Is ITT a Diamond in the Rough?

xxWith the recent collapse in stock prices, there hasn't been much to escape the selling. In fact, with the exception of the few select golden children chosen by the U.S. government in the banking sector, nothing else has managed to hold together.

Now it is arguable that many stocks have simply been unjustly and unnecessarily sold off as the panic and deleveraging has forced selling even in those issues not deserving of it. When the panic hits, all semblance of reason is thrown away, and stocks are sold with reckless abandon. The selling begets more selling, which in turn results in people redeeming mutual funds and hedge funds having to meet their redemptions. Poor performance drives redemptions which drives selling.

It still may be a bit premature, but we might as well begin a productive process of trying to sift through the carnage and find those stocks that might have been unjustly sold off and are potential diamonds in the rough at this point.

One that comes to mind is ITT Corp. (ITT - commentary - Cramer's Take). ITT makes diversified products for the defense and water industries. Slowdown or not we all need clean water and to maintain a strong defense. Whether their pumps are used to upgrade or replace older equipment, or as part of new infrastructure build outs, there should be continued demand.

Their defense business is more focused in electronics, with products not as prone to budget cuts. This would include products like night-vision goggles, GPS systems and radar systems. The firm has also been active with NASA projects and won a contract with the FAA to upgrade the air traffic control technology over an 18-year time span.

Not one of their contracts accounts for more than 4% of their business revenue, making the company less susceptible to macro-economic risks, the very reason for which the stock has been under pressure. When the dust settles and rationality returns to the market place, it could see a decent pop, as investors realize things aren't as bad as they thought for a company like ITT.

ITT

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The stocks' technical configuration is very similar to most industrial stocks after the recent selloff. It had been in a constructive configuration that gave way in quick fashion and was relentless in the decline. That decline was in the magnitude of 30% in just five weeks. Not as bad as many, but nasty just the same.

This will not be an easy road back, and we do need to be aware that the longer-term trends have been negatively impacted by the recent weakness. This can be seen in the now-downward-sloping moving averages, an indication of trend. However the sharp drop and volatile nature of the decline suggests there is an opportunity to the upside near term for a counter trend trade.

We can find longer-term support in the $39-$40 range near the recent low . There is the potential for the stock to trade back up to resistance in the low to mid $50s. We would look for a rally to that level and use a stop below the recent lows in the $38-$39 area.

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At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned, although positions may change at any time. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.