investors. All eyes will be on the company’s February 11 earnings report.
Technical Analysis
TSLA came public in June 2010 at 17, and hasn’t traded below that since its second week of trading. The stock has been volatile, but the general trend has been slowly upward, with little interference from big moves in the major indexes. TSLA has been on a 10-day tear that began on January 14 at 33 and now has the stock pushing 38. A nice volume spike on January 18 and generally elevated volume last week are both good signs. A dip to 37 would make a nice entry point, but you need to keep a close eye on TSLA; with the high level of short interest, the potential for big moves is high.
TSLA Weekly Chart
TSLA Daily Chart
Terex (TEX)
Why the Strength
After a long stretch of losses as the global economy was in a funk, Terex is leaner and meaner and, now that demand is picking up, looks firmly on the comeback trail. As we wrote back on December 31, Terex is your classic “risk on” stock, as it builds and sells things like cranes, construction equipment, and heavy duty vehicles—big items that are in big demand only when growth in the U.S. and overseas is picking up. And that’s really why the stock is strong today; investors are bidding up all things cyclical in anticipation of an economic renaissance. Thanks to cutbacks, Terex’s cost structure is much lower today than it was during the last boom, which has allowed earnings to pick up meaningfully in recent quarters (last year’s total was estimated around $2 per share, up from 46 cents in 2011), with more growth coming in 2013 (up 27%). Frankly, we think even that estimate could be hugely conservative, as any uptick in business is likely to fall right to the bottom line. Long-term, we’re not huge fans of Terex, but right now, the stars seem aligned for a meaningful upmove. There’s no set date for earnings yet, but expect results around the middle of February.
Technical Analysis
TEX fell hard during the market’s mini-crash in 2011, falling from 38.5 to below 10 in just a few months! It rallied back to 27 last spring but then spent months building a big base; it still found itself at 20 in mid-November, but that’s when the fireworks began. Shares rallied straight up to 30 by year-end, tightened up for three weeks and then, last Friday, exploded nearly 13% on its biggest day of trading in six months. We think the stock is buyable on a pullback of a point or two, with a stop in the 28 area.
TEX Weekly Chart
TEX Daily Chart
RockTenn (RKT)
Why the Strength
RockTenn makes packaging, including corrugated boxes, paperboard, preprinted packages, merchandising displays and specialty paper products. While it’s not a glamorous business, it’s one that can soar during economic good times and keeps its sales traction even during pullbacks. Corrugated packaging accounts for about two-thirds of the company’s revenue, with consumer packaging contributing 28%. Revenue growth was a healthy 80% in 2011, and slipped only a touch (to 71%) in 2012. The company’s Q4 and 2012 earnings report on January 22 featured earnings of $1.35 per share, handily beating analysts’ expectations of $1.27 per share. This positive result is also meaningful because the company had been having a hard time getting the expected efficiencies out of its 2011 acquisition of Smurfit-Stone Container, and the Q4 results may indicate that the takeover is finally bearing fruit. In the larger picture, RockTenn is getting a boost from a reviving U.S. economy, as increasing economic activity always generates higher consumption of shipping boxes and consumer packaging. RockTenn isn’t going to be a rocket shot, but there’s the potential for more post-earnings gains and the company’s stock pays a nice dividend with a forward annual yield of 1.1%.
Technical Analysis
RKT has been in a long-term uptrend since the market’s recovery in March 2009. But the response to last week’s earnings report was a leap from 74 to 80 on two-and-a-half times average volume. The new price at 80 is an all-time high for RKT, and institutional support has been gradually building since the first quarter of 2011. RKT is a solid choice as a way to play the recovery of the U.S. economy. Look to establish a position on a pullback of at least a point.
RKT Weekly Chart
RKT Daily Chart
Oshkosh (OSK)
Why the Strength
You don’t hang around in the specialty vehicle manufacturing market for 95 years without learning how to survive tough economic conditions. Not only has Wisconsin-based Oshkosh been in operation for nearly a century, but the company has done so without filing for bankruptcy! A large part of the company’s wherewithal is due to the fact that roughly 56% of revenues come from the defense industry (mainly the U.S. government). The other secret to Oshkosh’s success is diversity, with well-known brands including JLG (lifts), Pierce (fire trucks), McNeilus (garbage trucks), Jerr-Dan (towing and recovery vehicles), Frontline (mobile command and broadcast vehicles), CON-E-CO (concrete mixers) and IMT (truck-mounted cranes). Yet not all investors have been happy with Oshkosh’s business plans, as the company spent the better part of last year fending off activist shareholder Carl Icahn. Icahn finally gave up his takeover bid in December, walking away from an open tender offer of $32.50 per share for Oshkosh. The company’s recent quarterly earnings performance has vindicated management’s direction, as Oshkosh reported an impressive 20% jump in fourth-quarter profit and lifted its full-year earnings outlook. With a proven track record, and no more distractions, Oshkosh should continue to attract investors in droves.
Technical Analysis
Despite spending the first half of 2012 losing ground, OSK more than made up the difference after rebounding from a low near 19 in July. The recovery gained steam in August, as OSK reclaimed key technical support at its 50-day trendline, a moving average that bolstered the stock throughout its current uptrend. However, the fight with Icahn was not without its pitfalls, and OSK remained locked in a trading range near 30 for the better part of the 2012 fourth quarter. With that last hurdle out of the way, however, OSK was free to run, and the stock’s post-Icahn drift higher was given a shot in the arm with last week’s quarterly report. Shares are now perched north of potential support near 40. Any pullbacks could be viewed as buying opportunities.
OSK Weekly Chart
OSK Daily Chart
Netflix, Inc. (NFLX)
Why the Strength
Netflix is one of the most sucessful stocks in the history of Cabot Top Ten Trader, with 30 appearances to its credit; this means that Netflix has been strong enough to push its stock to a leadership position in the market 30 times since its first appearance almost 10 years ago. Those early victories, when Netflix was proving the appeal of its DVD-by-mail model (and kicking Blockbuster Video to the curb in the process) were very satisfying. But the innovator became the target when online delivery of movies and other content became routine, and Netflix’s stock suffered in the second half of 2011 after an ill-considered and poorly announced price increase and a move away from DVDs alienated customers. Now, Netflix is showing that it can continue to make money, as the company’s Q4 earnings announcement last Thursday caused a powerful 42% gap up in its stock price. Analysts had expected the company to report a 13-cent per-share loss, and were shocked when results showed a 13-cent profit instead! Subscribers increased by four million (to 33 million), aided by the widespread use of tablets and streaming TVs. The company has continued to make deals for new content, most recently with Disney and Sony. There’s still skepticism among analysts about the long-term viability of Netflix’s streaming strategy, but so far, the company has been able to avoid the fate that it visited on Blockbuster. Some of the credit for the health of Netflix belongs to CEO Reed Hastings, the innovator behind the company’s original triumph. Investors are betting that he can extend his winning streak.
Technical Analysis
NFLX had an eventful 2012, starting with a rally from 62 to 133 early in the year. But skepticism about the streaming strategy dropped the stock to 53 in August and the stock took a few months to build a new base. The rally that began in late October pushed the stock over 100 earlier this month, and the good earnings news on January 24 blasted NFLX to 140 in one day, with subsequent trading kicking it to over 170. With the good earnings news priced in, NFLX may need some time to digest these gains. If you like the story, look to get in on a pullback of at least three points. A dip below 140 would be bearish.
NFLX Weekly Chart
NFLX Daily Chart
Mohawk Industries (MHK)
Why the Strength
Reversing course on Mohawk Industries is paying off in spades. We initially bumped the stock into the sell column after it drifted toward its November lows, but the company came roaring back with a deal to acquire the fifth largest ceramic tile producer in the world. On Dec. 20, Mohawk announced the acquisition of Italian ceramics manufacturer Marazzi Group for $1.5 billion, sparking renewed interest from investors across the Street. The acquisition broadened Mohawk’s international reach to more than 100 countries, allowing the company access to lucrative ceramic tile markets in Western Europe, Italy, and Central and South America. Apparently Mohawk isn’t done with its shopping spree, after snatching up Marazzi and Pergo in the past several months, the company announced today that it is purchasing Spano Invest for $168 million. Spano manufactures and distributes chip and melamine board, which are used in furniture and building products. The company also operates a joint venture in Belgium that converts waste wood into green energy. That said, organic growth should not be overlooked, as Mohawk is enjoying strong sales amid a budding recovering in the housing market. During the prior four quarters, revenue and earnings have grown 4% and 23%, respectively, and earnings are expected to grow 27% in 2013.
Technical Analysis
When we last visited MHK, the shares were looking to extend their impressive rally past former resistance at the 90 level. Relying on support at its 10-day moving average, MHK has accomplished this goal, pushing toward a five-year high above the century mark. Volume has slacked off in recent weeks, but today’s acquisition news should provide a fresh influx. With the stock adding to its current cushion above the key 100 level, investors should feel safe taking bites on any signs of weakness. A stop loss on a trade below 94 makes sense.
MHK Weekly Chart
MHK Daily Chart
Kansas City Southern (KSU)
Why the Strength
While recent innovations in shale drilling have led to a boom in the energy sector, the wealth of petroleum products now being shipped has created an equally sizable resurgence for transportation companies. Riding near the forefront of the sector is domestic and international rail operator Kansas City Southern. The company operates mainly in North America via the north/south freight corridor, which connects commercial and industrial markets in the central U.S. with industrial cities in Mexico. High prices at the pump have prompted firms to shy away from truck transportation, directly benefiting rail shippers like Kansas City Southern. But the company is not solely reliant on the energy sector, as evidenced by its recent fourth-quarter earnings report. Specifically, Kansas City Southern cited strong intermodal and automotive volumes when it easily topped the consensus earnings and revenue estimates for the quarter. What’s more, growth expectations remain strong, with Kansas City Southern forecasting revenue growth in the high-single digits for fiscal 2013, with earnings up about 25%.
Technical Analysis
Technically speaking, KSU has been locked in a solid long-term uptrend for the better part of the past four years. The stock has enjoyed solid support at its rising 50-day moving average throughout this rally. From a shorter-term perspective, KSU has added more than 30% since January 2012, with the stock’s most recent upleg resulting from a solid bounce from support at its 200-day trendline in mid-November. Following last week’s quarterly report, KSU broke out to fresh all-time highs near 95. Buying dips following this run-up should yield better returns, as some consolidation is to be expected. Meanwhile, a stop-loss at 84 would be prudent.
KSU Weekly Chart
KSU Daily Chart
Delta Air Lines (DAL)
Why the Strength
There are a couple of factors at work here that are helping Delta’s stock soar higher than its jets. First and foremost, transportation stocks are amazingly strong as investors are discounting a major economic rebound—the Dow Transports just moved out to all-time highs! That’s clearly a bullish wind at the back of Delta; if business and leisure travel accelerates, flights will be fuller, and that extra revenue will fall right to the bottom line. Second, though, is the company itself—Delta’s management has done a good job cutting excess capacity (it expects to have 4% fewer seats flown in the first quarter), of making strategic investments (it bought a 49% stake in Virgin Atlantic to gain better access to Heathrow Airport) and it sees $600 million in savings from cost initiatives in the second half of the year. More important, January has already seen revenue per seat mile grow 5% from a year ago, and the top brass thinks that type of growth is likely to continue. All together, analysts see earnings of a whopping $2.60 per share, giving the stock a lowly P/E ratio of 5 for 2013. Clearly, Delta or any other airline isn’t going to be a great long-term investment, but right now, the trend is up and we see higher prices ahead.
Technical Analysis
DAL is another cyclical-type stock that’s been dead money for years, but is now showing very heavy buying power. The stock hit a double top in April and November 2010 around 15, fell to nearly 6 during the 2011 mini-crash, and then rallied to 12 last summer. And then it built a halfway decent base, with resistance appearing around 10. But since mid-December, it’s been screaming higher on huge volume! During the past few days the stock has paused around 14, and we think it’s buyable here or on minor weakness, with a stop down around 12.
DAL Weekly Chart
DAL Daily Chart
Credit Suisse (CS)
Why the Strength
European financial institutions have had a hard time in recent years, dogged by glaciers of toxic mortgage debt and undercut by weak growth in the global economy and threats to the very existence of the eurozone in Europe. Now, however, the situation has improved, the banks are repaying the cheap loans that the European Central Bank made to help keep them afloat in 2011 and 2012 and Credit Suisse is emerging as a strong company on the rebound. Credit Suisse operates in three divisions, private banking, investment banking and asset management, with operations around the world. Revenue growth has been negative for most of the past four years, so Credit Suisse is finding support from investors based primarily on the strength of the recovery of Europe following a long recession and worries about the solvency of Greece and other Mediterranean countries. It’s worth noting that projections of 2013 results assume that revenue will rise 10%. Credit Suisse is in the middle of a cost-reduction program that will result in a leaner, more profitable company, and has sold its ETF business to Black Rock. In addition to the widespread optimism about the health of Europe, Credit Suisse has picked up several upgrades from analysts. It’s still early in the company’s recovery, and momentum toward recovery is strong.
Technical Analysis
If you want a clue as to how far the global financial sector has traveled, the chart for CS will show you. The stock traded at 60 in October 2009 and had fallen to 16 in July 2012. The recovery began in August and pushed the stock to the mid-20s in September, where it spent more than three months re-basing. The blastoff in January has continued without any letup and CS is trading near 30 today. No date has been released for the company’s Q4 and 2012 results, but investors are much more focused on the future than the past. Try to buy on a pullback of a point and keep a loose stop at 26.
CS Weekly Chart
CS Daily Chart
Cree, Inc. (CREE)
Why the Strength
Cree Inc. is the most direct way to play the growth in light emitting diodes (LEDs), especially when it comes to their use in general lighting. Because it’s historically done business in LED components, as well as power and radio frequency chips, lighting only accounted for 29% of revenues last year. But that figure should reach 38% this year and grow meaningfully from there. The catalyst, of course, is lower prices, which has been the good news/bad news story with Cree; constant price declines are one reason the company hit a rough patch in 2012, but management adapted and is coping well—in fact, it’s targeting gross margins above 40%, a sky-high level for the industry! And, over time, these declines in LED prices (driven in large part by Cree’s innovations) are driving adoption of LED lighting in businesses and homes ... almost a Moore’s law for LEDs, if you will. The reason Cree is strong today is because of a terrific quarterly report; earnings are growing again, margins are up and it looks like LED lighting is near the tipping point—it currently makes up just 3% of residential lighting sales, but that figure could reach 16% by 2015 ... and that says nothing of the larger commercial and industrial markets. If that forecast is true, Cree’s business should continue to thrive.
Technical Analysis
CREE ran from 12 at the bear market low of 2009 to above 80 in early 2011, and then slid all the way back to 20 near the end of 2011 as business faltered. But it spent most of last year building a bottom and began rallying in earnest after a nice quarterly report in October. Shares ran up to 35, hit a pothole after an analyst’s downgrade, but last week changed the landscape—CREE soared 24% on the week on its biggest weekly volume in eight months. Some digestion is possible, of course, but we don’t expect a major retreat, so you can look to start a position here or on minor weakness.
CREE Weekly Chart
CREE 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.
