By Michael Cintolo, Vice President of Investments, Editor of Cabot Market Letter and Cabot Top Ten Trader
From Cabot Wealth Advisory 8/4/11
Sign up for free Cabot Wealth Advisory e-newsletter
As for the market, my view is that it's clearly not healthy here. It's not a disaster, but during the latest downleg, one of our key market timing indicators, which measures the number of stocks hitting new 52-week lows, has been flashing yellow. That is a warning sign that the broad market is weaker than the major indexes are letting on.
On the other hand, many leading stocks are still holding their own. Not a lot of money is being made, of course, but institutions aren't completely bailing out on every stock and sector. I wouldn't say that's encouraging, per se, but it's a sign that the bears aren't fully taking control.
At this point, it's usually good to get back to basics—look for stocks that have resilient charts, great growth stories and numbers (no pipe dreams!) and plenty of liquidity. Of all the groups, we're seeing some of the best action in the energy patch.
One idea on this front is
Cabot Oil & Gas (COG), no relation to our company. Here's what I wrote about the company in Cabot Top Ten Trader back in early July:
"The Marcellus Shale formation in Pennsylvania has become the nation's largest natural gas reservoir (and, by some estimates, the second largest in the world), and Cabot Oil & Gas is hitting gushers in some of its 200,000 acres. Thanks to better results per well from improved drilling techniques, as well as improved infrastructure, Cabot has seen its Marcellus production nearly double in recent months. Management has said it expects production to jump more than 33% this year, but that is almost surely conservative; one analyst is looking for a 49% jump as more wells come online. Of course, natural gas prices are in the dumps, but even if they can stabilize at these levels, Cabot could make a killing in the quarters ahead as it boosts production. Analysts see earnings up 26% this year and a monster 77% in 2012, but those figures could get a boost when the company reports second quarter results the morning of July 28."
Well, those results were released, and were fantastic—sales rose 23% and earnings crushed expectations, rising 116%. Far more important, though, is that production spiked nearly 48% and analysts have rushed to boost their expectations for this year and next. All told, earnings are estimated to rise 43% this year to $1.40 per share, and that growth should accelerate in 2012, rising a huge 95% to $2.73.
Moreover, the stock is acting very well, refusing to buckle much despite the market and, frankly, some softness in the oil patch. COG has been trading above its shorter-term 25-day moving average for much of the past six weeks (!), and is holding up in the lower 70s. It's a bit extended to the upside, but a small position on a dip toward 70 could be interesting, as long as you are willing to bail if the stock drops through 63.
Michael Cintolo
Vice President of Investments and Editor of
Cabot Market Letter and
Cabot Top Ten Trader
A growth stock and market timing expert, Michael Cintolo is editor of Cabot Market Letter and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides that has helped Cabot place among the top handful of market-timing newsletters numerous times.