by Daniel Putnam | March 5, 2014 9:26 am
Even though the bull market continues to power higher, this still isn’t the easiest time to target stocks to buy.
The U.S. market delivered an 4.3% gain in March and set new records in the process, but signs of slower growth, not to mention the situation in Ukraine, have led to a higher degree of uncertainty than we have seen in quite some time.
This type of an environment is more challenging, but it also favors individual, stock-specific plays over broader-market bets.
With that in mind, we have two ETFs and three stocks to buy, as they look like appealing opportunities in the month ahead.
Click to Enlarge Schlumberger (SLB) has a lot going for it on the fundamental side, which makes its positive chart formation that much more attractive. The oil-services company features exposure to robust secular growth trends, a rock-solid balance sheet, and reasonable valuation of 13.5 times forward earnings. This cheap P/E obscures a favorable growth story: After delivering EPS of $4.75 last year, Schlumberger is expected to post earnings of $5.73 and $6.76 this year and next.
These factors provide a tailwind that could lift the stock over a resistance point that has been in place for five years. As shown in the accompanying chart, SLB stock has encountered resistance at $95 on four occasions, most recently in autumn 2013. The stock has fallen back after closing last week at $93 — which means a move above $95 might take some time to play out — but the combination of improving fundamentals and a low valuation indicate that this should occur sooner rather than later. This would set the stage for an assault on the all-time high of $112 established in 2007.
Notably, Schlumberger’s industry peer Halliburton (HAL) is just short of its all-time high of $57.27, set in August 2011. A breakout by Halliburton would be a strong indication that SLB stock is on track to do the same.
Click to Enlarge International Paper (IP) doesn’t get as much attention as it used to, but the stock has trounced the S&P 500 in the past five years thank in part to industry consolidation and its own cost-cutting efforts. More recently, however, IP stock has lagged the market — creating an opportunity to play for a potential breakout.
IP has bumped against the $50 level several times in the past year, indicating the potential for outperformance if it can break through. International Paper isn’t exactly a social media stock, so it isn’t reasonable to expect major returns on a breakout. Instead, look at it as an opportunity for a few extra percentage points of return from a quality company. IP stock features high free cash flows, a 2.9% dividend yield and a forward P/E ratio of 10.7 — all of which form a strong foundation to move out to new highs in due time.
It should also be noted that $43 has been a source of support in the past year, so IP stock has the potential to underperform below this level if the broader market sells off in the months ahead. Set your stops accordingly.
Click to Enlarge Seadrill (SDRL) has made headlines lately, and not for the right reasons. Weak guidance, falling day rates, lower capex by the oil majors and analyst downgrades are all issues that have been weighing on SDRL stock. Since hitting a peak near $48 in September, the stock is off almost 22% — and that’s with its hefty double-digit dividend thrown into the mix.
Nevertheless, Seadrill remains a well-managed company with a large order backlog and a forward dividend yield of 10.6%. (This assumes 98 cents for the next four quarters on a $37 price). The company has said it will consider slowing the rate of dividend growth, but an outright cut doesn’t appear to be in the cards.
Seadrill isn’t a clean story, and the stock could remain volatile as long as concerns about day rates persist. Still, this is a chance to get a double-digit yield from a company that will benefit from growing demand for deepwater drilling capacity in the years ahead — and to do so at a depressed price. After its recent selloff, it’s time to give SDRL stock another look.
Click to Enlarge Those who missed the chance to bet on the higher bond yields have another shot. The yield on the 10-year Treasury, which has been trading in a range from 2.5% to 3% since last fall, has dropped back to the bottom of this channel with its Tuesday close of 2.69%. The 30-year bond, at 3.64%, is right at its lowest closing yield since early July.
Three key factors have underpinned this downward move in yields (and corresponding rise in prices): instability in the emerging markets, signs of slower-than-expected growth and, more recently, the conflict in the Ukraine.
This creates a new opportunity to bet against the bond market, since all three trends could prove transitory. If the troubles overseas quiet down, the “flight to quality” bid evaporates. And if the recent slowdown in the economy is indeed the result of the weather and not truly something larger, Treasuries lose another leg of support.
It’s true that not all elements of this equation may come together. However, betting against the bond market via funds such as ProShares UltraShort Lehman 20+ Year Treasury (TBT) right now provides an entry point on the low end of bond yields’ recent range. It also allows investors to do so with a defined reference point at 2.5% for the 10-year. (Keep in mind, TBT doesn’t track the 10-year note, but its longer-term target provides more leverage for the same trade.)
Click to Enlarge Wait? Buy Russia here? It might not be as crazy as it sounds. The fact that Russia has an intrusive government and important structural problems in its economy is well known.
Not for nothing does its market trade for an absurdly low valuation. According to etfdb.com, the price-to-earnings ratios of the three largest Russia ETFs are as follows:
|Market Vectors Russia ETF||RSX||10.42|
|iShares MSCI Russia Capped ETF||ERUS||4.99|
|Market Vectors Russia Small-Cap ETF||RSXJ||4.85|
Notably, the Market Vectors Russia Small-Cap ETF (RSXJ) and iShares MSCI Russia Capped ETF (ERUS) feature the second- and third-lowest valuations of all equity ETFs. As any investor knows, valuation alone isn’t a reason to buy — especially when something’s cheap for a reason. However, it does set up the potential for a possible trade from the long side.
Throughout history, the threat of armed conflict has represented a good time to buy since the actual outcome proves more benign than the initial fears.
This is a risky trade to make, since it’s impossible to say how the Ukraine issue plays out. However, what we do know is that RSX is already discounting a very destructive scenario. If the reality is somewhat more favorable, Russia is a depressed market poised to pop. Traders should keep a close eye on this one — it just might be 2014’s answer to the rally in Global X FTSE Greece 20 ETF’s (GREK) during 2012.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.
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