Supporting Industries are Strong
The broad market remains (ahem) challenging, but there are still broad pockets of strength, and if you care to mine them (we have mining on our minds, for obvious reasons), and you watch your stocks carefully, you can still make money in this market. Coal, oil and fertilizer remain strong, but we’re now seeing more action in stocks of supporting industries, like the companies that help the drillers, or the companies that sell and service the tractors that roam the fields. This extension of strength into supporting industries is normal; we well remember when layers of technology stocks went through the process in the 80s and 90s. So don’t fear it and don’t fight it; embrace it and prosper. Our Editor’s Choice in this issue is one of these stocks, Titan Machinery. Making its first appearance in Cabot Top Ten Report, and hopefully not its last, it boasts good management, a great industry rolling in cash, and excellent expansion opportunities. Plus, it’s a young stock, and the buyers are in total control.
Stock Name | Price | ||
---|---|---|---|
AGU (AGU) | 0.00 | ||
AUXL (AUXL) | 0.00 | ||
BUCY (BUCY) | 0.00 | ||
CPX (CPX) | 0.00 | ||
CRM (CRM) | 0.00 | ||
GDP (GDP) | 0.00 | ||
MOS (MOS) | 0.00 | ||
ROST (ROST) | 0.00 | ||
STLD (STLD) | 0.00 | ||
TITN (TITN) | 0.00 |
(AGU)
Why the Strength
The fertilizer business refuses to calm down, which is good news for people who own high flyers like Agrium. To the strong price appreciation of all kinds of commodity fertilizers, the company adds the leverage of its growing retail business. The company plans to double its present 15% share of the U.S. fertilizer and chemicals business. And it plans to grow its 6% of the U.S. seed business by offering of new varieties with genetically engineered resistance to insects, diseases and herbicides. As increased demand for ethanol from corn and for all kinds of food crops continues, Agrium is making the necessary moves to increase market share and earnings. Revenues were up 120% in Q1, and earnings rose 44%. In addition to strong financials, the company also pays a 1.1% dividend and is supported by 202 institutional investors, a new high.
Technical Analysis
Although it’s subject to significant pullbacks, AGU has been in an uptrend for years, and a strong uptrend since the middle of 2006. As the stock’s price has risen, volatility has increased as well, so picking a buy point is crucial. The patient investor should be able to pick the stock up on a pullback to around 100. Despite its dividend and strong earnings history, this is a strong growth stock, and it needs to be watched closely for evidence of price deterioration. A dip below the 25-day moving average, now at 90, would be cause for alarm. With all that said, this is still one of the biggest stories around.
AGU Weekly Chart
AGU Daily Chart
(AUXL)
Why the Strength
Auxilium Pharmaceuticals develops and markets treatment options for “unmet medical needs,” one of the most lucrative markets in health care. The company has one product on the market, Testim, a topical testosterone gel to treat hypogonadism in men. Revenues from Testim increased 40% in 2007, to $95.7 million. On the development side, Phase II and III clinical trials are underway for Xiaflex, a multipurpose injection that improves the flexibility of a variety of hardened tissues. Applications include treatment of Dupuytren’s Contracture, which affects the hands and fingers, Peyronie’s Disease and Frozen Shoulder Syndrome. AUXL surged earlier this month on news that Xiaflex performed well in Phase III trials for treatment of Dupuytren’s Contracture. Finally, Auxilium is testing a variety of applications for oral transmucosal films, which deliver drugs through the gums. This novel method of drug delivery could eliminate serious side effects from the treatment of conditions like overactive bladder. Overall, we like the company’s history of innovation and its market-oriented approach to drug development, and we assume that they will eventually be translated into earnings. Clearly, other investors are thinking similarly.
Technical Analysis
AUXL came public in late 2004 at 7, bottomed at 4 a year later, and has been trending up since. In February, it peaked at 36, and then fell to 23 in March, touching its 200-day moving average while shaking out weak holders. And now it’s back in the 36 region, preparing to break out to a new high. We think you can buy it here.
AUXL Weekly Chart
AUXL Daily Chart
(BUCY)
Why the Strength
Bucyrus, founded in 1880, is a global leader in the open pit mining industry; if you want to take the top off a mountain to get at the coal or copper or silver inside, you need its walking draglines, electric rope mining shovels and rotary blasthole drills. With the state of the commodity markets today, just being in this industry is a ticket to riches. But Bucyrus is no follower; it’s a leader. Last year, the company paid $731 million to acquire DBT GmbH, a global supplier of underground coal mining equipment, including roof support systems, armored face conveyors, plows, shearers and continuous miners. The acquisition roughly doubled the company’s size, and the timing, in hindsight, appears brilliant. When announcing the acquisition back in December 2006, Bucyrus president Tim Sullivan said, “We are very bullish on the long-term fundamentals for coal, and this combination will allow us to address 100% of the coal mined on a global basis.” Since then, the price trend of coal has made him look like a genius. Looking forward, analysts are expecting earnings to grow 52% this year and 29% next year, but actual results could be much better. The stock split 3-for-2 last month.
Technical Analysis
BUCY first appeared in Cabot Top Ten Report on June 4, 2007, and it’s appeared six more times between then and now, more than doubling in that time. If you like and appreciate the power of the coal-mining investment thesis, we assume you’re already a shareholder. If you’re a new reader, it’s not too late to get on board. You just need to buy smart and minimize any possible loss. Today, there’s good support at 70.
BUCY Weekly Chart
BUCY Daily Chart
(CPX)
Why the Strength
No surprises here, just another company benefiting from the booming oil and natural gas business. But Complete Production Services doesn’t sell oil or natural gas; it provides services to the companies and people who do. The company operates entirely in North America, where it offers producers regional expertise from Western Canada to Mexico and in pretty much every major American producing region in between. In order to maintain the best local knowledge possible, the company operates as five regionally managed divisions. In addition to expertise, the company provides field support, drilling services, well maintenance, equipment rentals, transportation, product sales and more. In short, it really does provide complete production services. That’s earned the company the business of North America’s largest oil and natural gas producers, and now CPX is benefiting from their booming growth. In the past five years, the company has grown revenues from $103 million to $1.7 billion.
Technical Analysis
CPX came public in April 2006 at 24, topped at 28 two months later—and again in 2007—and bottomed at 14 at the market’s bottom in January. That’s when buyers took charge; they doubled the stock in four months, and pushed it out to new highs in five. The stock is now freewheeling, trading with no ceiling on its growth, and if you’re attracted we recommend that you look for a pullback toward support at 30.
CPX Weekly Chart
CPX Daily Chart
(CRM)
Why the Strength
Salesforce.com doesn’t sell software; it sells a service that you use instead of software. The advantage is that Salesforce.com takes care of all the upgrades and maintenance of the behind-the-scenes software on its servers, while you focus on doing your job. Your job might be sales, or marketing, or customer service; it’s all covered by Salesforce’s on-demand customer relationship management (CRM) service … thus the stock symbol. The company was founded in 1999 by a former Oracle executive, and in less than a decade it’s become the industry leader, freeing users from the tyranny of on-disk software. Interestingly, because the service is a subscription, revenue paid to Salesforce now is earned later, so the price/earnings ratios appear higher than they would under more “normal” accounting practices. But the beauty of the business is that once a customer is on board, the defection rate is very low, so future revenues are very predictable. Revenue growth has accelerated slightly in recent quarters, profit margins are growing, and institutional support is growing; more than 200 mutual finds own the stock. We like it.
Technical Analysis
CRM came public in June 2004 at 18, bottomed at 9 two months later, and has been in a rough uptrend ever since. It last appeared here in October of 2007, trading at 55, but it was pulled down below 50 five times in the months following, touching its 200-day moving average several times. Since February it’s been quite powerful, hitting a high of 75 on the last day of May. Last Friday saw the stock gap up, presumably in response to an analyst’s upgrade, and we suggest buying in this area.
CRM Weekly Chart
CRM Daily Chart
(GDP)
Why the Strength
Goodrich Petroleum is an oil and natural gas driller based primarily in Texas and Louisiana. The company is relatively small, with $134 million in revenue last year. Goodrich has more than 200 active oil and natural gas wells in three states, which it has drilled with a 99.5% success rate. Besides obviously benefiting from the high cost of oil, Goodrich is also making strong plays with natural gas. One of the most valuable properties it owns is part of is the Haynesville Shale, a large subsurface source of natural gas in Louisiana that drilling companies just cannot get enough of. Goodrich purchased 3,250 acres of this shale a few weeks ago, which allowed it to acquire an additional 25 wells. Just this morning, Chesapeake Energy said it will pay Goodrich about $178 million for drilling rights to some of their Haynesville Shale property. The company’s revenue has been increasing steadily for several quarters now, and its liquidity stands at the best level in years.
Technical Analysis
Goodrich, which went public at 25 in 1987, bottomed out below one dollar in the late nineties before beginning a solid upward movement in January 2003. The stock took a dip down to the mid-teens this January before rocketing up to 40 in the first quarter of the year, and then 60 in the past few weeks. It can be tricky to find the best buy point for a stock that’s 60% above its 50-day moving average, so we recommend waiting to see if this latest move to the upper 50s holds before buying.
GDP Weekly Chart
GDP Daily Chart
(MOS)
Why the Strength
The major source of demand for agricultural products is still food, but ethanol production has given the industry a nice boost recently. The stampede for ethanol helped drive corn prices up more than 100% in the last two years, pushing farmers to grow more any way they can. The number one way to boost production of any crop, of course, is fertilizer. Mosaic produces and distributes phosphate, potash and nitrogen fertilizers worldwide, as well as specialty products and animal feed. A third of revenues come from the U.S., where American farmers are thriving thanks to government-subsidized ethanol production. Canada makes up another 15%, and the rest come from international powerhouses with growing populations to feed like Brazil (15%) and India (10%). The company is already the world’s largest miner, producer and distributor of potash fertilizer, and recently announced yearlong potash supply contracts with Chinese and Indian companies, shoring up future profits. The combination of increased output and higher prices has been a windfall for Mosaic, and the accelerating trend of earnings and the plump profit margins tell the story.
Technical Analysis
This marks the fourth appearance of MOS in Cabot Top Ten Report since June 2007, when it was trading at 36. Skeptics will say that the 300% advance since then is a sign it’s gone too far; optimists will remember that a trend, once in effect, can go farther than expected. If you’re in the latter camp, like us, try to buy on a pullback toward support at 143.
MOS Weekly Chart
MOS Daily Chart
(ROST)
Why the Strength
If you don’t live in one of the 27 states with one or more of the company’s 838 locations, you may not have heard of Ross Stores, but Ross is a Fortune 500 company and the second-largest off-price retailer in the U.S. Ross also has a second franchise called dd’s that operates in California, Florida, Texas and Arizona. By offering top quality name brands at 20% to 60% off, the company sells more than $6 billion worth of fashionable clothes and accessories every year. The company isn’t growing like a weed, but growth has been steady, and is likely to increase as consumers feel increasing pressure to trim budgets. Earnings estimates are up for fiscal 2009 and 2010 and May same store sales figures were up 7%, crushing analysts’ estimates of a 4.4% rise. Ross Stores also pays a small dividend of 1% that’s been increased frequently during the past few years.
Technical Analysis
ROST has been a model of consistency, trading in a 22–32 range for years. After reaching a low of 21 at the tail end of the winter bear market, the stock rose to the top of its range and broke out to a new high in May. ROST may not have the kind of breakout potential of an oil or fertilizer stock, but it’s a solid performer with considerably less risk than the leaders in those hot sectors. We think a small buy on a correction to 35 looks like a reasonable strategy.
ROST Weekly Chart
ROST Daily Chart
(STLD)
Why the Strength
Global steel demand remains high, and price hikes earlier this year did nothing to dampen investor enthusiasm for the sector. Steel Dynamics made a strategic move last year to buy OmniSource, a huge supplier of scrap. This move secured a continuing supply for the scrap metal, which is the main raw material for Steel Dynamics’ arc furnaces. Last Thursday, the company announced increased Q2 earnings guidance based on stronger-than-expected shipping volume and price for both flat-rolled steel and recycling. The company has been a market leader for a long time—we take its seven previous Top Ten appearances in four different years as evidence of superior management—and this increased earnings estimate should keep investors interested. A 1.1% dividend makes a nice addition to the package.
Technical Analysis
STLD was trading at 5 back in early 2003 and it has been outperforming the market for much of the time since then. Despite just hitting new price and RP peaks, the stock is trading at just 12 times expected earnings and just 16 times present earnings. The stock just spent a couple of months under resistance at 40, so this breakout to a new price peak may indicate the beginning of an advance with some legs. With the 25-day moving average just at 37, the stock isn’t especially extended. We think you can buy some here, then add to your position when you get a small profit cushion.
STLD Weekly Chart
STLD Daily Chart
(TITN)
Why the Strength
We love it when OptiMo, the software behind Cabot Top Ten Report, serves up a hot unknown young stock. This one we like so much we’re naming it Editor’s Choice. Titan Machinery, headquartered in Fargo, North Dakota, owns and operates 48 Case/New Holland stores in North Dakota, South Dakota, Minnesota, Iowa and Nebraska, selling a diversified mix of agricultural, construction and consumer equipment. These include loaders, graders, crawler dozers, landscape tractors, forklifts, excavators and much more. In the past five years, revenues have grown from $97 million to $433 million, and today farmers are spending money faster than ever. Just this morning, the company announced first quarter results; revenues grew 91% to $153 million, while earnings doubled. Also, the company completed three acquisitions in the quarter. Add it up all and you get a company that’s well-managed, in a strong sector, with great expansion opportunities. Because it’s just beginning to be discovered by investors, Titan could go much farther.
Technical Analysis
TITN came public last December at 9, and has been climbing strongly since then. Last week it closed at 28, but Monday morning’s announcement sparked a gap up to 30. History says the stock is now likely to climb further, so if you like the story, you can buy some now.