Play the News With the Charts on Your Side
Last month, the danger of European debt contagion, tensions in Korea, and inflation in China were in focus. But late in January, those concerns gave way to worries over political revolutions in Tunisia and Egypt, and other countries in the Middle East. But crisis creates opportunity, so some North American energy stocks could benefit. In addition, a second U.S. federal judge ruled against the recently enacted health care bill, and there are some companies that stand to benefit from these rulings. That’s why our top stock picks this month are oil stocks and health care stocks.
Where do the markets go from here? So far, stocks appear to be ignoring the inherent danger of a serious crisis in the Middle East even after Moody’s downgraded their rating on Egyptian bonds. But with 8% of the world’s goods and 3.3% of its oil sent through the Suez Canal, there is reason for concern.
Technically the next support for the Dow Industrials is at the 20-day moving average at 11,811 with 11,740 being a stop-loss point for traders. But the zone 11,557 (50-day moving average) to 11,450 is the major support zone and a penetration of that zone would cause a change in trend. A sharp reversal up to a new closing high would negate prior downside reversals. However, increased volatility and heightened political risks make owning domestic oil stocks and health care stocks a common-sense approach to offsetting the current political and investment risks.
#1 Anadarko Petroleum Corporation (APC)
Anadarko Petroleum Corporation (NYSE: APC), a major oil and gas exploration and production company, with operations primarily in the United States, the deepwater of the Gulf of Mexico and Algeria, is in a bull market that began in October 2008. Last year was spent retracing a breakdown that occurred in April. But in December, amid rumors that BHP Billiton (NYSE: BHP) had its sights on APC after failing to acquire Potash Corp. (NYSE: POT), the stock broke out on a huge breakaway gap from a major bottom “V.” Breakaway gaps need not be retraced (covered), so APC may have another major move up from it.
The rumors have not been confirmed, but based on the current price, the stock is still worth purchasing as a play on the continuing increase in the price of crude oil. Anadarko’s earnings for Q4 are expected to rise more than fivefold, according to Thomson Reuters. Technically, the breakout has a target of $90-plus. S&P rates APC a “five-star buy” with a target of $140. Buy now for a trade to $100 or for a long-term target of $130-plus.
#2 Chesapeake Energy (CHK)
Chesapeake Energy (NYSE: CHK) is one of the largest independent exploration and production companies in the United States. It focuses on U.S. onshore natural gas production east of the Rocky Mountains.
On Jan. 30, the company said that Cnooc Ltd. (NYSE: CEO) would pay $1.3 billion for access to acreage held by Chesapeake Energy. CHK has also developed a dominant natural gas shale position, and S&P “expects its expertise in unconventional drilling to carry over to liquids development.”
Technically, the close above $28 represents a major breakout from a three-year consolidation. The target for CHK is $39.
#3 Joy Global (JOYG)
Joy Global (NASDAQ: JOYG), a manufacturer of surface and underground mining equipment, is expected to increase revenues by 18.5% this year versus a 2% decline in 2010 (October FY). It has an order backlog of $1.8 billion, and S&P expects it to continue to see both higher orders and backlog.
Ford Research rates JOYG a “strong buy” and S&P’s rates it a “four-star buy” with a target price of $98. The stock has found support on its 50-day moving average since the major breakout at $63 in August. The technical target for JOYG is $100.
#4 Suncor Energy (SU)
The recent merger with Petro-Canada made Suncor Energy (NYSE: SU) one of Canada’s largest oil and gas producers. It is focused on Alberta’s vast Athabasca oil sands, making it independent of operations outside of North America.
Compared with other international oil companies, SU is not only safe from problems in the Middle East, but its profit margins increase greatly when oil rises above $80 per barrel, making it a hedge against rising prices due to Middle East tensions.
Technically, SU broke from a saucer formation on Friday, with a long-term target of $50 and a trading target of $45.
#5 UnitedHealth Group (UNH)
Leading health care services company UnitedHealth Group (NYSE: UNH) provides health care benefits to over 32 million individuals in the United States. Even though the economic picture has been unstable, UNH has managed to effectively execute its business plan. The company should even do well in managed health care, but has been highlighted by analysts as a beneficiary if the recently passed health legislation is drastically altered or dismissed.
S&P estimated earnings of $3.65 in 2011 and $4 in 2012. S&P has a “four-star buy” rating on UNH with a 12-month target of $46. Technically, the stock has broken from a powerful cup-and-handle formation with a price target of $48.
#6 McKesson Corp. (MCK)
McKesson Corp. (NYSE: MCK) is a biotechnology and drug company that operates in two segments. First, the distribution of ethical drugs, medical-surgical supplies, and health and beauty care products. Second, it provides solutions for biotech and pharmaceutical manufacturers.
Earnings for FY 2011 are estimated at $4.82, up from $4.58. The company has $1.3 billion in cash, which can be used for expansion.
S&P rates MCK a “five-star strong buy.” The break from a powerful cup formation has a technical target of $80, but the company has been highlighted as a chief beneficiary of the failure of a national health care plan, so the target may be too modest.
