4 stocks to watch for next week
The fiscal deal sparks construction and defense stocks for now. Alcoa and Constellation Brands will report earnings.
1) Alcoa reports 4Q results
What's happening: Alcoa (AA) is coming off a relatively flat three months, with the stock up just 1.8% since the end of September. It was in the red during much of that period until a large gain on the budget deal. The stock has been hampered by fear that President Obama and Congress would fail to reach an agreement to avoid the fiscal cliff. The company is due to report its fourth quarter results on January 8, with analysts expecting earnings of $0.07 per share, versus a loss of $0.03 per share during the same period last year. All eyes will be focused on Alcoa's earnings report, as the company is seen as a bellwether for the overall economy.
Technical analysis: AA was recently trading at $8.99, down $1.93 from its 12-month high and $1.02 above its 12-month low. Technical indicators for AA are bullish, with the stock showing a weak downward trend. The stock has recently seen support above $8.50, and resistance below $8.85. Of the 15 analysts who cover the stock three rate it a "strong buy," two rate it a "buy," seven rate it a "hold," and three rate it a "strong sell." The stock receives Standard & Poor's 4 STARS "buy" ranking.
Analyst's thoughts: I believe 2013 will be much better for Alcoa than 2012. A big reason why Alcoa's performance was lackluster last year was the slowing growth of the Chinese economy. Analysts believe that China's economy is going to pick up again in 2013, and so should its appetite for aluminum. The company remains the world's leading aluminum producer and with the fiscal cliff avoided and China improving, 2013 should reward investors this year.
2) Fiscal deal brings buyers back into the market
What's happening: The fear of the nation going over the fiscal cliff weighed heavily on some industries, including construction equipment. Since the end of September, Caterpillar (CAT) stock has appreciated 10%, but the vast majority of that gain has come over the past week as anticipation grew that a deal would be reached. Improved economic conditions in China are giving the stock a much-needed boost as of late. Since setting its 52-week high last February, CAT settled into a range between $80 and $85, but has been testing the high side of that recently. The fiscal deal raises enthusiasm towards the economy and should boost construction spending in 2013.
Technical analysis: CAT was recently trading at $93.50, down $23.45 from its 12-month high and $15.25 above its 12-month low. Technical indicators for CAT are bullish, with the stock showing a weak upward trend. The stock has support above $87.75. Of the 21 analysts who cover the stock, seven rate it a "strong buy," two rate it a "buy," and 12 rate it a "hold." The stock receives Standard & Poor's 4 STARS "buy" ranking.
Analyst's thoughts: As investor confidence returns to the market following the fiscal cliff deal, I expect to see Caterpillar continue its recent upward trend. The stock is still very depressed from its level this time last year, and I believe there is still much value in the stock. There is a chance that the stock may run into trouble in March as the debate over the debt ceiling kicks in, but the long term is very positive, especially if the situation in China continues to improve as it is expected to do.
3) Fiscal deal pushes back automatic defense cuts
What's happening: Half of the fiscal cliff debate involved the ending of the Bush-era tax cuts, but the other half involved automatic budget cuts that were set to kick in at the end of 2012. The scheduled budget cuts would have resulted in $55 billion in cuts by the Pentagon during the current fiscal year. The deal reached by politicians postponed these cuts, but it did not eliminate them. They were pushed back two months to allow further negotiations to take place along with the upcoming debate on the debt ceiling. This is better news for defense contractors like General Dynamics (GD) in the near term than no deal at all, but it keeps a cloud of uncertainty hanging over the entire sector for at least another two months.
Technical analysis: GD was recently trading at $71.21, down $3.33 from its 12-month high and $10.12 above its 12-month low. Technical indicators for GD are bullish and the stock is in a weak upward trend. The stock has support above $68.75. Of the 18 analysts who cover the stock 11 rate it a "strong buy," one rates it a "buy," and five rate it a "hold." The stock receives Standard & Poor's 3 STARS "hold" ranking.
Analyst's thoughts: GD stock has moved sharply higher over the past month and I believe that we have seen just about all the buying that we are going to see in the stock in the near term. While it is true that the fiscal cliff put off the defense cuts, there will certainly be some cuts made eventually -- it is just a question of how big the final dollar amount will be. As with anything in the investing world, uncertainty will keep the stock from moving too much in the weeks leading up to the new deadline for policymakers to reach a decision on just how big cuts in the defense budget will be. Should no decision be reached, the Pentagon will be forced to make the necessary $55 billion cuts this year and would have two less months to make them. There is too much uncertainty to go bullish on General Dynamics at the current time.
4) Constellation Brands reports 3Q earnings
What's happening: Constellation Brands (STZ) is coming off a fantastic 2012, a year in which the stock price increased 71%. A big reason why the stock was able to outperform the market by such a large margin is its low exposure to the weak European market. North American markets generate 77% of the company's sales, so European and Chinese weakness did not have a similar level of impact as it did on similar companies in the industry. The company will report its fiscal third quarter results on January 9, with analysts expecting to see earnings of $0.55 per share. During the same period last year the company had earnings of $0.50 per share.
Technical analysis: STZ was recently trading at $37.56, at 12-month high levels and $19.06 above its 12-month low. Technical indicators for STZ are bearish and indicate a possible trend reversal. The stock has recently seen support above $34.15. Of the six analysts who cover the stock four rate it a "strong buy," and two rate it a "hold." The stock receives Standard & Poor's 4 STARS "buy" ranking.
Analyst's thoughts: Constellation Brands has a solid earnings track record and I expect to see another better than expected quarterly report for its fiscal third quarter. With so much of its revenues coming from the U.S. market, I believe that the recently reached fiscal cliff deal will lead to more upside to the stock and its low exposure in Europe shields it from ongoing weakness in that region of the world. While I am bullish on the stock, I would be a little weary of setting up any new positions at the current time with the stock trading just one penny below its 52-week high. There is more upside to the stock, but I would want to wait for a little profit-taking to drive the price down a bit before jumping in. Even with the recent run up in price the stock is trading at a price-to-earnings ratio of just 16.9, but I would try to get in closer to the 15 level if possible.
*Annualized returns provided for comparison purposes only
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At the time of writing, Mr. Fowlkes has a long position in MSFT and does not have direct ownership in any of the other stocks mentioned.
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