3 Under-the-Radar Yield Plays

09/14/2011 10:55 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

These lesser-known dividend stocks show favorable chart and volume patterns, have good upside potential, and limited risk, making them good buys for both traders and longer-term investors.

One of the regular screens I run almost every day is one that looks for unusual volume activity. Normally, a quick look at the charts will allow me to determine whether I should do further research.

Yesterday’s scan revealed several companies that had turned up from recent lows on significantly higher volume. I was not familiar with the three companies that looked the best and was pleasantly surprised to see that all had attractive yields as well.

These stocks look attractive for both investors and traders since tight stops can be used. If the current bottom is just signaling a rebound within the downtrend, they still have the potential for 7%-10% on the upside. Of course, if a more significant low is being formed, the upside potential is even greater.

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Chart Analysis: Graco Inc. (GGG) is a $2 billion company that is in the industrial goods sector and is focused on all aspects of fluid delivery. It currently yields 2.4% and has a current ratio of 3.44. (The current ratio represents current assets divided by current liabilities. It is used as a measure of a company’s ability to pay its short-term obligations as well as the safety of its dividend. Above 1.0 is acceptable, so 3.44 is quite strong.)

  • On Monday, GGG made a low of $34.40, which was just above the August low of $34.04. It could be forming a double bottom, line b
  • Initial resistance is at $38.34 with key resistance at $40.79, line a. A move through this level should signal a move to the 50% retracement at $44.15
  • There is major resistance in the $46.50-$49 area
  • Volume was three times the average at 1.2 million and the on-balance volume (OBV) is testing its downtrend, line c

Applied Industrial Technologies (AIT) is a $1.2 billion company that distributes a wide range of industrial supply products to commercial and government clients. It currently yields 2.7% with a current ratio of 2.88.

  • The chart shows significantly higher lows, line e, which may be part of a flag formation
  • If it is a flag formation, AIT should at least rally back to the 50% retracement resistance at $30.60-$31.05 and possibly the 61.8% resistance at $32.15. A strong close above this level will suggest a more important low is in place
  • Volume on Tuesday was almost three times the average and the OBV has moved well above its weighted moving average (WMA). The OBV was very strong on the recent rally
  • Initial support is now at $27-$26.60 with more important support at $25.90 and a major support level at $24.50

NEXT: Another Little-Known High-Yield Play; How to Profit

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PAA Natural Gas Storage LP (PNG) is a $1.2 billion limited partnership that engages in all facets of natural gas storage. It currently yields 8.4% with a marginal current ratio of 1.08. It has fairly low average daily volume at 77,000 shares.

  • The chart shows lower lows that were not confirmed by the Relative Strength Index (RSI) and other momentum studies which have formed bullish divergences. Monday’s low at $16.32 was fairly close to the daily Starc- band (not shown)
  • There is first resistance at $17.60 with more important resistance at $18.19, line b
  • A close above $18.19 should signal a move to the 38.2% retracement resistance at $19.68. The 50% resistance is at $20.73
  • Volume was impressive yesterday at almost five times the average daily volume. The daily OBV has moved back above its weighted moving average

What It Means: Volume spikes are often significant, at least for the short term, and they sometimes have longer-term significance. These three companies each present very different opportunities.

The lower yields in GGG and AIT seem to be very well protected and the charts look much stronger than that of PNG. For all three, I would recommend selling half the position at the first resistance levels, which, if met, would result in nice short-term gains.  That would lower the cost basis of the remaining position and make the risk negligible. In all three, limit orders should be used, as always.

How to Profit: For Graco Inc. (GGG), buy at $36.44 with a stop at $34.28 (risk of approx. 5.6%). Sell half the position at $40.48 for an 11% gain and raise the stop to $35.38 on the remaining position.

For Applied Industrial Technologies (AIT), buy at $28.03 with a stop at $26.44 (risk of approx. 5.7%). Sell half the position at $30.58 for a 9.1% profit and raise the stop to $27.46 on the remaining position.

Higher-risk traders could buy PAA Natural Gas Storage LP (PNG) at $16.72 with a stop at $16.19 (risk of approx. 3.2%). Sell half the position at $17.92 for a 7.2% profit and raise the stop to $16.39.

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