Iffy Action
From a top-down perspective, the intermediate-term trend is up and most dips are met quickly with buying (Friday was a good example of that). But looking at individual stocks, we are seeing more and more iffy action; more groups are acting sloppily after big runs, strength is being sold into, and volatility is on the rise. None of this means you should be running into the storm cellar or that a big drop is a sure thing, but there’s enough worrisome evidence to hold some cash, to keep losers and laggards on tight leashes, and to be discerning in terms of what (and at what price) you buy. We’re knocking our Market Monitor down a peg.
What we like about this week’s list is that it’s mostly stocks that are out of the public’s eye—they haven’t been hot in recent weeks. Our favorite of the week is Canadian Pacific Railway (CP), which just broke free from a multi-month base and is part of the still-strong transportation group.
Stock Name | Price | ||
---|---|---|---|
Ubiquiti Networks (UBNT) | 170.11 | ||
Spirit AeroSystems (SPR) | 92.54 | ||
SM Energy (SM) | 0.00 | ||
The Priceline Group Inc. (PCLN) | 0.00 | ||
Harman International Industries, Inc. (HAR) | 0.00 | ||
Halliburton (HAL) | 0.00 | ||
First Solar (FSLR) | 83.74 | ||
Canadian Pacific Railway (CP) | 0.00 | ||
Chicago Bridge & Iron (CBI) | 0.00 | ||
Bitauto Holdings (BITA) | 0.00 |
Ubiquiti Networks (UBNT)
Why the Strength
Wireless Internet access is a given for most of the U.S., but for parts of the country—and for large swaths of other countries—it’s less common for a variety of reasons, mainly cost and the availability of infrastructure. But Ubiquiti Networks is stepping into that void with great success; its products allow service providers and companies themselves to deploy wireless networks that use the unlicensed RF spectrum. And, while the details can be an ice cream headache, Ubiquiti’s products provide much higher performance than competing technologies, and at very low price points, partially because (amazingly) the company has no direct sales force! Instead, the company has gained the following of vendors and service providers (it calls them its “community”) that actually helps with product development and sales efforts. The result is huge profit margins (nearly 32% last quarter) and renewed rapid growth. It’s important to note that the past hasn’t been all peaches and cream—the company had some hard times as some competitors tried to counterfeit its products, and the management team was broadly replaced. Now, though, things are back on track, with revenues booming and the bottom line likely to reach $1.82 in the current fiscal year (ending next June). There’s risk here, but also big potential.
Technical Analysis
UBNT came public in late 2011, ran from 17 to 26 by mid 2012, and then completely fell apart on the aforementioned counterfeit issues. Shares sank to 8 in August 2012! Then it began to right itself—the stock chopped its way back to 20 by this past August, and then surged on earnings and has continued to gyrate higher since. Last week, UBNT got another boost on a quarterly report, though there was some selling on the rally. If you’re game, we think starting a position here with a stop near 36 makes for a nice risk-reward trade.
UBNT Weekly Chart
UBNT Daily Chart
Spirit AeroSystems (SPR)
Why the Strength
Aerospace stocks remain one of the groups that has barely noticed the market’s wobbles; with the new jet delivery cycle well underway, the big dogs in the industry (Boeing) and all the major suppliers, like Spirit AeroSystems, are sure to benefit during the next two or three years. What institutional investors like is that there’s little competition here—most firms dominate their area in the industry. And Spirit certainly fills that bill; it’s the largest aerostructure supplier (think fuselages, propulsion and wing systems, etc.) to both Boeing and Airbus; its products go into every Boeing commercial jet, including 70% of the content for the 737 and it’s the largest suppler to the new 787. What’s held the company back in recent years isn’t demand but cost overruns; management has been sub-par. But the top brass (including a new CFO) has finally gotten a hold on their expenses and earnings are expected to explode in the quarters ahead. In fact, the third-quarter report crushed estimates (77 cents per share vs. 60 expected), and the company ended September with a jaw-dropping backlog of $38 billion. Earnings are expected to reach $2.66 per share next year, but we think that could prove very conservative if the top brass finally pulls the right levers.
Technical Analysis
While many stocks in its sector have been surging, SPR just couldn’t overcome resistance around 26 in recent years thanks to endless hiccups in its own business. Now, though, investors are growing confident that the company has put its issues behind it, meaning all of the building demand should fall to the bottom line—SPR has been trending nicely higher during the past year, and just popped out of a three-month base thanks to its earnings report. It’s a bit thin, but dips of a point or two are buyable.
SPR Weekly Chart
SPR Daily Chart
SM Energy (SM)
Why the Strength
Stocks of most energy producers were nailed last week, but a choice few, including SM Energy, stood tall. The reason for the stock’s strength: A blowout earnings report that promises more great things to come. The firm’s production grew 34% in the third quarter, led by a 48% hike in liquids (oil and NGLs, which are priced higher than natural gas). And that performance was led by SM’s stake in the Eagle Ford Shale, which boomed 61% last quarter and made up nearly two-thirds of total production. The Bakken is also contributing, and the company has the usual array of high-quality prospects that it plans to bring online gradually during the next few years. Possibly most important, cash flow and earnings are rising far faster than expected—cash flow outpaced capital expenditures (rare for a growth-oriented explorer), while earnings of $1.54 crushed estimates by 44 cents! Analysts see the bottom line up about 23% next year to $5.63 per share, but those are probably light ... assuming energy prices remain in their multi-month ranges. Recently, of course, natural gas and oil prices have skidded, and that’s always a risk for this sector. Yet with oil prices still standing north of $90 per barrel, and natural gas hanging around $3.50, there’s no reason SM can’t make a ton of money going ahead.
Technical Analysis
SM was a laggard for more than a year after topping in 2011; even as the stock gradually trended higher through this spring and summer, its RP line was flat-ish, indicating nothing-to-write-home-about appreciation. But that changed in September, with SM kiting higher, and then briefly surging above 90 following its quarterly report. The stock has since pulled back to its 25-day line before finding support. We still think the group needs time to settle down, but if you’re game, you could nibble around here and keep a tight stop near the 50-day.
SM Weekly Chart
SM Daily Chart
The Priceline Group Inc. (PCLN)
Why the Strength
Priceline.com is the market leader in online travel bookings, offering its customers reservations at over 295,000 hotels worldwide through the Booking.com, priceline.com and Agoda brands. In the U.S., Priceline also offers car rentals, airline tickets, vacation packages, destination services and cruises. The company reaffirmed its leadership role in online travel bookings last week, when it reported its fourth consecutive quarter of double-digit revenue and earnings growth. In fact, earnings per share blew past Wall Street’s consensus estimates. Priceline also announced that bookings for the quarter rose 41%, topping analyst estimates. There were a few concerns, however, that have created some short-term turbulence for Priceline. Specifically, the company’s Q4 guidance ($7.80 to $8.30 per share) was a bit softer than the consensus target ($8.27 per share). Priceline cited marketing expenditures in Asia for the pressure on earnings. Additionally, the company announced a switch at President and CEO, with Darren Huston taking over for Jeffery Boyd. While the move was expected, uncertainty almost always surrounds a changing of the guard at executive positions. Given Priceline’s strong market position, we view any controlled dips as buying opportunities.
Technical Analysis
PCLN shares have blazed a path higher so far in 2013. After peaking near 800 in April 2012, PCLN entered a period consolidation near 600 through the start of 2013. The stock showed signs of life in January, popping above 650 and pulling its 10-week and 25-week moving averages northward. In May, PCLN broke above 700 on strong volume, and hasn’t looked back since, riding key support at its 10-week trendline. In early September, PCLN eclipsed another milestone, closing north of 1,000 for the first time. And now the stock has briefly poked above 1,100 after earnings. Dips toward 1,050 can be bought, with a stop under 1,000.
PCLN Weekly Chart
PCLN Daily Chart
Harman International Industries, Inc. (HAR)
Why the Strength
Now that mobile devices pretty much dominate the home audio business, sound systems for cars are the drivers for high-end audio and electronics company Harman International. Harman, which makes audio equipment under brands like Harman/Kardon, JBL, Mark Levinson, Infinity and Becker, is a favorite of European car makers like BMW, Audi/VW and Daimler, which made Germany the source of 35% of 2012 revenues. The company also sells to Toyota and Lexus, plus China’s Geely Motors, Mazda of Japan and SsangYong in South Korea. The company’s earnings report on October 31 was a blowout, with revenue up 17% and earnings gaining 20%. Investors like the scale of the global recovery in automobile sales, which takes a little of the risk out of Harman’s story. It’s good news that the company’s announced program of cost-cutting in its European operations is expected to result in significant future savings. Harman is also growing via M&A, announcing a takeover of high-end audio innovator Duran Audio earlier in October.
Technical Analysis
In July 2013, HAR broke out of a multi-year trading range that had held in under the low 50s dating back to late 2009. The stock moved out above 60 in August and ran to new multi-year highs around 70 before consolidating for a couple of months with support at 65. The big blastoff on volume following the strong earnings report kicked HAR briefly as high as 85, but the stock gave up a few points to profit-taking. HAR looks like a good buy on any weakness for long-term growth investors who appreciate its 1.5% forward annual dividend yield and its strong automotive story. Use a stop at the 50-day moving average, now at 69.5.
HAR Weekly Chart
HAR Daily Chart
Halliburton (HAL)
Why the Strength
While skidding energy prices have nailed many exploring stocks, some of the large oil service stocks like Halliburton remain in great shape—it’s going to take a much more prolonged dip in prices to alter the drilling plans (both in the U.S., overseas and in deepwater) of major producers. Moreover, after a couple of so-so years because of heavy investments, Halliburton is set to reap the rewards as growth accelerates in a big way—it’s aiming to outperform the steady growth in the deepwater arena for many years, it has a dominant position in the Niobrara field, which some say could have twice the reserves of the Bakken, and its various technological advancements are some of the best-in-class in helping drillers maximize their wells. Analysts see earnings up 35% next year (the stock trades at just 13 times next year’s estimates) and more than 20% in 2015, and management also said it’s aiming to return 35% of its cash flow to shareholders by 2016. On that front, the dividend was just hiked (still a modest 1.3% annual yield). Yes, this is a well-known, big-cap firm, but we like the upside here, especially with institutional investors looking for liquidity and some surety of results.
Technical Analysis
HAL topped in 2011, falling from 58 then to as low as 26 in mid-2012, and it was still stuck at 30 last November. However, since then, the stock has done well as investors gradually coalesce around the view that earnings are set to pick up in a big way. The steady upside action began in late-June, and HAL hasn’t traded below its 50-day line since. This stock isn’t going to run away on the upside, but we think pullbacks are buyable with a stop just below the 50-day line.
HAL Weekly Chart
HAL Daily Chart
First Solar (FSLR)
Why the Strength
The solar revolution has been a real soap opera, pushed up by rising demand for electricity and rising oil prices, then dumped lower by the Great Recession and a glut in the silicon production industry. But through it all, First Solar, a manufacturer of solar electricity generating modules, has kept growing. The company’s proprietary thin-film cadmium-telluride technology was a big help during the silicon shortages and its reliance on the U.S. as its primary market (80% of 2012 revenue) insulated it from the vagaries of fluctuating European price supports. After booking its lowest annual revenue growth ever in 2011 (just 8% growth), the company’s sales gained 22% in 2012. And the company’s Q3 earnings report on November 4 crushed estimates, with revenue up 51% and earnings jumping 80%. Lower costs and increased module efficiency lowered the cost per watt for electricity generated at First Solar’s 550 megawatt Desert Sunlight Solar Farm to $0.59 per watt, which was a big driver of outperformance. Investors didn’t even mind the company’s lowering of its 2013 guidance from $3.6–$3.8 billion to $3.4–$3.6 billion. First Solar continues to increase the efficiency of its modules, which will maintain its highly competitive cost per watt and will open up new opportunities. The company has a net cash position of around $1.5 billion, which will enable both R&D and bigger solar farm installations. The solar industry has a leader in First Solar.
Technical Analysis
FSLR soared from a multi-year low just above 11 in the middle of 2012 to 59 May 2013. But disappointing earnings reports pushed the stock down to 36 in August and it wasn’t until October that the stock started to gain real momentum, soaring on volume to 55. After a quick dip to 50 after some negative results from competitors, FSLR soared to new multi-year highs as November began. FSLR looks like a good buy anywhere under 60, with a loose stop at 50.
FSLR Weekly Chart
FSLR Daily Chart
Canadian Pacific Railway (CP)
Why the Strength
Canadian Pacific Railway, based in Calgary, Alberta, is a major freight hauler with operations that stretch to Montreal in Canada’s east to Vancouver in the west and south into the U.S. Midwest and Northeast. About three-quarters of revenue comes from Canadian operations, with intermodal container shipping, grains, coal and crude oil making up the bulk of materials hauled. The company’s 14,700 mile network of track is dominated by a 4,700 mile high-density main line that stretches from Vancouver to Toronto. The company has been transformed by a 2011 purchase of 14% of its stock by Pershing Square Capital Management, which replaced the board of directors and influenced the choice of a new CEO. Under Pershing Square’s influence, Canadian Pacific made significant cost reductions, forged new alliances with other rail lines and moved aggressively to gain the edge in shipping Canadian coal to China via its Vancouver port. Cost savings allowed higher capital improvements and the company is now more efficient and profitable. So when it was announced on October 24 that Pershing Square was exiting its ownership position, investors were pleased to grab shares. Canadian Pacific is a play on the good grain harvest this year, on the increasing Chinese appetite for coal and on generally higher economic activity that raises the volume of intermodal container traffic. Revenue growth in 2013 has been in single digit percentages, but investors like the 49% gain in earnings in Q1, 53% in Q2 and 38% in Q3, along with estimates for a 29% hike in 2014. Canadian Pacific is a low-risk growth stock.
Technical Analysis
CP came out of an 18-month base in the middle of 2012, breaking out above 80 in July. The stock rallied strongly through May 2013, touching 140 before a five-month consolidation that dipped as low as 114. October 23 brought a gap up to 143 on massive volume and the stock has been creeping higher since, with a slight pause last week over support at 145. CP is buyable on any weakness of a point or two. A dip below its 50-day moving average, now at 131, would be bearish.
CP Weekly Chart
CP Daily Chart
Chicago Bridge & Iron (CBI)
Why the Strength
Despite its name, Chicago Bridge & Iron has had very little to do with either forging iron or building bridges for quite some time. However, the company does enjoy a dominant position in the market of building containment vessels for water and oil, and has even expanded into building entire energy plants for petrochemical and natural resource companies worldwide. Chicago Bridge & Iron expanded its reach into engineered construction in February when it acquired Shaw Group for $3 billion. The Shaw acquisition proved to be quite lucrative, with Chicago Bridge enjoying back-to-back quarters of triple-digit revenue growth. Following on the heels of a 119% spike in Q2 revenue, the company reported last week that Q3 revenue soared 107% year-over-year. Looking ahead, Chicago Bridge & Iron continues to build earnings (2013 estimates are for $4.17 per share, up from $3.08 in 2012), with several nuclear projects in China and liquefied natural gas (LNG) projects in Russia and the U.S. That said, Chicago Bridge’s backlog remained flat in Q3 following impressive growth in Q2. While this discouraged some investors, leading to a dip in the share price, the company’s expansion into LNG, and heavy buying activity by Warren Buffett, should drive additional investor activity going forward.
Technical Analysis
Despite a small setback last week, CBI’s long-term uptrend remains solidly intact. The stock kicked off 2013 with a snoozer, spending three months consolidating into support at 60. But CBI came to life again in September, soaring to a series of fresh all-time highs north of 70. Throughout this most recent rally, CBI has enjoyed the support of its 10-day and 25-day moving averages. In fact, following a post-earnings test of its 25-day trendline, CBI quickly bounced back to eclipse the 75 level. The stock looks buyable here or on pullbacks to 75.
CBI Weekly Chart
CBI Daily Chart
Bitauto Holdings (BITA)
Why the Strength
Bitauto is a Chinese company that provides Internet content and marketing services for Chinese auto manufacturers and dealers, giving them a place to list pricing and promotional information, including specs, reviews and feedback from consumers. Dealers can build virtual showrooms, do their own marketing and manage customer relationships. The company will also help dealerships build their own websites and plan and execute their own marketing and advertising campaigns. Used cars get their own website. Chinese automobile ownership has grown from 8.5 million passenger cars in 2003 to 120 million by the end of 2012. And projections for 2013 are for new car sales to near 17 million, with three million used car sales bringing the number of cars in play to 20 million. Bitauto’s revenue hit $168 million in 2012, a 61% increase over 2011. The company’s Q3 report showed a 129% jump in earnings (surpassing the 109% jump in Q2) and an after-tax profit margin on 20%%, the highest in years. Bitauto is 22% owned by AutoTrader, an Atlanta-based company that runs auto marketplace AutoTrader.com, and 25% owned by management. Sales of stock by venture-capital holders have improved liquidity, and institutional ownership, while still very small (35), is at its highest level ever. Bitauto is a big story in a rapidly growing automotive market.
Technical Analysis
BITA, which is making its debut in today’s Top Ten, came public at 12 in 2010 and sank steadily to a double bottom at 3.5 in January and June 2012. The stock topped 4 in August 2012, soared above 6 in November, got firmly above 10 in August 2013, then wedged tighter under resistance at 17 in August and September before ripping higher as October began. BITA spiked briefly over 28 after its constructive Q3 earnings report, but was undercut by general weakness in Chinese stocks in late October. The stock has traded sideways under resistance at 26 for three weeks, but showed some evidence of buyers moving back in last Friday. We think it’s buyable right here, or on a dip toward 24, with a stop at 21.
BITA Weekly Chart
BITA 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.