My Top-Rated Trade for the Week

My top-rated stock this week (out of more than 6,000 stocks and ETFs) is a basic materials company that focuses on industrial metals, minerals and oil and gas. In general, I like the basic materials segment of the global economy and even more so when the companies in this segment are headquartered in either Australia, Canada or Brazil — three countries blessed with an abundance of natural resources and strong emerging economies.

And although my 90-day global forecast data (see more on this in my Mastering the Markets newsletter this week) is providing an early warning that the likelihood of a -10% correction is building, there are plenty of signs that the market could continue to move higher in the near term.

A bull-trending market is generally positive for basic material stocks. As you can see from my time-cycle forecast for the sector (below), this market segment looks to be trending higher for the next couple of months (although some downward pressure is forecasted for late October).

In my rules-based trading book, “10: The Essential Rules for Beating the Market”, I talk about the importance of buying fundamentally strong stocks; especially if faced with the likelihood of strong market volatility. Fundamentally strong stocks tend to have better staying power in falling markets. In the case of this week’s pick, this stock has the highest combined score for fundamentals and technicals, making it a great candidate for potential profit.

My top pick for this week is BHP Billiton Ltd (NYSE: BHP). BHP is an Australian-based company engaged in the exploration for and production of: crude oil, liquefied natural gas, bauxite, alumina, aluminum, copper, silver, lead, zinc, uranium, diamonds, titanium, potash, nickel, iron, manganese and coal. If you like the industrial metals and minerals segment of the global economy, BHP should be a definite consideration.

BHP’s fundamentals are strong:

  • The growth rate for total sales for the most recent quarter versus the same quarter a year ago comes in at +38.1%. This compares to the metal mining industry’s average growth rate of +21.6% and the S&P 500’s average growth rate of +10.5%. 
  • BHP’s earnings growth rate for the most recent quarter was +102.7% compared to a year ago and trailing twelve month earnings were up +116.6% during the same period. 
  • BHP’s five year average earnings growth rate is +17.2%, while the average growth rate for its industry was +13.4% and the S&P 500’s was less than half that at +7.2% during the same time period.
  • BHP’s P/E of about 16 makes it nicely undervalued compared to its peers. It also throws its investors a decent 2.5% yield.

Below are some of my technical observations on BHP:

  • BHP trades in Zone 3 — indicating that it might be trending higher, having just broken out above the 200 day moving average.
  • The average daily volume has begun to increase on increasing share price, which is a potentially good sign that momentum is building in this stock.
  • Both the industry (metal mining) and the sector (basic materials) are in bull-mode. This means the average price of every stock in BHP’s industry and sector is now trading above the trend-line. This also means that more money is flowing in to the industry and sector than flowing out. This could put pressure on BHP’s share price to move higher.

Action to Take–> Based on the analysis above, I believe BHP is a good trade if traders buy BHP with a limit order at $72.40 and an initial stop loss at $68.94. A target of $88 would bring a profit of just over +20%.