Inflation-Related Good … Everything Else Bad
The market was just beginning to turn the corner last week before sellers re-appeared Thursday and especially Friday, driving the major indexes back toward their January lows. Thus, from a top-down perspective, you should respect the bears, which is why our Market Monitor above is again tilted toward the bearish side. On a sector-by-sector basis, however, many stocks are working – mainly oil, gas and gold, though coal stocks are also a bastion of accumulation these days. Right now, these inflation-related plays are just about the only game in town; how long it lasts, nobody knows, but that’s where you should focus your attention, if anywhere. This week’s Top Ten is once again heavy in these strong areas, with our favorite of the week being Goldcorp (GG), which has staged a good-looking breakout on healthy volume. You could buy a little on any weakness, while placing a relatively tight stop under 39, leaving a good risk-reward ratio.
| Stock Name | Price | ||
|---|---|---|---|
| CLF (CLF) | 0.00 | ||
| COG (COG) | 0.00 | ||
| CTRP (CTRP) | 0.00 | ||
| EOG (EOG) | 0.00 | ||
| FCN (FCN) | 0.00 | ||
| GFA (GFA) | 0.00 | ||
| GG (GG) | 0.00 | ||
| NFLX (NFLX) | 0.00 | ||
| PAAS (PAAS) | 0.00 | ||
| XEC (XEC) | 0.00 |
(CLF)
Why the Strength
Cleveland-Cliffs is the largest producer of iron ore in North America, with six mines in Michigan, Minnesota and eastern Canada, and the biggest reason for its strength today is the rising price of iron ore, in high demand by steel-makers worldwide. But there’s more; Cleveland-Cliffs has recently completed two major shifts in its focus. The first is an expansion in its operation to a global scale; it’s a majority shareholder in an Australian operation and a minority shareholder in a Brazilian operation. The second is its diversification into coal, which is the fuel source commonly used to process iron ore into steel. The company’s recently purchased coal mines in West Virginia, Alabama and Australia give the company a great position to serve both the domestic and the fast-growing Asian markets. Management obviously believes these moves will position it well for the years ahead, and we can’t argue. Also, the stock’s valuation seems reasonable, assuming the expected growth will materialize. Just remember that the major factor here – the price of iron ore – is out of the company’s control.
Technical Analysis
Since bottoming in 2003, back when no one wanted steel stocks, CLF has been in a healthy uptrend. Most recently, it encountered resistance at 105 in October, December and January before breaking out into new-high territory three weeks ago. Today, the 50-day moving average has just hit that 105 level, making it a very attractive buying area, should some selling pressures push the stock that way in the weeks ahead. Barring that, however, we think you could aim to buy under 115, a level the 25-day moving average is now approaching.
CLF Weekly Chart
CLF Daily Chart
(COG)
Why the Strength
Cabot Oil & Gas (no relation) is a Texas-based explorer/driller/producer with holdings in the Gulf coast, the Appalachians, the Rockies and western Canada. Energy stocks have been doing well as a group, but Cabot is on a particular roll because of a great February 13 earnings report that showed total proved reserves of 1,616 billion cubic feet equivalents (Bcfe), which reflects a 334% replacement of production. This ability to deliver on the promise of consistent double-digit growth in both production and reserves for years at a time has put Cabot on the map. After-tax profit margins have topped 20% in 10 of the last 11 quarters, and dividends have been increasing. Cabot Oil and Gas isn’t huge (market cap of $4.9 billion), but it has grown consistently, which is a great thing in an environment of rising energy prices.
Technical Analysis
COG is coming off a rough patch that followed a peak at 43 in June 2007. Since then, the stock has been as low as 30, but has shown an affinity for the 38 level, using it as both support and resistance at various times. An attempted December breakout was squashed by general market weakness, but the February earnings report did the trick. The rapid runup from 38 to near 50 may have left the stock a little extended, but it looks buyable on any correction back toward 45.
COG Weekly Chart
COG Daily Chart
(CTRP)
Why the Strength
Ctrip.com is the leading online travel agency in China. From a tiny beginning in 1999 as an aggregator of unused hotel accommodations, the company has blossomed into a full-service travel planning and booking service, with business soaring as more and more Chinese have the money and time to travel. The two big stories here (in addition to steady organic growth) are the Olympics, which are expected to spike travel activity, and international travel, which is becoming increasingly popular now that Chinese citizens are freer to move around the world. The company’s February 27th earnings report was impressive, with earnings up 107% and after-tax profit margins at 44.3%, the highest since 2005. This is a big, rapidly expanding market, and Ctrip.com is executing at a high level. A small dividend (0.2%) doesn’t hurt, either.
Technical Analysis
CTRP has been trending up since it hit its post-IPO low of 6 back in mid-2004, but periodic pullbacks have made it hard to stay in the stock; note its tumble from a December high of 63 to as low as 40 in January. Now that plummet below the 200-day moving average has given way to a new run at that all-time December high, fueled in part by last week’s earnings report, and any push through 63 would be highly bullish. We think you can take a nibble right here, then add to it on a breakout over 63.
CTRP Weekly Chart
CTRP Daily Chart
(EOG)
Why the Strength
The market is always interested in what’s new and different, and EOG Resources gave the market some new, exciting news to chew on – the company has discovered a bunch of new oil and gas finds that should significantly boost reserves and output in the years ahead. It found crude oil at Colorado’s North Park Basin and Texas’ Barnett Shale region, areas that EOG had been extracting just natural gas from during the past few years. Crude oil production from those regions should start later this year, with significant production in ’09. And EOG also found what could be one of western Canada’s largest natural gas deposits, with production there ramping up next year. All told, the firm boosted its targeted output growth to 13% to 15% for the next few years, up from 10% before. Combine that with a bull market in energy prices, and you have big potential – analysts are looking for a near-40% earnings jump in 2008, and that could be just the beginning. In a sector full of similar stories, EOG provides a nice change of pace with big potential.
Technical Analysis
EOG tried to break out on the upside in November and in January, but was turned back by a weak market. But the third attempt, in February, worked well, and last week’s humongous upmove was caused by the surprise reserve-find announcement. In a strong bull market, we’d probably tell you to go ahead and buy a little here, but with the bears refusing to give way, your best move is to try to buy a little (maybe half your normal position) on weakness. A deeper pullback toward 105 is possible, but not likely unless the market is starting another big leg down.
EOG Weekly Chart
EOG Daily Chart
(FCN)
Why the Strength
FTI Consulting is in the business of helping companies get out of trouble … or, if they’re smart enough to be proactive, stay out of trouble. Its areas of expertise include accountant malpractice claims, anti-money-laundering, arbitration, claims management, damages analysis, dispute resolution, expert witness testimony, forensic accounting, intellectual property, post-acquisition services, restructuring, SEC investigations, trial services, unsecured creditors, valuation and more. The firm has an unblemished 10-year record of revenue growth and a very good record of earnings growth, but its stock is hot today because last week’s fourth quarter report revealed exceptional growth thanks to the spread of the credit mess. In fact, President Jack Dunn commented, “What began as a virus in the U.S. sub-prime mortgage sector has erupted into a financial and economic plague - destabilizing world-wide economies, roiling credit markets and whipsawing stock markets. This plague is attacking transparency, liquidity and, most importantly, confidence in the world’s financial markets and the institutions and enterprises that rely on them. Transparency, liquidity and confidence - the very issues our skills are designed to enhance - are vital to enterprise value, which our mission statement calls out for us to protect. We are seeing broadly-based demand in every one of our segments from credit related engagements - and that demand appears to be accelerating.” Pretty strong stuff! As a bonus, the company announced the acquisition of TSC Brasil Limitada, the leading systems integrator and computer forensic and IT security consultant in the Brazilian and greater South American marketplace. We like it.
Technical Analysis
FCN is in a long-term uptrend. Most recently, it corrected from 63 down to 53 (shaking us out along the way), where it found support dating back to August. Then the earnings report sparked big buying last Friday, and now the stock is trying to gather power to break into new-high territory.
FCN Weekly Chart
FCN Daily Chart
(GFA)
Why the Strength
Brazil is now the largest emerging market in the world by stock market capitalization, and the country’s economy is growing well. The expansion of economic growth outside the Sao Paulo/Rio de Janeiro metropolitan areas is opening up a whole new world for Gafisa, the Brazilian construction company. Besides the general economic tailwind, the company is getting help from its initiative to provide low-cost housing and from a reported change in statutes that will make it easier to return defaulted homes to the market. Gafisa still makes a vast majority of its money from sales in Sao Paulo and Rio, but alliances with homebuilders and developers across Brazil are generating income from an increasingly broad geographic base. The company’s Fit Residential subsidiary is building houses with an average cost of $45,000, while Bairro Novo’s houses average from $30,000 to $50,000. With good results and projected earnings so high that they push the stock’s forward P/E to just 9, Gafisa is looking attractive.
Technical Analysis
GFA was the Editor’s Choice in its second Top Ten appearance in December. Since that appearance, when the stock was trading at 39, GFA has been through the volatility wringer, dropping as low as 29 in January. But after building a little base at 35, the stock has taken off, roaring above 40 on big volume. A break above that old December high at 43 would be bullish, but there is likely to be a little profit-taking pressure first. Look for a quick dip below 40 as the ideal buy point. If the stock won’t cooperate, consider taking a smaller bite.
GFA Weekly Chart
GFA Daily Chart
(GG)
Why the Strength
Goldcorp is something of a maverick among the precious metals sector, which remains one of the strongest groups in the market. The company operates a few different mines, mainly in the Americas and Mexico, though it also has a joint venture with Barrick Gold for a mine in the Dominican Republic. Like many gold firms, Goldcorp is busy expanding production – output increased a modest 9% in the fourth quarter, and the company is expecting a 10% to 15% production boost in 2008. But the maverick piece of the story is what makes Goldcorp unique; management has decided to leave its gold output 100% unhedged, so it will live and die with the spot and future price of gold bullion. During bad times, then, the company will get hit hard, but in bull trends like now, the company is likely to be one of the best performers. Analysts expect a 100% jump in earnings this year, but that could be conservative if gold prices continue their ascent.
Technical Analysis
GG has been performing well since the market low of August 2007, which, not coincidentally, was when the Fed first began chopping interest rates, giving gold a boost and further weakening the U.S. dollar. Recently, GG formed a base-on-base formation, with a consolidation in November and December leading to a brief breakout … but it didn’t go very far, as it formed another, higher consolidation during January and part of February. That one did lead to a solid, high-volume surge, and we believe any retreat toward 40 (the breakout level) will provide an attractive entry point.
GG Weekly Chart
GG Daily Chart
(NFLX)
Why the Strength
Netflix, of course, is in the business of delivering movies to your home, mainly in red envelopes that the mailman brings, but increasingly online as well. The reason for its strength is simple; management last week (out of the blue) increased its projections for both the first quarter and the full year. Netflix now expects to end the year with more than 8.9 million subscribers, up from 7.5 million at the end of 2007. It expects revenues to exceed $1.35 billion, up from $1.21 billion in 2007. And it expects earnings to top $1.18 per share, up from $1.02 in 2007. Interestingly, there was no explanation for the revised figures, so analysts are left to imagine. Are online viewings growing rapidly? Are viewings of high-definition Blu-ray DVDs hot? Is the company stealing viewers from Blockbuster? Are defections from Netflix shrinking, as the alternatives become less attractive? All of the above? In any event, Netflix is increasingly viewed as the champ today.
Technical Analysis
NFLX peaked at 40 in early 2004 and has been working since to surpass that old high. (The company’s revenues and earnings in 2007 were more than four times what they were in 2003.) Since it bottomed in July, it’s been beating the ailing market, and last week’s surprise announcement brought heavy buying that kicked the stock up from 26 to a high of 34. We think you can buy a little here.
NFLX Weekly Chart
NFLX Daily Chart
(PAAS)
Why the Strength
Silver has never enjoyed the respect that gold has, but it’s starting to come into its own. Pan American Silver made its first Top Ten appearance in January, and it’s back again as a combination of rising silver prices and increasing proven and probable reserves is making the company attractive. Silver was selling for just over $7.00 an ounce in 2005, but has risen to over $20 an ounce on today’s spot market. Prices have been held down by what are known as “above ground” reserves, i.e., hoards of silver in national stockpiles. The Indian government sold off 26 million ounces (one-third of its silver inventory) in 2005, and the Chinese government has sold about 40 million ounces. These national strategic reserves have been making up for a production deficit, but they won’t be able to do so for much longer. Electronic and pharmaceutical uses (silver is a well-known biocide) will keep demand high and the depletion of above ground supplies will put price pressure on in-ground reserves. That’s the story that’s making Pan American Silver, its seven operating mines and its 228 million ounces of proven and probable silver reserves, attractive to investors.
Technical Analysis
PAAS didn’t just take off and fly following its positive February 21 earnings report, but the news of record earnings, positive profit margins and increasing reserves has been pushing it higher ever since. The stock has just pulled back slightly from a February 29 price and RP peak, and looks like a good speculative buy anywhere below 40.
PAAS Weekly Chart
PAAS Daily Chart
(XEC)
Why the Strength
The energy sector remains the strongest group in the market – the upside volume seen in many stocks tells us big investors are getting in. And Cimarex has staged one of the strongest breakouts, a sign that investors see better times ahead. The company has operations all over the U.S., with a heavy emphasis in the South and Southwest and most of its reserves (76%) are natural gas. The firm’s fourth quarter report, out two weeks ago, crushed estimates, with the bottom line coming in 25% ahead of expectations thanks to a 7% production hike, higher sales prices and cost controls. Because of that, analysts are scurrying to hike their estimates – they’re calling for $4.45 per share in 2008, which is up from an estimate of $3.42 just three months ago! Our guess is that analysts are still behind the curve, and the market is telling us the final results will come in much higher. All told, Cimarex is a leader in the market’s leading group.
Technical Analysis
XEC followed through on its powerful breakout of two weeks ago by rising nearly three points on its heaviest weekly volume since the end of 2006. And the stock, like many energy issues, has risen the past five weeks in a row, something that’s often seen in big-winning stocks. The power of the move tells us two things. First, given the still-weak market, a short-term pause or pullback is likely. But second, higher prices are a good bet after the next pullback, unless the market totally unravels. Thus, we’ll nudge up our buy range from last week; you could buy a small position on a retreat of a couple of points.