While a pick-up in merger and acquisitions speculation seemed supportive for sentiment and helped a few targeted health care stocks on Monday, it was not a meaningful directional driver. In addition, there were no thematic takeaways from the corporate calendar to speak of, though earnings season is expected to dominate the headlines for the rest of the week, with nearly a third of the S&P 500 scheduled to report in that time.
Moreover, geopolitics remained largely on the backburner, as there did not seem to be any surprises surrounding the instability of the recent truce agreement in eastern Ukraine. Several momentum-oriented stocks beat the tape Monday after taking a drubbing over the past few weeks, as the media appeared determined to “pooh-pooh” the importance of the recent selloff.
Please note that the Nasdaq composite has been recovering quite nicely from the recent plunge to its 200-day average. If it can emerge back over the 100-day average, where it stalled Monday, don’t be surprised if the bears vanish in the mist and let bulls take a shot at the 4,300 level or higher. I kind of doubt that effort will prove successful, but if there is a window of success between 4,100 and 4,300, there’s definitely an opportunity to trade the depressed ex-leader stocks like Facebook (FB), Tesla (TSLA), Priceline.com (PCLN) and biotechs like Jazz Pharma (JAZZ).
In the meantime, let’s look at that M&A speculation. First, AstraZeneca (AZN) was up almost 9% after the Times of London reported that Pfizer (PFE) has approached the company about a whopping $101 billion takeover. Analysts were skeptical that AZN would go for it since the strategy was probably to cut the company up into little pieces, but it got the juices flowing nonetheless.
Then we had rumors that biggie gold stocks Newmont Mining (NEM) and Barrick Gold (ABX) were thinking about getting hitched in a $30 billion deal that would combine North American mines and spinoff foreign mines into a separate company. This is probably also not going to happen, but again, it gets investors’ minds racing with the possibilities.
Next was a Financial Times report that Charter (CHTR) was in negotiations to buy $20 billion in assets from Comcast (CMCSA), which would be a huge chunk of money for the firm and help push it up into the major leagues. CHTR jumped 5% on the news, while Comcast pulled out of its recent tailspin to rise 1.6%. This could actually happen, but cable companies outside of CMCSA have made lousy investments for the most part, so traders should stay away.
It was a fairly quiet day on the earnings calendar ahead of the ramp of announcements that are banging on the door just ahead. The more positive commentary thus far has revolved around better quarter-over-quarter results to come now that the weather is finally warming up, though companies are clearly hesitant to take their full-year guidance higher.
Earnings season has done little to resolve the debate about whether the selloff in momentum and rotation stocks into value stocks has more room to run, but that clarity is coming. There has also been little insight into whether companies will meaningfully step up capital spending, a concept that has received a lot of attention in the financial media. Some of the discussion has revolved around the pressure on companies to pursue capital spending, mergers and other overt growth strategies during a time span in which revenue growth continues to be anemic.
On the momentum front, the beleaguered big-cap social media and biotech companies finally had a reprieve. The major biotech fund, the iShares NASDAQ Biotechnology Index ETF (IBB), rose 2.3%, and actually looks good to go higher. Unfortunately, the seasonality trend of biotech is pretty lousy at this time of year, which is the only thing making me hesitate. I have the leveraged ProShares Ultra Nasdaq Biotechnology ETF (BIB) in my sights, but I’ll wait another day or two before making a recommendation.
Helping on the momentum side of the room were the beaten-up solar energy stocks, tracked by the Guggenheim Solar ETF (TAN), and social media stocks, for which Global X Social Media Index ETF (SOCL) is the major tracking fund. In a league of its own was Tesla (TSLA), which has been in a prolonged skid and finally rebounded by 3.2%, sort of like a racecar hitting a wall and bouncing. I love the concept, but the valuation is still outrageous, even for a major story stock. I’m trying to get over it and will let you know when to get in the driver’s seat.
As for commentary on the momentum, most analysts largely downplayed concerns about the broader market implications of the swift decline in these companies in the past month. The Financial Times noted that it is normal for crowded positions to be flushed out regularly, while also pointing out that it is hard to imagine significant broad market damage unless there is a sharp rise in interest rates.
Outside of drugs and techs, the other area of strong interest that spilled over from last week was the oilfield services sector. Halliburton (HAL) jumped 3.3% after announcing earnings that exceeded even optimistic expectations — showing the importance of shale-field fracking. I like this area a lot (see my top pick for 2014 in the fracking space here which is up 70% from my recommendation), and prices are cheap, but we’ll have to wait for a pullback. In an environment like this, chasing momentum is just not a great idea.
One of the stocks I do like as a short-term play, however, is Target (TGT).
Target is one of the largest retailers in the country, selling through big-box stores in suburban malls as well as from smaller stores in urban cores. Shares were hammered in the middle of last year after the company revealed that tens of thousands of customers’ credit information had been compromised. This has created a classic valuation dislocation that is likely to be resolved higher.
Despite trading around $59.70 now, a review of its intrinsic value suggests it should be going for at least $92.75. Basically, traders can buy at a time when the stock is cheap and heavily oversold, which is a good combination.
While shares were down 0.4% Monday, this is a cheap stock fundamentally, so value buyers are going to swarm all over it. I recommend buying Target around $59.45.
Set up to sell half of the position at my initial target of $62.35. The second target will be around $66, though in a strong wind it could get back to the $70 level in the next few months. I also recommend using stop at $58.50, good after 11 a.m. ET only.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
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