The stock market exploded higher on Jan. 2 with a broad-based breakout that was sustained by higher-than-average volume. But after three strong weeks, the underpinnings of the rally are beginning to weaken as noticed by our internal indicators. Momentum is sagging, as is the MACD indicator and the stochastic.
However, after one of the most successful starts to a new year, a consolidation is normal and investors and traders alike should position their cash to take advantage of any pullbacks by investing in sectors that should benefit from a slow economic upturn.
Sectors that appear capable of providing better-than-average-returns this year include financials (including banks), builders and cloud computing. This month’s list of stocks to buy is focused on those sectors.
Here are your top stocks to buy for February:
Top Stock to Buy #1 – BlackRock Floating Rate Income Securities Fund (FRA)
The Morningstar “four-star” rated BlackRock Floating Rate Income Securities Fund (NYSE:FRA) is a floating rate closed-end fund that could provide a protective hedge for bond holders from a rise in interest rates. The fund should benefit from both a rise in income and price, while straight bond holders will see the prices of their bonds fall. The fund seeks high current income and preservation of capital by investing at least 80% of its assets in leveraged floating rate debt securities.
Currently, the fund pays a monthly dividend annualized at $0.924 (5.89%). Talk of a rate increase by the Fed has resulted in a steady move higher despite no announcement that a rate increase is near. However, now could be a good time to buy since once interest rates rise, this fund could quickly move out of buying range.
Top Stock to Buy #2 – The Blackstone Group (BX)
The Blackstone Group (NYSE:BX) is one of the largest private capital managers and financial services providers in the world with assets under management of over $166 billion. The company reported Q4 earnings of $0.48, beating consensus estimates by $0.08. An influx of money from bond liquidations into equity management may lead to record earnings for BX. Consensus earnings estimates are for $2.11 in 2013, up from $1.64 in 2012.
Technically, BX broke from a right triangle early in January with an impressive breakaway gap accompanied by very high volume. In late January, it exceeded its Feb. 2, 2012, high of $17.25, and it appears that it will break its high of $19.58 made in April 2011.
Buy BX at $17 or lower for a trade to $22. Long-term investors could very well see BX break its all-time high of over $30.
Top Stock to Buy #3 – Rackspace Hosting (RAX)
Rackspace Hosting (NYSE:RAX) offers a portfolio of cloud computing services to businesses in more than 120 countries. Consensus earnings for 2013 are expected to jump to $1.07 from $0.75 in 2012.
After a consolidation last year from June to August, the stock broke from a cup-and-handle formation and established a pattern of higher highs supported by volume spikes, and a bullish MACD.
Due to its leading position in a very hot sector, this stock could have wild fluctuations. Thus, our buy under price for RAX is $73 with a price target of $95.
Top Stock to Buy #4 – Morgan Stanley (MS)
Financial services firm Morgan Stanley (NYSE:MS) reported a loss of $0.04 in 2012, but is expected to rebound to $2.05 in 2013 and $2.45 in 2014. The consolidation of Morgan Stanley and Smith Barney to one platform is expected to increase profit margins by over 20%. The company also expects to enter into global wealth management where their name is well accepted.
The stock broke from a bear market in November, and supported by strong volume ran from $17 to $23. The positive MACD is supported by very high volume, and so MS could continue its move higher. Buy MS at the market with a trading target of $28.
Top Stock to Buy #5 – Sherwin-Williams Co. (SHW)
When homeowners and builders think of paint they think Sherwin-Williams Co. (NYSE:SHW). The company produces a wide variety of paints and protective products for homes, boats and cars.
Analysts estimate that the company will earn $7.84 in 2013 versus $6.53 in 2012. These estimates could dramatically increase if the economy improves from a 2% growth rate.
Technically, SHW is in a clearly defined bull channel with support at its 50-day moving average at about $155 and its bullish support line. Although MACD is strong, volume is lagging, and so our buy under price is $155 with a trading target of $168. However, long-term investors could see much higher returns from this high-quality stock.