Starting to Broaden
The market was volatile last week, and we are starting to see signs that the bears are sold out – volume has been unusually light, a few more growth-oriented stocks are acting well, and the major indexes have refused to fall to seriously test their late-January lows. Of course, the buyers aren’t exactly taking control, but the last few weeks of action are enough to warrant a slightly positive shift in our market monitor above. What does that mean for you? If you’ve been sitting on the sidelines the past few weeks, take a couple of small positions in some strong, potentially-leading stocks. If the market improves, you can then put more money to work. This week’s Top Ten has more than a few candidates to choose from; most are from the commodity areas, but three are in the growth camp. Our favorite of the week is Western Digital (WDC), an old company that’s benefitting from a boom in hard drive demand for newer electronic devices. The stock is showing exceptional power and volume; we think it’s worth a nibble around here.
| Stock Name | Price | ||
|---|---|---|---|
| RRC (RRC) | 0.00 | ||
| WDC (WDC) | 0.00 | ||
| WLT (WLT) | 0.00 | ||
| XEC (XEC) | 0.00 | ||
| AUY (AUY) | 0.00 | ||
| CENX (CENX) | 0.00 | ||
| CMP (CMP) | 0.00 | ||
| CPHD (CPHD) | 0.00 | ||
| CREE (CREE) | 0.00 | ||
| DVN (DVN) | 0.00 |
(RRC)
Why the Strength
Range Resources, our Editor’s Choice two weeks ago, remains a leader in the strong energy exploration group. The company is due to report earnings tomorrow evening, while the final numbers aren’t yet known, Range officially reported that fourth-quarter production grew a solid 17%, its 20th consecutive quarter of sequential production growth. In fact, the firm drilled 211 wells in the quarter, and 210 of them are productive. Now that’s efficient! Management expects 15% production growth in 2008, which, combined with higher prices for natural gas, should lead to a solid bump up in earnings. Either way, this week’s earnings report is likely to show earnings growth accelerating for the third straight quarter – a bullish trait that often gets the interest of institutional investors. All told, we like Range’s prospects.
Technical Analysis
RRC remains in a strong uptrend, and we like the fact that its two prior breakout attempts – one in October of last year, the other in early January – were swatted down by a negative market. But three times is often a charm in the marketplace, and RRC’s third breakout attempt two weeks ago has gotten off to a good start. We don’t advise buying shares here, however – earnings are due out Tuesday night (February 26), and RRC is extended to the upside. If you bought some on our prior recommendation, hang on; if you didn’t, look for a pullback of a few points.
RRC Weekly Chart
RRC Daily Chart
(WDC)
Why the Strength
Western Digital is a big player in hard drives, an industry that has historically been extremely tough because of constant price declines. (Our new computer has a 160 GB hard drive; our prior computer, purchased a few years back, had a 40 GB hard drive … for about the same price!) However, new technologies are helping this company to thrive. More than half of Western Digital’s fourth-quarter revenues came from non-desktop PCs – things such as laptop computers, personal storage, mobile devices, digital video recorders (DVRs like TiVo) and the like. Indeed, the firm sold 8.7 million mobile drives in the quarter, up from 2.7 million a year ago; hard drive sales for DVRs grew to 4.1 million, also up from 2.7 a year ago. All told, unit shipments soared 40% year-over-year, sales growth is accelerating and earnings have powered ahead the past two quarters. A P/E of 10 rounds out a compelling investment story.
Technical Analysis
WDC fell sharply during the market’s January correction, but the action since then has been decisive and powerful. The stock has now staged five weeks up in a row, which is often a trait big winners possess (it tells you institutions are consistently adding shares). And better yet, the volume on all of those weeks was above average, including three huge-volume weeks! Clearly, there’s plenty of buying going on here, and should the market confirm a new uptrend, we expect WDC to be a leader. For now, buy just a little, as the stock needs a pullback and the market is not yet trending up.
WDC Weekly Chart
WDC Daily Chart
(WLT)
Why the Strength
Walter Industries’ six Top Ten appearances in 2004 and early 2005 were attributable to the homebuilding side of its business. It was sales of homes that fed the bulldog back then. But the housing industry has imploded and now it’s the company’s Alabama coal-mining operations that are driving earnings. Walter announced February 19 that it would close 36 of its Jim Walter Homes sales centers and cut 25% of its housing-related staff. That’s a good move in this environment, when the company’s $1.7 billion mortgage portfolio is more of a question mark and its 2005 sales of 5.9 million tons of metallurgical coal puts a gleam in investors’ eyes. The company announced Q4 earnings last Tuesday, and results easily beat expectations. Together with news that coal reserves in Mine No. 7 will be in production soon, the good results were welcome news. Walter Industries has a unique mix of businesses, and today coal is floating the company past a rough patch in home building and financing. With a small dividend, it makes an attractive package.
Technical Analysis
WLT’s Top Ten appearance at the end of last month signaled a return to growth for a stock that had a great run back in 2004-05. With good news on earnings, restructuring and projected coal production driving the stock, this drive from a long base with support at 20 has plenty of support. The problem of finding a buy point is a little trickier, as the stock has more than doubled from its August 2007 low. Look for a correction toward 45 as a way to reduce your risk exposure.
WLT Weekly Chart
WLT Daily Chart
(XEC)
Why the Strength
Cimarex Energy is nothing more than a well-run energy explorer that’s reaping the benefits of higher prices. Sure, it’s not changing the world, but it doesn’t have to in this commodity environment in order to register great gains. Cimarex is one of myriad energy firms with operations in the New Mexico, Oklahoma and Texas area, and like many leaders today, its focus is on natural gas. Successful drilling programs boosted fourth-quarter production by 7%, but realized sales prices soared 24% for gas and 58% for its oil output. The result was a huge acceleration in sales and earnings growth, with a bottom line figure ($1.54, up 117%) that beat expectations by more than 30 cents per share. Looking ahead, production is expected to increase only 5% to 10% in 2008, so Cimarex’s growth will be dependent on rising energy prices … a notion that the market is comfortable with.
Technical Analysis
At its low point during January, XEC was literally no higher than it was in October 2004, reflecting more than three years of zero progress. After that tedious rest period, the trend is turning up again; last week’s blowout quarterly report gapped the stock to an all-time price peak, and the stock’s relative performance (RP) line is close behind. While anticipated growth this year is low, we believe analysts are being too conservative; XEC’s powerful action tells you big investors are betting on better times ahead. If you’re game, you can buy a little in the upper 40s.
XEC Weekly Chart
XEC Daily Chart
(AUY)
Why the Strength
Yamana Gold is making its first Top Ten appearance, but the general outline of the company’s business proposition is familiar to all. It’s a Canadian miner that acquires, explores and develops gold properties, primarily in South America. The company has been on a major acquisition binge in the past few years, and some of them are now coming online: 2007 production came in at 800,000 ounces of gold, while 2008 is estimated at 1.3 million ounces, and 2.2 million ounces is targeted for 2012. Yamana’s reported production costs per ounce are among the lowest in the gold industry. Copper production provides a little revenue, but the company’s expansion plans are for gold only. There are no guarantees either that gold will continue to rise in price or that Yamana will deliver on its promises. But if the wisdom of the market jibes with your own sense of where the global economy is headed, a little gold might look good in your portfolio.
Technical Analysis
AUY has been rising for a long time, but not steadily. The stock got a huge boost in Q4 2005 and Q1 2006, soaring from 4 to 12. But progress has always been lumpy, and the stock has risen and fallen with economic expectations. The current upswing has brought AUY up to resistance at 17 three times since mid-January, and it’s hard to forecast what the next catalyst for appreciation might be. You can either take a nibble here to gain some general exposure to gold, or you can watch closely for a breakout above 17 on supportive volume.
AUY Weekly Chart
AUY Daily Chart
(CENX)
Why the Strength
Aluminum is one of the hottest commodities around, as demand from the BRIC countries remains high. This trend is supporting Century Aluminum, a company that sold 80% of its aluminum in the U.S. in 2006, but is globalizing both its production and its customer list. The company has ongoing projects — either resources or production or both — in Iceland, the Republic of the Congo, Jamaica and China. There has been a wave of consolidation in the aluminum business in the past year or so, and Century has been doing its share of buying, which has put some pressure on the current bottom line, but will pay off in the future. The company’s strong position in the production of high-purity metal is another plus. Century Aluminum has six previous Top Ten appearances, dating back to early 2004, which indicates that management has been able to keep the company attractive to investors.
Technical Analysis
CENX has had a number of strong rallies starting back in 2003/04, then again in late 2005 through April 2006, and a ragged one in late 2006 through July 2007. This latest run comes after a two-month correction and has blasted the stock from the high 30s to the mid 60s. A move this sharp will need a correction soon, and a nimble investor ought to be able to grab some CENX on a dip toward its old resistance level at 60.
CENX Weekly Chart
CENX Daily Chart
(CMP)
Why the Strength
Compass Minerals, located in Overland Park, Kansas, is the leading North American producer of sulfate of potash, a mineral used in the production of fertilizer. As most investors know by now, the fertilizer business is booming thanks to the growing global demand for food and the growing demand for ethanol. But what sparked the buying in CMP two weeks ago was a surprisingly good fourth quarter earnings report in which it was revealed that the company’s de-icing business – thanks to a snowy winter – was extremely profitable … especially when compared to the mild winter of 2006-2007. Compass also provides salt for swimming pools, animal feeds, foods and industrial uses, and prices are rising for all its products. As winter gives way to spring, the de-icing business will take a back seat to the company’s other business lines, but there’s no question that the major trends in its industries are now up, and our experience is that trends, once in effect, tend to persist longer than expected.
Technical Analysis
CMP came public in December 2003 and has been in a moderate uptrend since, slightly outperforming the broad market. But the buying surge two weeks ago shoved the stock into the limelight, and what’s impressive is that in the two weeks since, there has been no profit-taking! As we write, the stock looks to have stalled out at 55, and our guess is that the 25-day moving average, down at 46, will now have a chance to close the gap. If you’re interested, we suggest picking up a few shares on a retreat.
CMP Weekly Chart
CMP Daily Chart
(CPHD)
Why the Strength
Hospital acquired infections are a big problem, and Cepheid has a lucrative solution. Its GeneXpert testing systems are able to take a nasal swab and identify many infections with 52 minutes … compared with a whopping 24 hours for a conventional laboratory! Earlier detections mean big cost savings, as fewer patients will fall ill. The lucrative part of the equation comes not just from Cepheid’s system sales, but from the disposable cartridges used each time a test is performed. On that front, business is growing fast – the company sold 106 systems in the third quarter and another 125 in the fourth quarter, all of which should contribute to high-margin recurring revenue this year. The firm has a couple of other business lines, but the hospital testing market is the key. We like the accelerating revenue growth and shrinking losses. It’s a great story.
Technical Analysis
CPHD hasn’t done much the past few weeks, but that might be setting up a good buy point. The stock staged a huge up week to start 2008, and has since traded in a fairly tight range, with most weekly closes in the 30 to 32 area. And the ten-week moving average has caught up to the stock, which should provide some support. Bottom line, we think you could buy a little CPHD here, and then look to either add more on a breakout above 33, or cut your loss on a drop below 29. Note that earnings are due out February 28 after the close, which will probably determine the direction of the stock’s next move.
CPHD Weekly Chart
CPHD Daily Chart
(CREE)
Why the Strength
Cree is a market-leading producer of LEDs (light-emitting diodes), and the world’s growing demand for energy-efficient lighting means the future is bright. The company’s products are used in digital camera flash systems, automotive dashboard displays, traffic signals, cellular phone backlighting, and more. They feature single-wire bonding, low forward voltage, exceptional thinness, low heat generation, high resistance to electrostatic discharge, and long life. The result is bright light from little power, easy fits in tight places, and simple thermal management. And Cree is growing; three weeks ago the company announced it would pay up to $103 million to buy LED Lighting Fixtures, a move that will impact earnings negatively in the short term but add market share. In the long run, this market is guaranteed be much bigger, thanks to the energy bill passed in December that mandates traditional incandescent light bulbs be replaced by energy-efficient ones beginning in 2012. We expect Cree to a be a major player in this growing industry in the years ahead.
Technical Analysis
CREE was a rocket ship back in the technology-giddy market of 1999; it peaked at 101 in early 2002, and the years since have seen the stock attempting to re-establish a steady uptrend. If this is it – the stock has climbed from 20 to 34 in the past three months – the stock will soon break above its September high of 35. We suggest you buy a little on the current pullback, and add to your position if the stock can break out above 35.
CREE Weekly Chart
CREE Daily Chart
(DVN)
Why the Strength
With $11 billion in revenues, Devon Energy is one of the world’s leading independent oil and gas exploration and production companies. Headquartered in Oklahoma City, and drawing the majority of its products from North Texas’ Barnett Shale formation, its current revenue mix is 60% natural gas and 40% oil and other natural gas liquids, including propane, butane and ethane. The main reason for the stock’s strength, naturally, is rising prices for its products, a factor the company has little influence over. In the fourth quarter the average realized price for its natural gas rose 6% while the average price for its oil jumped 46%! Obviously, the trend can’t continue at that rate, but investors are betting that the company’s development projects, both land-based and deepwater, will grow revenues and earnings enough to make buying today worthwhile. One number that impresses us is the company’s after-tax profit margin, which has topped 20% for every quarter during the past four years. That’s a sign of capable management.
Technical Analysis
DVN boasts a solid 20-year uptrend, a mark of the deliberate growth executed by those capable managers. Most recently, the stock has zoomed from 75 to 100 in four weeks (helped by a super earnings report), and the odds are that a digestion period will enable the stock’s 25- and 50-day moving averages, both now at 88, to catch up. But long-term, all signs suggest that higher prices are on the way. Your challenge is to buy it as cheaply as possible.