Still the Same Story
The market environment hasn’t changed much during the past couple of weeks; the intermediate-term trend of the market is down, and few stocks are managing to make meaningful progress on the upside. That said, it’s also not a disaster out there; some growth stocks have been hammered, but many groups are holding up well and most indexes are just a few percent off their peaks. Of course, the U.S. elections are tomorrow, and it’s possible the results could change the market’s course. But right now, we’ll keep our Market Monitor in neutral territory as the sellers remain in control.
This week’s list is a bit of a hodgepodge of stocks and sectors, but most of the names have recently reacted well to earnings, which is always a positive clue. Our favorite of the week is Whirlpool (WHR), a turnaround stock that is showing exceptional strength. It’s not changing the world, but the numbers look outstanding. Try to buy on weakness.
| Stock Name | Price | ||
|---|---|---|---|
| WPI (WPI) | 0.00 | ||
| Whirlpool (WHR) | 0.00 | ||
| Affiliated Managers Group, Inc. (AMG) | 0.00 | ||
| CommVault (CVLT) | 0.00 | ||
| Eastman Chemical (EMN) | 0.00 | ||
| Expedia Group (EXPE) | 0.00 | ||
| GameStop (GME) | 0.00 | ||
| Louisiana-Pacific (LPX) | 0.00 | ||
| NXP Semiconductors (NXPI) | 0.00 | ||
| PVH Corp. (PVH) | 0.00 |
(WPI)
Why the Strength
Watson Pharmaceuticals is a global manufacturer and distributor of generic drugs that has been making news left and right. The company’s completion of its takeover of Activis (formerly the fourth-largest U.S. generic drug company) on October 31 vaulted Watson to the third position among the world’s largest generic makers. The combined company, which will change its name to Actavis in 2013, will have more than 17,000 employees globally in more than 60 countries. The other headline for Watson Pharma is its November 1 quarterly earnings report that beat both top- and bottom-line expectations and was bolstered by an upwardly revised outlook. In addition to generics, Watson is working on patented drugs of its own, as well as biosimilar drugs that bridge the gap between generics and proprietary compounds. Watson has an ambitious management team who want to push it even higher in the global pharmaceutical hierarchy. And the Activis purchase should do that—analysts see earnings booming to $8.20 next year, up 41%.
Technical Analysis
WPI interrupted its long-term price appreciation from July 2011 through March 2012, trading generally between resistance at 70 and support at 60. The rally resumed in March and the stock broke out above 70 in April, then tested that breakout in June before hitting new highs in July. WPI toyed with resistance at 90 in October, and spent most of the month trading in a range with support at 85. You can buy some on any dip toward 85 or wait for the breakout above 90, preferably on increased volume.
WPI Weekly Chart
WPI Daily Chart
Whirlpool (WHR)
Why the Strength
Now well into its second century, Michigan-based Whirlpool is a widely known manufacturer and marketer of home appliances, including clothes washers and dryers, refrigerators and freezers, stoves and ranges, dishwashers, mixers and other portable appliances. The company’s brands include Whirlpool, Maytag, KitchenAid, Jenn-Air, Amana, Roper and many more. About half of sales come from North America, with Latin America contributing a little over a quarter and the rest of the world making up the remainder. The stock is hot right now for a variety of reasons, including a huge 521% jump in earnings in the latest quarter and improved guidance for the whole year. But Whirlpool is also getting a boost from the slowly improving economy and the rapidly healing housing market, which has allowed the company to stop routinely discounting its appliances, boosting profit margins. The company has been picking up upgrades from analysts, who see the improved fundamentals of the appliance industry as distinctly bullish, especially for a company like Whirlpool that controls costs strictly. And finally, this S&P 500 company pays a quarterly dividend whose annual yield is 2.0%.
Technical Analysis
WHR made a nice run from 55 in late June to 85 in September. The stock consolidated at that level for five weeks before the strong earnings report on October 23 kicked it to 95 on big volume. The stock pushed briefly above 100 last week, but has pulled back a bit now. We think WHR is appropriate for both buy-and-hold investors and growth investors who want a piece of the stock’s continuing post-earnings strength. Buy on any weakness.
WHR Weekly Chart
WHR Daily Chart
Affiliated Managers Group, Inc. (AMG)
Why the Strength
Normally, a Bull Market stock like Affiliated Managers only does well when the market is kiting higher, but intriguingly, we’re seeing many publicly traded money managers that are acting well. Affiliated is the best of the bunch; think of it as an investment fund that invests in ... other investment funds. It’s a pretty novel approach, with the company taking a controlling interest in many smaller-but-successful money managers, who usually want to cash out part of their business. And the company then leaves its money managers alone; it might offer some marketing advice or other help, but it doesn’t take over operations. The stock is strong today because business is turning up. In the third quarter, the company saw sales (up 13%) and earnings (up 25%) both rise for the first time in a year, thanks to $11 billion in higher cash flows, bringing the aggregate assets under management for Affiliated’s firms to a whopping $416 billion. (Much of the growth in recent quarters has come from emerging markets and alternative investments.) And, remember, the company has churned out these results in an environment where most investors are apathetic at best! At the end of the day, the company’s prospects will likely come down to the market itself—if the market slides, the company should do OK (analysts see earnings up 20% next year), but if a sustainable uptrend emerges, Affilated’s assets could mushroom as investors come back to stocks.
Technical Analysis
AMG poked out to new multi-year highs in early September, just when the market was showing signs of life. But even as the market faded since then, AMG has acted well—it’s etched a tight six-week base, then poked out to new highs briefly before the market yanked shares back down during Friday’s selloff. If you’re game, we think you can buy a little around here, with a stop around 120.
AMG Weekly Chart
AMG Daily Chart
CommVault (CVLT)
Why the Strength
CommVault has an interesting history, having been formed in 1988 as a development group within Bell Labs and later becoming a strategic business unit of AT&T Network Systems. Since 1996, the company has been independent, focused on data protection and management. With more and more businesses moving their entire data and software operations to the Cloud, bulletproof backup, access, recovery and information analysis has become critical, and CommVault’s Simpana software provides a suite of services that keep data safe and available. CommVault’s earnings report on October 31 hit a trifecta of beating on earnings (38 cents per share vs. an expected 28 cents) and revenue ($118.2 million vs. estimates of $115.7 million) and optimistic guidance through the second half of the company’s fiscal year. Investors are also pleased that the company’s board has authorized another $50 million in share repurchases.
Technical Analysis
CVLT spent much of the first half of 2012 dealing with resistance at 55, then dipped to below 40 in July. But the stock fought its way back, finally topping that resistance in September and using 55 for support for six weeks of consolidation. When the good earnings news hit, CVLT used that nice base at 55 to vault higher, closing at 62 after trading at four times its average volume. The stock has since held onto its gains and added a bit to them. CVLT looks like a good buy on any correction below 64.
CVLT Weekly Chart
CVLT Daily Chart
Eastman Chemical (EMN)
Why the Strength
When we last visited Eastman Chemical in February, the company was in the process of dotting the “I”s and crossing the “T”s on its $5 billion acquisition of fellow chemicals firm Solutia. Nearly nine months later, Eastman is finally realizing the fruits of that acquisition, with the company posting adjusted third-quarter earnings last week of $1.57 per share, topping analyst expectations. What’s more, Eastman boosted its full-year earnings forecast to a range of $5.30 to $5.40 per share, topping Wall Street’s forecasts for $5.26 per share. Since Eastman has a diverse product line, the company’s growth has been hard to attribute to one particular sector. Eastman makes specialty polymers, polyethylene, intermediate chemicals and adhesives, and its products go into a broad range of customer products, including paints and inks, cigarette filters, yarns, toys, medical devices, etc. That said, low natural gas prices have helped to shore up the company’s bottom line. Overall, the company’s record performance in the wake of the Solutia acquisition underscores the strength of Eastman’s leadership. With revenue remaining strong, a decent dividend (1.8% yield), higher earnings guidance and a low valuation (12 times earnings), we think Eastman will continue to attract big investors.
Technical Analysis
2012 has been kind to EMN, despite concerns about global economic growth. The stock kicked the year off by resolving a cup-and-handle formation to the upside in January, with news of the Solutia acquisition providing fuel for the fire. A mid-year broad-market decline forced EMN into negative territory for 2012, but the stock held firm near support at 45, and has since come roaring back to not only best former resistance at 55—a region that capped the shares in February—but also contest resistance at 60. Despite the post-earnings jump, EMN does not appear to be overbought. You can either take bites here, or wait for a confirmation breakout above 60. Either way, a stop loss on a trade below 56 may be prudent.
EMN Weekly Chart
EMN Daily Chart
Expedia Group (EXPE)
Why the Strength
Online travel firm Expedia shocked quite a few investors last week when the company not only topped Wall Street’s third-quarter earnings expectations, but also boosted its full-year adjusted earnings forecast. Domestic revenue growth remained firm at 14%, while international revenue rose an impressive 22% year-over-year, catching many analysts off guard. In fact, brokerage firms Benchmark and Lazard Capital upgraded Expedia to a “buy” rating, with Benchmark citing “solid execution, strong organic tailwinds and an aggressive expansion strategy.” Speaking of Expedia’s aggressive expansion strategy, the firm continues to rapidly expand its reach via international partnerships. As we noted in early October, Expedia recently deepened its partnership with Chinese travel firm eLong to include global hotel booking options; hotel bookings remain a sizeable portion of Expedia’s revenue, accounting for a whopping 77% of worldwide sales during the third-quarter. China should greatly enhance this revenue stream, as the deal opens up a potentially $105 billion travel marketplace for Expedia, as more Chinese are expected go online to make their travel plans in the next year.
Technical Analysis
Technically speaking, EXPE has acted excellently in 2012. The stock has stair-stepped higher, with periods of sharp gains occuring in the wake of the company’s quarterly earnings reports. In late April, EXPE gapped higher and claimed support at the 40 level. Similarly, shares gapped above 50 in late July, testing resistance near 60 in the process. In August, EXPE began forming a pattern that resembled a cup-with-handle. This pattern briefly broke down in October, but strong earnings appear to have won out once again, placing EXPE on the verge of breaking out above the 60 level. Fortunately, the stock does not appear to be overextended in the wake of last week’s sharp gains, meaning that EXPE could have additional upside if the market balances itself. If you’re game, you could nibble here with a stop near 54.
EXPE Weekly Chart
EXPE Daily Chart
GameStop (GME)
Why the Strength
GameStop owns and operates more than 6,600 video game stores all over the world. But, as most anyone can see, that business model is outdated—the number of games being bought in a store (for use on PlayStation or Xbox, for instance) is stagnant at best, and declining at worst, as more gamers buy online or play on tablets. (Right now, only 13% of GameStop’s revenues come from online sources.) That has led to years of speculation that GameStop is likely to go down the drain ... but, ironically, that is now why the stock is so strong. Despite the worries, this company has increased earnings each of the past two years, with further gains expected this year and next. But because of the pessimism, the stock is dirt cheap! It trades for just eight times trailing earnings, the dividend yield is north of 4% (25 cents per share, per quarter) and there’s an aggressive share buyback program (share count fell 9% year-over-year in the latest quarter). Moreover, there are some catalysts for the industry going ahead, including a bevy of new game and console releases during the next few months, which could goose sales. We’re not arguing that this stock is going to be a huge winner for many months, but with solid earnings estimates (up 10% this year and next) and with the holiday season nearly upon us, we feel investor perception will continue to improve, which should help shares.
Technical Analysis
GME was a great growth stock through 2007, running as high as 64 that year before topping with the market. It then fell to 17 during the bear market ... but it really has never gotten going since. Shares actually hit new price lows (down to 15) in August of this year! But since then the action has been excellent, crossing above its long-term 200-day moving average in early September and constructing a tightening seven-week base ever since. We actually think GME is a good buy around here (in small amounts), with a stop around 21. FYI, a big move above 25 would confirm the stock’s strength.
GME Weekly Chart
GME Daily Chart
Louisiana-Pacific (LPX)
Why the Strength
Louisiana-Pacific specializes in manufacturing products for floors, walls and roofs. The company produces oriented strand board (OSB), siding products, and engineered wood products. It also makes decorative molding and cellulose insulation. Louisiana’s products are used in new home and manufactured housing construction and for repair and remodeling, and as such, the budding recovery in the housing market has been a boon for the company. What’s more, the reduced supply of lumber in the wake of the housing renaissance has meant timber and lumber supplies have been reduced, increasing prices and profit margins for the company. In fact, pine lumber prices in the southern U.S. rose significantly in September and are now 35% above year-ago levels! Finally, with initial estimates totaling Hurricane Sandy’s damage between $10 and $20 billion, with considerable re-roofing costs added in, lumber markets could grow even tighter as we head into Spring. While the fourth-quarter is seasonally weak period for construction and lumber companies, this confluence of events should provide an unusually strong period for an already outperforming Louisiana-Pacific. Just be aware that the company is slated to release its third-quarter earnings figures tomorrow morning (Tuesday, November 6) with forecasts anticipating a profit of 26 cents per share on revenue of $479 million.
Technical Analysis
The economic tumult of the past year-and-a-half appears to have largely missed LPX shares. Since setting a bottom in October 2011, the stock has soared nearly 200%! Throughout this rally, LPX has enjoyed the solid support of its 10-week and 25-week moving averages, with the former providing a key floor during the past several months. LPX is now trading at its highest levels since December 2007, as the stock squares off against former resistance at 16. The shares are currently consolidating into their 10-day trendline, as they digest a bit of excessive buying ahead of this week’s earnings. If the stock falls sharply after the report (below 14), just avoid it. But we’re not anticipating that, and think LPX can be bought between 15.5 and 17.
LPX Weekly Chart
LPX Daily Chart
NXP Semiconductors (NXPI)
Why the Strength
Semiconductor stocks have not been kind to the bulls for many months; the group topped out back in February 2011 and has struggled since as earnings momentum slowed. Now, though, a few firms in the group are perking up, including NXP Semi, a good-sized company ($4.2 billion in annual revenue) with a broad product line for a variety of industries. That said, much of the sexiness surrounding the firm comes from its position in near field communication chips (NFC for short), a technology that could revolutionize mobile payments; some big players like Google and Microsoft have adopted it for their digital wallet ... though others, like Apple and eBay, are skeptical, partly because of the big investment needed among retailers to upgrade their payment systems. (It was rumored NFC would be included in the new iPhone 5, but it was not to be.) Still, adoption is increasing (China Mobile is rolling out an NFC-based payment system in February), and besides, NXP Semi has a lot of other irons in the fire—earnings rose in the recently-reported third quarter for the first time in a year, and analysts see that upturn accelerating, with the bottom line coming in around $2.50 per share in 2013, up 50%. If the chip sector catches a tailwind, we think this stock could do very well.
Technical Analysis
NXPI isn’t strong per se, but it is resilient, with both the stock and its relative performance (RP) line knocking on the door of new-high ground. Shares were looking bad about a week ago, but the stock has rebounded on strong volume, thanks to its solid third-quarter report. It’s a jumpy stock, but we think nibbling on NXPI around 25 (with a stop around 23) could work. And if you see a big breakout above 27.5 and a healthy market, you could add to your position.
NXPI Weekly Chart
NXPI Daily Chart
PVH Corp. (PVH)
Why the Strength
PVH Corp. (formerly known as Phillips-Van Heusen) is a clothing company that operates in the U.S. and Canada, as well as in Europe and internationally. The company does its own designing, sourcing and marketing, farming out the actual manufacturing to outside firms. PVH Corp. has a big portfolio of owned brands, including Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, Bass, ARROW and Eagle, as well as licensed brands like Geoffrey Beene, Kenneth Cole New York and Reaction, Sean John, Joseph Abboud, Michael Kors, CHAPS and many others. The company distributes its products in every kind of venue, including department stores, specialty and independent stores, retailers, mass market stores and e-commerce websites. PVH Corp. even leases and operates about 1,000 retail location on its own. The big news for PVH Corp. is its recent $2.8 billion deal to buy Warnaco Group, which will unite the Calvin Klein underwear, jeans and sportswear lines under PVH’s management. The company’s Q3 results were just fine, but it’s the future possibilities opened up by the Warnaco takeover that are drawing enthusiasm from investors.
Technical Analysis
PVH spent most of May, June and July consolidating under resistance at 82, then broke out over 90 in August. The stock idled along between 90 and 100 in September and October, consolidating its gains. But October 31 brought a breakout to 110 on more than five times average volume. PVH has held up above 110 in the couple of days since then, but may need some time to digest its big move. You can look for a dip below 110 as a good entry point.