Some Signs of Distribution
The trend is still up, and we’re leaving our Market Monitor in bullish territory because the odds continue to favor higher prices in the weeks and months ahead. However, for the first time this year, we are starting to see a few chinks in the armor—volume is picking up a bit on the down days, growth stocks are lagging while some defensive-type sectors are pushing ahead, and we’re seeing some choppy up-and-down action. As we wrote in Friday’s update, none of these are “get out now” signs, but lightening up or selling your laggards makes sense. And, going ahead, should the market get rougher, you’ll find added value from our new Suggested Stop-Loss levels, which we include on every recommendation.
This week’s list has an encouragingly strong group of quality growth stories and charts. Our favorite of the week is RockTenn (RKT), a containerboard company that few investors are giddy about. But earnings growth will be big going ahead, and the stock is closing in on a good buy point.
| Stock Name | Price | ||
|---|---|---|---|
| United Continental Holdings (UAL) | 96.76 | ||
| Tenet Healthcare (THC) | 0.00 | ||
| Splunk (SPLK) | 207.67 | ||
| Shutterfly (SFLY) | 94.71 | ||
| Range Resources (RRC) | 0.00 | ||
| Rockwood Holdings (ROC) | 0.00 | ||
| RockTenn (RKT) | 0.00 | ||
| Meritage Homes (MTH) | 102.20 | ||
| FleetCor Technologies (FLT) | 0.00 | ||
| HomeAway, Inc. (AWAY) | 0.00 |
United Continental Holdings (UAL)
ir.unitedcontinentalholdings.com
Why the Strength
Following several round of cost cutting and revenue restructuring, the airline sector stands poised to reap the rewards of a continued economic rebound. Riding these economic updrafts, United Continental stands to gain additional altitude due to industry consolidation. Specifically, Delta acquired Northwest Airlines in 2008, as United itself merged with Continental in 2010, Southwest Airlines bought AirTran in 2011, and U.S. Airways and AMR (parent of American Airlines), announced last month that they are pursuing a merger. As a result of the narrowed playing field, analysts expect less price competition and higher ticket prices. Case in point, average airfares rose about 8% from 2008 through 2012. United is also in the process of divesting older planes to cut down on maintenance costs and increase fuel efficiency. Specifically, media reports indicate that FedEx is buying up to 30 Boeing 757s from United—though terms of the deal have not been disclosed. Finally, the integration of Continental is beginning to gel, with United’s on-time arrival rate rising from just 63% in July to better than 80% in February. Continued integration of Continental and improvements in performance should begin to materialize in United’s bottom line.
Technical Analysis
The last half of 2012 was a slow grind higher for UAL, with the shares limited on the upside by resistance at 22. The stock came to life in late December, however, breaking out above 22 and gaining a foothold above resistance near 24. Throughout this run, UAL clung tightly to support at its rising 10-week moving average, with the stock closing only one week below this trendline since November. More recently, UAL bested long-term resistance at 30—a level the shares had not bested since February 2008. The stock is currently consolidating near 32, and any further weakness looks buyable.
UAL Weekly Chart
UAL Daily Chart
Tenet Healthcare (THC)
Why the Strength
Wall Street analysts continue to tout the benefits of investing in managed health care companies, and, seeing their performance and potential for the rest of year, we have to agree. While we have covered Tenet Healthcare in the past, here’s a quick refresher: the company owns or leases 50 acute care hospitals with some 13,000 beds in 10 U.S. states. In addition to its acute care holdings, Tenet also operates specialty hospitals, skilled nursing facilities, physician practices, outpatient centers, imaging centers, and other health care facilities. The nice thing about Tenet is that the company was solidly profitable before the implementation of the Affordable Care Act (ACA). Specifically, revenue rose by an average of 5% year-over-year during fiscal 2012, while earnings averaged an impressive growth rate of 82%. As with all managed care operators, Tenet should continue to see a net positive impact from the phased implementation of ACA, with the Act set to provide coverage for roughly 30 million currently uninsured Americans. Furthermore, bad debt should also decline significantly as a result of expanded insurance coverage. Finally, there is a budding movement in many states to reverse course on their decisions to turn down the Medicaid expansion part of ACA. Should more states follow Arkansas’ lead, it could provide additional revenue for companies like Tenet.
Technical Analysis
THC struggled for most of 2012, plagued by political uncertainty ahead of the presidential election. But shares set a bottom near 25 in November, rebounding off their 50-day moving average. THC has since trended steadily higher along its 10-day and 25-day moving averages, testing its 50-day once in late February. After setting a string of fresh 52-week highs in early March, THC is now consolidating its gains into support near the 45 level. We recommend either buying here, or on dips if you’d like a better entry price.
THC Weekly Chart
THC Daily Chart
Splunk (SPLK)
Why the Strength
Splunk is s software company whose products give businesses control over the mountains of data that they collect and store in the Cloud, often in Hadoop clusters, which are cheap commodity servers connected with open-source software. Splunk’s software eliminates bottlenecks and security breaches in software applications and networks, and analysts say that it’s such a superior product that the company is competing on an equal footing with HP and IBM. With 60 of the Fortune 100 companies on the customer list and a string of 25 seven-figure contracts signed in the fiscal year ending in January, Splunk is clearly getting major traction. And, while the customer’s name hasn’t been released, the company announced a $20 million deal earlier this month. The demand for software to handle Big Data is so strong that Splunk has been able to grow revenue at an impressive rate; the 51% revenue growth in the latest quarter would have many companies doing cartwheels, but it’s the lowest growth rate in over two years for Splunk. The 200% jump in earnings in its latest quarter is also important, as it pushes the company closer to consistent profitability. Throw in the rumors that Splunk is a tempting takeover target, and it’s a nice package.
Technical Analysis
SPLK made a run from 26 to 40 late last summer, but a September–October correction pulled it back down to support at 26. The current rally began in mid-December and the stock soared to 39 on March 1. The stock has now spent three weeks trading sideways under resistance at 39 and the 25-day moving average is catching up fast. The ideal buy point would be on a dip to 38, with a stop just below the 50-day moving average, now at 35.4. The drop-dead sell line is at 33.
SPLK Weekly Chart
SPLK Daily Chart
Shutterfly (SFLY)
Why the Strength
Shutterfly is a big name in putting personal and professional photos online, and allowing users to upload, edit, enhance, organize, print and store those photos. The company has been growing for years, with revenue rising by 14% and 15% even in 2008 and 2009 when the economy slumped. Profits are typically based on big numbers in the fourth quarter, when the company ships mountains of Christmas cards, calendars and other personalized products with photos printed on them. Shutterfly has outlasted competitors like Fujifilm’s SeeHere, and has been active in buying out Kodak Gallery and other smaller rivals. (Shutterfly is suing Kodak for continuing its My Kodak Moments service, which Shutterfly contends is a violation of the non-compete clause of the buyout agreement.) The big story here is the avalanche of digital photos taken with cameras and smartphones. At some point, the number of people who want a print or a photo-printed product is potentially enormous, and the bigger Shutterfly (and its brands Tiny Prints, Wedding Paper Divas and Treat) gets, the more business will grow. Shutterfly was just started at a buy rating by a new analyst.
Technical Analysis
SFLY spent 2012 making three rallies and two corrections that amounted to wide swings from 21 to 35. The rally that began in December at 26 led to a nice flat five-week base at 33 in January. When the blastoff on February 6 came, the stock ripped to over 40 in one day, then put in a textbook three-week consolidation base under resistance at 42. Another small rally at the end of February pushed to stock to 45, but it has been resting near 44 for two weeks. If you’re patient, you should be able to get in under 43. Alternatively, you can wait for a lift above 44 on big volume. A dip below the 50-day moving average (now at 39.5) would be bearish.
SFLY Weekly Chart
SFLY Daily Chart
Range Resources (RRC)
Why the Strength
Cabot Oil & Gas (written about last week) is, in our view, the best-in-class natural gas explorer, but Range Resources isn’t far behind. Whether it’s production growth (up 35% in the fourth quarter), reserve growth (up 29% in 2012), future prospects (management believes it can boost output 20% to 25% annually for many years, with cash flow growing even faster) or unit costs (down 30% since 2008), Range has all the characteristics winning energy stocks possess. The driver of these results is the Marcellus Shale in Pennsylvania, which remains incredibly lucrative, though the company also makes hay in areas of Texas, West Virginia and, soon, the Utica Shale in New York and Pennsylvania. Interestingly, Range has a few unique traits; while it’s still heavy on natural gas, the firm’s liquids business—oil and natural gas liquids like ethane, which are higher priced—is growing fast and will make up 20% of production in the first quarter. And it’s not afraid to hedge production; it has 75% of its 2013 natural gas output and 50% of its liquids output already hedged! That could prove a small hindrance if, say, natural gas prices rip higher, but few investors are complaining; analysts see the bottom line leaping 50% both this year and next. All told, with the natural gas sector showing life for the first time in a while, we think Range will do well.
Technical Analysis
RRC has historically been a bit of a funky, hard-to-handle stock, but it’s come under control in recent months. Shares topped out at 77 in late 2011 (which is also where the stock topped in 2008) and started to etch a wide, sideways base between that high and 53. A tighter, proper-looking base began in October; things were going okay through February, but then a great quarterly report kicked RRC to new highs, and it’s followed through nicely since. You could nibble here or, ideally, on a dip of a couple of points.
RRC Weekly Chart
RRC Daily Chart
Rockwood Holdings (ROC)
Why the Strength
Rockwood is a chemical company whose product mix includes specialty chemicals like surface treatments (for cleaning and pretreatment) and fine chemicals (mostly lithium compounds) used in batteries and drug intermediates. This segment accounts for a little over a third of annual revenues. The titanium dioxide pigments business contributes about 25% of revenue, while performance additives, pigments used in paints and concrete products, kicks in a little over 20%. These are not hot businesses, but Rockwood’s management has been making strong use of its ample cash flow, allocating up to $400 million to buy back shares, repaying $509 million of debt and holding the rest to maintain its dividend yield at between 2.8% and 3.2%. It has also been reported that the company is in the process of exiting the titanium dioxide business, and will be concentrating on the higher-margin performance additives and specialty ceramics businesses. Investors have been responding positively to these moves, and that has put Rockwood—which appeared here in 2010 and twice in 2011—back in the Top Ten.
Technical Analysis
ROC ended a year-long rally in August 2011, scrubbing off half its value in a drop from 60 to 30. It would take 18 months for the stock to recover, tighten up and push out to a new high over 60, which finally happened in late February after a three-month rally. The stock met resistance at 66 a couple of weeks ago and has been consolidating its gains with support at 64 since then. ROC isn’t a story stock, but it reflects good management and a reasonable valuation (P/E ratio is 17). It’s buyable here, with a stop in the 57–59 range.
ROC Weekly Chart
ROC Daily Chart
RockTenn (RKT)
Why the Strength
Cardboard makes the shipping world go around! And No. 2 cardboard box manufacturer RockTenn helps manufacturers, shippers and online-retailers get their products to consumers. The company’s products include corrugated boxes, paperboard, preprinted packages, merchandising displays and specialty paper products. RockTenn has seen considerable strength in recent months, with a handful of factors driving investor demand. First and foremost, reports emerged last month that Georgia-Pacific is planning to raise its containerboard prices—a move that should allow RockTenn and others to follow suit, increasing revenue and ending a nearly two-year stagnation in pricing. Next, Spring is slowly springing, which should lead to a cyclical rise in demand for cardboard shipping containers. Finally, RockTenn’s acquisition of Smurfit-Stone is beginning to bear fruit. Specifically, RockTenn posted Q4 earnings of $1.35 on January 22, handily beating analysts’ expectations of $1.27 per share. The strong performance has led many brokerage firms to take a closer look at RockTenn, with Deutsche Bank upping its price target; earnings are expected to leap 38% each of the next two years. Finally, the company’s stock pays a nice dividend with a forward annual yield of 1.1%.
Technical Analysis
Little has changed for RKT since we last visited the stock a month ago. The stock remains in a long-term uptrend, gaining more than 40% since bottoming near 61 in November. The stock’s most recent up-leg is a result of investor reaction to RockTenn’s solid Q4 results, allowing shares to blow past former long-term resistance at 75. RKT proceeded to rally toward the 90 level, where it met with a fair degree of resistance. Shares are now consolidating into support at their rising 25-day moving average in the 85 region. You can take bites at current levels, or wait for a dip to 85 if you want to be safer.
RKT Weekly Chart
RKT Daily Chart
Meritage Homes (MTH)
Why the Strength
Homebuilding stocks aren’t in the first or second inning of their advance at this point; most bottomed in October 2011 when the news was terrible, and today, nearly everyone knows that the housing market is back. That raises the risk that the easy money has already been made; yet we’ve been impressed by the group’s resilience in recent weeks—they looked to be rolling over in February but are now back near their peaks. Meritage Homes has morphed into one of the strongest stocks in the sector, bolstered by its terrific fourth-quarter report a few weeks ago; not only did its headline numbers wow investors (sales up 48%, earnings up to 62 cents per share from a loss last year), but the underlying metrics of demand were awesome—new home orders rose 46%, and the value of the new orders rose 72%, indicating that prices are rising. (The average sales price for the quarter was up 18%.) Moreover, the company’s total backlog stood at $479 million at year-end, up 93% from the year before. Analysts see the bottom line totaling $2 per share this year and $3 next, but there’s a chance even those bullish figures will prove conservative, as a slowly accelerating job market and super-low mortgage rates push more and more buyers into the marketplace. Fundamentally, the housing sector has emerged from a multi-year bear phase, which portends higher prices in the long-term. The trick is getting in at the right time.
Technical Analysis
MTH has traced out a pattern similar to every other housing stock—it topped years ago (at 97 in 2005), underperformed for years (it was at 14 in October 2011) and has had an excellent run ever since. More recently, you can see that MTH was acting very sloppily during February, piercing its 50-day line for a few days, but it’s stormed back on big volume, reaching new highs last week. Given the still-choppy nature of the group, we think it’s best to try to buy on a small pullback, with a stop in the low 40s.
MTH Weekly Chart
MTH Daily Chart
FleetCor Technologies (FLT)
Why the Strength
It’s expensive for companies to run fleets of vehicles, and the potential for further losses from the extravagance or carelessness of employees on the road is high. FleetCor protects the interests of fleet owners by offering specialized credit cards that can be used to pay for fuel (FleetCards USA, Fuelcard, Fuelman and Universal Fleet MasterCard among others), food and lodging (CLC Lodging and FleetCor Mexico) and GPS/|GSM monitoring (Carnet). The company’s CFN and Mannatec private label fleet cards offer partners a way to issue these cards under their own names. And finally, FleetCor partners with major oil companies like Arco, BP and Chevron/Texaco to develop fuel card programs that give them access to fleet business. Growth has been rapid, both in the U.S. and abroad (international sales account for about a third of revenues). Revenue grew 20% in 2011 and 36% in 2012, and FleetCor’s Q4 numbers showed a 45% jump in revenue and a 46% gain in earnings. Institutional sponsorship has jumped from 167 a year ago to 300. The company has also just bought Telenav’s enterprise business unit, giving it a bigger footprint in the vehicle tracking business.
Technical Analysis
FLT has been rallying since last August, when it blasted out of a six-month base. It has been making a string of new highs ever since, with only an occasional slowdown to interrupt its upward momentum. FLT put in a small ten-day base at around 70 that ended last Thursday when it bolted to over 75 on Thursday and Friday. It’s probably best to get started in FLT with a small buy (a third or a half of your usual position size) and then wait until you get a little profit cushion to fill out the position. Waiting for a pullback hasn’t been a productive strategy. A dip below 67 would be a red flag.
FLT Weekly Chart
FLT Daily Chart
HomeAway, Inc. (AWAY)
Why the Strength
HomeAway is one of many relatively recent IPOs (coming public during the past 12 to 18 months) that has an improving chart, increased sponsorship and, most importantly, a great story that could drive earnings and margins much higher in the quarters ahead. The company is the Expedia of rental properties; while there’s competition out there, HomeAway is far and away the leader worldwide, with more properties (more than 700,000 and growing every week) and visits to its websites (which include VRBO.com) by an order of magnitude compared to others in the field. It also has the top online rental sites in the U.S., France, Germany, Spain, Britain and Brazil! The firm has seen steady growth in its traffic and properties for sale in recent years; it makes money by charging listing properties an annual subscription fee, and with a renewal rate in the 75% to 80% range, most clearly feel the money is worth it. But HomeAway is now expanding options for property owners (many are professionals), and this should help pricing going forward; it introduced tiered pricing (higher annual payments for better search results, more pictures, etc.) late last year, which is already a hit. And later this year, it will offer a pay-per-rental option (about 10% of the rental), which should be attractive to owners who only rent their property for a week or two every year. All told, this is a huge market (there are millions of potential listings) with plenty of room for growth. We see many more years of strong sales and earnings growth.
Technical Analysis
AWAY remains a bit thinly traded (it averages about $30 million of volume per day), but it seems to be growing quickly; in mid-December, it was trading just $12 million per day. And part of the reason for that is the stock’s sharp upmove in recent weeks, bolstered by a great fourth-quarter earnings report. AWAY bolted higher into the end of February, tightened up for a couple of weeks, and then shot ahead on big volume last Thursday and Friday after a bullish analyst upgrade. We think a dip of a point or two is buyable.
AWAY Weekly Chart
AWAY 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.
