Nine Stocks for Playing the Long Side Safely

Service Corp.(SCI Quote): Operating in a recession-proof industry -- Funeral Services and Cemetery Operations -- Service Corp. is the top-ranked non-small-cap stock in the group and is also the best known. The company is likely to benefit from the demographics of aging baby boomers. The stock has a huge base on the monthly chart, which is one of the reasons it has a technical score of 92 out of 100. We have a longer-term price target of $21. You can buy this between $12 and $15, and I have a stop loss of $10.50.

Xerox(XRX Quote): This has been a perennial turnaround story in the office product space that has gotten little traction over the past few years. We like its technical score of 91 out of 100, and the group has a money flow score of 80 out of 100. Its recent breakout over $17.10 gives us an entry price between $17.50 and $20, with an upside target of $26. I'd use a stop below the breakout, in the $16-$16.30 level.

Mosaic Company(MOS Quote): I have been monitoring the agricultural chemicals sector since last summer. Not only are they plays on the increased demand for food, but there is also a biofuels aspect to these plays. Our favorite in the group is Mosaic, a stock we have owned since last summer. Despite missing its earnings numbers last quarter, the stock has traded higher recently, primarily based on excellent money flow scores, and it has a technical rank of 92. We still like this name, and would use any pullbacks to initiate or add to a position; our upside target remains $41.

Charles Schwab(SCHW Quote): The appeal of the online asset manager is due to its technical score of 90, and its perfect (100) money flow and trend scores. Ideal entries are lower than the current price. So if you can get long between $19 and $21.40, then do so. That gives you a great risk/reward ratio. I would use a stop loss below the breakout over $19, around $18.50, and a $32 target. Yes, I keep hearing they are a potential M&A target, but that's irrelevant to quantitative investing. There may be lots of consolidation among money managers and online trading firms, but we prefer to rely on our unbiased quantitative system for discovering likely candidates.

Although Big Pharma is not one of our top sectors, there are a few names in the sector that are worth looking at: We bought Schering-Plough(SGP Quote) and Abbott Labs(ABT Quote) for our managed accounts back in January 2007. Each has done well and remains on our buy list. Schering has excellent money and trend scores, and a technical rank of 88 of 100. Current entries for Schering are $31-$34, with a point and figure price target price of $39-$40. Your stop loss is $30.25, providing a good risk/reward ratio. For Abbott, the money flow and intermediate and longer term trend scores the price target is $75, with an entry between $52 and $55 and a stop of $51.75. Again, this is an attractive risk/reward ratio.

A speculative name in the group is Warner Chilcott(WCRX Quote). The company has strong earnings momentum, with a 16.25% upside earnings surprise, and a 40.14 % upside earnings surprise in the previous (3/7/07) quarter. WCRX saw 26.88% of its outstanding shares bought by the 25 largest mutual funds in the fourth quarter of 2006. The technical target for WCRX shares is $26.

Back to the Macro

I need to make clear that I continue to have concerns about a laundry list of economic problems: inflation, slowing growth, slow job creation, rising interest rates, the drag from housing. However, certain sectors are more likely to outperform on a relative (as well as on an absolute) basis, especially if the economy slows or slips into a recession.

We will continue to look for names that allow our clients to participate in the market's upside. The key is identifying those stocks that will participate at much lower levels of risk. The companies discussed above fit that qualification.

To see Barry Ritholtz expound on this theme, check out this interview on TheStreet.com TV.