Something For Everyone
Last week we bemoaned the fact that the market had not yet decisively broken out to the upside, and indeed, most major indexes were below resistance and close to their longer-term 200-day moving averages. However, last week, leading stocks separated themselves from the pack—even during days the indexes were flat, the best stocks cranked out solid gains. We know that a pullback or correction could occur at a moment’s notice, yet we remain optimistic the best is yet to come. This week’s Top Ten reflects the broad bullish action among leading stocks last week, as we have a good mix of growth and commodity, big and small. Our favorite of the week is MasterCard (MA), a big-cap leader of this market advance that reacted very well to earnings last month, and has since quieted down beautifully. You can start a position in this area, and don’t worry about the high share price—just buy fewer shares.
| Stock Name | Price | ||
|---|---|---|---|
| ARG (ARG) | 0.00 | ||
| CLR (CLR) | 0.00 | ||
| EGLE (EGLE) | 0.00 | ||
| FLR (FLR) | 0.00 | ||
| GU (GU) | 0.00 | ||
| MA (MA) | 0.00 | ||
| MTL (MTL) | 0.00 | ||
| PXD (PXD) | 0.00 | ||
| UNT (UNT) | 0.00 | ||
| WTI (WTI) | 0.00 |
(ARG)
Why the Strength
Airgas isn’t the usual kind of hot Top Ten stock. Its products aren’t revolutionary and there’s been no dramatic news to kick the stock into a higher gear. What it offers is steady growth, both organic and via acquisition (more than 370 since it started in 1986) and equally steady profitability (augmented by a small dividend). The company sells nitrogen, oxygen, argon, helium and hydrogen for medical applications, welding and industrial uses. It also sells liquid carbon dioxide, nitrous oxide and dry ice, as well as refrigerants, chemicals and ammonia products. A very strong earnings report on May 7 recertified the company as a growth enterprise after a couple of quarters of worry that a slowing economy might undercut the bottom line. Airgas has been a real tractor for years, but institutional sponsorship has fallen off slightly since peaking back in 2006. They’ll be back. With a tame P/E ratio of 18, Airgas looks like a long-term winner.
Technical Analysis
ARG has been rising for years … not soaring, but never correcting for more than a couple of quarters. The big gap up on May 7 (up from 49 to 57) came after more than six months of consolidation after an October/December double top at 55. The stock dipped below 40 in January, but patiently worked its way back, spending three months under resistance at 50. Following the breakout, the stock has kept moving, and is pausing just under 60. A pullback toward 58 is quite possible, and would present an attractive buy point for a long-term opportunity.
ARG Weekly Chart
ARG Daily Chart
(CLR)
Why the Strength
Oil and natural gas explorers and producers are the kings of the market these days (along with other commodities stocks) and Continental Resources is making its third appearance in Top Ten. That’s not bad for a company that just came public about a year ago. The company’s operations are primarily in North America, with a great position in the lucrative North Dakota Bakken field. With demand for oil outrunning supply and the price per barrel running to keep up, Continental’s plan to increase production by 42% this year is music to investors’ ears. A great earnings report on May 6 was a home run: sales up 88%, earnings soaring 165% and after-tax profit margins of 39.2%. In fact, it was a grand slam, and more triple-digit growth is expected going ahead.
Technical Analysis
CLR has been on a tear since late March, when it exploded out of a five-month base and more than doubled in just six weeks. A couple of weeks of trading in a range between 50 and 55 have allowed the stock’s 25- and 50-day moving averages to catch up a little. Try to get in at the low end of that 50-55 range.
CLR Weekly Chart
CLR Daily Chart
(EGLE)
Why the Strength
Shipping rates soared to new highs last week, reflecting broad perceptions that global demand for bulk goods like iron oil, coal, grain and fertilizer would continue to grow. As a result, most of the stocks in the industry did well. Eagle is notable because the company is relatively small, so it can grow faster, and because its stock is relatively young, so there’s more potential buying power from institutions. The company is headquartered in New York, making it the largest U.S.-based owner of Handymax dry bulk vessels, but its chairman is Sophocles Zoullas, reflecting the traditional Greek dominance of the industry. First quarter results continued a pattern of accelerating revenue growth, and there’s a good chance that can persist, thanks to Eagle’s ambitious building program. The company has 18 ships in operation and 35 more under construction, with estimated delivery dates ranging from August of this year to March 2012. Finally, the company pays a dividend of 5.6%.
Technical Analysis
This marks EGLE’s first appearance in Cabot Top Ten Report, but the fundamentals above suggest it won’t be the last. The stock came public at 14 in June 2005, and began its main uptrend in early 2006. It peaked at 35 in October of 2007, and then dipped all the way to 20 at the market’s January low. The recovery brought it back to its old highs and then beyond last week. But today it sold off on heavy volume, raising the possibility this is a double top. If you’re interested, we suggest waiting for a dip toward the 25-day moving average at 31.
EGLE Weekly Chart
EGLE Daily Chart
(FLR)
Why the Strength
Fluor is an engineering and construction giant, with nearly $18 billion in revenues during the past 12 months. But this is still a growth company, thanks mainly to big orders from the oil and gas industry, as well as emerging demand in Green energy projects. In the second quarter, the company inked $5.7 billion of new long-term contracts ($4.3 billion of which came from the oil and natural gas industry), bringing its backlog to $31.5 billion during the next few years. Many of those orders in the U.S. are for refinery expansions and upgrades, to help deal with the forecasted gasoline crunch in the years ahead. Overseas, fast-growing emerging economies are building new refineries and chemical plants, and, encouragingly, Fluor is also scoring some awards in the alternative energy field, including polysilicon production plants and a $1.8 billion offshore wind farm in Scotland. All told, we like it.
Technical Analysis
FLR has been in a general uptrend for years, and it’s the first in its sector to break to new peaks in 2008. The stock’s recent basing structure was a bit deep, but it was well shaped, and the decisive upmove last week following the quarterly report tells you institutions are buying. FLR likely won’t double from here, but we view it as a place big investors will park money, knowing that the business’ outlook is so good.
FLR Weekly Chart
FLR Daily Chart
(GU)
Why the Strength
Gushan is the largest producer of biodiesel fuel in China, with four production facilities and three more expected to open this year. Growth is rapid and profits are fat. The main market for Gushan’s products is energy; its products are often burned in conjunction with petroleum-based diesel. But Gushan also sells byproducts: glycerine, plant asphalt, eruric acid, eruric amide and stearic acid. The company’s raw materials are used cooking oil and waste vegetable oil, and the fact that Gushan can turn these waste products into a low-polluting fuel pleases both environmentalists and investors. Gushan has a patent on its biodiesel manufacturing technology, and thinks that this, combined with its size and its first-mover advantage, will help it maintain dominance of the industry going forward. Two potential risks are that the cost of raw material might rise and that the price of biodiesel, which is tied by the Chinese government to the price of petroleum-based diesel, might rise less rapidly than the cost of goods … or even fall.
Technical Analysis
GU came public at 10 last December, and built a double-bottom at 8 in January and March before embarking on its current ascent. It’s still a low-priced stock by some measures, and you should recognize that volatility and risk are thus increased. But the overall pattern is constructive; last week the stock broke through resistance at 15 on big volume, and that level should now offer support.
GU Weekly Chart
GU Daily Chart
(MA)
Why the Strength
MasterCard doesn’t lend money, so it has no credit risk; in fact it has almost no debt. What is does have is accelerating growth, which is impressive for a $4 billion company, as well a #2 position (close behind Visa) in the global credit card processing business. The key factor behind the growth of both companies is the increasing use of plastic instead of paper checks or cash. Visa is the younger stock, but MasterCard is stronger, and a major reason for that is the company’s larger exposure to foreign transactions; about 50% of MasterCard’s revenue comes from outside the U.S. versus one-third for Visa. In the first quarter, U.S. revenue grew just 8.9%, while Europe grew 30.2%, Latin America grew 28.7% and Asia grew 27.8%. Attracted by these results, institutional investors continue to add this still-young stock to their portfolios; the number of funds on board reached 273 at the end of March, and we see no reason why it can’t reach 1,000 in time.
Technical Analysis
This marks MA’s 13th appearance in Cabot Top Ten Report since its IPO back in May of 2006. If you’re sitting with a profit now, you should hold on tight, but if you’re not a shareholder yet, the question is how to deal with the stock in the wake of the big earnings-inspired jump three weeks ago. The answer is, buy a little now. Since peaking at 300, the stock has pulled back quietly, while the 25-day moving average has advanced to 266. Finally, don’t let the high price scare you off; just buy fewer shares.
MA Weekly Chart
MA Daily Chart
(MTL)
Why the Strength
Commodities continue to be red hot, and mining and steel companies like Mechel, making its fourth Top Ten appearance, are among the market’s strongest leaders. Mechel is a Russian company with an integrated operation that includes the coal, iron ore and nickel that it needs to produce its steel and other metal products. The company’s proven and probable reserves include 282 million tons of coal, 61 million tons of iron, 13 million tons of nickel ore and 24 million tons of limestone (which is used in steel production). In addition to the rapid growth of Russia, which accounts for a little over half of Mechel’s revenues, the company is also benefiting from a program of acquisitions that is gobbling up smaller competitors. These acquisitions build market base, add to the distribution network and increase raw material supplies. Mechel just announced that its ADRs (the American Depositary Receipts that allow foreign stocks to trade on U.S. exchanges) will equal one native share from now on. Previously, one ADR was equal to three native shares. This is the equivalent of a 3:1 split in the stock. Mechel still looks good.
Technical Analysis
MTL has been rising strongly since it bottomed in May 2006 at 19. It spent a couple of months in late 2007 under resistance at 100, but took off strongly in February. Corrections in March and early May brought the stock back to its 50-day moving average, and it built a small base just under 160 before breaking out toward 170 today. Look for a profit-taking dip toward 165 as a buying opportunity.
MTL Weekly Chart
MTL Daily Chart
(PXD)
Why the Strength
Pioneer Resources debuted in Top Ten just a month ago, and today will mark its third appearance. That typifies the kind of momentum among oil and natural gas stocks that has made them the toast of the hour. Pioneer is primarily a North American explorer/driller with additional interests in South Africa, Tunisia and Equatorial Guinea. The emphasis here is on steady growth, with equal attention being paid to managing and optimizing production from existing wells and also new drilling operations. The bottom line, which showed up in the company’s May 7 earnings report, was a super 237% gain in earnings on just a 59% rise in revenues. That’s what runaway crude oil prices can do for an oil company that keeps expenses under control. A small dividend (0.4% most recently) completes an attractive package.
Technical Analysis
After 28 months under resistance at 55, PXD broke out to 60 in April. After that breakout move, it corrected back to its 25-day moving average at 55 before really blasting off. It took just four days for PXD to top 65, and it has since climbed steadily to over 70. The prudent choice is to look for a correction back to 65 as a buying opportunity, but that just doesn’t seem likely. If you like the story, take any dip of a couple of points and buy small, then add to the position as the stock advances.
PXD Weekly Chart
PXD Daily Chart
(UNT)
Why the Strength
Unit Corp. is an interesting company. It gets approximately 45% of its revenues from onshore contract drilling operations, leasing out its rigs to firms that are taking oil and natural gas out of the ground. Another 40% of business comes from actual exploration, as it drills dozens of its own wells and sells the energy in the marketplace. The remainder comes from mid-stream operations, thanks to its natural gas processing facilities. The stock is super strong for a few reasons, including rising energy prices (boosting the exploration segment) and renewed demand for the firm’s 129 onshore drilling rigs. Those rigs have been in oversupply for a couple of years, pushing rental rates lower, but prices are flattening out and will rise in the quarters to come. Growth has not been robust in recent quarters (see table below), but longer-term, Unit’s earnings have risen from $1.10 per share in 2003 to $5.71 last year and an estimated $7.31 in 2008, which is likely conservative. Combine that with a bargain valuation—12 times trailing earnings—and you have a recipe for higher prices.
Technical Analysis
UNT has been lagging its peers, as the stock was no higher in January of this year than it was back in early 2005. But that rest period is over, and shares have been moving higher since that January low near 45. This month’s action has been especially powerful, as UNT has exploded higher on huge volume after management offered an optimistic outlook in its quarterly report. Like many energy names, the stock is extended to the upside, but we don’t expect a huge pullback because the recent buying was so intense.
UNT Weekly Chart
UNT Daily Chart
(WTI)
Why the Strength
W&T Offshore is an energy explorer that operates mainly in the Gulf of Mexico, and it’s successfully participating in the energy boom. Earnings growth and revenues are accelerating, as you can see in the table below, thanks to modestly rising production (it could rise in the 10% range during 2008) and skyrocketing prices; in the first quarter, the average sales price for its oil and natural gas jumped 51%! Better yet, management has been adept at discovering new wells to drill, stepping into deepwater areas, and has successfully drilled all eight of its exploration wells this year, which should lead to rising production opportunities in the quarters to come. As for the current quarter, the outlook calls for another round of higher production and, likely, higher profits thanks to elevated energy prices. It doesn’t have the best growth story, but W&T’s future is bright nonetheless.
Technical Analysis
WTI has experienced three big moves since coming public in January 2005. First came a year-long rise from its IPO price of 19 to a peak near 50 in early 2006. That was followed by a 15-month decline back to 21, bottoming out last August. Now WTI has shot ahead to new all-time peaks above 50! The recent action has been exciting, with a much better-than-expected earnings report (22% above estimates) and big upside volume. It’s extended, however, and should give you an opportunity to buy down a few points from here.