More Pressure
The market and many stocks had a bad last week, no doubt about it—instead of slowly fading, the selling pressures have increased of late as earnings season begins in earnest. We can’t say we’re seeing a rash of breakdowns, but enough selling has occurred that we’re moving our Market Monitor into the neutral camp. A shift back in a week or two is possible if earnings season unfolds bullishly, but for now, we recommend limiting your new buying to smaller positions (maybe half or two-thirds of what you’d usually buy) and consider some names that could trend on their own (like precious metals names, for instance). You should, however, still try to hold onto shares of your most resilient performers, giving them a chance to re-emerge.
This week’s list has a few tempting growth stocks, as well as some turnaround plays that are doing well. But we’ll stick with the precious metals group, which has consolidated nicely after bolting higher last month. Allied Nevada Gold (ANV) is one of many that looks like it wants to head higher, bolstered by the price of gold and higher output.
| Stock Name | Price | ||
|---|---|---|---|
| ANV (ANV) | 0.00 | ||
| AOL, Inc. (AOL) | 0.00 | ||
| Barclays (BCS) | 0.00 | ||
| CTRX (CTRX) | 0.00 | ||
| DVA (DVA) | 0.00 | ||
| Eagle Materials Inc. (EXP) | 0.00 | ||
| AG (AG) | 0.00 | ||
| Google Inc. (GOOG) | 0.00 | ||
| Rackspace (RAX) | 0.00 | ||
| Royal Caribbean Cruises (RCL) | 0.00 |
(ANV)
Why the Strength
The Nevada gold rush is in full swing, and Allied Nevada Gold has staked out a potentially profitable claim. Currently, this gold exploration and development specialist operates the high profile Hycroft Mine, and owns 100% of the Hasbrouck, Three Hills, Mountain View and Wildcat projects, and the Pony Creek/Elliot Dome project. The Hycroft Mine has garnered considerable attention for Allied since the company refurbished and reopened the mine in 2008. When Hycroft was last in production between 1987 and 1998, the location produced one million ounces of gold. The company is also looking to restart the Hasbrouck mine, which Allied believes still holds 1.2 million ounces of gold and 29.3 million ounces of silver. In addition to strong business practices and solid mining locations, Allied is also getting some external upward pressures to its bottom line. Specifically, gold prices have risen to within striking distance of all-time highs following reports that several mining companies are having trouble in other parts of the world. Additionally, gold has also gained popularity in the wake of the Federal Reserve’s decision to implement a third round of quantitative easing. With Allied prepping to bring new mines into full production amid favorable market conditions, the company is proving attractive to more than just the “gold bugs.”
Technical Analysis
After spending the first half of the year struggling to find a direction, ANV rebounded sharply from a basing period at the end of July. It was the stock’s second trip to the 25 level in 2012, that created a double-bottom for the shares and provided an opening for bargain hunters. Fueled by a spike in gold prices, ANV shares rallied nearly 50% into mid-September, drawing the stock’s 50-day and 200-day moving averages into a bullish cross. Currently, ANV is consolidating is recent gains just below former resistance at the 40 level, as the shares unwind an overbought condition. With the shares currently retreating from 40, this is an opportunity to accumulate. A stop loss at 35.5 is prudent.
ANV Weekly Chart
ANV Daily Chart
AOL, Inc. (AOL)
Why the Strength
By the time Cabot Top Ten Trader began publishing in September 2002, AOL had lots of history, with a capital “H.” AOL was a pioneer in providing Web access for millions with a software suite that gave subscribers an entire Web community. AOL’s merger with Time Warner in 2000 was expected to leverage the strengths of each, but that didn’t work out, and the companies parted ways in May 2009. AOL has transformed itself into a collection of Web brands, including The Huffington Post, Patch, MapQuest, AOL Yellow Pages, Moviefone, Engadget and Cambio, among others. The company makes a majority of its money in the now traditional way of selling advertising aimed at visitors to its various sites. But 36% of 2011 revenue came from subscription fees. AOL got lots of headlines in April (and a huge boost for its stock), when it was announced that it would sell a bundle of 800 of its patents to Microsoft for $1.1 billion, the latest round in the high-stakes patent battles raging among tech companies. The next big catalyst came on July 25 when the company announced Q2 results that featured a per-share profit of 23 cents. Investors see that AOL’s big investments in buying websites with compelling stories is paying off. AOL is turning into a successful online publisher, something that its old Time Warner partners can envy. Q3 results will be announced in late October.
Technical Analysis
AOL became an independently traded company again in December 2009 and spent a couple of years hacking around, falling from 25 to as low as 10 in August 2011. After rallying to 18 in April 2012, the stock went ballistic, gapping up to 25 in one day. The stock kept that momentum, rising to 27 in July, when the good earnings news gave it a new burst of energy. AOL is now trading near its new high at 37. You should be able to pick some up on any weakness, with a stop at 33.
AOL Weekly Chart
AOL Daily Chart
Barclays (BCS)
Why the Strength
From slow lending rates, a struggling global financial system, and a LIBOR rate scandal, it’s been a rough year for London-based Barclays. Like most financial institutions, Barclays had finally shaken off the worst of the 2008 financial crash heading into 2012. However, early in the year, it was revealed that Barclays was involved in a LIBOR rate fixing scandal that was tied directly to the mortgage crisis in the U.S. More recently, the company is facing more fallout from the LIBOR scandal, as U.S. home owners have filed a class action suit versus several banks, including Barclays, Bank of America and UBS, to name a few. In an effort to change its image and set a new direction for the company, Barclays replaced former CEO Bob Diamond with Antony Jenkins in late August, after Diamond resigned when the LIBOR debacle came to light. With all of the company’s dirty laundry now out in the open, and a new CEO at the helm, Barclays is looking to turn the corner. While year-over-year revenue growth is still languishing in negative territory, the decline has been more than halved, as you can see in the numbers below. Furthermore, Barclays is looking to expand in the face of controversy, snapping up ING Direct’s U.K. deposits, mortgages and business assets. Once Barclays leaves the last vestiges of the LIBOR debacle behind, the company should be poised to pick up where it left off earlier in the year.
Technical Analysis
Following a grueling grind lower during the first half of 2012, BCS shares finally bottomed out in the single digits in late July. The stock rebounded sharply over the next month, reclaiming its 10-day and 25-day moving averages in short order. BCS even eclipsed its 50-day trendline before the end of August. The shares accelerated in September, after Jenkins replaced Diamond as CEO, placing BCS above an area of chart congestion near the 14 level. The shares have since consolidated into this region, waiting for rising support from their 10-day and 25-day trendlines. Additionally, BCS’s 50-day and 200-day trendlines are on the verge of a bullish cross. We think you can nibble around here with a stop near 13.5
BCS Weekly Chart
BCS Daily Chart
(CTRX)
Why the Strength
It’s a little deceptive to say that Catamaran is making its first appearance in today’s Top Ten. This Illinois-based pharmacy benefit management (PBM) company appeared here 10 times under its old name, SXC Health Solution; the name was changed in July. Along with major competitors Medco Health Solutions and Express Scripts, Catamaran offers services that allow customers—usually managed care organizations, self-insured employers, unions and state and federal government offices—to manage the cost and complexity of prescription drug programs. Catamaran is strong because its services take an expensive and difficult task off its customers’ hands, and because the company has been growing by gobbling up smaller competitors. Revenue grew a whopping 155% in 2011 after a solid 35% in 2010. That kind of growth often comes from acquisition, and Catamaran took over PTRX, Inc. and SaveDirectRx in October 2011. HealthTran was the next acquisition in January 2012 and Catalyst Health Solutions (which supplied the first part of the company’s new name) was added in July 2012. PBM is a relatively low-margin enterprise (after-tax profit margin in Q2 was 1.9%) so getting huge is a good strategy. With the national health care system in transition, Catamaran’s prospects look bright.
Technical Analysis
CTRX has been in an uptrend since October 2008, with some big corrections along the way. July through October 2011 was a particularly weak period with a drop from 33 to 20. But CTRX got moving again immediately and soared to 50 in just six months. The stock hit new highs as July began, and just revisited those highs two weeks ago. The stock’s retreat from 52 to 50 on light volume completes a good-looking cup-with-handle. CTRX is buyable right here, or on a breakout above 52.
CTRX Weekly Chart
CTRX Daily Chart
(DVA)
Why the Strength
DaVita is a specialized medical services company that provides dialysis services for patients with chronic kidney failure, which is also known as end stage renal disease. The company has a string of nearly 1,900 dialysis centers serving about 149,000 patients. The firm also provides outpatient dialysis services in 19 centers in four countries outside the U.S. and in 900 hospitals. Dialysis and lab services brought in 93% of 2011 revenue, indicating that its specialization is extreme. The demand for dialysis services is independent of economic conditions, and DaVita has booked five years of steady single-digit revenue growth, completely ignoring the Great Recession. Earnings per share have grown with similar steadiness, from $3.53 in 2008 to $5.14 in 2011, and 2012 estimates are for $6.12. Aside from its long history of growth and strong outlook, investor interest in DaVita is high right now for two reasons. First, an investigation by the St. Louis Attorney General’s office has been concluded without any charges being brought. Second, Warren Buffett has just upped Berkshire Hathaway’s stake in the company to over a billion dollars. The company will report Q3 results on October 30.
Technical Analysis
DVA isn’t a rip-roarer, but the stock has been in an uptrend since March 2009, with some big shakeouts along the way. The major correction came from July through August 2011, when the stock dipped from 90 to 59. After recovering to 90, the stock corrected to 80 in May. A quick June rally to 100 was followed by almost three months of consolidation before the stock broke out again in late September. The latest surge to 110 has left the stock’s 25-day moving average behind at 103, so another pause is possible. Try to buy on a dip of a couple of points.
DVA Weekly Chart
DVA Daily Chart
Eagle Materials Inc. (EXP)
Why the Strength
We’ll be honest: In the short-term, we’ve developed a bit of skepticism regarding the homebuilding stocks, simply because they’ve been running up for the better part of a year and many names are beginning to trade in whipsaw fashion ... a classic sign that bulls and bears are fighting it out. However, we’re seeing a few housing supply stocks continue to trade properly, and that includes Eagle Materials, a big player in cement, gypsum wallboard and recycled paperboard. Beyond the increasingly well-known housing rebound, Eagle is strong because of one unique factor—the company just bought two cement plants for nearly $450 million (not a small transaction for the firm), which will boost its cement capacity by a whopping 60%. And the timing couldn’t be more perfect, as industry capacity is tightening and prices are firming for cement; industry peer Cemex just announced decent guidance, for instance. Investors liked the news so much that they swallowed a share offering of more than three million shares (about a 6% dilution) to pay for the acquisition. Earnings estimates have rocketed higher in recent weeks, with analysts now expecting the bottom line to triple this year (to $1.57 per share) and leap another 50% in 2013. Earnings are likely out around the end of the month.
Technical Analysis
EXP had a huge off-the-bottom rebound from last September through April, but then chopped around and eventually succumbed to the market’s pressure. In fact, it wasn’t until early August that EXP really got going again, and it’s had a great run since. So far, the stock’s pullback during the market downturn has been controlled; we think a retreat toward its 50-day line (now near 44) would offer a chance to buy a small position, and you could add to it if earnings are well received. A stop around 43 makes sense.
EXP Weekly Chart
EXP Daily Chart
(AG)
Why the Strength
Precious metals stocks are among the most resilient in the market (there are three in this week’s issue), and First Majestic is benefiting from that. The company is obviously strong because of the rise in silver prices, but like many of the best commodity stocks, this company isn’t simply riding the trend of prices up and down; it’s embarked on an aggressive expansion program that could leverage higher silver prices into booming earnings. The firm is focused on four mines in Mexico, two of which have been operating for a while, one of which is being expanded and one which was just acquired and is ramping up. The result—in the third quarter, the firm’s silver output boomed 36% from a year ago, while its lead and zinc output (smaller pieces of the pie, but they still count) rose 75% and 100%, respectively. And that should be just the start, as First Majestic (which mined 2.4 million ounces of silver equivalent in the third quarter) is aiming to produce about four million ounces per quarter in 2014, or about a 70% hike from current levels. Now, the second quarter was a mess, but that was mainly because of falling silver prices (down 27% year-on-year). But that should change if the recent spike in silver (up 25% since mid July) continues. As precious metals go, we like it.
Technical Analysis
AG began trading on the NYSE in December 2010 and ballooned from around 13 to 27 by April of 2011! But then the stock gyrated lower for more than a year, finally falling to 12 at the market bottom of May. The stock’s initial bounce wasn’t all that impressive, but AG has put on a great show since mid-July, motoring back up to 24 on big volume and, now, pausing for three weeks. We think shares are a good buy here, but recommend using a looser stop around 20.
AG Weekly Chart
AG Daily Chart
Google Inc. (GOOG)
Why the Strength
If you need to look up anything online about Google, you can just google it. That about says it all. Google was founded in 1998 by a couple of Stanford grad students who were trying to figure out how to evaluate the importance of scientific papers. Eventually, they came up with the idea of favoring those papers that were cited most often in other scientific papers. When they extended this strategy to all the websites on the Internet, it transformed the search business. By selling advertising access to merchants based on the key words used in the search, Google invented the dominant strategy of monetizing search traffic on the Web today. The company is a major player in email, online news, streaming digital content, maps and directions and online communities. And it’s all (mostly) funded by the 66% of company revenue that comes from online ads aimed at Web searchers. Earnings topped $36 per share in 2011 and are estimated at $42.53 per share in 2012. Google is back on investors’ minds after a couple of years of skepticism that the company could monetize its dozens of Web experiments and real-world experiments like Google Earth and Street View. Apparently, it can.
Technical Analysis
GOOG has an enormous price, which puts off some investors who are accustomed to buying shares in lots of 100. But GOOG has made a 16-week stampede from 556 in June to 775 on October 5. Last week’s market-wide weakness pulled the stock back below 750 and today it dipped below its 25-day moving average for the first time since July. GOOG may need to correct a little more, and will likely see a little profit-taking before earnings are announced this Thursday evening. You can either take a small position now, or wait for earnings on October 18.
GOOG Weekly Chart
GOOG Daily Chart
Rackspace (RAX)
Why the Strength
Rackspace = Cloud. OK ... it’s not that simple, but the ruling reason to consider owning shares is that management is positioning the firm as one of the leaders in providing Cloud computing services. The big differentiator appears to be the firm’s adoption of the OpenStack open-source software for its cloud and hosting services; big competitors like Amazon’s Web Services use their own software, which can be limiting and lock customers in, especially when dealing with complex tasks like Big Data projects. (One analyst said last week that Wal-Mart is hiring a bunch of engineers to develop Big Data applications and outsourcing more to Rackspace.) There is a mega-movement toward having more IT resources hosted and operated at a data center, which is playing into this company’s hands. Dedicated hosting is still about three-quarters of Rackspace’s business, and is growing 20% to 25%; but cloud services are booming, up 70%, and the recent conversion to OpenStack could cause that figure to accelerate. Combine all of these positives with the company’s dedication to top-notch customer service, and we think years of great growth are ahead. Earnings are due out in early November.
Technical Analysis
RAX has had a huge, huge run in recent years, but it’s also suffered through some tedious, multi-month declines as well. The latest decline began in May but ended in early August, as fears that the company’s conversion to OpenStack would lead to lower selling prices and margins dissipated. Impressively, the stock staged an incredibly persistent upmove, marching into the upper 60s and actually hitting higher highs in recent weeks, even as most growth stocks sagged. In this environment, we advise looking for weakness to start a position, with a stop near 62.
RAX Weekly Chart
RAX Daily Chart
Royal Caribbean Cruises (RCL)
Why the Strength
After plowing through a period of stormy waters, it should be smooth sailing for Royal Caribbean as the company heads into a period of cyclical upside. Royal Caribbean operates as a worldwide cruise and vacation planning company. The firm owns five cruise brands, including Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises and CDF Croisieres de France. Last year, Royal Caribbean’s operations were plagued by political instability in the lucrative Egyptian market, and with violence once again erupting in the area, the company is facing a bit of turmoil. However, tensions have eased in the European market, opening up a clear revenue stream heading into the crucial holiday vacation period. Furthermore, the company still has plenty of room for growth overseas, even in European locations where cruise lines have operated for some time now. Finally, the company recently implemented a series of internal promotions, adding the role vice chairman role to Chief Financial Officer Brian Rice’s duties. The moves should also help improve Royal Caribbean’s position going forward; analysts see earnings rising 38% next year after this year’s sag.
Technical Analysis
As with most vacation and leisure stocks, RCL struggled to find direction throughout most of 2012. The shares hit bottom near 24 in May, and spent the summer sidling along support in the region. August brought much needed relief for RCL shares, with the stock encountering support at its 10-day and 25-day moving averages. These trendlines provided key lift for RCL, bolstering the shares throughout the past three months. The stock broke above former resistance at 30 in mid-September, and RCL has since utilized support in the area to gather strength. RCL looks ready to resume its move up; we think you can enter around here with a stop near 28.