BALTIMORE (Stockpickr) -- Bad habits can yield some good returns for your portfolio -- or at least that's the premise behind owning "sin stocks."
No, sin stock companies aren’t exactly in the business of burning down old folks' homes. Instead, they're in industries such as alcohol, tobacco, gambling and defense. They produce products that many people equate with bad behavior.
Why own sin stocks in the first place? Sin stocks tend to be businesses that provide a stress outlet for consumers. As a result, recession resistant revenues and sticky customer bases are the norm. The devil’s in the details with sin stocks; because these firms generally sport wide economic moats and deeper margins than traditional consumer plays, sin stocks benefit from an extra qualitative boost that you can’t find in any other group right now.
And we're seeing that in the price action this week – as U.S. markets feel the pressure to start 2015, some of the biggest sin stock names are showing breakout setups. That's why we're taking a closer technical look at five of them this week.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, let's take a look at five technical setups worth trading now.
Molson Coors Brewing
Up first on our list is Molson Coors Brewing (TAP) , the $14 billion beer company behind brands such as Coors Light, Molson and Blue Moon. TAP shareholders have had plenty of reasons to cheer each other in the past year: This stock has rallied more than 37% in the trailing 12 months, stomping the rest of the market along the way.
But don't worry if you missed the move in TAP; shares look ready to kick off a second leg higher in January.
Molson Coors is currently forming an ascending triangle setup, a bullish price pattern that's formed by horizontal resistance above shares at $77 and uptrend support to the downside. Basically, as TAP bounces in between those two technically important price levels, it's been getting squeezed closer and closer to a breakout above our $77 resistance line. When that happens, we've got our buy signal.
Relative strength has been a solid upside indicator in shares of Molson Coors in the past year. Just like this stock's price level, our relative strength line at the bottom of the chart has also been moving higher in an orderly fashion. That's our indication that TAP isn't just moving up -- it's also outperforming the rest of the market along the way.
As long as that uptrend in relative strength remains intact, this sin stock should continue to outperform the S&P.
Let's switch vices for a moment, shifting to $23 billion tobacco firm Lorillard (LO) . Lorillard has a for-sale sign in front of it -- the firm is primarily being sold to Reynolds American (RAI) once approvals come through. But in the meantime, this big cigarette maker is looking buyable. Just like TAP, LO is forming an ascending triangle pattern -- just in the shorter-term.
The buy signal in LO comes on a push above $64 resistance.
Why all of that significance at that $64 level? It all comes down to buyers and sellers. Price patterns like the ascending triangle are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Lorillard's stock.
The $64 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $64 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Wait for shares to catch a bid above $64 before you buy it. Until the merger closes, supply and demand are still the drivers of LO's price.
Moving up the food chain brings us to Altria Group (MO) , the country's biggest tobacco manufacturer. Altria actually has some big exposure beyond tobacco -- the firm's huge 27.1% ownership stake in SABMiller (SBMRY) and ownership of Ste. Michelle Wine Estates makes it the quintessential sin stock. And the price action is making it the quintessential breakout stock this week.
After a strong rally to start 2014, Altria spent the last three months consolidating sideways, bleeding off some overbought momentum in a well-defined price range called a rectangle. The rectangle is a price setup that's formed by a pair of horizontal resistance and support levels that basically "box in" shares between $51 and $48.50. Rectangles are "if/then patterns." Put a different way, if MO breaks out through resistance at $51, then traders have a buy signal. Otherwise, if the stock violates support at $48.50, then the high-probability trade is a sell.
Because MO's price action leading up to the rectangle was bullish, there's a higher likelihood for an upside breakout through $51. And we're testing that level this week. Wait for a close above $51 before jumping into this trade. A fat 4% dividend payout should continue to be a big macro driver for Altria's share price in 2015.
Defense contractor Lockheed Martin (LMT) is another name that's looking bullish as we head into 2015 – and it's another high-yield sin stock. The good news is that you don't need to be an expert technical trader to figure out why Lockheed looks buyable here. The price action is about as simple as it gets in this $62 billion defense stock…
LMT has spent the past six months bouncing its way higher in a well-defined uptrending channel. That price channel provides buyers with a well-defined range for shares. Each of the last five tests of trend line support have provided an extremely low-risk, high-reward time to be a buyer. That means buyers have another asymmetric profit opportunity on the next bounce higher.
Waiting for a bounce is important for two key reasons: it's the spot where shares have the furthest to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring LMT can actually still catch a bid along that line before you put your money on shares.
Last up on our list of breakout sin stocks is long-suffering casino operator Wynn Resorts (WYNN) . The gaming industry has been pummeled in the last six months, and Wynn hasn't been immune to the selloff. But that could be a big buying opportunity in 2015 -- shares are starting to look "bottomy" here.
WYNN is forming a double bottom pattern, a bullish reversal pattern that looks just like it sounds. WYNN's setup can be spotted by a pair of swing lows that bottomed out at approximately the same level. The buy signal comes on a push through $155 resistance, the intermediate peak that separates the bottoms.
Momentum, measured by 14-day RSI, is our side-indicator in WYNN. RSI made higher lows at the same time that shares of WYNN were re-testing support at the same level, a bullish divergence that points to mounting buying pressure in this casino stock. Wait for $155 to get taken out before you buy.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in the names mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory that returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji