So for the first time in years we’ve gotten to mid-May and continued to climb. The financial media has been all over it and if you’ve been following along you’ll know the argument of an underway capital rotation into cyclicals and other stocks which have followed along sluggishly in recent months and even years seems to be taking hold of the market.
If you need further explanation, please reference Chess-N-Wine’s great post here:
and Horan Capital Advisors’ post here:
Below I’ve outlined a watchlist of several stocks which appear poised to take advantage of this possible capital rotation.
WLT – Walter Energy
A little background from Google Finance:
Walter Energy, Inc. is a producer and exporter of metallurgical coal for the global steel industry and also produces steam coal, coal bed methane gas (natural gas), metallurgical coke and other related products.
It looks like this might be a bottom for WLT, as it’s based out at $17 and launched toward the 50 day moving average. Do note the key resistance points at approximately $24 and $28. Take a look at the weekly chart here to get an idea of the bigger picture.
WLT was sitting at $130 as recently as 2011. Even if we accept the capital rotation argument and expect significant cash flow into companies like WLT it’s doubtful that we’ll see highs like that in the near future. I would expect a break above key resistances at $24 and $28 might lead WLT to base out in the $40 range. Depending upon economic growth and the demand for materials like steel in coming years, it’s possible we could see WLT regain the $60 range.
If the charts weren’t convincing enough, take a look at insider buying (See: @InsiderCow). Everyone: CEO, CFO, VPs and Directors have been purchasing millions of dollars worth of WLT since around May 2011 when the downtrend began. Those buys haven’t been doing very well but we can see continuing purchases to lower their cost average. Either they’re in denial, or confident and patient.
X – US Steel
An industrial company like WLT leads us to the next stock ready for a cash infusion, US Steel. From Google Finance:
United States Steel Corporation (U. S. Steel) produces and sells steel mill products, including flat-rolled and tubular products, in North America and Europe. Operations in North America also include iron ore and coke production facilities, transportation services (railroad and barge operations) and real estate operations.
X is currently sitting just below $20 resistance. While a target price of $25 doesn’t sound reasonable given it’s the highest point on the daily chart, note that this high occurred in 2013, only 5 months ago. Take a step back and check out the weekly chart below.
As with WLT, I’m skeptical US Steel will reach 2011 highs again any time soon. X’s top in 2008 reached almost $200 which means we’re currently trading 10x lower than that. There’s no doubt it was overvalued at the height of the “financial crisis” but it reaffirms that a 25% play toward $25 is a reasonable target for the next few months.
TNH – Terra Nitrogen
From Google Finance:
Terra Nitrogen Company, L.P. (TNCLP) produces nitrogen fertilizer products. The Company’s principal products are anhydrous ammonia (ammonia) and urea ammonium nitrate solutions (UAN), which it manufactures at the Company’s facility in Verdigris, Oklahoma.
We broke through resistance after failing on the first attempt and are now sitting on support at $220. TNH hasn’t had a profitable 2013. It’s been in a corrective phase after rising from around $60 since 2011. If you think TNH is a good buy, you may want to look at RNF (Rentech Nitrogen Partners) as well. I think it’s possible to see the $240 level within a few months although I’m not terribly bullish on TNH after that.
WWE – World Wrestling Entertainment
This strikes me as an almost humorous trade but it should really be taken seriously. WWE has done very poorly over the end of 2010 through 2012 after topping out at almost $19/share. But 2013 has been different, we’ve seen this high dividend (5.11%) begin to pick up the pace and turn positive.
At this rate it looks like the 200 day moving average will turn positive in the next few days and I’d like to give it a target of $12 by mid-Summer 2013. Hopefully we can break through that $12 resistance and I’d be selling into strength at that point. The next resistance point looks to be $14 but unless you’re interested in collecting the dividend it might be a good idea to take profit while it’s there.
BAC – Bank of America
We all know that Bank of America has suffered tremendously since the recent financial crisis. At the height of the housing bubble BAC was selling at over $55 / share. Just before the start of 2012 that price was under $5 / share. Checkout the weekly chart below:
The pullback in early 2012 aside, BAC has been trending back toward its former glory. There’s no clear resistance until $15 which we failed to break above in January/February of 2011. If you’re buying into the capital rotation argument this stock should be on your watchlist. If you’re an insider follower you should also be interested. Since 2008 there’s been a wall of inside buyers purchasing millions of dollars worth of BAC (See: @InsiderCow).
Disclaimer: I currently do not own any shares in the stocks mentioned in this post but may initiate a position in WLT and/or WWE. (Click Here For Full Disclaimer)