2 Big Reasons To Buy This ‘Boring’ Retailer Now
While hot new stock offerings such as Alibaba Group (NYSE: BABA) and news-rocked fads such as Ebola-proof hazmat suit maker Lakeland Industries (NASDAQ: LAKE) may get your juices flowing, who says making money has to be so exciting?
Indeed, I found an investor guide from 1960 saying just that. Clearly, investors over the decades keep forgetting that slow and steady really can pay off.
Take women’s clothing retailer Cato Corporation (NYSE: CATO). Many of its peers sport high levels of volatility, yet most of these “exciting” stocks are either chopping around in ranges or in actual bear markets.
For example, in the first half of this year, Urban Outfitters (NASDAQ: URBN) soared and then abruptly gave up all of its gains and then some. That is not the kind of excitement that I want in my portfolio.
But CATO has been above the fray. Since mid-April, it is up over 45%, but it was absent in financial media until making a breakout move Wednesday.
The stock peaked in early September near $36, and then settled into a sideways range until this week’s breakout.
We can argue whether the pattern traced out was an inverse head-and-shoulders, but that would only be about semantics. A stock in a solid uptrend paused in a sideways range and then resumed its rally.
#-ad_banner-#We can project the next target by measuring the height of the range and adding it to the breakout point. In this case, that would be just above the $40 level.
Although I do not focus on the fundamentals, there are two factors to consider. The first is that low energy prices are giving retailers in general a boost. Less money spent on gasoline means more money available to spend in the stores.
Second, CATO’s trailing price/earnings (P/E) ratio is in the middle of the pack for all retail but well below the ratios of some of its competitor apparel retailers. Plus, it offers a beefy 3.2% dividend yield, and that is something anyone can like.
As for traditional technicals, momentum is strong but not overbought. Volume, and especially cumulative volume, is not great but not bad enough to worry. And moving average analysis shows the stock in “proper order” where price is above shorter-term averages, which are above longer-term averages. Put another way, CATO is in a bull market.
There is always a risk of a snapback to test the breakout at $36.45, roughly 1.5 points below current trading. However, unless volume swells on the dip, I would use that as an opportunity to add more to a long position.
The investor guide from 1960 adds, “If you want excitement, go to the race track.” If you want to make money and sleep at night, buy a stock in a bullish trend with supporting positive indicators.
Recommended Trade Setup:
— Buy CATO at the market price
— Set stop-loss at $36.50
— Set initial price target at $40 for a potential 6% gain in five weeks
— Set second price target at $43.50 for a potential 16% gain in 16 weeks
Note: Over the past year, one little-known indicator spotted 29 stocks right before they jumped double digits in a month. Now, it’s tagged another stock as an immediate “buy.” In fact, it’s flashing the same kind of buy signal as a stock that rose 266% in a year. Get its name here, including all the details on this indicator.
This article originally appeared on ProfitableTrading.com: It May Not be the Sexiest Retailer, but the Chart Says, ‘Buy Now!’