Strong Earnings, Dividends and Technicals
Following a run to new highs in early April, stocks pulled back briefly, and then drove to new highs on May 2. But profit-taking, signs of a global economic slowdown, and more euro zone debt issues reversed many of the gains made in April. The lowering of Belgium’s and Italy’s credit outlook and another downgrade of Greece’s sovereign debt resulted in renewed selling of the euro and strength in the U.S. dollar, which puts pressure on stocks.
However, despite losing some momentum, the bulls remain in very shaky control. The intermediate-term and long-term trends for stocks are still up, but the 50-day moving averages of the major indices are under attack, and a close below them could result in another wave of selling. Short-term traders should exercise caution since an emotional selling climax could happen before the next buying opportunity. But investors with longer-term objectives should buy top stock picks on this pullback, because the interruption of the major advance may only last for a few weeks.
This month’s top stocks to buy take into consideration the technical conditions of the markets, so more emphasis was placed on a defensive strategy and stocks with steady earnings and dividend growth. And some of our picks could directly benefit from investors’ reactions to another world crisis. Here are our top stocks to buy for June:
Top Stock to Buy #1 Analog Devices (ADI)
Analog Devices (NYSE: ADI), which designs and manufactures integrated circuits, reported a 45% increase in FY Q2 earnings along with a bullish Q3 outlook as a result of redirected sales from the slowdowns of Japanese suppliers to the industry. Its sales to communications and automotive clients were much higher than Wall Street analysts had predicted, so the stock is under review by several research firms with the possibility that they may increase their ratings.
Following a run from $30 in October to $38 in December, the stock consolidated in a “cup” formation with a double-bottom at around $37. In May, it broke from that very bullish formation with a trading target of $46 within two months. ADI pays an annual dividend of $1 for a 2.4% yield.
Top Stock to Buy #2 Coca-Cola Company (KO)
The Coca-Cola Company’s (NYSE: KO) powerful breakout in March, following the deep “V” market bottom, drove the stock to new highs in April. KO was one of our Top Stocks for December, and it has not been a disappointment.
This month, it broke from a triangle and appears well on its way to achieving a technical target in the high $70s by August. S&P has a “five-star strong buy” rating on KO, and Wells Fargo started coverage of the stock with an “outperform” rating. Credit Suisse recently raised its 12-month target to $95 from $80.
Top Stock to Buy #3 Linn Energy (LINE)
Independent oil and natural gas producer Linn Energy (NASDAQ: LINE) has properties in some of the most reliable energy producing regions in the United States. One of my favorite stock pickers, Jeffrey Saut of Raymond James Financial, considers it a “strong buy,” and Ford Equity Research also has a “buy” rating on LINE.
The company reported robust earnings for Q1 and anticipates a very strong 2011 with an expected average distribution coverage ratio of 1.4 times for the remaining quarters. Technically, LINE is trading in a rectangle (consolidation) following an advance that lasted for most of last year. And it has strong support at its 200-day moving average at $36, which also matches the support line of the rectangle. Buy this top stock for a breakout to the mid-$40s by September. LINN pays an annual dividend of $2.64 for a 6.85% yield.
Top Stock to Buy #4 NPS Pharmaceuticals (NPSP)
Small-cap biotech company NPS Pharmaceuticals Inc. (NASDAQ: NPSP) is developing therapeutics for gastrointestinal and endocrine disorders, as well as neurological diseases.
S&P has a “four-star buy” rating on NPSP with a 12-month target of $14. The stock broke from a long-term resistance line at $7.50 in December, and then gapped above $10 in late January. The open gap was filled when the stock meandered back to its bullish support line in March, and then broke to new high in May, as it rested on its intermediate support line now at $9.50. NPSP has strong support at its 50-day moving average and should reach S&P’s target, or go even higher, by September.
Top Stock to Buy #5 UGI Corp. (UGI)
UGI Corp. (NYSE: UGI), a natural gas utility holding company, distributes propane and operates various gas and electric utilities. It has steadily increased profits by acquiring non-utility businesses like PG Energy in Pennsylvania. One of its subsidiaries, AmeriGas, is the largest U.S. propane retail marketer.
S&P has a “five-star strong buy” rating on the stock with a 12-month target of $37. UGI pays an annual dividend of $1.04 for a 3.2% yield, and states that its earnings-per-share growth target is 6% to 10% with dividend growth of 4% annually.
The stock has settled into a bull channel with a bottom around $32 and top of $34. UGI is a steady producer and a long-term investment that should provide a higher-than-average total return.
Top Stock to Buy #6 Yamana Gold (AUY)
Canadian-based gold miner Yamana Gold Inc. (NYSE: AUY) made a high at just over $13.40 early in April, but in several weeks fell to support at just under $12. It has been one of our favorite gold stocks since breaking above $12 in November. Since then, several corrections followed after spikes to new highs, but whenever the stock pulls back to its bullish support line and 200-day moving average, we recommend buying it.
Q1 earnings were strong, and the company increased its dividend by 50% to 18 cents per share. Credit Suisse Equity Research rates AUY an “outperform” with a target of $15. This stock could be the “sleeper” in the precious metals sector with a run to the mid-teens or higher by fall.
