Duncan Energy Partners, Utility Sector Both Approaching 'Bull-Mode' Status

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Includes: DEP, XLU
by: StreetAuthority

Rarely do I see so many equities in the same sector come up as "top picks" as I have seen this week in my research. Normally, there will be a small bias to one sector or another, but 80% of the top 20 scoring equities are all from the same sector... utilities. This is definitely not normal.

When I see such a disproportionate number of high-quality stocks bubble up to the top of a single sector, it gets my attention.

I realize that for the most part, traders could not care less about the "boring utility sector," as it is known. But before you move on to something more exciting, take a look at the chart below [click to enlarge charts]:

Click to enlarge

I'll get into the obvious lower-left-to-upper-right trend forecast shown on the chart above (red dotted line) in a bit. But first, I want to draw your attention to the small, triangular red colored shape in the middle of the chart. What this is telling us is that the time-cycle algorithms are signaling that utilities would normally be moving slightly lower, but are moving higher. This creates an inversion and what I consider to be a grand opportunity for traders.

I have 30-plus charts that cover the entire gamut of the global economy. As a trader, I continually look for and hope for inversions, as this gives me the opportunity to play one of my favorite trader roles -- being a contrarian.

An inversion occurs when the purple line is moving counter to or is inverted to the actual daily pricing movement of the index or market indicator. In this case, the inversion, which looks to last only through this coming week, is telling us that the utility sector "wants" to move a little lower, but is actually moving higher. The important key is that in about a week, the data is telling us that the sector will begin a very nice trend to the upside. This gives traders an opportunity to buy into dips.

So if my recommendation for this week will move lower in price this week, that could well be an opportunity to buy into weakness and pick up shares at a cheaper price, in anticipation of the forecast move higher. At least that's the plan for this week's trade.

My pick for this week is Duncan Energy Partners LP (NYSE: DEP). This is a liquid natural gas (LNG) transportation company involved in the refining, marketing, storage and transportation of LNG. Although this equity is somewhat thinly traded, it might be setting up for a solid return if the chart proves to be correct. The stock moved lower last week following a dividend distribution, which by the way equates to a 6.5% yield.

Click to enlarge

The fundamentals are strong for this stock.

  • The growth rate for total sales for the most recent quarter versus the same quarter a year ago comes in at about +17.0%. This compares to its industry growth rate of +14.3% and the S&P 500's average growth rate of +12.0% in the same period.
  • Within DEP's industry, its P/E ratio of 17.40 makes it fairly valued compared to its peers.
  • As I mentioned earlier, DEP's yield of 6.5% isn't too shabby, either.
  • Institutional ownership is a bit light, coming in at about 13%. This is a smaller level of "big-boy" ownership, but not surprising given its low level of trading volume and the fact that it is in the utility sector, which is not known for growth -- the area that big institutions generally prefer to play.
  • Both the industry and the sector are very close to "bull-mode" status. This means the average price of almost every stock in DEP's industry and sector is above the trend-line and moving higher. This also means more money is flowing into this industry and sector than flowing out, putting pressure on DEP to move higher. This kind of technical activity strongly supports the trade.

I think DEP is a good trade for this week if investors buy DEP with a limit order of $27.68 and place an initial stop loss at $24.94. I think a reasonable target price for this trade is $35.00, meaning traders would be looking at a +26.4% potential profit from this trade.

Disclosure: Neither Mike Turner nor StreetAuthority, LLC hold positions in any securities mentioned in this article.