This Rock-Solid Financial Stock Is Set To Break Out

If you’re hunting for a steady growth stock that offers a strong technical breakout from a multi-month base, turn your attention to the United States’ northern neighbor — Canada.

#-ad_banner-#With a GDP of $1.8 trillion, Canada is one of the world’s strongest economies. Its banks are the country’s economic backbone. In fact, the World Economic Forum has ranked Canadian banks the soundest in the world — for the past six years and counting.

Of the five major Canadian banks, my favorite is the Royal Bank of Canada (NYSE: RY) due to its recent chart breakout, solid fundamental outlook, attractive valuation and strong dividend yield.

The bank, often referred to as RBC, is Canada’s largest financial institution and one of the largest banks in the world based on deposits, revenue and market cap. It offers personal and commercial banking services, wealth management, insurance, investor services and capital markets products.

Gains from its consumer banking and wealth management divisions are driving growth. The bank recently reported better-than-expected second-quarter results. Net income rose 15% from the same quarter last year, to $2.2 billion (Canadian). And earnings came in at $1.47 per share, beating the consensus estimate of $1.44.

A buoyant stock market helped the bank’s wealth management arm deliver record earnings as customers put more money into high-fee equity funds. The division earned $278 million, a 25% increase from the comparable year-ago quarter.

Additionally, profits from capital markets surged 32% to $507 million, and personal and commercial banking profit rose 7% to $1.1 billion.

The chart paints a very bullish picture.

Rising off a May 2012 low near $44, RY formed a major uptrend and went almost straight up to a January 2013 peak above $60. The stock then retreated slowly, and in June, it tested support marked by the intersection of the major trendline.

Support held and shares climbed, but they were again restrained by resistance in the low $60s. RY finally broke this resistance in late August, and the level now marks important support.

RY rose until November before faltering. Since then, it has consolidated in a range between support around $60 and resistance around $67.50.

Last week, shares blasted past resistance on the upbeat earnings report, hitting a new all-time high just under $70. With no overhead resistance in sight, RY could move much higher.

The measuring principle for the base formed during the consolidation period, which is found by adding the height of the base to the breakout level, suggests a minimum target of $74.59 ($67.47-$60.35 = $7.12; $67.47+$7.12 = $74.59). But that seems conservative, and analysts have a median target of $79.74, about 15% above recent prices.

The bullish technical outlook is supported by strong fundamentals.

For the upcoming third quarter, analysts project revenue will increase 14% from the year-earlier period to $8.3 billion. For the fiscal 2014 year (ending in October), revenue is estimated to be 5% higher at $32.4 billion.

Third-quarter earnings are expected to rise 5% year over year to $1.53 a share, while full-year fiscal 2014 earnings are forecast to increase 9%, to $5.93 a share.

The bank rewards shareholders with an annual dividend of $2.58 a share for an attractive yield of 3.8%. This should help put a floor under the share price.

Risks to Consider: RBC’s wealth management division is an important component of current growth. Competing products with lower fees could see customers defect, while a drop in the equity market could upset investor confidence. However, RBC is a diversified financial institution offering a variety of financial services to its client base. Given this, the bank should continue to perform solidly into the foreseeable future.

Action to Take –>
— Buy RY at the market price
— Set stop-loss at $64.99, just below support marked by the intersection of the major uptrend line
— Set initial price target at $79.74 for a potential 15% gain by late 2014

This article was originally published at 
One of the Soundest Banks in the World is Breaking Out

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