M A R K E T C O M M E N T
December 4, 2011
S&P 500: 1,244.28
“Show me a trend somewhere, anywhere, and I’ll play it.”
— Gil Morales
Perhaps the catalysts – a move by central banks to lower the cost of dollars and China’s move to ease – were less than met the eye, but last week was clearly a move in the right direction, backed, at least on one day, by some real demand.
At the surface, the way Wednesday played out – the gap open, the refusal to go much below that open, the close at the session high, the 23%-above-average volume – was the single most important moment for the bulls in some time.
The backdrop – a Europe not close to solving its problems and a domestic economy purring along – may not have changed much.
But perception is reality. And the tightening of sovereign, corporate, and junk bond spreads in Europe corroborates the view of at least some large investors that the world will not be falling apart. At least not this month.
Leadership did not change last week: It remains sparse.
Among the names, we have spoken about Golar LNG (GLNG) being the best actor among the glamours during the November weakness. The shipper has big earnings growth estimates of 999%/82% for ’11/’12. A potential entry would be a takeout of the Nov. 17 high of 44.26. Leaders like this many times do not offer textbook entries at the beginning of an intermediate-term advance, and this is no exception. The pattern is not a formal base, but something shy of this.
Similar to GLNG, Netsuite (N) has a pattern that is not out of a textbook. The cup is deep and the handle deep and high. Nevertheless, attempting to shoehorn every pattern that one sees into some sort of preconceived mold will not take into account the nuances that accompany each cycle and its leaders. Of critical import is the degree of accumulation seen in the base. This overrides whether a base is x weeks in length or x% deep. Large investors have been adding to positions in recent quarters, a plus, and ’12 earnings growth is estimated at 40%. The key here is that, like GLNG, the stock has held up quite well during the market turbulence and has outperformed nicely during October-November. Potential entry point above Nov. 15’s high of 44.53.
On the face of it, Petsmart (PETM) is not the most exciting title, with expected earnings growth slowing from 26% in January ’12 to 18% in January ’13, and a lukewarm 20 multiple. Yet the group is in the 95 percentile, and retailers are usually leaders early in a new bull market. Too, institutions are looking for defensive names with high stability of earnings growth, which PETM has. Potential entry would be above Friday’s high of 49.15.
Dollar Tree (DLTR) is quite similar to PETM: expected earnings growth slowing from 24% in January ’12 to 18% in January ’13, slightly higher multiple of 22, very high earnings growth stability, 99 percentile group rank. Potential entry would be above the Dec. 1 high of 83.14.
Rackspace Hosting (RAX) has a good level of earnings growth stability for a company expected to grow earnings by a prodigious 51%/51% in ’11/’12. A potential entry could be above the 44.11 high of Dec. 2 or the Nov. 8 high of 45.46. There is not a lot of accumulation seen thus far in RAX, and thus it may make sense to insist upon large volume on the breakout day. Either way, a junior-sized position could be used upon initial entry as a means of mitigating risk in case proven wrong. An add-on position could then be entered once price moves in the desired direction.
Ulta Salon Cosmetics & Fragrance (ULTA) is another defensive growth issue that is consistent with that favored early in a bull market. Though not showing the earnings growth stability of PETM and DLTR, this figure is nonetheless respectable. We like the higher multiple of 45, reflecting higher expectations for performance, and earnings growth is expected to be 50%/26% for January ’12/January ’13. There has been clear institutional sponsorship of this issue for some months, no doubt driven by its defensive characteristics amid concerns of economic slowing/recession earlier this year. A potential entry would be a takeout of the Nov. 7 high of 75.69.
Chipotle Mexican Grill (CMG), one of the better organic growth stories, has not shown a lot of accumulation in recent weeks, however estimates of 21%/26% for ’11/’12 + a very high level of earnings stability make this one to watch as it crawls up the right side of its pattern.
Other glamours worthy of attention: Under Armour (UA, 87.40 high of Oct. 31 would be a potential pivot point for entry), Intuitive Surgical (ISRG), Athenahealth (ATHN), and Hansen Natural (HANS, potential entry above the Nov. 4 high of 97.31).
A couple of oil & gas explorers are worth monitoring: Cabot Oil & Gas (COG), with nice accumulation going back for months, and with estimates of 34%/106% for ’11/’12, is forming a ledge with potential entry above the Nov. 11 high of 90; and Approach Resources (AREX), with earnings growth estimates of 69%/55% for ’11/’12. These are decidedly riskier vehicles, and it has been years (many) since we took the oil & gas segment seriously, in terms of being institutionally-oriented speculation numbers. However, the industry is undergoing a renaissance, i.e. that “something new” which is consistent with so many big leaders. Worth watching.
In summation, a bull market’s birth is never known until months after the fact. One can only go on what one sees, not what one believes. The averages are obviously improving, and an additional day of buying with conviction would improve confidence that a playable intermediate-term advance is at hand. Aggressive participants can begin to establish one or more positions in the names listed herein, with the idea that flexibility as to new technical developments is paramount.
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