Standstill for Now
As expected, the market lost a little steam during the past few days, with buyers showing little interest after stocks ramped higher in previous weeks. Of course, the sellers aren’t showing much muscle, either, resulting in a short-term rotational, choppy environment. What about the long-term? Could the rally have already run its course? Sure, it’s always possible, especially given the stop-start environment since early 2011. But the evidence points to an intermediate-term (and longer-term) uptrend in the indexes and most stocks, so you should remain bullish. That doesn’t mean you can’t book a few partial profits on the way up, but you should also hold on to most of your best performers.
This week’s list has some different names, including a few that have recently strengthened after many months of idling. Our favorite of the week is Jazz Pharmaceuticals (JAZZ), a former small-cap leader of 2010 and 2011 that consolidated for the better part of a year before breaking out last week.
| Stock Name | Price | ||
|---|---|---|---|
| Computer Sciences (CSC) | 0.00 | ||
| Concur Technologies (CNQR) | 0.00 | ||
| Google Inc. (GOOG) | 0.00 | ||
| HCA Healthcare (HCA) | 137.60 | ||
| Jazz Pharmaceuticals (JAZZ) | 0.00 | ||
| Mellanox Technologies (MLNX) | 92.00 | ||
| MCO (MCO) | 0.00 | ||
| Phillips 66 (PSX) | 0.00 | ||
| Barrick Gold (GOLD) | 27.20 | ||
| Royal Gold, Inc. (RGLD) | 129.66 |
Computer Sciences (CSC)
Why the Strength
Computer Sciences was once a great growth company; back in the 1990s, the stock was hot and the company was cranking out steady growth. But during the last decade, the company’s myriad professional services, applications development, network and data management offerings were eclipsed by the competition and, frankly, it looks like management simply got lazy and didn’t execute. That is changing now however—Computer Sciences has some new top brass, and their efforts look set to result in a turnaround. Granted, you can’t see it yet from the sales and earnings (see table), but key metrics are pointed up (in the second quarter, new business awards were $4 billion, up 74% from a year ago), cost cuts are set to be implemented (targeting $1 billion in savings during the next 18 months) and management is anticipating earnings and free cash flow of about $2.20 for the fiscal year ending in March 2013. Of course, with any turnaround, there are risks; the debt load here is large and any macro economic weakness could ruin the company’s efforts. But with a reasonable valuation (15 times estimated earnings), a tidy dividend (annual yield of 2.4%) and meaningful signs that the trend has turned up, we think Computer Sciences is a risk worth taking.
Technical Analysis
CSC peaked at 100 back in 2000, fell to 24 in 2002, hit 24 again in 2008 and 22 earlier this year! Obviously, it’s been a rough decade, but the stock’s double bottom late last year and early this year, combined with a huge earnings gap in August, tells us the trend has turned up. Shares have pulled back a bit in recent days after spiking to new recovery highs two weeks ago; we think CSC is buyable around here, with a stop at 30.
CSC Weekly Chart
CSC Daily Chart
Concur Technologies (CNQR)
Why the Strength
Concur technologies provides on-demand, Internet-based (cloud) business management software designed to help customers automate and manage non-payroll employee expenses. Since getting started in 1993, Concur’s business has boomed to more than 9,000 corporate customers. What’s more, with the increasing popularity of cloud software and the budding rebound in the U.S. economy, the company has seen strong growth throughout 2012. In fact, Concur has enjoyed double-digit revenue growth during the prior four quarters, while earnings per share spiked a whopping 200% in the third-quarter. Looking ahead, Concur recently boosted its full-year revenue, operating margin, earnings and free cash flow expectations for 2012. Despite concerns of economic weakness in certain markets, Concur credits increased travel transaction volume and quick returns on investments in emerging markets for its improved outlook. Additionally, the company expects solid returns in the $1 trillion corporate travel market following its investments in content aggregation and delivery, big data and mobile computing. In fact, Concur anticipates doubling its distribution capacity by the end of fiscal 2013 as a result of a significant increase in investment across its business.
Technical Analysis
Despite a brief correction in early 2011, CNQR shares have been locked in a solid uptrend for the better part of the past three years. The stock’s most recent upleg began nearly a year ago, when CNQR bottomed around 35 during the 2011 market collapse. Since reversing course, CNQR has trended steadily higher along support at its 10-week and 25-week moving averages, which shares have not closed a week below since October! More recently, CNQR has consolidated its post-earnings gains near 75. You can take small bites here with a stop just below 70.
CNQR Weekly Chart
CNQR Daily Chart
Google Inc. (GOOG)
Why the Strength
Google is one of the most recognizable companies in the U.S., so dominant in the online search business that its name has become synonymous with the act of looking something up. The company’s pioneering revenue model of selling the right to include advertisements based on key search terms has become a model for companies worldwide. Despite this dominance and a phenomenal number of institutional owners (over 3,600), Google hasn’t been exactly a hot stock; it’s just too well known. But a flat stock price is a great motivator, and Google surprised the market in August 2011 by announcing that it would buy Motorola Mobility for $12.5 billion. Motorola actually invented the mobile phone and had hits with the StarTAC and RAZR phones; it’s also a devoted user of Google’s Android operating system. But the real attraction for Google was Motorola’s huge portfolio of 17,000 patents, a trove that will make Google a more formidable opponent in the high-stakes patent-infringement battles that are raging in the industry. Google has lots of innovative irons in the fire, including the Google+ social networking service. But right now, it’s the patent wars that are sparking interest, and Google just raised the ante in the patent arms race.
Technical Analysis
GOOG capped a long rally from 247 to 630 just as 2009 was drawing to a close. Two-and-a-half years later (last June), GOOG was hacking along below 560. The interim produced two upmoves strong enough to get GOOG featured in Top Ten, but it’s been a long time since the stock actually pulled off a powerful rally. Still, that’s exactly what happened in July, when GOOG blasted off on strong volume. The stock topped its extremely long-term resistance in August, pausing under 680 for a couple of weeks before surging again in September. GOOG is clearly on investors’ minds as it has bolted higher with great volume support. GOOG is buyable on any weakness, with a loose stop at 680.
GOOG Weekly Chart
GOOG Daily Chart
HCA Healthcare (HCA)
Why the Strength
Founded as the Hospital Corporation of America, HCA Holdings has become so much more than its name implies. For starters, HCA is the largest private operator of healthcare facilities in the world. The company manages more than 160 acute care, psychiatric, and rehabilitation hospitals in the U.S. and U.K., serving up more than 40,500 beds total. Investors have sharpened their focus on the company recently, reacting to news that HCA has reached a $16.5 million settlement with the Justice Department over violations of federal laws that govern the relationships between hospitals and physicians. Specifically, HCA subsidiary Parkridge Medical Center of Chattanooga was accused of providing financial benefits to Diagnostic Associates, also of Chattanooga, in order to acquire more patients. HCA admitted no wrongdoing in the settlement. With the passing of this latest cloud, the company can once again focus on its core fundamentals, which are strong. In fact, HCA reversed a 67% plunge in full-year earnings per share between 2005 and 2007, posting earnings of $1.27 per share in 2008 and $2.84 per share in 2011. Revenue growth has also accelerated during this period, rising from 5% growth to 12% growth during the most recent quarter.
Technical Analysis
It hasn’t been an exciting year for HCA investors. The stock had a quick start to the year, breaking out above its 50-day and 200-day moving averages to challenge 30 in early February. However, HCA was unable to topple resistance in the area, and was forced to spend the bulk of 2012 bouncing between 30 and support at 25. The situation changed in August, as HCA rebounded sharply off support at its 200-day trendline. The stock has not looked back, using the company’s recent settlement news to finally break out above 30 to trade in new high territory. HCA is currently a bit overextended, so pullbacks offer the best buying opportunities. A stop-loss on a trade below 30 is also advisable.
HCA Weekly Chart
HCA Daily Chart
Jazz Pharmaceuticals (JAZZ)
Why the Strength
At first glance, Jazz looks like a well-diversified pharmaceutical company, with 16 drugs addressing conditions in five distinct sectors: women’s health, pain, psychiatry, oncology and narcolepsy. The reality, though, is different. The eight women’s health products will soon be sold to Meda for $95 million. And of the eight remaining drugs, only two have done the heavy lifting for the company so far. The biggest of these is Xyrem, which accounted for 88% of revenues last year. Xyrem is used to treat cataplexy associated with narcolepsy, and as an orphan drug, it enjoys extended patent protection, which has recently been reaffirmed; existing patents expire from 2019 to 2024. The cost of the drug is roughly $3,000 per month. The second contributor is Luvox, an antidepressant designed to treat obsessive-compulsive behavior. It accounted for 12% of revenues last year. Of the six remaining drugs, some were recently acquired and some have been in development for a while; the one that is now making a contribution to the company’s revenue stream is Erwinaze, designed to treat acute lymphoblastic leukemia. This recently acquired drug might account for roughly 20% of revenues in the year ahead. Still, the big dog looks likely to remain Xyrem for a bit longer, as sales in the second quarter soared 59% from the year before. The company has no debt and profit margins are excellent, so much more upside is possible, provided management makes the right decisions.
Technical Analysis
JAZZ came public in 2007, bottomed with the market in early 2009, and has been trending up since; it’s appeared here 10 times during the past few years. This appearance comes because after four months of twiddling its thumbs, the stock broke out on big volume last week on news of the Xyrem patent reaffirmation, and has continued to trend higher since. As with any extended stock, you can either wait for a normal pullback, or ease in by buying smaller amounts than usual.
JAZZ Weekly Chart
JAZZ Daily Chart
Mellanox Technologies (MLNX)
Why the Strength
Mellanox Technologies’ stock has been a shooting star during the past few months, but its recent pullback could provide an opportunity for buyers. The stock remains one of the strongest in the market because of optimism that the firm’s high-speed interconnect products—mainly its InfiniBand line—are the next big thing in the industry. Without getting into too many mind-numbing details, Mellanox’s products are much faster than the competition, and with the general sector growing like mad (cloud computing, data center interconnections, Big Data, etc.), this company’s sales and earnings have mushroomed. So why did the stock take a hit two weeks ago? First, an analyst downgraded shares based on valuation, unleashing pent-up selling pressure after such a huge run. And second, the company’s CFO decided to leave, which always causes some skittishness. More generally, there are also some worries about competition; while Intel selected Mellanox’s technology to use with its next-generation server platform, Intel is also busy acquiring smaller firms in the space, likely attempting to becoming a major player in the quarters ahead. To us, though, those are all ifs and maybes; to this point, the evidence suggests Mellanox will remain in the lead, so the odds favor more upside surprises in the months ahead.
Technical Analysis
MLNX isn’t early in its advance; the stock tripled from April through early September! Most of that came on two gigantic earnings gaps higher after the company obliterated estimates. That said, we can’t say the advance is over, either, and after a sharp two-day downmove, MLNX steadied itself just above 100 and began to push higher late last week. We think you can buy a small position (no more than half of what you’d normally buy) here and use a stop in the 98-102 area. If it fails, no big loss. But if MLNX gets going, you can look to average up on a decisive push above 120. The potential here remains big.
MLNX Weekly Chart
MLNX Daily Chart
(MCO)
Why the Strength
After completely missing the boat with the 2008 market crash, ratings agencies clearly haven’t been the most popular companies on Wall Street. However, given Moody’s Corp.’s impressive rebound since the crash, investors can no longer afford to ignore the firm. For one, Moody’s has the bond ratings market cornered, and the current low interest-rate environment, which typically favors these investment vehicles, has been a boon for the company. Moody’s saw profits rebound 40% in 2011 from their lows in 2009. Proving that the company has far from topped out, Moody’s lifted its full-year outlook for earnings of $2.76 to $2.86 per share on revenue growth of between 12% and 13%—both figures well ahead of current analyst expectations. Lest you pigeon-hole Moody’s as a bond-ratings agency, the company expects significant growth from domestic analytics, while professional services revenue is seen growing 75% for the full year. The company has predicated this guidance on a rapidly growing client base and continued expansion of regulatory requirements for banks and insurance companies. In fact, Moody’s rapidly expanding analytics division should continue to be a shining star for the company, even after interest rates begin to climb once again.
Technical Analysis
After spending much of the summer forming a base near 35, MCO shares exploded to the upside in July after the company boosted its 2012 earnings and revenue guidance. MCO immediately spiked above 40, but an orderly pullback brought the shares back to key support at their rising 50-day and 200-day moving averages. These long-term trendlines formed a bullish cross in late August, kicking off buy signals for technical traders, and prompting a renewed uptrend for MCO. The stock is currently trading near multi-year highs, and may be a bit overextended. We suggest buying shares on dips, with a stop-loss at 41.
MCO Weekly Chart
MCO Daily Chart
Phillips 66 (PSX)
Why the Strength
Phillips 66, which was spun off from ConocoPhillips and came public in May, is a pure oil and gas refiner that operates 15 refineries worldwide, 11 of them in the U.S. The company’s combined refining capacity is over 2.2 million barrels per day and it operates approximately 10,000 filling stations. There are also strong chemical production and mid-stream pipeline operations with over 15,000 miles of pipeline in the mix, plus anode coke and needle coke. Refining produces 41% of earnings, with marketing refined products kicking in 25%, chemicals 22% and midstream operations 12%. The company is strong right now because the boom in oil and gas production in the U.S. is producing an abundance of refining feedstock. With its global reach, Phillips 66 can also be an exporter. Phillips 66 is a brand new stock, but it has a long history of efficient and profitable operations as part of ConocoPhillips, and already has an impressive roster of over 1,000 institutional owners.
Technical Analysis
PSX, which came public in May, took just 13 weeks to build a post-IPO base. The stock really got going in July, moving out to new highs as the month ended. Except for a couple of pauses in August and some volatility early last week, PSX has been a model of bullish behavior with good volume support, advancing without hitting its 25-day moving average since early July. We think it’s buyable right here or on any weakness.
PSX Weekly Chart
PSX Daily Chart
Barrick Gold (GOLD)
Why the Strength
With central banks around the world now set to flood the financial system with liquidity (and with no specific end date to the money printing, to boot), gold prices have rocketed ahead, nearing $1,800 per ounce and bringing along with them most gold stocks. Randgold is one of the strongest in the group, and we think it’s because the firm isn’t just riding the higher price of gold—instead, this is a real growth-oriented miner that’s been digging out more gold year after year. The company’s operations are in Africa (its Loulo-Gounkoto complex is set to become one of the largest gold mines on the continent), and production leapt 58% last year and management expects a 19% gain in 2012. (Production for the first half was up 16%, so a little acceleration should take place in the months ahead.) But longer-term, it’s even better—another mine should ramp up in 2014, causing production to increase 40% or more by 2015. All told, analysts see the bottom line rising from $4.09 per share last year to $5.48 this year and $6.81 in 2013, but those estimates could prove very conservative if gold starts knocking on $2,000 per ounce. As gold stocks go, we like it.
Technical Analysis
GOLD effectively topped out in September of last year; the stock did hit minor new peaks in November and again in February, but the 115 to 120 zone proved hard to break. Shares then dipped to 73 in May before beginning to rebound. With the central bank moves this month, GOLD has moved straight up to new highs, busting above that resistance zone. That said, buying gold stocks on strength rarely works well, so after a 25-point upmove, we advise targeting a dip of a few points if you’re interested.
GOLD Weekly Chart
GOLD Daily Chart
Royal Gold, Inc. (RGLD)
Why the Strength
Whether you think of gold as an investment, a hedge against inflation or an emergency reserve, Denver-based Royal Gold has to be near the top of the list of gold investments. Royal gets its name from its strategy of investing in gold mines (like Barrick Gold, Goldcorp, Newmont, Kinross and others) and taking a royalty interest in the gold, and other metals, that actually get mined. The company’s interests in 193 properties on six continents include 39 producing mines, 26 development-stage mines, 40 evaluation-stage mines and 88 exploration-stage mines. By avoiding the costs and risks of actually digging in the dirt, Royal Gold achieves a much lower cost per ounce for its gold—just $452 an ounce, versus the industry average of $532 an ounce. Gold prices, which were around $250 per ounce in the late 1990s, reached $1,850 in September 2011, but fell for 10 months, finally finding support at $1,500 in May 2012. After three months of flat trading, gold began to move again in July, and August and September have seen strong appreciation. With gold now back near $1,800 an ounce, Royal Gold’s royalty interests look good, and institutional sponsorship is at its highest level ever. Counting today’s, Royal Gold has reached 15 total appearances in Top Ten, which testifies to the strength of its strategy.
Technical Analysis
RGLD has been in a long-term uptrend, as has the price of gold. The stock peaked at 84 in August 2011 and corrected to 57 last May. The rally that began in August has pushed the stock from 75 to over 95. There’s no predicting the price of gold, but RGLD is virtually certain to outperform the metal itself. If you want some exposure to gold, we think a buy of RGLD under 95 makes sense, with a stop at 85.