Friday, November 30, 2012

3 Overlooked Stocks Set to Rally Before Year-End

We watch the analyst recommendations on stocks closely for a couple of reasons. First, we like to know when the analyst community has become overly optimistic on a stock as it often identifies that it has run its bullish course. The simple rule to follow here is that if everyone is bullish it's usually not a bad time to be locking in your profits. 


Case-in-point, Apple (NASDAQ: AAPL). With nearly 90% of the analysts covering the stock rating it a "buy" or "strong buy," it has turned into a stock with avalanche potential, i.e., a relatively small amount of sellers can cause it to cascade down to lower prices. It doesn't mean that the stock is necessarily bad, just that it has more selling potential due to the large crowd of investors holding it.

The reverse is also true in that a stock that is performing well with low analyst ranks has the potential to explode higher. Why, you ask? Simply put, Analysts aren't paid to be wrong on a stock, which means that a stock that outperforms the market should grab analysts' attention and drive upgrades. For this reason, we closely monitor a list of stocks that are outperforming the market with low analyst recommendations as these stocks are more likely to see upgrades and, thus, even higher prices.

The table below identifies 10 stocks that are beating the S&P 500 over the past three months, with 50-day moving averages that are trending higher (a simple measure of technical strength), and fewer than 30% "buy" recommendations from the analyst community. This serves as a great list of stocks that traders have the ability to buy ahead of potential upgrades from the analyst community.

Below we'll go into more depth on three stocks we like right now from the list.

Lockheed Martin (NYSE: LMT)
Investors are deathly afraid of the "fiscal cliff" knocking the market and economy for a loop in 2013. From a logical standpoint (which could be a problem) the politicians in Washington are far better served by solving the situation before the Dec. 31 deadline, which would likely tack an easy 1,000 points onto the Dow and give companies like LMT a boost.
Analysts and traders are afraid to touch LMT now given its revenue from defense spending, which could catch the axe if we go over the cliff. We're betting that this doesn't happen and that this 5% yielder will attract not only traders, but also continue to get the attention of high-yield investors.

Recommended Trade Setup:
-- Buy LMT at the market price
-- Set stop-loss at $90
-- Set price target at $100 for a potential 8% gain by year-end

Tenet Healthcare (NYSE: THC)
We move into 2013 with the knowledge that "Obamacare" will continue to move toward full implementation. For the most part, the law is seen to put additional pressure on insurance providers while providing somewhat of a tailwind for health care providers like Tenet.
From a sheer technical perspective, this company is a dream as it has been a relative strength leader against the market and is breaking to new 52-week highs. Sentiment on THC remains negative, which suggests that robust upside potential exists as the bears could change posture and turn into buyers. We favor a target of $30 before year-end.

Recommended Trade Setup:
-- Buy THC at the market price
-- Set stop-loss at $26
-- Set price target at $30 for a potential 6% gain by year-end

Yahoo (NASDAQ: YHOO)
Don't call it a comeback, they've been here for years (sorry for the LL Cool J reference). It's true, though, Yahoo has been around and had the tools for success; its lack of it appears to have been a personnel issue, which may now be on the mend.
Wall Street votes with its accounts, and YHOO shares are reflecting some trust in new management. We don't typically like stocks that are trading nearly 30% higher over a three-month period, but Yahoo is likely to march higher as traders and analysts improve their outlook for the shares.
Look for a price of around $21 by January, a return of almost 12%. Not bad for a company that was all but dead a few quarters ago.

Recommended Trade Setup:
-- Buy YHOO at the market price
-- Set stop-loss at $18.50
-- Set price target at $21 for a potential 12% gain by year-end

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