Broad Market Powers Ahead
The market opened the New Year with a bang last week, partially thanks to a peaceful conclusion to the Fiscal Cliff deal. But, really, the market has been acting well enough for many weeks, and with some of the uncertainty finally in the past, the buyers flexed their muscle. At this point, we’re seeing excellent strength in many cyclical- and turnaround-type companies—financials, industrials, transports and the like, so that’s where your focus should be today. Growth stocks are doing well enough but we can’t say they’re leading quite yet ... though earnings season, which gets underway soon, can always change the landscape.
This week’s list is heavy on the cyclical side of the list, with many stocks coming back to life after 18- to 24-month rest periods—big launching pads that have the potential to generate sustained upmoves. Our favorite of the week is (believe it or not) General Motors (GM), whose business is at its best levels in five years and whose stock is acting like it has much more upside ahead. Buy on any weakness.
| Stock Name | Price | ||
|---|---|---|---|
| TripAdvisor (TRIP) | 55.14 | ||
| SodaStream (SODA) | 142.91 | ||
| Reliance Steel & Aluminum Co. (RS) | 117.45 | ||
| Robert Half (RHI) | 78.58 | ||
| Cheniere Energy (LNG) | 63.82 | ||
| General Motors Company (GM) | 0.00 | ||
| Ctrip.com International Ltd. (CTRP) | 34.94 | ||
| Citigroup Inc. (C) | 0.00 | ||
| Ashland Inc. (ASH) | 0.00 | ||
| ARM Holdings (ARMH) | 0.00 |
TripAdvisor (TRIP)
Why the Strength
TripAdvisor bills itself as “the world’s largest online travel company,” and it’s hard to find any contenders for the title. The company’s main feature is its aggregation of reviews and opinions from the more than 20 million members of its community about their experiences traveling worldwide. Revenues are generated by both display ads (14% of 2011 revenue) and click-based advertising (78%), with the remainder coming from subscription-based offerings, flash sales on its Snique-Away website and content licensing. International revenue is becoming increasingly important as Internet use increases worldwide: revenue from outside the U.S. rose from 39% in 2010 to 45% in 2011 and remained strong last year. The company continues to gobble up small, interesting travel-related businesses, but the real growth still comes from increasing membership, which increases the site’s attractiveness to advertisers. One knock on TripAdvisor is that it has few barriers to competition from both large companies and startups. For now, however, the company is growing well and after-tax profit margins topped 30% in Q3. Investors are waiting for the company’s earnings report in early February for more insight.
Technical Analysis
TRIP has made three emphatic and distinct moves since its IPO in late 2011. First, it doubled from its IPO price of 24 to 48 in July 2012. Then it corrected sharply in late July and worked its way to as low as 29 in late October. Then it gapped up on November 2 and began a rally that topped 45 briefly before settling into a trading range with support at 41 and resistance at 44. You can take a small position here, then watch the reaction to earnings in February. Or, you can just watch, then buy if the stock breaks out above 45 on volume.
TRIP Weekly Chart
TRIP Daily Chart
SodaStream (SODA)
Why the Strength
SodaStream, which has been in overseas markets for decades, is stepping up its efforts to conquer the U.S. market. The company’s equipment makes soda beverages, both plain and flavored, from tap water with a counter-top carbonation machine that uses CO2 cartridges. The company touts its lower cost per liter and its green advantage over store-bought beverages because its bottles are reusable. It looks like progress is being made, as the company has booked three quarters of revenue growth within a point of 50% and earnings growth has been 57%, 37% and 58% over those same quarters. The role model here is clearly Green Mountain Coffee Roasters, which sells its Keurig brewing equipment at a low margin and profits on sales of coffee pods. SodaStream gets 54% of its revenue from consumables like carbonation cartridges and flavorings. Western Europe contributed 53% of 2011 revenue, but that’s changing quickly as the company makes inroads in the States. The company’s announcement that it had purchased advertising time during the fourth quarter of the Super Bowl may indicate that management is raising its game to the next level. SodaStream won’t report Q4 and 2012 results until late February, so investors will be waiting for hard numbers until then.
Technical Analysis
SODA came public in late 2010 and rallied strongly through August 2011. But that rocket shot from its IPO price of 23 to near 80 led to a free-fall drop to 35 by the end of August and the stock was on a roller-coaster for the next 15 months, with support at around 30 and resistance at 45. The turnaround for SODA came in November, when the stock had dipped to 33. SODA soared to resistance at 45 in December, then gapped up on the first trading day of 2013. It hasn’t slowed down since. This isn’t an easy rally to buy, and today’s pullback may be the best buy point for a while unless the broad market loses momentum. Try to buy below 48 and put a stop in at 43.
SODA Weekly Chart
SODA Daily Chart
Reliance Steel & Aluminum Co. (RS)
Why the Strength
Due to uncertainty ahead of “Fiscal Cliff” negotiations, metals prices were driven lower, as were the values of metal-related stocks. As North America’s largest metals service center company, Reliance Steel & Aluminum is well positioned to take advantage of any bounce back. Operating a network of 220-plus service and distribution centers, Reliance processes and distributes more than 100,000 metal products worldwide to some 125,000 customers in a broad range of industries. Founded in 1939, Reliance operates in 38 U.S. states, as well as in Canada, Mexico, Asia and Europe. Fundamentally, Reliance offered up mixed third-quarter results, with earnings topping expectations on a roughly 4% year-over-year decline in revenue. Still, strong demand from the energy and automotive markets emerged as strong drivers for Reliance’s bottom line. Looking ahead, the company’s broad geographic footprint and diversified product base give Reliance considerable leverage to take advantage of accelerating growth in the aerospace, farm and heavy equipment markets. While Reliance still faces a risk of potentially weak metals pricing, investors should take heart in analyst forecasts for strong stainless and aluminum pricing heading into 2013.
Technical Analysis
RS began 2012 locked in a trading range between 52 and 57, with shares bouncing wildly between these areas through mid-May. The stock broke out to the downside heading into June, ultimately forming a bottom near 45 during the summer. RS found its legs in early August, and while volatility remained a major concern, shares ultimately trended higher along their 10-day and 25-day moving averages. Support at these trendlines firmed heading into November, driving RS toward multi-year highs above 60. The stock is now poised to consolidate these gains above 60, as RS considers its next hurdle near 65. We believe that buying on weakness is the way to go, while setting a stop loss near 57.
RS Weekly Chart
RS Daily Chart
Robert Half (RHI)
Why the Strength
Perception is everything in the stock market, and right now, investors are thinking the global economy is set to re-accelerate in a big way; we see it in the straight-up action among many industrial, commodity and transportation stocks. And we’re also starting to see it in staffing stocks like Robert Half, which has about three-quarters of its business in the U.S., and that’s where it’s seeing its best prospects (in the latest quarter, U.S. staffing revenues were up 12% vs. a 1% decline internationally). Importantly, after its last quarterly report in October, management upped earnings guidance, but best of all said the first two weeks of October had shown big growth in its permanent placement services. Investors took that as very encouraging, and since then the stock has only grown stronger despite the various worrisome headlines. Right now, analysts see 2013 bringing just 15% earnings growth, but we doubt that’s accurate; the top brass has been busy cutting costs for many years (earnings have been growing much faster than revenues of late) and if the job market continues to slowly heal itself, we think Robert Half’s bottom line could surprise on the upside in a big way. All in all, it’s not a sexy story and there aren’t even that many super-bullish data points yet, but our experience is that when a staffing stock shows this type of strength, it’s likely to continue.
Technical Analysis
RHI is lifting off from a two-year launching pad on big volume, which bodes well for the intermediate-term. Shares topped back in January 2011 and fell hard during that year’s market mini-crash, but you can see in the chart here that the stock formed a more well-rounded base for much of last year. And now it’s super strong! Since mid-November, RHI has been pushing higher, including a huge-volume ramp in the middle of December. If you want in, we think a dip of a point or so is buyable, with a stop around 29.
RHI Weekly Chart
RHI Daily Chart
Cheniere Energy (LNG)
Why the Strength
Energy production has taken an impressive turn in the U.S. during the past year. Once a net importer, the U.S. is now poised to become potentially the biggest net-exporter of liquefied natural gas (LNG) due to improved hydraulic fracking extraction methods. At the forefront of this movement is Houston, Texas-based Cheniere Energy, which, given its current infrastructure and position in the market, will be the first company to export LNG in the U.S. In fact, Cheniere has become the first U.S. company to gain approval to export LNG to non-Free Trade Agreement countries, a development that could be a considerable boon for the company. Specifically, unlike oil, which has international prices, LNG is priced based on local market conditions. This means that LNG prices are considerably higher in Asian and European countries where supplies are low, creating an opportunity for U.S.-based Cheniere. Due to its ownership of the Sabine Pass terminal in Louisiana, no company is better poised to benefit from LNG exports. In fact, demand for LNG from the Sabine Pass terminal is so great that Cheniere is already considering expansion. Cheniere is already looking ahead, applying to build an additional plant in Corpus Christi, with production beginning in 2017-2018.
Technical Analysis
Technically speaking, LNG was one of the best performing energy stocks of 2012, with shares more than doubling in value last year. While there were ups and downs associated with broad-market trends, LNG enjoyed solid support from its 10-week, 25-week, and 50-week moving averages, with the stock not closing a week below this trio last year. Heading into 2013, LNG appears to be heating up; shares have utilized support at their 10-day trendline to breakout to fresh 52-week highs above the 20 level. Given the stock’s recent surge, however, LNG may be a bit too hot right now. Try to enter on weakness, with a stop around 17.5.
LNG Weekly Chart
LNG Daily Chart
General Motors Company (GM)
Why the Strength
Most people will be puzzled at how such an old, huge, disliked company can show up in Top Ten. But, really, it shouldn’t be that hard to believe at all; GM is one of the stronger stocks in the market for three simple reasons—it’s dirt cheap, it’s finally out of the control of Uncle Sam and business is very good. Going in reverse order, the company’s December sales report, which was just announced last week, was up a decent 5%, but that marked the best December for GM in five years. In fact, new car sales for the industry as a whole grew double digits last year, continuing their recovery from the Great Recession ... yet they still remain about 15% to 20% below their pre-2008 levels. It’s similar to the housing industry—with business still at relatively depressed levels but headed in the right direction, odds favor upside surprises. As for GM in particular, it earned about $3.25 per share last year, but that should jump toward $4 this year as business recovers, leaving the stock with a P/E of less than eight times earnings. Lastly, as mentioned above, the company is set to shake free of the government’s grip; it’s agreed to buy back the remaining shares from the U.S. Treasury, which, if nothing else, helps investor perception in a big way. It’s not going to double in a few weeks, but as turnaround stories go, we think GM has what it takes to be a winner.
Technical Analysis
GM began trading again in November 2010, and actually had a good few weeks before the bottom fell out; the stock dropped to 19 by October 2011, re-tested that level in December of that year ... and it re-tested it again in July 2012. It acted well after that, but it was the repurchase announcement three weeks ago and last week’s bullish sales report that really brought in the buyers, pushing GM sharply higher on huge trade. We don’t advise chasing it here, but we’re also not expecting a serious, prolonged dip. If you’re game, look for minor weakness to start a position.
GM Weekly Chart
GM Daily Chart
Ctrip.com International Ltd. (CTRP)
Why the Strength
Ctrip.com is a Chinese online travel agency that specializes in consolidating unused hotel rooms and airline tickets and offering them to consumers at reduced prices. This makes Ctrip.com more like a Priceline.com than an Expedia. The company’s 2011 revenue was pretty evenly distributed between hotel reservations (40%) and airline reservations (39%), with packaged tours (14%) making up most of the rest. Ctrip.com is a seasoned Chinese business; the company was established in 1999 and has been through several boom/bust cycles, proving its viability. Revenue grew 27% in 2011 (to $545 million) and consensus estimates for 2012 are for $665 million. The company has announced that it will report Q4 and 2012 results on January 31. The larger story on Ctrip.com is that the Chinese middle class is now 300 million strong, about as many people as there are in the U.S., and that number is expected to grow quickly as China’s rulers move the economy away from low-wage manufacturing. This middle class is the prime target for Ctrip.com’s travel bargains, and the company’s informative website makes it a one-stop shopping destination for Chinese consumers. With Chinese economic growth back in a higher gear (although not the highest) and creating more affluent consumers with an appetite for travel, Ctrip.com’s outlook is rosy.
Technical Analysis
CTRP ran from 8 in late 2008 to 53 in November 2010, then took a 20-month correction to 12 in August 2012 that concluded with a 14-week run of virtually unbroken declines. But the stock made a stunning turnaround in August, popping to 17, then staged another rally in December, roaring from 18 to 23. CTRP is continuing to hop higher every time any good news about Chinese economic growth is released. You can buy a little here, or wait for a correction of a point. But a look at CTRP’s chart shows a stock whose rallies are concentrated in short bursts, so consider a small buy right here.
CTRP Weekly Chart
CTRP Daily Chart
Citigroup Inc. (C)
Why the Strength
While it may still be distasteful for some to consider investing in large financial institutions, there is growing evidence that Citigroup has turned the corner. For starters, the beleaguered bank has battled its way back from the 2008 brink and is now submitting a capital plan to the Federal Reserve—one that includes a share buyback plan. What’s more, new Chief Executive Officer Michael Corbat has made it a priority to cut costs across the board in addition to withdrawing from less profitable markets. Corbat has also been meeting with regulators in attempts to improve banking relations. These moves have already drawn praise from the brokerage community, with Goldman Sachs labeling Citigroup the “best large-cap restructuring story” while adding the stock to its “conviction buy list.” Wells Fargo issues similar praise when adding Citi to its “priority stock list.” Citi has struggled a bit recently, however, as revenue was down sharply in the third quarter on a year-over-year basis, led by a decline in non-interest revenue. That said, Goldman and many others feel that, under the leadership of CEO Corbat, Citigroup will soon start to show signs of full recovery. Investors should be aware that Citigroup is slated to release its fourth-quarter earnings report on January 17.
Technical Analysis
It’s been a rough ride for C shares during the past year, but the stock has still come out on top. After a quick start to 2012 that saw the stock rally to the 39 area, C plummeted to support near 25 during the summer months. The shares recovered in late August, rallying back toward 39 by mid-November. Following a second rejection in the area, C formed a base near 34 and springboarded past 39 to set a string of fresh 52-week highs. The rally has left C a bit overextended, but the power here is impressive. We recommend buying dips to maintain the best value, and a stop loss at 38 makes sense to limit losses.
C Weekly Chart
C Daily Chart
Ashland Inc. (ASH)
Why the Strength
Known for decades as an oil refiner, Ashland has moved toward a mix of specialty chemical products that bring higher margins. The company’s headline business is Valvoline motor oil and its string of oil-change operations, but specialty chemicals, polymers and water treatment products are actually bigger growth components. Specialty chemicals, like more generic commodities, do well when economic growth is occurring, and positive news from the U.S., Europe and China is boosting investors’ appetite for Ashland. The company doubled its revenue growth rate in 2012, from 13% in 2011 to 26%. And after-tax profit margins, which used to average around 4%, have topped 7% in the last couple of quarters. The company’s performance is courtesy of effective management, which has shed lower-margin businesses and acquired companies like International Specialty Products in 2012. Revenue from outside North America has increased to nearly half the total, which includes 13% from Asia, giving the company access to higher emerging market growth. Earnings are expected during the week of January 21, and investors are clearly expecting good results.
Technical Analysis
ASH put in a rough two-month base in October and November, with support at 69. The breakout began in early December and the stock soared from 70 to 80 in less than three weeks. The stock consolidated under resistance at 80 as the year wound to a close, then popped to 84 as soon as 2013 arrived. ASH is trading calmly at 84 and may remain flat until its 25-day moving average (now at 78) has a chance to catch up. You may be able to sharp-shoot ASH on a dip to 83, with a loose stop around 78.
ASH Weekly Chart
ASH Daily Chart
ARM Holdings (ARMH)
Why the Strength
The big story with ARM Holdings is that it’s on its way to becoming the Intel of the mobile age. The company’s chip designs have become something of a platform for smartphones and tablets, including Apple’s. ARM is basically a licensing firm, coming up with the designs (which are generally smaller and use less power than the competition) and then collecting royalties as big chip firms adopt them. During the past few years, the boom in mobile devices has helped the bottom line, driving the firm’s earnings from 26 cents per share in 2009 to 70 cents or so last year (along with sky-high profit margins in the mid-30% range). However, the big hubbub surrounding ARM now, and the main reason for the stock’s strength, is its latest and greatest design, a 64-bit architecture that could pave the way toward entry into the PC and server markets, which would be enormous. Now, it’s important to realize that lead times here are very long; despite announcing the new design last fall, the first licensing revenues likely won’t flow until late this year or early 2014 as customers need time to integrate the design and launch new products. But investors aren’t waiting around for that; they’re discounting an expected acceleration in business today. It’s a big idea, and we think the stock could go far.
Technical Analysis
ARMH was one of the biggest winners during the first couple of years of the bull market, roaring 10-fold before topping out in May 2011. Then it began a long, tedious basing effort; it fell as low as 21 this past July, but began making up ground quickly, tightening up in September and October and then breaking out on earnings. And, despite a tricky market, ARMH has been trending steadily higher since, with only mild pauses and pullbacks along the way. We think the stock could retreat a bit further, but with the 50-day line at 35.5 and rising, you could buy some around here with a stop just below 35.
ARMH Weekly Chart
ARMH 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.
