Buffett-Style Portfolio Acting Well

03/28/2011 10:05 am EST


Thomas Aspray

, Professional Trader & Analyst

Five promising industrial stocks we’ve been tracking recently have reached the recommended buying zones. Here’s how to manage the entries and risk on the positions.

On March 10, in a column titled “5 Stocks Buffett Would Love,” I took a technical look at five large industrial stocks that had market values over $5 billion and solid fundamentals that might make them acquisition targets of Warren Buffett. Now that four of the five stocks have dropped into the recommended buying zones, it’s time to act accordingly.

The weekly technical outlook on all five stocks in this portfolio remains positive, as most have bounced nicely from good support, but two stocks look the best, while I think “the one that got away” should still be bought at a slightly higher level.

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Chart Analysis: Kennametal Inc. (KMT) peaked ahead of the market in January at $44.10 and dropped to a low of $36.57 on March 15, bottoming one day ahead of the overall market.

  • The weekly chart shows that the 38.2% support of the rally from summer’s lows was tested on the recent decline, and KMT bounced above the $40 level last week but closed off the highs

  • The next resistance stands at $41.60 with the 127.2% retracement target at $46.30

  • The weekly on-balance volume (OBV) shows a pattern of higher highs (line a) as it has confirmed the price action. The OBV has rallied up to its weighted moving average (WMA), while the daily OBV is strong

  • If the recent lows are violated, there is next good support at $35-$35.40

WW Grainger (GWW) reversed to the downside in early January and appears to have formed a continuation pattern over the past 11 weeks. The weekly resistance (line b) was slightly overcome last Monday.

  • There is first resistance now at $138 and then in the $139.30 area. The 127.2% retracement target for GWW is at $143.60, which is the next likely upside target

  • GWW made lows on March 16 at $131.45 but held well above the prior lows at $129.00 (line c)

  • The weekly OBV has held up much better than prices, which is a positive sign

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Expeditors International of Washington (EXPD) had a low of $45.91 on March 15, just missing the top of the recommended buying zone at $44.90-$45.84, which is highlighted in green on the chart. It is a Transport stock that is entering a strong seasonal period (see “Transports Season to Shine: 6 Picks”).

  • The weekly support, line d, was tested on the recent decline with stronger support now at $44.30-$45.30

  • The weekly OBV continues to act well and suggests that the worst of the selling is over. A move in the OBV above its previous highs would be quite positive

  • A close above the recent weekly highs at $49.40 would be the first sign that the uptrend had resumed with stronger resistance in the $53.84-$55.11 area
What It Means: The action of the five stocks on the recent sharp market plunge was constructive and suggests they may be leaders once the stock market’s intermediate uptrend resumes. I still like all of them and will now adjust the recommended buying levels for EXPD.

Full disclosure: I just found out on Friday (Mar. 25)—my eldest sister’s birthday—that she already owns EXPD (I don’t) and I told her that it was a stock that I liked.

How to Profit
: In order to support my bullish view on these stocks, they should not drop significantly below the recent lows. Therefore, I will adjust the stops on many of those stocks where our buy levels have been hit.

As for EXPD, I would look to buy at $46.60-$47.44 with a stop now at $44.87 (risk is approx. 5.4%).

Update on Other Portfolio Positions

Illinois Tool Works (ITW) opened on March 14 at $54.25, which was in our buy zone of $53.65-$54.35, and closed Friday at $54.97. On long positions, raise the stop on this position to $51.37 and raise it to $52.40 on a move above $56.

WW Grainger (GWW) opened on March 15 at $132.94 near the lower end of our buying zone at $132.60 to $133.88. It closed Friday at $135.91. For longs, keep the stop at $127.86 for now, but raise it to $130.90 on a move above $138.

Automatic Data Processing (ADP) hit our buying zone at $47.92-$48.74 on March 16 and closed last Friday at $50.37. Raise the stop now to $46.67.

Kennametal Inc. (KMT) opened at $36.75 on March 15 and traded as low as $36.57, reaching the recommended buy zone at $35.82-$36.77. KMT closed Friday at $38.92. Raise the stop now from $33.93 to $34.87.

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