News-Driven Environment
The market remains under pressure, though the sellers have eased up a bit during the past couple of trading days; it’s possible that, after a sharp plunge at the end of last week we could see a bounce or countertrend rally develop. That said, this remains a news-driven environment, especially as our leaders in Washington begin their posturing to deal with the Fiscal Cliff. Overall, the intermediate-term trend remains down, and while there are some stocks and sectors resisting the decline, it’s best to stick with your generally defensive stance, limiting new buying to small amounts, taking profits (or partial profits) quickly when you get them and holding a good amount of cash on the sideline.
This week’s list is a hodgepodge of names that are doing well, usually because of recent catalysts or great reactions to quarterly results. Our favorite is a lower-priced name that looks like a special situation—Nam Tai Electronics (NTE) is showing exceptional strength, has huge earnings and sales, and even a big dividend, too. It’s a hot potato, but a small position on weakness could work very well.
| Stock Name | Price | ||
|---|---|---|---|
| AMC Networks (AMCX) | 0.00 | ||
| BE Aerospace (BEAV) | 0.00 | ||
| BioMarin Pharmaceutical (BMRN) | 0.00 | ||
| Computer Sciences (CSC) | 0.00 | ||
| Copa Holdings (CPA) | 0.00 | ||
| Lions Gate Entertainment Corp. (LGF) | 0.00 | ||
| Mohawk Industries (MHK) | 0.00 | ||
| Nam Tai Electronics (NTE) | 0.00 | ||
| Quanta Services (PWR) | 91.45 | ||
| Thor Industries (THO) | 104.76 |
AMC Networks (AMCX)
Why the Strength
AMC Networks is the first of two companies in this week’s issue that are centered on movies. AMC Networks, which was spun off from Cablevision systems in June 2011, operates cable channels that focus on films, including AMC, WE tv, IFC and IFC Films and Sundance Channel. AMC is, as the company’s website tells us, the only cable network in history to win an Emmy for Outstanding Drama Series four years in a row. With dramas like Mad Men, Breaking Bad, The Walking Dead and The Killing, AMC (formerly American Film Classics) is clearly the flagship channel for the company as a whole. IFC is slightly quirkier, featuring shows like Onion News Network and Portlandia. Sundance Channel features creative films from old and new creators. WE tv is dedicated to programming designed to appeal to women. IFC Films brings specialty films to audiences via both cable and theatrical releases. AMC Networks gets 90% of its revenue from its national networks, but the 10% that comes from international represents a growth area. With 30 years of programming history and a revenue model that centers on films but includes compelling original cable programming, AMC Networks has shown steady growth with significant potential to surprise on the upside. There was a tiff with Dish Networks that hurt Q3 results, but that squabble has been resolved, which should allow earnings growth to ramp back up.
Technical Analysis
AMCX came public in June 2011 and is making its debut in today’s Top Ten. The stock began a nice rally in late 2011 that lifted it out of its post-IPO doldrums, kicking it from 35 to 45 in three months. After correcting to as low as 35 in June, AMCX took one unsuccessful run at resistance at 45 in July, than broke out in October to as high as 49. Then the good earnings news on November 8 popped the stock into the 50s. AMCX has now given back a couple of points in a weak market environment, but hasn’t filled its earnings gap up. A buy on any weakness looks good, with a stop at 46.
AMCX Weekly Chart
AMCX Daily Chart
BE Aerospace (BEAV)
Why the Strength
BE Aerospace will never be an investor favorite, mostly because of its line of work; the company is the leading provider of interior products for jets, and these products (oxygen systems, lavatories, lighting systems, and more than 400,000 types of fasteners and other parts) don’t exactly get the heart thumping. However, we’ve always loved the story for a few reasons, the first of which is that there simply aren’t many firms in the industry; BE Aerospace dominates the market. The second deals with the industry itself—when business turns up, it usually does so for many years as new-order cycles take a long time to play out. That’s just what is going on now, and why this stock has been rallying despite a sour market; in the third quarter, sales and earnings continued their 20% to 25% growth trends, with management saying that trend should continue next year as well. But, as we said, these trends in the industry usually continue for a while, with CEO Amin Khoury saying the guidance was based on “our high-quality backlog ($8.25 billion) and the expectation of strong wide-body deliveries that are expected to continue. We believe we are well positioned to generate double-digit revenue growth for the next several years.” Barring some major worldwide economic meltdown, this new-order cycle should keep the company’s current and aftermarket service businesses growing nicely. It’s not changing the world, but with a reasonable valuation (16 times trailing earnings) and lots of certainty in its outlook, we think BE Aerospace can do well.
Technical Analysis
BEAV topped in 2008 at 54, fell to 5 during the crash, and then recovered to 40 by early 2011. Since then, though, it’s been a slog, with numerous ups and downs and little net progress. At this point, the stock is still within a trading range that’s been carved out since March, but for the first time in a couple of years, BEAV seems to be resisting the market’s pull, with shares and the RP line moving back up toward their peaks. If you want in, you could nibble around here with a stop near 41, or just keep it on your watch list and look for an eventual move above 48.
BEAV Weekly Chart
BEAV Daily Chart
BioMarin Pharmaceutical (BMRN)
Why the Strength
BioMarin Pharmaceutical has been on fire lately. The company specializes in rare genetic diseases, and currently maintains a product portfolio of four approved treatments: Naglazyme for the treatment of MPS VI, Aldyurazyme for MPS I, Kuvan for PKU, and Firdapse for LEMS. In early November, BioMarin announced that it would license the exclusive rights to Firdapse to Catalyst Pharma. The company will also make a $5 million investment in Catalyst Pharma, which will then pay royalties on sales of the drug, which is currently approved in Europe and in Phase III clinical trials in the U.S. The company also has a pipeline of very promising genetic treatments, in particular drug candidate GALNS, which is designed to treat people with Morquio syndrome (MPS IVA)—a rare genetic disorder that causes problems like abnormal heart and skeletal development. If you have read about BioMarin in the past month it is likely due to GALNS; recent positive late-stage trial data prompted the company to announce that it could seek regulatory approval next year. Clearly GALNS isn’t going to impact BioMarin’s bottom line any time soon, but with Wall Street already starting to price in the drug’s potential impact, investors would be smart to take a closer look at this rising biotech star.
Technical Analysis
Speaking of a rising star, BMRN was off to the races last week in the wake of the GALNS news. The stock broke out above former resistance at the 44 level to trade in all-time high territory just below 50. Prior to the surge, BMRN shares were already headed higher in a steady uptrend along support at their rising 50-day and 200-day moving averages. Shares looked to have topped in late October, as a double top at 44 and a broad-market sell-off pulled the stock below its 200-day line. Now, though, the stock has re-asserted itself, gapping back to new highs. Buying dips in the current market environment is recommended, while a stop loss on a trade below 44 should help limit losses.
BMRN Weekly Chart
BMRN Daily Chart
Computer Sciences (CSC)
Why the Strength
Computer Sciences is a big company (nearly $16 billion in annual revenue) that has its hand in many growth-oriented technology cookie jars, things like applications development, network and data management and professional services. The firm lost its way for years, but the stock is strong today because the company is cutting costs and is in the midst of a solid turnaround—in the third quarter, revenues were basically flat from a year ago after adjusting for currency swings, but bookings totaled $4.2 billion, and earnings were up 15% (and more than double estimates!) as profit margins expanded nicely. More important, free cash flow surged to $237 million, up from a cash burn of $268 million the year before! And management hinted at bigger things to come, partially because of more restructuring (it’s looking to sell a small business it owns in Italy) but also to position itself to participate in some big growth areas like Big Data (a recent acquisition in that field should help). Obviously, it’s not the most exciting story in the world, but when you consider that the company’s profit margins are still just 4.4%, we see a ton of room for improvement if management makes the right moves. Throw in a reasonable valuation (14 times this year’s earnings) and a tidy dividend (2.3% annual yield) and you have the ingredients to keep big investors interested.
Technical Analysis
CSC was a dog of a stock up until July, when the stock bottomed out at 22. But then the stock’s character changed—shares zoomed to 35 by mid-September, and only gave ground grudgingly during the market’s ensuing downturn. And then, last week, CSC bolted to new recovery highs following third quarter results. It’s extended to the upside, but if you want to nibble, a dip toward 25 could provide an opportunity, with a stop around 32.
CSC Weekly Chart
CSC Daily Chart
Copa Holdings (CPA)
Why the Strength
Copa has come a long way from its 1947 beginnings with three Douglas C-47s serving Panamanian destinations. From its hub in Panama City, Copa Holdings serves the transport needs of Central and South America and the Caribbean, with codeshare agreements providing access to North America and the world. Copa’s modern fleet of 73 aircraft (47 Boeing 737-700s, and 26 Embraer 190s) is constantly being upgraded—at the end of 2011, the company had firm orders for 46 additional Boeing 737-Next Generation aircraft. One consistent theme in Copa’s seven previous appearances in Cabot Top Ten Trader is the company’s strict cost-control program that keeps cost per seat-mile low. The real story for Copa is the recent upswing in revenue. From a 3% dip in 2009, annual revenues have bounced back by 13% in 2010 and 29% in 2011; revenue growth has averaged in the 20s in 2012. Copa will benefit from strong economic growth in Central and South America as well as globally. The transportation sector is seldom the source of fast-moving stocks, but investors are impressed with the company’s results and the potential of its market; its 2.2% forward annual dividend yield doesn’t hurt either.
Technical Analysis
CPA made good progress during the 2009 recovery from the Great Recession, but then spent about a year trading sideways. The breakout began in April 2011 and CPA has been advancing and consolidating ever since, making strong moves and then trading sideways for some months. A move that began in January of this year kicked the stock from 60 to 85 in just four months, and a move in October broke out above 85. With the stock now trading at 95, the rally that began in 2011 is confirmed. If CPA follows its pattern, it will begin consolidating soon, although volume is continuing to rise as this rally progresses. We think a small bet here makes sense, although a dip to 93 is a possibility.
CPA Weekly Chart
CPA Daily Chart
Lions Gate Entertainment Corp. (LGF)
Why the Strength
Lions Gate Entertainment released 14 motion pictures during its fiscal 2012 (ended March 31) and most of them were instantly forgettable. But Hunger Games is not only not forgettable, it’s likely to yield two more blockbuster films (or more) before enthusiasm plays out. This in itself is enough to put Lions Gate on the map, but the company is also working hard to increase its footprint in the entertainment industry. In late 2011, the company formed Celestial Tiger Entertainment as a joint venture with Saban Capital Group and Celestial Pictures. Lions Gate also bought Summit Entertainment in February 2012. The company works all aspects of the entertainment business, including production and syndication of TV shows, a library of around 13,000 film and TV titles and DVD sales, rental and licensing for broadcast. The boom-or-bust aspect of film and TV production makes it difficult to see growth patterns. But investors see the company’s projected 57 cents per share in earnings in fiscal 2013 (after a 30 cent-per-share loss in fiscal 2012) as a very positive sign. And the blockbuster earnings report on November 9 beat analysts’ expectations handily, largely from strong demand for Hunger Games. If next year’s Hunger Games (Catching Fire) does as well, Lions Gate should continue to catch fire itself.
Technical Analysis
LGF made its big move in January 2012, blasting out of single digits and coming to rest eventually between 13 and 15 in July and August. A tick up to a range between 15 and 16 in September and October was met by a big downdraft earlier this month, swamping LGF to 14.5 before the great earnings news kicked it back above 16.5. LGF is always going to be a little speculative, as nothing in films is really predictable. But LGF is buyable by the adventurous investor on any dip toward 16 with a tight stop just below 15.
LGF Weekly Chart
LGF Daily Chart
Mohawk Industries (MHK)
Why the Strength
Mohawk Industries is yet another company that’s benefiting from a big rebound in housing activity, both new construction and existing home sales. The company is the world’s largest supplier of all things flooring—carpets and rugs (which actually account for about half of the industry), ceramic tile, laminate, hardwood flooring, vinyl, you name it. Thus, it’s not a surprise that the firm’s yearly earnings peaked back in 2006 at a whopping $6.52 per share, before falling to $2.14 per share in 2009. That bottom line figure actually rebounded nicely during the past three years (up to an estimated $3.70 this year), but we believe the best is yet to come—even as the housing market remained in the relative doldrums (by historical standards), Mohawk produced a whopping $2.25 per share in free cash flow in the third quarter, and that was with no revenue growth to speak of. Looking ahead, management believes earnings growth will accelerate in the fourth quarter and the top line could leap nearly 10% in 2013, allowing earnings to boom 30% and cash flow to do the same. Of course, the company is doing all it can on its own to improve the bottom line, including a few small acquisitions here and some refinancing to lower interest expenses. But it’s clear the housing market is driving investor perception that the future will be very bright; as we’ve often written, if housing starts can get back to their 60-year average, it would represent a near-doubling of activity, which would be a boon for Mohawk Industries. We like it.
Technical Analysis
Like much else in the broad housing sector, MHK looked horrible one year ago, with the stock trading at 40, having fallen 40% during the market’s mini-crash. But the rebound since has been excellent, and after building a 15-week base from May through September, MHK has broken out and pushed to new highs despite the soggy market. More recently, the stock bolted ahead after Hurricane Sandy and its quarterly report, only to back off late last week. We think you could nibble here with a stop at 79, which is just below the 50-day line.
MHK Weekly Chart
MHK Daily Chart
Nam Tai Electronics (NTE)
Why the Strength
Investors have been wary of Chinese stocks for several years, and skepticism about the transparency of quarterly reports is still high. So it’s good to have a Chinese company with a substantial history to lend some credence to positive news. And Nam Tai Electronics has plenty of history. The company was featured five times in Cabot Top Ten Trader in 2003 and once in 2005. In those days, the big story was the high demand for electronic gadgets like cameras and media players. Today, Nam Tai’s popularity with investors is a result of the company’s expertise in producing LCD touch screens for tablet computers and cell phones. Specifically, Nam Tai has been identified as one source for the screens for Apple iPads and iPhone 5s. Apple won’t confirm the identities of any of its suppliers, but investors have done their due diligence and fingered Nam Tai as a new, significant supplier. The assumption is that huge demand from Apple will drive growth at Nam Tai through the ceiling. And evidence from the last two quarterly reports seems to support this thesis. Q2 revenue was up 63% and that growth scooted to 198% in Q3. Earnings have been similarly affected with 375% growth in Q2 and an impressive 5,200% growth in Q3. For a company like Nam Tai, whose market cap is just $642 million, one great customer is all it needs. The recently-hiked dividend (4.2% annually) provides a cherry on top.
Technical Analysis
After a monster rally in 2003, NTE put in three years—from late 2008 through late 2012—trading under 10. The breakout above 10 came in August when the Q2 earnings surprise hit the headlines. Then came three months of sideways trading with support at 10 and resistance at 12. The November 5 earnings report pushed the stock above 14, and it’s has been using 14 for support since. If NTE holds to pattern, it will trade sideways for a while until more news (good or bad) moves it out of its range. We think a small buy makes sense on any dip below 14, then average up when the next move comes.
NTE Weekly Chart
NTE Daily Chart
Quanta Services (PWR)
Why the Strength
With more than 65% of its revenue derived from electrical power infrastructure, Quanta Services could be a major player in the Hurricane Sandy rebuilding effort. The company specializes in designing, installing, repairing and maintaining network infrastructure for the electric, natural gas, oil pipeline, renewable energy and telecommunications industries. Quanta also has its hands in outsource management and specialty work such as installing traffic and light rail control systems. But Quanta isn’t dependent on the rebuilding effort, as the company was already firing on all cylinders prior to Sandy’s landfall. Specifically, Quanta has averaged year-over-year revenue growth of 48% during the past four quarters, with earnings growth averaging 78% for the same period. Operating margins are also improving significantly, with the company reporting an 8.6% margin for the third-quarter—110 basis points better than the prior year. With state and local governments reeling from Sandy’s sting, officials may now have adequate incentive to modernize their infrastructure to prevent future disasters. Should Quanta acquire any such projects, it could further energize the company’s bottom line.
Technical Analysis
While the ride higher has been far from smooth, PWR has held up better than most stocks in 2012, riding steadily higher on support from its 50-day and 200-day moving averages. In fact, PWR has not closed a session below this duo since December 2011. Following the company’s third-quarter earnings report, PWR rallied sharply, placing shares above former resistance in the 26 region. PWR is currently a bit overextended, so expect some consolidation at these levels. Buying dips is the way to go, while a stop loss at 24 might be prudent.
PWR Weekly Chart
PWR Daily Chart
Thor Industries (THO)
Why the Strength
Despite its name, Thor Industries is more likely to be found riding the magic bus than hurling lightning bolts. The company competes directly with Winnebago, manufacturing and selling recreational vehicles and small to mid-sized busses in the U.S. and Canada. Thor’s product line includes Airstream, Thor Motor Coach, Keystone RV, Heartland RV, Dutchmen, Champion Bus and Goshen Coach. The company caught investors off guard last week after reporting record first-quarter earnings. Specifically, Thor saw sales surge 30% to $877 million, topping Wall Street’s estimates by about $140 million. Total RV sales remained strong, rising 36% year-over-year, with a 28% jump in towable RV sales and a 95% spike in motorized RV sales. Looking ahead, Thor reported that its total RV backlog was up 73% from year-ago levels. The company cited considerable success among dealers at its September Open House in Elkhart, Ind., while CEO Peter B. Orthwein noted that, “Given the view of our business through the January quarter, we believe Thor will be well positioned to enter the important spring retail show season.” With expectations for continue growth into 2013, maybe Thor can inject a little lightning into investor portfolios.
Technical Analysis
It’s nice to see THO shares picking up where they left off following the first quarter of 2012. The stock appeared to be headed on a long road-trip higher in January, having rallied off its December low near 22 to tag a high just shy of 34 by mid-February. But the stock stalled in the spring, and despite an attempt to get going in early May, THO plunged toward long-term support at 26 throughout the summer. Following a basing period, THO resumed its former uptrend, and shares have now broken out to fresh multi-year highs above 40, with potential short-term support building at 42. You can take bites here, or wait for the post-earnings enthusiasm to die down a bit, as a short-term pause could be in store.