Now about new highs being celebrated, amidst deterioration of a slew of internals: This suggests nei...
5 Stocks Buffett Would Love
03/10/2011 3:45 pm EST
These companies are fundamentally strong, and the charts show solid long-term uptrends. With corrections underway, each stock looks like an attractive buy for value-minded investors and traders.
In a recent Wall Street Journal article, Dennis K. Berman discusses the results of a scan conducted by CapitalIQ to find stocks that appeared to meet Warren Buffett's acquisition criteria.
Though it is quite likely that Mr. Buffett will not buy any of these companies, the fact that they fit the criteria warrants a closer technical appraisal to see if they would work together as a "Buffett-style" portfolio.
Starting out, it might be illuminating to take a look at the chart of Burlington Northern (BNI) up to the time of Buffett’s buyout in 2009. This chart is courtesy of QuoteMedia.com since my historical database only went up through 2006. There are just a few things that need to be pointed out. The first is the basing period from roughly 2001 through 2004 as BNI finally overcame resistance (line a) at $33.40 in July 2004. BNI shows a clear pattern of higher highs and higher lows up through the peak in June 2008 at $114. The final peak occurred after BNI broke out of its upward trading channel, lines c and d. The drop back through this support (line d) in December 2008 suggested a change in trend as it violated the lows made early in the year. Before the decline was over in March 2009, the long-term uptrend, line b, was also briefly violated. By looking at this chart, it is evident that BNI was a strong market performer for many years as Buffett was accumulating shares, but it also shows that long-term bulls might have bailed out of BNI when the $80 level was broken.
The first stock I would like to examine is Illinois Tool Works (ITW), which has long been a darling of many astute value investors and advisors. ITW bottomed in March 2009 at $25.60 (point 1), and by the end of the year, it had almost doubled (point 2). In April 2010, ITW hit a high of $52.49 and then underwent a several-month correction that held above the major 50% support level at $39. During the correction to the August 2010 low of $40.33, the on-balance volume (OBV) held up very well and had confirmed the April highs. The longer-term uptrend in the OBV, line f, was tested on several occasions. The OBV moved through its resistance (line e) the week of September 18, 2010, signaling that the uptrend had resumed.
ITW is now in a solid uptrend, line c, and is testing the major resistance, line a, in the $56 area, which goes back to 2008. Once this is overcome, the all-time highs are at $60. Using the impulsive rally from point 1 to point 2 and measuring up an equal amount from point 3, the 100% target is just above $66. This corresponds nicely with the upper boundaries of the long-term trading channel, line b. The OBV has pulled back to its weighted moving average (WMA) but does show a pattern of higher highs.
How to Profit: Buy ITW at $53.65-$54.35 with a stop at $50.27 (risk of approx. 7.5%). On a move above $56.65, raise the stop to $53.90 and sell half the position at $59.88.
NEXT: See More Buffett-Worthy Values|pagebreak|
WW Grainger (GWW) is a Chicago-based industrial equipment company that formed a double bottom in March 2010 at just below $60 per share. The OBV made new lows with prices and formed no positive divergences. The major resistance in the OBV, line d, was finally surpassed in August 2009, which was bullish. By Thanksgiving 2009, the all-time highs from 2007 at $99.60 were surpassed. The correction from the April 2010 highs at $116.07 was fairly brief as it held well above the 38.2% support at $95. The weekly OBV turned up in July and made new highs in August, leading prices higher for almost a month.
Since December, GWW has been consolidating from the highs at $140.17 and shows a flag formation on the weekly chart, lines a and b. The insert shows the same formation on the daily chart, which is clearly a continuation pattern. The short-term targets from this formation are in the $148-$150 area. The equality target, using the rally from point 1 to point 2 and measuring up from point 3, is at $153.
How to Profit: The flag formation clearly favors an upside breakout and the only question is how close we are to completing the pattern. I would buy GWW at $132.60-$133.88 with a stop at $127.86 (risk of approx. 4.4%). If we complete the flag formation first by closing above $138.15, then buy at $137.47 or better with a stop at $132.77 (risk of approx. 3.4%).
Automatic Data Processing (ADP) broke through its downtrend dating back to 2002 in early 2011. The next resistance, which dates back to December 2001, is at $54.21. The all-time highs for ADP were recorded in November 2000 at $62.41. In December 2010, the resistance at line c in the $45.75 area was overcome, and this was confirmed by a similar upside breakout in the OBV (line d). The first support is at $49.50-$50.30, which corresponds to the 2007 highs. There is further support at $48.50, but much stronger support in the $46-$47 area. The OBV is rising sharply but is still below the 2007 highs.
How to Profit: Since ADP is close to its highs, this becomes a more difficult entry, and I would only look to buy quite a bit lower unless a better trading range develops. Go long at $47.92-$48.74 with a stop at $45.71 (risk of approx. 6.2%). On a move above $51.20, raise the stop to $48.88, and sell half the position at $52.88.
NEXT: 2 More Stocks to Watch|pagebreak|
Kennametal Inc. (KMT) is a machine tool and accessory company that has pulled back 14% from the January highs at $44.11. The 2007 highs are at $45.60. The minor 38.2% support is not far below current levels at $36.40 with the lower weekly starc- band at $34.85. The 50% support and the May 2010 highs come in at $34. The weekly OBV bottomed out in August 2009 by moving through resistance at line c and was very strong at the end of 2009. The OBV has confirmed all of the recent highs (line e) and made strong new highs in early 2011. The OBV is well below its weighted moving average and would likely take a few weeks to turn positive. The monthly OBV (not shown) is now very close to testing its rising weighted moving average and also confirmed the recent highs. There is initial resistance at $39.80-$40 with more important resistance at $41.60. A move above this level should confirm the resumption of the uptrend, and the equality target is at $46, which would be an all-time high.
How to Profit: KMT may be close to completing its correction, and I would buy at $35.82-$36.77 with a stop at $33.93 (risk of approx. 7.7%). Once above $41.80, raise the stop to $36.77, and sell half the position at $43.68.
Expeditors International Washington (EXPD) is in the air delivery and freight services business. EXPD dropped briefly below $25 per share in 2009 and recently hit a high of $57.15. This was just below the 2006 high of $58.32. With the low last week at $46.28, it had dropped over 20% from recent highs. The minor 50% support calculated from the 2010 lows and the major 38.2% support from the 2009 lows comes in at $44.50-$45.50. There is additional support at $42.39, which corresponds to the May 2010 highs. The major 50% support and the weekly uptrend (line b) are in the $40.50 area. The OBV did not break its two-year downtrend, line c, until early in 2010. The OBV has formed a series of higher highs, but is still below the 2008 high. It has held up very well on the recent correction, indicating a low level of selling pressure. It is positive that the OBV is still above its weighted moving average and support at line d.
How to Profit: EXPD has corrected enough that it may also be quite close to the correction lows. I would buy EXPD at $44.90-$45.84 with a stop at $42.53 (risk of approx. 7.2%). On a move above $52.60, raise the stop to $47.44 and sell half the position at $56.40.
Of course, now that these stocks are in the news, it’s likely that even if Warren Buffett were once interested, he isn’t anymore. From my perspective, it is more important that in addition to compelling fundamentals, they have charts showing strong long-term uptrends. They are currently undergoing corrections, which should set up good buying opportunities. Even if these companies are never bought out, I think that their stocks would make welcome additions to anyone's portfolio.
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