Value stocks and other bargains

‘How High is Up?’ The Three Stooges, in the 1940 short film of that name, found it was on the 97th floor of a Manhattan construction site. MoneyLetter columnist Keith Richards may not know the answer that precisely, but he does know that stocks won’t get there in a straight line. Keith can be reached at valuetrend.ca.

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I’ve made no secret of it—we at ValueTrend hold a very strong belief that the market simply CANNOT continue to push high-growth stocks up in a straight line. Something has to give sooner or later.

Money may rotate out of some of these high flyers into value stocks, and/or overlooked sectors. There are opportunities appearing right now in overlooked sectors and stocks. I’d like to look at a few sectors that we have bought, or are looking at possibly buying as potentially overlooked—or newly breaking out—sectors.

Banks benefiting from economic and interest rate growth

The US big bank stocks have already broken out. On the BMO Equal Weight US Banks Hedged to CAD Index ETF (TSX—ZUB) chart, you can clearly see a nice breakout followed by some upside momentum. Given the breadth of the sideways trading base, the breakout suggests significant upside potential. As is said in Technical Analysis: “The greater the base, the better the case.” Or something like that!

The US regional banks have been a step or two behind the big banks, at least from a technical perspective. On the chart for the SPDR KBW Regional Banking (ETF) (NYSEARCA—KRE) you can see that we are in a much earlier stage of the breakout. The chop in the sector since the breakout may be due to the independent problems that US regional banks in the west might face as a result of the fires out there. California’s economy will be affected by these fires, thereby affecting its banks. The reason I would consider an ETF like this one is the opportunity to diversify outside of any particular region’s challenges.

Whether we look at the large banks or the regionals, both are beneficiaries of rising interest rates and steady economic growth. One could argue that the stage is set for both in the United States.

A crude oil exchange-traded fund to buy

WTI crude oil blew through $62 resistance recently. This is the level below which oil has been contained since early 2015. I’ve been talking about the oil sector as a trade since November. My blog in November suggested a ‘buy’ if oil held $55, which it did. We entered the trade shortly after that blog was written with an 8 per cent portfolio position (3 energy stocks). We may bump it up to 10 per cent, with a direct oil play via a crude oil ETF, such as the United States Oil Fund LP (ETF) (NYSEARCA—USO). I’d look to the mid-$70s then $90 as possible targets for WTI crude.

Upcoming sectors to watch

The price of gold has been stuck under a very heavy lid since 2013. It has not broken $1,400/ounce. The bigger challenge for gold has been in the $1,360-$1,380 area. I wouldn’t buy gold until it broke $1,400, unless you are viewing it as a very near-term trade. But there is a chance it could break later in the year. Materials tend to do well in the face of rising interest rates. Bullion and gold stocks will be interesting, should gold break the 5-year holding pattern it’s been stuck in.

Consumer staples stocks have been trading sideways for most of 2017. The Consumer Staples Select Sect. SPDR (ETF) (NYSEARCA—XLP) needed to break through about $57 to confirm that its otherwise healthy-looking, long-term trend is intact. It finally did break that price point in January. We’re looking at that breakout as a sign of possible rotation as value stocks return to the limelight.

Keith Richards, Portfolio Manager, can be contacted at krichards@valuetrend.ca. He may hold positions in the securities mentioned. Worldsource Securities Inc., sponsoring investment dealer of Keith Richards and member of the Canadian Investor Protection Fund and of the Investment Industry Regulatory Organization of Canada. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only and not necessarily those of Worldsource Securities Inc. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.

This is an edited version of an article that was originally published for subscribers in the March 2018/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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