Pockets of Strength
Friday’s big surge upward—200 points for the Dow—was a clear bullish sign, a reminder that there’s lots of cash sitting on the sidelines waiting for a reason to get back into the market, and a reminder that when those billions of dollars eventually do find their way back into stocks, prices will skyrocket! Yet it’s been hard for the market to maintain a strong uptrend as the tug-of-war between stocks and bonds continues. And it’s not the yields keeping people in bonds these days, it’s simply fear. Thus our Market Monitor remains in the neutral zone—which means while it’s fine to target some attractive situations, you should keep some cash in reserve until the broad market is more supportive, and you should continue to practice risk management. That means buying on dips, not at new highs. It means taking some profits off the table when they come easily. And it means cutting losses short when things go against you.
We’re still very enthusiastic about the homebuilding sector, and our Editor’s Choice this week is Ryland, a homebuilder that’s appeared here this year twice before and has great potential to keep on climbing. Also attractive are companies in fertilizer, energy, electronic health records and more. Enjoy the issue and enjoy the summer!
| Stock Name | Price | ||
|---|---|---|---|
| Agrium (AGU) | 0.00 | ||
| Athenahealth (ATHN) | 0.00 | ||
| Cabot Oil & Gas (COG) | 0.00 | ||
| CLGX (CLGX) | 0.00 | ||
| Marathon Petroleum Corporation (MPC) | 0.00 | ||
| Ryland (RYL) | 0.00 | ||
| Spirit Airlines (SAVE) | 57.03 | ||
| TripAdvisor (TRIP) | 55.14 | ||
| Weyerhaeuser (WY) | 0.00 | ||
| Zillow (Z) | 76.64 |
Agrium (AGU)
Why the Strength
The story on fertilizer manufacturer Agrium is very similar to that of CF Industries, which appeared here last week. Agrium makes nitrogen, potash and phosphate-based fertilizers and other agricultural products, 88% of which are distributed in North America. Recent droughts have created shortfalls in crop production, and that has raised the price of agricultural commodities. So farmers are encouraged to buy more fertilizer to try to take advantage of the situation. The company recently announced that its Q2 results would be near the top of its guidance, as strong demand is keeping prices high for many products. Agrium had a 44% increase in revenue in 2011, and is growing both in its home country of Canada and internationally. In March, it was announced that Agrium will acquire 90% of Viterra’s Canadian operations and all of its Australian retail facilities in a deal with Glencore, the company that is acquiring Viterra. Investors are encouraged that Monsanto has already released strong quarterly results, and a good report from Agrium would give the stock another boost. That’s what investors seem to be expecting.
Technical Analysis
AGU was very strong in 2009 and 2010, but has been languishing since it hit 99 in February 2011. The stock drifted lower for 11 months, finally putting in the second part of a double bottom in December. In 2012, AGU has been strong every month but May, when the wheels came off the entire market. The rally that began at 74 in June finally met resistance at 92 in the first week of July. AGU is now near 91 with its rising 25-day moving average just below 87. Taking a position near 90 looks like a good bet.
AGU Weekly Chart
AGU Daily Chart
Athenahealth (ATHN)
Why the Strength
Athenahealth, which has enjoyed nine previous appearances in Cabot Top Ten Trader dating back to late 2008, is benefiting from the transition of medical records and medical practice management to electronic records. The company calls itself “a leading provider of cloud-based practice management, electronic health record (EHR) and care coordination services to medical groups.” In practice, the company’s big selling point is its billing platform that facilitates payments to medical practices and increases collections. The company is a model of consistent growth, with eight years of revenue growth of 30% or more. This is still a small company, with trailing 12-month revenues of just $351 million. Investors appreciate the five straight years of profitability and the prospects for EHR and other services as government-mandated health coverage brings huge growth to the medical services sector, including services like coordination of care and communication with patients. Athenahealth will report earnings on Friday, July 20, at 8:00 a.m. ET.
Technical Analysis
ATHN ripped higher during January and February, then began a basing period with resistance at 78 and support at 70. The breakout above 78 came in June, and the stock has since used its old resistance as support. The stock is likely to trade sideways until earnings come out this Friday. As always, we don’t advocate taking big positions ahead of earnings, but if you’re interested in this strong play on healthcare reform, a small buy ahead of the quarterly report (with a stop at 77) could pay off.
ATHN Weekly Chart
ATHN Daily Chart
Cabot Oil & Gas (COG)
Why the Strength
Cabot Oil & Gas (no relation to us) is probably the most attractive energy producer from a straight production standpoint—the company’s property in the Marcellus Shale in Pennsylvania is unbelievably rich, and its stakes in the Eagle Ford Shale in Texas and Marmaton area in Oklahoma have great promise as well. The company’s production (mainly natural gas in the Marcellus Shale, though increasingly from liquids in Eagle Ford and Marmaton) was 130.6 billion of cubic feet equivalent (Bcfe) in 2009, 187.5 in 2011, and the firm expects between 253 and 281 Bcfe (up 40% to 45%), mainly because, as opposed to its peers, Cabot isn’t pulling back on its drilling plan despite the steep drop in natural gas prices this year. The firm can afford to do that because of its pristine balance sheet and management’s conviction that, even at depressed levels for natural gas, its best-in-class well results (it operates 15 or the top 20 producing wells in the Marcellus Shale, for instance) should produce profits now ... and a potential torrent of cash flow if and when prices rebound. Bottom line, if natural gas prices stay down, Cabot is likely to gyrate in its recent range as the earnings power won’t be there. But if prices bounce, this company will be the one that institutions gravitate toward. As commodity stocks go, we like it. Earnings are due out July 24.
Technical Analysis
The huge drop in natural gas prices was too much for COG to handle earlier this year, taking shares down from a peak of 45 to a low under 30 in April. However, as prices have at least shown signs of bottoming, big investors are piling back in—shares spiked in June back above 40, and impressively, the stock has consolidated on light volume during the past couple of weeks. Of course, if natural gas collapses again, then all bets are off, but COG is certainly acting as if the stock is putting the finishing touches on a seven-month base. If you want in, you could buy a little here with a stop around 37, and look to buy more if the stock heads north.
COG Weekly Chart
COG Daily Chart
(CLGX)
Why the Strength
CoreLogic provides consumer, financial and property data to corporations and government agencies to help them identify risk and make informed, predictive business decisions. The company’s services have been popular during the economic downturn, especially in the area of mortgages. In fact, business has been going so well for CoreLogic that the company has topped the consensus earnings estimate during the past four quarters by an average of 24%. What’s more, the company raised its full-year outlook late last month, marking the second time in the past four months that CoreLogic has lifted its earnings target. The company now sees 2012 revenue in the range of $1.45 billion to $1.48 billion, with second-quarter earnings up 15% year-over-year. The firm has also announced a stock repurchase program, with CoreLogic targeting a buyback of some five million shares in 2012. Finally, with many counties, cities and municipalities considering the seizure of underwater mortgages, CoreLogic’s data could experience even greater demand.
Technical Analysis
While 2011 was a disaster for CLGX, with the stock plunging to fresh multi-year lows in August and September, the shares have turned around significantly this year. CLGX began 2012 by extending a budding rally along support at its 50-day moving average. In mid-January, the stock gapped above its 200-day moving average, and additional strength pulled this long-term trendline into a bullish cross with its 50-day trendline. Following this cross, CLGX shares have gone on to eclipse the 20 level, setting a string of fresh 52-week highs in the process. If you choose to jump onboard this hot one, we suggest a stop at 18.5.
CLGX Weekly Chart
CLGX Daily Chart
Marathon Petroleum Corporation (MPC)
Why the Strength
Just over a year ago, on July 1, 2011, Marathon Petroleum was spun off from Marathon Oil. The parent company remains focused on global oil and gas exploration and production, while Marathon Petroleum, with $81 billion in revenues, is focused on U.S. downstream operations, specifically, refining, marketing and transportation. It’s the largest petroleum refiner in the Midwest, the fifth-largest nationally, and the largest marketer in the Midwest, Gulf Coast and Southeast, with 4,500 miles of pipeline, 5,000 Marathon gas stations, 1,375 Speedway gas stations and 1,350 convenience stores. The main reason Marathon is strong today is simple; crude oil prices are down big (thanks to fracking), but refined gasoline prices haven’t dropped as much (fodder for conspiracy theorists), so profit margins for refiners are booming. Consensus estimates are for 6% earnings growth in 2012, but that’s probably conservative. Finally, the stock pays a solid 2.2% dividend.
Technical Analysis
MPC hasn’t made much progress in the year that it’s been public, but it’s setting up for what could be a big move, and that’s the main reason it’s earned a spot in this week’s Cabot Top Ten Trader. Specifically, the low of 26 last fall shook out weak hands (some of whom no doubt preferred to own the parent company), and the surge to resistance at 45 in January provided a profit-taking opportunity that sent the stock back down to 34. But now it’s back up at 45, looking ripe for a breakout (and downside risk is probably lower than ever), so if you’re game, buy now and hold on.
MPC Weekly Chart
MPC Daily Chart
Ryland (RYL)
Why the Strength
Ryland builds single-family homes, townhouses and condominiums in 13 states, so the past few years have been rough. Revenues dropped by almost 82% from 2005 to 2011. The company lost money in 2008, 2009, 2010 and 2011. And the stock dropped 89% from top to bottom. But that bottom is clearly past, and now the industry is on the rebound; in fact, the residential and commercial building industry has been ranked in the top three by stock performance for the past 10 weeks! How long this trend will last no one knows, but we take comfort from the fact that trends usually go to extremes, as well as the fact that new-home inventory is at record lows any way you look at it. With housing prices down as well—they’ve bottomed in most areas—and interest rates at rock-bottom too, conditions are ripe for a boom characterized by growing demand and constrained supply. Ryland, seeing this trend developing, is focused on growing once again; it recently completed the acquisition of the Charlotte and Raleigh, North Carolina operations of Timberstone Homes, gaining 945 additional lots and homes for future sales. Second quarter results will be released after the market close on July 25.
Technical Analysis
RYL has been climbing strongly since bottoming at 9 a year ago, and the trend shows no sign of slowing. Nevertheless, RYL has proven a tricky fish for us to land this year. When we recommended it in February, we were knocked out on a pullback in March, and when we recommended it in April, it stayed strong for so long that it failed to fall back into our buy range. So, trying again, we’ll note that the uptrending 50-day moving average is at 23 (as is May support) and recommend buying anywhere between here and there.
RYL Weekly Chart
RYL Daily Chart
Spirit Airlines (SAVE)
Why the Strength
Airlines are usually the furthest thing from our minds when considering growth stocks, but Spirit is a newer player without all the legacy costs of the huge airlines, and its stock is dirt cheap. On the growth front, the company continues to launch new routes (but only if profitable!), leading to consistent growth in traffic and elevated load factors (i.e., how full each flight is), and year-over-year growth in revenue passenger miles was 16.8% for the first half of 2012, while the load factor was 84.8%, down a fraction from last year. Spirit came public just over a year ago and has posted solid numbers ever since. Moreover, analysts expect more of the same, with earnings jumping 40% this year and another 30% in 2013 (to $2.50 per share). And, as we mentioned above, the stock is very cheap—it’s trading at just 12 times this year’s estimates and, at the end of the first quarter, the company was sitting on a ridiculous $421 million in cash (about one-quarter of its present market cap) and no debt. We’re not going to pretend there’s anything revolutionary here, because there isn’t; it’s still an airline subject to worries over the economy and oil prices. But this is a very well-run company with capable management, and the stock is still relatively new. We think it has solid potential. Earnings are due out July 26.
Technical Analysis
SAVE is in the midst of its third base-building phase since coming public in May 2011. The first occurred last summer during the market’s mini-crash. The second began at year-end and gave way to an advance that took shares up to 25 in May. Now we see an 11-week cup-shaped base that found support at SAVE’s long-term 40-week moving average and is now revving up the right side. There’s still resistance to battle through, but nibbling on weakness with a tight stop near 20 could work.
SAVE Weekly Chart
SAVE Daily Chart
TripAdvisor (TRIP)
Why the Strength
TripAdvisor, the travel site that was spun off from Expedia last December has some jaw-dropping numbers. For starters, it’s the largest travel site in the world, with an emphasis on the social aspect of posting reviews of travel sites and services. 56 million unique visitors come to its branded sites every month and they post about 25 new comments every minute, posting over 60 million reviews and opinions so far. It’s also a global company that manages and operates 19 other travel media brands whose sites have nearly 70 million unique monthly visitors. With numbers like that, it’s no wonder that the company gets 79% of its revenue from click-based ads and 15% from display-based ads. These enormous user numbers are like catnip to advertisers, and the increasing use of the web for travel planning outside the U.S. is a great source of growth. TripAdvisor will be reporting Q2 results on July 24 (Tuesday) after the market closes, and the chart tells us that investors are expecting good news. Estimates are for 41 cents per share in earnings and $202.5 million in revenue.
Technical Analysis
The chart for TRIP shows some volatility, but there’s no mistaking the strength. TRIP has ripped from its IPO price of 29 to as high as 46 last week. With earnings due out a week from tomorrow, it’s likely that TRIP will do some sideways trading as investors get their bets down and wait for the results. We think this is a big story. TRIP looks like a good buy near 44.
TRIP Weekly Chart
TRIP Daily Chart
Weyerhaeuser (WY)
Why the Strength
Forest products firm Weyerhaeuser Co. specializes in producing softwood lumber and other building materials in North America. The company also offers cellulose fiber products used to make paper, packaging and textiles. The grudging economic recovery is finally starting to materialize in Weyerhaeuser’s bottom line, with the company reporting that first-quarter earnings doubled on a year-over-year basis. What’s more, Weyerhaeuser also guided second-quarter earnings above Wall Street’s expectations. But the company’s recent bout of strength comes from a string of better-than-expected housing reports. In a recently released report, the National Association of Home Builders stated that production of single-family homes rose for the third month in a row in May. While a continued rebound in the housing market would certainly benefit Weyerhaeuser, the situation could be exacerbated by low lumber inventories among homebuilders. As such, the combination of a rebounding housing market and a rise in lumber prices would be a considerable boon for the company.
Technical Analysis
WY shares kicked off 2012 with a rally, rising quickly to a high near 23 in March. However, the stock was pummeled by signs of a slowing economic recovery. As a result, WY retreated to its 200-day moving average, and skipped along this key trendline until the beginning of June. Fresh off support, the shares finally began to trek higher, receiving a considerable boost on June 28 in the wake of the company’s quarterly report. Riding its 10-day trendline, WY has since eclipsed its 2012 high, leaving the shares potentially overextended in the wake of this rally. As such, we recommend buying dips and setting a stop loss on a trade below 22.
WY Weekly Chart
WY Daily Chart
Zillow (Z)
Why the Strength
As the U.S. housing market continues to recover by fits and starts, the most obvious beneficiaries are home builders like Lennar (LEN), building supplies stores like Home Depot (HD) and manufacturers of basic materials like USG Corp. (USG), all of which have been featured here recently. One wildcard way to play the recovery is Zillow, an online real estate information provider that allows customers to search for home listings, compare mortgage rates and find brokers to do business with. Seattle-based Zillow was founded just in 2004, but it’s already the biggest online real estate website, which means that both advertisers and real-estate agents are eager to pay to reach motivated browsers. The company’s six-year revenue history shows at least 49% growth per year, with 2011 growth coming in at a whopping 117%. In fact, quarterly revenue growth has topped 100% for six straight quarters. With home buyers looking for homes on smartphones, tablets and laptops, Zillow is likely to continue to grow, as its rapid expansion makes it a mandatory place for sellers and agents to be.
Technical Analysis
Z came public about a year ago, opening at 20 and spiking to 60 in its first few days. But reality set in and the stock dipped back to near its IPO price in late 2011. 2012 has been a good year for Z, pushing the stock as high as 44 in early May before the June market weakness pulled it back to 31. Now, Z is back at 42, with a couple of days of advances on strong volume setting the stage for another run at that early May high. With the quarterly report not due for another month, Z may have some room to run. Look to buy on any dip of a point or so.