Three Bullish Second-Quarter Plays

This column was originally published on RealMoney on April 9 at 12 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Analysts are ratcheting down estimates for quarterly profit growth in response to the housing slowdown and subprime crisis.

But there's one place where reduced earnings aren't showing up right now: The interface between one quarter and the next usually triggers waves of warnings as internal company mathematics fail to match external expectations.

That hasn't happened yet, at least from an anecdotal point of view. But it might be too early to declare victory, with the market holiday skewing last week's news flow. So let's wait another week and keep our fingers crossed. In the meantime, a little planning for a better-than-expected earnings season is in order.

An upbeat period for earnings and positive commentary from the majority of publicly held companies would help improve market sentiment and shake off the jitters that have afflicted world markets since late February. It might also turn out to be an excellent setup for contrary-minded traders and investors.

Downside put protection headed into earnings season is more expensive than usual because of the growing consensus that we're in a slowdown that teeters on recession. But recent data, including last Friday's labor report, show a resilient economy finding new ways to replace growth lost when housing prices crashed out of the skies.

Realistically the markets might continue their recovery off the post-chaos lows and break out to new multiyear highs in the next two to three months. Honestly, there isn't anything in the price charts that rules out this bullish event, especially with the relatively strong finish to the first quarter.

The best way to benefit from a bullish second quarter is to play sectors that held up well through all the turmoil. I nominate the utility stocks in this regard. Note how the Utility HOLDRs Trust(UTH Quote) hit an all-time high on the day prior to the selloff. It fell with the broad market but then shot back above its February high-water mark last week.

The positive action confirms that the uptrend is still intact and sets the stage for a continued rally up to $150. Notably, the instrument is responding to a monthly breakout over six-year resistance at $121. This predicts the rally could last through the rest of 2007. This is excellent news, because the sector is a canary in the coal mine for the U.S. economy.

Reviewing my databases, I pulled up three utility issues that show solid positioning and healthy accumulation through all the March madness. These could be the stocks to own in the second quarter, even if the broad market hits yet another brick wall. I believe it's a good idea to put these strong issues on your screen now and look for good entry points.

Reliant Energy(RRI Quote) shows considerable upside, having made despite strong gains in recent months. The stock has been trading higher since a post-IPO decline ended in late 2002. That long-term rally has mounted layer after layer of overhead supply created by the sharp downturn. The latest domino fell in March when price pierced resistance above $17.50.

Price has held up well after the last rally spike hit $21.70 about two weeks ago. This sets up a key test at the rally high that could unfold in the next few days. Notably, this stock is an offshoot of the original holding company that was tangled up in the California power crisis. The 2001 IPO price at $34 marks a natural reward target for the current uptrend.

PNM Resources(PNM Quote) hit an all-time high at $30.43 in August 2005 and pulled back. It mounted this price level late last year and dropped into a broad bull flag that tested support and the 50-day moving average. The stock rallied out of this pattern in late March and is now trading at another new high.

The latest rally confirms the 20-month breakout and supports an uptrend that could last throughout 2007. Unfortunately it's tough to find a good trade entry, because price has been moving higher almost every day for the last two weeks and looks overextended. For this reason, I'd wait for a pullback to $31.50 before getting on board.

Natural gas prices have been remarkably stable in recent months. This has allowed many gas utility companies to firm up and tag new highs. Equitable Resources(EQT Quote) is a key industry player that hit $44.48 in November and dropped into a healthy consolidation pattern. It returned to the high in February and broke out several weeks ago.

The stock spiked up to $50 at the end of first quarter and is still working off volatility from that big rally day. Price is holding up well and could retest the high in the next week or two. This bullish action would support a continued uptrend to an initial target at $60. Given all the positives, it could be headed much higher in coming months.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider Utility HOLDRs Trust to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.