Equity markets have been rallying behind very aggressive central bank policies. Up until recently, the Federal Reserve has been as accommodative as possible to grow the economy. Initially, they started the quantitative easing program (QE) to bail us out of the 2008 financial crisis. They’ve tried to wean us off of it, but every time they found reasons to delay. Experts tell us that the taper should be coming this year. Investors are tense, so equities are on their back foot. Wall Street prices fell last week and more this morning. It’s an opportunity to find some stocks to buy even into the taper promise.
This week we could get more clarity on the timeline. Meanwhile, stocks will continue to be jittery going into the Fed announcement. Investors expect that they will tell us more about their policy mid-week. My guess they will deliver more of the same and not say anything new. If that’s the case stocks may get a relief pop.
Fed Chair Jerome Powell may be seeking reappointment so he doesn’t want to ruffle any feathers. Besides, he failed the last time he tried to accelerate the tightening process.in 2018. I doubt he will try it again now.
Tapering is more of a sentiment bruiser headline then an actual drag on the profit-and-loss statements. The Fed’s mandate is to grow jobs without creating inflation. They have been aggressively buying $120 billion a month in assets. The tapering will simply reduce that number, so in essence, they are still accommodative.
The QE will continue as it will take months to get back to flat. The Fed is far from discussing tightening thereafter.
My assumption is that the Fed headline threat has a short-term effect this week. Within that, we consider the following three stocks to buy:
Stocks to Buy: U.S. Steel (X)
U.S. Steel Corp. stock is up about 50% this year. I remember trading it last year when it was around $5 per share. I find it funny that I’m considering buying the dip down to $22 per share now. The biggest change is that the price of steel has gone through to roof. The rally there is of epic proportions. Overnight, there were headlines from China causing a mini crash in it. X stock is starting the week on a very bad note.
The rally from low-to-high has been more than 300%. Nevertheless, we recently learned about U.S. Steel expanding production. They announced building a $3 billion milling facility. That speaks to their confidence. It should inspire investors to buy the dip in spite of the scary headlines.
X stock has fallen almost 30% since August. A big chunk came this Friday as it lost fell 8% and today. The good news for investors is that it’s falling into a recent pivot. All year, buyers have fought for the stock around $22 per share. This gives new investors confidence to initiate positions by catching the falling knife. Since the rally has been so violent on the way up, new positions should not be full size.
The stock price moves in sympathy to the price of steel. If the Fed announces a taper next week, it may put downside pressure on X. If they discuss tangible dates, they might cause the U.S. dollar to strengthen. When that happens it puts downside pressure on everything priced in dollars, including steel. If my earlier assumption is true, X stock will have the opportunity to find footing this week. If it doesn’t, a secondary entry point would be closer to $18 per share.
Nucor stock has also hit the skids of late. It has fallen 20% and more this morning. However, it still has a slightly better trend going than X. The rally from the February bottom is ongoing and in the hands of the bulls. On the other hand, X stock has more of a sideways consolidation zone then a clear uptrend.
The bad news about a better trend is that it could have more froth to shed. NUE is falling into $100 per share, which is the clear pivot. It is also a round number that carries some psychological support as well. Drops below $100 would make for a good opportunity to add to longs.
Fundamentally, skyrocketing steel prices are supporting revenue growth. So far, management has been smart enough to make it flow to the bottom line. The trailing 12-month net income is now $3 billion, which is 2.3 times bigger than four years ago. Statistically, the stock still carries a reasonable valuation with a 10 price-to-earnings ratio.
This healthy step up in financials doesn’t support froth. The stock price rise is still at a reasonable pace. There is very little hopium in NUE stock at this point. That doesn’t usually mean it cannot fall, but it’s good to know there is also technical support. Even if this first line of defense fails, $83 per share would make an excellent secondary entry opportunity area.
Stocks to Buy: Peabody (BTU)
NUE and X are up an impressive 100% and 50% year-to-date respectively. BTU stock blows them both out of the water up 510% already this year. What’s more impressive is this comes a recent 26% drop from the Sept. 10 high. This morning, it too is falling fast, so its investors are not immune to pain.
Rallies this big usually unfold in equally as impressive corrections. The opportunity this week is to catch the falling knife but into a pivotal zone. BTU stock should find buyers as it approaches $13 per share. Even if that fails, there are secondary zones around $12 per share or lower.
Ironically, of the three stocks to buy today, this is the least healthy. The fundamental metrics are nowhere near as good as the other two. Total revenue for Peabody is a fraction of what it was four years ago. Moreover, net income is a $300 million loss when it was $370 million profit in 2017. Clearly there is a lot of froth in the current stock price.
Just for that reason, of the three today this is my least favorite investment. However, it does make for exciting trading opportunities. The buyers have been in charge and they have stepped up on every dip. Based on the daily chart, this makes for a solid trading buy-the-dip opportunity. I worry about what happens if they bounce into $16 per share. There are likely sellers lurking there, so it’s important to track that progress.
Traders need to know when to stop out and book profits. This is not as much of an investment opportunity as the other two, based on my taste. In fact, according to Yahoo finance, the expert opinions disagree with me. Most of the analysts who track it rate the stock as a buy. That is not the case for the other two.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.