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Top Ten Trader
Discover the Market’s Strongest Stocks

May 27, 2008

The market had a rough week, and worse, leading stocks took it on the chin. We think that’s a good reason to take things a bit easy for now; take a few profits, cut all losses short and hold some cash on the sideline. Overall, this bull trend is intact, but it’s OK to take a step back as we let the best stocks find their footing. This week’s Top Ten identifies, in our view, most of the very best leading stocks in the strongest sectors in the market. These should definitely be on your watch list, and a few look to be near good buy points today. Get all the details inside.

A Shot Across The Bow

We knew a correction was on the way, and the market delivered it last week. The major indexes still look fine, but we’re a bit wary of the action of leading stocks—even in recent days when the indexes are up, most leaders are dropping. That doesn’t mean the bull move is over, but as you can see in our Market Monitor above, we’d cool our heels a bit; don’t hesitate to take a few chips off the table, and remember to cut all losses short. As for buying, we believe this week’s list offers many of the top leaders in the market in various sectors. Not all are near good buy points, but any further weakness should bring them there soon. Our favorite of the week is Hercules Offshore (HERO), a shallow-water driller that has recently emerged from a tight consolidation. We do feel that many energy names can pull back, but HERO should pull back less than most.

Stock NamePriceBuy RangeLoss Limit
ANR (ANR) 0.0060-66-
CLF (CLF) 0.0087-97-
CLR (CLR) 0.0053-57-
ENER (ENER) 0.0045-54-
FRO (FRO) 0.0058-64-
HERO (HERO) 0.0032-34-
MMR (MMR) 0.0028-32-
SOHU (SOHU) 0.0070-76-
SU (SU) 0.0066-70-
X (X) 0.00160-170-

(ANR)

Why the Strength

Alpha Natural Resources is a leading supplier of high-quality Appalachian coal, with mines in Virginia, West Virginia, Kentucky and Pennsylvania. Surface mines number 38, while underground mines number 27. Approximately 89% of the company’s coal is high-BTU and 82% is low-sulfur, qualities in high demand by electric utilities. Furthermore, Alpha is also one of the country’s largest producers and exporters of metallurgical coal, which is in high demand by steelmakers worldwide. Prices for all types of coal have been rising in recent months, and the result is a trend of accelerating revenue growth. Paralleling this is a trend toward increased institutional ownership; the number of mutual funds on board has swelled from 66 a year ago to 115 at the end of March. How far these trends will go, no one knows; the global forces behind rising prices are large and complex. Yet experience has taught us that trends are best embraced until they end, so we recommend embracing this one.

Technical Analysis

ANR appeared in Cabot Top Ten Report in October, November and December of 2007, but we were shaken out of the stock by the market’s big January correction, which took the stock down from 35 to 22. Since then, however, the stock has been hot. If you managed, for some reason, to hold on to ANR, congratulations. If not, we recommend buying on any normal correction. The 25-day moving average is just under 60, and any move toward that level would offer an attractive entry point.

ANR Weekly Chart

ANR Daily Chart

(CLF)

Why the Strength

Cleveland-Cliffs is the largest producer of iron ore in North America–it operates six iron ore mines in Michigan, Minnesota and Eastern Canada–and is thus a major beneficiary of the global boom in demand for steel. Last year it diversified into Australia, buying a majority interest of a major producer there–from which it is better able to serve the booming Chinese market–and it also bought a 30% interest in a Brazilian iron ore project. Then there’s coal. In the U.S., the company operates three coking coal mines (again, booming thanks to demand for steel) in West Virginia and Alabama, and has a 45% interest in an Australian thermal and coking coal project. As both demand and prices rise for all these commodities, Cleveland-Cliffs has seen revenue growth accelerate. Earnings growth, however, has been uneven, reflecting the costs–usually one-time–of recent acquisitions. But investors are clearly looking for major earnings growth going forward (analysts are projecting $5.86 per share in 2008, up from $2.57), resulting in a forward price/earnings ratio of just 16. Cheap.

Technical Analysis

This marks CLF’s sixth appearance in Cabot Top Ten Report since February 11, when it was trading at 116. Since then, it’s split 3-for-1, touched its 50-day moving average three times and its 25-day moving average twice. We think you can buy a little here or lower.

CLF Weekly Chart

CLF Daily Chart

(CLR)

Why the Strength

Continental Resources is one of the top energy exploration stocks in the market. The reason for its strength is simple—the company has the biggest position in the Bakken fields in North Dakota and Montana, which one CEO said is the most exciting new oil play in North America. Indeed, a recently updated geological survey said the Bakken is the largest oil field in North America, with an estimated three to four billion barrels of recoverable oil. As for Continental, the company is successfully drilling in that and other areas, with a big emphasis on oil instead of natural gas. The results (see table below) have been outstanding, with accelerating sales and earnings growth, and this could be just the start; management expects production to leap 40% by year-end. Obviously, a correction in the overheated energy market will come at some point, but the major trend is up, and we believe Continental Resources is among those best positioned to benefit.

Technical Analysis

CLR got going right after the market bottomed in March, more than doubling since then; news of positive drilling results in a new area of the Bakken field caused a rush of buying last week. We don’t see CLR as a good buy right here, but we also don’t believe the stock is near a long-lasting top; it’s only eight weeks up from an eleven-week basing structure, and the sector remains in an overall uptrend. If oil prices pull back (a possibility, given the intense attention), CLR will likely do the same and offer a sound entry point.

CLR Weekly Chart

CLR Daily Chart

(ENER)

Why the Strength

Two weeks ago we told you how new President Mark Morelli had slashed 160 engineering jobs and focused this previously scattered company on the profitable business of solar power, a move that yielded the company’s first profitable quarter in many years. Today we’ll look more closely at the firm’s unique solar power products. Produced using a patented thin-film method, its UNI-SOLAR photovoltaic laminates are flexible and lightweight. Some come in rolls, so they can be applied to any flat roof. A typical roll is 15 inches wide, lengths range from 9 to 18 feet, and application is simply peel-and-stick! Some come on rigid panels, so they can be mounted and angled toward the sun. And some are portable. Designed for photographers, hikers, the military and all sorts of outdoor workers, these can be dropped, stepped on, packed and redeployed while continuing to operate. The company has two production plants in Auburn Hills, Michigan, with total annual production capacity of 58 megawatts, and is building two plants in Greenville, Michigan, that will each have two production lines; when they are running at full speed in 2009, they will have a total annual production capacity of 120 megawatts, enough to power 48,000 homes. In short, the company is taking steps to meet the huge anticipated demand.

Technical Analysis

It’s not enough to identify a great company; sometimes the hardest part is buying the stock correctly. Two weeks ago, when ENER was trading at 52, we gave it a buy range of 43–52, and in the days that followed, it only traded in that range for one day. Today we’re going to raise that range just a little, noting that the uptrending 25-day moving average is just under 44.

ENER Weekly Chart

ENER Daily Chart

(FRO)

Why the Strength

Frontline touts itself as the world’s largest tanker company, and it’s certainly a giant in the international movement of crude oil on the high seas. While the business of transporting crude gets some benefit when the price of crude rises, it’s not like owning the oil itself. Frontline keeps profit rising by avoiding long-term leasing contracts and renting its ships on the spot market where they can command a premium rate (about 27% higher than the fleetwide rate). The company is upgrading its fleet, selling off its older single-hull tankers and buying the safer double-hull tankers that command higher spot prices and also contracting for newbuilt ships. Frontline paid an enormous dividend (11.5%) last year, but it’s not clear whether this was a result of one-time deals (the company spun off more than 17% of its holding to shareholders in February) or the payoffs it has received as it canceled long-term charter agreements. Either way, it’s an impressive cash payout.

Technical Analysis

FRO spent nearly two years—from early 2005 to early 2007—in a slow tailspin, falling from 46 to 26. It then caught fire in January 2007, ripping from 26 to 53 in just six months. After a six-month correction back to 34, the stock heated up again in March of this year and last week vaulted to new highs near 70, before pulling back to the low 60s. Trading at just nine times earnings, FRO looks like a bargain. Wait for the stock to stabilize before you jump in.

FRO Weekly Chart

FRO Daily Chart

(HERO)

Why the Strength

Fundamentally, the deepwater drilling sector appears to have the best growth prospects in the oil service world. However, the stock market disagrees; many shallow-water and land-based drillers are surging, as investors anticipate a huge upmove in day rates (read: rental rates) for these firms’ services. Hercules Offshore operates a fleet of 35 jackup rigs, 27 barge rigs, 65 liftboats and three submersible rigs, but in recent quarters, they haven’t produced growing earnings. (Revenues are up because of the acquisition of TODCO last summer.) Even so, management indicated that utilization rates were on the rise near the end of the first quarter, and earnings should begin leveling out near the end of this year … and boom in 2009. In the world of oil stocks, that means Hercules Offshore is meeting with buyers today, and we believe higher prices are ahead.

Technical Analysis

HERO bottomed out along with everything else in January, hitting a low of 20, down from 44 in early 2006. The action since then has been encouraging, however; there have been many weeks where the stock closed in the top part of its range, and trading during March and April showed a bunch of tight weekly closes—both of these are signs of support. Since May began (and earnings were reported), the stock has shown great power on big volume. We think you can buy a little on any weakness.

HERO Weekly Chart

HERO Daily Chart

(MMR)

Why the Strength

McMoRan Exploration is an oil and natural gas explorer/producer with a couple of good stories. The first story is the rise of crude oil prices to over $130 a barrel, a phenomenon that has given all companies with crude and gas reserves a boost. The second story is that of a small exploration company that had a run of 14 quarterly reports that featured just two quarters with positive earnings … not a record that lights a fire in investors’ hearts. Q4 2007, however, featured a 346% rise in revenues, a number that was dwarfed by the company’s 472% revenue surge in Q1 2008. McMoRan Exploration has the geographical advantage of drilling in the shallow parts of the Gulf, which is cheaper, and also has been bringing in a bunch of new wells from properties acquired last summer. We think it looks like a leader in a hot sector.

Technical Analysis

MMR has been featured in Top Ten four times this year, in March, April and May, and it has been a true rocket launch. Since it bottomed at 11 in October 2007, the stock has ripped into the mid-30s, before correcting slightly the last couple of days. It would be good to be able to grab this high flyer as near to 30 as possible, although under 30 would be even better.

MMR Weekly Chart

MMR Daily Chart

(SOHU)

Why the Strength

Making its third Top Ten appearance this year, and its 11th overall, Sohu.com looks like an emerging winner in the Chinese market. Often tagged with the label “The Yahoo! of China,” this hugely popular Web portal has long been the biggest in China. The problem has been a spotty earnings record, which, though always profitable, reveals many quarters of year-over-year declines. Today it seems that the approaching Beijing Olympics, of which Sohu.com is the Internet content service sponsor, have driven earnings sharply higher and in turn attracted investors. Sohu.com’s Q4 2007 earnings were up 105%, more than doubling any increase in years, and the Q1 2008 increase of 256% was phenomenal. The stock now has an all-time high number of institutional investors on board (69), which bodes well for the company’s liquidity and fund raising. We like it.

Technical Analysis

SOHU has been correcting slightly with the market, digesting its April gap up. After peaking earlier this month at 86, the stock has pulled back close to its 25-day moving average at 75. This looks like a useful buying opportunity for those who might have missed it on the way up in April. If the stock firms up around its 25-day moving average, we think you can buy it right here.

SOHU Weekly Chart

SOHU Daily Chart

(SU)

Why the Strength

Canadian company Suncor Energy is a big (market cap nearly $66 billion) energy company with diversified operations. The company has been known as a developer of Canadian oil sands, which it mines conventionally and with steam extraction, resulting in bitumen that is appropriate for refining into gasoline, diesel and other products. Suncor has another side, though, a commitment to sustainable energy that has pushed the company into wind power projects, ethanol production (200 million liters annual capacity) and carbon dioxide capture and storage. As a company with a strong Green commitment, Suncor is included in the Dow Jones Sustainability Index and the FTSE4Good Index, two benchmarks commonly used as standards by environmentally conscious investors. Being Green has been good business for Suncor, which pays a small dividend (0.3% annually) and contributes 1% of its average Canadian pretax profits to charitable causes. With a strong base in the oil sands business (which looks more attractive as conventional oil prices rise) and a strong alternative energy initiative, Suncor’s business is set to accelerate in the quarters ahead.

Technical Analysis

SU, which appeared once in Top Ten back in 2003, took a vacation in 2006 and early 2007, meandering around in the 70s and 80s. In March 2007, it got moving, and its RP line has been in an uptrend since, including a real blastoff in March 2008. Since the beginning of the year, SU has soared from 79 to over 140. The stock is splitting 2:1 today, which is reflected in our buy range.

SU Weekly Chart

SU Daily Chart

(X)

Why the Strength

U.S. Steel is acting like it’s the 1910s all over again! The company might be commonly viewed as an old, stodgy firm, and to some extent, that’s true. But right now, U.S. Steel is the leading steel stock in the market, thanks to a variety of factors. The first, of course, is strong demand and rising prices, thanks mainly to the emerging economies. (China’s recent earthquake, in fact, could accelerate demand in a rebuilding effort.) The second, however, is more unique to U.S. Steel—the firm produces much of its own raw materials, such as metallurgical coal and iron ore, both of which are skyrocketing in price. The result is that the company should make the most of the current bullish environment; first quarter earnings were only up 2%, but they crushed expectations, and analysts foresee a 70% earnings jump this year, a figure that could be very conservative.

Technical Analysis

Like many stocks in this issue, X broke out soon after the market bottomed in March, and has staged a steep, big-volume upmove since. Now the stock is hitting some turbulence, which is only natural after such a rise. But since the stock is just nine weeks out of its base, it’s unlikely to have hit its final top, unless the market itself totally unravels. X nearly touched its rising 25-day moving average last Friday, and it could easily revisit that area in the days to come.

X Weekly Chart

X Daily Chart