The Few Vs. The Many
There remain a few hundred leading stocks that are in great shape – they’ve reacted well to earnings, are in powerful sectors and find buying support just a couple of weeks after beginning normal corrections. However, there are also plenty of stocks that are languishing, or have been taken out and shot during earnings season, leaving investors scratching their heads. The bottom line is that stock selection is very important in this environment, as the leaders are putting on outstanding displays … but there are still plenty of potholes. Thus, holding a little cash as earnings season continues isn’t a bad idea; this week’s Top Ten, for instance, contains a couple of big earnings winners that look ripe for buying. Our favorite of the week is Nasdaq Stock Market (NDAQ), a pure “Bull Market stock” that’s going to benefit from both the strong equity markets and consolidation in the industry. Look to buy on a pullback of a couple of points.
| Stock Name | Price | ||
|---|---|---|---|
| CNX (CNX) | 0.00 | ||
| CYBS (CYBS) | 0.00 | ||
| DECK (DECK) | 0.00 | ||
| DV (DV) | 0.00 | ||
| IBN (IBN) | 0.00 | ||
| NDAQ (NDAQ) | 0.00 | ||
| NUVA (NUVA) | 0.00 | ||
| SGR (SGR) | 0.00 | ||
| STLD (STLD) | 0.00 | ||
| STP (STP) | 0.00 |
(CNX)
Why the Strength
Coal stocks have come to the fore, with many breaking out of well-formed basing structures the past couple of weeks. We wrote about Alpha Natural Resources in last week’s issue, and now here’s Consol Energy this week. The company is a big producer, with $3.8 billion in revenue the past twelve months, and while recent results haven’t been inspiring, management sounds extra bullish on the future. CEO J. Brett Harvey said that “most of the key indicators suggest that a very robust energy market is rapidly developing. We are seeing a repeat of the cycle we saw in 2004-2005, except that we expect the international market for both steam and metallurgical coal to be much stronger and likely to remain strong much longer [than before].” The firm also detailed how many international markets, which used to be coal exporters, are now importing coal to supply a rapid expansion in power generation. Combine these demand trends with falling coal production in the U.S., and prices are already heading up, with lots more upside potential in the quarters to come.
Technical Analysis
CNX rose about four-fold from late 2003 to later 2005, but then it was time for a rest … a long rest. Shares made marginal new peaks in mid 2006, but overall, this stock was range-bound the past couple of years as coal prices and earnings slid (the bottom line is expected to contract about 13% this year). But remember, CNX and all coal stocks tend to move months ahead of reporting improved results, and last week’s breakout of a near 18-month consolidation signals the next upleg is underway. We think you can buy some here.
CNX Weekly Chart
CNX Daily Chart
(CYBS)
Why the Strength
CyberSource is a leading provider of online payment solutions, serving 2,200 customers including Intel, J.C. Penney, Kodak, Perry Ellis and even Cornell University. We’ve always liked this small firm’s story because it’s based on recurring revenue – CyberSource gets a cut of every transaction it processes for its customers. And with a huge 287 million transactions performed in the third quarter alone (up 41% year over year), and with e-commerce only expanding, this company’s business is on a solid upward trajectory. Even better news stems from the soon-to-be-completed buyout of competitor Authorize.net, which will allow cost savings and broaden the combined companies’ product offerings. Throw in the firm’s big cash position – $60 million, or more than 10% of the total market cap – and the string of solid sales and earnings results, and we believe higher prices are on the way.
Technical Analysis
CYBS is graduating from the low-priced category, finally garnering enough institutional attention (63 funds now own shares, up from 49 a year ago) to merit a closer look. The stock has been in a mild-but-choppy long-term uptrend, though progress came to a halt the past few months, partly because of the market’s summer wobbles, and partly because investors wanted to see how business was progressing. Third quarter earnings, released two weeks ago, gave big investors lots of encouragement, and now CYBS has broken to new peaks on heavy volume. It’s going to be volatile, but if you’re game, you can buy a little around here and look to add shares should the stock move higher.
CYBS Weekly Chart
CYBS Daily Chart
(DECK)
Why the Strength
If you’ve seen people wearing tan UGG sheepskin boots with fleece on the outside, you’ve seen the foundation of Deckers’ success. Founded in 1973, Deckers began marketing Teva-brand sandals in 1985, then bought the Simple brand in 1993 and UGGs in 1995. The company has worked hard to diversify the Teva brand away from strap sandals and it’s working even harder to broaden the very hip UGG brand outside of fleece boots. The worry has always been that UGGs, which caught on in the early 90s, would go the way of other fashion fads, which would reduce the 70% of revenues that Deckers derives from the fleecy footgear. But recent results have shown that UGG boots still have fashion cachet, driving Deckers’ most recent quarterly report that showed revenues up 57% and earnings up 77%. Orders for UGG boots are reported to be strong through 2008, and many investors credit CEO Angel Martinez — who once helmed Rockport and ran marketing at Reebok — with keeping the brand fresh. Deckers looks to be on the right track.
Technical Analysis
DECK was a Top Ten pick three times back in 2004, but the stock tanked in 2005. Since bottoming in October 2005 at 17, however, the stock has soared, and last Friday, it gapped up from 119 to over 140. Today’s action has given a little back, but the 25-day moving average is still back at 113. If you like the story, watch the stock until it finds its footing, perhaps as low as 130, then start with a small position.
DECK Weekly Chart
DECK Daily Chart
(DV)
Why the Strength
DeVry is one of America’s leading for-profit providers of career-oriented education, with over 80 physical locations in the U.S. and Canada and an online component, too. The company offers associates, bachelor and masters degrees in accounting, business administration, engineering, health information technology, network and communications management and more. And it’s very proud that over the past ten years, 90% of graduates who sought employment found jobs in their chosen field within six months of graduation. But the stock market today is most proud of the fact that in the latest quarter, revenues grew 14% while costs grew just 3%! The biggest factor in keeping costs down was real estate; this company may actually benefit from recent trends in that industry. And the result was a profit margin that soared for the first time into double-digit territory and earnings that jumped 208% from the year before. Analysts have now increased their estimates for 2008 and beyond. In short, the future is bright.
Technical Analysis
DV’s major growth phase ran from its IPO in 1991 all the way to the market top in 2000. Earnings slumped in 2002 through 2005, as the technology market imploded, and the stock’s recovery from those bleak days has taken time. But the quarterly results, released after the market close last Thursday, brought buying that gapped the stock up on Friday morning, shooting it into new-high territory. It’s a strong pattern, and we think you can buy a little here.
DV Weekly Chart
DV Daily Chart
(IBN)
Why the Strength
Banking has not been a historically rich vein of Top Ten stocks, but then ICICI Bank, making its first Top Ten appearance, isn’t an ordinary bank. ICICI is the second-largest bank in India, which is the second-largest country in the world (by population) and also the second-fastest growing. The company began in 1955 as the Industrial Credit and Investment Corporation of India, a brain-child of the World Bank, the Indian government and some top Indian industrialists who set it up to channel development loans to businesses. The company wasn’t a bank, but it did its job so well that it started a banking subsidiary in 1994. The Indian government’s deregulation program began in 1991, and ICICI caught the wave of economic expansion that followed. The company’s current success is traceable to one man, Kundapur Vaman Kamath, who moved it into the auto loan and credit card businesses just as the Indian middle class began to swell and who continues to push into new services. ICICI just soared on news that previously announced restrictions on anonymous foreign ownership of Indian stock were being tempered. Revenues continue to soar in a financial market that is unscathed by the subprime mortgage crisis. A tidy 0.9% dividend completes the package for this bank with huge prospects in a huge market.
Technical Analysis
IBN’s major trend has been up for years, but it’s had big corrections that may make it hard for growth-oriented investors to stay in the stock. The current move began in mid-September as the stock righted itself after the global July/August slump. It jumped from 44 to 55 in a couple of weeks, then built a widening base at that level before last week’s take-off. With the 25-day moving average back at 55, a correction back toward the lower 60s would make a nice opportunity to get in.
IBN Weekly Chart
IBN Daily Chart
(NDAQ)
Why the Strength
One of the best places to invest in a bull market is in the stocks of companies that benefit from bull markets. Years ago when it was smaller, Charles Schwab (SCHW) was one of our favorite bull market vehicles. Today, there’s more profit potential in fast-growing companies like NASDAQ Stock Market. With $2.2 billion in revenues, and a revenue growth rate of 62% in the latest quarter (results were released last week) the company has major profit-making potential. NASDAQ Stock Market runs the largest equity market in the U.S., processing 29.5% of all volume. It also processed a record-high volume of 18% of NYSE-listed equities during the latest quarter. There’s plenty of news about this company: it wants to buy the Boston Stock Exchange; it will acquire shares of OMX through Borse Dubai; it will acquire a third interest in DIFX, a subsidiary of Borse Dubai; it sold its part of London Stock Exchange; it launched the Portal Market, a platform for private placement securities; and it began the NASDAQ ETF Market. Management here is certainly creative and forward thinking. But the biggest reasons to own this stock are the current bull market and the strong chart.
Technical Analysis
NDAQ came public in 2005 at 10, peaked at 47 in early 2006, and then digested that gain over the next eighteen months, wandering about for the most part in the 30s. The current strong advance has been under way since mid-August, and the stock just broke above its old high of 42, set back in November 2006. An ideal buying point would be the 25-day moving average at 40, but it’s unlikely to pull back that far.
NDAQ Weekly Chart
NDAQ Daily Chart
(NUVA)
Why the Strength
NuVasive has been developing spine surgery products since 1997 and selling them since 2000. Many of these products incorporate proprietary technology, but all address the growing demand for cost-effective solutions to back pain that allow continued functionality with minimal pain. Traditionally, that means fusion, and here the company offers products for both the cervical and lumbar regions. But NuVasive has also developed a product, named NeoDisc, that will address disc degeneration in the cervical area while preserving motion. Clinical trials are under way, and if successful, the device will provide relief to people with chronic neck or shoulder pain. The company also offers a software-driven nerve-avoidance system, and last week it introduced five new products at the North American Spine Society’s annual meeting. Revenue growth is rapid. The company has just posted its first two quarters of earnings, and analysts are estimating earnings of $0.11 for 2008 (likely conservative). The number of mutual funds on board has just hit 100.
Technical Analysis
NUVA came public in 2004 at 11 and it’s been trending up since. But last week saw the stock’s best week yet, as it blasted off from support at 35. Average daily trading volume has now exceeded 400,000 shares, so larger institutions will be looking at the stock. There’s support at 38, and if you have the opportunity to buy it there, we recommend that you take advantage of it.
NUVA Weekly Chart
NUVA Daily Chart
(SGR)
Why the Strength
Shaw is yet another winner from the strong engineering and construction group. However, this company has a different focus from many of its peers (such as FWLT, MDR and KBR); Shaw is heavily leveraged to the power generation industry, which is undergoing a significant ramp-up in capacity worldwide. Even better, the firm stands to benefit from what is likely to be a huge increase in nuclear power plant construction in the years ahead. Historically, Shaw has usually booked good business, but execution has been poor, leading to choppy results. But a new management team is in place, and they’re helping the business work off some old, fixed-price contracts, while booking a stunning amount of new business – the backlog as of August 31 totaled more than $14 billion, and new orders are looking good. It’s a bit lower quality than the other E&C companies, but Shaw still has great upside potential.
Technical Analysis
SGR broke to new highs in May, clearing a thirteen-month basing structure, as investors looked ahead and saw growing backlogs and earnings in the years to come. The market’s summer correction did hurt the shares, but buyers returned soon enough, driving SGR up seven weeks in a row to new peaks. After putting on a good show last week, the stock is well extended above its moving averages. Try to grab some on a retreat of a couple of points.
SGR Weekly Chart
SGR Daily Chart
(STLD)
Why the Strength
Steel producers continue to do well as a group, and Steel Dynamics, while not a fast grower, has several assets that make it attractive. The company recycles most of its steel from scrap metal, and its acquisition of scrap giant OmniSource has secured its source of raw material for the foreseeable future. An earnings report that hit the high end of its forecasted range also gave the stock a boost, as did the improved guidance that accompanied the earnings report. Beyond that, Steel Dynamics is about as close as Top Ten stocks usually get to being genuinely cheap, with a forward P/E ratio of just 11. We also like it that the stock made Top Ten appearances back in late 2004 (three times) and once in mid-2006. We think that the ability to keep a stock moving quickly enough to qualify for Top Ten status over multiple years is a mark of quality for a company’s management. A small dividend completes the package.
Technical Analysis
STLD has been in a long-term uptrend since it was trading at 5 back in early 2003. Since then, the stock has risen strongly, with a significant correction in early 2005 and another in mid 2006. STLD fell along with the global market in July and August, but rebounded with energy, pausing at 45-47 before the earnings news really kicked it into high gear. Resistance at 55 has held for a couple of days, and a retreat of a couple of points from that level is quite likely.
STLD Weekly Chart
STLD Daily Chart
(STP)
Why the Strength
Suntech Power is making its first-ever Top Ten appearance, but other solar stocks have been showing up all year. Compared to some others covered here, Suntech is a big company (third-largest in the world in silicon cell production, and creeping up on $1 billion in sales) and one that’s been around for a comparatively long time (founded in 2001). The company was the first in China to top one megawatt in annual production capacity and it continues to expand, both by building new factories and by acquiring competitors. With earnings not expected until November 15, Suntech’s recent rise isn’t an earnings story. Rather, it’s a result of increased visibility — CEO Zhenron Shi was named one of Time Magazine’s “Heroes of the Environment” for 2007 — and business news, such as the news that the company had signed contracts to ensure adequate silicon supplies for seven years. Beyond that, the company is profitable, growing, and is attracting a lengthening roster of institutional investors. The rest of the story is technical.
Technical Analysis
STP came public at 15 in late 2005, and soared quickly to 45-46 before pulling back to support in the lower 20s. A return to 40 peaked early this year, and another run toward that long-term resistance at 45 failed during the July/August global fear-fest. But last Thursday, the stock broke through its old resistance at 50, rising to 56 on huge volume in a classic breakout. After a couple of days rest, it looks to be on the move again today, rising over 60. Look for a move back to the mid 50s as a prudent buy point.