The Dow is working on a 10-session winning streak, the NASDAQ is at the best level in a decade, and the S&P 500 is within one percent of its all-time high. It all sounds great on paper, but at the same time there is a large number of individual investors sitting with large amounts of cash missing out on the rally.
Do not fret, it is not too late to get into the mix and join the rally. Both the technical and fundamentals point to higher stock prices in the months ahead. The market entered the fifth year of the bull market, a feat that has been achieved five times in the past century. The average gain during the fifth year of a bull market is 20%.
Add to that the valuation of the S&P 500; a very achievable earnings estimate for the index is the $111/share in 2013. If that is the case it puts the S&P 500 P/E ratio at 14.0, well below the historical average of 15.5. Assuming the index can climb to match its historical P/E ratio it would put the index at 1720, another 10% higher from current levels.
While the technicals (momentum), history (5th year of bull market), and fundamentals (valuation) back up the bulls argument, the bears have more than enough reasons to be out of the market. Everything from Europe to the U.S. financial situation to China slowing to Iran. The problem is that all 4 of those factors have been handing over the market for the last 2 years and all stocks have done is move higher in value.
Even with multiple factors in the favor of the bulls it is still important to only pick stocks that meet certain criteria. I have found three stocks that meet three factors that generate high probability winners during bull markets.
First the charts meet my standards for consolidating near a high, which is extremely bullish. Second, the fundamentals are attractive and the stocks are nowhere near overvalued. Last, all three stocks fall under a long-term investment theme I believe in. The combination of all factors makes the stocks buying opportunities.
Textainer Group Holdings (TGH) has a fleet of dry freight and special-purpose marine cargo containers it leases to other companies. Its fleet currently holds about 1.6 million containers. The company has been taking advantage of the increased demand for goods around the globe after the worldwide recession has subsided. Technically the stock has pulled back from an all-time high it set in February and has been holding above the $40 price support area, where it also has its 50-day moving average. The consolidation on support is even more bullish when combined with the declining volume. Fundamentally the stock is a good valuation with a PEG ratio of 0.99 and the 4.4% dividend yield is an added bonus.
Franklin Electric (FELE) is a maker of water and fuel pumping systems around the globe. As the demand for both water and fuel increases the company should be well positioned to take advantage of the long-term investment theme. Fundamentally the stock is extremely undervalued with a PEG ratio of only 0.47and a forward P/E ratio of 17.1. FELE pays a small dividend of 0.9%. While the fundamentals are almost enough to create a buy signal, the chart backs up the notion. The stock has been consolidating near an all-time high as it hugs the 50-day moving average. It appears a breakout above the high of $67.49, set in January, is only a matter of time for the play on water and energy - two of my favorite long-term sectors.
Visa (V) should not need a long description. The payment processing and credit card company is one of the most recognizable brands in the world and most of us have a piece of plastic with their logo on it in our wallets. This is one reason I like the stock, because every time we swipe that Visa card it is good for this company and I know mine is swept several times per day. The company trades with a very acceptable PEG ratio of 1.18 and pays a small dividend of 0.8% annually. Technically the stock has been nothing short of amazing the last couple of years with a slow and steady uptrend. Since a breakout last June the stock has been pulling back to its 50-day moving average and bouncing to new highs. For the last month the stock has been trading higher with the moving average and if history is correct a breakout is imminent above the $165 area.
It is clear my bias is to the bullish camp for the reasons mentioned above. The three stocks in this article are unique in that they not only could move higher in a short-term momentum environment, but also a long-term bull market as we are currently experiencing. That all being said I will caution that when a bull market ends it could end quickly and you always want to have stop-loss orders in place to protect against falling in love with any one stock.