Keith Richards.
Keith Richards is portfolio manager at ValueTrend Wealth Management of Worldsource Securities. His focus is on technical analysis.
Top Picks:
Yum Brands (YUM NYSE)
There was a bump along the way that presents us with this opportunity. Yum recently hit its support line after news was released that there were some difficulties with a supplier, that have now been rectified (the supplier was terminated). The company has a focus on expanding in emerging markets where the potential is significant. Just this month they announced the first of many Pizza Hut restaurant openings in Africa. The stock is showing excellent support at current levels, and we feel this stock will turnaround in the near-term. A strong rebound off of the trendline followed by a continuation of the uptrend should result in positive upside for this stock.
Tata Motors (TTM NYSE)
Tata is a leading Indian manufacturer of automobiles, trucks, and buses. We expect the commercial and passenger vehicle business in India to improve contributing to better margins and more successful product launches. We have already seen increased sales in the Jaguar and Land Rover brands which are important drivers for continued growth in Tata's revenue. Tata pulled back after a strong breakout—we view that as a test of the breakout at around $43, and we have been wanting to enter the stock at the current price for a while. This, like YUM, is an opportunistic point to buy a good stock on a pullback.
Encana Corp. (ECA TSX)
Encana is the only energy stock we have left, after selling Enerplus a few weeks ago. It's also probably one of the only ones we would own. Ironically, we have a bearish bias towards the energy sector. The big picture for commodities doesn't look good in general, and oil is testing a key support level in the low $90s that could be technically negative if breached. I've posted a detailed blog on the key commodity charts here.
Having said that, Encana is a unique story within the sector. They embarked on a new strategy last November. Over the last year they have sold assets and invested more aggressively into core areas. The transformation is progressing well and will continue to progress as the company diversifies its portfolio from the previous natural gas concentration. Encana made headlines Monday announcing a multi-billion dollar deal to acquire Athlon Energy of Texas. This acquisition plays very nicely into their strategy of an expanded oil focus. After only recently selling off their remaining stake of PrairieSky Royalty, the cash generated did not remain idle for very long at all. Technically, an absolutely ideal "cup & handle" bottom formation played out over 2011-2014. The breakout from this bottom formation suggests a return to the $30-$32 area for this stock.
Past Picks: October 2, 2013
Pembina Pipeline (PPL TSX)
Then: $30.69; Now: $32.82 +6.94%; Total return: +11.94%
CAE Inc. (CAE TSX)
Then: $11.29; Now: $13.63 +20.73%; Total return: +22.92%
Texas Instruments Inc. (TXN NASDAQ)
Then: $40.26; Now: $47.80 +18.72%; Total return: +21.99%
Total Return Average: +18.95%
"Now" figures are intraday from the date of the analyst's appearance on BNN Market Call.
Disclosure: | Personal | Family | Portfolio/Fund |
PPL | Y | N | Y |
CAE | N | N | N |
TXN | Y | N | Y |
Market outlook:
We recommend three investment theses at this time:
1. Buy large caps on weakness this month and into October:
The S&P is operating a bullish trend channel, and it's recently fallen from the top of that channel, as I noted it may do on my last show. This, along with the fact that it was overbought according to momentum indicators I watch, and the fact that it is "September" – seasonally speaking, the worst month of the year – suggested a bit of choppiness might be expected this month. Right on schedule, the market has fallen with that prognosis. As noted on my last show, we held 25-per-cent cash, with that pullback in mind. I'm happy to see we got it!
The key thing to remember at this time is that the current volatility should be used as a buying opportunity.
Despite recent volatility, the S&P 500 and broad NYSE index continue to show big picture healthy trends – the big picture remains bullish for the large cap stocks on NYSE. Thus, if you followed my suggestion by holding some cash, you are currently in a very nice position to start accumulating stocks that may have been previously too pricey! Support on the S&P 500 comes in at 1,960 and around the low 1,900s. As for the TSX – I'd suggest that if a strong rally doesn't appear promptly, the next target for the TSX lies around 14,600 – which is where the previous low and the 200-day moving average meet – not to mention the old breakout point. A bearish cycle on commodities put extra pressure on the TSX going forward. I continue to suggest picking TSX stocks carefully, while emphasizing U.S. and international stocks in your portfolio.
2. Avoid Nasdaq, small-cap stocks in general (with a few exceptions!):
The Nasdaq and small-cap indexes are showing very weak market breadth. The Nasdaq new high/new low chart shows us that the number of new highs vs. lows are trending lower, and in fact have both moved below the "0" line, and breached their 200-day moving average. According to Bloomberg, about 47 per cent of Nasdaq stocks are down at least 20 per cent since their peaks in the past 12 months. Further, about 40 per cent of the Russell 2000 small-capped index stocks are down 2 per cent from their highs. Their charts began rolling over in the summer.
3. Avoid commodities
I've been pounding the table to avoid gold and oil, along with copper, and agricultures – per the blog mentioned above in my write up on Encana. All are big-picture bear markets, due to a 33-year cycle that peaked about 3 years ago. Commodities are struggling to maintain support in this low-inflation market. We traded the energy counter-rally over the summer via some good energy stocks, but sold out of most of it 2 weeks ago. The trade is over. Again, there may be odd exceptions like my Encana top pick – but the bigger trend is against the underlying commodities and those stocks levered to them. Gold in particular looks terrible, especially for the mid-to-longer term.