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Top Ten Trader
Discover the Market’s Strongest Stocks

July 9, 2012

The market is trying to repair the damage from its spring correction, but last Friday’s job-induced plunge shows that not every investor is rowing in the same direction. Overall, we’re still optimistic this rally could morph into something more powerful, but we need to see more evidence that the buyers are willing to make a stand. For now, some new buying is OK, but keep some cash on the sidelines and let the market tell you what your next move should be. Tonight’s Cabot Top Ten Trader is interesting because many of the names are newer to us; they weren’t necessarily the leaders of the early-year advance. Our favorite of the week is a recent IPO that has a unique and under-the-radar growth story.

Trying To Find Its Legs

The market continues to show some overall improvement in tone, but last Friday’s jobs-induced decline and today’s low-volume dip makes it clear that not all investors are rowing in the same direction. Thus, we’ll leave our Market Monitor in the neutral column until we see definitive signs of buying. The good news is that, with earnings season beginning this week (and a deluge of reports starting next week), we’ll likely get an answer relatively soon as to whether this rally is the real McCoy. For now, we’re still leaning optimistic, so it’s fine to own a few resilient names, but we advise waiting until you begin to make some real money before you become more aggressive.

This week’s list has a few newer names to consider; in fact, there are only a couple of early-year leaders featured today. Our favorite of the week is Nationstar Mortgage (NSM), which is set to become the leading non-bank mortgage servicer in the country. The stock is extended, so try to buy on weakness.

Stock NamePriceBuy RangeLoss Limit
CF Industries (CF) 45.23185-195-
GNC Holdings (GNC) 0.0040-41.5-
Lions Gate Entertainment Corp. (LGF) 0.0014-15-
Meritage Homes (MTH) 102.2032.5-34.5-
Nationstar Mortgage (NSM) 0.0022.5-24-
Spectrum Pharmaceuticals (SPPI) 19.3115.5-16.5-
Stratasys (SSYS) 0.0050-52-
SYNC (SYNC) 0.0014.5-16.5-
TFM (TFM) 0.0053.5-56-
Web.com (WWWW) 0.0017-18-

CF Industries (CF)

cfindustries.com

Why the Strength

When fertilizer giant CF Industries was first featured in Cabot Top Ten Trader in early 2007, the big news was low wheat inventories caused by droughts and demand for corn to make ethanol. Today, the demand for corn ethanol remains constant, but the big news is that record heat in the midwestern U.S. is threatening corn crops. And the constant factor in the background is still a growing world population that needs feeding. CF Industries manufactures and sells nitrogen and phosphate fertilizers: 85% are sold in the U.S., 8% in Canada and 7% are exported. CF Industries is the second largest nitrogen fertilizer producer in the world, a result of its acquisition of Terra Industries in 2010. The company has come a long way from its founding in 1946 to serve the buying needs of regional agricultural cooperatives. With a consistent and growing position in North American fertilizer production and distribution, the way is clear for CF Industries to make headway overseas. The company will report Q2 results in early August.

Technical Analysis

CF was a rocket in the second half of 2010 and had a good 2011 despite a tendency to correct back to 130. A rally that began in mid December 2011 boosted the stock to 190, where it put in 10 weeks of consolidation. A breakout in late April was undercut by the May market meltdown, which dropped CF to 155. But buying on volume resumed in June, and the stock is on the verge of a new high just below 200. The 25-day moving average (now at 179) is rising fast. You can buy CF anywhere under 195, although a dip to near 190 is possible.

CF Weekly Chart

CF Daily Chart

GNC Holdings (GNC)

www.gnc.com

Why the Strength

Retail stocks have become something of a mixed bag—many growth-oriented plays like Under Armour, Fossil and Lululemon are looking ragged, while a few restaurants like Chipotle and Panera are also under the weather. But other, fresher merchandise like GNC Holdings is still acting well; in fact, after a sloppy, wide-and-loose trading pattern, the stock flexed its muscle last week and looks poised to be a leader of any market advance that develops. The reason for its strength is that the company possesses a combination of steadiness and growth that is attracting many big investors; sales of its myriad health and wellness products are unlikely to be damaged by slow growth in Europe and the U.S. (GNC has registered 27 straight quarters of same-store sales growth), yet, at the same time, the firm has managed to crush estimates in recent quarters while registering accelerating sales growth. Throw in a reasonable dividend (44 cents per share, per year, 1.3% annual yield) and a healthy share repurchase program (about 7% of shares will bought back by the middle of next year), and you can see why big investors are placing their bets here.

Technical Analysis

GNC’s consolidation began in late April, after an earnings-induced surge. The pattern that followed wasn’t ideal; shares hit lower lows in mid May, early June and again in mid June, with relatively sloppy trading. However, there’s no question the stock has righted itself—GNC has powered ahead of late, especially last week, when it moved to new price highs on big volume. It’s still not a great environment to buy strength, so if you’re interested, try to get in on a dip of a point or so, with a stop below 38.

GNC Weekly Chart

GNC Daily Chart

Lions Gate Entertainment Corp. (LGF)

www.lionsgate.com

Why the Strength

The entertainment industry is a boom-or-bust business; just ask Disney, which lost a bundle on the John Carter fiasco, or Universal, which watched its movie Battleship go down without a fight. Lions Gate owns a library of about 9,000 film titles and 4,000 TV episodes that it sells to retailers, video rental stores and TV channels. Lions Gate also got great mileage out of its Saw movie and its six sequels, but the big news for Lions Gate now is the success of the box-office monster Hunger Games, which may become a cash cow if the next two installments do well. The company has other assets, such as a chunk of the Mad Men series and the Tyler Perry Madea films, but right now it’s clearly Hunger Games in the driver’s seat. As a much smaller studio than Disney, Universal or a few others, Lions Gate is bound to be cyclical; it must commit a higher percentage of its resources to produce a film, and will rise or fall on the strength of relatively few titles. Despite that, investors right now are hungry for the Hunger Games studio.

Technical Analysis

LGF bumbled along in 2009, 2010 and 2011 in single digits, coming to life only in October 2011 and blasting off in January 2012, a move that soared from 8.5 in January to 16 in March. The big April market correction pulled LGF back to a double bottom in April and May, and the stock has been trading under resistance at 15 for a few weeks. LGF isn’t a buy-and-hold stock, as its fortunes will be at the mercy of every new film released. But if you watch the news and look for a breakout above 15 on volume, there is good money to be made by being nimble with this one.

LGF Weekly Chart

LGF Daily Chart

Meritage Homes (MTH)

meritagehomes.com

Why the Strength

While the jury is still out on this market rally, there’s no question that, to this point, the housing sector has grabbed a leadership role; a variety of homebuilders (including Lennar, our Editor’s Choice last week) and housing supply outfits are showing up on the new-high list. Meritage Homes is a smaller homebuilder (less than $900 million in annual revenue, compared to $3 to $4 billion for the larger companies in the industry), though it has operations in more than two dozen states spread around the U.S. There hasn’t been much bullish news unique to the company of late—its last earnings report was back in late April, when it revealed a 40% increase in sales orders and a 44% increase in its backlog—but investors are keying off some bullish earnings reports from peers Lennar and KB Home two weeks ago, as well as repeated multi-year highs in macro totals of housing starts and new and existing home sales. Meritage isn’t the highest quality company in the group; we’re not thrilled to see that the company is still losing money, while many other homebuilders have cut expenses enough to remain in the black during the bust. But that’s in the past, and analysts are estimating that the bottom line will total nearly 50 cents per share this year and nearly $1.50 in 2013. The next big event will be earnings, which are due out July 26.

Technical Analysis

MTH wasn’t a leader in the homebuilding group earlier this year; the stock effectively lost steam in late January, though it reached a couple of minor highs in the spring. But shares have changed character during the past month, with buyers pushing the stock up from its correction low of 25 to a new peak of 35 on big volume. We don’t expect a huge retreat, but a dip of a point or two is possible and would offer a solid entry point. If you buy, consider a stop around 30.

MTH Weekly Chart

MTH Daily Chart

Nationstar Mortgage (NSM)

www.nationstarholdings.com

Why the Strength

In last week’s issue we wrote about Ocwen Financial, which is aiming to become one of the largest non-bank mortgage servicers. Well, Nationstar Mortgage is one-upping Ocwen—thanks to some proposed acquisitions, it should be the largest non-bank mortgage servicer by year’s end, and analysts are forecasting big earnings growth both this year and next ($2.10 per share this year and $2.99 in 2013). The big idea here for the entire industry is that most of the largest mortgage servicers (which earn fees for handling billing, collections and bad loans) are the largest banks in the country, but just about all of them are looking to exit or dramatically cut back their exposure to the business after the 2008 disaster. That means a whopping $4 trillion in mortgages (measured by unpaid principle balance) could be sold off during the next five years, providing a monstrous opportunity for companies like Nationstar. It’s already completed a few purchases (including $10 billion worth of servicing rights from Bank of America), but the buyout everyone’s talking about is that of Rescap, the insolvent mortgage arm of Ally Financial that’s the fifth largest servicer in the U.S.; Nationstar is the leading bidder for the firm’s whopping $370 billion of mortgage assets. Berkshire Hathaway is interested in bidding as well, but Nationstar is the favorite (and even if it loses out, it gets a $70-plus million breakup fee as compensation). It could be news-driven in the near-term, but long-term, we like this story.

Technical Analysis

NSM just came public in March, and it didn’t do much until it bottomed in early May. But since then the stock has been on fire! It initially thrust to 20, then paused for a copule of weeks, and now it’s catapulted to 24 on big volume. One risk here is that NSM is majority-owned by private equity firm Fortress Investment; who knows if they’ll decide to book some profits in the months ahead. But at this point, we can’t argue with the stock’s strength; if you want in, look to buy a small amount on a dip of a point or two.

NSM Weekly Chart

NSM Daily Chart

Spectrum Pharmaceuticals (SPPI)

www.spectrumpharmaceuticals.com

Why the Strength

With a pair of highly promising late-stage drugs, a diverse pipeline, and a blockbuster colorectal cancer drug (FUSILEV), Spectrum Pharmaceuticals is a rising star in the biotechnology sector. The company posted record earnings in the first quarter of fiscal 2012, with net income soaring to $46.5 million from $13 million a year ago, as sales of FUSILEV soared and operating expenses were reined in. Additionally, the company revealed that recent clinical data for ZEVALIN in the treatment of aggressive relapsed/refractory lymphoma was “outstanding.” Spectrum also has two drugs currently in Phase III: belinostat, which is designed to treat T-cell lymphoma, and apaziquone to treat bladder cancer. Belinostat recently saw encouraging results in a Phase II study to treat relapsed and refractory aggressive B-cell lymphomas. Finally, Spectrum is also looking to expand its pipeline through acquisition, announcing last week that it has renewed its tender offer for Allos Therapeutics. Ironically, many analysts believe that Spectrum could eventually become a takeover target itself, as large-cap pharmaceutical companies are ramping up merger and acquisition efforts to strengthen their own pipelines.

Technical Analysis

SPPI shares struggled early in 2012, tagging a low near 9.5 by mid-April. The stock held its ground, however, rallying back to battle resistance near 12 in May. SPPI entered a holding pattern until June, when solid clinical trial data and impressive quarterly earnings data drove the stock toward multi-year highs. Separately, investors should know that more than 50% of Spectrum’s stock is currently sold short. With the stock showing no signs of slowing its ascent, these shorts could be squeezed into buying back their positions. A potential short-covering rally could spark significant gains for SPPI, but be prepared for volatility.

SPPI Weekly Chart

SPPI Daily Chart

Stratasys (SSYS)

www.stratasys.com

Why the Strength

As businesses look to cut costs and speed up product design and creation, rapid prototyping is becoming big business. Rapid prototyping allows companies to literally print demo and concept products, without sending away for expensive and labor-intensive molds. Stratasys lies at the forefront of this market. Even more impressive, the company has found innovative ways to expand the market for its 3D printers beyond this market niche. The company landed squarely on investors’ radars in April, when it acquired competitor Objet to create a $1.4 billion company. The company struggled in its infancy, as hugely expensive printers priced many customers out of the market. That said, prices have recently fallen below $10,000, opening up possibilities for Stratasys. While earnings growth has slowed for three straight quarters, growth was still a healthy 33% year-over-year in the first quarter. What’s more, revenue growth has held above 30% for five of the past six quarters. With manufacturing growth experiencing a modest recovery, Stratasys should continue to offer solid returns.

Technical Analysis

SSYS shares were content to idle beneath resistance at 40 for much of the first-quarter—that is until the company acquired Objet in April. The acquisition sent SSYS rocketing higher, with the stock quickly topping out above 50 on volume that was more than six times its daily average. Volume has remained elevated since, even as the stock formed a base. Recently, SSYS has revved back up to its prior high, before pulling back a bit during the past two days. We recommend buying dips and placing a stop loss in the 47 to 48 area.

SSYS Weekly Chart

SSYS Daily Chart

(SYNC)

Why the Strength

Since going public in February, Synacor has become one of the hottest properties in the field of online services and content delivery. The company offers a package of solutions enabling telecom and cable operators to unify registration and login, billing, personalization, video delivery, content management, household management and television listings. Synacor is probably best known for its TV Everywhere platform, which enables telecom clients to offer media content to electronic devices over the Internet. The company hasn’t let its publicly-traded infancy slow it down, acquiring HTML5 Platform specialist Carbyn in May—a move that allows Synacor to more rapidly scale delivery services to smartphones, tablets, laptops and Internet-connected TVs. According to an Oppenheimer report, the company commands about 25% of the market, outstripping its largest competitor Yahoo!, which holds an 18% market share. About 44% of the market currently uses in-house solutions, representing a large potential for growth. What’s more, scaling up could provide cost savings and improved margins.

Technical Analysis

Since its IPO in February, SYNC has been on fire, surging more than 200%. After initially heading higher, SYNC formed a base under 6 in April, ultimately bouncing off its 50-day moving average. The shares once again encountered this trendline in May, as SYNC extended a stair-step pattern higher. The stock set a high of 15 in late-May, before once again consolidating those gains. SYNC broke out to a fresh all-time high above 15 on Friday, and hit another high again today! With the potential for another period of consolidation, we recommend buying on weakness, while setting a stop near 13.5.

SYNC Weekly Chart

SYNC Daily Chart

(TFM)

Why the Strength

The Fresh Market is an organic food store chain that offers organic meats, produce and coffee via its 119 stores in 21 states. Like its larger rival, Whole Foods Market, The Fresh Market caters to customers who are willing to pay for the benefits of fresher, higher quality foodstuffs and products. But unlike Whole Foods, which averages about 40,000 square feet per location, The Fresh Market has created a standard store design that averages about 20,000 square feet. This smaller size, along with the stores’ open plan displays, is intended to reproduce the European markets where people shop every day for food and meat and fish that are not sold in plastic trays. The Fresh Market is very deliberate about choosing new locations for expansion, aiming for a 15% expansion in its store count every year, and this has brought consistent double-digit growth in five of the last six years, as well as after-tax profit margins that have approached 6% for the last couple of quarters. Attention to customer service and the quality of the shopping experience have paid off for The Fresh Market.

Technical Analysis

TFM is still a relatively young stock, having come public in late 2010. The stock has never traded as low as its IPO price of 22, but it did dip to 31 in August 2011. Since that low, TFM has been in a solid uptrend. After being pulled down by the May meltdown, the stock vaulted higher in late May on good earnings news. A high volume correction in early June that dropped the stock from 59 to 50 resulted in a three-week basing period with support at 51. TFM climbed back to 58 last week and looks like it might need more time to get organized for a new run at 59 again. We think you can buy a little right here, with a stop at 51.

TFM Weekly Chart

TFM Daily Chart

Web.com (WWWW)

www.web.com

Why the Strength

Doing business on the Web is standard practice these days, and you’d think that pretty much every business would be online by now. But the success of Web.com shows that there are plenty of small- and medium-sized companies in North and South America and the U.K. to make a thriving business out of getting them online or making their online presence work better. Web.com specializes in providing bundled services, software and consulting that will register a company’s domain name (including renewal reminders), provide the tools and functionality to create a site, and offer tutorials and tools to manage the new site. And finally, Web.com will help to optimize search engine results, provide leads for generating business and other marketing assistance. The rush of new businesses coming online keyed a 66% jump in revenue in 2011, and a 132% gain in Q1 2012. Revenues are almost all based on subscriptions (98% of 2011 revenue). With the acquisition of Network Solutions in 2011, Web.com now has nearly three million customers and manages nine million domains. Small- and medium-size businesses need lots of Web help, and Web.com not only beat expectations in its May 2 earnings report, it also forecast higher-than-expected results for the entire year.

Technical Analysis

WWWW came out of a five-month correction that dropped the stock to 6.5 in October 2011. Since then, the stock has blown by its old high of 16 in May 2011 and has been pushing higher on elevated volume. WWWW is now out to new all-time highs just above 19 and is showing signs of spending a little time digesting its gains. You can look to buy on a dip toward 18, with a stop just below 17.

WWWW Weekly Chart

WWWW Daily Chart