This Chart is Projecting Double-Digit Returns for This High-Yielding Stock
You don't often find a stock with a 7.7% dividend yield in this income starved environment. When it's supported by a bullish technical outlook and solid fundamentals, you know it's likely a winning trade!
Shares of Rentech Nitrogen Partners (NYSE: RNF) are on a tear. So far in 2013, the stock is up more than 15%, and, as I explain below, the technicals point to further price appreciation ahead.
The master-limited partnership (MLP), which went public in 2011, makes nitrogen fertilizer and industrial chemicals. With a rising global population, and a decrease in arable land, their fertilizer is in high demand.
Rentech operates two nitrogen fertilizer plants: one in Illinois, the other in Texas. The Illinois property is located in the heart of the Midwest Corn Belt -- the largest consuming area of nitrogen fertilizers in the United States.
This past November, Rentech acquired a Texas-based ammonium sulfate fertilizer plant, previously owned by Agrifos. It's expected that the $158 million acquisition will help Rentech generate $20 million in additional operating income and $25 million in EBITDA in 2013. As an MLP, Rentech must pay out 90% of its earnings, so the majority of the cash flow increase should pass straight into shareholders hands as dividends. The rising dividends should support the share price.
Rentech is also currently benefiting from favorable weather conditions. Last year's drought in the United States reduced corn inventories, causing farmers to purchase more fertilizer to grow crops. Additionally, last year's unseasonably mild winter meant lower natural gas prices. Natural gas is a key component of nitrogen production, used to make fertilizer. So long as the price of natural gas remains low, Rentech, and shareholders of the company, should continue to benefit.
From a technical perspective, the stock is strong. Shares have been in a major uptrend since their December 2011 low of $16.04. Since this time, the stock has headed due north.
In September 2012, the stock hit a high of $40.05. Unable to break through round number resistance at $40, shares slipped to a low of $34.75. This pattern repeated again in October as the stock hit a fresh high of $41.15, only to slide back to support, at $34.50.
Rising off support in late November, shares once again tested resistance near the $40 level. Unable to break this barrier yet again, shares slid, approaching, but not quite falling to $34 support. This volatile up-and-down pattern created a rectangle.
This Jan. 7 trading week, shares blasted through $40 resistance, hitting an all-time high around $46.88. In the process, the multi-month rectangular holding pattern was bullishly broken.
According to the measuring principle for a rectangle -- calculated by adding the height of the pattern to the breakout level -- shares could hit a price target of $47.80 ($41.15-$34.50 = $6.65; $6.65+$41.15 = $47.80). At current levels, this target represents about 4.25% returns. However, with no overhead resistance in sight, the stock could go higher.
The bullish technical outlook is supported by strong fundamentals. Due to strong sales of nitrogen fertilizer, the company's third-quarter revenue jumped 56% to $60.2 million, from $38.6 million in the comparable year-ago period. It should be noted that reduced supply available for shipment negatively impacted 2011 results.
For the full 2012 year, to be reported March 18, analysts project continued demand for nitrogen fertilizer will cause revenue to increase 27%, to $228.8 million, from $179.9 million last year.
For the three months ending Sept. 30, 2012, operating income nearly tripled to $29.2 million, from $10.4 million in the comparable year-ago period. Higher margins and prices paid for the company's nitrogen products largely contributed to the gain. Reduced R&D expenses also helped boost income levels.
Likewise, third-quarter net income increased almost nine-fold to $28.8 million, from $3.3 million in the comparable quarter a year ago. On a per share basis, these results break down to earnings per share of two cents, compared to an earnings loss of -26 cents per share in the year-ago period.
For the full 2012 year, analysts project continued low natural gas prices, combined with income generated from the recent Agrifos acquisition, will cause earnings to rise 362% to $3, from 65 cents last year.
In addition to a strong fundamental outlook, the company's forward annual dividend is $3.40, which translates to an impressive yield of about 7.7%.
All these factors make Rentech a winning stock. Even if resistance is hit near current levels, you get paid handsomely to wait.
Risks to consider: Natural gas is an essential component in nitrogen production. So long as natural gas prices remain low, production costs can be kept down. Rising natural gas prices could negatively impact future earnings. However, record production, combined with unseasonably warm weather so far this year has meant low natural gas prices that should continue well into the foreseeable future. Because the stock recently spiked, traders might want to enter the position with caution, so as not to buy at a high. The safest strategy is to wait for a pullback before buying.
Action to Take --> Buy RNF on a pullback to $43.05. Set stop-loss at $40.02, slightly below current support. Set initial price target at $47.80 for a potential 11% gain.
This article originally appeared on ProfitableTrading.com:
High-Yielding Stock's Chart is Projecting Double-Digit Returns
StreetAuthority LLC does not hold positions in any securities mentioned in this article.