Trend Remains Down
Hurricane Sandy has the market closed today and possibly tomorrow, but we don’t think that’s going to affect the market’s path all that much. It’s not 2008 out there, but there’s no question the intermediate-term trend is still down, and that earnings season has been generally rough thus far. We flipped our Market Monitor into neutral territory a couple of weeks ago and it remains there today; it’s better to focus on capital preservation these days than capital appreciation, though some new buying here or there is fine—just be sure to keep your positions smaller than normal, and to keep your stops in place.
The good news is that we have seen a decent amount of big-volume support appear in many stocks during earnings, including more than a few commodity and turnaround situations. Our favorite of the week is Packaging Corp. (PKG), a firm with a supposedly boring story ... but with exciting numbers and a beautiful chart.
| Stock Name | Price | ||
|---|---|---|---|
| 3D Systems (DDD) | 0.00 | ||
| ARM Holdings (ARMH) | 0.00 | ||
| Cabot Oil & Gas (COG) | 0.00 | ||
| HDFC Bank Limited (HDB) | 0.00 | ||
| Jazz Pharmaceuticals (JAZZ) | 0.00 | ||
| Melco Crown (MPEL) | 0.00 | ||
| Michael Kors Holdings Limited (KORS) | 73.22 | ||
| Packaging Corp (PKG) | 0.00 | ||
| Royal Caribbean Cruises (RCL) | 0.00 | ||
| United Rentals, Inc. (URI) | 0.00 |
3D Systems (DDD)
Why the Strength
3D Systems is a leader in the red-hot 3D printing market. Capable of creating disruption across several markets, 3D printing can be used to make everything from plastic models to end products such as dental fittings and aviation components. While 3D printing has been around for several decades, recent cost reductions and technology advancements have made the technology much more practical. And, as the company’s recent third-quarter earnings report showed, 3D Systems is knocking the cover off the ball. Not only did revenue and net income come in better than expected, (rising 57% and 63%, respectively) but operating margins improved, and printer sales soared more than 120%. 3D Systems also boosted its full-year revenue to between $345 million and $365 million, on earnings of between $1.20 and $1.30 per share. Meanwhile, consolidation has been brisk in the 3D printing realm, with 3D Systems snapping up more than 20 small peers since late 2009, most recently shelling out $35 million for Rapidform, a 3D reverse engineering and inspection software provider. All told, analysts see the bottom line rising more than 30% next year, and this looks like a long-term growth industry.
Technical Analysis
DDD topped out in April 2011 and fell into the end of last year. But 2012 has been nearly all up! The stock took off in January after breaking above its 50-day moving average. DDD rode support at this trendline to an all-time high near 45 before succumbing to broad market weakness. The stock bottomed just above 30 before rebounding sharply to contest the 40 area. Last week’s quarterly report provided a considerable boost for DDD, vaulting the stock past this area of resistance. The stock still has resistance around 45 to chew through, but nibbling here or on minor weakness, with a loose stop around 37, makes sense.
DDD Weekly Chart
DDD Daily Chart
ARM Holdings (ARMH)
Why the Strength
Chip developer ARM Holdings has taken the mobile devices market by storm. The company specializes in developing and licensing low-power chips based on reduced instruction set computing (RISC). The company’s low-power chipset designs have scored licensing deals with more than 250 chip makers, including Samsung Electronics, STMicroelectronics, and Texas Instruments for products including digital TVs, handheld computers, mobile phones and set-top boxes. More recently, ARM is sharing the limelight with Microsoft following the release of the latter’s Surface tablet PC, which features ARM chipset designs. Recent reports indicate that the Surface has sold out of all pre-orders in the U.S. and the U.K. In fact, the exploding popularity of portable computing (tablets, smartphones, etc.) has been a considerable boon for ARM Holdings, as evidenced by the company’s third-quarter earnings report. The company extended its string of double-digit revenue and earnings growth during the quarter, driven by strong growth in licensing and royalty revenue from a rapidly expanding mobile marketplace. Fourth-quarter revenue and earnings guidance was also in line with analyst expectations—a strong feat considering many competitors foresee flat-to-lower numbers moving forward. With mobile computing expected to grow significantly, ARM should remain a solid growth stock within the semiconductor sector.
Technical Analysis
When mobile computing entered the mainstream in 2010, ARMH shares appeared unstoppable. The stock nearly tripled in value that year, finishing just south of 30. However, 2011 saw ARMH unable to make any headway, as the shares sidled between 30 and support at 25. The bottom fell out in early 2012, with ARMH bottoming out around 22. However, several key product launches in the mobile market provided a catalyst, and ARMH got going in July and gapped higher last week. The stock is currently a bit extended following last week’s earnings report. We recommend buying on weakness. A stop loss on a trade below 28 is prudent.
ARMH Weekly Chart
ARMH Daily Chart
Cabot Oil & Gas (COG)
Why the Strength
Natural gas prices were trading just south of $5 per thousand cubic feet in the summer of 2011, fell below $2 in April of this year but have now rebounded back to $3.70. If this commodity continues its uptrend that began in April, Cabot Oil & Gas—which we think is the top play in the natural gas drilling industry—should do extremely well. The company is a production powerhouse thanks to its incredibly lucrative wells in the Marcellus Shale in Pennsylvania (which is almost exclusively natural gas) and the Eagle Ford shale in Texas (which provides oil-based liquids). Total production in the third quarter was up a solid 33% from a year ago, and that was in spite of permitting delays for a few gathering lines; all of that helped propel earnings well above expectations. For 2013, Cabot’s management (which has a history of being reasonable, if not conservative, when it comes to guidance) expects output to increase 35% to 50%, including a 45% to 55% gain in liquids. The bottom line is that if the price of natural gas (and, to a lesser extent, oil) rises from here, Cabot’s earnings estimates for next year (currently $1 per share, double this year’s tally) could prove very conservative, as Cabot’s history of meeting its production growth targets is outstanding. As commodity stocks go, we like this story. (FYI, we have no relation to this firm, despite the name.)
Technical Analysis
COG topped out nearly a full year ago and has been etching a base since. The stock found support three times around 30 (in January, April and early June) before getting going—COG rallied to 40 by the end of June, to 47 in mid-September, and then moved straight sideways for more than five weeks. Late last week, the stock surged on its positive quarterly report, nosing to new highs. We think minor weakness would be a time to buy a little, with the idea of adding more if COG heads higher from there.
COG Weekly Chart
COG Daily Chart
HDFC Bank Limited (HDB)
Why the Strength
HDFC Bank is a regional financial concern based in Mumbai, India. Like most big banks, HDFC provides a range of services, including banking and treasury operations, with overseas operations in Bahrain and Hong Kong. While many investors have been keen on U.S. banking concerns in the wake of additional quantitative easing, foreign banks like HDFC have largely been shunned due to exposure to the European economic crisis. However, according to reports from the International Monetary Fund, India’s protectionist approach to economics has largely sheltered the country’s banking system from European fallout. What’s more, many analysts believe that the country’s current round of economic reforms should provide a solid floor for India’s economy. HDFC has been quick to capitalize on India’s reform efforts, announcing earlier this month that second-quarter net revenue surged 22%, bolstered by notable hikes in deposits and loans as well as improving net interest income and fee-based revenues. Overall, the company’s exposure to India’s rapidly expanding retail credit market bodes well. Investors should be aware that competition is fierce in India’s emerging retail-credit market, but the strength of HDFC’s other banking operations should give it a leg up on the competition.
Technical Analysis
Like many financial stocks, HDB has had a rough time in 2012. Shares kicked the year off with a quick rally to the 35 region, and spent the next several months consolidating into support. However, a mid-year reversal in global stock markets sent HDB shares down for a retest of the 27-28 area. Shares have since staged a rebound, stair-stepping higher along support at their 50-day moving average—a trendline HDB reclaimed in early July. The stock is currently pulling back to this moving average, providing an opportunity to buy into the rally ahead of the next potential upleg. A stop loss at 35.50 might be prudent to help limit losses.
HDB Weekly Chart
HDB Daily Chart
Jazz Pharmaceuticals (JAZZ)
Why the Strength
Two weeks ago, Jazz completed the sale of its Women’s Health Business to Meda for $95 million in cash, and this is good in that allows the company to focus on its true moneymaking products. Chief among these is Xyrem, which accounted for 88% of revenues last year. Xyrem is used to treat cataplexy associated with narcolepsy. It costs roughly $3,000 per month. And because it’s an orphan drug, it enjoys extended patent protection. This status was reaffirmed in mid-September; existing patents expire from 2019 to 2024. Also contributing to the firm’s enviable profitability (note the after-tax profit margins of 51%) are Luvox, an anti-depressant designed to treat obsessive-compulsive behavior, and Erwinaze, designed to treat acute lymphoblastic leukemia. Erwinaze is being adopted rapidly; it might account for 20% of revenues next year. Analysts are looking for 19% earnings growth for the firm in 2013 but we have little doubt that’s conservative. Closer at hand, however, is the third-quarter earnings report. There has been no announcement of a release date, but somewhere between November 1 and 7 is likely.
Technical Analysis
This marks JAZZ’s 12th appearance in Cabot Top Ten Trader since December of 2010. Back then it was trading at 19; now it’s at 54. And signs tell us the uptrend is not over! Specifically, JAZZ recorded a massive multi-day spike higher on September 17. That uptrend peaked at 60 in the first week of October. And the weeks since then have seen the stock retreat normally to 54, where we now see a base-building effort unfolding as the stock’s 50-day moving average cruises toward 53. You can buy here if you’re not yet on board, with a protective stop between 50 and 51.
JAZZ Weekly Chart
JAZZ Daily Chart
Melco Crown (MPEL)
Why the Strength
In the world of gambling, there are few destinations hotter than China’s Macau. The area has quickly become a gambling Mecca, not only for millions of Chinese, but also thousands of gambling tourists. Within the area, Melco Crown Entertainment is a key player, operating the Altira Macau resort, which sports some 255 table games, 95 gaming machines and a luxury hotel with about 215 deluxe rooms, as well as a number of restaurants, bars and other visitor amenities. The company also operates eight other Macau casinos under the Mocha Clubs brand. Enjoying the relative strength of the Chinese economy, Melco has averaged year-over-year revenue growth of 25% during the past four quarters. What’s more, the company has seen impressive earnings-per-share growth in the high triple-digits during the same period, though that growth should slow some in 2013. Recently, investors have flocked to Melco and other Chinese stocks trading on U.S. exchanges due to a rising yuan. In fact, the Chinese currency traded near a five-month high last week due to prospects for rising industrial output and an increased likelihood that China would meet its economic growth target this year. Backed by a strong yuan, a growing Chinese economy and what brokerage CLSA Asia-Pacific Markets is calling a “golden age” for Macau (thanks to the next phase of development, this time on the Cotai strip), Melco provides investors with a solid opportunity in the gambling sector. Earnings are likely out in a couple of weeks.
Technical Analysis
While MPEL is up more than 45% on the year, shares are still down 10% from their late-April high near 16. That said, shares have rebounded smartly since July and should test resistance in the weeks ahead. Volume has been light throughout the rally, but activity should begin to pick up with the recent push above 14 and the improving Chinese economic outlook. If you’re game, try to buy a small amount on a dip toward 13.5, with a stop around 12.5.
MPEL Weekly Chart
MPEL Daily Chart
Michael Kors Holdings Limited (KORS)
Why the Strength
Michael Kors remains one of the market’s strongest stocks for one main reason—its growth numbers are as big as we can ever remember seeing from a retailer. Remember, this is a good-sized company (about $1.5 billion in annual revenues), yet sales in the June quarter grew at their fastest rate in years, thanks to an unheard-of 37% increase in same-store sales (those open at least a year). And that growth continued last quarter; the firm has already preannounced sales growth of around 70%, driven by a whopping 45% hike in same-store sales! Clearly the company’s high-end products are meeting with huge demand, and with just 253 retail stores at the end of June and a rapid growth plan (it opened 76 stores during the past year alone!), there’s no reason the firm’s retail business can’t double or triple in the years ahead. And wholesale sales, which made up more than 40% of Kors’ total business, are also growing quickly, up 66% last quarter. Numbers aside, the fact is that Kors appears to be the next big thing in high-end retail—as long as management continues to execute, open stores at a good clip and offer the trendiest, highest-quality products, many years of great growth are ahead, which should attract more and more institutional investors. Earnings will be out November 13.
Technical Analysis
KORS is one of the few growth stocks that is not only resisting the market’s decline, but is also trading in a tight, controlled manner ... usually a sign that big investors are “in control” of the stock. And this action is coming on the heels of a large 23-million-share offering (the prior float was just 100 million or so), another sign that big investors are boosting their stake. Now, a shakeout below obvious support in the 53.5 area wouldn’t be a surprise, but KORS’ combination of a healthy chart, great numbers and a big growth story mean you could buy a little around here or on weakness, with a stop around 50.
KORS Weekly Chart
KORS Daily Chart
Packaging Corp (PKG)
Why the Strength
Containerboard and corrugated packaging is not the stuff of growth stocks, and so Packaging Corp. is not a stock to buy and hold for a number of years. But the company is just beginning what looks to be a powerful turnaround that, combined with a reasonable valuation (19 times trailing earnings) and a healthy dividend (2.8% annual yield), should help the stock head higher. In the September quarter, the firm’s revenues inched up 8%, but earnings gained 28%, and there’s likely more where that came from. The reason: Years of sluggish demand caused industry capacity to be slashed, but now, with demand picking up, capacity is tight and prices are rising. Indeed, Packaging Corp. hiked prices for its containerboard by $50 per ton last quarter, which customers took without a fuss, and the firm expects a similar price hike for its corrugated products in this quarter; management expects the full benefit of these moves to be felt in the first quarter of 2013. Even so, the top brass expects December quarter earnings to rise more than 50% (which would be another quarter of acceleration), and analysts think next year could see the bottom line leap to $2.78 per share, up 34% from 2012. One last bullish catalyst could come from the dividend, which was actually 20% higher in the past despite lower earnings; it’s very likely a dividend boost or share repurchase plan could be enacted once the tax treatment of these moves is figured out in Washington.
Technical Analysis
PKG has an outstanding long-term chart, with the stock breaking free of a multi-year range in July and continuing to act well during the market’s correction. In fact, the stock’s price-volume action has been exemplary, with a big-volume rise in mid-September leading to a tight, four-week sideways move as the 50-day line (now at 34) catches up. We think the stock is a good buy here with a tight stop around 34; or, if you want to wait, you could look for a decisive push above 37 before entering.
PKG Weekly Chart
PKG Daily Chart
Royal Caribbean Cruises (RCL)
Why the Strength
Royal Caribbean is the world’s second-largest cruise ship operator (after Carnival). It fully owns Royal Caribbean, Celebrity, Pullmantur, Azamasa and CDF Croisieres de France and owns half of TUI Cruises. All told, the company has 40 ships in service. And its stock is strong today because business is improving faster than expected. The defining event of the past year in the industry was the sinking of the Costa Concordia (owned by Carnival) in January and the resulting loss of 32 lives. Fears were that bookings across the industry would suffer, and they have. But the shrinkage was less than expected. As a result, Royal Caribbean’s third quarter results, released on Thursday, showed both revenues and earnings exceeding analysts’ estimates. Furthermore, management revealed that it is engaged in negotiations regarding the possible construction of a third Oasis-class vessel. According to management, the two vessels currently in service—the largest passenger vessels in the world—not only earn high reviews from customers, they also cost less to operate on a per-customer basis! Earnings look set to rebound smartly next year (up 37%), and the stock’s action of recent months confirms that.
Technical Analysis
Royal Caribbean is big, so its stock is not going to be delivering any moon shots. Still, RCL did break out above its early 2012 highs in the last month, and Thursday’s results sparked a high-volume wave of buying that could definitely run further. The only resistance ahead is at 50, where the stock topped at the start of 2011. You can buy here, and use a stop at 31.
RCL Weekly Chart
RCL Daily Chart
United Rentals, Inc. (URI)
Why the Strength
For a company that is effectively a “risk-on” stock, United Rentals has an intriguing long-term business plan, continues to report buoyant earnings and has huge earnings estimates. The company is a leading renter of construction and industrial equipment; over the long-term, renting is attractive to customers who want to avoid the huge upfront cost of purchasing this type of stuff, as well as the ongoing maintenance and upkeep. Another plus is its ongoing integration with RSC, which was bought last year; the company is on track to realize a whopping $100 million in synergies, with $230 to $250 million in annual savings on the way. But investors are mostly focusing on the environment, and while many big industrial firms are reporting sluggish results (think Caterpillar), United Rentals said that its rental rates and volumes were both up about 7% year-on-year in the third quarter. Going forward, management made a point of saying they’re watching for signs of deterioration, but “we’re not seeing any cost or concern at this time, and we don’t see any reason to alter our plan.” Indeed, analysts now see 2012 bringing earnings of $3.40 per share, with next year booming to $4.80! While we know these types of estimates can change in a hurry, if United Rentals comes close to matching them, the stock will almost surely work its way higher.
Technical Analysis
URI isn’t super resilient, but it looks to be emerging from a multi-month correction. The stock suffered a big 44% downdraft during the spring correction, bottomed in July and rebounded weakly into September before pulling back again. However, URI then gapped above its 200-day line on its third-quarter report, and, importantly, has held very firm during the past few days despite the weak market. (Note the very tight action last week despite the market’s wobbles.) It’s not our typically-strong chart, but we think the stock is a good buy around here, with a stop around 35.