It's been a disappointing earnings season in the basic industries sector, with a downbeat report from
followed by warnings from
. Hurricanes Katrina and Rita and commodity hedges that limited profits were blamed.
The sector is 13% overvalued, but nonetheless, I see value in Alcoa, DuPont,
Alcoa reported disappointing earnings after the close on Jan. 9. Higher energy costs and damage to refineries from hurricanes Katrina and Rita caused Alcoa's quarterly income to decline 16%, missing analyst forecasts. On Jan. 17, Alcoa said it will close its pension plan to new workers and suspend employer contributions.
Alcoa is rated a buy by ValuEngine. Its shares are trading 11.5% below their fair value of $33.31. The weekly chart profile is overbought, with the five-week modified moving average at $28.66. Long-term investors should consider buying if it falls to my semiannual value level of $24.27 for a potential rally to the stock's fair value. According to Thomson Financial/First Call, 16 Wall Street analysts have a median price target of $34.25, with a high price target at $40, which is a bit stronger than my profile.
DuPont cut its fourth-quarter earnings outlook in half because of plant outages and the longer-than-expected time it has taken to restore production at 14 Gulf Coast plants shut down by the hurricanes. DuPont is rated a buy by ValuEngine, and it is 15.5% undervalued, with fair value at $47.22. The weekly chart shows declining momentum, with the five-week MMA at $41.58.
Long-term investors should consider buying on weakness to my monthly value level at $37.42. A rebound to my semiannual risky level of $45.45 is feasible if DuPont ends a week above its five-week MMA. According to Thomson Financial/First Call, 14 Wall Street analysts show a median price target at $50 with a high price target at $55, which is a bit stronger than my profile.
Dow Chemical shares are 14.2% below their fair value of $49.55, and ValuEngine rates it a buy. The weekly chart profile shows declining momentum, with the five-week MMA at $43.97.
Long-term investors should consider buying if it dips to my monthly value level of $39.82. It's below my semiannual pivots of $44.29 and $45.99 and annual pivot of $44.77, which suggests it could decline to the value level. According to Thomson Financial/First Call, 13 Wall Street analysts have a median price target of $54, with a high target of $63, which is much stronger than my profile.
ValuEngine rates Lyondell Chemical a buy. It is 21.1% undervalued, with fair value at $30.48. The weekly chart profile shows declining momentum, with the five-week MMA at $24.84. Long-term investors should consider buying on weakness to my semiannual value level of $22.20.
A weekly close above my semiannual pivot at $25.36 would indicate that there is potential that it could rise to my quarterly risky level of $30.65. According to Thomson Financial/First Call, 12 Wall Street analysts have a median price target of $33 with a high price target at $40, which is much stronger than my profile.
Phelps Dodge cut its EPS estimate because of production shortfalls at its mine in Chile and losses on price hedging. Phelps Dodge shares are trading 16.1% over their fair value of $120.75, but they're rated a buy by ValuEngine. The weekly chart profile is overbought, with the five-week MMA at $141.22.
A close Friday below $141.22 would shift the chart profile to negative. My quarterly pivot is $137.69. Investors should reduce holdings if it rises to my quarterly risky level of $151.93, or consider doing so on a sell stop below $141.22 Friday. If shares fall to my semiannual value level of $132.92, you may want to buy.
According to Thomson Financial/First Call, 14 Wall Street analysts have a median price target of $160, with a high price target of $190, which is much stronger than my profile.
My Metrics Explained
I evaluate the U.S. capital markets and profile all sectors, industries or specialty groups of companies. There are more than 6,000 stocks in my database.
Remember that when investing and trading in the U.S. capital markets and specific stocks, decisions should be made only after evaluating both fundamental and technical considerations. It is also equally important to manage risk/reward by having levels at which to buy on weakness and sell on strength. The way to do this is to enter limit orders to buy at a price below the market, or to sell at a price above the market.
Combining fundamentals and technicals is like trying to mix oil and water, but I believe it is necessary to do so, to the best of your ability. The levels at which to buy or sell can be used regardless of the fundamentals or technicals.
My discipline involves a three-pronged approach to measuring the risk/reward for trading or investing:
I use ValuEngine to define my fundamental ratings.
: Long-term investors should start a position now.
: Buy on weakness to a value level.
: Add to an existing position on weakness to a value level, and reduce an existing position on strength to a risky level.
: Reduce on strength to a risky level.
: Liquidate now as a source of funds.
Weekly Chart Momentum
This approach measures the technical strength of a stock.
: 12x3 weekly slow stochastic above 80 on a scale of zero to 100.
: 12x3 weekly slow stochastic rising above 20, but below 80.
: 12x3 weekly slow stochastic not rising or declining, but between 20 and 80.
: 12x3 weekly slow stochastic is declining below 80, but above 20.
: 12x3 weekly slow stochastic is below 20 on a scale of zero to 100.
Key Technical Levels
I identify these as a price at which to buy on weakness and at which to sell on strength.
Moving averages on daily charts
: The 21-day, 50-day and 200-day simple moving averages (SMAs).
Moving averages on weekly charts
: The five-week modified moving average (MMA) and the 200-week simple moving average (SMA).
Value levels and risky levels
: My model includes proprietary analytics that evaluate the past nine closes in several time horizons: weekly (W), monthly (M), quarterly (Q), semiannually (S) and annually (A).
Richard Suttmeier is president of Global Market Consultants, Ltd., chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in Lower Manhattan, and the author of
newsletter. At the time of publication, he had no positions in any of the securities mentioned in this column, but holdings can change at any time. Early in his career, Suttmeier became the first U.S. Treasury bond trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback --
to send him an email.