Short-Term vs. Long-Term
The market bolted ahead last week, cheered by news that the Federal Reserve was joining the European Central Bank in embarking on new money-printing programs. The strength was so broad, in fact, that we saw nearly 750 stocks on the NYSE and Nasdaq hit new 52-week highs on Friday, the highest level since early 2011. In the long run, such strength usually portends more strength; uptrends don’t up and die after exhibiting so much momentum. Short-term, however, the market almost always has a digestion phase after such a powerful romp; we don’t expect a huge, punishing retreat, but we do think patience could pay off with many stocks during the next couple of weeks. Bottom line: You should remain bullish, but keep your feet on the ground and look for advantageous entry points.
This week’s list has a heavier commodity flavor than we’ve seen in some time—that’s not a surprise given the central bank action. Our favorite of the week is Silver Wheaton (SLW), a unique silver firm that owns stakes in many mines. With precious metals back in favor, we think buying SLW on weakness will pay off.
| Stock Name | Price | ||
|---|---|---|---|
| ANN (ANN) | 0.00 | ||
| Cameron (CAM) | 0.00 | ||
| The Gap, Inc. (GPS) | 0.00 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Martin Marietta Materials (MLM) | 261.52 | ||
| NXP Semiconductors (NXPI) | 0.00 | ||
| Pioneer Natural Resources (PXD) | 0.00 | ||
| PulteGroup (PHM) | 45.93 | ||
| Rackspace (RAX) | 0.00 | ||
| Silver Wheaton (SLW) | 0.00 |
(ANN)
Why the Strength
When Ann Inc. made its four appearances in Cabot Top Ten Trader in 2010, the company was still called Ann Taylor Stores. The name change doesn’t seem to have altered the company’s ability to connect with its customer base that yielded a 12% jump in revenue in 2012. The company’s strategy is very clear. Ann Taylor stores market professional and special occasion apparel, including shoes and accessories, while Loft stores feature more casual apparel. Both Ann Taylor and Loft also have a chain of outlet stores, and each does business via catalogs and online stores. In 2011–2012 (the company’s fiscal year ends in January), the Loft brand’s sales accounted for 59% of revenue, with Ann Taylor stores kicking in 41%. That also slices up to 67% for the stories, 22% for the outlets and 11% for e-commerce. Ann Inc. went through a rough patch during 2008 and 2009, but the company has been rebounding nicely, gathering strength from the resurgence of the whole retail sector. The company plans to open 65 more stores in the coming year, and carries no debt. The Q2 earnings report on August 16 crushed expectations and enthusiastic investors have continued to buy the Ann Inc. story since then.
Technical Analysis
ANN corrected sharply in May, June and July 2011, then began building a rising base. A breakout attempt in February and March 2012 failed at 30, but the stock found support right at its January resistance. So the June/July rally had a great base to work from and the August earnings surprise gave a huge surge of energy to an existing uptrend. The stock’s performance since its gap up from 28 to 34 on August 16 has been exemplary, topping 39 last week. It will be useful if the stock will pause under 39 for a bit to allow the 25-day moving average (now at 35) to catch up. Buy on a dip of a point or more.
ANN Weekly Chart
ANN Daily Chart
Cameron (CAM)
Why the Strength
Energy stocks had been lagging, but they picked up steam after the European Central Bank announced their bond-buying program, and strengthened further after the Fed’s similar announcement last week. Cameron is one of our old favorites and it looks poised to reassume a leadership role. The company is one of the three main players in pressure control systems (mainly blowout preventers), and in the wake of BP’s disaster two years ago, demand for these 400-ton, $45 million pieces of equipment (!) is surging; incredibly, there are 88 deepwater rigs (where these preventers are needed due to the harsher and higher-pressure environment) expected to ship during the next seven years, compared to just 39 during the past seven years. All of the new rigs will need a preventer, and about half will have two for added safety, and this will also lead to plenty of aftermarket (recurring) revenue for Cameron as well. The company has a lot more going for it than just blowout preventers; it’s one of the leaders in sub-sea trees, used in offshore drilling to control pressure and fluid flow, which should see huge demand as drilling accelerates in places like Brazil and Africa. All told, earnings are projected to increase 21% this year and then soar 34% in 2013. We like it.
Technical Analysis
Like many commodity-related stocks, CAM has been basing for about a year and a half—it topped out in March 2011, bottomed in October 2011, rallied earlier this year before plunging again into June. But since that low, CAM has risen 11 of the past 12 weeks and is challenging its old peak around 62. There should be some resistance in this area, so aim for a small pullback to grab shares, with a stop around 53.
CAM Weekly Chart
CAM Daily Chart
The Gap, Inc. (GPS)
Why the Strength
Gap Inc. was founded in San Francisco in 1969 as a very hip retailer; its name even referred to the “generation gap” that separated the 1960s generation’s sense of style from that of the older generation. The company was a world-beater during the second half of the 1990s, but fell hard after the Tech Bubble burst and never got its mojo back … until now. Revenue growth was narrowly negative for six of the last seven years, so the two latest quarters of 6% sales growth represent a real turnaround, as does the 15% earnings growth in Q1 and 40% growth in the latest quarter. Management has re-focused its offerings at its Gap, Old Navy and Banana Republic stores, which have a global footprint, and introduced specialty stores like GapKids, babyGap, GapMaternity and GapBody, as well as the Piperlime online fashion boutique and the Athleta line of women’s performance gear. The retail sector is a market leader right now, and the 0.9% bump in retail sales in August was welcome, as was the reported jump in back-to-school sales. With Gap stores having successfully reconnected with a new generation, the future looks good for Gap Inc.
Technical Analysis
GPS traded at 15 in mid 2009, and hit that same level again in September 2011. In the intervening 26 months, the stock had made a few runs into the 20s, but never caught a real updraft. But a rally in late January had some real power behind it, and the stock has been in an uptrend ever since, with only a five-week correction in May interrupting its progress. GPS gapped up from 30 to 33 in August, and has now been basing for four weeks with support at 35 and resistance at 36. The 25-day moving average has just caught up with the stock’s price, and that should shake things loose. We think GPS is buyable right here, with a stop around 32.5.
GPS Weekly Chart
GPS Daily Chart
Lululemon Athletica (LULU)
Why the Strength
Lululemon has been one of the big leaders since the bear market low in March 2009, and, while some of the firm’s growth metrics are slowing down a bit, investors are jumping back on this winner after a great quarterly report. Sales and earnings both topped expectations, and, interestingly, management was able to finagle the business so that its tax liability not only decreased by nearly 10%, but should stay down. That led analysts to hike their earnings estimates going forward, with the bottom line likely to reach $1.76 per share this year (up 42% from a year ago, and up from $1.63 before the report) and $2.24 in 2013. Of course, the really big picture here doesn’t have to do with taxes, but instead, with Lululemon’s history of strong same-store sales growth (up 15% last quarter, and expected to remain in the double digits going forward), rapid store growth (189 at the end of the quarter, up 25% from a year ago!) and booming direct-to-consumer (mainly e-commerce) business, up 91% in the last quarter. All told, while competitive pressures are rising, Lululemon’s management is pulling the right levers and keeping growth on track.
Technical Analysis
LULU has followed the market’s path during the past year, which has meant a lot of ups and downs before the recent push higher. Shares chopped lower for the second half of 2011, then had a nice run in the spring before another tedious, multi-month, 36% downturn. LULU began to push higher in August, though, and then staged a monstrous-volume upmove after earnings two weeks ago. It held those gains last week, though we think odds favor some more backing-and-filling, so try to buy on minor weakness, with a loose stop around 70.
LULU Weekly Chart
LULU Daily Chart
Martin Marietta Materials (MLM)
Why the Strength
Martin Marietta Materials is the second largest supplier of construction aggregates in the U.S., supplying stone, gravel and sand from 285 quarries and distribution facilities in 27 states. The company has piqued investor interest recently, with many projecting that Martin will benefit from the latest round of economic stimulus (when stimulus plans have hit the economy in the past, infrastructure firms have outperformed significantly). In fact, analysts have recently issued upgrades and positive research notes regarding Martin due to expectations that the company could capitalize on states’ increases in infrastructure spending to address aging roads, bridges and buildings. Martin is also seen benefiting from additional economic stability arising from a potential deal in the eurozone to address Spain and Italy’s debt issues. Finally, investors should be aware that Martin has been in hot pursuit of competing construction firm Vulcan Materials Co. (VMC). The company initially offered $4.7 billion in stock for Vulcan, but the bid was blocked in May by a Delaware court due to confidentiality issues. However, top Vulcan investors, including one of the company’s founding families, have urged a renewed takeover offer.
Technical Analysis
MLM shares began 2012 by rallying steadily toward an area of longer-term resistance near 90. Ultimately, the stock was battered lower by global economic concerns just as it was testing this resistance. Shares found support near 65 in June, forming a basing pattern. MLM then bounced back heading into the latter half of 2012, with shares taking off in earnest after reclaiming support at their 50-day trendline in July. MLM rode this trendline throughout August, setting up a breakout in the wake of the Fed’s announcement last week. Shares are now a bit overbought, and buying dips is highly recommended. Also consider a stop-loss near 82.
MLM Weekly Chart
MLM Daily Chart
NXP Semiconductors (NXPI)
Why the Strength
Netherlands-based NXP Semiconductors makes a huge variety of microchips, selling over $4 billion worth per year. The whole chip sector has been in an uptrend recently, but NXP is making an especially strong move in chips used for near-field communication, a key technology for payments using mobile phones. Mobile payments have been used overseas for years, and are just starting to gain traction in the U.S. The other reason NXP is making its third appearance in Top Ten is that the company recently held an Investor Day in New York, during which management hinted strongly that it would use its bumper crop of free cash flow to pay down its debt, with an ultimate goal of gaining an investment grade rating for that debt. That kind of rating would lower borrowing costs, which would show up on the bottom line. Everything in the electronics world seems to be about Apple right now, and there was some speculation that the new iPhone 5 might include near-field communication chips from NXP. That didn’t happen, but the possibility that a high-profile company might include NXP chips in the future is another reason for the company’s current enthusiastic reception by investors.
Technical Analysis
NXPI came public at 14 in August 2010, and made a big move after basing for three months, soaring to 35 in April 2011. Then the market took over, squelching that rally in the big 2011 correction and pulling the stock back to a five-month base between 15 and 18. This year has seen a big upmove from January through March, then a couple of months of weakness. The present rally began in June, and the stock is back near its March highs. NXPI can be bought right here, or you can wait for the stock to break out above old resistance at 27.
NXPI Weekly Chart
NXPI Daily Chart
Pioneer Natural Resources (PXD)
Why the Strength
Independent oil and gas exploration firm Pioneer Natural Resources has been a standout in the energy sector this year. Like many domestic energy concerns, Pioneer has ridden the rising tide of U.S. oil production, which has soared to its highest level in 13 years due to unconventional oil and gas extraction methods, such as hydraulic fracking. Texas has been a player in these new exploration and extraction methods, and Pioneer holds considerable sway in the area, maintaining exposure to the highly lucrative oil shale fields in East and West Texas. Despite persistently low natural gas prices, Pioneer has benefited from increased productivity and output from the West Texas Spraberry and Wolfcamp shale formations. Currently, 35% of Pioneer’s production and 50% of its proved reserves are in the Spraberry and Wolfcamp regions. The company appears to be doubling down on the area, selling its South African operations earlier this year, while recently announcing the sale of properties in the Barnett shale region of Texas. The sale of the Barnett region is expected to help Pioneer reduce its debt load. With the prospect of higher natural gas prices heading into the winter months, and liquid natural gas and oil prices holding firm, Pioneer’s future looks great.
Technical Analysis
Since rebounding from support near 80 in June, it’s been all uphill for PXD shares. The stock has reclaimed all of its major moving averages, including breaking above both its 50-day and 200-day moving averages last month. PXD has even pulled its 10-day and 25-day trendlines into a bullish cross, a technical formation that often precedes periods of additional upside. Additionally, after sidling beneath the century mark for most of August, PXD finally eclipsed 100 early this month, resulting in an influx of buying pressure that sent shares soaring above 110. You can buy here, but take small bites and remain cautious, as PXD could be a bit overextended following its recent run. Pullbacks to 110 would be ideal accumulation points, while a stop loss at 102 makes sense.
PXD Weekly Chart
PXD Daily Chart
PulteGroup (PHM)
Why the Strength
It seems like every week or two our screens pick up on a homebuilder, as the housing recovery rolls on. Pulte is one of the major players in the industry, with more than $4 billion in sales during the past year, and operations in more than two dozen states, serving many types of home buyers (first-time, move up, etc.). And it’s been benefiting as much as any firm thanks to the rebound—not only are sales and earnings gradually accelerating, and earnings estimates buoyant (53 cents per share this year and more than 90 cents in 2013, both likely very conservative), but all of the firm’s underlying metrics like new orders (up 32% last quarter), backlog (up 37% in dollars) and even average selling price (up 8%) are all pointed up. Just to review, the big story in this sector is that U.S. housing starts have fallen so far, for so long, that even if activity simply returns to its 50-year average, it would represent a near-doubling of demand. Nobody is arguing for a brand new housing bubble, but the major trend of housing has turned up.
Technical Analysis
PHM might be the strongest stock in the housing group; it rallied powerfully earlier this year (up nine weeks in a row on humungous volume), built a base during the market’s down time, and then broke loose in late July. Now the stock is red hot, surging last week on big volume after the Fed opened up the spigots. There is a bunch of housing data to be released this week, which could be used as an excuse to rein in extended stocks like PHM. Thus, we’ll set our buy range lower and look for a shakeout during the next few days.
PHM Weekly Chart
PHM Daily Chart
Rackspace (RAX)
Why the Strength
The wholesale movement of entire enterprises—websites, email, software, catalogs, e-commerce, memory and backup and intranet—to the cloud has created enormous demand for server space. And Rackspace Hosting, as its name implies, is all about server space. Rackspace has more than 180,000 customers and revenue growth has swelled from just 18% in 2009 to 24% in 2010 and 31% in 2011. The company’s quarterly earnings report on August 8 was a blockbuster, with a 29% jump in revenue and 38% leap in earnings, both of which topped analysts’ expectations and eased worries about how OpenStack, Rackspace’s cloud-server software, would perform. As more of the business world moves to the cloud, Rackspace’s quality hosting will expand in step. The big challenge on the horizon is the strengthening Elastic Cloud Compute (EC2) scalable cloud service being promoted by Amazon, which is a tough competitor in any field. But right now, there’s no arguing with success. Rackspace Hosting has been a consistent performer, with a total of 15 appearances in Cabot Top Ten Trader, dating back to June 2009. The stock’s three appearance in 2009, four in 2010, four in 2011 and four previously in 2012 are a testimonial to management’s ability to consistently push the price of the company’s stock higher. That’s a powerful argument all by itself.
Technical Analysis
RAX has been making strong advances and modest retreats for years. The latest correction came in May and June, pulling the stock from 61 in early May to 41 in early June. After a seven-week basing period, the stock got moving again in early August, and gapped up from 50 to 56 on August 8 on that strong earnings report. After pausing to consolidate for just over a week, the stock took off, and has been making steady gains on calm volume ever since. With the stock over 65 and the 25-day moving average at 60, RAX doesn’t seem especially extended. We think you can buy on any weakness.
RAX Weekly Chart
RAX Daily Chart
Silver Wheaton (SLW)
Why the Strength
Silver Wheaton is a silver miner with no dirt under its fingernails. It gets its exposure to silver via 15 silver purchase agreements and three precious metal agreements from silver and gold miners in Mexico, Sweden, Peru and elsewhere. These purchase agreements are expected to yield about 28 million silver equivalent ounces and 42,000 ounces of gold. Actual miners are willing to offer these purchase agreements at favorable rates in order to get capital to finance mining operations, and, in some cases, to get rid of silver, which is a useless commodity to many gold miners. The company offers investors a piece of the silver market without the volatility of miners’ strikes, mine disasters or weather incidents. Silver was trading at less than $5 an ounce in 2001, and wouldn’t push that number up until 2004. But since then, with a 10-month correction during the Great Recession, silver has been in a strong uptrend, boosted both by increasing industrial demand and its precious metal lure, and is now trading at above $34 per ounce. With no capital outlay for actual mining, Silver Wheaton has put together a string of six quarters with after-tax profit margins over 70%. It also pays a small dividend. The real promise of Silver Wheaton is that it will outperform the price of silver as long as investors see it as a useful hedge against inflation.
Technical Analysis
SLW, which traded at 2.5 in late 2008, hit 48 in March 2011. From there, the stock bumped its way downhill until it tagged 23 in March 2012. Following that bottom, the stock put in a three-month bottom with support at 25, then started a strong rally in July. The rally has been marked by strong volume spikes on upside days, and only one significant pullback—August 23 through August 30. The big spikes in volume on September 13 and 14 were a reaction to the Fed’s announcement of perpetual quantitative easing. Right now SLW is a good play on both momentum and a smart business plan. Buy on weakness, and consider a loose stop around 33.