Some Improvement
This remains a split tape, with many defensive and some commodity stocks testing new-high ground, while most of the market is chopping around, and growth stocks are still lagging. That said, we have seen a few rays of light lately—the mid-cap indexes are back above their 50-day lines, many growth stocks have held support for many weeks, and we’re seeing a few more potential leaders emerge on earnings or other good news. We’re sticking with our neutral Market Monitor until we see more bullish action among a variety of stocks and sectors, but the next week or two will be interesting.
This week’s list is still relatively heavy on commodity names, but our Top Pick is a growth stock that just completed a game-changing acquisition. Avago Technologies (AVGO) has great projected earnings growth, but the company reports earnings on May 29 so keep new positions small.
| Stock Name | Price | ||
|---|---|---|---|
| Zillow (Z) | 76.64 | ||
| Nabors Industries (NBR) | 0.00 | ||
| Lazard (LAZ) | 0.00 | ||
| Diamondback Energy (FANG) | 0.00 | ||
| Extra Space Storage (EXR) | 0.00 | ||
| Constellium (CSTM) | 0.00 | ||
| Carrizo Oil & Gas (CRZO) | 24.03 | ||
| Broadcom Limited (AVGO) | 266.26 | ||
| Athlon Energy (ATHL) | 0.00 | ||
| AerCap (AER) | 0.00 |
Zillow (Z)
Why the Strength
Zillow is a major enabler of the revolution in real estate listings in the U.S., providing free access to information to consumers, while getting paid by advertisers. And business is booming. The first quarter of 2014 (figures released last week) saw revenues grow 70% from the year before and earnings double! Behind the growth were an increase of 56% in Premier Agents (who pay more), a record 79 million monthly unique users (mobile and web) and 5.8 million loan requests through Zillow Mortgage Marketplace (growth of 29% year-over-year). Also making news in the first quarter were “a new layer of product integration into various television shows including NBC’s … American Dream Builders and cult-favorite Portlandia … and continued work on HGTV.” Significantly, analyst estimates were raised after the report; the consensus is now for earnings of 82 cents in 2015! The only thing scary (to some people) about the stock is its valuation—but if you consider Zillow’s dominance of the industry, you can conclude that it’s worth it.
Technical Analysis
Z came public in July 2011, and has been trending roughly upward since. But the stock is unusual this year because it’s the rare growth stock that is not tracking the trend of the Nasdaq. Having completed its correction at the end of last year, it’s spent this year climbing gamely upward, ignoring the carnage around it. When we last looked at it a month ago, it had dipped to its 50-day moving average and was trading at 87. Since then, it’s rocketed briefly to 100, and last week it was back at its 50-day moving average again! So, while the trend is definitely up, volatility rules, and you’ve got to pick your entry point carefully. (Alternatively, you can pick entry and exit points carefully, and frequently, but the more trades you make, the more opportunity for error.)
Z Weekly Chart
Z Daily Chart
Nabors Industries (NBR)
Why the Strength
When it comes to extracting oil and gas from the ground, few companies are more accomplished than Nabors Industries. The world’s largest land drilling contractor, Nabors operates about 500 land-drilling rigs, and more than 750 workover and well-servicing rigs. The company operates in the U.S., Africa, Canada, Latin America, East Asia, the Middle East and Russia. Nabors’ offshore machinery includes 39 platform rigs, 12 jack-ups, and four barge drilling rigs. The company is benefiting directly from a rapidly improving land rig drilling market, with higher day rates making its older rigs more profitable overseas and its new PACE-X rigs (which are capable of drilling multiple wells at the same time) dominating the landscape in the shale-oil drilling regions. More recently, Nabors reported well-received first-quarter earnings results. While revenue was below year-ago levels, the company was still able to top expectations despite weather-induced interruptions in North America. But the boom in oil drilling in the U.S. is still in its early stages, and with the prospects for increased drilling in areas like the Permian Basin in west Texas, increased rig activity should continue to benefit major players like Nabors. In fact, the company already has orders for four new PACE-X rigs, with anticipated demand for an additional 13 rig deployments in 2014. As a result, earnings for the next two or three years are expected to grow rapidly (up 34% in 2014 and up 66% in 2015).
Technical Analysis
NBR has had several false starts since the market crash in 2008. Shares topped out north of 30 in early 2011, only to be sent crashing back into single-digit territory before the end of the year. This time around, NBR appears prepared for a more sustained rally. After coming off a year-long consolidation into the 15 region, NBR surged past 20 in late-February following a strong quarterly report. Shares have ridden that wave higher, establishing a foothold above 25. If you’re game, NBR can be bought here.
NBR Weekly Chart
NBR Daily Chart
Lazard (LAZ)
Why the Strength
Financial services firm Lazard bills itself as “one of the world’s pre-eminent financial advisory and asset management firms,” operating out of 42 cities in 27 countries, with business split roughly equally between financial advising and asset management. According to Lazard CEO Kenneth Jacobs, the improving U.S. economy has given companies more confidence to do M&A deals. In fact, the value of takeovers announced so far in 2014 has already topped the $1 trillion mark—the fastest pace in seven years. Lazard has placed itself at the center of the buying spree, resulting in a 118% spike in first-quarter earnings and a 30% jump in revenue, which totaled a record $540 million. Results were driven by a 64% spike in financial-advisory revenue, as advising fees on mergers doubled during the quarter. So far this year, Lazard is advising on the GlaxoSmithKline transaction with Novartis, General Electric’s acquisition of Alstom’s thermal renewables and grid businesses, Pepco’s sale to Exelon, and TIAA-CREF’s acquisition of Nuveen. Overall, management continues to return cash to shareholders through dividends (2.1% annual yield) and share repurchases, while analysts are forecasting a 36% rise in earnings for 2014, and an 18% gain in 2015.
Technical Analysis
After forming a base in the 35 region in mid-2013, LAZ has enjoyed a solid uptrend along the support of its 10-week and 25-week moving averages. These trendlines have even helped LAZ hold its ground during the recent market turmoil. The stock is currently attempting to break out above the 50 region, with volume picking up in the wake of the company’s first-quarter earnings report. LAZ looks buyable here or on a dip of a point or two, but keep a firm stop below 45.
LAZ Weekly Chart
LAZ Daily Chart
Diamondback Energy (FANG)
Why the Strength
Diamondback Energy is a young (founded in 2007) oil & gas explorer and producer that operates solely in the Permian Basin of West Texas and is focused on the Wolfberry Trend of the Basin. The specific region is important because Diamondback’s wells produce the highest proportion of oil (79%) of any operators in the Basin. Diamondback has five horizontal rigs and one vertical rig operating and expects to complete 17 to 20 wells every quarter in 2014. The company’s Q1 earnings report on May 7 was full of positive surprises, beating estimates on production during the quarter and projecting future production higher than analyst estimates—revenue came in 239% ahead of last year and earnings grew by 342%. Diamondback has raised its production by 126% since its IPO in October 2012 and total reserves are up 75%. The company’s 2014 capital budget is fully financed based on current liquidity and cash flow, which means 65 to 75 gross horizontal and 20 to 25 gross vertical wells in 2014, which will further lower the company’s expense-per-barrel. Investors are reacting positively to the earnings news and Diamondback Energy has excellent prospects.
Technical Analysis
FANG (cute symbol) has been in an uptrend since about a month after its late 2012 IPO. The stock ran into some choppy weather for a few months in late 2013, but caught an updraft in early January 2014. FANG hit a peak at 77 in late April and has traded mostly sideways since. But the stock has received consistent support at its 25-day moving average in March, April and again last week. FANG is buyable on any weakness, or you can wait for the stock to make a clean break above 75. In either case, a relatively loose stop—say 67 or so—makes sense as the stock is significantly more volatile than the broad market.
FANG Weekly Chart
FANG Daily Chart
Extra Space Storage (EXR)
Why the Strength
Extra Space Storage is a real estate investment trust (REIT) that operates over 1,000 professionally managed self-storage facilities in 32 states and Washington D.C., half of which (527) are wholly owned, with about a hair over a quarter (273) run as joint ventures and a hair under a quarter (252) only managed. The company controls about 550,000 units that contain over 59 million square feet of rentable space, making it the second-largest owner/operator of self-storage properties in the U.S. It has an aggressive acquisition program, with 91 new sites bought during 2012, 78 in 2013 and 26 thus far in 2014, with four more under contract. Since estimates of the total number of storage facilities in the U.S. is estimated at over 50,000 and growth of new sites is less than 1% a year, Extra Space’s acquisition program represents an increasing bite of a fairly stable pie. The company boasts that it has a record of 33 quarters of increasing same-store revenues, and its remarkable record of stable revenue and earnings growth bears that out. Q1 results showed a 28% gain in revenue and a 24% growth in earnings. As a REIT that must distribute at least 90% of its taxable income to stockholders, the company’s attractive 3.1% forward annual dividend yield is one big reason investors favor Extra Space Storage’s stock. Strong fundamentals and its continuing acquisition program are also attractive features.
Technical Analysis
EXR has been a steady performer since the economy began its recovery from the Great Recession in 2009. EXR bottomed at 5 in March 2009 and kept appreciating despite a significant flat patch that began in May 2013 when the stock hit 45. After peaking at 49 last November, the stock dipped to 40. But the recovery came quickly and EXR based for six weeks under resistance at 50 in March and April, then broke out to new highs in late April. The stock has been consolidating its gains for two weeks over support at 51, and the rising 25-day moving average has now topped 50. EXR looks like a good long-term hold as an income stock, although price appreciation trends are also attractive. Look for a dip toward 51 as an entry point and put in a stop at 47, which was support in March.
EXR Weekly Chart
EXR Daily Chart
Constellium (CSTM)
Why the Strength
With increasing demand on several fronts, including aerospace and automotive, 2014 is expected to be a strong year for aluminum. As an up-and-coming player in the aluminum market, Constellium stands to benefit. The company makes specialty rolled and extruded aluminum products ranging from tin cans to metal frames for automobiles and airplanes. The company also makes proprietary metals, including Surfalex, an alloy for auto bodies, and AIRWARE, a lightweight, specialty aluminum-lithium alloy for aerospace applications. According to analysts, global demand for aircraft aluminum products is expected to grow by 8%-9%, as commercial and regional aircraft operators look to upgrade their fleets. Meanwhile, automotive demand is seen rising as much as 4% as automakers turn to aluminum to lower vehicle weight in order to meet fuel efficiency standards. In fact, at the Detroit Auto Show, Ford unveiled the first high-volume vehicle to be built with a full aluminum body (its popular F-150 pickup). Already a leader in the aerospace market, Constellium has been on the move to improve its exposure to the auto industry. As such, the company recently announced a joint venture with United Aluminum of Japan to open a $150 million aluminum sheet facility in Bowling Green, Kentucky, targeted at supplying aluminum sheet to the auto industry. The company is slated to release its latest quarterly results on May 16.
Technical Analysis
CSTM has been on fire since going public in May 2013. In fact, the stock has more than doubled from its IPO near 13.5 to just shy of 30. The stock met with early resistance near 20 in October before breaking out for higher ground in late-November. In 2014, CSTM has extended its gains, bolstered by support at its 10-week moving average. This Friday’s quarterly earnings report will determine the stock’s next big move. You can nibble here ahead of the event, or simply wait to see how shares react.
CSTM Weekly Chart
CSTM Daily Chart
Carrizo Oil & Gas (CRZO)
Why the Strength
Carrizo is another solidly-performing energy explorer that’s just starting a major growth phase. The company is a bit more spread out than some of its peers; it owns 47,000 acres in the Niobrara field in Colorado (a little-known area that’s very lucrative), 67,000 acres in the Eagle Ford shale (where the majority of its proved reserves are), 25,000 acres in the emerging Utica shale and 37,000 acres in the Marcellus shale. The focus is on the Eagle Ford with three rigs and about two-thirds of the firm’s capital expenditures, but spending is increasing in both the Niobrara and especially the Utica this year. The wells in each area sport huge returns, from a low of 50% or so in the Niobrara to upwards of 120% in the Eagle Ford! The net result of this year’s program should be great growth—in the first quarter, total production grew 48% (after adjusting for the sale of some assets), and for the whole year, Carrizo expects its higher-priced, higher-margin oil output to rise 54% (and account for 60% of all production). As with many of today’s energy explorers, such expansion should continue for years, as Carrizo has another 1,200 potential well locations, compared to just 150 or so that are pumping out energy today! The large amount of capital spending will constrain earnings growth to “only” 20% this year, but that should pick up into 2015 and beyond as this year’s wells come on-line. It’s a good story.
Technical Analysis
CRZO is a good example of a stock that looks like it wants to really get going, but the market environment is standing in its way. After basing from October through February, the stock broke out in powerful fashion and had a nice run for a few weeks, but in the past six weeks, CRZO has tried to move into new high ground a couple of times, only to be yanked back down by the market. Even so, we like the volume patterns here, and the relative strength is great—if you want in, you can buy some here with a stop near 50.
CRZO Weekly Chart
CRZO Daily Chart
Broadcom Limited (AVGO)
Why the Strength
Singapore-based Avago Technologies is a giant designer and supplier of chips and other electronic components that go into more than 6,500 devices worldwide. The company has been a constant innovator in the tech world, bringing out the first dot matrix LED displays in the 1960s and the first fiberoptic transmitters and receivers in the 1970s. The company is big, and is a frequent acquirer of innovative competitors and owners of complementary technologies. Avago acquired Javelin Semiconductor and CyOptics in 2013 and just completed the all-cash takeover of LSI Corp. for $6.6 billion. The LSI deal will give Avago an excellent entree into the enterprise data storage market and will increase annual revenue from $2.7 billion to nearly $5 billion. As a result of the takeover, Avago will take LSI’s place in the S&P 500 Index, which explains the monster spike in its stock’s trading volume on May 6. The company will report its Q1 results after the market closes on May 29, though the focus will likely be on cost synergies from the LSI purchase, which are expected to push earnings up 30% each of the next two years. A tidy 1.6% annual dividend yield completes a very strong picture.
Technical Analysis
AVGO traded sideways through most of 2011, 2012 and the first eight months of 2013. The stock began its breakout run in September 2013 when it soared past 40. AVGO was trading at 53 when it made its most recent appearance in Top Ten, and has been in an uptrend ever since, except for a few rocky weeks in April. The stock gapped up May 6 on news that the LSI deal had gone through and has been edging higher since then. AVGO is buyable on any weakness of a point or so, but you should keep new positions small ahead of earnings. Use a stop at 62.
AVGO Weekly Chart
AVGO Daily Chart
Athlon Energy (ATHL)
Why the Strength
Athlon Energy is a young (founded in 2010) Fort Worth, Texas-based oil & gas explorer and driller, operating primarily in the Midland Basin region of the Permian Basin. The company has been sharing in investors’ enthusiasm for all energy stocks, but it also has some traits that separate it from the herd. Athlon’s management is committed to a strong program of acquisitions as a way to develop scale. Production doubled in 2011, then doubled again from Q4 2011 to Q3 2013 and is projected to double again from Q3 2013 to Q2 2014. The company just issued an upsized $650 million of 6% senior notes, which will, together with a concurrent registered equity offering, provide funding for pending acquisitions. Drillbit activities have kept energy reserves growing rapidly: The company replaced 11 times its production in 2011, 14 times production in 2012 and 10 times production in 2013. And the company expects to use its raised capital to keep on acquiring. Athlon reported Q1 results on May 6, and the 93% gain in revenue and 40% jump in earnings per share were solid, with record high average daily production, which was up 71% from Q1 2013. Athlon has been acquiring acreage cheaply from other drillers in locations where horizontal drilling hasn’t been tried, and it looks like it’s paying off.
Technical Analysis
ATHL came public at 20 in August 2013, and advanced into the mid-30s in October. A late-year correction to 27 gave way to another strong rally in January, although February/March market weakness keyed a useful re-basing with support at 35. A sharp rally last month kicked the stock from 34 to 44 in three weeks, then the stock consolidated ahead of earnings. There hasn’t been a big reaction to the earnings report of May 6, and ATHL has been trading sideways for the last 10 sessions. It looks like a good buy around here, with a tight stop just below 37.
ATHL Weekly Chart
ATHL Daily Chart
AerCap (AER)
Why the Strength
At its core, we can’t say AerCap is a revolutionary growth company; the firm’s strategy of buying jets and then leasing them to operators has been around for years. But this company is a special situation for a couple of reasons. First, demand for new, fuel-efficient jets looks set to increase for many years, thanks to both consistent passenger growth (especially in Asia) and the fact that most airlines have finally gotten their house in order and are very profitable, allowing for fleet upgrading and expansion. Second is AerCap’s soon-to-be-completed purchase of AIG’s airplane leasing business; when completed, it will transform the company into a top dog in the industry, include cost-saving synergies and, most important, come with an order book that’s second to none. It takes years for an ordered jet to be built and delivered, but AIG’s unit has dozens of in-demand jets scheduled for delivery during the next few years, adding to AerCap’s 41. AerCap is doing just fine now—in the first quarter, sales and earnings topped expectations, its fleet utilization rate was 99%, and the average term remaining for its leased jets was 6.6 years. Thanks to figures like those, as well as the acquisition, earnings are expected to grow 30% both this year and next. The risk here would be a financing hiccup; it’s not cheap to purchase these planes, and the combined firm will have billions of dollars of debt. But with the long-term lease contracts in place, we’re not worried.
Technical Analysis
AER has had a huge run during the past year, but we don’t consider it late-stage; the humongous leap in December (when the acquisition was announced) made AER a brand new stock in our minds. Since then, shares have built two bases, each one sitting on top of the other, and last week the stock zoomed to new highs following the quarterly report. Dips are buyable, with a stop around 42.
AER Weekly Chart
AER Daily Chart
Previously Recommended Stocks
Below you’ll find Cabot Top Ten Trader recommended stocks. Those rated HOLD are stocks that traded within our suggested buy range within two weeks of appearing in the Top Ten and still look good; hold if you own them. Stocks rated WAIT have yet to dip into our suggested buy range … but can be bought if they do so within the next week.
Those stocks rated SELL should be sold if you own them; they will no longer be listed here. Finally, Stocks in the DROPPED category are those that failed to trade within our buy range within two weeks of our recommendation; that’s not a bad thing, we just never got the price we wanted. Please use this list to keep up with our latest thinking, and don’t hesitate to call or email us with any questions you may have. New recommendations each week are in green.
