Allison Transmission (ALSN)
From Cabot Wealth Advisory 11/20/14 Sign up for Cabot Wealth Advisory—it’s free!
Interestingly, to this point I’m seeing a lot of what I call “defensive growth” stocks do well—auto parts retailers, some managed care firms, REITs, defense contractors, stuff like that. Yes, there are some real growth stocks doing well, too, but some of the most powerful straight-up moves since mid-October have come from the defensive groups.
Because our screens for Cabot Top Ten Trader focus on finding stocks showing unusual recent strength (as well as a few other qualifiers), a bunch of these names have appeared in Top Ten since mid-October. One I like is a firm called Allison Transmission (ALSN), which has a unique story and is spinning off a ton of cash. Here’s what I wrote about the company in Top Ten on November 10:
“We’ve seen a variety of auto-related stocks show extraordinary action since the market low in mid-October, and Allison Transmission—the largest maker of fully-automatic transmissions for commercial truckers, as well as hybrid systems for buses and other products—is one of them. The stock is strong today for three main reasons. First, of course, is the bullish outlook for the entire auto industry; with the economy picking up steam, demand is accelerating. Second is a longer-term factor: With demand up, trucking firms are finding it difficult to find drivers experienced with complicated standard transmissions in trucks. And third is that Allison has spent a bunch of money during the past couple of years to expand capacity; with its investments in the past, the firm’s increase in sales is creating a torrent of free cash flow, which management is starting to return to shareholders.
The third-quarter report was fantastic, with sales up 19%—the fastest rate of growth since 2011—earnings up 39%, profit margins of 17.3% (!) and free cash flow that totaled more than twice reported earnings! Management is now giving that cash back to shareholders in a big way—it just bumped up its dividend (1.8% annual yield) and wants to buy back $500 million of stock (8.3% of all shares) within the next two years. We like it.” As you can see in the chart below, ALSN built a long, sloppy, choppy base for much of 2014, before hitting the skids in late-July, and really went over the falls in September and October.
But since that October bottom, ALSN has soared to new price highs (though, to be fair, its relative performance (RP) line is a bit short of new highs) and has been consolidating those gains tightly in recent days. I don’t think the stock’s going to double, but there’s a real story here and the stock’s action tells me it wants to head higher. You could nibble around here or, preferably, on dips of a couple of points, with a stop around 30.
For more updates on ALSN and to learn more about additional momentum stocks featured in Cabot Top Ten Trader, click here now.
|Allison Transmission Holdings (ALSN)
One Allison Way
Indianapolis, Indiana 46222
|Index Membership: N/A
Sector: Consumer Goods
Industry: Auto Parts
Full Time Employees: 2,700