In mid-September, the market survived the latest Federal Reserve surprise — no tapering of its bond-buying program. The Dow Jones Industrial Average hit another new high, the S&P 500 rose to record territory, and the Nasdaq reached its best levels since September 2000. The bull market is still very much alive.
But it seems unlikely that the S&P 500 can sustain a run to another new high before testing support at 1,672 to 1,679 (20-day and 50-day moving averages), and perhaps even the intermediate trendline at around 1,650. Internal indicators are overbought and RSI on the leading index, the Russell 2000, flashed a “non-confirmation.”
Despite the Fed’s surprising decision to continue buying bonds in September, sources at their regional banks say that the Fed will soon taper, QE will end, and interest rates will normalize. Currently, equity values are slightly overbought, and investors who have cash to invest should focus on stocks with a solid history of earnings growth. Household names with broad support should perform well despite a slight correction in the overall market. So, this month, I’ve focused on names familiar to most investors and generally suggest buying them on weakness.
Here are your top stocks to buy for October:
Top Stock to Buy #1 – Amazon.com (AMZN)
Leading online retailer Amazon.com (AMZN) is expected to increase net sales 22% in 2013, while earnings are expected to come in at $0.85 per share, up from a loss of $0.09 in 2012. The consensus estimate for 2014 is $2.81 per share.
The stock attempted to break out of a well-defined bull channel in July and failed. Now, it is again attempting to break above the resistance at about $320, and if it succeeds, it will probably make a run to $340. But the chances of profit-taking are high, and trying to buy AMZN on a pullback to $300 seems prudent. However, if buying volume increases and the stock closes above $320, buy it at the market.
Top Stock to Buy #2 – Eaton Corp. (ETN)
Eaton Corp. (ETN) makes electrical systems and components for power management in the aerospace, hydraulics, truck and automotive, and power transmission industries. Analysts expect earnings per share (EPS) of $4.19 in 2013, up from $3.94 in 2012, and $5.02 in 2014. The high target of fundamental analysts is $81, and the stock has a dividend yield of 2.4%.
Technically, ETN is attempting to break from a broad triple-top, which is being propelled by higher-than-average upside volume. Buy ETN for a trade to $78. Investors may also want to buy the stock as a long-term hold.
Top Stock to Buy #3 – Pitney Bowes (PBI)
Pitney Bowes (PBI), once known solely for its postage machines, now provides hardware, software and services to integrate physical and digital communications channels. For example, it recently helped turn one of North Florida’s largest commercial print and mail operations into a “White Paper Factory,” which no longer uses pre-printed forms and envelopes, saving the company $1 million a year.
Earnings are expected to improve from an estimated $1.70 this year to $1.75 next year. The stock has a dividend yield of 4.1%.
PBI is trading at the top of a well-developed bull channel but could pull back to its 50-day moving average, now at $16.50. Buy PBI on a drop to its 50-day moving average or on a high-volume breakout through the resistance line at $18.50.
Top Stock to Buy #4 – Qualcomm (QCOM)
Qualcomm (QCOM) is a leader in developing products and services based on its advanced wireless broadband technology. It expects solid chipset sales throughout the coming year, and it is believed its Snapdragon chipset will provide an advantage in the wireless area over competitors. It has a strong royalty base in markets like China, which are converting from 2G to 3G. The consensus estimate for fiscal year (FY) 2013, ended in September, is for EPS of $4.55 and $4.96 in FY 2014.
I recommended QCOM on May 2, at the $62 area, noting that high-volume sell-offs like the one we saw in April have usually led to rebounds. Since then, the stock has pierced its old high and appears capable of continuing the move to my trading target of $76. But profit-taking could drop it to support at its 50-day moving average at $65. Thus, it would be prudent to buy a half position now and add to it if QCOM breaks out on increasing volume or pulls back to support at $65. Long-term investors have an excellent opportunity for gains in excess of the fundamental 12-month target of $85.
Top Stock to Buy #5 – Stratasys (SSYS)
Stratasys (SSYS) is a maker of three-dimensional printers and 3D production systems for office-based rapid prototyping. The company’s only competitor is 3D Systems (DDD), which I recommended on Aug. 27. Stratasys’ merger with Objet Geometries took out the other major player in this industry. And the merger, it is reasoned by analysts, created a worldwide leader in 3D printing.
While 3-D Systems has a slight edge in marketing, Stratasys has a greater geographic footprint, and both companies should prosper. SSYS is expected by analysts to earn $1.85 per share this year and $2.49 in 2014. The mean target of fundamental analysts is $111.23.
On Sept. 13, the stock gapped down nearly $5 because of a 4.5-million share offering of new stock at a 4.9% discount from the closing price the day before. However, the stock held at its bullish support line and is moving up on high volume. SSYS should be bought at the market with a trading target of $110. The stock can also be held for long-term appreciation.
Top Stock to Buy #6 – Texas Roadhouse (TXRH)
Texas Roadhouse (TXRH), a national chain of casual dining restaurants, has had five successive years of earnings growth and is expected to earn $1.31 per share next year versus $1.15 in 2014. It has taken market share from LongHorn Steakhouse, owned by Darden Restaurants (DRI), and Ruth’s Chris (RUTH) through lower price points and store expansion.
Some analysts believe that the company can’t keep up the pace of the last two years, but company management is optimistic, planning a 1% increase in prices that should make Wall Street’s estimates too conservative.
The stock broke above a triple-top in mid-September on high volume and appears headed to a trading target of $28 to $32. Buy TXRH at the market with a stop-loss order at $23.