Cash-Rich Companies with Strong Charts
07/05/2011 10:10 am EST
Investors looking for relative safety in the current environment should consider shares of these four companies, which have plenty of cash on hand and solid chart patterns.
Better-than-expected economic data, especially on the manufacturing side, added fuel to the impressive stock market rally last week. On a short-term basis, the major averages are clearly overbought, as most are at or above the daily Starc+ bands.
On the plus side, the Advance/Decline (A/D) lines on the broad NYSE Composite as well as the S&P 500 and Dow Industrials have all moved above their previous highs. This does favor new highs for the major averages, and the Dow Transports surpassed the 2011 closing highs on Friday.
This week, the focus will be on the unemployment situation, but there are still quite a few analysts favoring the double-dip scenario, as they are skeptical about last week’s positive economic data. From a contrarian standpoint, the continued skepticism should be another positive for the market.
For the nervous investors, stocks with high levels of cash often seem attractive to investors. Many companies have also instituted new buyback programs recently, and while most income investing experts prefer dividend increases, several of these companies have quite interesting charts.
Chart Analysis: Discover Financial Services (DFS) benefited last week from the hike on debit card fees and currently has close to $4 billion in cash. The weekly chart shows that it has clearly broken out of its four-month trading range (lines a and b). The three-week, 13% pullback from the May highs held the breakout level (line b) from March.
- The breakout from the trading range has targets in the $29 area with the 2007 highs at $32.17
- The volume has been strong over the past few weeks, as the weekly on-balance volume (OBV) has overcome resistance (line c) and confirmed the price action
- DFS closed lower Friday on high daily volume, suggesting a needed correction is now underway
- Initial support is at $25-$25.37 with stronger support in the $24.10-$24.60 area, which corresponds to the 50% and 61.8% support levels
Campbell Soup Co. (CPB) recently announced a $1 billion share buyback program and currently yields 3%. CPB has been locked in a trading range over the past seven months with resistance at $35.70 (line e) and support at $32.78 (line f).
- The strong close last week above the prior three-week highs at $34.45 is a short-term positive
- On a move above $35.70, the next major resistance stands in the $38 area. There is additional resistance from 2008 at $39.43-$40.83
- The weekly OBV has turned up from its weighted moving average (WMA), which is a positive sign. The daily OBV (not shown) has also turned positive
- There is short-term support now at $34-$34.20 with stronger support at $32.95-$33.48
NEXT: Two More Smart Buys in the Current Environment|pagebreak|
Intel Corp (INTC) closed strong last week after holding the support in the $21 area. INTC currently yields 3.2% and has almost $12 billion in cash.
- There is next resistance at $23 with more important resistance in the $24 area, line a. A convincing breakout above this level will signal a move to the 2007 highs at $27.99
- The weekly OBV held its uptrend, line c, and has moved back above its weighted moving average. The daily OBV is also positive
- The weekly chart shows that the uptrend from the 2010 lows, line b, is still intact. Major support stands at $19.36
Walt Disney Company (DIS) has $3 billion in cash and yields 1%. The weekly chart shows last week’s strong close after testing the support zone from 2010 in the $37.19-$38 area.
- There is next chart resistance in the $40.45-$41.67 area with the 2011 highs at $44.34
- The weekly OBV did confirm the March highs, but recently violated its long-term uptrend, line f. The monthly OBV pattern is positive, as it has held its rising weighted moving average
- There is minor support now at $39.20 with stronger support in the $38-$38.50 area
- The long-term uptrend, line e, is in the $36.40 area
What It Means: On the economic front, the battle lines are clearly drawn as to whether the recent weak economic numbers represent just a pause in the recovery, or if they are warning about further economic weakness ahead.
The technical action is clearly positive and does favor further gains this month. Therefore, the first lower daily close this week should signal the start of an overdue pullback. For those who are underinvested in stocks, these companies are buying back shares and generally have good cash levels, making them worthy of consideration.
For those looking for a strong economy for the rest of the year, Walt Disney Company (DIS) should have the best potential, but also higher risk. Though Discover Financial Services (DFS) has already broken out to new highs, it is clearly leading the market higher.
How to Profit: For Discover Financial Services (DFS), go 50% long at $25.23 and 50% long at $24.72 with a stop at $23.48 (risk of approx. 5.9%). Sell half the position at $29.42 and raise the stop on the remaining position to $25.22.
For Campbell Soup Co. (CPB), buy at $34.24 with a stop at $33.08 (risk of approx. 3.4%). Sell half the position at $36.24 and raise the stop on the remaining position to $33.67.
For Walt Disney Company (DIS), buy at $39.18 with a stop at $36.92 (risk of approx. 5.7%). Sell half the position at $41.34 and raise the stop on the remaining position to $38.42.
On April 11 (see “Best Yield Bets in Tech”), I recommended going 50% long Intel Corp (INTC) at $19.74 and 50% long at $19.42 with a stop at $18.57. Both levels were hit when the low on April 14 was $19.41. Raise the stop on that position to $20.32.
Those not already long INTC could still buy at $21.92 with a stop at $20.88 (risk of approx. 4.7%). On a move above $23.60, raise the stop to breakeven.