November 5, 2007
The market’s wild earnings season continued last week, with some great winners and some painful losers. Overall, the market remains in a volatile phase, so there’s nothing wrong with playing things a bit closer to the vest. However, many stocks remain in firm uptrends, and this week’s Top Ten highlights a few recent earnings-related successes; our studies tell us that many of these earnings winners go on to bigger and better things down the road. So get our favorites inside.
Many Earnings Winners … And Losers
This has been one of the wildest earnings seasons we’ve ever seen. Plenty of leading stocks, including a few in this week’s Top Ten, have reacted strongly to their quarterly reports … but there have been a large number of stinkers, too. All these cross currents tell us one thing: Not everyone is rowing in the same direction, and there’s no need for you to take unnecessary risks until that changes. The good news about such a volatile market is that you can easily spot what stocks are resisting the sellers; should the market resume its uptrend, these are the issues that are likely to put on a spectacular show. For now, you should be holding a little cash on the sideline, while making a couple of purchases here and there during weakness. Our favorite stock of this week’s bunch is MasterCard (MA), which, admittedly, has become well known since coming public eighteen months ago. But last week’s huge earnings-related breakout bodes well, and with the market favoring big-cap, liquid stocks, MA should attract plenty of money.
Why the Strength
Apollo Group is the largest for-profit educator in the U.S., serving nearly 300,000 students in 259 locations in 40 states, Puerto Rico, Canada, the Netherlands, and Mexico. The company’s flagship is University of Phoenix, but it also runs the Institute for Professional Development, The College for Financial Planning Institutes Corp. and Western International University. The company and the stock had an awesome ten-year run from 1995 until early 2004, but then growth slowed and management, pushing hard to meet Wall Street’s expectations, got in trouble with the SEC. Distracted from running the business, growth slowed further; at the nadir, the company actually saw earnings shrink for three quarters. But the SEC investigation is over; the company reconstituted its compensation committee and filed its delinquent financial documents. And in July Apollo announced that the agency would not recommend any disciplinary action against the company. The quarter ended June 30th saw growth of revenues and earnings improve, and the quarter ended September 30 (the fiscal fourth), whose results were released two weeks ago, saw the trend accelerate. We like it.
APOL was a well-loved dependable darling of the market until 2004, but when the company began to disappoint, the stock fell hard. From its high at 98 in early 2004 to its low of 33 a year ago, APOL lost a shocking 66% of its value. But now the trend is solidly up, and the next stop is that old high of 98. We recommend buying on a normal correction.
APOL Weekly Chart
APOL Daily Chart
Why the Strength
Chicago Bridge & Iron’s name is a historical artifact dating back to the company’s 1889 founding. The modern, global version of the company — 60 locations and 14,000 employees — is based in The Netherlands and is more likely to be building an oil and gas platform or an LNG terminal than a bridge. CB&I specializes in EPC projects on which it does the engineering, procurement and construction, delivering a ready-to-run facility for a lump sum payment. The company points out that more than three-fourths of its business comes from repeat customers. Liquified natural gas-related projects account for 44% of revenues, with refining-related projects delivering 33%. After-tax profit margins just hit a four-year high, and the company’s Q3 earnings report showed an 81% increase in net income, a 40% rise in contract backlog and concluded with a boost in earnings guidance.
CBI made its first Top Ten appearance in May, and the stock was in a strong uptrend at the time. But it had just consolidated its gains and made a new breakout when the July/August market slump knocked it down. Since then, however, it has been ripping higher in a strong rally that was just crowned with another surge after a Halloween treat earnings report. Look for a retreat below 50 as an opportunity to pick up a little.
CBI Weekly Chart
CBI Daily Chart
Why the Strength
U.S. bankers may be still conservative, gray-flannel-suit types, but the banking industry is packed with action these days, what with the subprime mortgage debacle and all. It’s the same in India, where banks are benefiting from strong economic growth and the desire of the growing middle class for a bigger menu of services. K.V. Kamath, the mover and shaker behind ICICI Bank, is dragging the company into the 21st century, offering ATMs, auto loans and credit cards in addition to the usual agricultural loans and savings accounts. The action in the Indian banking industry comes from regulators’ attempts to control excess liquidity and the inflation that it can stimulate. Officials announced restrictions on foreign investment in mid-October (since withdrawn), and raised bank cash reserve ratios on October 30. These changes put the Indian stock market on a roller coaster, but ICICI Bank, which made its Top Ten debut last week, has held up well. With regulatory decisions likely to even out over the long run, the bank’s stock and its 0.7% dividend look like a good way to play the growth of India.
IBN has been in a long-term uptrend since it bottomed out in late 2001. Most recently it zoomed from 54 to 66 in just five days in late October. And it stayed well above last week’s recommended buy range as it held on to most of those gains. However, today’s weakness has been enough to bring it back within range of its October 29 gap. Look for this dip to drop IBN below 65 and provide a prudent entry point. We’ll move the buy range up by one point to try to meet it. aps as low as 130, then start with a small position.
IBN Weekly Chart
IBN Daily Chart
Why the Strength
With the price of gold topping $800 an ounce, gold stocks are acting well, and Kinross, the third-largest producer in North America, is one of the leaders. The company mines and processes gold and silver in nine mines in the U.S., Canada, Brazil, Chile and Russia, employing more than 4,500 people. Two weeks ago Kinross agreed to sell its Kubaka gold mine properties in Far Eastern Russia (which ceased operations in 2005) to OAO Polymetal for $15 million. A few days before that, Kinross and Linear Gold announced an agreement to explore and develop Linear’s 98,000 hectare Ixhuatan Project in Chiapas, Mexico. And back in September, Kinross and Goldcorp agreed to an asset swap that would substantially increase Kinross’ ownership and control of its core mines, while strengthening its strategic position in Chile. In short, Kinross traded portions of two mines in Canada for a portion of one mine in Chile plus $200 million in cash. These moves away from shared ownership (and thus shared risk) are a sign of the industry’s optimism today. Third quarter earnings will be released after the close on Wednesday November 7 and we have no doubt they’ll be excellent.
KGC has surged from 10 to 20 in eleven weeks, and while it looks a little high short-term, there’s no sign of buyer exhaustion. Volume trends remain supportive, suggesting that the stock could eventually return to its old high of 32, hit back at the start of 1996. We recommend buying on a correction.
KGC Weekly Chart
KGC Daily Chart
Why the Strength
Since coming public in May 2006, MasterCard has wowed the market with impressive sales growth, stunning earnings growth, and growing margins. Last week’s third-quarter earnings report crushed expectations – transactions processed rose 13% overall, but just 7.7% in the U.S. That means the real action is overseas; transactions grew 22% in the Asia-Pacific region, 26% in Europe, 24% in Latin America and a whopping 41% in South Asia, the Middle East and Africa. Going forward, those trends should remain buoyant, as more consumers use credit or debit cards, instead of cash; emerging markets, in particular, should be a big growth engine. Of course, this isn’t a brand new story, but MasterCard has a dominant position in its business, and earnings estimates continue to be hiked. Thus, while it’s not the first inning of the stock’s overall upmove, there’s likely more upside ahead.
There was a chance that MA was in for a prolonged base building phase after running from 39 last May to 175 this July. Indeed, the stock cratered after its second quarter earnings report, and wasn’t acting so hot before last week. But a blowout earnings number changed the landscape, breaking the stock free from a three-month structure. You could buy a little here, but with the stock market on shaky ground, waiting for a drop of a few points is prudent.
MA Weekly Chart
MA Daily Chart
Why the Strength
The huge increase in demand for corn for ethanol production plus the global increase in fertilizer use have been kind to Mosaic. This Saskatchewan potash miner (65% owned by Cargill) makes phosphate fertilizers and markets them worldwide. Fertilizer companies have all been on a roll since the middle of 2006, when people realized that growing corn for cars would require lots of fertilizer. Add to that the growing demand from much of the rest of the world for increasing amounts of beef (which requires grain for fattening) and it’s a seller’s market. Mosaic’s after-tax profit margins used to be in the low single digits; the last two quarters they have been 12.0% and 15.1%. Earnings have jumped 667% and 386% in those quarters, and institutional investors have been piling in quickly. The real kicker here is that a major Russian potash miner has either had a mine flood or is going to lose its railroad connection (depending on who you read), and the potential global disruption in supply may give this long-running story a fresh wind. We always say that trends tend to continue longer than most investors expect, and this trend may give Mosaic new life.
MOS had been trading in a range roughly between 12 and 18 since early 2004 when the fertilizer bull market began in mid-2006. The stock had risen from 15 to 38 in a year when it made its first Top Ten appearance in June. Since then it has soared to near 70 and doesn’t appear at all tired, as buying volume has swamped selling. It’s hard to countenance buying after such a long advance, but the stock has spent more than a week under resistance at 70, and a dip toward its old resistance at 65 is probably the best buying opportunity you can expect from MOS.
MOS Weekly Chart
MOS Daily Chart
Why the Strength
While oil service stocks are beginning to have a rough go of it, the stocks of energy producers are finding buyers, thanks to new all-time peaks in the price of oil and a rebound in natural gas prices. Southwestern Energy is a big beneficiary, due not just to higher prices, but to much higher production as well. The company’s Fayetteville Shale site saw production more than triple from a year ago, leading to a company-wide 56% jump in oil and natural gas output. Even better, the Fayetteville site is accelerating – production near the end of October was up 30% from the end of July. When you combine higher realized prices (its oil and natural gas sales prices were up 15% and 7%, respectively) with higher production and sound cost controls, you get newly accelerating earnings growth – up 47% and 50% the past two quarters, with an 85% gain expected in the fourth quarter and 43% more expected in ’08. Bottom line: The tide appears to have turned for oil producers, and that will help Southwestern Energy.
SWN was one of the bull market’s biggest winners from ’03 to ’06, but at its low point this August, the stock was no higher than it was in October 2005 – nearly two years of zero progress. That means all the weak hands were surely worn out, and the result has been advances in eight of the past nine weeks, capped by a big-volume, earnings-induced breakout last week. While SWN won’t likely be as dynamic on the upside as it was earlier in the decade (it rose about 15-fold!), we think you can buy a little around here, or on a pullback of a couple of points, and expect higher prices.
SWN Weekly Chart
SWN Daily Chart
Why the Strength
Synaptics is firing on all cylinders, as the company’s touch-pad technology used in notebook computers, MP3 players and mobile phones gains traction. The firm’s third-quarter results, released last week, were outstanding – sales and earnings rose 58% and 135%, respectively, thanks mainly to stronger than expected sales of notebooks. But longer-term, computers are just part of the story – Synaptics’ non-computer revenue totaled $16 million, triple from a year ago. The company is in prime position to cash in on the major trend toward more touch-screen electronic widgets in the years ahead … it’s just a matter of staying on good terms with its customers, such as Apple and Hewlett-Packard. A couple of years ago, Apple shunned Synaptics, causing business and the stock to plunge. Right now, all is well, but this isn’t a stock to hold forever.
SYNA remains in a superb uptrend, which began at the start of June, when shares broke out of a nice, tight basing structure. It’s made a few trips back to its ten-week moving average during that time, and with a shaky market, appeared to be ripe for pullback after earnings. But instead, the report blew away expectations, helping the stock to soar last Friday. You shouldn’t buy it right now, but the big-volume jump should provide support on any coming weakness. Thus, if you’re game, buy a little SYNA on a retreat of a couple of points, and then add shares on the way up.
SYNA Weekly Chart
SYNA Daily Chart
Why the Strength
United Therapeutics is a biotech company with a robust lineup of drugs that have made the company a profit every quarter since Q2 2004. But with sales of $196 million and a market cap of $2.17 billion, investors are clearly focused on something in addition to today’s revenues and earnings. The company’s Q3 earnings report illustrated what that was. United’s earnings moved up a whopping 74% on strong sales of its hypertension drug Remodulin. But what really put the rockets under the company’s stock price was news that Viveta, an inhaled treatment for high blood pressure, had proven effective in late-stage trials. High blood pressure is a serious condition with an enormous patient population, and the potential of this combination proved irresistible to investors.
UTHR has had one previous Top Ten appearance, back in October 2004, when an earlier drug approval was pushing earnings firmly into positive territory. But the stock peaked in late 2005, and traded mostly between 50 and 60 from April 2006 to February 2007, and then between 65 and 70 until the end of October. But the double-whammy earnings and clinical trial reports that propelled the stock to 95 last Thursday has since boosted it over 105. That’s a huge gain to digest, and with the stock’s 25-day moving average back at 71, it feels like the horse is out of the barn. Look for a steep pullback toward 90 as a reasonable buy point.
UTHR Weekly Chart
UTHR Daily Chart
Why the Strength
Like Chicago Bridge and Iron back on page 3, Willbros is thriving today because companies in the oil and gas industries are spending to expand. Willbros’ specialty is pipeline construction and everything associated with that task, from building roads and hauling equipment to coating pipe and building pumping stations. The company operates in the U.S., Canada, Oman, Nigeria and Venezuela. Its administrative offices are in Houston … and it’s headquartered in Panama! A big project today is the installation of a 30” pipeline running 43 miles from Ponder, Texas to Frisco, Texas. And the company is now growing by acquisition; it recently agreed to buy Tulsa-based Integrated Service Co. for $225 million. What’s most striking about the company, fundamentally, is that it just posted its first quarterly profit since the end of 2003. On one hand, this suggests that management hasn’t been top-notch; on the other hand, that business conditions are rapidly improving.
WG came public in 1996 and peaked at 24 in 1997, and again in 2005 and again in 2006, making that an important resistance level. But the stock smashed through that level in May of this year, and kept running until it hit 35 in July, which contained it for three months. Now it’s up and running again, propelled by big volume since the release of the third quarter’s earning report. We think the short-term potential is very good, if you can get on board on an appropriate pullback. The 25-day moving average is down at 36.