Stock Picking Among 15 Basic Materials Stocks Is a Tough Call

NEW YORK (TheStreet) -- On Wednesday I decided to screen the basic materials sector to identify stocks that are suitable investments in 2014. Today I present my 'buy and trade' information for 15 stocks that are tradable but should not be a part of a longer-term investment allocation in today's overvalued and overbought stock market.

Even Alcoa (AA) which reports quarterly results in after-hours this afternoon does not qualify as a long-term investment at this time. The former Dow component is one of nine stocks in today's table of 15 that has a sell rating according to www.ValuEngine.com.

The aluminum producer is 29.5% overvalued in a sector that's 7.8% overvalued. I give the basic materials sector an underweight rating as 63.8% of the 390 stocks in this sector have sell or strong sell ratings. Alcoa has become a momentum trade with a positive but overbought weekly chart profile. The five-week modified moving average is $10.00 with its 200-week simple moving average at $10.96 vs. Wednesday's multi-year intra-day high at $10.88.

Another reason I screened the basic materials sector is to find one or two gold or silver mining companies for portfolio consideration, but again without a buy-rated stock. There are three gold or silver miners in today's table and two have hold ratings and are extremely undervalued.

Barrick Gold (ABX) and Newmont Mining (NEM)are 36.7% and 36.6% undervalued respectively. Investors considering an underweight stock-specific company for a diversified portfolio consider one of these gold miners that are worthy of my buy-and-trade strategy.

As an alternative consider an investment in the SPDR Basic Materials (XLB) ($45.68) which set a new multi-year intra-day high at $46.22 on Dec. 31 vs. the all-time high at $46.54 set in May 2008. This ETF includes former Dow component Alcoa, Dow component DuPont (DD) and gold miner Newmont Mining. The ETF is up 18.2% over the last 12 months and is above its 200-day SMA at $41.54. Note that the daily chart below shows this ETF tested its 200-day SMA in mid-April and again in late-June/early-July. The overall basic materials sector is down 24.9% over the last 12 months. The basic materials ETF has a positive but overbought weekly chart profile with its five-week MMA at $44.94. Semiannual and annual value levels are $43.29 and $37.62 with a monthly pivot at $45.38 and quarterly and semiannual risky levels at $46.18 and $47.54.

Courtesy of MetaStock Xenith

Today's table of basic materials stocks shows that the 15 companies I selected have a mixed bag of valuations, 12 month performances with some near multi-year highs and some near multi-year lows.

The column labeled 'OV / UN Valued' shows that Dow Chemical (DOW) and Olympic Steel (ZEUS) are the most overvalued by 34.8% and 35.9% respectively.

The 'VE Rating' column shows that 6 stocks have '3-Engine' hold ratings and that 9 have '2-Engine' sell ratings.

The next column 'Last 12-month Return%' shows that the biggest losers over the last 12 months are: Barrick Gold down 46.4%, Buenaventura (Compa)  (BVN) down 66.8% and Newmont Mining down 48.6%. The biggest winners are Archer Daniels (ADM) up 49.5% and DuPont up 37.1% over the last 12 months.

The 'Forecast 1-Year Return%' column shows that all 15 stocks are projected to decline by 3.3% to 10.6%.

The column that is headed 'P/E Ratios' represents the trailing 12 month price-to-earnings ratios and the stocks that have P/Es they are between 6.9 for Barrick Gold and 37.4 for Nucor (NUE).

The '200-day SMA' column represents the 200-day simple moving averages. Barrick Gold, Buenaventura, Mosaic (MOS) and Newmont Mining are below their 200-day SMAs. The others are above which reflects the risk of a reversion to the mean.

How to use Value Levels: If you are looking to buy eatery stocks or add to long positions, my buy-and-trade methodology recommends that you employ good-until-cancelled GTC limit orders to buy weakness to a value level shown in the table. The value levels followed by an 'M' apply for January only. Those followed by a 'Q' apply until the end of March. Those followed by an 'S' apply until the end of June. Those followed by an 'A' apply for all of 2014.

How to use Pivots: A pivot will likely be a magnet during the time frame shown by the letter. Pivots followed by an 'M' apply for January only. Those followed by a 'Q' apply until the end of March. Those followed by an 'S' apply until the end of June. Those followed by an 'A' apply for all of 2014. If a value level or risky level is violated during its time horizon that level becomes a pivot and has an 85% chance of being re-tested during its time horizon.

How to use Risky Level: If you are looking to book profits on eatery stocks, my buy-and-trade methodology recommends that you employ GTC limit orders to sell strength to a risky level shown in the table. The risky levels followed by an 'M' apply for January only. Those followed by a 'Q' apply until the end of March. Those followed by an 'S' apply until the end of June. Those followed by an 'A' apply for all of 2014.

At the time of publication the author held no positions in any of the stocks mentioned.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Richard Suttmeier is the chief market strategist at ValuEngine.com. He has been a professional in the U.S. Capital Markets since 1972, transferring his engineering skills to the trading and investment world.

Suttmeier has an engineering degree from Georgia Tech and a Master of Science degree from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. He became the first long bond trader for Bache in 1978, and formed the Government Bond Department at LF Rothschild in 1981, helping establish that firm as a primary dealer in 1986. This experience gives him the insights to be an expert on monetary policy, which he features in his newsletters, and market commentary.

Suttmeier's industry licenses include, Series 7 and Registered Principal (Series 24). He has been the Chief Market Strategist for ValuEngine.com since 2008 and often appears on financial TV.

Click here for details on Suttmeier's "Buy and Trade" investment strategy.

Richard Suttmeier can be reached at RSuttmeier@Gmail.com

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