Patrick McGrady's  Instablog

Many traders believe the S&P 500 ($SPX) is technically breaking down from a Head and Shoulders pattern and is headed back towards the $875 - $900 level.  The majority of analysts, managers, and commentators are bearish on the world economy and the double dippers have been all over the news recently.  However, these traders and individuals are ignoring a number of factors. 

Fundamentally:

1.) The S&P is still very much in an intermediate-term uptrend.  2.) Companies continue to report improving and positive earnings.  3.) M&A activity is alive and well.  4.)  Problems in Europe are easing and being contained.  5.)  China is showing signs of a soft landing.  6.)  Consumers are still spending.

Technically:

1.)  The S&P is consolidating after a huge run.  2.)  The 38.2% Fibonacci retracement level for the S&P 500 is at $1,008.  3.)  All technical indicators are oversold on a long-term and intermediate-term basis.  4.)  $SPX's long-term support is at $1,000.  5.)  $SPX has formed a long-term Expanding Triangle formation and is near support  6.)  $SPX has formed an intermediate-term Bullish Wedge formation and is near support.

For these reasons, the S&P 500 is a BUY between its current level of $1,030 and $1,000. 

$SPX 3-Year Weekly:


$SPX 1-Year and 4 Month Daily:

Disclosure: Long Stocks

Two meat production companies that have seen consistant and significant capital inflows have been Sanderson Farms Inc. (SAFM) and BRF-Brasil Foods (BRFS).  Both companies are plays on a growing international demand for meat.  Sanderson specializes in poultry, while Brasil Foods is a bit more diversified with poultry, pork, and beef.  Sanderson and Brasil Foods are both trading a large discounts comapred to their industry average.  SAFM has a projected forward P/E of 8.6 with a PEG ratio of just 0.7.  BRFS has a projected forward P/E of 18.2.  The slightly higher P/E is more than justified due to the company's substantial growth with a PEG ratio of just 0.3.  The current industry average P/E for Meat Product companies is 48.1. 

Below are the 3-Year Weekly charts of SAFM and BRFS.  Both charts looks very attractive, and both stocks are Buys are current levels.

Sanderson Farms (SAFM):


Brasil Foods (BRFS):




Disclosure: None Mentioned

Fundamentally:
With a FY-2010 earnings estimate of $27 per share (the low end of analysts' expectations), Google is sporting a 32% earnings growth estimate and is trading at a Forward P/E of 18.  To put Google's Forward P/E of 18 into perspective, we need to look at its historical average.  GOOG's 5-year historical P/E average is 46.9.  With annual earnings of $27 per share (the low end for the year), a P/E of 46.9 would put Google's stock price at $1266.30.  However, with a slowing and somewhat uncertain economic world recovery combined with GOOG's recent move to pull out of China, Google does not deserves such a multiple.  Although, I would argue that a forward P/E of 18 for a company as historically dominant as Google seems silly.  A more suitable P/E for Google would be slightly above the industry's average P/E of 25.7, let's say a P/E of 26.5.  If GOOG were to maintain annual earnings of $27 in 2011 and growth in the internet and technology sector continues to expand and be in high demand GOOG seems very undervalued.  My price target for Google is $715 (forward annual earnings of $27 per share times my hypothetical P/E of 26.5 (slightly above the industry's average of 25.7).  Analysts are expecting annual earnings of $30 per share for Google in 2011.  At GOOG's current price of $482, the company is trading at 16x 2011 earnings.  A P/E of 16 would be comparable with the historical P/E average of the S&P 500, however, GOOG presents much better future growth potential, cash flow, and a well established and defined economic moat than the index.  Google's other valuation ratios look cheap as well.  Price-to-sales of 6.3 is half of Google's 5-year historical average of 12.  Price-to-cash flow of 16.2 is much less than the firm's 5-year historical average of 24.8.

If worldwide demand for technology continues to expand for years to come as it has recently, Google is extremely underpriced.  The firm has proven itself as the dominant market player.  Apple (AAPL) has taken shares in the cell phone and apps market, but Google could see a strong comeback if the AdMob deal goes through and if the Droid X sees high demand.

Some potential unexpected bullish catalysts:
1.  Google could very well get back into China, or work out some type of deal with the Chinese government.
2.  The FDC files for a request for preliminary injunction against the Google AdMob deal, but GOOG challenges and wins.  This would place Google at a great competitive advantage in the mobile display advertising market.
3.  Advertising spending continues to pick up and the uncertainty in the world economies settles.
4.  The Driod X takes the cell phone market by surprise and Google takes market shares from Apple.

Technically:
Since peaking in late December 2009/early January 2010 Google (GOOG) has been consolidating nicely and is beginning to look attractive once again.  The recent pullback has brought GOOG all the way back down to its intermediate-term support line on its three year weekly chart.  If GOOG can hold support, which is currently around $480, and can advance to a weekly close above $530, this would mark the completion on an ABC correction and the stock is likely to advance to a new high.  However, if GOOG breaks down below its uptrending support (the $480 level), this would mark the completion of wave #4 on what potentially could be a 5-wave correction pattern.  In this case of scenario, the next support level would be somewhere between $420 and $400, where Wave #5 would most likely be completed.  No action is to be taken on GOOG as of yet, but a profitable trading opportunity is sure to occur very soon.  GOOG would be a buy on a weekly close above $530 (a bullish breakout), or GOOG could be a quick short on a weekly close below $480 (a bearish breakdown and the completion of Wave #4).  If GOOG does breakdown below $480, it would be recommended that shorts cover somewhere between the $420 and $400 range as GOOG should find solid support here and complete its 5th Wave of a potential 5-Wave correction.

Below are the technical charts:









Disclosure: None Mentioned

Disclosure: None Mentioned