4 Defensive Names Near All-Time Highs

08/31/2011 9:30 am EST


Kate Stalter

CMO & Senior Financial Advisor, Better Money Decisions

Consumers are continuing to spend in certain categories, and some discretionary names have notched new price highs, even in an uncertain market. In a stock with heavy buying and strong fundamentals, a pullback following a new high can offer a buy opportunity, writes MoneyShow.com contributor Kate Stalter.

Many investors dismiss stocks that have already run to new price highs, assuming that it’s too late to get in. However, in many cases, after reaching a new 52-week or all-time high, a stock will pull back, digest its gains, and set up for a fresh rally.

As major indices have struggled, most stocks were knocked down from previous price highs. However, a small number actually managed to reach new peaks. That’s an indication of institutional confidence in these names at a time when conviction about the general market was on the wane.

There’s a defensive nature to some of the names that have run to new highs. Dow component McDonald’s (MCD) has marched higher in each of the past four months.

Certainly, there’s an element of “good, fast, cheap” that enters into the company’s and the stock’s success. In a poor economy, consumers know exactly what they are getting when they go to any McDonald’s restaurant. They also know service will be relatively quick, and their meal will be inexpensive.

However, like most price leaders, McDonald’s has continued to innovate, revamping its menu and putting a new emphasis on store cleanliness. Perhaps the most eye-catching innovation, though, has been its coffee beverages, which have attracted customers who wouldn’t have necessarily gone to Mickey D’s for a Big Mac or a Happy Meal.

Though trading volume in the stock has declined in the past three weeks, it’s remained higher than average. Solid fundamentals tend to attract institutional investors, whose buying pushes the price higher. Wall Street sees double-digit earnings growth for McDonald’s in each of the next two years.

A product that’s associated with McDonald’s is Coca-Cola (KO). Coke’s Mexico-based bottler and distributor, Coca-Cola Femsa (KOF), has pulled back from last week’s all-time high of $102.59, but the technicals remain strong as the stock finds support at its 50-day line.

The company distributes Coke and other beverages in nine Latin American nations. Though it has a market cap of nearly $18 billion, it trades a paltry 67,000 shares a day, on average.

The current 50-day pullback could offer a buy opportunity—though, as always, it’s prudent to use caution in choppy market conditions, such as the ones we’re seeing currently.

While emerging-market stocks in general have suffered disproportionately in recent months, Coca-Cola Femsa is among those bucking the trend.

A possible red flag for Femsa: Trading volume has been tepid for months as the stock advanced. Ideally, you’d like to see new highs on heavy volume, a sign of greater investor conviction.

The earnings outlook remains strong, a fundamental factor in the stock’s favor. Wall Street has pegged earnings growth at $5.07 per share this year, up 20% from 2010. Next year, analysts see EPS of $5.80, up another 14%.

As with McDonald’s, there’s a defensive nature to Femsa. Soft drinks and beer, which the company also distributes, are among items that consumers continue to purchase even in poor economies.

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Dollar Tree (DLTR), another stock that’s been running higher at breakneck speed, is clearly the beneficiary of consumer nervousness. The stock gapped higher Monday, perhaps boosted by some positive comments in the media from some fund managers.

It ran to yet another new high on Tuesday, but reversed off earlier gains. It’s normal for some investors to grab profits on strength, so a pullback soon after a fresh peak is not usually a cause for concern.

Discounters were also some of the best price performers during the market downturn and weak economy in 2008 and early 2009. In fact, the company posted an earnings gain in 2009, something many companies were unable to accomplish.

The stock recently consolidated price gains below its ten-week line. It pulled back in tandem with the general market, action seen in the majority of stocks. It’s shown upside trade in the past two weeks, regaining its 50-day line on August 24 in heavier-than-normal volume.

Volume trends have been positive lately. On August 17, the stock showed a heavy-volume downside reversal. The following day, it also finished lower, but much of its trading volume came as the stock rallied off session lows, with Dollar Tree ending near the top of its session range.

Since then, it’s notched five sessions of above-average upside volume.

The stock is a bit extended from its most recent technical buy point above $70.54. The fundamental picture remains bright, with analysts eyeing 22% earnings growth this year. The next pullback could offer a technical entry point.

Fellow discount retailer Dollar General (DG), which beat top- and bottom-line views in its second-quarter report Tuesday, is also climbing to new highs.

The stock has youth on its side, having gone public in November 2009. Stocks that have gone public within the past decade or so are often some of the market’s best price gainers.

It gapped 6% higher on the earnings beat, after the company also raised same-store sales views. Even more than earnings, upbeat guidance often propels a stock higher in heavy volume.

This is another example where a fresh high could signal renewed institutional confidence, and could offer potential for individual investors.

At the time of publication, Kate Stalter did not own any of the stocks mentioned in this article.

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