ADT and PIR: Two Stocks on Our Radar

10/12/2015 9:00 am EST

Focus: STOCKS

Michael Berger

President & Founder, Technical420.com

Recent volatility in global markets cannot be ignored and investors must position themselves accordingly, so Michael Berger, of Technical420.com, highlights the stocks of a pair of companies that do not have too much exposure to global markets.

The United States stock market closed higher on Friday, making it the best week of 2015 for the S&P 500 (SPX) and the second best for the Dow Jones Industrial Average. Friday’s rally came after Federal Reserve minutes were released. The minutes that were released made an interest rate hike during 2015 seem unlikely. 

Investors must now reposition themselves to protect their investments during the upcoming earnings season. The rally last week left the NYSE McClellan Oscillator in massively overbought territory on a short-term basis and we expect to see a pullback between mid-October and mid-November.

Selectivity Is Key

Last week’s rally was not significant enough to wipe out the Dow Theory sell signal from August 25. Since the early 1950s, there have only been seven of 24 such signals that did not morph into a bear market and this makes it difficult to ignore such signals. Unless the lows from August 25 are breached, we are currently ignoring the signal.

Recent volatility in global markets cannot be ignored and investors must position themselves accordingly. We recommend investing in companies that do not have too much exposure to global markets, especially China.

On Our Radar

Two investments we expect to outperform the market over the near term are the ADT Corporation (ADT) and Pier 1 Imports, Inc. (PIR).

The ADT Corporation ADT is on our radar because 100% of its business is located in North America which makes them not levered to global market concerns. ADT is trading at a significant discount to its peer group with a 1.63 price-to-sales ratio (industry average is 35.72). ADT is enjoying a healthy pricing environment and is making progress on improving its subscriber metrics. We expect to see ADT experience multiple expansion on its path to free cash flow growth due to strategic investments in Pulse and small business capabilities.

Pier 1 Imports, Inc. PIR has seen its share price fall by approximately 25% during the last month and shares are down more than 50% during 2015. Negative market sentiment has driven PIR down to a level where the risk/reward profile heavily favors reward. We believe that cost overruns related to congestion in Pier 1’s distribution centers are transitory and will be worked through over the next few quarters. PIR’s management team has successfully balanced the pricing mix at stores and we expect to see margins continue to improve over the next twelve months. 

Michael Berger, Founder and President, Technical420.com

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