3 lofty stocks that are set to correct
Moody's, First Solar and Tripadvisor all could stand to lose a little froth
By Johnson Research Group
The market's stall on the heels of Ben Bernanke's cryptic testimony early last week has traders considering the prospects that we could finally see a round of profit-taking.
So far, the S&P 500 has posted only slight declines, but things might only be getting started if the benchmark index fails to hold at its first level of support at 1,625.
The potential for declines has us checking on some of the index's more "overbought" stocks for candidates to short into the market's weakness.
One easy way to determine whether a stock has overextended itself is to measure the current price's distance from its 50-day moving average -- what we refer to as a stock's "50-day premium." Monitoring the list of companies with the highest 50-day premiums yields a list of stocks that might be more inclined to sell off as traders begin to lock in profits.
The table below identifies the 10 stocks in the S&P 500 with the highest 50-day premiums. While we believe many of these stocks will continue to outpace the market over the course of the year, their current premiums suggest they have farther to correct when the market does see a pullback.
Here are three stocks that investors should pay special attention to -- both to potentially short or play with put options, as well as buy on the dip.
Moody's (MCO) got tripped up in the rating agency llegations in February (InvestorPlace), which offered an incredible opportunity to get into this market leader. We loved Moody's on the pullback to $40, but shares now feel toppy shy of $70.
While MCO remains a long-term "buy" on our books, we're expecting the shares to see some pressure. Right now, a 10% decline back to the $60 level is reasonable, and enough to offer short sellers or those willing to buy puts an opportunity to hedge a market decline.
For the record, we would be a buyer of MCO shares at a $60 price.
First Solar (FSLR) has been on fire since its earnings announcement on April 9. Since that report, FSLR shares have returned 31% -- six times the S&P 500 in that time! -- putting the solar manufacturer on our list of companies rich for profit-taking.
First Solar is already trading 14% off of its highs from earlier this week, but a break through its 20-day moving average ($48.93) will enact another round of profit-taking.
For now, a near-term target of $45 is reasonable for FSLR shares, which is plenty of room for a bearish trade or hedge to profit.
Like Moody's, we would love to own Tripadvisor (TRIP) through the remainder of 2013, as our outlook is favorable for the company. TRIP shares have rallied 42% during the past three months -- compared to the S&P 500's return of 10.9% for the same period -- as we head into the official summer travel season.
While we love Tripadvisor's performance so far this year, it looks like there's room for correction. The current chart suggests the stock could possible take a trip (sorry) to the $54 level, a correction of more than 12% if it happens.
For now, locking in profits or even buying puts on TRIP makes sense, as does picking the shares up if they do hit the $55 level.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
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