November 12, 2007
Put the defensive team on the field! Last week’s huge drop broke the uptrends for most leading stocks and the market as a whole, so you should now be focused on holding cash, selling poor performers and -- importantly -- working on a watch list for the next bull move. This week’s Top Ten has many stocks that are still acting well, and there’s nothing wrong with buying a little on weakness. But in general, you should now be thinking about capital preservation, and preparing for the next major uptrend. Also, please note that, due to our regular publishing schedule, there will be no Top Ten Report next Monday; we take two Monday’s off per year, one around Turkey Day, the other around Christmas. Thus, your next Top Ten will be sent to you Monday, November 26.
Time to Play Defense
Last week’s sharp market break on huge volume brought down many leading stocks, and dropped the major indexes through key support. That means the intermediate-term market trend is now down, so you should be selling your losers and poor performers, holding on to plenty of cash, working on a watch list, and possibly making a few token buys here and there. Overall, we know the next bull move will bring many profit-making opportunities (they always do!), so your goal should be to get from here to there with as much of your capital (and confidence) as possible. This week’s Top Ten contains many interesting stories and solid charts, and buying a little on weakness is fine as long as you have cash stowed away. Our favorite of the week is LG Philips (LPL), a cyclical stock in a high-tech industry (LCD screens). Business is improving rapidly, and the stock’s huge-volume breakout means any retreat should be arrested just a little below today’s level.
Why the Strength
Like AU Optronics, which made a Top Ten appearance three weeks ago, LG Philips is a joint venture (although Philips is trimming back its stake) that’s a big player in the market for liquid crystal displays – better known as LCD screens. In fact, LG Philips is the second largest maker of LCDs, so its fortunes are almost strictly tied to the industry’s global supply/demand balance. For more than a year, price declines for the firm’s displays were outrunning cost cuts, resulting in small sales gains but lots of red ink. But now management has churned out two quarters in a row of big profits, and the best is yet to come – display prices rose 7% sequentially in the third quarter, and the uptrend should continue well into 2008. Indeed, analysts are looking for a whopping $2.92 in earnings per share next year, up from an estimate of just $2.07 three months ago! This is anything but a buy-and-hold type of stock, but with business trends improving, and with two firms in the industry now on the right track, we believe higher prices are likely.
LPL has been range-bound since coming public in mid-2004, swinging between 14 and 26 the past couple of years. But the last three weeks have shown some huge-volume buying pressures, pushing shares out to new all-time peaks. If the market remains weak, it will be hard for LPL to swim against the tide … but the big volume breakout tells us that support in the mid 20s should hold up. If you’re game, buy a little on weakness.
LPL Weekly Chart
LPL Daily Chart
Why the Strength
NuVasive is in the spine surgery business, and that’s nobody’s idea of a hot market. Yet the fact that the stock has earned a spot here (again) makes us check it out … and we like what we see. The challenge for all spine surgery companies is to provide effective treatment, do it for a cost-effective price … and make a profit while doing it; NuVasive is now doing all three. The company has been in the business for a decade, developing a suite of products that treat both the lumbar and the cervical regions. Traditionally, these products have fused vertebrae, but the company’s newest products (designed for the cervical area) promise to preserve some flexibility even as they address disc degeneration. The company announced five new products at a recent meeting of the North American Spine Society. Equally important, the company’s third quarter earnings report was the second in a row to show profits; analysts are now projecting full-year earnings of $0.08 per share for 2008.
NUVA came public in May 2004 at 11 and has been trending generally higher since. This means that shareholders on board are happy, and thus content to sit as the stock climbs higher; there’s no one looking to “get out even” on a bounce. Most recently, we see the earnings-inspired boost that sent the stock from 38 to 44, and now the digestion period that’s followed, notable for the way it’s ignored the broad market weakness. The uptrending 25-day moving average is nearing 40, and we think you can buy now.
NUVA Weekly Chart
NUVA Daily Chart
Why the Strength
Onyx Pharmaceuticals is riding a wave of investor support following news that the company’s Q3 earnings report showed a profit for the first time ever. The profit was a result of increased sales of Nexavar, an anti-cancer pill developed by Bayer from proteins developed by Onyx. Earlier in the year, Nexavar was found to be effective against liver cancer, a disease with precious few other treatments. There is a continuing swirl of activity at Onyx, with a number of clinical trials in various phases, all involving attempts to mobilize Nexavar, which works by preventing tumors from increasing their blood supply through angiogenesis, against other malignancies. With an effective drug in pill form (with few side effects) that targets a set of deadly diseases, Onyx looks to be poised for further advances, although there are no sure things in the trials-dominated world of pharmaceuticals.
ONXX had eight previous Top Ten appearances back in 2003–04, but had been somewhat adrift until the first bit of good news about Nexavar hit in February 2007, blasting the stock out of a 2 ½-year downtrend. Since that jump from 12 to 24 in one day, ONXX has been rising and holding, then rising again. It’s fairly extended at this point, but is likely to offer the aggressive investor a down day sometime this week. Look for a pullback below 55 as an opportunity to take a position.
ONXX Weekly Chart
ONXX Daily Chart
Why the Strength
Priceline.com is a stranger to nobody, yet the stock continues to be a strong performer, driven mainly by better-than-expected earnings. Last week’s third-quarter report did the trick – sales and earnings rose 33% and 119%, respectively, thanks to another outstanding performance at Booking.com, the firm’s European online travel site. Bookings there were up a huge 98%, and that trend should continue for another few quarters at least; Europe’s online travel industry is two or three years behind the U.S. Interestingly, even domestic bookings were strong, up 19% from the prior year. And Priceline is now expanding into Asia – it bought tiny Agoda.com, a Southeast Asian online travel site. If the company can take its European model and apply it to Asia, who knows how big this could get? As it stands now, Priceline is firing on all cylinders.
PCLN’s advance began last summer and has continued without much of a hitch. Sure, there have been a few sharp shakeouts, but the uptrend has gotten help every time earnings were reported. Because the upmove is long in the tooth, buying PCLN is a higher-risk proposition – there are more potential pent-up selling pressures should something go amiss. Even so, last week’s huge-volume upmove should lend support if the stock is dragged lower by the market, so if you want in, you can take a nibble around 100.
PCLN Weekly Chart
PCLN Daily Chart
Why the Strength
Gafisa is Brazil’s leading national homebuilder, a diversified construction company with over 900 completed projects, including houses, housing developments and commercial buildings. The company has done more than 90% of its business in the Rio de Janeiro and Sao Paulo areas, but it’s branching out. It was announced on October 26 that Gafisa had taken a 70% stake in Cipesa, a homebuilder in the Brazilian state of Alagoas. Gafisa’s success stems partly from the company’s efficiency at bringing North American-style subdivision developments to Brazil, and partly from the action of the booming Brazilian economy itself. The big question on Gafisa has been about whether the current slump in housing in the U.S. will prove contagious; being in Brazil might provide immunity and it might not. Revenues increased 11% in 2004, 25% in 2005 and 62% in 2006, and in the long run, the company’s outlook is excellent. Q3 results show a 124% rise in sales and a 30% jump in earnings, numbers that tend to produce optimism.
GFA came public just about four months before the global July/August pothole, debuting at 24, climbing to 37, then falling to 21 in the downdraft. Since then, the stock has soared to new price and RP peaks on good volume. Today’s pullback to below 40 looks normal, but a dip below the 25-day moving average at 34 would be even better.
GFA Weekly Chart
GFA Daily Chart
Why the Strength
Last Friday, spot prices for gold reached $835 an ounce. Today, they’ve declined to near $800, but no one is expecting any kind of wholesale retreat. This is good news for Randgold Resources, a British exploration and development company with mines in southern Africa. The company’s first Top Ten appearance came in mid-September, when the price of gold had just topped $700. Its second came in mid-October when gold prices soared through $750 an ounce. In that second appearance, we pointed out that Randgold’s cash costs per ounce of gold amounted to $361 an ounce. With that kind of gross margin, much of the appreciation in gold prices will obviously make its way to Randgold’s bottom line. The company has a number of different mines and has announced that two of its mines in Mali will be increasing production during the next year. This all makes Randgold, still a fairly small company, plus its proven and probable reserves of 6.29 million ounces of gold, a potential cash cow … if gold stays in favor.
GOLD (great symbol to have, these days!) has been in a fairly sedate long-term uptrend. But it hit strong resistance at 26 in May 2006 and was stopped there twice more in the months following, finally punching through last month. Since then, it’s been a monster, rising to a new resistance level at 38 at the end of October before pulling back normally. This pullback to 35 looks normal, but you should watch the chart to make sure that a support level is in place before you decide to buy.
GOLD Weekly Chart
GOLD Daily Chart
Why the Strength
Alpha first appeared here three weeks ago, on October 22, and here’s what we like about it. First, it’s in the coal business, where increased demand, particularly for the metallurgical coal used to make steel, is strong. And second, management appears pretty smart. They started this company in 2002 and have grown it with numerous acquisitions since; the company now operates more than 60 mines in West Virginia, Virginia, Kentucky and Pennsylvania. Since that first appearance, the company announced its third quarter results; revenues were up 7%, which was nice, and earnings hit $0.14 per share, beating analysts’ estimates by a penny. But what’s interesting is that management has announced that it will be cautious (unlike some competitors) about paying to expand production of metallurgical coal in the near term. The cost per ton has dropped a bit in the past year, and management notes that in the fourth quarter it must honor current contracts as well as factor in holidays and deer hunting season. Said CEO Michael Quillen, “You can’t pay ‘em enough to miss deer season.” Going on, he noted, “In this business, supply and demand is often in fragile balance. We’re taking a disciplined approach to growth.”
When ANR first appeared here, trading a bit above 26, we gave it a buy range of 24 – 26. But the stock soared to 28.61 before the earnings announcement knocked it back down below 26 … and below its 25-day moving average.
ANR Weekly Chart
ANR Daily Chart
Why the Strength
Mining stocks, especially those that are bringing gold out of the earth, have been having a great year as global demand has skyrocketed. Part of this is due to economic jitters, which make some people want to have something tangible to hold on to (like stock certificates in a gold mining company), and part is due to growing demand from the increasingly affluent citizens of India and China, where gold is a traditional way to store family wealth. Buenaventura is Peru’s largest precious metals miner, with three mines in Peru, controlling interests in four other mining companies and minority interests in three others; it owns 44% of Yanacocha, the top gold mine in Latin America. The most recent quarterly results provided a huge boost for Buenaventura’s stock, registering a 23% gain in earnings (after three quarters of declines) on a 35% jump in revenues. The stock also pays a dividend (0.9% most recently). If precious metals appeal to you, Buenaventura’s mix of gold, silver, copper and zinc makes a lot of sense. Strikes called last week by unions at many Peruvian mines are a source of concern; watch the chart to see how the stock reacts.
BVN made its one previous Top Ten appearance on July 23, just before the global market slump that bottomed in mid-August. But the stock had built a very long base (with resistance at 30-31) dating back to December 2003, and recovered quickly from that brief setback. With a very strong RP line since the middle of August, BVN should rise as long as gold stays in favor.
BVN Weekly Chart
BVN Daily Chart
Why the Strength
Denbury is the second oil producer to earn a Top Ten spot of late, following the lead of Southwestern Energy last week. The company is benefiting from the potent combination of higher production at its properties in the Gulf Coast region (it’s the largest oil and natural gas operator in Mississippi) and higher prices in the marketplace. The just-reported third quarter saw production levels increase a solid 22% from a year ago (and an even better 9% from the quarter before), while price hikes tacked on another 10% to growth, resulting in 32% sales growth and a better-than-expected bottom line. And here’s the interesting part – management is already calling for a 25% jump in production for 2008 … but analysts are guessing earnings will rise just 7%. Obviously, they’re looking for big price declines, but with oil and natural gas prices showing some spunk, we think higher prices, not lower prices, are likely. All told, we like the story, and believe the sector as a whole is embarking on a new uptrend.
DNR enjoyed a huge advance during ’03 to ’06, riding the back of skyrocketing energy prices. But like most names in its group, the stock then built a long base, wearing out the weak hands as energy prices consolidated for many months. Now the trend is back up; while the breakout occurred in July, it wasn’t until September that the fireworks really began. It’s tricky to buy anything in such a weak overall stock market, but picking up a small amount on a drop to 54 seems worth the risk.
DNR Weekly Chart
DNR Daily Chart
Why the Strength
Even if you don’t normally look at the boxes down below, I urge you to do so in this case, because First Solar boasts exceptional growth. Revenues were up 290% in the third quarter! Earnings were up 717%! And profit margins hit a record-high 24.2%! The business, of course, is solar power. Phoenix-based First Solar uses a lower-cost thin-film process to make solar cells, that are used in large-scale commercial grid-connected installations in Europe. Why Europe? Because those countries have no oil, and because their governments tend to be ahead of the U.S. in encouraging non-polluting energy technologies. Solar is still a very, very small part of the world’s total energy picture, but the trend is clear. Demand for clean energy is growing, and as production volumes increase, the cost of the product comes down, bringing it closer and closer to parity … the point where the costs of solar and fossil-fuel power are equal. Detractors will note that, with a market valuation of $15.9 billion, First Solar is rather expensive … to which we can only reply, “The best growth stocks are always expensive.”
FSLR has been in a strong uptrend since it came public a year ago. But when those eye-popping numbers mentioned above were released last week, FSLR soared 34% on huge volume, providing a perfect illustration of what happens when too many people try to get through the door at once. Happily, FSLR has appeared here in Cabot Top Ten six times previously this year, so if the story appealed to you, you likely bought it before last week. Today the stock collapsed, filling its gap, and any buying should target the 25-day moving average at 153.