More Oil!
The market’s growing volatility is a small area of concern on our mind today; if anything, it should cause you to manage your market exposure a little more carefully; buy low and keep losses small. On the other hand, there are still some very strong stocks out there, and as we all know, trends can persist far longer than expected. Four oil stocks anchor this issue of Cabot Top Ten Report, reflecting the fact that the sector is strong, that it held up extremely well in last Friday’s market dump, and that many mid-sized companies in the sector are attracting institutional investors’ money. As long as the trend continues—and we recognize that it may be overdone in the short-term—we like them all. But our Editors’ Choice is one of the two steel companies in the issue, Gerdau. Benefiting from the fast-growing Brazilian economy but diversified into the rest of South America and North America, it’s got a great track record of growth as well as a chart that’s been building a base for the past month.
| Stock Name | Price | ||
|---|---|---|---|
| BNI (BNI) | 0.00 | ||
| CXO (CXO) | 0.00 | ||
| ENER (ENER) | 0.00 | ||
| GGB (GGB) | 0.00 | ||
| MDU (MDU) | 0.00 | ||
| ME (ME) | 0.00 | ||
| MT (MT) | 0.00 | ||
| TAP (TAP) | 0.00 | ||
| WLL (WLL) | 0.00 | ||
| AGU (AGU) | 0.00 |
(BNI)
Why the Strength
High and rising commodity prices are buoying everything they touch. Fort Worth-based Burlington Northern Santa Fe operates the second-largest railroad in the country, with over 32,000 miles of track in 28 states and Canada. First quarter revenue rose by 17%, led by a 38% increase in agricultural revenues. That includes profits from the booming trade in foodstuffs like wheat, soybeans and corn as well as shipments of ethanol. Of course, no one has been left unharmed by rising fuel costs, but BNSF has managed to largely offset the price increases with greater fuel surcharges for its customers. In fact, the company is taking advantage of the seller’s market in energy to begin shipments of Wyoming coal to the East Coast, for use or export. BNSF also expects a surge in business from trucking companies, despite dwindling freight volumes this year. Trains use one-third as much fuel as trucks, so BNSF’s prices are very competitive over long hauls. Also, the stock pays a 1.7% dividend.
Technical Analysis
BNI has a fine long-term chart, reflecting management’s ability to grow earnings through careful expansion over the years. The stock broke out above its 2007 high of 95 back in March, and paused to let its 25-day moving average catch up in April, but since then the buyers have been in complete control. And last Friday’s market collapse? It only gave the stock an opportunity to pull back to support at 110. If you like the story, you can buy some here.
BNI Weekly Chart
BNI Daily Chart
(CXO)
Why the Strength
Midland, Texas-based Concho Resources came public in August 2007, when oil was $73 a barrel. Since then, energy prices have taken off, and CXO has followed suit. Concho, an independent oil and gas producer, operates almost entirely in the Permian Basin in Texas and New Mexico. The company has over 2,400 wells and identified drilling sites in the area. Last week, Concho added another 1,651 identified drilling locations, including a stake in the lucrative Wolfberry Play, by acquiring Henry Petroleum. The company also has a requisite stake in “unconventional emerging resource plays,” still firmly in the exploratory stage. Regardless of how well that turns out, Concho will continue producing oil and gas as long as the market keeps lapping it up. The most recent quarters show accelerating revenue growth—always a good sign—and triple-digit earnings growth. Institutions are climbing on board this young stock and you can too, if you don’t already own enough oil and gas investments.
Technical Analysis
CXO came public in August 2007 at 11 and has been trending up ever since. The acquisition of Henry Petroleum last week sparked a buying frenzy that spiked the stock up from 33 to 40, and now the stock is consolidating that gain. Ideally, it will now trade in a range between 35 and 40, so any opportunities to buy in the low end of that range will be attractive.
CXO Weekly Chart
CXO Daily Chart
(ENER)
Why the Strength
In its first 13 years as a public company, Energy Conversion Devices became famous for its brilliant technology and infamous for its inability to translate revenues into profits; the scientists in charge cared more about technology than they did about shareholders. But last September, a new CEO came on board; he slashed peripheral projects, focused like a laser beam on the company’s solar power technology and then one month ago astounded analysts with a quarterly profit of $0.23 per share. Looking forward, analysts are projecting $1.53 for 2009! What’s unique about the company’s solar technology is its use of stainless steel as a substrate instead of silicon. This enables continuous production (instead of batch production) on half-mile-long rolls, and the result is flexible panels that can be easily rolled onto roofs, that do not break, and that cost less than traditional silicon panels. Looking forward, the future is bright; demand is mushrooming and costs of production are falling.
Technical Analysis
ENER came public in 1995 at 18 and topped out at 31 a year later. Then began the long yo-yo pattern that would take it down to 5, up to 43, down to 7 and up to 58. That was the January 2006 high, which stood until last month, when the unexpected profit news gapped the stock up from 36 to 50, and buyers extended the upward pressure through the month. At this point, the stock is moderately over-extended and due for at least a mild correction. But the long-term profit potential argues for buying some soon if you aren’t already on board.
ENER Weekly Chart
ENER Daily Chart
(GGB)
Why the Strength
No steel company is as large as ArcelorMittal, but Gerdau, the Brazilian giant, is the world’s 14th-largest producer and has carved out an admirable niche market in the manufacture of long steel products like rods, slabs, wire and specialty products. Gerdau’s history dates from 1901, when it began life as a nail factory. From that humble start, it has grown into a company with a capacity of 24.8 million metric tons of steel a year and 37,000 employees. The company’s specialization in long steel products gives it high exposure to new construction, which uses enormous amounts of rebar and structural steel. Gerdau got 42% of its revenue from Brazil last year, and that country’s continuing economic growth provides an excellent base for Gerdau’s bottom line. Institutional investors number just 32 (a new high), indicating huge potential for support from large investors. The stock is also benefiting from a June 5 rate hike by the Brazilian central bank, which shows both the strength of the Brazilian economy and the bank’s aggressive stance in controlling inflation.
Technical Analysis
GGB has been in a long-term uptrend since 2003, but the rate of advance really steepened when global markets came out of this year’s January correction. GGB had spent the last four months of 2007 banging its head on 30, then dropped to 23 in January before bolting to 35 in February. After a month to digest gains, the stock shot to 50, and has spent three weeks building a base at that level. We think you can buy some right where it is.
GGB Weekly Chart
GGB Daily Chart
(MDU)
Why the Strength
MDU Resources, founded in 1924, is located in Bismarck, North Dakota, which means it’s perfectly positioned to benefit from the energy boom that’s transforming the economy of the region. The company distributes electricity and/or natural gas in Montana, North Dakota, South Dakota, Wyoming, Minnesota, Oregon and Washington. It also owns Fidelity Exploration and Production, which drills and pumps oil and natural gas in a broad swath from Montana to Alabama. Finally, it mines and markets crushed stone, sand and gravel; in March it bought the biggest concrete block manufacturer in Fairbanks, Alaska. All these, if well-managed, will bring future growth, but the key driver of profits today is higher prices; while total output grew 8% in the first quarter, revenues grew 42% (an accelerating trend) thanks to higher prices. Looking forward, analysts are most excited about the company’s assets in the Bakken shale reserves of North Dakota, where MDU expects to participate in up to 670 wells in 2008. The dividend yields 1.7%. We like it.
Technical Analysis
Long-term shareholders in MDU are happy; in the past twenty years, the stock has climbed from 3 to 34. Last summer, the stock peaked at 32, but last week that old high was exceeded as the stock lumbered to a high of 34. It’s not going to be a rocket-shot from here, but if you’re looking for a lower-risk way to invest in the industry long-term, MDU may be your ticket. With the 25-day moving average down at 32, you can buy on any little correction.
MDU Weekly Chart
MDU Daily Chart
(ME)
Why the Strength
With the cost of oil continuing to be in an upward trend, and with some analysts predicting $150 per barrel this summer, oil stocks are still the leaders of this market. One stock performing particularly well is Mariner Energy, an oil and gas exploration and production company based primarily in Texas and the Gulf of Mexico. The company only went public two years ago, and with a market cap of less than 1% of oil giant Exxon, it has strong growth potential. Mariner continues to increase its oil output thanks to acquisitions, with its total net production increasing 23% compared to last year. In its most recent quarterly report, the company says that it expects this growth to continue at a rate of 30 to 40% through 2008.
Technical Analysis
ME came public in early 2006 and has been trending up since. For the first part of the 2008, the stock worked to break through resistance at 30, finally achieving the feat in early May. The subsequent run-up took it to 35. It is now taking a well-deserved rest and attempting to break through resistance at the 35 level. However, the stock has been very volatile in the past several days, thanks in no part to the fluctuation of oil prices. We recommend buying on any normal pullback.
ME Weekly Chart
ME Daily Chart
(MT)
Why the Strength
ArcelorMittal—back for a second Top Ten appearance after debuting in March—is the largest steel company in the world … and the world is still hungry for steel. Founded in just 1989, the company grew huge (10% of total world production) by acquiring other large producers (who were already the results of mergers), leaving it with 64 steel mills in 27 countries. Just to show that the wave of acquisition isn’t over, ArcelorMittal recently announced it is buying Bakermet, a Canadian metals recycler. The global appetite for steel is strong enough that producers, citing the rising cost of the scrap used in mini-mills, are imposing surcharges on prices, even those thought to be covered by existing contracts. ArcelorMittal is a huge company, and it’s getting bigger. It also pays a nice (1.1%) dividend and is now owned by a new high of 48 institutional investors, which means there’s plenty of room for big-investor ownership to grow. We like it.
Technical Analysis
When MT first appeared in Top Ten in March, we noted that it had just broken out on average volume from a six-month basing formation. We didn’t think it was an ideal setup, but it has proven to be a successful one. The stock, which was trading at 82 at the time, has topped 100 on above-average volume to reach both a new price peak and a new RP peak. We think it looks buyable on any dip toward 100.
MT Weekly Chart
MT Daily Chart
(TAP)
Why the Strength
The country’s third largest brewer, Molson Coors was formed in 2005 by the merger of the Adolph Coors Company with Canadian competitor Molson Inc. Based in Denver, the company brews the popular beers Coors Light, Molson Canadian, Keystone and Blue Moon, among others. Coors Light, the company’s bestseller, is the fourth most popular beer in the U.S. Now, the company is planning a joint venture with the U.S. operations of London-based SABMiller, maker of Miller Lite and Milwaukee’s Best and a major importer of foreign beers. SABMiller’s brands already command 18.7% of the U.S. market; together with Molson Coors’ 11%, the companies will dominate almost 30% of the U.S. beer market. Nevertheless, the MillerCoors joint venture was approved by the Justice Department last week. The companies expect to save $500 million annually by combining operations, and doubtless hope to gain a competitive advantage against Anheuser-Busch, the giant brewer in control of almost half the U.S. beer market.
Technical Analysis
TAP has beaten the market by a slim margin in recent years, but some heavy buying power has appeared on the scene this year, suggesting that this stock has better-than average upward potential. In recent weeks, the stock has been walking up its 25-day moving average, and it’s now working to break out above last October’s resistance at 58. It won’t be a market leader, but it certainly has the potential to be a leader of the low-risk sector.
TAP Weekly Chart
TAP Daily Chart
(WLL)
Why the Strength
Whiting was founded in 1980, near the tail end of the country’s last inflationary wave, and it managed to survive until the current wave of energy inflation took root. Its business, like so many strong stocks today, is oil and gas exploration and production. Its properties range geographically from Montana and North Dakota to Texas and Louisiana. The reasons for its growth are familiar. In the first quarter, production was up 6%, while natural gas prices were up 25% and oil prices were up 65%. How long this will last, no one knows, but management appears both capable and optimistic. We say capable because it’s grown revenues over the past five years from $167 million to $819 million. And we say optimistic because the company just completed a $365 million acquisition of a natural gas field in Utah. Named Flat Rock, the property produced 19 million cubic feet of gas per day in March 2008, and Whiting believes it can increase production by about 70% in 2009 and double it in 2010. Analysts are looking for an earnings increase of 126% this year.
Technical Analysis
WLL came public in 2003 at 16, climbed to 46 by early 2005, then spent almost three years building a long, long base. It finally said good-bye to 46 this January, and three years of pent-up buying power took control, doubling the stock in four short months. At this point, the advance is not young, yet we don’t think it’s over. Last Thursday the stock gapped up beyond 100, and on Friday, when the broad market was tanking, the stock kept on climbing. If you’re game to ride this rocket, we suggest buying on a pullback and keeping a tight stop.
WLL Weekly Chart
WLL Daily Chart
(AGU)
Why the Strength
Like the petroleum sector, the fertilizer business has been one of the top performers of the past couple of years. The big story is the increasing global demand for food (for people) and ethanol (for cars), both of which demand fertilizer to increase output. Agrium, based in Calgary, Alberta, Canada, has 14 production sites in North America and Argentina that can turn out nearly 10 million tons of fertilizer a year. Nearly half of this output is sold wholesale, while the rest—along with seed and crop-protecting products—is sold in the company’s 500-plus retail farm centers in the U.S., Argentina and Chile. Agrium hasn’t been letting the grass grow under its feet, either. The company acquired Royster-Clark in 2006, doubling its retail footprint, took a nearly 20% equity position in a Chinese fertilizer company in 2007, acquired 32 retail locations from Archer Daniels Midland in 2007, and has begun construction of an Egyptian nitrogen facility that’s scheduled for completion in 2010. The fertilizer story has had amazing longevity, and it’s showing no signs of exhaustion. The stock also pays a small dividend.
Technical Analysis
In the middle of 2004, AGU was trading at 12. After consolidating for a year from July 2005 to August 2006, it got going in earnest, soaring from 24 in September 2006 to the 90s in recent trading. The stock took a run to 95 on huge volume in April, then corrected to 75, shaking out weak holders before recovering to 91 in May. The most-recent run has taken the stock from 80 back to the April high of 95, now established as a resistance level. Try to buy on a pullback toward the 25-day moving average at 88. The story is still big.