October 8, 2007
The bull market continues, with the market’s best stocks doing the heavy lifting. Be sure not to get too complacent during these good times -- with earnings reports upcoming, many leaders will surely fail, while many will soar. Just be prepared for volatility, and try to get stocks that have pulled back to attractive buy points. This week’s Top Ten contains many candidates for your portfolio, including one that’s leading a group that’s quietly made a comeback.
Still Chugging Ahead
The market continues to perform well, with the market’s leading stocks outperforming the broad market indexes. These are good times, so enjoy them! But remember to guard against complacency; hundreds of earnings reports are about to flood Wall Street, and we’re sure that some leaders will fail, while others will soar. Thus, while the overall bull market shows no sign of ending, the next few weeks will be volatile. This week’s Top Ten contains another well-rounded batch of stocks, with a couple of biotech names highlighting the newfound strength in that sector. Another group that’s quietly improved has been the steel stocks, with Schnitzer Steel (SCHN) leading the way. The stock is in a mild pullback following a powerful breakout in recent weeks. We think it’s buyable around here.
Why the Strength
Cellphones may be really popular in the developed world, but in the emerging world, where landline communications are often in need of very expensive upgrading, they have been a revolution. Turkcell is the number-one Turkish wireless communication company, with about 60% market share. The wireless revolution has been a big hit in Turkey, with business users and young people (nearly half of the nation’s 73 million people are 25 or under) taking the lead. This has led to an explosion in Turkcell’s subscriber base and a 210% jump in earnings in the last reported quarter. The situation is not all rosy, as U.K.-based Vodaphone is making a strong bid for a larger share of the market. But Turkcell has one ace up its sleeve in the form of investments in mobile operations in several countries in the former Soviet Union, like Ukraine. Wireless providers have been strong stocks in Russia, China, Mexico and Brazil, and Turkcell fits nicely on that list.
TKC made a couple of big runs back in 2003 and 2004, while the stock was running up from single digits. But starting at 13 in January 2005, the stock became strongly range-bound, trading as high at 17 and as low as 10, but winding up right back at 13 in March 2007, 26 months later! April brought a rally that led to new highs in July before the global July/August slump. But TKC recovered quickly and blasted off again in September. After briefly topping 24 last Friday, the stock has relaxed a little. With its 25-day moving average back just above 20, a dip toward that level would offer an attractive buying opportunity.
TKC Weekly Chart
TKC Daily Chart
Why the Strength
Alnylam, headquartered in Cambridge, Massachusetts, has sold no products and thus has no earnings. But the markets the company is tackling are huge, and should any success be achieved, the current market capitalization of $1.3 billion could seem like peanuts. So what’s the product? The process, actually, is the use of RNAI (ribonucleic acid interference) to turn off specific disease-causing genes. The diseases the company is targeting now include age-related macular degeneration and respiratory viruses, lung infections caused by the respiratory syncytial virus, influenza, hypercholesterolemia, Parkinson’s disease, Huntington’s disease, neuropathic pain, and progressive multifocal leukoencephalopathy. Partners, who are keeping the company running with an increasing trickle of cash, include Medtronic, Novartis, Biogen Idec and Roche. We’re impressed fact that 67 mutual finds are on board, betting that the company’s approach will meet success down the road.
ALNY came public in 2004 at 6 and has been climbing higher, with moderate volatility, for most of the three years since. Most recently, the stock spiked from 15 to 23 in early July, when it signed a big deal with Roche. That led to an eight-week base-building phase in the 23 – 25 area, and that, in turn, fueled the recent run to 35. The 25-day moving average is down at 30, and any dip toward that level would offer a decent buying opportunity.
ALNY Weekly Chart
ALNY Daily Chart
Why the Strength
Auxilium is our second small, high-potential, money-losing medical stock, but this company actually has product on the market. It’s a cream containing a proprietary testosterone formulation that’s used for the treatment of hypogonadism (low testosterone levels) and it has a market share of 19.8%. In the latest quarter, prescriptions for this cream, named Testim, were up 40% from the year before. The company’s next drug, now in phase III trials, is Xiaflex, for the treatment of Dupuytren’s contracture. Xiaflex is also being tested for treating frozen shoulder syndrome and Peyronie’s Disease. And then there’s Auxilium’s transmucosal film delivery system, which might be used to treat overactive bladder and various pain symptoms. The basis of this technology is a small film that adheres to the upper gum. All told, the prospects are bright, though actual earnings are still in the distant future. As in Alnylam, ownership of the stock by many mutual funds (40) is a sign that institutional investors have confidence that the fundamentals will work out well.
AUXL appeared in Cabot Top Ten last November and December, trading at 13 and 17, and then again last month, trading at 21. Last week, it hit an all-time high of 23. So where to buy? Ideally on a pullback toward the 25-day moving average, which is now down at 21.
AUXL Weekly Chart
AUXL Daily Chart
Why the Strength
Ciena Corp. is the latest company to take advantage of the new bandwidth build-out boom taking place in the telecom industry. In brief, network operators are upgrading their networks – or building entirely new ones – to handle the bandwidth-hogging applications in demand today. We’re talking about high definition video, Voice over Internet Protocol and mobile video (more and more common with 3G mobile devices). Customers are also using Ciena’s various switching and transport equipment to help different networks from bought-out firms work together in a cost-effective manner. This company was a total bust during the post-bubble era, but management has turned things around – earnings have been positive for six quarters in a row, and revenue growth has been solid. As business accelerates, we believe Ciena will continue to perform well.
We always like tightness in a chart, and CIEN had that in spades, closing at and around the 38 level for seven of eight weeks during August and September. That is usually a sign of accumulation, and sure enough, encouraging words at an analyst conference last week caused a buying stampede – with all the available shares already in strong hands, the stock rose dramatically. The good news: Last week’s jump broke the stock free of an eighteen-month basing structure, so this looks like the start of an advance, not the end of one. Buy a little on any weakness.
CIEN Weekly Chart
CIEN Daily Chart
Why the Strength
Even if you haven’t heard of First Solar, you’ve heard of solar cells and the exciting potential of photovoltaic electricity, a non-polluting, renewable source of energy. The entire sector has been hot, with a number of leading companies breaking away from the pack to a leadership position. Each manufacturer offers a slightly different value proposition, which makes following the sector an interesting activity. First Solar’s claim to fame is its use of a proprietary thin-film technology that reduces the company’s reliance on silicon as the raw material for its cells. While First Solar’s cells aren’t quite as efficient as the best of the silicon-based variety, the production cost is so much lower that First Solar wins on a cost-per-watt basis. The company has a huge installed base, and is building a third factory in Malaysia to go along with its U.S. and German sites. The new factory (which will begin operations in 2009) will bring First Solar’s manufacturing capacity up from 210 megawatts per year to 570 megawatts, which will have an enormous affect on revenues. First Solar is a clear leader in a rapidly developing industry.
FSLR came public at 20 in November 2006, and climbed to the high 20s before pausing for a little base-building in December and January. Then came the February blast-off
FSLR Weekly Chart
FSLR Daily Chart
Why the Strength
Hansen is making its second straight Top Ten appearance after a long hiatus. Ironically, those long periods of time out of the public’s eye often result in a better, stronger story, and that’s the case here. Hansen suffered through some short-term charges and competition worries in recent months, but all of that is in the past. Today, the company’s distribution deal with Anheuser Busch is fully in place, helping to bring its Monster Energy drinks to a much wider variety of store shelves. And the market for energy drinks continues its boom – this is the first truly new and exciting offering in the beverage industry in many years (decades?), and the Monster brand is gaining share on most of its peers. We like the company’s innovative management (a new coffee energy drink has been well received), we like the big profit margins, and we like the acceleration of earnings growth (45%) projected for next year.
HANS has now risen seven weeks in a row, a sign of persistent buying from deep-pocketed mutual funds, hedge funds, pension funds and the like. Even better, the stock has pushed decisively out to new price peaks, although its RP line is still short of its 2006 high. Still, you shouldn’t let that bother you too much – a pullback is certainly due, but we expect any retreat to be met with plenty of buying, especially if the stock happens to fall to the mid 50s.
HANS Weekly Chart
HANS Daily Chart
Why the Strength
OmniVision designs and markets semiconductor chips used in a wide variety of image-gathering devices. But it doesn’t manufacture them; that low-margin work is outsourced. As a result, OmniVision can devote its efforts to hiring the best engineers and working to stay on top of this rapidly advancing field. Today, for example, its camera chips are found in millions of cell phones, but that’s high-volume, low-price work whose technology has trickled down from more demanding applications. The firm’s chips are also found in security and surveillance systems, digital still cameras, digital camcorders, webcams, interactive video games, PCs, automotive imaging systems, pattern/face recognition systems and electronic games and toys. The company’s chips provide resolutions from 1.3 MegaPixels to 5.17 MegaPixels, and as in all chip industries, costs continue to fall while performance improves. But the cyclicality of this industry is tough, as you can see from both the negative year-to-year comparisons in the table below and the chart’s action.
OmniVision is an old friend of Cabot Top Ten Report, but it’s not a buy-and-hold investment; it cycles up and down. Previous peaks came in the mid-30s in both 2004 and 2006, so simple logic says the stock might hit that level again in 2008. If you bought five weeks ago after the stock’s appearance here, as the stock built a fine base at 20, congratulations; you can just hang on. If you’re not yet in, wait for a pullback toward the 25-day moving average at 22.
OVTI Weekly Chart
OVTI Daily Chart
Why the Strength
Quintana Maritime, which is making its first Top Ten appearance today, is the latest chapter in the amazing 2007 performance of drybulk shippers like DryShips (six Top Ten appearances) and Excel Maritime Carriers (two appearances). The story is based on enormous global demand for drybulk commodities like coal, iron ore and grains, coupled with a shortage of available shipping capacity. Demand from China leads the list, but drybulk ships are typically leased for years at a time, and if other countries want to increase imports of commodities, they have to outbid current users. This has put huge upward pressure on drybulk shipping rates, which, given how long it takes to build these ships (and how many of those under construction are already leased), isn’t expected to moderate for years. Quintana is a Greek shipper with 23 drybulk carriers, and it’s rising along with the sector. The company’s most recent quarterly results show a 78% rise in earnings on a 203% jump in revenues and an after-tax profit margin of 30.6%. The rising drybulk tide is floating all boats, and Quintana is having a great run.
QMAR’s chart is basically a big “V,” with a decline from its July 2005 IPO at 12 to its bottom at 7 in May 2006. At that point, the stock’s fortunes turned, and it took off on a nearly straight-up run that peaked at 20 just before the July/August market slump. The stock came back quickly, hitting a new high on October 1 and soaring all last week. It doesn’t seem tired, either. You can buy a little here, but a pullback is obviously possible. Look for a correction as a chance to get in.
QMAR Weekly Chart
QMAR Daily Chart
Why the Strength
The BlackBerry maker’s amazing growth story continues. Last week, this company’s quarterly report was inline with expectations, but management provided a much better than expected outlook, helping the stock to push higher. Impressively, the firm is showing accelerating growth of sales and earnings, and both metrics more than doubled in the latest quarter, a rare feat for a big company. Yet, while growth is likely to slow somewhat going forward, the prospects for RIMM remain bright – one big-picture analysis predicted that the number of mobile email addresses (like you get with a BlackBerry) will multiply more than ten-fold in the next few years. That’s going to be caused not just by international expansion in the core enterprise market, but also by a big push into the consumer area, where the firm’s Pearl and Curve models are selling very well. Valuation isn’t cheap, but the best growth stocks always look expensive. We still like it.
The clue that RIMM was set for higher prices came in August, during the market’s meltdown. While the stock did succumb to pressure that month, buyers arrived on the scene as soon as the market bottomed on August 16. In fact, the stock bolted higher on humongous volume right away, registering a new high just a few days after the market low! Since then, the bulls have been in control, with last week’s big earnings-induced jump serving as an exclamation point. If you own some, sit tight. If you’re looking to get in, we advise buying after minor weakness, or a few days of tightness.
RIMM Weekly Chart
RIMM Daily Chart
Why the Strength
Portland, Oregon-based Schnitzer Steel is a global leader in the metal-recycling industry. At its facilities on both coasts, the company takes scrap metal (like old cars) and recycles it into rebar, wire, fence posts and other specialty products. The stock has appeared in Top Ten six times before this issue, three times in 2003 and in April, June and September of this year. Together with the company’s record of growing revenues and earnings at a good clip (+40% and 32%, respectively, for the latest quarter), we think that a high number of Top Ten appearances is a strong testimonial to management’s ability to keep the company’s stock soaring. The underlying story is the incredible growth of industry and infrastructure in India and China, which keeps demand for Schnitzer’s steel (and its price) high. A tiny dividend (0.1%, most recently) completes the picture.
SCHN appeared in Top Ten three times in late 2003, then lay dormant for three years along with most other steel stocks. But it jumped out of its old trading range on April 9, on news of strong profits and optimistic guidance. After that April kickoff, the stock consolidated from May through August. It blasted off again in late August and ripped to new price and RP highs in late September. The 25-day moving average is down at 66, and any pullback toward that level would present a decent buying opportunity.