James Dennin, Kapitall: These undervalued stocks are rallying well above their 200 day SMA. Can they get much higher?
While the stock market took a slight dip in January, there are still many analysts who think that it will still go much higher in 2014, as much as 7 or 8% depending on how the rest of the economy does throughout the spring and summer months.
The reason behind their thinking has to do with the technical performance of stocks in the year so far.
The simple moving average (SMA) of a stock is the average closing price for the stock over a set period of time. As of now, the three most commonly cited SMAs, the SMA 50, 100, and 200 — are all moving in more or less perfect tandem.[Read more from Kapitall: Can You Profit from the Internet of Things?] Even when stocks receded, the average SMA 50 never dipped below the SMA 100. This indicates that the momentum on the stock market hasn't really abated if you look outside the day-to-day performance of each company. Earnings will drive stock market growth this year. Without the Fed buying assets to drive up stock prices their only support going forward will be better earnings. Fortunately as the economy improves this will get more and more likely. We decided to run a screen to see which companies were rallying but also seemed likely to grow their earnings. To do that we ran a screen on stocks that trade on the S&P 500 index. We wanted companies that are rallying, so we screened for stocks that trade at least 15% above their SMA 200. Then, to narrow the screen further we looked for a mismatch between earnings per share (EPS) and price. Earnings per share is the ratio between a company's earnings and the amount of shares in the stock's float. When EPS goes up it means that the company is doing a better job of generating more earnings for each share of equity. When EPS goes up faster than the stock's price it's called an EPS/Price mismatch. This indicates that the company might be undervalued and could support a higher stock price.