Broadening Out
The past couple of weeks have brought a distinct change in the market’s behavior. While the major indexes continue their mild advance, beneath the surface, we’re seeing more and more stocks acting in a healthy manner, including plenty that have gapped up on earnings. That tells us that big investors aren’t waiting patiently to build positions—they’re buying with both hands, driving the market’s leading stocks higher. There will be bumps in the road, of course, but you should be putting money to work in the market’s leading stocks at prudent buy points. This week’s Top Ten contains something for everyone—some commodity, some growth, some big, and some small. Our favorite of the week is Gafisa (GFA), a fast-growing Brazilian homebuilder that shot out of a nice, tight pattern last week. Earnings are due out tonight, but we think you can buy some around here.
| Stock Name | Price | ||
|---|---|---|---|
| CNQR (CNQR) | 0.00 | ||
| FEED (FEED) | 0.00 | ||
| FST (FST) | 0.00 | ||
| GFA (GFA) | 0.00 | ||
| KSU (KSU) | 0.00 | ||
| MA (MA) | 0.00 | ||
| MMR (MMR) | 0.00 | ||
| PWRD (PWRD) | 0.00 | ||
| WLT (WLT) | 0.00 | ||
| X (X) | 0.00 |
(CNQR)
Why the Strength
Employees sometimes have to travel, and Concur aims to streamline the process, bringing together on online booking, automated expense reporting, meeting management, while paying vendors and reimbursing employees. The company was founded in 1993 in Redmond, Washington, the home of MicroSoft, and turned its first post-Bubble profit in 2003. Concur’s software is now used by seven of the world’s 10 largest companies, but also serves those with fewer than 100 employees. Companies pay a monthly subscription, and the integration of Concur’s software with back office and payroll activities ensures a high rate of subscription renewal. Earnings growth has been steady (88%, 71% and 100% in the last three quarters) and institutional ownership of the stock has been increasing as well. The company beat guidance with its fiscal second quarter report on April 30 and raised guidance for Q3 on May 1. It’s not a world-changing story, but helping companies to control and simplify the expense of business travel is clearly a profitable idea.
Technical Analysis
CNQR has been trending higher since the middle of 2005, but its real run began in August 2006 at 12 and the stock soared to near 40 in December 2007, when the Winter Bear took a bite out of it. This dip bottomed in February and CNQR has since rallied to challenge its late-2007 high. It will pay to watch the stock’s action as it deals with resistance at 40; a dip to fill the 33-36 gap from last Thursday is possible, but not desirable. Try to buy on a correction to support at 36.
CNQR Weekly Chart
CNQR Daily Chart
(FEED)
Why the Strength
Making its first Top Ten appearance in this issue is AgFeed Industries, a Chinese company that sells premixed and blended food for pigs. It sounds a little odd, but there are some compelling numbers behind the stock. In the past 20 years, Chinese meat consumption has doubled, and 65% of the meat consumed by Chinese is pork. When per capita income reaches $3,000, meat consumption increases dramatically, and Chinese per capita income is now at $2,616. China raises about 600 million hogs a year (compared to the U.S., which raises about 100 million). Add to all this that AgFeed Industries feeds can halve the time-to-market for a hog and the 20% a year rise in commercial pig-raising operations, and the stage is set for some excellent sales growth. AgFeed has a franchise network of over 630 independently owned retail chain stores, offering excellent distribution and a pipeline for any future product introductions. It’s not a common story, but after a hard winter that killed over four million pigs and a bout of blue-ear disease that killed millions more, China needs more hogs.
Technical Analysis
FEED has been digesting an April rally that blasted the stock from 13 to 20 in just two weeks. Since that move hit resistance at 20, the stock has corrected back to 16 and then leaped back to 19 in a strong one-day rally last Friday. If you like the story, you can buy a little right here, then add to it on a breakout over 20.
FEED Weekly Chart
FEED Daily Chart
(FST)
Why the Strength
While commodity stocks have been acting sloppily in the past two weeks, OptiMo (our stock screening system) continues to highlight many energy stocks as among the strongest in the market. Forest Oil is an exciting story as far as oil companies go, as recent decisions by management to dedicate more money to production growth have created excitement. In fact, just last week, the company said its expected 2008 sales volume will be higher than its earlier estimate, thanks to a new acquisition and higher capital spending (more drilling). Looking ahead, a big attraction with Forest is the Utica Shale, a big recent natural gas find located between Montreal and Quebec City; that area, which already sits near pipelines, could hold four trillion cubic feet of natural gas, and production should ramp up later in 2009 and 2010. Importantly, earnings are due out tonight, and the stock’s reaction will be paramount. But we believe Forest Oil remains a leader in the oil patch.
Technical Analysis
FST exploded out of a messy consolidation in early April, breaking above 52 on huge volume and carrying higher the next couple of weeks. But what we like best is the stock’s action during the past two weeks, which has seen lots of volatility in commodity stocks. FST has closed each of the past three weeks at nearly the same level, and on low volume, a great sign that big investors have been in no hurry to dump shares. And from a bigger-picture perspective, the stock is just five weeks out of its basing structure, which is usually far too soon to top out. The reaction to tonight’s earnings report will be vital, but as long as FST doesn’t fall apart on the news, we think it’s buyable around here.
FST Weekly Chart
FST Daily Chart
(GFA)
Why the Strength
Brazilian stocks got a huge shot in the arm last week when Standard & Poors upgraded the country’s debt to investment grade, which is likely to open up new avenues of cash flows for Brazil’s economy. Gafisa is one of the country’s biggest homebuilders; while that industry is in tatters here in the U.S., it’s booming in Brazil, as mortgage terms improve, allowing more low- and middle-income families to afford housing. Indeed, sales and earnings growth (see table below) have been strong in recent quarters, and estimates call for big increases the next two years (although, to be fair, there are only two analysts currently covering the stock). And if S&P’s latest move helps bring down interest rates, so much the better! The company is set to report earnings tonight, and while anything is possible, we believe the company’s leading position and the latest debt upgrade are powerful catalysts for Gafisa.
Technical Analysis
GFA broke out of an eight-week base last week on its heaviest volume ever. That structure was also part of a longer five-month pattern, which began in early December around 43. What we liked best about the pattern (besides last week’s surge, of course) were the prior two weeks of tight action and closes; as we write often, that can be a clue that there are no more sellers coming into the market. Earnings are due out tonight, so it’s possible GFA will sell off on the news. But unless the results are truly horrid, last week’s huge upmove means any pullback is a buying opportunity.
GFA Weekly Chart
GFA Daily Chart
(KSU)
Why the Strength
As the name implies, rail line Kansas City Southern operates from Kansas City south to ports on the Gulf of Mexico and across the Midwest and southeast U.S., then on to Mexico City from Laredo, Texas. It also holds the concession for a 47-mile railroad that runs along the Panama Canal and operates a bulk-handling deep-water port in Port Arthur, Texas. With 3,184 main and branch route miles of track in the U.S. and 2,661 track miles in Mexico, KC Southern is a good sized player, and a major commodities shipper, with 28% of 2007 revenues coming from moving forest products/metals, 21% from minerals, 20% from chemical/petroleum, 18% from coal, 5% from intermodal/auto and the remainder from other. The company is still experiencing growth from the boom in commodities prices, and beat analysts’ expectations in its April 24 earnings report. KC Southern is rolling.
Technical Analysis
KSU had a terrible time back in the week of July 10, 2000, starting Monday at 179, soaring to 192, then crashing to 5 (five!) by the end of Friday. The reason: a spinoff of its money-management subsidiary that included Janus. It’s been a long, slow road back for the current railroad-only stock, but KSU has been on a steady roll since the middle of 2004 and really took off in 2007 as commodities heated up. After building a double top at 42 in June and July, the stock corrected to 30 in August and took seven months to build a new base. The recent breakout followed the earnings surprise. It’s likely the stock will revisit 45 before taking off again, and that’s the price to shoot for.
KSU Weekly Chart
KSU Daily Chart
(MA)
Why the Strength
One way for a company to become a great success is to provide a product or service that almost everybody buys. Decades ago, AT&T fit the bill. Today, the closest contenders are MasterCard and Visa. Of the two, MasterCard has greater exposure to non-U.S. markets, where growth is faster. Quarterly revenue growth is accelerating (see the table below). Return on equity has improved from 12.5% in 2004 to 16.5%, 21.3% and 29.3% in 2007. The number of mutual funds holding the stock has increased from 85, soon after the stock came public in 2006, to 266, and we expect that it will eventually top 1000. Some people worry unnecessarily that the credit crisis will hurt the company. Fact is, MasterCard is not a lender; it’s a processor. It benefits from the increasing use of plastic, and wins whether hard-pressed consumers spend their last thousand dollars on a vacation or increasingly expensive eggs and gasoline. The hardest part of this stock is buying correctly.
Technical Analysis
MA came public in May 2006 at 40 … and it hasn’t split yet. Maybe the managers are taking their cue from Warren Buffet and those kids at Google. The stock hit 200 last fall as the broad market was topping out, and it continued to tread water in that neighborhood throughout the winter as the broad market fell apart. But as the weight came off the market in late March, MA drifted up to new highs. Then came last week’s earnings announcement, which sparked buying that gapped the stock up on big volume to nearly 300. The 25-day moving average is down at 220, but if this strength is real (and we’re fairly confident it is) the stock should hold above the top of the gap at 260. That’s where we’ll put the low end of our buy range.
MA Weekly Chart
MA Daily Chart
(MMR)
Why the Strength
McMoRan is one of the strongest oil and gas explorer/producers out there, and there are several big reasons for that. First, McMoRan drills mainly in the shallow regions of the Gulf of Mexico, so expanding its operations is easier and less costly than for many competitors. Second, the company acquired a bunch of properties in the region from Newfield last summer and those are beginning to pay off big-time. And third, this company, which has not posted a profit since 1999, is now ramping up profits rapidly. First quarter earnings, announced three weeks ago, reached $0.47 per share, blowing away analysts’ estimates of $0.32. If this growth continues, buyers will continue to snatch up this under-appreciated stock.
Technical Analysis
MMR came public back in 1998 at 12 and topped out at 25 in 1999 (the last year the company made a profit). Following a plunge to 3 (!), it climbed right back to 24 in 2005, but couldn’t break through that old high. This year, however, the stock has succeeded in breaking out to new-high territory. It hit 29 after the earnings report was released, and the odds are that this breakout will attract pent-up buying power that will push the stock much higher. But first comes the mini-correction following that initial surge. It brought the stock down to 26 last week, and you may get the chance to buy even lower in the weeks ahead.
MMR Weekly Chart
MMR Daily Chart
(PWRD)
Why the Strength
As you might expect, the Perfect World of the company’s name is only an online fantasy, but for millions of Chinese game players, it’s enough. Perfect World is a young company (it was founded in 2006 and came public just last July) and it’s making money by giving Chinese devotees of MMORPGs (massively multiplayer online role-playing games) fresh content courtesy of its Angelica 3D Game Engine technology platform that makes the creation of new content faster and cheaper. Perfect World has been growing like a weed, bringing revenues from just $11.3 million four quarters ago to $35.4 million in Q4 2007. Active paying customers are up 160% from a year ago and the company is adding casual games to its lineup to increase traffic. With China just having surpassed the U.S. in number of Internet users, Perfect World is in a perfect place to keep growing. An earnings announcement isn’t scheduled, yet, but should come later this month.
Technical Analysis
PWRD came public at 16 last September, and has never traded that low since. The stock has been trading in a range with support at 22 and resistance at 32, but a big-volume buying day last Friday may (repeat, may) indicate that a breakout is coming. Aggressive investors can buy a little right here as the stock pulls back slightly. The safer course is to buy on a breakout over 32 on good volume. This is a high-risk/high-potential issue.
PWRD Weekly Chart
PWRD Daily Chart
(WLT)
Why the Strength
Walter Industries is a moderately diversified mid-sized company that’s consistently increasing its growth potential by adapting to market forces. Way back in 2003, homebuilding and home financing accounted for 39% of the company’s business, and the stock benefited from that weighting. Meanwhile, 35% of revenue came from industrial products (mainly pipe) and 19% came from natural resources. Last year, (four years later) 78% of earnings came from natural resources, while 22% came from homebuilding and financing. And the industrial products? Sold. This year, Walter is working to separate its financing business from the rest of the company, and expects to achieve the goal by year-end. Looking forward, the long-term goal is to turn Walter into a pure-play natural resources and energy company. So, even while current metrics are poor, the market is looking ahead, and valuing Walter at least partially on what it expects to become. Today its main natural resource assets are two coal mines in Alabama that supply some of the best (and highest-priced) coking coal in the country. Months from now, who knows?
Technical Analysis
WLT first appeared in Cabot Top Ten Report in January, when it was trading at 42 after breaking out above long-term resistance at 35. The advance following that breakout has proved very profitable. More recently, the stock found resistance at 73, and spent over four weeks building a healthy base in the 70 area. But last Friday the stock mounted a high-volume attack on that old high, and today saw a very satisfying follow-through. If you’ve got it, hold on tight. If not, buy a little here.
WLT Weekly Chart
WLT Daily Chart
(X)
Why the Strength
U.S. Steel remains in great shape, as demand for its products is surging while the company’s costs are likely going to rise much less than its competitors. As we touched on two weeks ago, the company produces much of its own iron ore, a major raw material used in steel-making that has seen its price skyrocket in recent months. It’s also benefiting from some longer-term coal contracts, again keeping its costs reasonable. That will help earnings boom in the quarters to come, as steel prices are set to rise across the board. U.S. Steel reported decent earnings last week–while the bottom line rose just 2%, those results were 30% above expectations, and more important, management indicated the second quarter is likely to be very strong. While it’s big and old, U.S. Steel continues to act like the top stock in the leading steel group.
Technical Analysis
X was our Editor’s Choice two weeks ago, and while it hasn’t made much progress in that time, we’re bullish on its recent action. Most commodity stocks have been very volatile of late, with some taking a beating. But X has consolidated in a relatively tight range, and the bears couldn’t even use the earnings report as an excuse to drive prices lower. The stock poked its way out to new peaks this morning, though we think it could spend a little longer in its recent trading range before making a decisive move higher. Hold on if you own some, and if you don’t, you can buy a little in this area.