Six consumer discretionary stocks with upside potential

What are we looking at?

Canadian consumer discretionary stocks with long-term upside potential.

The screen

We limited our pool to the S&P/TSX 60 Index.

To find the most promising, we looked at each stock's 40-week moving average (40wMA). This is the average closing price for the stock over a period of 40 weeks. Charting the moving average week by week gives us a sense of investors' behaviour: Are they growing more (or less) enthusiastic about the company's outlook and are they more (or less) likely to purchase the stock.

Generally speaking, stocks that trade above their rising 40wMA are the best candidates for investments; they are the ones that show a bullish behaviour. We identified the status of each stock's average (rising, falling or flat) in the adjoining table.

We chose this indicator because stocks tend to stay relatively close to their 40wMA. When stocks rise far above this average, investors often use this as an opportunity for profit-taking, since this usually leads to a price correction toward the 40wMA. Similarly, when stocks decline far below this average suggesting a change in trend, investors can usually expect a recovery rally to follow toward the average to provide a selling opportunity.

More about Phases & Cycles

Phases & Cycles Inc. has been providing independent research for over 24 years, using behaviour analysis. It publishes investment ideas for both the Canadian and U.S. equity markets. Its research reaches more than 1,000 users across North America and Europe.

What did we find?

All six stocks in this sector have a rising 40wMA and are trading above it. Magna International Inc. and Tim Hortons Inc. are trading significantly above their 40wMA, and therefore a minor price correction may occur. At the same time, Shaw Communications Inc. is closest to its average, suggesting it is currently at a favourable entry level.

Canadian Tire Corp. Ltd. and Thomson Reuters Corp. recently completed a corrective move and have started a new up-leg. Gildan Activewear Inc. is in the midst of a minor correction toward its average and therefore a better entry point should appear at a slightly lower level.

In the adjoining table we summarize our findings. Readers are advised to do further research before investing in the companies shown here. You may find a more detailed list covering a larger pool of Canadian consumer discretionary stocks at www.phases-cycles.com.

Ron Meisels is the director of research and Monica Rizk is the senior technical analyst for Phases & Cycles Inc. (www.phases-cycles.com). They may hold shares in companies profiled.