Building Your Watch List
With the market in a defined downtrend, the odds are against the bulls; buying a bunch of stocks, even if they have tremendous Top Ten-type relative strength, will usually cost you money. Thus, you should be focusing on building your watch list of resilient stocks with top-notch growth stories; doing that today will prepare you to pounce once the market gives us a green light. This week’s (and last issue’s) Top Ten is a great place to begin building – you’ll find a wide array of stocks here, from different industries with different prospects. Many are familiar names, which we view as a good thing; big investors are still sitting tight with many leaders, giving them a shot at racing ahead once the bulls re-take control. Our favorite of the week is Chicago Bridge & Iron (CBI), partly due to its chart (some recent high-volume buying suggests good support on any weakness) and partly due to the ongoing boom in oil and gas infrastructure.
| Stock Name | Price | ||
|---|---|---|---|
| AG (AG) | 0.00 | ||
| BIDZ (BIDZ) | 0.00 | ||
| BUCY (BUCY) | 0.00 | ||
| CBI (CBI) | 0.00 | ||
| CNX (CNX) | 0.00 | ||
| FLS (FLS) | 0.00 | ||
| FSLR (FSLR) | 0.00 | ||
| MA (MA) | 0.00 | ||
| STP (STP) | 0.00 | ||
| UTHR (UTHR) | 0.00 |
(AG)
Why the Strength
The demand for biofuels such as ethanol and a growing middle class (and hence growing food consumption) in Asia has led to higher crop prices around the globe. That, in turn, has boosted farm incomes, which is resulting in strong sales of agricultural tractors, sprayers, combines, hay tools and the like. AGCO is a big player in this market, along with Deere and CNH Global, which has helped sales and earnings boom in the last few quarters. Perhaps most encouraging has been the reaction of both AGCO’s and Deere’s stock to recent earnings reports – both firms handily beat estimates (Deere reported just last week), and in each case buyers drove the stocks nicely higher. AGCO’s management isn’t sitting on its hands, either; they’re busy restructuring their plants to lower product costs and inventories, which should help margins improve dramatically. We’re not in love with the story, but we see more good times to come.
Technical Analysis
AG was range-bound for many years, but finally showed some life by breaking out of its first base in November 2006. It’s moved sharply northward since that point, although the occasional correction (usually due to market weakness) has popped up. During the latest market correction, however, AG has held up very well – it’s only registered one down week, and has remained above its 50-day moving average (now around 54). That line should provide support on any coming retreat, so the stock is buyable around here if you already have lots of cash on the sideline.
AG Weekly Chart
AG Daily Chart
(BIDZ)
Why the Strength
Bidz runs an Internet auction site that’s different from eBay in several ways. First, all auctions are live; instead of telling the site your maximum bid and allowing it to outbid other bids as they arrive, you place your bids in real time. Second, if a bid is placed in the last 15 seconds of an auction, the auction will automatically be extended for an additional 15 seconds from the time of the latest bid. The auction will close only when there’s been no bidding activity for 15 seconds. Today we watched the bid for a pair of .33 carat diamond stud earrings climb from $16 at the “scheduled” closing time to $125 five minutes later … much more exciting than the eBay method. And third, the company itself owns most of the merchandise, mainly jewelry and watches that it buys at closeout prices. But that’s slowly changing, as the company now offers a Certified Merchant Program that enables merchants to sell televisions, fine art, clothing and much more. What’s most impressive to us about the company is the profit margin, which is on track to top 10% in the quarters ahead. Bidz is still small and eBay – or any other big player – could come up with the cash to buy it in a second. But if the company can stay independent, early shareholders could win big.
Technical Analysis
The earliest BIDZ buyers got in at 10, in the months after the company’s June IPO. After building a base at 8 until September, the stock then rocketed upward, hitting 22 today before reversing and plunging on huge volume to finish above 16. The 25-day moving average is down at 15, and aggressive investors could buy a little now.
BIDZ Weekly Chart
BIDZ Daily Chart
(BUCY)
Why the Strength
Bucyrus International is a play on the global boom for commodities, as the firm provides excavation equipment such as electric mining shovels and blast-hole drills for both surface and underground mining. But this is no lump-sum business – nearly half of the company’s revenues come from aftermarket parts and services, so a big sale of equipment often leads to years of recurring revenue. A recent acquisition has bolstered results, and, thanks to elevated metals prices and signs that coal prices are on the rebound, analysts are expecting a 50% jump in earnings next year as new orders pick up. (Bucyrus already has $985 million of backlog booked for the next twelve months.) And this follows a few years of healthy earnings growth, a sign that management at least knows how to handle boom times. It’s not changing the world, but the wind remains at Bucyrus’ back.
Technical Analysis
BUCY came public in July 2004 at a price of 12 and soared to 60 by May 2006. But like many commodity-related stocks, BUCY started a long consolidation at that point; in early September of this year, the stock was again trading for 60, meaning about sixteen months went by with zero progress. Now, however, the buyers are regaining control, thanks to a strong third-quarter earnings report – we like how the relative performance line has pushed steadily higher the past ten weeks. If you’re game, you could buy a few shares on a dip of a couple of points, and keep a stop in the mid 70s, where there’s strong support.
BUCY Weekly Chart
BUCY Daily Chart
(CBI)
Why the Strength
Chicago Bridge and Iron, the big construction company based in the Netherlands, works in the oil and gas industries, primarily on designing and building plants and infrastructure that produce, process, store and distribute natural resources. The company boasts an excellent reputation (as its more than 75% proportion of repeat customers testifies), a record backlog of projects and a global reach. The most recent buzz on the company comes from its acquisition of Lummus Global, an oil and gas production unit, from the Swiss company ABB Ltd. The firm’s October 31 earnings report featured an 85% jump in quarterly earnings and a strong increase in 2007 profit guidance. CB&I is on the less glamourous side of the current energy situation, with solar manufacturers making headlines while Chicago Bridge continues to build out the facilities to make the most of our remaining fossil fuels. A 0.3% dividend adds to the appeal of this old-technology company.
Technical Analysis
CBI made its first Top Ten appearance in May, when the stock was just breaking out of a base that had kept the stock under resistance at 30 for 19 months. A second appearance came after the Halloween earnings report that kicked off another jump, this time from 45 to 55. Since that second appearance, the stock has been wedging down due to the market, with a strong convergence at 50–52 on diminishing volume. The 25-day moving average is rapidly approaching the same level, and a small buy at this level makes sense.
CBI Weekly Chart
CBI Daily Chart
(CNX)
Why the Strength
Consol Energy, based in Pittsburgh PA, traces its roots back to 1860, but it’s come a long way since then. Today the company has 15 bituminous coal mining complexes in six states. It’s the largest underground producer of coal in the U.S., as well as the largest producer of high-BTU bituminous coal. And the reason its stock is strong is simple; increased demand for coal from overseas users, particularly from steel-makers in China, has boosted the price of coal globally. Looking forward, no one knows where this trend will end, but we do know that we don’t need to know. All we need to know is that when the trend turns down, we get off. Long-term investors who are committed to the stock probably appreciate the small dividend, yielding 0.7% annually. But we suggest that you simply ride it when it’s hot, and sell when it’s not.
Technical Analysis
CNX first appeared in Cabot Top Ten on October 29, when it was selling at 57. Three weeks later, it was down at 50, touching it 50-day moving average, and today, having shaken out any weak shareholders, it’s back on the upward track, preparing to break out to new highs. There’s been no selling pressure in all this time, just normal fluctuations in sympathy with the broad market. But CNX is stronger than the broad market, as evidenced by the strong relative performance (RP) line. Buying some on a dip toward the 50-day line could work out well.
CNX Weekly Chart
CNX Daily Chart
(FLS)
Why the Strength
Flowserve, based in Irving Texas, has been building products that manage the flow of liquids in pipes since 1912. Today the company is well diversified: 43% of its revenue comes from the oil and gas industry, while 23% comes from general industry, 15% from the chemical industry and 6% from the water industry. And it’s diversified internationally, as well. While 37% of revenue comes from the U.S., 26% comes from Europe and 37% from elsewhere … where, of course, Asia is the biggest growth component. So Flowserve is one of those companies that actually benefits from a falling dollar, as it makes the company’s valves and pumps more attractive to foreign buyers. For example, the company recently announced it was exploring a joint venture with China National Nuclear Corp and SUFA Technology Industry Co. to produce valves for the Chinese nuclear power market. Revenues and earnings are on long-term uptrends, and the company pays a 0.7% annual dividend. Finally, the profit margin has been expanding in recent months, suggesting that the stock may deserve a higher premium than the market has historically accorded it.
Technical Analysis
FLS’s long-term trend is up, and it’s especially strong today, as evidenced by the late-October spike up from 80 to 90 when third quarter earnings were released. After that the stock rolled up to 96, and since then it’s been building a short base on top of 90 … while the 25-day moving average, now at 86, catches up. You could buy some here, while any dip into the mid-80s would mark a super entry point.
FLS Weekly Chart
FLS Daily Chart
(FSLR)
Why the Strength
The solar industry has been one of the biggest stories of 2007, and First Solar has one of the most interesting story lines. Demand for solar cells is huge, but the prospect for profitability of most solar manufacturers rises and falls based on fluctuations in the supply of silicon … how much they have and how much it costs. First Solar has neatly sidestepped the silicon problem by using a proprietary thin film technology that substitutes a mixture of cadmium and tellurium for 99% of silicon. First Solar’s cells aren’t quite as efficient as the most advanced versions, but avoiding the escalating expense of silicon feedstock results in a lower cost per watt in the large arrays that are the company’s specialty. The company’s new Malaysian factory is scheduled to start production in 2009, which will nearly triple manufacturing capacity. By avoiding the global silicon crunch, First Solar has emerged as a clear leader in this environmentally hot sector.
Technical Analysis
FSLR’s chart is breathtaking, reflecting a rise from its IPO at 20 a little over a year ago to solidly over 200 in recent trading. With its 25-day moving average hustling to keep up (now at about 175), the prudent choice is to wait until the gap closes a little, either with a correction below 200 or a pause to build a new base after the November 8 gap up that blasted the stock from 167 to 224. The problem is that the trend line (as represented by a series of rising lows) keeps heading steadily up. Any dip below 200 would make for a good buying opportunity, but the chart doesn’t make it look likely. A small buy on a correction below 210 may be the best you can hope for. Just keep it light until you have a little profit cushion.
FSLR Weekly Chart
FSLR Daily Chart
(MA)
Why the Strength
MasterCard is strong today because it’s a big, liquid stock with great growth prospects, especially overseas. True, the stock has become well known during the past year as shares have risen, and to be frank, we thought it might be running out of gas. But an outstanding third-quarter earnings report – earnings of $1.80 per share were nearly 40 cents above estimates – and estimates calling for reaccelerating earnings growth ahead (triple-digit gains are expected for the fourth quarter) caused the stock to soar in late October, and it’s held those gains in fine fashion during November. The biggest obstacle might be the planned IPO of Visa (likely coming within a couple of months), which could siphon off investment monies, but if that were a worry, we’d expect more weakness during the current market correction. Overall, we see bright prospects for this company, as the mega-trend toward using credit and debit cards, rather than cash, picks up steam.
Technical Analysis
The last two weeks of October and first week of November saw MA register huge gains in heavy volume, thanks to the aforementioned earnings report. And in the two weeks since, shares have edged lower on well below-average volume, a sign that big investors are sitting tight. At this time, there’s little doubt MA is the best-looking big-cap stock in the market, which is highly significant considering the market’s overall lousy performance. We think you can buy a little around here, and place a stop in the 165 to 170 area.
MA Weekly Chart
MA Daily Chart
(STP)
Why the Strength
Solar power remains a big story, as fears, both rational and irrational, about the future of energy push investors toward alternative technologies. Chinese solar manufacturer Suntech Power is back for its second Top Ten appearance in a month, this time with a strong new quarterly earnings report providing the impetus. Suntech is big (third-largest in the world in silicon cell production), and just topped $1 billion in sales for the trailing twelve months. And the earnings report on November 15 showed a near doubling of net revenue that handily beat analysts’ expectations. CEO Dr. Zhengrong Shi commented that profit margins are expected to rise in the future as lower-cost silicon contracts begin to take effect in 2009. This combination of strong earnings, rosy outlook and increased manufacturing capacity (production is forecast to top one gigawatt in 2008, two years ahead of schedule) proved attractive to investors. Having the equivalent of a celebrity spokesman in Dr. Shi, who has quickly attained a high profile in the alternative energy industry, and an ample supply of polysilicon from established manufacturers are also reassuring factors for those trying to sort out the winners among proliferating solar companies.
Technical Analysis
After blasting off in October from a long base, STP has proven spiky in November, with prices swinging from an early low of 55 (November 5) to highs near 76 (November 8). The stock briefly tagged its 25-day moving average below 60 on the day before Thanksgiving, then ripped to 68 on the day after. The lows keep rising, however, and this means that the stock will likely present another attractive buying opportunity on a pullback toward 63/64.
STP Weekly Chart
STP Daily Chart
(UTHR)
Why the Strength
United Therapeutics is like a lot of biopharmas in that its attractiveness to investors rises and falls with the news of its drugs’ clinical trials. But it’s different from a lot of biopharmas in that it’s actually a profitable company, with positive earnings every quarter since Q2 2004. (It was that swing to profitability that earned the stock its first Top Ten appearance back in October 2004.) The company can thank strong sales of its hypertension drug Remodulin for its positive income statement. But the story that put United in Top Ten earlier this month, and again today, is the late-stage trial success of Viveta, an inhaled treatment for high blood pressure. High blood pressure is a serious condition, and the patient population of potential users is enormous. With one wave of good news already priced into the stock, investors are now calculating the odds of final approval for Viveta, and that kind of calculation is an inexact science at best. Prudent investors may want to think twice about betting on that coin toss, or at the very least, keep any bets small.
Technical Analysis
United Therapeutics is like a lot of biopharmas in that its attractiveness to investors rises and falls with the news of its drugs’ clinical trials. But it’s different from a lot of biopharmas in that it’s actually a profitable company, with positive earnings every quarter since Q2 2004. (It was that swing to profitability that earned the stock its first Top Ten appearance back in October 2004.) The company can thank strong sales of its hypertension drug Remodulin for its positive income statement. But the story that put United in Top Ten earlier this month, and again today, is the late-stage trial success of Viveta, an inhaled treatment for high blood pressure. High blood pressure is a serious condition, and the patient population of potential users is enormous. With one wave of good news already priced into the stock, investors are now calculating the odds of final approval for Viveta, and that kind of calculation is an inexact science at best. Prudent investors may want to think twice about betting on that coin toss, or at the very least, keep any bets small.