It suddenly looks like U.S. stocks are back on track. Tensions in the Middle East have eased and U.S. stocks — again — have reached new highs.
Short of a stunning disappointment in Friday’s jobs report, there seems little that can slow this market down. That would be particularly good news for Friday’s three big stock charts.
All three stocks have a reasonable amount of correlation to macroeconomic and market sentiment. All three big stock charts show real potential for a significant near-term move. With a little bit of external help, those moves could go in the right direction.
Square (SQ)
Right now, Square (NYSE:SQ) looks like it’s at the beginning of a breakout. The one big concern with the first of Friday’s big stock charts is that we have been here before:
- There’s a lot to like here technically. Shares have bounced off support at a key level that presented resistance just a couple of months ago. A nice gain Thursday cleared the 200-day moving average. Continued strength could drive a bullish “golden cross” in which the 50-day moving average reverts above that 200-day average. To top it all off, SQ stock exited a triangle pattern and held that gain on Thursday.
- But there are concerns. Technically, again, we’ve been here before. SQ looked set for a breakout in November before fading at the 200DMA. A summer rally was undercut by a disappointing second quarter earnings report. The chart looks positive, but there’s still the chance of a reversal.
- Fundamentally, the news looks more mixed, as highlighted by a Wall Street upgrade this week. SQ stock isn’t cheap at over 60x forward earnings. And competition from the likes of PayPal Holdings (NASDAQ:PYPL) and Shopify (NYSE:SHOP) is a concern. On the other hand, there simply aren’t any cheap growth stocks left in this market — and initial guidance for organic revenue growth over 30% in 2020 suggests Square is managing its competitive environment just fine. Square stock has been left out of the market rally for months now, but there’s a case that underperformance simply can’t last forever.
American Airlines (AAL)
The same could be said of American Airlines (NYSE:AAL). The economy is growing. Global demand for air travel should continue to rise. The airline industry in the U.S. has stopped its destructive pattern of pricing wars. Yet AAL stock remains one of the market’s cheapest stocks, and the second of Friday’s big stock charts doesn’t yet look bullish:
- There’s a lot to unpack here technically, but it does seem a bit too early to call for a breakout. There has been a decent uptrend from August lows, but a triangle pattern here suggests the market still hasn’t made up its mind. With moving averages still potential resistance, there’s a chance of a reversal back toward October or even late August lows.
- Fundamentally, the case seems more positive. Again, AAL stock is one of the market’s most inexpensive names. A 5.3x forward price-to-earnings multiple is the 3rd-lowest in the S&P 500. Among components on that index, only Mylan (NYSE:MYL), which is dealing with debt and secular pressure on its generic business, and insurer Unum Group (NYSE:UNM), which faces significant potential long-term liabilities in its long-term care business, are cheaper on the same basis. AAL has cyclical risk and is managing through the 737 MAX situation at supplier Boeing (NYSE:BA), but does not face any such existential crisis.
- In that context, AAL stock seems simply too cheap. But “too cheap” has been a dangerous phrase in a market that has preferred growth to value, and the chart at the very least suggests investors can stay patient before buyers pile in.
Kinder Morgan (KMI)
Pipeline operator Kinder Morgan (NYSE:KMI) seems to have had its breakout already, with shares bouncing sharply amid optimism toward energy stocks. But the rally in the third of Friday’s big stock charts may not be done:
- After the gains of the past few weeks, it’s tempting to argue that the easy money has been made. But KMI stock only has gained about 13% — not necessarily an enormous gain for a leveraged energy play, even if pipelines are a more defensive business than exploration and production. Meanwhile, the stock saw a golden cross this week, and at a 30-month high resistance may have been cleared. This rally may well have more room to run.
- Fundamentally, KMI stock is intriguing as well. A 4.6% dividend yield is attractive on its own. But Kinder Morgan already has announced that it will increase its payout 25% in 2020. That puts the forward yield above 6%, and represents another step in the company’s effort to repair the damage done amid a disastrous dividend cut back in 2015.
- That said, there’s still work to do in regaining trust and driving growth. The recent bout of optimism toward U.S. energy might not last, particularly with the geopolitical environment (hopefully) returning to normal. Some investors may still have a “once bitten, twice shy” attitude toward KMI stock. And there are pipeline operators available at similar yields and multiples — and some of those stocks aren’t at resistance. I do like KMI here, but as always investors need to keep the potential risks in mind.
As of this writing, Vince Martin has no positions in any securities mentioned.
