Still Some Sellers Out There
The market bounced back in the first few days of last week, but Friday’s negative reversal, combined with today’s downmove, makes it clear that there are still sellers lurking out there. Our thoughts remain unchanged—on a near-term basis, expect more choppiness and hesitation; taking some profits on strength and holding some cash makes sense as we head into earnings season. That said, we can’t conclude the intermediate-term trend has turned down, either for the market or for most stocks; thus, while you should dump your losers and laggards, we recommend holding on to most of your best performers.
This week’s list reflects the recent environment—most of the names are either a bit thinly traded or have the ability to trade outside the market’s influence (housing, precious metals, etc.). Our favorite of the week is Fusion-io (FIO), a relatively new technology firm that is growing rapidly and has been acting very well over the past few months.
| Stock Name | Price | ||
|---|---|---|---|
| Accenture (ACN) | 0.00 | ||
| Align Technology (ALGN) | 316.20 | ||
| CLGX (CLGX) | 0.00 | ||
| Cosan Limited (CZZ) | 0.00 | ||
| Fusion-io (FIO) | 0.00 | ||
| NetSuite, Inc. (N) | 0.00 | ||
| ONYX Pharmaceuticals (ONXX) | 0.00 | ||
| Qihoo 360 (QIHU) | 0.00 | ||
| Whirlpool (WHR) | 0.00 | ||
| AUY (AUY) | 0.00 |
Accenture (ACN)
Why the Strength
Accenture is the behemoth consulting and outsourcing company, with $30 billion in annual revenues and operations across the world. The stock isn’t going to double from here, but it’s strong today because of a terrific earnings report (for the quarter ending August 31), higher guidance, a reasonable valuation and a tidy dividend. First, the earnings report: The numbers themselves didn’t wow anyone (see table below) but they did beat expectations, and management hiked guidance for the next 12 months by a decent amount; it appears big firms aren’t hesitating to spend money if it will save them money, which Accenture’s various services do. Underneath the surface of the quarterly results, it was clear business should remain buoyant; bookings in the quarter were north of $9 billion, a huge amount that should lead to a steady increase in business. Indeed, analysts now see earnings rising 11% next year ... hardly exciting, but there’s little chance Accenture won’t hit or exceed that target. As for the other factors mentioned above, the P/E is a reasonable 19 times earnings, the dividend amounts to 2.3% annually and the company also boasts nearly $9 per share of cash. It’s a steady, low-risk investment.
Technical Analysis
ACN doesn’t have the normal kind of chart we see in Top Ten; it trends slowly over time and then consolidates for many months. But the reason the stock showed up on our screens this weekend was because it just leapt out of a 15-month basing area on the aforementioned earnings report; ACN gapped above resistance at 67 and has crawled higher in the days since. We wouldn’t chase the stock, but a dip of a point or two would offer a nice entry point, and a stop around 65 would keep risk low.
ACN Weekly Chart
ACN Daily Chart
Align Technology (ALGN)
Why the Strength
Align Technology was incorporated in 1997 and received approval from the FDA for its Invisalign system of flexible plastic tooth-straightening braces in 1998. There is a sense in the analyst community that the company, which first appeared in Top Ten in 2007 and has made a total of six prior appearances, has come into its own. After two years of single-digit revenue growth in 2008 and 2009, Align Technology has delivered two years of 24% revenue growth and earnings have increased steadily, from 32 cents per share in 2008 to 97 cents per share in 2011. Estimates for 2012 have a consensus estimated of $1.22 per share. The Invisalign technology uses clear, flexible appliances to move teeth toward their desired position, avoid the discomfort and embarrassment of metal braces. Since its 2011 acquisition of Cadent Holding, the company has marketed Cadent digital scanners, but the widening line of Invisalign appliances, especially its Teen line, is what it will live and die by. There is potential for the company to increase global sales, as international revenue was only 24% of 2011 revenue. Invisalign has been able to increase sales of an expensive, elective process during some very hard economic times, and that’s a good sign for the future.
Technical Analysis
ALGN made a stunning recovery last year after suffering a crash from 24 to 14 in August and September. The stock popped from 17 to 24 in October and began the admirably consistent rally that has been on track for 11 months now. Volatility has increased since April, but the central tendency is on rails. ALGN has been trading under resistance at 39 for three weeks, and may stay in a sideways mode until the company issues its Q3 earnings report after the market closes on October 17. A buy anywhere under 38 makes good sense, with a loose stop at 34.
ALGN Weekly Chart
ALGN Daily Chart
(CLGX)
Why the Strength
CoreLogic can be considered the information leader for all things housing. Technically a financial services company, the firm collects and maintains the most comprehensive consumer, property and mortgage database in the U.S., Australia, New Zealand and the U.K., and has the analytics to match, helping firms analyze credit, spot fraud, evaluate renters and buyers, determine collateral risk and much more. Because of that, its customer base is amazing; the top 10 investment firms on Wall Street, top 100 mortgage lenders and every Federal government agency are all customers, along with thousands of title companies, other lenders, property appraisers and the like. Obviously, as the housing market suffered for years, so did CoreLogic, but now the sun is beginning to shine again; sales are up, led by mortgage origination services (up 30%), cash flow is booming (up 92% in the second quarter), and the future is bright. Also helping is a shareholder-friendly management; the company is set to buy back at least 10 million shares this year, bringing the float down by about 8%. Earnings are due October 24 after the market’s close.
Technical Analysis
Like many housing-related names, CLGX bottomed in the second half of last year and has been making solid upward progress ever since. But the advance has accelerated in recent months; the stock hasn’t closed below its 25-day moving average since June! That said, CLGX has started to gyrate a little bit in recent weeks—the main trend looks great but our guess is the stock will pull in a bit, giving you an opportunity to buy on weakness with a stop around 25.
CLGX Weekly Chart
CLGX Daily Chart
Cosan Limited (CZZ)
Why the Strength
Making its debut in today’s Top Ten, Cosan is a Brazilian company that looms large in the production of energy and sugar, both based on enormous plantings of sugar cane. On the energy side, Cosan produces 2.2 billion liters (a hair over 581 million gallons) of ethanol per year. Much of that ethanol goes into Brazilian autos, 90% of which are “flex fuel” capable, and can run on gasoline, ethanol or any mixture of the two. Cosan has been producing ethanol since its founding in 1936, and gets nearly 80% of its annual revenue from ethanol sales. But the global demand for ethanol for fuel has made the company one of the world’s largest ethanol exporters. Cosan is also a major sugar producer (annual production of four million tons), and gets 10% of its revenue from sugar sales. Two-thirds of all sales come from inside Brazil, with Europe contributing 24%, Latin America 4% and North America just 3%. Moreover, Cosan bought ExxonMobil’s Brazilian assets in 2008 and is now the third-largest lubricant company in Brazil. Other activities include seaport operations, sugar storage, rural real estate and sugar retailing. The Brazilian economy is very healthy, and Cosan has booked revenue growth of 26% for each of the last two years. The company also pays a 1.8% annual dividend.
Technical Analysis
CZZ has been in a very nice uptrend since the middle of June. The rally began with wide swings, but volatility lessened in August and September. The stock consolidated at around 15 in late September, then popped up on big volume on September 26. CZZ has now been trading sideways under resistance at 16 for eight sessions and volume has dried up nicely around here. With Q3 earnings not expected until early November, we think you can either take a small position on any weakness or wait for the breakout above 16. A stop at 14 makes sense.
CZZ Weekly Chart
CZZ Daily Chart
Fusion-io (FIO)
Why the Strength
Even though you may never see its name on a product, Fusion-io is a key player today in the ever-advancing race toward faster and more powerful computing systems. The key element provided by Fusion-io in this race is a new memory tier named NAND Flash memory that increases application performance by making data more accessible, doing so by moving it from remote hard disks to local Flash memory chips. These products are incorporated into systems created by others; partners include IBM, Hewlett-Packard, Dell, Cisco and NetApp, to name a few. Because Fusion-io has patents on its technology, the potential for growth is great, as the industry strives for ever-faster and more efficient technologies to address the demands of cloud computing and big data (to use the latest buzzwords) as well as good old e-commerce and social media. For the fiscal year that ends June 30, 2013, management is looking for revenue growth of 45 to 50% and operating margins of about 12%, but those are likely conservative.
Technical Analysis
FIO came public in June of 2011 at 19, and has traded between 16 and 42 since then, displaying great volatility but no real trend. However, the earnings report of August 9 may have changed that, as it sparked a massive wave of buying that boosted the stock from 21 to 27 in one day and that has pushed the stock steadily higher in the two months since. Still looming overhead is the old high of 42, but there’s plenty of potential for profit between here and there. We recommend buying on any normal pullback, perhaps to the 25-day moving average at 30.
FIO Weekly Chart
FIO Daily Chart
NetSuite, Inc. (N)
Why the Strength
NetSuite is sort of a “baby Salesforce.com,” though its smaller size isn’t any knock on it. The company is the leading cloud-based provider of financial and enterprise resource planning software (ERP) in the world, offering its customers tools to better manage their supply chain, inventories, orders, billing and workforce, as well as better manage and analyze their finances. And NetSuite’s products, highlighted by its OneWorld software, have been a hit—revenues have risen at least nine years in a row, even during the teeth of the Great Recession, and the rate of growth has been accelerating in recent quarters (see table below). Earnings are also kiting higher, though the actual earnings figure is vastly understated; because of the way Cloud software firms account for revenue, cash flow is a much better gauge of how a firm is performing. So it’s good to see NetSuite’s cash flow increase 80% in the second quarter to $15.2 million (versus a reported $4.8 million in net income). Historically, much of this success came from a focus on small- and mid-sized businesses, and that does remain a big market, but NetSuite is now going after some bigger fish, which is goosing results. Overall, we like this story a lot over the longer term.
Technical Analysis
N is a bit thinly traded (less than $40 million of dollar volume per day), but other than that, there’s no part of the chart we can find fault with. Shares have been motoring higher since late-May, when N found big-volume support and the market bottomed out. There have been some gyrations since, but shares have been trading well in recent weeks, including a month-long tight area just above 55. If you’re game, you could buy some around here, with a stop near 57, which is just below the 50-day moving average.
N Weekly Chart
N Daily Chart
ONYX Pharmaceuticals (ONXX)
Why the Strength
Onyx is a successful biopharmaceutical company focused on cancer in its many forms. Its lead product is Sorafenib (Nexavar), approved by the FDA as a treatment for both kidney cancer and liver cancer. But the company also has FDA trials in process for treatments for lung cancer, thyroid cancer, stomach cancer, colorectal cancer, multiple myeloma and solid tumors. In fact, it was the FDA’s approval of Kyprolis for the treatment of multiple myeloma that sent the stock soaring on huge volume on June 22. Onyx turned profitable way back in 2008, and was profitable right through 2011 as revenues grew by triple-digit percentages every year, but investments in drugs in development mean the company has returned to its money-losing ways and there’s no telling when it will emerge again. Nevertheless, investors aren’t worried about that; they see the pipeline of drugs, they know management is extremely capable and they’re hitching their wagon to a star by investing in ONXX.
Technical Analysis
ONXX has been public since 1996, and in the decade that we’ve been publishing Cabot Top Ten Trader, it’s earned 10 appearances here; the most recent was on January 3 of this year, when the stock was trading at 43. The June 22 announcement saw the stock jump from 45 to 65 on massive volume, and it’s been working its way higher since. Now, it’s worth noting that ONXX is quite volatile; investors who buy and sell on news items can push the stock in either direction quickly. But right now the trend is clearly up, and if you buy on a normal pullback, the odds of success are good.
ONXX Weekly Chart
ONXX Daily Chart
Qihoo 360 (QIHU)
Why the Strength
When Qihoo 360 made its Top Ten debut last March, the Chinese company was still just a maker of cybersecurity software, helping Chinese mobile phone users avoid viruses, trojan horses and other malware that plague mobile devices in China and elsewhere. The company had a few other irons in the fire, like a hookup with Rovio to manage the Chinese launch of Angry Birds Space. But the news in August that Qihoo had fired Google as its search provider and was launching its own search service that would compete directly with Baidu, the dominant online search provider in China, really caught investors’ attention. In the two months since that announcement, Qihoo has made some inroads, gaining a little over 9% of Chinese search traffic. About 5% of this 9% was taken from Baidu, with the other 4% being shaved off Google’s share. This is an impressive feat, although there is a consensus that Baidu, which had over 80% of Chinese search traffic before, is unlikely to lose much more market share. Investors see Qihoo’s 191% revenue growth in 2011 as evidence of it’s viability. And the company clearly doesn’t lack for ambition, having already gone international with its mobile cybersecurity products. Qihoo 360 is very much on investors’ minds right now.
Technical Analysis
QIHU took a nine-month dip after its IPO in March 2011, falling from its high of 36 to 14 in early January. Three months of rebound brought the stock back to 26 in March, but four months of correction took it back to 15 again. An August rally kicked QIHU back to 25, and that level has provided resistance ever since. QIHU has been trading sideways since late August, and is sitting just below its now-flat 25-day moving average. QIHU is a bit of a speculative issue, and investors will likely wait for news on Q3 results before jumping in on volume. If you like the story of the little challenger to the Baidu giant, you can buy a small position anywhere under 23.
QIHU Weekly Chart
QIHU Daily Chart
Whirlpool (WHR)
Why the Strength
This year has reminded us just how many companies are benefiting from the rebounding housing market. Whirlpool, for instance, will never be classified as a housing stock, but its well-known line of kitchen and laundry appliances should meet with greater demand as more houses are built and sold, and as more consumers feel comfortable putting money into their homes (because home prices are firming). Possibly just as important, Uncle Sam slapped duties on washing machines from Mexico and South Korea (think brands like LG) because of anti-dumping laws, helping to limit competition and raise prices. That said, it’s not all peaches and cream here. The company is being held back by weakness in Europe—earnings actually missed expectations in the second quarter with management offering cautious words. However, investors are firmly focused on the future; with central bank money gushing into Europe and the U.S., the bet is that the economy will improve at least somewhat, and so Whirlpool’s bottom line should accelerate going ahead; analysts see earnings leaping to $8.10 next year, which, along with the reasonable valuation (15 times earnings) and dividend (2.3% annual yield), should keep big investors interested.
Technical Analysis
WHR will never be a truly hot stock, but it’s been in a steady, persistent uptrend since bottoming in late June, rising from 54 to 85 over that time. Of course, before this rise, there was a sharp downturn during the market’s spring correction, so WHR is something of a “risk-on” stock. Like the market, WHR has hit some short-term resistance in the 87 area, and could easily retreat a few points as it consolidates its healthy July-September gains. Look to buy on weakness, with a stop around 78.
WHR Weekly Chart
WHR Daily Chart
(AUY)
Why the Strength
With gold prices hovering just under $1,800 per ounce, silver at $34 an ounce and investor anxiety levels quite high, precious metals stocks are in demand. Yamana Gold is a major Canadian miner with operations in Mexico and South America that expects to produce around 1.2 to 1.3 million equivalent ounces of gold (GEO) this year (up from 1.05 million ounces last year). GEO includes the company’s substantial output of silver, as well. Yamana aims to be a low-cost producer with cash costs of below $250 per GEO, and has an active exploration program that is projected to yield annual production of 1.75 million GEO from 2014 onward. The company also prides itself on the stability of its dividend program, currently listed as paying a forward yield of 1.4% per annum. Yamana bought Extorre Gold Mines in August 2012. Incorporated in 1980, Yamana is a stable, proven miner to investors who want some shiny stuff in their portfolios.
Technical Analysis
AUY was trading below 10 in the middle of 2010, but its path to its recent price around 19 has been bumpy. From September 2011 through July 2012, the stock showed big volatility, with swings as high at 18 and dips to 12.5. The rally that began in August has shown consistent upward movement, and has pushed the stock out to its highest level since early 2008. AUY has met resistance at 19.5, and may need to pause while its 25-day moving average, now at 18.5, catches up. If gold appeals to you, you can buy AUY here, keeping in mind that the company will report Q3 results on October 29.