May 12, 2008
The market isn’t powerfully bullish, but many sectors are, and that means you should continue looking for good opportunities to make money. This week’s Top Ten Report contains a few new names, as well as leaning a bit more toward the growth side of fence, at least compared to recent weeks. So don’t wait -- take a look inside!
Not Perfect, But Good
A few weeks ago, we were optimistic that by this point the market would be in a full bore, all-out bull stampede. Instead, the market’s advance has turned into a choppy uptrend, especially among individual stocks and sectors, where a solid week or two of rising prices attracts profit-takers. Nevertheless, the good shouldn’t be the enemy of the perfect—most stocks are heading higher, and while volatility is elevated, there are plenty of winners to go around. Just remember to keep your feet on the ground, take a few chips off the table if your stock soars for a few days, and to cut all losses short. This week’s Top Ten contains a few names that are new to us, including one monster earnings winner last week. Our top pick is FMC Technologies (FTI), an oil service stock that is showing great price and volume action of late. It’s not as extended as some of its oil peers, but looks to be a great buy around here, or a little lower.
Why the Strength
Making its first Top Ten appearance, GrafTech is an Ohio company that makes graphite and carbon products that are used in a number of industries. The company’s main product line—the graphite electrodes used in steelmaking and aluminum production—accounted for 81% of 2007 sales. GrafTech also has a high-tech side, producing exotic materials like carbon foam (used in composite tooling), expandable graphite (for making fire-retardant materials) and flexible graphite (used in packing and gaskets in harsh environments). The company is roaring ahead right now because both steel and aluminum are in high demand from emerging markets. GrafTech recorded a record 21.2% after-tax profit margin in Q1 and earnings growth rates have been leaving revenue growth rates in the dust. A great earnings report on May 1 (plus raised projections for 2008 earnings) just confirmed what the Street already knew; GrafTech is hot.
GTI’s long-term uptrend began in July 2006, when the stock was trading below 5 after nine quarters of fitful performance. It soared steadily for 12 months, topping at 20, then corrected for nine months. The stock took off again in March, ripping from 14 to 23 (its highest price since February 2000) on huge volume. A four-day correction back to 22 presents what looks like an ideal buying opportunity.
GTI Weekly Chart
GTI Daily Chart
Why the Strength
While oil and natural gas grab the headlines, the inflation trend is affecting almost all commodities, including coal. Major demand from emerging economies, continued buildouts of coal-fired plants around the world, and record low inventory levels have driven the price of coal skyward. James River Coal is a U.S. firm that, admittedly, is not the highest-quality play in the industry—it’s owned by just 19 mutual funds and has yet to produce a profit. In fact, the company actually entered bankruptcy proceedings back in 2003 before emerging a year later. But the market always looks ahead, and James River Coal is strong today because management has indicated it is securing longer-term contracts for its coal at significantly higher prices. After its recent earnings report, one analyst upped his 2009 earnings estimate to $2.50 per share, although the consensus remains down near $1.70. We are believers in the overall coal story, and while James River isn’t the leader in its group, it’s likely to participate in the ongoing boom.
JRCC is a volatile stock, emerging from low-priced territory around the start of the year to surge above 30 last week. The catalyst was the first-quarter earnings report, or rather, management’s outlook for the future. The stock has risen ten points in recent days on gargantuan volume, an obvious sign of accumulation. Most investors will be hesitant to buy after such an upmove … and we are, too. But we also don’t expect any huge pullback, as big investors are likely to snap up shares during any weakness. You can do the same.
JRCC Weekly Chart
JRCC Daily Chart
Why the Strength
Pioneer Natural Resources is another small oil and gas company story. The company’s major operations are currently in the lower 48 states, but that’s quickly changing, as Pioneer expands to take advantage of untapped resources in Alaska and Africa. The company began exploration in Alaska’s North Slope in 2002, and is now drilling its second well in Oooguruk. Revenues are expected to begin trickling in late this summer, and Pioneer plans to have five or six producing Alaskan wells by the end of the year. The first of Pioneer’s African developments, in Tunisia, is already producing several thousand barrels a day and should contribute substantially to growth throughout 2008 as production capacity increases. Finally, the company’s facility in South Africa is expected to begin producing in late 2008 or early 2009. Pioneer is still a small player in the oil and gas industry, but the company’s growth over the next year should be magnificent.
PXD peaked at 56 back in 2005, and the years following saw the stock trading in the 30s and 40s, neither strong nor weak. But the stock began attracting the attention of buyers this year, and it first appeared in Cabot Top Ten Report on April 21, when it was trading at 60. Following that, the stock pulled back to kiss its 25-day moving average at 55, but it then climbed out to new highs, before the excellent earnings release last week. Today, PXD is looking a little extended, short-term. We suggest buying on a pullback, ideally to 60, which now represents support.
PXD Weekly Chart
PXD Daily Chart
Why the Strength
ReneSola, which debuted in Top Ten on April 28, is a Chinese company that offers a slightly different way to play the solar power boom. The company refines the silicon that’s used in solar cells and cuts it into wafers. That’s it. ReneSola is a young company, but an ambitious one, with almost 260 refining furnaces producing a combined monocrystalline and multicrystalline capacity of 378 megawatts and plans for rapid expansion. Solar power remains one of the bigger stories out there, and silicon supply has been a major limiting factor. This puts ReneSola in the driver’s seat as solar cell manufacturers strive to try to lock in their supplies for years in advance. This has the potential to be a very big company, and a very big winner, but the immediate outlook for the stock will be decided by its quarterly earnings report on Wednesday, May 14.
SOL has been public just over three months, and it’s been an event-filled time. After its IPO at 13, the stock dipped to 8 in March, then made up for lost time by roaring to near 20 in recent trading. This is still very much an IPO stock, with few institutional investors on board, so wild swings in price are to be expected. If you want to buy, keep it small and use a tight stop until the stock’s direction after the earnings report becomes clear.
SOL Weekly Chart
SOL Daily Chart
Why the Strength
Sky-high oil and gas prices are affecting everyone, for better or worse. Among the biggest winners are small oil and gas producers with the flexibility to benefit from this seller’s market. While big oil companies are realizing higher prices, they’re already pumping almost all they can in the short-term. Small producers, on the other hand, can both command higher prices and increase production. Texas-based Comstock Resources is one of these independent energy companies with room for growth. In the first quarter of 2008, Comstock increased production by 25% through acquisitions, onshore development and offshore exploration. Combined with an average 73% increase in realized oil prices and a 23% increase in natural gas prices, the production increase more than tripled Comstock’s first quarter earnings. Over the next year, development of properties in Arkansas, Kansas, Kentucky, New Mexico and Oklahoma should bring even greater growth.
CRK’s long-term trend is up, reflecting the growth of the company, but the oscillations have at times been horrible for investors, bringing drops of 66%, 87% and 94% over the past two decades. In recent times, however, the stock has been behaving extremely well. Over the past two years, it built a long loose base under 35, finally breaking out above resistance in late March. When it appeared in Cabot Top Ten Report on March 31, trading at 40, we named it Editor’s Choice. And then last week, the stock reacted to the super earnings report by vaulting from 47 to 56. We think you can buy a little now.
CRK Weekly Chart
CRK Daily Chart
Why the Strength
As the price of “conventional” energy (based on fossil fuels like oil, gas and coal) keeps rising, the promise of solar energy keeps getting brighter. The eventual promise is that the cost per kilowatt for solar will meet the cost for conventional, and the whole energy equation will shift. Canadian Solar is a Chinese maker of solar products, from solar modules rated from 5 watts to 300 watts to specialty products like car battery chargers and GPS systems. The company is pretty typical of a well-run Chinese solar company except for one thing; it is also one of the largest recyclers of scrap silicon in the world. Canadian Solar has an international team that procures pot scraps, tops and tails of ingots and broken wafers, which it then refines into fresh feedstock. The company has also built a 10 KW grid-connected solar power station in China as a demonstration project. Earnings are scheduled for reporting on May 13 (tomorrow!), which will be the biggest factor in which way the wind will blow for Canadian Solar.
CSIQ came public in late 2006 at 15 and spent 10 months grinding its way lower, finally bottoming out at 7 in August 2007. When the stock turned up, it really took off, ripping to 31 in less than four months. CSIQ corrected to 15 during the winter bear market, but got moving again quickly and has just moved out to new price and RP peaks. We don’t view buying just before earnings reports as a prudent strategy, so if you want to get in on this story, we advise waiting for the report and then jumping in if results are good. You may lose a few points that way, but your downside exposure will be correspondingly less.
CSIQ Weekly Chart
CSIQ Daily Chart
Why the Strength
Encore Acquisition has made a couple of prior Top Ten appearances, and it’s here again after a blowout earnings report. The company is an oil explorer (most of its reserves and production are oil) with an outstanding history of production increases, and rising prices have brought some real juice to the earnings line. In the first quarter, output rose a solid 18% from a year ago, but management was able to parlay that into 109% revenue growth and more than $1 per share in earnings, which crushed estimates by 21 cents! Looking ahead, management has a big stake (240,000 acres worth) in the Bakken field in Montana and North Dakota, which the firm’s CEO says is “the most exciting new oil play in North America.” It plans on ramping production there in the quarters to come, and its myriad other properties (some it’s discovered, some acquired in recent years) are paying off big. All told, Encore is among the leaders in the group.
EAC, like most oil stocks, is up sharply from its January low, and is showing a pattern of sharp, quick thrusts higher, followed by a week or two of tight, controlled declines. The latest surge came last week, after its earnings report caused a rush of buying (the stock soared last Thursday on volume about triple its average), and now we expect another retreat, especially with the stock’s short-term 25-day moving average down at 46. Hold on tight if you bought earlier. If you didn’t, look for a drop into the low 50s as a chance to add some shares.
EAC Weekly Chart
EAC Daily Chart
Why the Strength
When a batter strikes out five times in a row, the odds are he’ll strike out on the sixth as well. But not Energy Conversion Devices. After failing to meet analysts’ estimates in five consecutive quarters, the company hit a home run last week when it announced that revenues had soared 155% in the quarter, while earnings had flipped from a loss of 17 cents to a profit of 23 cents. The big reason? New President Mark Morelli, who came on board in September. The company, which we’ve followed for years, has developed much great technology, but old management cared more about science than profits. Morelli, contrarily, cut 160 engineering positions–in areas like fuel cells and cognitive computing–and left 100, mainly in the solar power division. Fully 90% of the company’s revenues now come from solar power products. The company’s main advantage is that it makes its products from amorphous silicon, which is not only less costly than polysilicon, but lighter. Energy Conversion Devices incorporates this silicon into flexible rolls, which double as a roofing material in both industrial and residential applications. Going forward, the company is looking to sell other non-core assets and drive this solar power business as fast as it will go. We like it.
ENER peaked at 58 at the end of 2005 after stringing together its only four quarters of profits in the past decade, and bottomed at 20 in January of this year. Since then, it’s had a nice rebound, but the seismic event that put the stock on our radar screen was the catapult from 36 to 50 that followed last Thursday’s earnings release. Odds are that this trend will continue; the question is whether the stock will pull back substantially first. We say buy a little now.
ENER Weekly Chart
ENER Daily Chart
Why the Strength
eResearch provides technology and services for the collection, analysis and distribution of clinical trial data. The company’s products and services are all about information; they include clinical research platforms, online portals and consulting services that help streamline and automate clinical trials. But despite being an established market leader in cardiac safety trials, the company floundered for years. Finally, in 2006, new management was installed to turn things around. Management cut costs and increased efficiency by outsourcing a good portion of clinical trials, transforming eResearch from a service provider to a technology company. The result has been reinvigorated performance and renewed growth. Buoying eResearch’s upward trajectory is increased demand for clinical trial facilitation from pharmaceutical, biotechnology and medical device companies.
ERES was a big winner for Cabot Top Ten back in 2003, but it peaked at 28 in 2004 and spent the past few years shaking out all but the most loyal shareholders. More recently, we see a double bottom in January and February, followed by a push against resistance at 13 that was broken with last Tuesday’s gap up following the earnings report. Today, we’ll put the low end of our buying range at 14, where we find the top of last week’s gap.
ERES Weekly Chart
ERES Daily Chart
Why the Strength
FMC Technologies is one of the strongest stocks in the market because of its link to the deepwater oil drilling industry, which is likely to accelerate as major drilling projects commence in the years to come. The company doesn’t operate rigs, but it’s the #1 provider of subsea trees—intricate yet sturdy equipment that transports oil from the well to a storage device or pipeline. Interestingly, the firm also operates some odd legacy businesses (food processing, air transportation products), but the growth has and will be in the energy division, and management has taken steps to spin-off the other divisions. We like FMC’s accelerating revenue growth, its $4.6 billion backlog, and its recent five-year contracts with both Devon Energy and Anadarko Petroleum, which reinforce the idea that demand in the deepwater exploration market remains strong.
As an oil service stock (as opposed to oil exploration), FTI has lagged some of the jaw-dropping action of other energy stocks. But it may be kicking into gear now. The stock rose right to its early November peak a couple of weeks ago, and then began to trade in a tight band for two weeks. That led to last week’s breakout on healthy volume. Is it as dynamic as some of its oil peers? No … at least not yet. But the breakout gives you an opportunity to take a stake if you want in.