Sellers Finally Make a Stand
After weeks of straight-up action, leading stocks finally came under some selling pressure late last week, and it appears more selling is on the way, short-term. We’ve written that such a pullback is likely (you often see peaks and troughs near the 15th of the month of earnings season), so if you’re holding a couple of laggards, now’s the time to kick them out of your portfolio. Longer-term, however, we believe any retreat will result in buying opportunities – our OptiMo stock screening system continues to uncover a wide array of great-looking stocks with even greater-sounding stories. Thus, while you should expect some choppiness in the near-term, you should be putting money to work on weakness. Our favorite idea this week is Aecom Technology (ACM), part of the strong engineering and construction group. It’s a new issue, which helps, and looks like a good buy around here, or on a slight pullback.
| Stock Name | Price | ||
|---|---|---|---|
| ACM (ACM) | 0.00 | ||
| ANW (ANW) | 0.00 | ||
| CRM (CRM) | 0.00 | ||
| FLR (FLR) | 0.00 | ||
| GIGM (GIGM) | 0.00 | ||
| GOLD (GOLD) | 0.00 | ||
| HNSN (HNSN) | 0.00 | ||
| JASO (JASO) | 0.00 | ||
| LVS (LVS) | 0.00 | ||
| VIP (VIP) | 0.00 |
(ACM)
Why the Strength
The global construction boom, which has boosted the prices of all commodities, has been kind to engineering firms, too, and one of the most attractive is AEC. Whether you’re building an airport, a bridge, a pollution control system or a mass transit system, AEC can do it all. This firm has grown rapidly in recent years, completing 21 acquisitions since 1999, and is still on a rapid growth track. It has 31,000 employees, serving clients in over 60 countries, and is a major force in fast-developing China, Qatar and Abu Dhabi. Still, over half of revenues come from the U.S., and a large part of that is from the U.S. government. The stock is still being discovered by investors and it might be called undervalued here, with a PSR of less than one and a PE ratio that’s less than half the growth rate. But this growth will only continue if the firm can keep on acquiring. The stock says it’s likely.
Technical Analysis
AEC first appeared here two weeks ago, after it had spurted from 26 to 36 in three short weeks. We recommended buying between 30 and 35, and in the days since the stock has pulled back to nearly 33 before rebounding to continue building a base around 35. This is encouraging; in fact, we particularly like the way the stock held up last Thursday when many leading stocks reversed in a big way. It shows us that buyers are still in control of this stock, and that once the pressure comes off the market, it’s likely to resume its uptrend. We think you can buy a little now.
ACM Weekly Chart
ACM Daily Chart
(ANW)
Why the Strength
For several years now we’ve been seeing energy stocks appear in Cabot Top Ten Report. And many times this year we’ve written up bulk shipping companies, which are benefiting from the supply/demand imbalance in the industry. Now comes the company poised to benefit from the intersection of both industries. Aegean, based in Greece, naturally, supplies and markets refined fuel and lubricants to ships in port and at sea. Its biggest bases are in Gibraltar, Greece, United Arab Emirates and Jamaica, while newer bases lie in Singapore and the Gulf of Guinea on the west coast of Africa. And just last week the company announced it had acquired Belgium-based Bunkers at Sea, expanding the company’s reach into Northern Europe. The company’s global market share is about 20% today, and that share is growing, as it acquires smaller competitors and adds new ships. There’s a small dividend of 0.1%, but the main attraction here is growth; in fact, revenue growth is accelerating! While that trend is not likely to continue, we do like to see analysts’ estimate of 97% earnings growth for 2008 and we like the fact that the stock is young and relatively unknown.
Technical Analysis
ANW came public last December at 14, and stayed low and fairly unnoticed until September 14, when a major brokerage initiated coverage with a buy rating. Buyers then blasted the stock over 25, and the buying continued right up to last week, when the stock hit 43. At some point, a major correction will come, but today, the buyers are still in control. If you’re feeling aggressive, and you know how to control risk, you’re welcome to buy on any minor pullback.
ANW Weekly Chart
ANW Daily Chart
(CRM)
Why the Strength
Salesforce.com is the leader in a potentially huge market. The company provides on-demand customer resource management (CRM – hence the stock’s symbol) software for firms big and small. This software allows companies to organize their customer data far more easily, resulting in more marketing opportunities and better service. And the on-demand model is something this company has pioneered; Salesforce.com can get a customer up and running in weeks, not months, costs are generally lower, and the software is more easily customized and accessible than standard CRM solutions. The result has been fantastic growth – the latest quarter saw a huge 155,000 new users, bringing the total to 800,000 users among more than 35,000 customers (a corporate customer will typically have hundreds of users). And that’s led to great revenue and cash flow growth (earnings are understated since customers pay by subscription). Competition is a worry as many big software firms are getting into the space, but Salesforce.com is the leader today.
Technical Analysis
CRM is another stock that took much of the past year or two off. The stock hit a peak of 43 near the start of 2006 … and traded at that same level early last month! In between there were lots of ups and downs, wearing and scaring out weak hands, paving the way for the recent upmove to new peaks. Granted, it’s not the strongest breakout we’ve ever seen, but new price and RP highs following twenty months of base building will usually lead to higher prices. You can buy a little around here, and then look to average up should CRM push ahead.
CRM Weekly Chart
CRM Daily Chart
(FLR)
Why the Strength
The engineering and construction sector remains one of the hottest groups in the market – two stocks in the group made the Top Ten cut this week alone – thanks to booming demand, both domestically and (especially) internationally, for new infrastructure in the oil and gas markets, the power markets and general infrastructure, such as roads and bridges. Fluor is one of the largest players in the field, and thus is one of the few that has exposure to all three of these strong end markets. The company’s most recent quarterly report showed tremendous business trends – while sales and earnings growth were healthy, the real story was the huge amount of new orders ($5.8 billion worth) and a massive 43% year-over-year growth in backlog, to $25.7 billion. On a valuation basis, Fluor seems priced for perfection … and maybe it is. But these stocks tend rise and fall with orders and backlog levels, not just earnings growth. So we think the stock could have further to run as the global boom continues.
Technical Analysis
FLR had a decent 2003 through 2005, but like many growth stocks, it then spent many months “re-setting” itself. In FLR’s case, that meant a long thirteen month period where the stock went nowhere – from 104 in April ’06 to 100 in June ’07. But now the buyers are back in control; this stock barely budged during the sharp market selloff in July/August, and has now marched ahead eight weeks in a row, a sign of consistent institutional buying. We think a short-term pullback is likely, but higher prices should come after that.
FLR Weekly Chart
FLR Daily Chart
(GIGM)
Why the Strength
GigaMedia was founded in 1997 as a Taiwan Internet service provider, but management soon acquired an online game portal that featured mah-jongg gambling and then moved into online poker. Now, with online games and gambling bringing in 58% of revenues (the Internet business is down to only 22%), GigaMedia is a major player with over 64 million registered users, many of whom are playing for real money. Asian players are still the core of the company’s business, and plans have been announced to make a run at the Japanese market with its enormous appetite for Pachinko and other gambling diversions. GigaMedia had one previous Top Ten appearance (in April 2007) as the company was recovering from a blow to its business from the U.S. Congress, which outlawed the use of credit cards as a way to pay for online gambling. But that shock is well in the past, and the company just picked up new analyst coverage last Thursday. GigaMedia, with aggressive management and a robust foothold in the Asian and European markets, looks strong.
Technical Analysis
GIGM was trading around 14 when it appeared here in April. Since then it’s been over the falls in the market’s July/August correction and has roared back to new highs with advances in nine out of the past ten weeks. The announcement that a Bear Stearns analyst had begun coverage sent the stock soaring from 18 to 21 last Thursday and Friday. It should give back at least half that gain, at least temporarily, and a drop below 20 would offer a decent buy point.
GIGM Weekly Chart
GIGM Daily Chart
(GOLD)
Why the Strength
While many investors doubt the lasting power of the recent upmove in gold prices, it’s clear that gold stocks are in favor. Randgold is making its second Top Ten appearance in four weeks, as it looks to leverage its various South African mines to cash in on higher bullion prices. Its main revenue producers include a stake in the Loulo gold mine in western Mali, and a stake in the Morila mine in southern Mali. Both are set to ramp up production in the second half of this year and beyond – a big reason why analysts are looking for a 54% jump in ’08 earnings, to $1.11 per share. But also encouraging, found in the latest earnings release, was Randgold’s cash costs of $361 per ounce; with gold prices now fetching around $750 per ounce, and with the trend of gold strongly up, this company is poised to rake in big money going forward.
Technical Analysis
GOLD looks like most of its peers – a long, tedious sideways trading range for more than a year, leading to a powerful, higher-volume blast-off a few weeks ago. The obvious driver is the price of gold; that, more than actual earnings results, will push this stock up or down. And right now, the price of gold is in a firm uptrend, following an equally-powerful breakout of its own at the start of September. If you bought any gold stock on our previous recommendations, sit tight. If you haven’t, we think you can buy some GOLD on a pullback of a couple of points.
GOLD Weekly Chart
GOLD Daily Chart
(HNSN)
Why the Strength
Hansen Medical (not to be confused with Hansen Natural), making its first Top Ten appearance, is a medical device company with almost no revenues, but high potential. The company offers special cardiac catheter (brand named Artisan) with exceptional flexibility and a control console (branded Sensei) that gives the surgeon operating it enhanced control. This catheter is used now in conjunction with fluoroscopes and other radiation sources to map the inside of the heart as part of treatment for cardiac arrhythmia. Sales of the product were approved by both the FDA and the European Union in May. The big potential comes from the possibility that the catheter will be especially useful if ablation (using electricity to destroy rogue bits of the heart) is approved in the U.S. as a treatment for arrhythmia. Ablation has been approved in Europe, and the company’s first sale of a Sensei/Artisan system is expected to lead to clinical trials at the Cleveland Clinic in Ohio. The system, with its exact controls and remote console, reminds us of Intuitive Surgical’s makeover of the surgical enterprise. This is hardly surprising, since Hansen’s CEO was a co-founder of Intuitive Surgical and its VP of Advanced Applications directed instrument development there. It’s pretty clear that Hansen Medical is headed either for a buyout by a bigger firm or for a big payday if ablation therapy is approved in the U.S. It’s a real speculative situation — revenues are minor — but the upside potential is huge.
Technical Analysis
HNSN came public in November 2006 at 12 and quickly made excellent progress. Most recently, it broke out to new price peaks on October 10 after picking up new analyst coverage. Since then, it has pulled back slightly. This isn’t a stock for the faint of heart, but buying on a drop back toward its 25-day moving average (now at 27) would help to control risk.
HNSN Weekly Chart
HNSN Daily Chart
(JASO)
Why the Strength
JA Solar, the Chinese manufacturer of solar cells, is back for its fifth appearance in Top Ten, which is pretty remarkable for a stock that came public just this year. JA is strong because solar is strong, because it restricts itself to making only solar cells (leaving the assembly of panels and arrays to others), and because its supply of silicon is secure. The company is also politically connected, with a chairman who is a member of the Chinese National People’s Congress. Ultimately, none of this would make any difference if the product weren’t good or management weren’t ambitious. But JA’s cells convert sunlight at 17.6% efficiency, which is at the upper end for mass manufacturers. And the company’s moves to increase manufacturing capacity from the current 75 megawatts per year to 175 megawatts per year (including securing the additional silicon necessary for the increase) reflect aggressive management. The company also just picked up coverage from a new analyst, which always helps. JA Solar has a good product and a strong market. We like it.
Technical Analysis
JASO has shown considerable volatility since it came public at 15 in February. It has pulled back strongly twice this year, and then advanced even more strongly. Since the July/August slump, it has risen from 27 to nearly 50. The most recent spike came after a new analyst’s recommendation and a follow-on offering. The solar sector isn’t as broadly strong as it was a month or so ago, but the best stocks remain leaders. We think JASO is buyable on a correction of a point or two from its new price peak.
JASO Weekly Chart
JASO Daily Chart
(LVS)
Why the Strength
Las Vegas Sands is one of the planet’s leading gaming companies, and if you understand the potential for growth, as this company extends its reach all over the world, you’ll understand why this company perpetually sells at an elevated valuation. Its new Venetian Macao Resort Hotel Casino in Macao opened just a month ago, and has already surpassed expectations. Later this year, the Palazzo Resort Hotel Casino in Las Vegas – with approximately 3,025 luxury suites! – will open. Next will be Bethworks in Bethlehem, PA and Marina Bay Sands in Singapore, both of which are expected to open in 2009. Beyond that, Chairman and CEO Sheldon Adelson has been quoted as saying Asia can handle 10 Las Vegases! He’s also said there are opportunities in Europe, the Middle East, South America, and countries such as Russia, Turkey and India. So growth potential is superb here, and management is top-notch. The only reasons to hesitate are the company’s high debt load (200% of equity) and its high market valuation. But the best growth companies are always expensive!
Technical Analysis
LVS came public at 29 in late 2004 and has worked its way generally higher ever since. In Jan 2007 it peaked at 110, and spent over seven months consolidating that gain. Then came the breakout to new highs last month on the news of the successful opening in Macau. The past three weeks have seen the stock building a new base at 140, while the 25-day moving average, now at 130, works to catch up.
LVS Weekly Chart
LVS Daily Chart
(VIP)
Why the Strength
Vimpel is a Russian wireless service provider with about 55 million subscribers in Russia and other nations of the former USSR. As with wireless phone businesses in many emerging economies, growth has been coming from expansion of service; it’s cheaper to put up cell phone towers than to string wire lines into the country. Vimpel has been active in acquiring smaller competitors and current licenses give it access to 95% of Russia’s population and all of Kazakhstan, Ukraine, Uzbekistan, Tajikistan and Georgia. With an enormous geographic footprint, growth is now stewing from higher revenue per customer, as subscribers use more minutes and value-added services. Several factors have been supporting Vimpel’s stock, beginning with a 5-for-1 split in late August. A favorable court ruling affirming the company’s right to purchase Ukrainian Radio Systems has also given the stock a boost. Revenues have been growing at a 50%+ rate for the last four quarters and earnings have been increasing for the past three. With a roster of institutional supporters that grows every quarter and a small dividend, Vimpel looks like a winner.
Technical Analysis
VIP has been in a long, powerful uptrend, but after the market’s July/August correction (and the 5-for-1 split on August 22), the stock accelerated, soaring to last week’s high of 32 in just six weeks. With earnings safely on the books (next report due at the end of November), VIP looks ready to continue its rise. Look for a drop of a point or two to pick some up.