Rubber Meets the Road
Given how tenuous the market looked heading into August, it’s hard not to be pleased with how the month turned out—the wild volatility of May, June and July subsided, leadership emerged and most stocks moved higher. We latched onto more than a few solid winners, which we’re pleased with. But now, with the market having pushed back toward its springtime highs, the rubber is likely to meet the road—the set-ups are there for the indexes and many leading stocks, it’s a matter of whether big investors back from vacation are willing to push stocks higher. Right now, the evidence remains bullish, so we remain optimistic that higher prices are ahead.
This week’s list has many of those set-ups; several stocks have tightened up during the past two or three weeks after bullish earnings reactions. Our favorite of the week is Eagle Materials (EXP), one of many housing-related stocks that look to be near good entry points.
| Stock Name | Price | ||
|---|---|---|---|
| Agrium (AGU) | 0.00 | ||
| Apple (AAPL) | 248.94 | ||
| Cirrus Logic Inc. (CRUS) | 0.00 | ||
| Cooper Tire (CTB) | 31.50 | ||
| CYT (CYT) | 0.00 | ||
| Eagle Materials Inc. (EXP) | 0.00 | ||
| The Flowserve Corporation (FLS) | 54.70 | ||
| Medivation (MDVN) | 0.00 | ||
| Toll Brothers Inc. (TOL) | 0.00 | ||
| Zillow (Z) | 76.64 |
Agrium (AGU)
Why the Strength
Partially due to the persistent drought plaguing America’s breadbasket, Calgary-based fertilizer and farming specialist Agrium is thriving because of a rising crop prices. A worldwide shift toward utilizing farm products for fiber and fuel in addition to food has created a considerable boom for agribusinesses. But access to world markets is only one of Agrium’s advantages. Unlike many of its competitors, Agrium also operates as a retailer and wholesaler. In fact, 67% of its $15.8 billion in sales in 2011 came from retail outlets, with 33% derived from wholesale. Because of this retail exposure, Agrium is often at the forefront of emerging trends in farming communities. This business model has paid off in spades for Agrium, with the company reporting second-quarter revenue growth of 10.8% year-over year, with earnings jumping 18.3% over the same quarter last year. Operating margins are also strong, coming in at 17.4% in the second quarter of 2012, up from roughly 13% a year ago. Investors should also be aware that Jana Partners has taken a big stake in Agrium, and is pushing for an increase in the company’s $900 million stock buyback program and the sale of the company’s retail unit.
Technical Analysis
Since setting a near-term bottom near 80 in June, AGU shares have enjoyed a considerable rally. In fact, the stock has added more than 25% along solid support from its 10-day and 25-day moving averages. Recent news surrounding Jana Partners’ pressure on upper management resulted in a recent spike in volume for AGU, though the stock has largely spent the past week consolidating into support. That said, this pullback could be an opportunity for AGU investors, bringing the shares back from an overbought condition. If you buy, consider a stop near 93.
AGU Weekly Chart
AGU Daily Chart
Apple (AAPL)
Why the Strength
When Apple made the most recent of its 13 total appearances in Cabot Top Ten Trader on August 6, its market cap was $578 billion. Today, that total worth has risen to $624 billion, making Apple the most valuable company ever, surpassing the value of Microsoft in the pre-bubble days. Despite this, the company’s stock trades at a reasonable P/E ratio of just 16. There’s not much new left to say about Apple, since everyone either has an iPod, iPhone, iMac, MacBook or iPad, or knows someone who does. The company has prospered by designing and producing electronic gadgets that are beautiful to see, seductive to touch and easy to use. The value of the company’s look and feel and intuitive user interface were just confirmed by a big win in a patent infringement suit against Samsung. The prospects for Apple’s next quarter (following a rare earnings miss in Q2 that didn’t seem to discourage investors) are great, as sales of the expected next iteration of the iPhone are widely expected to be hot; rumors of a smaller iPad are also fueling optimism. The company’s relatively low P/E is probably a result of many investors feeling that the stock has had too long a run to allow new owners to make money. But with both an advancing price and a new dividend program, this still looks like a good story to get in on.
Technical Analysis
AAPL dipped from 644 in April to 522 in May, but it topped its April high in late August and has pushed as high as 680. Last week’s dip below 660 was a good buying opportunity, and watching for that kind of quick correction can pay off with an advantageous price. Right now, 660 looks like an important number, as that’s where the stock tightened up during the week of August 20. Try to get in on any weakness.
AAPL Weekly Chart
AAPL Daily Chart
Cirrus Logic Inc. (CRUS)
Why the Strength
Both Cirrus Logic and Apple, its biggest customer, are featured in today’s issue. That’s no accident, as the wave of popularity for Cirrus’s analog and mixed-signal audio chips is a direct result of the popularity of Apple’s iPhones, iMacs and iPads. Cirrus’ July 30 Q2 earnings report was undercut slightly by weaker-than-expected Apple sales, with revenue up just 7% and earnings down by 8%. But given the expected release of new iPhones this month, the outlook for the future is rosy. (Management significantly hiked Q3 and Q4 earnings estimates during its most recent conference call.) Cirrus Logic is a fabless chip designer, which keeps production costs under control and allows more of any revenue growth to drop to the bottom line. The company has a ton of patented design innovations, which strengthen its position against its competitors. But right now, Apple is the alpha customer, and as long as Cirrus Logic remains a major supplier, the future looks rosy.
Technical Analysis
CRUS gapped up in late April on good Q1 earnings and blasted off from 30 to 36 on July 31 on well-received Q2 results. Since that leap, the stock has meandered higher, topping 42 on August 27. The mild correction last week pulled the stock down just one point, which is another show of strength. Ideally, the stock will trade sideways for a little longer as its 25-day moving average (now at 39) catches up. CRUS is buyable anywhere under 41 with a loose stop at around 36.
CRUS Weekly Chart
CRUS Daily Chart
Cooper Tire (CTB)
Why the Strength
Cooper Tire & Rubber is anything but a true growth stock; the company lost money from 2005 through 2008, and after a brief rebound, saw its earnings dip 35% last year. However, the company is now in the midst of a powerful turnaround thanks to a couple of factors. First, the firm is simply doing well by increasing its market share; in the latest quarter, for instance, Cooper’s North American total light vehicle tire shipments rose 15%, while the industry’s shipments as a whole were flat. The second factor is good old cost-cutting through manufacturing efficiencies as business increases, and also from lower raw material costs, as commodity inputs into Cooper’s business have fallen off dramatically. All that allowed profit margins to reach 4.9% in the second quarter, which is up dramatically from just 1.3% the year before! And management recently said they expect continued cost declines in the current quarter, which should help boost margins further. All together, 90 days ago, analysts thought Cooper would earn about $2 per share this year and $2.45 in 2013, but today, those estimates have skyrocketed higher, now at $2.50 and $3, respectively! Combine the turnaround with a dirt cheap valuation (just 10 times trailing earnings) and a solid dividend (2.1% annual yield), and we think this under-the-radar stock can do very well.
Technical Analysis
CTB fell off a cliff during the 2011 market panic, and also took a 23% haircut during this year’s springtime downturn. But it’s been acting extremely well since early June; it popped from 14 to 18, pulled back to 16, and has since rocketed to 20 on the back of a blowout earnings report. Better yet, CTB has tightened up nicely and shown numerous signs of accumulation during the past two weeks, We think you can buy around here or on any minor weakness, with a stop around 18.
CTB Weekly Chart
CTB Daily Chart
(CYT)
Why the Strength
Chemicals concern Cytec Industries has had a hot hand recently. In July, the firm topped analysts’ second-quarter earnings estimates by 35 cents per share, extending the company’s solid win streak in the earnings confessional. In fact, Cytec has averaged year-over-year earnings growth of 92% and 11% revenue growth during the past four quarters. More recently, Cytec has attracted considerable attention as several potential buyers have emerged for the company’s coatings resin business. Specifically, Blackstone Group, Apollo Global Management and Advent International are among the private equity firms that are reportedly interested in snapping up the Cytec unit. Analysts are speculating that the unit could bring in roughly $1.3 billion! Investors should also be aware that Cytec is on deck to release its third-quarter earnings report on October 18. Speculation ahead of the event could spark additional interest from investors.
Technical Analysis
CYT has seen some considerably choppy action this year, but the overall trend has remained to the upside. In February, CYT gapped sharply higher in the wake of better-than-expected quarterly earnings, and the stock’s post-earnings low near 55 set a key support level. In fact, CYT rebounded from this region in June, creating the start of the stock’s current upleg. Following the June rebound, CYT reclaimed support at its 50-day moving average and broke an area of turbulence near 60. Driven by the potential sale of its resin business, Cytec shares are now headed toward the 70 level. That said, recent speculation has CYT a bit overextended, so we recommend buying dips and setting a stop loss near 63.
CYT Weekly Chart
CYT Daily Chart
Eagle Materials Inc. (EXP)
Why the Strength
Homebuilders like Toll Brothers are the most obvious way to invest in the new housing upturn, but Eagle Materials is one of our favorite ancillary plays on the group. The company makes its money by making and distributing cement, concrete, recycled paperboard and gypsum wallboard from 25 facilities, so its directly benefiting from higher demand in recent quarters. Indeed, the firm’s earnings slipped for years (but, importantly, remained solidly in the black) but are just beginning what looks to be an extremely powerful rebound—sales growth is accelerating higher, while earnings are lifting off (last quarter’s 31 cents per share was the highest in many years). Moreover, analysts see the bottom line rocketing to $1.54 per share this fiscal year (ending next March) and $2.14 the year after. It’s not a complicated story, but that’s the point; Eagle Materials is one of a handful of companies that survived the housing bust and are now thriving as a durable leg up has gotten underway. We like it.
Technical Analysis
EXP looks to have begun a new advance. The stock had a huge run into mid-March, reaching 37 on lots of encouraging news. But then shares took a prolonged breather, with EXP trading around 34 in early August! Now, though, buyers have stepped up their efforts, with the stock spiking higher last month on big volume and finishing August trading tightly, a good sign. You could nibble here or on a dip of a point or so, with a stop near 38.
EXP Weekly Chart
EXP Daily Chart
The Flowserve Corporation (FLS)
Why the Strength
If an industry has fluids that it needs to move, Flowserve has the pumps, valves, seals and actuation & instrumentation equipment to make it happen. The company also manufactures, distributes and services steam traps and systems, hydraulic decoking systems, energy recovery devices and monitoring and control equipment. With a roster of 44 heritage brands of equipment that have been acquired in the past, Flowserve is highly diverse, serving the power generation, chemical processing, water resources, oil & gas and general industries, with oil & gas providing the biggest chunk of revenue with 40% of 2011 sales. The company’s business is global, with 32% of sales coming from North America, 23% from Europe and 45% from the rest of the world. Investors’ interest in the company has been piqued a little by the drought in the U.S. Midwest, but the revenue implications of the need to move water around is unclear. More important now is the company’s strong Q2 report on July 31 that beat on both revenue and earnings. That good news was reinforced by a confirmation of the company’s profit outlook for the year. The company will pay a dividend of 36 cents per share to stockholders of record as of September 28.
Technical Analysis
FLS suffered a six-month slump from 136 to 67 from April through September 2011, but took just five months to recover to 122 in February 2012. The stock bumped downhill through March, April and May, but caught an updraft in June and really soared in late July to a new 52-week high. The stock is showing a great technical setup, trading sideways in a very tight range with support at 126 as its 25-day moving average has been catching up. We think a buy at or below 126 should give good results. A stop at 118 also makes sense.
FLS Weekly Chart
FLS Daily Chart
Medivation (MDVN)
Why the Strength
Medivation has made six appearances in Cabot Top Ten Trader since late November 2011, as investors anticipated the approval of its candidate drug MDV3100, a compound known as enalutamide that has shown real power in fighting certain forms of prostate cancer. The big moment arrived on August 31, three months earlier than expected, and MDV3100 (now branded as Xtandi) will begin shipping within a couple of weeks. Xtandi is priced at $7,450 per month, although competition from Johnson & Johnson’s Zytiga may cause some adjustment. Investors, who have been bidding Medivation’s stock up in anticipation of this news, are likely to jump in with both feet, at least for a while. There is no doubt that Medivation will now transform itself from a small company that once eked out a profitable quarter based on payments from its larger development partners to a fully profitable pharma. Xtandi is a pill-based treatment that has shown significant results against metastatic, castration-resistant prostate cancer. It should be a blockbuster.
Technical Analysis
MDVN has already made huge progress, soaring from 8 in mid-2010 (following a huge slump based on bad news from clinical trials) to over 100 in late July. Even though last Friday’s good news came in the middle of the afternoon session, the stock ripped from 98 to 105, a new all-time high. And today’s action continued the buying fever. We would ordinarily counsel waiting for a pullback after this kind of blastoff, but the revenue implications of Xtandi are still working their way through investors’ brains. A small buy right here, with a follow-up buy after you get a little profit cushion, could pay off handsomely.
MDVN Weekly Chart
MDVN Daily Chart
Toll Brothers Inc. (TOL)
Why the Strength
About the only thing to worry about in the housing sector is that there is quickly becoming little to actually worry about! Whether it’s home prices (up for the first time in years), homebuilders’ confidence, housing starts or results from individual firms, all the data suggests the housing market is continuing its steady rebound from the six-year bust. For Toll Brothers, the company’s latest quarterly report confirmed that much better days are ahead—sales and earnings both rose more than 40%, beating estimates. Even more impressive was that Toll saw its new orders and backlog rise 66% and 59%, respectively, a clear sign that the higher-end of the housing market, where Toll specializes, is coming back quickly. Analysts see the bottom line growing north of $1 per share next year, but we think that could prove very conservative if business continues to accelerate as it has in recent quarters.
Technical Analysis
Most homebuilding stocks have been in a two-steps-forward, one-step-back advance for months, but now they’ve tightened up and look ready for another leg up. (We like how most held up well during today’s down market.) TOL looks a bit better than most in the group thanks to its bullish earnings reaction a couple of weeks ago; shares leapt out of a six-week range and have traded tightly since. We think TOL is buyable around here or on a dip of a point or so, with a stop just below 30.
TOL Weekly Chart
TOL Daily Chart
Zillow (Z)
Why the Strength
Recent reports indicate a budding rebound in the housing market. In fact, according to the S&P Case-Shiller Home Prices Index, home prices rose in all 20 tracked markets in June. Naturally, with consumers increasingly turning to the Internet for their shopping experience, online housing specialist Zillow stands to benefit directly from a resurgence in the housing market. Specifically, Zillow provides information about homes, real estate listings and mortgages through its website and mobile applications, even connecting consumers directly with mortgage specialists. As noted, Zillow has attracted quite a bit of attention due to improving economic data concerning the housing market. But the big news recently has been the approaching initial public offering (IPO) of Zillow competitor Trulia. The IPO has shed some light on Zillow’s valuation, and, in this post-Facebook IPO world, has prompted many gun-shy investors to indirectly bet on Trulia via Zillow shares. But Zillow easily stands on its own, snapping up revenue of $50.5 million and net income of $3 million for the first six months of 2012.
Technical Analysis
After a rough 2011, Z trended steadily higher along its 50-day moving average through May of this year. A mid-year pullback in the broader market pressured Z into retreating to long-term support at its 200-day trendline. Shares held firm at this key moving average, and Z rebounded back toward its highs of the year above 40. Another spate of turbulence recently sent Z down for a test of the 36 level, but the shares have once again bounced back. With Z trading back above 40, now may be a perfect time to benefit from an extended rally. Buying a little here with a stop near 38 seems reasonable.