High-Growth Stock’s Breakout Makes It A ‘Buy’

With the threat of a U.S. strike against Syria postponed, a major overhang for the overall market has been removed. The S&P 500 index has again rallied back above its 50-day moving average and broke the minor downtrend line that formed off the mid-July high, near 1,710.

Although I still remain cautious because of fears of tapering by the Federal Reserve, I am again trading from the long side. One stock I am currently attracted to is Rock-Tenn (NYSE: RKT), an international paper and packaging company, which according to Bloomberg, sports the highest earnings per share (EPS) in its industry.

In the most recently reported fiscal third quarter, Rock-Tenn’s EPS rose 127% from the same period a year ago. Operational improvements, as well as aggressive sales and pricing strategies, contributed to the gain.

Based on planned price increases, management said it anticipates fourth-quarter and full-year earnings will be sharply higher this fiscal year, which ends in September. Rock-Tenn is also looking to reduce borrowing costs and enhance profitability by pursuing an investment-grade ranking on its debt from both Moody’s and Standard & Poor’s.

From a technical perspective, the stock is strong.

Rising from its June 2012 low near $49, the shares have formed a major uptrend and have risen over 150% to date.

Starting in early 2013, shares formed an accelerated uptrend and have been moving steadily higher, with a few brief periods of lateral consolidation. During the July 29 trading week, the stock hit an all-time high of $118.31. The following week, shares retested this level but were unable to penetrate it, and a small shelf of resistance formed.#-ad_banner-#

In early August, shares retreated to the $110 level, which held as solid support during several consecutive weekly tests. This support level is reinforced by the intersection of the accelerated uptrend line.

Last week, shares jumped several dollars to a new all-time high on news that Wells Fargo (NYSE: WFC) revised its rating to “outperform.” Then, on Monday, the stock soared nearly 5% to another new high at $126.05, breaking out of a rectangle formation.

Typically, rectangles resolve in the direction they are first entered, and shares should continue to move higher.

According to the measuring principle for a rectangle — taken by adding the height of the pattern to the breakout level — shares should reach a minimum target of $126.13. At current levels, that represents a 1.4% potential gain. However, with no historical resistance in sight, shares could move much higher.

The strong technical picture is supported by upbeat fundamentals.

Due to increased product prices and higher sales volumes, analysts expect revenue for the upcoming fiscal fourth quarter will increase 9.3%, to $2.6 billion.

For the full 2013 fiscal year, analysts project increased demand, coupled with higher prices paid, will cause revenue to increase 9.8%, to $9.6 billion. For full-year 2014, analysts expect revenue will jump an additional 6.2%, to $10.2 billion.

The earnings outlook is even brighter. Due to operating improvements that resulted in increased production and reduced maintenance costs, analysts expect fiscal fourth-quarter earnings will increase nearly 80% compared with the same period last year, to $2.50 a share.

For fiscal 2013, analysts project improved sales and pricing strategies will cause the company’s earnings to rise almost 60%, to $7.12 a share. By 2014, analysts expect earnings will increase another 33%, to $9.51 per share.

In addition to a strong fundamental outlook, the company is reasonably valued based on its trailing P/E ratio of about 14.3.

The company also has a very attractive PEG ratio (P/E divided by EPS growth rate) of about 0.86. Typically, a PEG of 1 or less shows good value.

The stock has a forward annual dividend yield of 1%. It has consistently paid a dividend since 1997, and since 2009, the quarterly dividend has jumped from $0.10 per share to its current $0.30 a share.

Given the strong technical and fundamental picture, I plan to go long on the paper products stocks.

Risks to Consider: Consumer packaging is an economically sensitive sector, and a downturn in worldwide GDP could result in decreased revenue and profit for Rock-Tenn. Additionally, the company’s strategy of raising prices may prompt some clients to source their packaging from competitors. That said, increased prices have only resulted in revenue and earnings growth, and management anticipates strong growth ahead.

Action to Take –>

— Buy RKT at the market price

— Set stop-loss at $109.89, just below current support

— Set initial price target at $134.95 for a potential 8.5% gain by year’s end

This article was originally published at ProfitableTrading.com
High-Growth Company’s Breakout Makes It a ‘Buy’

P.S. — Rock-Tenn’s industry-leading position makes it similar to a special group of securities we call “Forever” stocks. These are stocks solid enough to buy, forget about and hold — forever. To learn more about these stocks — including some of their names and ticker symbols — click here.