Sunday, January 31, 2010

Structure of the Stock Market: Focus on Nucor and Dollar Tree

Within the overall setting of the reckless financial structure of Team USA, individual listed American stocks are providing interesting opportunities for analysis. Since all one can do in unsettled, overvalued times is try to get the odds on one's side, one can be grateful for technical and fundamental analysis agreeing from time to time.
The Nucor (NUE) chart shows it hitting a ceiling several times since the rally began last year, in a setting of a major failure to even challenge its peak pre-crash price. This price action is now supplemented by rapidly deteriorating 2010 and 2011 earnings estimates. Nucor is a marvelous company, at least from a shareholder's standpoint, but I would stand clear of it on a timing basis. The technicals and fundamentals have deteriorated together; more detailed charts show that spike bottoms notwithstanding, $30 was a rough support level during the bear market and easily could be challenged or breached again during a serious market correction.
On the other hard, the short-term and long-term charts of Dollar Tree show support at a high level, moving averages at all-time highs, and a move from under $4/share when it came public in 1994 to the current level.
It is consolidating above its 2000 price high, has rising earnings estimates, trades for about 13X year-ahead estimates, has all its moving averages moving upward and trades above all of them. In other words, DLTR looks a lot like gold as it was preparing to move from the sub-$1000 range last summer to its breakout to new price highs. DLTR has a very high financial strength from Value Line, as do others in its peer group which I also like and own, such as ROST and TJX. (How odd is it that the deep discounter retailers are so financially strong as companies when their clientele is financially the opposite?)
I personally do not short stocks much, especially those of great companies such as Nucor, but a simpler paired concept is as follows: of one's money allocated to stocks, own those with improving fundamentals and strong charts such as DLTR and ROST; and put aside funds for other great companies such as Nucor. That way one does not have to be tormented by deciding when to sell the former because there is a perceived better risk-reward by switching into NUE at the bottom. For all we know, DLTR may be entering a multi-year tear in which earnings double and the P/E increases.
For what little it's worth, I think that DLTR can justifiably trade this year at 15-16X $4/share earnings estimates (which assumes modest beats on earnings), which would yield a price of $60-64, or about a 20-25% return on this dividendless stock. Downside risk is, of course, 100%.
Copyright (C) Long Lake LLC 2010

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