Focus on the Most Battered Sectors
Even though the economy appears to be gradually improving, global issues have yet to be fully addressed. The wide swings in the market generated by headlines are likely to remain a challenge for traders and investors alike. Thus, this year, the trading range of the S&P 500 could be as broad as 1,140 to 1,440.
But a recent report by the National Association of Realtors that pending home sales for November increased by 7.3% and an improving technical picture could result in a breakout by the sectors most severely impacted by the recession. A January surge is likely and buying the undervalued stocks of the financial and building industries might provide the best way to participate.
Here are your top stocks to buy for January:
Top Stock to Buy #1 — Home Depot (HD)
Home Depot (NYSE:HD) rose from under $28 to over $42 since August largely due to excellent Q2 earnings of 86 cents versus an 83-cent consensus and meeting its Q3 consensus estimate of 60 cents. Higher gross profit margins and better expense leverage have contributed to the quarterly success. Therefore, analysts raised their full-year 2011 earnings estimate to $2.36 and to $2.60 in 2012. And Credit Suisse analysts consider HD to be undervalued “by a significant margin.”
The breakout from $38 is a major change of direction for the stock. The initial objective is $46, but longer term the stock will likely go much higher.
Top Stock to Buy #2 — JPMorgan Chase (JPM)
JPMorgan Chase (NYSE:JPM) has over $2.3 trillion in assets and has increased earnings every year since 2008. It is expected to earn $4.67 this year compared to $3.96 in 2010, and estimates are for an increase to $5.37 in 2012. JPM is considered the most solid of all major banks by a broad range of analysts.
Technically JPM appears to have double-bottomed at about $28. A break through the bearish resistance line at $34 could produce a quick run to its 200-day moving average at $38. Longer term the stock should appreciate as the economy improves, eventually trading close to $50. The company pays a dividend of $1 per share for a yield of 3%.
Top Stock to Buy #3 — Masco Corp. (MAS)
Masco Corp. (NYSE:MAS) manufactures a range of home improvement and building products including faucets, cabinets, coatings and windows, and installs insulation in new homes. The increase in pending home sales released on Dec. 30 resulted in a gain of 8.41% for Masco with the stock closing at $10.70.
The company is expected to report earnings of 20 cents for 2011 versus a $3 loss in 2012. Earnings of 55 cents are estimated in 2012 by S&P, which targets the stock at $12, but expects it could go even higher as earnings targets are met. MAS has a dividend yield of 2.86%.
Technically the stock ran to its 200-day moving average on the better home sales report. A punch through its 200-day moving average at $10.65 should result in a quick run to $14. Longer term this stock is capable of a major advance.
Top Stock to Buy #4 — Owens Corning (OC)
Owens Corning (NYSE:OC) is a producer of glass fiber reinforcements and building materials, including roofing materials. The company predicted that roofing demand could reach the highest levels in 15 years, and wall-board shipments rose 4% in Q3, the first year-to-year increase since 2006. A 35% increase in wall-board prices will take effect this year, according to Fitch.
The results of an increase in home construction would directly benefit OC with a dramatic increase in earnings from the estimate of $2.30 in 2011.
Technically the stock has formed a “V” bottom and a break through the resistance band at $30 to $32 should result in a quick run to $36-$38. Longer term expect much higher prices that will track an economic recovery.
Top Stock to Buy #5 — Toll Brothers (TOL)
Toll Brothers (NYSE:TOL), a major builder of luxury homes in the United States is geographically focused to take advantage of an increase in demand for houses priced in the range of $550,000 to $575,000.
Even with the tepid demand of the last year, TOL managed to report a profit of 12 cents per share. The company has one of the strongest balance sheets in the industry and should benefit substantially when the housing market improves.
Note the variation of a “W” bottom — a very strong technical formation. A break above resistance at $21-$22 could quickly take TOL to the high $20s.
Top Stock to Buy #6 — Vodafone Group (VOD)
Vodafone Group (NASDAQ:VOD), a leading provider of international wireless communications services, is expected to earn $2.44 in 2012 and $2.89 in 2013, according to S&P. Cost-cutting efforts and a more stable mobile industry in Europe should greatly contribute to earnings, and improving trends in emerging markets are expected to help as well.
The company has begun to extract itself from non-core assets and will receive dividend payments from Verizon Communications (NYSE:VZ) this year. VOD pays a dividend of $1.44 giving a yield of 5.15%.
Consensus targets for the stock this year are $33 to $35, but the stock is in the process of forming a bullish saucer and recently completed a golden cross (50-day moving average crosses up and through 200-day moving average), two very positive technical signals. A break through its high at $29.75 could result in a major move and a target north of $40.