Tech Stocks Start To Pop UP
Commodity stocks have been (and remain) the leaders of the market’s advance, but interestingly, the tech-heavy Nasdaq has been outperforming all other major indexes for the past few weeks. Now, finally, some individual tech stocks are beginning to pop up—there are two chip stocks and one hard disk drive maker in this week’s Top Ten. We’re not ready to tell you to move a ton of money into technology sectors, but it’s a sign the rally is broadening out. Elsewhere in this week’s list, there are the usual suspects of oil, natural gas, steel and alternative energy. Our favorite of the week is Marvell Technology (MRVL), a chip firm that gapped up in a big way after its earnings announcement last Friday. We think you could nibble around here, although a drop of a point or two isn’t out of the question.
| Stock Name | Price | ||
|---|---|---|---|
| AMSC (AMSC) | 0.00 | ||
| CMI (CMI) | 0.00 | ||
| EAC (EAC) | 0.00 | ||
| GTI (GTI) | 0.00 | ||
| HK (HK) | 0.00 | ||
| MA (MA) | 0.00 | ||
| MRVL (MRVL) | 0.00 | ||
| NETL (NETL) | 0.00 | ||
| PCX (PCX) | 0.00 | ||
| WDC (WDC) | 0.00 |
(AMSC)
Why the Strength
With the high cost of oil all over the news, investors are looking even more closely at alternative energy solutions. While a lot of that attention has been focused on solar stocks, wind energy is also seen as a viable alternative. American Superconductor may not sound like a stock having anything to do with wind power, but the company is profiting from its power systems divisions which manufacturers electrical systems for use in wind turbines. American Superconductor not only makes money on the initial sale, but also the replacement parts for the wind turbine, which promises recurring sales for years. With companies in the U.S. expected to double their spending on wind power this year, American Superconductor is in a prime position to benefit from the surge towards alternative energy.
Technical Analysis
After its positive earnings report in early May, AMSC had been consolidating near 30 before a move up on decent volume over the past week. With the stock up nearly 15% from its support, we recommend waiting to see how the stock performs at this new level before jumping in. The 25-day moving average is still back at the support level of 30, so buying on weakness is advised.
AMSC Weekly Chart
AMSC Daily Chart
(CMI)
Why the Strength
This medium- and heavy-duty engine maker has been buffeted recently by weakness in the American truck market as consumer demand for giant vehicles cools. Daimler-Chrysler’s decision not to manufacture any more 2008 Dodge Ram pickups drove Cummins to furlough 125 employees at a midrange engine plant in Indiana this week. But despite the trying domestic conditions, the company posted a 33% jump in first-quarter profits in April and beat earnings and revenue estimates. The reason is a growing international market; 57% of first-quarter sales came from overseas. The company already has established markets in developing dynamos China, India and Brazil and is looking to expand into emerging markets like Russia, Vietnam and Africa. It’s a strategy that should pay off nicely as these countries’ power demands and emissions standards increase in tandem. It’s not dynamic, but Cummins is in the midst of a good growth trend.
Technical Analysis
CMI hit the skids in January along with everything else, but remained well above those lows in March (during the Bear Stearns panic) and showed good accumulation in late April and early May, partly because of a better-than-expected earnings report. The stock has hit some resistance as it approached its old peak, but the past two weeks of relatively calm action, especially given the market’s choppiness, are encouraging. If you’re game, you can buy a little around here, and look to add should CMI decisively break out above 74.
CMI Weekly Chart
CMI Daily Chart
(EAC)
Why the Strength
Encore Acquisition has been a hot oil and gas exploration company since Q4 2007 earnings results confirmed the soundness of the company’s 2007 restructuring. With properties in the Permian Basin of West Texas, the Haynesville shale of northern Louisiana and the Montana Bakken field, Encore has been impressing investors with its production gains and the potential of its properties. But now, the company is hot because it has essentially put itself up for sale, and analysts expect a long list of suitors to line up. As a small company with a huge wad of cash, Encore’s owners say that they took this step because the market was undervaluing the company’s shares. It looks like the promise of a bidding war will correct that oversight.
Technical Analysis
EAC bolted out of a 27-month base in April of this year, and has been a pure rocket since then. From 26 at its Jnauary lows, the stock soared to 70 on May 22 before correcting back to under 65. Since then, news of the possible sale has lit the spark again and the stock has been getting back in gear. The results of a possible bidding war are uncertain, but it looks like a buy anywhere under 70 is a pretty good bet.
EAC Weekly Chart
EAC Daily Chart
(GTI)
Why the Strength
In its more than 120-year history, GrafTech has supplied carbon electrodes that allowed the city of Cleveland to lead the world in having electric street lights and done pioneering work on arc lights for Hollywood productions. These days, the big story is steel, and GrafTech’s carbon and graphite materials are a mainstay in the arc furnace technology that powers the steel recycling business. The company’s product list includes hundreds of items that capitalize on natural and synthetic graphite’s ability to withstand high temperatures and the ability of carbon foam to provide high strength/low weight materials. Demand for increased steel production has pushed revenues and after-tax profit margins to record highs. With robust projections for 2008 earnings on the books, GrafTech is hot, both literally and figuratively.
Technical Analysis
GTI’s current laser-shot uptrend began in March, as the stock was finishing up the consolidation of a huge 2007-07 run that lifted it from 5 to 20. After correcting back to 14, the stock took off, fuelled by great earnings and a robust outlook. The current run from 14 to 27 has been marked by tiny corrections (longest was three days) and a ruler-straight uptrend. Any pullback looks like a buying opportunity; try to start a position under 26.
GTI Weekly Chart
GTI Daily Chart
(HK)
Why the Strength
Petrohawk is an oil and gas company with operations in Louisiana, Texas, Arkansas and Oklahoma. As oil and gas prices have continued to climb, the company has spent the last several months acquiring newly feasible resource plays, including stakes in a number of “unconventional” gas shales. Because shale is much less permeable than sandstone and limestone (the more conventional sources of natural gas) the rock has to be fractured to induce gas to flow to drilling rigs. But as horizontal drilling techniques develop – and natural gas prices soar – these shales are suddenly becoming lucrative. In November, December and again in January, Petrohawk expanded its holdings in the Fayetteville Shale, a deep natural gas reservoir (below 10,000 feet) in Arkansas (that has made Southwestern Energy a big winner). In April, Petrohawk increased its total holdings in the Haynesville Shale, a similar property in Louisiana, to over 70,000 acres. With no end to the energy resource crunch in sight, the future looks bright for resourceful Petrohawk.
Technical Analysis
HK has been participating in the energy bull market the past few months, breaking out soon after the market bottom in March, advancing consistently through most of April and May, and then exploding higher last Friday on gargantuan volume. There was no news to account for the jump, although investors appear bullish that the company’s Haynesville Shale properties will produce more gas than expected. The stock is extended here, but the big volume tells us big investors are active. Use a pullback of a couple of points to get in.
HK Weekly Chart
HK Daily Chart
(MA)
Why the Strength
With all the worries of a credit crisis, it may be surprising to see a financial stock performing so well. Of course, MasterCard has a unique position in the financial industry in that it is simply a processor, not a lender. So every time someone swipes a card with the MasterCard logo, the company makes money regardless of the debt that person may owe. In fact, a recession may increase the likelihood that a consumer will charge an item and pay for it later instead of paying for it immediately with cash or a check, which means more money for MasterCard. With costs of everyday purchases like gas and groceries rising, it is also likely consumers would rather put that expense on a card and benefit from rewards like airline miles or gift cards.
Technical Analysis
MA has consistently performed well all the way back to its IPO in June, 2006, and the past quarter has been no exception. The stock had a slow but steady move from 200 to 240 through March and April before jumping to 280 and then 300 in recent days. With the stock having moved up quickly in the past week, we recommend waiting for it to settle in the 300 range before buying.
MA Weekly Chart
MA Daily Chart
(MRVL)
Why the Strength
Marvell Technology was a true market darling for many years, as the company’s semiconductors were used in many of the world’s hottest electronic devices. But all good stories come to an end (in the stock market, anyway), and the stock plunged from 37 to 10 as earnings fell off a cliff. However, Marvell is back on track, as its quarterly report confirmed last week—sales of chips for Wi-Fi and smartphones, combined with cost controls, led to a solid 27% gain in revenue and a huge 380% jump in earnings. Moreover, it appears that the company will supply chips to Apple’s new 3G version of its iPhone (expected to be announced next week). All of this had analysts scrambling to hike their earnings estimates; the consensus figure calls for $1 per share this year, but since Marvell crushed expectations by 85% last quarter, that’s likely conservative. We like the story.
Technical Analysis
MRVL dropped 73% between January 2006 and January 2008, which, believe it or not, is about average for a big leader after it’s topped. But the past few months have shown tighter, bullish action—the stock consolidated around 11 for three months, began rallying strongly in April, and exploded higher last Friday after its blowout earnings report. Indeed, shares jumped 23% on five times average volume, a clear sign institutions were active. There remains overhead resistance in this area, so a few bumps in the road can be expected, but we do expect higher prices over time.
MRVL Weekly Chart
MRVL Daily Chart
(NETL)
Why the Strength
The ever-evolving Internet and an increasing number of Internet-connected handheld devices are keeping pressure on networks to get faster. NetLogic designs, develops and markets integrated circuits that speed up the flow of voice and data over both wireless and wireline networks. NetLogic works at the transistor level to design fully customized chips that are smaller, require less power and get networks running faster and more efficiently. Most of NetLogic’s designs are sold to original equipment manufacturers; as a fabless designer, NetLogic sticks to designing and customizing systems and leaves the manufacturing to others. The lack of physical plant contributes to the company’s high profit margin—25.4% in the latest quarter! Earnings growth is back on track after a few bad quarters from Q4 2006 through Q3 2007, and its quarterly report on April 30 smashed the Street’s expectations, putting the stock back near the top of investors’ lists.
Technical Analysis
NETL came public in the mid-2004, and the stock made a heroic run from late 2004 until April 2006, when it topped out at 45. The stock corrected to under 20 in late 2006, and had been stuck in a 22–26 range when that April 30 earnings report gapped it up from 29 to 33. Since then, NETL has digested that gain and then made another leap to near 38. Look to buy on a correction back to that old 36 resistance level.
NETL Weekly Chart
NETL Daily Chart
(PCX)
Why the Strength
The coal industry remains one of our favorite commodity-related stories, and Patriot Coal will be in good position to take advantage of skyrocketing prices. The company is based in St. Louis, and was spun-off from Peabody Energy in October of last year. It operates a bunch of mines, both on its own and via joint ventures, and is set to close on its purchase of Magnum, which will give the combined entity 1.9 billion tons of proven and probable coal reserves. That’s all great, but the big story here remains an outstanding global supply/demand balance in the coal markets. Strong demand for steel and electricity in many emerging economies, combined with tight supplies (partly due to floods and earthquakes) have catapulted the prices of all kinds of coal. Patriot has a decent amount of coal that has yet to be contracted out for 2009 and 2010, and that should result in booming earnings next quarter ($0.38 a share), this year ($1.70 per share) and in ’09 ($6 to $7 per share in earnings).
Technical Analysis
PCX has been on fire the past couple of months, like many coal names. We can’t say it’s the most institutional quality stock in the group—it trades just about 500,000 shares per day—but it’s clearly garnering more support by the day. Our current thought is that many coal names (and other commodity names) are likely to hit some type of rough patch in the near-term, but since most are just a couple of months out of solid basing structures, we think higher prices will eventually come. Thus, with the stock more than 60% above its 50-day moving average, we advise buying on pullbacks.
PCX Weekly Chart
PCX Daily Chart
(WDC)
Why the Strength
Western Digital is a leading producer of hard disk drives, a business that’s as cyclical as they come, and one that doesn’t exactly get the pulse racing. However, while desktop computer demand used to be the major factor here, the industry has expanded into newer electronic devices—MP3 players and digital video recorders in particular, with laptops growing nicely as well. The result has been tremendous growth; in the first quarter, hard drive revenue jumped 43% thanks to a 41% increase in units shipped. And some analysts believe current-quarter shipments are running ahead of schedule, which should lead to another triple-digit expansion in earnings. At some point, business will slow significantly, which makes this stock hard to handle. Yet right now, the wind is at the company’s back.
Technical Analysis
WDC was a Top Ten member a couple of times earlier this year, yet the stock’s pattern wasn’t stable—it plunged for most of January, before racing straight up to new peaks in February. Compare that action to the smoother, rounded pattern seen in recent months, capped off by a big move to new peaks three weeks ago; such a process wears out weak holders. WDC will always be a bit choppy, but with technology-related shares doing better, we think it’s worth buying on weakness.