Third Time’s the Charm?
The market began correcting in late March, and since then it has tried to get going twice (in late April, and in early June), with both rallies failing. Late last week, though, another rally attempt got underway, and while it’s early, it looks more promising—the upmove last Friday was powerful, and there appears to be less uncertainty surrounding Europe. Plus, potential leading stocks have now had two to three months to rebuild bases, so there are more potential buyable patterns out there. That said, the market remains fragile, and earnings season is dead ahead; our guess is that earnings, not Europe, will likely decide the market’s next big move. We’ll keep our Market Monitor in neutral territory for now, but color us encouraged by the market’s action.
This week’s list has a few good ideas; sector-wise, it’s clear that the housing stocks are performing best. Thus, we’ll keep it simple and name Lennar (LEN), the leading homebuilder in the market, as our Editor’s Choice; the company just came out with a great earnings report, propelling shares to new highs. Try to buy on weakness.
| Stock Name | Price | ||
|---|---|---|---|
| 3D Systems (DDD) | 0.00 | ||
| CPHD (CPHD) | 0.00 | ||
| Cirrus Logic Inc. (CRUS) | 0.00 | ||
| Eagle Materials Inc. (EXP) | 0.00 | ||
| Expedia Group (EXPE) | 0.00 | ||
| Lennar (LEN) | 61.85 | ||
| Ocwen Financial (OCN) | 0.00 | ||
| Skechers (SKX) | 0.00 | ||
| Ultimate Software (ULTI) | 0.00 | ||
| Western Refining (WNR) | 0.00 |
3D Systems (DDD)
Why the Strength
A printer that can print a three-dimensional object may seem like science fiction, but it’s very much a reality. Founded in 1986, 3D Systems is part of an industry that can now offer reliable prototyping, production and replacement parts in variety of media. This means that someone using a 3D Systems printer can design an object on a computer and then “print” a prototype that is built up, layer by layer into an accurate physical object. The company has been active in the M&A market, acquiring Kemo Modelmakerij in October 2011, Z Corporation and Vidar Systems in January 2012, Robot Nation and Paramount Industries in April 2012, and FreshFiber BV and Bespoke Innovations in May 2012. In addition to selling 3D printers for both amateur and professional use, the company also offers a production service that accounted for 40% of 2011 revenues. Sales of materials brought in 31% of 2011 revenue, with sales of printing systems accounting for 29%. This is still a very young industry, but 3D Systems is quickly acquiring the advanced capabilities that will make this kind of production an accepted part of both prototyping and manufacturing. Sales of materials provide follow-on revenue, and with 42% revenue growth in 2010 and 44% in 2011—with boosts from acquisitions in both years—the company is clearly onto something. It’s still early in the game for 3D printing, but 3D Systems has booked 11 straight quarterly profits, which is a good sign.
Technical Analysis
DDD had a rocky 2011, starting the year at 16 and ending it near 14 after a big February rally fizzled out. But 2012 has been a very strong year, with the stock soaring from 15 to new all-time highs over 34 last week. DDD has made three dips to its 50-day moving average during its 2012 advance, and if this pattern continues, the stock should offer a chance to get in at a lower price when the surge that began on June 14 plays out. Look to buy when the stock dips back toward its 25-day moving average, which is now at 31.4.
DDD Weekly Chart
DDD Daily Chart
(CPHD)
Why the Strength
Cepheid, which has already added two 2012 appearances in Cabot Top Ten Trader to its six previous appearances, develops and produces medical diagnostic kits that can detect infectious diseases and cancer. The company’s GeneXpert testing systems can identify a wide variety of diseases, from flu to resistant strains of bacteria that require urgent treatment. Cepheid can offer hospitals tests that are as accurate as off-site laboratories at a competitive price. These tests can be performed without advanced training, and results are achieved much faster, which can be crucial with resistant strains of disease organisms. The company has a broad range of additional tests in its pipeline, and each new test increases the likelihood of new adoptions. This is a revolutionary technology that can transform the medical lab business, and Cepheid reaps continuing revenue from the sale of reagents and disposables, sales of which made up 73% of 2011 revenue. The company also offers its tests for multi-drug resistant tuberculosis at reduced rates to poor countries. A new test for particular strains of chlamydia and gonorrhoea are expected to find wide acceptance among testing facilities. Cepheid is strong and growing stronger.
Technical Analysis
CPHD has been in a long-term uptrend, but has had an interesting 2012. January brought a great earnings report that kicked the stock from 32 to 43 in just four days. But CPHD then went into a four-month correction that, while not out of control, pulled the stock back to 35 in early June. At that point, CPHD began a four-week rally that kicked it to new highs above 45. With the stock trading just under 46 and the 25-day moving average back at 40, the stock is more than a little extended. But there is power here, and a small buy on a dip of a couple of points might pay off.
CPHD Weekly Chart
CPHD Daily Chart
Cirrus Logic Inc. (CRUS)
Why the Strength
Cirrus Logic, a fabless chip designer specializing in audio chips for mobile devices, has been riding on Apple’s coattails for a while now. That’s both the good news and the cautionary note, as any company that gets two-thirds of its revenue from any one customer is always vulnerable, either to a downturn in the customer’s business or to a change in sourcing. Right now, however, things could hardly be better for Cirrus Logic, as the company booked a 64% jump in earnings in Q1 on a 21% jump in revenue. Because the company doesn’t do its own manufacturing, after-tax profit margins have topped 20% in six of the last eight quarters. The company spends 20% of its profits on R&D, and has a portfolio of more than 1,000 patents that protect its more than 700 products. Cirrus Logic was founded in 1984 in Silicon Valley, but now does business out of its Austin, Texas headquarters. The company’s second-most important product line is in the power measuring and metering line but Apple (which the company doesn’t list among its customers in deference to Apple’s sensitive policies) is very much in the driver’s seat. Cirrus Logic has $185 million in cash on hand and no debt. Earnings will be out during the third week of July.
Technical Analysis
CRUS built a sloppy base at 16 from April 2011 through the end of the year. But January brought a great blastoff on volume and the stock has been in a volatile uptrend since. A big dip in April quickly gave way to a huge-volume breakout on April 25 and 26, and the stock has been gradually trending up in May and June. CRUS isn’t a stock for the faint of heart, as it’s quite volatile, which is understandable given its reliance on Apple and its rise from 13 in 2011 to 28 in recent trading. The stock looks buyable under 28.5, with a stop at 26.
CRUS Weekly Chart
CRUS Daily Chart
Eagle Materials Inc. (EXP)
Why the Strength
With three stocks in this week’s Top Ten, housing-related stocks are in pole position for the market’s latest attempted advance. Eagle Materials, which had nearly $500 million in revenue last year, does good business in cement, concrete and aggregates, and gypsum and wallboard—all base materials that are directly tied to the health of the housing sector. Thus, as housing starts, and both new and existing home sales have picked up in recent months, so has Eagle’s business; revenue growth, which had been negative for eight of nine quarters, has now been accelerating for three quarters in a row. Impressively, earnings remained positive throughout the bust period, but now they’re set to pick up in a big way; analysts see earnings of nearly $1.50 per share for the fiscal year ending next March, up from just 60 cents last year. What really gets us excited about all the housing firms is not only the size of the potential rebound—we still think most investors underestimate how far business dropped off, and hence, how a return to a “normal” building environment would represent a huge jump from these levels—but also how much firms like Eagle cut to the bone during the bust, increasing their earnings power going forward. We think more upside surprises are ahead.
Technical Analysis
EXP bottomed with most housing stocks in October and enjoyed a solid uptrend until mid-March when it stalled out; the stock didn’t break down until the market collapsed two months later. However, the retreat was controlled (just over 20% deep), especially considering the run it had off its low, and the stock began to inch higher in the weeks that followed. Then, last week, the stock let loose on the upside, pushing to new highs on great volume (78% above average) on Friday. We do think some wiggles could be upcoming, as the market is still choppy and the stock has just moved up a few points. But any weakness should be a buying opportunity.
EXP Weekly Chart
EXP Daily Chart
Expedia Group (EXPE)
Why the Strength
Expedia, which was created in 1996 as a sideline of Microsoft, has come a long way since it was spun off in 1999. The company is now the largest online travel company in the world, with about 9,500 employees worldwide and a wide variety of brands that offer specialized travel services. In addition to its eponymous website, Expedia operates Hotels.com, which runs over 75 local country sites around the world; Egencia, a major corporate travel management company with local-language sites in 47 countries; and eLong, a Chinese online travel site. As the world has dragged itself out of the Great Recession, Expedia’s revenues have picked up from 1% growth in 2009 to 14% growth in 2011. Hotel reservations contributed 70% of 2011 revenue with sales outside the U.S. made up 42%. With people increasingly comfortable with making their own travel arrangements, Expedia is enjoying the benefits of being large, which helps to secure cooperation from hotels and other destinations. The company’s 12% revenue growth in Q1 was supplemented by a 62% gain in earnings and a 19.5% after-tax profit margin that was the highest in years. This is a good story with a high potential for growth, especially outside the U.S. The company pays a small dividend, with a forward annual yield of 0.7%.
Technical Analysis
EXPE spent 2010 and 2011 ambling higher in wide swings featuring gradually higher highs and higher lows. But the whole character of the stock changed in late April when it blasted off from 31 to 42 in a week on massive volume. It took EXPE just three weeks to digest those gains, and the stock has motored higher since, with just a dip below its 25-day moving average in late June. This is a big, institutional-grade stock, and we think it’s buyable on weakness of a point or two.
EXPE Weekly Chart
EXPE Daily Chart
Lennar (LEN)
Why the Strength
We’ve thought Lennar represented the top play in the homebuilding sector for a few months now, as the stock recovered to multi-year highs faster than its peers (it moved to four-year peaks in January) and its business remained as resilient as any in the sector. And now that business is improving, Lennar is leading the way higher. The company is back to being one of the strongest stocks in the market thanks to a terrific quarterly report last week; sales and earnings both beat expectations, and management offered many encouraging words in its conference call. Notably, despite persistent worries of a
new downleg in housing prices because of huge “shadow” inventories, the reality is that consumers are beginning to fear missing out on the incredible affordability (low prices + low interest rates) and inventories in many markets are extremely lean. Of course, the top brass was careful to point out that, while the housing depression was national, the recovery is regionalized, with some markets doing great and others still in the dumps. Still, the trend is clear—it’s up,
and analysts and institutional investors are beginning to come around to that fact. Analysts now see Lennar’s earnings totalling 87 cents per share this year and $1.37 in 2013, and we think that could be very conservative if the economy picks up steam and interest rates remain low. We like it.
Technical Analysis
As mentioned above, LEN was the first homebuilder to hit multi-year highs, and it actually trended higher into early-May, even as the market was sagging. It eventually succumbed to the pressure of the market, but the bigger picture shows a stock that ran from 12 to 30, and could only pull back to about 23.5 before perking up again. Last week LEN burst to new highs following earnings on a big pickup in volume; while it won’t be straight-up from here, it’s clear the path of least resistance is up. Try to buy on any weakness.
LEN Weekly Chart
LEN Daily Chart
Ocwen Financial (OCN)
Why the Strength
Earlier in this issue we’ve written about a homebuilder (Lennar) and a housing materials firm (Eagle Materials), and now we have Ocwen, one of the largest non-bank mortgage services in the country. However, while the budding housing recovery is likely helping business, it’s not the ruling reason Ocwen is strong. Instead, because of the sting of the housing bust and coming regulations, the largest mortgage services (all the big banks) are looking to cut down their exposure to the business. (Servicers often earn 25 to 35 cents per $100 of the unpaid balance of the loans by handling billing and collections and work with troubled loans.) And that has led to an acquisition frenzy—Nationstar Mortgage is one play, but Ocwen is another that’s been busy, buying $10.7 billion of servicing rights from Bank of America, $30 billion of loans from JPMorgan, and $51 billion from Goldman Sachs. Bigger picture, lenders are expected to sell an incredible $4 trillion of servicing rights during the next five years as the big players exit the market, which should provide plenty of opportunity for intelligent buyers like Ocwen. Analysts see earnings per share of $1.54 this year and north of $2 in 2013, compared to just $1.05 in 2011. It’s an intriguing situation.
Technical Analysis
OCN has been a decent performer in recent years, but has never been strong enough to pass our demanding screens. However, the stock looks to have changed character since late-May; after a gradual dip with the market, OCN has been on a tear, moving straight up to new highs during the past month on a big pickup in volume. It’s extended to the upside here, but a reasonable pullback looks buyable, with a stop around 16.5.
OCN Weekly Chart
OCN Daily Chart
Skechers (SKX)
Why the Strength
Stylish footwear firm Skechers appears to have finally turned its situation around. For the past couple of years, Skechers was plagued by elevated inventories and a federal lawsuit concerning deceptive claims surrounding its Shape-Ups exercise shoes. The company recently agreed to settle the lawsuit for $40 million, putting to rest an issue that had sullied company’s image. Meanwhile, during its fiscal 2012 first-quarter earnings report in late April, the company indicated that not only is it finally clearing out its inventory, but it is also selling more full-priced product. The news significantly boosted Skechers’ gross margin, and prompted the company to forecast a return to profitability in the second half of 2012—potentially ending a long stretch of disappointing revenue growth. Finally, Skechers is already receiving praise for its new product line. Specifically, Skechers GOrun performance footwear received the “Most Innovative” award from two major running magazines, as well as the endorsement of the U.S.'s top marathoner.
Technical Analysis
Investors also appear to have concluded that Skechers is on the mend, as the stock has sprinted sharply higher this year. After spending the first quarter trapped below 15, SKX vaulted higher in the wake of the company’s first-quarter earnings report. The shares proceeded to consolidate into their 50-day moving average before a round of accolades in the running press sent investors scrambling for the bargain-priced shares. SKX is once again in a period of consolidation, hovering just above 20. Given the stock’s tendency to rally sharply following a basing period, now may be a buying opportunity.
SKX Weekly Chart
SKX Daily Chart
Ultimate Software (ULTI)
Why the Strength
Ultimate Software isn’t the biggest software company in the business services group, but the firm is one of the fastest growing in the sector. The company has made a name for itself via its UltiPro software suite, which companies use to manage hiring, human resources compliance, benefits enrollment, payroll, appraisals, and time and attendance. Ultimate Software employs the “software-as-a-service” business model, with customers paying on a monthly basis for software as needed, which they access via the Internet, rather than paying a large sum upfront to license a software package. What’s more, customers don’t have to pay for the whole shebang upfront, and can add features for a lower cost as needed. By leveraging this business model against an increasingly cost-conscious consumer base, Ultimate Software has stolen market share from traditional business software firms. As more companies realize the benefits of Ultimate Software’s services, the firm should continue to expand at a healthy clip.
Technical Analysis
ULTI shares have enjoyed an impressive uptrend so far this year, rising along the solid support of their 10-day and 50-day moving averages. The stock has breached this duo only twice this year! ULTI’s uptrend accelerated in late April, after the shares rebounded from support near 70. Bargain hunters took advantage of the opportunity, sending ULTI soaring toward a series of fresh all-time highs, culminating in a peak above 90. The stock is currently pulling out of a period of healthy consolidation, and could be poised to begin its next leg higher.
ULTI Weekly Chart
ULTI Daily Chart
Western Refining (WNR)
Why the Strength
Western Refining has come a long way in a short period of time. As recently as 2010, sagging sales, a mountain of debt and growing losses had many oil industry experts believing that Western was a surefire candidate for bankruptcy. A boom in the North American crude market changed all that, however. High oil prices and the advent of improved production techniques, such as shale fracking, allowed the company to rapidly increase output and improve margins. Western also benefited greatly from West Texas Intermediate (WTI) crude, which sells for about $10 to $20 less per barrel than regular crude. This price discrepancy, and the company’s proximity to WTI production, allowed Western to buy at a discount and sell refined products for a considerable profit. As a result, Western has rattled off four straight quarters of double-digit revenue growth, with earnings surging nearly six-fold during the same period. The company has even slashed its debt load and improved its balance sheet, adding to its attractiveness..
Technical Analysis
WNR shares have shown considerable strength so far this year. While the stock has largely followed the broad market higher, rallying sharply during January and early February, WNR held its ground when Wall Street action grew choppy. The stock entered a tight trading range between 18 and 20, refusing to join in the broader decline. Now, with buyers returning to the market, WNR has broken out of its trading range. Given Western’s improving fundamentals, an uptick in crude oil demand could be a considerable boon for WNR.