iShares Barclays 20 Year Treasury

3/24/12         

   This week I am choosing to not recommend a stock, but to recommend one of the only ETFs out there worth playing.  An ETF (Exchange Traded Fund) trades like a stock and invests in underlying commodities, stocks or bonds.  Of all the ETFs available, the only ones worth trading are the gold ETF, GLD and the treasuries ETFs, TBT or TLT.  This week, I am recommending you buy and buy now the iShares Barclays 20 Year Treasuries (TLT).  The TLT is the long side of the US Treasury trade that invests in 20-30 year bonds.  It currently has an expense ratio of 0.15% but pays out a 3.37% dividend. 

            Now, you might be asking why the hell I’m recommending something that everybody in the world thinks has started a massive sell off and bear market.  Well, that’s the exact reason that I’m recommending you buy it, not sell it!  For the last month, since the stock market has hit new highs, all you hear about is how the US treasury bull market is over and done and all the money is coming out of bonds.  Well, if you look at how the stock market and the treasury markets have been trading over the last week, you’ll see exactly the reason why I want to be long the treasuries.  Last Tuesday, BHP Billiton, one of the largest miners in the world, said they expect a slow down in China to last for an extended period of time, saying “China wouldn't consume much more iron ore in 2020 than it does now helped spurred the sell-off.”  That helped drag the stock market lower and in turn, marked the 8-month low in the 30-year treasuries, before rallying off that low.  On Thursday, we got a weaker than expected China PMI, which created a stock sell off and continued the rally off the lows in the treasuries.  Any negative news out of China is a welcome sign for the treasuries and a bearish sign for US equities.  Additionally, with a Presidential election coming up, and continuous problems out of Greece and the rest of the European nations, there is no reason to be “all in” in the stock market.

                    While some of the US economic data has been positive and better than expected, new housing starts are still weak, as noted by KB Homes on their conference call Friday.  The Fed has shown no signs that they will begin raising interest rates before 2014, which means they still see weakness in the jobs market and home buying.  Further, the Fed has been buying up treasuries over the last few years though QE1, QE2 and the Twist program, and has yet to unload those purchases.  If you think the Fed is going to take a loss on any of those trades, you are sadly mistaken.  This most recent drop in the treasuries was just a head fake down, before a rally to make new highs where, at that point, you’ll see the Fed begins to sell off their treasuries positions.  
            Looking at the charts, it further demonstrates my opinion of a head fake down.  Without focusing on the 30 year Treasury futures market (the market that the TLT most closely tracks), look at the daily and weekly chart of the TLT.  We’ll start first with the daily.  If you look at how the TLT traded on Monday and Tuesday, you’ll see they not only traded right down to the 200 day moving average (where it then bounced off of), but it also put in a bullish tweezer bottom.  What that means is on Monday, TLT traded to a low of $109.69, continuing its bearish downward move, before finishing slightly off the lows at $110.01.  On Tuesday, the stock opened higher, traded all the way down to the low of Monday, before rallying back up, to close up on the day at $110.54.  Since then the TLT has rallied to $113.21.  

            Now take a look at the weekly chart of the TLT.  Two weeks ago, TLT closed at a 5-month low of $111.43, which is right at the 61.8% Fibonacci retracement.  TLT then opened last week at that same level, traded slightly below $110.00 (hitting all buy/sell stops to wipe everyone out), and then turned and rallied to close at $113.21, a few dollars off of the 50-day moving average.  Last week’s bullish move on a candlestick chart is called a bullish piercing line (after a long red candle (downward move), a white candle (upward move) closing at or near the midpoint of the previous bar).  A move such as this almost always confirms that the Bears have sold out this market and the Bulls have regained control. 

            I am recommending you buy TLT at the open on Monday, around Friday’s closing price of $113.21, and you can stop yourself out on the downside at $107.15, which would be slightly below the 50% Fibonacci retracement.  I’m looking for a move above $125, giving you about a 12% gain, plus the almost 3.50% dividend. 

            Full disclosure:  I currently hold no positions in as I prefer to trade in the futures market.

Jeff Lewison

Peabody Energy

3/15/12      

      I wanted to get this out tonight because I want you in a stock tomorrow morning in case we get a nice rally.  The stock I’m recommending this week is Peabody Energy (BTU).  Peabody is one of the largest coal miners in the world, which mines, prepares, and sells thermal coal to electric utilities and metallurgical coal to industrial customers.  This is a company that has been around since the late 1800s and has a market cap of $8.63B.  While I love the technical move it made today (more on this later), I like this play because I think that all the worries about China’s “hard landing” are vastly overblown and China is the world’s largest consumer of coal energy.  China’s Prime Minister Wen Jiabao just simply won’t let the Chinese economy come crashing down like the United States and Europe.

            Peabody Energy is extremely cheap, trading at just 7 times forward earnings and has a price-to-earnings growth rate of a measly 0.83, making this one of the cheapest stocks in the entire market.  The company is growing quarterly revenues by about 29% and earnings by 9%, with operating margins of 20%.  BTU pays out a small, yet helpful 1.10% dividend and with a payout ratio of just 9%, has plenty of room to raise the dividend.  Analysts currently have 22 buys, 3 holds and 1 underperform rating on the stock, which is an increase from 21 buys just three months ago. 

            The technicals of BTU are what really got me excited about this particular stock.  If you look at the chart, you see this thing has just been obliterated since hitting a 52 week high back at the end of last March.  It’s spent an entire 365, going straight down, until the last few months, where it has flattened out.  If you look even closer to the performance over the last 8 days, you’ll see that the stock has traded on almost twice the average daily volume as it put in new lows.  What I want to talk about is today’s move in the stock.  What happened today is called an outside reversal day.  What that means is that the stock opened in the middle of the previous day’s body, made a new 52 week low, and then just blasted off, finishing on the highs of the day for a 5.38% rise.  The move today alone engulfed six of the last seven days of price action, which indicates capitulation (you get a last major selloff to new lows before rallying back on unusually high volume). 

            Additionally, if you look at a long-term weekly chart, you’ll see that BTU has fallen about 50% from the armpit line of the head-and-shoulders.  The $30 level looks to be strong support as the last time it’s came down to this level was when it rallied in 55% from October 3, 2011-November 3, 2011.  Before that, the last time BTU was at $30/share was in July 2009, where it began a major bull move all the way up to $73.95. 

            Now, you need to look at this as a low risk trade using the recent 52-week low as your stop out.  So using a very tight stop, buy the stock tomorrow morning and stop yourself out at $29.78.  Peabody Energy closed today at $31.71, so you’re only risking about $2/share. 

            Full disclosure:  I currently hold no positions in BTU but am initiating a position tomorrow morning.

Jeff Lewison

Tiffany & Co.

3/11/12 

This week I’m taking a look at a stock that has grown 20% since early January, but I think still has a lot of room to grow and is well off its 52-week highs.  My stock this week is Tiffany & Co. (TIF).  The company is a designer, manufacturer and retailer of high-end jewelry in the US, Asia, and Europe and to start the year, had 243 stores up and running.  While most of the luxury retailers (i.e. Coach, Louis Vutton, etc…) have been rocking of late, Tiffany has been hurt by lower guidance, and down economy.  They showed strong holiday sales of 14% (11% in the US and 23% in Asia), but missed analyst expectations, driving the stock down 8% (where it has since come back from).

            Although it’s compared to stocks like Coach, they really aren’t direct competitors.  TIF should be compared to a company like Harry Winston, whose sales are less than 30% of Tiffany, and Cartier, whose sales are mainly made up of watches and is higher end than Tiffany.           

Fundamentally, Tiffany is still in great shape despite a beat-down stock price.  They offer a healthy 1.70% dividend while you wait and have consistently increased their dividend, most recently by 16% in 2011.  More importantly, they have a payout ratio of just 31% giving them even more room to increase their payout.  The company is trading at just 17x forward earnings, compared to Coach, which is trading at almost 25x earnings.  TIF is sporting a low price-to-earnings growth rate of 1.29 and has a market cap of $8.73B.  Tiffany has only $700M in debt to go along with their $300M in cash, giving them almost $2.50 in cash per share.  Earnings and revenues for the company have more than doubled in the past 10 years, where analysts are expecting TIF to earn $3.65/share for FY12 on revenues of $3.64B.  Analysts have 10 buys and 12 holds on the stock, with an average price target of $74 (a nice 10% increase from here), but I think that’s too low.  Management has also guided to increasing their European exposure by 56% and US exposure by about 45% over the next five years.

            What makes more bullish on this stock in addition to the strong fundamental story, is it looks to be breaking out technically.  After blowing through the 50 day moving average on February 14, Tiffany has rallied 8% to it’s 200 day moving average ($69.97), where it closed just $1.20 off of on Friday.  The 50% Fibonacci retracement (see end for explanation) is $69.54, which is just $0.04 above Friday’s high.  If there’s one thing I’ve learned about how stocks act at Fibonacci numbers, it’s that they almost never break through on the first attempt.  TIF has spent 2 days up against the 50% level and any boost in the broader market will propel the stock right up through that level, making it a new floor for the stock to trade against.  Additionally, the short-term uptrend line comes into play at the current floor for the stock of $66.01, which also happens to be exactly the 38.2% retracement level. 

            Now, there are a few ways to play this stock.  If you’re investing for the long term, buy it at the open (15 minutes into the open- I like to wait until the market settles down to buy) and let it go.  If you’re looking to trade the stock, wait for a pullback to the $66 level on a drop in the broader market and then pull the trigger.  It’s important to note that Tiffany does report earnings in a couple weeks on March 20, so if you’re unsure about where enter, wait for the earnings report and buy on any dip in the stock.  Tiffany has had a habit of missing 4^th quarter earnings, but on lower guidance and lower expectations, I think the company beats.  No matter how you play it, I don’t think you can go wrong!  My price target on the stock is $78, which would give you a roughly 15% gain from Friday’s close.        

            Full disclosure:  I currently hold no positions in TIF.

Jeff Lewison

Fibonacci retracements is a method of technical analysis for determining support and resistance levels. They are named after their use of the Fibonacci sequence. Fibonacci retracement is based on the idea that markets will retrace a predictable portion of a move, after which they will continue to move in the original direction.  The measurement is created by taking an extreme high (100%) and an extreme low (0%).

PP&L Corporation

3/3/12

As the markets continue to march higher, I am getting more and more convinced that we will see a blow off top, resulting in a high on the S&P of 1400 before we see a 3-5% pullback.  I continue to be bullish crude oil until April crude falls below $104.50/barrel, meaning that you’ll see lower consumer confidence, lower retail sales, higher unemployment and lower corporate earnings.  All that spells lower stock prices despite being bullish for Dow components, Exxon Mobil and Chevron.  Additionally, tensions in Iran are not going to retreat quickly and there are still major problems in Europe.  All this being said, I think it’s time to move from overweight growth to underweight, and move from underweight income to overweight. 

That’s why this week I wanted to recommend a stock paying a high dividend but also has good growth.  Keeping with the theme from last week about bottoming natural gas prices, I’m recommending a $16.5B company called PP&L Corporation (PPL).  PPL is an energy and utility company that delivers natural gas to over 5 million customers in the northeast and northwest.  They operate in 3 regulated segments; Kentucky, Pennsylvania and International.  The supply segment of the company owns and operates power plants to generate electricity using coal, uranium, natural gas, oil and water resources.  Internationally, they distribute electricity to 7.7 million customers in the United Kingdom.   Management just recently announced a small 3% increase in their dividend to boost it to 5% or $1.44/share.  With a payout ratio of just 63% of net income, the company has plenty of room to continuously increase the dividend.    

PPL is trading for just 11x 2012 earnings with a PEG ratio of 2.64.  On February 10^th, PPL reported better than expected earnings where the stock rose almost 3%.  The company reported FY11 earnings of about $1.44B or $2.61/share (a 20% increase YOY) citing solid performance in all business segments.  Management expects 2012 earnings to be between $2.15-$2.45/share.  The reason for the decline compared to 2011 earnings is due to a drop in operating margins in their more regulated businesses, where they expect to get about 70% of their revenues from, compared to 60% in 2011.  Analysts currently have 7 buys and 10 holds, with an average price target of $29.85.    

From a technical perspective, PPL looks very strong with good support.  Since December, PPL has built an inverted head-and-shoulders with both shoulders bottoming at exactly $28.28 and the bottom of the head at $27.29.  On February 17, PPL broke back through the 50-day moving average, closed below it immediately the next day and has since rallied off it everytime it’s been challenged.  Friday’s low turned out to be exactly the 50-day moving average, where it then rallied to close down $0.11 at $28.46, a perfect low risk entry price for the stock.  On the downside, you want to stop yourself out if PPL falls below the head, so use a stop loss of $27 for about a 5% loss, a level it hasn’t been at since October 4 (which just happens to be the 52 week low for stock market).  Not only is that a big reason I like stopping yourself out at that level, but also because it’s below the head, below the uptrend line that comes into play at $27.54 and below the 50% Fibonacci retracement at $27.19.  PPL is already up about 9.5% this year excluding dividends, but I think it has more room to run, as I’m looking for a rally to new highs at $32, with the next level of resistance coming into play at $28.95 (the 78.6% Fibonacci number and the breakout level of the inverted head-and-shoulders.             

            Full disclosure:  I currently hold no positions in PPL but am planning on initiating one on Monday. 

Jeff Lewison