Green Light Still Shining
The market remains in full bull mode, despite the “shocking” (to some) news that the U.S. economy contracted by 2.9% in the first quarter. We’re not easily shocked, and we know that the message of the market is what matters, so we continue to recommend that you invest heavily in leading stocks, particularly those that present attractive entry points. Happily, there are plenty to choose from these days, and this week’s issue offers a fine variety, from energy to medical to retail to restaurants to automobiles.
Our favorite stock in today’s crop is Agnico Eagle Mines (AEM), a gold miner that has solid growth prospects and a great technical set-up. While the big jump in gold stocks two weeks ago got a lot of attention, Agnico’s capable management has made a lot of moves that augur well for the long term.
| Stock Name | Price | ||
|---|---|---|---|
| Tesla, Inc. (TSLA) | 818.87 | ||
| Sanchez Energy (SN) | 0.00 | ||
| Schlumberger (SLB) | 0.00 | ||
| SolarCity (SCTY) | 0.00 | ||
| KapStone Paper (KS) | 0.00 | ||
| JD.com (JD) | 39.58 | ||
| InterMune (ITMN) | 0.00 | ||
| Buffalo Wild Wings (BWLD) | 0.00 | ||
| Allegheny Technologies (ATI) | 27.78 | ||
| Agnico Eagle Mines (AEM) | 79.05 |
Tesla, Inc. (TSLA)
Why the Strength
Electric car manufacturer Telsa Motors has become quite a celebrity stock over the past year or so. Still, Tesla’s growth potential remains considerable. In fact, the company’s leadership role in the electric car market has given rise to an interesting development; Tesla has opened up its patents to competitors in an effort to accelerate the rate of electric car adoption. In effect, Tesla is offering its technology as the industry standard. Further entrenching Telsa’s leadership role, the company has announced that it’s talking with Nissan, and BMW—the other largest electric vehicle manufacturers—regarding a new level of collaboration on vehicle charging networks. Such a partnership could change the electric-vehicle landscape by removing one of the largest obstacles to consumer adoption—fueling or charging. Meanwhile, Tesla recently announced that deliveries for the much anticipated Model X (Tesla’s SUV) will begin in early 2015. Analysts are forecasting that the Model X could be Tesla’s biggest selling vehicle, especially with legal sales restrictions now out of the way in New York and New Jersey. Overall, we remain quite bullish on Tesla’s growth potential.
Technical Analysis
TSLA kicked off 2014 with a breakneck rally of roughly 100 points to the 265 area. Unable to hold this lofty perch, the stock began an orderly retreat to the 200 region. TSLA spend the spring consolidating into this region before breaking down and testing support at its 200-day moving average in mid-May. Here, the shares reversed course, grinding their way back above the key 200 level. TSLA took off once again in June after the company’s patent announcement. Shares are now consolidating those gains in the 240 region, as their 10-day moving average plays catch-up. As TSLA extends its current rally, it could put pressure on a wealth of short sellers. Some 24.6 million TSLA shares are sold short, accounting for 27% of the stock’s total float (shares available for public trading). A break back above 250 could be just the spark to set off a short-squeeze.
TSLA Weekly Chart
TSLA Daily Chart
Sanchez Energy (SN)
Why the Strength
Sanchez Energy caught our eye more than a year ago; the company was aggressively drilling its core acreage in the Eagle Ford shale in Texas, causing revenues to grow from literally zero in 2008 to $314 million in 2013. Yet the stock never really got going until a huge acquisition in mid-May—for a whopping $634 million, Sanchez bought 106,000 contiguous acres in the Eagle Ford from Royal Dutch Shell. And this is isn’t simply a land grab, as the area has 176 producing wells, with another 49 in various stages of development. Moreover, there are at least another 200 drilling locations (with rates of return likely to be in the 45% to 55% range), which will offer a few years of drilling inventory, and despite the big purchase price, management says the deal will meaningfully boost both earnings and cash flow right away. All told, production should soar this year because of the deal, but management’s early expectation is that output will expand another 22% in 2015, which we believe could prove conservative if energy prices stay high. It’s a good story.
Technical Analysis
A couple of months after its IPO, SN ran up to 25 in March 2012. And in May 2014, it was at the same price! Despite rapid growth, the firm wasn’t getting much respect on the Street, but the acquisition has changed perception in a very big way—the stock rocketed higher on its heaviest volume ever (breaking out of a double bottom base) and then continued higher with three more huge volume weeks. It finally dipped with most energy stocks last week, and we think you can start a position here or on minor weakness if you don’t own any.
SN Weekly Chart
SN Daily Chart
Schlumberger (SLB)
Why the Strength
Schlumberger needs no introduction—it’s the largest oil services firm in the world with a whopping $46 billion in revenue (that’s $126 million every day of the year if you’re counting) and operations in every industry segment and in every energy-rich country around the world. Obviously, the bullish backdrop for the energy industry as a whole—triple-digit oil prices, recently-buoyant natural gas prices and the prospects for a ton of LNG activity in the years ahead—have pushed earnings higher in recent years. But the reason for the stock’s latest strength was management’s presentation last week—thanks to margin expansion, share buybacks and good old fashioned growth, the top brass believes that Schlumberger’s earnings can increase 17% to 20% annually for the next few years, resulting in $9 to $10 in earnings per share in 2017. Combine that with some optimistic words about the industry in general, as well as a reasonable current valuation (23 times trailing earnings, 1.4% dividend yield), and investors piled into the stock. Sure, it’s not the most exciting story around, and 17%-plus growth isn’t the stuff dreams are made of. But we see institutional investors accumulating shares over time, now that management has given them such a large earnings target.
Technical Analysis
SLB just broke out of a nice base in March, which, to us, looked like the final resting period of a larger two-and-a-half year launching pad dating back to mid-2011. Shares were steadily advancing from the recent breakout, when last week’s long-term earnings outlook caused shares to surge higher on the heaviest weekly volume since last April. That said, SLB isn’t a gap-and-go type of stock, so try to buy on dips.
SLB Weekly Chart
SLB Daily Chart
SolarCity (SCTY)
Why the Strength
As solar power moves closer to parity with fossil fuels in cost per watt, SolarCity continues to make moves to capitalize on that fact. The company has been known primarily for its innovative installation financing contracts that bring the cost of installation for solar arrays to zero in exchange for a long-term agreement by homeowners to buy the power produced. This no-load installation reduces the risk to homeowners to zero and steadily raises the installed photovoltaic base. But SolarCity is also making moves to improve its product, buying California-based Silevo, a closely held company that specializes in high-efficiency solar modules, in an all-stock deal. This puts SolarCity into the solar module manufacturing business, competing directly with Chinese solar makers. Silevo’s factory in Buffalo, New York is planned to triple in size, although negotiations with New York state officials on financing for construction are still going on. Investors expressed emphatic approval of the acquisition when news came out on June 17. There are still regulatory hurdles to jump and the move into manufacturing complicates SolarCity’s business model. But the chart tells us that the deal is getting a thumbs-up from investors.
Technical Analysis
SCTY was a rocket from its December 2012 IPO at 8 through its peak at 88 in February. After that high, SCTY corrected steeply in March and April, and put in a rough bottom at 47 in May. June brought a blastoff on massive volume after the Silevo announcement, leaping from 55 to 65 in one session and continuing to rally on higher-than-average volume right up to today. SCTY has outrun its moving averages, which are now below 58, so a little consolidation or correction is likely. Look for a pullback of a couple of points to get in and use a stop at 60.
SCTY Weekly Chart
SCTY Daily Chart
KapStone Paper (KS)
Why the Strength
KapStone Paper and Packaging is thriving because economic growth, especially online sales, creates a need for corrugated packaging to deliver goods. KapStone, which was founded just in 2005 and came public in 2007, has grown both organically and via takeovers, including the $330 million acquisition of U.S. Corrugated in 2011 and the $1 billion buyout of Longview Fibre Paper and Packaging in 2013. KapStone now has a sizable footprint in container board, corrugated cardboard and kraft paper and thus participates in virtually every kind of product delivery. This growth has produced a string of three very strong quarterly results, with revenue up 74% in Q3 2013, 87% in Q4 and 72% in Q1 2014. Earnings growth has been similarly impressive, with 148% growth in Q3 2013, 221% in Q4 and 71% in Q1 2014. While it’s the fifth-largest U.S. producer of containerboard and corrugated packaging and the largest producer of kraft paper, with a market cap of a little over $3 billion, KapStone is still a relatively small company. But with four paper mills, 11 paper machines and 22 packaging plants across the U.S., KapStone is a young, growing participant in the rapidly growing packaging and shipping materials business. KapStone is making its debut in today’s Top Ten, but it joins other companies in the sector that have shown recent strength.
Technical Analysis
KS consolidated under 10 for six quarters in 2011 and 2012, but got moving in the second half of 2012 and broke into double figures in December of that year. Since then, KS has been very strong, punctuating its steady advance with rocket shots on huge volume in June 2013 and February 2014. After meeting resistance at 33 in early March, KS corrected to spend five weeks basing at 25 in April and May. The stock began its new rally during the first week of May and is now consolidating its breakout above 33 with a few days of sideways trading. KS has a growing roster of institutional supporters and a buy anywhere under 33 looks reasonable. Use a stop at 30 to give this volatile issue a little room.
KS Weekly Chart
KS Daily Chart
JD.com (JD)
Why the Strength
As Alibaba moves inexorably toward its much-hyped U.S. IPO, investors have been enjoying access to an increasing number of Chinese retailers. One is JD.com, the largest online direct-sales company in China, enjoying a 46.5% market share. While Alibaba works a little more toward the eBay end of the street (auctions, shops for other vendors), JD.com is closer to Amazon; it just sells stuff. And the variety is huge; the company offers over 40 million different items across 13 categories. The company also specializes in rapid delivery, with orders received by 11 a.m. in 43 Chinese cities delivered on the same day and orders received by 11 p.m. delivered by 3:00 the next day. In six cities, delivery between 8:00 a.m. and 8:00 p.m. will be in customers’ hands within three hours. To accomplish this feat, JD.com has seven fulfillment centers and 86 warehouses in 38 cities across China. JD.com describes itself as a “technology-driven company” that has made heavy investments in its technology platform aiming at future growth. Like Amazon.com, JD.com’s investment in the future has kept current earnings under pressure, with just two profitable quarters in the last two years. 2014 is expected to be another unprofitable year before positive EPS arrives in 2015. But revenue growth has been great, with triple-digit growth in 2010 and 2011, 96% growth in 2012 and 72% in 2013. JD.com is totally focused on growing sales, but when earnings catch up, the potential payoff is huge.
Technical Analysis
JD came public on May 22 priced at 19 and quickly soared to near 30 on June 12, but corrected to 25 on June 20. From that correction, it took just four trading days for JD to leap back to 28. That kind of volatility isn’t unusual for recent IPOs, and a big pullback can offer an attractive buying opportunity. Look for a dip of a point or so and use a stop at 25.
JD Weekly Chart
JD Daily Chart
InterMune (ITMN)
Why the Strength
InterMune, a California-based drug company, has never turned a profit. But that may be about to change. The company’s core drug candidate, a treatment for idiopathic pulmonary fibrosis (IPF) called Esbriet, may be about to gain U.S. approval. IPF is a condition that causes thickening and scarring deep in the lungs, interfering with oxygen transfer. The drug is already available in Europe, Canada, Japan and several other countries, but the FDA rejected initial approval in 2010. With strong clinical trial data arriving in February, InterMune resubmitted the drug for approval on May 27. Currently, there are about 70,000 IPF cases in the U.S., a figure that InterMune anticipates will increase by 15,000 to 20,000 each year as diagnosis techniques improve. What’s more, Esbriet apparently has a major market already waiting for its approval, as a recent physician survey indicated that 75% of pulmonologists would prescribe Esbriet over the currently available IPF treatments. With that kind of pricing power, some analysts believe that Esbriet could boost InterMune’s revenue from $70 million last year to more than $1 billion in 2017. Lastly, some analysts believe that InterMune will quickly become a takeover target once Esbriet receives approval, especially considering the drug’s market potential. All things considered, InterMune could have a very bright future for investors.
Technical Analysis
While ITMN entered 2014 trading flat, the stock received a massive 171% boost on February 25 in the wake of strong Esbriet trial data. The stock then entered a 10-point trading range for the following three months, as traders awaited news on FDA submission and regulatory rulings on Esbriet. With anticipation for a decision growing, and speculation that ITMN could be a takeover target as soon as (if not before) the FDA rules, ITMN broke out to a series of multi-year highs just shy of 50. Speculation has waned during the past week, allowing ITMN to pull back to support near its 25-day moving average. As such, we believe ITMN is buyable here with a stop near 38.
ITMN Weekly Chart
ITMN Daily Chart
Buffalo Wild Wings (BWLD)
Why the Strength
Buffalo Wild Wings is a classic cookie-cutter story, as this sports bar has grown from next to nothing 10 years ago to a national chain of around 1,000 locations (opening about 100 new locations this year), nearly all of them in the U.S. and Canada. The servings are simple and attractive (it’s mantra is “Wings. Beer. Sports.”) and keep dedicated fans coming back month after month, year after year. Long-term, management believes there’s room for 1,700 restaurants in North America and 3,000 in total around the world via franchising. Historically, wing prices have been a bugaboo, but after a few years running higher, prices have softened this year, allowing the firm’s margins to expand. We’re also intrigued by the company’s minority ownership of PizzaRev, which is aiming to be the “Chipotle of Pizza”—it allows customers to assemble an 11 inch pizza in the same way you’d make a burrito at Chipotle, and for $8 or so, have it cooked up in specialty ovens in just three minutes! Buffalo Wild Wings is the franchisee in Minnesota and recently opened its first PizzaRev location, with many more likely coming. (PizzaRev’s home is LA and it’s expanding quickly in that area.) Consider that a nice lottery ticket for upside potential, with the core Wild Wings concept providing a long runway of growth as well. We like it.
Technical Analysis
BWLD has been in a long-term uptrend for years, but with many multi-month shakeouts, corrections and dead periods along the way. The most recent of those rest periods began last November, and despite a brief move to new highs in March, continued through much of June—it almost looks like a big W on the weekly chart. But BWLD has been acting well since the market bottom, and last week, surged to new highs on good volume. It can oscillate several points each day, but the stock is buyable around here with a stop in the upper 140s.
BWLD Weekly Chart
BWLD Daily Chart
Allegheny Technologies (ATI)
Why the Strength
One of the top players in the U.S. specialty steel industry, Allegheny Technologies manufactures stainless steel as well as specialty steels, nickel- and cobalt-based alloys, titanium and titanium alloys, tungsten materials and other more exotic alloys such as niobium and zirconium. The company caters mainly to the aerospace, chemical process, and oil and gas industries. Allegheny has benefited lately from a modest rebound in the U.S. economy, especially within the oil and gas industries given the current shale-oil boom. The current driver for Allegheny’s success, however, is increasing growth within the aerospace industry. Back in February, the company snapped up Dynamic Flowform, an aerospace flowforming manufacturer. More recently, the company acquired precision machining company Hanard Machine. Hanard’s key markets include aerospace and defense, with a smattering of oil and gas customers. Allegheny expects the acquisition to at least double the revenues of its Cast Products unit in the next five years. Lastly, several analysts have come out recently stating that Allegheny is undervalued, citing Alcoa’s $2.85 billion acquisition of rival Firth Rixson as an example. We tend to believe these analysts are onto something, especially considering that earnings are forecast to rise more than 500% by 2015!
Technical Analysis
Until recently, ATI had been relatively stagnant since we last visited the stock in late April. Shares entered a months-long consolidation period just above 40, with the stock’s 10- and 25-day moving averages providing support. In fact, we were tempted to bail on ATI on a handful of occasions during the past month, as the stock came close to hitting stop-loss targets in the 38 region. Recent news has reinvigorated ATI, however, and the stock is poised to challenge overhead resistance near 45. We still like ATI’s growth potential, and believe the stock is buyable on dips following its recent run.
ATI Weekly Chart
ATI Daily Chart
Agnico Eagle Mines (AEM)
Why the Strength
While Agnico Eagle Mines’ name seems to promise silver (AG), nickel (NI) and Cobalt (CO), that’s ancient history. Agnico-Eagle is now a senior Canadian gold mining company with active operations in Canada, Mexico and Finland and a large exploration effort in North America and the Nordic countries. The company achieved record gold production in Q1, with 366,421 ounces of gold produced at a total cash cost of $537 per ounce. With gold prices at around $1,300 an ounce in the quarter, this record production produced strong earnings growth of 97% and a solid after-tax profit margin of 21.7%. The quarter also included significant amounts of silver, zinc and copper, but the rebounding price of gold was clearly the driver. In April, Agnico Eagle teamed up with Yamana Gold to buy the Osisko Mining Corporation, a move characterized as a low-risk, accretive operation. Management has already forecast that 2014 production will exceed the high end of guidance with costs forecast to be better than the low end of projections. Miners are coming back into popularity with stabilizing gold prices, and Agnico Eagle is a reliable, low-cost producer. Agnico Eagle will release its Q2 results on July 30, after the market closes.
Technical Analysis
AEM (which trades on both the New York and Toronto exchanges) peaked at 88 in December 2010, falling to as low as 24 last October. This multi-year skid paralleled the price of gold, but the turnaround may have begun. AEM soared from 25 last December to 35 in March, but retested that low again in April. The rally that began in June lifted AEM from 30 to as high as 38 before the stock began a consolidation over support at 38. If you have a yearning for some gold in your portfolio, AEM looks good on any dip below 37. Use a stop at 34.
AEM Weekly Chart
AEM Daily Chart
Previously Recommended Stocks
Below you’ll find Cabot Top Ten Trader recommended stocks. Those rated HOLD are stocks that traded within our suggested buy range within two weeks of appearing in the Top Ten and still look good; hold if you own them. Stocks rated WAIT have yet to dip into our suggested buy range … but can be bought if they do so within the next week.
Those stocks rated SELL should be sold if you own them; they will no longer be listed here. Finally, Stocks in the DROPPED category are those that failed to trade within our buy range within two weeks of our recommendation; that’s not a bad thing, we just never got the price we wanted. Please use this list to keep up with our latest thinking, and don’t hesitate to call or email us with any questions you may have. New recommendations each week are in green.
