“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
This is a quote from Warren Buffet and it neatly sums up contrarian investing. It is not an approach I focus on in my newsletter because it is a longer term strategy, often needing many years to work. But for anyone looking to find some longer-term investments, there are some good opportunities forming right now.
Of course the first market segment that comes to mind is the oil sector. While Saudi Arabia is in an oil price war with the U.S. frackers (the companies who drill using horizontal hydraulic fracturing), hoping to drive their competition out of business, the frackers have actually cut their costs by a third and many are remaining profitable at these lower oil prices. If oil rebounds a little, there are several quality companies in the U.S. that will show good profits.
But there is a stock in another sector that caught my attention. It has one of the worst charts you'll see. Its Relative Strength reading is 18, meaning 82% of the companies in the S&P 500 are outperforming it. The stock has an Investor's Business Daily Accumulation/Distribution rating of ‘E', which represents heavy selling by institutions. Many other stocks in the same sector have similar characteristics.
But as the jobs numbers are suggesting, the economy is slowly improving. The sector this company is in should be among the first to recover. The sector is railroads, and the company is Canadian National Railway.
CNI has gone through two months of strong selling, most likely from one or more institutions dumping a large position (the Bill & Melinda Gates Foundation has been the largest holder of CNI for many years, but they tend to be very long term investors and it's probably not them dumping the stock).
CNI has fallen back to 2014 highs, which may offer support.
But the company has actually been doing quite well. Revenue growth has been consistent and earnings growth has been picking up:
The stock sports a Return on Equity of 23%. A common trait of stocks that draw the interest of institutions is an ROE of at least 20%. And indeed, the number of institutions holding CNI has increased 13% over the past year:
Canadian National pays a 1.7% dividend. But over the past 5 years, CNI has raised its dividend an average 17% a year. They have raised their dividend for 18 consecutive years. As a longer term play, CNI could be a good play on a rebound of the North American economy, and this stock would be a good candidate for dividend reinvestment.
Seasonally, CNI has a good track record of gains over the next 6 weeks, averaging 5.1%, but more importantly, the gains are pretty consistent and regularly occurring:
So if the current levels in the stock hold, this could be a good time to buy CNI stock. However, right at this moment, CNI's chart does not show a good trade entry. If this stock interests you, wait for a clear rebound on strong volume. At some point this stock will be perceived as a value to institutions (as Jim Cramer says, he likes to buy wholesale, not retail). If this stock doesn't immediately interest you, at least keep it on your larger watchlist.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
By Gregg Harris, MarketTamer Chief Technical Strategist
Copyright (C) 2015 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com.
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