Caution Is the Order of the Day
Markets coughed up a hairball at the end of last week and weren’t all that happy today. Defensive stocks had a better time of it, but many growth issues came under heavy pressure. A few high-profile issues (like Google GOOG) got taken to the cleaners after poorly received earnings reports. It’s too early to conclude that markets are in for a big correction, but the action is negative enough to warrant taking a slightly more defensive posture. You should tighten up the leash on your stocks, maybe be a little quicker to take partial profits or cut losers off if their charts deteriorate. Don’t go in for wholesale selling, but work to protect your portfolio.
This week has an interesting list of metals, large-caps and retail, but the Editor’s Choice is Citigroup (C), a global banking giant that’s making a slow comeback from a massive correction when the housing bubble burst. It’s a good value for a high-quality stock that’s appealing to institutional investors.
| Stock Name | Price | ||
|---|---|---|---|
| Silver Wheaton (SLW) | 0.00 | ||
| Weyerhaeuser (WY) | 0.00 | ||
| Chico’s FAS (CHS) | 0.00 | ||
| Citigroup Inc. (C) | 0.00 | ||
| Coeur Mining (CDE) | 0.00 | ||
| Domino’s Pizza (DPZ) | 339.47 | ||
| LyondellBasell Industries NV (LYB) | 0.00 | ||
| Ocwen Financial (OCN) | 0.00 | ||
| Oshkosh (OSK) | 95.04 | ||
| Polaris Industries (PII) | 0.00 |
Silver Wheaton (SLW)
Why the Strength
When Silver Wheaton made the first of its eight previous appearances in Top Ten in March 2008, silver was trading just above $20 an ounce on the spot market. The company had recently been spun off from Goldcorp and already had five contracts with silver producers that would allow it to sell 15 million ounces of silver. Today, silver is trading just above $32 an ounce, and Silver Wheaton has 15 long-term purchase agreements (and three contracts for other precious metals) that are expected to allow sales of 28 million silver equivalent ounces, which includes 42,000 ounces of gold. The company’s forecast for 2016 has production at about 48 million silver equivalent ounces. As always, Silver Wheaton is just buying the rights to buy silver at a fixed price from proven mines in politically stable countries, and has no ongoing capital expenditures. Thus, while you can regard an investment in Silver Wheaton as a silver investment, the company’s extremely low price per ounce gives it a real edge on actual pick-and-shovel miners. Most of the mines from which silver rights are purchased are in search of other metals, and regard silver as a bothersome byproduct, which is why they are pleased to have upfront money and sell the silver at a fixed price. Silver Wheaton pays a dividend with a forward annual yield of 1.0%, and will report Q3 results on Monday, November 5, before the market opens.
Technical Analysis
After a 16-month correction (including a three-month base in May, June and July of this year), SLW got moving again in late July, soaring from 25 to 40 in September. The stock has now put in five weeks trading in a tight range between 38 and 40, as investors watch to see how the global economy will fare and how the company’s quarterly results stack up. Volume clues indicate that there’s still accumulation going on, indicating that institutional investors are likely bulking up in SLW. We think a small bet ahead of earnings is okay, but keep it small and put in a mental stop at 36.
SLW Weekly Chart
SLW Daily Chart
Weyerhaeuser (WY)
Why the Strength
If there was any remaining doubt that the housing market is in a strong rebound phase, last week’s housing starts figure put that to rest—they came in at an annual pace of 872,000, the most since July 2008 and up 35% from a year ago. That is big news for Weyerhaeuser, the large timber company with $6.47 billion in annual revenue. Like every firm connected to the housing market, Weyerhaeuser had a rough few years, but used that period to divest some non-core assets and cut costs. It also switched to a REIT structure, which has led to some generous dividends (currently yielding 2.4) that could rise as earnings boom. And boom they should, with analysts estimating 90 cents earnings per share next year, a figure that’s looking conservative given the housing starts figure mentioned above. Obviously, if housing demand dries up, timber prices could fall, but there are no signs of that today.
Technical Analysis
About the worst thing you can say about most housing supply stocks is that they’ve come a long way; WY is up from 19 to 28 since May, a big jump for what’s usually a slumbering stock. It’s not showing any signs of distribution yet—in fact, shares tightened up beautifully for a month before popping to new highs on big volume last week. The market could yank it lower but we think WY is a solid buy here, with a tight stop just below 26.
WY Weekly Chart
WY Daily Chart
Chico’s FAS (CHS)
Why the Strength
Chico’s FAS is a mid-sized retailer (market cap of $3.1 billion) that aims its string of over 1,250 stores at specific sectors of the female clothing market. All of these stores sell private-branded apparel accessories and related products. The company’s more than 600 Chico’s brand stores (plus 90 outlets and monthly catalogs and website) aim at fashionable women 30 years and older. The White House|Black Market chain of over 380 boutiques and 35 outlets sells exclusive fashions that appeal to higher-income women 25 years and older. The Soma Intimates segment sells lingerie, loungewear and beauty products at more than 185 boutiques and 15 outlets. The Boston Proper line is a direct-to-consumer retailer that sells “daring, modern fashion with a sensual feel” through catalogs, direct mail and online, and the company plans to start testing stores for this brand this year. Investors like Chico’s for its focus on clear demographics and its record of positive earnings growth. The company’s recent success has allowed it to maintain an active program of share buybacks. Recent earnings reports have beaten expectations; the company will likely release Q3 numbers in late November.
Technical Analysis
CHS built a six-month base under resistance at 16 from late February to late August before gapping up above 18 on August 22. Since then, the stock has been trading in a range between 18 and 19.5 on calm volume. With its 25-day moving average now flat and the rising 50-day just pushing above 18, CHS looks buyable right here, although a dip to below 18 would represent an attractive entry point.
CHS Weekly Chart
CHS Daily Chart
Citigroup Inc. (C)
Why the Strength
Banks with a market cap of nearly $110 billion are not frequent visitors to Cabot Top Ten Trader, but we believe that any company whose stock makes a strong move deserves a chance to be considered. Citigroup is a global holding company with banking, investment, insurance and credit card enterprises operating in more than 160 countries. The largest chunk of the company’s 2011 revenue (42%) came from its consumer banking operations, with services to institutional clients close behind at 41%. Citigroup, whose stock dropped from near 600 to 230 in the years following the bursting of the Tech Bubble, worked its way back above 500 by the middle of 2007, when the wheels really came off. C dropped to under 10 in March 2009, as the company’s heavily leveraged exposure to mortgages sank it like a stone. The company has continued to recover, and resumed paying its penny-per-share dividend in May 2011. Citigroup just experienced a quick departure of its CEO, Vikram Pandit, and COO John Havens after a spat with the company’s board, but investors seem to like the idea. What investors see now is a recovering global financial giant with a newly conservative approach to risk whose stock trades with a P/E of just 12. It’s still early in Citigroup’s recovery, and the company’s Q3 earnings report on October 15 beat expectations. A position in C makes sense as a play on the continuing recovery of the global economy and a speculative hope that its stock can return to the stratosphere.
Technical Analysis
C had recovered to over 50 when 2011 began, but began 2012 at 27. There have been lots of big swings in the stock, which has a beta of 2.2, indicating that it’s twice as volatile as the broad market. But the big move from 25 in July to 39 last week shows that there is big interest in owning a financial whale at a discount. Volume on October 16, the day following the CEO’s departure, was more than 250% above average, which may be a sign of relief. C looks buyable on weakness.
C Weekly Chart
C Daily Chart
Coeur Mining (CDE)
Why the Strength
Coeur d’Alene Mines is the largest U.S. silver producer and has a growing gold production capability as well. The company’s 2012 production is expected to top 18.5 million ounces of silver and 210,000 ounces of gold, with costs of between $6.50 and $7.50 per ounce of silver and $1,150 to $1,250 per ounce of gold. After a long period of development, the company’s three big, wholly owned mines—San Bartolome in Bolivia, which produces silver, Palmarajo in Mexico (silver and gold) and Kensington in Alaska (gold) are all producing. The company’s other assets include the Rochester silver mine in Nevada, the Martha silver and gold mine in Australia and strategic minority shares in five silver development companies in North and South America. According to its CEO, Coeur d’Alene is also looking to grow by buying small silver mining competitors. Revenue jumped 98% in 2011, and good cash flow has allowed the company to institute a $100 million share repurchase program. With 216 million ounces of silver and 2.3 million ounces of gold in total reserves, Coeur d’Alene represents significant exposure to continuing price increases in these metals. Earnings are expected out in the first full week of November.
Technical Analysis
CDE corrected sharply from its high of 31 in February and its four-week bottom at 15 in July. But starting in August, the stock made a monster run, regaining 30 in just seven weeks. The stock has now spent four weeks re-basing under resistance at 30, as investors wait out the earnings report that’s expected in early November. CDE looks like a reasonable bet on the price of precious metals on any dip below 29.
CDE Weekly Chart
CDE Daily Chart
Domino’s Pizza (DPZ)
Why the Strength
Domino’s operates more than 10,000 pizza restaurants in U.S. and more than 70 other countries. That’s a lot (only Pizza Hut is bigger), so annual growth of revenues has tended to be in the single digits in recent years. The exception was 2010, which saw 12% growth bouncing back from small declines in 2008 and 2009. Yet the stock has been doing well since the 2008 market bottom, and not just because it was oversold. 2010 brought a new CEO, Patrick Doyle, as well as significant changes to the recipes for the dough, sauce and cheese used in the pizzas. And last month Domino’s rolled out a new pan pizza, with “2 layers of real cheese in every bite” and “toppings all the way to the edge.” While none of this is revolutionary, it caters to the demands of the mass market, and as companies like Coca-Cola have proven, you can make a lot of money that way. Last week’s earnings announcement beat analysts’ estimates easily—thanks in part to lower cheese prices—and those same analysts are looking for 17% earnings growth this year and 15% next year.
Technical Analysis
DPZ put together a nice uptrend from its 2008 bottom to a high of 39 in March. But the advance stalled out there, and the summer selloff took the stock back down to 28, which turned out to be the bottom of a long cup-and-handle formation. The handle at 37 was left behind when last week’s earnings announcement spiked shares up above 41, and we think buying on the mild retreat since then will work out well.
DPZ Weekly Chart
DPZ Daily Chart
LyondellBasell Industries NV (LYB)
Why the Strength
There isn’t any mystery or glamour about Netherlands-based LyondellBasell; it’s a chemical company whose products are used mostly to make plastic. Using crude oil and natural gas as feedstocks, the company’s plastic resins—olefins and polyolefins—wind up in consumer packaging, home furnishings, auto components, fuels and containers. The company also has serious technological expertise that it licenses, including safety reviews and training and start-up assistance. Commodity prices are an essential component of LyondellBasell’s revenue picture, and anything like high gasoline prices (which dampen demand for auto fuels) can improve the company’s profit picture by lowering prices for certain kinds of crude oil. The company’s stock experienced a huge jump in trading volume on September 4, when it was added to the S&P 500 Index. But the longer-term interest in LyondellBasell is just a reflection of the gradual recovery in the global economy, which boosts demand for basic materials, and the company’s generous dividend, which is expected to pay a forward annual yield of 2.9%, but which has been augmented by special dividends in the past. The Q3 earnings report this Friday (October 26) will come before the open.
Technical Analysis
LYB came out of a six-month consolidation/correction in August, breaking through resistance at 46 and making for 50, where it paused again. The company’s issuance of 17 million additional shares, which came with its addition to the S&P 500, was digested quickly, and the stock pushed above 50 (into new-high territory) in September. Since topping 55 last week, LYB has pulled back by a point, with investors likely showing a little caution so close to earnings. We think a small position in LYB makes sense for investors with a longer time horizon who find its combination of growth and income attractive. If the reaction to earnings is good, you can average up; if not, a stop at 46 will be helpful.
LYB Weekly Chart
LYB Daily Chart
Ocwen Financial (OCN)
Why the Strength
Ocwen Financial has been one of the stars of 2012, though few investors know of the company. That the firm is flying under the radar is a good thing in our book, but the main reason the stock remains so strong is that Ocwen is at the center of a tectonic shift in a humongous industry. In the aftermath of the housing debacle, most big banks don’t want to be involved in servicing mortgages, which involves collecting payments and late fees, as well as dealing with foreclosures. Because of that, servicing rights for trillions of dollars of mortgages are being sold ... and Ocwen is gobbling up many of them. Moreover, just two weeks ago, the company dove headfirst into the mortgage origination market by acquiring Homeward Residential in a $750 million deal. With the housing market rebounding, analysts thought it was a shrewd move and were quick to boost their earnings estimates; they’re now looking for $3.80 per share next year, up from a buck last year and $1.50 this year. And we think even those bullish numbers could rise if more deals are made in the months ahead. Earnings are out November 1.
Technical Analysis
OCN got going in May, accelerated its uptrend after reporting a great quarter in early August and mushroomed two weeks ago after the Homeward purchase. It’s a monster stock! That said, in this environment, buying a name this extended can bite you ... but further modest weakness, or even a couple more weeks of trading in this area, could provide an opportunity. For now, we’ll set our buy range low, looking to take advantage of any temporary dip.
OCN Weekly Chart
OCN Daily Chart
Oshkosh (OSK)
Why the Strength
This 95-year-old Oshkosh, Wisconsin vehicle manufacturer has been around the block a few times, but unlike other American vehicle manufacturers, it’s never been bankrupt. One reason for that is that 56% of revenues come from the defense industry (mainly the U.S. government). Another is the company’s commitment to diversification; its well-known brands include JLG (lifts) Pierce (fire trucks), McNeilus (garbage trucks), Jerr-Dan (towing and recovery vehicles), Frontline (mobile command and broadcast vehicles), CON-E-CO (concrete mixers) and IMT (truck-mounted cranes). Yet not all shareholders are happy with the company. Activist shareholder Carl Icahn launched a takeover attempt earlier this month, offering 32.50 per share. And today he released an open letter to shareholders, explaining his thinking and his goal of replacing some of the company’s directors. So the stock is in play, and adding more fuel to the fire (perhaps) will be the company’s fiscal fourth quarter earnings announcement, scheduled for Friday, October 26.
Technical Analysis
Taking a long perspective, we see that OSK’s big long uptrend ended in 2008, with the stock trading above 60 per share. In the global financial crisis, the stock tanked like most, falling below 10, and the highest it’s been since is 40, so today’s 30 is nothing to write home about. Maybe Mr. Icahn has a point. On the other hand, the short-term chart shows a nice July-September run that took the stock from 20 to 30, then a normal dip, and then the effect of the takeover announcement. Bottom line: if Mr. Icahn succeeds, you get a couple bucks. If he doesn’t, the stock could drop, but we think the odds are greater that it could be driven higher by intelligent management actions.
OSK Weekly Chart
OSK Daily Chart
Polaris Industries (PII)
Why the Strength
Minnesota-based Polaris began life in 1954 as a developer and manufacturer of snowmobiles, but that segment of the business accounts for just 11% of revenues today. The bulk of the business (69%) comes from four-wheel and six-wheel ATVs marketed to hunters, farmers, ranchers and outdoorsmen of all stripes, as well as the military, and Polaris is dominant in this industry. But the company is not sitting still; it has a great track record of adapting to the market. Polaris got out of the personal watercraft business in 2004. It created an on-road division in 2009; now 5% of revenues come from its American-made motorcycle brands Indian and Victory. And in 2011 it began moving into the electric vehicle market, buying Global Electric Vehicles (GEM), a maker of neighborhood electric vehicles, from Chrysler, and investing in Brammo, a manufacturer of electric motorcycles. Revenue trends have been steadily positive for years, with the exception of a big dip in 2009—the economy, you know. And last week’s earnings report brought more good news, beating analysts’ estimates for both revenues and earnings. Particularly impressive to us were the fat 10.7% after-tax profit margin (high single-digits are more typical) and the fact that revenues from motorcycles (mainly Indian and Victory) soared 78%.
Technical Analysis
PII’s main trend is up, though there have been numerous multi-month basing periods along the way, one of which appears to have just ended. The April high of 80 was first topped in early September, but the breakthrough failed to develop traction. Odds are the earnings report, which was met with a high-volume wave of buying, will be the spark that ignites a fresh uptrend.