Stocks Of The Week 10/5/2020

The stock market seems to be completing a topping process. See this chart: 

What that shows is a classical set of patterns that indicate big danger. 

The “megaphone” pattern is bearish if resistance is not broken. And, the rising wedge ie bearish if the support is broken – which has occured.

Essentially, if the S&P 500 doesn’t break through resistance above (SPY) 347 or so, then a big correction could come swiftly.

 This is the chart most bearish technical analysts are showing. Remember what I have told you about charts though. Picking the right time frame is important and setting biases behind is more important.

But, there’s another way to look at it. What if we change the megaphone pattern a bit by connecting the two tops in 2018, lowering the slope of the top of megaphone.

In this case, the bulls are happy because it would take a lot to break support. That means, a small pullback should be bought. 

But wait, there’s more. Here’s the way I look at it.

In my chart, not a representation of others, I think there is a megaphone pattern. And the stock market is now in a decision zone. I would bet that on volatility, everything corrects. However, the ends of our barbell will correct a bit less and recover faster. The secular decline stocks and debt zombies will fall further for longer. 

A correction is looming where the past and future break apart really hard. We do not want to be stuck in old economy, high debt, low scalability investments.

A lot of dividend favorites are going to get crushed and folks don’t have their head wrapped around that.

If a company isn’t generating enough cash to pay down debt (if it has any), and pay dividend, and a buy back some share, i.e. shareholder yield, they are screwed. Negative shareholder stocks can go to zero or way down at least. Low shareholder yield are still barely alive, like zombie alive.

For our purposes, we need to focus on our barbell stocks, not the entire market except for select “shorting” opportunities. 

Growth Stocks Of The Week

Ford (F) is starting to get some momentum. Use any pullbacks to buy some shares and/or sell cash-secured puts. It’s a 4th Industrial Revolution company, not just a car company. What happens when they go green? Millennials will fall in love. Already Robin Hood investors are taking stakes. 

Crispr Therapeutics (CRSP) is a great company in a great growth space (gene editing) that a lot of people want to own. The stock has run up, but, biotech and healthcare are starting to take a breather. On a correction this is a prime growth name to own. 

SR_Research_CRSP

Courtesy of Stock Rover

SunPower (SPWR) is a breakout candidate soon. They have very low financial risk with Total (T) as majority owner. They have huge growth as solar has become cost competitive with gas and coal, but with a fraction of the pollution (materials). 

Landstar (LSTR) is not on the Plug & Play right now, but it’s borderline and was on last quarter. If it has a significant pullback it’s attractive again. High margins in trucking brokerage, much more scalable and cheaper to operate than owning all the trucks.

I did not cover Freeport McMoran (FCX) but it is something to think about. More and more alternative energy is using copper (and zinc). An infrastructure bill and stimulus in China would drive copper demand. Freeport is the biggest copper miner in the world with great assets.

Dividend Stocks Of The Week

Northrop Grumman (NOC), Lockheed Martin (LMT) and Raytheon (RTX) are all attractive long-term. They have tightened their belts during Coronavirus and stand to do very well with a high-tech future. Lockheed has the best technology from what I can tell. So, if you only want one, buy Lockheed when the time comes.

If you want them all, you can buy all three or buy the SPDR S&P Aerospace & Defense ETF (XAR) which is equal weight and includes smaller cap companies as well. Over the past 3 and 5 years, Lockheed, Northrop and XAR have moved about the same. Raytheon is the laggard, but I like their future post merger and disposals. If you want the group, but the ETF in my opinion for like 6% vs 2% in each stock. 

Here’s Lockheed:

Disney (DIS) is in the midst of major challenges from Coronavirus. They’re rebound will take time. But, it will come. If we can get it under $100 per share, I think we have to be very serious about doing so. At some point the streaming is a major revenue generator and there is always the chance that they do some strategic transactions. 

Merck (MRK) is a likely winner in the COVID-19 vaccine. Why? Because they are making a traditional vaccine that is going to be safe and effective. They also have a stake in an oral vaccine. If that hits, that’s big. The earlier vaccines to market are likely to be less effective and for emergency use only. Merck’s traditional vaccine is almost certain to be available by flu season 2021. If I’m right about that, Merck has upside way over $100 per share. If I’m wrong, it’s still decent from the buy zone. 

3M (MMM) is unloved but will do well long-term with their technology. From the right price it’s low risk with good upside on top of the income. I also think it’s a takeover target.

The risk is that the PFAS liabilities are more than the couple billion high-end that the street is pricing in. I don’t think that is likely given 15 years have passed since 3M exited that business and has paid out a half billion already. 

To mitigate risk I’m focused on the bottom of the buy zone with 3M, not the middle. I misspoke in the webinar saying look to buy 3M around $140, I think the right price is between $140 and $115 with a bias towards the lower end. 

Cisco (CSCO) is falling into the buy zone and wringing out risk. If it makes new revenues on internet security, it can do very well. It has a fortress balance sheet. 

We talked some REITs in the Q&A, worth the watch and listen in the webinar.

This Week’s Stocks Of The Week Webinar

Closing Thoughts

As I was finishing up, this headline came through.

Trump calls off coronavirus stimulus talks until after election

Buckle up. Get your “A List” ready. No B or C ideas. Plug & Play all the way, and I’ll finalize a list of top REITs for next Monday.