Growth & Materials Lead the Way
If your portfolio is full of growth or materials stocks, you’re likely a happy camper, as these types of issues are being gobbled up by institutional investors these days. Indeed, we’re glad to see the Nasdaq – a good representation of growth stocks – outperforming the broader S&P 500, a sign that investors are growing more bullish. That’s a good sign for the market as a whole, but remember that with a new quarter underway, earnings season is about to begin, so be prepared for increased volatility (both upside and downside) going forward. This week’s Top Ten contains something for everyone, whether it’s China, oil, chips or even engineering and construction. Our favorite of the week is Focus Media (FMCN), a great growth company that just leaped out from a nice basing structure. It’s already reported earnings, and we think you can buy a little on weakness.
| Stock Name | Price | ||
|---|---|---|---|
| Aecom Technology (ACM) | 0.00 | ||
| CMED (CMED) | 0.00 | ||
| Crocs (CROX) | 0.00 | ||
| New Oriental Education (EDU) | 113.97 | ||
| Focus Media Holdings (FMCN) | 0.00 | ||
| Flotek (FTK) | 0.00 | ||
| HANS (HANS) | 0.00 | ||
| OMTR (OMTR) | 0.00 | ||
| OmniVision (OVTI) | 0.00 | ||
| VeriFone Systems, Inc. (PAY) | 0.00 |
Aecom Technology (ACM)
Why the Strength
Aecom (which stands for Architectural Engineering, Consulting, Operations and Management) is one of the world’s largest engineering firms. It began as Ashland Technology in 1985, but has made numerous acquisitions since then … 21 in the past nine years! And recently, the acquisitions have been international, as growth is twice as fast outside the U.S. as inside. Most recently, the company announced that it would acquire KMK Consulting of Canada, a firm that specializes in water, wastewater and municipal engineering. With the addition of KMK, Aecom will have over 31,000 employees, serving clients in more than 60 countries. In August, the company announced it was selected as the primary consultant and program manager by the Great Socialist People’s Libyan Arab Jamahiriya Housing and Infrastructure Board (HIB), a project with a budget of $40 billion. It’s also providing architectural, engineering design and construction services for the new Etihad Towers in Abu Dhabi. We like it as a play on the growth of the global infrastructure and a vote for capable management. With a market cap of just $3.4 billion, profit margins that are usually above 2%, and good growth prospects, it looks like a good
Technical Analysis
ACM came public in May at 20, ran up to 29 by mid-July, and then spent two months consolidating that gain. But note the uptrending RP line (indicating better-than-market performance) even in that base-building period. ACM then broke out to new highs two weeks ago, telling us the buyers are still in control. Any pullback toward the 25-day moving average at 29 should be used as a buying opportunity.
ACM Weekly Chart
ACM Daily Chart
(CMED)
Why the Strength
China Medical Technologies (C-Med) is making its fourth Top Ten appearance, but it hasn’t always looked like a winner. The company’s fortunes have always been based on an interesting combination: the steady growth of its sales in diagnostic hardware and the explosive potential of its High Intensity Focused Ultrasound (HIFU) machine, a computer guided system that uses ultrasound to kill tumors inside the body without anaesthesia, incisions or pain. The company has enjoyed steady sales growth (75% in Q2) and high margins (45.3% for the latest quarter) and it pays a small dividend (0.9%). Some of the current excitement stems from the closely watched clinical trials of the HIFU machine in Washington state. Good news from those trials would put more fuel in its tank. But even without that news, investors are attracted by the company’s
Technical Analysis
CMED declined to almost identical lows at 27 on August 6 and then on Panic Day! (August 16). This double bottom indicated a strong base of support from willing buyers who were waiting to scoop it up at that level. Since August 16, the stock has risen strongly, with the breakout to new highs coming on September 14. CMED has just broken through minor resistance at 42, and is near uncharted territory, challenging its old highs from early 2006. Volatility will probably remain high on this stock due to the nature of its business and the shallowness of its float. But the upside potential is big.
CMED Weekly Chart
CMED Daily Chart
Crocs (CROX)
Why the Strength
Crocs’ growth story continues, as the company’s new products and its push into new countries boost investors’ perceptions. Of course, doubters remain – short interest mushroomed last month to more than 18 million shares, up from 12 million the month before – but the facts tell us that business remains strong. The firm is seeing a similar ramp up in sales of its products in overseas markets as it did in the U.S., and that’s just for its core line of footwear. One of its new fall models, the Mammoth Croc, adds a synthetic fur interior to the traditional model (allowing people to wear them in the winter), and reportedly more than one million have been pre-ordered by retailers, a bullish sign. And looking ahead, Crocs is integrating its proprietary Croslite material into a few other products as well. All told, we still think this story has legs.
Technical Analysis
CROX ripped to new peaks last week on good volume, lifting from a multi-week consolidation. Our thinking on this stock is as follows: CROX is now a year removed from its initial breakout, so we’re probably not in the early innings of its overall advance. But that’s not a bad thing – the latter stages of an advance are often the most explosive, and the stock could be starting that phase now. Thus, if you own some already, sit tight. If you don’t, we believe you could buy a little around here and look to add should the stock move higher in the days and weeks to come.
CROX Weekly Chart
CROX Daily Chart
New Oriental Education (EDU)
Why the Strength
New Oriental Education had one Top Ten appearance back in January, but the company — the largest private provider of educational services in China — isn’t in a classic growth sector. The company’s main business comes from coaching ambitious students for high school, law school and medical school admission tests, and from teaching English. Word has it that there are now more people studying English in China than there are native speakers of the language. Business has been good, and earnings, despite a highly seasonal business cycle, have shown flashes of strength. The current rally isn’t based on earnings or any particular news, although reports that the company is pushing what it calls “iEnglish” courses offer the promise of smoothing out revenues from the test-preparation business, which peaks during school vacations. As a play on the runaway growth of China and the ambition of the Chinese to learn English, New Oriental Education looks like a winner. The company’s earnings report is scheduled for October 15.
Technical Analysis
EDU is a relatively low-volume stock (averaging 417,000 shares a day) and it can be volatile. This rally comes after the stock built a July 27/August 16 double bottom base. The breakout came on September 25 when the stock broke through its old resistance level at 59 on good volume. A drop of a couple of points would offer a pretty good buy point for investors who have the patience to stick with the stock through some trying ups and downs.
EDU Weekly Chart
EDU Daily Chart
Focus Media Holdings (FMCN)
Why the Strength
Focus Media got its start in 2002 when a bored advertising executive named Jason Jiang was waiting with others for one of Shanghai’s notoriously slow elevators. He realized that if he could deliver ads to people during their five-minute wait, he would have a captive audience. Starting in January 2003, he put 17” flat-panel displays in 50 buildings and began selling time to luxury goods makers. The idea exploded. Expanding to other office buildings, convenience stores, airport shuttle buses, and cities outside Shanghai, Focus Media targeted the places that the most affluent and influential citizens roamed. Advertisers loved it and revenues soared; during the latest quarter, revenues were up 126%, earnings up 100% and after-tax profit margins hit 40.0%. With 135 institutional investors on board, Focus Media is a high-profile Chinese success story. The question was always how growth could continue once saturation was reached in Chinese cities. The answer has come with a strong move into mobile phone and Internet advertising. Focus Media is aggressive, smart, and plugged firmly into the wave of China’s growth.
Technical Analysis
FMCN exploded out of its July 2005 IPO, climbing from 9 to 35 in just ten months. The stock then corrected for five months but has since been working its way higher. A correction from 53 to 34 during the July/August market slump has given way to a dramatic blastoff driven by an analyst’s upgrade and news that an internal probe into questionable payments to a competitor firm had found no wrongdoing. A strong earnings report on September 27 actually marked a top for the stock at 61, and it has since corrected back to 58. Volatility is likely to remain high in FMCN, but aggressive investors can grab some on any dip
FMCN Weekly Chart
FMCN Daily Chart
Flotek (FTK)
Why the Strength
Flotek is a small company riding a wave of growth in a major industry, and that’s a great recipe for success. The industry is oil and gas exploration and production, and Flotek’s contributions come in two forms. The first is downhole pump components, drilling tools and casing accessories. It’s a competitive business, but Flotek’s patented Petrovalve offers the first major design improvement to the valve system in bottomhole pumps in over 50 years. In brief, the Petrovalve’s gas breaker technology solves gas lock problems encountered on wells with low flow rates or high gas ratios. The second part of the business is the specialty chemicals segment, in which Flotek offers cementing, acidizing, and fracturing chemicals additives. We like the rapid growth rates of both revenues and earnings (possible in part because the company is so small). We like the increasing profit margins. We like the increased earnings estimates for 2008. And we like the fact that the company is still little-known.
Technical Analysis
FTK came public at 6 two years ago, climbed to 15 in six months, but then fell right back below 7, as earnings growth slumped in 2006. Since that bottom, however, the stock has been trending strongly and persistently upward, driven by investors who see a bright future in both the energy industry and this little firm’s corners of it. As we write, there’s good support at 40, from both the 25-day moving average and the stock’s August high, and we recommend buying on any modest pullback.
FTK Weekly Chart
FTK Daily Chart
(HANS)
Why the Strength
Hansen was a regular in Cabot Top Ten during 2004-2006, making a total of fifteen appearances (the first was in the split-adjusted 3 to 4 range back in May 2004). The big growth driver was (and still is) the firm’s Monster energy drinks, which not only took advantage of a generally growing industry, but also grabbed market share, becoming one of the bigger players in the market. A distribution deal with Anheuser-Busch was signed last year, which led to some short-term charges (it backed out of its current deals) that slowed earnings growth. But that’s now in the past – the Busch deal is a huge positive, and the bottom line is already beginning to re-accelerate, with 39% growth in the second quarter, and 81% projected for the third. That growth is also due to new products – the firm has a new coffee-energy drink (!), dubbed Java Monster, that’s getting positive reviews – which tells you management is not resting on its laurels.
Technical Analysis
HANS reached a peak of 53 in the middle of last year and promptly collapsed as earnings growth fell off a cliff. What followed was a long, messy consolidation period, but trading began to tighten up in April and May. Then a great quarterly result in early August gave the stock a pop, helping it to hold up well during the mid-August market massacre. And now HANS has pushed ahead to new peaks, rising each of the past six weeks. We believe you can get in on a retreat of a couple of points.
HANS Weekly Chart
HANS Daily Chart
(OMTR)
Why the Strength
You can buy almost anything online these days, but have you ever wondered about the behind the scenes software, that tracks and measures your progress through a web site, sometimes seeming to shadow you like a used-car salesman? Omniture is a leading provider of web optimization software that lets companies analyze – in real time – the behavior of their customers and tweak their sites so that visitors stay longer and buy more. Some of this software lets advertisers manage their online advertising campaigns for optimum productivity. And much of it relies on the new science of “on-site behavioral targeting technology.” Users include JetBlue, Novell, J. Walter Thompson, Half.com, Hewlett Packard, Overstock.com, Autobytel, Discovery Channel and more. Revenue growth is booming, and the company has now posted four quarters of positive earnings; estimates for next year see a gain of 139% per share! Also, profit margins are at all-time highs and are likely to top 20% before long. Which all explains why the company is valued by the market at $1.76 billion, and the PE ratios are eye-popping. But that’s no reason to shy away; the best growth companies are always expensive.
Technical Analysis
OMTR came public in June 2006 and since bottoming two months later, it’s been in a strong, steady uptrend, acting like a great growth stock. It first appeared in Cabot Top Ten eight weeks ago; if you bought back then and are holding still, congratulations. And if you haven’t bought yet, our best advice is to take advantage of any normal pullback, ideally toward the 25-day moving average at 27.
OMTR Weekly Chart
OMTR Daily Chart
OmniVision (OVTI)
Why the Strength
OmniVision describes its products as “single-chip solutions that integrate … image capture, image processing, signal conversion, and output of a fully processed image or video stream.” In other words, when you point your digital camera, video camera or cellphone camera at something, it’s an OmniVision chip that’s actually turning the light into a digital signal. The company is an old friend of Top Ten, having made six appearances during a rally that lasted from late 2002 through 2003. Two more appearances in early 2006 and one early last month complete its history. This history tells you a couple of things: first, that OmniVision is historically strong enough to lead the market during its good phases; second, that the chip business is cyclical and the cycle is up right now. With sales of video devices in a strong uptrend, OmniVision’s earnings for its fiscal first quarter, reported in late August, crushed expectations, and the guidance for fiscal Q2 was strong. Investors liked the story and the stock has been doing well. There’s nothing revolutionary here, just a well-run company with a quality product that’s in a cyclical upturn. You can make good money if you play it right.
Technical Analysis
A look at the chart for OVTI will tell you that it’s not soaring to the stars. The 2003 rally topped out in the high 30s, while the one that began in October 2005 eventually stalled at 34. But with OVTI currently at 23, there’s plenty of room left to run. A pullback to the 25-day moving average (now at 21) would mark a buying opportunity.
OVTI Weekly Chart
OVTI Daily Chart
VeriFone Systems, Inc. (PAY)
Why the Strength
VeriFone is a play on the rising use of credit and debit cards instead of cash, in both the U.S. and emerging markets. The company is the leading provider of point-of-sale and wireless payment systems – when you swipe your card at a gas station or grocery store, you’re likely using a VeriFone system. Every year, a higher percentage of payments are made with plastic instead of cash, and that means higher demand for this firm’s software and products. Emerging markets are a huge opportunity, with many governments promoting credit-based purchases, especially wireless ones (such as taxi cabs taking credit payments, which, incidentally, they do in New York and Philadelphia). An acquisition last year has rounded out the product line, and has helped continue the company’s string of superb earnings results and lofty profit margins. It’s not a barn burner, but we think the stock will outperform the market.
Technical Analysis
PAY came public in April 2005 and immediately put on a good show, rising from 10 to 33 in less than a year, and then to 43 by February 2007. But that peak proved to be the start of a tedious six-month basing process – PAY meandered even as the market was doing well this spring. The stock began to firm up in August and September, and then tightened up beautifully for a couple of weeks, a sure sign no more stock was for sale. The weak hands were worn out! And that led to last week’s huge upmove on the heaviest weekly volume total in the stock’s history. A pullback could be in the cards, but we don’t expect anything more than a point or two of downside.